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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.
Operator: Thank you for your patience. Your conference will begin in approximately two minutes. Please continue to stand by. Greetings, and welcome to the PENN Entertainment, Inc. First Quarter 2026 Earnings Call. I would now like to turn the conference over to Joseph Jaffoni, Investor Relations. Please go ahead. Joseph Jaffoni: Thank you, Chelsea. Good morning, and thank you for joining PENN Entertainment, Inc.'s 2026 first quarter conference call and webcast. We will get to management's comments and presentation momentarily as well as your questions and answers. During Q&A, we ask that everyone please limit themselves to one question and one follow-up. I will now review the safe harbor disclosure. Today's discussion contains forward-looking statements. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results to differ materially. For more information, please see our press release for details on specific risk factors. It is now my pleasure to turn the call over to PENN's CEO, Jay Snowden. Jay, please go ahead. Jay Snowden: Thanks, Joe. Good morning. I am pleased to report PENN's diversified retail portfolio delivered another solid quarter, as Retail segment adjusted EBITDAR grew year over year. Our property performance was encouraging across the portfolio with particular strength in the West segment, reflecting the ongoing ramp of M Resort's new hotel tower and impressive results from the team at Ameristar Blackhawk. In the Midwest segment, we delivered strong revenue and EBITDAR growth led by our properties in the St. Louis market as well as continued momentum at the new Hollywood Joliet in Illinois. Results thus far from our first two development projects provide us continued confidence in the anticipated success from the upcoming openings of the Hollywood Columbus hotel tower on June 12 and the new Hollywood Casino Aurora on June 24, in addition to our new Council Bluffs relocation scheduled to open in 2028, all of which are subject to final regulatory approvals. As we have said previously, we anticipate our four development projects will generate 15% plus cash-on-cash returns on our aggregate project cost of $800 million, which is net of the 50% contribution from the City of Aurora. Overall, increases in both visitation and spend per visit companywide supported year-over-year theoretical revenue growth across all of our rated worth segments, representing the largest quarterly increase in three years for the Retail segment. Looking ahead, we continue to see solid trends into April despite higher gas prices and ongoing geopolitical uncertainty. Importantly, we are also beginning to see improving trends in those regions where we are anniversarying new supply, particularly in Bossier City, Louisiana, and Council Bluffs, Iowa. Turning to the Interactive segment, we saw significant adjusted EBITDA improvement of approximately $78 million year over year in Q1 driven by nearly 15% year-over-year growth in iCasino revenue and approximately 5% year-over-year growth in online sports betting revenue, and a significant reduction in marketing spend coupled with continued cost management. This marks the first full quarter under our realigned digital strategy, which is focused primarily on our U.S. iCasino states and Canada, while operating under a more efficient cost structure overall. We are continuing to see positive trends in Ontario, including year-over-year growth in average monthly active users, online sports betting revenue, and iCasino revenue. These results reflect the ongoing strength of theScore Bet brand in Canada and our realigned digital strategy, which we think bodes well for the anticipated July 13 launch of regulated iCasino and online sports betting in the province of Alberta. theScore Bet has been approved as a registered iGaming operator by the AGLC and preregistration efforts have begun in the province. We expect our Alberta launch to result in a $20 million loss in 2026, within the range we previously provided on our quarterly earnings call in February. As Felicia will discuss in a moment, the resulting change to our prior breakeven guidance for 2026 Interactive adjusted EBITDA is entirely attributable to this $20 million investment in Alberta. Said differently, outside of Alberta, our breakeven Interactive guide for the year is unchanged. Slide five of our investor presentation underscores our continued focus on our major pillars of growth as our Retail and Interactive segments, along with our recently optimized corporate structure and maintenance CapEx spend, drive significant improvement in free cash flow generation in 2026, which in turn strengthens our balance sheet as leverage declines and sets us up for an even stronger free cash flow story in 2027. I will now turn it over to Felicia. Felicia Kantor Hendrix: Thanks, Jay. Our Retail segment generated revenues of $1.4 billion, adjusted EBITDAR of $471.4 million, and segment adjusted EBITDAR margins of 33.2%. Our adjusted EBITDAR results benefited from a one-time favorable adjustment related to a legal accrual, which nets out to a $5 million benefit primarily in the South region. As it relates to 2026 guidance, based on our better-than-expected first quarter Retail results, we are increasing the midpoint of our 2026 Retail revenue and adjusted EBITDAR guidance by $20 million and $12 million, respectively, to reflect the upside generated in the quarter. As a result, our revised guidance ranges are $5.73-$5.86 billion for revenue and $1.88-$1.98 billion for adjusted EBITDAR. As you think about the second quarter, as Jay mentioned, we continue to see stable trends carrying into April. While this is the case, as we noted on our February earnings call, we do expect some temporary disruption in the quarter, as the legacy Aurora riverboat will be closed for about two weeks due to regulatory requirements prior to opening the new Hollywood Casino Aurora on June 24. The 2026 Retail segment should benefit from the contribution of all four of our development projects, and we expect adjusted EBITDA to grow year over year in the mid-single digits. Our Interactive segment in the first quarter generated revenues of $358.3 million, including a tax gross-up of $185.8 million, and an adjusted EBITDA loss of $10.8 million. We now expect 2026 Interactive revenues of approximately $1.6 billion, inclusive of an estimated tax gross-up of about $820 million, and an adjusted EBITDA loss of $20 million, which, as Jay just mentioned, is entirely attributable to the Alberta launch. On the revenue side, our revised guidance now takes into account the online sports betting promotional spending associated with launching in a new market, particularly in the third quarter, as well as further fine-tuning our online sports betting expectations for the year. Importantly, we are also seeing better-than-expected performance in stand-alone iCasino in the U.S. and in Canada, which is somewhat offsetting the factors I just mentioned, and is consistent with our Interactive segment strategic priorities. We continue to expect small losses in the second and third quarter, but note that the loss in the third quarter will be the largest loss of the year due to the Alberta launch. We expect 2027 to be profitable in the Interactive segment. Overall, our first quarter 2026 Interactive segment performance and outlook reflect the benefits of our increased emphasis on U.S. iCasino states and Canada, as well as our more rationalized and nimble cost structure. We expect the “Other” category adjusted EBITDAR to be negative in 2026, unchanged from our original guidance back in late February. The table on page eight of our earnings release summarizes our cash expenditures in the quarter, including cash payments to our REIT landlords, cash taxes, cash interest on traditional debt, and total CapEx. Of our total $95 million CapEx in the quarter, $65 million was project CapEx, primarily related to our four development projects. As we remain focused on delevering and strengthening our balance sheet, in March we issued $600 million of unsecured notes due 2031 at an interest rate of 6.75% and used the proceeds to repay borrowings under our revolver. Accordingly, we ended the first quarter 2026 with total liquidity of $1.7 billion inclusive of $[inaudible] in cash and cash equivalents. Subsequent to quarter end, on April 16, we refinanced our $1 billion revolving credit facility and refinanced approximately $447 million of our Term Loan A. In June, we expect to receive approximately $225 million in funding from GLPI for the new Hollywood Casino Aurora, which opens on June 24, and the remaining $21 million from the City of Aurora by the end of the year. We have elected not to take GLPI capital in connection with the construction of our Hollywood Columbus hotel tower, which opens June 12. As we highlight on slide five of our earnings deck, we expect to delever by at least one full turn for lease-adjusted net leverage and by at least two full turns for traditional net leverage at year-end 2026, driven by strong free cash flow generation throughout the year and more optimized CapEx spend. Total 2026 CapEx is now expected to be $420 million, down from our prior guidance of $445 million, and that total includes $200 million of project CapEx, down from our prior guidance of $225 million, and $220 million of maintenance CapEx, which is unchanged. The reduction in project CapEx reflects a timing shift moving from 2026 to 2027 for the Council Bluffs relocation project, which is now expected to be completed in 2028. Importantly, this is only a change in our planned start date with no changes to scope or budget. We continue to expect total cash payments under our triple-net leases to be $1 billion in 2026, and for 2026 cash interest expense, net of interest income, we now project $150 million, reflecting our $600 million notes offering and current interest rates. For cash taxes, our outlook is unchanged. We do not expect to be a cash taxpayer in 2026 given the favorable tax deductions enabled by the one big beautiful bill in addition to our acquired NOLs and various tax credits. Our basic share count at the end of the first quarter was 1.334 billion shares. We also have 4.5 million potential dilutive shares from the remaining convertible notes stub and about 1 million dilutive shares from RSUs and stock options. I will now turn it back to Jay. Jay Snowden: Thanks, Felicia. I said during our last earnings call that 2026 would be a year of strong execution for PENN. While we have the rest of the year still to deliver, I am happy to report we are off to a great start. Looking ahead, we will remain laser focused on improving our free cash flow generation while optimizing our corporate overhead and remaining disciplined with our capital. With that, can we please open the line for our first question, Chelsea? Operator: As a reminder, that is star one to ask a question. We do ask that you please limit yourself to one question and one follow-up. Our first question will come from Barry Jonas with Truist Securities. Please go ahead. Barry Jonas: Hey, guys. Good morning. Jay, if we look outside of your development projects, what do you think is driving your strong retail trends? I think the consumer is benefiting from higher tax refunds, but as you mentioned, you do have higher gas prices and general macro uncertainty to deal with. Thanks. Jay Snowden: I think it is really what you laid out, Barry. It is hard for us to know exactly what the drivers are. There are definitely puts and takes. Gas prices are higher, although, as I have said in the past, as you look at regional gaming over the last several decades, the economic indicator that most closely correlates to behavior on regional gaming is employment, and employment continues to be a really good story in the U.S. Gas prices may be a little bit of noise and a headwind. The vast majority of our customers in the regional portfolio come within a 30-minute drive, so you are probably not making a decision on the price of gas as to whether you are visiting a casino once every week or two weeks or once a month, because it is not going to cost you much to get there. I would say we are seeing some benefit from tax refunds being higher year over year by what I read as 11%-12%, which is helpful, and I think we will probably continue to see and feel that. April feels very much through the first three weeks like a continuation of Q1, which is good. We are not seeing any cracks in the armor. We are feeling really good as we look out for the remainder of the year. As it relates specifically to PENN and our portfolio, we are now fully anniversaryed around the Bossier City new supply which opened in February. You probably feel an impact through maybe March, but now that we are here in April, we are starting to see some nice trends on a year-over-year basis out of Bossier City. In Council Bluffs, Iowa, we saw incremental supply hitting the Nebraska market across the state line probably through about now last year, so by the time you get to the second half of the year, we are feeling pretty good. You do not see any new supply really impacting us. There is a little bit of renovation competition in Baton Rouge, but that is not going to impact us by much given our asset quality there. We are going to have all four of our growth projects up and running — two of them fully ramping with M Resort hotel and Joliet, and two just opened. Learnings we have from the hotel expansion at M and the water-to-land conversion at Joliet are going to make the Columbus and Aurora ramps probably a bit stronger and faster. It still will take time, but there are learnings we are applying there. Overall, we are feeling good about the consumer generally, and we are feeling really good about the setup for PENN specifically as we move throughout the remainder of the year. Barry Jonas: Great. And then just for a follow-up, maybe for Felicia. I think your free cash flow targets look very strong this year. How confident are you in hitting them and maybe growing off these levels into 2027 and beyond? And then just sneaking in, should we think about potential uses? Thank you. Felicia Kantor Hendrix: We feel confident in our guidance. As Jay just said, we feel good about the consumer, generally and specifically, and we have talked about our pillars. One of those pillars of growth is increasing our free cash flow production going forward, especially given our right-sized CapEx and the resizing of our overall corporate structure. We are in a good place. We continue to improve in our Interactive segment, generating smaller losses throughout the year and, as we get into the fourth quarter, generating profitability. So again, we feel good about our free cash flow profile and growth looking forward. As we get into 2027 and think about our return of capital, we are obviously looking at share repurchases and continuing to delever. As you can see on slide five of our earnings slides this morning, we expect to generate lease-adjusted net leverage in the ranges of 5.3x to 5.7x this year — a significant decrease from 2025 — and our traditional net leverage over two turns lower in 2026. We expect that to continue to decrease into 2027. Then we are in a very good place as we look at our typical uses of capital inclusive of share repurchases, investing in our continued growth pipeline, and continued delevering. Jay Snowden: I would just take a step back. We are going to generate $3 plus of free cash flow per share this year. Our stock is trading just under $15 as of yesterday. So you have a 20% free cash flow yield. We have a tremendous amount of confidence in the ability to deliver on that this year. In every category, the story gets better in 2027. We are not going to guide yet for 2027, but you should assume everything looks better, which means that free cash flow story and the free cash flow yield are even more compelling as you look out to what is now not that far away given we are in April 2026. Operator: Our next question will come from Brandt Montour with Barclays. Please go ahead. Brandt Montour: Good morning, everybody. Thanks for taking my question. I just want to start off with digital. Was hoping you could talk, Jay, a little bit more about how that business progressed throughout the first quarter. Presumably, you continue to build iGaming stand-alone momentum and perhaps some further cost rationalizations. But we did see the industry iGaming growth slow in March. How would you characterize how your contribution margin exited the first quarter in terms of your trajectory toward breakeven? Jay Snowden: Happy to, Brandt. The backdrop for PENN is that we have really shifted our focus the last six months, and certainly throughout Q1, from the OSB-only states in the U.S. to much more of a focus — prioritization of OpEx and customer acquisition — on Canada as well as the states in the U.S. that offer both iGaming and OSB. From our perspective, the progression in the quarter looked quite good. February was the one softish month we had; January was solid; March was solid. We continue to see really good momentum on the stand-alone Hollywood Casino side of things. Overall, we are feeling comfortable. We are focused in the right areas. There is some pressure on customer acquisition costs as it relates to U.S. sports betting — that has been well covered — because of prediction markets and others in online sports betting stepping up to respond to that. That is not really a big focus of ours right now. Our focus is on Canada and getting ready for the Alberta launch. We feel really good about the setup there. We have done a lot of analysis on what worked for us with the Ontario launch and what maybe did not. We are doing more of the right things, and we expect to deliver market share results in Alberta that look very similar to what we have generated in Ontario, where we continue to have momentum. Our story may be a bit unique in that Canada is really driving a lot of our results, Hollywood stand-alone iCasino in the U.S. is driving results, and OSB is maybe less important overall to the Interactive story. We are feeling good about the momentum we have internally at PENN. Aaron LaBerge: Canada growth in March was very strong, and our stand-alone casino growth is very healthy. We are setting record revenues there. Growth and acquisition continue to be strong. As Jay said, we are seeing some softness on the OSB side, but we are offsetting that with disciplined spend and reinvestment in the areas that matter. Casinos — specifically stand-alone — and Canada both look really good going out of this quarter and into last quarter. Jay Snowden: Lastly, our retention in the U.S. post rebrand is exactly where we expected it to be. It has been very strong with our higher-worth customers, which has been the primary focus. We have lost some of the unprofitable and lower-worth customers — that was by design as we pulled back on reinvestment in some key strategic areas. We feel really good about having a handle on everything, which is important as we look out through the remainder of the year. When we put out the original guide for Interactive, we had some wiggle room on marketing spend, reinvestment, and cost structure, and we can make adjustments in real time, which is what we did in Q1 and will continue to do throughout the year. You will see really nice momentum in Canada and the U.S. as we close out the year with a profitable fourth quarter. Brandt Montour: That is great. Thanks for that. Just following on to that, in the deck, I think it says marketing spend was down over 65%. We were looking for 50%. Is that efficiencies you found in the quarter or timing? How should we think about the rest of the year in terms of that extra savings you outlined for the first quarter? Jay Snowden: Aaron, do you want to take the first stab? Aaron LaBerge: The decrease in marketing spend is also inclusive of what we are spending with ESPN. The rest is focused efficiency across the markets that are working, as we just talked about. We were spending a lot more in OSB-only states, which were not as profitable for us, so we have shifted that. We are focused in hybrid states that have both iCasino and sports betting. Stand-alone is showing a lot of great momentum, so we are spending there. Canada is starting to pick up as well, so we are spending there. We have a lot of levers to move around to make sure our marketing is working in the best way for us, and that is what we have been doing. Jay Snowden: There is nothing really one-time driving that decrease year over year, Brandt. It is us continuing to get better and smarter and be more judicious in terms of where we are allocating marketing dollars every week, every month, every quarter. That will continue. There will be a little bit of noise in Q3 with the Alberta launch, so I would not bake the Q1 decrease in for the rest of the year because of third-quarter noise. We feel really good about having a handle on cost structure, marketing, reinvestment, delivering the best returns, where to invest in customer acquisition, and where to pull back. The focus is on getting this to breakeven or better as we move throughout the remainder of the year and into 2027. Aaron LaBerge: We will continue to monitor results and invest where we see opportunity and where it is effective throughout the year. Operator: Our next question will come from Daniel Politzer with JPMorgan. Please go ahead. Daniel Politzer: Hey. Good morning, everyone. Thanks for the question. First, on the regional gaming landscape, there has been news flow on potential M&A. Where do you stand as you think about your balance sheet and leverage improving relative to potential opportunities if there were assets to come on the market or fall out of any large transaction? Jay Snowden: We are staying close to the headlines as you are, and we will see what does or does not develop. I feel better about our balance sheet today than I have in years, and that is great. As you look out to the end of the year, for us to have our lease-adjusted net leverage back into the mid-5s — the midpoint of what we have here is 5.5x, maybe a little better — and traditional net leverage in the low-2s, then look out to 2027, where if you were looking at doing something from an M&A perspective, it probably takes you out to 2027 given timelines in our highly regulated industry. We would be looking at leverage levels that would be lower — low-5s on a lease-adjusted basis and into the high-1s from a traditional net leverage perspective. We are going to have more capacity. The history of PENN M&A is very accretive given our overall operating structure. We have the industry's best tax-adjusted EBITDAR margins, a great asset portfolio, and a very valuable database that can help improve results of assets we acquire. We would definitely be interested in looking at the right asset in the right market at the right price. We are not placing proactive calls, but if assets on the market are attractive, we will take a look. Daniel Politzer: Thanks. Then turning to Interactive. In the quarter, your iCasino net revenue is up 15% and online sports book up 5%. Over the course of the year, it seems likely that iGaming will be up more. Can you put some parameters around how to think about growth through each of those segments for the full year? Jay Snowden: We obviously have assumptions built out in our model and our guide. You will definitely see higher growth from iCasino than OSB. It also depends on market growth. I would expect us to be at or above market growth in iCasino. For OSB, on a net basis, probably close to where market growth is — handle definitely lower — but on a net revenue basis, at the market is probably the right way to think about it. Operator: Our next question will come from Joseph Stauff with Susquehanna. Please go ahead. Joseph Stauff: Thanks. Good morning, Jay. I wanted to ask if you could give maybe an update on Joliet and the progress thus far in the months and the outlook in terms of the ramp. And then the second question is on Alberta. I know the launch date was moving around, but assuming early July, what are you allowed to do going into that launch to leverage your brand in Canada, especially around the NHL playoffs and with Edmonton being about a third of the population? Jay Snowden: I will take Joliet and then Aaron can respond to Alberta. We continue to feel really good about Joliet. Every month, we feel a little bit better. We are seeing strong results on the revenue side. You saw the slide where we are continuing to break records from a gaming revenue and non-gaming revenue perspective every quarter. The end of the quarter in March was our best month ever for Joliet, both in slots and tables. Same thing at M Resort. We feel really good about these investments and our ability to generate incremental revenue and incremental EBITDAR and EBITDA. Based on our learnings for Joliet, by the time we hit the 12-month mark in August, we are going to be feeling pretty good about the margin improvement as well from pre- versus post-, whereas the first six to nine months, revenues are much higher but you are figuring things out on the cost side and you have all of your restaurants and entertainment programs open most days of the week. Then you start to dial it back with your learnings. We are in that dial-back and optimization phase with Joliet while continuing to see database trends improve. We are very excited about what we are seeing month to date in April, in addition to what we saw in Q1. I think we are right where we expected to be, and it is a good template for what we expect with Aurora, applying those same learnings and a roughly 12-month time frame to ramp. At M Resort, there are a lot of learnings we can apply to our Columbus hotel that is going to open in June as well. Aaron LaBerge: In Alberta, we feel really good about our launch. TheScore brand in Canada is very strong — it is the number one media sports brand in market. We have as many people on theScore in Alberta as we do in Ontario, so it is very strong. We have a full-scale marketing plan that starts in July. The date is no longer moving around — it is July 13. We will have a full-scale launch then. We are already in market with preregistration. We will be active from a brand and performance marketing perspective. We launched in Ontario and enjoy a very nice market share there today — it is a big part of our gaming business — and we expect to see similar market share in Alberta based on the investments we are going to make. We have a great partnership with the Jays, which is a national team, and we will lean on that. If you are in Ontario today, you are seeing theScore brand all around the city, and the same will continue in Alberta. We will leverage all of our assets, and we are expecting a very successful launch. Operator: Our next question will come from Jordan Bender with Citizens. Please go ahead. Jordan Bender: Hi, everyone. Good morning. It looks like you exited the Washington, D.C. sports betting market. Following the rebrand and now what you see in the business with it settling, any change to philosophy operating in certain states, whether size or tax rates? Jay Snowden: It is a good question. That is something we are always evaluating. Generally speaking, staying in OSB-only markets — if we can get those to be close to breakeven from a contribution margin perspective — makes sense for us as you think about iGaming eventually passing legislatively in many of these states. Your number one feeder into iGaming is the cross-sell from online sports betting — 60% of our online gaming business in the states that offer both came from online sports betting initiation. That is compelling. If you are not losing money in a state and you have volume of customer activation and retention and you have cultivated relationships, it makes sense to stay in those markets. That is our view, but we will continue to look at each market individually. D.C., we did not have much volume, so it did not make sense for us there. Everywhere else, as of the last time we analyzed, it made sense to stay in the game. Aaron LaBerge: That is the beauty of having a scale platform. You can launch and operate at an efficiency level that is breakeven or better, and it does not really cost you anything to stay there. D.C. was the only obvious one for us to look at. Currently, there are no plans to change our footprint. Jordan Bender: Understood. Thanks. Felicia, I think your comments from last call point to sports betting gaming margins maybe being a little bit under what you expected for the quarter. Is it fair to assume there was a couple of million of bad hold in the EBITDA number in 1Q? Felicia Kantor Hendrix: I think that is fair. Jay Snowden: We came in at 8.4% versus a structural hold of 9%. That was some of the impact in Q1. Overall, we were pretty close to where we expected to be, so we did not call it out. Generally speaking, March Madness does not hold as well as other sports because you do not have the same same-game parlay volumes that you do with NBA, NFL, and MLB. We were not disappointed, but in Q2 it is more likely to be at that structural hold number of 9% or better depending on how things go for the NBA and NHL playoffs. Operator: Our next question will come from John DeCree with CBRE. Please go ahead. John DeCree: Hey. Good morning, everyone. Thanks for taking my questions. Jay, on the progress of an omnichannel strategy, can you talk a little bit about where your iGaming customers are coming from? Is that cross-selling from OSB? Is that activating the retail database? How is that strategy going and how are customers coming into the system? Jay Snowden: It has been and continues to be a big focus for us, given where the industry is and where it continues to head. Having a digital and a retail relationship with your consumer is absolutely critical — an imperative. We are happy today with our ability to execute on that. Specifically on iGaming, roughly 60% of that business comes directly from online sports betting. In the states where we have a retail footprint — less so New Jersey, more Pennsylvania and Michigan — most of the rest of our business comes from our retail database. Then you have some organic through the brands and performance marketing efforts and customer acquisition investment. Overall, we are continuing to get better. We are continuing to work on our systems to make it a lot more automated, which will be better for the customer experience from an omnichannel perspective. The ideal scenario — and I do not think we are that far away — is one platform, one app, and one wallet for everything, with full integration to your retail experience on premise. I feel really good about omnichannel execution. I think we do it very well relative to the market, and it is only going to get better as we continue to invest in resources and capital. Aaron LaBerge: We got a lot of early growth from our database in Pennsylvania and Michigan, as Jay mentioned, but the brand is really strong. As we continue brand and performance marketing, the growth you see in our numbers is building on itself. It is a nice one-two punch to leverage your database and then support that with marketing to pull in new users. We are not seeing signs of that stopping based on our marketing spend, and we expect to continue that success, especially in hybrid states. Operator: Our next question will come from Shaun Kelley with Bank of America. Please go ahead. Shaun Kelley: Hi. Good morning, everybody. Thanks for taking my question. Jay or Aaron, building on that last question, I think you mentioned 60% of iGaming coming from some form of sports betting cross-sell. More broadly, we have seen a slowdown in OSB trends — you can see it in the 5% growth rate number. What is the offset for PENN? Your data looks like it is outperforming what we are seeing in the broader market. We are seeing a correlation between OSB slowdown and iGaming slowdown for those that rely on cross-sell. What is working for you to stay above that trend? It sounds like Ontario is one point, but anything else? Jay Snowden: Overall, the way to think about it is Ontario is clearly an area of strength, and the launch of the Hollywood stand-alone casino is another. We are just now starting to anniversary those launches from late Q4 and early Q1 of 2024 into 2025. For us, being relatively new as a stand-alone with that brand lead is very compelling given that is the flag on our brick-and-mortar properties in Pennsylvania and Michigan. We are continuing to put some extra weight into Canada. In the areas where you would expect us to have brand equity — and we do — we are leaning in. That is why we are seeing performance a little bit better than the market. We would expect that to continue as we learn what is working and what is not. It is definitely Ontario and Hollywood stand-alone driving most of that. Aaron LaBerge: In Ontario, the strength of theScore brand really helps us. The sportsbook is growing, and that high cross-sell drives gaming revenue. We have also seen growth in our stand-alone theScore Casino as well, which we are investing in, so that is a nice one-two punch in Canada. In the U.S., cross-sell is important, but if you are getting lower OSB volume, it will affect casino revenue on that cross-sell. We have been offset somewhat by the success we have seen in Hollywood. We are moderating between the two. They are both still very important to a healthy business, but we are seeing more growth on the casino-only side. We are focused on continuing to drive OSB in hybrid states because the crossover is important. Shaun Kelley: Thanks. As a quick follow-up, could we get a legislative update? There are proposals in Michigan around potential iGaming/OSB tax increases, some in Ohio, discussions in Massachusetts and Arizona, and Maine as well. Jay Snowden: Generally speaking, on the states you mentioned, it is still relatively early in the process. We need to see how it plays out. Since prediction markets have gotten aggressive on spending, and it appears there is some impact on customer acquisition costs and potentially on OSB handle, legislators and state leaders we are speaking to understand that now would not be a good time to raise taxes on incumbent operators, especially on the brick-and-mortar side. Those conversations have been ongoing but productive. As it relates to Maine, there is litigation pending regarding the iGaming legislation that passed. We will see how that plays out. We are not happy with how that was put together in Maine as one of the two land-based operators who have paid hundreds of millions of dollars in taxes, invested a lot of money, and employ a lot of Mainers. If that ends up being implemented the way it was proposed, you should expect PENN to be investing next to zero in the state of Maine going forward. Operator: Our next question will come from Chad Beynon with Macquarie. Please go ahead. Chad Beynon: Hi. Good morning. Thanks for taking my question. Wanted to ask about the Chicago market. The VGT bill to permit restaurants in Cook County and Chicago was passed, and it looks like restaurants can start in the third and fourth quarter. Given your presence in the area — I know you are a little further out into the suburbs — do you think there will be any impact from this, and is anything factored into the guidance in the back half? Jay Snowden: I would say no in terms of impact, just given where our properties are located, as you noted, in the suburbs. For Aurora, our primary competitor is Grand Vic. We do not really compete with folks who would plan on spending the majority of their gaming budget in downtown Chicago given traffic and commuter dynamics in Chicagoland. Same thing with Joliet; our primary competitor is Harrah’s Joliet. That will not change. If anything, we are excited about being able to participate. We have Prairie State Gaming, our VGT route operation business in Illinois, that does quite well for us and continues to grow on the top and bottom line. We anticipate participating in the expansion of VGTs in the greater Chicago area, which overall should be net positive for us. Chad Beynon: Interesting. Thank you. With the increase that you have seen on the retail customer, what is the current status or update on cashless gaming? You were a leader with that. Do you think this will continue to progress and maybe with some of that retail business coming back, you could see more green shoots there? Jay Snowden: The dynamic on cashless for us is that customers who are engaged with cashless love it and use it almost every time they visit our retail properties. We see stronger retention and LTV with those customers. We are not planning to do anything wildly different. We are looking to continue to improve the experience overall, and that will not change. We continue to make the experience better, particularly as we think about new openings like Joliet and Aurora and what adoption looks like. It is probably more an education thing than anything else. Those who have engaged with our cashless product do like it, but the percentage of those who engage is still below where we want it to be. We are continuing to work on that. Overall, I would expect adoption to continue to improve over time. Operator: Our next question will come from Jeff Stanchel with Stifel. Please go ahead. Jeff Stanchel: Hey, good morning, everyone. Thanks for taking our question. One from us on the retail business. It seems there is a bit more pushback recently against unregulated skill games and other gray market distributed gaming. You saw the Virginia governor veto the bill. Missouri seems to be starting some legal enforcement. There is a court case making its way through Pennsylvania. Jay, do you agree the trend seems to be shifting against these machines, and how much of a tailwind could this be if machine counts go down materially in any of these key states? Jay Snowden: We are feeling better about where things sit in states like Pennsylvania and Missouri than we probably ever have. The skill game legal case is going to be in front of the Pennsylvania State Supreme Court in the next couple of months. We will see how that goes. We have a very strong opinion as to skill games and their illegality in most of these markets, if not all. In Missouri, you have an attorney general who we think is doing a fantastic job stepping up and shutting devices down. The argument is often that bar and tavern owners need the machines or else they may not have a profitable operation. The reality is these are illegal. I do not think we would make that argument in other areas of life. If you are operating illegal machines and the state attorney general says shut them down, they need to be shut down and probably should never have been in operation. We are encouraged by what we are seeing in Pennsylvania and Missouri. There is still time for things to play out, and we will stay close to it. If it moves in the direction we hope, it would create a tailwind for us on the retail side. It is hard to measure given variables, but I would imagine it would ultimately be a tailwind. Operator: Our next question will come from Ben Chaiken with Mizuho. Please go ahead. Ben Chaiken: Hey. Good morning. Thanks for taking my questions. A few on Aurora. How long will you be in transition? Presumably, there will be some downtime from your comments — I am guessing it is largely in May. Is there anything notable about this opening and project versus Joliet? My perception is that the surrounding area around Aurora is a little more developed versus Joliet. And then, what are some of the learnings you alluded to earlier — you described it as potentially stronger and faster? Jay Snowden: Happy to. For Aurora, you are correct: it will be roughly a two-week operational shutdown that will happen in June. It happens right before we open, so you should expect that to happen maybe a little bit in late May, but the rest will be in June. It will be entirely in the second quarter of 2026. Having done it once before closely with the Illinois regulators, we expect it to go smoothly, given that the Joliet transition also went smoothly. The biggest differences between Aurora and Joliet include the surrounding area, as you noted. The Rock Run development around Joliet is just now starting to come out of the ground. We have 250 residential units going up adjacent to Joliet that should be open by the end of this calendar year, and a 250-plus room hotel breaking ground soon and opening by 2027, within walking distance to Joliet. That is a really good long tail for Joliet — as good as the start has been, it should get better over time. For Aurora, we expect a ramp that continues to improve over time as most new openings do. It is a more mature area — we are adjacent to the Chicago Premium Outlets, which generates millions of visits a year. We are going to have a hotel with over 200 rooms with suites, a spa — Joliet does not have that — a larger casino floor, more F&B, entertainment space, and outdoor entertainment. Think about Aurora as bigger with a few more amenities versus Joliet, in a very mature area, right off the interstate. We are feeling bullish about the Aurora opening given what we have seen in Joliet so far. Ben Chaiken: That is helpful. One on Alberta. What were some of the considerations when thinking about customer acquisition and marketing? You talked about strategies that worked and did not work with Ontario. Any nuances you can share about expectations, whether that is player behavior or market size? Aaron LaBerge: When we launched in Ontario, it was a lot less competitive. There are a lot more applicants and people in market for Alberta, which is a factor we are looking at. Leaning on theScore brand will help us break through some of that noise. In terms of players, it is hard to tell because they are not playing today. Right now, we are modeling similar behaviors to what we see in Ontario, and we will adapt from that. Operator: Our next question will come from Trey Bowers with Wells Fargo. Please go ahead. Trey Bowers: Hey, guys. Thanks for the question. On digital, as we look through the balance of the year, any incremental detail you can give on the cadence? When you say a small loss, should we look to Q1 as a good idea of what Q2 and Q3 should look like and then get to a Q4 level of exit profits? Jay Snowden: Happy to, Trey. Q2 looks very similar to Q1 — maybe a touch better — but in that range of a small loss. Q3 would be a larger loss because you have the Alberta launch in Q3 for the first three months of that market. Q4 should be profitable and get us to a total loss for the year of $20 million. That is the cadence to think about. Trey Bowers: Perfect. As a follow-up, going back to your comments on M&A earlier, with the shares where they are, how do you think of a hurdle rate for M&A versus buying your own stock, especially given you referenced the 20% plus free cash flow yield? Jay Snowden: This is a topic we spend a lot of time on at the board level. We are constantly evaluating our capital allocation options. Something on the M&A side would have to look really free-cash-flow accretive to invest there. If you have a free cash flow yield at 20% plus, that is what you have to measure against, with different variables added to the equation. We think there could potentially be assets where, depending on the market and the value our database and operating cost structure could deliver, you could get a really nice return in that same neighborhood. There is no doubt that our stock is very attractive at these levels, especially as you look out to 2027. Operator: Our next question will come from Bernie McTernan with Needham & Co. Please go ahead. Bernie McTernan: Great. Good morning. Thanks for taking the question. On the retail guidance raise for this year, it was really only flowing through the 1Q beat. Was it just an earlier-than-expected impact from the growth projects, or any other color you could provide? Jay Snowden: It is still early in the year. We are feeling really good about what we see in April, but we do not want to get ahead of ourselves. There is a lot of geopolitical and macro noise, and markets are fluctuating. Based on where we are in the calendar year, that is more of a factor than anything. If the trends we saw in Q1 and are seeing in April continue, then we would have guided higher than what we ultimately did. We want some more time under our belt, and we want to get the two new properties opened — Columbus and Aurora — and then we will have more to share. The next time we are on this call in August, we will be in a position to be more clear about the rest of the year. Bernie McTernan: Makes sense. On OSB, revenue grew 5% this quarter. It seems like MAUs were down, so presumably handle was down. So the growth was driven by higher GGR hold and lower promotional intensity. Can you frame the runway if MAU and handle trends stayed this way — what is the runway to keep stable-to-slightly growing that OSB revenue base? Aaron LaBerge: You hit it. Hold is helping us as our volumes are down. We will focus on maintaining volumes and growing them slightly, although our plan anticipated volumes would go down as part of our new structure and focus. Casino volumes are important, Canada is important, and OSB in hybrid states is important. We did see that softness, as you noted, but we held well. We continue to make improvements in our risk and trading. We have confidence in how we are holding and the improvements we are making. We think hold will continue to help us as volumes are flat. Jay Snowden: On a year-over-year basis, MAU declines have been pretty consistent. It is not as though these are further accelerating in the wrong direction. It has been very stable post rebrand throughout Q1. The goal in 2026 is stability and then to start to see some growth in MAUs and continue to see growth in ARPMAU as you move throughout this year and next year. We are focused on our higher-worth sports betting customers. That is working for us; retention has been fantastic. We want to be above flat in OSB net revenue. We accomplished that in Q1 and want to continue to accomplish that as we move through the rest of the year and into 2027. Operator: Why do we not take one more question? Our last question will come from Stephen Grambling with Morgan Stanley. Please go ahead. Stephen Grambling: Hey. Thank you for sneaking me in. Sticking with overall digital, a clarification on turning profitable in the fourth quarter. Do you anticipate you could be profitable even if we strip out the licensing or skin revenue? And longer term, how do you think about how Canada versus the U.S., excluding skins, will contribute to EBITDA? Any puts and takes in each? Jay Snowden: We will have a lot more to share as we move throughout the year. Overall for Q4, based on what we are anticipating right now, we will be profitable inclusive of the skin revenue. Probably pretty close to breakeven without the skin revenue, if not a little positive. We just need more time under our belt post rebrand, but that sets up very nicely as we head into 2027. We want to get this business to profitability overall and then to profitability after skin revenue, and we are going to do that. Trends are moving in the right direction from an NGR, cost structure, and contribution profit perspective. That will continue to get stronger every quarter as we conclude the year and head into 2027. Stephen Grambling: Is there any reason to believe the margin structure long term would be different, excluding skin revenue, in Canada versus the U.S. on an apples-to-apples basis? Jay Snowden: Canada is going to be our strongest margin market in North America, driven by volume and market share and by tax rate, and the fact that you have iCasino and OSB. Canada for us is market number one from a margin and profitability perspective. In the U.S., in the states that have both OSB and iCasino, we are going to see much stronger margins than the OSB-only states. We are of the opinion it is probably a matter of time before many of the OSB-only states turn to some form of iGaming, and we want to stay in the business and be ready when that day comes. Operator: Thank you. We have now reached our allotted time for questions. I would like to turn the call back over to management for any additional or closing remarks. Jay Snowden: Thanks, everyone, for dialing in. I know it is a busy morning in the space. Thank you, Chelsea, and we look forward to speaking to all of you again in August. Operator: Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Greetings, and welcome to the Dow Inc. 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 you would like to ask a question at that time, please press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I will now turn the call over to Dow Inc. Investor Relations Vice President Andrew Riker. Mr. Riker, you may begin. Andrew Riker: Good morning. Thank you for joining today. The accompanying slides are provided through this webcast and posted on our website. I am Andrew Riker, Dow Inc.’s Investor Relations Vice President. Leading today’s call are James R. Fitterling, chair and chief executive officer; Karen S. Carter, chief operating officer; and Jeffrey L. Tate, chief financial officer. Please note our comments contain forward-looking statements and are subject to the related cautionary statement contained in the earnings news release and slides. Please refer to our public filings for further information about principal risks and uncertainties. Unless otherwise specified, all financials, where applicable, exclude significant items. We will also refer to non-GAAP measures. A reconciliation of the most directly comparable GAAP financial measure and other associated disclosures are contained in the earnings news release that is posted on our website. On slide two is our agenda for today’s call. James R. Fitterling and Karen S. Carter will start with a summary of our first quarter performance, including details on each of our three operating segments. Karen S. Carter will then provide an update on current industry dynamics, including how global supply disruptions are influencing market conditions. She will also discuss Dow Inc.’s competitive advantages, particularly our purpose-built asset footprint and advantaged feedstock positions. We will then outline several actions underway to deliver a step-change improvement in earnings across the cycle, including progress on Transform to Outperform and our other self-help initiatives. Jeffrey L. Tate will close with our outlook for the second quarter and an overview of our capital allocation priorities and focus areas for disciplined financial management, both in 2026 and across the cycle. Following the prepared remarks, we will open the call for Q&A. I will now turn the call over to James R. Fitterling. James R. Fitterling: I would like to first take a moment to recognize our colleagues, neighbors, customers, and partners in the Middle East who are facing significant turmoil and uncertainty. Our thoughts are with everyone affected by this conflict, and we wish for their safety and well-being during these difficult times. On slide three, I will cover additional details from the first quarter. The solid results we delivered reflect our commitment to controlling what we can control. While January and February order books were solid, we experienced a sharp positive inflection in March with the beginning of the conflict in the Middle East. We expect the supply disruption will persist throughout 2026. During this quarter, we focused on Dow Inc.’s strengths of prioritizing our customers, managing costs aggressively, and operating with safety, reliability, and long-term value creation. We delivered 3% sequential volume growth, net sales of $9.8 billion, and operating EBITDA of $873 million. And with our self-help actions well underway, we delivered approximately $193 million in period cost savings. As we look ahead to the second quarter and beyond, we are taking actions to enhance Dow Inc.’s agility and resilience. We are also entering a seasonally high-demand period, providing additional tailwinds as we move through the next couple of quarters. In addition, an increasingly positive margin backdrop continues to unfold, and we expect the pricing momentum that began in March to continue across every business and every region in Dow Inc.’s portfolio. On the supply side, the conflict in the Middle East has created constraints that are clearly evident in the near term. This includes supply chain disruption for an extended period of time. We also anticipate impact to future investments, including potential delays or cancellations of planned industry capacity additions, as well as increased pressure for capacity rationalization. And lastly, we expect that the higher global oil and naphtha prices will steepen the global cost curve. Against this backdrop, our in-flight actions serve to further strengthen Dow Inc.’s competitiveness and position us to drive margin improvement and capture earnings upside. First, our incremental growth investments are delivering returns, like our new world-scale polyethylene train in Freeport, Texas. And we are making progress on our Alberta project where the overarching merits of this investment and the cost-advantaged Americas are further reinforced by the current global dynamics. In addition, the benefits from our previously announced European asset shutdowns begin this year. And lastly, we are building a Dow Inc. that is more agile and resilient through any cycle. A company that delivers through periods of volatility, and one that focuses on capturing upside, improving margins, and outperforming our peers to effectively reset the competitive benchmark. We will share more details on all of this later in the call, and Karen S. Carter is going to cover our first quarter operating segment performance. But before that, I would like to briefly address our recent leadership announcement. Effective July 1, Karen will assume the role of chief executive officer and I will move to the role of executive chair. This announcement follows a deliberate multiyear succession process in partnership with our board and ensures continuity as we execute our strategy. Serving as CEO of Dow Inc. has been the privilege of a lifetime, and I am incredibly proud of what our team has accomplished together. This transition comes at the right time as we transform our company for its next phase of growth. I have full confidence in Karen’s leadership, her deep operational experience, and her ability to drive performance and value creation. As CEO, she will continue our efforts to transform Dow Inc., positioning us for greater agility and resiliency through any phase of the cycle. She is exactly the right leader to guide our company and deliver on our strategic priorities with discipline and rigor. Thank you. Karen S. Carter: Good morning to everyone joining today. I am honored to step into the role of CEO of Dow Inc. Having spent my entire career with the company, I have a deep appreciation for our people, our innovation capabilities, and the critical role we play in enabling our customers’ growth. As we look ahead, our priorities remain consistent. We will continue to drive operational excellence, maintain disciplined capital allocation, and advance high-value growth in our core markets. Dow Inc. is well positioned with our advantaged global portfolio, a strong balance sheet, and a talented global team. My focus will be on driving execution, delivering value for our customers, and ensuring consistent long-term value for our shareholders. I am excited about the opportunities ahead and confident in our ability to continue to deliver for all stakeholders. Turning now to our first quarter results by segment. As James R. Fitterling mentioned, Team Dow Inc. remains focused on disciplined execution in every business throughout the first quarter. As the situation in the Middle East unfolded in March, we continued to manage costs and cash tightly while also prioritizing our customers. We delivered solid results in January and February, and then dynamics in the Middle East quickly impacted industry supply-demand conditions. In fact, our operations outside the region experienced the largest percent sales gain from February to March that we have seen in our company’s history. Our teams remain focused on balancing near-term dynamics with discipline while also progressing our long-term objectives, and this agility continues to be a key differentiator for Dow Inc. In Packaging & Specialty Plastics on slide four, first quarter net sales were $4.9 billion, reflecting price decline versus the same period last year. Polyethylene volumes increased in all regions both versus the prior year and last quarter, supported by continued global growth in flexible food and specialty packaging applications. Polyethylene volume gains were offset by lower merchant olefins sales following a turnaround in the U.S. Gulf Coast and lower licensing revenue. With safety and reliability at the forefront of our priorities, this turnaround is now complete. The unit is fully operational, and our team is shifting their focus to completing our second cracker turnaround for the year, which is planned for the second quarter. Operating EBIT was $[inaudible] million driven by lower integrated margins and higher planned maintenance activity. This was partly offset by higher polyethylene volumes, as well as tailwinds from the company’s cost-reduction efforts. Looking ahead, our significant Americas footprint, including our new Poly7 asset, will enable our teams to capture improved margins. Next, turning to our Industrial Intermediates & Infrastructure segment on slide five. Net sales were $2.6 billion, down 8% year over year. This was largely due to lower prices in both businesses as well as lower volumes in polyurethanes as a result of impacts from the Middle East conflict. Our proactive cost-savings actions in both businesses provided tailwinds that offset some of the decline. Volume declined in the quarter as well, primarily due to our actions to reset our competitiveness by shutting down our higher-cost upstream propylene oxide asset late last year. As a reminder, this action rationalized approximately 20% of North American PO industry capacity. And while we are experiencing a prolonged weak demand landscape across building and construction, our new alkoxylation assets are driving growth in Industrial Solutions, which serves attractive end markets such as home care, pharma, and energy. Moving to the Performance Materials & Coatings segment on slide six. Net sales were $2.1 billion, which is flat compared to the same period last year, with higher volumes in both businesses. Volume increased 2% year over year, largely in downstream silicones, particularly in electronic and home and personal care end markets. Notably, downstream silicones continue to be a growth engine for the business, delivering high single-digit volume improvement versus last quarter. The business remains focused on advancing our multiyear asset and market strategy which will help us grow with key customers. The strategy includes shifting our mix towards higher-value products in markets like electronics and mobility, while rightsizing higher-cost upstream capacity. And this work is further advanced by our previously announced European asset actions, including the shutdown of our basic siloxanes plant in Barry, UK by the middle of this year. This capacity represents approximately 25% of European siloxane industry capacity. Next, on slide seven, I will frame further details on the current macroeconomic environment. The headline is this: demand across many markets is steady. At the same time, supply is short, and arbitrage is increasing. On the demand side, for our core polyethylene packaging markets, conditions remain resilient. But we are seeing mixed signals in other key markets that Dow Inc. serves. For example, in the U.S., inflationary pressures and higher interest rates are still weighing on existing home sales. This continues to be reflected in our Industrial Intermediates & Infrastructure and Performance Materials & Coatings segments, both of which serve the building and construction market. Consumer spending has shown some modest improvement but the landscape and behaviors are likely to remain cautious until we see a significant inflection in macroeconomic conditions. Moving to supply dynamics. We anticipate that shutdowns, feedstock limitations, and logistical constraints will continue to reshape polyethylene product availability across regions. These conditions are creating ripple effects well beyond the Middle East, including significant impacts to logistics costs and transit times. Supply and feedstock into Asia and Europe are constrained, which is triggering price increases globally. It is also leading to increased production in the Americas and is providing Dow Inc. the opportunity to capture new business in Europe. The duration and severity of these constraints increase the likelihood of lasting industry impacts, including the potential for accelerated capacity rationalization in this context, as well as delays or cancellations of planned capacity additions. Expectations for higher U.S. supply are helping to ease some of the pressure and provide stability. North American LNG markets remain well supplied and regionally insulated from these disruptions. In addition, U.S. Gulf Coast NGLs, including ethane, continue to be largely unimpacted. All of these factors underscore the benefits of Dow Inc.’s cost-advantaged footprint in the Americas. Next on slide eight, we will unpack some of the current regional and industry impacts in more detail. In the two months since the conflict began, the scale of disruption we have seen is unprecedented. Roughly 20% of global oil capacity is currently offline and approximately half of global ethylene and polyethylene supply is either offline, constrained, or directly impacted. These are unparalleled numbers reflecting a combination of physical infrastructure damage, feedstock limitations, and severe logistics disruptions. Transit through the region remains significantly impaired, largely driven by the ongoing disruption in the Strait of Hormuz. And the disruption has been amplified across Asia and Europe, tightening feedstock availability and pushing producers to reduce production or increase prices to cover the rapidly escalating costs occurring from the conflict. Looking across regions, a large portion of Middle East capacity remains offline with increasing risk of lasting infrastructure damage. In Asia Pacific, feedstock constraints are limiting operating rates and reducing export availability, challenging producers who are operating at uncompetitive levels. And in Europe, high costs will require continued price increases to justify additional production. In contrast, the Americas continue to operate at high rates, highlighting the importance of Dow Inc.’s cost and feedstock advantages in the region. Currently, it is estimated that roughly three quarters of announced global capacity additions would be either directly impacted by the conflict or dependent on supply chains that remain highly constrained. The longer these conditions persist, the greater the potential for further industry changes. And lastly, it is not likely that the pricing impact of these events will be temporary. We expect rising global production costs and a steepening global cost curve to continue influencing pricing and spreads. Next, on slide nine, we will discuss how Dow Inc.’s specific advantages drive near-term value. At the beginning of the Middle East conflict, petrochemical prices, especially polyethylene, were at multiyear unsustainable lows. Despite broader near-term market volatility, we anticipate packaging demand will remain resilient, providing meaningful pricing potential as evidenced by recent March settlements. That brings me to our advantaged global asset footprint. Dow Inc. operates a large portion of our light cracking capacity in the cost-advantaged Americas, with assets in the U.S., Canada, and Argentina, all of which continue to operate at high rates. Our consistent focus on investing in the Americas gives us reliability, feedstock security, and cost stability at a time when global supply chains are strained. In Europe, our feedstock flexibility remains a critical differentiator. With naphtha supplies impaired and pro-nap spreads increasing, Dow Inc.’s ability to optimize across feedstocks provides a clear cost and availability advantage versus peers. This allows us to protect and expand margins through running our assets competitively, even in a volatile energy and feedstock environment. And specific to our Packaging & Specialty Plastics segment, Dow Inc. has higher North American capacity than our closest peer, further supported by the 2025 startup of our Poly7 polyethylene train in Freeport, Texas. Additionally, approximately 80% of our P&SP product sales go into higher-value, resilient applications including packaging, consumer, and health and hygiene. These end markets have historically demonstrated lower risk of demand destruction. The structural advantages we have deliberately built over time give us confidence in Dow Inc.’s ability to manage through volatility while capturing value at any point in the cycle. In addition to these portfolio advantages, slide 10 outlines the key areas where we remain committed to self-help actions that will strengthen Dow Inc.’s earnings power. First, we are on track to deliver the remaining cost savings from our previously announced $1 billion program by the end of this year. We are also executing a series of strategic moves that will uniquely position Dow Inc. to win. This includes earnings upside following the completion of our remaining incremental growth investments in cost-advantaged regions, as well as benefits this year from the beginning of our European asset shutdowns. Additionally, Transform to Outperform is expected to deliver at least $2 billion in near-term EBITDA improvement. As a reminder, we expect approximately two-thirds of that to come from productivity gains, and the remaining one-third from growth. Next, I will share a few examples of early opportunities that we have identified and are taking action on. First, we have begun transformation assessments at approximately 25% of our large sites with a goal to deliver sustained improvements in returns from all of them over the next two years. We are evaluating and driving improvements in production yields, asset utilization, maintenance productivity, energy efficiency, and third-party spending, and we expect this work will result in more than $400 million of the $1.3 billion in productivity improvements that we committed to. The first site transformation identified approximately $80 million in run-rate EBITDA improvement, well exceeding our initial projection. We are also seeing early growth gains from expanded use of digital commercial capabilities and more disciplined opportunity management. Pilot efforts in these areas have meaningfully improved the quality, size, and value capture from new opportunities. Learnings are quickly being scaled to support and accelerate targeted growth across the portfolio. And since completing comprehensive evaluation, our dedicated end-to-end process owners have shifted from assessment to execution. For example, in our plan-to-fulfill work process, we defined a clear end state from demand planning to manufacturing operations all the way through to customer delivery. We are now redesigning work and leveraging technology to simplify workflows. This enables increased efficiency for Dow Inc. and service reliability to our customers. Additionally, in the first quarter, we announced a series of senior leadership changes that delivered an approximately 20% reduction in both headcount and cost at that level. We remain confident that our collective efforts in Transform to Outperform will ramp sharply to $400 million in the second half of the year, creating a Dow Inc. that is more resilient across the cycle while consistently delivering growth, customer success, and improved shareholder value. And as an important reminder, all of our self-help actions and the upside they provide are additive to the potential upside we anticipate going into the second quarter. Next, I will turn the call over to Jeffrey L. Tate, who will cover our second quarter modeling guidance and Dow Inc.’s key financial strength. Thank you. Jeffrey L. Tate: As we look ahead, I would like to provide some context around our earnings expectations for the second quarter and for the remainder of the year. As we have noted throughout today’s prepared remarks, the situation in the Middle East has introduced volatility and uncertainty into the broader market environment, including how customers secure product. We remain committed to taking actions to position Dow Inc. for success amidst this ongoing turmoil. Karen S. Carter shared the ways in which we are quickly pivoting to several of the areas that are directly within our control. This includes leveraging our advantaged manufacturing footprint and activating pricing levers across all businesses and all geographies, including our largest operating segment, Packaging & Specialty Plastics. These levers give Dow Inc. significant near-term advantages. Our expectation for second quarter is approximately $12 billion of revenue and EBITDA of $2 billion. This sequential improvement is driven by pricing gains, expanding margins, increased asset utilization, typical seasonal demand improvement, and our continued focus on reducing cost—all of which are expected to more than offset rising feedstock and energy costs, planned maintenance activity, and expected sequential decreases in licensing revenue. In Packaging & Specialty Plastics, our global pricing strategies—especially for polyethylene—are designed to capture value in key markets, helping to mitigate external pressures. We expect this to drive significant sequential improvement versus the first quarter. For Industrial Intermediates & Infrastructure, we expect normal seasonality and improved margins to provide sequential gains. With that, higher plant maintenance and lower licensing activity in the second quarter are expected to mute these tailwinds. And in the Performance Materials & Coatings segment, we anticipate a modest impact from the Middle East conflict. However, rising propylene costs are likely to delay seasonal demand uplift that we would normally see across building and construction end markets. On equity earnings, several factors will impact Dow Inc.’s sequential earnings expectations. First, we anticipate a headwind from the safe proactive shutdown of our facilities in Kuwait as a result of the Middle East conflict. Lower feedstock availability at our Thailand joint ventures will also be a headwind. Additionally, beginning this quarter, we suspended Sadara equity loss recognition in accordance with U.S. GAAP. The carrying value of all liabilities on the balance sheet reached a total of Dow Inc.’s existing relevant obligations and commitments. This is also reflected in our updated full-year equity earnings expectation which can be found in the appendix of today’s presentation. In summary, predicting global macroeconomic and end market dynamics in this period will continue to be difficult. But we expect more potential upside to these projections than downside. All of this represents our best assessment during a period of rapid change. We will provide updates later in the quarter if there are any significant developments compared to our current expectations. Next, on slide 12, I will spend a few minutes on our consistent approach to disciplined financial management, which remains another core differentiator for Dow Inc., especially in environments like we faced over the past few years. First and foremost, our capital allocation framework remains consistent. Everything starts with safe and reliable operations. In addition, we continue to maintain a solid balance sheet as well as our longstanding commitment to an investment-grade credit profile. On capital deployment, we remain focused on high-quality organic investments, with capital expenditures expected to be at or below depreciation and amortization across the cycle. This includes prioritizing advantaged assets, regions, high-return projects, and investments that strengthen our cost position and earnings durability. With our near-term growth investments behind us, Path2Zero remains our only planned major project. Returning cash to shareholders through dividends and share repurchases also remains a clear priority across the cycle. Looking ahead to the balance of the year, our cash priorities are clear. In March, we received a cash payment from the Nova litigation, and we expect to receive the remaining tax withholdings of approximately $300 million later this year. At the same time, we remain focused on delivering the full benefits of our self-help actions, which we expect to total approximately $1.1 billion this year. This includes the remaining $600 million from our 2025 program, as well as $500 million in growth and productivity improvements from Transform to Outperform. As we mobilize the teams and complete several assessments in the immediate term, we expect to demonstrate a significant portion of the in-year value in the second half of this year. We will also continue to take a disciplined approach to working capital, making prudent trade-offs to support customers and operations while protecting our cash position as earnings improve. This was evident in the first quarter as we saw a year-over-year improvement in working capital of greater than $300 million. Importantly, all of this is underpinned by our strong liquidity position and well-laddered debt profile, with no substantive maturities until 2029. We have approximately $14 billion of total liquidity, inclusive of cash on hand and committed bilateral credit lines. Our revolving credit facility was recently renewed through 2030, and our committed accounts receivable securitization includes the recent renewal of our European facility through 2029. We also ended first quarter with over $4 billion of cash on hand. This liquidity positions us well to manage through macro or industry volatility without compromising our near-term priorities or Dow Inc.’s long-term strategy. Our intentional actions give us confidence that Dow Inc. can continue to navigate the current environment, invest in the right opportunities, and deliver sustained value to shareholders across the cycle. Next, I will turn the call back to James R. Fitterling to provide closing remarks on slide 13. James R. Fitterling: Thank you, Jeffrey L. Tate. As I look at slide 13, it really captures how we position Dow Inc., not just for this quarter or this year, but for long-term value creation through the cycle. First, even in a disrupted industry environment, we are well positioned to navigate market dynamics, which was apparent in our first quarter results. Our order books were solid in January and February, and we saw a sharp positive inflection in March, and we expect that to continue throughout 2026. As a result, the positive momentum from announced pricing actions across every business and every region is taking hold and building. At the same time, our mix continues to shift toward higher-value sales, including functional polymers where Dow Inc.’s differentiation clearly shows up in our “pound for polyolefins” benchmarking. We published this peer benchmarking today on our investor relations website. This annual process provides important insights into our performance and that of the broader industry, and it is what ultimately led to Dow Inc.’s actions to effectively reset a competitive benchmark through Transform to Outperform, which is underway. This year’s results demonstrate that Dow Inc. is delivering consistent outperformance in many areas. This includes superior performance in our advantaged polyolefins portfolio, as well as outperforming the peer median on EBITDA growth for downstream silicones across all markets. That is not accidental. It is the result of disciplined execution and a focus on value. Our teams understand Dow Inc.’s strengths and have aligned our R&D and innovation to the areas of our portfolio where Dow Inc. wins and our customers value it the most. Second, we have focused relentlessly on building long-term agility and resilience. We are acting thoughtfully but decisively to improve the quality of our portfolio and improve our long-term earnings. And we are not backing off. Transform to Outperform is already driving new value that is additive to near-term market upside. We are leveraging our strengths to enable faster, more efficient operations, improve innovation, and modernize how we serve our customers in high-value markets. At the same time, we are seeing tangible benefits from decisive portfolio actions, including the completion of our incremental investments in high-growth areas of our portfolio, as well as the shutdown of higher-cost upstream assets in Europe that will begin later this year. And with a revised timeline, our Alberta project will enable growth and resilience in high-value applications like pressure pipe, wire and cable, and food packaging. We remain confident that Dow Inc. can capture outsized growth in these markets for years to come, which will create additional value for shareholders. And lastly, foundational to everything we do is the financial discipline and flexibility that we have built. That discipline matters. It is what allows us to be steady when others are reactive and to keep investing when it counts. So when we say Dow Inc. remains a compelling investment opportunity, we say it with confidence, grounded in actions. We entered 2026 in a strong position and we remain on solid footing. Our long-term vision, our strategic priorities, and the steps we have taken to navigate a challenging down cycle inflected in a way that positions our company for stronger, more resilient growth for years to come. I am incredibly proud of how Team Dow Inc. has navigated all the challenges that we have encountered over the years. They have adapted quickly to changing market signals while staying focused on cash generation and improving margins. Thank you for your continued interest and support of Dow Inc. I will now turn the call back to Andrew Riker to get us started with the Q&A. Andrew Riker: Thank you. We will now open the call for questions. I would like to remind you that our forward-looking statements apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Operator: Thank you. Ladies and gentlemen, we will now begin our question-and-answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. We kindly ask that everyone limit themselves to one question. Your first question comes from the line of Hassan Ahmed from Alembic Global. Your line is live. Hassan Ahmed: Morning, James and Karen, and congratulations to both of you on your new roles. A question around the timelines associated with the normalization of supply chains in a post–peace declaration sort of environment, and also the sustainability of some of these pricing initiatives, particularly for polyethylene, that you have announced. It seems that, in a no–facility damage environment, it would take at least probably three quarters for supply chains to normalize. Then there are questions around how much damage to facilities has actually been done, what impact that may have on the availability of supply, and the availability of feedstocks as well. And in a higher oil, higher naphtha pricing environment, would rationalization be accelerated? Would love to hear your views about the sustainability of pricing and timelines associated with normalization, particularly as consensus estimates seem to be factoring in a V-shaped normalization of these supply chains. James R. Fitterling: I will take a shot, and then I will ask Karen to talk about the pricing. When I was at CERAWeek at the very beginning of the conflict in early March, I mentioned that we did some modeling at that time that it would be 275 days or longer for the supply chain disruption to unwind. And a lot has changed since then. There have been more attacks in the Middle East. More assets have had to be shut down. This week, the last cargoes of crude to go to refiners landed at refiners. So the way I look at that is the first ripple effects of the shutdown of the straits hit the shores this month—two months later. And we do not have any sign that the straits are going to reopen. In fact, any ships that have attempted have been turned back. The straits moved over 130, probably close to 150 cargoes a day—very different cargoes: very large crude carriers, LNG cargoes, marine-packed cargo for moving plastics, bulk chemical shipments, refined fuel shipments. All that stopped, and all that tankage is full and sitting in the Arabian Gulf. And so we have to clear that, and I just gave you a pretty good estimate of what it takes to clear it and get it out to market, and then you have to get vessels back in and get them offloaded. You are going to have to get a lot of empty vessels back in the Gulf before you can restart plants because the plants are at tank tops. When we looked at it, we said shipments that go out of the straits are going to be prioritized. I do not think it is very likely that petrochemical and plastic shipments will be prioritized first. I think it is more likely that crude oil, fuel, fertilizers would be prioritized first because those affect national security and food security for a lot of countries. You have got repairs that have to be made. In some cases, the repairs may be made because of the duration of this before the straits reopen, so if there is anything good here, you have got some time to get repairs made before the straits reopen. But you have to have human capital, and you have to be able to get the equipment in that you need to repair some things. The 275 days I mentioned was the logistics unwind from talking to our logistics providers. We were going into this in March, at the end of February, with low inventories, pricing momentum, and good order books. We had 3% volume growth sequentially in the first quarter, and now we are seeing a tick up. So I think everything is poised for strong demand and really tight supply, and I think that bodes well for price and outlook. Karen S. Carter: Exactly, and on the pricing—thanks for the question—I think we should go back to January and remember that you had $0.05 in January. Then in March, in relation to the Middle East crisis, there was another $0.10 settlement. If you look at ACC data for the month of March, the way I would calculate it, it was a record month. Demand has remained steady, but both exports and domestic sales set second-highest month ever records. Then, if you look at overall total sales, it was also a record as well. Industry operating rates surged to 97% while DTI declined. So all of that sets us up for strong price momentum. If you look at the announcements, for the month of April we have $0.30 per pound on the table, and then we have another price increase out there for the month of May of $0.20. So when you look at the $2 billion guide that we have for second quarter, there is $0.26 per pound of margin improvement globally that is baked into that, and that is also aligned with our view of the duration. Based on James’s comments around the duration, we believe that there is more room for prices to move up, and as we do that, that will present upside to the $2 billion guide. Operator: Your next question comes from the line of Michael Joseph Sison from Wells Fargo. Your line is live. Michael Joseph Sison: Good morning, and congrats as well to Karen and James. When you think about the $1.75 billion for P&SP in 2Q, can you frame whether that is kind of a mid-cycle EBITDA or a peak EBITDA? And then when you think about the sustainability of these integrated margins into 2027 as supply chains come back, where do you think we could end up post all this? James R. Fitterling: Karen, do you want to take it? Karen S. Carter: Sure. I will go back to the $0.26 per pound integrated margin improvement that we expect to get here in the second quarter. That is mid-cycle, perhaps a bit above mid-cycle. It is important to go back to the impact of this, which is really 3x what we saw in 2021 from Winter Storm Uri. There, you really did see us move over about a six-month period to mid-cycle and above prices. So my response is that if it is mid-cycle, we are moving to peak levels. But with the supply shock overnight, that is why you are seeing the ramp and price increases go faster than even what we saw in 2021. And again, as I indicated in my last answer, we expect that this environment is going to continue in alignment with the duration of the recovery, which we believe is going to take six months to 18 months to resolve. Operator: Your next question comes from the line of Vincent Stephen Andrews from Morgan Stanley. Your line is live. Vincent Stephen Andrews: Thank you. Good morning, and I echo the sentiment on the leadership transition. Could I ask, James, if you think when we get to the other side of the conflict, there could be any changes in the cost curve on a sustainable basis, and in particular, whether you think Europe’s position can improve at all on the other side? And then, in the nearer term, how are you thinking about the profitability of your own European assets over the course of the next couple of quarters? Do you think prices will improve enough to reset profitability there, or how are you thinking about it? James R. Fitterling: Good morning, Vince. On Europe, a couple of things are having an impact right now. The tightness in the marketplace from the shutdown of the straits is not just the inability to move product, but the magnitude of the impact. About 20% of Middle East oil production was shut in with the straits, and about 40% of Asian naphtha production was shut in through the straits. You saw the effect of that being force majeures in Asia of the high-cost producers because they could not get feedstock. On top of that, we are seeing in China restrictions on the refiners. They are being forced to produce fuel and jet fuel at the expense of something like naphtha, and that is going to continue to keep pressure on the availability of naphtha there. That has helped in Europe. Europe has a little bit closer access to some naphtha and they have some refining capacity. I would say the biggest help on margins right now has been the tightness in byproducts. You are starting to see positive byproduct credits in the crackers. As you know, a naphtha cracker makes one-third ethylene and two-thirds byproducts, so byproduct credits can be a big contribution to improved margins there. I think it will hold, obviously, through second quarter and third quarter. Longer term, a lot is going to depend on decisions that countries and people make. I talked about 40% of Asian naphtha and 90% of Japan’s LNG coming through the straits. I think it is logical to expect that countries are going to step in and make some changes like we saw after Russia–Ukraine when the Germans worked hard to diversify and get five LNG facilities going to diversify their natural gas supplies. You are going to see some things like that. Those will obviously take time to shake out. You cannot get any of that in place in a one- to two-year period, but there will be decisions that will be made that will have a longer-lasting impact. On Europe, we will return to profitability. Karen, maybe a little bit on margins and demand there. Karen S. Carter: Demand for our assets definitely has moved up. The pro-nap spread has widened. We have more flexibility from a cracking perspective than any of our peers in the region. So we have increased our operating rate, and we are helping to fill the gap from a supply perspective that you just referenced, James. We anticipate that margins in the second quarter are also going to go up in Europe for us. James R. Fitterling: I think Europe will be under pressure when Middle East supply comes back because with that being shut in now, it has to be supplied from domestic Europe. When that comes back, the cost position in Europe will move back. So I do not think it changes our long-term outlook on Europe. I think it gives us a little breathing room in the short term and some time to do things wisely and get it shut down in a really smooth fashion. Thanks, Vince. Operator: Your next question comes from the line of Jeffrey John Zekauskas from JPMorgan. Your line is live. Jeffrey John Zekauskas: Thanks very much. A two-part question. The export price of polyethylene from Houston today is about $1,775 a ton FOB, but the delivered price to Asia for polyethylene is less than $1,300 a ton. Can you describe what is going on in terms of why our general export price is so high but Asia seems to be a weaker region for pricing in the scheme of things? And for Jeff, could you let us know what the relationship that you expect between operating cash flow and EBITDA is in 2026, and what the real cash commitments are to Sadara? James R. Fitterling: Karen, do you want to touch on what is going on with Asian prices of polyethylene? Karen S. Carter: Yes, thanks for the question. What I can say is that our prices around the world are going up. The export price is the indication of real demand, not local price, and as James just indicated, in China in particular they are starting to restrict the feedstock that is going to petchem production. So we continue to expect prices there to go up as well. Jeffrey L. Tate: On the cash side of things in terms of operating cash flow and EBITDA, we entered and exited first quarter with a very strong cash position at slightly over $4 billion. As we look at our outlook for not only second quarter but for the full year, we continue to see not only the self-help actions but also all of the activities related to our pricing momentum building as we work our way through the year and through the quarter. With that, we would expect our cash conversion rate to steadily improve as we go from one quarter to the next. We are in a really good position to see that operating cash flow and free cash flow increase from a cash conversion perspective. In terms of your question around the Sadara cash commitments, I would like to make a couple of comments. You will notice that in first quarter, Dow Inc.’s cumulative equity losses for Sadara reached $1.4 billion. This matches our existing relevant obligations and commitments. Accordingly, under U.S. GAAP, we are in a position to suspend further recognition of the Sadara equity losses. The $1.4 billion of commitment that we have from a relevant obligation perspective is comprised of $1.2 billion of debt, approximately $100 million related to our revolving credit facility, and approximately another $100 million related to our letter of credit. Specific to your question around the cash commitments for 2026 through 2038, that would be approximately $100 million per year. Operator: Your next question comes from the line of Kevin William McCarthy from Vertical Partners. Your line is live. Kevin William McCarthy: Thank you, and good morning. James, one of the most common questions that we field from investors is along the lines of assessing the durable supply-side impacts from the conflict. Would love your thoughts on that subject in terms of physical damage to assets in the Middle East, new plants that we thought might be starting up that are in fact unable to do so, and you also made a comment that you would expect increased rationalization of assets because of the conflict. How would you frame out the lasting impact as opposed to the impacts related to feedstock and traffic through the strait? James R. Fitterling: Yes, Kevin. I do not have all of the insight to what has happened there, but I can go based on the incidents that I am aware of and things that have been shared that are public. I think most of the attacks were relatively limited. We saw information about, for example, the East–West pipeline in Saudi where a pump station was attacked. We saw some situations in Kuwait where some upstream assets were attacked. In most of those cases, they have the capabilities, the people, and the wherewithal to get that repaired and back up. So if you look at what I said about 275 days plus to reopen the straits and get things back to normal, I think a lot of that is going to be able to be repaired within that time frame. You had the situation in Qatar with the LNG plant. What got hit there was a very critical piece of equipment that takes two and a half to three years to rebuild, and then, of course, it has to get installed. That is the most significant attack that I have heard of, and there is not a lot that I think they are going to be able to do to fix that quickly, but that does not have as much impact on the petrochemical side of things. Talking with our partners, I think they are actively working on repairs, and I do not hear anything from them that leads me to believe it is going to extend longer than the duration of this logistics constraint. Operator: Your next question comes from the line of Patrick David Cunningham from Citi. Your line is live. Patrick David Cunningham: Hi, good morning. Thanks for taking my question. Could you perhaps walk through any impacts of the conflict on maybe the 10% to 15% of non-polyolefin derivatives that are exposed to some of these tightening market dynamics, and where you might see the biggest potential for additional export opportunities or advantaged footprint taking advantage of some of the higher margins? James R. Fitterling: Ethylene glycol has probably been the biggest impact of all of it. You see that already showing up in the response and what is happening, and those should be able to repair quickly. It is also one of the things you see in the results with Kuwait’s earnings in the first quarter—remember Equate has operations in Canada and Texas, so they have a global footprint on MEG. They are able to supply their customers and also take advantage of the price increases, and that more than offsets the situation that they have to deal with locally. They will be able to get that back out and moving once the roadblock clears. On propylene derivatives, there are some—obviously, we have some in the polyurethanes business that will be impacted. There is some polypropylene that will be impacted. In polypropylene, you had different downstream demand dynamics—autos being slow, appliances slow—which takes a little demand pressure off polypropylene. So we have not seen the same kind of dynamics there. Karen S. Carter: On the EO side and MDI, we are working to get those prices up above the cost increases. MEG prices are moving up as well. On the silicones and siloxanes side, there is less impact from the conflict. There, I would just highlight that prices are moving up as an early indication of what we are seeing on anti-involution in China, which we believe is a positive sign. We are working to move prices up across the board. Most of it is because of the Middle East crisis; within silicones and siloxanes, it is a bit of a different story, but prices are moving up as well. Operator: Your next question comes from the line of Frank Joseph Mitsch from Fermium Research. Your line is live. Frank Joseph Mitsch: Thank you, and let me offer my congratulations to James and Karen. Coming back to Sadara, could you speak to the future of what your expectations are for Sadara over the next couple of years? Can you speak to whatever damage may have been sustained so far to that facility? And also, Jeff, when you were speaking to the changes on a GAAP basis for Sadara—that unit had been running at a negative $120 million or so per quarter in equity earnings to Dow Inc.—I would imagine that might have been higher had you not made the adjustment to GAAP. Can you comment on that? Thank you. James R. Fitterling: I will take the first part. One of the things I will continue to do as Karen takes over the CEO role is finish up these negotiations with Saudi Aramco on the restructuring of Sadara and trying to address some of the challenges that we have faced there. I think the asset itself has sustained a little bit of damage. Most of it is pretty straightforward, and we are able to manage it. A lot of what was fired at that coast was intercepted and protected very well. A few stray things got through, but we have a good team on the ground, and they have gone through all the damage assessments, and they will be able to get things back up and running. Our focus is going to be on getting the restructuring right, getting the participation of Sadara right. It is not really an operating problem; it is more of a leverage issue and a balance sheet issue that we have to get right, and that is what we are working through with Aramco. As I promised, I will have more of an update for you midyear when we come back for earnings then. Jeff, do you want to comment on that last part? Jeffrey L. Tate: Yes, Frank. In terms of looking at first quarter specifically, you are spot on—the equity loss impact was $115 million. On a full-year basis, we would estimate that to be in the approximately $400 million range from a Sadara impact perspective for Dow Inc. Operator: Your next question comes from the line of David L. Begleiter from Deutsche Bank. Your line is live. David L. Begleiter: Thank you. Good morning, and again to James and Karen, congrats on the new roles. Karen, back to 2Q guidance: what does that $0.26 of global margin expansion imply for the $0.30 you have announced for April and the $0.20 for May? Does that include a portion of those or all of those? Karen S. Carter: It includes our April price increase that is on the table, but it does not include May. So May would present upside to the guide that we have in second quarter. Operator: This concludes our question-and-answer session. I will now turn the conference back over to Andrew Riker for closing remarks. Andrew Riker: Thank you, everyone, for joining our call, and we appreciate your interest in Dow Inc. For your reference, a copy of our transcript will be posted on Dow Inc.’s website within 48 hours. This concludes our call. Operator: You may now disconnect.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Keurig Dr Pepper's Earnings Call for the First Quarter of 2026. This conference call is being recorded [Operator Instructions] I would now like to introduce Chethan Mallela, Vice President of Investor Relations at Keurig Dr Pepper. Please go ahead. Chethan Mallela: Thank you, and hello, everyone. Earlier this morning, we issued a press release detailing our first quarter 2026 results, which we will discuss on today's call. An accompanying slide presentation is available and can be viewed in real time on the webcast. Before we get started, I'd like to remind you that our remarks will include forward-looking statements, which reflects KDP's judgment, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting KDP's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For more information, please refer to our earnings release and the risk factors discussed in our most recent Form 10-K and our latest 10-Q, which will be filed with the SEC later today. Consistent with previous quarters, we will be discussing our Q1 performance on a non-GAAP adjusted basis, which reflects constant currency growth rates and excludes items affecting comparability. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings materials. Here with us today to discuss our results are Keurig Dr Pepper's Chief Executive Officer, Tim Cofer; and Chief Financial Officer, Anthony DiSilvestro. I'll now turn it over to Tim. Timothy Cofer: Thanks, Chethan, and good morning, everyone. We are pleased with our start to the year. We closed the JDE Peet's acquisition and made steady progress on our transformation initiatives, while continuing to drive our base business, with first quarter results that tracked slightly ahead of our expectations. In a dynamic operating environment, our teams remain focused on balancing longer-term foundational work with near-term execution. Looking ahead, our top priorities for 2026 remain unchanged: delivering our low double-digit EPS growth guidance in a high-quality way, seamlessly integrating JDE Peet's and beginning to unlock combination benefits, and achieving key milestones to set up a successful separation. While there's plenty of work ahead, our well-constructed plans and year-to-date progress reinforce our confidence in delivering on these commitments. Before discussing our quarterly results, let me briefly touch on our transformation work. On April 1, we closed the acquisition of JDE Peet's, welcoming over 20,000 new colleagues to KDP and bringing our complementary portfolios and capabilities together, united by a shared passion for great brands and exceptional coffee experiences. With the transaction now closed, we have begun to operationalize our integration plans, led by a dedicated transformation management office and guided by clear work streams and accountability. At the same time, we're also advancing our work to separate into 2 advantaged pure-play public companies which will be well positioned to create value through increased focus and organizational clarity with fit-for-purpose strategies and capital allocation policies. Beverage Co. will be a growth-oriented challenger in the large and attractive $300 billion North American refreshment beverages market. With iconic brands, differentiated go-to-market capabilities and a proven track record of white space expansion, the stand-alone beverage business should deliver compelling financial results while also possessing strategic optionality over time. Global Coffee Co. will be a scaled leader in the $400 billion global coffee market with an enhanced set of capabilities to meet consumer needs across formats, channels and geographies. Supported by a portfolio of leading global and regional brands, deep expertise in sourcing, blending and appliances and strong synergy potential, the coffee business will also have a compelling value creation model. As we balance near-term performance with our transformation agenda, we have put in place an operating model designed to maintain enterprise focus while preparing each business unit to operate independently at separation. Under this structure, the centralized KDP leadership team is responsible for strategic oversight, total company commitments and transaction execution. While our dedicated beverage and coffee operating units are accountable for delivering their 2026 business plans and shaping the strategic direction for each business. As CEO of KDP and the future CEO of Beverage Co., I am overseeing both the KDP leadership team and the beverage operating unit. As we recently announced, JDE Peet's CEO, Rafa Oliveira, has been selected by the Board to lead the coffee operating unit and become the future CEO of Global Coffee Co. upon separation. Rafa has meaningful CPG experience, a track record of navigating complex global markets and is the architect of JDE Peet's brand-led strategy. He's the natural choice to lead our coffee business today and in the future, and I look forward to advancing our partnership as we prepare to stand up 2 winning companies. Overall, our transformation work is progressing well, and we continue to target operational readiness to separate by the end of 2026, with the official separation likely to occur in early 2027, subject to market conditions. Turning now to our first quarter results. Net sales grew 8%, with positive contributions from both net price, realization and volume mix. Top line performance was led by continued strong momentum in U.S. Refreshment Beverages and International, partly offset by previously discussed temporary pressures in U.S. Coffee. Our EPS of $0.39 declined from last year, reflecting the phasing of cost and tariff impacts and lapping a below-the-line gain in the year ago period. Importantly, as Anthony will discuss, we have visibility to healthy EPS growth beginning in the second quarter with further acceleration in the back half. Let me now discuss our Q1 segment performance. I'll start with U.S. Refreshment Beverages, which delivered another robust growth quarter. Net sales and operating income each grew at a double-digit rate, driven by favorable trends in our core carbonated soft drink business and continued momentum in our portfolio's emerging growth areas. Within CSDs, the category remained healthy, with Q1 retail sales dollars growing at a mid-single-digit rate and accelerating from Q4. While Dr Pepper faced a difficult innovation comparison versus the Blackberry launch last year, our underlying trends were strong, with the brand's 3 primary lines, regular, diet and zero sugar collectively gaining share during the quarter, supported by demand generation activity and point-of-sale execution. CSD Innovation will play an important role in our plans for the rest of the year. Canada Dry Fruit Splash strawberry launch nationally in February and has driven healthy consumer trial, strong on-shelf velocities and incrementality to the franchise. The launch contributed to Canada Dry's Q1 share gains and should provide a further tailwind in coming quarters. In addition, the fan favorite, Dr Pepper Creamy Coconut limited time offering relaunched earlier this month, and we're confident it will build on its successful initial run during 2024 as it taps into ongoing consumer interest in dirty sodas. Our performance in 2026 will also benefit from our continued focus on aligning our CSD portfolio with consumer needs around both value and wellness. With consumers seeking affordability in the current environment, we have refined our promotional strategies to offer compelling price points in key channels, while maintaining discipline to ensure net price realization continues to offset inflationary pressures. We're also leaning into the better few areas of our portfolio with Bloom Pop prebiotic CSDs expanding rapidly off a small base and our zero sugar CSD offerings growing at a double-digit rate in Q1. Beyond CSDs, we continue to build our presence in emerging growth areas. In energy, we once again expanded market share during the first quarter, led by Bloom and GHOST, which were 2 of the top 3 fastest-growing major trademarks in the category. Our performance reflected strong innovation, incremental distribution wins and high-quality DSD execution. We believe our portfolio approach to the category remains a clear advantage, and continue to see meaningful growth potential across C4, GHOST, Bloom and Black Rifle. Our sports hydration partnership with Electrolit is also delivering healthy results, with the brand gaining significant share in Q1 through distribution expansion and strong velocities. Overall, U.S. Refreshment Beverages continues to represent an outsized growth driver for KDP, and we expect this segment to remain a key contributor in 2026. Turning now to U.S. Coffee. While both net sales and operating income declined, the quarter largely played out as we expected, and we have conviction in both the category and our business. I'd highlight a few key points. First, the coffee category is healthy, with continued growth and manageable elasticities. The Keurig compatible subsegment grew retail sales at a nearly 4% rate, with our owned and licensed brands keeping pace. Our licensed Lavazza brand was a standout performer, growing K-Cup sales more than 50% in the quarter through brand strength, successful innovation and increased distribution breadth and quality. Second, as expected, our reported results were impacted by some meaningful but temporary headwinds. Peak year-over-year cost pressures constrained Q1 segment profitability, reflecting the timing of higher cost green coffee hedges and tariffs. And as previewed last quarter, trade inventory adjustments pressured pod shipments, which declined 7% and lagged point-of-sale trends, weighing on operating income. Importantly, these headwinds should ease slightly in Q2 and moderate more meaningfully in the back half, providing visibility to improve top and bottom line trends over the balance of the year. Third, despite the near-term profit pressure, we're thoughtfully investing in the long-term growth initiatives. Let me provide a few examples. We're enhancing our premium owned and licensed segment through the well-supported Keurig coffee collective innovation launch, which is off to an encouraging start with strong retailer enthusiasm and early consumer trial. We are continuing to execute our coffee partnership strategy as evidenced by the recent renewal and expansion of our K-Cup agreement with Nestlé USA. This agreement deepens and extends a highly successful relationship, and will enable us to expand distribution and innovation for the Starbucks brand in the Keurig ecosystem. And we continue to prepare the Keurig Alta system for its initial targeted direct-to-consumer launch planned for later this year. This disruptive next-generation coffee system will feature our Keurig brand, the newly acquired premium Peet's Coffee brand and over time, the likely participation of partner brands as well. Putting it all together, combining constructive category trends with our investments to support long-term growth initiatives, we remain confident in the prospects for our Coffee business. In International, Q1 net sales grew at a high single-digit rate, driven by net price realization. While volume/mix declined modestly due to some short-term impacts related to the Mexico beverage tax, we're encouraged by the resilience of underlying consumer demand and our share trends across key categories. Despite the top line strength, operating income declined, reflecting cost pressures and higher investment spending in a seasonally smaller profit quarter. Looking ahead, we expect profitability trends to improve as inflationary pressures ease, volume/mix strengthens and we execute our commercial plans for the year, including summertime activations to drive engagement and celebrate soccer fandom. Overall, we continue to expect our International segment will remain a meaningful growth contributor over time, given our strong local share positions in attractive categories as well as portfolio and distribution expansion opportunities in both Canada and Mexico. We will also be disciplined and opportunistic in targeting other geographies. For example, we recently evolved our Suntory partnership in Europe to a more collaborative concentrate supply model that will provide access to incremental consumers through a capital-light, low-risk model. To close, we're starting the year on solid footing. We completed the JDE Peet's acquisition. We're making steady progress advancing our transformation agenda, and we remain on track to achieve our full year outlook. As we look ahead to the rest of the year, we're focused on sustaining base business momentum, integrating JDE Peet's with excellence and laying the groundwork for 2 strong standalone companies. With that, I'll turn the call over to Anthony to discuss the financials in more detail. Anthony DiSilvestro: Thanks, Tim, and good morning, everyone. We delivered solid first quarter results that were modestly ahead of our expectations, reflecting strong momentum, particularly in cold beverages. Net sales increased 8.1% in the quarter, led by strong gains in U.S. Refreshment Beverages and International, partly offset by a decline in U.S. Coffee, as expected. Net price realization was the primary top line driver, contributing 5.5 percentage points to growth, while volume mix added 2.6 points. Gross margin contracted 220 basis points as elevated cost pressures were only partly offset by net price realization and productivity savings. We expect Q1 to represent the most significant year-over-year gross margin decline for our legacy KDP business, with trends improving as inflation and tariff impacts ease, particularly in the back half. SG&A was flat as a percent of sales, with transportation and warehousing efficiencies offsetting increased marketing spending across all 3 segments to support our key brand equities and compelling innovation slate. All in, Q1 operating income declined 1.9%. Including the below-the-line impact of lapping last year's $0.02 gain on the sale of our Vita Coco state, EPS decreased 7.1% to $0.39. Moving on to our segments. U.S. Refreshment Beverages net sales grew 11.9%, with volume/mix contributing 7.2 points. Net price realization added another 4.7 points, reflecting inflation-driven price increases taken early in the year. On the bottom line, segment operating income was strong, increasing 9.8%, with net sales growth and productivity savings more than offsetting inflation and a higher marketing spending. Overall, U.S. Refreshment Beverages has strong momentum, led by healthy trends in carbonated soft drinks, energy and sports hydration. We have robust innovation and commercial plans in place for the balance of 2026, and expect another strong year for this segment. In U.S. Coffee, our Q1 performance was largely as anticipated. Net sales declined 2.3%, with volume mix driving an 8.2 percentage point decline. Odd shipments declined 7%, reflecting trade inventory adjustments along with manageable price elasticities. Brewer shipments also declined at a high single-digit rate, primarily driven by elasticity. Net price realization added 5.9 points to net sales, driven primarily by carryover pricing in both pods and brewers. Turning to profit. Segment operating income declined 21.3%. This was primarily driven by meaningful cost pressures as higher green coffee costs and tariffs flow through our results in the quarter. Profitability was also impacted by the pod shipment decline and increased marketing spending. Collectively, these factors more than offset benefits from net price realization and productivity savings. Ultimately, our U.S. Coffee segment is tracking with our plans. While we continue to expect subdued profit for the full year, we have visibility to progressive improvement, particularly in the second half when our costs improve and short-term trade inventory dynamics normalize. In our International segment, constant currency net sales increased 8.5%. Net price realization contributed 9.2 percentage points, driven by pricing actions taken in response to cost pressures in both Mexico and Canada. Volume/mix provided a partial offset, declining 0.7 percentage points. International segment operating income declined 15.1% on a constant currency basis, primarily due to cost pressures, including the Mexico beverage tax and increased marketing spending. As we previewed last quarter, we planned for a softer start to the year in this segment, and we continue to expect profit trends to improve as 2026 progresses. Turning to the balance sheet and cash flow. During the first quarter, we closed the financing for the JDE Peet's acquisition with an optimized structure comprised of a $4.5 billion beverage company convertible preferred equity investment, a $4 billion coffee company pod manufacturing JV minority investment, approximately $6 billion in newly issued long-term senior debt and an additional term loan borrowings. Based on this financing mix, we continue to expect net leverage of approximately 4.5x at midyear. We remain committed to investment-grade ratings for KDP and our 2 future companies and will prioritize debt paydown in the near term. Our plan is for free cash flow generation to serve as the primary deleveraging source, though we will also continue to assess noncore asset divestitures. We generated $184 million of free cash flow in the first quarter and continue to expect legacy KDP will generate approximately $2 billion for the full year. Incorporating the net cash flow contribution from JDE Peet's this year, including the impact of incremental financing costs and onetime deal and transformation-related expenses, we expect approximately $2.5 billion of aggregate company free cash flow in 2026. Cash generation should increase beyond this year, enabling us to further optimize Beverage Co. and Global Coffee Co's. capital structures and over time, providing optionality for value-enhancing capital allocation. Let me now turn to guidance. We are reaffirming our 2026 outlook, which uses current FX rates and includes the anticipated contribution from JDE Peet's as of the April 1 deal close date. We plan to report JDE Peet's as a separate segment until separation. For the total company, we expect net sales in a range of $25.9 billion to $26.4 billion, reflecting 4% to 6% constant currency growth for legacy KDP and an $8.5 billion to $8.7 billion contribution from JDE Peet's. On the bottom line, we expect low double-digit EPS growth in constant currency, which includes an anticipated 6 to 7 percentage points contribution from the JDE Peet's acquisition and 4% to 6% growth for legacy KDP. Based on current rates, we anticipate that FX will represent an approximately 1 percentage point tailwind to total company net sales and EPS growth for the full year. Below the line, we are assuming the following: interest expense of approximately $1.13 billion to $1.16 billion; an effective tax rate of approximately 22%; and approximately 1.37 billion diluted weighted average shares outstanding. As a reminder, beginning with the second quarter, our P&L will also have 2 new impacts to reflect the pod manufacturing JV and the convertible preferred security. For the balance of 2026, we expect the following: approximately $190 million in pretax coffee JV costs, which will flow through the noncontrolling interest line, and convertible preferred costs that will flow through below net income to KDP and will be calculated each quarter as the greater of the roughly $53 million quarterly preferred dividend or the securities approximately 8% proportionate share of earnings. For 2026, we expect the calculation to default to the proportionate share of earnings. From a phasing perspective, we expect high single-digit EPS growth in Q2, with further acceleration in the back half as costs improve and synergies built. In closing, we delivered solid Q1 results. Our teams executed well in a highly dynamic environment and made important progress preparing the company for its next chapter. We remain on track to deliver our full year commitments, while also building the foundation for our 2 future stand-alone public companies. With that, I will turn the call back to Tim for closing remarks. Timothy Cofer: Thanks, Anthony. Overall, we're pleased with our start to the year. With clear priorities and well-crafted plans, we're striking a healthy balance between near-term fundamental delivery and our longer-term transformation initiatives. We will remain focused on disciplined execution to achieve our 2026 commitments and capitalize on the value creation opportunity we see ahead. With that, we're now happy to take your questions. Operator: [Operator Instructions] The first question today comes from Dara Mohsenian with Morgan Stanley. Dara Mohsenian: So first, on U.S. Refreshment, clearly, strong sales growth on an underlying basis even adjusting for incremental gross distribution, et cetera. Can you just give us a bit more detail under the hood on what's driving the momentum in a segment and brand level and how sustainable you think those growth drivers are going forward? And any thoughts on the impact from SNAP changes so far? And then if I can just slip one in on Coffee. There's obviously a lot of dynamic factors impacting profitability at this point. You have the higher commodity pressure, particularly with the hedgings and the inventory timing. But at the same time, obviously, green coffee prices have come off, the tariff situations improve. So just -- can you give us an update, on a quarterly basis going forward, how you see profitability in that segment playing out given those factors? And also how pricing ties into the cost dynamics, both in terms of what you're seeing in the marketplace and your own potential actions? Timothy Cofer: Yes. I'll tackle the first 2, and I'll take it over to Anthony to talk about coffee profitability. Look, on U.S. Refreshment Beverage, we're very pleased with our start to the year. You saw the print, double-digit growth both on the top line and the bottom line. And in terms of your question on sustainability, we expect this segment will continue to deliver strong results in the balance of the year, both top and bottom. As you think about the top line, we've got a great innovation slate lined up. You've already seen the impact on our second largest CSD brand, Canada Dry, with the Fruit Splash innovation and news there, that drove share gains. Literally in the last days a week, we've launched Dr Pepper Creamy Coconut. We expect that to be a big hit this year, capitalizing on dirty sodas. Feel very good about our DSD route to market execution and the ability to continue to drive distribution gains for key brands, both owned brands that are showing strong growth continued momentum like our zero sugar lineup and a lot of partner brands, think energy, rapid hydration, prebiotic CSDs. Last thing I'd say on the top line driver is stepped up brand support. We are planning to increase marketing this year. We did it in the first quarter. You'll see it on a full year basis, and really dialing up our precision marketing capabilities and our digital agenda. Having said that, I will say net sales will likely moderate relative to the Q1 elevated levels. The quarter, as you mentioned, Dara, did benefit from some incremental GHOST distribution year-over-year on a comparison basis and some outsized growth in some partner brands. Having said that, top line growth will remain strong for the remainder of the year, healthy volume trends, positive net price realization and U.S. Ref Bev will be an outsized contributor relative to our MSD net sales growth guide for legacy KDP, and I expect this top line growth momentum will also translate into continued operating income as well. You then referenced SNAP. I would tell you this, we're seeing healthy trends across our categories. Even with the pricing actions to offset inflation, the volume we're seeing in CSCs at a category level and broader LRB have been positive this year. And I think this underscores the value that our categories provide to our consumers and what we're doing around affordable pack sizes and some of the work on price pack architecture and RGM. The innovation is still ringing true to consumers and providing continued appeal. So the SNAP impacts to date have been manageable and largely consistent with our expectations and our plans. We know and we monitor closely state-by-state, how these waivers roll out, and you'll expect us to continue to monitor that and adjust in our RGM capabilities to ensure that we deliver on our guide. Anthony DiSilvestro: On the Coffee phasing question, let me start by saying on a full year basis for 2026, we do expect a modest year-over-year profit decline for U.S. Coffee with the cost pressures continuing to exceed pricing and productivity, particularly in the first half, and you saw it in our first quarter. Our results will also reflect our decision to prioritize investment spending as we set up the business for separation despite the inflationary backdrop. From a phasing perspective, we would expect the Q1 decline will be the most significant for the year as the inflation cost pressures peaked on a year-over-year basis, and you're seeing the green coffee cost inflation come through the P&L. And as we've talked about in the past, it does lag market prices by about 6 to 9 months, given our hedging programs and our inventory cycle. I would also say in the first quarter, a little bit of extra drag, top and bottom line from some adjustments and reductions in trade inventory levels, particularly in pod. And also, as I said, our higher marketing spend behind initiatives like Keurig Coffee Collective and the Keurig Anthem campaign. This pressure should begin to moderate a bit in Q2, but the larger improvement will be in the back half. Cost inflation will meaningfully ease in the second half and our innovation and commercial [ programming ] will begin to kick in and we should see some top line improvement. And I would end by saying, look, based on current coffee prices, this could be a tailwind for us going into 2027. Operator: The next question comes from Chris Carey with Wells Fargo. Christopher Carey: So I wanted to follow up on this line of thinking. Just [ 2 ]. Number one, you stress test confidence a bit more. I look at consensus estimates for coffee margins specifically and see roughly 1,000 basis points of margin improvement into the back half of the year. Certainly, you're not talking about guiding to segment margins, but there's clearly some nice improvement in margins if you're going to see modest profit declines in the full year. There's also roughly high teens or 20% earnings growth in the back half if you're delivering high single digits in Q2. So I just wanted to maybe dig in a bit deeper on the cost front. How much visibility do you have in your coffee costs at this point of the year, I assume, high? And secondly, how much visibility do you have that your stronger consumption trends in coffee will be reflected in stronger shipment trends so as to avoid some of the volume mix deleverage into the back half of the year? And just one quick follow-up as well on U.S. Refreshment. From the Creamy Coconut launch, are you expecting any uplift into Q2? Because I would imagine that would offset some of the drop-off in GHOST. Timothy Cofer: Okay. Let me start broadly with -- talking about U.S. Coffee and how we're seeing the various puts and takes on the year. And then, Anthony, maybe you can talk more specifically on green coffee cost and how we're seeing that flow through the P&L on a quarterly basis. I think -- our focus in 2026 in U.S. Coffee is to navigate these near-term headwinds while really positioning our business for long-term success. So as we anticipated and as we shared at the guide at the beginning of the year, the first half of the year features headwinds from real peaking cost pressures and some trade inventory adjustments. And so you've seen that flow through, impacting both our top and our bottom line performance in the first quarter, but this is tracking right on to our expectations. Anthony mentioned this a minute ago, we're also deliberately stepping up our investment behind long-term growth initiatives even as we manage through these higher cost peak inflationary environment in Q1 from a P&L standpoint. So we've meaningfully increased our Q1 marketing. Anthony said it earlier, on both pods and brewers and against our fairly robust active innovation slate on both the pod and the brewer side, Keurig coffee collective new brewers and then preparing for Alta. All of this gives us good line of sight to an improving top and bottom line trend as the year progresses. Net sales will improve as our innovation, our marketing, our commercial investment will build through the quarters, and operating income will also benefit from the improving coffee cost envelope, particularly starting in the second half. Anthony, do you want to talk a little more on coffee cost, green... Anthony DiSilvestro: Sure. Let me step back a bit. We are guiding -- and we have a high degree of confidence to our low double-digit EPS guide. And as Tim mentioned, that's going to accelerate as we go through the year here for a number of reasons. The most significant one would be green coffee cost, and we have very good visibility to how this will flow through balance of the year, given our current hedging program as well as our inventory cycle. I would add to that, we are mostly hedged on other commodities, including those that have been impacted by the recent conflicts in the Middle East. We are also bringing on board, obviously, JDE Peet's. And JDE Peet's profile will follow a one that's similar to our U.S. Coffee segment, right? As coffee prices improve, their quarterly performance will improve as well. And also, again, we have good visibility to that. Now as they bring JDE Peet's into the fold, we will build synergies throughout the year, and that will obviously have a building impact on our performance as we go through the quarters. So sitting here today, good visibility to the rest of the quarters and -- which gives us a high level of confidence in our guide. Timothy Cofer: Yes. And then, Chris, your last question back on Dr Pepper and Creamy Coconut. As you think about Q1 on Dr Pepper, it did reflect a bit of innovation timing shift. So Blackberry a year ago launched early in the year, and we lapped that. So we saw a little bit of pressure there. But as I mentioned in my prepared remarks, our 3 core Dr Pepper lines, regular, zero, and diet Dr Pepper collectively grew share. So overall, I feel great about Pepper momentum, now layer in Creamy Coconut. And we've got a lot of confidence. Creamy Coconut is going to be a big success this year. Already in the first few weeks, we've seen a ton on social and in-store activity. There's a lot of excitement building as we roll into summer on Creamy Coconut, and I do think that will be an important contributor year to go for brand Dr Pepper. On top of that, I would tell you, we still have -- we're going after some unique occasions and consumers. There's still distribution gaps we can close. Dr Pepper Zero Sugar continues to grow at a double-digit rate and has upside. And we're layering on our enhanced precision and personalized marketing capabilities. So Dr Pepper will be a great growth standout. We expect another year of share growth and a meaningful contributor to outsized growth in U.S. Refreshment Beverage. Operator: The next question comes from Michael Lavery with Piper Sandler. Michael Lavery: You touched on each of the segments and just unpacked how some of the year unfolds. Helpful color. But could you walk us through the JDE Peet's piece of that and just considerations on what's left for the rest of the year and how to think about just moving parts and what's going on there? Timothy Cofer: Sure. Let me start by saying, overall, we closed the deal April 1. And I think, overall, I'd tell you, what we've learned in the last few weeks confirms everything we saw in our planning process and the deal close period. This is a business that has a healthy foundation, strong brands, strong capabilities and a talented team. I'm seeing already the energy and the opportunity behind both their, what they called reignite the amazing strategy, which is in its early stages but has lots of runway, and now the combination benefits of combining legacy Keurig Green Mountain with JDE Peet's. We've announced and we can confirm confidence in the $400 million in synergies as well as some incremental revenue opportunities, in particular here in North America between the Peet's brands and the Keurig brands. So feel very good broadly about what we've seen since the close. In terms of performance of the business, obviously, we just took ownership of the business, so I'll speak at a high level on what we've seen year-to-date. I would say the trends are consistent with our expectations. Even back to when we announced the deal, obviously, back in '25, they delivered a solid year, managing through the very unfavorable see price inflation. And we are on track for another good year here in 2026. I would say the phasing of the results will be influenced by commodity cost timing just like we're seeing in the KDP Coffee business. And the profit will be more constrained in this inflationary first half. We saw that in Q1. We expect that to continue into Q2. But at the same time, we have good visibility to accelerating trends in the second half as green coffee becomes more favorable. Operator: The next question comes from Andrea Teixeira with JPMorgan. Andrea Teixeira: I was hoping to see if you can talk about like as the green cost prices improve, are you planning to roll back some of the pricing you had for [ coffee ] parts to just reignite volumes and improve operating leverage? And just as a clarification, as we decompose U.S. Refreshment Beverages volume mix, in particular because of cost, can you comment on how it behaves on a more organic basis? Anthony DiSilvestro: Sure. I'll start on the coffee pricing question. So in coffee, our pricing in 2026 that you're seeing in the sales bridge is primarily the carryover from 2025 actions that we took to offset inflation. And as we talked about the inflation, it's persisting in the first and second quarter of this year as we see it come through the P&L. And as we move into the second half, that the current coffee price pullback should ease pressure on our P&L. So we should see a moderating impact of year-over-year pricing as that happens and that moderation come through in the second half, and we lapped some of those prior year increases. Beyond that, it's probably not appropriate for us to speculate on future pricing actions. We'll certainly continue to monitor the inflationary environment. We keep an eye on the elasticities. We are mindful of any price gaps and certainly prioritize providing value to our consumers as we consider these longer-term pricing actions. Timothy Cofer: Good. And then Andrea, you asked a question related to GHOST, and I think I mentioned that in response to Dara's question. Q1 did benefit from some incremental year-over-year GHOST distribution benefits. And if I had to dimensionalize that, that's worth a couple of points in terms of that onetime impact as we lap that a couple of points to the US RB growth performance. Now we've cycled that kind of onetime benefit. And now we're just in core KDP DSD growth, which we expect will continue to be outsized, right? There's still distribution growth opportunities feature and display, cold cooler presence as well as a robust innovation slate for GHOST. So GHOST will continue to be an outsized growth driver, but Q1, in particular, benefited from a couple of months of outsized performance. Operator: The next question comes from Peter Galbo with Bank of America. Peter Galbo: Anthony, I wanted to go back to a comment that you made around kind of being hedged on input costs that may be tied to the Middle East, at least for the remainder of this year. I think maybe it would just be helpful to sensitize or help us sensitize some of the exposures to things like aluminum and PET, if we do get a prolonged kind of rally here in resins and aluminum costs that lasts into '27. So just any additional color you can help us with there as we start to contemplate maybe what the margin implication could be going forward? Anthony DiSilvestro: Sure, sure. Look, as with many CPG companies, we have both direct and indirect exposure to commodities that have been impacted by the Middle East conflict. And this includes a number of inputs tied to the packaging and energy areas such as aluminum, resins, diesel, that's in our DSD network, freight costs. And I would say that no single one of those inputs has an outsized impact on our cost structure, but they're all important. And as we've seen the recent inflationary moves, we have a very systematic and comprehensive hedging program, and those hedges and forward cover are in place to help insulate us in the near term from that volatility. For 2026, we are largely hedged and wouldn't expect to see the recent movement impact our P&L in 2026. But I would say, to the extent those higher prices sustain, we would develop mitigating action plans that we would execute longer term to protect our margins. Operator: The next question comes from Robert Moskow with TD Cowen. Robert Moskow: You may have mentioned it before, but you said in your prepared remarks that after the split, you'll have optionality for value-enhancing capital actions. I want to know if you could give any more color on what those actions might entail? And would they have anything to do with the convertible you have and the minority investments? Timothy Cofer: Yes. I'll take that. And I did make that comment as it relates BevCo. I think specifically, obviously, both companies on the other side of this separation will have the independent optionality to make the best choices for their business and their shareholders. As I think about BevCo, let me start by saying that I love this portfolio, the leadership positions we have across the LRB categories, the advantaged capabilities that we've built and really this very entrepreneurial challenger culture that runs through our company. And I'm confident that with these set of characteristics and advantages, we can deliver consistent top-tier results and we can create a lot of value. As an independent company, we -- I do believe we'll have some additional strategic optionality that perhaps was less actionable under a combined KDP umbrella. And what could those look like? I mean one is around route to market. I'm a big believer in the power of DSD. It's a source of competitive advantage. And I do think today, it is optimal for us to own DSD in most markets. We take a very local decision case by case and we let the scale and the economics and what's best for our brands dictate that ultimate route to market. But as a stand-alone, BevCo will be incentivized to continue to test the optimal model as it relates route to market. And I think as a stand-alone company, we've got that optionality. The other area is just around portfolio and continuing to future-proof this portfolio, ensure this portfolio is structurally advantaged, pursuing white space expansion has always been a priority for KDP. And I think BevCo will be even more agile and even more proactive in this area. We can consider earlier-stage partnerships, new geographies, more creative structures. So overall, we've got a lot of conviction in the future of BevCo and our ability to drive healthy top and bottom line growth in our current portfolio and with enhanced optionality. Operator: Next question comes from Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: I guess one quick just clarification on the guidance for Q2. Is that total company guidance? Or is it, I guess, legacy KDP? And then sort of drafting off of Robert's question on the portfolio. Maybe just to add to that, what Anthony had mentioned on the potential sale of noncore assets, what types of things would that be? And is the intention just to maybe have a tighter portfolio there? And -- or is it more in the spirit of bringing down leverage? Anthony DiSilvestro: Yes, in answer to your first question, the high single digit is total company outlook for the second quarter. In terms of your other question, just stepping back a little bit, we are very focused on committed to investment-grade ratings, not only for KDP, but for the 2 future companies. And our ability to deleverage is primarily driven by our ability to generate significant free cash flow. And you heard it in our prepared remarks, we are expecting $2.5 billion of free cash flow, which includes 9 months of JDE Peet's and all the related costs of the debt financing. We also said that free cash flow obviously will support our dividend and enable us to deleverage by about [ a half a turn ] per year. And that will get us to our stated leverage target that separation, which is 3.5 to 4x for BevCo, [ 3.75 to 4.25 ] for Global Coffee Co., but we also said we'll look for additional opportunities to accelerate deleveraging. Not appropriate to getting any specific details, but there are a number of things that we're looking at across non-core assets and minority investments to help us along. Operator: The last question today comes from Filippo Falorni with Citi. Filippo Falorni: I wanted to ask on your energy drink portfolio. We continue to see very solid growth for both GHOST and Bloom in track channel data. Can you comment a bit on the shelf space gains that you're realizing in the spring resets? Like how much room do you see in terms of further distribution for both brands? And then on the other side, C4 has been a little bit softer. Do you see any cannibalization from GHOST? Or what are the plans to reaccelerate that brand? Timothy Cofer: Sure. Thanks, Filippo. You've heard me say this many times, big believer in energy as a category. It's 29 billion. It's growing mid-teens. And there are structural growth drivers in place that suggests this is a category that continues to have a long runway for growth. I think there's distribution expansion, particularly when you think about channels outside of C-store. There's household penetration upside. There's occasions to go after. There's cohorts, obviously, female forward brands are experiencing tremendous growth right now, and we have one of those in our portfolio in Bloom. So it's a great category, strong growth, and we see continued runway. We like the approach we've taken. We've taken a portfolio approach. We have 4 brands of scale that we go to market with. GHOST, a great lifestyle brand; C4 in performance; Bloom, female forward; and Black Rifle in mainstream, and feel good about that position. And you saw continued market share growth here in the first quarter, and we expect that to continue on the year. Our portfolio is well over $1 billion now, and we see continued upside. As it relates to your other 2 kind of sub-questions on -- one on shelf space and one on C4. On shelf space, we had a successful sell-in cycle for our energy portfolio this year. And we are beginning to see and would expect on the year meaningful distribution gains, incremental PDPs or total distribution points, including in the critical convenience retail channel expanded space as well in kind of up and down the street. And you're seeing that particularly with GHOST and with Bloom. On C4, we feel great about our partnership with Nutrabolt, and what we're building together on C4, we've created a lot of value for both parties. Since we first took distribution back in 2023, C4 has more than doubled its retail sales, added more than 1 point of market share. And as it relates near in performance, it is fair to say we made some decisions together with our Nutrabolt partners to rationalize some elements of the portfolio. So there was a smart subline that we're no longer distributing through DSP, and the ultimate line has been repositioned for even stronger performance, and that's in the high stimulation 300 mg type of caffeine segment. So when you adjust for those factors, we feel good about the underlying trends and kind of the core yellow can performance line, excited about the innovation that we're bringing to market with our Nutrabolt partners and confident in C4's long runway ahead to drive brand momentum. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chethan Mallela for any closing remarks. Chethan Mallela: Thanks, Betsy, and thanks, everyone, for joining us today and for your interest in KDP. The IR team is available if you have any follow-ups. Thanks so much, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the First Quarter 2026 CBRE Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chandni Luthra. Thank you. You may begin. Chandni Luthra: Good morning, everyone, and welcome to CBRE's First Quarter 2026 Earnings Conference Call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an excel file that contains additional supplemental materials. Today's presentation contains forward-looking statements, including, without limitation, statements concerning our business outlook, business plans, seasonality and capital allocation strategy as well as our earnings and cash flow outlook. These statements involve risks and uncertainties that may cause actual results and trends to differ materially. For a full discussion of the risks and other factors that may impact these statements, please refer to this morning's earnings release and our SEC filing. We provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix. Throughout our remarks, when we cite financial performance relative to our expectations, we are referring to actual results against the outlook we provided on our fourth quarter 2025 earnings call in February, unless otherwise noted. Also, as a reminder, our Resilient Businesses include facilities management, critical infrastructure services, property management, project management, loan servicing valuations, other portfolio services and recurring investment management fees. Our transactional businesses comprised property sales, leasing, mortgage origination, carried interest and incentive fee in the investment management business and development fees. Finally, beginning this quarter, our financial results reflect the financial reporting changes we discussed on our fourth quarter earnings call and in our March 24, 8-K. Prior period results have been recast accordingly. I'm joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 3 as I turn the call over to Bob. Robert Sulentic: Thank you, Chandni, and good morning, everyone. CBRE continued to generate strong financial results while making important strategic gains during the first quarter of 2026. Together, our 3 services segments, Advisory, Building Operations & Experience, and Project Management grew revenue by 20% and operating profit by nearly 30%. Additionally, profits from our data center land development program were delivered earlier in the year than anticipated. Our Resilient Businesses grew revenue by 18%. This reflects our strategy to grow businesses that are resistant to real estate cycles or benefit from secular tailwinds, which supports strong through-cycle growth. Simultaneously, our Transactional Businesses achieved their highest growth rate of the current cycle at 22%, reflecting our strategy to maintain and extend our market leadership position in sales, leasing, financing, and real estate development. These businesses generate excellent margins and cash flow while providing data and market insights that help us across CBRE. Our work related to infrastructure assets has become a source of significant profits and growth spanning all 4 business segments. This consists of the services we perform for data centers as well as power, telecom and transportation assets, among others. This is also central to our strategy. We generated more than $3 billion of total revenue from infrastructure activities in 2025 and nearly $950 million in the first quarter. Within the BOE segment specifically, we've created a dedicated critical infrastructure services business line. This business line includes work for data centers along with the telecom and power assets captured in the Pearce business we acquired last year. Revenue in this business line totaled $1.7 billion in 2025 and $580 million in the first quarter and is expected to grow in excess of 60% this year. The strong momentum we saw during the first quarter in Infrastructure Services and across other parts of our business has continued in the early weeks of the second quarter. Considering this, we are upgrading our EPS expectations to a range of $7.60 to $7.80 for the year, which would result in more than 20% growth at the midpoint of the range. This assumes that the economic environment remains supportive. Emma will describe our outlook in more detail after she reviews the quarter. Emma? Emma Giamartino: Thanks, Bob. Good morning, everyone. Our first quarter results exceeded expectations. Even without the pull forward of profits in our land development program, EPS beat our expectations by nearly 10%. In local currency, our Services segment delivered 27% operating profit growth. And as Bob mentioned, nearly 30% with the benefit of FX. Given this relatively large FX tailwind, I will reference growth rates in local currency, unless otherwise noted, to best reflect our operating performance. Advisory Services revenue saw continued strength in leasing and accelerated growth in sales. Leasing revenue grew 18% globally and 21% in the U.S. Industrial leasing grew 24% in the U.S., as occupiers continue to act ahead of tightening supply for first-generation big-box facilities. U.S. office leasing revenue increased by 15% with broad-based strength across gateway and non-gateway markets. Additionally, data center leasing revenue more than tripled from last year's first quarter. Outside the U.S., leasing revenue rose by double digits in Asia Pacific, led by Japan, while EMEA saw mid-single-digit growth. Global property sales revenue growth accelerated from Q4, rising 39%, led by the U.S. and Asia Pacific. U.S. property sales revenue increased 64% as all major property types delivered double-digit increases. Outside the U.S., growth was notably strong in Japan. Mortgage origination revenue increased 53%, fueled by strong volumes from debt funds and the GSEs. Our loan servicing portfolio grew 5% to more than $460 billion. Advisory SOP grew 35%, delivering strong operating leverage. Turning to the Building Operations & Experience segment. Revenue grew 16%. In addition to significant growth in our new critical infrastructure services line of business, which Bob described earlier, our local facilities management business continued to increase revenue at a mid-teens rate. In the Americas, revenue was up almost 30% as this region had 1 of its best start to a year. Enterprise Facilities Management revenue also grew by double digits, led by the technology, industrial and life sciences sectors. BOE's SOP increased 23%, with operating leverage driven by an amortization cost reclassification. Excluding this change, SOP growth was in line with revenue growth as expected. Turning to our Project Management segment. Revenue increased 11%, while pass-through costs rose 9%. Growth was underpinned by strong infrastructure activity. Among real estate projects, growth was driven by the technology sector and was broad-based, led by double-digit growth in Asia, the U.K. and the U.S. SOP grew 14%, reflecting operating leverage. In the Real Estate Investments segment, SOP exceeded our expectations, driven by earlier-than-anticipated data center land sale profits. We continue to have embedded gains of approximately $900 million that will be monetized over the coming years. In Investment Management, recurring asset management fees increased driven by higher net asset value. However, operating profit declined due to lower incentive fees and promote income. We raised $1.3 billion of new capital during the quarter and ended Q1 with more than $155 billion of AUM, in line with Q4's level. Now I'll discuss free cash flow and capital allocation. We produced $1.7 billion of free cash flow on a trailing 12-month basis, reflecting 78% conversion. As we've discussed previously, cash incentive compensation is paid out in the first quarter based on the prior year's performance. Due to the strong performance in 2025, free cash flow conversion was lower than the prior year's Q1. We expect to end in 2026 with free cash flow conversion around the high end of our 75% to 85% target range. We have repurchased nearly $540 million of shares year-to-date, reflecting our continued belief that our share price does not reflect the sustained long-term growth trajectory of our business. As Bob indicated, we now expect full year core EPS of $7.60 to $7.80, up from $7.30 to $7.60, previously. The increase is driven by our outperformance in the first quarter and early part of the second quarter, momentum in our infrastructure services-related businesses and strong pipelines across our company. We are increasing our outlook for advisory and BOE. Advisory is now expected to deliver high-teens SOP growth. We are expecting approximately 25% SOP growth for BOE, which includes high teens growth due to improved performance in the underlying business and the remainder due to the cost reclassification. There will be an offsetting increase to depreciation and amortization, resulting in a neutral impact to net income. Our SOP expectations for project management and REI remain unchanged. Our outlook assumes no material changes to the macroeconomic or interest rate environment. And in terms of seasonality, as a result of our first quarter outperformance, we expect to generate nearly 40% of EPS in the first half of the year, a higher percentage than we would typically achieve. With that, operator, we'll open the line for questions. Operator: [Operator Instructions] And our first question comes from the line of Anthony Paolone with JPMorgan. Anthony Paolone: Great morning. Nice quarter. My first question relates to just how you're thinking about the second half of the year because the first quarter and first half looks quite strong. And so wondering if you can get into a little bit more of your thinking into how much of that maybe was pulling forward stuff you thought would happen later in the year versus just outright strength and trying to get a sense of your conservatism or how you're thinking about 2H. Emma Giamartino: Sure, Tony. So we increased the midpoint of our guidance from $7.45 to $7.70 of EPS, as you saw. As Bob talked about and I talked about, we pulled forward our development profits that we expected to generate later in the year to the first quarter. So there's no impact to our guidance for our REI segment. . In terms of the raise from $7.45 to $7.70, 1/3 of that is based on the outperformance in the first quarter in advisory and BOE and 2/3 of that raise is increasing our expectations for the remainder of the year. Within advisory, we're seeing strong pipelines going into Q2 and especially in the U.S. And so despite the fact that there's uncertainty in the macro, we are raising our outlook in advisory for the remainder of the year. But remember that, that growth will still decelerate going into the second half, given we're working against tough comparisons. And then within BOE, we're raising our guidance for the remainder of the year slightly given the strength in both critical infrastructure services and local. Anthony Paolone: Okay. Got it. And then my second question really is the roughly $30 billion in pipeline and projects in Trammell Crow right now. Can you talk about how much is, say, industrial data center office and so forth? And just the prospects of that -- you mentioned the $900 million, just the prospects of that potentially just being further accelerated and seeing that as the year progresses? Robert Sulentic: Yes, Tony, the biggest portion of the Trammell Crow in-process portfolio and pipeline portfolio is in 3 areas. So industrial, multifamily and data center land. The thing to know about Trammell Crow Company, forever that business has been really good at acquiring land, entitling land, improving land and positioning land to be more valuable than it was before we got involved with it. That is a core competency of that business. And as we've moved through various parts of the cycle, we've aimed at business in areas that we thought had secular tailwinds. So if you remember, coming out of COVID, CBRE was and continues to be a massive office building business. And COVID hammered everything about office buildings, but we moved aggressively into industrial land and multifamily land and multifamily development and industrial development. And within 2 years, we are back to record earnings. What you're seeing now is a considerable amount of investment in multifamily and industrial because we believe there is a dearth of new development that will be coming on over the next few years, and we're well positioned to do that. We've talked a lot about that. But we also, around the country, have secured dozens of land sites that have the potential to be data center land sites over time. And we're working with various data center users, especially the hyperscalers to get that land entitled, get that land powered, get water into the land. And we think we'll have a relatively steady stream of opportunities and data center land over the next few years. It will be lumpy. For sure, it will be lumpy and as evidenced by the first quarter, our harvest so far this year is kind of what we thought it would be for the first year, and Emma gave you some perspective on that. Operator: [Operator Instructions] Our next question comes from the line of Steve Sakwa with Evercore ISI. Steve Sakwa: Maybe, Bob, if you could just maybe elaborate a little bit on maybe some of the conversations that you and the team have had with some other C-suite executives just more around kind of where their head is on the macro. And I realize that the problems in the Middle East kind of occurred fairly late in the first quarter. So not much time to impact that business. And maybe that's tempering your enthusiasm for the back half a little bit. But just how are you sort of thinking about leasing and sales? And I guess what would it maybe take to create more challenges in that business moving into the back half of the year? Robert Sulentic: A bunch of different things going on there, Steve. So 1 is what's going to happen specifically with regard to the Middle East and things that are directly impacted by the Middle East. One is what's going to happen to the economy more broadly. Big theme, obviously, is what's going on with artificial intelligence, big theme is what's going on with job creation and all the old jobs disappear. So I'll comment on each of those. . Starting with the economy. People feel generally good about the economy and less energy prices spike to the point where we end up in a situation where there could be a recession in parts of the world that are energy specific -- or energy sensitive, maybe global recession. I don't think people think that's going to happen, but they're worried about that. Most companies that we interface with are not particularly impacted by what's specifically going on in the Middle East. If you look at our company, none of our 4 business segments have as much as 5% of their profits in the Middle East. So it didn't impact us in the first quarter. It hasn't impacted us so far in the second quarter. Most of the companies that we're working with have not been massively impacted there or even all that materially impacted. And so they're watching like we are, but not that worried about that specifically. The whole AI job creation or job destruction thing that is unfolding and ping-ponging back and forth, lots of discussion around that, lots of headlines around all the jobs that are going to be eliminated by AI. And so we've tried to dig deep and get some kind of empirical underpinning based on the business we do with companies. And I will tell you that kind of the market-facing headlines don't sync up very well at all with what's going on in our direct conversations with these clients. So to give you a statistic, if really there was this view that all these jobs are going to be eliminated by AI, you would think that the users of space would be backing off on their leasing of space, not just currently, but you would think they'd be taking shorter-term leases for fear that they weren't going to need the space in the future. The average length of lease we're doing in office buildings today hasn't decreased by a day. It simply hasn't decreased. It's held steady for the last several years, and it's holding steady now. So to put your money where your mouth is, thing would suggest that the fears around job losses aren't quite as high as the headlines. I can tell you for our company when we look at what's going on, we anticipate some job loss in certain areas. So we have AI initiatives underway to create efficiencies in the company. And so for instance, we have lots of people in call centers around the world, thousands of them. We think some of that -- we think we can rationalize that by maybe as much as 25%. We're going to be able to cut back on research. We're going to be able to cut back on our human resources or people organization. But the most profound thing going on in our business today as we've moved into critical infrastructure in a 3 billion last year in our services business is already almost $1 billion in the first quarter, we can't hire enough people. Our biggest challenge is across that business, we're having trouble getting the various skilled people we need. And we're not alone in that regard. I'm sure that anybody that's following the market is seeing the same thing. So there's a myriad of things going on when we talk to others in our sector and others in the companies we serve. But net-net, I would not say there's a lot of fear about what's going on right now at least in the foreseeable future. Steve Sakwa: Great. Maybe just as a quick follow-up, Emma, I know you talked about the $540 million of buybacks. I think in the excel file, it showed $530 million of actual buybacks in the quarter. Could you either provide a share count or an average buyback price that's associated with that $500 million? I just want to make sure we have kind of our shares moving forward accurate for the model. Emma Giamartino: Yes, the price is in the high 140s. It's around $148. . Operator: Our next question comes from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Really nice results here. First, I wanted to ask about training partnership with Meta around data center capabilities. And Bob, you're just talking a little bit about some of you can't hire enough people, I think, critical infrastructure. So I guess, do you see similar opportunities with other big tech and AI companies. And then as we think about something like that, is it more like a onetime revenue opportunity or there kind of recurring resilient revenue streams that as you kind of that could be built as you be supported by a partnership like this. I guess how we be thinking about these opportunities? Robert Sulentic: It's definitively not a onetime thing. We're building a capability there in multiple cities around the U.S. to recruit, train and place technical people to support Meta's data center initiative. And it is really, really hard to get those people and we're recruiting and training those people and sending them not only into CBRE's teams to support Meta, but into our competitors and others in the market. They viewed us as having a unique ability to hire and train people. We have a big operation in that regard. We hire something like 30,000 people a year, and so that we ended up in that position. The bottom line is, with these companies that we interface with to do critical infrastructure and data center work, there's a broad base of things that we can do to support them, and this is something that surface because of our brand and our scale and our breadth here in the U.S. and in other places around the world, that we were well positioned to help them with, and we expect this to be an enduring service that we provide. Stephen Sheldon: Very helpful. Maybe then as a follow-up, around the commentary on average office lease durations holding steady. Would be curious with industries, you guys have the flexible co-working business with industries. What have you seen there? Have you seen demand for more flexible space start to pick up? Is that something that could structure -- if, let's say, average lease duration start to pull back, would you even potentially see an uptick in demand for solutions like industrial that give companies more flexibility? I guess, how are you thinking about that? Robert Sulentic: Yes. The number of industrial units that we're adding is exceeding our expectation in underwriting when we bought the business. We're quite pleased with the pace at which we're adding those units, and we expect it to continue this year and into the foreseeable future. And the thing about that business is that I think anybody that's been following us knows we bought that business because we thought it was a premium offering that would be interesting to corporates in addition to small- and medium-sized businesses, and we're seeing that play out, just like we're seeing strength in every other part of the office market. We're also seeing that Industries' capability as an experienced company is becoming an increasing opportunity for us with our corporate clients on the facilities management side of things. So yes, we're seeing good momentum there, and we're quite excited about it. Operator: Our next question comes from the line of Julien Blouin with Goldman Sachs. Julien Blouin: Congrats on the quarter. Clearly, a very strong first quarter for both investment sales and leasing. I guess, just curious on -- I know you say the pipelines continue to look very strong. One of your peers last week was commenting on the fact that they are seeing sort of client decision-making slowing down given the lack of visibility. And when you have sort of this sort of instability, long-term investments just becomes slightly harder to make. I'm just interested, are you seeing any signs of that? And if you do see -- if we do end up seeing an impact, is your expectation more that we could see that in EMEA and APAC versus the U.S.? Robert Sulentic: I think there's more worry in APAC, in Asia over the impacts of higher -- and Continental Europe a little bit over the impacts of higher energy prices. We really aren't seeing decision-making slowing down as it relates to industrial leasing or office leasing. Where we're seeing some slower decision-making is corporate capital investment, except for data center investment. And we think part of what's going on there is that resources are moving from other types of real estate-related capital investment to data center investment. But there could also be a little uncertainty that is creeping into. Capital investment is 1 of those things that tends to slow down a little bit when there is some uncertainty. So we have seen some decision-making slowdown there. But really not on the leasing side. It hasn't surfaced yet for the -- it certainly hasn't surfaced in data centers. Obviously, Emma gave you those numbers, but it hasn't surfaced as it relates to kind of traditional warehouse leasing, traditional office leasing. Office leasing is strong all around the world, maybe a little less so in Europe. So we really aren't seeing yet that slowdown in decision-making. We'll see how things unfold, but we're not seeing it now. Julien Blouin: That's very helpful. And maybe going back to the AI topic. I was wondering how your thoughts on the risk from AI have maybe evolved since last quarter. Do you still believe that your BOE segment is where some risk of disintermediation lies and less so on the capital market side. And I guess, how do you think about some of these headlines that are out there around sort of smaller AI-based start-ups that are reported to be gaining traction in smaller commercial real estate transactions and sort of bypassing traditional brokers in the process? And do you think there's a risk that if they prove themselves at sort of the smaller sized transactions like 6 or 12 months from now, they could be used for $10 million or $20 million transactions. Robert Sulentic: Yes. Well, I'll kind of hit that at the end here. I'll walk you through how we think about AI. So we start by thinking about it like we do with everything. We are very driven by our strategy. And as you know, our strategy is to be diverse across asset types, service types, geography and client types. And we very definitely have pursued this strategy of pushing resources into areas of secular tailwinds. AI is creating a considerable secular tailwind for our company right now, and it's fairly broad-based. To the point where I think our move into critical infrastructure and data center services is going to be at least as profound as our move into outsourcing was in the '90s and early 2000s and much faster. Again, I want to reiterate some of the numbers we laid out, $3 billion. And this is independent of our land program in Trammell Crow Company. $3 billion of revenue last year, almost $1 billion of revenue in the first quarter, growing almost 50% this year, some very strong opportunities for us to do M&A in that area because of the track record we've established for M&A. This is a good home for targets. It's a good home for employees. And our brand and history positions us well with clients. So a lot of opportunity there. We think that's the overwhelming impact to our business. The second thing we look at is what we can do to enhance the products we have. So if you go across our 4 segments, Brokerage, Building Management, Project Management. We are developing AI-enabled tools in every 1 of those areas. We've been able to attract some very strong people. Again, I think our brand and our scale has helped us. There's a lot of interest in real estate. We've been able to attract some technology people and then some AI people that have helped us there. And we're very bullish about the product suite we've developed. I think it's going to help us do more business than we've done before. The next place is efficiency. This is where there's going to be some potential loss of employees. And I commented on this earlier. We're going to see some efficiency in our offshore service centers. We're going to see some efficiency in the research area and financial planning and analysis and human resources. There's a lot of those areas, and we think the gains will be fairly significant. It's going to take time to get those gains, because you have to develop the tools and then you have to implement the tools and then you have to reorganize yourself and limits. So there will be some eliminations there. Where we think we're most protected, and I commented on this last quarter, is in our transactional businesses. So our investing businesses, our brokerage businesses, our development business, where you lead with strategy and negotiations and creativity. And I know there's been commentary. We've read it, we've seen it, "Oh my gosh, in the brokerage business, there's all this data-related and financial analysis related work that goes on, that's going to be squeezed down by AI, which is going to cause revenues to be squeezed down". Well, if you really know how that business works, the vast majority of what we spend in that business goes to our brokers, the vast majority of what we spend. It doesn't go to financial grinding and analysis and data. We do a lot of work in data, we do a lot of work in financial analysis, but the majority of the expense is around brokers. And what the brokers provide is specifically the strategic help, this creative help, this negotiating help, the knowledge that goes beyond the data that's on the street. And that's why, over the years, when I've been asked, as you guys get bigger and stronger, you're going to use that leverage to squeeze down your brokers? The answer has always been no. The real value in that business comes from that creative strategic thinking. It's true in our investing businesses. It's true in Trammell Crow Company. That land development business is not going to be disintermediated by AI. It's going to be enabled by AI. So we're not sitting here today. I'm sure there's going to be ways AI does stuff that it hasn't done before, and we're all going to figure that out over time. But we think we're reasonably well protected there. And then when you hear these anecdotes about some proptech company that says they're disintermediating the brokerage business, I would ask them to show you their revenue stream and see what you get. Operator: Our next question comes from the line of Brendan Lynch with Barclays. . Brendan Lynch: Maybe a few follow-ups on the data centers. How is the Pearce acquisition trending versus the $90 million of EBITDA contribution you had originally anticipated for 2026. And maybe in terms of expanding the data center platform, what are some of the other verticals or some verticals you could potentially expand into? Robert Sulentic: Yes. I'm going to answer the back half of that question and Emma will [indiscernible]. Pearce, by the way, is not a big data center business. So it's telecom power, et cetera. But in the data center business, we're seeing big impact in our brokerage business. We're seeing big impact in our building operations and experience business where we formed this critical infrastructure line of business, and we're doing a lot of project work there, we're doing a lot of building management work. We do work on over 1,300 data centers around the world. And then, of course, we're continuing to see in turn towns in our big project business, a lot of work, and we have opportunity to expand all those things. Turner & Townsend has primarily over the years, before we combined with them, been European, Middle East, Asia Pacific business with some activity in the U.S. Now they're growing rapidly in the U.S., leveraging the network of professionals that CBRE has. On the contrary, our data center services, building management and small projects business in the white space has been primarily U.S., and now we're seeing a big opportunity to expand that in Europe and Asia. So those are some areas we're focused on. And I think Emma can talk about M&A. But I think if you look at the M&A strategy, we've had, you'd be confident that there's opportunity for us in those areas around the world. Emma, I don't know if you want to add to that? Emma Giamartino: Yes. Just to add on Pearce front and specifically to your question, it's performing well in line with our expectations. One important thing to note is if you take the $60 million of revenue that we forecasted for 2026, you can't ratably lay out across the quarters because there is a seasonal element business, given that they're maintaining cell towers and wind farms and solar. So the weather has an impact on the revenue here. So if you exclude Pearce in the first quarter, our BOE revenue growth was mid-teens. . Brendan Lynch: Okay. Great. That's helpful. And maybe just 1 follow-up. If I heard you correctly, it was about $900 million of embedded profit in the land bank. And you talked about dozens of other land opportunities that you could monetize in the future. How should we think about the steady state contribution, understanding it's going to be lumpy, but just your ability to acquire attractively priced land and add some value-add components to it and kind of keep that pipeline steady over the next couple of years? Robert Sulentic: Yes, the $900 million is not land profits captured in Trammell Crow Company. It's all profits captured in Trammell Crow Company, including the land. And the data center land opportunity, we have lots of sites that we have the opportunity -- the potential opportunity to monetize, but it's hard. It's really hard. You have to get approvals, you have to get power, you have to get water. And as a result, we have not been overly aggressive about forecasting what might happen there. . We're very excited about the potential. We like the portfolio of sites that we have control. We have very little capital of our own investment in those, by the way. We really like the ability we have to work with hyperscalers and other data center clients to help them get land positions. But we're knowing how hard that business is and the scarcity challenges around things you need and the public opposition and so on and so forth, we're being very measured about the outlook we're establishing for that. But the $900 million is all the profits we see captured in Trammell Crow Company today. And we are filling that back up at the same rate. We're emptying it out, I guess, is what I would say. Operator: Our next question comes from the line of Jade Rahmani with KBW. Jade Rahmani: I wanted to ask about AI and how you've rolled it out to your teams. Could you quantify what percentage of your teams are using it? And if you're limiting who can use it? And what are you doing to maintain the closed-loop system in terms of your data, where data is the linchpin of value in that business? Robert Sulentic: Jade, we're like everybody else. We're working our way through that and trying to figure it out. And you didn't say it explicitly, but you kind of implied it. One of the things we're watching very closely is it can get really expensive really fast if you don't control who has the access to use it and what they can use it for. And our Chief Operating Officer, Vikram Kohli, who's also over our cost control program and specifically has reporting up to him the technology part of our business right now is watching very closely how we're using AI and where we're using it. how we're using it to improve our products and where we're using it randomly around the system. And as you can imagine, there's a lot of that. And I will just say broadly that we are controlling it controlling who has access to it, controlling what we use it for. And we're reasonably pleased like we have been historically that we're attacking new technology in a measured way where the benefit we're getting is in balance with the cost, we're expanding on it. But it's something you've got to watch really closely. Jade Rahmani: Just switching to transactions. Just wondering if you can give any comment as to whether the pipeline has slowed at all. driven by the increase in rates and also modest widening in CBRE borrowing spreads that we've seen. Emma Giamartino: So Jade, the pipeline hasn't slowed at all and going into Q2 the pipeline is actually stronger than we would have expected it to be at the beginning of the year. I think what's important to note about rates that we get asked about a lot. As long as the tenure has been around in the 4% to 4.5% range, we've seen sales activity and loan origination activity continue to grow and accelerate. So as long as there is a significant spike above that, we don't expect to see any slowing. . Operator: Our next question comes from the line of Seth Bergey with Citi. Seth Bergey: I guess, just wanting to go back a little bit to capital allocation. You did kind of the buybacks in the quarter. And has AI changed the way you kind of think about your capital allocation priorities as you think about buybacks or kind of resilient businesses that bolt-on? Or is there any sort of incremental investments or kind of AI companies that you would look to kind of add to the platform? Emma Giamartino: So our capital allocation priorities remain consistent and they have over time. We are always prioritizing M&A, and if anything, as Bob mentioned earlier, we see even greater opportunity for M&A at this point than we have historically, especially in the data center space. And so we will continue to prioritize M&A. But of course, as you've seen, as we're monitoring our pipeline and thinking about what we can convert in a year. We're going to fill that in the buybacks, especially when our price remains undervalued. In terms of investing in AI, as Bob said, it's similar to how we invest in technology. And we're constantly organically investing through our CapEx in technology and now AI to support our business, and that will remain unchanged. I don't expect us to be investing in specifically AI companies, like we didn't make large investments in technology companies historically. Seth Bergey: And then I guess you talked a bit about raising headcount where it makes sense and using AI to kind of increase productivity. It might be a little early, but do you have a sense of how that can kind of change the margin profile of certain segments kind of over time? Emma Giamartino: So it's very difficult to speculate how it will impact over time, but it will. I think it will take a number of years, and it will start in our functions. I mean, Bob mentioned our HR teams, our shared service teams, but even those head count reductions, we anticipate happening a few years from now versus immediately. So time will tell in terms of how that will explicitly impact our business. Operator: Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Great. Just a quick one. Going back to sort of the BOE. I think you mentioned earlier in the call that the sort of ex the acquisition, the revenue growth would have been, I think I heard mid-teens if that's correct. And I think the messaging has been that, that growth rate has been sustainable for quite some time. I guess my question is, is there a way to sort of double click and think about how much of that growth is driven by existing tenants expansion there versus sort of new businesses? And has that mix sort of shifted as the business has changed over the past couple of years? Emma Giamartino: So the way we think about that business is between our Enterprise Facilities Management, our local business and then now our Critical Infrastructure Services business. So Enterprise is a solid double-digit grower -- low double-digit grower over time. Local as it's been expanding into new markets, I mentioned earlier, we have still significant growth within the Americas. Our local business grew revenue in the Americas this quarter of 3%. So that's bringing that growth above that double-digit, low double-digit range. And then our Critical Infrastructure Services business, as you saw, has tremendous growth within it. So it is going to keep that growth rate within our BOE segment in that mid-teens range and potentially above over time. . Ronald Kamdem: Helpful. And I guess my second question is, as I'm sort of thinking about whether it's advisory services versus BOE versus project management, at sort of this point in the cycle is advisory -- is the greatest margin upside still in advisory services because of potential transaction upside? Or how do you guys think about sort of the potential margin uplift in some of those other segments? Emma Giamartino: So advisory is nearing -- has already gone back to the 2019 levels of margins, which we think is a relatively steady state margin for that business. There will be incremental margin uplift throughout this year. But where we think the opportunity is, is within BOE and within project management. Those margin gains, as you've seen, are steadier and more incremental over time, but we see opportunity for those to increase. . Operator: And we have reached the end of the question-and-answer session. I would like to turn the floor back to CEO, Bob Sulentic, for closing remarks. Robert Sulentic: Thanks, everyone, for joining us today, and we'll talk to you again in 90 days when we report on our second quarter. Operator: Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Waste Connections, Inc. Q1 2026 Earnings Call. [Operator Instructions]. I will now hand the conference over to Ron Mittelstaedt, President and CEO. Please go ahead. Ronald Mittelstaedt: Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our first quarter results. I'm joined this morning by Mary Anne Whitney, our CFO; as well as several other members of our senior management. As noted in our earnings release, we are well positioned for 2026 following a strong start with upside potential from recent trends. We do not -- we not only exceeded expectations for revenue and EBITDA, but delivered EBITDA margin of 32.5%, up 90 basis points year-over-year, excluding commodity impacts in spite of outsized weather impacts and in advance of recovering higher fuel costs. Against a volatile macroeconomic and geopolitical backdrop, our results reflect the durability of our model and consistency of execution, as we continue to benefit from improved operating trends along with recent increase in commodities and special waste activity. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items. Mary Whitney: Thank you, Ron, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed in the cautionary statement included in our April 22 earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements, as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron. Ronald Mittelstaedt: Thank you, Mary Anne. On the strength of our business and consistent execution, 2026 is off to a great start with results exceeding expectations. Despite the volatility of the broader macro environment, we haven't seen anything today that doesn't support our full year outlook as provided in February. In fact, we believe we should be well positioned for incremental benefits, both from external factors driving higher fuel and other commodities and also as a result of our ongoing investments in human capital and AI, which have broad implications for our operations along with continued M&A. In Q1, we saw improving dynamics across our business, starting with better-than-expected solid waste pricing retention, resulting in core price of 6% providing visibility for the high end of our full year 2026 outlook of 5% to 5.5%. Next, our landfill tons were slightly stronger than expected offsetting the volume impacts from slowdowns and closures related to severe winter weather, which persisted in several markets, most notably in the Northeast. Landfill activity was led by higher special waste tons, up 8% year-over-year in Q1, the sixth consecutive quarter of improving special waste. Looking next at the aspects of our results related to crude oil prices and related volatility, which are twofold. First, our E&P waste business where revenues increased sequentially and were up about 4% over a year on a like-for-like basis. We saw increases both in Canada on greater production-oriented activity and higher pricing and in the U.S. on drilling-oriented activity, most notably in the Gulf. To date, we haven't seen a meaningful increase in rig count or pickup in drilling activity which may be driven by sustained higher crude prices or long-term supply disruptions and would be additive to the levels we are currently experiencing. Next, fuel and related costs. Spot diesel in the U.S. was up 12% year-over-year, including an increase of over 35% in March. That surge drove our internal fuel costs about $5 million above our expectations for Q1. Our exposure to the cost impact is limited due to the hedges we proactively put in place for over 45% of our expected diesel requirements for 2026. Additionally, in certain markets, our pricing mechanisms allow for recovery of a portion of higher fuel-related costs over time through surcharges, which will step up in Q2 as a result of the incremental costs we have already absorbed. Based on what we have seen to date, we would expect to be largely insulated on an EBITDA basis over time from most of the effects of higher fuel costs between the benefit from any pickup in E&P waste activity, the impact of hedges and the recovery of higher diesel costs through surcharges, albeit with some lag in timing. Looking next at trends for other commodities. Recycled commodity values stepped up sequentially in Q1 for the first time in 7 quarters, led by improving values for fiber during the quarter. Although nominal, the increase is a positive indicator and landfill gas sales also stepped up sequentially, in this case, due to increased volumes on stable values for renewable energy credits, or RINs. Moving next to operating trends. Q1 marked our 14th consecutive quarter of improvement in employee retention and the achievement of another milestone as voluntary turnover dropped to below 10%. We can't overstate the value of human capital as a differentiator and continue to see the benefits of lower turnover throughout our operations from our record safety levels to increased employee engagement and ultimately, customer retention. Shifting to the subject of technology. Our continued investment and focus on AI and our overall digital platform are showing promising results within pricing effectiveness, customer engagement and asset optimization. Specifically, our AI-driven pricing tool has yielded approximately 20% improvement in customer retention and pricing effectiveness, while maintaining our core pricing strength. We are encouraged by early results knowing our analytics and capabilities will only get better as our technology advances. Further, for the balance of '26 and into 2027, we are excited about our continued involvement in the field to expand our AI-powered tools, reinforcing our commitment to our decentralized-first model and value-based approach to the business. These current and future tools will continue to expand our customer engagement and routing productivity with early indications suggesting strong returns on investment. Moving next to M&A. We continue to anticipate another outsized year of activity based on a robust and building pipeline with high visibility and a handful of deals with aggregate annualized revenue of approximately $100 million expected to close by the end of Q2 or early Q3. We are on track for another above-average M&A year. Most importantly, we remain disciplined in our approach to acquisitions and well positioned for implementing our growth strategy, while also increasing return of capital to shareholders. To that end, on a year-to-date outlays of approximately $365 million, we've repurchased about 1% of shares outstanding. And finally, an update on our management of the ongoing elevated temperature landfill or ETLF event at Chiquita Canyon, our closed landfill in Southern California. We continue to make progress on mitigating the reaction, which based on objective data collected to date is stable, controlled and decelerating. As noted previously, we have sought out the increased involvement and oversight of the US EPA in an effort to streamline the process. Over the past several weeks, the EPA has expanded its involvement at the facility, which we welcome. To date, the EPA has weighed in and provided direction on 2 critical issues, and we respect their expertise and experience, which have facilitated the development of plans to resolve these matters consistent with our expectations. We continue to work with the EPA in a long-term agreement which should provide even greater clarity once consummated. There is no change in our 2026 outlook for Chiquita, which reflects free cash flow impacts of $100 million to $150 million. That said, we did adjust our accrual in Q1 to reflect the higher spending we saw in 2025, which was incorporated into our 2026 outlook. We look forward to being in a position to more formally reforecast the outlays for subsequent periods once we have a roadmap for moving forward, still anticipated this year. Additionally, we continue to expect free cash flow impacts in 2027 will decline as compared to 2026, as previously communicated and continue to step down in each year going forward. And now I'd like to pass the call to Mary Anne to review more in-depth financial highlights of the first quarter, I will then wrap up before heading into Q&A. Mary Whitney: Thank you, Ron. In the first quarter, revenue of $2.371 billion exceeded our expectations and was up $143 million or 6.4% year-over-year. Contributions from acquisitions net of divestitures totaled $55 million in the quarter. Organic growth in solid waste collection transfer and disposal of 3.1% was led by 6% core price which range from about 4% in our mostly exclusive market Western region to over 7% in our competitive markets. Total price of 5.9% included a reduction of about 10 basis points in fuel and material surcharges given the lag in recovery at higher costs. With over 75% of our price increases already in place or contractually provided for, we have high visibility for full year 2026 core pricing at the high end of the range we provided or about 5.5% and given the recent step-up in diesel costs, we would expect surcharges to increase accordingly, albeit with a lag, driven not only by the mechanics of the surcharges but also due to advanced monthly or quarterly billing for some of our customers. As Ron noted, we have hedges in place for almost half of our diesel requirements and utilize surcharges in a portion of our markets. Yield of 4.7% reflects ongoing reductions in customer churn and implies solid waste volumes down about 1.5%, including up to about 0.5 point attributable to outsized weather amounts that contributed to Q1 volume losses to varying degrees across all of our regions, except the Western region, where volumes were up about 1.5%. Looking at year-over-year results in the first quarter on a same-store basis. Roll-off pulls were down 1% on rates per pull up 3%. And with the exception of our Western region, pulls were down in all regions. That said, we are encouraged by improving roll-off trends, especially given weather impacts. As compared to Q4 year-over-year results, pulls were less negative by almost 0.5 point and year-over-year rate per pulls stepped up by 120 basis points. Landfill trends, while still mixed, are also encouraging. Total tons were up 4% on MSW up 5% and special waste up 8%, partially offset by ongoing weakness in C&D down 5%. Increases in MSW tons were spread across our Western, Canadian and Central regions while special waste activity was broad-based, driving increases in 5 of 6 of our geographic regions. Most noteworthy, though, was a 20% increase in special waste activity in our central region, where the pickup in activity we noted in recent quarters had been lagging other markets. And following up on Ron's comments about improving commodity-driven activity. Recycled commodity revenues improved during Q1 led by an increase in old corrugated cardboard or OCC, which averaged $89 per ton in Q1 and exited the quarter in line with the 2025 full year average price of $94 per ton. Additionally, our landfill gas sales increased sequentially as a result of contributions from 1 of our new RNG facilities currently in start-up and also from higher natural gas prices, which spiked in Q1, similar to last year. Values for renewable energy credits, or RINs, remained stable at about $2.40 following the EPA's updates for renewable volume obligation. Adjusted EBITDA for Q1 is reconciled in our earnings release was $769.5 million, up 8% year-over-year. At 32.5% of revenue, our adjusted EBITDA margin exceeded our expectations and was up 50 basis points year-over-year, driven by 90 basis points underlying margin expansion offset by about 40 basis point drag from commodities. Outside solid waste margin expansion reflected improvement in several cost items, reflecting favorable price cost spread dynamics led by strong pricing retention and magnified by benefits from employee retention and safety. These benefits were partially offset by higher fuel and related costs. And finally, adjusted free cash flow of $246 million was in line with our expectations and consistent with our full year outlook as provided in February of $1.4 billion to $1.45 billion. We were pleased to see Q1 CapEx outlays outpaced last year's slow start, largely as a result of more expeditious deliveries of fleet and equipment and faster progress on projects, including our R&D facilities in development. Moving next to our balance sheet. We opportunistically accessed the public debt market with a $600 million note offering in early March to further diversify funding sources. Following that highly successful offering in activities during the quarter, including share repurchases, as noted by Ron, our debt outstanding of about $9.1 billion had a tenor of over 8 years at an average interest rate of about 4% with about 80% of our debt fixed. With liquidity of approximately $1 billion and quarter end net debt-to-EBITDA leverage of about 2.75x, we retain flexibility for acquisitions as well as returning capital to shareholders through additional repurchases and dividends. And now let me turn the call back over to Ron for some final remarks before Q&A. Ronald Mittelstaedt: Okay. Thank you, Mary Anne. As we've said, 2026 is off to a great start, and there are a number of factors working in our favor for the rest of the year. The strength of our results is a reflection of the projectability and consistency that sets us apart regardless of the macroeconomic environment. Our industry-leading results are also a reminder of the importance we place on asset positioning and market selection, both of which are fundamental to our strategy and which we believe drive differentiation. Our results highlight the importance of discipline around capital allocation as well as the value of human capital and culture in driving results. These are the tenants that have guided Waste Connections approach since our founding over 28 years ago and which remain fundamental as we approach $10 billion in revenue very soon. To that end, we're most grateful for the commitment of our 25,000-plus employees who live our values every day, putting safety first and making Waste Connections such a great place to work. We appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions. Operator? Operator: [Operator Instructions]. Your first question comes from the line of Tyler Brown with Raymond James. Patrick Brown: Mary Anne, so I appreciate some of the comments on fuel, but I just want to make sure that I've got it. So sorry for this, it's kind of a multipart question. But number one, I just want to make sure that it's clear that kind of over the course of the year, you would expect fuel to be effectively a push from an EBITDA dollar perspective. But then two, if we assume where fuel is and it stays where it is, we clearly need to contemplate higher surcharges, and that will be dilutive on margins. So I assume that needs to be considered. Can you maybe size some of the dilution there? And then three, for my garbage bill, I believe I paid 2 months in advance. So we also need to consider that there is a lag on fuel recovery. So can you help us think about fuel dilution, specifically in Q2? So I know there's a lot there. I'm sorry about that, but just some more color on fuel. Mary Whitney: Sure. Happy to address that, and there are a lot of moving parts. So here's how I'd approach it. First of all, you have fuel impacts that are direct and indirect. And what we know is that the direct impacts are mitigated or impacted by, first of all, the hedges we have in place. So we've got hedged almost 50% of our fuel requirements and then we get fuel surcharges in certain of our markets. And as you said and as we said in the script, largely in terms of the dollar amount of the impact from fuel, we can recover that over time through fuel surcharges. You used the term during the year. I'd just remind us since the spike started in March, it goes into next year in terms of the recovery. To your point, there is a lag, the lag is driven by twofold. One is the mechanism specified by whatever -- what limits it provides for the surcharge; and then secondly, as you also pointed out, we advance bill customers on a quarterly or monthly basis. And so you can appreciate that when fuel ran in March, customers who we had billed in January, of course, we couldn't have recovered that, we hadn't anticipated it, so it could take, by example, up until May to get that. So then that brings you to the question of how quickly we recover? And to think about it quarter-by-quarter, Q2 would be the toughest, right, because it's the slowest recovery because we're late to the game. By Q3, you're more at that 100% level, and then that continues through the year. So of course, again, as you pointed out, there's a margin impact there when you recover the dollars and so you get the revenue and EBITDA, but the margin changes and obviously, that's a function of how big the number is. Illustratively, if we've got about 50 million gallons that aren't hedged, you then rate that over the course of 3 quarters of the year, you could see how with a couple of dollars higher fuel, this could be as much as $60 million or $70 million in incremental fuel surcharges that would run through the P&L and that would create that margin differential. So then I think about the other bucket, which is indirect impact. So moving the indirect impact, it then says there's an opportunity to have incremental benefits associated with the higher fuel to the extent that there is an increase, for instance, in E&P waste activity. And that, again, we would expect to take longer. We haven't seen it yet. As strong as our E&P results were in Q1 that really didn't reflect the pickup in drilling activity. We did see an improvement in commodities. You've already seen a little bit of an offset of those margin drags. And then you would look to continue to see that as we move through the year. Patrick Brown: Okay. Perfect. And then I know I'm sometimes a bit spacey but maybe I missed it, but did you give any color specifically on Q2 around revenue or EBITDA and is that a change? Should we think about not getting that forward quarter look or how should we think about that? Mary Whitney: Well, actually, it's consistent with the way we've been doing it really since last year. And we certainly give guardrails around the movement throughout the year, and I think we did that in Q1 when people laid out their framework for the year. And so I now think about directionally to provide that what's changed since our guidance in February and of course, as I mentioned, when I look overall at the commodity impact, that's probably improved just based on where the pricing has gone to date, probably a 10 basis point benefit versus where we expected things to be in February, and you'd start seeing that in Q2 to the extent it doesn't change from here. And we just talked about the incremental margin headwinds associated with fuel, which would be most felt in Q2 versus the other quarters. Operator: Your next question comes from the line of Konark Gupta with Scotiabank. Konark Gupta: The first one, Mary Anne, the underlying margins in Q1, if you strip out the fuel impact, I think they were up 110 basis points, commodities as well. I think in February, you guys were looking at 50 to 70 basis points for the full year. I'm just trying to understand like with the pricing moving to the high end of the range, do you think the underlying margin expansion has potential upside to the 50 to 70 bps, is that for the full year? Mary Whitney: Obviously, we're excluding fuel in this conversation. But yes, with respect to the fact that we just said we had a nice strong start to the year that could be arguably another indication maybe a nice tailwind as we move through the year. We'd always be cautious because you have to have a lot of things go right and we described all the things that went right in Q1 and acknowledging that those benefits we've seen, for instance, from the human capital-driven benefits, as we described with respect to retention and the improvement we've seen there. We've gotten most of those benefits. So I wouldn't think that they continue at the same extent as we move through the year. So you might have a little better improvement in Q1 versus the other quarters and the underlying margin expansion. Konark Gupta: Okay. That makes sense. And on the M&A side, I think, Ron, you were mentioning about the $100 million acquisition worth in the coming few months. I just wanted to understand the nature of these transactions. What kind of areas are you targeting? And what kind of assets are these mostly post collection or collection? Ronald Mittelstaedt: Yes, sure. Well, first, and that was a little -- you broke up just a little, but didn't -- we didn't mean to imply that there was a $100 million transaction. There's a series of transactions that equates to $100 million or more, just to clarify. These are all consistent with our traditional, what I'd call, singles and doubles, core solid waste transactions both franchise and competitive, both -- we have some integrated transactions in that, meaning collection through disposal and a few smaller E&P tuck-in transactions as well. So everything that's consistent with our existing platform. Operator: Your next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: I wanted to talk about volume. I think last quarter, you had talked about for the year an expectation of down 50 to flattish. This quarter, we did see some nice improvement versus last year, and it was impacted by weather, so even better than the 150. And so my question is, does anything need to happen specifically to get to -- are you still expecting a flat to down 50 for volume for the year? And does anything sort of special need to happen? Or are you running at that sort of pace to get to that level and how much visibility you have in that? Mary Whitney: Sure. So I guess a couple of observations. We did see improvement in underlying volumes, as you point out, in Q1, and we're still able to deliver the volumes in line with our expectations in spite of, call it, 25 to 50 basis points of weather impact. Some of that, we'd attribute to that improvement in special waste, which you never -- you try to hesitate to generalize from that because it can be lumpy, and we've had multiple quarters of improvement in special waste. So I'd be cautiously optimistic there. And then, Toni, the final piece of the puzzle is really that construction-driven activity, which we haven't seen accelerate yet. And so there was some improvement in the underlying dynamics factored into our expectations for the full year that got you closer to that flat or even positive as you exit the year to deliver those numbers as you described. But the good news is that we are seeing that reduction in the shedding or lost contracts and so that is directionally getting us in the right -- we're moving in the right direction. Ronald Mittelstaedt: The last thing I'd comment on, Toni, is -- I think we commented on this in our remarks -- was that we -- with our AI pricing tool, we've seen perhaps up to almost a 20% improvement in retention/churn on the same type of price, which led us to a little bit higher performance on price than our 5% to 5.5% guidance and so that has a component to volume as well. Toni Kaplan: Terrific. And then I wanted to ask about E&P strong in the quarter, I think up sort of modestly organically, but a nice quarter there. And also, you had sort of mentioned if the fuel prices continue to be high, that could be even more of a tailwind for you. Just wanted to understand, has your pipeline changed? Has it gotten better? Or is this sort of you need a little bit more time for prices to be at a higher level in order to see any sort of impact to the pipeline and future deals? Ronald Mittelstaedt: Yes. I mean, as you know, Toni, the crude ran with the Iran crisis so precipitously within a matter of days to let alone a week. We have not yet seen any increase in rig count in the U.S., which is what would be needed to drive incremental drilling activity to affect our volumes in the U.S. Now if you have a sustained higher price crude, you will absolutely see there is a mobilization period that takes place, that takes time and it takes several months. And producers aren't just going to react on a 4- to 6-week price increase in crude. But if you have a sustained increase in crude price, they will react and then you'll see a mobilization of rigs and we will see greater drilling activity and then that will have an impact. And then, of course, in our Canadian E&P business, that is 80% to 85% production linked. And we have seen some nominal increase in their production because of what's going on with the price of crude in Canada as well, as well as their ability to export or their desire to. So certainly, if this is sustained, we will see it. But I'd say it's too early to say that producers are reacting to a 4- to 6-week crisis and not knowing if that's -- how long that is going to go on. Operator: Your next question comes from the line of Faiza Alwy with Deutsche Bank. Faiza Alwy: Yes. I wanted to ask about yield. And you've been -- we've been talking about fuel surcharges, but I'm curious if there is sort of this potential for underlying benefit that we could see on yield alone, as you look at your contracts where you may not have fuel surcharges, for example. Just curious how we should think about yield going forward from here and if there's room for potential upside? Mary Whitney: Sure. So most of our price increases, as we described, are in place or known. And so when I think about the benefit in yield that could be in '27 more so than in '26. That doesn't mean that there haven't been situations in the past when there's been outsized cost pressures or inflation later in the year, and we've revisited our price increases. But at this time, we think in terms of the recovery through the fuel surcharges that we know we're entitled to and then incremental pricing benefits lagging and into next year. Faiza Alwy: Okay. Understood. And some of the benefits that you've been talking about as it relates to retention just because this is a relatively newer metric historically given us core price. Just help us think through, like, does that show up more now in volume or in yield? And sort of how should we think about that? Does yield still sort of decelerate through the course of the year mechanically or should we see, again, like a slight improvement as maybe you lean into some of your technology initiatives a little bit more? Mary Whitney: So yield, you should expect yields to follow the similar cadence to what price did because really, what we're talking about is always the dollars associated with the price increases that we've retained and the denominator gets bigger, right? So with most of the price increases are done early in the year. So that's a consistent numerator on a denominator that's getting bigger. What's changed in the way we're communicating it is that arguably before our volume was reflecting any difference in mix and the price volume trade-off the customer churn that was inherent in delivering the price increase. And so now we've just really shifted it to the yields bucket. So it's a function of those 2 pieces. So of course, as customer churn improves, the yield should reflect some of that. So you will see a little bit, but I would still expect the number, the absolute value to decrease over the course of the year. Operator: Your next question comes from the line of Adam Bubes with Goldman Sachs. Adam Bubes: I have a follow-up on E&P. I think on the last call, you talked about expectations for E&P waste revenue is flattish for the full year? In the quarter, I think it was up over 20%. It sounds like that was largely acquisition contribution, but are you seeing outperformance on the acquired revenues? And is the right way to still think about E&P revenues for the full year as flattish because the run rate looks much better right now? Mary Whitney: Sure. So I think the commentary about E&P expectations is that really not much margin contribution was expected. And on an organic growth basis, it was expected to be pretty minimal. And so this is really consistent with what we expected, given the fact that we had rollover contribution from acquisitions, but also have the benefit of projects we've done, including at bolt-on acquisitions recently, but also, for instance, reopening one of the facilities we've talked about reopening. That's why we try to communicate like-for-like basis to normalize for those benefits. So I'd say overall, I still think the margin impact, again, unless we -- or until we get that pickup that Ron was just talking about in terms of drilling activity where it could be more meaningful, I think that would be pretty limited. But yes, the dollar amount would go up because of those incremental projects on the rollover. Adam Bubes: Got it. And then I think you're targeting 7 AI initiatives through 2027. It sounds like some of those are already having a real impact. I understand you're going to lap some of the strong margin tailwinds from voluntary turnover, but between continued price cost, the AI initiatives, landfill gas ramping, just at a high level, how are you thinking about potential for continuation of outsized underlying margin expansion beyond 2026? Ronald Mittelstaedt: Yes, Adam, I mean, you're correct. We've targeted 7 initial AI initiatives between 2025 and '27. We implemented 3 of those in 2025. We're implementing 2 in '26 and 2 more in '27. We are spending roughly $25 million to $30 million a year right now in each year on those initiatives. If you put them all together, the returns have been quite staggering, to be honest. Most of them much quicker than a 1-year payback. As we roll out our routing and other broader digital tools, it really suggests that the returns will meet or exceed the pricing tool return. I know others in our space have talked about fairly significant margin contribution, and we have no reason to believe it looks any different. We haven't laid out a formal number. But look, we believe as we come out of '27 and head into '28, it is reasonable that through all of 7 of those initiatives, to expect somewhere approaching about 100 basis points of margin appreciation as we head into '28. So this doesn't just come linearly. Obviously, you load the costs up initially in terms of the capital and the infrastructure we're in that phase and still delivering what we're delivering and then you see those improvements as things get fully implemented in the field and deployed, which takes time. It takes time to reroute 570 locations with 15,000 trucks. That's going to take all the way through the majority of '27, as an example. So we feel extremely confident and are very excited about what we're seeing from AI. It has outpaced our expectations in virtually every manner, but it is a complex implementation. But those 7 initiatives are all on pace. If anything, we think we're a little bit ahead. But I think that 100 basis points is a fair expectation, as we come through getting all 7 implemented. Operator: Your next question comes from the line of Bryan Burgmeier with Citi. Bryan Burgmeier: Maybe just following up on E&P. Just curious if you think the kind of 4% growth rate that you flagged in 1Q is an appropriate number for 2Q or 3Q? I'm not sure if maybe that 1% number only captured 1 month of improvement, so maybe 2Q could be even better. Also, I don't want to kind of get ahead of ourselves. So any detail on that would be great. Mary Whitney: Well, I think the key thing is that we haven't seen a pickup in the drilling activity, frankly. So really, that would be the determinant. So I would say, watch the rig count, and that will be the leading indicator that, that could improve. I wouldn't encourage you to think that there's been a recent run-up and that you should then increase that for a full quarter. As we've said, we really haven't seen it yet. Underlying activity is up nominally is the way we described it. And so I'd say it'd be a little premature to go that far. Bryan Burgmeier: Okay. That makes sense. And last question and I can turn it over. I think we're targeting like $30 million of EBITDA from natural gas this year. I guess, is that still accurate? And then beated any of that sort of come online in 1Q or do we think about that being mostly kind of back half weighted? Mary Whitney: Yes. So I think you're referring to the RNG more or landfill gas sales where nat gas is a tiny piece of it, and then we talked about that spiking in Q1 as it did last year. But -- what I'd say is it's always good news when you get a contribution from a facility in start-up. A reminder that start-up comes with a lot of expenses. So you're working through that as you start these facilities. But we look forward to having more visibility. And certainly, we'd expect in July when we revisit all of our expectations, we'll have a little better visibility on our RNG projects. But we still are on track to have those facilities come online as we have described so that our or a dozen-or-so, about half of them were still to come that we'd expect that by year-end. And so maybe some are a little early and some are a little later, but it's right in line with our expectations. Ronald Mittelstaedt: Yes, Bryan, just to reiterate on Mary Anne, we originally outlined 12 RNG projects, 5 were online by the end of '25. One came online in the first quarter -- the end of the first quarter of '26, so really no contribution or very de minimis. And we plan to bring another 6 online by year-end. Most likely most of those coming online in the fourth quarter to give us all 12 online for next year. We remain confident in that. And so the CapEx on RNG will come to effectively an end for these first 12 and then the EBITDA contribution from those will come in '27 and beyond. So you will sort of have a double impact to free cash flow starting in '27 from the RNG. Operator: Your next question comes from the line of Trevor Romeo with William Blair. Trevor Romeo: I had one more follow-up on the E&P business. I think, Mary Anne, you talked about one of the previously mothballed facilities coming back online. So can you just remind us, do you have more of those mothballed facilities kind of still off-line at this point? Or just sort of any other organic project growth opportunities or anything like that, that could still happen in the future and what the decision would look like on those? Ronald Mittelstaedt: Sure. Trevor, this is Ron. So when we acquired in February of '24, 30 facilities from Secure that were disposal, landfill and processing facilities. 25 of those were operational. There were 5 smaller facilities that were mothballed. To date, we have brought online 2 of those 5 facilities. So there's 3 that we will continue to make market dynamic decisions on whether we reopen those or not. These tend to be smaller facilities, but contributing $2 million to $5 million in EBITDA per facility sort of as we open them. So collectively, they're meaningful. And as I said, we've opened 2. We are evaluating and of course, demand will depend on whether we open 1 in the latter part of this year or not. I wouldn't expect it to be meaningfully contributive, but as I said, the aggregate and the rollover is meaningful as we go forward. Trevor Romeo: Okay. That's really helpful. And then maybe just switching over to the New York City market. I think there was some reporting recently about time lines on some of the waste zones and the rollout kind of shifting around a bit. I know you've also kind of added to your presence there with acquisitions in the market or in the region kind of the last several quarters, let's say. So all that said, could you maybe just give us an update on how the city rollout and your kind of positioning and strategy is going there? Ronald Mittelstaedt: Sure. Happy to. So the New York City market is going through the implementation of a nonexclusive franchise system from an openly competitive system where there were hundreds of smaller, in this term, called carters or haulers in the city for the commercial waste. They have divided the city into 30 commercial zones amongst the 5 boroughs. And they have awarded 3 franchise haulers per zone. No hauler is allowed to have more than 15 zones. We have the maximum at 15. We have -- most of our zones are in Manhattan and Queens and Bronx. We have a fully integrated position. We have multiple transfer stations in our zones and we also have 5 MSW and C&D landfills that we are feeding that volume to or can feed it to over the coming years. I think it's safe to say we're really the only fully integrated company in New York City in those zones. So it is an opportunity that we are very excited about. It is coming along, but the city is going through some changes, as you know, in leadership, et cetera. No impact to the franchise system other than they are slowing the implementation a bit in some of the zones just because it is such a change. And so it's pushing back between 6 and 12 months the implementation of their original zone scheduling. So it's sort of -- they hope to have everything implemented sort of by the end of '27. And now we're hearing that plan is sort of the middle of '28 to the end of '28 by the time everything is implemented. So no other change than a 6- to 12-month delay on the full implementation of the zones. Operator: Your next question comes from the line of Jerry Revich with Wells Fargo. Jerry Revich: Ron, I just wanted to circle back to the performance at Arrowhead. So you folks have ramped that operation up really nicely over the course of this year. Last quarter, we spoke about internalization rate approaching 60% for the company, that's one of the contributing factors. What can that look like on a multiyear basis? Now as you folks have delivered on the higher capacity, how much higher could you take volumes at the landfill over the next couple of years? And where could internalization rate for the company go as you continue to ramp that up? Ronald Mittelstaedt: Sure. Well, I appreciate the kind words about the achievement of that, Jerry, it's been a lot of work by our team to get there. Look, we are right now or this year running between 7,500 tons and 8,000-plus tons a day at our peak when we at Arrowhead. We have a plan to get that to 8,500 tons to 9,000 tons as we roll into 2027 for the year, then this takes a number of incremental step changes in trackage both in Arrowhead, at the landfill as well as at the intermodal facilities along the East Coast. And so that is in the process of being implemented and laid by Norfolk Southern. So we have a cap, if you want to use that word, of 15,000 tons a day is what the facility is permitted for and that's on a 7-day 365-day year 24-hour a day permit cap. So there's still obviously a lot of room. So I'm not going to tell you -- sit here and tell you that in 5 years, we're going to get to that. But I do believe that we will get north of 10,000 tons a day is somewhere in the 2- to 3-year mark from now as we sit here. As we continue to grow, that will move the internalization on that objective into the low- to mid-60% level which, as you know, and those that follow us know, it means we're really actually more than 80% internalized in our competitive market footprint, which is where it really matters. And when you compare it against competitive market models, that's very, very high. So it is something we're focused on, but it is playing out about as we had hoped. Jerry Revich: Super. And then just a shorter-term question. Impressive pricing in the quarter and so you folks were able to put up really good margins even with the diesel headwind. Can you just talk about how pricing cadence played out over the course of the quarter to what extent did that reflect you folks managing the business for these pockets of inflation or any other comps that you would make on the outperformance in the quarter? Mary Whitney: Sure. Well, what I'd say about the outperformance in the quarter is that what's really great about it is it came from so many different places. And I will say that pricing retention was a little stronger than expected, and we'd attribute some of that to the success of rolling out that AI price optimization tool that we've talked about. So we've continued to see benefits there. We'd also say that our human capital driven initiatives and being fully staffed and providing the level of service that allows us to defend those price increases has continued to be additive. And then again, as we've said, all these initiatives have driven small improvements in a number of areas. And so when I look through what drove the 110 basis points of underlying margin expansion, it's pretty much every line item with the exception of fuel and related costs, there, which was about a 20 basis point drag as we've described. So I would say, Jerry, that's how we think about the outperformance. Now that was augmented by the fact that we had strong special waste volumes. And so landfill volumes were a little better than expected, so that's a good guide. Commodities improved over the course of the quarter, so that's a little good guide. So all those pieces working together helped to drive the margin expansion. Operator: Your next question comes from the line of Seth Weber with BNP Paribas. Seth Weber: Just another margin question. Your SG&A was basically flat year-over-year with higher revenue. And just was there anything unusual in that number in either number year-over-year? Or is there any reason to think why you can't kind of continue to keep SG&A flattish year-over-year going forward with all these initiatives you're talking about? Mary Whitney: Yes. There can always be some noisy things, whether it's incentive comp or other pieces. We certainly not always in Q1. We certainly have talked about the fact that for our AI initiatives, we've hired, we've incurred some upfront costs in order to drive those benefits we're seeing. So that would be a contributor. But really nothing to call out there. Just a reminder that there's always a lot of moving pieces quarter-to-quarter. Seth Weber: Okay. And then just in your prepared remarks, you talked about strength in the volumes in the Western region. Can you just put any more color behind that? What's driving that, which areas, in particular, which markets? Ronald Mittelstaedt: Sure. Seth, this is Ron. Yes. I think one of the reasons we point this out, and again, for those that have followed us for quite some time, the West region is what we call our exclusive region in our franchise region. And the benefit of that is that we get 100% of all volumes wherever they're generated and we get them at a guaranteed price of the franchise. So I think it just shows that, that model derives very strong volume and stability benefit, which is why we like it. We had strong landfill and special waste growth in our Eastern Oregon landfills as well as in some of our Northern California landfills, as an example. So -- and we saw consistency. And as Mary Anne noted, improvement in roll-off volumes in our West, again, because we get everything, so not only was our price per pull up there, but if our pulls actually per day were up there as well. So you do not have that price/volume competitive trade-off in the West I think that was what we were trying to note more than anything. And so that probably more reflects the underlying economy at a -- maybe a 0% to 1% type real GDP going on right now. So that was really what the commentary was about. Operator: Your next question comes from the line of Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: Ron, I just wanted to ask you a little bit more about what it looks like in terms of the cyclical parts of the business? It seems like the special waste continues to be strong. C&D was down 5%. I think last quarter was down 4%. Maybe it's bouncing around a little bit. You noticed the pulls getting less negative. Are we -- are you seeing this as an improvement? Are you seeing this as kind of a flattening out? Like where do you see that we are and where do you think that we're going to end the year in terms of overall economic activity? And where do you see the trajectory of the business in that way? Ronald Mittelstaedt: Well, obviously, if I understood that, we'd be in a different business. But I'll give you what we believe, how is that? Look, special waste being up for the sixth consecutive quarter in our industry, special waste is traditionally a leading indicator. So -- and the reason is, it is predominantly speculative cleanup for development of commercial or residential real estate. That is predominantly what special waste is. So that usually precedes infrastructure and construction development on at some point. So that's a positive. Now C&D being down 4% to 5%, that's a real-time indicator of what activity is predominantly in construction, okay? Now you don't do a lot of construction in Q1 because of the winter weather. So that's a little hard to say, is that an indicator of the academy or not. I would tell you it's probably not. I think we feel like there's pent-up demand starting to come. We're not seeing any negative indicators in our business. Obviously, if the Iran situation drags on and fuel remains elevated for consumers and businesses that could be a pinch point in the economy, but assuming hopefully that this is a relatively short-lived situation and fuel will be retreated by the second half of the year, we think there's a lot of positive momentum in the underlying economy that should start to come through. So I would tell you to your comment, we would say flat to improving with how you ask the question, and that's what we would say it is. Mary Whitney: The other observation from it would be that, that was our 10th consecutive quarter of negative C&D volumes, right? So clearly, this has been around for a while, roll-off, pulls similarly. At some point, the comps get that much easier and so you should see it get better. And so that was kind of the expectation going into the year that maybe things became less negative. As Ron said, Q1 is probably not the right time to look for it, but that's how we're thinking about the business trajectory. Shlomo Rosenbaum: Okay. And then just shifting back to your question you touched on in rail and how you're continuing to internalize more over there. I just want to ask, is there -- in terms of what's going on to the rail as you're ramping up the tons, is it primarily internalization or are you seeing some also at the landfill third-party contributing to some of the growth in the tones there as well? I'm asking that both kind of strategically and then also just in terms of where the pricing is for rail versus kind of the stuff that is landfill more locally? Ronald Mittelstaedt: Sure. So at this point, Shlomo, most of what is going on the rail, our rail at least in our situation, is a greater amount of internalized tons. Now that has been very purposeful. We've taken tons over the last 1.5 years that we're going into third-party sites on the Eastern seaboard. Some of those our sites, some of those third parties, and we've internalized some of that volume. We have not yet pursued aggressively third-party volumes into our intermodal transfers on the Eastern seaboard because we have had some capacity constraints at some of our Northeastern landfills. So we have pulled down some of our volume there and internalized it on the rail so that we could take customer volumes into those landfills. And so as that alleviates itself here over the next year to 2 years at a couple of our sites, we will be able to pursue more third-party volume onto our rails, and that will be incremental to us. But we have not yet done that. So this has been mostly internalized volume at this point in time. Look, as far as the competitiveness of the rails. Look, the longer you go, the farther you go in our case now, rail is going 1,500 to 1,800 miles from the Eastern Seaborne to Alabama. So it's quite some distance you start becoming more competitive with an increasing fuel surcharge than you do on over the road. If you were going a shorter distance, trucking would be more cost effective. But when you start talking longer distances, rail is more cost-effective than trucking. Operator: Your next question comes from the line of Noah Kaye with Oppenheimer & Co. Noah Kaye: Great. The first one is on yield and price. I would just observe that this 130 bps spread between core price and yield is already quite tight in a positive way for this industry. And so I guess that spread probably tightened year-over-year given the intentional shedding moderating and some of the AI and turnover and safety initiatives. But is there any way to dimension or confirm what kind of improvement in the spread might have been year-over-year? And how should we be thinking about that sort of spread for '26 as a whole? How should we be modeling that? Mary Whitney: Sure. So when I look back and try to do apples-for-apples in prior periods, I'd say I agree with you overall that that churn was probably running more in that 150 to 200 basis points for several quarters. And so some of what we've seen is a tightening there. What gets a little trickier, as you can appreciate Noah, is that mix factors into this, and so does seasonality, therefore. And it's a reminder that when we look at, for instance, selling in the Northeast and that rates per yard can be twice as much as they are in, say, our mid-south or Southeast region, that is another factor that's influencing what that amount is, which is frankly why we thought it was good to get it out of volume because it was overstating the negative volumes in a way that felt punitive. So what we're really trying to do is achieve some parity with our peers, our comparability with our peers and we're going to acknowledge that it's still imperfect, but I think that's another consideration to have which could cause a little variability. Noah Kaye: Okay. And then related, it looks like risk management as a percentage of COGS improved 30 bps year-over-year in the quarter. You've talked in the past about risk management as a lagging benefit of improved safety rates. Was that in any way a positive surprise? And how are you thinking about in the guide risk management as a benefit to margins for '26? Mary Whitney: Yes. As you'll recall, we called it out in Q4 that, that was the first time we'd really seen it flip from being a headwind to a tailwind. And so was it a surprise? Look, it's always encouraging when you see the trends that you've expected to see in the business materialize in the numbers, you're always cautious because you can't generalize. But 2 quarters is certainly good to see. And yes, we came into the year, Noah you'll recall, we've talked about the fact those drivers for outsized margin expansion, we said this was really the final piece of those human capital-driven benefits, the lagging benefit of risk. So is it generally in line with what we were hoping for this year? Yes. It will vary quarter-to-quarter, but this is the right way to think about it. It's a good guide that was factored into our expectations. Operator: Your next question comes from the line of Kevin Chiang with CIBC. Kevin Chiang: Congrats on a strong start to the year here. Maybe just a follow-on on as a number of questions that were asked along the same vein. Just on the special waste, I appreciate a lot of the moving parts in Q1 be a little bit noisy with weather. But I guess when you look back historically, what type of lead indicator is special waste to total volumes? Like does it typically lead total volume inflection by like a year, 6 months, 18 months? Is there any like rule of thumb that we can point to when you see this type of special waste improvement over such a long period of time? Ronald Mittelstaedt: Yes. I mean I think, Kevin, it's a little anecdotal, but I would tell you that generally, it's certainly in that next 6 to 12 months. I mean, look, this is property being cleared by developers who have pulled permits to do speculative construction or development. So that's shopping centers, infrastructure, apartments, homes, et cetera. So you're probably talking that, that goes on for that and that lot clearing and cleanup goes on for 3 to 9 months and then construction begins. So we've talked about it, it's improving for 6 consecutive quarters now. So I think it's reasonable to expect that by this summer, as we go into the summer and through it, you should see some pickup in C&D and flow through into the solid waste business. I mean that would be a traditional pattern. Kevin Chiang: That's helpful. And maybe I can ask the yield and core price question over a longer period of time. You're definitely gaining traction with some of your AI revenue management strategies here. Like when you look at whether it's a ratio or a spread, does that change over time as you look at some of the benefits from this AI tool? Like do you reduce churn and so it helps the yield or maybe the rollbacks also improved, so maybe the net impact on the numerator and denominator are kind of equal? Just wondering how that ratio may or may not be impacted as you gain momentum on some of these revenue management initiatives driven by AI? Mary Whitney: Sure. So as you know, Kevin, first of all, of course, the absolute value of whatever this number is, is a function of what our costs are doing. So to the extent that we're seeing benefits in cost that say we need less price, that will factor into what you see, whether it's price or yield. Now specific to yield as compared to core price, I would expect, and we look forward to, needing to put less price on the street, but to retain more because of these tools. And as we've said, that's one of the benefits we're already seeing. And ultimately, as we've described, it's really keeping the customer longer that's the greatest benefit. And so I would expect there to be some improvement in yields, but that would be tempered by the need for less price overall. So I'm not -- we'll take both of those things into consideration in terms of expectations for what those numbers look like. Operator: Your next question comes from the line of Tobey Sommer with Truist. Tobey Sommer: If I could ask a follow-up question on the rail point. As you look at the business and the industry over a long stretch of time, how do you see the volumes shifting towards rail? And how -- what are your plans to help drive that change beyond Arrowhead? I imagine with the success of experience, you're looking at other ways to drive that change. Ronald Mittelstaedt: Yes, Tobey, I mean, obviously, look, today, rail is predominantly or almost exclusively a northeastern seaboard modality for waste because of very high tip fees in the Northeast because of landfill scarcity. You're not building new landfills in the Northeast, and it's obviously difficult to expand landfills in the upper Northeast. So the combination of all of that is ripe for rail to take waste out of the geography. As landfill aerospace scarcity gets tighter in other parts of the country, such as along the lower East Coast Seaboard, as an example, down in through Florida and the Carolinas, I think you will begin to see similar things happen at smaller levels there next. You still have a very -- a large amount of aerospace available in the Southeast and in the Midwest and in the Rocky Mountains at relatively inexpensive cost relative to the Northeast. So it's not as conducive in that geography for rail. And then on the West Coast, in the Pacific Northwest, you do have rail as a very large modality that has been in place for quite some years in Washington and Oregon. You do not have it in really in California and I would not expect it there any time soon. So look, you really need to be moving the volumes somewhere probably north of 300 to 400 miles for rail to make sense in most -- or chip the environment. So as you go forward 5, 10 years and you continue to see consolidation of landfills and increasing aerospace rates or tip fee rates, you will see more and more rail as waste moves economically farther. So look, without divulging to the last part of your question, let me just say, stay tuned. And I think with -- for us, you will see an incremental rail opportunity that will happen in 2026, and I'm quite confident in that. So it will continue to develop throughout the industry. It will be slower but follow landfill fees and the price of crude because those are the 2 things that as they move up, rail becomes more and more economical. Operator: We have reached the end of the Q&A session. I will now turn the call back to Ron Mittelstaedt for closing remarks. Ronald Mittelstaedt: If there are no further questions, on behalf of the entire management team, we appreciate your listening to and interest in the call today. Mary Anne and Joe Box are available today to answer any direct questions we did not cover that we are allowed to answer under Regulation FD, Reg G and applicable securities laws in Canada. Thank you, again.
Operator: Good morning, and welcome to Iridium Communications First Quarter 2026 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Kenneth Levy, Vice President of Investor Relations. Please go ahead. Kenneth Levy: Thanks, Dave. Good morning, and welcome to Iridium's First Quarter 2026 Earnings Call. Joining me on the call this morning are our CEO, Matthew Desch; and our CFO, Vincent O'Neill. Today's call will begin with a discussion of our first quarter results followed by Q&A. I trust you've had the opportunity to review this morning's earnings release, which is available on the Investor Relations section of Iridium's website. Before I turn things over to Matt, I'd like to caution all participants that our call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform act of 1995. Forward-looking statements are statements that are not historical fact and could include statements about our future expectations, plans and prospects. Such forward-looking statements are based upon our current beliefs and expectations and are subject to risks, which could cause actual results to differ from forward-looking statements. Such risks are more fully discussed in our filings with the Securities and Exchange Commission. Our remarks today should be considered in light of such risks. Any forward-looking statements represent reviews only as of today, and while we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views or expectations change. During the call, we'll also be referring to certain non-GAAP financial measures, including operational EBITDA pro forma free cash flow. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Please refer to today's earnings release and the Investor Relations section of our website for further explanation of these non-GAAP financial measures in a reconciliation to the most directly comparable GAAP measures. With that, let me turn things over to Matt. Matthew Desch: Thanks, Ken. Good morning, everyone. We've had a good start to the year, and our results are right where we expected them to be. Total revenue grew 2% as in service revenue. We're reiterating our guidance for the year, and Vince will give you the details in a minute. We continue to have some important new products under development for introduction this year, and they're driving a lot of activity with our partner base. In the IoT area, our new tri-mode module, which we call the Iridium 9604 is on track for commercial availability in June, and our beta partners are now testing and preparing their first products using our next-gen platform. The 9604 combines our First Data IoT service, cellular IoT and GPS all in a very small and top-effective package and is generating a lot of excitement across our partner ecosystem. We believe the module also has the horsepower consolidated a number of our other legacy services over time, and that can be helpful to our sustaining cost and to simplify our portfolio. In the P&C area, the announcement of our new ASIC rolling out in July is also generating a lot of inbound activity and attracting a number of new partners who are looking to integrate this technology into their products. NSS disruptions around the world are highlighting the need for new assured PNT solutions for drones and autonomous vehicles, shipping companies and their insurance providers, critical infrastructure in the U.S. and abroad, commercial allocation, the opportunities are expanding tests. Over 100 new companies have expressed interest in the ASIC and we expect the commercial loss to drive deployments once it's in the market. Of course, our new Iridium NTN Direct standards-based service has generated a lot of activity as well as it progresses closer to commercial loss later this year. We've been demonstrating live over-the-air to mobile network operators and partners and its performance has been impressing everyone, even as we make enhancements and further tune the service. We've been expanding agreements with more MNOs, having signed 7 to date with a number of others in the pipeline, there's clear demand from MNOs to roam on to Iridium's network when their customers find themselves out of coverage. We're also in discussions with additional chip and module manufacturers to have their 3GPP Release 19 chips with Iridium capability available in 2027 and have gained support from the test up community as well. It's been a big job for Iridium to reprogram our satellites and build cloud-based processing and standards capabilities into our gateway and I'm very proud of my team for accomplishing so much so quickly. Indirect is positioned as complementary to the big B2B services that are emerging from StarLink, AST and now Amazon Leo. As these companies focus on connecting smartphones from the space, we will continue to focus on scalable specialty applications that support low-cost to IoT, particularly for industrial and government markets where reliability and coverage are critical. While, I talked about some of the new products we have underway this year to drive growth, our partners are also making progress on products and certifications that will resonate with their target markets. They include launching some new term loans in the maritime GMDSS area and conducting flood trials for certification of our new Iridium service aviation safety service. More broadly, I want to remind you of the 4 growth factors I talked about on our fourth quarter call in February. These are areas where we're prioritizing investments and it is a significant opportunity to expand our revenues even as more competition eventually comes to the satellite sector. First, in IoT, we are, by far, the leader in satellite IoT in terms of subscribers, revenues and technology partners. And we believe that as we reduce costs by adopting standard 3GPP protocols, we will see continued success and growth. We are already pursuing cost-sensitive use cases that were more difficult to address with proprietary services like automotive, smart meters, agriculture and expanded asset tracking. Our network reliability, global coverage partner ecosystem and strong brand position will allow us to continue to expand our revenues particularly when we add our second growth vector, PNT, into the mix. I've already talked about how our new PNT ASIC is expanding our pipeline of opportunities. But it's also attracting major chip makers earlier than we expected as these manufacturers eventually incorporate our PNT IP into their standard GNSS chips says, we think our business could really explore. We provided guidance on the revenue potential expected in this area over the next 4 years, and I'm as bullish about meeting those targets as I've ever been. Some early customers are starting slowly, but they are committed to the big rollout that we've been expecting. We also believe that our engineering and development work on new identity management and trusted location products could open up some very big new markets. We remain in the early phases of business development for these important services, but the opportunities are exciting. Our third growth area is national security missions with the U.S. government and is building off our success with the EMSS contract with the Space Force and the competency we've demonstrated in developing and operating the FDA satellite operation centers. We see a growing need for commercial satcom providers to complement Starlink and other broadband networks that are becoming part of the government-based data network or SDN. We have a growing pipeline of work in this area. Some of it will generate service revenue but also fast-growing engineering and support work. Requirements for Golden Dome are just now taking shape and we think Iridium is well positioned there. Finally, aviation safety is an area of distinction for us and of course factor for growth. We have a great position in this industry with our equity interest and strong relationship with Aireon as well as for our ability to be certified to connect pilots and aircraft controllers by satellite. Our efforts to develop some differentiated products that could bring more value to airlines is still in the early stages, but we are increasingly confident about our potential to disrupt the status quo in the market. I want to acknowledge all the attention that mobile satellite services has been getting of late, especially in light of Amazon's plans to purchase Globalstar. People have realized the importance and signifies of LSB spectrum as it relates to connecting consumer devices on a global basis from space when out of coverage from cell towers, which happens over 45 -- excuse me, over more than 85% of the planned surface. We share this view of the value of this spectrum. Regardless, our priority today is to focus on expanding into these 4 growth areas while maintaining our revenue base and legacy services. We believe that this is the right direction for Iridium, and we'll continue to stay focused on execution across the business. So we're off to a good start in 2026. Partner activity remains strong, and we continue to generate a lot of cash that we plan to invest in our growth factors. I look forward to providing more updates on our progress in the coming quarters. Now let me turn the call over to Vince for details on the quarter. Vince? Vincent O'Neill: Thanks, Matt, and good morning, everyone. I'll start my remarks today by reviewing Iridium's financial results for the first quarter and some trends we're seeing within our major business lines. I'll also provide an update on Iridium's leverage and capital position and discuss our outlook for the balance of the year. OEBITDA was $116.3 million in the first quarter, down 5% from the prior year period. The change largely reflected the impact of the shift to pay annual incentive compensation and cash which I previewed on our fourth quarter call. This resulted in a $4.2 million hit to OEBITDA and will have a full year impact of $17 million in 2026. This quarter's OEBITDA also reflects the benefit of a 2% increase in service revenue and ongoing growth in engineering and support. On the commercial side of our business, service revenues up 2% to $130.4 million. This was in line with our forecast and reflected growth in commercial IoT and voice and data during the quarter. Voice and data revenue rose 3% from a year earlier to $57.4 million, driven by the price actions we implemented last summer. This drove a 7% increase in ARPU from the year earlier. Net subscriber trends had improved from the year ago period when headwinds primarily associated with the [indiscernible] level of seasonal deactivations. Commercial IoT revenue was $46 million in the first quarter, up 5% from a year earlier. Net subscriber numbers this quarter have largely stabilized following last year's volatility related to a modification to retail pricing plants by one of our large consumer-oriented partners. As Matt noted, we are now in bigger trials of the new hybrid modem, the Iridium 9604, which combines cellular, satellite and GPS in one engineered solution. Early feedback has been great and we expect that the lower overall integration cost of incorporating this chip will help to accelerate subscriber growth. Commercial broadband was down 5% from the year ago period, and continues to reflect the ongoing impact from customer conversions to backup companion services, a trend we've discussed previously. Hosting and other data services revenue was $14.8 million this quarter, down about 1% from last year's comparable quarter. The decline mostly reflects the timing of expected payments related to activities with an existing non-PNT customer. We continue to be encouraged by the ever-increasing interest we are seeing for Iridium's assured PNT solution to address the vulnerabilities inherent to GPS and GNSS based systems. The introduction of our TNC ASIC this July is expected to accelerate growth and expedite the pace of deployment of Iridium PNT solutions. We continue to have conviction that PNT will drive at least $100 million in annual revenue for Iridium by 2030. Government Service revenue was up modestly in the first quarter to $27.6 million reflecting the final step-up in our EMSS contract last September. Turning to subscriber equipment. Sales were $20.2 million in the first quarter, largely in line with our expectations. Engineering and support revenue was $40.8 million in Q1 as compared to $37.5 million in the prior year period. This rise in revenue continues to reflect Iridium's growing scope of work with the Space Development Agency and supports our strategic focus on revenue growth tied to national security missions. As noted in this morning's earnings release, we are affirming our full year guidance for both and OEBITDA. I'd like to take a minute to review some of the drivers underlying this year's forecast. Starting with our commercial business in voice and data, we expect revenue to grow in the first half of the year, benefiting from the price actions implemented last summer. As a result of these actions, we would expect our to remain about $48 for the remainder of the year, consistent with our first quarter ARPU. IFC revenue is expected to grow in the mid-single digits. As Matt noted, we are deep in testing of next generation IoT modem and our targeting new markets and use cases that are highly sensitive to cost, full factor design and integration time lines. Based upon the positive feedback we were getting on the Iridium 9604, we believe it fills the gap in the satellite IoT market for utility at a value price. In our broadband business, we expect Maritime customers to continue to move to lower-cost backup plants. However, the introduction of new partner terminals combining Iridium service and GMDSS safety services will act as a tailwind for new subscriber growth. And over time, we believe, helped to offset current ARPU pressures. We continue to believe that really will remain an important player in the maritime sector. With regards to our government business, we have started discussions on our success contracts with the U.S. government and continue to expect they will exercise their option to extend the EMSS contracts for a period of 6 months at current rates. Accordingly, we expect the EMSS revenue of $110.5 million this year, even as we expand our relationship with the U.S. government with incremental engineering work. As Matt discussed, we get a lot of inbound traffic on our PNT solution. We continue to believe that this strong interest, along with the availability of our PNT this summer may provide upside to our full year hosted payload and other data of revenue forecast. We also expect that the strong trend we saw in engineering and support in the first quarter to continue. This momentum is tied to our work with the FDA and should support another year of record engineering growth. As I noted earlier, a Iridium will introduce a number of new terminals and modems this year. Our focus on lower cost hardware should broaden our sales funnel and allow Iridium to extend its satellite solutions to customers that have not historically considered nonterrestrial services. We can continue to expect full year recruitment sales will be in line with historical levels between $80 million to $90 million in 2026. SG&A growth in Q1 was more pronounced than more we expect for the balance of the year, largely due to timing benefit of program expenses in Q1 '25, the nonrecurring nature of some expenses incurred this quarter and the increase in sales costs tied to stock price appreciation this year. Going forward, we expect the SG1 run rate to moderate to low double digits in 2026 though stock appreciation could result in additional sales expense. Taken together, this outlook post our forecast for flat to 2% growth in service revenue in '26 and for operational EBITDA between $480 million and $490 million this year. I would again remind you that started in 2026, Iridium will pay annual incentive compensation entirely in cash rather than a mix of equity and cash as has been company's prior practice. This change is projected to have a $17 million impact to OEBITDA in '26. Without this change, OEBITDA have been projected to be in the range of $497 million to $507 million in 2026. I hope this color is helpful as you chart our progress and update the financial models for our first quarter results. Moving to our capital position. As of March 31, Iridium had cash and cash equivalents balance of $111.6 million and ended the quarter with a net leverage of 3.4x OEBITDA. Our strong free cash flow provides significant flexibility to reduce net leverage quickly. We also have flexibility to utilize our strong liquidity position to invest in business growth opportunities through product investments or even the tackle acquisition. On March 31, Iridium made a quarterly dividend payment of $0.15 per share to shareholders. We remain committed to an active and growing dividend program and expect the Board will continue to grow Iridium's dividend, consistent with prior years. Capital expenditures in the first quarter were $30 million. As we've noted previously, we anticipate CapEx this year to be consistent with 25 to support our work on Iridium NTN Direct. Turning to our pro forma free cash flow. We present a detailed description of our cash flow metrics, along with the reconciliation to GAAP measures in a supplemental presentation under the Events tab on our Investor Relations website. In those materials, we project pro forma free cash flow of about $318 million for 2026. Based upon our expectations for Iridium's growth, we expect to have the capacity to generate at least $1.5 billion to $1.8 billion of free cash flow over the balance of the decade. Iridium occupies a unique position in satellite market, and we remain very excited about our prospects for incremental top line growth and shareholder value creation. With that, I'll turn things back to the operator and look forward to your questions. Operator: [Operator Instructions] Our first question comes from Brent Penter with Raymond James. Brent Penter: Matt, you touched on the Amazon acquisition of Globalstar. I'd like to hit on that a little bit more. First, could you expand on what you think that deal signals about the value of Iridium and the MSS spectrum that you own? And then second, how do you expect Amazon owning Globalstar may or may not change the competitive landscape of the markets you operate in? Matthew Desch: Well, I think in general, it speaks to the value of the L&S spend that we occupied. More so, it speaks to the opportunity that I think the industry, certainly Amazon feels about the potential for global direct-to-advice services in the coming years. And I think it's healthy for the industry to get another big competitor. I think it will create more opportunities and expand the potential for that market more greatly. I'm not sure what was the second part of your question, Brian? Brent Penter: Yes, you started to hit on it. Matthew Desch: I don't think it changes really anything for us competitively that dramatically. I mean, as I said, we're really positioned to be complementary. We started pivoting well over a year ago towards those areas that are -- we believe we can create a differentiated advantage really whether it be aviation or national security missions or PNT, IoT, et cetera. And those areas, we feel really good about regardless of how many large operators there are in sort of the more straight to D2D space. So I don't think the change that dramatically. Brent Penter: Okay. Got it. And then last quarter, you all talked about the possibility of strategic alliances related to your spectrum. Can you update us on any early learnings in those discussions? And given the recent spectrum activity and valuations, has that moved up the stack to become higher priority? Matthew Desch: I don't know that I can really speak to that question. I mean, I think it's probably, at this point, an area of a lot of interest and activity in the industry. And I just think we just need to not comment on that at this point. Operator: And the next question comes from Chris Quilty with Quilty Space. Christopher Quilty: Matt, maybe a little bit of a follow-up on that. Does Amazon's acquisition of Globalstar in any way will effectively kill the potential for a big LEO processing round in your opinion? Matthew Desch: Describe what a big LEO processing round would be. Christopher Quilty: Well, Spacex had been looking to reopen up the big LEO band and now you've got Amazon that's just committed to $11.5 billion to take a position there. Presumably, you wouldn't get a new round to review that spectrum at a time when there's an ongoing acquisition associated with it, [indiscernible] right? Matthew Desch: So that's kind of a fine detail overall there. I mean, look, our position is more spectrum for mobile satellite services and D2D would be a good thing. We continue to kind of lobby for looking for more spectrum for the industry in general, whether it be for directed device or for any of the other applications, which are kind of consumer-friendly, device friendly, the kinds of things that Iridium has been focused on. So I don't know if it makes it more likely or not likely as I said, I think this is -- I think in general is a good thing. It does create more competition in this area of what's happening, a more better funded sort of competitor in the D2D area, but I don't know what that will mean these days for the FCC or for spectrum at this point. Christopher Quilty: Got you. And Vince affirm the $100 million for the PNT business in 2030, but you've gotten off to a slow start with customers. To hit that target, do you expect that as customers roll on, are there going to be sort of chunky step function pickups in revenue? Or does this grow on like a per subscriber basis where it starts slowly and then ramps up? Matthew Desch: I think it's going to be both. I think it's going to be both chunky. I think you can see some large movements in sort of that area as some major kind of customers come on and take sort of global business opportunities. And I think you'll also see sort of a broad-based subscriber by subscriber growth. I mean, that's what we're seeing. The number of companies that are integrating solutions right now are pretty -- business at pretty extraordinary in my experience in Iridium, all the activity around the discussions we're having around it. It just takes time for these devices to proliferate the market and to create the kind of growth we're expecting. And I think a lot of that will be accelerated by the ASIC. That wasn't completely required, but it is definitely an accelerator. Christopher Quilty: Got you. And final question. You mentioned lower cost for the 9604 in terms of your partners implementation costs. Can you give us a sense of this that 10% cheaper or 50% cheaper. And can you also touch on basically supply constraints that you've historically had or not in ramping that up versus something that's standards-based mean how fast do you think the product can be adopted and delivered? Matthew Desch: Okay. Well, in terms of pricing, it all depends on volume and really high volumes, it could be significantly less expensive than our legacy portfolio, the 9602 and 9603, 9604 being built on a more global platform that's utilized for many other applications means that the cost overall is quite a bit lower. And then, of course, the fact that it integrates multiple technologies into the same platform. So it's not a one-for-one kind of thing. It includes both those who want cellular and GNSS had to put those technologies separately into it. So it's really a fraction of the overall cost of the 3 solutions together. I don't know whether that's 20% or 10% or 30%, but it's a significant reduction, especially for those customers and volume we're utilizing all the power of the new product. And the terms of standard -- sorry, go ahead, Chris Christopher Quilty: No, I was going to say, so it's lower cost hardware going into lower-cost applications. Typically, we'd expect the ARPU to go down. But if you're bundling in additional capabilities like the old PNT, where does the ARPU go? Does it hold steady? Does it go up or down? Matthew Desch: Well, I think, first of all, it can support low and high ARPU applications. As I've often said, ARPU is kind of irrelevant. It's all incremental earnings to us is more a matter of what kind of resources of our network it utilizes and typically low ARPU applications, use almost no resources of our network and higher applications to use that more. So the more important part here is just how it sort of expands the use case of applications. So I mean we're really talking about a lot more things that we hadn't seen before. And when you add that together with our NTN Direct Service, which is a standard space, which would use standard ships, which are also low cost. In those cases, there's almost no integration costs that people have to go through A lot of times, they already have applications, they're just upgrading the chipsets and they can roll on to our network with almost no additional costs. So that opens up not only lower cost applications, but it opens up applications with large industrial companies who are uncomfortable using proprietary standards. For example, I'm really surprised that all the discussions we're having in the automotive industry right now. It does take a while to create revenue, but they're high volume and could be really efficient users of a standards-based solution. So it's really not a matter of kind of but ARPU will go down or up, maybe incremental ARPU in some of these applications will be lower, but the overall revenues that is what will grow versus what's most important. Christopher Quilty: Okay. I had to ask a lot of questions [indiscernible] since he wasn't on the call. Matthew Desch: Well, thanks for that . Operator: The next question comes from Edison Yu with Deutsche Bank. Xin Yu: I wanted to sort of come back to the Amazon Globalstar from a slightly different perspective. Is there any sort of, what you say, industrial logic to having that full L-band block that you currently share the 0.95 with Globalstar. Does that make any sense to kind of combine it? Would there be any sort of synergies that you could derive from just kind of technically speaking? Matthew Desch: Yes. As that question or that thesis that you're describing has been described very fully by both analysts and others in the industry. And I think I really need to leave it to that right now. Otherwise, it will sound like I'm promoting or trying to highlight something that I'm really not comfortable doing right now sort of in the current environment. Xin Yu: Understood. Second topic, there was some news about a drone outage. I'm sure you've probably done and obviously you guys are doing work there. Have there been any updates on the regulatory front or any sort of recent discussions since the last quarter on drones? Matthew Desch: You mentioned drone outage. Is that to some another company's technology. Are you talking about and how is it -- you're not talking about Iridium outage, right? Xin Yu: No. It was -- I think it was reported in the media. It was not related to you, obviously, but I think it sort of highlighted potentially some opportunities for you. Matthew Desch: I will say the drone environment for us is really hot. I mean, both in terms of integrating our communication technologies into drones as if not a primary or backup source, but also our PNT technologies makes a lot of sense as one of the technologies to maintain a location. And obviously, a lot of focus is on Middle East and other areas right now where drones are being operated. I'm equally excited about the commercial side of drones, which needs all those technologies as well with the new FAA Part 1 rules that are expected to come out later this year and finally, open up beyond visual line of sight commercial drones, where Iridium technology makes a lot of sense there. And there is a lot of activity around that. both in terms of our -- whether it's 9604 or 9704, which is the higher-speed IoT product or our Iridium NTN direct. And of course, a lot of discussion around PNT just to protect the integrity of the location. Operator: And the next question comes from Hamed Khorsand with BWS. Hamed Khorsand: Just want to understand what you're seeing on the subscriber end on the commercial IoT? Is any of that coming from the consumer side? Or is this purely coming from industrial customers? Matthew Desch: It's actually coming from both. And it looks a lot more. I think this year, like it did much more so than last year when we got the commercial side of it was kind of going through a pricing change from a big customer that sort of I thought distorted sort of the supravenumbers, but we're seeing a healthy subscriber growth is we did back in '22, '23, '24 and more normal growth. But we're getting growth from really across the board, industrial and consumer. Hamed Khorsand: Okay. And then could you just talk about this EMSS contract that you're saying that would require a 6-month extension. Is that just the same aspect that happened a few years ago when you were going through the renegotiation process? Matthew Desch: Yes. I mean our current EMSS contract, which has been a 7-year contract is approaching it's final seventh year, but there's an automatic -- there's a opportunity really for the customer during negotiations if it isn't completed on time to just extend it at the current year 7 price for an extra 6 months. That has happened in the last 3 contract renewals that I've been a part of. And so I'm expecting it to happen again this time as well, particularly if you could imagine if customer didn't see sort of the value in getting the new contract right away, they might extend the current one a little bit further. Operator: And the next question comes from Tim Horan with Oppenheimer. Timothy Horan: It seems like if you can get your PNT better than every GPS chip out there, the market is orders of magnitude bigger, I would say the same thing for IoT team. Can you just describe a little bit more detail where you are in getting it adopted in the standards? And I guess related to that, I mean, could you become a standard GPS replacement globally? And how do you think about pricing in that environment? I mean, because the lower you price it, the more likely you are to become the standard replacement? I know this is a complex question, but any thoughts would be helpful. Matthew Desch: Well, be careful about using the word standards, it does apply. But when I was referring in my comments to getting this to GNSS chipsets, I would say there's a number of suppliers who supply the majority of chipsets that go into all our consumer products. And handheld units and golf carts and all those sort of things. And I was referring to the fact that we always we also wanted to get into those chips, but they probably didn't see didn't understand really the value of our PNT service. When the ASIC came out and has become very public and all being interested generated, we're now seeing some of those companies who are now seeing exactly what's involved and what the physical attributes and sort of technical attributes in our -- and we're in discussions with some about integrating that more powerful alternate PNT service directly into their chips. You're right, that would expand the market really dramatically. But now in addition, when you said the word standard, 6G is includes the idea of PNT, and we're working to get our PNT technology embedded into the sixth generation standards that would -- that are really talking about enhancements to PNT. I wouldn't use the term we replace GPS. Our goal is always to be an alternative augmentation to GPS. Currently, we're not as accurate as GPS, but we're being so powerful, we're really difficult to jam or spoof being encrypted, et cetera. I will say we have plans to make our system much more accurate. I'll talk about that maybe more in the future that would require some additional payloads in space, and we're kind of in the early stages of kind of working through that book. We think we can do that pretty quickly and cost effectively. As far as what the value of that would be, yes, it would be extremely large and dramatic in terms of the potential for number of units and the impact that we could make across a wide variety of industries. It's a little early stage to talk about that. That's a 2030 kind of thing. I think we'll reiterate, I'm happy both reiterating our guidance on PNT to 2030 as well as the upside we see from like identity management, trusted location products to that. But yes, we're working right now on a much bigger strategy that could be a lot larger . Timothy Horan: And can you give us some color of the same concept for your IoT communications here. Matthew Desch: The same color on IOT in terms of... Timothy Horan: I'm sorry, you're becoming better in other chips like you described, like what would it need to take for that to get the really strong growth where they're not just using your customized ASICs, but it's something[indiscernible] . Matthew Desch: Yes. Well, obviously, Iridium PNT direct is completely about being embedded into standard chipsets. And right now, several of them are already in process of developing including some of the largest and most prolific terrestrial IoT chip manufacturers. And as they include our technology into those chips and any time those chips get into products, those customers could basically roll them on to a satellite network. I mean it -- it does expand the market tremendously for sort of IoT applications for us. Again, we're expecting growth in this area. I can just sort of say general, we're not giving exact guidance yet. There is some cannibalization of our sort of legacy services sort of embedded in that, but we believe that the overall market expansion greatly or significantly sort of goes beyond that so that our IoT services can continue to expand across that. And by the way, it doesn't replace all the sort of existing technology we have, like the 9604 because they provide tremendous value as well. Timothy Horan: But lastly, on the spectrum, just some concern that maybe your spectrum has already been utilized and couldn't be ported over to other constellations are used for other purposes. Can you kind of give any thoughts on that? Matthew Desch: Well, I mean, yes, our spectrum is being utilized and it's generating a lot of cash and revenue. I don't apologize for that. But yes, we have a very efficient network architecture. Our satellites are regenerative, they can utilize spectrum on literally a message by message basis and can be highly configured and controlled and automated in a way that is extremely efficient, and we've only improved that over time. So I know the questions some of you are asking is could we make some of our spectrum available for lease or for obviously, sale or for could somebody else as they controlled us, take advantage of our spectrum, particularly for like 5G new radio. And the answer is yes, we believe it could. We believe we can whether we were doing it ourselves or we're doing it with in conjunction with someone else that we could allocate some amount of spectrum to those other applications and continue to generate the revenues and cash flows and growth that we're expecting by very effectively moving around within our spectrum band on literally a call-by-call basis to serve the traffic that we expect to see in the future. So I know on some of the questions some of you asked, would we lease the spectrum to do that for someone else. I mean, theoretically, it's possible or technically as possible to do that. I'm not really -- I don't think that's the best way to add value from a rating perspective to our shareholders, et cetera. So I'm really not looking for those kind of opportunities right now. It would be some other kind of arrangement that would seem to make the most sense. Operator: And the next question comes from James Ratzer with New Street Research. Unknown Analyst: My question was really a direct follow-on from that last one to understand a bit more about the capacity utilization on your network. I mean, Matt, you are able to kind of quantify any further at the kind of peak hour of your network usage or in certain kind of global hotspots, what percentage of your capacity is currently being used? And in particular, going out towards the end of the decade as you roll out the new services you're talking about, how do you see the capacity utilization on your network evolving over the next 4 to 5 years? Matthew Desch: Yes, James. So it's a complicated question to answer and to do it simply. Our network really reassigns itself every 90 milliseconds. And then you can imagine, its ability to kind of handle traffic varies moment by moment, literally position by position on the air surface. We don't have any brownouts today, if you will, or peak. I'm always sensitive to talk about this because we -- one of the most efficient users of spectrum on the planet. We would like more spectrum. We would -- we believe we have enough spectrum to handle our growth plans going out into our next-generation system. And we have plans to sort of create capacity through capital expenditure and the next-generation constellation. That being said, we have areas where we're much more fully utilized in certain places and places less utilized. One thing I've talked about on previous earnings calls is one of the most inefficient users of our spectrum was our broadband service, which 5 to 10 years ago when we implemented or 7 to 8 years ago, I guess, when we promoted there was no Starlink or Amazon's LEO services or other broadband traffic, and we were just competing really with Inmarsat sort of L-band broadband services. That service is in decline. And the good news is it's kind of creating capacity for us because the most efficient user of our network is IoT and PNT services and things like safety services, whether it be aviation or maritime. So with that, we really believe we have to utilize a portion of our spectrum. We kind of repack our spectrum in a very effective way, create the ability to create new services within our existing band [indiscernible] Unknown Analyst: I get it, I get it. Can you say just last one for me, as you upgrade your satellite constellation. What kind of multiplex do you think you can get on capacity increase? Is that a kind of 2x increase, 10x increase? What are you planning on that front? Matthew Desch: Well, I challenged the team with a 10x increase. And the designs that we're talking about with kind of smaller, but many more satellites. We currently have a design that really maybe requires maybe 4x more satellites than we're currently operating, but it really does expand the capacity greatly with other antenna technologies and smaller beams on the ground, et cetera. So a lot of a lot of thinking about that. We're not having to really develop that system even start to develop that system for a number of years from now. But we're excited about some of the technologies we seek available and available to us that will kind of lower all the cost of that to provide whether it be launch or satellite bus capacity at a cost that certainly isn't greater than the network costs we experienced last time and probably a bit lower. So yes, I mean, I think we can get quite a bit of capacity in the future. Operator: Our final questions come from Justin Lang with Morgan Stanley. Justin Lang: Matt, just staying on the topic of spectrum and any potential arrangement with a third party. Just curious how we should think about the fact that you have government users relying on the network? I'm not sure we've seen that dynamic, at least not to the same extent with other spectrum that's recently transacted. So just curious how that factors into the considerations, if at all? Unknown Executive: Factors great consideration and nothing I would do or anything I'd say it would hurt the ability for us to operate our network out in the future for one of our most important customers or will for any customers for that Matt. Matthew Desch: I mean one of the reasons I would in terms of partnering in some way to sign additional services using our spectrum. One of the reasons why I want to be intimately involved in that is to be able to evolve services seamlessly and our customers and partner base, which is the most extensive in the industry after the future quite seamlessly for those customers. So there will be a lot of demand by our partners, whether they're government or industrial to future standards-based services. And we think we could be extremely valuable in terms of managing that transition over the next 10 years. So it's not an issue. We don't think it's an issue. We don't think there should be any concern by anybody in terms of doing anything in the future in terms of anything we do with our network in any way particularly if we can help manage that transition into the future. . Unknown Analyst: Great. That's perfect color. And then maybe just maybe one for Vince actually. The larger PNT order you've anticipated that sort of moved around quarter-to-quarter. Any update on that front you can share in new timing expectations? Vincent O'Neill: No. I think that's pretty much the same. Justin, as we talked on our February call. As I highlighted in my scripted remarks, we do think that there's the potential for upside there in terms of our '26 guide. But we just feel it would be premature to include that in the outlook at this point. . Unknown Analyst: Got it. So that order is not in the guide factored into the outlook today, right? . Vincent O'Neill: That's right. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Matthew Desch: Well, there's certainly a lot of interest in our spectrum. We certainly agree it does have a lot of value . [indiscernible] has been are demonstrating that. But I want to reiterate, we're really heads down and focused on organic growth, the kind of things we're doing as well as the investments we're making in our 4 growth pillars and new products we have coming out. So I'm really looking forward to continue talking about that in coming quarters with you as well as we demonstrate our continued ability to grow here. So thank you for being on the call and look forward to talking to all of you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2026 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Investor Relations. Please go ahead. Maria Lee: Thank you, Sarah, and good morning. I'd like to welcome everyone to our first quarter 2026 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Evan Scott, our Chief Financial Officer. Statements made today that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Please see Lockheed Martin's SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Jim. James Taiclet: Thanks, Mark. Good morning, and thank you to everyone on the line for joining us on our first quarter 2026 earnings call. First, I'd like to highlight this week's breaking news on a recent win for our Aeronautics business. Just this past Monday, Lockheed Martin signed a $1.5 billion contract with the Peruvian Air Force for 12 Block 70 F-16 fighters with an opportunity for a second squadron of an additional 12 aircraft. This is the first F-16 direct commercial sale contract in decades and broadens our footprint in the modernizing Latin American region. This was a collaborative partnership with the U.S. government, and we continue to work with the Peruvian government in executing on its sovereign acquisition process. Overall, we reported solid results for the quarter as demand for our premier Defense Technologies and space exploration capabilities remains high. This elevated demand is supported by the highly effective performance of our platforms and systems that has again been demonstrated during this first quarter. Artemis 2 crew and the dedicated teams at NASA completed their historical mission and a near flawless flight and recovery using our Orion spacecraft. Artemis launched on April 1, carrying 4 astronauts on a 10-day mission around the Moon. The first crude space flight beyond low earth orbit since 1972, and the farthest humans have ever traveled from earth. The Orion spacecraft served as the crew transport and habitation module throughout the entire mission, traveling thousands of miles beyond the moon before safely splashing down in the Pacific Ocean. Orion is the only vehicle capable of traveling into deep and back while safeguarding human life. It will enable future Artemis missions and ultimately, exploration of the moon, Mars and beyond. We are now assembling Orion for Artemis 3, 4 and 5, cementing Lockheed Martin's role in sustained deep space discovery. While Artemis 2 reflects what's possible at the edge of human space exploration, it also underscores that Lockheed Martin's portfolio is delivering extraordinary capabilities in the most demanding conditions both on earth and in space. Additionally, Lockheed Martin platforms have performed extremely well in very demanding missions during recent U.S. and allied operations and active conflict zones. The F-22 Raptor and the F-35 Lightning established air superiority when called upon. Our C2 BMC and [indiscernible] systems combined with FAD and PAC-3 interceptors, delivered layered air and missile defense in infrastructure and populations, military bases and ships at seed. Moreover, the Black Hawk combat rescue helicopter and C-130 aircraft supported successful combat search and rescue operations and extremely difficult conditions in hostile territory. The operational relevance of these systems has direct implications for our business. In the weeks following Prism's first use in active operations, we announced plans to quadruple production to meet accelerated demand. This is in addition to the commercially inspired long-term agreements we already entered into with the Pentagon to rapidly expand the production capacity for PAC-3 and THAAD interceptors by 3x and 4x, respectively. In light of these multiyear framework agreements, we are in the process of construction and/or modernization of more than 20 facilities across several states dedicated to achieving these great expanded reduction rates of production of these sophisticated munitions. These investments are expected to support thousands of skilled manufacturing jobs across our defense industrial base, provide accretive investment opportunities for our suppliers and enable the addition of second and third sources within our supply chain to enhance the resiliency of our production system. For its part, the F-35 also continues to execute critical missions, delivering fifth-generation air-to-air and air-to-ground capabilities unmatched by any other aircraft. The platform's combination of Stealth advanced sensors and AI-assisted targeting enables pilots to operate with decisive advantage. In the first quarter, we secured a new F-35 production contract for long lead items and the initial presidential budget request includes increased F-35 quantities. Rotary wing capability is proving equally valuable with a family of Black Hawk supporting critical search and rescue personnel insertion and resupply missions. We are also far down the road in converting the Black Hawk to both pilot optional and fully autonomous operations to capitalize on its range payload and survivability in contested environments. These examples are testaments to our strategic focus on mission execution and our commitment to disciplined investment to drive 21st century digital and physical technology into tried and true major platforms. This initiative is designed to provide our customers with the most capable integrated and reliable systems that can be quickly assimilated into existing force structures, training programs and logistical infrastructure. The urgency of the current operational environment, coupled with the strong performance of franchise Lockheed Martin Systems has also spurred the rapid progression of initiatives that were already underway with our customers on long-term production commitments. We recently announced a $4.8 billion contract to further accelerate production for PAC-3. A tangible example of how we partner with our customers and advance from novel framework to contract to continue increasing the scale and speed at which we can deliver. The long-term demand inherent in the munitions agreements allow us to confidently expand our investments, boost internal capabilities with robotics, and strengthen supply chain resilience, in turn, delivering long-term shareholder value to Lockheed Martin's shareholders. Chart 3 outlines our collaborative approach with the U.S. government to address these urgent requirements and illustrates how acquisition transformation is enabling us to accelerate and expand production. These munitions agreements provide risk mitigation for industry and efficiency and speed for government a combination that benefits customers and shareholders alike. We also remain committed to advancing emerging technologies. Since launching the Lockheed Martins Venture Fund, we have backed more than 120 companies with many now serving as Lockheed suppliers. In the past 2 years, we've added 25 new companies and are expanding the fund's capacity to $1 billion, more than double its formal size. Our expertise and innovation and scaling the production at scale enables us to serve as trusted partners for the next generation of solutions from startup and other new entrants to the industry. Building on this momentum, earlier this week, we announced a further strategic investment in [indiscernible] technologies to bring to market a fully integrated end-to-end turnkey counter UAS solution, which seamlessly uses detection, control, identification and mitigation capabilities into a single commercially available offering. This partnership will accelerate Fortum's ability to scale production. We'll also incorporate its products into our deployment-ready integration with Lockheed Martin's Sanctum counter UAS ecosystem. This is just the latest example of reinforcing our commitment to invest in innovative technologies that deliver rapid reliable solutions for new threats. Our commitment to developing advanced capabilities is consistent with the budget environment where there continues to be broad support for national defense initiatives. The administration's priorities, accelerating munitions production, strengthening integrated air and missile defense, advancing next-generation aircraft, expanding space capabilities and preserving long-range for [indiscernible] strike are reflected in this budget request. These priorities are all well aligned with our already long-standing initiatives and product sets. The Department Awards budget rollout that was released on Tuesday, reflects continued strong demand for our core franchise programs. At a broader level, the administration's prioritization of defense industrial base investment and modernization spending provides a constructive backdrop as we execute against our significant backlog. We are well positioned. Our strategy is taking hold. Our solutions are in high demand, and we remain confident in our full year guidance for 2026. Before turning it over to Evan, I'll cover our top focus areas for the year. With that significant backlog and demand continuing to grow, enhancing and accelerating execution is imperative for us. Factory production is already up more than 60% from just 2 years ago. and we remain focused on converting demand and long-term growth while executing with discipline in a dynamic environment. Next is innovation. A key feature of our 21st Century security vision encompassing AI solutions for enterprise efficiency, digital threat integration, model-based engineering to accelerate our program time lines and a commitment to open systems architectures that allow us and our partners to rapidly integrate new technology from us or others and continuously enhance capabilities, thereby strengthening deterrence. Third, our partnerships are in full alignment with the department's acquisition transformation strategy. This is enabling a government industry model that we have long advocated for and under which we were the first to sign a multiyear agreement. International demand also remains robust as budgets expand and allies and partners across the globe continue to seek out our superior systems and capabilities. Finally, our people are the foundation of everything we do. Tens of thousands of workers develop, build and sustain our systems, and we're deliberately growing this workforce by investing in training pipelines collaborating with community colleges and technical schools and creating long-term manufacturing careers. Our new munitions acceleration center that we're building in Camden, Arkansas exemplifies this effort serving both as a production facility and a development hub for the next generation of defense talent that will use the latest in AI and robotics to do their jobs. Now I'll turn the call over to Evan to walk us through the Q1 financial results and outlook. Evan Scott: Thank you, Jim. Good morning, everyone, and thank you for joining us. I'll now walk through our consolidated financials and touch on some additional highlights from the quarter include few words, a status update on the munitions agreements before handing it off to Mark, who will discuss the quarterly financials by business area, and then I'll come back to discuss the detail on our 2026 outlook. Starting on Chart 4. First quarter sales were $18 billion, in line with the first quarter of 2025. We saw strong growth on missile programs within MFC and and on strategic missiles within space, offset by lower volume at Aeronautics, primarily related to the life cycle on classified programs and an RMS on Sikorsky heavy lift programs due to timing of material receipts. First quarter 2026 sales were impacted due to the shortened fiscal period compared to the prior year, we expect sales to grow in the second quarter and throughout the remainder of the year, supporting our full year growth outlook. Next, segment operating profit amounted to $1.8 billion, a decline versus the first quarter of 2025, primarily due to nonrecurring events in the prior year related to program milestones and completions at Aeronautics, Space and RMS. First quarter 2026 results also reflect unfavorable performance adjustments at Aeronautics associated with F-16 and C-130. Design and development delays temporarily impacted F-16. On C-130, integration challenges and supplier constraints, which occurred early in 2025, persisted into the first quarter of 2026. The C-130 deliveries have resumed with 4 aircraft delivered as of today, keeping us on track for our full year targets. Earnings per share of $6.44 decreased 12% primarily driven by lower profit and mark-to-market losses due to changes in the fair value of investments and liabilities for deferred compensation plans. This was partially offset by benefits from a more favorable FAS/CAS pension adjustment. Shifting to new business, MFC was awarded $7 billion in orders for PAC-3 contracts. This includes 1 award for $2.2 billion from the first quarter of 2026 and a $4.8 billion fully funded undefinitized PAC-3 contract we signed earlier this month, advancing the first of the [indiscernible] ramp production agreements we announced earlier this year. These awards underscore the sustained and growing demand for our missile defense capabilities. Lockheed Martin's commitment to the mission and the government's dedication to partnering on the rapid scale-up of this capability. We are partnering with the Department of War to definitize all multiyear munition acceleration agreements, and we will continue to provide updates as we progress. At Aeronautics, we secured a $700 million contract to procure long-lead materials for F-35 lots 20 and 21 for our international program partners. A further signal that Allied nations are continuing their commitment to the F-35 program as the aircraft consistently proves itself in live combat. At space, we secured an $890 million contract for our Fleet Holistic Missile capabilities, a program that provides sea-based nuclear deterrents and one that Lockheed Martin has served as a prime contractor for more than 70 years. And at RMS, we were awarded a $365 million contract for Aegis Blistic Missile Defense. The Aegis weapon system is a proven command and control solution that links sensor and effector assets across all domains from undersea to space, showcasing how Lockheed Martin connects established and innovative technologies to enhance homeland defense capabilities. They're adaptable for missions like Golden Dome. Moving to free cash flow. We reported use of $291 million in the quarter. The negative cash was largely driven by working capital timing, including impacts from the implementation of a new ERP system in one of our business areas. The impact of this system upgrade was anticipated and we expect that the effect will be resolved by the second quarter. Our full year cash guidance remains, and as in past years, higher cash flow is projected to be weighted towards the latter half of the year. Additionally, earlier in the quarter, the IRS issued favorable guidance regarding the corporate alternative minimum tax. This strengthens our confidence in reaching the upper end of our cash flow range. In the quarter, we paid $816 million in dividends and retired $1 billion of long-term debt. We remain committed to our dynamic and disciplined capital allocation prioritizing a strong balance sheet while investing for the long term. In the first quarter, we invested $511 million in capital expenditures and $458 million for research and development. an approximately 15% increase over the prior year first quarter. I will now turn it over to Mark to walk through the business area results. Unknown Executive: Thanks, Evan. Starting with Aeronautics at [indiscernible] First quarter sales in Aero decreased 1% year-over-year, primarily driven by life cycle timing and classified programs, losses recognized on the F-16 program and lower production volume. This was partially offset by increased volume on F-35 sustainment. Segment operating profit decreased 14% compared to the prior year related to unfavorable profit adjustments on F-16 and C-130 programs and the absence of favorable profit adjustments on classified programs that occurred in the first quarter of 2025. These impacts were partially offset by favorable profit adjustments on the F-35 program. The image on the right depicts an F-35, refueling from a KC-130, underscoring Aeronautics role and delivering integrated air power to the U.S. and its allies. In the first quarter, we were awarded a $462 million contract to expand support of the Royal Canadian Air Force's fleet of C-130Js. Turning to Missiles and Fire Control on Chart 6. Sales at MFC in the quarter increased 8% from the prior year, driven by higher volume from production ramps on existing PAC-3 tactical strike missile programs, including JASSM, LRASM and PRISM. Segment operating profit increased 8% year-over-year, primarily from the higher sales volume. On the right, you can see a photo of a [indiscernible], equipped with Precision Strike Missile, or PRISM. In the first quarter, we successfully completed the first flight test of our PRISM increment to demonstrating its ability to engage moving targets. Shifting to Rotary and Mission Systems on Chart 7. Sales at RMS decreased 8% year-over-year in the quarter, primarily from lower production volume of both RADAR programs and at Sikorsky. Operating profit in the first quarter decreased 19% compared to the prior year. driven by unfavorable preadjustments at Sikorsky programs and on the absence of a cost recovery from an intellectual property license arrangement that occurred last year. In the first quarter, we delivered the very first UH-60 MX, Black Hawk helicopter to the U.S. Army. The UH-60MX includes a fully integrated Matrix autonomy suite, enabling optionally piloted flight and supporting the Army's pursuit of open architecture, mission supported autonomy. On Chart 8, we'll conclude the business area discussion with space. Sales increased 7% year-over-year in the first quarter, primarily driven by higher sales volume on strategic and missile defense programs, including the Fleet Ballistic Missile and next-generation interceptor. Operating profit decreased 26% compared to the prior year, primarily due to the absence of a benefit from completion of a commercial civil space program, partially offset by higher sale volume on the programs I previously described. Now I'll turn it back over to Evan. Evan Scott: Thanks, Mark. Shifting to Chart 9. Our 2026 financial outlook remains consistent with the expectations we shared in January including mid-single-digit sales growth, profit of $8.4 billion to $8.7 billion and free cash flow range of $6.5 billion to $6.8 billion. Our free cash flow guide continues to assume between $2.5 billion and $2.8 billion of capital expenditures in support of production ramps and key strategic growth opportunities. It is also important to note that we expect margins to improve over the course of the year, with gains anticipated in the second half of 2026 as production milestones are achieved and risks are retired. We remain focused on disciplined operational execution, scaling production and delivering at speed to meet the urgency of this moment. Now we'll open up the line for Q&A. Operator: [Operator Instructions] Your first question comes from Kristine Liwag of Morgan Stanley. Kristine Liwag: Maybe Jim and Evan and Mark, I want to focus on the F-35, the company's largest program. It was very encouraging to see the Pentagon request 855 in the fiscal year '27 budget up from 47% last year. And you've also called out the funding for sustainment. I was wondering, can you reorient us on where we are in the program, the F-35 role in Modern Warfare and your outlook for production and sustainment. James Taiclet: First off, I'll say that the performance of the F-35 and active operations over the last 6 months has been really definitive proof that the aircraft is standing alone around the world and its ability to do both really advanced air-to-air emissions and achieve our superiority alongside F-22s and also air-to-ground missions. And so in the midnight hammer operation, for example, when the nuclear capabilities of Iran were damaged significantly. That mission was enabled by the scoring of the bombers, V2 bombers by F-22 and F-35, it couldn't have happened, I don't think, without them safely. And part of that mission was to air the ground side of sort which enabled both U.S. and Israeli F-35s to essentially obviate the air defense system and very [indiscernible] defense system of Iran. So this is quite evident now with that and other missions that the F-35 is uniquely capable as a fifth generation platform. It's the only one in the free world in current production right now. And so therefore, the net from the U.S. government is solidified, as you said, and also the interest in the airplane from our allied customers is also heightened as well. So I think it's basically proven itself as the dominant modern fighter aircraft through its performance. The second piece of it, Kristine, is -- and I think both our allies and us have discovered this in the European and Middle East theater is that F-35 is basically a flying command post, where it can ingest sensor data from the aircraft, organize it, declassify it necessary and pass it off without any pilot intervention into the command and control system for multiple services and multiple allies, that information gets digested and then other platforms can actually act on in other crews and capabilities can be applied to these threats that the F-35Cs when it's in flight. And so there have been missions where an individual pilot or a for ship of airplanes does 3 or 4 missions over a couple of hours and those missions can include Combat Air Patrol, protecting other airplanes. It could include close air support protecting truths on the ground that are friendly. And it can also include the sort of surveillance and data fusion mission that I also described. And there have been some examples of missions that have gone on 3 or 4 hours with the aircraft, multiple are fuelings and again, the single pilot or the formation can execute all 3 of those missions even when all the munitions are expanded. So I do think that this aircraft has -- we always do it, but internally, but that it is superior to every other airplane in the world right now that we faced at least. So I think that's the position of the aircraft. Operator: Your next question comes from Rich Safran with Seaport Research Partners. Richard Safran: I thought you could give some additional color on Aeronautics and RMS results. Some of this was a difficult comp, but I wanted to know if you could maybe give some more color on your opening remarks and discuss what drove the adverse profit adjustments on the F-16 at Sikorsky and also on the F-35 that offset. James Taiclet: Yes, I'm happy to take that, Rich. Starting in F-16, we have a new configuration that's being delivered as part of the Taiwan and Morocco production run. So we ran into some issues during the flight test causing some rework, which delayed deliveries. So the combined cost of the rework and schedule extension ran through our program estimate. Unfortunately, we're back on track with a successful flight test and plan to deliver -- begin deliveries of the first aircraft as soon as this week. So we're right back on track on that program and, of course, celebrating the good news on Peru. But the team is very focused on the execution, and we're off to a good start this quarter. I think one of the positive points, as you pointed out here is the F-35 production margins. That's accretive to overall aero margins. We've seen some real strength in performance on our deliveries that you've seen as well as our cost performance. So I think that's looking good. RMS we had some cost growth on some of the programs there and a lot of material timing that we expect to be just sort of a quarterly anomaly as well as sort of a difficult compare to last year Q1 as we had several onetime profit events that make it a tough compare. If you look at just the quarter in context with comparing quarter-over-quarter, all those onetime charges across 3 BAs accounted for about $190 million of sales and about $240 million of profit. So when you sort of net that out, we see the Q1 is on track we expect to see successive sales and margin growth throughout the year with strength to get to our total year guidance. Thank you. Operator: Your next question comes from Seth Seifman with JPMorgan. Seth Seifman: I wonder if you could talk a little bit about the the multiyear contracts that you're looking to sign in Missiles and Fire Control, and obviously, a lot of important opportunity there for the company. But can you also help us think a little bit about the risk side? Are you signing up and committing to reach these significantly higher production rates in the out years? And how do we think about what the financial downside could be for the company if these rates aren't reached? James Taiclet: So as far as the tripling or quadrupling of production rates, that's going to have to be a team effort in the U.S. government and us and our major suppliers certainly have all locked arms on how to get that done. So for example, if you look at the PAC-3 system, we're the OEM and the integrator of course, for the missile itself, but we rely on L3Harris for solid rocket motors and we rely on Boeing for seekers. Both of those companies have publicly stepped up to meet the same level of commitment as we are to invest in that scaling within their companies. Those are just 2 examples. But I would say essentially what the government, we and our major suppliers have agreed to is to -- we'll go ahead and fund the NRE on the 7-year framework agreements. And as a result of that, we can focus on the small and medium suppliers and helping them scale up as well while our large teammates in the industry will handle their own nonrecurring costs. And that's all been agreed upon between the U.S. government, those companies and Lockheed Martin. With respect to our small and medium suppliers, we've got a lot of interest in getting financial help for them to do the scaling. Part of that's going to come from the open strategic capital inside the Department of War. They've got a pretty big balance sheet and they're going to use that to help equity with equity and debt instrument investments in the small and medium supply base to encourage and enable all of this. We are having the confidence now to add second and third sources in that small and medium supply base and even in some of the larger subsystems, if you will, because we have a 7-year agreement, so the nonrecurring costs to stand up those second and third sources now makes sense. So I think this is a very well risk-managed arrangement. And if you kind of go back to the slide very quickly, there was some real constructive engagement, I'll say, between the U.S. government, and I can only speak for Lockheed Martin here. But some of those engagement elements really enabled us to go to a more commercial-like business model for major weapon systems. It really hasn't been done before. And that's because the leadership of the department at this point is willing to engage in topics such as risk mitigation. And some of the ways that we've done that with the government is for our commitment to do nonrecurring cost, capital expense investment, et cetera, to reach these new levels of production. We have basically a 7-year commitment and if you will, a recovery element to these agreements that says if for whatever reason the government decides the production rate won't be as high in years 5, 6, whatever or there's a change in Congress that changes the nature of how this agreement can be actually appropriated, I'll say, then there are kind of reach back or clawback mechanisms for making the company holds. So I'm just again speaking for Lockheed Martin. There's clawback arrangements with the government then the agreements and will be in the contracts to make sure that we're whole. And if there's a change in government policy or a reduction in the production rate that they request down the road, we will not be harmed by that. Another element is, again, this notion of our major suppliers being asked and stepping up to their own NRE. So we don't have to make that investment with any risk whatsoever. And then the third thing is that we requested and made arrangements for two important elements, which are very similar to the way we build telecom networks in my last industry, which is inflation index base escalator. So fixed price to start with inflation-based escalator for the 7-year period that's based on an index for the industry. And then secondly, kind of cash flow neutral approach, which means if we were doing our contracting for Patriot the old way, our cash flow would be x, it wasn't going to be X minus anything. And so we were going to get and will get under these agreements, advanced payments from the government to make this program for -- and all of these long-term agreements, cash flow neutral for the OEM and for Lockheed Martin in our case. So -- that's what we've negotiated as far as risk management. I think it's quite really solid, frankly, that we protected the company and also enabled the company, we think, with our supply chain to actually make good on these ramp-ups. Unknown Executive: And just one additional context as well. In addition to the key contract provisions that were negotiated the highest levels of this company and at the Pentagon. If you look at the operational, it is true that we're going to have an aggressive ramp schedule. As Jim said, we're back to back with our suppliers. What's also notable is the support that we've gotten from the Department of War, which is to say they have pulled in some of the true industry experts from our industry and others, both at our facility and our suppliers to say, if there is a best practice out there, we're going to put it to use. It doesn't have to be invented here to make sure we scale these milestones. So it is all hands on deck in the best possible way. Operator: Your next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Jim, can you share an update on the classified program in Aeronautics, including how risk is trending on the program? And then are you seeing any willingness from the government to provide additional funding to support your efforts to keep that program on track? James Taiclet: Yes. Given the classified nature of the program you're referring to in aeronautics, what I can say is, and it was, I guess, evident from our release, there were no charges taken on the program of interest here in the first quarter. We have increased the scrutiny on that program. And actually, again, the higher levels of operating executives in this company is now overseeing that program. We do think we have a path through the flight test and other parts of this program. that have sufficient coverage, I'll call it, in our financials right now to hopefully not experience any additional write-downs of the program. But it is complex. It is cutting-edge literally, and there's still some risk there, but we think we've got it well managed. On the government side, there's really strong interest in this program at very high levels in the department. And they seem -- again, see, I can't speak for them, but very, very committed to carrying through with this program. and carrying through the success for it. And therefore, there's ongoing discussions with them on making sure that the contract is structured in a way that the company and the industry can be successful in delivering this. At the same time, the government will get what's asked for and what it's going to pay for. So I would say that from my perspective and what I can share on this call, I feel better about that program than I have probably since I got here 6 years ago. Operator: Your next question comes from Scott Mikus with Melius Research. Scott Mikus: We saw Northrop reached an agreement on B-21 production to accelerate, which gives them the opportunity to improve the economics on the program. Given the strong demand for missiles and munitions, is there an opportunity to reach an agreement with the customer to accelerate production of the classified missile program at MFC that could yield some better economics for Lockheed. James Taiclet: So given the unclassified nature of what you're referring to, I think I can put it in a similar context. The demand from the customer for that capability is heightened. It's something that will make a difference. I would suggest as any large classified program would and our abilities to accomplish emissions that it will be applicable for -- so that is increased. The interest in the customer of getting this field is increased, I would say, over the last year or 2. Secondly, the program, again, of interest is similar as to the last one you all asked about. There were no charges taken in the first quarter. Again, that's the only thing we could kind of say about that. And again, we have put risk mitigation on that program similar to the aeronautics program level. So I do think we have it covered with oversight of some of the best and highest level experts in our company on a recurring basis. Having said all that, there is interest and again, the product accelerating and expanding production potentially and there's conversations about that with government. There's nothing different about that system other than its level of classification vis-a-vis PRISM or Patriot, et cetera. It's an MFC volume missile program, which could be subject to a similar contracting approach if the government decides to do that. And so they all have to stop. Unknown Executive: And just one last piece of context to support that as well. We last took a charge there in 4Q of 2024, and there has been no change in estimate since then. So we've struck a baseline and continue to hold that while we look for additional opportunity. Operator: Your next question comes from Ken Herbert with RBC Capital Markets. Kenneth Herbert: I wanted to ask a question on free cash flow. Significant use in the first quarter, I think, as expected, step up in working capital. I wanted to just verify this was F-35 or if there's anything else to call out on that in the first quarter? And then second, as you think about the full year guide, how should we think about the cadence here in the second quarter and in the second half of the year to hit the full year guide on the free cash? Evan Scott: Yes. So I think in the first quarter, a few things going on there. One, as we disclosed, we've got an ERP or billing system transformation at 1 of our business areas that occurred to close the year last year. So we went through that process this quarter and expect to be back on track in the second quarter. It's notable, of course, that we drill very hard to surge and collections to close out the prior year knowing that this was in front of us. That's what positions us to make the additional contribution to our pension, which helped derisk our cash flow this year. F-35 continues to make progress as we progress on deliveries, we'll have more opportunities for cash liquidations. I think as you look throughout the year and the pace of our deliveries and program milestones, we're going to continue to see cash increase throughout the year, it's going to be back-end loaded, not unlike previous years, but I think we've demonstrated our ability to close the year strong and hit our cash flow guide. And then with the support that we've gotten from the tax policy, which helps enable and incentivize investment in American manufacturing, that gives us additional confidence to hit the top end of our range this year. Operator: Your next question comes from Gautam Khanna with TD Cowen. Gautam Khanna: Was wondering if you could comment on the pinch points in ramping MFC capacity. I know you guys have the JV you're building with GD on solid rocket motors and just wanted to see like how quickly can missile capacity actually be raised? And if you're throwing even more money at it, can it be pulled forward more substantially than maybe what people are thinking. James Taiclet: So the goal is to sort of have a ratable increase from our current levels of production, which is last year 650 Patriot missiles per year up to 2,000. And that's going to take 3 to 4 years depending on supply chain and other considerations, but we really do think we can get it done in 3 to 4 years. the supply chain improvements that we're pursuing, the General Dynamics slacked Martin teaming on solid rocket motors, also Northrop Grumman is looking at expanding a solid rocket motor business potentially into Patriot. And there's some commitments there that we think will bear some fruit. The other pinch point. So I think we've got solid rocket motors, I don't want to say covered, but we've got a lot of interest in it. You may have heard that L3Harris is spinning out its SRM business to -- and also have support from the U.S. government to finance and fund their expansion, which they've already announced where it's going to be and how it's going to happen. So that's a good sign. Secondly, Northrop's commitment is a good sign. Thirdly, General Dynamics partnership with us is another good sign as far as SRM, pinch point risk, I guess, I'd call it. The second area is the seeker for the Patriot. And Boeing is similarly made a public commitment and one to the government that says, hey, we're going to invest in that seeker business. We're going to get to the volumes that we're asking -- you're asking us for. And they've actually been improving as well over the last year or 2 [indiscernible] to deliver on this very complex component. So those are the 2 biggest I guess, risk areas, there'll be a handful of others in the mid to small business supply chain. We will have -- and the government -- as Evan just said, we'll have assistance provided to those companies. And we're looking for capital markets providers in addition to the government of strategic capital to to provide ready and efficient financing for these medium and small companies, given that they're going to have a 7-year subcontract to Lockheed Martin, who has a 7-year contract with the U.S. government, a pretty good credit line there. So I think that we're going to be able to manage those pinch points, but those are the main ones. Operator: Your next question comes from Ron Epstein with Bank of America. Ronald Epstein: Just circling back on some of your comments you brought up in your prepared remarks about how you're deploying AI in the enterprise and in some of the weapon systems. How are you broadly thinking about that? Are you developing pools herself as lucky trying to develop its own large language model or are you using outside stuff? Just kind of broadly thinking about your AI strategy and what you're doing there? James Taiclet: Yes. Thanks, Ron. So there's only 2 dimensions to artificial intelligence adoption in Lockheed Martin. One is the in-house business systems, production system, ERP supply chain management, all those kind of in-house critical activities. We're applying artificial intelligence there, everything to the closing process, right, to contract and bid provisions to respond to our customers. Every place that you can imagine, AI could be helpful, defect management and discovery, those kinds of things in the factory supply chain breakdowns. Those kinds of things, we are using -- utilizing AI to make all those business processes better for us. The second thing that we're doing and alluded to earlier is we are introducing AI into our products and services where it makes sense to do that. But under a rubric of of an ethical standard that is adopted from the Department of Defense's rubric. So we're introducing AI into target recognition into battle management, command and control, [indiscernible] as it's called things like that, places where you've got a lot of data. If you can fuse it, bring intelligence to it quickly and provide commanders and pilots options. That's basically the way we're driving AI into our mission solutions, if you will. All of this is within what we call the Lockheed Martin Artificial Intelligence Center. So we made a decision with our then really a chief engine here. We have another [indiscernible] today, but her predecessor when I first joined the company 5, 6 years ago, said, hey, I want to stand up a single AI center for all of Lockheed Martin instead of having each business do it or something like that and consolidate the GPUs, consolidate the infrastructure make sure that we have a totally wold system that can operate at the classified level and has no connection to the external Internet so that we don't have cyber and other risks in that regard. And also, we have our own data sets. We don't use any data from outside the company or outside the customer that's provided to us. So we have this internalized AI center, but we utilize external models for it. So there's a range of AI models. Many of them are incredibly well known, and we have access to those on a token basis or otherwise that we run in our AI center on our own GPUs on our own infrastructure that's cyber secure and hacking secure. So that's how we do it. There's been a pretty significant investment over these last 5 or 6 years into that. And I actually think that we may have a best-in-breed AI center, at least in our industry. So we're not building basic artificial intelligence models. We're using others, but we're applying them to our internal business operations and to our product set. I think, in pretty aggressive and useful impactful ways. Operator: Your next question comes from John Godin with Citigroup. John Godyn: Jim, I wanted to just ask about the evolving landscape a tremendous amount of new issues, new entrants. What is that impacting the competition for talent? How is that impacting contracting and maybe offensively, you had some comments in your prepared remarks about how it might be impacting the opportunity to make investments or strategic partnerships. I'd love to just kind of get your take broadly. James Taiclet: So we welcome competition. We welcome what we like to call other people's money and other people's talent into this endeavor with us or in competition with us for that matter. So this traditional defense industrial base needs to be expanded. And we've been working for years to expand it with some of the major tech companies and telecom companies out there like when we publicly stated these before, Verizon IBM, Microsoft, NVIDIA, et cetera. At the same time, it may be less visible. We've been investing in this sort of startup and new entrant space ourselves. We've done some acquisitions of relatively early-stage companies internally into Lockheed Martin. But in many cases, I'd say in most, we can be an investor through our venture group, have a [indiscernible] get access to the technology and figure out how to incorporate it again into our products and systems in ways that will benefit our investment that we have, the company we invest in and will accelerate our capability and again, using other people's money and other people's talent with these businesses, things maybe that we don't have the bandwidth or the personnel to do. So I think it's a positive development both for the National Defense Enterprise of the government and our industry together and for our company, and we're embracing this. We have another entity called Lockheed Martin [indiscernible], where we can do medium-sized joint ventures or co-investments. We're doing that in the wildfire fighting space that we've announced before, for example, through kind of an all entity, if you will. So we are eager to get access to and collaborate with small, medium, new entrant companies, et cetera. We have -- we're a subcontractor [indiscernible] some cases, frankly. So we view these companies across the board as just other suppliers in the term of this industry's [indiscernible], right? So Same thing with Northrop, Same thing with Boeing Defense. We partner with them sometimes. We compete against them sometimes. This industry is used to that and is comfortable with that, and so are we. Our goal is to get the best technology and get access to it through whatever vehicle we need to deliver on a mission technology road map for our customer, right? So if our goal is how do we have the best air-to-hair compact capability in the U.S. Air Force, for example, we want to take the platforms we have we want to introduce AI from the best available source. We've actually are working with the Air Force now at Edwards Air Force Base, which is a test pilot school. There within autonomous F-16 that's working tactics that will be more survivable where even a piloted aircraft when it's in a dogfight or has to do a really hard turn on a missile can take over and optimize that response in the fight, so to speak. So we want to advance these mission capabilities with our platforms or networking with others, frankly. And we want to get these these resources into those mission sets. And we're not very proprietary about where they come from, frankly. So how does that affect our talent management I would say that we have excellent retention rates. It's about half of general industry as far as losing folks on a voluntary basis. We're at like 4-ish percent broad industries like 8% to 10% turnover. So we have pretty solid retention, but there are some places like AI data scientists and others where it's competitive, and we have compensation plans that we think can meet the moment on that and keep the key people we need to. And the third thing I'll say on talent is people that come to Lockheed Martin want to come here for a reason, and that reason often has to do with either their prior military service, their families, where they grew up or whatever it is, that gives them some connection with these missions. Like this air defense mission we're talking about is so important. And the situation in the Middle East would be far, far different if the Patriot and the FAD and the Aegis systems weren't employed and others from other of our competitors and partners, but people will get drawn to that mission and they tend to stick around if that's why they came here. The contracting side, we had a meeting with about 30 of our key people yesterday in Arlington in our office there. And I said the same thing to them. This is a golden opportunity right now based on who's in government, their experience, their willingness to change the demand that they have for what we do and our partners in our industry do. We can move the contracting system from this far cost -- federal acquisition regulation based, cost-based Truth negotiation act burden that we've all had and move it more towards a commercial contracting system, which is exactly the agreement we have in these frameworks with the Department of War right now. This is the time to do that. I would say the new entrants and the venture-backed companies are constructive on this. They're helping us and the government get out of our traditions and into a more agile contracting scenario. We will -- we embrace that. And then as far as investments, if you get the contracting right, you can keep the talent, we'll have better ROI on our investments going forward, and we'll have better risk management, too. So -- and again, we can partner and offload certain kinds of technologies or certain kind of physical investments that someone else is better off making than we are. So I'm encouraged by all of this in the evolving landscape as you asked. And I think we're positioned to take a good advantage for our company and for the the U.S. government and our allies based on this more available resource out there for us. Unknown Executive: It's Mark. We're coming up on time. We'll take 1 more question. Operator: Your next question comes from David Strauss with Wells Fargo. David Strauss: One quick clarification question and then a question around cash flow and working [indiscernible] CapEx. Clarification question would be around what your growth rate would have been ex the work week comparison if you had the same number of work weeks this quarter. And then on the cash flow side, Evan, wondering what what exactly you baked in for working capital this year to kind of recover your higher CapEx investment in the cash burn profile on the aero and MFC classified programs, what we're looking at this year and then maybe looking out beyond that? Evan Scott: Sure. So I think of the shorter week or shorter time period of this quarter being kind of in the few hundreds of millions of dollars of revenue thereabouts. So we'll get that extra time back in 4Q, just so we're all tracking to the same calendar there. With respect to the cash burn on our classified programs, I'd still think of that as kind of the $500 million to $700-ish million a year for this year and next year, and then we expect to see a pretty sizable drawdown on that cash draw depending on how that goes. And the last question was CapEx. Yes. So from a CapEx perspective, a key part of the tenant, as Jim mentioned, is sort of cash flow protection as we make sizable investments ahead of scaling. So if you think about the $1 billion increase year-over-year on CapEx we've had. I think about half of that tied to these agreements that have this kind of cash flow protection. So that's what we have assumed in our guidance now to have the offset there as we invest in capital scale rapidly for the future. James Taiclet: Okay. Thanks again, everybody, for joining us. So in the first quarter of 2026, Lockheed Martin, our products and systems proved themselves again and again, in conflict situations and outer space literally. Our backlog is resilient, our investments in capacity, digital transformation and people are going to position us to deliver on the commitments we've made to you and to our customers. Lastly, and this is really important. We want to thank the service members who have put themselves out there and executing these missions with skill, dedication and courage and that's why many of us work at this company is to help them get their missions done and come back safely. So thanks to all of you for joining us, and we'll be back in touch with you next quarter. Thanks. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Nasdaq's First Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Ato Garrett, Senior Vice President and Investor Relations Officer. Please go ahead. Ato Garrett: Good morning, everyone, and thank you for joining us today to discuss Nasdaq's First Quarter 2026 Financial Results. On the line are Adena Friedman, our Chair and Chief Executive Officer; Sarah Youngwood, our Chief Financial Officer; and other members of the management team. After our prepared remarks, we will open the line for Q&A. The press release and earnings presentation accompanying this call can be found on our Investor Relations website. I would like to remind you that we will be making forward-looking statements on this call that involve risks. A summary of these risks is contained in our press release and a more complete description in our annual report on Form 10-K. We will discuss our financial performance on a non-GAAP basis, excluding the impact of acquisitions and divestitures as well as the impact of changes in FX rates. Definitions and reconciliations of U.S. GAAP to non-GAAP plus adjustments can be found in our earnings presentation as well as in a file located in the Financials section of our Investor Relations website at ir.nasdaq.com. And with that, I will now turn the call over to Adena. Adena Friedman: Thank you, Ato, and good morning, everyone. Today, I'll start with a review of our first quarter financial results, and we'll then review the operating performance across our divisions. I will then hand the call over to Sarah to walk through the financial results in more detail. Nasdaq entered 2026 with strong momentum, and our first quarter performance reflects one of the strongest starts to a year in our company's history. We delivered the highest Q1 organic growth since 2021 across net revenue solutions revenue and operating income as well as our highest ever quarterly revenue growth in the Financial Technology division. The results this quarter demonstrate the breadth and depth of the client engagement we are experiencing across our platform, which is resulting in meaningful growth. As we outlined at Investor Day, the power of our platform enables us to serve as a trusted transformation partner to our clients, underpinned by our embedded client community, deeply integrated solutions, gold standard data and engineering excellence. This is a dynamic moment for the world and for markets, underpinned by an accelerated pace of technological change, persistent geopolitical tensions and concerns about the stability of the private credit market as well as overall complexity across the global economy. In the U.S., softer labor conditions and inflation pressures are offset by resilient spending from higher income households and continued capital deployment in AI. Investment in AI continues to be a meaningful driver of economic activity, especially in the United States through large-scale data center and infrastructure build-out. Within this overall environment, macroeconomic growth remains balanced and constructive in the U.S. and across other major economies. Smart regulation is also starting to take shape across the capital markets and banking industry. And as a result, clients are moving forward with investments in the modernization of their core infrastructure. Within the banking sector, we're experiencing increasing demand for cloud-based mission-critical solutions that include AI features to support workflow automation. Within Capital Markets, we're experiencing demand for solutions and services related to the transition to always on markets and the tokenization of assets. As the industry addresses these trends, Nasdaq is well positioned to reinforce its role as the trusted fabric of the global financial system. Turning to our financial results. In the first quarter, we delivered $1.4 billion in net revenue, a 13% year-over-year increase. Our overall annualized recurring revenue, or ARR, grew 12% year-over-year to $3.2 billion. Expenses were $608 million, up 8% year-over-year. Operating income was $799 million, up 17%, and we delivered 21% diluted EPS growth. Within our divisions, Capital access platforms generated 10% revenue growth and 7% ARR growth. Financial Technology delivered 18% revenue growth and 16% ARR growth. And Market Services delivered 10% net revenue growth. As we move into divisional performance, I'll cover how our results reflect disciplined execution against our expand, evolve and transform growth framework from delivering on 1 Nasdaq across our core franchises to evolving our solutions with new innovations to transforming the business in key strategic areas. Starting with capital access platforms, where I'll first discuss data and listings. In our U.S. listings franchise, we welcomed 15 new operating companies raising over $5 billion in proceeds during the quarter, including 7 of the top 10 IPOs. Early in the second quarter, we were pleased to welcome Arxis and Kailera Therapeutics, 2 of the biggest IPOs in Q2 so far. While the IPO environment has been uneven amid market volatility, issuer engagement remains strong. Companies in our pipeline continue to prepare for market entry. We see encouraging environment -- we are seeing an encouraging environment for improving IPO activity entering the second quarter, and we believe that we are well positioned to support that activity as momentum builds. In our data business, we continue to deliver strong revenue growth, highlighted by 32% year-over-year growth of enterprise license agreements and continued momentum in Asia and the Middle East. Looking ahead, we see continued progress towards always-on markets, creating meaningful operations for our data business, enabling trading activity in regions where demand for Nasdaq's proprietary market data is already rising. Our index franchise delivered $79 billion in net inflows over the last 12 months, including $6 billion in the quarter, exiting the quarter with ETP AUM of $836 billion. Our average AUM this quarter increased 32% year-over-year to reach a record of $877 million. Net inflows were modestly positive, impacted by sector rotation and a risk-off environment tied to market uncertainty in March. We view this impact as short-term tactical behavior and not representative of structural trends. Although we don't view early quarter flows as predictive, we are encouraged by the momentum we've seen to date in the second quarter with $15 billion of net ETP inflows as of April 20. Our index performance has been underpinned by our success in product innovation. 46% of inflows were driven by product launches over the last 5 years and 25% were driven by launches over the last 3 years. Institutional adoption of our index products grew among annuity providers contributing to a 30% increase in insurance-related revenues. International expansion was driven by strong demand from EMEA and APAC this quarter. This contributed to 19% of total ETP AUM coming from non-U.S. clients. We launched 31 new products in the quarter, including 12 international products and 11 in the institutional annuity space. We also launched the Nasdaq Private Capital indexes, a way for investors to benchmark private market investment allocations, an asset class that has historically lacked transparency. We were also pleased to announce that we will expand access to the Nasdaq-100 later in the spring with 2 new carefully selected partners, BlackRock and State Street, while continuing to work closely with our long-standing partner, Invesco. The pricing terms related to the index license for these upcoming new U.S.-listed ETFs will be consistent with the QQQ pricing terms. We are excited to continue to grow and expand distribution of our flagship index to new investors across the U.S. and globally with all of our high-quality partners. For example, with Invesco, we continue to create new marquee products to address investors' evolving needs. Recently, we expanded the Invesco QQQ innovation suite with the launch of the Invesco QQQ Equal Weight ETFs. Additionally, with the expanded partnerships with BlackRock and State Street, we look forward to working with them to make the Nasdaq 100 more accessible to their investor universe and to help drive additional institutional adoption. Turning to workflow and insights. Revenue grew 6%, driven by continued strength in analytics. Analytics delivered solid revenue growth, underpinned by eVestment's strong performance, which benefits from powerful network effects and sustained demand in volatile markets. With an investment, we continue to expand the reach of our data assets to meet the evolving needs of our clients and to enhance the value that we bring to asset owners and asset managers, including in private markets. This quarter, we integrated our data with Databricks to broaden entitled access to eVestment's comprehensive institutional investor data. Across analytics, we're leveraging our gold standard data assets to support our clients' AI strategy. The investment AI-ready data has been adopted by global asset managers, GPs and institutional investors representing over $9 trillion in assets under management. and helped drive a 29% year-over-year increase in Q1 bookings. In Corporate Solutions, AI adoption is strong with 74% of IR Insight users and 51% of Boardvantage users leveraging our AI solutions. Overall, the corporate buying environment remains muted, driven by lower IPO activity compared to historical levels. Turning to Financial Technology. We delivered record revenue growth of 18%, driven by sustained global demand for our mission-critical technologies. We continue to deliver on our One Nasdaq strategy with strong bookings performance for Q1 signing 64 new clients, 1 cross-sell and 85 upsells during the quarter. The division sustained compelling land and expand momentum, driving more than 50% year-over-year growth in ACV bookings. while supporting clients transition to cloud. Cloud-based solutions accounted for 80% of ACV bookings in the quarter. I would like to call out a key expansion this year of an existing AxiomSL and Calypso Tier 1 bank client that brings our cloud, AI and on Nasdaq strategy to life. In Q1, we completed a significant renewal and expansion of AxiomSL driven by our ability to deliver cloud and AI-enabled regulatory solutions. Early in the second quarter, we expanded the relationship further with a cross-sell for Nasdaq Verafin, our cloud-based AI native financial crime management solution. The expansion of this relationship illustrates the power of our platform as we deliver innovative technology to address our clients' top regulatory and risk management needs. Turning now to a review of the subdivisions, starting with financial crime management technology. Nasdaq Verafin delivered another strong quarter with 21% revenue growth across a growing client base of more than 2,800 clients representing nearly $12 trillion in collective assets. During the quarter, we signed 58 new SMB clients, driving a 24% year-over-year increase in ACV bookings from that client segment. In enterprise, we signed 2 renewals and 1 expansion with existing clients and early in the second quarter, we added further momentum with an enterprise upsell and a new Tier 1 client cross-sell that I mentioned a moment ago. Nasdaq Verafin is evolving its platform through strategic partnerships, including our recently announced partnership with FIS. This agreement expands our ability to deliver leading AML and fraud solutions to FIS' banking and payments clients. We continue to lead through advanced AI-driven innovation. Our Agentic-AI workforce is now deployed by more than 500 clients, up 40% since Investor Day. Later this quarter, we will launch our new drug trafficking analytic, which embeds generative AI directly into our models and synthesizes open-source intelligence, social media, and third-party research to help clients more effectively detect potential drug trafficking activity. Regulatory technology delivered sustained momentum supported by new capabilities introduced across our product suite as well as structural trends impacting the industry. These trends include the transition to always-on markets, sustained investment in infrastructure modernization and improving clarity of the regulatory environment. Specific to AxiomSL, this momentum is translating into meaningful client expansion and new wins across regions as global institutions deepen their use of our regulatory reporting and capital management solutions. For instance, a large international bank significantly expanded its U.S. footprint with us, extending the use of our platform to support CCAR reporting. Another large bank expanded into cloud-based broker-dealer capital management and regulatory reporting, underscoring growing confidence in our cloud-enabled regulatory infrastructure. We also secured a new client in Europe for consolidated reporting across capital, liquidity and financial regulatory requirements, highlighting continued momentum across the continent. We are realizing the benefits from investments we've made in our cloud capabilities as approximately 90% of AxiomSL ACV bookings in Q1 have been for cloud-based solutions. We're also experiencing strong interest in our AI solutions within AxiomSL, including Reg-Copilot, REG Simplify, RegNavigator and REG Investigator, the products we detailed during Investor Day. In surveillance, we delivered strong growth this quarter, supported by upsells and renewals, including a renewal of a global Tier 1 bank. We are experiencing interest in our crypto surveillance services, both with new clients and upsell opportunities. We are also continuing to invest in our core product to sustain strong client engagement and demand. For example, we recently introduced our calibration copilot, an AI-powered tool that's enabling clients to optimize workflows, reduce false positives and increase accuracy of detection. In the second quarter, we will release our Gen AI platform extension, which connects news and market events to trade data. In beta, this capability has proven to be an effective solution for clients to uncover risks faster and more effectively. Capital Markets Technology delivered an excellent quarter with strong demand driven by broad-based growth across the sub division. In trade management services, we had outstanding results, driven by robust demand and pricing increases that Sarah will address in her remarks. In Market Technology, we continue to experience momentum in our managed trading services business with a new cloud-hosted trading client for tokenized assets in addition to an expansion of services with several of our large clients. We also continued progress on the rollout of our Eclipse product suite with 2 significant client implementations for trading and clearing completed in the first quarter. This progress demonstrates the strength and readiness of our modern cloud-enabled platform. Calypso, we delivered 4 new sales, including on cross-sell. One of these wins was a new cloud-based booking for an enterprise-wide derivatives platform with a large U.S. insurance company, supporting the company's broader technology transformation efforts. Now turning to Market Services. The division delivered 10% organic net revenue growth driven by record volumes in our U.S. markets in both U.S. equity options and U.S. equities as well as elevated volumes in our European markets. We're experiencing strong industry-wide momentum and short-dated options and our market share and volumes align with our established leadership and equity options. We also continue to expand our opportunity within index options with revenue more than doubling year-over-year. Looking ahead, we're excited to be leading the transition to always-on markets. With SEC approval to extend our market operations to 23-5, we are focused on expanding access, resiliency and continuity for global market participants with the projected launch of December 6, 2026. We are excited to set a new standard for how regulated markets operate in an increasingly global and digital economy. In parallel, the FCC's approval of our proposal to enable the trading of tokenized securities allows us to enhance how investors access markets and how issuers connect with shareholders. We will continue to collaborate with DTCC and the industry to build the infrastructure needed to launch tokenized equities. Building on this foundation, we're advancing the Nasdaq equity token design that takes modernization a step further by putting issuers at the center of ownership rights. This approach will give issuers greater control over how their shares are represented and managed in tokenized form. As stated in our initial announcement, we expect to provide early benefits of the Nasdaq Token design in the first half of 2027. Looking ahead, the broader forces shaping the global financial system, including rising complexity, investment in AI and the need for resilient trusted infrastructure continued to reinforce the role that Nasdaq plays at the center of the financial ecosystem. Supported by the scale of our platform and disciplined execution across our priorities, we remain confident in our ability to create durable value for clients as well as long-term value for our shareholders. And with that, I'll turn the call over to Sarah to walk through our financial results in more detail. Sarah Youngwood: Thank you, Adena, and good morning, everyone. In the first quarter of 2026, Nasdaq delivered exceptional results. headlined by solutions revenue growth of 14%, record financial technology revenue growth of 18% and diluted EPS growth of 21%. The strong performance in the quarter demonstrates the engine of profitable and durable growth we have created and the outstanding execution of our teams, particularly in the context of the volatile macro environment throughout the quarter. Let's start with quarterly results on Slide 11. We reported net revenue of $1.4 billion, up 13% with solutions revenue of $1.1 billion, up 14%. Operating expense was $608 million, up 8%, leading to an operating margin of 57% and an EBITDA margin of 60%, both up 2 percentage points. This resulted in net income of $549 million and diluted EPS of $0.96, up 21%. Slide 12 shows the drivers of our 13% net revenue growth for the quarter. We generated 10 percentage points of offer, driven by new and existing clients and product innovation. Meanwhile, beta factors contributed 3 percentage points of growth this quarter, driven by higher overall volumes in market services, onetime items in FinTech, representing just under 1 percentage point of beta and higher volumes in index derivatives. Let's review division results starting on Slide 14. In capital access platforms, we delivered revenue of $565 million, up 10% with ARR growth of 7%. Data and listings revenue was up 9% in the quarter with ARR up 8%. Data revenue growth was strong and driven primarily by upsells and pricing. Listings revenue benefited from the improving IPO environment, pricing increases and a $2 million onetime benefit from prior period application fees partially offset by delisting and lower amortization of prior period initial listing fees, in line with our previous comments. Index revenue was up 14% in the quarter, with ARR up 6%, driven by record average ETP AUM of $877 billion. The quarter's performance reflects Index's ability to deliver inputs in a volatile macro environment, including the Nasdaq-100 declining 6% in market performance in the first quarter. ETP AUM reflected $79 billion in net inflows over the last 12 months, including $6 billion in the first quarter. As Adena said, we are encouraged by the momentum of ETP inflows we are experiencing earlier in the second quarter with $15 billion of net inflows as of April 20. Annual rent based growth was partially offset by a decline in volume-based revenue versus the prior year period, driven by continued mix shift in derivative volumes from higher-priced muni contracts to lower-priced micro and mini contracts due to higher retail volumes and a year-over-year decline in capture. Those factors were partially offset by record derivative volumes, up 9% in the quarter. In Workflow and Insights, revenue was up 6% in the quarter with ARR growth also at 6%. The revenue increase was driven primarily by analytics, mainly investment and Datalink, with both businesses benefiting from strong sales momentum, client engagement to the platform's AI capabilities and demand for data to power AI. Corporate Solutions revenue was essentially flat, driven by the trends we have previously described. Quarterly operating margin for the division was 62%, up 2 percentage points versus the prior year period. Moving to Financial Technology on Slide 15. The quarter reflected record revenue and ARR growth. Revenue was $517 million, up 18%, with ARR growth of 16%. Our business continues to experience strong demand across all fintech subdivisions and high levels of client engagement. We had very strong ACV bookings growth of more than 50% in the quarter versus the prior year period, setting a new first quarter bookings record as we executed on our land and expand strategy. 80% of those ACV bookings were cloud-based deals, reflecting our position as the trusted transformation partner to drive modernization for our clients. The division signed new clients, 85 upsells and 1 cross-sell in the quarter with another cross-sell signed early in the second quarter. Gross sales continue to represent over 15% of the Financial Technology division pipeline with strength across all 3 subdivisions. Financial client management technology revenue grew 21% in the quarter. with AR growth of 17% and net revenue retention of 110%. We signed 58 new SMB clients in the first quarter compared to 35% in the prior year period with a 24% year-over-year increase in ACV bookings from SMBs. In enterprise, we signed 1 expansion and 2 renewal deals during the quarter as well as 1 new Tier 1 cross-sell and on upsell early in the second quarter. As we discussed last quarter, the sequential revenue improvement in the fourth quarter was primarily driven by professional services fees related to SMB and enterprise client implementations. And as such, we did not expect to maintain those levels over the first half of 2026 based on the implementation timing for deals signed in the second half of 2025. Regulatory Technologies delivered revenue growth of 12% and ARR growth of 13%. Revenue growth in the quarter reflects strong performance in surveillance and solid growth in AkzoMasel, driven by our successful sales execution as well as sequentially improved professional services revenue, consistent with our previous comments. Capital Markets Technology revenue grew 20% with AR growth of 18%. This quarter's exceptional performance reflects ongoing momentum and broad-based demand across Calypso, Market Technology and trade management services. Specifically, we had strong demand for data center services in trade management services. A large increase in upfront revenue recognition versus a year ago related to on-prem Calypso deals signed and renewed in the quarter and 2 onetime items which were termination fees related to M&A in Market Tech operators, representing 4 percentage points of capital market tech revenue growth in the quarter. Financial Technology quarterly operating margin was 47%, up nearly 3 percentage points versus the prior year period. Turning to Market Services on Slide 16. We had record net revenue of $317 million, up 10%. Growth was primarily driven by record market volumes in U.S. equities and U.S. options volumes increasing in European equities and strong volumes in Canadian equities due primarily to market volatility in commodities. We also continued to deliver alpha as reflected in strong revenue growth in index options elevated market share in U.S. equities and U.S. options, strong initial adoption of newly launched short-stated options products and elevated capture in European derivatives. This was partially offset by lower capture in U.S. equities and U.S. options driven by the strong volumes we mentioned in the quarter coming with a mix shift towards lower revenue capture order flow. We continue to manage effectively the balance between capture and market share while maintaining our strong lead in U.S. equities capture and in U.S. options market share. Quarterly operating margin for the division was 63%, up 2 percentage points versus the prior year period. Moving to expense on Slide 17. We had operating expense of $608 million in the first quarter, an increase of 8%, driven by investments in people and technology to support revenue and drive innovation and higher compensation costs related to delivering strong revenue performance. The first quarter operating margin was 57%, and the EBITDA margin was 60%, both up 2 percentage points versus the prior year period. We are updating our non-GAAP expense guidance for the year to a range of $2.485 billion to $2.545 billion from $2.455 billion to $2.535 billion. given the strong revenue performance we have experienced year-to-date. Our updated guidance assumes an FX impact consistent with our previous expectations. Looking ahead, we expect a higher expense growth rate in the second quarter than the first quarter, driven in part by the timing of our annual compensation cycle consistent with the prior year. We maintain our 2026 non-GAAP tax rate guidance of 22.5% to 24.5%. Turning to capital allocation on Slide 18. Nasdaq generated free cash flow of $629 million in the first quarter and $2.1 billion in free cash flow over the last 12 months at a conversion ratio of 12%. Without the impact of the timing of tax payments, the conversion ratio would have been 108%. We paid a dividend of $0.27 per share or $153 million in the quarter representing a 29% annualized payout ratio. As a reminder, we announced at Investor Day that our Board has approved an increase in our dividend by $0.04 per share to $0.31 per share going forward, which will be reflected in the June payment. We ended the quarter with a gross leverage ratio of 2.8x within the mid- to high to target we established at Investor Day. We took advantage of market volatility and accelerated our share repurchases. In the first quarter, we repurchased $548 million as compared to a total of $616 million of repurchases in all of 2025. In combination with the dividend, Nasdaq returned over $700 million to shareholders in the first quarter. In closing, Nasdaq delivered excellent results in a dynamic operating environment. reinforcing our track record of delivering profitable and durable growth across macro cycles. As we highlighted at our Investor Day in February, we are the trusted transformation partner to our clients as they navigate structural shifts in the financial markets and accelerate their AI journey. The exceptional solutions revenue growth and record financial technology performance we delivered in the first quarter are important proof points of the Nasdaq story. They give us the confidence that we are achieving our ambitious strategic objectives and generating long-term value for our investors. With that, I'll open the call for Q&A. Operator: [Operator Instructions] And I show our first question comes from the line of Bill Katz from TD Cowen. William Katz: So at the Investor Day, I thought you guys did a great job of just sort of debunking some of the concerns around Agentic AI and it seems like there's some really good stats here this morning as well to that score. So maybe a 2-part question. Number one, can you maybe step back and help us frame out the Agentic AI capabilities for the Nasdaq platform itself? And then secondly, can you unpack some of the growth that you saw in the first quarter from clients just in terms of where you see the greatest uptake around Agentic-AI adoption? Adena Friedman: Bill, and when you say -- just so I can understand, when you say the Nasdaq platform itself, are you -- what do you mean? What are you referring to? William Katz: So your core business, like your expense structure, innovation, that kind of efficiencies, et cetera. Adena Friedman: I just wanted to make sure. Okay, great. I just wanted to make sure we were on the same page. So thank you for the comments and the question. So as we mentioned at Investor Day, we do have an internal program to drive AI adoption within the operations of Nasdaq, and we say that's AI on the business. And we are focused in some key areas, and we have a program in place where we are striving to achieve $100 million of expense efficiencies by the end of 2027 and we also did mention that the majority of that will show up in 2027 because we also are making investments in AI to make sure that we can achieve those efficiencies. And so as we are focused -- where we're focused is certainly on making sure we're automating key elements of the product development life cycle, making sure we're creating new automations and capabilities for our clients in the client success area in terms of client service, implementations and managing our client interactions as they're working with our systems and our products. And then also, we have other areas across our expert teams, too. We have automation and finance, in marketing, legal, HR, all of those areas have benefits that are coming in from the Gen AI capabilities that we see across the business. It's an exciting time. I have to tell you to understand and tap into the technology and the benefits it can provide. If I were to highlight on product development, I think the most exciting part of that is our ability to speed up the ability to deliver new capabilities to clients. to use automation to really make sure that the code that we're delivering is really clean. It's fit for purpose. It's really and you can be more creative as a product team, if you know you can deliver things faster. So it's pretty exciting in terms of how we're thinking about the product road maps as well. So hopefully, that answers your question on that. In terms of the areas where our clients are seeing the most benefit from our AI capabilities, anti-fincrime is a key area because we have so many ways to automate workflows associated with financial crime management in terms of there's a lot of manual work that goes into investigating potential actors to managing on the regulatory reports. And that -- all of that, we have automation tools around. We're now bringing some of those automation tools into the surveillance area and into the AxiomSL regulatory reporting areas. So we're also kind of building once deploying many in terms of the skills that we're learning from these deployments. And then as we mentioned, AxiomSL, we have some clients that are signing up and going to our cloud-based solutions because we are only offering our AI capabilities through the cloud-based solutions, and they really like the automation that we can bring in from a regulatory reporting perspective. And then in CAP, we have AI deeply embedded in our Boardvantage tool to summarize Board documents and board and also Board agendas to make it so you can auto build board agenda in addition to an IR. So it's kind of everywhere. Some of the products we purposely charge for and some of the products are embedded in the products so that we work with our clients on thinking about the value that they're getting upon renewal. Operator: And I share your next question comes from the line of Alexander Blostein from Goldman Sachs. Alexander Blostein: I was hoping we can double-click on trends you're seeing in fintech, in particular, in Capital Market stack. Sarah, you highlighted to a couple of drivers this quarter. But given the really strong momentum in ARR even sequentially, I was hoping you can give us a little more detail on where you're seeing the incremental uptake, particularly within cap markets as well as your view for the rest of the year within that segment. Adena Friedman: Great. Thank you. So there -- as we mentioned, there's actually good momentum across all 3 elements of the Capital Markets Tech business. We start with trade management services where we offer connectivity services to our clients who trade within the Nasdaq exchanges. There, we're definitely seeing more and more interest in having -- bringing in more connectivity capabilities to make sure that they can manage the volumes in the markets, but also to drive new strategies that they want to execute within our markets. And so that has been -- and also, as a reminder, we did expand our data center last year. So I think that -- 2 years ago, sorry. So we have more opportunity to offer capabilities to our clients now with the larger data center footprint that we have. But it does -- and we're working on some new innovations within the data center, too, in terms of making some investments in like cooling and other things to really continue to allow our clients to drive new strategies in the markets. So that's exciting. And as Sarah mentioned, and I think I did too, that we did have a pricing increase as well in that business this year. With regard to Calypso, the key areas that we're really seeing -- we're seeing a lot of demand across the world for 1 thing. The second thing is collateral management, as you know, is one of our strongest modules within Calypso and we definitely are seeing really strong momentum in collateral management demand from our clients. And then I think that within -- and also international, it's really -- we have a lot of demand actually both, I think, domestically and internationally in Calypso. So in market technology, we definitely see a lot of trading opportunities with new asset classes, new areas of new markets that are coming up. In addition to modernizing our core clientele, we have had really good success and bringing our clients into the next-generation trading and clearing solutions. And then also, we launched an intelligence suite, which we kind of allow our clients, we have it internally. But basically, a modern way for them to manage all their data within their infrastructure. And that's been a really great, I would say, add-on sale to our clients as they're thinking about how they leverage AI they're leveraging us to kind of help them modernize their data management infrastructure. So those are the areas of demand, Alex, that we're really focused on, and it is driving good momentum. We don't give outlook kind of specifically we give long-term or medium- to long-term outlook. But we are definitely seeing really good demand and momentum across all 3 areas of fintech and Capital Markets day. Operator: And our next question comes from the line of Dan Fannon from Jefferies. Daniel Fannon: I wanted to expand upon your comments on the strength in data. I think you've mentioned 24/5 and some of the growth internationally from clients. So I was hoping you could just expand a bit upon that and how you see that progressing as we think about the year. Adena Friedman: Sure. Well, it's been interesting over the last really 5 to 6 years, we've seen a broad-based increase in demand internationally for Nasdaq's market data. And I think part of it is the fact that there's just more demand for the companies that are listed on Nasdaq and U.S. equities in general from global investors. The second thing is that retail investors have really kind of grown and expanded around the world, and there's just more accessibility to the U.S. markets by retail investors. And so retail brokerage platforms around the world want to be able to provide real-time access to the market data from our markets. And so all of that has been driving kind of a longer-term trend of global expansion of data. We have though seen some acceleration of that in the last, I would say, a year, so it's not just in this quarter but over the last year, as 23/5 trading in U.S. equities is both there is some trading that already occurs in the dark today. But as these firms are getting ready for 23/5 trading with lit markets like ours and central transparency, I think they're getting themselves ready to be able to offer those capabilities so they can trade in domestic hours and that is definitely driving more demand for enterprise license deals with our clients around the world. Operator: And I share your next question in the queue comes from the line of Ben Budish from Barclays. Benjamin Budish: I wanted to ask about index revenues in the quarter they were down a bit sequentially when your volumes are quite good. Average AUM was up. I know there's a dynamic with the CME fee sort of resetting at the beginning of the year, but it looks like the volumes are quite strong. So I'm curious if there's anything else going on in the quarter, if there's any color on the timing of that fee reset and what that means for Q2. Sarah Youngwood: So what we've experienced is a mix shift in futures. And I talked about that as the retail is driving more micro volumes and that at a lower capture than the mini. So that was the main driver. The volume in futures was actually good. And then there is a second, but let's say, smaller driver, which is in a little bit of a continued mix shift, and that's the story we've been telling in the ETP AUM as we go towards a bit more institutional. Adena Friedman: And on the reset, I think that definitely, we achieved -- you're right that the fees -- the kind of sharing agreement resets of the year-over-year -- and we saw that we kind of had -- we've now gone to the higher tier as of the end of Q1. So that will come in -- start to come in at a higher level in Q2. Operator: And I share our next question in the queue comes from the line of Owen Lau from Clear Street. Owen Lau: So far your tokenization strategy, could you please give us an updated time line on your tokenized trading capabilities? I know you have 23/5 trading going on, but what are the remaining hurdles you need to cross before you can execute the first 3? Adena Friedman: Sure. Well, we are very active in working with DTCC and with the industry can make sure that we're doing this in lockstep and we're doing it in an organized way. I think that DCCC has significant efforts underway, and they have at least expressed an interest in trying to get to that first trade that you mentioned before the end of the year. So that's, I think, the goal that they have and they're working collaboratively with us as well as with industry players to goes through the whole process, make sure that they're advancing their systems, doing some -- they're going to want to do test trades as they get further into the year and that allows us to be able to get to that, as you said, kind of first trade. I would say though, it's likely that this will still be an early -- kind of an early phase by the end of the year to make sure that we're -- the end-to-end is working seamlessly. So it's going to be a little while, Owen, but it's -- I mean, we're doing a lot of work together and it's going well so far. Operator: I show our next question comes from the line of Brian Bedell from Deutsche Bank. Brian Bedell: Maybe just Adena, you talked about the impact of always on markets, helping data, but can you also talk about the potential impact across your fintech platform as the clients increasingly need to respond to always on, particularly in the Calypso and Capital Markets business. I know we talked about in the past the initial guidance from the Adenza businesses didn't contemplate crypto as much and that's already been a help. To what extent do you see this always on dynamic advancing growth in these businesses? Adena Friedman: Yes. So I think that the areas that we're seeing -- we're having a lot of conversations with clients, and in some cases, already clients are signing up for expanded services I would say the first one is surveillance. So even without the established markets being there, they do want to be able to surveil activity, trading activity, if they are, in fact, offering it to clients during the during the international hours that exist today. So that's already driving demand in terms of surveillance clients. also our trading. So our clients around the world who are other markets who are looking at how do they want to expand their trading hours and really kind of continue to modernize our infrastructure around trading that is driving more demand for our Eclipse trading platform because it is built to be able to support 24/7. And then the third thing is in Calypso, as you mentioned, collateral management, risk management, capital management, just core trade infrastructure. While Calypso generally supports OTC instruments, there is just a move and desire to make sure that they are able to support collateral management across all their markets and they are connected into both clearing firms and clearing houses. And certainly, the U.S. markets move there. I think that, that's something that they're definitely seeing more demand for collateral management. And then trade management services within Capital Markets Tech also as firms are thinking about how are they going to be support 23/5 markets themselves, and they want to come in and have more colocation capabilities that's also driving some demand. So those are areas that we are having active dialogue with clients as we prepare for 23/5. Operator: And our next question comes from the line of Michael Cho from JPMorgan. Y. Cho: I just wanted to touch on the index business again. I think one of the benefits you cited in terms of licensing it to BlackRock and State Street is on access to new investors. And so I was wondering what kind of incremental investor segments do you think BlackRock and State Street might provide for Nasdaq? And then just longer term, how are you thinking about the potential for AUM and product expansion from the index licensing versus any licensing fee changes that might M&A in the coming years. I'm just looking at the evolution of other flagship index providers who have been more susceptible to that than Nasdaq in the past. Adena Friedman: Sure. So well, just to touch on the pricing point, just to make sure we're clear, with the new relationships that we have with BlackRock and State Street, the index pricing licensing terms are the same as for QQQ. So that's not changing our pricing paradigm. What we're really focused on with BlackRock and State Street is they have their own unique investor universe. So they have incredible distribution out into the institutional ecosystem as well as broad-based retail investor base. And they complement Invesco, who has been and continues to be an amazing partner to us. So we're at this point where the Nasdaq-100 is really becoming a core component of an investment strategy. among asset owners, insurance companies. And we want to make sure that we can distribute it out through the channels that they usually use right? So they're not having to -- they can leverage the relationships they already have with BlackRock or State Street in order to get access to these products in a seamless way. And so it does feel like the right next step for us, in a way, a new chapter of growth and expansion for the Nasdaq-100 as we continue to execute on global growth, as well as institutional growth of that index. It also -- we already do work with State Street and BlackRock and other product areas. So it just kind of continues to -- an evolution of our relationships there. to make sure that we can leverage the strength of their platforms for our flagship product, while we also work with them on new product expansion. In terms of just generally across the index business, we are very fortunate to have an index franchise that's really focused on innovation oriented and thematic indexes that we work really collaboratively with our partners. We use all of our marketing assets to be able to drive distribution and adoption of these products. And I think the way that we partner with our clients allows us to have a fee base that we feel very confident that we're delivering great value to them, but also value to us. And we would expect that to continue as we launch other new products. Operator: And our next question comes from the line of Elias Abboud from Bank of America. Elias Abboud: Anthropic's new Mythos model is expected to post significant cybersecurity risks for financial institutions. So as one of the largest bank software vendors, I was wondering if you previewed Mythos and if you can speak to the extent to which the release poses risks or creates liability for Nasdaq. And then separately, does it create any new opportunities? Is bank cybersecurity an interesting adjacency for you? Or is that too far afield from your current business? Adena Friedman: So I'll answer the second question first, which is that there are amazing cyber companies, many of which are listed on Nasdaq that provide very, very advanced cyber capabilities to us and to our bank clients. And we would expect that we will continue to partner with them and we'd expect the banks to continue to partner with them. And speaking of them, we have a lot of engagement with our cyber partners, with our hyperscaler partners with the banks and with the government on how new models are being introduced into the financial industry. We're very careful in how we bring new models into Nasdaq. We do leverage Bedrock, which is AWS' AI platform infrastructure to support a lot of our AI infrastructure here at Nasdaq as well as we work with Microsoft and like Azure. So we have these great partners that help us make sure that we're protecting ourselves. We do a lot of extra production. And then we will test models extensively before we bring any new models into our infrastructure, we do a lot of testing of models. So we're not going to just race forward with any new model and bring it in. We do a lot of work first to determine if it's got utility and then to do incredible IT security reviews on it. And then we'll bring it in and determine how it can be best used for our purposes. I also think as these new models come in, there obviously are going to be new protections that both the LLM providers, but also their partners will provide to make sure that they can be brought in securely. Operator: And I show our next question comes from the line of Patrick Moley from Piper Sandler. Patrick Moley: Big picture one for me on tokenization. You mentioned the equity token design, putting issuers at the center of ownership rights, governance, investor experience. So is tokenized settlement and 24/5 trading becomes a reality, Adena, I'm wondering if you see this fundamentally transforming the IPO process itself particularly as it relates to expanding global retail access and reducing some of the frictions and costs associated with traditional underwriting. And if so, does this represent any sort of structural opportunity that investors might not be Nasdaq's ability to grow the list. Adena Friedman: Yes. So I think the first thing I'd say is there are multiple paths to the public markets today in terms of you can have a direct listing, you can have a SPAC combination, you can have an IPO. So there are choices. In terms of trading and organization changing, I mean, I do think that the nature of securities, I mean, the actual construct of the underlying CUSIP and the technological capabilities that provides are interesting and obviously allow for the free flow of capital allowed potentially for companies to have more direct interaction with investors over time. But I also think that the IPO process or the go public process is a huge after taking to engage with both institutional and retail investors to make sure that you're unlocking that demand prior to the day that you enter the public markets. And there is value to that process. Whether it's through a direct listing or through an IPO or SPAC combination, that engagement with investors leading up to it, and in some -- certainly, the underwriting for new capital being raised and making sure that you're getting support in the stock in the first few days and weeks of trading, I think, is important. But I can't say that I think that tokenization has an opportunity to unlock and expand investor reach during that process. It can improve engagement with retail investors as they're going through that process. But I'm not envisioning a fundamental change in the IPO process, I have to say. I think only time will tell if that's an opportunity. Operator: And our next question comes from the line of Jeff Schmitt from William Blair. Jeffrey Schmitt: You'd mentioned you're working on outcome-related options in Market Services. Would these be similar to prediction market products? And could you just provide some more detail on what you're doing there? Adena Friedman: Yes, sure. Yes, they are -- essentially, you can call them outcome-oriented or event options. Think about them as -- and the first one that we are seeking approval from the SEC is an option on predicting the future performance of the Nasdaq 100. So it's some people call binary option, I guess, now, is it going to go up or down kind of thing. And so it is a way to bring the notion of our prediction market construct into a regulated market. The nice thing is with our options business is it is fully overseen by the SEC, and we have a lot of regulatory controls in place. We're working with OCC, which is the clearing house to make sure that we think about the risk models around it and the margin models so that we can kind of introduce the notion of, what I would call, entry-level options into a marketplace that has a regulatory framework that's very well established. So it is our first effort in that area. Operator: And I share our next question comes from the line of Ashish Sabadra from RBC Capital Markets. Ashish Sabadra: Very strong ACV momentum in Verafin and you also talked about the Tier 1 plant signed in 2Q. My question was, can you talk about the pipeline for Tier 1, Tier 2 clients. And just a follow-up there would be, as we think about these implementations going live, is it fair for us to assume that we start getting the ARR growth back into the midterm range as we get into the back half of the year? Adena Friedman: Great. Thank you. Well, actually, as Sarah had mentioned, with a lot of the signings that we had in the latter half of last year. So our momentum in enterprise signings really picked up as we went through last year, we had, I think, more than double -- it's not triple the number of signings last year versus the prior year. But a lot of it has happened in the second half. So -- and we don't recognize ARR in the clients until they're fully implemented. So we are still in implementation mode for a fair number of those clients in addition to obviously, anything we signed in the first quarter. So we do anticipate that the benefits of those deals will start to flow in later in this year. I think the second thing is that our pipeline is very strong. We have amazing engagement across a wide range of clients either in POC where they're testing us or in contract negotiation or we're having really just good dialogue with them as you're thinking about modernizing their [ ASC ] capabilities. So the pipeline is strong. The activity and the signings have been very strong, and we're excited to start to show the benefit of that as we implement the clients. Operator: And I show our next question comes from the line of Alex Kramm from UBS. Alex Kramm: Just wanted to come back quickly on the capital markets disclosures that Sarah gave on those cancellations. So first of all, is that fully in the run rate? Or is that still coming out of I think you mentioned a 4% onetimer. So does that mean that maybe there's a 1% headwind to growth? Or maybe you can just size up what kind of headwind that is? And then overall, as we think longer term with the expectation that bank M&A may be picking up, do you expect to see more of these? Or do you think these are kind of like onetime events here or unusual events. Sarah Youngwood: Yes. So I would say that the impact going forward is actually not very much that the 4 percentage points you have very correct, which is that is a positive this quarter which we have put on as described as M&A related. It's a of market operators, which is really different than bank M&A. And so we're not seeing very much of that happening. It just so happens that we had that hit this quarter. And those have been a long time in coming in terms of like our awareness of them. So we're not seeing a sequence of those as a trend at all. Adena Friedman: And I think Sarah also, the termination fees are not commensurate with the actual ACV value. It's different. So the ACV value of these as they're going to come out of ARR is quite modest versus the termination fees that we received as a result of the changes. Operator: And I share our last question in the queue comes from the line of Michael Cyprys from Morgan Stanley. Michael Cyprys: Just wanted to ask about 23/5 trading that's expected to launch. I heard you mentioned on December 6. I was hoping could update us on the steps that you're taking between now and then, how do you see this rolling out? What sort of milestones do you anticipate in the first year. We also hear some hesitation from certain market participants out there, some hesitation just around including around potentially limited liquidity in the overnight session. So I guess, just what sort of steps are you taking to address some of those concerns out there? Adena Friedman: Sure. So in terms of -- I'll actually take the last question first. I would say anytime that you have change in the industry, there are people who are excited about it and people who get nervous about it. That's just -- I think that's actually quite healthy because you want to make sure that you're thinking through concerns as you're trying to progress the market. Today, if you look at the volumes that occur today. So we operate from 4:00 a.m. to 8 p.m., our systems are open for trading during that period of time outside of our hours. So from 8 p.m. to 4 a.m. U.S. time, the -- there is about 2% of volumes is occurring today. So 2 percentage points of volume. So there is volume occurring outside the hours of operations for our business. So we are excited to be able to tap into that demand that market activity, but also to really use the infrastructure that we're putting in place and that the industry is putting in place to make sure we can grow that. And so what we're doing is making sure that as we go forward, as of December not only is Nasdaq launching its venue, but the tape has announced that they're launching the consolidated tape to be -- make it so that all national best bid in offer and less sale will be available. Obviously, our market data will be available. And so you'll have a more market environment. You'll also have -- we also have MarketWatch, expanding our hours of Market Watch, expanding hours of our market operations team, our tech ops, our network ops, all of those organizations will be expanded to make sure we can we can support the clients that are coming in and trading across the globe. And then we also will make sure that as we launch that we have a lot of investor education. We want to make sure that we're working with retail brokers and through the -- when we make a sale of our market data, we often work with them also on education and other things that they can do to promote and make sure that their investors are ready to be able to trade our securities. So it's a holistic effort, and we would expect over time, but I also would say it's an evolution, not a revolution to see expansion of investor interest across the globe to have the opportunity to trade in their home hours and to have liquidity throughout the 23-hour period. I would point out that the Nasdaq futures, Nasdaq-100's futures trades 24/5 today. So the idea of being able to trade in the future, trade the ETFs and trade the underlying all in domestic hours for that -- for those stocks is exciting, but it is going to be offered to every stock across the U.S. equities market. So I see it as a natural next step here, but it will take time to make it so that there's a lot of penetration. Operator: That concludes our Q&A session for today. I would now like to turn the conference back over to Adena Friedman, President and CEO, for closing remarks. Adena Friedman: Great. Well, thank you very much. We are very pleased with the performance and momentum across Nasdaq as we execute our strategy to modernize markets power the innovation economy and build trust in the financial system. Thank you very much for joining the call, and have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.
Operator: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the PulteGroup, Inc. Q1 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, please press 1 again. Thank you. I would now like to turn the call over to James Zeumer, Vice President of Investor Relations. Please go ahead. James Zeumer: Thank you, Kelvin, and good morning. I want to welcome everyone to today's call to review PulteGroup, Inc.'s operating and financial results for our first quarter ended 03/31/2026. Joining me on today's call are Ryan Marshall, President and CEO; Jim Ossowski, Executive Vice President and CFO; and David Carrier, Senior Vice President, Finance. In advance of this call, a copy of our Q1 earnings release and this morning's webcast presentation have been posted to our corporate website at pultegroup.com. We will also post an audio replay of this call later today. I would highlight that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments made today. The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Now let me turn the call over to Ryan. Ryan? Ryan Marshall: I made the following statement to the senior leaders of PulteGroup, Inc.'s homebuilding and financial services operations. In a quarter that grew increasingly more complicated, you delivered exceptional results both operationally and financially. I offer the same thoughts to open this call. In a period that saw every aspect of our consumers' lives impacted by domestic and global events, our discipline, focus, and proven business platform allowed us to deliver another quarter of strong business performance. Financially, our $3.3 billion in home sale revenues, 24.4% gross margins, and lower share count all contributed to driving earnings of $1.79 per share. Supported by the ongoing strength of our operations, we positioned the company for future growth by investing $1.3 billion in land acquisition and development, while returning $360 million to shareholders through share repurchases and dividends. After having allocated $1.7 billion to these activities, we ended the quarter with $1.8 billion of cash and a net debt to capital ratio of effectively zero. Operationally, we were successful in growing our community count, which was an important driver of our 3% increase in net new orders. And as shown in this morning's release, our results benefited from 18% order growth in Florida, as our diversified business platform and exceptional land positions continue to deliver strong results. As pleased as I am with the growth in orders, I am even more encouraged with the fact that many of these homes are build-to-order homes. In the first quarter, build-to-order homes accounted for 43% of net new orders, up from 40% in Q1 of last year. On our last earnings call, we outlined our plans to shift our business back toward our historic mix of 60% build-to-order and 40% spec. This quarter was just the first step in a process that will take several quarters to complete, but I am encouraged by such early success. And finally, I would highlight the progress we continue to make on lowering our spec inventory, particularly our finished inventory. Reflecting actions taken by our field teams, we ended the quarter with an average of 1.4 finished specs per community, which is inside our target range of one to 1.5 finished specs per community. This level of spec inventory allows us to effectively serve those homebuyers needing quick move-in homes, while supporting our strategic shift back to selling more build-to-order homes. Overall, I would say that the first quarter developed as a typical spring selling season, with orders increasing sequentially as we moved through the months. It is difficult to determine what impact global events may have had, but we appreciate consumers were facing higher rates and costs in March. Through the first few weeks of April, demand conditions have remained on track with typical seasonal trends. Still, in the quarter, we experienced strong buyer traffic to our communities, and sold more than 8,000 homes, which says consumers remain actively engaged in home buying. And once again, our diversified business platform allowed us to capture the strongest segments of the business, namely the move-up and active adult buyers. Economic reports talk to the K-shaped economy and how lower- and middle-income families are struggling much more than those in upper incomes. Housing demand over the past two years has been consistent with these dynamics. We saw this play out again in our first quarter results, with both relative demand strength in our move-up and active adult businesses, and option and lot premium spend that continues to average over $100,000 per home. However, on the lower leg of the K, first-time buyers continue to struggle with the challenges of stretched affordability and fear of job loss. Our ability to offer low fixed-rate mortgages and other incentives is certainly helping solve the affordability riddle for some. But this comes at a price, as incentives in the quarter reached 10.9% of gross sales price. Even at this level, I think we have done an excellent job of balancing the need to sell homes, particularly finished spec homes, and turn our inventory, while maintaining higher margins in support of delivering strong returns on invested capital. A critical support to this balance has been our ongoing willingness to adjust our starts pace in alignment with core demand. We again demonstrated such discipline as we started approximately 6,500 homes against orders of 8,000 homes in the quarter. This approach helped us to clear excess inventory, and allowed our communities to more easily sell from a position of strength while still providing sufficient production to achieve expected closing volumes for the full year. While there is uncertainty about how events will develop over the next few quarters, I remain optimistic about long-term housing demand and confident about the strength of our business model. I could draft a long list of our strengths, but would highlight the following three key points. We control approximately 230,000 lots, including 35,000 owned and finished lots, so we have a land pipeline that we believe can meet current sales and accelerate as buyer demand improves going forward. We have a strong market presence across the major markets, and an unmatched ability to serve all buyer groups. We are benefiting currently from having 60% of our business among more affluent Pulte and Del Webb buyers, but we fully appreciate the importance of maintaining the presence of our Sentex brand among first-time buyers. And finally, we have a culture that is committed to delivering superior build quality and buyer experience and to raising that bar every day. Thank you. And let me turn the call over to Jim Ossowski for a review of our first quarter results. Jim? James Ossowski: Thank you, Ryan, and good morning. I look forward to providing a detailed review of PulteGroup, Inc.'s solid first quarter operating and financial results. On a year-over-year basis, first quarter net new orders increased 3% to 8,034 homes with a value of $4.6 billion. Higher net new orders in the period benefited from a 9% increase in average community count to 1,043, while absorption paces decreased by 5% to 2.6 homes per month. I would highlight that the growth in our net new orders was driven by the ongoing strength of our Florida operations. I am pleased to report that orders increased in every Florida market and were up 18% statewide. In addition to gradual improvements in Florida's new and existing home inventories, our strong performance reflects PulteGroup, Inc.'s superior land positions, our ability to serve all buyer groups, and our outstanding leadership teams. Our cancellation rate as a percentage of starting backlog in the quarter was 13% compared with 11% last year. The percentage increase in our cancellation rate reflects the smaller starting backlog we had entering the period, as unit cancellations are actually slightly down in the quarter relative to last year. In the first quarter, net new orders among move-up and active adult buyers were higher by 3% and 14%, respectively, over the first quarter of last year. Net new orders among first-time buyers decreased by less than 1% from Q1 of last year. By buyer group, net new orders in the first quarter consisted of 38% first-time, 39% move-up, and 23% active adult. In 2025, net new orders were 39% first-time, 40% move-up, and 21% active adult. Net new orders benefited from land investments made in prior years as we grew community count across all buyer groups. Home sale revenues in the first quarter were $3.3 billion compared with $3.7 billion last year. Lower home sale revenues for the period were the result of a 7% decrease in closings to 6,102 homes in combination with a 5% decrease in average sales price to $542,000. ASP was down mid-single digits across each buyer group and reflects the generally competitive conditions and elevated incentives that exist in many markets across the country. By buyer group, closings in the first quarter break down as follows: 38% first-time, 39% move-up, and 23% active adult. This compares with a prior-year closing mix of 38% first-time, 41% move-up, and 21% active adult. Based on sales and closings in the period, at the end of Q1, our backlog was 10,427 homes with a value of $6.5 billion. We ended the first quarter with 14,090 homes in production, of which 6,349 were spec homes. As Ryan highlighted, and consistent with our stated objective, we lowered total spec inventory by almost 900 homes from 2025. At quarter end, specs accounted for 45% of homes under construction. Of the specs under production, there were 1,515 finished spec homes, which is a decrease of nearly 500 homes, or 24%, in just the past 90 days. At this level, we are in our target range of having an average of one to 1.5 finished specs per community. Based on the homes under construction and their stage of production, we expect to close between 6,700 and 7,100 homes in Q2 2026. This keeps us on track with our previous guidance on closings, in the range of 28,500 to 29,000 homes for full year 2026. Consistent with the guide we provided on our last earnings call, given land investments made in prior years, we expect year-over-year community count growth of 3% to 5% in each of the remaining months of 2026. Given competitive market conditions and our belief that incentives will remain elevated, we expect the average sales price of second quarter closings to be in the range of $540,000 to $550,000. For full year 2026, we reaffirm our previous guidance of ASP of $550,000 to $560,000 as we expect a higher mix of build-to-order closings in the third and fourth quarters. For the first quarter, we reported gross margin of 24.4%, which is down from 27.5% in 2025. The year-over-year decline in gross margin primarily reflects higher incentives, which were 10.9% of gross sales price in Q1 2026. This is an increase of 290 basis points from last year and is up 100 basis points sequentially from Q4 2025. As we are getting the question more frequently of late, I would note that within our Q1 home sale cost of revenues is approximately $6 million, or 20 basis points, associated with land impairments. Based on quarterly testing, impairments were triggered in two communities and are reflective of today's competitive market dynamics in combination with our ongoing efforts to clear excess spec inventory, particularly finished specs. I am pleased to report that, thanks to a lot of outstanding work by our construction and procurement teams, Q1 house costs were down 5% from the first quarter of last year, to $75 per square foot. Savings were led by lower lumber costs, but we have also achieved savings across a wide array of building products and services. Based on anticipated closing mix and current selling conditions, we expect second quarter gross margin to be in the range of 24.1% to 24.4%. I would note that we expect Q2 gross margins to be the low point for 2026. We are forecasting gross margins to recover in the back half of the year as we benefit from increased closings of higher margin active adult and build-to-order homes. As such, we maintain our guide for full year 2026 gross margin to be in the range of 24.5% to 25%, although likely toward the lower end of the range. First quarter homebuilding SG&A expense of $380 million, or 11.5% of home sale revenues, compared with $393 million, or 10.5%, in Q1 of last year. On a dollar basis, SG&A expense in the quarter was down $13 million from last year, though we lost leverage given fewer home closings and revenues in the period. First quarter SG&A expense was in line with prior guidance, so we are maintaining our guidance for full year 2026 expense to be in the range of 9.5% to 9.7% of home sale revenues. Our Financial Services operations reported first quarter pretax income of $13 million, which is down from pretax income of $36 million in the first quarter of 2025. Financial Services pretax income in the first quarter was impacted by lower homebuilding volumes and reduced capture rate along with lower net gains from the sale of mortgages. Mortgage capture rate in the period was 85%, compared with 86% last year. First quarter pretax income for the Group was $449 million. In the period, we recorded a tax expense of $102 million, or an effective tax rate of 22.8%. Our Q1 tax rate reflects the benefits of stock-based compensation and federal tax credits. Looking out to the remainder of the year, we continue to expect our tax rate to be approximately 24.5%. Our expected tax rate does not take into consideration any discrete period-specific tax events that might occur. PulteGroup, Inc.'s net income for the first quarter was $347 million, or $1.79 per share. In the comparable prior-year period, the company reported net income of $523 million, or $2.57 per share. Earnings per share for the first quarter were calculated based on 193 million diluted shares outstanding, which is down 5% from the prior year. In the first quarter, we repurchased 2.4 million common shares for $308 million, which brings total repurchases for the trailing 12 months to 10.3 million common shares for $1.2 billion. In a separate press release we issued this morning, we announced that our board authorized an additional $1.5 billion for share repurchases, which brings total availability to $2.1 billion. Along with returning capital to shareholders, we continue to prioritize investing in the growth of our operations. In the first quarter, we invested $1.3 billion in land acquisition and development, which was evenly split between the two activities. We ended the first quarter with 229,000 lots under control, which is down approximately 5,000 lots from 2025. We remain focused and disciplined in our land activities, as we look for opportunities to grow our business while achieving acceptable risk-adjusted returns and managing overall portfolio risk. After 24 months of variable housing demand and limited opportunities for price appreciation, land inflation has started to ease. We are seeing land prices stabilize in many parts of the country, and even move lower in individual deals in a handful of markets. Every land deal is different, and A locations are still in demand, but we are finding more opportunities to negotiate improved land terms, be it the price, the timing, or both. In the first quarter, we issued $800 million of senior notes split equally in tranches of five and ten years. We used approximately $600 million of the proceeds to repay existing notes with the remaining $200 million to be used for general corporate purposes. Inclusive of these transactions, we ended the first quarter with a debt to capital ratio of 12.3%. Adjusting for the $1.8 billion of cash we held at quarter end, our net debt to capital ratio was effectively zero. Given current market dynamics, and our expected 3% to 5% growth in community count, we are projecting land acquisition and development spend of $5.4 billion in 2026. Assuming this level of land spend and the expectation that house inventory will increase commensurate with an increasing level of build-to-order home sales, we would expect 2026 cash flow generation to be approximately $1 billion. Overall, it was another very productive quarter for the company. Now let me turn the call back to Ryan. Thanks, Jim. Ryan Marshall: Before opening the call to questions, I will offer a few additional comments on demand conditions in the quarter. Given everything that is happening in the world, demand has actually held up better than might be expected and could certainly improve if global tensions eased and interest rates came back toward 6%. This would be highly consistent with the increased buyer activity we saw developing early in the first quarter when mortgage rates dipped below 6%. Consistent with trends we experienced in 2025, the pockets of home buying demand strength and softness did not change dramatically. Home buying demand in our Northeast, Southeast, and Florida markets generally remained positive. First quarter demand in the Midwest was more variable across the markets than we had been experiencing. That being said, the weather conditions were a bit more extreme, so we will have to see how the trends progress over the next couple of quarters. As I highlighted earlier, our Florida teams continue to operate at a high level as we benefit from a strong land pipeline and experienced leadership teams. Looking out to our Texas and West markets, overall demand trends remain slower relative to the rest of the country, but I would suggest they may be finding more stable footing. Between ongoing pricing actions and incentives, the markets are finding clearing prices where transactions can happen. We still have work to do in clearing some final spec inventory in California and Washington, but I am hopeful we are getting to the end of this tunnel. One final comment I would share on buyer demand: well-positioned communities that offer the right product and a compelling value equation to the consumer are selling homes. From Boston to Naples, and Raleigh to San Jose, consumers are looking for the opportunity to buy homes that work for their state of life and their financial capabilities. Our job is to make sure PulteGroup, Inc. communities meet the requirements. Let me close by thanking the entire PulteGroup, Inc. organization for the great first quarter operating and financial results the company delivered. I also want to recognize our team for their tireless efforts to deliver a superior home buying experience. I am proud to report that our customer surveys are now showing PulteGroup, Inc.'s Net Promoter Score, as measured one full year after the initial delivery of the home, has risen to a score of 65. To put this in perspective, these results place PulteGroup, Inc. among such well-known service leaders as Apple, Google, and Chick-fil-A. It is this type of commitment to our customers and to each other that has PulteGroup, Inc. again ranked among the Fortune 100 Best Companies to Work For. This marks Pulte's sixth year on this prestigious list. Our ranking on this list has never been a goal, but rather an outcome of the tremendous culture we work hard to maintain inside of our organization. Now let me turn the call over to Jim Zeumer. James Zeumer: Great. Thanks, Ryan. We will now open the call for questions. So we can get to as many questions as possible during the remaining time of this call, we ask that you limit yourself to one question and one follow-up. Kelvin, please open the call to questions. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As we enter Q&A, we ask that you please limit your input to one question and one follow-up. As a reminder, to ask a question, please press the star button followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. Your first question comes from the line of John Lovallo of UBS. Please go ahead. John Lovallo: Good morning, guys. Thanks for taking my questions. The first one is, can you just help us with some of the moving pieces in the gross margin walk from roughly 24.4% in the first half to 24.5% to 25% for the full year? I mean, it certainly seems like closing mix is going to be a good guy; sticks and bricks could be a good guy; land may be a little bit better than it had been. Then the incentive load, are you still assuming sort of 10.9% carries throughout the year? Ryan Marshall: Yeah, John. I think you have got all the right pieces there. We are assuming a higher incentive load, but we would expect it to likely come down driven by a couple of factors. One would be more build-to-order and more move-up and active adult business, where we tend to incentivize less. We have also cleared a lot of the finished spec inventory, which we were carrying with a higher incentive load. So, while we would expect the overall environment to remain competitive and the elevated incentive load to stay, the mix of product and consumers that we have coming through could potentially bring the overall number down, which is why we are guiding to the full year staying within our range. You will note that Q2 is going to be a low point for a couple of reasons. One of the big reasons is that a lot of the spec inventory that we sold in Q1 at a higher incentive load are closing—some closed in Q1, and you have got a bunch more that are closing in Q2. John Lovallo: Okay. Yeah. That is really helpful. And, maybe just kind of echoing what you said, Ryan, before. It seems like the spring has actually been reasonably good considering a lot of factors in the market. Most builders have reported orders that are up year over year, indicating a little bit of a better spring despite this background of geopolitical headwinds. The question is, if we do, in fact, get some kind of resolution here to the conflict in the Middle East, do you think we could still have a really good spring selling season and, on top of that, is there a chance that it could get extended a bit maybe into June just given shorter cycle times for many of the builders? Ryan Marshall: Hard to know whether it gets extended or not, John. I think ultimately the consumer will have to decide that. But as I tried to highlight in my prepared remarks, when rates came down to 6%, maybe even a touch below 6%, things were moving along really well. Despite the things that are going on globally, it is still, I think, a very good spring selling season, and we are pretty pleased with what we have delivered and how it has set us up for the full year. I can promise you that we did not have any of the current geopolitical disruption on our bingo card as we laid out our full-year guide and set expectations for how the year would play out. But as we look at the actual numbers for Q1, we are in line with where we wanted to be and where we thought we were going to be, which is the big reason that we are reaffirming our full year. So, all things considered, I am incredibly pleased with how we performed. I am really pleased with how the consumer is behaving. And I think there is bias to the upside. If things can get resolved and rates were to come down a little bit, I think things could get even a little bit better. John Lovallo: That is encouraging. Thank you. Operator: Your next question comes from the line of Alan Ratner of Zelman. Please go ahead. Alan Ratner: Hey, guys. Good morning. Thanks for all the detail, and nice job in a tough market. You know, Ryan, you alluded to this several times, but I was hoping to dig in a little bit deeper on the incentive trends. Specifically, can you talk through the difference in incentives you offer both across price points as well as BTO versus spec? I see they were up sequentially and year over year across the averages, but I am curious if there is any notable difference across those price points or BTO versus spec? Ryan Marshall: Yeah, Alan. There is definitely more incentive on spec broadly. And then there is more incentive as a percentage on first-time spec. I tried to provide some nuance around that in my comments around the K economy. That first-time entry-level buyer is the most challenged by affordability, and that is where we have tried to lean in more in order to solve the affordability equation. I think we have done it pretty effectively. And then when you move into the move-up and the active adult buyers, we are incenting there as well; the types of incentives vary. There is still a fair number of incentives that are going into a forward commitment program that is specifically targeted to dirt sales. So it is not as low as a 30-year fixed-rate mortgage that we would offer on a spec that is complete, but still in the low- to mid-5% range and materially below the current market. And it is locked in for the entire duration of the build cycle. So there is a lot of value that we think is being offered there, and there is a cost to that, but that is factored in the incentive load. So all things considered, we do still expect incentives to remain higher. But given the mix shift in buyers as well as spec to build-to-order, we think the overall incentive load for us as a company will come down. Alan Ratner: Great. Second, I was hoping to ask about your land book. Land banking has become a bit of a hot button topic in the investment community over the last couple of months. You have seen a nice uptick in your share of lots held off-balance sheet, but I know that includes a lot of different things—traditional land options, land banking. Can you quantify for us your exposure to land banking and talk more broadly about how your land banking deals are generally structured? Are you making periodic interest payments? Are they more kind of on the back end in a PIK fashion? Any color you can give would be great. Thank you. Ryan Marshall: Sure, Alan. Happy to go into it. I am going to ask Jim to give you some of the specific details. But before he does, philosophically, the way we have structured our land book for the better part of six or seven years is we want as many lots as we can possibly control with underlying land sellers. And today, that represents well over 50% of our controlled land, controlled with options with underlying land sellers. In our move to go from 50% controlled option to 70%, we knew we were going to need to incorporate some element of land bank, and we have done that. We have maintained a diversified book of land banking partners, which I am very pleased with—the number of partners and the alignment that we have with those partners. And then our overriding focus has been we want risk transfer. So we are looking for the ability to walk away in the event that things go sideways on a single individual transaction. So this overarching belief or idea of risk transfer and risk mitigation is the entire foundation of our land banking portfolio. With that, I will have Jim share a few more details with you. James Ossowski: Sure. Thanks, Ryan. Alan, I will fill you in on a couple of things. As it relates to land banking, of the 229,000 lots that we control, we have about 18,000 with land bankers, so it is about 8% of the book of business. To Ryan's point, what we really want to do is get underlying optionality with land sellers directly. Of the 127,000 lots that we have under option, over 85% of those are with underlying land sellers. So again, it is the vast majority. That is what we task our teams to do—let us go for that first and foremost. If we can supplement it with banking, we will, but we would love to get a deal with people on the ground first. Alan Ratner: Great. That is really helpful. And, Jim, if you have it, of those 18,000 lots with land bankers, can you give a little bit of detail on how those are structured either in terms of average deposit and what the kind of carry is? James Ossowski: Most bankers that are out there today usually request about a 15% deposit on those. And then rates will be in the low double-digit range typically. To give you context, our deposits as a percentage of future purchases is only 7.5% for the whole company, and about $7,000 per unit for the whole company. So the vast majority are at very low deposits with underlying land sellers, but the bankers carry a little bit richer mix. Alan Ratner: Great. Really appreciate the detail, guys. Thanks a lot. Operator: Your next question comes from the line of Stephen Kim of Evercore ISI. Go ahead. Stephen Kim: Thanks very much, guys. Appreciate all that color, particularly on the land side. I wanted to talk a little bit about your free cash flow guide. I believe you said about $1 billion. Now the way I am modeling things, it seems like your net earnings are going to be much higher than that. So I was wondering if you could talk about the free cash flow conversion and what you see as being offset to the net income this year. Is it that you anticipate ending with a meaningfully higher owned land supply than you currently have, or is there something else going on? James Ossowski: Great question, Stephen. There is not an assumption that we have any significant increase in our owned land supply. We have certainly been working down our house inventory in recent quarters as we moved our spec down, but there is an anticipation there will be a little bit more build-to-order that is going to come in the back half of the year as we set ourselves up for 2027. So it is really on the house side, where we see a little bit of an incremental increase. Stephen Kim: I will take that as a real positive, obviously, because it suggests that this is just kind of a temporary thing and the free cash flow conversion should improve once you get over this build of BTO. First, is that in fact the way you see things? And where do you see the BTO mix of, let us say, orders or maybe closings finally reaching your 60% level? Is that something that could be reached by the end of this year, or is this something that is going to take well into next year to accomplish? Ryan Marshall: On the cash flow, the conversion of net income into cash flow is a big focus for us. We believe it is a very meaningful and powerful driver of value for shareholders. I think Jim provided some nice breadcrumbs in terms of where we are going and why it is at a billion. Hopefully there is a slight bias to the upside this year, but as we rebuild that inventory on build-to-order, I agree with you—this is a good thing. It means we are selling homes, and we are selling homes that are dirt. I do think it is a temporary situation. As we move into next year, you would see better, more normal conversion rates from us. As it relates to build-to-order, the target mix is 60/40. We made great progress in Q1. I would expect that to continue as we move through the year. The fact that we were able to reduce so much spec inventory in Q1 is also a powerful driver in that journey. I think it might take a tad longer than the end of this year, but not much beyond Q1 of next year. We will keep you updated as we move. We are going to do this in a measured, balanced way, but we are also not going to drag it out forever. Operator: Your next question comes from the line of Anthony Pettinari of Citi. Please go ahead. Anthony Pettinari: Good morning. You talked about stick and brick costs—I think down 5%—and it sounds like lumber was a good guy there. Lumber has been coming up for the last month and a half. Can you just remind us of the lag in which you would see that? And then related question: with conflict in the Middle East, it seems like we are seeing metal prices and petchem-based building material price hikes out in the market. What would be the lag that you would see some of that in your stick and brick costs? James Ossowski: Great question. First, as you noted, we had a really good first quarter. Our procurement teams have done a great job; house costs were down 5% year over year. As we look out over the balance of the year, we want to reaffirm that our house costs would be flat to slightly down. We still believe that, and that is baked into our guide. On your question on lumber, when will we see that? Usually two quarters out, because the way that we buy the lumber today, those are going to turn into closings two quarters out from now. It inflected higher in recent weeks. The other thing that we are keeping an eye on are fuel costs. We are monitoring that. At this point in time, we have done a good job—when you hear of things like fuel surcharges, we have combated those so far—but in recent weeks, as the cost of fuel started to come down a bit from the highs, we are keeping an eye on it. Again, I will go back to what I said: Q1 was a really great one, and even with some of those headwinds for lumber, we still believe we can be flat to slightly down for the remaining quarters. Ryan Marshall: And, Anthony, in terms of metal and some of the other related costs, we would see that being later in the year before we would see an impact. One of the things that our procurement teams have worked with our suppliers and trade partners on is: let us just take a mock-up of patience here. We are in a conflict. If it continues, there will be real cost increases. But we are not going to overreact to the whipsawing of markets up and markets down based on what is happening on a day-to-day basis from the conflict. Anthony Pettinari: Okay. That is very helpful. Just one quick one on incentives. Without cutting it too finely, were incentive levels fairly steady for the three months of the quarter and maybe the exit rate into April? Or was there any kind of increase or decrease you would call out there? James Ossowski: They were fairly steady across the quarter. It really got down to a community-by-community basis of what we had to offer to move specs, but again, pretty consistent through the quarter. Anthony Pettinari: Okay. That is very helpful. I will turn it over. Operator: Your next question comes from the line of Michael Rehaut of JPMorgan. Please go ahead. Michael Rehaut: Thanks. Good morning, everyone. Thanks for taking my questions. Just a clarification on the incentive question. Jim, when you said kind of stable throughout the quarter, was that on closings or orders? And when we think about a slight dip down in 2Q gross margins, I believe you are saying that is from the fuller impact of the reduction of spec that was transacted three, four, five months ago. I am trying to get a sense of how incentives are still impacting 2Q gross margins from prior conditions and if the comments you just made were more on current market conditions on orders? Ryan Marshall: Mike, no offense, but I think you mixed a few things there. What we talked about is, in Q1, there were spec sales that had elevated incentives. Some of those closed in Q1; some of those are going to close in Q2. It is part of the reason that we are saying that is the low point, which is impacting the guide that we are providing for Q2, and we would expect it to go back into the range that we have guided to for the full year. In terms of whether it was closings or sign-ups, it is probably slicing it a little too thinly. We report the incentives on closings—that is the approach we have been taking, and we are going to stay consistent with that. The incentive load on future backlog and future closings is embedded into our guide. As I have said a couple of times, we are actually optimistic that while the overall environment will stay elevated, we can see incentives come down because of buyer mix and brand mix. Michael Rehaut: Okay. That is great, Ryan. Shifting to the strength that you saw in Florida, I would love to dive into that a little bit. Obviously it was a bright spot for you this quarter. Can you help us understand what is going on in Florida from a broader market perspective in terms of inventory—both on new and existing homes—and how much you think that contributed to the stronger results that you saw this quarter? Ryan Marshall: We are very happy with most of what we are seeing out of Florida, and this has been the third or fourth quarter in a row where we highlighted the strength of the Florida market. If you went back a year ago, I think we were an outlier, outperforming a market that was arguably a little tougher. Florida has continued to get better over the last 12 months, and it is at the best point that we have seen it in a while. In addition to that, the strength and positioning of our communities and the expertise of our teams there have allowed us to outperform what is a pretty healthy market right now. We are happy about Florida. It is not without its challenges. Insurance costs are high. Affordability is stretched there, just like it is in a lot of other places. There have been some recent headlines about affordability in Florida, and I think that is because Florida historically was very affordable. There are some attributes of Florida that are not changing: it is a pro-growth, pro-business state that has a lot of great jobs, a more diversified economy than it has ever had, and no state income tax. So I think there are a lot of reasons why people still want to go to Florida, but I can also understand and appreciate why it is maybe not the best fit for others. Maybe to sum it up: we love our Florida business, and I think this quarter's results are a good demonstration of that. Michael Rehaut: And any comments on the inventory trends across the major markets? That would be very helpful. James Ossowski: We have seen inventory come down in certain locations. Some of the more affordable parts of the state—North Port, Lakeland—are still a little bit elevated, but we have been really pleased that both new and existing have come down in the places where we do business. Operator: Your next question comes from the line of Michael Dahl of RBC Capital Markets. Please go ahead. Michael Dahl: Morning. Thanks for taking my questions. I wanted to first ask about the mix dynamics in the back half of the year. From an order standpoint, we see that mix evolving, with move-up and active adult outperforming first-time. In terms of what you are projecting on the margin in the back half, how much of that do you already have visibility on based on what you have sold over the past handful of months versus an assumption of what is left to sell in the next several months and what that mix is going to look like? James Ossowski: I would tell you it is based on what we are seeing on the sales floors today and what we have out there. Ryan highlighted our Florida business has done really well. Our Northeast and our Southeast businesses, which carry a higher margin profile, as well. So we are looking at what we sold in Q1 and making predictions about what goes out over the balance of the year. There are a lot of parts and pieces that go into it, but the build-to-order mix and the active adult are the two biggest components that will drive the increase. Michael Dahl: Relatedly, we look at starts versus sales and your comments about doing a pretty good job taking down finished spec in the quarter. It sounds like there is a little left to go. In the current environment, if you are within that one to 1.5 per community band on finished spec, are you trying to get down to the lower end right now given what you are seeing in the market and how you think about optimizing profitability? And how does that tie into how we should think about your prospective starts versus order pace? Ryan Marshall: The way I would guide you on that is that we are inside the target range that we want for specs, and we are very comfortable operating at the lower end or the higher end of that range. We want to be inside that range. Beyond that, where we are at in the range will be driven by specific community-level decisions and the type of buyer we are going after and whether it is a true entry-level or more of a move-up type community. That is the reason we give a range on that. We have said we are not going to chase volume. We are going to get our company back to a build-to-order model, which we are doing. We made excellent progress. We have reaffirmed the full-year number. And we are going to be matching starts to sales cadence. So the starts that you saw in Q1 were reflective of the sales that we had in Q4. You will see our starts in Q2 more closely match the sales that we just had in Q1. That is the kind of build that you want to see from us. We are very comfortable with where we are at on what we will start in Q2 and how that sets us up for the full year. I will note a big reason why we have been able to do it this way this year is because we have gotten build times—cycle times—back down to pre-COVID cycle times of less than 100 days. There are a lot of things that are working exactly the way that we have designed our operating model to work. Operator: Your next question comes from the line of Sam Reid of Wells Fargo. Please go ahead. Sam Reid: Thanks, everyone. Wanted to drill down a little bit more on ASP. I believe in the prepared remarks it sounds like ASP was down mid-single digits across all buyer cohorts, which would include move-up and active adult. It also sounds like based on your answer earlier in the Q&A that you might have stepped up some forward rate commitments to those move-up and active adult buyers. Are you also making any surgical price cuts in move-up and active adult as well that we should be mindful of? Ryan Marshall: We look at pricing all the time and make sure that we are competitively priced. Discounts, I think, are an important thing psychologically for buyers today, so we try to have the right relationship between headline price and what incentives are—they are tethered together. There are some communities where we have taken price cuts, and Jim highlighted in his remarks that has been a big driver in the communities where we have had to take impairments. It has typically been the price cuts. Fortunately, it is just two communities, and it was a fairly small number. Hopefully that is indicative that we have made very few top-line major price reductions. Sam Reid: Switching gears to the Financial Services line item. I noticed Financial Services pretax was lower, and I believe one of the reasons you called out was lower gains on mortgage sales. Can you talk about the moving pieces behind that lower gain and whether it is also a function of perhaps a step up in adjustable-rate activity? James Ossowski: Great question. Let me start by saying we are very pleased with the operating performance of our Financial Services organization. They do a great job supporting our homebuilding operations and supporting our customers. On ARMs, they were 9% of all closings in the first quarter versus 7% for all of last year—so a little bit higher, but nothing meaningful. Year over year, a couple of things to point out—and some of this is just timing, and we will expect improvement over the balance of the year. Homebuilding volumes were down. We noted lower net gains on the sale of mortgages as rates ticked up on us; we had lower value ascribed at the time that we do our rate locks. We also had slightly higher expenses as we have invested in people and technology for the year. Again, I think they performed very well in the first quarter, and I would argue it is a little bit of timing, and we will continue to see improvement over the balance of the year. Operator: Your next question comes from the line of Analyst. Please go ahead. Analyst: Good morning, everyone. Thank you for taking the questions. Maybe just to pull on the thread of the build-to-order mix. I think you said from an order perspective, it was maybe 3% higher in Q1 relative to last year. My question is on gross margin. I think you are implying in the second half maybe the gross margin is up 75 basis points, give or take, relative to the first half. It seems the build-to-order closings mix would need to be fairly meaningfully higher if that is the main driver. What exactly is the build-to-order closings mix in the second half, and is there anything else that supports that level of sequential margin improvement? James Ossowski: You will have both the richer mix of build-to-order and, as Ryan highlighted and I said in my prepared comments, as we have gotten more of that finished spec inventory off the books, that will be less influential as you get out to Q3 and Q4. So a little bit of both—build-to-order and then less of these finished specs that came through in Q1 and Q2 for us. Ryan Marshall: It is not as if we have got a gigantic chasm to cross from where we are today to where we are going to be. Q1, we were at 24.4%. We are going to be in that same kind of zip code for Q2 with a heavy load of finished specs that came with heavy discounts. And then to go back to our full-year targeted range of 24.5% to 25%. It is not as if there have to be colossal shifts in margin performance in order to be in the guide that we have given. Analyst: Understood. Thank you. And then secondly, you mentioned easing land prices. How do you think about the timing of what you are seeing in the land market today for when it actually flows through your P&L? And is there a rule of thumb or broad average for Pulte on land costs versus development costs as it pertains to the final lot cost that you ultimately see in your cost basis? Ryan Marshall: The general rule of thumb is 50/50—some markets go 60/40—but a general rule of thumb at 50/50 is pretty good. In terms of timing from when we contract a piece of land to when you start seeing it flow through the P&L, it is typically in the 18- to 24-month range, depending on how lengthy the entitlement process is. So anything that we are contracting today at lower cost, you are well into 2027—late 2027 and beyond—before you are going to see the benefit of the lower land cost. Operator: Due to our limited time, your last question will come from the line of Trevor Allinson of Wolfe Research. Please go ahead. Trevor Allinson: Hi. Good morning. Thank you for taking my questions. First one is on your approach to share repo here. You have got the new authorization out. Your net leverage is close to zero. I think you mentioned earlier that the cash flow headwind from more BTO is somewhat temporary in nature. I want to gauge your appetite for accelerating share repo here, maybe ahead of your cash generation, and then your views overall on leverage versus the roughly 0% you are at currently? Ryan Marshall: Trevor, I would reiterate that we have been incredibly disciplined on capital allocation. Our focus is on investing in our business. That is our number one priority. It is what our shareholders care about. It is what they have entrusted us to do, and that is how we are structuring the business. Then we are paying a dividend, and we are using the share buybacks as a way to return excess cash that is being generated by a really well-running business back to shareholders in a very tax-efficient way. Do we have the ability to do a levered buyback, which I think you are suggesting? Sure, we have got the leverage capacity; you could do it. We do not think it is in the best interest long term of the company. As it relates to leverage—and we have talked about this for the better part of the year—a debt-to-cap ratio will be an outcome as opposed to a targeted goal. We are going to decide the cash needs of the business based on how we are going to grow it: how much land we are going to buy, how much land we are going to develop, how much inventory, etc. We will see how much cash we have, we will see how much debt we need to raise to do that. That is going to be the driver of our debt-to-cap leverage ratios, as opposed to saying we want to be a set number. Trevor Allinson: That makes sense. Thanks for all that color, Ryan. Very helpful. Second one, just on the Midwest. It has been a bright spot for you guys the last couple of years. You mentioned some weather impacts there, maybe also some comp dynamics just given it has been stronger. Are you starting to see any change in relative performance in the Midwest? Ryan Marshall: We are still really happy with our Midwest performance. It has been great and continues to be very good. There were a couple of markets that maybe did not do quite as well as what they had been doing, but it was not widespread across the entire Midwest. For the couple of markets that are maybe a tad slower than what they had been, we are going to keep watching them. The Midwest—and the Northeast, for that matter—actually had a real winter for the first time in a long time. Boston, as an example, I think had snow four or five times. It has probably been at least four or five years since they have had a winter like that. It was a tougher winter season than what we have historically seen. Our Midwest business also tends to be more move-up and active adult, which, as we have highlighted, continues to be one of the stronger consumer groups. Trevor Allinson: Thank you for all the color, and good luck moving forward. Operator: That concludes the Q&A session. With that, I will now turn the call over to James Zeumer for final closing comments. Please go ahead. James Zeumer: Thank you. We appreciate everybody's time this morning. I am sorry we were unable to get through all the questions in the queue, but we will certainly be available for the remainder of the day, and we will look forward to talking to you on our next earnings call. Operator: Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.
Operator: Thank you for standing by, and welcome to the Honeywell First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's call is being recorded. I would now like to hand the call over to Mark Macaluso Senior Vice President of Investor Relations. Please go ahead, sir. Mark Macaluso: Thank you. Good morning, and welcome to Honeywell's First Quarter 2026 Earnings and Outlook Conference Call. On the call with me today are Honeywell Chairman and Chief Executive Officer, Vimal Kapur; Honeywell Aerospace Technologies President and Chief Executive Officer, Jim Currier, and Senior Vice President and Chief Financial Officer, Mike Stepniak. This webcast and the presentation materials, including non-GAAP reconciliations, are available on our Investor Relations website. From time to time, we post new information on this website that may be of interest or material to our investors. Our discussion today includes forward-looking statements that are based on our best view of the world, and of our businesses as we see them today and are subject to certain risks and uncertainties, including those described in our recent SEC filings. This morning, we will review our financial results for the first quarter of 2026, provide guidance for the second quarter and discuss our full year outlook. As always, we'll leave time for your questions at the end with Vimal, Mike and Jim. With that, it's my pleasure to turn the call over to Vimal, who will begin on Slide 3. Vimal Kapur: Thank you, Mark, and good morning, everyone. Honeywell delivered strong results in the first quarter, building on the momentum from 2025, despite a complex geopolitical backdrop and temporary mechanical supply chain constraints in Aerospace. Orders grew 7% organically on the strength of our Building and Industrial Automation segment as well as in petrochemical and refining verticals in Process segment. Including the orders growth in Aerospace, we drove backlog to over $38 billion with book-to-bill above 1.1. Sales growth was robust across Electronic Solutions and Aerospace, [indiscernible] aftermarket services in Building Automation and gas and LNG in Process Automation and Technology bolstered by our innovation and new product engine. We expanded margin 90 basis points to over 23%, driven by pricing discipline, productivity and accelerated stranded cost removal ahead of the Aerospace spin. All of this drove 11% adjusted earnings growth in the quarter, demonstrating the strength and agility of the Honeywell operating system. We also made tremendous progress on the portfolio transformation that began in 2023. We announced the sale of our Productivity Solutions and Services and Warehouse and Workflow Solutions businesses, respectively, which we expect to close in the second half of 2026. We are also excited to announce that now we expect to complete the Honeywell Aerospace spinoff in the third quarter on June 29, marking the final step in our transformation. All of the acquisitions, divestitures, spin-off and simplification effort over the past 3 years have positioned both Aerospace and Automation for right future as independent leading industrial companies. Despite the strong start to the year, we are taking a prudent approach to our guidance given the uncertainties surrounding the conflict in Middle East. We remain confident in our ability to drive accelerating growth in the second half as our backlog supports a pickup in growth in Process Automation and Technology. We will continue to closely monitor the situation and provide any further updates if the situation changes materially. Before we get into the details, I want to thank all our employees for their focus, commitment and dedication throughout our multiyear transformation. The future is bright as we set both businesses and gear to thrive with the right strategic focus, and capital allocation priorities that will drive value for our customers, employees and shareholders. Let me turn to Slide 3 to discuss the progress on our portfolio transformation. As I mentioned, we are progressing on the final separation milestone with the Aerospace spinoff now expected to complete on June 29, just over 2-months away. The leadership team for both Honeywell and Honeywell Aerospace are in place and already executing for our customers today. In March, we successfully raised $20 billion of Aerospace spin financing while delivering strong investment-grade credit rating of A3, A- and BBB+ with a positive outlook from Moody's, Fitch and S&P, respectively. Proceeds from the financing will be used primarily to redeem Honeywell debt, the majority of which has been completed as of quarter end and to fund a cash to the Aero balance sheet. Aerospace also announced a groundbreaking supplier framework agreement with the U.S. Department of War to rapidly increase the production of critical dense technology through a $500 million commitment. Honeywell was among the first tier 1 supplier to sign an agreement of its kind, and we are honored to support the U.S. and allied forces with these increased production capabilities. This agreement demonstrates the criticality of Honeywell Aerospace to national security interest and supports a multibillion-dollar revenue opportunity. Turning to Automation. We amended an agreement to acquire Johnson Matthey'’s Catalyst Technologies business, which [ adjusts ] the total consideration and extends the date to close the deal to the end of July. We continue to believe the combination of the business with our capability in Process Technology will unlock future growth by broadening our portfolio, growing our installed base and creating a more integrated offering for our customers. As I mentioned, we announced -- we signed an agreement to sell Productivity Solutions and Services to Brady Corporation and Warehouse and Workflow business to American Industrial Partners, in two, all cash transactions. These businesses are well positioned to grow profitably under highly capable new leadership with deep industry experience. And for Honeywell, the sale allow us to further simplify our portfolio alongside the planned separation from Aerospace. Following these sales and spin, we will have a more cohesive portfolio focused on three principal end markets. [indiscernible] to share much more about our business with the investment community at our upcoming Investor Day for both Honeywell Aerospace and Automation business in June, both companies have exciting future ahead. Before we get into the details, I want to discuss our outlook for Process Automation and Technology in light of the current Middle East conflict, let's turn to Slide 4. In quarter 1, the Middle East conflict drove a roughly 0.5% impact to revenue for all of Honeywell, most notably in Process Automation and Technology given the energy exposure and presence in the region. Clearly the situation in the Middle East is evolving rapidly, and we hope for fast resolution to the conflict. However, our guidance assumes the conflict persists through the end of the quarter and the resulting logistics and shipment delays cost a roughly 1% impact to revenue. We continue to effectively manage through this with the safety and well-being of our employee being the top priority. Despite the conflict, demand continues to be strong for differentiated Process Technology on a global scale. We have secured over $2 billion in project wins over the past 3 quarters, including for LNG, refining and petrochemicals and sustainable aviation fuel across U.S., Brazil, Africa and Middle East. These wins include both rebuilding of the impacted facility with the key customers, including Qatar Energy LNG and new expansion projects helping further reinforce the growth outlook for PA&T, securing a long tail of high margin services and software opportunities. Notably, in November last year, Dangote Petroleum Refinery and Petrochemicals selected Honeywell to supply advanced technology services, proprietary catalyst and equipment to help double production capacity at Africa's largest refinery in Nigeria. In addition, Dangote will license Honeywell's Oleflex Technology, which converts propane to propylene and Honeywell's Petrochemical Technology to produce linear alkylbenzene or LAB, a key ingredient in detergents for household needs. With this agreement, the customer will nearly double its production of polypropylene which supports the manufacturing of packaging materials, consumer goods and industrial products and once at full production will operate once of the world's largest LAB plants. As a follow-up of this award earlier in April, we announced that Dangote also selected Honeywell to provide Connected Services, Advanced Digital Performance Monitoring and Operator Training at the same refinery. This will help customers like Dangote improve operational performance, increase asset reliability and enhance their workforce ultimately unlocking greater value for their facility. On LNG, we recently signed agreement to provide integrated liquified natural gas pretreatment and liquification solution for Commonwealth LNG planned export facility in Louisiana and next decade's Rio Grande LNG project in Texas through an agreement with Bechtel. We expect strength in our LNG vertical to continue given the additional projects we expect to be awarded in quarter 2. Longer term, we expect the favorable crack spreads in petrochemical and refining will generate incremental catalysts and services demand to maximize performance of our customers' plant in addition to needed repairs and modification related to rebuild. Once the conflict stabilizes, we expect the industry will benefit from pent-up demand and more stable feedstock supply, enabling better plant utilization rates. Despite the near-term disruption Process Technology orders increased double digit, driving a 22% increase in PA&T backlog. We remain on track on expected second half ramp as LNG and large modular equipment deals convert to sales in the back half of the year, which will be followed by new catalyst demand in 2027. So while we acknowledge the challenges the business faced over the last few quarters, we are encouraged by the resiliency of orders growth and backlog, which will generate a strong runway as we progress through 2026 and into 2027. I look forward to sharing more with you during the June Investor Day. Let me now turn to Slide 5 to talk more about Aerospace growth trajectory in 2026. We continue to see strong Aerospace demand across commercial OE, commercial aftermarket and defense space, which is driving sustained orders growth of 28% over the last 12-months, which drove roughly $19 billion Aerospace backlog, a 20% increase from the prior year and 1.1 book-to-bill in the first quarter. Against this backdrop, our mechanical supply chain over-delivered in the fourth quarter of 2025 enabling double-digit organic sales growth. However, certain critical suppliers experienced temporary constraints to start the year, which led to slowdown in January and February and lower output and sales growth. Output improved considerably in March, our highest revenue month for the quarter, making us confident that our supply chain efforts will produce better results moving forward. Given the significant amount of demand we see in Aerospace portfolio, Honeywell has invested more than $1 billion over the past 3-years into expanding the capacity and resiliency of our supply chain. Our 2026 guidance incorporates the continuation of this elevated level of spending focused on [ on-boarding ] new suppliers, developing internal capabilities and assisting our supply partner with engineering and operation. The strategy drove double-digit output growth for 14 straight quarters prior to quarter 1, and we are confident on getting back to the trajectory in the near term. Given the progress exiting Q1, our history of recovering from supply chain constraints and continued positive demand trends, we are maintaining our Aerospace guidance of high single-digit organic sales growth for the year. As you can see on this page, the outlook is consistent with historical linearity in the business, as we typically experience a sequential ramp throughout the year. To further support this ramp, Electronic Solution deliveries are meeting accelerating defense requirements, and we are investing in a new capacity necessary to ensure we can continue to do so. In the first quarter, Electronic Solutions sales grew double digit. With that, I will now turn the call to Mike to go through Honeywell's first quarter results and 2026 outlook in more detail on Slide 6. Mike Stepniak: Thank you, Vimal, and good morning. In the first quarter, we successfully navigated the difficult geopolitical and macroeconomic environment while exceeding expectations for both segment margin and adjusted EPS. Sales grew 2% organically, led by growth in Building Automation and Aerospace Technologies, and pricing and execution remains strong across the portfolio, fueled by new product introductions. On a segment basis, Building Automation surpassed our expectation once again in the first quarter with sales up 8% organically across both solutions and products. Sales growth was led by strong demand for new products and momentum across the high-growth data center and healthcare verticals. On a regional basis, sales in the Middle East and India were both up double digits. Building Automation also delivered strong orders growth, up 9% with double-digit growth in projects, services and fire products. Aerospace sales grew 3% organically, with commercial demand and increasing global defense needs, supporting growth in commercial OE, commercial aftermarket and defense and space. Underlying demand remains robust. But as we discussed on the previous slide, 1Q results were adversely impacted by temporary supply chain headwinds in mechanical products. On profitability, Aerospace segment margin expanded 20 basis points from the prior year to 26.5% aided by pricing, productivity and favorable mix. In Industrial Automation, sales were up 1% organically in the quarter. Solutions grew 7% led by robust Services demand in measurement and strong performance in Warehouse and Workload Solutions. Products declined slightly primarily in Productivity Solutions and Services, but was partially offset by continued strength in Sensing. Notably, Industrial Automation orders were up 10%, highlighted by strength in China and recovery in Europe. Finally, Process Automation and Technology sales were down 6% organically in the first quarter. This was driven principally by timing delays in refining catalyst reloads and automation service upgrades, including impacts related to the conflict in the Middle East. Project sales were flat as elevated demand in LNG was offset by delays in process automation. However, the orders momentum continued in Process Automation and Technology with double-digit growth in Process Technology in the first quarter, following very strong order growth in the fourth quarter of 2025. In total, Honeywell orders grew 7% organically with broad-based demand, resulting in book-to-bill above 1.1 and 15% increased backlog. On profitability, segment profit increased 6%, while segment margin expanded 90 basis points to 23.3% with margin expansion in all 4 segments. This was principally led by Industrial Automation, which expanded 260 basis points and Process Automation Technology, which expanded 200 basis points from pricing and productivity actions, a strong result in Process Automation and Technology despite the top line volatility. Adjusted earnings per share of $2.45 was up 11%, driven primarily by higher segment profit and lower share count. Foreign currency provided a modest benefit and below-the-line items were favorable primarily due to higher pension income. You'll find additional information on the first quarter adjusted EPS bridge in the appendix of our presentation. Running out the results, we ended the quarter with nearly $100 million of free cash flow, down from $200 million last year. The benefit of higher operational income was offset by timing of collections in the Middle East and inventory headwinds in Aerospace, given the mechanical supply chain dynamics. Collections have improved meaningfully in April, and we remain confident in our full year outlook. On capital deployment, we returned $1.8 billion to shareholders through roughly $1 billion of share repurchases and $800 million of dividends while funding over $220 million in CapEx to drive future growth. Let's now turn to Slide 7 to discuss our second quarter guidance. We anticipate second quarter organic sales growth of 2% to 4%. Aerospace should improve sequentially from first quarter, driven by ramping OE production rates and higher defense spend, supported by incremental improvements in the supply chain, while Process Automation Technology will be slightly weaker than first quarter due to incremental pressure stemming from the Middle East conflict. Both Building Automation and Industrial expect to be roughly in line with their full year outlook for these businesses. We expect segment margin to be in the range of 22.2% to 22.5%, down 10 to up 20 basis points, led by pricing and productivity actions that we expect will largely offset rising inflation and unfavorable mix in Process Automation and Technology due to timing of high-margin catalyst shipments and the impact from the Middle East. We are also seeing an acceleration in the stranded cost takeout ahead of the Aerospace spin. On the segment level, we expect strongest margin expansion in Building Automation, while Aerospace margin will be roughly flat. Adjusted EPS is expected to be $2.40 at the midpoint, reflecting a higher effective tax rate in the quarter, amounting to about $0.16 headwind. On a normalized tax basis, EPS in the second quarter would be roughly $2.55 at the midpoint of our guidance, driven by higher segment profit and higher expected pension income. Slide 8 provides a look at the second quarter dynamics, I just described. We expect growth from roughly $0.06 of higher segment profit, while lower below-the-line expenses will drive a similar benefit of $0.04 to $0.07 due to higher pension income, partially offset by increased repositioning costs. But the main item to note is the $0.16 headwind from a higher tax rate of approximately 21% versus 16% in the second quarter of 2025. Nevertheless, we still expect our full year tax rate to be approximately 19%. The impact from the share count reduction and foreign exchange translation will be roughly $0.01 each. Additional below-the-line details are available in the appendix of the presentation. With that as the backdrop for the second quarter, let's turn to Slide 9 to discuss our full year outlook. We're maintaining our organic growth outlook of 3% to 6% despite the temporary headwinds we encountered in the first quarter. We expect strength to continue in Building Automation, while Industrial Automation will continue to recover in Europe and China. Process Automation Technology should be roughly flat for the year as order visibility and robust backlog levels delivered a strong second half. Finally, in Aerospace, as I mentioned earlier, our full year guide of high single-digit growth remains intact, driven by improvement in our supply chain observed in March. We expect to continue to deliver strong operational execution driven by pricing discipline, productivity actions and earlier-than-expected stranded cost takeout. In the first quarter, this allowed us to deliver strong margin performance while navigating near-term volatility related to material cost inflation, mechanical supply chain headwinds in Aerospace and impact from the Middle East conflict. While we outperformed our expectations in the first quarter, the ongoing geopolitical situation warrants prudence. And we are, therefore, maintaining our full year segment margin guidance of 22.7% to 23.1%. Our guidance continues to include the results of PSS and WWS until the transaction close. It also assumes a continued ramp in Quantinuum investments. And while we expect to de-consolidate the results of Quantinuum in the second quarter, we are not adjusting our segment margin or adjusted EPS guidance at this time to reflect this. There is also no change to our free cash flow guidance for the year. Let me now turn the call back over to Vimal to wrap up before Q&A. Vimal Kapur: Thanks, Mike. We are pleased with our first quarter results with segment margin and adjusted earnings per share exceeding expectations. Looking ahead, we are successfully navigating an uncertain geopolitical backdrop with the strength of our resilient business model approach and rigor of our Honeywell accelerator operating system. We are tracking ahead of schedule on our separation milestone with the Aerospace spin-off now expected to be completed on June 29. I'm very excited to be on the [indiscernible] of this formation of 2 leading pure-play public companies and witnessed a long runway of value creation both businesses will deliver. We look forward to hosting investors at our upcoming Honeywell Aerospace Investor Day on June 2 and 3 in Phoenix and our Honeywell Investor Day on June 11 in New York City. These events will provide an excellent opportunity to share our strategy and long-term growth expectation. With that, Mark, let's take the questions. Mark Macaluso: Vimal, Mike and Jim are now available to answer your questions. [Operator Instructions]. Operator, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: [indiscernible], this is the last quarter of Honeywell as is. But I just wanted to just maybe just try and get a bit more information on the supply chain challenges, especially in such a low volume quarter. So just -- it's obviously a very popular inbound question we're getting from investors. So any more details on that? And kind of measures in place to try and solve this problem? James Currier: Nigel, this is Jim Courier. Just to give you a little bit of color and commentary around the supply chain challenges. Typical historical patterns are such that we normally have a slower start at the first of the year, particularly as we exited a very strong fourth quarter at 13% output growth for Aerospace. What I would tell you is that the start of the quarter, however, was more acute in terms of the decline versus what we had anticipated. And we recognize that this issue at the end of January and early February, and it was a very acute transitory issue specifically with some key suppliers in the mechanical space that adversely affected both our engines business and our Control Systems business. And when I say acute, we can actually identify down to specific outlines within the portfolio that were impacted. The point being, however, is that we started to see the recovery as we deploy the resources accordingly and we started to see that recovery in the March time frame, and we're seeing that momentum carry itself over into April, which gives us the confidence in terms of our forecast that we have of mid- to high single-digit growth for the second quarter. Nigel Coe: Okay. That's great. And then just on the 2Q margins, you're forecasting quite a step down Q-over-Q. And you talked about some of the productivity and obviously getting ahead on the stranded costs. Just wondering any more details on how to think about margins by quarter, why they'd be coming down Q-over-Q? And I think you called out Aerospace flat year-over-year. I just want to make sure that was the case. Mike Stepniak: Yes. Nigel, this is Mike. So our margin expansion framework for the year remains the same. So we talk about [ 20% to 60% ] for the year. 50 bps to 90 bps expansion operationally. We have 30 bps drag from Quantinuum. What's happening sequentially versus the first quarter, first, operationally, nothing is changing. We're doing extremely well on stranded cost takeout, that's ahead of plan. Pricing will be above 3% again. So feel good about what we're doing on pricing and the teams are progressing well. What's happening in the second quarter sequentially, we have, I would say, a mix pressure from catalyst sales or lack of catalyst cells in the second quarter. And it also gives us a little bit of pressure year-over-year. But as you remember, last year, second quarter was our strongest quarter on catalyst sales in the year. So on total year, I don't see any pressure to what we guided. In fact, I feel more confident that we'll deliver that 20 bps to 60 bps. We just have to get through the second quarter. In Aerospace, we talked about roughly being for the year at 26%, and that's kind of where it's going to be for the year. Vimal Kapur: I'll also add that the loss of revenue we're having in Middle East is also high-margin revenue. So that just has associated margin pressure because of services software, which has impacted the most due to disruptions there. So that becomes the additional driver because it's kind of high dis-synergies associated with that. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start off maybe with the PA&T organic sales ramp through the year. Help us understand kind of how we should be thinking about that? It sounds like you're still thinking sort of flattish for the year as a whole on organic sales, which is consistent with your prior guidance, but obviously a much tougher first half. So maybe sort of flesh out for us some of the main moving pieces and how that organic sales growth trends from here in the year? . Vimal Kapur: So essentially, I think the only change since we provided the guide has been the Middle East situation and we lost revenue, as we indicated, about 0.5% of Honeywell total revenue in Q1 and about 1% in Q2. What we feel very strongly about is our backlog in the business continues to grow. Not only we had a strong booking in Q3, Q4 of second half of last year, but also printed a very strong orders number in Q1 of this year, and trends remain very, very robust for Q2, which gives us a very high confidence of second half ramp of the revenue of high-single or PA&T segment. Therefore, it's just going to be first half is, as you've seen the actual results of Q1 and then forecast for Q2, they get offset by strong performance in the second half. So net-net, the overall year being flattish, we remain very confident on that. The backlog supports it, the historic linearity supports it. So there's not much out of the way assumptions we have made in this forecast. Mike Stepniak: And Julian, there is also just continues to be more pent-up demand for the second half. We're seeing a lot of requests from customers in the Middle East. So I'm confident this demand is coming and like Vimal said, from a backlog standpoint, we still have a lot of conversion happening sequentially that's going to happen in the second half. So quite excited about that opportunity. Julian Mitchell: And then just secondly, back to Aerospace. I just wondered if you could give us some update on what you're seeing kind of real time in the commercial aero aftermarket side of things and whether you have moderated your outlook at all for the second half or Q2 on things like flight hours or departures that type of thing? That would be helpful. And on the supply chain issue, just lastly on that, is there any help you can give us on kind of specific product types that were most affected by the supply chain issue? James Currier: Yes. So specifically, Julian, to the product type, I'm not going to provide specificity around the actual outlines themselves other than say that it was very acute and we could attribute it to a couple of outlines specifically within the Engines and Power Systems business. As it pertains to the commercial aftermarket and any implications on a full year basis, right now, we saw no impact in Q1 as a result of the conflicts, and we see negligible potential impact in Q2 that's going to be overcome-able. I think the point that I would highlight, however, is that the demand is exceptionally strong, and our growth is constrained by supply and not demand across the board, and any impacts that we see in terms of flight hours in the Commercial segment tend to have a trailing impact in the Aerospace business, as flight hours go down, we start to see as it works its way through the ecosystem, it's anywhere between a 3- to 6-month delay before we would see something within the Aerospace business. Operator: Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe just a follow-up on the last question. On the commercial aftermarket. Jim, any way you could delve into that a little bit more, talking about your Middle East commercial aftermarket exposure? How do we think about it on engine mix within business aviation, APUs on commercial, powered by the hour on that 3- to 6-month lag comment, where would you see the most volatility? And as a follow-up, on Aerospace margins, as we look at Q1 solid start, 26.5%. How much of an impact was the supply chain? And do we see any puts and takes from asset sales or mix in that Q1 figure? James Currier: Sheila, a couple of things I'll talk to you on the commercial side of the aftermarket, particularly out of the Middle East. Again, as I mentioned, our growth is limited by supply, and not about the demand. Now having said that, we are watching very closely fuel prices, the increase in fuel prices and how much longer they will persist across the board. But we're not seeing any related demand impacts. And power by the hour programs for us, there's a smaller revenue stream within the overall aftermarket portfolio, as compared to time and material and repair and overhaul portions of our business overall. The one point I wanted to highlight, and you mentioned it about business aviation we've actually seen very strong resilient growth in business aviation flight activity, even in light of the higher fuel prices, and it actually grew much better than what we saw in the commercial air transport. And as you know, that is a part substantial part of our portfolio in terms of business aviation within the aftermarket and part of the overall revenue of our Honeywell Aerospace. The one thing I would also add is just on defense. So as we see the conflicts that are occurring, the two key words to remember are going to be around replenishment and sustainment, replenishment around the aspects of missiles and munitions, furthering increasing the magazine capacity that exists not only for the U.S. but for our allies abroad. And then with the usage of aircraft in theater and how we are positioned, we're continuing to see very strong demand in terms of sustainment and support of those operations. Sheila Kahyaoglu: Great. Can I just add the margin question. Can we just -- can you talk about the solid Q1 margins. How much of an impact was supply chain? Was it negative? And any positive onetime items in there? James Currier: As you know, our mechanical business, we actually -- our mix was much more favorable Electrical versus Mechanical and that produced a tailwind for us in Q1, even despite of our lower volume leverage in the quarter. Now as our output will increase throughout Q2 and be more of a mix around mechanical due to the recovery that we anticipate will occur, you'll start to see that fluctuate, and you'll start to see it being a little bit more normalized. But the focus area I would apply is full year. You do see fluctuations quarter-to-quarter, very mix dependent. But on a full year, we expect modest expansion for Honeywell Aerospace. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: Good morning, everyone. I just want to say at the outside here, I don't recall any other time in Honeywell's history where you've had more portfolio moves at one time that you've been orchestrating as well as navigating all the geopolitical issues. So the fact that you can reaffirm guidance here is impressive. I did want to understand -- I know it's early, and I appreciate that you've -- you're assuming the conflict last through the second quarter. Can you size for us what the Middle East rebuild opportunity is at this point? Maybe not just give us some dimensions and qualitative what areas you'd be active in? Vimal Kapur: Yes. First of all, Deane, thanks for your comments on portfolio transformation. I would say that with the announcement of the firm date of the Aero spin on 29th of June and completion of transactions for both businesses, which were held for sale, puts us in a position now, Honeywell will be a pure-play automation company, well positioned for its future. So I really feel good about what we have accomplished over the last 2 years. To your question on Middle East, I would say that I see that coming up in three different phases. The first phase is obvious that the services required to get the plants up and running. That work has not yet started. The situation has normalized to a point that we are being requested for that. So there are a few facilities which got hit during this conflict. So they are still -- there's no real activity in those sites. Now after that phase is over, it probably will take -- typical plant start-ups can take 8 to 12 weeks then we really expect the refurbishment of some of the facilities, which have been impacted. The one where Honeywell equipment is there, specifically in Process Technology, we have some known issues. We are already working with the customer, and that can show us an incremental demand in second half of the year as the things become more normalized. And finally, as the oil price remain elevated to now $100 or above, the forecast generally suggests that the supply side disruptions won't end so soon because the normalization is going to take likely much longer, which then bodes well for the overall spreads for the product for our customers, which will -- which should support the more demand for services and catalyst in the times ahead. So all in, I would say the best way to put it forward is that near-term headwinds are already reflected in our numbers. And long term, the trend suggests that it's going to be a favorable outcome for Honeywell and more broader for the process industry. Deane Dray: That's really helpful. And just as a follow-up on that last point on the impact of $100 oil to UOP, in particular, there's -- were pushouts of catalyst reloads. But you also said that the spreads remain favorable. So just what's the impact on UOP near term? And then as we see some normalization? Vimal Kapur: Yes. So as you saw, I just mentioned in our earlier conversation that we remain very, very convicted on the fact that we'll have PA&T Process Automation Technology, second half at high single digits. That's driven by the two facts. One is our backlog is very strong due to the 3 successive quarters of order booking and then [ Q2 ] was also looking very, very robust at this point. And then we do expect the catalyst demand favored by the favorable spreads. So all things being equal, we remain very confident of the second half performance for Process Automation Technology business due to a combination of backlog and catalyst demand coming ahead. Mike Stepniak: The only to just add that the margins will improve as well in the second half for the business, given better mix, more volume leverage and strong pricing. Operator: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I'm sorry to beat a dead horse on this Aerospace issue, but I just have one more follow-up on this. Like when we look across the 3 subsegments of commercial aftermarket, commercial OE and defense and space, which were impacted by the issue in the first quarter? And how should we think about the path to improvement within those 3 pieces into 2Q? James Currier: Nicole, this is Jim. It actually impacted all of 3 end market segments. When I talk about specific outlines within our Engines and Power Systems business, it was both commercial and again, very acute. It impacted both Commercial and it also impacted Defense Engine outlines. And then some of that, obviously, being that the supply base is the same for commercial and defense and that same supply base is supporting aftermarket and R&O repairs as well. Those same outlines then were affected from an R&O standpoint in terms of being able to deliver into the aftermarket, both from a defense standpoint as well as on a commercial. And again, it was highly acute and highly specific in the engines and Power Systems business. But again, the mechanicals also affected us slightly as well on our control systems business. Nicole DeBlase: Got it. Okay. So the improvement into 2Q should be kind of broad-based across those 3 pieces? James Currier: That is precisely correct. Nicole DeBlase: Okay. Understood. And then just on the order trends, Curious what you guys saw in the 7% organic growth if you were to kind of parse that out across your shorter cycle and longer cycle businesses? And any interesting trends throughout the quarter? Vimal Kapur: Yes. So order -- the overall orders reported are 7% growth. Orders growth was led by Industrial Automation, up 10%, which is a combination of both long and short cycle. Building Automation also had a strong quarter, 9% orders growth. Process and Automation Technology was up 3% and Aerospace was up 6%. So I would say across the board, it's broad-based strength in the orders. On the short cycle, Nicole, I would say that specifically for Automation side, Building Automation performance remains exceptionally well. As you have seen that this is fifth or sixth successive quarter, we are printing high single-digit growth. Not only the demand remains robust. So it continues to perform well through our new product introduction and perform better than market. Industrial Automation also the demand is shaping up well. Initially, when the start of the year, we had expressed concern on demand of short cycle in China and Europe, that certainly is recovering, which is very positive for us. We'd also see short-cycle demand in U.S. I think that's where Industrial Automation business have some pockets where we have to do more recovery, but we are trending in a very right direction. And as we have observed the Industry Automation results, I do expect that business to start performing more like low single-digit growth. Once we take out the 2 businesses which were held for sale out of our revenue forecast, I'm just saying the RemainCo business it's trending very nicely towards low single-digit [indiscernible] second half of the year. So short cycle, I would say, overall strength is favorable. On the Process market, I would say it's being clouded by the war and the disruptions, and it's just hard to separate the reality of the demand versus the disruption caused by oil prices, supply shortages, ability to do shipment. It's hard to kind of separate the facts versus reality and provide an absolute comment there. Mike Stepniak: Yes. I would just add that we're expecting short cycle to accelerate in the second quarter. It will be mid- to high single-digit growth. So we feel good about short-cycle right now. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: Just a question on Building Automation. Clearly, it has been one of the best businesses for you for a while. At the same time, some of your competitors, I think, seem to be sort of waking up a little bit. How do you view a competitive environment in this market in areas like fire? And how sustainable is your leader -- clearly at AHR. I mean your software presentation was fantastic. Sort of -- I understand why you feel confident that maybe just expand what is we're seeing on Building Automation? How is competitive environment developing, as I said, given that some of your competitors are waking up. Vimal Kapur: Thank you, Andrew. I mean, I would say that, look, we remain in our guide more conservative because we always [ cite ] Building Automation at mid-single-digit plus and we are performing high-single. And as I had mentioned during our Q1 earning call -- in earnings calls in earlier in the year, that we don't want to always assume we will keep taking share. but we have been constantly doing that, which is good news for Honeywell. I would say the competition by our business model is sell product through channels. We actually compete with large multinationals on a very limited basis because projects business in Building Automation is just about 15% of the overall segment. So what the headline base is, some of the peers, which are publicly reported companies, our overlap with them from a portfolio perspective is not very large. Our competition is midsized companies, which vary by each region. We have set up companies we compete in fire and BMS and security in U.S. We have different set of people we compete in Europe, different set of people we compete in China, and that's the benefit in this business that we are benefiting from fragmentation of the market. We are going on the strength of our new products, and our common supply chain. And we believe that our organic growth engine, new product and innovation [indiscernible], including Forge is working extremely well. And the quarters are shaping quite well ahead. The near-term demand remains strong. So we do expect that the trend what you have observed over the last 4 to 5 quarters should remain intact in the times ahead. Andrew Obin: And with the divestiture of the Warehouse Automation and Handheld Devices I mean, clearly, the Sensors business is becoming much more core and front and center. Could you just sort of parse out what you're seeing there? And what are the trends in key verticals there? Vimal Kapur: Yes, Andrew. So clearly, now Industrial Automation is positioned as a Sensing and Measurement business. I'm really pleased on finally, we found a very clear strategy in the business. I would say that our position there in three broad end market sensing, in aerospace, medical devices, industrial equipment, that's position 1. Position 2 is our metering business in utilities and position 3 is gas detection on all environments, be it oil and gas, be it semiconductor and more broader in industrial. The end markets are strong in each one of these areas I mentioned. And our job is to benefit from these fragmented industrial automation market in Sensing and Measurement and build a better position as we did in Building Automation over the last 3 to 5 years. That's a task ahead of us. Our strategy is working. Our performance is improving every quarter progressively. And as I mentioned, that I do expect that second half gets slightly better, and we remain very optimistic on the performance for 2027. Operator: Our next question comes from the line of Andy Kaplowitz with Citigroup. Andrew Kaplowitz: Yes. Vimal, can you give a little more color into the improvement you saw particularly in IA margin in Q1. The margin improvement was impressive. I know you've talked about a bigger focus on productivity and [indiscernible] ahead of separation in that segment, and in PA&T. But a bigger fixed cost take out in IA. So maybe you can update us on what you've been doing and or how much improved pricing versus cost is helping as well? Mike Stepniak: Sure, Mike, I'll start and I'll ask Vimal to add some color to it. I think IA is going to be a margin expansion driver for us for the next year or so. With the separation of the [indiscernible] businesses. We saw a lot of opportunities structurally just to simplify the business from a cost standpoint. And the team got after that cuase quite early. So you'll continue to see the benefit as we go through the year. Also pricing for us has improved. I think the team has done a really outstanding job in terms of understanding the inflation, working with the customers to manage it and improving pricing. So that's the second piece. And then finally, I would say NPI, the team has been on NPI for the last 18 months, and we're starting to see those NPI hitting the market, and that's helping us recover share where we lost share. So all around, a really good story on Industrial Automation and will continue to be a source of strength for us this year and next year. Vimal Kapur: Yes. I mean, I think the only thing I'll add would be the pricing story is very strong in Industrial Automation, but also more broad-based and across Honeywell. We signaled the pricing between 3% to 4%, and it's more trending towards upper end, more towards 4% versus 3% and how inflation is shaping up I expect that trend to persist, which is going to help us continue to expand margin expansion as we have guided. But I overall performance, I think I have nothing more to add to what Mike said. Andrew Kaplowitz: And then, Vimal, maybe it's a little early for this question, but just focusing on some of your customer conversations as the Middle East conflict has played out here. And given your relatively big exposure now to LNG, do you sense a need for more energy security now or maybe more local-for-local investments. So maybe you have a more robust LNG cycle? Like what are your conversations like around that? Vimal Kapur: Very, very bullish on LNG cycle, I would say, Andy, the 2 businesses we acquired in the last 18 months Liquefaction business from [indiscernible] and Sundyne business, they're performing extremely well. The demand continues to remain strong by the fact we very correctly mentioned not only in U.S. there's more capacity being built to serve the known demand. There's additional capacity being asked now for diversification. [indiscernible] think about those demand being in places like Africa, which was not on the map of LNG business, but they have a lot of gas. So people are considering projects there. We have a lot of inbound requests from that part of the world. And clearly, the refurbishment will be required in Middle East to the damaged infrastructure, which will be the -- which was not a planned demand because this was not something we planned for. So all in, the LNG Liquefaction business and our overall Honeywell LNG story in terms of automation story, our software capabilities is there, with the Sundyne having very specialized equipment for compressors and pumps for LNG, we have a very neat proposition, and it is going to remain a highlight of RemainCo Honeywell. It will remain for next few years a high-growth vertical based upon the demand I have seen over the last few months. Operator: Our next question comes from the line of Joe Ritchie with Goldman Sachs. Joseph Ritchie: So I really like Slide 4. Obviously, it shows like how geographically diversified your project wins have been over the past year. I'm curious, as you kind of think about that high single-digit ramp in the Process side of the business. How do you -- how are you guys underwriting the potential risk to that second half implied guide? Vimal Kapur: Joe, these are very firm projects. There are -- sometimes the demand of these projects can get shifted due to FIDs happening and not happening. But in this case, the LNG backlog is very strong, in particular and some of the new demand, which have come from Africa for refining capacity, there's a natural case there to build more fuel infrastructure in Africa because it never had one, and there's a big refinery by Dangote, which is one of the largest refineries. So those are very, very firm demand, which makes us confident on a very, very limited uncertainty in our backlog. And that's why if you see our confidence factor on high single-digit growth for the overall Process segment is very high. We are not making any assumptions of unknown demand the linearity and supported by our backlog conversion is the basic fact on which we are forecasting this. Mike Stepniak: And Joe, we've been talking about it for almost a year now. We always had that backlog. The backlog improved. Those are all projects which went to FID, meaning they're invested, there is cash behind them and they're ready to go. So like Vimal said, this is a very solid backlog that's going to start converting in the third quarter. Joseph Ritchie: Yes, that's great to hear. And then -- and then maybe just touching on the Building Automation business. I just came back from being a data center [indiscernible] the last couple of days. And clearly, that's a part of the business that I'm sure is growing significantly. I'm sure we're going to hear more about this in June, but maybe just help kind of highlight like how you're thinking about the potential opportunity for your business specifically as it sells into data centers? Vimal Kapur: Yes. So we continue to improve our share of demand in data centers every quarter progressively. And where we have done a great job is really moving into Tier 2 data center providers. I think there's always a lot of conversation of hyperscalers, but increasingly, Tier 2 providers are becoming very, very relevant, not only in U.S., but I'm also talking about Europe and Asia, and that's where our segment performance is very strong. So I expect that we continue to ramp up our volumes in building automation and data center, but interesting development is not Joe, that we are actively working on liquid cooling for our Sensors business because if liquid cooling trend is true, it requires more sophisticated controls compared to the traditional HVAC air-based control. And that's where Honeywell technology is going to be very, very relevant. So our Sensing business is actively working with other liquid cooling providers, which names are well known. And we are also actively working for power generation for some of the data center, which are behind the meters. We have seen a trend where behind the meter power capacity is being set up and our traditional control and automation capability is very unique in that space, because think about it, we always did power plant within a refinery within a paper mill. That's not new for us. And now power plant happens to be in the data center, which is our natural capability. So I would say Honeywell penetration in data center now continues to improve, and we remain bullish on our revenue growth coming from the segment, not only in Building Automation, in the years ahead, it's going to help also Industrial Automation. And depending on some of the projects in the U.S., it may also help Process Automation business. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Unknown Analyst: I wanted to ask a question on on Aero. Just the cadence of growth intra-quarter. I think you mentioned it being acute in terms of challenges in January, February. But obviously, the full quarter closed out at, I think, 3%, 4% organic growth. It implies maybe the exit rate in March is back to where you expected in the second quarter. I just want to get a sense of that. If you can just give us a little bit of that intra-quarter cadence. James Currier: Yes. This is Jim. A couple of comments around that. The cadence within the quarter, I think it's important to note that 50% of the quarter is actually delivered in the third month. And therefore, the momentum that we saw and which you saw in March and carrying that momentum going forward into April, the point being is that our starting point in terms of the first month is substantially better than what we saw in the first month of the first quarter, i.e., January. So as that momentum continues and has laid itself over into April, we expect to see that continued progression throughout the quarter. And even though it's early in the quarter, and as I mentioned, 50% of the quarter is delivered in the third month, what we're seeing in terms of recovery gives us the confidence in terms of what we expect in year-over-year growth for the second quarter. Unknown Analyst: Okay. And then just on the Process Automation side, we noticed, obviously, the aftermarket was down 10% in the quarter. Projects have been relatively stable. Just wondering if you could just talk about Process Automation aftermarket trends. I assume -- I think you said that Middle East conflict, nothing really embedded in the back half. Correct me if I'm wrong, but if you could talk about how that impacts the aftermarket of the Process Automation? Vimal Kapur: Yes. So most of our lost revenue was as a practical matter was aftermarket because this is where our ability to ship the product related to service migration project, lot of on-site services we provide, which are contractual, you can't just simply go there. So it got impacted incrementally by about $50 million round numbers in quarter 1, and we have forecasted about a 1% impact there. Overall, when we started the year, we had indicated the demand being very muted for services and catalyst in process thing got disrupted with a conflict, but the elevated oil price now supports strong demand on the other side of it. So we'll see how the business performs. But we think that the quarter 1 and quarter 2 were the bottom, and we should see more sequential improvement in the second half of the year in the business. Operator: Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: Just one question on the portfolio, but I guess, multi-part. Something wonky in your calendar you're calling June 29, Q3. I'm wondering on the PSS sale, if you could give us a little bit of color on whether or not there's tax leakage, on warehouse. I'm wondering if you could tell us what the 2025 EBITDA was? And then finally, I think you said Quantinuum would be consolidated in Q3. I guess that implies your selling a stake or there's a round that you won't participate in that will take you below 50%? Maybe you could give us a little color on that also. Vimal Kapur: There were four questions there. I'll try to see wrap up here. So I think on the tax leakage part, PSS, I'd like to let Mike talk about it. Mike Stepniak: Sure. So there won't be any tax leakage related to these two transactions. And obviously, we'll have more more to share on that as we progress and complete the transactions. But probably, you'll see it in the third quarter. Vimal Kapur: Both these transactions, Jeff, I want to look ahead and not look back. These are behind us. These businesses are in safe hand with the rightful owners, and I think we have gone through a public auction process and found the best buyers for both of them. I think that's what I can share. On Quantinuum, I'll let Mark... Mark Macaluso: Yes. I think, Jeff, not a great answer for you, but we're subject to rules restricting our ability to share really any further details beyond what you've seen in the release from Wednesday. Jeffrey Sprague: Okay. Understood. And then on the date, so 29 was technically the third quarter for us? Vimal Kapur: So the first day of the quarter 3, happens to be on June 29. I know I was equally surprised by [indiscernible]. Yes, I was confused for a couple of days, but now I've settled. Operator: Our final question this morning comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: Is the supply chain disruption that weighed on Aero growth in January and February, primarily a function of inability to ship because maybe some of your suppliers are struggling to keep up with the pace of demand? Or is it because your Aero customers overbuilt inventory towards the end of last year and they were effectively de-stocking early in the year? James Currier: Chris, this is Jim. It was absolutely not any de-stocking that is happening with our customer supply base. It was purely supplier-centric the lack of certain critical piece parts from high critical suppliers that did not achieve the volume outputs necessary to allow us to deliver the specific outlines within Engines and Power Systems and Control Systems portions of the business. Christopher Snyder: And then just a quick follow-up on Aero. Is there any color you could provide on back half margin expectation, just all the moving parts between the mix shift, obviously, some of the commercial OE price negotiations that you've talked about? And then maybe lastly, any sort of integration tailwinds from case just just kind of -- what do we expect there in the back half? James Currier: Yes. I mean, what I would say is, on an annualized basis, you will see us being modestly up on margin expansion. -- quarter-to-quarter, you do see variability largely driven by mix across the board and mix within the mix of what we are delivering. But on a full year basis, we'll be modestly up for Aero margins. Vimal Kapur: Okay. As always, I would like to thank all our shareholders, our customers and all the Honeywell future shapers around the world for the strong first quarter results you delivered. We remain confident in our path ahead, and we look forward to sharing more with everyone in the months to come. Thank you for joining us today, and we hope that you have a great rest of your day. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings, and welcome to the Rollins, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Lyndsey Burton, Vice President of Investor Relations. Please go ahead. Lyndsey Burton: Thank you, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The company's earnings release discusses the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2025. On the line with me today and speaking are Jerry Geoff, President and Chief Executive Officer; and Ken Krause, Executive Vice President and Chief Financial Officer. Management will make some opening remarks, and then we'll open the line for your questions. Jerry, would you like to begin? Jerry Gahlhoff: Thank you, Lyndsey. Good morning, everyone. I'm pleased to report Rollins delivered strong first quarter results. We saw sequential acceleration through the quarter and continue to see solid growth across all major service lines with total revenue growth of 10.2% and organic growth of 6.6%. Demand was a little slower to start the quarter, particularly given some unfavorable weather in January. But we exited with well over 8% organic growth in March. Spring spring quickly for our teams as we are experiencing healthy growth in recurring and onetime services. As expected, we continued our investments in incremental sales staffing and marketing activities ahead of peak season to ensure that we are positioned top of mind for the consumer as pest season begins. We are well staffed on the sales, technician and customer support front with our teammates onboarded, extensively trained and ready to provide an exceptional level of service for our customers. Earlier this month, we announced our acquisition of Romex Pest Control, a top 40 pest management company according to PCT Top 100 rankings. Romex provides us with entry points into new markets. while enabling them to further scale their operations and expand service offerings to their existing customer base. Most importantly, they have a strong people and customer-focused culture and we were thrilled to welcome our new Romex teammates to the Rollins family. As you know, we believe the combination of Orkin and our strong group of regional brands is a competitive differentiator for Rollins, giving us multiple bites at the apple with potential customers, while also providing some balance and diversification with respect to customer acquisition. The addition of Romex is another example of our successful M&A playbook in action. -- as we continue to add high-quality businesses to our premier portfolio of brands through a disciplined and strategic approach. On the commercial side of the business, we're encouraged by our momentum. Overall, we delivered solid commercial growth for the first quarter. Over the last year, we have strategically added resources to support our dedicated commercial division within Orkin. These resources are paying off. as Orkin Commercial continues to deliver new customer wins across key verticals. Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Kim will discuss in more detail, but we saw headwinds to profitability from higher insurance and claims as well as some pressure from head count given lower volume earlier in the quarter. As we discussed last quarter, it's important that we maintain healthy staffing levels ahead of peak season, so we aren't hiring, training and onboarding a large number of new teammates at the same time, seasonal demand ramps up. We've learned that extreme swings in hiring activity drives teammate turnover rates higher and have potential negative impacts on the customer experience. This hinders profitability in the short term but is the right decision for the business long term and sets us up to capitalize on peak season demand as evidenced by our performance in March. In closing, we're excited about where our business stands today. The year is off to a solid start and demand from our customers remain strong. Our teams in the field are ready to support our customers as peak season ramps up. And I want to thank each of our 20,000-plus team members around the world for their ongoing commitment to our customers. I'll now turn the call over to Ken. Ken? Kenneth Krause: Thank you, Jerry, and good morning, everyone. Diving into the quarterly financial statement and starting first with revenue. Revenue growth was solid to start the year. It was very encouraging to see an improving growth profile as we move throughout the quarter. In total, we delivered revenue growth of 10.2% year-over-year. Organic growth of 6.6% was negatively impacted by unfavorable weather, particularly in January, but we saw a very strong sequential improvement in each month moving through the quarter. We were especially pleased with approximately 12% total growth and over 8% organic growth in the month of March. Overall, organic growth of 6.6% in the quarter represents a 90 basis point improvement versus the fourth quarter of 2025. We realized good growth across each of our service offerings. In the first quarter, resi revenues increased 9.3%. Commercial pest control rose 9.6% and termite and ancillary increased by 13.5%. Organic growth was also healthy across the portfolio, with growth of 4.2% in residential, 7.7% in commercial and almost 10% in termite and ancillary. Turning to profitability and our gross margins. They were 50.8%, a decrease of 60 basis points. The lower volume in the first part of the quarter, coupled with higher insurance and claims activity or headwinds to quarterly margins. Looking at our 4 major buckets of service costs, people, fleet, materials and supplies and insurance claims. First and foremost, lower vehicle gains within our fleet line on the income statement created 50 basis points of headwinds to gross profit margin. We should see this start to improve as we go into the second quarter. Insurance and claims drove an additional 30 basis points of headwinds to gross margins, while service payroll costs provided 20 basis points of headwinds as we carry more technicians ahead of the start to peak season in March. Fuel costs represent approximately 1.5% of sales, and we saw a relatively neutral impact from fuel in the quarter. We currently expect fuel costs to continue to track below 2% of sales in 2026. We are seeing good receptivity on our recent price increase and expect price to contribute 3% to 4% of growth for the year, ahead of CPI, and we expect to be positive on price/cost for the year at that level of price realization. Gross margins are usually at their lowest point in Q1 given revenue seasonality, but we anticipate improving margins in our underlying operations as we move through peak season. Quarterly SG&A costs as a percentage of revenue increased by 70 basis points versus last year. Incremental selling investments provided 50 basis points of headwind while higher insurance and claims cost contributed 20 basis points of headwinds on the SG&A line. First quarter GAAP operating income was $145 million, up 2% year-over-year. Adjusted operating income was $153 million, up 4% versus prior year. First quarter adjusted EBITDA was $179 million, up 4.4% versus last year and represents a 19.8% margin. The effective tax rate was 21.3% in the quarter versus 23.5% and reflects the benefits of both the improvement associated with windfall tax benefits as well as the work our tax team has done to improve our effective tax rate. We expect our effective tax rate to come in under 25% for the year, down approximately 100 basis points from historical levels. Quarterly GAAP net income was $108 million or $0.22 per share. For the first quarter, we had non-GAAP pretax adjustments associated with acquisition-related and other items totaling approximately $7 million of pretax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $113 million or $0.24 per share, increasing 9.1% from the same period a year ago. Turning to cash flow and the balance sheet. We delivered operating cash flow of $118 million and free cash flow of $111 million. Free cash flow conversion, the percent of income that was converted into cash flow was over 100% for the quarter. Cash flow performance was negatively impacted by the timing of tax payments associated with our tax credit planning strategy. This strategy has delivered meaningful benefits and is enabling very strong improvements in our effective rate. Also, our year-over-year cash performance was impacted by our transition to semiannual interest payments on our 2035 senior notes that we issued a year ago. Excluding these items, free cash flow would have increased 14% versus Q1 2025, and free cash flow conversion would have been approximately 140%, all very healthy. enabling us to continue our balanced capital allocation strategy. During Q1, we made acquisitions totaling $18 million, and we paid $88 million in dividends in the first quarter. We continue to expect M&A to contribute 2% to 3% of revenue growth for 2026. Our leverage ratio stands at 0.9x. Our balance sheet remains very healthy. Ladies and gentlemen, please stand by. It appears that our speakers have disconnected. Please stay on the line. [Technical Difficulty] I'll actually go back through and just redo my area [indiscernible] here and just just cover the areas, but just starting over here, diving into the quarterly financial statement and starting first with revenue. Revenue growth was solid at the start of the year. It was very encouraging to see an improving growth profile as we move through the quarter. In total, we delivered revenue growth of 10.2% year-over-year. Organic growth of 6.6% was negatively impacted by unfavorable weather particularly in January, but we saw very strong sequential improvement in each month moving through the quarter. We were especially pleased with approximately 12% total growth and over 8% organic growth in the month of March. Overall, organic growth of 6.6% in the quarter represents 90 basis points of improvement versus Q4 of 2025. We realized good growth across each of our service offerings in the first quarter. Residential revenues increased 9.3%, commercial pest control rose 9.6% and termite and ancillary increased by 13.5%. Organic growth was also healthy across the portfolio, with growth of 4.2% in residential, 7.7% in commercial and almost 10% in the termite and ancillary area. Turning to profitability. Our gross margins were 50.8%, a decrease of 60 basis points. The lower volume in the first part of the quarter, coupled with higher insurance and claims activity were headwinds to quarterly margins, looking at our 4 major buckets of service costs of people, fleet, materials and supplies and insurance and claims vehicle gains, lower vehicle gains with our fleet line on the income statement created 50 basis points of headwind to our margins and we should start to see this improve as we go into the second quarter. Insurance and claims drove an additional 30 basis points of headwind to the gross margin line, while service payroll costs provided 20 basis points of headwinds as we carry more technicians ahead of the start to peak season in March. Fuel costs represent approximately 1.5% of sales, and we saw a relatively neutral impact from fuel in the quarter. We currently expect fuel costs to continue to track below 2% of sales in 2026. We are seeing good receptivity on our recent price increase and expect price to contribute 3% to 4% of growth for the year, ahead of CPI, and we expect to be positive on price/cost for the year at that level of price realization. Gross margins are usually at their lowest point in Q1 given revenue seasonality, but we anticipate improving margins in our underlying operations as we move through peak season. Quarterly SG&A costs as a percentage of revenue increased by 70 basis points versus last year. Incremental selling investments provided 50 basis points of headwind, while higher insurance and claims costs contributed 20 basis points of headwinds. First quarter GAAP operating income was $145 million, up 2% year-over-year. Adjusted operating income was $153 million, up 4% versus prior year. First quarter adjusted EBITDA was $179 million, up 4.4% versus last year and represents a 19.8% margin. The effective tax rate was 21.3% in the quarter versus 23.5% reflects the benefits of both the improvement associated with windfall tax benefits as well as the work our tax team has done to improve our effective tax rate. We expect our effective tax rate to come in under 25% for the year. That's down approximately 100 basis points from historical levels. Quarterly GAAP net income was $108 million or $0.22 per share. For the first quarter, we had non-GAAP pretax adjustments associated with acquisition-related and other items totaling approximately $7 million of pretax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $113 million, or $0.24 per share, increasing 9.1% from the same period a year ago. Turning to cash flow and the balance sheet. We delivered operating cash flow of $118 million and free cash flow of $111 million. Free cash flow conversion, a percent of income that was converted into cash flow was over 100% for the quarter. Cash flow performance was negatively impacted by the timing of tax payments associated with our tax credit planning strategy. That strategy has delivered meaningful benefits and is enabling very strong improvements in our effective rate. Also, our year-over-year cash performance was also impacted by our transition to semiannual interest payments on our 2035 notes that we issued a year ago. Excluding these items, free cash flow would have increased 14% versus the first quarter of 2025 and free cash flow conversion would have been approximately 140%, all very healthy, enabling us to continue our balanced capital allocation strategy. During the first quarter, we made acquisitions totaling $18 million, and we paid $88 million in dividends. We continue to expect M&A to contribute 2% to 3% of revenue growth for 2026. Our leverage ratio stands at 0.9x, our balance sheet is very healthy and it positions us well to continue to execute on our growth priorities while returning capital to our shareholders. As we look to the remainder of 2026, we remain encouraged by the strength of our markets, our recession-resilient business model and the engagement and execution by our teams. We are positioned extremely well to deliver on our financial objectives. We continue to expect organic growth in the 7% to 8% range for the year with growth from M&A up 2% to 3%. We remain focused on improving our incremental margin profile while investing in growth opportunities, and we anticipate that cash flow will continue to convert at a rate that is above 100% in 2026. With that, I'll turn the call back over to Jerry. Jerry Gahlhoff: Ken, that was much better the second time around. You really paid off on the Milligan [indiscernible] play. So -- thank you for that great recovery. We're happy to take any questions you have at this time. . Operator: [Operator Instructions] Our first question will come from Manav Patnaik with Barclays. Unknown Analyst: This is Ronan on for Manav. How should we think about -- how should we think about the sustainability of that March exit rate as we move through peak season? Does it primarily reflect normalization from the early quarter weather induced softness? Or -- is it underlying demand trends that suggest the higher organic base going forward for the rest of the year? Kenneth Krause: We feel good about the exit rate. We feel good about our business. The improvement of 90 basis points from Q4 to Q1, reaffirms the confidence we have in our outlook. Our outlook is rooted in that 7% to 8% organic growth. We remain committed to that level of growth and organic growth across the business. coupled with the 2% to 3% of M&A growth. When we think about our exit rate at 8.4% or so percent as we think about March, Yes, you had an extra day there, but you also just had a really good month, just really good demand. The residential area, which in the quarter, I think, grew at something around 4% to 4.2%. In the month of March, we saw over 7%. So -- so we continue to see good demand for our services, which gives us confidence in our outlook at that 7% to 8% organic growth, Ronan. Unknown Analyst: That's helpful. And then as volume ramps through into peak season, how should we think about the incremental margin flow-through relative to 1Q given the cost set up and the margin drivers and dynamics you described for the quarter. Kenneth Krause: Yes. Thank you for the question. And really, when we think about margins, Q1 is usually our low point just because of the seasonality of the business, and it came through in that manner. We fully expect improvements to start to -- we start to see improvements here as we ramp into Q2 and Q3. We should see improvements going into the second and third quarter here of 2026. So we remain committed to the outlook we have on our incrementals. The business is intact. And and provides us a sense of confidence in what we can deliver from an incremental margin profile. . Operator: Our next question comes from Sam Kusswurm with William Blair. Unknown Analyst: I think you just touched on this already, but maybe to help us bridge to that 7% to 8% organic growth for the remainder of the year. Can you just share how April has trended so far relative to exiting March here? Kenneth Krause: We're early, Sam, in April. But we really -- looking at our projections and forecasts that we continue to look at I mean we still have a lot of confidence in that 7% to 8% organic growth. And as I said before, the 2% to 3% of M&A growth. So we feel like business is very much intact, and should continue to deliver that sort of growth profile for our investors. . Unknown Analyst: Okay. That's helpful. maybe pivoting a little bit. We saw that the insurance and claims expense was 3.7% of sales in the quarter. This compares to the full year rates of 2.9% and 25% and 3.2% in 2024. I guess I'm curious how we should think about this expense line as we move through the remainder of the year. And if you're kind of expecting it to remain at this elevated level. Kenneth Krause: That's a hard one to predict. When we think about insurance and claims, it's an area with a lot of oftentimes volatility. We do our best every quarter to put the most accurate number on the financials, and that's what we did in Q1. We unfortunately had some claims that continue to mature and go through the maturation process. And that was a headwind for us. And -- but it's really hard to predict what that line will look like as we go forward. We're hopeful that we'll see it moderate as we go into the second half of the year and improve, but we also know that tax and circumstances change as we go through out each and every quarter. With that said, we still are -- we are still holding strong to our incremental margin profile as well as our ability to grow earnings in that double-digit range. And so we continue, despite having and facing some of those headwinds in insurance and claims have a -- continue to have an outlook that remains unchanged with respect to the incremental margin profile. Jerry Gahlhoff: And Ken, I would add that long term, how we approach safety and insurance and claims has to do with investments that we're making today and investments we made last year that are going to continue to pay off for us long run by reducing our collision frequency rate, our injury frequency rate, that long term should be able to help us drive our costs down. We're piloting a lot of programs making investments, especially in driving safety to avoid these types of situations that hopefully can begin to change the arc or the trajectory of that component on our P&L. . Operator: Moving next to Greg Parrish with Morgan Stanley. Gregory Parrish: Congrats on the quarter. Maybe I covered some of the big topics. Maybe just to touch on Romex you acquired a few weeks ago. Maybe you could touch on the strategic rationale, what attracted you to their culture of that business? And any early expectations for that? Jerry Gahlhoff: Yes, this is Jerry. We got to know the team at at Romex over some period of time and had a number of meetings with them and kind of as I've referred to it or described it as kind of a dating process for you, you just kind of get to know each other. And they've got some really talented people on the team that we had met, and we're very impressed with their operations, how they -- how closely they were aligned with us, how they treated people, how they approach customer service. They also operated in some very complementary markets to that were good markets that were -- they had some really strong positions in and continue to grow and expand. And plus we saw a great opportunity to leverage some of -- the things that we do as we add additional services to customers, they were focused pretty heavily on pest control, residential pest control, primarily and a little bit of ancillary service offerings and and we saw an opportunity to be able to leverage our knowledge and expertise to help them continue to expand their depth of relationship with their customers over time as well. So we're really excited about the team at Romex, especially the talent that we know is there. And that's oftentimes one of the -- if you look across our portfolio of brands, oftentimes when we add brands to our group we're getting super talented people, and that really helps shape our company and has formed who we are today. So we're really proud of that. Gregory Parrish: Great. And then I wanted to ask on fuel costs. I appreciate the additional disclosure that you gave. I know you talked about your exposure in the past as well, and it's fairly low exposure. But just remind us the limited exposure that you do have, is that hedged at all? And did that have any impact, albeit small on margin in the quarter? Kenneth Krause: On the fuel costs, Greg, just to double-click on that, we do not hedge that cost. It's a relatively minor cost in our P&L. It's about 1.5 points in terms of total exposure in the P&L. We will continue to evaluate it. But for now, we don't see a meaningful exposure that would require us to take extensive approaches outside of just making sure that our price increase reflects this volatility and challenging environment that we might be in. But with that said, we continue to enjoy a highly variable cost structure with a very low amount of exposure to the fuel area. . Operator: Moving on to Tomo Sano with JPMorgan. Tomohiko Sano: [indiscernible], you mentioned that residential organic growth in March was about 7%. Could you provide more detail on the trends you saw in March [indiscernible] segment as well Additionally, are there any notable differences in growth rates or demand recovery by region? Kenneth Krause: Now overall, Tomo, the business is very healthy in March. -- residential probably showed the greatest improvement. Commercial also was stronger relative to January and February in termite and ancillary hang in there -- hung in there. Our onetime business certainly benefited as we went throughout the quarter. If you recall, Q4 negatively was negatively impacted by a very weak onetime number. and we saw some improvements in that area as we went throughout the quarter. So all told, we feel good about where we are to start Q2 across all of our major service offerings. But it was probably residential that improved the most quarter-to-quarter, which makes sense as you get into season, it's usually going to be the residential side that pops more than the commercial side that is much more stable through the year. . Tomohiko Sano: And a follow-up you have continued to invest in people, service and infrastructure even during the periods of unfavorable weather and revenue softness to ensure continuity and improvement in customer service -- so when you look at the market today, do you see this as a strategy that clearly differentiates the rolling from competitors? Are there specific ways in which you approach to investment and service stance out versus peers? Jerry Gahlhoff: I don't -- I wouldn't comment about how it compares versus peers. I think this is our strategy. And -- when you look at the investments we make and the best example I can give you, when I started in this business a decade ago, this business was a lot simpler. And I did pest control, and I did termite work. And the options that we had to learn about and what I had to do, we're relatively simple 30 years ago. Today, you've heard Ken talk about having 9 shots on goal. And when you have to train people to be able to be experts and knowledgeable both on the service and the sales side for the complexity of all the things that our team does -- that takes time. It takes experience. It's harder and harder. You can't just get somebody up and running in a few weeks, like it was 30 years ago when I started in this business, so those are investments that we make that we do think probably differentiate us from -- from our competitors, but we do it because it's the right thing to do. It's the right thing to do for our customers to ensure that our -- that we have trained people that have been through a season and have been experienced so that when they're dealing with a problem in the month of April or the month of May, we're able to put more experience at the door to help them solve their problem. So that's a big part of our strategy. It has to do with how do we improve customer retention by ensuring that we have a better service delivery offered through some of these kinds of investments that we make because this is not the long game. It's about lifetime value of a customer. And the more that we can invest to improve the long-term value of the customers, the better off we are. Would you add anything to that, Ken? Kenneth Krause: Yes. The only thing I would add is when you look at industries, you might look at how people pare back head count quickly or change headcount. I mean, as Jerry had used the word, we take a long-term-oriented approach. We very much do. And so when we think about January, some may have decided to pare back and pulled back on headcount, we decided to hold in there because we were confident in the ability to drive growth in the business. We knew there was a temporary and transitory challenged with weather. We saw through that, and we kept our people, we invested in our people, and that's paying off now as we start peak season. . Operator: Next question comes from Curtis Nagle with Bank of America. Curtis Nagle: Just one, apologies have missed this. if you'd be able to break out the growth rate for recurring and onetime in the quarter? And then I'll just have a follow-up. Kenneth Krause: Yes. Overall, when you look at the recurring and onetime and you compare that to what we've seen historically, as we had talked during the call, January, February were weaker. We saw weakness in January, February. March was very healthy at that 7% sort of range on the recurring business. The onetime business continue to accelerate and improve as well. If you recall, in November and December, we were contracting in that area because of the challenging weather. And in January, we were flat we saw a nice strong improvement in March. And so it shows that, that business didn't necessarily go away, but we were able to go back and recover that. And we exited with a pretty healthy backlog. Ancillary, the more of the 9 shots on goal that I oftentimes refer to is double-digit solid growth in March. And so overall, all healthy -- all signs point to healthy a healthy portfolio across recurring onetime and the ancillary. Curtis Nagle: Okay. And then maybe, Ken, could you give an update on -- the efforts to improve your retention rates going into the spring season, both from just raw retention and then some of the cost savings you've talked about? Kenneth Krause: Certainly. When we think about retention, there's 2 aspects of retention. There's technician turnover and technician retention and then there's customer retention. On the technician turnover, it's more around short-term people that are coming in the business in the first year and how do we improve upon that. We're making great strides there. We're going to have an Investor Day on May 14. We're going to talk a lot about what we're doing around our culture and all the investments and the results we're seeing as well as the potential to move the needle when it comes to margins with spending less on onboarding because we're keeping our people through that first year. So continue to make progress there. And then on the customer side, we're also making changes there. We're putting leadership around that, and we'll talk more about that in Investor Day. We're not seeing any major changes in the quarter per se when it comes to customer retention. It's not precluding or prohibiting us from growing our business, but there's an opportunity there. We just lose way too many customers every year, and we're making investments in that as well. And Jerry and the team and all of us, we're going to speak to that in our Investor Day in May. Jerry Gahlhoff: Yes, the commercial side of retention remains very strong, very stable. We did make some modest improvements in the residential side, particularly across our business. as we exited the first quarter. So we were good to see that. But we still see that there's a lot of potential upside there and thus the investments that we've talked about making. . Operator: Moving on to Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to ask on just the margin improvement opportunity as the year progresses. Maybe if you could just talk about what gives you confidence that you'll be able to see some improvement and maybe commenting on areas of opportunity outside of just inherent operating leverage as the volumes as the top line accelerates. Kenneth Krause: Thanks for the question, Stephanie. And when we think about it, when we look at the first quarter, you look at the incremental coming in at a pretty low point. But whenever you understand and whenever I took the time to really analyze and dig into the results, what I found was about 100 basis points in total of headwind was associated with insurance and claims and then the gains on sales that we had in the fleet. . We talked about the fact that if we excluded those 2 items, you would have had a closer to a 20-or-so percent incremental margin profile. And that's about what we would expect in Q1. I mean a lower volume, and that's -- that's the kind of performance we would expect to see come through the model in a lighter revenue quarter. When we think about those 2 areas, we talked about the fact that the sales on leased asset or gain on sale of assets should change and not be a headwind as we go into Q2, we should start to see some improvements there year-over-year. And so that certainly should help us regain some traction on the margin line. And the fact that we continue to see improvements in the overall growth of the business should also just yield solid results as we carried higher technicians and people into peak season. So considering those 2 or 3 points, I think it gives us a lot of confidence that in Q2, Q3 and Q4, we should see improvements in the margin profile to get us back into that range that we're targeting. Jerry Gahlhoff: When you look at how much we spend on our P&L basis on people, when the growth is there, you get leverage on the people side as well. And that's probably the biggest opportunity that we have going in the rest of the year. Operator: We'll go next to Peter Keith with Piper Sandler. Peter Keith: On the margin topic, I'll just stick with that. For the gross margin, I was curious because you quantified all the negatives at negative 100 basis points in some versus the 60 basis point decline. So -- what were the positives that offset and I'm assuming pricing played into that, but I was hoping you could answer the question. Kenneth Krause: Yes. No, thanks for the question. I mean we saw some good performance in the materials and service line. We also saw some improvements across a broad category of items that you normally would leverage like branch rent and professional services and and things like that, other cost categories, if you will. And so across those 2 or 3 areas, you had the materials and supplies and then you had the other areas, the 3% to 4% pricing allowed us to leverage those because they're not changing as much. They're not as maybe as variable as some of the other costs. And so we're able to leverage that through the P&L. Those are the things that produce the positive improvement in the gross margin, which was unfortunately fully offset by the items we talked about. Peter Keith: Okay. Helpful. And then secondly for me, just on the free cash flow, thanks for the details on the onetime items. I guess as we think about those items going forward on the timing of credits and the semiannual interest payments, what you experienced as headwinds on free cash flow in Q1 reversed in Q2 where now we should see abnormal year-on-year increase. Kenneth Krause: Yes. They will -- as you go throughout the year, they will. The interest expense certainly will, that's paid [indiscernible] annually. So Q2, you won't see that come through year-over-year and be a headwind. The tax payments -- we fully expect that by Q4, you'll see a nice improvement in the use of cash with respect to this. Some of this is front-loaded in the first half of the year. So you might -- you probably see improvement in Q2 and Q3 from where we are in Q1. You won't see it reach a full potential until Q4. But for the full year, that mid-teens sort of growth rate in cash is something that we continue to target and have a lot of confidence in delivering. . Peter Keith: Helpful. And congrats on that March exit rate? Kenneth Krause: Thank you, Peter. . Operator: We'll hear next from Josh Chan with UBS. Joshua Chan: Jerry and Ken, maybe for Jerry, I guess in prior years where the weather is tougher to start the year, and your experience, by what month does everything kind of normalize and then you kind of move past the slowness and maybe catch up, I guess, when the things going to get back to normal usually? Jerry Gahlhoff: Yes. So Ken and I were talking about this yesterday. There have been times where we've we've had slow marches and literally, it was right around this time of the year in April when it was suddenly break and business would pick up. We were very fortunate, I think, in March to have had very favorable conditions pretty -- by the end of the first week of March, it really popped. It felt like things were literally heating up. And -- but oftentimes, it's usually end of March, beginning of April that it starts to go. Sometimes that delayed like the third week of April, and we're really treating it when that happens. . And once in a while, it does. And you're just waiting -- and we can tell based on phone call volumes on a day-to-day basis, we know when that's when it's official, so to speak, and it happened. And really, that happened for us at the end of the first week of March. So that was really good. Joshua Chan: Okay. And then I think you mentioned earlier that you want to improve retention. I guess the retention in the industry has always been maybe not incredibly high. So I guess I wonder -- what is it that you think you could change about something that has been this way for a little while? Jerry Gahlhoff: Well, I guess that goes back to the mindset of continuous improvement that there's always something that that can be made better that we ought to be able to improve. I mean for example, I give a shout out to our team at Fox Pest Control. When we acquired Fox 3 years ago, their customer retention was what I would call normalsh. They have partnered with our -- with the HomeTeam brand, who has some best-in-class retention. And over the last 3 years, have moved their residential retention by 5 percentage points. That's big movement over a few year period of time. So that demonstrates to us that there's always room for improvement, always opportunity to get better -- and we're going to be pushing hard on that lever across all of our business units. Even if you're really good. The expectation is we need you to also make some modest improvements compared to maybe some of the territories or brands or parts of the business that are -- lag a little further behind others. So we see it as a huge opportunity -- it's an opportunity to also potentially accelerate our organic growth rate a little bit more. And so we'll probably unpack that. We'll definitely be unpacking that a little bit more for you at the investor conference in May. Joshua Chan: Great. Thank you both for the color today and look forward to the Investor Day. Jerry Gahlhoff: Thanks, Josh. Operator: Our next question comes from Ashish Sabadra with RBC Capital Markets. Unknown Analyst: This is David Paige on for Ashish. I had a question on commercial. It looks like some solid growth continued solid growth. You mentioned maybe some business wins and some other investments. So I was wondering if you could just click on how trends are going in commercial -- and then maybe as a follow-up, what is the competitive environment that you're seeing in commercial? Jerry Gahlhoff: We haven't seen any significant change in the competitive environment in commercial we still feel that we're positioned and just perfectly to have scale to be able to service customers anywhere in North America. And that creates great opportunity. We've continued to invest and feet on the street, looking at some reports recently. We began the year with almost 80 more commercial account sales managers than we had in the first quarter of last year, and they're putting wins on the board. So we see it in both in local sales -- those are the account managers that are more in the branches and the regions and the territories that they're working in. We also see it amongst our national accounts. Getting great growth out of both those channels, driving growth throughout different verticals that we know that we like to focus on and so we're really excited about that. And so those investments on the commercial side take a little longer to pay off, but it's one of the -- it's also one of the reasons we're so optimistic about the rest of the year because we know that the business coming in that's that have recently been sold as it turns into that organic recurring revenue growth throughout the remainder of the year. Operator: We'll go next to George Tong with Goldman Sachs. Unknown Analyst: You mentioned with insurance and claims that certain claims are going through the maturation process. Can you elaborate on whether this was from a specific vintage or period when claims activity was particularly high? And how quickly your safety investments translate into improved claims performance. Kenneth Krause: When you think about these claims, I mean, these claims have the potential to go back a number of years. I mean what you saw just generally across the business was post COVID, when people came back on the highways, accidents started to happen. And so you saw claims from that vintage. You also saw more near-term claims. And so it's not -- it's hard to pinpoint any specific period that these claims pertain to. They're across a number of years. And I mean when you think about the safety, I think it's already paying off. I mean, we're seeing great improvements in our safety experience. But what happens is it just takes time for that to see its way through the cycle. As I described, some of these claims are 3, 4, 5 years old. So as you think about it, you're probably going to continue to see experience like this in the next several years, hopefully, tailing off and trailing off as you move forward and make even more improvements in the safety experience. But this is probably something we're going to deal with for -- unfortunately, for a while. The lead indicators are positive. That's the good news. So when you're accident and injury frequency rates are coming down long term, that is the best predictor that we have for those volumes. But at the same time, we see the cost of insurance and kind of the crazy market that, that is has just been a headwind for us for several years now. Unknown Analyst: Got it. That's helpful. And then with respect to fuel costs, can you discuss what your strategy is to pass along the cost to customers? How real time can your prices adjust to changes in fuel costs? Kenneth Krause: So George, we have 2 ways of charging for cost in our business. And really, we don't think about -- we think about the value of our business there's there's just annual price increase that we always talk about. Then we have rate cards. And so as we go throughout the year, we have the ability to adjust the rate cards based upon what we're experiencing with -- in our cost inputs. And so that's something we -- I think we've done historically and we'll continue to do as we go forward. Jerry Gahlhoff: And I would add that for us, it's more about how do we avoid the fuel costs, I believe, for example, reduce idling time, how do we use apps that are installed on all of our phones that help direct us to the location nearest stuff that has the best gas prices. How do we leverage relationships our fleet team is doing a good job negotiating deals with large providers of fuel to get rebates on fuel use that runs through their systems. Those are the things that we're more focused on is about efficiency in our model and efficiency in our entire fleet system, and we'll let our normal price increase programs do their part to help us also offset. Kenneth Krause: Or even how we build out dense routes, like or we acquire businesses like Fox Sala or Romex who have very dense routes. And like those are really good points, Sherry, that you highlight. And it's not just about reacting, but it's how do we proactively do things to make our business better. Operator: Seth Weber from BNP Paribas. Unknown Analyst: This is Christina [indiscernible] for SEth Weber. So I wanted to touch a bit about how you guys target around 2% to 3% revenue growth from M&A. And after the acquisition revenue in the first quarter and the Romex acquisition, I was wondering if you guys expect this to -- this acquisition to push the full year M&A contribution above the 3%? And how does this change the overall M&A pipeline for the rest of the year? Kenneth Krause: Thank you for the question. In the first quarter, I think M&A contributed 3.6% of revenue growth for M&A. And we expect that to moderate as we go throughout the year. That was certainly bolstered last year by the the Sala acquisition. And so right now, we're solidly in that 2% to 3% range. There's an opportunity to go higher. There's probably very low likelihood that it would be below that. We are very confident in 2 to 3. We're not ready to raise it yet, but we also just know that we're very active and we have a very strong pipeline. And -- but right now, step 2 to 3 is probably the right range to be in. . Unknown Analyst: Got it. And as a follow-up, so termite and ancillary was up about 9% to 8%. So I was wondering what's actually driving this and if you guys are seeing any customer demand for bigger ticket ancillary services? And I guess how cross-selling is going for selling these services across the rest of the brand portfolio. Kenneth Krause: Going well. That will be a big topic that we talked about in May. The ancillary termite ancillary includes ancillary, which is this hockey season we're in here and playoff season, the 9 shots on goal. We continue to see great demand there. I think Ed Donahue will be joining us as part of a panel in May and he actually was really instrumental in developing our approach with Oregon and we've seen great improvements there. But it's a great business. We continue to see good levels of demand, and it's a huge opportunity across the portfolio because we have a number of brands that aren't doing much with that part of the business today. Jerry Gahlhoff: Yes, it's a great point, Ken. We moved Ed Donahue, who is VP of Sales for Orkin for many years. And we've moved him over to our non-Orkin brands this year and the group and brands has been moving the needle a great deal and adding services using our RAC, our in-house financing, teaching them how to -- and training them, how to how to leverage that throughout their businesses, and we've seen some really nice improvements in that regard very, very quickly, and we're excited about that. And like Ken said, you guys will see and meet at in May at the Investor Day. You'll hear more about that. Operator: Moving next to Jason Haas with Wells Fargo. Unknown Analyst: This is [indiscernible] for Jason Haas. We've heard that one of your competitors is being more aggressive with their marketing. So I'm wondering if you're seeing any change in the competitive environment and if you're adjusting your marketing strategy and response. Kenneth Krause: Not really. We're seeing great growth there and good performance. Jerry Gahlhoff: Yes. I don't -- we're continuing to focus on what we do, how we do it. spending our money efficiently, moving it to efficient channels and making adjustments. I'm sure that, that team has to monitor and see what a variety of competitors -- we have so many competitors in this space, all looking to gain the same customers. But the more we try to target, who our best customers are, what we're doing and the marketing team stays on brand and focused on getting the right types of customers to our brands, that's when we win. And we still feel very comfortable and confident in everything that we're doing from a marketing standpoint. . I mean the fact that we saw 90 basis points of improvement in organic growth from Q4 to Q1, and I think that stands out and shows that the investments we're making continue to yield really strong results in our markets. Unknown Analyst: That's helpful. And then as my follow-up, I'm curious within the residential segment, if the acceleration you saw in March was caused by any business from earlier in the quarter shifting into March? Or is all of that acceleration was just strong underlying demand? Jerry Gahlhoff: There may be a little bit of carryover from backlog in February into March. But based on what I saw in February was not nearly as tough as January was in terms of branch closures and a number of days that we really couldn't get the work done. So we carried probably more backlog into February than we did March. So -- but March was -- Mark, as I mentioned, by the first week, I mean it started going and the phone started ringing and things just picked up. So a lot of that organic was just coming at us right there in the quarter, and we also had time to get all of our work done that was scheduled to be done in the month. Operator: This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments. Jerry Gahlhoff: Well, thank you, everyone, for joining us today. As a reminder, we will be hosting our Investor and Analyst Conference on May 14 at the New York Stock Exchange. We're excited about what we have to share and look forward to seeing many of you in person. Thanks. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2026 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Mr. Kartik Ramachandran. Please go ahead. Kartik Ramachandran: Thank you, Darryl, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well as the earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com. We will begin today with Steve Squeri, Chairman and CEO, who will start with some remarks about the company's progress and results; and then Christophe Le Caillec Christophe, Chief Financial Officer, will provide a more detailed review of our financial performance. After that, we'll move to a Q&A session on the results with both Steve and Christophe. With that, let me turn it over to Steve. Stephen Squeri: Thank you, Kartik. We had a very strong start to the year. Revenue in the quarter grew 11% or 10% on an FX-adjusted basis and EPS was $4.28, up 18% over the prior year. Card member spending grew 10% on a reported basis, and this is the highest quarterly growth in 3 years, driven by strong growth across both Goods and Services and T&E. We continue to see strong demand and engagement with our premium products across our customer base. Within our U.S. Platinum portfolio, we're seeing accelerated spend growth following the refresh while maintaining high retention rates after the fee increase went into effect. Millennial and Gen Z spending growth continues to be robust and globally over 70% of new accounts are on fee-paying products. International remains our fastest-growing segment with billings up double digits for the 20th consecutive quarter on an FX-adjusted basis. And consistent with what we've seen for several years, our credit performance continues to be excellent and best in class. Based on our strong results to date and our confidence going forward, we've decided to increase our investments in marketing and technology to capitalize on key growth opportunities and build on our momentum. Looking ahead, we're reaffirming our full year 2026 guidance of 9% to 10% annual revenue growth and EPS of $17.30 to $17.9. While the macro and geopolitical environment remains uncertain, we believe we are well positioned to continue delivering strong results, given our focus on premium customers, our spend in fee-centric model and very strong portfolio quality. Our performance once again demonstrates the power of our growth strategy as we continue to execute our proven playbook. A key part of the playbook is the ongoing investments we're making to enhance our differentiated membership model, which is fueled by our high-spending Card members, the value added by our world-class partners and the innovations and service delivered by our talented colleagues. One of the most compelling features of Amex membership is the unique experiences and access we offer our card members in dining, sports, entertainment and more. Sports are a powerful engagement engine across our customer base. In Q1, we announced several agreements that added to the relationships we have with over 50 top-tier leagues, teams, venues and events around the world. In March, we announced a multiyear global partnership with the NFL, making American Express the League's official payments partner beginning with the 2026 season. This broad-based sponsorship includes exclusive card member experiences, ticket access, on-site activations and other perks at high-profile league events, including the NFL Draft and the Super Bowl. We're very excited about the opportunity to join with the NFL as they expand internationally. With our large global footprint, positioning us well to support their growth while engaging Amex card members around the world. We also announced new multiyear sports and entertainment agreements with MetLife Stadium, Mercedes-Benz Stadium and teams in play there. And we renewed our sponsorship with the NBA, along with several agreements with NBA teams across the country. In addition to our sports sponsor partnerships, we continue to enhance Amex's membership with recent openings and plans for new or expanded airport lounges in Las Vegas, Boston, Charlotte, Dallas Fort Worth and New Delhi. And the expansion of our fine hotels and resorts and hotel collection programs with an additional 300 properties recently accepted into the program out of an approximately 1,400 who apply. Another key element of our strategy is the ongoing innovation of our product value propositions, and we continued our progress on this front as well. In the quarter, we announced a road map for a series of commercial products and solutions that we're planning to roll out in the U.S. In 2026 for businesses of all sizes, starting with the launch of our new Graphite Business Cash Unlimited card. The road map includes plans to release 8 newer enhanced products, benefits and capabilities including a corporate cash back card and expense management software, making this the most significant 1-year commercial product expansion in the company's history. Together, these new offerings will give our business customers what they want, card products that combine high spend capacity and great value plus an integrated suite of tools that will help to manage expenses and cash flow, gain insights from their spending and automate day-to-day tasks, all backed by American Express' world-class global customer service. In addition to these announcements, we further the development of our AI capabilities in the quarter. As I said in my recent annual letter to shareholders, while it's still early days, we are embarking on a new era of commerce, where AI-powered agents can make autonomous decisions on behalf of consumers and businesses. But in addition to offering speed and convenience, Agentic Commerce brings added complexity and risk. This plays directly to the strengths of our -- to our strengths of trust, security and service. Given our closed-loop network that provides an end-to-end view of transactions, and supported by the investments we've been making in our technology and risk capabilities, we are well positioned to deliver intent-driven authorizations, enhanced fraud protection and strong security features to help protect our card members and merchants. Earlier this month, we introduced the Amex Agentic Commerce Experiences or ACE Developer Kit, which will enable the integration of American Express cards into AI-powered transactions with trust and control. Along with the kit, we announced Amex Agent purchase protection, an industry-first commitment to back our card members by protecting registered agent purchases. We have more AI-powered products and capabilities under development that will roll out this year to help transform and grow our business. This includes upcoming announcements with leading AI companies to make our membership assets discoverable and actionable on their platforms and building proprietary AI-powered experiences across our own platforms. In summary, our business continues to perform at a high level, exhibiting continued momentum from executing our proven strategy and making meaningful progress on the strategic use of AI to drive long-term growth and efficiencies. With our loyal premium customer base, our talented customer-focused colleagues and a differentiated business model, we are confident in our ability to deliver long-term sustainable growth. Now I'll turn it over to Christophe for more details about the quarter, and then we'll take your questions. Christophe Le Caillec: Thanks, Steve, and good morning, everyone. Q1 was a very good quarter. Revenue growth accelerated to 11% or 10% FX adjusted, with broad-based growth across revenue lines. Spend growth stepped up to 10% or 9% FX adjusted, the highest level we've seen in 3 years, and we continue to see healthy demand for our premium products with over 70% of new accounts acquired on fee-based products. Credit performance remains excellent with both delinquency and write-off rates still below 2019 levels. And we continue to invest across marketing, technology and our premium value propositions to support long-term growth. We delivered very strong returns in the quarter with EPS of $4.28, up 18% year-over-year. Turning to Billed business on Slide 4. Overall spend was up 10% FX reported this quarter. That momentum reflects an acceleration in U.S. Platinum spend following the refresh last year and the benefit of our global footprint, with tailwinds from FX and high growth in international markets. These results demonstrate the strength of our premium focus and our diversified business. Spend growth was about 1 percentage point higher than Q4, driven by T&E spending, up 9% FX adjusted, while goods and services growth remained stable, up 8% FX adjusted. Retail spending kept up its momentum, up 11% FX adjusted, and spending of luxury retail merchants was up 18%, reflecting the continued strength of our premium customer base. Restaurant spending was up 9% once again this quarter. At the same time, airline spending picked up, growing 8% -- growing 8%, sorry, driven by higher growth across consumers, SMEs and large corporates. These trends sustained throughout most of the quarter, but we did see airline growth soften in the last few weeks of March and into April, driven by travel disruptions from the Middle East conflict. In the U.S., we continue to see strong demand and engagement on platinum following the refresh last year, with accelerated spend growth on the portfolio, high retention rates and continued strong new customer acquisition. And we continue to capture a high share of the spin wallet from both new and tenured platinum customers. The refresh is also driving high levels of engagement with our membership assets by U.S. consumer card members. Lodging spend on our fine hotels and resorts and hotel collection programs is up 50% year-over-year. And in dining, spin at U.S. resi restaurants is up 20%. Looking at our international business, ICS had another strong quarter, up 13% FX adjusted, including the impact of the weaker dollar, spend growth was up 20%. Looking at New Card acquisition, we acquired 3.1 million new COGS in the quarter with continued momentum in acquiring younger customers and attracting new customers onto our fee-paying products. Turning to balance growth. First, a quick note on presentation. The metrics shown on Slide 13, which we previously referred to as total loans and card member receivables is now labeled total balances. Starting this quarter in our financial statements, we have combined card member loans and card member receivables into a single line called card balances, reflecting the evolution of our products through lending features like pay over time. This is consistent with how we've been presenting balances in our earnings slide for the past few years. Total balances increased 7% year-over-year FX adjusted, largely in line with spend growth. As a reminder, there is about a 1 percentage point impact on balanced growth from the small business co-brand held-for-sale portfolios again this quarter, as we previously disclosed. As we exit this portfolio over the course of this year, we will see impact of certain metrics at the consolidated level and within the Commercial Services segment. Most notably, we expect a low single-digit impact to spend growth in SME starting in Q2 until we lap the portfolio exits. At the same time, we expect a negligible impact to pretax income. These impacts were incorporated in the guidance we provided for the year. Turning to credit on Slide 14. Credit performance remains very strong and stable. Delinquency rates were flat to last quarter while write-off rates were slightly down. These results are consistent with our expectations for generally stable credit metrics throughout 2026. Overall provision expense of $1.3 billion included a reserve release of $24 million. The reserve release this quarter was mostly driven by lower ND card balances versus Q4. Our reserves also reflect uncertainty in the macroeconomic environment. Turning to revenue on Slide 16. Revenue was strong this quarter, up 11%. We saw momentum across revenue lines with net card fees, NII and service fees and other revenue, all growing at double-digit rates again this quarter. Net card fees continue to be our fastest-growing loan, up 16% FX adjusted, in line with Q4. We expect card fee growth to pick up as the year progresses as we see the impact from Platinum refresh exiting the year in the high teens. Importantly, about 1/4 of the overall U.S. consumer Platinum portfolio has been built for the higher annual fee, and we have seen no change to our very high retention rates relative to pre refresh. Net interest income was up 12% FX adjusted again this quarter, growing faster than balances. Notably, we are driving strong growth in NII, while growing balances, largely in line with spending, and while maintaining best-in-class credit results. In fact, write-off dollars are up by only 4% year-over-year, while NII is growing at double-digit risk pace. We also continue to see strong demand for our deposit products with high-yield savings and direct CD balances up 9% year-over-year. As we see -- as we see with our premium card products, our savings products is resonating with millennial and Gen Z customers, which make up over half of the accounts and about 1/3 of the balances. Looking ahead, we expect NII growth to continue to outpace growth in balances for the year. Turning to expenses. The VC to revenue ratio was 44.7% this quarter, in line with our expectations. There is some quarterly variability in the ratio given seasonality. For the full year, we continue to expect the VCE to revenue ratio to be lower than Q1, around 44%. The step-up versus the first half of last year reflects the investment we made in the value proposition of our U.S. Platinum cards when we refreshed these products last year. Marketing spend was $1.5 billion this quarter, flat to last year. Given the strong performance we saw in Q1 and our confidence in the balance of the year, we plan to increase our marketing investments to support long-term growth. We now expect marketing expenses to grow in the mid-single digits for the full year. Moving on to capital. We returned $2.3 billion of capital to our shareholders including $0.7 billion of dividends and $1.7 billion of share repurchases. We continue to deliver very strong returns with an ROE of 35% this quarter. Our strong ROE enables us to return high levels of earnings to our shareholders around 75% over the past 3 years. And this quarter, we increased our dividend by 16%, demonstrating our confidence in the sustainability of earnings generated by our model. As we think about our capital requirements, we view the recent Basel proposals as an improvement from the prior proposal. Under the rules as proposed today, we expect the impact of capital requirements to range from neutral to modestly positive. As we evaluate the proposal in the CapEx or other regulatory considerations, we are encouraged by the first discussion of modernizing the tailoring framework and resulting bank category designations. We remain focused on maintaining a strong balance sheet and capital position. We plan to continue to return the excess capital we generated to shareholders while supporting growth and we do not expect a material change to our capital management approach in the near term. That brings me to our 2026 guidance. We feel really good about our momentum starting the year and our first quarter results. We are seeing stronger earnings than expected, and we have decided to increase investments in marketing and technology. As a result, we are reaffirming our full year guidance of revenue growth of 9% to 10% and earnings per share between $17.30 and $17.90. With that, I'll turn the call back over to Kartik and we'll take your questions. Kartik Ramachandran: Thank you, Christophe. Before we open up the lines for Q&A, I will ask those in the queue to please limit yourself to just 1 question. Thank you for your cooperation. And with that, the operator will now open up the line for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Ryan Nash with Goldman Sachs. Ryan Nash: Congratulations on all the new partnership wins. Hopefully, it results in more victories for the giants and jets. Maybe, Steve, to kick off, clearly, we're seeing really strong performance in overall spend. I guess for starters, do you think the momentum that you're seeing in the business is enough that we could start to trend towards that aspirational 10% revenue growth, is that on the table for the year? And you talked about increased marketing and tech spend. Can you maybe just talk about what that's offsetting in terms of where was performance tracking better than expected? And where are you using that to offset? Stephen Squeri: Yes. So I don't know about the jets and the giants, but we -- that will have to play itself out. As we think about -- and let me go -- let me look at this at the beginning here. But as we think about sort of the year and we think about the spending, it continues to be strong. And look, we just had the strongest quarter of spending that we had in the last 3 years. And obviously, spending will drive higher revenue. When you look at -- and I laugh a little bit about sort of the aspirational 9% to 10%, if you look at the last few years, whether it's FX reported or it's reported or FX restated, we've kind of hit the 10%. And our guidance this year is 9% to 10%, and we've just delivered a quarter of 11%. So you can make your own judgment on that. But we feel really good about that aspiration. If we didn't, we wouldn't put it down. So I think what you're seeing is momentum that I believe if it continues, will allow us to achieve that. When you look at the increased investment in technology and marketing, you have regulators in this business. And one of the regulators is making sure that we return what our shareholders are looking for. And so every year, as we go through our processes, we have ROI cutoffs. And we believe what I would say are really good investments on the table. And so when you have an [indiscernible] delivery like we just had in the first quarter, it gives us that confidence that we can move those ROI thresholds down and continue to hit within our guidance range. And as I think about this business, the way I think about this business is, I don't think about it for this year, I think about it the next year and the year after. And what I'm trying to do and what we're trying to do as a company is to build and continue to build on that momentum. And so for me, I look at where we are today, it's a function of the decisions that we've made in the past and those decisions that we made in the past are reinvesting in the business versus just always dropping into the bottom line. And so that's how we said it. As far as technology goes, we've been very fortunate with some of the results we're seeing from an AI perspective and that we're getting about 30% benefit with our programmers from a coding perspective and testing perspective. But what that has done is allowed us to get to more stuff. And when you have a company like ours in so many different areas, whether it's the many countries we're in, the merchant business, the network business, the consumer business, corporate or small business, there is just a huge appetite for technology. And so the overperformance we've had gives us an ability to get to those things a little bit quicker, combined with the AI that we've had -- the AI efficiencies that we're seeing. So look, I feel really good about where we wound up this quarter and against a backdrop of an unstable world at this point. But against that backdrop of an unstable world, we saw record billings Christophe mentioned luxury spending in retail up 18% in front of the cabin is up 12%, and we're seeing great engagement from our platinum refresh. So I feel pretty confident about the rest of the year. Christophe? Christophe Le Caillec: So maybe I can take the second part of your question, Ryan, around the offset in terms of this incremental investment. So you might remember the conversation we had at the end of the quarter, right? We had lot of spend momentum. One of the questions, one of you asked is like how are you thinking about 2026 and say, we'll see. We don't know. We're seeing that we're maintaining momentum. We even have stronger momentum when you look at billings. So that's the check. The other thing is that when you study the P&L, there were also a few unexpected items either on operating expenses. I'll mention 2 that went in our favor. One is a core decision regarding VAT in Europe. So we booked that. And there was also a gain that we registered as we completed the acquisition of the half of the joint venture we had in Switzerland. So that allowed us to book a small gain. So the completion of that acquisition, the court case in France give us a little bit of more confidence in terms of expenses and releasing investment capacity on marketing and technology. Operator: Our next question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani: I guess I have a follow-up on the bill business trends. It is quite remarkable how strong they were in the midst of all this geopolitical activity in the backdrop. I know Christophe, you mentioned there is some softness in airline spending that you've seen over the last few weeks. I'm just curious, is there a way to quantify that? And sort of is it material enough that -- it doesn't sound like it, but that it could deter some of the upside? And then I'm just wondering, is there any other impacts that you've seen across the spending cohorts as a result of the higher fuel prices? And then I guess offsetting that is the momentum you have in platinum. So I'm just trying to think about the interplay between these 2 factors? Christophe Le Caillec: So on airline softness, I mean, yes, we saw definitely noise towards the end of March, beginning of April. And where it was the most visible is in the volume of refunds that were still being processed. It's always hard to know exactly what happened with these refunds is that people booking on a different schedule, different airline, but we definitely saw a spike in terms of customer reform. This being said, the impact is not that large. And I don't think that it is something that you should worry too much about. I'll take advantage of that to mention as well that this is where our assets, both in terms of TLS or the benefits we offer in airports really were valuable to our card members. We were able to rebook I think, something like 18,000 of our customers who have tickets to the Middle East and we also saw a spike in terms of engagement with our partner, clearer at the airport. So definitely, I don't think this is something that should create an impact to our overall billing trends. In terms of fuel, yes. I mean we saw the average ticket price go up, and we definitely saw an increase in terms of the fuel spend. Now fuel is less than 2% of the overall bill business. So the impact is just not very visible on the overall bill business, and it's really, really hard as well to see if there is any offset anywhere. And when we study that at the different product levels, cohort levels, geography, we don't see any discontinuity. And we see as you mentioned, strength, momentum, stability across the board and across the portfolio. Operator: Our next question comes from the line of Don Fandetti with Wells Fargo. Donald Fandetti: Steve, can you talk a bit about your confidence in enhancing the expense management offerings for the middle market SME customers? And I guess, is this an area of focus in terms of the sort of incremental investment? Stephen Squeri: Yes. So thanks, Don. Yes, look, we'll -- in the next few months, we'll relaunch or launch center. And it certainly has been an area of focus for us. And I think when you look at that expense management software. If you take the commercial business and break the commercial business into 3 parts, small business, middle market and large corporate and global, I think where we're seeing a lot of strength is truly in small business and in large and global where the expense management, I think, will really come in is in those middle market companies, especially those small businesses transitioning to middle market. And that's somewhere that we will release, I think, will help us solidify our position that we have there. Additionally, to the software, and you may have seen, we just acquired a company called HyperCard, we brought in a group of people who we've been working with for a number of years who are really in expense management space and we have a lot of expertise in expense management agents and we'll be integrating those into center. And so as we think about our overall corporate commercial portfolio, it's a combination. It's 8 new products, benefits and enhancements that we're releasing through. So it has been and continues to be an area of investment because we still see it as an area of opportunity for us. I mean, we're known for small business, middle market and corporate, still a leader in that space, but we are investing now significantly in that, obviously, with the center acquisition over a year ago with the HyperCard acquisition and just the investment that we're making. So it's an area of focus and will continue to be an area of focus for us. Operator: Our next question comes from the line of Erika Najarian with UBS. L. Erika Penala: I just wanted to make sure that your investors are taking away sort of the right message on the revenue and expense dynamics. And I know Ryan tried to get into this in his question, but it sounds like from everything, Steve, that you said that your -- you've hit 11% revenue growth. Clearly, you're trending above that 9% to 10%. And given that you are at the top or a little above that revenue range, then you're reinvesting that back to the company, and that's why you're reiterating the EPS. In other words, the key takeaway from this quarter is really that sort of upside to revenue. Is that sort of the correct message that your investors should be taking away? Stephen Squeri: Well, I think you have a couple of things. I think the message our investors should be taking away is that we're reaffirming guidance of 9% to 10%. I think while we had the 11% growth this quarter, one thing I will point out, as the year goes on, the Amazon and the Lowe's book will roll off. That will have a slight drag on revenue, zero impact on PTI. And so I think what you should take away from this is that we're reaffirming the 9% to 10%, and we're taking the over delivery from an EPS perspective and investing that back into the business. Operator: Our next question comes from the line of Mark DeVries with Deutsche Bank. Mark DeVries: I appreciate that it was a relatively modest acceleration in build business and commercial services. But are you seeing any green shoots there that give you optimism about a bigger recovery and just kind of the organic spend there? And what kind of incremental tailwind might you get from this kind of record year of product launches across the commercial suite? Stephen Squeri: Well, I think that one of the green shoots that we're seeing is organic is not as stressed as it has been in the past. And while we had a minor uplift sequentially, we think that as you think about the product enhancements that we've been doing is that, that will play out a little bit more over the longer term as opposed to this year. So those products take some time to get into the marketplace. We just launched the cashback product from a small business perspective. We've got the cash back better from a corporate -- cash back product from a corporate perspective, which comes out later this year. So I think as we go into next year, we expect that to give us a bit of a tailwind into next year, not as much of an impact for this year. Operator: Our next question comes from the line of Craig Maurer with FT Partners. Craig Maurer: I wanted to ask about the Platinum Refresh for a second. It's -- we're going to lap that in September. And I'm curious if you can -- if you can separate perhaps how much lift you got in spend from that refresh from existing card members versus new customers? I'm trying to get my hands around how much of a decel we might see as you grow over that in terms of billed business growth later in the year? Christophe Le Caillec: So it's a good question. I guess you're looking at the -- one of the slides that we have with U.S. consumer platinum accelerating by 6 percentage points. The majority of that, given the size of the portfolio is coming from tenure card members. Although we're very pleased with new account acquisition, the majority of that 6% lift is coming from the back book, and that's a very strong sign. As you think about projecting that into 2027, we'll see what happens. But I don't think at this stage, we should expect like a further acceleration in 2027. I expect that step-up to maintain into 2027. But I don't think that you should expect to see another one. So we're going to lap that at some stage in '27. Operator: Our next question comes from the line of Rick Shane with JPMorgan. Richard Shane: Look, a really big part of the journey in American Express over the last decade is reinvigorating your products and penetration to younger cohorts, and it's been a big part of the success here. I am curious as we think about sort of a more uncertain, more volatile economic environment. If you think about that younger cohorts, are they more sensitive to changes that we see, whether it's in terms of spending pattern credit? Is there greater sensitivity sort of beta to the cycle in their behavior versus your more seasoned cohorts? Stephen Squeri: I think ultimately, there'll be less, not more. And I'll tell you why. I think the younger generation is more equipped for the changing dynamics in the world today that, in fact, maybe more middle-aged people, maybe more people, Christophe and my age, I think they're more adaptable, more technology savvy, more into what's going on in the marketplace today. So I feel a lot more comfortable having a card base that is actually skewed a little bit younger than one that would be what you used to see 10 years ago. I think the other thing that's really important is to understand that when you look at our -- when you look at the millennials and you look at the Gen Z that's in our card base, it's not every millennial and Gen Z. It's the creaming the crop. And we show the slide a quarter ago, 2 quarters ago, where our millennial and Gen Z credit performance is better than the industry is Gen X and baby boomer credit performance and is significantly better than the industry's millennial and Gen Z performance is. So one of the things that we've seen with the millennials over time is we get [indiscernible] high share of their -- we get a high share of their wallet right out of the gate. But what we've seen with millennials is as time goes on, that high share translates into even more spend as they continue to move through their lives and continue to be successful, so forth and so on. So I actually feel a lot more comfortable with the SKU of our base today, then if you would have asked me this question, if my base hasn't skewed because I'd be more concerned with my GenXers and my boomers. I mean the reality is when you look at it, and we showed a slide on the consumer, you see the Gen Z is up 38%. The millennials are up 13%. Our GenX are actually really strong at 8%, but then you look at the boomers up about 4%. And so I think we're -- we will continue to depend on that for our growth and just look at our card acquisition. So I feel very confident on who we're acquiring because of the characteristics that they possess and the characteristics that they have to deal in an ever-changing world. So that's how we think about it. Christophe Le Caillec: Maybe I'll have one data point, Steve. And I mentioned it in my remarks, but if you look at like in terms of like the quality of the GenZ and millennials that we attract to the franchise, one interesting data point is to look at the profile of the high cell customers. And I mentioned that half of these customers are actually Gen Z and millennials. Of course, they represent 1/3 of the balances or they have lower balances. But if you had asked me a few years ago, where are the balances going to come from, where are the account is going to come from. I wouldn't have told you that I'm confident it's going to come from the younger cohorts. And -- but that's what we're saying, right? So it tells you something about the profile of these younger customers that are joining the franchise. They have savings. Operator: Our next question comes from the line of Rob Wildhack with Autonomous Research. Robert Wildhack: I wanted to ask about the relationship between spending growth and balance growth. Back in January, I think the commentary was for balances to grow in line with spending. And I know you've got the co-brands rolling off there. But if we could normalize for that, how do you think about balanced growth if the acceleration in spend from this quarter continues, would you expect to grow balances concurrently? Or do you kind of like the balance growth at the level that you laid out back in January? Christophe Le Caillec: Yes. I think first, I like it when I see spend accelerates. And the fact that balances are growing at a slower pace, like 7%, some of it is just rounding. So I would not interpret it too much. The other thing is that typically balance lag. The final thing is that we're not chasing balance growth. We're chasing customers who are going to spend with us. And if they feel the need to revolve, then we're going to put in front of them the best possible products so that they can revolve at the pace they want, including pay over time, which typically has shorter revolve durations. And so that's the kind of revolve that we like. So I'm not too concerned about that. And you've seen that 7% kind of like stable over the past few quarters. What you've seen as well is, over the last few quarters, NII outgrowing that balanced growth, and I think has been stable in that 12% range as well. And some of it is coming from what I just mentioned a few minutes ago, we are successful at funding those balances with either high-yield savings accounts that are a cheaper funding source for us, and that's helping the NII growth as well. So the dynamic is very stable and consistent over the past few quarters. Operator: Our next question comes from the line of Jeff Adelson with Morgan Stanley. Jeffrey Adelson: I just wanted to follow up on Rick's question. I appreciate all the color and understand, obviously, that you've got a healthier consumer in there. You view the Gen Z more adept at handling these changes in technology. But just given the market focus on AI jobs-related displacement. Just curious if you're seeing any sort of impact in the customer base today? Or just if you have any sort of views on what that trend might look like for you over the next few years? Stephen Squeri: Yes, we're not seeing any impact at all on this at all. And maybe I'll just make a couple of comments. I think technological change over the years, no matter what it has been, whether it's been the Internet, the cell phone, what have you and even eliminating the word processor and going to desktop PCs has always brought a plethora of new jobs, number one; and number two, has fuel GDP. Now will AI lose some jobs? Yes, it would. But who would have thought about influencers, podcasters, web developers, AI programmers years ago. Probably nobody. And if you think about the jobs that are out there today, and where these jobs are, can I think more Gen Z and millennials are going to be more trained for this and more ready for this. And so will jobs go away. Yes, jobs will go away. A number of the service jobs will go away. I mean, even at American Express today, if you look at our volume increase and you look at our ratio of volume to how many people we have on the phones, it's decreased. Not as many people want to talk on the phones and plus we're making the people that are answering the phone is more efficient because they have AI tools at their disposal, whether that's for travel or whether that's for card servicing. We'll always have a representative there that you can call up and talk to, that's never going to go away from American Express. We're always going to be able to serve our customers how they want to be served. But I think from an AI perspective, yes, you'll see a bunch of jobs go away, but I think you'll also see a tremendous creation of new jobs. And I think this cohort will be much more likely to fill those jobs and create new jobs, new opportunities. The last thing I'll say is a lot of people talk about white collared workers. Our base is not just white collared workers. Our base is premium consumers and premium small businesses that from a consumer perspective, want access to experiences and want access to service and special offers and things like that. And that runs the gamut. I mean, that runs the gamut for the individual entrepreneur to the TikToker and to the influencer and to the podcaster, to as well as people that are research analysts, investors and hedge funds and everything else. So I think that will be there, and we'll see how it all plays out. But again, technology has, over time, fueled GDP, not crush GDP. Operator: Our next question comes from the line of Darrin Peller with Wolfe Research. Darrin Peller: Steve, you recently launched your Agentic Commerce Experience developer kit, I know you wrote about it at length in your letter. So just given our checks are indicating in general across AI and agentic, if there's been more fraud on some of these transactions. It's early days, but you're still seeing some of the questions on that. And then just structural questions around networks in an increasingly agentic world. Just I'd love to hear how you would think about through all your closed loop data [indiscernible] these transactions? Stephen Squeri: Yes. I mean, look, I mean, I think from my perspective here is that in an agenetic world, data is king. Data is a king from a service perspective, an identification perspective, a fraud perspective, a credit perspective, data is king. And when you look at our -- when you look at our business model, we have the card member, we have the network and we have the merchant. And we have a free flow of information and it's a perfect information as you're going to get in this model. And so when you think about Agentic eCommerce and you think about a lot of the early forays into it, yes, it is -- can be fraught with fraud and it can be fraught with -- it's a lot riskier environment that you're dealing in. In a normal e-commerce world, in a normal bricks-and-mortar world, off-road is significantly less than the competition, significantly less. And why is that? Because of data. And so while agentic commerce, that story is yet to be written. We're at the -- I would -- I think we're warming up at a bull pen. I wouldn't even say we're in the first [indiscernible] here of agentic commerce, but we're warm enough in a bull pen but it will take off fast eventually. And so as we released our ACE developer kit, one of the things that we did were a developer kit is we said, look, to control the transaction to understand what's going on, what we want to do is have the agentic declare intent, and we want to match that intent with what was actually purchased. And so we want data from an intent perspective, all the way to a completion perspective. We don't even have that today in a normal bricks and mortar world. It would be hard to do. But in an e-commerce genic world, we can get that data. And so I think it's going to make our fraud and our risk capabilities and our ability to detect fraud and our ability to back our card members even better than we would in a brick-and-mortar world or in a traditional e-commerce world, which is why we came out with Amex agent protection. It basically says if the developer and the agent register with us and we see the intent and we see what the purchase was and our card member is left holding the bag, we'll back our card member and we'll figure it out on the other side. So I think -- and as I wrote in the shareholder letter, I think this sets us up a lot better than our competitors because of the closed loop network and the amount of data that we have. And I think anybody that talks to you about large language models will basically say to you, the model is as good as the data that it has. And so what we're trying to do is get as close to perfect data as you can in agentic transaction. And that's how we're thinking about it. Operator: Our next question comes from the line of Mihir Bhatia with Bank of America. Mihir Bhatia: You mentioned that you're reinvesting the 1Q upside in technology and marketing. I think you've talked about technology investments a little bit on the call and even the commercial side investments. But maybe just a little bit more on the marketing. Where are you investing on the marketing side? Is it to support the commercial? Is it just more programs across the board to brand marketing and like what is the payback period on these like business drive faster growth in '27? Just maybe more on the marketing investments you're making? Christophe Le Caillec: Yes. Mihir, thank you for the question. You simply said, it's going to go again our acquisition efforts, like new card acquisition efforts. As Steve said previously, at any point in time, we have a series of marketing ideas. We call them investment opportunities that are not funded. We rank order them, and we start when we run out of capacity. These marketing ideas are ready to be executing, and that's what we're going to do with those incremental dollars. So what we're trying to do is take advantage of the opportunities we're seeing. We expect the returns to be very strong, and that's why we're directing this incremental performance towards this investment opportunities. Operator: Our next question comes from the line of Terry Ma with Barclays. Terry Ma: Just wanted to touch on commercial. You just announced a pretty major expansion, which probably involves some level of investment. So I'm just curious, like should we expect some impact to the BCE from that kind of launch going forward? Christophe Le Caillec: Terry, on VC, you should not expect any impact, at least for the reason that, as Steve said previously, either those new product and capabilities that we are going to roll out, it will take time before they flow through the P&L before we see a lift in terms of volume. So I don't think you should expect to see a change to VCE ratio, and 44% is still the right number for the full year. Stephen Squeri: Yes. And I think if you look at the -- what we've just announced, you look at those -- they're more -- not a lot of additional benefits on those cards. It's more about capabilities here. I mean we have the OpenAI, ChatGPT benefit and the cash backlog will be the reports piece of it. But I think as Christophe said, it will be benign. Operator: Our final question will come from the line of Chris Kennedy with William Blair. Cristopher Kennedy: I just wanted to follow up on your prior comments. Steve, in your letter, you kind of mentioned how new technology can accelerate growth at American Express. Is there a way to frame kind of the opportunity today with data in agentic relative to prior innovations, such as e-commerce or mobile payments? Stephen Squeri: Yes. I think it's a little bit too early. And I think the company is so big at this particular point, as I said just before, I think it was so early stages. I think if you would ask me that question when e-commerce first started, I would have probably given you the same answer. And I don't think anybody could have imagined what the phone -- what the phone would have ultimately represented, right? I mean everybody thought the phone was for making phone calls. And the reality is nobody makes phone calls with the phone anymore. I mean you're doing a lot of commerce on the phone. It's been -- Uber has shown how you put private capital into the public market by having drivers out there. So I think it's -- our sense it will be an accelerant. I just think it's really hard to quantify it at this early stage. Kartik Ramachandran: With that, we will bring the call to an end. Thank you again for joining today's call and for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you. Operator: Ladies and gentlemen, the webcast replay will be available on our Investor Relations website at ir.americanexpress.com shortly after the call. You can also access a digital replay of the call at (877) 660-6853 or (201) 612-7415, access code 13759550 after 1:00 p.m. Eastern Time on April 23 through April 30. That will conclude our conference call for today. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to American Airlines Group's First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Neil Russell, Vice President, Investor Relations. Please go ahead. Neil Russell: Thanks, Latif. Good morning, everyone, and welcome to the American Airlines Earnings Conference Call. On the call with prepared remarks, we have our CEO, Robert Isom; and our CFO, Devon May. In addition, we have a number of senior executives in the room this morning for the Q&A session. After our prepared remarks, we will open the call for analyst questions, followed by questions from the media. To get in as many questions as possible, please limit yourself to 1 question and 1 follow-up. Before we begin, please note that today's call contains forward-looking statements, including statements concerning future events, costs, forecast of capacity and fleet plans. These statements represent our predictions and expectations of future events, but numerous risks and uncertainties could cause actual results to differ from those projected. Information about some of these risks and uncertainties can be found in our earnings press release that was issued earlier this morning, form 10-K for the year ended December 31, 2025, and subsequent quarterly reports on Form 10-Q. Unless otherwise specified, all references to earnings per share are on an adjusted and diluted basis. Additionally, we will be discussing certain non-GAAP financial measures, which exclude the impact of unusual items. A reconciliation of those numbers to the GAAP financial measures is included in the earnings press release and investor presentation each of which can be found in the Investor Relations section of our website. A webcast of this call will be archived on our website. The information we're giving you on the call this morning is as of today's date, and we undertake no obligation to update the information subsequently. Thank you for your interest in American and for joining us this morning. With that, I'll turn the call over to our CEO, Robert Isom. Robert Isom: Thanks, Neil, and good morning, everyone. I'd like to start my comments this morning by saying that American continues to make significant progress on our objectives to deliver for our investors. American Airlines is a premium global airline that is positioned to win for the long term. Our focus on delivering on our revenue potential this year is guided by our 4 pillars. Elevating our customer experience, growing our global network, driving premium revenue and leading in loyalty. We're seeing the benefits of our multiyear commercial initiatives come through in our revenue performance. Demand for American's product continues to grow, and during the quarter, we recorded the 9 highest revenue intake weeks in our history. First quarter revenue grew 10.8%, and we expect this demand strength to continue, as we anticipate the second quarter will deliver revenue growth of approximately 15%. The first quarter also included a few challenges including a $320 million revenue impact from winter storms and a $400 million increase in fuel expense versus the forward curve in January. Even with those headwinds, our pretax margin improved approximately 2 points year-over-year. I'm proud of how our team has managed the business through these disruptions with a focus on safety and delivering a world-class customer experience. Thank you to the American Airlines team for your resilience and continued commitment to excellence. It's this dedication that makes American the premium global airline that our customers trust. Moving forward, we're working to take the appropriate actions to drive revenue to offset the increases in fuel costs. Assuming the current forward fuel curve, we expect to be profitable in 2026. Devon will provide an update on our second quarter and full year outlook in a few minutes, but I'd like to quickly summarize the progress that we've made on our 4 pillars and my perspective on how these initiatives will come to drive American forward. Our first pillar, Elevating Our Customer Experience, is centered on delivering a consistent and premium experience across every step of the travel journey. We're increasing the number of premium seats across our fleet through new deliveries and fleet retrofit. In the first quarter, lie flat and premium economy seats grew more than twice as fast as main cabin seats. American's flagship suite offers customers a luxurious flying experience, and we're expanding this product across our international capable fleet. The flagship suite has delivered leading Net Promoter Scores since its introduction. We're also investing in the customer experience, both on the ground and in the air. American offers the industry's leading large network with new flagship lounges planned for Miami and Charlotte, bringing our total to 10 premium lounges, the most of any airline. We're investing in new and expanded Admirals Club lounges across our network and have announced 12 new or refreshed lounges over the past year, and there's more to come. We're enhancing our onboard experience through upgrade of food and beverage offerings and luxury onboard items, including bedding and duvets and our Centennial themed products such as amenity kits and sleepwear. Connectivity in-flight is critical to the customer journey. Today, AAdvantage members enjoy complementary high-speed satellite WiFi sponsored by AT&T on more aircraft than any other carrier globally. Finally, reliability and disruption management are among the most important drivers of customer satisfaction. We're making intentional investments in our schedule and technology to deliver more on-time arrivals, fewer misconnections and a smoother travel experience. Our largest investment started earlier this month in the form of a new 13 bank structure at DFW. We expect the new structure will support an even more reliable operation as approximately 1/3 of our aircraft touch DFW every day. Since the rebanking, we've seen improvements in customer connection rates and NPS scores. The DFW operation running smoothly is critical to the success of our entire system, and we anticipate this structure will help to enable effective future growth at our largest and most impactful hub. All of this will result in improved customer satisfaction scores and an even more reliable operation. Our second pillar is Growing Our Global Network. American is a premium global airline with the most comprehensive North American network in the industry. In 2026, we're prioritizing growth in hubs where we can improve both our local share and hub profitability as we efficiently utilize existing infrastructure, particularly in Philadelphia, Miami and Phoenix. Later this year, we also expect to add flights at DFW to take advantage of new gate expansions at Terminal A and Terminal C. We'll, of course, adjust our growth rate depending on factors, including demand and fuel price. However, our long-term network objectives stay the same. Finally, we're grateful to Secretary Duffy, Administrator Bedford, and their leadership teams for acting swiftly to minimize flight disruptions at Chicago O'Hare during the upcoming summer travel season. We expect to operate 500 flights per day this summer and look forward to continuing to grow local share, deepening loyalty and increasing co-brand credit card acquisitions. We're excited about our strategic growth opportunities in future years. We have hubs in some of the fastest-growing economic regions in the country and construction projects are underway to enable growth. We expect our operation at DFW to become the largest single airline hub in the world once the new Terminal F is operational in 2027. During the quarter, we also announced plans to further invest in Miami by redeveloping Concourse D, which we expect to enhance operations, elevate the customer experience and improve regional and international travel. And in 2028, upon completion of our investments in Terminals 4 and 5 at LAX, we'll have a significantly expanded operation with the newest facility offering a modern convenient customer experience. We remain on track to increase our international capable fleet to approximately 200 aircraft by the end of the decade and plan to continue to grow alongside our joint business and One World Partners. We're launching new service to destinations such as Budapest and Prague as well as to Caracas and Maracaibo where American will be the first U.S. airline to reconnect service to Venezuela in 7 years. Our third pillar is driving premium revenue. We continue to deepen the relationships we have with our corporate and agency partners and are capturing greater share among high-value customers. Our customer base skews higher end, and our customers have shown that they're willing to spend more for an improved travel experience. We're focused on improving our revenue mix through better segmentation and redefining our fair products. We've already seen the impact of these efforts in our premium cabins, with paid load factors in business and premium economy at the highest levels in our history, up approximately 10 points versus 2019. This reflects both strong demand and improved commercial execution and it highlights the opportunity we see across the premium segment. We also think there's significant opportunity in upselling in the main cabin. Last year, we began sharpening the differentiation between Basic Economy and Main Cabin and that strategy is working. These targeted changes have led to increased demand for our extra legroom product, Main-Cabin Extra. Loyalty is our fourth and final pillar, American invented airline loyalty and today, the AAdvantage program is the largest airline loyalty program in the world. We offer more value per mile, countless ways to earn and redeem miles and more engagement opportunities for AAdvantage members. During the quarter, we redesigned the loyalty experience in our mobile app, enhancing the AAdvantage activity screen to improve performance, clarity and engagement. These efforts, combined with the introduction of free WiFi produced record AAdvantage enrollments in the first quarter, up 25% year-over-year led by customers in New York, Chicago and Los Angeles. Our new co-branded card partnership with Citi plays a critical role in our loyalty strategy and offers our customers the most straightforward and seamless path to status in the industry. This partnership has significant upside as it is designed to drive long-term growth in credit card acquisitions, spend and member engagement. The first quarter got off to a fast start with card acquisition setting all-time records while spend on our co-branded cards increased 9% year-over-year. Now I'll turn the call over to Devon to share more about our first quarter financial results and outlook for the second quarter and full year. Devon May: Thank you, Robert. Excluding net special items, American reported a first quarter adjusted loss per diluted share of $0.40. While the increase in jet fuel prices kept this from being a profitable quarter, we were able to improve our pretax margin by nearly 2 points year-over-year. Revenue performance in the quarter exceeded our initial expectations. Total revenue grew 10.8% year-over-year, reflecting strong demand for our product and the continued returns of our multiyear commercial initiatives. Premium demand continued to perform well throughout the quarter, with year-over-year premium unit revenue growth, 7 points higher than Main Cabin extending the momentum we saw last year and underscoring the strength of both our premium customer base and the products we offer. At the same time, we saw a meaningful improvement in main cabin revenue performance following the economic uncertainty that affected last year's results. This strength was further supported by continued momentum in managed corporate revenue, which increased 13% year-over-year. Domestic year-over-year PRASM increased 6.6% in the quarter, and we expect domestic year-over-year performance to accelerate in the second quarter. Our international entities exceeded our initial expectations. Atlantic unit revenue was up 16.7% year-over-year, with London up 25%. Pacific unit revenue increased 7.8% year-over-year. Finally, unit revenue in Latin America was slightly negative, but excluding Mexico, performance was nicely positive in the quarter. Our unit cost, excluding net special items, fuel and profit sharing, was up 5.2% year-over-year. The severe winter storms lowered our Q1 capacity production, which pressured CASM ex by approximately 2 points. As we previously discussed, additional cost pressure came from staffing the operation in advance of the upcoming summer season. We are continuing to see the results of our multiyear effort to reengineer the business and expect over $200 million of incremental savings from these efforts in 2026, bringing our total annual operating savings to approximately $1 billion since this initiative was launched. This transformation leverages procurement excellence, technology investments and process improvements to improve the customer and team member experience while driving a more efficient business. Looking ahead to the second quarter. Demand across all cabins and entities remains robust. We expect domestic unit revenue to grow more than 10% in the second quarter. Internationally, we expect all entities to deliver positive unit revenue performance led by continued strength in the Atlantic region, which we expect to be up high single digits. Our capacity for the second quarter is about 1 point below our initial plans as we have suspended flying to Tel Aviv and Doha, have reduced planned capacity in Chicago and have further decreased some other marginal flying in the face of higher fuel. Further reductions in the very near term don't make economic sense given the current demand environment as we enter our summer peak. But as we move beyond the summer peak, we will be sharp with capacity in light of the current fuel environment. We expect second quarter revenue to be up between 13.5% and 16.5% year-over-year. driven primarily by continued improvements in the domestic entity, growth in corporate customer volumes and our ability to recapture elevated fuel costs. Second quarter CASM ex is anticipated to be up 2% to 4% year-over-year, slightly elevated due to the close-in reductions in capacity. Based on the forward fuel curve from April 20, and we expect a fuel price of approximately $4 per gallon in the quarter. With this second quarter guidance, we expect to deliver adjusted earnings per diluted share of between a loss of $0.20 and a profit of $0.20. We are also updating our full year outlook to reflect our current revenue expectations and the forward fuel curve. The midpoint of the full year earnings guidance is $0.35 per share, approximately flat to 2025 despite jet fuel prices increasing fuel expense by over $4 billion year-over-year. Turning now to our fleet and capital expenditures. We now expect delivery of 49 new aircraft this year, down from our initial estimate of 55 aircraft, reducing CapEx by nearly $300 million. Our deliveries this year include the 12 Boeing 787-9 aircraft in our premium configuration and the continued expansion of our Airbus A321XLR fleet. Based on these deliveries, we now expect total capital expenditures to be approximately $4 billion. We ended the first quarter with nearly $11 billion in total available liquidity, and we have more than $27 billion in unencumbered assets and first lien borrowing capacity. We continue to make significant progress on our financial priorities, ending the quarter with total debt of $34.7 billion, a reduction of $1.8 billion in the quarter. This is the first time our total debt has been below $35 billion since mid-2015. The improvements we have made on the balance sheet provides significant flexibility as we navigate the current environment and reflect the disciplined approach we've taken to capital allocation. I'll now hand over the call to Robert for closing remarks. Robert Isom: Thanks, Devon. We officially celebrated our 100th anniversary this month, a remarkable milestone that reflects a legacy of innovation, resilience and caring for people on life's journey. American is positioned to win by delivering sustainable growth and creating long-term value for shareholders, team members and customers. Our focus remains on executing our commercial initiatives while managing cost efficiently to deliver results and expand our margins. There's tremendous upside ahead for American from elevating our customer experience and growing our global network to driving premium revenue and leading and loyalty, we're executing on the strategy and initiatives that will drive value and shape our next 100 years as a premium global airline. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Catie O'Brien of Goldman Sachs. Catherine O'Brien: Maybe just a higher-level industry one first. Obviously, I understand that the recent fare increases are driven by the spike in jet fuel. But I think it's interesting that there's been no demand impact as of yet, unless you're seeing something different, which please correct me. But even before the spike in fuel, there was quite a bit of pricing momentum. Do you think something has changed structurally in the industry, whether there's been a shift towards better pricing discipline over the last several months? Is it competition? Are product change's playing a role? I just would love to hear your take. Robert Isom: Catie, thanks for the question. I have our Chief Commercial Officer, Nat Pieper here with me to help that as well. I'll just start with this. I think that travel is a good deal. If you take a look at pricing today on real terms versus where we were almost a decade ago, we're just catching up to where we were. So I think people realize that. And then on top of that, we've given them good reason to actually want to spend more. There's been a drive to a premium product. American has been a big part of that. And I think that what you're seeing is recognition that travel is still a good deal. There's an experience-based consumer dynamic going on in the industry, and we benefit from that. We've got a great product out there, a great network and feel really good about demand as we go forward into the future. Nathaniel Pieper: Catie, it's Nat. Thanks for the question. I think the thing that -- a couple of things that are interesting. Number one, is there a long-term resetting in terms of consumer spending hierarchy. There's a lot -- we all remember revenge travel from COVID and people got tired of buying TVs and wanted to go see the world. And I think some of that has continued and extended. For us, a lot of -- we've had 9 weeks so far in the first quarter that were a company record setting from a revenue intake perspective, prior to any of the hostilities in the Middle East that drove fuel where it is. So there's something going on there from a long-term spending perspective. And then as Robert referenced, we think the American offering is really resonating with consumers as well. The investments we've made in customer experience, our network and focusing on local market share, which are our highest yield yielding customers, and then lastly, on the loyalty side. And then there's also a piece of it with getting the right product into the right hands of the right people at the right price, delivering value to consumers. Part of it's bundling, part of it is segmenting and we're making good progress on that. So I think that's a component as well. Catherine O'Brien: That's great. Really helpful. Maybe just for my second question, can you walk us through the assumptions behind your full year revenue outlook? Is there a fuel recapture expectation there? Are you assuming demand is steady or improved, where there's ultimately some demand elasticity? Just really trying to understand the puts and takes and how they may or may not be different at either end of the per share guidance. Nathaniel Pieper: Sure. Certainly, the second quarter revenue estimation for us, plus 15% is an eye-popping number, and we feel good about it. I'll start with, we booked 65% of the second quarter. And it obviously is a strong performance based on the trends that we're seeing in our hubs, a lot of the American specific pieces that are in place. We did incorporate, as you would expect, some fuel recapture in the plan. When we built our plan at the outset, we had significant margin expansion due to a lot of American specific improvements that I referenced earlier and as Robert talked about in our 4 pillars. And obviously, since we shared that plan, fuel has risen an incremental $4 billion of fuel expense for American in the year. Historically, airlines recover that additional fuel expense, either by increasing revenue or by reducing marginal capacity. And we've been encouraged so far by the pace with which revenue has been recaptured and obviously, if fuel continues through the third quarter into the fourth quarter, we're going to see some more broad industry capacity reductions. But as we thought -- we think about it and what we've incorporated in second quarter, roughly 40% to 50% of fuel recapture and we would expect that to grow through the balance of the year, 75% to 85% in Q3 and then ultimately in Q4, if fuel is still at the level with capacity reductions. I think our recapture rate would be in the 90s. Operator: Our next question comes from the line of Scott Group of Wolfe Research. Scott Group: So we've seen some more material capacity reductions from others. I think you guys are not -- I think you'll lead the industry on capacity growth in Q2. How are you thinking about capacity in the back half of the year now that you've got more time to plan for a higher fuel price environment? And just to sort of be clear on sort of the answer that last question, is there an assumption in the guide that RASM growth accelerates further in the back half of the year, I guess, in third quarter as we get a full quarter of this higher fare environment? Devon May: Scott, it's Devon. I'll just start on the capacity discussion. I think Nat's answer on our expectations for fuel recapture effectively already answer your question on RASM that we do expect higher yields going forward as we pass through more of the higher fuel expense. But on capacity for the second quarter, we have planned for slightly higher capacity than what we're putting out there right now. So a couple of months ago, we were at about 6% for Q2. Since that time, we've reduced some line in obvious places like Tel Aviv and Doha. We've also pulled back a little bit domestically with some marginal flying as well as some reductions in Chicago. I'd just say, if you look back at our capacity, we have tended to be very conservative with capacity growth for the past, I don't know, half a decade or so. But you just look at the last couple of years, in 2024, we found ourselves in an oversupply environment and we quickly pulled capacity out in the back half of the year. In 2025, we had a handful of different demand shocks. We did the same thing. And we'll do the same thing here. We're going to keep a close eye on fuel and demand over the next 4 to 6 weeks as we are planning for the off-peak period in August, September and beyond, and we'll make capacity adjustments accordingly. Scott Group: Okay. And then maybe secondly, Robert, I've asked this to some of the others, but I'll ask you as well. Historically, when fuel prices eventually normalize, the industry sort of gives back a bunch of the pricing increases that it's gotten. Is there any reason to think it can be different this time and we can hold on to more of this higher price? Robert Isom: Scott, two things. First off, as Nat alluded to, we had already seen a lot of traction in our efforts in the first quarter before any run-up in fuel prices. On top of that, I really am confident in the initiatives that we're pursuing, whether it's from a customer experience perspective, our network, the initiatives we have to drive premium revenue and loyalty, those are going to pay off. We're giving people good reason to want to engage with American more fully and to spend. And I do view that as a good sign for us. And I just go back to the first quarter, 10.8% revenue improvement, and that includes a really big hit for the worst storms in terms of impact to our operation with Fern and Gianna that we've ever seen in our history. And as we look to the second quarter, as Nat said, a lot of that is on the books. We're anticipating 15% growth I'm bullish on what that means for our business. Operator: Our next question comes from the line of Brandon Oglenski of Barclays. Unknown Analyst: Robert, I'll probably just pose one question about kind of two parts here for you. It's been about 2 years now since you guys made a pretty sizable pivot and then repivoted back on your commercial business travel strategy. So can you tell us where you are in that journey I think you guys said you were fully recaptured on share at the end of last year. But what is next on corporate and business strategy at American? And then secondarily, I think you were hinting at this earlier, but how are you thinking incrementally about upselling or getting incremental rebranded fares on your premium products and maybe within that corporate strategy as well? Robert Isom: Thanks, Brandon. I'm going to let Nat help me out with this. But I'll say that, look, we did pivot and I'm really pleased with what the team has been able to do over the last year. We fully engaged in the marketplace. We've deployed our sales team everywhere and they have accomplished the objectives that we set out to achieve. We've recaptured the share that we've lost. We've gained a little bit since then, and we're going to continue to be very active at improving from there. Nat? Nathaniel Pieper: Brandon, just some numbers to back up the evidence that Robert sees. Managed corporate revenue for us is up 13% year-over-year and our unmanaged business, small and medium enterprises, our advantaged business product is up 28% per year. And obviously, really exceptional yields on both of those products. Further example, our TMC performance is up 11%, thanks to our partnerships with Amex GBT, with BCD and their support of American. I look at all of those results, along with the feedback that we're getting, one of the wonderful things when you make a distribution change is that everybody gives you feedback, a lot of it loud, a lot of it, maybe you don't want to hear. But over time, as that feedback has moderated and become more productive, we're getting good sense that what we're offering and what we're putting on the shelf is resonating with our network, with our customer experience, the loyalty program and delivering value to guests. And so all of those things yes, we feel good about recovering the share that we had lost, but we see runway there as well. And it's a core part of the positive American revenue story that you're seeing and that we see for the rest of the year. Operator: Our next question comes from the line of Ravi Shanker of Morgan Stanley. Ravi Shanker: Can you unpack the FAA decision in Chicago a little bit more? Kind of how does that compare versus your expectations? And what do we think about the incremental steps from here? Robert Isom: Sure. Ravi, thanks for the question. Look, American has been serving Chicago for 100 years. It was our very first flight flown by Charles Lindberg included Chicago. And we are going to be in Chicago for another 100 years. So we had flown about 500 flights a day out of Chicago prior to the pandemic, and it's taken us some time to build back up to that. We're going to be able to fly 500 flights as a result of the initiatives that have been put in place to address over flying. And so I want to, first off, give a shout out to the DoT and FAA, Secretary Duffy and Administrator Bedford, got in front of what would have been a real issue in Chicago. Chicago O'Hare would have likely been in a delay program from the very first flight of the day if something hadn't been done. So I'm pleased, first off, that we're going to avoid an issue of having too much flying in Chicago for the aerospace and ground capacity. And that's good news, not just for American Airlines. It's good news for the entire industry. So real complements to the administration, Secretary Duffy, and Administrator, Bedford for that. And in terms of what we end up with, again, we're going to fly what we had hoped to fly, 500 departures. That will allow us to continue to build in Chicago with our customers. And our product is resonating. And whether it's local passenger growth, our business passenger growth, AAdvantage enrollments, our co-branded credit card enrollments, all of those are meeting and exceeding our expectations. So no one's going to kick us out of Chicago. That's something that everybody is going to have to get used to, including our biggest competitor. We're going to be roommates and roommates for a long, long time. Ravi Shanker: Understood. Very clear. And maybe as a follow-up, Robert, kind of there's been a lot of industry speculation about M&A and such. But can you address that directly, if you can, in addition to what you guys put out over the weekend? But also, I just love your views on what do you think are the -- is the ideal industry structure over time. I think you put in the press release that you think some things needed to change. So what might those things be? Robert Isom: Well, I'll just start out with this and again, on the heels of the Chicago question. Look, we're going to be roommates, and we're not getting married. And so I want to stress this that the idea of the two largest airlines in the world getting together, that is something that we've viewed as being anticompetitive. And obviously, everybody that has weighed in suggests the same thing, bad for customers, bad for the industry. And then ultimately, that would be bad for American Airlines. In regard to consolidation in the industry, we're focused on American Airlines. We're focused on delivering on our core initiatives. And part of that is building out our network. We already have the most comprehensive network in North America. That allows us to really pursue opportunities organically internationally and then also with our partners, some of which are part of OneWorld, others that are part of OneWorld and also joint businesses. All those are accretive to American Airlines. And we really look to continue to focusing on all those partnerships, whether those be domestic or international. Now of course, if there are opportunities from a consolidation perspective or if there's assets that become available in the marketplace, American has a long history of being aggressive. We've got a lot of experience. And whether it is the potential for M&A or the work that we've done to pioneer partnerships, we're going to be on the forefront of that. Operator: Our next question comes from the line of Jamie Baker of JPMorgan. Jamie Baker: So probably for Nat, you know this question about yield stickiness when fuel prices recede as sort of become a conference call stable this season. It came up yesterday on the United call. And I found the commentary there to be interesting. Basically, the suggestion was that historically marketing and government affairs had some degree of influence over pricing decisions. It was not unilaterally left up to revenue management. So that's my question for American. First, do you sort of agree with that broader premise, but more importantly, do you think the industry and/or American specifically, has evolved to a point where maybe going forward, pricing and revenue management exerts wields more influence than in the past? Any thoughts there? I realize it's not quite coming in the form of a question, but I'm trying. Devon May: Jamie, thanks for the question. I guess I'll start with just praising my colleague, Nat, who has government affairs responsibility here. I think he has 0 appetite at American to dabble in revenue management. I saw the transcript and frankly, interesting just from a team perspective and kind of the organizational structure that we have here, pretty well aligned and revenue management is one of those functions core to the airline, core to the assets and experience that American has. So I think we are emphasizing it tremendously. We are investing resources, we're investing people on top of our very experienced people that are here. And I think as technology evolves, and Jamie, we referenced it a little bit, we call it the revenue growth program within American, but that's kind of a sound bite on really being able to effectively segment and bundle one's products, getting the right product into people's hands at the right price. And I think the capabilities that we have and really across the industry are just going to continue to evolve in a positive way at a number of different price points, but ultimately, the goal is to maximize revenue across the enterprise. Jamie Baker: Okay. Interesting. And second, probably for Robert, the news that you might look to pursue more of an NEA type relationship with Alaska and -- well, actually, maybe that's not the way to convey it. But my question relates to pilots. My understanding is that the current scope allows for codesharing with international partners, but not the type of Alaska while long-haul flying that they've started adding post merger. I'm just trying to understand what scope impediments might stand between you and a potentially closer relationship with Alaska? And maybe the answer is not black and white, and I get that as well. Any thoughts there? Robert Isom: Thanks, Jamie. I'll just start with this. We've been working with Alaska for well over a decade. And I remember working with Ben Minicucci to talk about sponsoring them to come into the OneWorld relationship, which we successfully executed, and I think it's been a terrific enhancement to Alaska and has enabled OneWorld and their customers greater access to travel just about anywhere people want to go. We were able to also do great things with the West Coast International Alliance, which has been hugely beneficial, doing things that benefit our consumers, things that we really couldn't have done on our own. And I feel good about where our relationship is and what happens next. The Alaska team is fiercely independent, a very, very successful airline and we are the same. As we go forward, we'll make sure that anything that we do complies with our scope clauses and we're going to make sure that we really take care of our customers and do what's right for both companies and our customers. Now I'll leave it at that. Operator: Our next question comes from the line of Conor Cunningham of Melius Research. Conor Cunningham: Just maybe a point of clarity before I get into another question. Just on the yield progression throughout the year, I just want to make sure that I understand. Is it that you assume that yields will essentially be flat from here to get to your recapture target by the end of the , i.e., you don't need additional fare increases to get to that 90-plus percent come fourth quarter? Nathaniel Pieper: Yes. I think that roughly in line, that's right. We don't need enormous increases to hit our targets as it works through because it balances with the recapture assumptions. Conor Cunningham: Right. So cupful forward curve comes down, you're currently exposed at the higher fares. Okay. Makes sense. All right. And then, Devon, maybe on the cost side, just clearly, some challenges in 1Q given whether I think everyone had those problems as well. But your 2Q guide is actually pretty good and then it seems like the setup for the second half is also in a pretty good standing. So if you could just give some puts and takes that you see moving throughout the year, just on cost, I think that would be helpful. Again, I think it sticks out relative to a lot of what we're hearing so far. Devon May: Sure. Well, it's been a long-term effort on driving efficiencies in the business. It's something we've been at for 3 years. You don't see it every single year because some of these initiatives are long-term in nature. We've had a handful of new CBAs that have driven some cost pressure. But we're seeing it this year. If it weren't for the storms in the first quarter, our cost performance would have been really nice, up 2% to 4% in the second quarter feels pretty good. Obviously, it has been a little bit lower had we flown the entirety of our schedule. The back half of the year, we're set up well. We're going to see pressure in some areas that end up being good pressure, things like selling expense. But our unit cost is going to be dependent on how much capacity we produce. So if we produce a similar amount of capacity to what we're doing here in the second quarter, I would expect unit cost to be in the low single digits. If we pull back on capacity, given the higher fuel, we're going to see some cost pressure there. But we do a nice job getting out of any sort of volume-related costs. We'll continue to do that, and we'll continue to focus on driving an efficient business. Operator: Our next question comes from the line of Tom Fitzgerald of TD Cowen. Thomas Fitzgerald: Just curious within the loyalty program, what geographies you're seeing the most -- the strongest performance in terms of sign-ups? And then if that kind of within that question, if that $1.2 billion of other revenue, if that's kind of a good run rate for that line item moving forward? Nathaniel Pieper: It's Nat. I'll take the first one and then, Devon, the second piece of it. First, just from a resonating perspective, from a volume, as you would expect, it would be in our hubs. But what's exciting about loyalty enrollments is the penetration of our top 3 markets are New York, Los Angeles and Chicago. So places that incredibly competitive hubs for us but also for our competitors. So again, further evidence that the loyalty program, the biggest, the best and it continues to resonate with guests. Devon May: Sure. And yes, just on other revenue or the marketing component of it. We did see an increase. It's pretty meaningful year-over-year quarter-over-quarter just versus the fourth quarter was up something less than 10%. But like we've been saying as remuneration grows, we expect that line item to grow as well. I would expect less volatility in that line item than what we've had from quarter-to-quarter in the past. And it's probably going to be somewhere around $1 billion a quarter for 2026. Robert Isom: Tom, I just want to underscore one stat. While Chicago, New York and L.A. lead, overall, the loyalty growth -- our loyalty enrollments are up 25% year-over-year. Thomas Fitzgerald: That's all great color. I really appreciate that. And then kind of a similar bucket, just on the corporate recapture, Curious what verticals you're seeing the most momentum and maybe other places where there's still room to recover versus the last couple of years? Nathaniel Pieper: Well, the 3 verticals we've seen the most uptake in are banking, health care and pharma and industrials, and that's both domestically and internationally. So encouraged by that performance and really across all verticals, I think there's still opportunity there. But those are the big 3 we're seeing right now. Operator: Our next question comes from the line of Michael Goldie of BMO Capital Markets. Michael Goldie: You've rebanked DFW and now Philadelphia. Can you talk about the operational benefits you expect to get from this? And what other initiatives you're undertaking on the operations front? Robert Isom: Michael, thank you. So 1 of the biggest parts of our elevating customer experience initiative is to improve our reliability, the biggest investments that we're making. So the rebanking of DFW, it really smooths out the operation throughout the entire day. There's never a period during the day where we come close to exceeding the operational capacity of the hub. And from what we've seen so far is just really strengthening our operational reliability. But then it's when it's stressed, say, throw a thunderstorm in which we've had our ability to recover is so much quicker. Over the -- our centennial celebration. I was at in DFW talking to our team went to the control center and asked folks, okay, well, can you -- do you sense something's different. And for the most part, people said, you just don't see as many people running from gate to gate. And so it's an improvement in operation. It takes the stress level down considerably for our customers. but also for our team members as well. And then I know Net could comment on this. But the good thing that we're seeing as well is that revenue is holding and increasing 2 points to that. One is that we just don't have as many misconnect. Second is that we haven't really extended connect times by that much. And so we really haven't seen people book away. So we're retaining more revenue. It's a better customer experience. NPS scores are higher. So we're taking that of course. And those results are very, very promising. And we've expanded it and we'll be expanding it to Philadelphia and taking a look at the potential in other parts of our network as well, and we'd expect similar results. ultimately higher NPS scores, lower misconnections, greater retention of revenue. But that's not all. We've certainly taken a look at our schedule to make sure that we've buffered appropriately in terms of travel times outside of connect times in the hubs. And that, I believe, is paying off. And as well, we're making good use of contractual changes that have happened, especially with our flight attendants, where we've increased boarding times. And so all of that has come to fruition. The airline as a whole, regional mainline, we're in good shape and ready for the summer. So thanks for the question. Michael Goldie: And then as my follow-up, when you think of industry consolidation, which everyone seems to be in agreement on. If M&A is difficult to pass, do you think airlines will increasingly look domestically for partnerships as another avenue? Robert Isom: Well, I appreciate the question. The biggest issue out there today is, again, the largest airlines in the world get together and do something. And the answer to that is it's anticompetitive. So whatever happens next, we look to make sure that anything that we do strengthens our network and in many cases, partnerships are the best way to do that. In other cases, it's just organic growth. And so what you'll see from us this year, included in our growth plan, is to really strengthen our hub in Phoenix, make sure that Miami is fully built out. We've got a lot of work going on in Chicago as noted in Philadelphia as well. it really is the most comprehensive network in North America. And we're -- we've been pioneers in terms of building partners, building relationships. And we've got a tremendous amount of experience here with M&A, should that ever come about. And so I feel really good about where we stand. And as dynamics change and the fortunes of other carriers change, we'll be ready. Operator: Our next question comes from the line of John Godyn of Citigroup. Unknown Analyst: This is Max for John. I just wanted to follow up on the fuel pass-through commentary and getting to a recapture rate in the 90s by the end of the year. If we can maybe get a little bit of geographic color kind of how pass-throughs are evolving internationally versus in the domestic market. Maybe a little bit of color would be helpful. Nathaniel Pieper: Okay. I'll start, just give you the quick entity run through around the world and then come back to the other question. I think just first, domestically, 65% of Americans capacity, as Robert just said, we got the best network in North America, and it's resonating. Unit revenue up 7% in the quarter, and we saw it increase sequentially up into March for double digits. And then as mentioned earlier, the second quarter booked, and we're seeing further acceleration as it goes through in Q1, stellar performance in Philadelphia and LaGuardia as we strategically are shifting to deepen our schedule, improving our service to big markets and really generating higher yields that way. Pleased with the improvement in D.C. as well. And then in the second quarter, DFW full implementation of the 13 bank structure and Los Angeles, as that operation straightens out a little bit, we're starting to see traction there as well. In the Atlantic, 15% roughly of our capacity depending on season, it's our best-performing international entity. Our quarterly RASM, 17%, March was north of 20%. And in the second quarter, as we grow a bit, we'll still see high single digits in unit revenue performance. Heathrow, the stalwart, RASM 25% in the first quarter. not rocket science, our strategy there. We're putting our best most premium airplane into the world's most premium market, and we'll continue that through the summer. British Airways is a terrific partner for us in Heathrow. And obviously, the IAG Group across the transatlantic as well. Rest of Europe remains strong. We've got 4 new routes coming online here in May, two out of Philadelphia to Prague and Budapest, 2 out of Dallas to Athens and Zurich and bookings there look terrific. Latin America, roughly 15% and mixed bag with breakeven RASM on the quarter, short-haul international challenge due to the events in Mexico, but that's starting to turn positive as we get to May into June bookings. And in the deep South, that's been strong. Brazil was the stalwart there. And then in 2Q, as we grow Argentina, we'll see better revenue performance in that. And then the other highlight for Latin America for American, we're excited to restart a Venezuela service next week. We'll be the first U.S. carrier to do that, and it just further enhances our industry-leading Latin American operation out of Miami. Lastly, in the Pacific roughly 5% of our capacity, 8% unit revenue growth in the first quarter, a little bit higher expectation in the second quarter. And again, the shift of our 2 big markets. In the first quarter, Oceania performance was great. It will stay decent in the second quarter, but Japan really becomes a stalwart as we fold into May into June. And no coincidence. We've got 2 terrific joint business partners in each of those arenas, Qantas in Australia and Japan Airlines across the Pacific. So a good story around the entities. It's a terrific demand environment, both for the domestic and the international. Unknown Analyst: Great. That was great color. And kind of as my follow-up, every airline has a bit of a different philosophy guiding its capacity decision. Can you help us understand what yours is if the macro situation continues? And you revisit second half capacity growth plans. Are you managing to margin neutrality and ROIC target or any other targets kind of got in this decision? Robert Isom: Yes. We touched on capacity earlier. I'd just say we're always going to be sharp on capacity. When we had a supply issue in 2024, we pulled capacity pretty quickly. In '25, we had different demand shocks, we pulled capacity to get supply more in line with demand as well. This year, we have this fuel increase. And we are going to do what's needed on capacity to make sure that we are passing on as much of that fuel increase to customers as possible. So we'll be watching for the next 4 to 6 weeks before we have to make some capacity decisions for August and September, and we'll adjust accordingly. Operator: Ladies and gentlemen, at this time, the Q&A queue is open to two media questions. [Operator Instructions] Our first question comes from the line of Alison Sider of Wall Street Journal. Alison Sider: Curious what you guys are seeing for World Cup bookings, and those are coming in as you'd hoped or if there's any kind of concerns about people not wanting to travel to the U.S.? Nathaniel Pieper: Allie, the World Cup event, actually, we're really excited about that. I personally am super excited. Just any event with a ball and a scoreboard is worth it but the globalization and with that event really means thrilled to be the official North American airline of the FIFA World Cup and something we can work on with Qatar Airways as well. We've got the best network in North America to get global fans where they want to go, huge loyalty benefits for us here as well. And we're really excited to see it. It's a great event because it's not focused geographically on one city like the Olympics, but you get the entire North America region with matches in Canada and Mexico, in addition to double-digit cities in the U.S. So really excited about the event and not seeing book away at this time. Operator: Our next question comes from the line of Leslie Josephs of CNBC. Leslie Josephs: My question is about demand with fares going up. Is it that you're seeing the same or growing number of bookings at a higher rate or fewer people booking, but the -- they appear to be willing to pay more to fly? And then my second question is about VFR travel. Whether you're seeing any change in that this year? Robert Isom: Leslie, thanks. Just in terms of demand, we've always been really sharp in terms of managing our load factors. And we see our loads keeping pace with the capacity adds and so that would suggest that we're seeing the real benefit in yields right now. And then from a VFR perspective, I don't have a lot of detail on that. But I'd tell you that we've held pretty true to where we have been historically. And I'd just tell you that VFR traffic, I'm really excited about what Nat mentioned with our return to Venezuela. My guess is that that's going to be a real factor in the development of that marketplace. Operator: Our next question comes from the line of Rajesh Singh of Reuters. Unknown Attendee: Robert, can you comment on reports of talks with Alaska to join your transatlantic and transpacific joint ventures? And how far those discussions have progressed and what scope you were considering? Robert Isom: Thanks for the question. We've got a great relationship with Alaska. We really look forward to building on a history that's dated back a long time, not just a OneWorld when we brought sponsored Alaska into OneWorld, but then develop the WCIA. And as their business has changed and ours has too. We look for opportunities going forward. I know that they've been fiercely independent, but at the same time, we have been able to cooperate for the good of consumers on a number of fronts, and we look forward to doing more with Alaska going forward. Unknown Attendee: And Robert, if I can just squeeze in one more question. You said that if there are any consolidation opportunities in looking at that. Is there anything out there that in you and you think that might be the best fit for American? Robert Isom: So a question regarding consolidation. Again, I appreciate that we're always on the lookout for opportunities, but right now, nothing to report. And American has long experienced in terms of making sure that we take care of our customers, our network, our company, and we've been really creative over the years in being able to do that, whether it was back -- the creation of today's American Airlines back in 2013, in the combination of U.S. Airways and American all the way to things that have worked really well like our relationship with Alaska and the WCIA or our joint businesses with IAG and JAL. And we'll continue to be creative and do what's right for our company and our customers. Operator: This concludes the Q&A portion of the call. I would now like to turn the conference back to Robert Isom for closing remarks. Sir? Robert Isom: Thanks, Latif, and thanks, everybody, for listening in today. We're really encouraged by our revenue growth in the first quarter, anticipated growth in the second quarter. It's all due to what we're focused on, elevating our customer experience, growing our global network, driving premium revenue and leading in loyalty. We have a fantastic team. I'd just like to thank them for everything that they do. And I'm very encouraged by what we're projecting for the year with fuel prices up by over $4 billion, we're still anticipating to be able to produce a profit here. It gives testament to what we will be able to do when those fuel prices moderate in the future. So thank you for listening in, and we're going to get back to work. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. Hello, and thank you for joining the Stewart Information Services Corporation First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask a question; instructions will be given at that time. Please note, today’s call is being recorded. It is now my pleasure to turn today’s conference over to Kathryn Bass, Director of Investor Relations. Please go ahead. Thank you for joining us today for the Stewart Information Services Corporation first quarter 2026 earnings conference call. Kathryn Bass: We will be discussing results that were released yesterday after the close. Joining me today are CEO, Frederick Eppinger, and CFO, David C. Hisey. To listen online, please go to stewart.com to access the link for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company’s press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ. During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today’s earnings release, which is available on our website at stewart.com. Let me now turn the call over to Frederick. Frederick Eppinger: Thank you for joining us today for the Stewart Information Services Corporation first quarter 2026 earnings conference call. Yesterday, we released the financial results for the first quarter. I will kick off today’s call with an overview of our results and our current macro housing outlook, followed by a review of our results and strategic direction by business line. After my remarks, I will turn the call back over to David so he can further cover our results for the quarter. I am very pleased with the results in the first quarter this year. As you know, the first quarter is typically the most impacted by seasonality, and on top of that, the residential transaction activity continued to be at historically low levels. In that environment, we delivered one of the best quarters in the company’s history with adjusted EPS of $0.78 and revenue growth of 28%. In the first quarter, each of our businesses showed strong revenue growth and improved earnings as we executed on our strategic priorities. Though first quarter existing home sales were muted, our direct operations, agency services, and national commercial services benefited from strong commercial growth. Our Real Estate Services segment also delivered strong results year-over-year, bolstered by our recent acquisition of MCS. In the first quarter, along with 28% adjusted revenue growth, we delivered adjusted net income growth to $24 million, up from $7 million in the same quarter last year, and we delivered a 4.3% margin for the quarter, up from 1.8% in 2025. On our last call, I shared that we expected existing home sales to improve around 6% to 8% in 2026, beginning our journey back to a more normal existing home sales environment. While we anticipate some growth in the housing market, we foresee the potential for growth to be a bit more muted this year given the broader macro and geopolitical conditions and where we have seen interest rates move as a result. We anticipate that we will continue to maintain our business momentum in the second quarter, but we could see the residential market continue to bounce along the bottom of around 4 million existing if ongoing geopolitical tensions prolong. In the first quarter, housing signals were mixed. As mentioned, existing home sales were relatively flat, down 1% compared to 2025. Median sale price growth was a bit weaker than in the past few quarters; however, it was positive, up just under 1% for the quarter. The pricing story currently varies significantly by market, and we are seeing more price negotiations, which may be helping homebuyers to balance rates. Interest rates remain a critical gauge for homebuyers entering the market. And though we were confronted by difficult weather across the country in January, early in the quarter, we saw rates move closer to 6% and felt momentum in both purchase and refinance activity. March, however, saw the impact of rising global tensions, and rates exited the month around 6.3%, cooling activity a bit due to the increase itself but also because of the quick shift in rate and sentiment. We do anticipate some momentum will continue into the second quarter as rates remain at or below 2025 levels heading into the spring selling season. All in, our view of the residential market growth will be closer to 3% to 5% for the year. We believe commercial, on the other hand, will remain more resilient and can continue to have solid growth. Turning to our business line results. Our direct operations business grew 10% in the first quarter compared to the same timeframe last year. The growth came from improved transaction activity. We have not deviated from our longstanding focus on gaining share in target MSAs through organic and inorganic efforts. We continue to see positive momentum in our strategic initiatives to grow commercial business out of direct operations, which we often refer to as Main Street Commercial. In the first quarter, our direct operations grew Main Street Commercial by more than 20% year-over-year. Looking forward, we believe we will grow this operation in part through targeted acquisitions, and we have seen a pickup in opportunities in our pipeline for direct operations as well as opportunities that benefit our other business lines. We are thoughtful in our assessment of opportunities and expect to continue to grow the company in part by being acquisitive. Our national commercial services business delivered another impressive quarter of results. Energy continues to be our largest asset class, but other notable gainers in the quarter were our industrial site development, data center, and retail asset classes. In total, we grew national commercial services by 40% in the first quarter. We remain focused on growing all of our asset classes through geographic expansion and acquisition of leading industry talent. Our agency services business delivered a very strong first quarter with revenues up 25% compared to 2025. Our agency partners confront the same housing headwinds as we do, so we consider this growth to be especially solid considering conditions. We are focused on growing this business through ramping up new agents and wallet share expansion of existing agents, with an emphasis on 15 target states. We saw strong progress towards our goals this quarter with solid year-over-year premium gains across most of our states. In addition to geographic growth, we are focused on expanding our commercial offering for agents, and we are seeing success there, growing 46% in the first quarter compared to last year. This goes along with 15% residential growth as well. We will continue to build on the momentum we have made in recent years for our agents to differentiate our service and better our offerings for our agent partners. Our Real Estate Solutions business grew revenues by 66% in the first quarter compared to last year. Our recent transaction of MCS helped to strengthen our results for the first quarter. However, all of our other operations combined grew over 20% when compared to the first quarter of 2025. The addition of MCS allows us to further our strategic priority for this segment, which is to win more share across the top 300 lenders and further our cross-selling efforts across our expanded product lines with existing customers. In the first quarter, we added to our Real Estate Solutions segment once more, Appraisal Network into Stewart Valuation Intelligence. Our appraisal company, National Appraisal Network, also known as NAN, helped strengthen our appraisals both in scale and deepen our talent base. In the first quarter, we delivered 12.5% adjusted margins, up from 9% last quarter. For the full year, we fully expect to improve margins and deliver in the low-teens range for this segment and expect that our recent acquisition of MCS will help us improve our historical margin outlook. Moving to our international operations. We are focused on broadening our geographic presence in Canada, increasing our commercial penetration as well. In the first quarter, we grew our non-commercial revenue by 9% and our commercial revenue by 14% in a very challenged housing market. We believe we can build on our strong position in these markets and continue to grow share. As an enterprise, we are dedicated to being the premier titles and service real estate services company. We are focused on strengthening the company for lasting success through targeted multi-pronged growth plans by business to further fortify our position. We thank our customers and agent partners for your trust and dedication to Stewart Information Services Corporation. We are committed to doing our best to continually improve our services for your benefit. For the Stewart Information Services Corporation team, thank you for your dedication and focus on growing this company together. We are able to execute at this level because of your steadfast commitment to our journey. In the first quarter, we celebrated our inclusion on the Forbes America’s Best Large Employers list. We thank our employees for this recognition and are committed to being a destination for industry-leading talent. I am very proud of the progress we have made on our journey and feel that progress is visible in the results we delivered this quarter in spite of both macro and housing headwinds. David, I will turn it over to you to provide the update on our results. Operator: We will now turn the call over to David C. Hisey for the financial results. David C. Hisey: Good morning, everyone, and thank you, Frederick. I appreciate our employees and customers for their steadfast support amid a continuing challenging residential real estate market. Yesterday, Stewart Information Services Corporation reported strong first quarter results with both revenue and profitability improvement. Total first quarter revenues were $781 million, resulting in net income of $17 million, or diluted earnings per share of $0.55. On an adjusted basis, net income was $24 million, or diluted earnings per share of $0.78, compared to $7 million and diluted earnings per share of $0.25 last year. Appendix A of our press release shows adjustments to our consolidated and segment results, primarily related to net realized and unrealized gains, acquired intangible asset amortization, acquisition-related expenses, and severance costs, which we use to evaluate operating performance. In our Title segment, operating revenues increased $104 million, or 21%, driven by strong results from our direct and agency title operations. As a result, pretax income increased $13 million, over 100%. On an adjusted basis, Title pretax income increased $14 million, also over 100%, with adjusted pretax margin of 4% compared to 2% last year. In our direct title business, direct title revenues increased $38 million, or 17%, while total open and closed orders improved from last year. Domestic commercial revenues increased $25 million, or 35%, driven by higher transaction size and volume with growth across asset classes led by energy, industrial, site development, data centers, and retail. Average domestic commercial fee per file improved 33% to $21,000 compared to $15,800 last year. Average domestic residential fee per file in the first quarter was $3,300, consistent with last year. Total international revenues increased 10%, primarily driven by higher volumes. In our agency operations, gross agency revenues increased 25% to $333 million compared to $268 million last year, driven by improved volumes across our key agency states, including New York, Florida, Ohio, and Pennsylvania, and also helped by commercial transactions. After agent retention, net agency revenues increased $11 million, or 23%. On title losses, the first quarter title loss ratio improved to 3.1%, compared to 3.5% last year, reflecting our continued favorable claims experience. We expect our title losses in 2026 to average in the 3.5% to 4% range. In our Real Estate Solutions segment, total revenues increased $64 million, or 66%, driven by growth in our credit information services operations and our MCS business, as Frederick noted. RES adjusted pretax income improved $11 million to $20 million, or over 100%, and adjusted pretax margin improved to 12.5% compared to approximately 10% last year. We continue to focus on managing our overall cost to serve and strengthening customer relationships. We expect our margins to trend higher as those relationships mature. On our consolidated operating expenses, our employee cost ratio improved to 29% compared to 31% last year, primarily due to increased revenues. Our other operating expense ratio increased slightly to 28% due to higher expenses in the RES segment. Our financial position remains solid and well positioned to support our customers, employees, and the real estate market. Total cash and investments were approximately $420 million in excess of statutory premium requirements. Total stockholders’ equity at March 31 was approximately $1.4 billion, representing a book value of $54 per share. And net cash used by operations improved to $4 million compared to $30 million in the prior-year quarter due to higher net income. Again, thank you to our customers and employees for their continued support. We remain confident in our ability to serve the real estate markets. I will now turn the call over to the operator for questions. Operator: We will now open the call for questions. Thank you. We will take our first question from Bose Thomas George with KBW. Please go ahead. Your line is open. Frederick Eppinger: Good morning, Bose. Bose Thomas George: Hey, good morning. Just wanted to start on commercial. Obviously, the fee profile was up very nicely year-over-year. When you think about the trends over the next few quarters, how do you see the cadence of that year-over-year growth? Could it persist for a little while? When do the comps get a little more challenging? Frederick Eppinger: That is a great question, Bose. What has happened is our pipeline is really quite good, and what we are seeing across the industry is the frequency of very large deals has increased. The other thing for us is we are winning more deals as we have had a good two-year run here of growing scale and capabilities. I think it is natural for our average to hover at this higher level. The other interesting thing for us, if you compared us to others, because we were small four or five years ago, our refi percentage is less. So we are a little bit bumpier on size of deal because it tends to be less refi softening of the numbers. I am pretty confident that the business will continue. The growth year-over-year will jump around a bit for us, just because, if you recall, a couple of quarters last year grew 50% plus, and we were in a market that was growing half that. So there might be some comparisons, but I am bullish on our continued success as we go through the year on commercial. I would say the commercial in our direct operation—part of that is generated by our own staffing, if you will, putting skills back into the direct offices. I believe that has momentum both continuing and could increase over time for us because of the investments we are making there. That is a little different for us because we were underpenetrated in what I call Main Street—the smaller end of commercial—compared to the big guys. Bose Thomas George: Okay, great. Thanks. And then switching over to the ancillary, can you talk about the year-over-year growth rate outlook there with MCS now? Is what we saw in the first quarter a reasonable level for the rest of the year? And I think you guided to a margin in the low teens for that segment for the rest of the year? Frederick Eppinger: Yes. On the margin first, I would say 11% to 12% was good. Now it is 12% to 13%, maybe even a little more. We have some work to do on some consolidation, but it is going to tick up to that 12.5% to 13%, maybe a little 13% plus. I feel good about the trends there, and it is a nice solid book of business. On growth, we grew most of the businesses outside of MCS. In total, I think there was 21% or something of growth, and there is good penetration expectations in that business. It could soften a little bit, but you are going to see pretty strong growth coming out of that. There is a lot of momentum. Given my view that the RES growth is going to be marginal, particularly for the next quarter or two, I feel we can sustain, with our momentum, somewhere around a 15% growth rate for the overall company. It might be a little less or more, but when I look under the hood in all of these businesses, even with a low resi market, our share growth is good—like in agency—and the trends feel pretty good. So that is how I think about it in total. I think we have established a little bit of momentum right now. David C. Hisey: And Bose, just real quick to give a little more color. We had mentioned that MCS was a little over $160 million a year, so it is roughly $40 million a quarter on revenue. When you take that effect out, you can get to that 20% that Frederick was talking about. It is slightly seasonal, so it is a little less than that in the first quarter, but the $40 million is good the rest of the quarters. Operator: Our next question comes from Geoffrey Murray Dunn with Dowling & Partners. Please go ahead. Your line is open. Frederick Eppinger: Good morning, Geoffrey. Geoffrey Murray Dunn: Good morning. First, could you share what the mix of commercial is in your agency line? David C. Hisey: In agency? Frederick Eppinger: Yes. It has to be parallel to what we have, but it will not have a lot of energy or big stuff. Agents typically do not have those mega deals. They will have some smaller in the data center space, but it is a pretty broad CRE kind of mix without the energy on top, because energy and the huge deals tend to be direct business. I feel good about it in agency. If you recall, we have always been strong as an underwriter for agents, but our commercial was very skewed to New York. Historically, the company was very good in New York, but our ability to reach our commercial capacity to other big commercial-oriented agents across the country was much weaker. We also did not have the facility when we had big multi-location deals to facilitate that. So we created something called a concierge service that facilitates that. We have also instituted what we call direct-issue capabilities, so in certain places where they do not have licenses, we can finish the account. We now have capabilities in that space as good as anybody. In my view, that has been one of those areas we have been growing now for six quarters at a very high rate, because people have started shifting parts of their book to us because we are a credible offering. Geoffrey Murray Dunn: Okay. And then I wanted to dig a little bit more into the RES margin. If I remember correctly, PropStream has a very strong margin. MCS, I think you are talking close to 20%, and then you are double digit in Informative. And the challenge, I think, has been—the rest of the businesses. So what is the margin first—is that correct? And then what is the margin opportunity on those other businesses, maybe thinking about some extra—you know, move to margin to the venture. Frederick Eppinger: Yes. The margin is a little more consistent than you think. Pricing is teeny—so yes, it has a little bit higher margins—but it is a very small business. MCS was higher, but the others hover around that 12% target that we have. Is there opportunity to improve that? Yes. For example, appraisal in my view—we have some good supply and there is work we are still doing because of the acquisition. That could be high single digits to low double digits and could go up a little bit. I am shooting for, in most of the businesses, around that 12% margin, and those are the ones where we have our volume. Our remote online notary tools are a very small business. It is really a tool for our business. We do a little bit of outside sales, but it is really for delivering for ourselves and our agent partners. It is not really a core of the growth or the margin. I feel pretty good about the breadth. Seasonality obviously in the appraisal and the notarization/signature businesses—those are cyclical; they are just like the rest of our businesses. MCS is a tad countercyclical to that because it is in the default area and it is less volatile quarter to quarter. The pattern of that is helpful to us too. As I said, I think we were at this 12% overall, moving into the 13% to 14% range. If the market comes back—if the market is at 5 million—just like our other businesses, that thing can get to [inaudible] right? They may have some cyclical nature to them because of the volume. It is a very solid portfolio now, and it is a lot stronger now that we got the scale up in appraisal and we got MCS into the mix. Geoffrey Murray Dunn: Great. Thank you. Operator: We will move next with Oscar Nieves Santana with Stephens Inc. Please go ahead. Your line is open. Oscar Nieves Santana: Good morning. You mentioned earlier the acquisition of Nationwide Appraisal Network, which was announced right after the end of the first quarter. What details can you share about that transaction in terms of the purchase price and how it was financed, and also the expected contributions to the financials, both in terms of revenue and margins? Frederick Eppinger: NAN is small—about a $40 million transaction. You will probably get about $30 million to run through the next three quarters or so. The incremental margin is what I described; we should get into the low double digits. There are going to be some integration costs and transition costs out of the gate here. As far as the proceeds, if you recall in December, when we raised $150 million, I said I saw some promising, interesting things that I wanted to pursue to complement our business. There are a half dozen or so things that were quite warm that help both in the RES area and in the direct operations area. That is what we are pursuing. We had essentially free cash on hand that we used for that, and we have other dry powder for the other transactions I am talking about. What I am trying to do is, in each of these businesses—particularly on the services side—if they are relatively fragmented businesses that are rolling up, what you are seeing is the financial buyers in a lot of those businesses—they bought in 2021, they overpaid, etc.—they are withdrawing. It has made a lot of people pause, and so what you are going to be able to do, at least I think, in some of these businesses is build a leadership position—which we have done in RES—and again, it sets up nicely for us to get the scale in these businesses. In the direct side, because the commercial market is a little bit better and there is a little bit more light at the end of the tunnel, agents are making a little bit of money, and they are much more willing. These folks that we have been talking to for months—we are getting at trading prices that make sense for both of us with an earn-out. Our target list—there are a couple in particular that I feel are higher probability in the next six months. That is why we raised the money. That is why we have it available for these transactions. We will see how it happens. We spend a lot of time reaching out, making contacts, developing a pipeline, figuring out how these things fit and how they help our talent base. My view is there is a chance things are going to start happening, and I want to make sure we are capitalized enough to take advantage of it. We do not like competing or auctions. Most of what we do is we try to make this happen on a one-on-one basis. Oscar Nieves Santana: That is very helpful. I have a couple of follow-ups related to that. Do you have an updated expectation, given what you mentioned about the pickup in the pipeline, about how much capital you could be deploying through the end of the year? And also, can you share some of your learnings so far related to the MCS integration process? Frederick Eppinger: On MCS, I am thrilled. MCS was a leader in their space, and I could not be more pleased with the leadership team and their ability to continue to grow and set us up with a high reputation in that space. It also completed a little bit of [inaudible] there are some other places I am looking to evolve capabilities, but it really rounds out our presence in the default marketplace. Because of the nature of that business, there is not a lot of integration with the rest of the company except for the normal things you think about—financial stuff. So it is a pretty standalone business model. But there will be cross-sell opportunity and relationship opportunities that come from it. It is doing everything we expected it to do, and I am thrilled by it. As far as capital, again, the things that I talked about in December are well within our excess capital availability—within the money we raised and the roughly $70 million on top of that available. So it is in that range of availability as we go forward. What is the probability of it happening? I do not know. I just want us to be prepared, to be truthful. I would also tell you that in the next two or three years—let us say two years—I think a few of the gems in our marketplace are going to become available. There are only a handful of things in the title business—[inaudible]—assets that are going to be [inaudible]. Somewhere in the next couple, three years, they could become available. I do not do capital planning for those because they are so rare. If it happens, it happens, and it will stand on its own and justify the returns. In the normal course, as you know, most of the deals we do are in that $20 million to $50 million range. We have really good line of sight to the pipeline, so in the normal course we are going to use our available capital. Oscar Nieves Santana: Super helpful. I will get back in the queue. Thank you. Operator: Thank you. At this time, there are no further questions in queue. I will now turn the meeting back to Frederick for closing remarks. Frederick Eppinger: Thank you so much for your interest in Stewart Information Services Corporation. To summarize, I feel very good about the company. I do not think we have ever been this strong as far as talent and position in the marketplace. Hopefully, even with a difficult market, we can continue our momentum. I am pleased with the progress we are making so far. Again, I just want to thank everybody for their interest in the company. Operator: Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.
Operator: Greetings and welcome to Comcast's First Quarter 2026 Earnings Conference Call. Please note this conference call is being recorded. I will now turn the call over to Executive Vice President, Investor Relations, Ms. Marci Ryvicker. Please go ahead, Ms. Ryvicker. Marci Ryvicker: Thank you, operator, and welcome, everyone. Joining us on today's call are Brian Roberts, Mike Cavanagh, Jason Armstrong and Steve Croney. I will now refer you to Slide 2 of the presentation accompanying this call, which can also be found on our Investor Relations website and which contains our safe harbor disclaimer. This conference call may include forward-looking statements subject to certain risks and uncertainties. In addition, during this call, we will refer to certain non-GAAP financial measures. Please see our 8-K and trending schedule issued earlier this morning for the reconciliations of these non-GAAP financial measures to GAAP. With that, I'll turn the call over to Brian. Brian Roberts: Good morning, and thanks, Marci. We're off to a good start. We've taken a hard look at both where the market is and how we're performing and made some real changes. With our new leadership structure, Mike as Co-CEO and taking the day-to-day lead on improvements and Steve off to a fast start fully running connectivity and platforms, I really like our team. Steve has brought in key new talent and is quickly restructuring a lot of the operations. And equally important, we have better aligned everyone across the entire company around a clear set of priorities with a sense of urgency to work in harmony toward the important company-wide initiatives. We've gone top to bottom in the businesses, looking at how we operate, how we serve customers and where we need to reset. As you'll hear from Mike, Jason and Steve, it's still early, but the initial results are encouraging. We're starting to see signs that our efforts are working, and we're shifting the businesses in the right direction. I'm also convinced that we have absolutely the best products in each of our markets. So the opportunity in front of us now is making sure customers really see that and feel it in every experience and touch point. There is a real energy across the company now to work together in different ways to take advantage of the big moments we have, whether it's the mobile launch we just announced, the Olympics, the Super Bowl or Xfinity's new membership program. These are opportunities to show up for consumers in a way that only Comcast can and connect that across all of our growth businesses. Net-net, I feel encouraged about where we are. We've got the right leaders. We're making meaningful but important improvements, and I feel good about these early results. Mike, over to you. Michael Cavanagh: Thanks, Brian, and good morning, everyone. Our focus as we begin 2026 is on executing against the priorities Brian just highlighted. We are just 1 quarter into the year, but are pleased with the progress, so let me highlight some of the first quarter achievements. First, despite what remains an incredibly intense competitive environment, broadband net losses improved by more than 100,000 year-over-year, the first year-over-year improvement since the fourth quarter of 2020. We also delivered the best wireless net additions of any quarter in our history. Together, these are early signs that the strategic pivot we've made in our connectivity business is underway. Second, in Parks, another area of consistent and disciplined investment, we generated healthy underlying EBITDA growth driven by robust consumer demand at Epic Universe. And third, we had a real company-wide moment with legendary February. We outperformed across audience, engagement and monetization. And importantly, we leveraged this massive reach to market our connectivity products at scale, a proof point that when we really lean in, we can move the needle. Stepping back, this was our first quarter post VERSANT, and we're already seeing the benefits of a more focused portfolio. Our 6 major growth drivers now represent well over 60% of total company revenue, up from 50% when we introduced this framework 3 years ago, supported by consistent organic investment and deliberate portfolio actions, including the spin of VERSANT Media. Now going deeper on our Connectivity & Platforms business, the competitive environment remains intense. Fixed wireless continues to market aggressively across our footprint. Fiber overbuild is moving at a rapid pace and promotional convergence offers remain elevated. We're not assuming this gets easier anytime soon. Against that backdrop, we're investing to compete effectively, whether it's against fixed wireless, fiber or any other alternative such as satellite. To do this, we're staying focused on what we can control and what matters most to consumers, exceptional connectivity powered by the most reliable WiFi, best-in-class products and a simpler, more transparent experience that's easy to buy, activate and support. Our confidence is building in the strategy and actions that are underway, including the execution of our go-to-market shift that we amplified through the reach of our sports portfolio. We aligned the full company across Xfinity and NBCUniversal around clear offers, focused messaging and sharper targeting, and we saw that combination contribute to improved broadband and wireless performance this quarter. We also used these tent-pole moments to launch real-time 4K, a meaningful differentiator, enabling us to deliver live sports with lower latency and at a higher quality than our competitors. And we continue to see our customers consume more video online, which is driving network demand higher with monthly data usage on our network up 10% this quarter. Given the scope of the changes we've made across the business, the early signs of progress are: connect volumes are up for the first time in more than 4 years, voluntary churn continues to improve and NPS is moving in the right direction. Customers are responding to our go-to-market strategy with roughly 40% of our residential broadband base already on our simple, transparent packaging and the majority still expected to migrate by year-end. Wireless is a central lever in our convergence strategy. It increases engagement, reduces churn and strengthens customer lifetime value. Wireless accelerated meaningfully this quarter even as the competitive environment remains intense. And we like what we're seeing both in the momentum we're generating and in the quality of the customer relationships we're building. Our free line offer continues to perform well and is doing exactly what we intended, building awareness, increasing attachment and expanding the top of the funnel across our broadband base. We're managing that base of customers with a clear life cycle playbook focused on usage, engagement and the overall product experience with the goal of converting a meaningful portion to paid relationships starting in the second half of the year. At the same time, we're gaining traction in premium wireless. We launched Premium Unlimited a year ago to broaden our offering for customers who want a more feature-rich mobile experience, including unlimited talk, text and data in the U.S. and internationally. Since launch, adoption has increased meaningfully. Uptake is now around 30% and the premium base is up roughly fivefold. And we're building on that momentum with Mobile+, our new premium plan we launched just yesterday. Mobile+ includes everything customers already value and adds lifetime device protection for all devices. We're the first in the industry to include this feature at no additional charge as part of the core offering, a disruptive shift away from the traditional pay-per device model used by incumbent carriers. Mobile+ strengthens our value proposition and reinforces our product and pricing advantage. Shifting to content and experiences. Legendary February was a remarkable 17-day stretch for our Media business. More than 225 million Americans watched across the Milan Cortina Winter Olympics, Super Bowl 60 and the NBA All-Star game. That scale drove record advertising sales, roughly $2 billion over the 17 days and helped accelerate momentum at Peacock. We added 2 million net new subscribers in the quarter with revenue up more than 70%, putting Peacock on track to approach profitability for the first time next quarter. The Olympics continue to be a meaningful differentiator for us. Milan Cortina was the most watched games since Sochi, averaging 23.5 million viewers. Peacock streamed a record 16.7 billion minutes, more than double all prior winter games combined. And NBC closed out prime time #1 on the closing ceremony night, marking our 143rd consecutive Olympics night at the top. The Super Bowl averaged 125.6 million viewers, the most watched in our 100-year history and the second most watched program ever. And the NBA All-Star game delivered its largest audience since 2011 with 8.8 million viewers across NBC, Peacock and Telemundo peaking at 10 million. Turning to Studios. We're off to an exceptional start with Nintendo and Illuminations, the Super Mario Galaxy movie, which has crossed $750 million globally, the biggest title of the year worldwide, and the franchise has now grossed $2 billion at the global box office. We have a strong lineup for the rest of the year with Steven Spielberg's Disclosure Day, Illuminations' Minions and Monsters, Christopher Nolan's the Odyssey and Universal's Fuccer & Law, among others. Lastly, at parks, Orlando continues to perform extremely well with Epic driving strong resort attendance and higher per cap spending. We're continuing to invest behind a pipeline of growth. This year, we opened Fast and Furious Hollywood Drift in Universal Hollywood and our first-ever kids park in Frisco, Texas this summer. Internationally, our U.K. park is progressing through final planning approvals as site stabilization begins, and we're building on our strength in Japan with immersive Pokemon experiences. With that, let me turn it over to Jason. Jason Armstrong: Thanks, Mike, and good morning, everyone. Let me start with a high-level overview of our consolidated results and then get into more detail on our businesses. Before I begin, I want to note we recently issued updated pro forma trending schedules, which we filed in early March. The most significant change is the removal of VERSANT from our financials, along with a few smaller updates within Connectivity & Platforms and Content & Experiences. As a result, when I refer to our results today, all year-over-year comparisons will be presented on a pro forma basis. In the first quarter, revenue increased 11%, in part benefiting from NBCUniversal's highly successful airing of the Milan Cortina Winter Olympics and the Super Bowl. Excluding these events, revenue was up low single digits. As we've discussed, this is an investment period for us. We continue to execute our broadband go-to-market pivot and customer experience improvements with the goal of stabilizing our customer base and returning the category to revenue growth over time. At the same time, we're absorbing the full cost of the first year of the new NBA contract in Content & Experiences, and this quarter included the peak dilution from that. As a result, adjusted EBITDA declined 9%. Earnings per share were $0.79, and we generated $3.9 billion of free cash flow in the quarter, of which we returned $2.5 billion to shareholders, including $1.25 billion in share repurchases. Now turning to our businesses and starting with Connectivity & Platforms. Before diving deeper into the results, I wanted to begin with a high-level overview and share some perspective on the direction we're heading. As we've consistently emphasized, we made a decisive and strategic pivot in this business to position ourselves more competitively within the evolving broadband market. This transformation hasn't just been about minor tweaks. It's been a comprehensive shift. We prioritize simple and transparent pricing. We've dialed up our investments in both current and future customer experience. and double down to ensure our network and product offerings remain best in class. Another significant change has been how we're leveraging wireless to support and enhance broadband, far more expansively than we have in the past. The encouraging news is that the early indications suggest this pivot is not only gaining traction, but is absolutely the right move. Our new go-to-market offerings are clearly resonating with customers. For instance, this quarter, we saw a notable improvement in broadband performance, narrowing our losses by over $100,000 versus the prior year, while simultaneously achieving record wireless net additions accompanied by a meaningful improvement in how our customers perceive and rate us as measured through Net Promoter Scores. Of course, with any major strategic shift, there are inevitable costs, simplified pricing and the inclusion of bundled free wireless lines have put pressure on broadband ARPU, and as a result, have also weighed on EBITDA growth, which is evident in our 4.7% decline this quarter. We were transparent about this last year, flagging that these pressures would intensify into the early part of this year, including the quarter we're reporting now and some incremental pressure in the second quarter. That expectation remains unchanged. However, we anticipate some relief as we exit this year, particularly as we begin to lap the initial investment pressures and monetize the free lines at the 1-year anniversary mark of the start of our Freeline rollout. Looking ahead, like others in the industry, a key metric for success is increasingly shifting toward consumer purchase intentions around bundled broadband and wireless offerings. To support this, you'll notice in the trending schedules we published in March, we started to break out wireless revenue into service and equipment revenue. And we're now grouping broadband revenue and wireless service revenue together into a new convergence revenue view. Our convergence ARPA, or average revenue per account currently stands at roughly $85. For context, our telecom competitors are roughly double this amount on the same metric. This really underscores the significant growth opportunity in front of us, especially as we stabilize broadband and look to accelerate growth through wireless. Now let's get into more details on the quarter, starting with broadband. Broadband subscriber losses improved by 117,000 year-over-year to 65,000. This improvement reflects traction from our new go-to-market strategy, including improved connects year-over-year, lower voluntary churn, a step-up in take rates on gig plus speeds and the continued uptake of our free wireless line offer. In addition, we leaned into the unique moment that legendary February created across our company by amplifying Xfinity brand awareness on a national platform with particular emphasis on gig speeds and our 5-year price guarantee. We estimate these specific offers accounted for over half of our year-over-year improvement in subscriber losses. Broadband ARPU declined 3.1%. This is consistent with the pressure we signaled on our fourth quarter call, and reflects the absence of a rate increase at the beginning of the year, our new go-to-market pricing, including the legendary February offers and the impact from strong adoption of free wireless lines, which initially has a dilutive impact on broadband ARPU. We expect incremental pressure on broadband ARPU for another quarter until we start to anniversary early go-to-market transition efforts as well as the impact of free lines starting to roll into paying relationships which will happen in greater volumes as we exit this year. Convergence revenue declined 2.8% with convergence ARPA down 0.8%, reflecting the pressure on broadband revenue and partially offset by 15% growth in wireless service revenue. We added 435,000 net wireless lines, our strongest quarter on record with nearly half of our residential postpaid phone connects coming from customers taking a free line. We're deliberately leaning in as our free line offer expands awareness and ultimately widens the base of customers we can drive into paying relationships. We also continue to see a strong uptake in our new premium unlimited wireless plans, accounting for about 30% of our postpaid phone connects reinforcing that we're competing effectively in the higher-value segment of the wireless market. We ended the quarter with 9.7 million total lines at 16% penetration of our domestic residential broadband customer base. Looking ahead, in the second half of the year, many of the free lines will come up for monetization Early engagement and usage trends are encouraging in that respect, and we expect to convert the significant majority of free lines into paying relationships, which should provide a tailwind to Convergence revenue and ARPA growth over time. Turning to Business Services. Revenue grew 6% and EBITDA increased 4%. Growth continues to be driven by strong momentum at our Enterprise Solutions business as we add customers and deepen our relationships through a strong mix of advanced solutions. And looking ahead, we're excited to expand our business mobile relationships through the launch of our T-Mobile MVNO, which adds another differentiated capability to the portfolio as we compete for business customers at every level. In content and experiences, there are a few items I'd like to highlight. At Theme Parks, we delivered another quarter of strong growth with revenue up 24% and EBITDA increasing 33%. Adjusting for the roughly $100 million of preopening costs at Epic in last year's first quarter, Parks' EBITDA grew over 7%. Under the hood, we had very strong growth in Orlando, where Epic continues to drive higher per cap spending in attendance across the entirety of the resort. We are really pleased with Epic's performance since its launch. It's expanding the overall guest experience and helping to position Universal Orlando as a true weeklong destination. Partially offsetting strong growth in Orlando is some pressure at our other parks. Specifically, in Osaka, we're seeing some impact from China-related inbound travel trends, which is putting pressure on attendance. And in Beijing, we're navigating a more challenging macroeconomic environment. Turning to media. Revenue increased over 60%, including strong contributions from the Milan Cortina Winter Olympics and the Super Bowl, which together drove $2.2 billion of incremental revenue. Excluding those events, Media revenue growth remained strong, up 13%, driven by 21% growth in distribution and 5% growth in advertising. The strong growth in distribution was driven by Peacock with paid subscribers of $5 million year-over-year and $2 million sequentially, reaching $46 million. In advertising, underlying demand remains solid, supported by a record upfront and a strong sports lineup, including the NBA. In the second quarter, we'll continue to benefit from sports, including the NBA playoffs and the FIFA World Cup on Telemundo and Peacock. Media EBITDA was a loss of $426 million, consistent with the dilution we've been expecting in the first season of the NBA as we straight line the amortization of these rights with quarterly seasonality driven by game counts. The first quarter was the peak volume with about 50% of the games played and the corresponding costs flowing through. So as a result, this quarter represents our peak EBITDA dilution from NBA costs. This dynamic flowed through to Peacock as well, where EBITDA losses were $432 million. Importantly, we expect the set up to improve from here, with second quarter reflecting a meaningful inflection point with Peacock expected to approach profitability. So stepping back, the first quarter was the high watermark for NBA-related dilution for media, and we feel good about the direction from here. At Studios, we had really strong growth this quarter. This was in large part driven by content licensing deals led by the successful renewal of the office on Peacock. While that benefits Studios this quarter, it drives larger eliminations at the C&E level. Now let me wrap up with free cash flow and capital allocation. In the first quarter, we generated $3.9 billion of free cash flow. We did that while continuing to invest meaningfully across our businesses, including broadband go-to-market pivot and customer experience work in connectivity, further strengthening our domestic broadband network and onboarding the NBA. Stepping back, our capital allocation framework has been and will continue to be balanced and consistent. With the VERSANT spend now complete, our portfolio is more streamlined, and our capital priorities continue to start with investing organically behind our growth drivers. We ended the quarter at 2.3x net leverage. Just as a reminder, leverage is calculated on a 12-month trailing basis. So as VERSANT exits the calculation over the course of this year, we expect leverage will tick up a bit. And as I said last quarter, our intention is to bring leverage back to 2.3x. And we continue strong capital returns to shareholders. This quarter, we returned $2.5 billion, including $1.25 billion of share repurchases and $1.2 billion of dividends. And over the past 12 months, we've returned $11 billion to shareholders, which includes a significant and well above market dividend yield, along with strong and methodical share count reduction. This balanced approach has served us well, and it continues to guide how we allocate capital as we execute through this transition period. With that, let me turn it over to Marci for Q&A. Marci Ryvicker: Thanks, Jason. Operator, let's open the call for Q&A, please. Operator: [Operator Instructions] Our first question today is coming from Craig Moffett from MoffettNathanson. Craig Moffett: I guess the obvious place to start is with broadband. Your broadband ARPU rate of decline actually moderated sequentially a little bit. I wonder if you could just elaborate a little bit on how much lower do you think broadband ARPU might have to go to maintain the kind of stabilization that you've seen? And then if you could just broaden the lens perhaps just to talk about where the improvement came from, was it relative to FWA? Was it relative to fiber? Was it relative to all of the above? Steven Croney: Craig, it's Steve. Thank you for the question. As Jason said and we previously have highlighted, broadband ARPU pressure would intensify in the early part of the year. We do see some incremental pressure in Q2, but we do expect relief as we exit the year, and we talked about it. The primary drivers of the decline include the absence of a broadband rate increase, free wireless lines and migration to our simplified pricing I talked about it earlier, we were not competitive enough. We need to adapt our approach and pivot the business, and our focus is on getting to the other side of as soon as possible. We'll talk about a few of the areas where we see improvement. Our continued mix shift to higher speed tiers. We're seeing a significant improvement in our gig plus tier speed mix. Our higher mobile attachment, '25 was our best year in mobile net adds -- line net adds that we've had and it's our -- Q1 was our largest quarterly net adds on record. And we're seeing the early cohorts of our free line conversion, and we expect significant majority of those to convert to paid relationships that will accelerate in the back half of the year. Mike touched on in his script, we've launched new premium products, and we're very happy with the sell in there on the mobile side. And we do maintain our pricing flexibility. So we can adjust the rate and acquisition pricing as the market evolves, and we're lapping the period and we will have a period of elevated transactional activity tied to plan migrations, and we expect those volumes to normalize over time and that will reduce our dilution going forward. So I think we will see improvement as we exit the year this year. And in reference to your second question, overall, I touched on it in the last call, 4 key objectives I'm focused on. It's improving broadband performance year-over-year driving higher mobile penetration, creating better customer outcomes and returning to revenue and EBITDA growth. And we're really encouraged by Q1. We did see benefit across all of our competitive environments, and we did see both tech and disconnects improve. Jason highlighted, though, half of the about -- a little over half of the improvement was tied to our investment in Legendary February. That was a unique opportunity for us, and we really took advantage of it. But foundationally, our new pricing and packaging is resonating, and we're supported by clear messaging, better creative, driving greater awareness across our prospects and our base. And definitely, we're leaving no stone unturned. I'm challenging everything we're pushing hard. A few examples of that are, we're leveraging our data more effectively than we ever have; we're using AI to improve transactional outcomes; we're currently running hundreds of models with thousands of attributes to optimize our acquisition or upsell or win back our retention; and we're enhancing our marketing tech stack to enable greater customization and personalization, leveraging those models to drive better outcomes. We'll continue to focus on the customer experience, and we're driving improvements across the entire customer life cycle that includes simplified buy flows, simplifying our activation, focusing on same-day order to activation with broadband, improving our unassisted channels, taking out customer effort and continuing to improve reliability across the entire network and very, very pleased with the results where we've upgraded the network. So we're seeing early and measurable progress in NPS. And we're also hyper focused on sales effectiveness. We hired a new head of sales, and that individuals focused on sales development, training staffing models, compensation models and tools and once again, pleased with the early results there. So I'd say in summary, we're building a more stable customer base with our new pricing and packaging. We're seeing higher gig tier mixes, accelerating mobile attach and higher NPS, all of which will benefit us into the future. Craig Moffett: Steve, that's super helpful. Can you just comment on the FWA versus fiber part of that? Steven Croney: Yes. Like I said, we saw improvement across all of our competitive environment. Michael Cavanagh: And Craig, I would just add to that, I think to step way up, the improvements equal parts, execution and then leveraging the totality of this company. On the execution side, as Steve said, I said in prepared remarks, our connect activity was better, our churn activity was better, customer perception of us was better. So all sort of taking place in the quarter are expected to repeat, amplifying across the company through legendary February, that a little bit more of a one-off event. We'll obviously look for opportunities to do that again in the future, but nonetheless, put the full weight of the company behind us in the quarter. Operator: Next question is coming from Michael Rollins from Citigroup. Michael Rollins: I'm curious if you could expand further on some of the success you're seeing in wireless in terms of kind of moving up into larger families, you mentioned the business opportunity that's coming up with new MVNO. And also just within this context, what is Comcast doing to simplify the migration process for customers. And if carriers start to pull back on subsidies, your competitors do less on that. Does that help you get a better hit rate to move customers over to Xfinity Mobile? Steven Croney: Good question, Mike. I strongly believe we have the right to compete and win when it comes to mobile. We have 2 strong MVNOs covering consumer and broadband. We have largest converged footprint. We have the nation's largest WiFi network. We've talked about it. We offload about 90% of XM traffic, and we have lower acquisition costs because we're selling to our base. continued operational focus, Q1 was great. Our largest line net add quarter since launch. We've really rallied the organization around mobile. And this has helped create awareness within the organization. We're mobile-led and really helping with our sales effectiveness. We're also doing a much better job in life cycle management. So we're selling more to our existing customer base. We're selling more to our mobile customer base. About 30% of our connects line net adds are coming from existing mobile customers adding more mobile lines, which is really important for us. We're focused on continuing to improve the customer experience. We have a long way to go here, but we've made great strides improving the customer experience once again, across the entire customer life cycle. And has been the case the last few quarters, about 50% of our lime connects are free lined, and we're really, really pleased, as I touched on the last question with the early retention rates for that free line roll-off. And then on top of that, have the TMO MVNO, which will be launched in the near future, bringing mobile availability to our mid-market and enterprise customer base. So -- and then in reference to your question on the subsidy side, we primarily compete on price and value. So really, really focused there. And we will use subsidies selectively, new product launches, key moments. But that's an area that we'll continue to watch and target -- also target throughout the customer life cycle. And then the last one, which Mike touched on a bit, is our premium plans. So we launched that about a year ago. And we really were not competing well for those that wanted to feature rich product. And we've done a great job. About 30% of our connects are premium customers. And as of yesterday, we launched a new premium plan that has device protection included. We think that's a significant differentiator. No one else in the marketplace is doing that. So not only will it help our premium upsell, it should also help our conversion rates when it comes to mobile. So overall, when you look at it, I think our MVNO relationships, it's a capital-efficient model, we have a cost structure that supports profitable value proposition and it's really resonating with our customers. And with about 16% penetration, we have a long runway ahead of us, I'm very bullish. Michael Cavanagh: And it's Mike. I'll just pile on. I think if you look at the journey over multiple years in mobile, it's been a steady compounding effect basically of improving products from -- by the gig and a focus on a certain type of household at the beginning to now, we're fully competitive right up to the top of the need of a household at the higher end. Plus the passage of time, I think and Steve's bringing the focus to the whole organization of attaching mobile and using free lines and being hyper focused as we're in this year of the processes and life cycle management, they mentioned to make sure we do a great job converting to paid because, as you said, once we see that happening, we're doing a nice job getting paid mobile customers to add more lines down the road. So that all is -- this is not a fleeting moment for us these past few years. I think we've been steadily building and letting the effect of our progress in mobile compound itself and it's going to continue to be a big area of focus for Steve and his team going forward. Operator: Our next question is coming from John Hodulik from UBS. John Hodulik: Two, if I may. Maybe first for Steve. From Jason's comments, it sounds like after the benefit of the year-over-year improvement in broadband subs is due to the sort of legendary sea promotions and the half was sort of organic based on some of the efforts you've had. If we expect those efforts to sort of gain more traction through the year. Can we expect the high-speed data subscriber losses for the year to improve versus last year? That's my first question. And then second, maybe for Brian. We spent about a year talking about media consolidation. But I think the conversations have shifted towards cable consolidation. Just what are your thoughts on the potential landscape and maybe regulatory framework and sort of just backdrop on further consolidation in the cable industry. . Steven Croney: Thanks for the question, John. Yes, I would say we do expect improvement year-over-year, but more than half of the benefit in Q1 was tied into the legendary February. We really leaned into that from a marketing investment and an offer investment. It was like I said, it was a great moment, and we took advantage of it. Brian Roberts: Let me start and maybe Mike wants to -- this is Brian, jump in as well. Look, really pleased, as I said in my opening, with the energy, I think you can feel it in the team the broadband business, I think, frankly, we've corrected and perhaps way too much negativity. So I think we have a great company and we're going to operate even better in the months and quarters ahead. That's the plan of record. Part of that is believing in the assets you've got, we've made the change with VERSANT, and I think we feel really good about and comfortable. But as we said on the last call, and I think we've always thought if we can find ways to create shareholder value, the bar is high, but we're always focused on looking at those kind of creative situations. And -- but that said, I also just really do like the direction of the company and don't want to create a lot of distraction. But Mike, what are your thoughts? Michael Cavanagh: Yes, I think you said it. I think the opportunity we have, given the negativity around the cable segment and the changes we've made and the progress we're seeing and the road map we see ahead, I think, is a rich path to drive value. I think we're undervalued, frankly, and the negativity on the business is something we need to work on changing people's sentiment towards a period full stop. And I think doing that by continuing to run the play that Steve just articulated really well is Plan A. I think, in addition to that, we've got plenty of opportunities and have worked with others in the industry to partner around video or mobile or otherwise. So there are ways to benefit ourselves through scale in partnership terms, and we're open to doing that. And then ultimately, there's always bigger ideas that, as Brian said, open to strategic possibilities to create value. But we've got -- the focus is really on what we can do ourselves and the list is long, and we're underway on that. Operator: Our next question is coming from Jessica Reif Ehrlich from Bank of America Securities. Jessica Reif Cohen: I guess turning to NBCU. As you also said, your assets are more streamlined following diverse spend, and you've locked in basically all major sports charge like everything at this point. So as you look at your key assets in Universal Studios, Peacock, Theme Parks, they all seem strategically very important. How are you thinking about allocating capital across these assets [indiscernible], what gives you confidence the returns will become more visible in your consolidated earnings over time? And you said Peacock will be profitable next quarter. But is that -- should we expect consistent profitability? Michael Cavanagh: Sure. It's Mike, Jessica. So I think zooming out, I think we feel great about NBCUniversal, both it's -- how it's set up post VERSANT with each business that's within it, Parks, Studios and Media set up to be growers. It's our -- you look at parks, and we're really pleased with the big initiative last year was Epic. And ahead of us is a U.K. park and the expansions of the kids parks in the U.S. and more to come. So I think the creative plans inside our Parks business to keep driving growth, and that's one of our 6 important growth drivers is a good one, and we love that business, and we'll allocate -- recycle the capital that they create back into the business over time. to keep growing that business and creating value above our cost of capital. So no question that, that's a leader. Commented on Parks earlier -- I mean, on Studios earlier in the script, in the call. I think we're off to a great start with Mario, and we've got several great further movies coming out the rest of this year. We've been #2 in the box office, top 2 for the last 3 years, and I expect that to continue under the great leadership that we have, and that's a part of the flywheel of creating franchises and feeding parks. And fits right into what makes a media company great alongside parks. And then on the Media side, now that we are post VERSANT in first quarter out of the gates, we are very, very focused on making that business a business that the combination of NBC Broadcast and Peacock. And as Jason said, Peacock should approach profitability in the second quarter. And then because of our straight-line amortization of NBA rights as we look to the next season, so to speak, of NBA lapping itself I think the prospect for ongoing and durable profitability for Peacock is what we have our sights set on. And that, combined with really putting it together with the linear media business in is how we're going to manage the media business going forward is what is the revenue opportunity as we look at consumers and what they're willing to pay across the landscape that they're faced with, how broadcast sustains, which I think we feel very pleased when you look at the power broadcast in this legendary February and what it means to marry great broadcast together with a stream platform like Peacock. So I think there's obviously work to do on all those fronts. But I think we have a very elegantly designed media business where we've gotten it focused to 3 parts, Parks, Studios and Media that are going to work together for years to come, and we're going to be focused on driving value and putting capital to work against the opportunities that we have there. Operator: Next question is coming from Sean Diffley from Morgan Stanley. Sean Diffley: You had alluded to satellite being kind of a new thing to be concerned about. I was curious if you could compare and contrast the fixed wireless learnings versus the satellite learnings. Do you expect that to change meaningfully the way that regulators could look at the definition of the market? And to John's question earlier, potentially have a more favorable view of larger scale M&A in the cable sector. Steven Croney: Thanks for the question, Sean. Our assumption is that the market will stay highly competitive, fiber, fixed wireless and now satellite is getting more promotional. And what we focus on is what we can control and what matters for the customer anchored by the following. We have a great network that is on par with fiber and it does exceed the capabilities of fixed wireless and satellite, both of which are capacity constrained. We're focused on price value. Our new go-to-market strategy and free wireless lines is really resonating in the marketplace. We have a differentiated WiFi experience that ranks #1 for reliability in our footprint, hugely important for the customer. and we're improving the customer experience. But the tremendous amount of focus that we have, we are taking a vulnerability and I believe, creating an opportunity in an area where we can win. If you take it from the customer's lens, what the customer is solving for is broadband is a product that's incredibly relevant to their lives, with consumption growing about 10% year-over-year, and that lends itself to prioritizing a WiFi experience that leans into speed and reliability. And we stack up incredibly well there. Other customers don't prioritize simplicity. And this is where Fixed Wireless did really well. They changed the game on ease of install, simple pricing. As I touched on earlier, that's exactly where we've been investing. And I see no reason why we can't win there as well. So to me, if you put all these together, I feel we have a great hand. We either have a leadership position or we have a path to a leadership position on the things that matter most to our customers, and that is how we intend to compete, no matter who the competitor is. Brian Roberts: Okay. Well, this is Brian. Let me just -- on the second part of that question. Look, I think what makes -- what you count on us to do is to reevaluate the market, the technology and the landscape. And I think as the government, we'll perhaps do that based on what actually happens here in the years ahead. That's why we have -- that's what we've done for 50 years. And it makes it interesting and intellectually an opportunity to see this changing landscape, what opportunities that open up for the company and what's real, what's not real. So I think what matters most of what Steve just said. And again, I echo I think he's off to a fabulous start with the team in being -- trying to control the things we can control, and that's making our customer experience better and making sure we have the absolute best product in as many customers' homes as possible. And then we'll see where the market evolves to and what doors that opens and what situation that creates. But we're hopeful that through that changing landscape, the last 50 years, we've managed to position the company in a place where we can grow, where relevant, we can return capital to shareholders, all the things Jason said. So first order of business is make sure we execute really well. That's what's so important about this quarter. Operator: Next question today is coming from Sebastiano Petti from JPMorgan. Sebastiano Petti: I guess just given some of the headlines we're seeing on a macro basis and consumer sentiment kind of at all-time lows. Just any color you might be seeing domestically in the parks or from maybe some of your ad partners if you're sensing any tone shift perhaps in the economic weakness is that translating to [indiscernible], et cetera? I know you did talk about Epic driving higher attendance and per caps. And then maybe just more of a housekeeping question. I think, Mike, in your prepared remarks, you did say fiber builds are accelerating. Obviously, you see all the announcements out there from your competitors, not surprising, but any update in terms of where you guys stand today, perhaps on a fiber overlap basis across your residential footprint? Michael Cavanagh: Sure, Sebastiano. So I think in terms of the macro and the geopolitical and how it's affecting our domestic business, Jason commented on some of the impacts on international parks of just changing in travel patterns. And I think the inbound international travel to the U.S. parks is something that has not ever gotten back to the level we saw pre-COVID. So those are -- those factors continue to exist. I think inside the U.S., domestic to domestic, we haven't yet seen any significant impact in the parks business caused by higher oil, but I think that does not mean that it may not happen depending on the duration of the effect on price of gas and the like and airline tickets and so forth. So more to come, but thus far, not seeing a pullback of any level that's concerning in the current results. But like I said, that we'll see what the coming quarters look like and pretty much the same on the advertising side. We felt, obviously, had an excellent quarter just finished on the advertising front best ever. And so I think the underneath it, aside from the special events that we had during the quarter, it was strong advertising results at a baseline level. And as we sit here now, that's sustained. Brian Roberts: In reference I just want to comment that the compelling nature of the Olympics pulls forward our relationship with advertisers, obviously, the same for NFL Sunday and the Super Bowl. So as we look forward to L.A., and we've got tremendous enthusiasm and excitement for how that could also keep the ecosystem very, very robust. It's -- we have a good road map ahead of us. In reference to the second part of your question, about 55%. Marci Ryvicker: Operator, we have time for one last question. Operator: Our final question today is coming from Michael Ng from Goldman Sachs. Michael Ng: I just wanted to ask about the wireless line to paid strategy in the second half. First, could you just talk a little bit about what you've seen in the free line roll-offs to date and the strategy that gives you the confidence in the successful conversion later this year. And then second, I was just wondering if you could talk about the related impact from the wireless monetization strategy on broadband subscriber trends. Could this also help broadband ARPU stabilize later this year? Steven Croney: Yes. So in reference to the wireless free line to paid strategy. We're early in that role. But as I mentioned, we're really focused on life cycle management, managing those customers all the way throughout. And in the early cohorts, we've seen a significant majority of those customers rolling to paid. So we're -- we feel that will continue as we move forward and more of the lines roll in the back half of the year. And yes, it will have a direct impact on broadband ARPU based on revenue recognition as those lines rolled to paid in the back half of the year, and that will be a tailwind. Marci Ryvicker: Thank you, Mike. That now ends our call. Thank you, everyone, for joining us this morning. Michael Cavanagh: Thanks, everybody. Operator: Thank you. That does conclude today's question-and-answer session and today's conference call. A replay of the will be made available starting at 11:30 a.m. Eastern Time today on Comcast Investor Relations website. Thank you for participating. You may all disconnect.
Operator: Good morning, and welcome to Bread Financial Holdings, Inc.'s first quarter 2026 earnings conference call. My name is Michelle, and I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open to your questions. To register a question, please press star followed by 11. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial Holdings, Inc. The floor is yours, sir. Please go ahead. Brian Vereb: Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer, and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions, and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliations of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta. Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call. Before speaking to our results, as we celebrate 30 years in business and 25 years as a public company in 2026, I want to take a moment to thank our current and former associates. Your commitment to excellence in how we serve both our brand partners and customers is reflective of our enduring value-driven culture. We are extremely proud of our history and the continued transformation of our company. We remain committed to delivering on our brand promise each and every day. Today, Bread Financial Holdings, Inc. reported strong first quarter results, which were underscored by a return to loan growth alongside increasing growth in credit sales and continued improvement in our credit metrics. Credit sales grew 7% year over year in the first quarter, driven by successful new partner launches across our full product suite and increased shopping activity with our long-standing partners, especially among Gen Z and millennials. Consumers are being thoughtful and budgeting actively amid lower sentiment and confidence and higher fuel costs. In the quarter, we saw year-over-year sales growth across a broad set of categories including health and beauty, jewelry, and travel and entertainment. Additionally, our expanding home vertical grew nicely in the quarter. In the current macroeconomic environment, consumers continue to demonstrate resilience as highlighted by credit sales growth as well as improving delinquency rates. We will continue to closely monitor and adapt appropriately to consumer spend and payment behaviors. On the new brand partner front, we were excited to launch new credit card relationships with Ford and Ethan Allen in the quarter. Our long-term agreement with Ford, which has one of the largest dealer networks in the U.S. with nearly 3 thousand franchise dealerships, includes co-brand credit card and installment loan programs. Leveraging our deep expertise in the automotive retail landscape, the program will increase customer loyalty by enhancing their car ownership experience to earn rewards and increasing accessibility to subscriptions, parts, and services. The addition of Ethan Allen, America's number one premium furniture retailer with nearly 140 design centers and a significant online presence in the U.S., strengthens our prominence in the home vertical with flexible financing options. We are also offering Bread Pay installment loans for AAA, Dell, and Ford, as we continue to expand this product offering. Additionally, we are pleased to announce the new comprehensive suite of payment options with Academy Sports, including co-brand, private label, and installment loans. Our full product suite, technology advancements, sophisticated underwriting, enhanced loyalty programs, and a differentiated partner model are central to our success in winning new partnerships and retaining and strengthening existing relationships and driving higher lifetime customer value. Our first quarter financial results highlight our company's strong capital and cash flow generation, earning net income of $181 million, generating revenue growth of 5% year over year, and growing tangible book value per common share by 26% to $61.57. Additionally, during the quarter, we continued to build shareholder value as we retired a total of 3.5 million shares of common stock, or 8% of our outstanding shares at year-end 2025. This was a result of both our ongoing stock repurchase activity and the unwind of our capped call transactions. For six consecutive quarters, we have seen improvement in our credit metrics via the year-over-year change in our delinquency and net loss rates. We are pleased with this trend and remain confident that this improvement will continue over time. We believe our emphasis on disciplined credit risk management, coupled with product diversification towards co-brand credit cards and installment products, continues to positively impact our risk distribution. Overall, our solid, sustainable results underscore the success of our efforts and emphasis on allocating capital efficiently, growing responsibly, and advancing our operational excellence initiatives. Finally, moving to our investment priorities, we continue to invest in our business to drive growth for both Bread Financial Holdings, Inc. and our partners. These investments include digital and technology advancements across our business, including AI. We are deploying AI responsibly across the enterprise to accelerate operational excellence, which includes increasing productivity and efficiency, driving innovation, and strengthening risk management. Our investments are reinforced by a disciplined value-tracking framework ensuring a strong return on investment. Supported by technology advancements, strong capital levels, and cash flow generation, we are well-positioned to execute on our growth priorities while delivering sustainable long-term value for our shareholders. We remain confident that we will deliver on our 2026 financial targets, which Perry will discuss in more detail. Now I will pass it over to Perry. Perry Beberman: Thank you, Ralph. Slide 3 highlights our first quarter performance. During the quarter, credit sales of $6.5 billion increased 7% year over year, which can be attributed primarily to new partner growth as well as increased general-purpose spending. We are pleased that loan growth has inflected positively as average loans increased 1% to $18.3 billion, and end-of-period loans increased 2% to $18.1 billion. We plan to continue building on this momentum throughout 2026. Direct-to-consumer deposits increased 10% year over year to $8.7 billion at quarter end, with our average direct-to-consumer deposits representing 48% of total funding, up from 43% a year ago. Revenue increased $48 million, or 5%, primarily reflecting the implementation of pricing changes and lower interest expense, partially offset by lower billed late fees and higher retailer share arrangements. In total, we generated net income of $181 million and diluted EPS of $4.15. Note that our EPS calculations now reflect dividends paid on preferred equity. Looking at the financials in more detail, on Slide 4, first quarter total net interest income increased 6% year over year, driven by the gradual build of our pricing changes and lower interest expense. Noninterest income was $13 million lower year over year, driven by higher retailer share arrangements, which includes both higher credit sales-related partner payments and increased profit share driven by improved loan yields and credit losses. Total noninterest expenses decreased $5 million, or 1%, reflecting our ongoing expense discipline and a credit received during the quarter. Looking at the expense line item variances, which can be seen in the appendix, employee compensation and benefits cost increased $5 million primarily due to higher wages related to annual merit increases and incentive compensation. Information processing and communication expenses decreased $5 million primarily due to lower outsourced data processing costs as a result of a credit received in the quarter. Finally, PPNR was strong as it increased $53 million, or 11% year over year. This is a result of risk-based pricing discipline driving higher revenue yield while at the same time delivering sound operating expense management. Turning to Slide 5, net interest margin of 19.3% increased year over year and sequentially as loan yield continued to benefit from the gradual build of pricing changes and funding costs continued to improve. To that end, we are seeing interest expense decrease as our cost of funds benefits from the actions we took last year to reduce our parent senior notes from $900 million to $500 million and reduce the rate paid from 9.75% to 6.75%. Additionally, during the quarter, we repurchased $50 million of our subordinated debt using excess cash and now have $350 million in principal outstanding. Moving to Slide 6, our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $6.4 billion at the end of the quarter, representing nearly 29% of total assets. At quarter end, deposits comprised 78% of our total funding, with the majority being FDIC-insured direct-to-consumer deposits. Shifting to capital, we ended the quarter with a CET1 ratio of 13.3%, up 130 basis points compared to last year. As you can see in the upper right table, our CET1 ratio benefited by 340 basis points from core earnings. Common stock repurchases and preferred and common stock dividends reduced our capital ratios by 210 basis points, while the impact from costs related to debt repurchases accounted for approximately 40 basis points of impact to CET1 since 2025. Additionally, we are very pleased with the outcome of our capped call transactions, which we retained after fully repurchasing our convertible notes last year. We elected to unwind the capped call in exchange for shares of common stock, and the result of the full unwind was the retirement of 1.5 million shares in the quarter. As of quarter end, our remaining stock authorization was $690 million. Our share repurchase cadence going forward will be contingent upon capital generation from our business, our growth outlook, incremental investment expectations, and the resulting capital levels against our capital policy targets. Additionally, we look to further optimize our capital structure by issuing additional preferred shares. The timing of potential additional preferred share issuances will be predicated on market conditions. That timing will influence the cadence of subsequent common share repurchases. Finally, looking at the bottom right of the slide, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 25.5% of total loans, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a proven track record of accreting capital and generating strong cash flow and remain well positioned from a capital, liquidity, and reserve perspective. This provides stability and financial flexibility to successfully navigate an ever-changing economic environment while generating increased value for our shareholders. Moving to credit on Slide 7, delinquency rate for the first quarter was 5.59%, down 34 basis points from last year and down 16 basis points sequentially. Our net loss rate was 7.33%, down 83 basis points from last year and down 10 basis points sequentially. We remain pleased with the ongoing gradual improvement in our credit metrics, which continue to benefit from our prudent credit risk management framework, ongoing product mix shift, and overall consumer resilience. New investors often ask how to think about our portfolio and typical customer. Our typical customer represents a middle-income American. For context, our new customers have an average annual income of around $100 thousand. As Ralph mentioned, our consumers remain resilient as evidenced by improving credit trends in our monthly external credit performance data, what we are seeing in our internal data, and what we are hearing from customers contacting us that our teams monitor continuously. The first quarter reserve rate improved 73 basis points year over year to 11.46% due to our improving credit metrics and higher credit quality new vintages, as well as stability in our credit risk distribution with 64% of cardholders having a greater than 650 prime credit score. Note that per investor request, we have updated our published credit risk distribution ranges to more closely match peer ranges. Compared to the prior quarter, the reserve rate increased 26 basis points, which was impacted by the seasonal paydown of holiday-related balances during the first quarter. We continue to apply prudent weightings on the economic scenarios used in our credit reserve modeling given the wide range of potential macroeconomic dynamics, including ongoing uncertainty regarding trade policy and global conflicts, and the downstream impacts on inflation and unemployment. These weightings remained unchanged from the prior quarter. Turning to Slide 8 and our full year 2026 financial outlook. Our 2026 outlook is unchanged and is based on our strong first quarter business results, continued consumer resilience, inflation remaining above the Federal Reserve target of 2%, and a generally stable labor market. As we mentioned earlier, we are pleased to have reached an inflection point with positive loan growth in the first quarter. We expect full-year 2026 average credit card and other loan growth to be up low single digits compared to 2025. Growth will continue to be supported by our stable partner base and new business launches, credit sales growth, and continued credit loss rate improvement, partially offset by higher cardholder payment rates. Total revenue growth is anticipated to be up low single digits, largely in line with average loan growth. We anticipate full-year net interest margin to be higher than 2025 as a result of continued benefits, albeit slowing, from implemented pricing changes and improving funding costs. The incremental benefits tied to pricing changes slow throughout the year as the majority of our portfolio will have repriced. These NIM tailwinds will be partially offset by lower billed late fees from improving delinquency trends, higher payment rates, and a continued shift in risk and product mix. For noninterest income, we expect meaningfully higher retailer share arrangements, or RSAs, going forward as a result of both higher credit sales-related partner payments and increased profit share driven by improved loan yields and credit losses. Specifically for the second quarter, we expect this dynamic to pressure noninterest income by up to $40 million compared to the first quarter of 2026. We manage expense growth based on revenue generation and investment opportunities and expect to deliver positive operating leverage in 2026, excluding the pretax impacts from debt repurchases. We expect second quarter total expenses to be up sequentially from the first quarter as we continue to invest in our business to drive growth, build new capabilities for our partners and customers, and deliver future efficiencies. Initial estimates of the second quarter expenses are just under $500 million. Given the ongoing gradual improvement in our credit metrics, we are on track to achieve a net loss rate at the low end of our 7.2% to 7.4% targeted range for 2026. This guidance contemplates stable macroeconomic conditions, continued risk and product mix shifts, and a resilient consumer. We continue to expect our full-year normalized effective tax rate to be in the range of 25% to 27%, with quarter-to-quarter variability due to the timing of certain discrete items. Our strong results in 2026 are a testament to the successful execution of our company's transformation efforts, the capital generation power of our business model, and our financial resilience due to our relentless and disciplined focus on capital and risk management. We are proving that we will deliver on what we say we will. Our PPNR growth, continued improvement in our credit metrics moving toward our historical loss target, and ongoing capital optimization demonstrate our commitment and path to achieving our longer-term mid-20% ROTCE target in the coming years. In closing, we remain confident in achieving our 2026 outlook and further in our ability to generate attractive returns and increase value for our shareholders throughout the dynamic economic and regulatory environments. Operator, we are now ready to open up the lines for questions. Operator: Thank you. Star followed by 11 on your telephone keypad. If you change your mind, please press 11 again. When preparing to ask your question, please ensure your phone is unmuted locally. One moment for our first question. Our first question will come from the line of Vincent Caintic with BTIG. Your line is open. Please go ahead. Vincent Caintic: Hi, good morning. Thanks for taking my questions. First one, kind of a broad question on guidance. First quarter was strong. Revenues grew 5% year over year and your credit sales were up 7%, and loan growth is nice to see that be positive. I am a bit surprised to see loan growth and revenue growth guidance at low single digits. So I was just wondering maybe if you can talk about what is baked into guidance and any conservatism there and how we should kind of expect that cadence of growth to be for the rest of the year? Thank you. Perry Beberman: Vincent, thanks for the question. Look, we are really pleased with the first 90 days of results, and our thoughts on guidance are we are off to a really good start, and that gives us a high degree of confidence to share that we are able to reaffirm guidance and feel very confident in our ability to achieve the guidance across all the things that you just talked about. With the degree of uncertainty in the macro environment, it feels a little premature to declare a big change such that we can then up it. But, again, if the trends continue on into the second quarter, I think there is some optimism there. On average loan growth, remember that is an average. So what you are seeing is we are up almost 2% on ending. Expect that will continue to grow throughout the year to get us to that low single digit on average. So that is going to build, but we expect ending loans to be higher than low singles. Vincent Caintic: Okay. Great. That is helpful. Thank you for that. And then second question on the share repurchases. Very nice to see the strong quarter and also nice to see the increased authorization. You talked a little bit about it, but if you could maybe help us on how to think about cadence, how much of future share repurchases are based on having to raise those preferred equities, and then any thoughts on kind of long-term CET1 framework? Thank you. Perry Beberman: Yes. When you think about the cadence, when we announced the additional share buyback program, we did not time-bound it, so it is open-ended. The cadence will be informed by, first, the amount of growth that we have in any particular quarter, making sure that we maintain our capital ratios, that we are supporting the growth first and foremost, and then, if we have additional capital at that point, we will try to return it to keep closer to our capital targets. As for the cadence around additional share repurchases beyond that, we have talked before about the opportunity around preferred share issuance, and that will be largely market-dependent. You cannot wake up any morning and know what is going to be the news cycle and what the markets are going to demand. So, obviously, we are actively monitoring those markets, and we will opportunistically issue. That would then generate some additional opportunity for capital return should that happen. That is cared for in the overall share authorization. So the cadence and the amount that we are able to use this year will somewhat be dependent on earnings generation and the preferred share issuance. As you look longer term, we said during our investor day back in 2024 that we are looking to optimize our capital stack, and the preferred issuance is a component of that. The new-to-story would be the Basel III endgame opportunity, should that go into effect. For us, we would look at that as the standardized approach, and that could be an opportunity where, if it lowers our risk weighting for our assets, that could free up maybe another 100 basis points of opportunity around capital. More to come on that. Obviously, everybody is looking at it, and we are very pleased that the Federal Reserve is thoughtfully looking to simplify in some cases and free up capital for banks. But, again, that is in proposal stage, so nothing we can bank on yet. Operator: One moment for our next question. Our next question will come from the line of Mihir Bhatia with Bank of America. Your line is open. Please go ahead. Natalie Howe: Hey, thanks for taking my question. This is Natalie Howe on for Mihir. I wanted to ask a little bit about how pricing changes are flowing through the model. You talked about how it would be a tailwind through 2027 and you highlighted it as a driver for the quarter. As that flows through, what else are you looking at for the year as levers for NIM stability? And along with that, where are rate cuts or increases fitting into this? Thank you. Perry Beberman: Yes. On the pricing changes, that has been a nice tailwind for us. Largely, it is working its way through, and so the degree of benefit that we are going to see incrementally throughout the year is going to slow. It will gradually still be accretive, but it is slowing, as most of the portfolio is repriced. With net interest margin, as we look outward, I would like to say it is going to be reasonably stable because we do have some rate cuts still playing in there, and we are slightly asset sensitive at this point. You also have ongoing product mix that will affect NIM. Cash mix will affect NIM. Credit quality has puts and takes: as your credit quality improves, you may have some lower top-line APRs; you will have lower reverse fees, which is good, but you also have lower late fees, which is a drag. There are a lot of moving parts in net interest margin as well. On funding, with the work that our treasury team has done to increase direct-to-consumer deposits, that has been a positive. There are a lot of moving parts, so we think about it as stability, and we are very pleased with where we are. Our philosophy as it comes to underwriting is to pay for the risk that we take and make sure that we are appropriately assigning APRs at that time. You can see that with our strong risk-adjusted margin that we have been delivering. Natalie Howe: Got it. Thank you. And if I could ask about travel and entertainment, you said that there was strength there in the quarter, but right now, with current fuel prices and sentiment, how durable is that as a driver right now, and how are you looking at the rest of the year? Ralph Andretta: Yes. This is Ralph. The consumers are being thoughtful on how they spend their money. As gas prices go up, they may decide to pull back on T&E. But T&E has been a strong category for us for some time. We see it being a strong category in the future. Operator: Thank you. And one moment for our next question. Our next question will come from the line of Bill Ryan with Seaport Research Partners. Your line is open. Please go ahead. Bill Ryan: Hi. Good morning, and thanks for taking my questions. First question is on the loan growth. I know you made some pricing changes in terms of how payments are applied that has led to an increase in the accrued interest and fee component of the portfolio. It was up fairly nicely in Q1. Looking forward, how much impact is that going to have on receivables growth? Is it going to stabilize at some point as a percentage of the portfolio, or do you still expect that to increase? Perry Beberman: Yes, Bill. I appreciate the question. What you are referring to is the change that we made last year to our minimum payment due payment hierarchy, and we adjusted it to conform with what we are able to do with the CARD Act. It changes the mix a little bit between what portion of interest and fees would be paid versus principal. If you are looking at trust data or principal-only data, that is what includes it. But total loans include both principal and interest, so there is no effect in total. Bill Ryan: Okay. And just one follow-up question related to the NFL portfolio. I know there were some announcements during the first quarter. Maybe if you could highlight for investors what those changes were. Are you expecting some acceleration in the portfolio growth? Just give us some highlights of that. Thanks. Ralph Andretta: Yes. The announcement was about American Express being now the partner for the NFL, and we are thrilled about that because we are partners with both the NFL and American Express. We are still the issuer of the NFL card, so we believe between the NFL, American Express, and us, it is a real touchdown in terms of good for our consumers and good for the fans. We are excited about it. Yet to be determined what we will do together, but rest assured, it will be a very exciting partnership. Operator: Thank you. And one moment for our next question. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is open. Please go ahead. Moshe Orenbuch: Great. Thanks. I was hoping you could talk a little bit about the competitive dynamic in terms of new customers. What is out there, and are there specific verticals of yours that you are thinking about as areas for potentially either new partnerships or portfolio purchase-type opportunities? Ralph Andretta: Yes. Moshe, how are you doing? The home vertical has been really strong for us. With the addition of Ethan Allen, we have Raymour & Flanigan and Furniture First. We find that vertical to be extremely strong. Our vertical in beauty with our beauty partners is extremely strong as well. Adding Ford to our automotive vertical continues to strengthen that with our existing partners. We have a number of de novo opportunities in the pipeline, and the pipeline continues to be robust. We win more than our fair share because of our product set and the sophistication of how we underwrite, as well as the reputation our teams have in the marketplace. We feel confident that as we move forward, we will continue to add partners to each of our verticals. Moshe Orenbuch: Got it. Thanks. The macroeconomic variables that are out there and the outlook have kind of bounced around, and obviously gas prices matter a lot to your customer. Can you talk a little bit about how you took that into account and how you are thinking about that in terms of your outlook for both credit and spend? Perry Beberman: Yes. Thanks, Moshe. You are right. There are a lot of moving parts with the economy right now. As we look at it top line, with full employment and wages outpacing inflation, that continues to provide resilience to the consumer. You have seen that come through in both the spend and credit metrics we put out there. While that looks good, sentiment and confidence are really low, some historic lows. With the good of the employment and wage growth, consumers are still engaging and purchasing, and they are managing their credit obligations, so the payments have been solid. They are probably adjusting their lifestyle, which is good, and that is how we have used the word “choiceful” in the past. Related to elevated oil prices, that is something we are watching because consumers are immediately feeling that at the pump. It has not yet really pulled through in the form of other price increases on goods and services because, as you know, higher oil can end in higher fertilizer costs and heating costs. It is going to pull through; it is just a matter of when. That is something we are cautious about, and we have it cared for in our outlook in terms of being cautious with the reserve rates. On tax refunds, overall it has been a good guide and has helped consumers weather the hopefully short-term price impacts in fuel. We have not seen an overwhelming amount of that used to pay down credit card debt and really improve payments more than you otherwise would have thought. A number of customers under $100 thousand are saying they are going to try to save a little bit, maybe to build a buffer for what is to come. Those things are what we are watching. We were cautiously optimistic entering the year; now I would say we are more cautious for what is happening out there. But the consumer, as of right now, is resilient, and that is encouraging. We are monitoring it very carefully. Operator: Thank you. And as a reminder, if you would like to ask a question, please press star followed by 11. Our next question will come from the line of Sanjay Sakhrani with KBW. Your line is open. Please go ahead. Sanjay Sakhrani: I first wanted to talk a little bit about the late fee mitigation impacts, Perry. I think you mentioned in the press release that that is coming on. I am curious, as we think about the magnitude of the contribution of those mitigation impacts, how does it sequence over the course of the year? Does it get more significant as the loan growth materializes more? And then how does it continue into next year? Perry Beberman: When you look at the new portfolio coming on, that is at our target-state pricing. When the repricing on the existing portfolio has taken hold and the portfolio is churning through payments and new purchases coming on at the higher pricing, we are largely most of the way through that pricing pulling through. Over the course of the year, you will see a gradually declining amount of benefit. Think about this first quarter and where net interest margin is landing: it is expected to be more stable throughout the year, not really expanding as a result of pricing because other things influencing net interest margin are going to play into effect, which is a more diversified product suite. As more customers come in with better credit risk, they have lower APRs, and that is going to pull through. Similarly, you are going to see maybe some rate cuts. There are a lot of things happening there. On credit, there will be lower billed late fees as credit continues to improve. A lot of influences in there, which allowed for those pricing changes that have been made to offset what would have been headwinds. But as you go throughout the year, the benefit of pricing changes alone will start to be muted, as most of it will have been reflected in actuals. Sanjay Sakhrani: Got it. And then I have a higher-level question about the charge-off rate. We tend to compare it relative to the historical averages, but the mix has shifted on the portfolio as well. You have moved more toward co-brand, maybe upmarket a little bit more. As we think about the path toward normalization, is the target the same or a little bit lower than it was in the past? And since we are talking about credit quality, you alluded to tax refunds and people saving more. How should we think about the magnitude of the impact of tax refunds in the first quarter, and is there any residual impact into the April month? Perry Beberman: Thanks, Sanjay. I will start with the target state of our losses. There is a view that all co-brands are created equal. We do have some top-of-wallet type of co-brands that you hear Ralph talk about—the NFL partner earlier, or AAA, or our Caesars partnership—but we also have a lot of retail partner co-brands. In those partner programs, we are still underwriting deep, and we are getting paid for that risk. So the loss profile is kind of replacing what was just only private label. When we talk about our loss rate target, we are still looking to get to a loss rate target that is around 6% or below. If the product mix really shifts strongly towards top of wallet, you may end up with something lower than that, but largely for what we expect and how we underwrite, how we get paid for the risk, and the ROTCE targets that we put out there, around 6% is where we want to live because that is where you get the best return. If we went too far upstream, then we would not be able to deliver the returns that we are looking for. Specifically to tax season, consumers have seen $300 to $350 of higher tax refunds on average, which is nice, but many who are below $100 thousand have stated that they are looking to save more of that, and we have not seen a material increase in payments to date above what you otherwise might have expected. I think it is helping, but they are probably using some of that to offset near-term gas price impacts that they felt at the pump. We are encouraged overall. In some years, that might have been more of a stimulus to pay down debt, but consumers are always looking to use it different ways—spend on near-term needs, save, or pay down debt. In this case, it has not really bent the curve in payments. That said, our credit metrics for the quarter and even starting through April show that payments are remaining strong. It just is not excessively better than what we would like to see. Operator: Thank you. I will pass it back to Ralph Andretta for closing remarks. Ralph Andretta: I want to thank you all for joining the call and your continued interest in Bread Financial Holdings, Inc. Looking forward to our next quarterly call, and everybody have a wonderful day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Thermo Fisher Scientific 2026 First Quarter Conference Call. [Operator Instructions] I would now like to introduce our moderator for the call, Mr. Rafael Tejada, Vice President of Investor Relations. Mr. Tejada, you may begin. Rafael Tejada: Good morning, and thank you for joining us. On the call with me today is Marc Casper, our Chairman and Chief Executive Officer; and Jim Meyer, Senior Vice President and Chief Financial Officer. Please note this call is being webcast live and will be archived on the Investors section of our website, thermofisher.com under the heading, News Events and Presentations until July 22, 2026. A copy of the press release of our first quarter earnings is available in the Investors section of our website under the heading, Financials. So before we begin, let me briefly cover our safe harbor statement. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements within the meaning of applicable securities laws. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q under the heading, Risk Factors. These forward-looking statements are based on our current expectations and speak only as of the date they are made. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even in the event of new information, future developments or otherwise. Also, during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the press release of our first quarter earnings and also in the Investors section of our website under the heading, Financials. So with that, I'll now turn the call over to Marc. Marc Casper: Thank you, Raf. Good morning, everyone, and thanks for joining us today for our first quarter call. As you saw in our press release, we delivered a strong start to the year. Our end markets are progressing in line with our expectations. We continue to strengthen and add to our capabilities by executing our proven growth strategy and completing the acquisition of Clario. Our progress in the quarter further advances our leadership position as the trusted partner to our customers. And as you know, we're actively managing the company, leveraging our global scale and the strength of our PPI Business System to create value for our stakeholders and position our company for a very, very bright future. To start, let me recap the first quarter financial results. Our revenue grew 6% to $11.01 billion. Adjusted operating income grew 6% to $2.4 billion. Q1 adjusted operating margin was 21.8%, and we grew adjusted EPS by 6% to $5.44 per share. Turning to our end markets. performance played out as we expected. I'll briefly cover each end market, starting with pharma and biotech. We delivered mid-single-digit growth during the quarter. Performance was driven by strength in our bioproduction business, our clinical research business and our research and safety market channel. In academic and government, revenue declined low single digits driven by muted macro conditions in the U.S. and China. In Industrial and Applied, growth was flat during the quarter. Growth was led by our chromatography and mass spectrometry business as well as the research and safety market channel. Finally, in Diagnostics and Health Care, revenue declined in the mid-single digits. We delivered another quarter of strong growth in our transplant diagnostics business. As I look ahead, we see our end markets progressing as expected in our original guidance. When I think about the broader macroeconomic environment, there is added complexity, of course, given the conflict in the Middle East and we expect this to create some modest level of inflationary pressure. Our customers remain focused on advancing their priorities, and we expect our end markets to prove resilient. We are well positioned to navigate through this period, leveraging our experienced management team, global scale and the strength of our PPI Business System. Let me now provide some highlights from our growth strategy this quarter. As a reminder, our growth strategy consists of three pillars: high-impact innovation, our trusted partner status with customers and our unparalleled commercial engine. Starting with the first pillar of our growth strategy, high-impact innovation. We had an excellent start to the year. Our innovation enables customers to advance science and improve lives around the world. During the quarter, we launched a number of new technologies across our business that strengthen our industry leadership and help customers break new ground in their important work. In our Analytical Instruments business, we introduced the Thermo Scientific Glacios 3 Cryo-TEM, a next-generation cryo transmission electron microscope that features AI-enabled workflows. What's really exciting about this launch is that it further democratizes access to cryo-EM through the robustness of the instrument that allows us installation in a broader range of lab spaces, bringing high-end structural biology capabilities to more customers. In Mass Spectrometry, we introduced the Thermo Scientific TSQ Certis Triple Quad Mass Spectrometer. This advanced platform delivers faster, high-quality results helping customers enhance productivity and reliability in pharmaceutical and applied markets. We also launched the Thermo Scientific Niton, XL5E handheld XRF analyzer, which is a great addition to our handheld portfolio. This new instrument enables industrial and applied customers to identify materials in the field, helping them drive productivity and speed decision-making. In Life Science Solutions, we launched the Gibco CTS Compleo fill and finish system. This automated system helps address manual fill and finish challenges in cell therapy manufacturing, enhancing productivity and reliability while enabling scalable manufacturing. In laboratory products, we introduced the FluidEase Pro ClipTip electronic pipettes, which improves precision and efficiency in everyday lab work helping customers generate more reliable results. Let me now cover the remaining pillars of our strategy. Our trusted partner status provides us with unique insights to guide our strategy and continually strengthen our capabilities for our customers. At the same time, our industry-leading commercial engine enables us to deliver those at scale. During the quarter, we continued to strengthen our leading position in both of these areas. Earlier in the year, we announced a strategic collaboration with NVIDIA, combining our leadership and laboratory technologies with NVIDIA's advanced AI capabilities. The team is making great progress working together towards the commercialization of new workflow solutions that will enhance scientific instrumentation and help customers work faster, improve accuracy and get more value out of each experiment. To further strengthen our U.S. drug product manufacturing capabilities for our pharma and biotech customers we formed a strategic collaboration with SHL Medical, a leading provider of advanced drug delivery systems. We will be leveraging our recently acquired Ridgefield new Jersey Sterile fill-finish site to offer fully integrated sterile fill-finish and device assembly solutions for our customers. Another great example of our trusted partner status is the continued adoption of our unique accelerated drug development offering which combines our leading capabilities in pharma services and clinical research. This competitive differentiator is translating into strong performance and share gain in our clinical research business which delivered strong revenue and authorizations growth once again in the quarter. We also continue to invest in our commercial engine to ensure we're meeting the current and future needs of our customers. Let me share an example. We opened a new Cryo-EM Drug Discovery Center in San Francisco. It provides pharma and biotech customers with hands-on access to further accelerate adoption of our advanced Cryo-EM technologies to advance drug development. So wrapping up on our growth strategy, we made great progress during the quarter, and we're continuing to advance our leadership position. Let me now turn to capital deployment. We continue to successfully execute our disciplined approach to capital deployment, which is a combination of strategic M&A and returning capital to our shareholders. In late March, we completed the acquisition of Clario and had a terrific kickoff with our new colleagues. Clario is a market leader in digital endpoint data solutions. This technology business is an outstanding strategic fit and highly complementary to our clinical research capabilities. It enhances our ability to serve pharma and biotech customers by enabling deeper clinical insights and helping improve the productivity of the drug development process. This acquisition is a great example of the value that our proven M&A strategy creates for the company. Clario further strengthens Thermo Fisher's position as the trusted partner to pharma and biotech customers delivering important benefits to enable their success. And the acquisition has a very attractive return profile for our shareholders. We're also very pleased with the progress we're making with our filtration and separation business, which we acquired from Solventum. I had the chance to visit the team in Germany recently. The business is performing very well. The integration is going smoothly and customer enthusiasm for these capabilities is very high. Finally, in terms of return of capital during the quarter, we repurchased $3 billion of shares and increased our dividend by 10%. Let me now give you a brief update on our PPI Business System because of its relevance to our success. PPI is deeply embedded in our culture and empowers colleagues across the company to operate with agility. The mindset of finding a better way every day is a core part of our culture and gives me great confidence in our ability to manage through the current environment. We have a proven track record of actively managing the company and consistently delivering strong operational performance. As a reminder, a few areas of focus for the PPI Business System in 2026 are driving an accelerated level of cost productivity, deploying AI at scale to run the company better, and the continued mitigation of tariffs. Our teams are proactively working to mitigate any potential impacts from higher inflation given the current macro environment. Now I'd like to review our 2026 guidance at a high level. We are raising our guidance for the full year on the top and bottom line, incorporating the positive impact of Clario and the strong first quarter earnings performance. We are raising revenue guidance from a range of $46.3 billion to $47.2 billion to a new range of $47.3 billion to $48.1 billion, which represents 6% to 8% reported revenue growth over 2025 and continues to assume 3% to 4% organic revenue growth for the year. And we expect adjusted earnings per share to be in the range of $24.64 to $25.12 which represents 8% to 10% growth over 2025, an increase from our original guidance of $24.22 to $24.80. Jim will take you through the details in his remarks. So to summarize our key takeaways, we delivered a strong start to the year. We're raising our full year revenue and adjusted EPS guidance. Our end markets and our business are progressing in line with our expectations and we're on track to deliver a strong year. We've advanced our long-term competitive position in the quarter with high-impact innovation and important strategic collaborations. We're incredibly excited about the addition of Clario to our capabilities and we'll continue to leverage the strength of our PPI Business System to create value for our stakeholders while building an even brighter future for our company. With that, I'll turn the call over to Jim. James Meyer: Thank you, Marc, and good morning, everyone. I'll start by thanking Marc and Stephen for their support during my transition into the role. I've appreciated meeting many of you on the call over the past few months and look forward to continued engagement with the investor community. In my remarks today, I'll take you through an overview of our first quarter results for the total company and then provide color on our 4 business segments. And finally, I'll share details on our updated guidance for the year. Before I get into the specifics of our financial performance, I'll provide a high-level view on how the first quarter played out versus our expectations at the time of our last earnings call. As you saw in our press release, we have a strong start to the year. We advanced our proven growth strategy, closed the acquisition of Clario and delivered strong earnings growth. Let me begin with Clario, which was not included in our previous guidance. We were excited to complete the acquisition in late March and the business added $30 million of revenue and $0.01 of adjusted EPS to our first quarter results. The business is on track, and the integration is progressing well. Turning back to the total company, both revenue and organic revenue growth were in line with our previous guidance for the quarter. On the bottom line, we delivered adjusted EPS in the quarter that was $0.14 ahead of our previous guidance. This included the $0.01 from Clario and $0.13 from strong operational performance, demonstrating our continued active management of the company and the power of the PPI Business System. So a strong quarter with excellent execution by the team which enabled us to deliver Q1 financial performance ahead of what we'd assumed in our prior guidance. I'll now provide you some additional details on our performance. Starting with earnings per share. In the quarter, adjusted EPS grew by 6% to $5.44. GAAP EPS in the quarter was $4.43, up 11% from Q1 last year. On the top line, Q1 reported revenue grew 6% year-over-year. The components of our reported revenue change included 1% organic growth, a 3% contribution from acquisitions and a 2% tailwind from foreign exchange. As a reminder, in Q1, we had one less selling day than the prior year quarter. This impacted organic revenue growth by approximately 1 percentage point. Turning to organic revenue performance by geography. In Q1, North America grew low single digits Europe was flat and Asia Pacific was flat, with China declining low single digits. With respect to our operational performance, we delivered $2.4 billion of adjusted operating income in the quarter, an increase of 6% year-over-year and adjusted operating margin was 21.8%, 10 basis points lower than Q1 last year. This includes approximately 80 basis points of headwind from tariffs and related FX versus the prior year. In the quarter, we delivered very strong productivity. This enabled us to fund strategic investments to further advance our industry leadership and largely offset the impact of unfavorable mix and the headwind from tariffs and related FX. Total company adjusted gross margin in the quarter was 40.8%. The drivers of adjusted gross margin are similar to those of adjusted operating margin. Moving on to the details of the P&L. Adjusted SG&A in the quarter was 16% of revenue. Total R&D expense was $340 million in Q1, reflecting our ongoing investments in high-impact innovation. R&D as a percentage of our manufacturing revenue for the quarter was 6.9%. Looking at our results below the line, Q1 net interest expense was $120 million. The adjusted tax rate in Q1 was 10.5%, and average diluted shares were $373 million in Q1, $6 million lower year-over-year, driven by share repurchases, net of option dilution. Turning to free cash flow and the balance sheet. Q1 cash flow from operations was $1.2 billion and free cash flow was $830 million after investing $370 million of net capital expenditures. During the quarter, we completed the acquisition of Clario for approximately $9 billion plus potential future performance-based payments. The business is now part of our Laboratory Products and Biopharma Services segment. In Q1, we also deployed $3.2 billion of capital to shareholders through $3 billion of share buybacks and approximately $160 million of dividends. We ended the quarter with $3.3 billion of cash and equivalents and $43.2 billion of total debt. Our leverage ratio at the end of the quarter was 3.8x gross debt to adjusted EBITDA and 3.5x on a net debt basis. Concluding my comments on our total company performance, adjusted ROIC was 11%. Now I'll provide some color on the performance of our 4 business segments. In Life Sciences Solutions, Q1 reported revenue increased 13% versus the prior year quarter and organic revenue growth was 1%. The growth in this segment was led by our bioproduction business, which had another quarter of excellent organic growth. Q1 adjusted operating income for Life Sciences Solutions increased 14% and adjusted operating margin was 36.2%, up 60 basis points versus the prior year quarter. During Q1, we delivered very strong productivity, which was partially offset by unfavorable mix and the expected impact from the acquisition of our filtration and separation business. In the Analytical Instruments segment, Q1 reported revenue was flat, and organic revenue decreased 2% year-over-year. Performance reflects muted demand for instruments from academic and government customers in the U.S. and China. In this segment, Q1 adjusted operating income decreased 11% and adjusted operating margin was 20.7% down 250 basis points versus the year ago quarter. The majority of the margin change was driven by the expected impacts of tariffs and related FX. Beyond that, we delivered good productivity. It was more than offset by lower volume and unfavorable mix in the quarter. Turning to Specialty Diagnostics. In Q1, reported revenue declined 1% year-over-year and organic revenue declined 3%. Performance in this segment reflects the impact of one less selling day in the quarter and a strong year-over-year comparable. In Q1, growth in this segment was led by our transplant diagnostics business. Q1 adjusted operating income for Specialty Diagnostics increased 3% and adjusted operating margin was 27.4%, 90 basis points higher than Q1 2025. During the quarter, strong productivity and favorable mix were partially offset by lower volume. Finally, in the Laboratory Products and Biopharma Services segment, reported revenue increased 7% and organic growth was 4%. In Q1, growth in this segment was led by our clinical research business and our research and safety market channel. Q1 adjusted operating income in the segment increased 6% and adjusted operating margin was 12.9%, 10 basis points lower than the prior year quarter. In the quarter, we delivered very strong productivity, which was more than offset by unfavorable mix, strategic investments and expected headwinds from foreign exchange. Turning to guidance. As Marc outlined, we're raising our 2026 full year guide to reflect the strong start to the year and the acquisition of Clario. We now expect revenue to be in the range of $47.3 billion to $48.1 billion and adjusted EPS to be in the range of $24.64 to $25.12 representing 8% to 10% adjusted EPS growth. Our updated guidance for the year continues to assume 3% to 4% organic revenue growth. The midpoint of our organic growth guidance continues to be slightly above 3% and we continue to assume a $300 million tailwind to revenue from foreign exchange for the year. At the midpoint, the guidance includes $900 million higher revenue, 20 basis points of additional margin expansion and $0.37 higher adjusted EPS compared to our previous guidance. This incorporates the acquisition of Clario, which increased our 2026 revenue guidance by $900 million and added $0.32 of adjusted EPS net of financing costs. At the midpoint, the increase in adjusted EPS reflects the contribution from Clario and the strong operational performance in Q1, partially offset by an assumption for higher inflation in future quarters that we are actively working to mitigate. In terms of adjusted operating margins, our guide has increased to 70 basis points of expansion for the year, including the addition of Clario and the strong performance we delivered in Q1. We are continuing to actively manage the company and drive excellent operational performance, enabling us to increase our guidance for the year while navigating a complex macro environment. Let me provide you some of the modeling elements for the full year. We expect approximately $660 million of net interest expense, which now includes financing for the Clario acquisition. We continue to assume that the adjusted income tax rate will be 11.5%. We expect between $1.9 billion and $2.1 billion of net capital expenditures and free cash flow in the range of $6.9 billion to $7.4 billion for the year, both reflecting the addition of Clario. In terms of capital deployment, we're assuming $3 billion of share buybacks, which were already completed in January and that we'll return approximately $700 million of capital to shareholders this year through dividends. We estimate the full year average diluted share count will be between $370 million and 375 million shares. Now let me provide some color on phasing for Q2. Aligned with the quarterly progression in our original guidance, we are assuming organic revenue growth of about 3% for the second quarter. We expect Q2 adjusted EPS to be between $0.25 and $0.30 higher than Q1. So to conclude, we had a strong quarter. We executed very well to deliver on our commitments. We are thrilled to have welcomed Clario to the company, and we are raising our adjusted EPS guidance for the year. With that, I'll turn the call back over to Raf. Rafael Tejada: Operator, we're ready for the Q&A portion of the call. Operator: [Operator Instructions] Our first question comes from Michael Ryskin from Bank of America. Michael Ryskin: Great. Marc, let me start with sort of a high-level one. A lot of questions from investors, both this morning and just over the last couple of weeks has been -- the acceleration as you go through the year. Investors are increasingly worried about the ramp given some of the end market concerns lingering macro pressures. You touched on a couple of those when you were talking about the first quarter. So what would you say to sort of [indiscernible] some of those fears about the ramp needed to hit the full year guide. You talked about -- you did 1% in the first quarter, as Jim just called out, 3% for the second quarter. I think a lot of people are assuming sort of like 3% in the third quarter and then 5% in the fourth. You've got days [ impact ] in there. But beyond that, just sort of talk about the confidence of the improvement in performance as you go through the year. Marc Casper: Yes. So Mike, thanks for the question. When I step back and look at the quarter, I had the opportunity to see many customers during the quarter. And of course, the macro is challenging with the war in the Middle East and so forth. But it's actually not actually even in the customer's thinking in a good way. They're focused on their pipelines. They're focused on the scientific advances. I mean it's an incredibly exciting time about what's going on in our industry. The markets played out as we expected in the first quarter. We understand the ramp, but the ramp is not really assuming a change in the underlying market conditions. This happens to do with comparable days, things of that sort. So it's nice to have a good quarter behind us. And then we step up in a logical way from there. But Jim, maybe you want to talk a little bit about the phasing? James Meyer: Yes. When you think about the phasing from Q1 to Q2, you have the impact of the headwind from days in Q1 that doesn't exist in Q2, and you also have a significant comparable change in analytical instruments. So that's really the step-up is those two drivers, Q1 to Q2. And then if you think about the first half to the second half, you obviously have the impact of days, the headwind in Q1, the tailwind in Q4 and you have a meaningfully different revenue phasing profile in pharma services that impacts both to this year. in last year. So our Pharma Services business delivers much stronger growth in the second half of the year aligned with kind of how we modeled the year to start it. Michael Ryskin: Okay. And then a follow-up, if I could. I mean, it sounds like you had another good strong quarter in Pharma and Biotech. You called out bioproduction, you called out clinical research continue to do well. Is there anything in particular that kind of offset that? I think you touched on weaker U.S. A&G and in China, maybe a little bit softness in diagnostics. so is there just any moving pieces in terms of what came out worse than expected to offset some of the strength in pharma and biotech? Marc Casper: No. I mean as I think about the end markets and the growth that we delivered even by the various 4 end markets, they pretty much were what we expected to happen during the quarter. So we knew that pharma and biotech would be the strongest growth of that end market. That was our expectation. It was. The strength actually was broad-based in terms of the momentum there. So I don't think there was really anything that was materially different, I'd say, in the tiny categories, you have a weaker respiratory season, but it's really in the irrelevance in terms of the scale of it. So that probably shows up in -- all positive to that, this shows up elsewhere in some minor numbers. But pretty much a very predictable quarter that our team did a nice job executing against. Operator: Our next question comes from Tycho Peterson from Jefferies. Tycho Peterson: Marc, just maybe picking up on that biopharma thread, Curious if you could talk on PPD. I think one of your peers had light bookings last night, obviously, you're coming off a very strong fourth quarter. So curious what you saw in the quarter on PPD. And then is the biotech funding, which has been okay here. Is that starting to translate into spending? And then just early feedback on Clario too from customers and how we think about the combination there. Marc Casper: Yes, Tycho, thanks for the question. Clinical Research has had an excellent quarter. And whether you're starting to say sequentially, how is the business progressing nice step-up in organic growth. But then when you look at it year-over-year, really nice growth organically, both in revenue and authorizations, the customers really value our capabilities. So early read is we're continuing our share gain momentum. And the conditions are actually improving. It's not a surprise, but you're seeing biotech environment is improving from a funding perspective. That's a good thing from our perspective. And I'd say the sentiment continues to get stronger from that perspective. And there's lots of good opportunities that we've been able to close, but also a nice funnel of activities as well. When I think about our accelerated drug development capabilities, where we simplify the process, we reduce complexity, take time out, that's highly valued by our customers. It's unique to us because we're able to leverage the insights of our development and manufacturing organization as well. So that's going very well. And we're embedding AI into our capabilities per that collaboration we had announced some time ago with OpenAI and customers value that, and that positions us very well. So business is quite healthy and our trusted partner status is really progressing. If I think about just the amount of dialogue I've had with our biotech customers and our pharma customers recently, they're really excited about what we're doing together. Clario is exciting, right? We just closed it. I think it was March 24, when I was there for day 1. And the early feedback from customers even from announcement to close is they're very excited about the technology that Clario has and how we think about bringing the major endpoints together in an easier way for them to execute their clinical trials. So I actually am very excited about the acquisition and looking forward to the value unlock that is going to bring for the company and for our customers. Tycho Peterson: Great. And then maybe just a quick follow-up on analytical instruments. Obviously, everybody has kind of been dealing with the academic government headwinds. I guess as we kind of think about that business for the remainder of the year, how are you feeling about a recovery on the instrument side? Marc Casper: Yes. So when I think about the instruments business, as you said, the market conditions are kind of below the normalized level, it's really driven by the academic and government environment in the U.S. and China. Our innovation is super strong. So I actually feel very good about what's ahead. If you just think about how much time I spend in my script just on product innovation out of the instrument business, whether it's the next cryo-EM, whether it's our new mass spectrometer or new handheld, just a small sampling of what we launched. And ASMS is going to be awesome for us in June. So really, that's going to be exciting in terms of what's ahead. The comparisons are a little odd this year. We know them. So there's nothing new, but the comparison for analytical instruments, as Jim said, is much easier in Q2 because it was affected by the implementation of tariffs. So you'll see the growth normalize in the first half, in a certain respect, in the business. Operator: Our next question comes from Jack Meehan from Nephron Research. Jack Meehan: Marc, I wanted to get your thoughts around AI as you -- this is obviously a huge topic for the market. As you look across the business segments, can you talk about how adoption might be influencing your customer spending behavior? And I'm not sure if you're planning an Analyst Day or not, but any color you can share on new offerings you might be able to highlight that leverage your data in Clario? Marc Casper: Yes. So Jack, thanks for the question. So I was going to have in my closing remarks that we're going to have our Analyst Day the morning of May 20. So we will do that, and we're quite excited to see our analysts in New York that day. In terms of artificial intelligence, super exciting, actually. And when I think about the role that AI is playing with our customers, it's accelerating scientific discovery. It's deepening understanding and it's ultimately going to accelerate bringing new medicines to patients faster to address significant unmet medical needs. And when I think about what it means is we believe that AI is going to improve the returns on investment for the drug development industry. That means that there'll be more products that will be coming through the pipeline and ultimately will create an enhancement of funding interest in the biotech community. So we actually think it's a meaningful positive. And for our company, obviously, the good end market matters, and that will help us. But we see it as a significant positive for Thermo Fisher Scientific as we're exceptionally positioned to shape it and benefit from it both in our clinical research business, we talked about that in the past with OpenAI, NVIDIA is really across our technology businesses, our instrument businesses, parts of Life Science Solutions. And it's going to make our portfolio of capabilities stronger and really amplifies what differentiates us, our scale, our portfolio breadth, our trusted partner status and obviously, great execution. We believe that AI is going to accelerate and enhance our durable competitive advantage that we've had. So it's an exciting time, and we're looking forward to continue to drive the adoption that makes a huge difference for our customers. Jack Meehan: Cool. Yes. I'm looking forward to May 20. Jim, one follow-up. You called out higher inflation a few times in the script. I was wondering if you could just elaborate like what areas you might be seeing that in and what the strategy is around offsets and productivity? James Meyer: Yes, Jack, thanks. Given the daily variability in oil prices, we felt it appropriate to put a placeholder in the guide for future quarters. for the risk of inflation that we aren't fully able to mitigate within a year. The teams activated to offset it and mitigate it, and we expect to be able to do that, but just a wide range of outcomes that was prudent to put something in there. The areas you see it first is in the shorter-term kind of supply chain logistics and transportation. And we started to see some of that and seems actively executing against that. But right now, it's just a placeholder, given the variability. Operator: Our next question comes from Dan Arias from Stifel. Daniel Arias: Marc, last quarter, the way that you and Stephen framed the year was to sort of say that you're looking to retire risk as you go along here. When you're answering Mike's question, you talked to some of the moving parts on the macro that have sort of cropped up as new, but I'm curious if you think there's anything that's sort of an offset there that maybe 90 days later, you're feeling a little bit better about and would sort of consider being retired at this point. Marc Casper: You know every year we have expectations of how things are going to play out based on our experience and our deep knowledge of working with our customers. When it goes exactly as we thought, which is what Q1 was, that retires risk, right, in terms of the world was as we thought it would be. Our operating discipline was even stronger than what we embedded in our guidance, which is allowing us to raise our earnings outlook. And customer sentiment is actually quite strong. If I think about what pharma customers and the biotech customers are interacting with us on, they are excited about their pipelines excited about the improving environment from their own end markets, the fact that they've reached agreements with the U.S. government, things are good in that industry and getting better, and that bodes well. So I feel from that perspective, retire risk. In one of our normal conventions, if I think about the earnings side of the equation, normally, we would have beat by the $0.13 operationally. We largely just flow it through the P&L. The only reason we didn't do 100% of that is there's volatility, as Jim said, in inflation. Nobody has a crystal ball exactly how it is. What I do know is our team is fully focused on offsetting it with all the levers. I believe that if it's relatively modest, we will offset it all, and that will all flow through the bottom line, what we held back. But if the world gets really challenging from an inflation perspective, then we've given ourselves a little bit of a cushion to deal with it. So I feel good as we sit here in late April about what the year is. We obviously raised our outlook and excited to deliver a great year. Daniel Arias: Okay. Helpful. And then, Jim, for the quarter, you had the selling days issue that was mentioned, but I think that there might have been also some phasing in pharma services that was material. Is that a quantifiable amount? And I think you characterized the combination of those two as a couple of points. So it's a normalized number, for 1Q is more like 3%, and you're pointing to 3% or so for 2Q, is the general assumption that it's kind of status quo across the board when it comes to end market conditions? Or is it more puts and takes some improvement in one place, maybe a step back and other places? And so that's kind of where you net out. I guess I'm just kind of curious about how you see 1Q to 2Q in the context of where a more normalized 1Q number might be. James Meyer: Yes, thanks. Your characterization is correct. So the 1% growth in Q1 was impacted by about 1 point from the impact of selling days and about 1 point by the impact of the timing of revenue phasing in the Pharma Services business. In Q2, there's puts and takes, but in the aggregate, your summarization is correct. Operator: Our next question comes from Matt Larew from William Blair. Matthew Larew: Just wanted to follow up on Jack's question on AI, but also the instrument innovation highlights you shared. It seems like there's going to be an enhanced emphasis on scale, automation, connectivity and auditability or proof of work both for large-scale generation of biological data and in autonomous labs. I think the threat of your portfolio alone may be an advantage, but as you think about the way your instrument exists today and what kind of enhancements or changes you might make in the future, how does -- how customers might shift the way they are using your instruments affect the way that you're thinking about developing them? Marc Casper: Yes. So Matt, excellent question. So if I think about one of the real interesting aspects, and I like the way you characterize it, of the adoption of AI in the research aspects of the lab work, you're seeing experimentation scale up and will scale up in areas that it would never have happened in the past, right, which is just large-scale generation of biologic information to effectively create biology models, right? So as opposed to what people normally do, which is they're looking at their particular area of interest, you're not seeing very wide scale large volume labs that are just trying to build biology models, if you will. And so when you think about what those customers need, they want the instruments to be more automated or more automated-ready, and they want it to be easy to effectively have the data be able to populate their own models, right? Those are a couple of the trends, it's not a -- it's a trend that we've been aware of for actually a number of years long before generative AI, right, in terms of what customers would have in the past called it the lab of the future or lab in the loop. That's not a new thing, but you're seeing very scaled facilities coming online and our technologies are being adopted. So as part of our R&D road maps about how do we create better connectivity and we feel good about what we're doing there. Matthew Larew: Okay. Great. And then on reshoring, I think that was probably a 2027 and beyond item. I think an industry conference this week heard that people are seeing RFPs. Would just be curious your level of confidence that, that will remain a tailwind? And what sort of the activity level has been like for Thermo? Marc Casper: Yes. So when I think about the reshoring activity, it's actually a nice tailwind, right, in the '27, '28 time frame what we've been able to already secure, start first with our CDMO business, right? A number of customers have decided that leveraging our capabilities is the best way to meet their production requirements in the U.S. So you've seen on the -- some announcements and some topics that we've talked about there. And in fact, President Trump visited our drug product site in Cincinnati, Ohio as part of -- when he was talking about health care, which was really about reshoring in a way in terms of what we're doing, and that's a site that would benefit from those growth in jobs and so forth. So there's real momentum and contracts signed. In bioproduction, we expect that the revenue is largely a '27 and '28 activity. We've won some business already in terms of in kind of industry parlance, brownfield facilities that are scaling up. So you see some of that. So that increases the confidence that you'll see even more revenue in '27 and '28. So really a nice positive. And then what I would say is our bioproduction business had a phenomenal quarter, but phenomenal in terms of just very strong growth from what we've seen, of what others have reported for in excess of that. So the team is doing a great job in terms of delivering on our customers' needs, and we feel very good about the prospects of our business. And view reshoring as an incremental tailwind that will develop over the next couple of years. So thank you for the question. Operator: Our next question comes from Dan Brennan from TD Cowen. Daniel Brennan: Congrats on the quarter. Maybe just on pharma, Nice quarter again. I'm just wondering on the preclinical side market, it's hard for us to track, but I know it's a big part of the business, and I think maybe that's been an area that was not invested in as much with MSN and IRA. Can you just speak to a little bit what you're seeing in that part of the business? Has it been a bit of a drag on your business? And is that something that we could see get better this year? Marc Casper: Yes. So Dan, thanks for the question. So when I think about the business serving, I'll call it, the lab-based portions of pharma and biotech. And it's a little bit hard for us to -- we don't discern in our own data, whether it's going to a QA/QC lab or it's going to a research lab because customers don't manage that segregation so much, but I think it's a rough proxy. We're seeing good momentum in the channel business there in the, what I'll call the higher tech portfolio of the life science reagents a little bit softer but still progressing in the right direction. So I would say that of the businesses, that's one that we're seeing the signs of a pickup. And I feel okay about how that's progressing going forward. So hopefully, that's helpful. Daniel Brennan: No, it is, Marc. And then just on U.S. academic and government, just wondering if you can elaborate a little bit on how that's been progressing. Obviously, I think there's hopes that things hopefully are bottoming out and starting in a little bit better. So I'm just wondering if you -- are you seeing any signs of that? Just remind us how you think about what you're assuming for the rest of the year in U.S. academic and government? Marc Casper: Yes. So Dan, in terms of the conditions in the U.S., when I think about the quarter played out as expected, muted conditions for sure. The passage of the budget in late January is good in terms of being a positive. We saw funding flows start to improve during the quarter. That's also a positive. Our assumption is that for the year, we would see greater stability in the U.S. end market improving modestly over time. But not back to normal is what we've assumed kind of in aggregate, similar to what we saw last year. Operator: Our next question comes from Casey Woodring from JPMorgan. Casey Woodring: Maybe if you can just walk through the specialty diagnostics performance in the quarter and the mid-single-digit decline there. I think you called out strength in transplant and minimal impact from respiratory but maybe just walk through where the softness occurred in the quarter. I think we've seen a couple of reports of a weaker microbiology market in China. So just wondering if that contributed there. And then any color on Pacing and Specialty Diagnostics for the rest of the year? I think you have an easier comp coming up in 2Q and tougher comps in the back half. So just how do we think about the growth cadence there? Marc Casper: Yes. So Casey, probably stepping back on the business. Where we play in Specialty Diagnostics, a highly differentiated, profitable business, really focused on high-value clinical insights. And so the technology capabilities are very strong. And when you think about that, we cover the range from immunodiagnostics, transplant diagnostics, biomarkers, protein diagnostics for multiple myeloma. All of those things are incredibly important to the health care systems around the world. When I think about the particulars of Q1 performance, this business is almost entirely consumable. So it has the more significant impact from the days. It also had a tougher comparison versus the prior year because of respiratory, which obviously doesn't repeat in the second quarter. So the phasing is that, that business improves as the year progresses. And so it's performing in line with what we would expect. Casey Woodring: Got it. That's helpful. And then maybe just a quick follow-up on China. Just curious to hear how performance in the region played out relative to your expectations across your different businesses. I think you called out a bit weaker academic in the region. So maybe just walk through the sort of portfolio, particularly the pharma end market in China. And then curious if you'd expect China to return to growth at any point this year? Marc Casper: Thanks. So as a reminder, China is about 7.5% of our revenue. We had low single-digit decline in the quarter. Conditions are muted in aggregate as you mentioned, academic and government, [indiscernible] pharma and biotech performing well in the country and we're well positioned to capture opportunities as the conditions improve. I was in China in March, I participated in the China Development Forum incredibly productive visit, right? And I had the opportunity to engage with a number of our customers, our team, with government stakeholders, I actually left China incrementally more positive coming out, particularly as what I did see is that China pharma and biotech customers, the innovators see the value in doing more work with a company like us because when they're competing with another Chinese company, actually, our technology and capabilities is a differential advantage for them, and they're trying to license some of these technologies to the West. And therefore, I actually think we're very well positioned to benefit from that trend. And so I came a little bit incrementally positive on China. We're not assuming any meaningful growth coming out of China this year. And when I think about upside over time, China will be an upside that we didn't embed even into our longer-term viewpoint that if that returns to stronger growth, and obviously, that will create an incremental tailwind. Rafael Tejada: Operator, we'll take one more question. Operator: Our final question comes from Justin Bowers from Deutsche Bank. Justin Bowers: So Marc, the research and safety market channel was a strong contributor to growth in 1Q. Can you help us understand how indicative of that is in a recovery in the end market versus ongoing market share gains? And likewise, the clinical business has also recovered nicely, PPD is taking share. Can you help us understand the appetite for customers to reinvest in early stage and for your upstream in R&D and what you're seeing there? Marc Casper: Justin, thanks for the questions. So on the first one, on our research and safety market channel, business is doing well. And it is actually a blend of both improving end market conditions as well as market share gains, there's both. And so I feel good about how that business has performed for quite some time and continues to progress in a very nice direction. So that one is well positioned and is benefiting from a combination of market conditions and good execution. In terms of clinical research, and we're seeing it in strong -- in terms of customer interest and reinvestment in those things. We had a strong quarter of authorizations growth, and we actually have a very strong pipeline as well, right? So authorizations of what you've signed up, pipeline is what's -- what you're working on that is not yet in the decision process. Both are -- have moved nicely in terms of how that business has been progressing. And actually, that business is progressing as we thought it would this year, right, in terms of stepping up in performance. And it was good to see that not only that those wins that we've been talking about for a few quarters have actually translated into good growth in terms of what we delivered as well. So good news on both fronts. So let me wrap with a quick -- thank you so much, Justin. So let me wrap with a quick couple of comments. First, thank you to everyone for participating in our call. We're pleased to deliver a strong quarter, and we're on track to deliver a strong year as we continue to create value for our stakeholders and build an even broader future for our company. We look forward to updating you at our Investor Day, which we've scheduled for the morning of May 20 as well as the year progresses. As always, thank you for your support of Thermo Fisher Scientific. Have a good day, everyone. Operator: Thank you. This now concludes today's call. Thank you all for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Union Pacific's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, and slides for today's presentation are available on Union Pacific's website. It is now my pleasure to introduce your host, Mr. Jim Vena, Chief Executive Officer for Union Pacific. Thank you, Mr. Vena. You may now begin. Vincenzo Vena: Well, good morning, everyone. Thanks for joining us. It's a wonderful morning here in Omaha a railroad and a little bit of rain coming down, but nothing that wouldn't stop men and women of Union Pacific from going out there and delivering. So really excited to be here and excited to review our first quarter and then take your questions. So of course, I'm joined here by the regular crew. We have the Chief Financial Officer with me, Jennifer Hamann. Got Eric. Eric railroad looks pretty good this morning. So excellent job our Executive Vice President of Operations. And of course, Executive Vice President of Marketing and Sales, Kenny Rocker. Now why don't we just go through the highlights real quick before I turn it over to Jennifer. If we go over to Slide 4, 2026 started strong as we delivered record first quarter results. Again, we showed who we are executing on new opportunities and raising the bar on what's possible for ourselves and the industry. And it's really important that we see that strength reflected in our bottom line as we reported first quarter records in operating income and net income. For the quarter, reported net income of $1.7 billion grew 5%, earnings per share of $2.87 increased 6%, and we've improved our operating ratio. Excluding merger costs, our adjusted net income was up 7%, EPS of $2.93 increased 9%, and our operating ratio improved 80 basis points to 59.9%. These are strong results that reflect what's possible when the team consistently executes at a high level. Now I'll let the team walk you through the quarter in more detail and then come back and wrap it up before we go to Q&A. Jennifer? Why don't we do the first quarter financials, please? Jennifer Hamann: All right. Thank you, Jim, and good morning, everyone. Let me begin with the walk down of our first quarter income statement on Slide 6, where our operating revenue of $6.2 billion increased 3% versus last year as freight revenue of $5.9 billion grew 4% on 1% lower volume. Digging into the drivers, lower volume reduced freight revenue 75 basis points. Fuel surcharge revenue of $608 million increased $43 million reflecting the impact of higher year-over-year fuel prices and a 100 basis points to freight revenue. Core pricing combined with business mix to drive 325 basis points to freight revenue improvement. As we committed, our quarterly pricing dollars exceeded inflation dollars. Specifically, coal pricing remained positive but at a lower rate than last year for business index to natural gas prices. And as we noted in January, we continue to see impacts from the competitive and global environment in select agricultural markets. Fortunately, we are well positioned to compete as our strong operating performance and productivity initiatives enable us to continue to win new business at good margins. Our first quarter business mix was positive, although not as favorable as we might have expected, due to the higher volume in our lower average revenue per car businesses, such as coal and rock combined with lower volume on some of the higher arc businesses, such as food and refrigerated and forest products. Upping up the top line, other revenue declined 4% to $324 million, driven by lower subsidiary revenue as we have now lapped the metro transfer completed in the first quarter of 2025. Turning to expenses. Our appendix slides provide more detail, but let me discuss the key drivers as total operating expense increased 3% to $3.8 billion. Compensation and benefits expense increased 1% as we almost entirely offset the impact of inflation with record first quarter workforce productivity that enabled a 5% smaller workforce. First quarter cost per employee increased 6.5%, driven by higher wages and benefits, along with increased incentive compensation. We continue to expect full year compensation per employee to increase between 4% and 5%, as we work to offset cost inflation with process and technology improvements. Fuel expense grew 7% on a 7% increase in average fuel price from $2.51 to $2.69 per gallon. Purchase services and materials expense increased 7% as a result of merger-related costs, while equipment and other rents declined 9% with record first quarter cycle times. Reported first quarter 2026 net income totaled $1.7 billion and was a first quarter record with earnings per share of $2.87. Adjusted for the merger costs, our earnings per share totaled $2.93 and operating ratio came in at 59.9%. Overall, we delivered strong quarterly results to start the year, and we are confident in the ability to continue delivering for all of our stakeholders by successfully executing on the fundamentals of our business. Turning then to cash returns on the balance sheet on Slide 7. First quarter cash from operations totaled $2.4 billion, up 10% versus last year, and we generated free cash flow of $630 million after making significant investments in the network and returning an industry-leading dividend to our shareholders. Net debt decreased $1.2 billion as we repaid our long-term debt. We ended the quarter with an adjusted debt-to-EBITDA ratio of 2.5x, while we continue to be A rated by our 3 credit rating agencies. Looking ahead, we are affirming our 2026 outlook. This includes our expectations for reported earnings per share of mid-single-digit growth and operating ratio improvement. Our original diesel fuel estimate of $2.35 per gallon established in January is now much harder to predict as we have seen quite a bit of volatility recently. And all the fuel prices seem to be coming down for the month of April, we will likely average over $4 per gallon. Beyond 2026, we remain committed to attaining our 3-year CAGR target of high single-digit to low double-digit EPS growth throughout 2027. I'll now turn it over to Kenny to provide an update on the business demand. Kenny? Kenny Rocker: Thank you, Jennifer, and good morning. In the first quarter, freight revenue grew 4%. And if you exclude the impact from fuel surcharge, freight revenue increased 3%, both first quarter records. Core pricing gains, higher fuel surcharge revenue and favorable business mix more than offset the 1% lower volume in the quarter. Let's walk through the key drivers. Starting with our bulk segment, revenue for the quarter was up 10% compared to last year, driven by a 12% increase in volume. Strength in coal was driven by sustained utility demand and favorable natural gas pricing supported by strong service execution as well as new business with LCRA, which started in April of last year. In grain, first quarter delivered record volume driven by strong export demand, including a rebound in shipments to China and continued expansion into Mexico, such as Bartlett's new facility in Monterrey. Grain products continue to benefit from business development tied to renewable fuels and associated feedstocks. Turning to Industrial. Revenue was up 5% for the quarter on a 4% increase in volume, delivering a record first quarter and outperforming the market. Strong core pricing, both best ever quarterly average revenue per car. We continue to see strength in demand for construction projects driven by new LNG terminals and data centers, coupled with our intense focus on business development. Petrochemicals also performed well this quarter, reflecting new business wins and improved demand. Premium revenue for the quarter declined 5% on a 9% decrease in volume and a 4% increase in average revenue per car, reflecting business mix and higher fuel surcharges. As expected, lower West Coast imports and customer shifts had a drag on international intermodal volumes, which declined 28% versus last year. But on a positive, domestic Intermodal delivered its third consecutive record quarter driven by outstanding service and continued commercial momentum. Softening vehicle sales pressured automotive volumes, though having one incremental volume with BMW offset some of the market softness. Looking ahead on Slide 11, we remain optimistic about coal's potential despite current natural gas pricing, we expect full year coal results to be positive. In grain, improving export demand to China, along with continued momentum into Mexico, positions the business well to support growth. For grain products, we expect continued strength driven by business development and expanding renewable fuels and feedstock markets with a clear renewable fuels policy, providing more stable demand. Moving to Industrial, despite a soft housing environment and tepid end market fundamentals, we remain firmly focused on out farming industrial production. We expect the strong volume and construction and petrochemicals to continue based on our customer wins. A great example is the Golden Triangle Polymers Company joint venture with CPChem, where we are encouraged by the upcoming start-up of this new world scale facility in the third quarter. Wrapping up with premium. International intermodal volumes will remain subdued, although we lapped some of the shifts we experienced last year as we moved through the quarter. Domestic intermodal continues to perform well, supported by over-the-road conversions enabled by our strong service product and diverse market reach. While softer vehicle sales are expected to pressure automotive volumes, we expect business development wins will offset some of the impact. Our first quarter results reflect the team's relentless focus on revenue growth, which is achieved through pricing to the service we provide, investing for growth and driving business development. And with that, I'll turn it over to you, Eric. Eric Gehringer: Thank you, Kenny, and good morning. Moving to Slide 13. Our first quarter operating results highlight our focus on safety, service and operational excellence. Last year, we led the industry in employee safety. We carried that momentum into the first quarter as we improved both employee safety and derailments versus their respective 3-year rolling averages. We set first quarter records in all 6 of our key performance and efficiency metrics on Slides 13 and 14. Freight car velocity increased 9% to 235 miles per day. This performance was driven by best-ever terminal dwell of 19.7 hours, 11% better than last year and our second quarter below 20 hours. Every day, we continue to challenge ourselves to find new and innovative opportunities to reduce car touches, leverage existing technology in our terminals and implement new technologies. For service, both intermodal and manifest SPI finished at 98%, a 4 and 5-point improvement, respectively. These results compare to our best service lines, which were achieved in 2025 as we continue to raise the bar for success. We also demonstrated that maintaining a buffer of resources is critical to recovering from weather and incidents as customers trust us to provide consistent, reliable service. Moving to Slide 14. Locomotive productivity improved 6% and was a best ever quarter. Notably, our average active locomotive decreased 4% with higher gross ton miles, highlighting efficiency gains from our combined efforts related to locomotive dwell, train length and capital investments that increased locomotive pulling power. Workforce productivity, which includes all employees, increased 7%. Our active train engine and yard workforce decreased 4% on a 1% reduction in car load levels, demonstrating our discipline as we remain more than volume variable. Looking ahead, we continue to hire for attrition and to support our service. Train length grew 3% compared to last year. Proprietary technologies such as physics train builder combined with mainline investments and solid execution of the fundamentals enable us to safely grow train length. In closing, we had a very successful first quarter. We operated safely, efficiently managed our resources and consistently served our customers. As we progress throughout the year, we will remain nimble and continue to build on our strong momentum. With that, I'll turn it back over to Jim. Vincenzo Vena: Thank you very much, Eric. Fantastic results. If we're going to turn to Slide 16, before we get to your questions, I'd like to quickly summarize what you've heard so far. We had a strong first quarter and start to the year. Our network is running well and we are delivering on commitments to our customers. When you put it all together, we are doing what we said we would, the industry in safety, service and operational excellence, and that further translates in affirming our long-term guidance of high single digit to low double digit CAGR through 2027 with best-in-class operating ratio and return on invested capital. Before we turn to your questions, just a quick merger update. We are 100% on track with filing a revised application on April 30. We are confident the additional information we are providing meets the STB's expectations and we look forward to moving toward approval and the real exciting part of operating in America's fist Continental Railroad. With that, we're now ready to take your questions. Rob? Operator: [Operator Instructions] And the first question is from the line of Scott Group of Wolfe Research. Scott Group: So Jim, I wanted to ask on the merger. We were supposed to be 6 months or whatever into this process. And I guess we're about to restart the clock. Does the fact that we are taking this long. Does this give you any more or less confidence in the -- and your ability to sort of to get this approved. And I don't know, just maybe confirming we're -- yes, so that's the -- I guess that's the crux of the question. . Kenny Rocker: Listen, Scott, great question, and I appreciate it. It's a good way to start off. I thought for sure, you'd start with Jim and the team, a pretty good quarter, but I think top of mind for a lot of people is the merger. So let's talk about merger. We were not we were disappointed but we were not surprised with looking at historical events of how the process works to put the railroads together that we were going to get some things that we foresaw in what we thought was going to happen, didn't happen on the time line we like. But we knew that this was not going to be a process that's going to happen as quick as I would like okay, to be done I was hoping it was going to be done for my birthday this year. So we're going to miss that date in August. But at the end of it, when we look at the fundamentals, we look at the facts of what this combination will deliver for both the country and being able to expedite, take trucks off of the highway, be able to move products in a much more seamless open up new markets for customers be able to provide service to some underserved markets that today, optionally, they end up going with trucks instead of going by rail, we are more convicted now than we ever have been when you take a look at what's in the merger application and all the detail that we're putting forward. So at this point, we are much more convicted. I'd be concerned leading this company if we have lost our way in how we operate and what we do every day because of the merger. And as you can see, we've been very clear. Our time is spent on operating the railroad every day, finding ways to grow our business, finding new markets, finding new customers, adding to the customers we have. And you can see that even with all the economic uncertainty with everything that's going on in the world and with tariffs that we had to go through and our customers did, we delivered again a quarter that moves us ahead. So because of that, let's turn to the merger itself and what's in the -- what we are going to put forward in the application and why it's such a compelling case, a much more compelling case now. The experts that we've hired are clearly going to show where their opportunity is. We know that on a service level, a seamless railroad is able to move products at less cost. Therefore, even the pricing is going to be beneficial for our customers because of our less cost. And we're going to be able to serve our customers with a product that allows them to save on their own costs internally, whether it's railcar inventory and be able to move to their end product and end user faster. For our employees, we were real clear and we've been clear right from the start that our employees, our unionized employees. They should be part of the win of a new railroad that goes across the country, and we've guaranteed a job for everyone. And that commitment is are on glad, and we're very happy to make that with agreements or without agreements, even though we have a number of agreements. So service is going to be better. We provide more opportunity. We take trucks off of the highway and our employees are guaranteed jobs. I think we're more convicted now that this is good for the country and good for Union Pacific. And financially, it is good for our shareholders. We see a lot of growth opportunity there, lower cost movements, much more fluidity. So I'm more convicted today than I was when we put the application in the first time, Scott. Operator: Our next question is from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: I hope everyone is doing well. I guess maybe to sort of think about the guidance. So that was helpful on the merger, and I think it gives us a good sense of how you're thinking about it. As you think about the outlook for this year, particularly the operating ratio improvement, obviously, a good first quarter, but fuel is going to be a headwind here of fuel surcharges will be a headwind from an operating ratio perspective. So I guess if you could maybe give us a little bit of color, are there incremental productivity sort of opportunities that are becoming more apparent to you as you guys have been operating so far through the year. Can you just sort of talk a little bit about that because I do think that there's a headwind there, but maybe there's been some incremental positive offsets? Vincenzo Vena: Jennifer, why don't you talk about the fuel and everything that we're doing on that piece? Jennifer Hamann: Yes, sure. Thanks for the question, Chris. So you're right, fuel will definitely be a headwind, particularly here in the second quarter with -- again, I mentioned on the call, in the prepared remarks, we're paying a little north of $4 a gallon right now here in April. So that will certainly pressure margins, particularly here in the second quarter. But we have a lot of opportunities to drive efficiency in our railroad. We have opportunities and Kenny and his team are driving in terms of business development. With that great service product, we are also being very consistent in terms of pricing for the value of that service. And when you put all those things together, we are still confident for the full year that we will be able to improve our operating ratio. And we reiterated that to make sure that everyone understood if we have that confidence and we have line of sight to be able to do that. Fuel, again, pressure here in second quarter, and we feel good about the rest of the year, though. Operator: Our next question comes from the line of Jonathan Chappell with Evercore. Jonathan Chappell: Jim and team, a pretty good quarter. So my question is really for Kenny or Eric, whoever wants to answer it. We look at the numbers that Eric's team is putting up on slides 13 and 14, and then we understand there's obviously a lot of macro headwinds that you're facing across different end markets. Is there an estimate for spare capacity or maybe another way to ask it is what kind of volume growth can the current system handle without needing to add extra resources if some of those macro headwinds turn to talents? Eric Gehringer: Yes, Jonathan, thank you for that question. And certainly, a topic that we review on a consistent basis. We've always said from the railroads perspective, you have 5 critical resources, mainline capacity, terminal capacity, crews, locomotives and cars, and you're obviously hitting on one of those 5. Now as we look at the railroad today, we have latent capacity. Now we've driven that through a couple of different ways. Number one, and I reported this morning on top of all the improvements we've made train length, we did it again, 3% improvement best quarter ever, that train length is generating lane capacity. After a number of other reasons why we do train length, that's right up there at the very top for being able to generate that capacity. In addition to that, we still invest between $500 million and $700 million a year in capacity projects. And you've heard us talk about those in the past. They're citing extensions, they're citing constructions. They're the expansion of terminals. So the Union Pacific is positioned and will remain positioned with that capacity to bring growth that Kenny and the team are working on every single day to bring this railroad. Kenny Rocker: The only thing I'll add, Eric, is 2 tangible ways to see that capacity really bearing fruit. One is on the equipment side, where we're able to go in and insert more equipment into a facility and/or spot at 100% of their order fulfillment, which allows us to go out and capture more business. But then more importantly, on the capacity -- and I've talked about this before, is the ability to shift in different lanes or geographic areas. So maybe we're going from the Gulf to the Southeast or from the Midwest shift down to the Gulf of Mexico. That's the kind of capacity benefits that we seem to really take advantage of. Eric Gehringer: And that's a really good example, too, when we think about the grain this year. So last year, you recall when we were talking about volume opportunities. Kenny and I were talking about the shift of grain into Mexico. But we've seen some of that shift back to the Pacific Northwest as China has become more open to receiving American commodities, and we didn't have to go in and build 5 more sidings. We went in with the capacity we had and took advantage of it and very successfully delivering on it. Kenny Rocker: And nor was that clearly forecasted. So we had to be agile. Vincenzo Vena: So Jonathan, if I can just add what the team already said was is we build the railroad, both capacity-wise and with asset-wise with a buffer. But what's really important for us is today, with the business level that we have, and I looked at in detail every morning, we're operating with over 100 locomotives on the mainline less just because of our speed and what we've been able to improve. So we parked them. So they give us a nice buffer of locomotives and assets. On the people side, we figured out both by technology, by investments by how we operate the yards, by how fluid we try to stay, we've been able to get more cars switched per employee real important. And we see line of sight to be better at that. On the capacity of the railroad to add 10% more business, let me say this. We've invested hundreds of millions of dollars, especially in our terminals to make them more resilient and able to recover faster and have a higher level of capacity, both by the speed that we're moving the railcars through and the way we're handling them and touching them less, moving less touches. The overall network, and this is key of who we are and what we do. So if you turn the clock back, and I hate to look back too far, but in 2019, if we were operating this railroad the way we were in early 2019, we would have 25% more trains out there running this morning than we are today. So we did not remove capacity. So this railroad is operating at the higher volume. But let's say, it's not less volume. It's higher volume than we were in 2019, and we're operating 24% less trains to be able to move that volume. The touches are faster, less touches, the way we operate our terminals is faster. So I'm very comfortable that we have the capacity to add a lot of business without the huge incremental costs that normally would have to, both capital and operating cost because what happens is if you're running up against your capacity, it costs you more operating dollars to be able to try to operate it through because you cause congestion. So I'm very comfortable. We do not sleep until we're comfortable that the railroad is running with the system it has. Now Eric will tell you that we're not done. You go back again to when I came back and joined the company again after my sabbatical, some people were asking me the question, what's left. And I think you could see what was left. There was lots of opportunity, and we see lots of opportunity as we move ahead over the next few years. So thanks for the question, Jonathan. Operator: Next question comes from the line of Jason Seidl with TD Cowen. Jason Seidl: Obviously, a good quarter, and it's nice to see the railroad operating so strongly. This is probably on Kenny's side. I wanted to sort of dive deeper into your commentary on business development. One of your fellow railroads yesterday, talked about their success. They're seeing new projects grow in excess of 15%, and we're talking about adding maybe 1% to 2% in terms of car loading growth for next year. Could you give us some more color on UP's efforts right now, and where do you think that could go and add your car loadings into the future? Kenny Rocker: Yes. I won't give any guidance on the volume, but we are very bullish, optimistic about the new pieces of business that are coming online. I think you're talking about the industrial development aspect of it. We feel good about the numbers we closed for the quarter. We closed about 20 new construction projects in the first quarter. We feel good about where we're headed in second quarter. And I tell you, we got a strong pipeline that's out there of construction projects that are coming on. Most of those are on the carload side. And you've heard me say in the past that we've really taken a focus on adding new customers, both at the origin and the destination and expanding that capacity. So we're pretty excited about where we are. Operator: The next question comes from the line of Ken Hoexter with Bank of America. Ken Hoexter: Great job on the expenses, and I thought that was an impressive stat on the -- stats some. I don't think we've heard before. But looking at the way the stock is trading, I want to return to the M&A seems to suggest the market is building in maybe larger concessions that might be somewhat destructive to market value. Just again, given where you're trading and the peer,does that make sense? Is there anything in the detailed request for deal terms or discussions parties are having through the process on where you'll come out on concessions? And then, Jen, any reason you switch the language to reported outlook from adjusted in you're calling out merger costs or does that mean your long-term target still includes some merger cost. I just want to understand a clarification there. Jennifer Hamann: Yes. Let me hit that last one. Ken, actually, we added that as a clarification from last time because we didn't have reported and that generated a lot of questions. And so we wanted to be clear that when we talk about the EPS growth that of our reported. So that includes the headwind to your point, that we do have from the merger cost that we didn't originally anticipate as well as the fact that we're not buying back shares right now. So it is on reported. Jim?. Vincenzo Vena: Okay. Reported. Jennifer thought she was helping, and I love it, Ken, that you caught the change in words, so that was perfect. Listen, as far as the stock and conviction on that, the market is the market, okay? I can't control the market I wish I could, but I can't. But I'll tell you, fundamentally, as a business, we see growth in opportunity with customers, whether we're building in on some customers. And those will be new products that we add or the amount of investment that our customers are making in different parts of the country to grow their business and be able to export and the move within the U.S. economy. So we're real comfortable with that. On the merger, Ken, and concessions. This is truly an end-to-end merger with a small little piece of overlap that we'll take care of as we go through in the application and say how we're going to handle that to make sure that no customer. In fact, the number of customers that are going to go from 2 to 1 is like a handful out of all the thousands of customers we have. So it's a very small piece in the hand. It's pretty hard to come up with concessions that make sense. Now some of our competitors are out there very, very loudly talking about what this business is. And let's put the framework of where we are today and what our competition is. CSX reported yesterday, great results. I was impressed. They did a great job, okay? And they are going to compete hard and they will still be a competitor in the eastern part of our network. They will compete every day against everything we try to do as a seamless railroad. And they'll do that through price, they'll do that through innovation, They'll do that through being able to be more efficient. And that's what they need to do to compete against us. But if anybody thinks they're not going to compete, and you could see what they've done to try to compete already just with the announcement that we had on the merger and what they've done. In the West, people get this wrong. We are not competing against Burlington Northern Santa Fe. They're owned by Berkshire that this morning is over a $1 trillion company. Berkshire has the monetary capability with $300-plus billion in cash plus they have the capability to invest in the railroad and they're going to be a strong competitor for us after. So if you take a look at the 2 biggest pieces of competition that we have in the U.S., we're very comfortable that they will compete hard against us, but we are going to be able to provide a level of service with less touches that speed up products moving across the U.S., that's why it's so compelling. So Ken, I'm not sure, and I don't see a big change in the amount of concessions. Are we talking to people? Yes, we are. We're talking to customers. We're talking to to competitors across the spectrum to see that we could come up with something reasonable, but we're not prepared to really give concessions to the level that basically just opens up our railroad for no reason at all other than they want to gain something through this process. That's not the way America works. America works and that if it's truly detrimental to customers, the real world combination, then you need to do something about it. But when you speed up things, give more opportunity, it's pretty hard for us to see any major concessions that we have to give. Operator: The next question comes from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Maybe I'll follow up on that because I think your more skeptical competitors and maybe even some investors would say yes. But this combination at a very high level is going to drive more than 40% market share to your network relative to now much smaller competitors and regional competitors. And how do you push back on that criticism of a transaction of this size? Vincenzo Vena: Well, I think what you have to look at is the entire market that's out there. People want to look at the railroads and say, combined Union Pacific and the folks Southern is going to have a combined 38% or 39% actually is the number of GTMs, but we're not going to be that much bigger than our Western competitor at that level with gross tons that were both going to be moving. As far as the local market. Listen, I think short lines do a great job and an excellent job of handling that first mile, last mile and ICS strengthening them, we'll be able to drive more business to them with this combination. So they're not going to lose in the long run. There's always some that are going to be affected because of if we don't stop cars or hand them off somewhere, we can take them to a longer route or a different route that will help. But at the end of the day, listen, the 40% or actually the 39% number when you take a look at the entire market, railroads are in the low double digit. Capture of the true mark that moves by land or by water here in the United States of America. So that opportunity is huge for all of us to be able to swing that a little bit. And I think that's a better way to take a look at it, Brandon. Operator: Your next question comes from the line of Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I think I'm going to ask maybe a different question theme here. But Jim, I wanted to get your opinion in terms of how you think about just the value of Union Pacific's physical network at a time where look, investors are increasingly focused on AI-driven disruption. So what do you think the market is missing about just the intrinsic value of the network, especially post deal? And then also maybe talk a little bit about what you're doing in this world of just a lot more technology opportunities, AI-enabled efficiencies and what you're already doing in the yards and operations to drive better results? Vincenzo Vena: Great. Thanks for the question. Listen, Eric, why don't you start about how we're using information AI technology to operate the railroad and what we see coming down the pike? Eric Gehringer: Absolutely. So our conversations inside UP when we talk about AI or equivalent tools, really focused first on making sure that we're not doing it just to do it. We're instead focused on what is the actual thing we're trying to solve and what's the associated value, whether that's removing car touches, dropping dollars to the bottom line, improving our service. And I think it's important that you all hear us say that because you see in other cases where that's not it. They treated as a hobby. We're not in the business of hobbies here. We're in the business of delivering value. Now if you think about how we're using that, some of the ones that are most important because they're foundations to our service and their foundations to our productivity, which allows us to grow. It's how we think about using AI inside of our dispatching center. We have an automated movement planner is a program that we call that's informed by AI, and it's continually evolving. Automated movement planner really focuses on driving an even more consistent and reliable service by providing support to our dispatchers in real time and looking out 12 hours in advance to lay out their railroad. If you just even look at 200 miles of railroad, there's a lot that happens in not just the movement of trains, we have to have people go out and maintain the track and then we also have variability events, unfortunately, some days. And we have to plan for that, and AI has been a great resource for us to do that. Now when we think about inside our terminals, we've talked in the past about technologies like Mobile NX that allow us to automate part of that. There's some AI components to that, and there's certainly value in that. Even more valuable is the tools that we've provided like terminal command center to our teams that are actually on the ground operating those terminals. That provides them an even higher level of intelligence and being able to not only forecast what's coming at them, but for what they have in their yard, how do they see problems right? If you're going to go out and you're switching a bunch of cars and now you've got a trim, but you accidentally have the wrong car in one of those cuts, okay? Well, that's a big hit to the productivity and thus impacts our [indiscernible] product. We can see that ahead of time. Well, then we can plan that even 2 hours ahead that says, "Well, I'm going to be in that track. Let me grab that car then. So even in the case of mistakes, which we work tirelessly to avoid, you can even be more efficient in how you're able to address those, if you can see that risk ahead of time, and that AI tool allows us to do it. And I'd say in total for the whole company, I mean, there's at least 8 or 10 really major projects that we're using. I've given you 2 examples, but they really represent how we're using it to, one, improve our service product and to, drive efficiency. Vincenzo Vena: The nice part about technology and how fast it's changing with AI. And what it really drives for us is we always talk about the big things, trains, assets, big locomotive weigh in 434,000 pounds and how we move it. But fundamentally, across the company, whether it's how we're going to be able to communicate with customers, how we're -- the number of people you need to be able to communicate with customers and how you get information better. We're working hard on that using AI tools and information tools to be able to do that. Even in the finance department, how do we get better being able to get information out. So it's across the board that we're doing that. Stay tuned. We're going to be implementing and have the capability to implement our locomotives to make them even more autonomous than they are today so that they can operate to give us more fuel conservation. Those tools are driven by technology in the background that allows the locomotives to operate in a smarter, much more fuel-efficient manner. And we're getting pretty close to be able to roll that out, not yet today. Eric will get real excited if I start to announce things a little bit ahead of them. But those are the things. Big things, how fast we can change with the different flow of business. I talked about at the very start this morning about a railroad being a little bit of rain coming down in Omaha. It's rather cool in Green River this morning. It's below freezing. So we got a whole bunch of snow up at the top of the Danner Pass. We have rather breaking warm weather in other parts of the railroad. The nice part about it is we get a little bit of everything. So how you react to the weather and how you react to be able to change the network and be able to change the way we operate every railcar in a faster manner, we use tools to be able to get to the point where we're going to be able to react much quicker. We're talking about trying to get to the point where we can do that in days instead of weeks the way it takes us right now. The way we manifest and use employees to make sure that we optimize the entire system. So it does touch a lot. We're a simple old business with big hardware. But at the end of the day, we've got a whole team and Rahul who leads that for us and is doing a spectacular job for us to look at opportunities to embed the latest in information, manipulation and get us an answer quicker and be able to be able to automate as much of this railroad as we can. So good question. Love it. Hopefully, I answered your question. Operator: The next question is from the line of Brian Ossenbeck with JPMorgan. . Vincenzo Vena: Brian, how many pounds do you have in your back now lots. Brian Ossenbeck: We're up to 65 and climbing. So just trying to keep up. Vincenzo Vena: Impressive, Brian. Brian Ossenbeck: Maybe I'll put a copy of the next merger document in there as well. . Vincenzo Vena: That's more than 60 pounds. You'll need a trailer behind you. Brian Ossenbeck: I just might. Well, in terms of -- just 2 quick follow-ups on Jim question on integration technology, kind of dovetailing that last discussion. So are you still assuming first half of '27 approval, and it doesn't sound like it, but I just wanted to confirm that you're not really expecting to address some of these concerns from your peers, just so addressing what the STB has asked for and the new application out next week. And then just would love to hear more about maybe from Eric and you, Jim, about clear concern about integration based on prior issues that the industry had quite a long time ago. Clearly, things have changed some of that you just mentioned with technology. So what can you give us in terms of new ways, new processes, new new abilities to really get ahead of what's been a huge concern in the industry, but we would assume it should go a little bit better this time around. So I know you can leave you so much on that part right now, but would love to hear how you're planning for that this time around with some new tools? Vincenzo Vena: Brian, you are on it this morning. There were 5 questions in there. I love it. But let's start with the timing. Yes, we're working off of the timing that we know of that the STB has put out. So it will be second quarter next year, we would expect to be able to be at the place where they approve it, then we can move ahead. So that's the timing. Now it's not finalized. We're hoping that they can speed it up and get it -- get through the process. I think they should be able to. Again, it's Jim Vena. The way I do things, we make decisions pretty quick. But I understand they want to look at it. They want to do a thorough examination and we're ready for it because we're operating the railroad the way it should be operating, and it's not affecting what we're doing for the Union Pacific stand-alone today. I'm going to pass it over to Eric here in a minute on integration. Our competitors, what we're doing with the application is we are answering, and given the information that the STB asked for, they were very specific on the information that they required from us, and we're answering those questions, whether it's the EPRA, whether it's market share and the amount of business that we built in. So we've done that. And we're absolutely sure that we've answered the questions that -- and how we're going to handle it. We've decided to release 5.8 really at the end of the day, I never thought that our competitors should know exactly what that document held. But when we looked at it, listen, at the end of the day, it's not going to make a big difference. So that's going to come out. So we will answer the 3 key points plus the other point that they, in general, wanted some more information. So that's what we're answering. As far as our competitors, you're a smart guy, Brian, and everybody on this call are smart people. Competitors are always looking to get an advantage that they can't get or they don't want to spend the money to be able to get. If a railroad wants to build in, which we are building into customers, they have every right to do that. They have every right to go through their own merger, small and large, which they have. So at the end of the day, if we built this transaction against satisfying what the other railroads, absolutely Canadian Pacific would love to get access to the West Coast of the U.S. Well, I'd love to get the Toronto. If they want to give up Toronto in markets in Eastern Canada and into the Canadian Prairies, I would love to do that, too. But it would be pretty hard for me to ask for that. So it's really some of the stuff that they've asked for is not fundamentally about competition. It's about trying to gain for their own railroad. And we're not going to answer that. We don't need to answer that, but we're more than willing to sit down and talk. Like I would be more than willing to trade Toronto for access to Denver as somebody who wants it tomorrow. So anybody who's listened in that wants to do that, give me a call, and I'm ready to do that. I'll run the Toronto, you can run the Denver, okay, and we'll match that up. So some of the stuff that they're saying is just not fact-based and I find it hard to believe. If you step back, though, let's talk about competition. I was just in Canada, visiting my family went out to one of the ports and terminals in Vancouver, and we talked through with one of the largest world operators of terminals, and you know what Canada is spending money to compete against the U.S. ports. In Prince Rupert, there's a plan to expand and double. In Vancouver, there's a plan to expand and double. At Contrecœur, there's a plan to expand and double the capacity for imports. That's who we're competing against. We sometimes have a narrow view of what competition is without looking at really what's happening in the marketplace. Our intermodal product, our international and domestic product is in competition with product. The size of the investment that's being made by the Canadian government, they expand the ports in Canada, the Canadian economy that cannot and does not need that much. It's purely to compete against U.S. ports and U.S. movement of goods in the U.S. That's the real competition and sometimes we're too narrow the way we look at it. Eric, on integration? Eric Gehringer: Perfect. So Brian, on the integration side, you're right. You certainly want to learn from the learnings of past mergers. Now we got to be a little careful there, right? You hear some people go back and reference challenges from mergers 30 years ago. And to your point, right in your question, you said it, a lot has changed in 30 years. But let's hit the most important 3 items when you look back in time and then think about how we already are planning to do it differently. So one of the things that certainly caused challenges in the past was technology. When you had 2 railroads merging together with 2 different transportation systems. It wasn't the technology itself that caused the problem. It was the pace at which the integration occurred. In other words, there was an intentional thought and change management around what is the pace you cut that over. Well, we've got a huge advantage, right? We, Union Pacific, have already demonstrated a very strong ability to change over systems, including our full transportation system called NetControl, just a little less than 2 years ago very successfully not a blip, no customer was impacted. It was seamless, it was very effective. So we've got that experience. In addition, when you move past the technology and you think about timing, you've seen in the past with some mergers where a KPI right out of the gate is the pace of implementation. Now look, we're not in the business of going slow. We're in the business of understanding exactly what we have to on day 1, day 90, day 180. And I'll tell you on day 1, you're not going to see a lot of difference, right? We will operate these 2 railroads, largely independently, at least for the first few months. And then we'll thoughtfully because of all the planning that we're doing, implant 1 action, once that action is implemented, we'll make sure that it worked effectively and then we'll move to the next. And then I save the most important one for last. If you look at past mergers, often, the premium railroad was buying a railroad that was operating very poorly. That's not the case here. The Norfolk Southern is a good railroad. They're good in how they think about their infrastructure, they're good in how they think about technology. Together, we're going to be even stronger, but we're not buying some railroad that's been in disarray for a decade. We're buying a really good railroad, combining it with another really good railroad. And obviously, as Jim has pointed out today, the net outcome is a positive for all of our stakeholders. So that work is all underway. It's being done very intentionally, and we're going to be the most comprehensive integration of any 2 railroads that this country has ever seen. Vincenzo Vena: Brian, I appreciate the question. Thank you very much. Operator: The next question is from the line of Walter Spracklin with RBC. Walter Spracklin: I just like to go back to the Kenny slide, I guess that's Slide 11. And when I compare that outlook slide to the same slide, the quarter before. It looks like you've added 3 new positives. You've had construction as being a plus, you deleted forestry as a negative and you improved auto from negative to neutral. So 3 positive inflections there. And then we're hearing from trucking peers that it sounds like the freight recession might be overall together. So my question is that and your Q1 results and volume are pretty good. Your railroads were operating well. If the volume is indeed looking better compared to where it was in the fourth quarter, why wouldn't your EPS guide be up as well. And I don't think your team would have an issue getting operating leverage, but it doesn't -- that logic kind of implies you are. So just love to get some clarity there on those topics. Vincenzo Vena: Walter, I love the question. I'm going to pass it over to Kenny because I'll tell you, you must have been listening in because we have had that same discussion. So I can hardly wait to hear his answer. Go ahead, Kenny. Kenny Rocker: Yes. So first of all, you heard my comments, lumber is still challenged. It's just a smaller volume that we're talking about there. And yes, we're looking at autos. And I'll tell you, we highlighted the fact that we have won some incremental pieces of volume. The SAAR for lumber is still negative, call it, 3%. The SAAR for auto is still negative, call it, 2% or 3%. So we're winning our way here to get to a point that we can fill a little bit better about those markets. There was a second question, I believe you had more on the intermodal side. And you're right, we've seen the jump up in the fuel here. Now that happened here pretty weekly, call it, mid-March. And -- we'd like to see that sustain a little bit more from a timing perspective. We'd like to see the sustained tightening of the truck market. We're looking at the prices, just like everyone else. And as we progress throughout the year, if those sustain, then you're right, we should see a little bit more uplift on the volume there. So it all begins with the service product. Eric and his team have done a fabulous job, and you're seeing us win. And again, our size is -- our goal is to increase the size of the pie here with over the road, and we're accomplishing that. Vincenzo Vena: So Walter, no advance or but you gave the same answer to me as he gave to you this morning. But the next thing I said to them was pretty clear is if you have a railroad running at a high level of service and you're delivering for customers and the economy is still it's not been as impacted as some people would say because of all the ins and outs that are out there at this point, that it's his job and our job and his job and his team specifically to go sell that service level that we have, look for opportunity to grow the business. And I like it, though, he's got more positive than negatives on there. So I'm real comfortable with that. So Walter, I know fellow Canadian, okay, spent -- you spend your time in Canada, and I go back every so often I'm not sure what the heck is going on with the Canadian teams at hockey, but most of you are probably in bed, but I stayed up to watch the oilers last night and they lost. So tough times. Hopefully, your team is winning. Operator: Our next question comes from the line of David Vernon with Bernstein. David Vernon: So Jim or Kenny, I'm wondering how you guys are thinking about this -- tackling this issue of proving that this merger enhances competition. You've been out in the market for a couple of months now with this concept of commute gateway pricing. I'm just wondering how or what kind of feedback have you gotten from customers Obviously, we've heard the other railworks, but how are you thinking about that idea and its ability to kind of help meet this fairly ambiguous notion of how the merger enhances competition? Vincenzo Vena: Well, let me start. We're not ambiguous. I think how do we have competition and how do we enhance competition pretty straightforward. We're going to be able to move products across the country faster than anybody with less touch points. If people want to compete against that, okay, they're going to have to either be able to enhance their service and be able to move it with less touch points with whichever way they can do that or they're going to have to do it in price. That's what they're worried about is some lanes that are only going to be able to do it with price. We're going to enhance competition to be able to have products that move right now that are consumed mostly in the East, it's going to be able to move across the country in a much more seamless manner. They open up more markets for it. It enhances the capability to sell in markets and move the way products are supposed to move. We're going to enhance so that we can compete better against the -- like I mentioned with the intermodal, but I could do that with the carload business, I could do that with soybeans. We're going to be able to move their product in a faster, much more efficient manner that allows them to open up markets. Again, our competitors, whether it's trucks because a large piece of the growth that we see is intermodal is we're going to be able to remove and give our customers optionality to look at do they want to go intermodal with the railroads or do they want to go by truck. The committed gateway gives the railroads both the Western and the Eastern Railroad, the optionality to have a set price that they can offer to go out to customers and those products that we've identified. We've said that we're going to keep every gateway open. If somebody wants to get to the Southeast through the CSX at New Orleans, they can have that. It is the faster road in some markets. Why would we ever limit that capability. So the base is the base, and we are enhancing the movement. Kenny, why don't you talk about the conversation with the customers or... Kenny Rocker: Jennifer, if you point -- I'm going to see you trying to jump in first. So let me just kind of remind everyone, 520 customers that have signed a letter of support 700 commercial partners signed a letter of support, 2,000 in total that signed a letter of support. And I'll tell you, Jim and I have spent a lot of time together going out and seeing customers. Here's what's undisputed. The customers see the value on the transit improvement. They see the benefits of an interchange going away, they are excited about the fact that their supply chains. I'm talking those that invest in equipment and those that use our system equipment that, that will become more valuable to them and will increase the cycle times there. The things that as we move throughout the journey, we do know they want to see what we're going to be filing. They want to see this process as we go through it with the STB and other stakeholders, but we are staying close to them throughout this whole journey. Let me double down real quick on something that Jim said, though, that's how we're able to win the day. Now I didn't mention this in Jim's last comments about domestic intermodal book, we've got 3 consecutive quarters where we have really put together a record quarter. And we've done that, Eric, through first service which is what you need, and you'll see that with single line service from this merger. And then a lower cost structure allows us to open up new markets. The margins look a lot better for new pieces of business. Customers see that, customers appreciate that and that excites the customer base. Jennifer Hamann: And the only thing I was going to add to what you have said is with committed gateway pricing, we're actually extending the benefit of the merger to customers that would otherwise not be impacted. And so that absolutely enhances competition. . Vincenzo Vena: Yes. Good point there, Jennifer. Listen, great question. Thank you very much. Go ahead. Operator: Our next question is from the line of Tom Wadewitz with UBS. Thomas Wadewitz: I wanted to ask you about just how you think about the key things you need to execute on? You said kind of if you're looking at like maybe 2Q '27 for approval. So you got some runway ahead, you want to execute well, and your service is strong, your rail network operation is very good, which I think would be supportive of the case you can make it all work, right? How do you think about volume growth? Is that also important for you to deliver volume growth as you continue to build your case that you can handle what's a heavy lift of integrating 2 large railroads. So I think that's just like -- is that an important piece, too? And then I guess related to that, how do you think about volume versus price? I mean you are more -- you've got efficient operation, low cost structure. Do you intentionally like say, "Hey, we just want to do a little more volume think you may be intermodal and grain markets where I think there's been some question about price versus volume. Vincenzo Vena: Listen, we want to increase volume, no way answer, but that's a goal. So don't have to expose or talk about that for too long. We want to increase revenue. So we do that by having more business, being able to move more products on our railroad, drive more business to our railroad, but also be very diligent on price and making sure that we price in the right way to increase revenue. And you could see that again this quarter. We've done a great job of it in the last few quarters of where we are on revenue. So that is key. And remember, I separate what we're doing for the merger versus what we're doing for the railroad today. The railroad today's job is, is to run at a real high level, and I give Eric and the entire operating team a lot of credit. I look at it and I'm an old operating guy, okay, I spent a lot of time in this 48 years I've been railroading to be able to look at railroads and what we can do. And I'm very impressed, and I see more runway there to be able to make ourselves more efficient and be able to move the products. And that way then can go sell or sell our customers on what we can do better. So for us, absolutely, we need to increase revenue, which we've done, and we have good line of sight on it, and we have to price at the right level for the service that we're providing, for the value we're providing. And I think there's a lot of runway left in there that we can show what we're delivering for our customers with better speed, better flexibility, better timing that they can win in the marketplace and we can grow together. There are certain markets we react and we have to react. We've had to react on the movement of some grain products, okay, just because of where the market is. We've done it with soda ash. So it is a -- if it was easy, my mother would be here running the railroad. So it's not easy. But our key goal is increase volume and increase revenue drive it to the bottom line, high level of service for our customers and operate as efficiently as possible. I think that's a good summary of the way we are, Jennifer. Jennifer Hamann: That's an excellent summary. And even with some of the high truck competition we've seen in the last couple of years that have compressed it. Truck pricing is still a more expensive option than rail. And so what we're doing to be more efficient and get into new markets and offer new services to our customers just positions us very well to grow going forward. . Vincenzo Vena: Kenny, anything you want to add or you're good? . Kenny Rocker: No, I think you covered it all. Okay. . Vincenzo Vena: I was trying to pass it over to you. Next question. Operator: Next question is from the line of Richa Harnain with Deutsche Bank. Richa Talwar: So I wanted to ask about headcount. I think you made this comment record on few workforce productivity, and this is indeed the lowest quarter or headcount levels we've ever seen. And that's as growing top line. So maybe you can just update us, is this the new normal? Or could it be better? I think Jim, you made a comment that you have line of sight to be better than that, and Eric is holding us to that. So maybe talk about that and drilling to effectively how this is possible, how are you achieving these productivity initiatives? What are you doing differently? And as you think about maybe the pending merger with NS, do you think these productivity gains are transferable? Or do you think there's something unique about the U&P network, allowing you to achieve these levels of productivity more easily than maybe alternative networks. Vincenzo Vena: I'm going to pass it over to Eric here in just 1 second because he has the largest amount of employees. Of course, we look at everything that we're doing on our management and how we operate the railroad from a management side, and we've done a good job of being able to be more efficient and through attrition and be able to size it the right way, and we see more benefit on there. As far as the combination, absolutely, I don't have to talk about it a lot. That's -- we do see substantial improvement in how productive we can be when the 2 railroads are combined. You only need 1 Chief Marketing Officer, and you only need 1 CEO. So some of those things are real easy. So I'm just joking, cannot worry about it. But at the end of the day, yes, we see a lot of that. And Eric, on the day-to-day operating the railroad, what do you see moving forward? Eric Gehringer: Yes. And Jim got it exactly right, that they absolutely are transferable. So 7% improved workforce productivity. When you think about how we did that, like -- and then you think about tomorrow and a week from now, a month from now, it's the same thing. Really, one of the greatest strengths of Union Pacific, yes, it's all the initiatives that we execute successfully, but it's more our mindset right? Because when you have a mindset that says productivity drives growth, and then you can drive alignment within the whole company of why do we work every day to be productive. And we have that. We do that exceptionally well. And then you combine that with operating kind of mindset of perpetual dissatisfaction. And you can look at it every single day, like it doesn't matter. I can look at any scorecard and the team can look at any scorecard and they can have lots of conversations just like I do, and you see things. Now sometimes those things are big and they take a while because maybe you have to make a bunch of changes, but when you look at our productivity over the last handful of years, a lot of them have come just straight from the fundamentals. Why is one terminal at 19 hours of dwell but another terminal is at 15 hours a dwell. We can't 19 be 15. And so we go and we grind on that. And we grind and we grind until we can get that terminal as good as the other one. Now that's what I mean by fundamentals, and it expands across our entire network. You layer on top of that the technology that Jim had mentioned and Jennifer mentioned and I mentioned in a previous question that was asked, well, now you got a multiplying factor right? Now you're actually getting even more out of those initiatives. And that's what we do. I could not be more proud of what the team has accomplished in productivity because, again, we do it to position Kenny and the team in the best possible position to win in the marketplace. And there is no finish line to that. Vincenzo Vena: Thanks for the question. Operator: The next question is from the line of Ari Rosa with Citigroup. Ariel Rosa: Nice quarter here. I actually wanted to stay on the headcount point because it is truly impressive what your -- the efficiency gains that you're able to achieve here. But Jim, you've made this commitment to the unions that all the union jobs are going to be protected. I'm wondering, given the kind of productivity gains that you're seeing, is there any dimension in you worry that, that could slow down actually some of that that progress? Or how are you thinking about that commitment against -- weighed against the very impressive productivity gains that you're achieving? And then just kind of broadening out, is there anything that you think you would be doing differently in terms of how you're operating the railroad currently if the merger process were not going on? Vincenzo Vena: Let me answer that last question. No. we operate the railroad the best we can today and always look for improvements. So we're not changing. And I'm telling you, I've sort of tried to tell everybody this real clear and people will tell you at Union Pacific. There's people that are dealing with the merger, dealing with the applications, dealing with how we look at putting it together when it gets approved because it's going to get approved. It's such a compelling case. But bottom line is most of the people at Union Pacific, their job is to operate the railroad. If anybody thinks I'm going to let people get lost and travel into some place to go talk about the merger, okay? That's not going to happen. We're talking -- we're railroading the Union Pacific, the way we are today, okay, now ifs and or buts. So I'm very comfortable that we're doing the right thing. The commitment with the unions. I thought about this, I didn't wake up one morning have my cup of coffee sitting out in the balcony looking at 6:00 in the morning at the metrics and said, maybe I should just protect every employee. When we make these big decisions like that, we looked at attrition numbers, normal attrition numbers for both railroads. We've looked at how fast we think that we can put this together and get the -- optimize it so that the service is not impacted for the customers on both railroads, and we're very comfortable that the commitment that we gave will not limit our capability to move ahead and be productive, but it also guarantees people a job. We're very comfortable with that with just the attrition numbers. And remember, this is a story. We see the opportunity to grow the business in intermodal, for example, there's areas in the country where we just don't move intermodal, it gets trucked that we know we can give the optionality. And if our service stays high, we can win more business and bring it on the railroad. So I'm very comfortable with the attrition numbers plus what we do for growing the business, that, that commitment is strong. It's set in stone, but we're very comfortable when we made that commitment that it was made with a thoughtful process. So I don't see any issue with that commitment at all impacting us as we move ahead. Operator: Our final question is from the line of Ravi Shanker with Morgan Stanley. Madison Pasterchick: It's actually Madison on for Ravi. Just one more to kind of end the call. Just wondering, given your current network utilization and service levels and kind of current levels of inflation, was wondering what does operating leverage and incremental margins look like in the up cycle? Vincenzo Vena: Well, listen, we love upcycle. Jennifer would scold me if I got into too much detail. But it's -- Madison, that's exactly the way we're thinking about it is there are so many things that are going on that are sort of holding back all the railroads, truck pricing, all those things that would be helpful. So higher natural gas, we love it. Now anybody who heats a pool like I do in Phoenix, Arizona, I don't like it. But at the end of the day, for the railroad, I like it. So I think we're in a good place. We operate in a good manner and Madison, I see us up cycle would be very beneficial. And if everything in the world settled down and we had the economy growing, would really help us because we grow with America and the businesses in America. So -- thank you very much for the question. Operator: Thank you, Mr. Vena. There are no additional questions at this time. I'd like to turn it to you for closing comments. Vincenzo Vena: Well, listen, thank you very much. I know there's lots going on. There's lots of many companies reported, and I'd like to thank you all for joining us this morning. As far as our shareholders, our owners, you can be rest assured that we look at this railroad every day to make sure we operate in the best way possible move ahead. I'm very comfortable that we're doing that, have the right team. I joke around with Kenny about only needing 1 Chief Marketing Officer. But at the end of the day, him and his team are doing a good job I can't be prouder of Eric and the team, the way they're leading and Jennifer and her whole team that keeps our feet to the fire and making sure that we're doing the right things. So with that, looking forward to putting the application in on the 30th, getting it accepted and moving ahead with this transaction that will just build on the results of Union Pacific and make us a stronger railroad and a strong competitor to move the products that Americans use every day. Thank you very much. Appreciate everybody joining us. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines at this time, and have a wonderful day.