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Tuukka Hirvonen: Good afternoon, and welcome to Orion's Q1 2026 Results Webcast and Conference Call. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. In a few moments, we will kick off with the presentation by our CEO, Liisa Hurme, after which you will have the possibility to ask questions either from Liisa or from our CFO, René Lindell. We will be first taking the questions through the conference call lines. And after that, we will turn on to the webcast chat function. So you may also type in your questions using the chat function of this webcast. And to our Finnish-speaking viewers, this event is held in English. But afterwards, later this afternoon, you will find a Finnish interview of Orion's CEO, Liisa Hurme on Orion's website. And just before letting Liisa to step in, just a reminder about this disclaimer regarding forward-looking statements. With these words, I'd like to hand over to Liisa. Liisa Hurme: Thank you, Tuukka, and good afternoon on my behalf as well, and welcome to listen Orion Q1 2026 results. Some highlights from this Q1. All our businesses performed solid in a solid way and very well, I would say so. And we also have good news regarding our clinical pipeline. We've been granted -- ODM-212 has been granted orphan drug designation in mesothelioma by FDA now in April. And we also started a new Phase Ib/II study called TEADCO which is a basket trial evaluating ODM-212 in combination with standard of care treatments in patients with selected advanced solid tumors. And I will talk more about that later on. Also, we have strengthened our executive team. We've appointed Berkeley Vincent as an Executive Vice President to lead Innovative Medicines division and as a member of my executive team, as of April 8. So let's look at the financials. Net sales, a healthy growth of almost 18% compared to the previous year's quarter 1. Also, operating profit growth 47%, which brought us to operating profit margin of 27.5%. And earnings per share increased 47%. Looking at net sales in more detail. Innovative Medicines drove net sales growth with royalties and tablet sales. But as I already mentioned, all the divisions are performing well, of course, in relation to the size of the division. So branded products growth was EUR 5.2 million, generics EUR 1.9 million; and Animal Health, EUR 1.1 million. And even Fermion external sales grew EUR 1.8 million, ending up to EUR 480 million of net sales during Q1. And the operating profit consists, of course, the royalties here in the Column 3, close to EUR 41 million and change in sales volume of EUR 21 million. We, of course, see some effect on decreasing prices, as we usually see the biggest products suffering of this are, of course, Simdax and Dexdor, but there are the generics as well. This comprises of EUR 9.3 million. That also includes FX and changes in cost of goods. No major milestones received in Q1, and then we also see increase in our fixed cost. And thus, our operating profit was close to EUR 150 million during Q1. Now to Innovative Medicines. The division growth was close to 54%. And here, we can see the Nubeqa royalties and tablet sales of EUR 145 million -- close to EUR 145 million, some other business of EUR 5.4 million, which is usually sales of services to our partners resulting EUR 150 million of net sales. And as we remember from the previous years, we start with the lower royalty rate from Bayer in the beginning of the year. So the royalties are tiered during the financial year. And we see in Q1 clearly lower income of Nubeqa compared to the last quarter of previous year, but clearly, a higher revenue, Nubeqa revenue compared to the previous year's quarter 1. And royalties were EUR 95 million and tablet sales to Bayer, EUR 50 million. Branded products, close to 7% growth compared to previous year with EUR 82.2 million. Easyhaler continues to drive growth in this division, especially budesonide-formoterol as the recent changes in treatment guidelines from last year favor the use of combination products over the mono products, and we've been able to really increase our sales according to this new guideline. And the good growth momentum in women's health therapy area continues with the HRT products. Generics and Consumer Health, 1.4% growth. It's according to market growth, maybe slightly below that, but this is only 1 quarter, and we all know that this is really a very wide portfolio in many different geographies. So this is a very good achievement for the first quarter. And Animal held 3.3% growth. Of course, again, a very wide portfolio, both for companion animals, and livestock and a global portfolio and the growth comes from all of the different geographies in both segments or both units. When we look at the top 10 products, of course, we see the Nubeqa as we discussed, driving the growth; Easyhaler, 7% growth; Entacapone slightly minus compared to the previous year's quarter 1. But this is mainly, again, timing issue of deliveries to different regions and different partners. Same goes with the Dexdomitor and the Animal Health DDA portfolio #4 here, which grows almost 11%, and that is, again, a result of deliveries leaving during Q1. And as I mentioned, women's health continues good growth trajectory with almost 15% growth. Burana slightly decreasing, almost 6%. And that's also a kind of more of a timing issue and depends on the season. But then we see 3 of our generics; Trexan, Quetiapine and Fareston which have a very, very healthy growth. This is partly due to the previously mentioned timing of deliveries to our partners but also showing that, for example, Trexan is a golden standard treatment, globally used both in cancer and autoimmune diseases and also solid position in our top 10 products. And Simdax, as I already mentioned, facing a heavy generic competition in Europe. Now Innovative Medicines during the quarter 1 comprised 36% of our net sales and generics, 32% and branded products, 20%. Animal Health and Fermion together were 11%, 12% of our net sales. Our clinical development pipeline has now -- the list is now a bit longer with the new combination study for ODM-212, but I'll go through the list to remind us what we have now going on. So the two 1st ones are studies on Nubeqa, the DASL-HiCaP for the neo-adjuvant use of darolutamide in prostate cancer; ARASTEP for the biochemically reoccurring prostate cancer; OMAHA-003 and 004 studies for metastatic castrate-resistant prostate cancer with opevesostat molecule that Orion has developed and then out-licensed to MSD. Then a bit of an odd product on this list, which is otherwise oncology products or molecules is levosimendan. It's a old classic from Orion's portfolio, the same molecule as we have in Simdax and that's developed for pulmonary hypertension, and there are two Phase III studies ongoing with that by our partner Tenax. Then two Phase II studies, again, with opevesostat for women's cancers like breast, endometrial and ovarian cancer -- MSD -- by MSD. And this is, of course, to test whether this mechanism of action would also work for hormonal cancers in women. CYPIDES is still ongoing. That was the Phase II study that was used when the Phase III studies with opevesostat started. So the results of that study were used for planning of that -- those Phase IIIs. TEADES is a monotherapy study, a Phase II study for ODM-212 for malignant pleural mesothelioma, and also for epithelioid hemangioendothelioma. These are 2 very rare cancers, solid tumors, and we think that this molecule, based on its mechanism of action, should have a direct antitumor activity to these cancer types. And the newest addition, TEADCO, co referring to combinations. The indications here, the cancers are mesothelioma, non-small cell lung cancer and pancreatic cancer. Here, we are combining ODM-212 with some known drugs that are used for these specific cancers. And we use the other kind of a mechanism of the inhibition, which would fight for the drug resistance or prevent the drug resistance, that patients usually throw to these currently used treatments. Sustainability is another topic. Some key figures of Orion sustainability programs. We've been able to decrease our greenhouse gas emissions by 13%, and this is scope 1 and 2, so doesn't include the Scope 3. Our injury rate is 4.9, and there is clearly room to improve there. For this year, we have very ambitious targets for LTIF. And then 2 things regarding more of a kind of code of conduct or how we operate within own company and with our suppliers, this has to do with the code of conduct. In Orion, 98% of our employees have carried out or done the training for code of conduct. Also, we do this code of conduct training and agreement with our suppliers, and 96% of our suppliers are also adhered to code of conduct, our third-party code of conduct practices. We have specified our outlook for this year. We gave our outlook in January. And now after Q1 when 1/4 of the year has already passed, we are a bit more wiser, and we are able to increase the lower limit of our range by EUR 50 million, both on net sales and operating profit. So the net sales range was EUR 1.9 billion to EUR 2.1 billion in the original outlook, and now it's from EUR 1.95 billion to EUR 2.1 billion. And same with the operating profit, which was previously EUR 550 million to EUR 750 million, and now it's from EUR 600 million to EUR 750 million. And here are some upcoming events for this year. And I think at this point, I thank you for your attention, and I think it's time for questions. Tuukka Hirvonen: Yes. Thank you, Liisa, for the presentation and set up for today. And now let's turn on to the question. We will first start with questions on the conference call line. So at this point, I would like to hand over to the operator. Operator: [Operator Instructions] The next question comes from Alex Moore from Bank of America. Alexander Moore: Two for me, both on Nubeqa. So you previously mentioned a quarterly royalty reporting can be impacted by last month estimates and some reconciliation effects. I was just wondering for Q1, is there any particular conservatism or phasing assumptions baked into your sales estimate for March? And then separately, can you give me high level color on whether the reconciliation for sales in December was meaningfully positive or negative in terms of impact on your reported royalty for the quarter? And then secondly, based on your current assumptions for full year sales run rate and tiered royalty rate, do you see consensus expectations of around 50% growth for Nubeqa sales this year as achievable? Rene Lindell: Yes. Maybe I can take that one. So I'll start first with basically December numbers. So we always try if possible to close the year with the actual reports and that we managed to do last year. So there was no reconciliation or overflow from '25 to '26. Naturally, as we said in the last month of the quarter, within the year are based on estimates that we then have and the latest data we have, and then we'll be updating in the second quarter, and then we will discuss that, of course, in Q2, but we are not giving details between -- in between months of how the Nubeqa accruals and actuals go. And then, yes, we are very happy, of course, that Bayer is also optimistic on the full year of Nubeqa and so are we. And of course, we do our own scenarios and try to make a balanced outlook for the year that includes various scenarios. But other than that, not commenting on Bayer's estimates. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 2 questions. Starting from the guidance upgrade, I think you mentioned that you were just wiser after Q1. Can you specify was the upgrade just based on Q1 performance? Or have you also upgraded assumptions related to the rest of the year? Rene Lindell: Yes. Maybe I can comment that. So as Liisa said, of course, we have 1 quarter behind us, and that was solid across the businesses. And also, I think Nubeqa performing very nicely in the numbers and in the market. So I think it's a general -- I think if we look at really the lower boundary, we also see that the probability for that old outlook, lower limit starts to be quite low and made sense to raise that lower limit to a bit higher. And when it comes to other aspects, some also effect from the fact that we have a little bit more information on the U.S.A. tariffs for pharma for this year that the impact would be earliest for October quarter. And that -- as that information came through that also reduces a little bit of the downside risk, although being said, it is still something of which is then end of the year, what the impact will be, if any, at that point of time. Sami Sarkamies: Okay. And then my second question would be related to Nubeqa product deliveries. These grew only 30% in Q1. I think they were also a bit small in Q4. So should we just assume that inventories at Bayer have become lower in the last couple of quarters, and these product deliveries will pick up at some point in time during the rest of the year? Liisa Hurme: Well, I think the tablet deliveries from Orion to Bayer is not a very good -- I would say, not a very good lead indicator how Nubeqa sales would develop or how the inventories that the supply chain is really, really long if you think the global supply chain. So it's -- I would advise not to look at that tablet number or tablet sales. We ship according to buyer's forecast. Of course, here for the shipments there is the same factor than for any other shipments that sometimes they leave on a certain -- last day of a certain month or then first day of the next month. So there might also be a big change or big differences depending on when the shipments leave Orion. So that's not a very good and reliable indicator for prognosing inventories or future sales. Rene Lindell: Perhaps I can continue here a little bit that we do expect for the full year that we will have higher tablet deliveries than what we had in Q1. So it wasn't yet I think, representative of the average level for the year. Liisa Hurme: No, no. This is exactly what I mean, and -- yes. Sami Sarkamies: Okay. And then, actually, I have one more question regarding the new combination study for ODM-212. Can you tell a bit more about the study, how many patients were recruited? When are you expecting readouts? And then it would be interesting to hear what is currently the market for the drugs that you will be combining ODM-212 with? Liisa Hurme: Well, I think I'll start with the studies. These are not huge studies. I don't have the exact number of patients unless my colleagues here have that. But let's remember that both of these indication, even though they are big ones. So we are now carrying out Phase Ib/2. So we are even first trying different dosing with some of the combined drugs. So -- and for the results and readouts, I would be on a safe side to say that we can expect those during '28. And the markets for the drugs that we are combining, I'm not going to share here the market details of those drugs, but those are listed -- the ones that we combine with, are listed in the press release currently. Sami Sarkamies: Okay. So assuming additional studies for these patients. . Liisa Hurme: Yes. . Sami Sarkamies: Are these blockbuster products? Liisa Hurme: Oh, yes. Indeed, some of them are. Tuukka Hirvonen: They are. But then again, 1 needs to remember that their indication may be wider than the one we are targeting with this combination. So we have listed the active ingredients in the press release we announced earlier this morning. So with that, you can definitely find out the brand names for these products. But again, please bear in mind that their indication may be wider than the one we are targeting with these trials. Sami Sarkamies: Okay. Thank you. I don't have any further questions . Operator: The next question comes from [ Matty Carola ] from OP Corporate Bank. Unknown Analyst: Firstly, about royalty rate. So what should we think about during this Q1? Is it comparable what we saw last year, first quarter? Or is it higher as now the sales, of course, grew from Bayer to Q1 last year? Tuukka Hirvonen: Apologies, Matty, the line was a bit bad right now. There's somewhat echo. Could you please repeat your question? Unknown Analyst: All right. Hopefully, it's better now. Yes, I was asking about the royalty rate during the Q1. So is it at the same level than last year? Or is it higher now as the Nubeqa sale has grew from last year? Rene Lindell: I don't think we comment on the royalty rates in that perspective as to where the tier breakpoints or so you'll have to probably wait for that calculation to be done a bit later during the year. Tuukka Hirvonen: Growing faster compared to previous year, we will be reaching the higher tiers earlier than last year. So in that sense, in Q1, also probably the average is somewhat higher than last year. Unknown Analyst: All right. Maybe then another question regarding the sales and marketing costs as they've been increasing. So could you roughly say how much there is like the actual costs? And how much are the end royalties? These are kind of causing the cost growth. Rene Lindell: Yes, of course, and he royalties are paying a role in their part, but also we have added sales force also to support, especially branded products in some European countries. So you will see both effects there visible that, of course, with Nubeqa growing quite a lot from last year's Q1, then, of course, those would be also visible in the sales and marketing. Unknown Analyst: Okay. And one more question regarding the R&D pipeline. So as you did have said that there is this one kind of the old study, which is not covering oncology. So I think it was last year exactly when you were putting this Tenax study in your pipeline. And could you remind us what was the reason to add that study back then to your pipeline? Why it was not there prior to year ago? You want to [indiscernible]? Liisa Hurme: Yes. That's a very good question, and thank you for asking so that we can remind -- I think that was the time when Tenax started the Phase III program for pulmonary hypertension. They had been working with levosimendan for a while, doing some confirmatory studies, but that was exactly the time when they were able to start the first study and then eventually later on last year, they started the next study or the second study for pulmonary hypertension. So there is no other reason for that. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: Ssian Ssirau from SEB. One question from me regarding Nubeqa. So when we think about this early-stage indication for Nubeqa, what would be a reasonable time line to expect that you would expense for you because I have understood that Bayer is fully responsible for the development for now. Liisa Hurme: Indeed. This relates to the DASL-HiCaP study and the readout for this study, if I remember correctly, it's '28. Tuukka Hirvonen: Estimated in '28. Liisa Hurme: Estimated in '28. I think that the latest point for us to jump in and use our opt-in would be when we see the results of the study. Operator: The next question comes from Iiris Theman from DNB. Carnegie. Iiris Theman: I have just 1 question. So what pipeline is do you expect in the next 12 to 18 months? Liisa Hurme: Well, I'll start with our ambition to start Phase I study, at least one Phase I study with our biologics during this year, by the end of '26. And then if you ask for the next 12 months, of course, then we move to enter in clinical stage. So I think those are the one -- the major initiations of new projects. And then regarding the results, no major results that we would be expecting this year. Tuukka Hirvonen: With the exception of the LEVEL trial -- Phase III trial by Tenax in Q3 this year. Liisa Hurme: Yes. Thank you, Tuukka. But then in '27, the... Tuukka Hirvonen: ARASTEP. Liisa Hurme: ARASTEP will -- there will be a readout for ARASTEP in '27. Then again,-- what else did we have in '27? Tuukka Hirvonen: Current estimate for the women's trials with opevesostat. Current estimate is in the end of '27. We'll see how that pans out. And also for our first ODM-212 Phase II, so with the mono trial, current estimate is also in the end of '27, but it may move either direction, depending on recruitment rates and so forth. Iiris Theman: Okay. And anything about opevesostat, ODM-208 for prostate cancer? Liisa Hurme: Readout for both of the studies is '28. Tuukka Hirvonen: Yes. The estimated final readout is in summer '28 for both of these trials. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Tuukka Hirvonen: Thank you, operator. Then we'll turn to the webcast questions. So again, you still have the opportunity to type in your questions by using the webcast chat, if you wish. We have here 1 question coming from Shan Hama from Jefferies. So Shan is interested to hear that could we please provide an update on opevesostat timing. And if we could still see interim data this year following Merck's comments in '25 ASCO, so last year. Liisa Hurme: Well, I think I can only repeat what we said a minute ago that the readout for both -- the readouts for both of the studies are estimated to happen in '28. And regarding any interim results or interim analysis, I don't have information on that. So that should be asked from MSD. Tuukka Hirvonen: Exactly. Thank you, Liisa. So we have no further questions either from the webcast, and I think that we don't either have any follow-ups on the conference call line. So I think it's time to wrap up and some closing words, if we wish, Liisa. Liisa Hurme: Yes. I thank you for your attention and very good questions. And of course, I hope that you will be attending our upcoming events this year and have a nice rest of the day. Thank you.
Operator: Hello to all of you. Welcome to Orange Q1 2026 Results Conference. For your information, this conference will be recorded. The call today will be hosted by Christel Heydemann, our CEO; Laurent Martinez, our CFO, with other members of Orange Executive Committee for the Q&A session after the presentation. So let's start with the presentation. Christel Heydemann, the floor is yours. Christel Heydemann: Good morning. Thank you for joining our Q1 results presentation. Before getting into our Q1 results, I would like to mention that last week in France, we announced entering into exclusive negotiation with the Altice France Group for the acquisition of SFR jointly with Bouygues Telecom and the Free-iliad Group. Our joint offer reflects a total enterprise value of EUR 20.35 billion for the Altice France assets under consideration. Orange's share within the split of price and value between buyers would be around 27%. This transaction would help sustain and strengthen the entire digital economy and the telecommunications sector in France. There is no certainty though, that this process will result in an agreement. In parallel, in Spain, we already received the approval of the antitrust authorities, and we are confirming a closing of MASORANGE transaction in Q2. Back to our results. The year 2026 started with the presentation of our new strategic plan, Trust the future. This plan was well received, and we are now fully focused on its execution. In Q1, we reported very strong financial results with group revenues up by plus 3.5% and EBITDAaL up at plus 6.6%. This is fueled by a very robust retail services performance, growing plus 1.1% in France and in Europe and plus 13% in Middle East and Africa. We also accounted for significant positive wholesale nonrecurring items in France. These items were mostly anticipated and therefore, already integrated into our guidance. Excluding these effects, the underlying growth in group revenues is circa plus 2.5% and circa plus 3.5% in EBITDAaL. Based on these solid results, we are upgrading our EBITDAaL group guidance from circa 3% to above 3%, while fully confirming the rest of the '26 guidance. Lastly, I would like to emphasize that in the current volatile environment, Orange remains very solid and highly resilient. We closely monitor conflict situations, particularly in the Middle East, always prioritizing the safety of our employees. Additionally, we are well hedged regarding energy in Europe and benefit from the high level of solar power adoption in Africa and Middle East. As a result, our exposure to the indirect impacts of the crisis is limited. Let's now review our strong Q1 results. Revenues reached EUR 10.1 billion and grew by 3.5%, driven by retail growth across all geographies and the expected positive wholesale nonrecurring items in France. EBITDAaL is up 6.6% this quarter, reflecting growth in retail services, continuous efficiency efforts and the positive effect of wholesale nonrecurring items. We maintained discipline on eCapEx with eCapEx to sales around 15%, in line with our guidance. This solid first quarter gives us strong confidence in achieving our 2026 guidance with an EBITDAaL growth now expected to be above 3%. Q1 was a dynamic quarter marked by the launch of several strategic Trust the future initiatives in our 3 core ambitions. Customer intimacy, innovative growth and excellence at scale. In customer intimacy, we introduced 2 AI assistants in France. Sharlie, a 24/7 conversational assistant dedicated to answering our Sosh clients and my AI assistant, MAIA, an assistant helping Orange sales teams better understand customer needs. We also launched new loyalty programs in France. Regarding innovative growth, we announced more than 10 innovative offers at the Orange Business Summit, including Europe's first anti-drone-as-a-service solution, sovereign collaboration tools and an AI-powered cybersecurity offer. In terms of excellence at scale, Orange Business announced a partnership with Tech Mahindra to accelerate digital transformation for our international customers. And in France, we began decommissioning 2G and copper networks closing 900,000 households while implementing our new organization to boost efficiency. Trust the future is in action. I will now hand over to Laurent for the business review, starting with France on Slide 8. Laurent Martinez: Thank you, Christel. Moving to France. The competitive environment remained generally stable on the high end and slightly improved on the low end. In the first quarter, our efficient commercial strategy led to robust commercial performance. We recorded the lowest churn on fixed broadband and convergence since Q2 2022, and mobile churn improved by more than 1 point. Net adds remained strong with 55,000 in fixed, a record since Q4 2021, 40,000 in mobile and 15,000 in convergence. Convergence ARPU is up by EUR 0.3 year-on-year and fixed broadband ARPU is stable, both sustained by our cross-sell strategy. Mobile-only ARPU is down by EUR 0.8, still reflecting the mix effect related to the competitive landscape over the past year. On the financial slide, revenues reached EUR 4.4 billion, up by 2.3% year-on-year. Retail services, excluding PSTN, increased by 1.1%. The strong performance of fixed broadband and convergence, driven by our focus on our customer loyalty and multiservice approach offset the expected decline in PSTN services this quarter. We increased our NPS to above 34, widening the gap versus the #2 to 11 points while reducing churn across all segments. On the wholesale side, revenues increased by 6%, mainly due to the positive impact of circa EUR 100 million wholesale nonrecurring items, which includes significant cost financing anticipated in our plan. The strong results give us confidence in achieving our target of stable plus EBITDAaL growth in 2026 in France. Turning to Africa and Middle East, which continues to deliver a very strong performance, demonstrating our positive momentum. Revenues increased double digits for the 12th quarter in a row, driven by money, 4G, fixed broadband and B2B. Remarkably, 2/3 of our countries are up double-digit growth in terms of revenues. Looking forward, we are very comfortable on our high single-digit EBITDAaL growth outlook for 2026. Let's continue with Europe. Europe posted a solid start of the year with revenue up 2.2% year-on-year. Services remained strong, fueled by good commercial momentum, balanced between volume and value. Over the quarter, net add remains robust with 66,000 in mobile, 51,000 in FTTH and 21,000 in convergence. Convergence ARPU is up by 4.2% in Q1 in Poland. IT&IS is up by 12%, mainly driven by Belgium and Poland. Wholesale growth was driven notably by low margin activities such as international interconnection. Thanks to this robust result, we confirm the low to mid-single-digit EBITDAaL growth outlook for 2026. Moving to Orange Business. In a market environment that remains very challenging, IT&IS revenue growth was driven by strong equipment sales and sustainable growth within Orange Cyber Defense of more than 9% in the quarter. We announced a new partnership with Tech Mahindra and the launch of 14 new innovative offers at the Orange Business Summit. Overall, we continue to actively drive the transformation of Orange Business, and we confirm our outlook for continued improvement. Turning to MASORANGE. The acquisition process, as you know, is well advanced with the recent clearance by the antitrust authorities, and we are expecting a closing in the second quarter of this year. Total revenues are up by 1.2% year-on-year, driven by B2B equipment sales and wholesale services, offsetting the expected mix impact on the services in a challenging market environment. Over 1 year, total clients is up significantly with over 400,000 mobile lines, with a limited reduction during the first quarter of 2026. Synergies are on track and the 2026 outlook remains confirmed. I will now hand over to Christel for the guidance update. Christel Heydemann: Thank you, Laurent. We are proud of this very strong Q1 results, which mark a very solid start for our new Trust the future plan announced a few weeks ago. Our 2026 guidance, excluding MASORANGE for now, is fully confirmed and is upgraded on EBITDAaL, mainly thanks to a very strong performance of Africa Middle East. The expected impacts of the reconsolidation of MASORANGE on our guidance are confirmed as well. We expect the closing of the MASORANGE operation in Q2 2026 and plan to provide further details alongside our H1 results. Laurent, Jerome and I are now ready for your questions. Operator: [Operator Instructions] So the first question is coming from Ondrej Cabej ek from UBS. Ondrej Cabejšek: Hello, can you hear me? Hello? [Technical Difficulty] Christel Heydemann: Yes, we can hear you. Ondrej Cabejšek: Okay. So 2 questions for me, please. First of all, congratulations on entering exclusive talks. And I was hoping you can give us color on key aspects of the second bid such as whether it is now largely a legal formality and you are confident this new offer will be accepted. What has allowed you to increase the bid by roughly 20%, whether there is any update on the regulatory process and time line and so forth? That would be the first question. Second question, please, is really on the French competitive dynamics where the retail ex PSTN trends have improved sequentially. So if you could please speak as to what is driving this? How sustainable it is? And whether now that there is a deal in place, we can expect maybe continued rationalization in the French market already? Christel Heydemann: Thank you. On the Altice negotiation. As you know, we submitted a revised offer compared to the offer we had submitted in October. And of course, in October, we had very limited information, since then we entered into due diligence in January, February and have been able to submit this revised offer, which has been accepted by the seller given the granted exclusive negotiation. In terms of what's now planned, as you know, we have this exclusive window until mid-May. There is, of course, a lot of usual items to be discussed, legal aspects as well as commercial as usual in this type of transaction. So I won't provide more details. As you know, this is a complex transaction given we are not bidding as Orange. We are bidding as part of a consortium, and we have also agreements within the consortium. But of course, as soon and if we reach an agreement and sign an MOU in the next weeks, we will, of course, provide you with more details. We are -- as we said, our share in the transaction is reflecting the value created and the price, 27%, which is unchanged compared to our offer in October. And then in terms of what has been driving the price evolution, a lot of aspects. Just to give you one item. Back in October, we were considering an asset deal. We are now talking of a share transaction for the acquisition of SFR shares. So that's just one item. And I don't want to go into more details given really at this stage, there is no certainty that this transaction will go to an end. But you know how important this transaction is not just for Orange and France, but at large for the telecom market. We've been very vocal on the need for market consolidation. We believe it's critical to sustain investment on our critical infrastructure. And that's why, of course, we will continue to engage with authorities, country authorities as well as regulatory authorities, but not just us, of course, as a consortium. So difficult to provide you more details at this stage, but stay tuned. And of course, as soon as we have progressed, we will give you more colors. On the French market environment, the Q1 competitive dynamics was less aggressive, especially on the low end. The broadband and the high-end market remains what it was before. Now on one side, you could say Q1 is usually a lower competitive quarter. There's some seasonality effect, even though it's not been like that over the past years, all Q1s. And this is normally the consequence of a very active promotional activity for the Christmas and end-of-year period. But the -- but clearly, lower competitive -- less aggressive. And of course, our performance is also very much driven by the lower churn on all our segments, mobile, broadband, convergence. And this is what we've highlighted in our Trust the future plan. Our focus on churn reduction is, of course, a key enabler of our commercial performance. In terms of what we could expect from a consolidation, let's be very clear. The transaction between the consortium and SFR, I suspect, especially in the current environment where purchasing power is under pressure because of the Middle East crisis. I don't think that if we were convinced that this transaction would drive price increase in the French market, I'm pretty sure the antitrust authorities would not approve it. So this is something that -- on which we are, on one side, very confident on the need for this transaction to happen and consolidation to happen, but also clearly, we know the market will remain competitive no matter what. And we also know that France has -- is one of the cheapest market in Europe as well. Ondrej Cabejšek: I may have one quick follow-up. Can you just confirm that part of the deal could now be share-based? Is that what you said? And if so, how could that possibly look like? Christel Heydemann: Well, this is a technicality, but indeed, the consortium would buy the SFR shares that are part of Altice. In addition, we would also buy other assets. So again, too early to provide you more details. We're not buying the Altice shares, to be clear. But this was just one example of something that changed between October and our latest offer. Operator: So our next question is coming from Andrew Lee from Goldman Sachs. Andrew Lee: Just checking, you can hear me? Operator: Yes, we can hear you well. Andrew Lee: Okay. I have 2 organic questions for you. Just one on France and one on Spain. So useful color from you guys on a slightly less aggressive low end of the market in France. And as you've commented in the past, some of the pricing is coming up by EUR 1 to EUR 2. So kind of a part A and part B question to this one. When can we start seeing that come through in your ARPU trends in mobile in France? And is it enough of an improvement for mobile ARPU to turn positive through the year? The Part B question is Iliad launched some unlimited offers at the end of the quarter. Has that impacted your perception of competitive aggression in France at all? And then just on Spain, you saw an improvement in MASORANGE's growth to 1.2% in the quarter. Are we seeing any signs of an improved outlook for growth there, whether that be MASORANGE's positioning or the market environment? Christel Heydemann: Thank you, Andrew. On the French market, I mean, we don't guide on the mobile ARPU trend, but clearly, what we see is less aggressive offers for the low end of the mobile market, which probably also drives less market dynamic and part of the explanation for churn reduction. The lowest part of the market is very sensitive to price. And so it's difficult to directly reconcile this dynamic with, of course, the future trend. Part of our ARPU drive is really linked to churn reduction and upsell on our base. So -- and again, we don't guide on the mobile ARPU trend. And as you know, our strategy to grow is also convergence. So migrating mobile-only customers to convergence customers. On the Free Max offer, which is the high-end offer from -- announced by Iliad, we -- I mean, this is, of course, their strategy. I'm not going to comment on their strategy. That being said, if we think of high capacity or big package for travelers, we have competitive offers in our portfolio, be it Sosh or Orange that are actually cheaper than this Free Max offer. And EUR 30 a month for mobile is not cheap. So we -- I mean, at least, we have our own strategy. We don't think that this at least will change what we drive. But we've seen a good take-up on all our travel offers as well. And as you know, I mean, Q2 is typically an active quarter for that. So expect more commercials as well from us on this side. But of course, Free is sending a signal in the market that they need higher-end offers compared to their, I would say, brand that has been built on this EUR 2 voice mainly offer. On the Spanish market, the Spanish market remains extremely competitive on the low end. Our performance in Spain is as per plan, and we expect to stabilize. So it's the same recipe as in France, focused on churn reduction, focused on customer value management, and we have been -- we have seen some price increases on the high end of the market. And of course, we play with our different brands, but we definitely forecast an improvement. And actually, Q4, if we compare our Q1 performance in Spain compared to Q4, we have already improved the trends. So this is as per plan. Operator: So the next question is from Akhil Dattani from JPMorgan. Akhil Dattani: Can you hear me? Christel Heydemann: Yes, we can. Akhil Dattani: Great. I've got two as well, please, if I can. The first is just on the anticipated merger review process on the SFR deal. I'd love to get your early thoughts more just around jurisdiction. Bouygues has been talking in the last couple of months around their expectation that the deal will likely not be split between both the French authorities and the EC, but will more likely be led by one party. I just wondered if that is your assessment at this stage. Now we're a bit more advanced in the process. And I guess I'm particularly interested in your thoughts around the press reports last week around the EU's new merger review process draft that was leaked to the Financial Times. It looks like there is a lot more supportive rhetoric around consolidation and a focus away from consumer pricing and more to innovation investments in creating European champion. So would love to just get your understanding of where we are and your engagement with the relevant bodies. So that's the first question. And then the second question is, I guess, a bit of a simple one around the EBITDAaL guidance. Q1 obviously was very strong at 6.6%. Christel, you mentioned underlying it's still 3.5%. If we were to just very simplistically take the 3.5% for the next 3 quarters, you'd obviously get well above 4%. So could you just talk us through when we look through guidance? I know it's obviously very early in the year. But is this just a bit of conservatism in the context of obviously lots of macro unknowns? Or are there specific phasing items we should think about for the next few quarters? Christel Heydemann: Thank you, Akhil. On the merger review process, you're right that, as you know, this would be 3 files, one for each member of the consortium. And we know Bouygues would be led from the French authorities and Iliad would be led by Brussels. And regarding Orange, it would depend linked also to the closing and the time line of our Spanish transaction. That being said, you're right, ultimately, in this type of deal, and same was true when we did the MASORANGE transaction. You would expect one of the authority to take the lead, and this is something that the 2 authorities would agree on. That being said, I think that given the scale of the transaction, the impact this would have on the telecom market in Europe, I'd be surprised that even if the French authorities lead the analysis, and again, this is not for us to decide. It's going to be an agreement between the authorities. I'd be surprised if Brussels does not follow closely and if they don't work together. So of course, it's -- we don't have any signal of any sign. And of course, I can only remind that so far, we don't have an agreement to submit. So it's a bit premature. But of course, we started to discuss with authorities to get them ready because we also know that these antitrust process takes time, and we want to make sure we can help them get up to speed quickly. In terms of what the new draft or at least the leakage we got in the FT article, we follow closely, of course, and we expect to see the revised guidelines of the draft in the coming weeks. We take it as positive. We can recognize from what has been leaked that some of the ask we had are in the leakage. So it's -- I would say it goes in the right direction. As you know, we've been pretty vocal for the past years. And so this is key. Now let's -- we are -- there is a new Head of DG Competition that was recently appointed but we also know the administration will not completely walk away from consumer prices, especially, as I said, in the current environment where I don't think any political leader could easily talk to their -- I mean to citizens and country population and completely discard price impact or purchasing power. So of course, this is something that if we look at the CMA decision in the U.K. was taken into account with some behavioral remedies and some abilities to drive that. And of course, this is something that we are also considering. But again, too early to comment further given we're still actively discussing on how to get an agreement agreed. In terms of the guidance, as we said, we are upgrading above 3%, and we are, I mean, very confident and very -- I mean these are good results, very good results for Q1. As we also said, we will update and provide you more details and the impact of the MASORANGE consolidation in -- with our full H1 results. So I mean I won't give you now a more detailed guidance. But indeed, we are very confident with our guidance. Operator: So we have now a question from Nick Lyall from Berenberg. Nicholas Lyall: I hope you can hear me. Operator: Yes, very well. Nicholas Lyall: There was a couple of questions on France, please. Firstly, I think, Laurent, in your comments, you mentioned the top end of the market is stable, but I just wanted to ask on the convergent ARPUs. It looks as if by next quarter, they could be negative and slipping. So is it possible to give us a bit of an update on what's happening there, please? And then secondly, again, in Orange France, in the revenue line, the other revenue seems to be up by about EUR 30 million as well. Apologies for being a bit of a spotter here, but revenue is up about EUR 30 million. That would account for about 70 basis points of growth. What's in there? Is that a one-off for, say, copper sales or something? Or is there -- is that just a normal underlying number, please? Christel Heydemann: Thank you. On the convergent ARPU, as I said for the mobile ARPU question, we don't guide on the ARPU trend, but there is also a seasonality effect between Q4 and Q1 related to content or roaming, for instance. So -- but again, we don't guide on convergence, but we are comfortable. And of course, we are successfully executing our plan where the growth is driven by churn reduction and our convergent strategy. On the question on others, Laurent? Laurent Martinez: Nick, so on the others, indeed, we are EUR 22 million year-on-year. So it's a small item, but this is related notably to the copper resale phasing in France. This is the main element of this variation. Nicholas Lyall: Okay. That's great. And can I just come back on maybe Akhil's question as well. Is there any difference, Christel, you think in terms of timing between French and EC authorities? Just -- it's probably a very, very difficult one to answer, of course. But is there any sense that the French authorities may be faster if it was a French process? Could you help us on that? Christel Heydemann: Well, I'd love to tell you that it's going to be fast, but my own experience with our different files has been pretty disappointing. And you know, I mean, based on our Spanish experience, if you want to move fast in this type of transaction, of course, you have to be very proactive in terms of remedies. And if I look at our Spanish approval, so you could say, okay, it was in a previous world with a different commission, old guidelines, but still, it took time also because we didn't want to say yes to everything that was required. So -- so there's a thin line between trying to move fast and making sure we build a proper and sustainable environment for the future. So -- but clearly, in order for us to move fast, we are anticipating, preparing, I mean, notification, a lot of work that has to take place. But again, I don't want to -- the French authorities. We know that the authorities will do their best also to move fast. They know they have pressure and political pressure and economic pressure. But there's a lot of work to be done, and we have to respect that. Operator: So next question is from Roshan Ranjit from Deutsche Bank. Roshan Ranjit: Can you hear me now? Operator: Very well. Roshan Ranjit: I've got 2, please. First one, sorry, going back to France and maybe a bit more focused on the fixed ARPU, which, I guess, reversing some of the declines, which we've seen in the previous quarters. Something which you guys have talked about before, which was the perhaps targeted price increases as well as the ongoing upselling. Is it possible to kind of give us a bit more detail around if there was an element of that this quarter in these targeted price increases, and perhaps what percentage of the base that was allocated to? And can we expect some of that going forward? And secondly, Africa Middle East, which I guess we don't get the EBITDAaL split this quarter, but based on the top line, seems to be going very well. I got a sense from the CMD that there is an element of upside through the year maybe. But can you remind us on the energy situation regarding, I think, is it subsidies versus the solar split and how you are not officially hedged on energy, but how you are able to scale that dynamic given the energy situation? Christel Heydemann: Thank you, Roshan. On the fixed market, maybe, I mean, I will let Jerome comment on the impact of our price increases and whether we plan more and Laurent will answer on our energy hedging policy. Jerome Henique: Yes. Thank you, Christel. Well, as mentioned, we are stable year-on-year and quarter-over-quarter on our fixed broadband ARPU. This reflects the success of our upsell and cross-sell strategy first. It's as well fueled by our multiservice activities or new growth engine such as subscription VOD or other packages, helping us to push for high-end mix in our sales which means fixed broadband above EUR 40, which represent now a large share of our sales, thanks to the enrichment of the packages. As far as price increases are concerned, we do a very limited and targeted one. I don't think we do comment on volumes on that. Laurent Martinez: So Roshan, moving to the energy and the MEA situation. Just overall, if I look at Europe, we are 100% hedged on the energy for Europe in '26, more than 90% in 2027, and we are well advanced as well in '28. So very much extremely well covered. On Middle East and Africa, we are covered as well naturally because we have a lot of our sites, which are solar powered. And we continue to expand on this in terms of investments. And of course, we'll have some headwinds related to the fuel price, and there is a lot of mechanism indeed, in terms of subsidies, mitigation. So overall, we are not at all concerned that would put at risk our overall guidance and the positive momentum we have in Middle East and Africa when it comes to the EBITDA. Operator: So we are going now to take a question from Carl Murdock-Smith from Citi. Carl Murdock-Smith: Given the other issues I thought I'd just double check. Can you hear me? Operator: Yes, very well, Carl. Carl Murdock-Smith: That's fantastic. Two questions from me, please, both slightly on kind of prudence in guidance. So firstly, on Africa and the Middle East, following up kind of on Roshan's question. The evidence in Q1 is that it's still growing very well. Laurent, I think you said that you're very comfortable on the EBITDAaL guidance. Is it fair to say that your high single-digit guidance for this year on EBITDA versus 14% last year could be seen as conservative? And are you simply staying prudent given, as you just talked about, the kind of potential impacts from energy prices and geopolitical events? And then secondly, I was reading the universal registration document. And I wanted to ask about the disparity between annual bonus targets and the LTIP. So in your 2025 annual bonus, your organic cash flow beat targets with 23.5% payout versus its 20% weighting. And that follows on from beats in 2023 and 2024 as well. So you've beaten your target in the scorecard in each of the last 3 years. But if I look at the 3-year LTIP over the same time period of 2023 to 2025, you came in below target at just below EUR 10.7 billion versus a target of just above EUR 10.8 billion. So you only got a 94.5% payout on that metric. So I guess I'm asking just what's going on there. Is Orange more prudent when issuing its 1 year targets and guidance and then more stretching in its medium-term budgets? I'm just trying to reconcile that overachievement on 1-year performance versus underperformance on the 3-year. And I suppose I'm asking with one eye on your 2026 guidance, which might be viewed as prudent, but also another eye on the 2028 organic cash flow target of EUR 5.2 billion, and your likely overachievement or underachievement relative to that target? Christel Heydemann: Thank you, Carl. So I mean, as we -- I mean, first, I mean, the guidance is a combination of -- I mean, it's our best estimate from what we see on our group portfolio of activities, and we are rightfully confirming and as you said, I mean, MEA is really outperforming, and it's been like that for actually several quarters. Now we do not underestimate as well the difficulty for the teams to achieve those results in a very complex environment and sometimes volatile environment. But -- and we will reconsolidate MASORANGE in Q2, which has also impact on our overall numbers. So we will provide you more details, especially on the cash flow accretion that this would bring knowing that for the rest of the guidance, the MASORANGE, we reconfirm the guidance. When it comes to how we drive the performance of our teams with annual bonus and LTIP. So the LTIP, of course, is on 3 years. Just so that you know in terms of why the '25 performance and this has been an intense discussion with my Board of Directors. The guidance had been set in the context where initially MASORANGE was not included, and it was revised to include MASORANGE. And so somehow the LTIP was more demanding, I would say, in terms of target than the annual bonus. But this is -- there is no specific intent to be more strict or ambitious in LTIP than in annual bonus. We take the same balance where we were -- we want objectives that are reachable, but we also want to make sure we reward over performance. And all our executives in the company, our top 300, they both have an objective on their division, the business they drive as well as a group objective and the LTIP is a global reward system. So that now we are increasing the volume of LTIP to our top management, and I know this is a comment we had over the years from you to make sure that we aligned objectives from -- on the performance and the shares and investors and top executives. So this goes in the right direction. But I also recognize that our Board of Directors is trying to push us and challenge us by setting ambitious objective. But again, it's always an exercise where it's all about making the objectives ambitious but also reachable. So it's a lot of internal discussion, as you would expect. But there is no specific intent in terms of why '25 was different between the annual bonus and the LTIP. Operator: So next question is from Russell Waller from New Street. Russell Waller: Hope you can hear me. Operator: It's okay. A bit far away, but it's okay. Russell Waller: Okay. Yes, I had a question on the consortium offer. You said that there was a possibility that you were thinking about bidding for the shares rather than the asset. And I just wanted to ask about that, please. What are the implications of that? Does that mean that you then take on some tax liabilities or working capital adjustment? Or are there any other liabilities or assets? And why is it important or relevant? Is this something that the seller has asked for? And why is it important to hear? Christel Heydemann: Thank you. On the -- I mean, this was just one example of something that changed between our revised offer and the first offer in October. But I won't provide you more details, but just the objective of the share transaction for SFR is to be faster in terms of transition and executability of the transaction because if you think of a pure asset deal, that would mean acquiring customers, acquiring IT, acquiring very different type of assets with a risk of execution that was too high. Now I won't comment on tax and liabilities because as you can expect, this is something that in any transaction is reviewed in detail. And I don't think there's any difference whether it's an asset or share deal, I mean, in any case, liabilities and taxes are included. And this is something that we've reviewed. And of course, we would comment in more details if and when we have an agreement. Operator: So next question, this is from St phane Beyazian, ODDO. Stéphane Beyazian: I was wondering with MASORANGE potentially France, obviously, the timing of the 2 transactions are obviously not the same, not the same year. But I was wondering whether you're considering some noncore asset sales, tiny bits that perhaps you could be selling in order to bringing a little bit of cash. And my second question is regarding the copper network shutdown, whether you've made progress there? What color can you give us about this? Christel Heydemann: Thank you. I mean, as you know, we always review our portfolio of assets, and we have been -- we have been exiting or selling several assets, of course, Orange Bank a few years back, our content activities as well. More recently, we announced the sale of Globecast, and we are now in the process of consulting employee representatives. And this is something -- a transaction that would -- that we plan to close later -- I mean, in the next month, later in the year. So there is, of course, a number of assets that we always consider to make sure that they get the proper shareholding structure for their own strategy. But this type of portfolio review is not linked to our balance sheet need. I would say that for the MASORANGE and the considered Altice transaction. As you know, this is something which we took care of, and we have the ability to fund through our cash flow trajectory. But of course, that doesn't preclude us from reviewing on a regular basis, our portfolio of assets. On the copper, Jerome? Copper. Jerome Henique: Yes. Thank you, Christel. Well on our copper network removal and technical shutdown, we successfully passed the Phase 2 last Jan, which was a scaling one as we had a technical shutdown for close to 1 million households. It went very smooth and well indeed. And I think it was underlined by the Arcep regulation authority as such. We as well, commercially speaking, closed 21.5 million households for copper offer sales. So we are rolling out this industrial project as per plan with no issues so far. Stéphane Beyazian: And have you already contracted with -- I think you were planning to launch a tender. Have you done all of that already? Jerome Henique: Yes. It's still in process because the next phases will be, of course, more and more important in terms of scale of removal, and we need to control the end-to-end process, including treatment and resale. RFPs are still going on. Operator: We now have a question from Eric Ravary, CIC. So Eric, we cannot hear you because we see on our device, on our screen that your mic is muted. Okay. Well, in any case, as you know, the team is fully at your disposal after the call to follow up with your question. So Eric was the last question in the list. So we could possibly take a very last one if someone is willing to do so. If not, I will leave the floor to Christel for concluding remarks. So Christel, please. Christel Heydemann: Thank you. Q1 marks an excellent start to our Trust the future plan, and we are very pleased with our very strong results. Based on these achievements and our outlook for the upcoming months, we are slightly raising our group EBITDAaL guidance from circa 3% to above 3%, and we will again provide you with an update on our guidance with H1 results following the closing of the MASORANGE operation. Thank you, and I wish you a pleasant day.
Operator: Good morning, and welcome to the LSEG First Quarter Results 2026 Investor and Analyst Call. [Operator Instructions]. I would like to remind all participants that this call is being recorded. I will now hand over to David Schwimmer, Chief Executive Officer, to open the presentation. Please go ahead. David Schwimmer: Good morning, and welcome to our first quarter results. I'm joined by our CFO, MAP; and our Head of IR, Peregrine Riviere. Q1 was a record quarter for the group and a perfect example of the value of our model. Our leading multi-asset class trading venues have been critical sources of liquidity, price discovery and risk management, while customer engagement with our trusted data to inform their decision-making has reached new highs. This is reflected in revenue growth of almost 10%, the highest since the acquisition of Refinitiv 5 years ago. This strong start puts us in an excellent position to deliver on our financial targets for the year. And as you will have seen from this morning's announcement, we expect revenue growth to be in the upper half of the 6.5% to 7.5% guidance range. We continue to take an agile approach to capital allocation. In the first quarter, we used the dislocation in our share price to buy back GBP 1.1 billion of shares. Including dividends, we expect to return more than GBP 3 billion over the next 12 months. Q1 was also a quarter of strong strategic progress. We're continuing to innovate and invest to capitalize on the opportunities that the ongoing technological change across our industry is creating. Our LSEG Everywhere strategy is embedding our AI-ready data across financial services, driving further growth in March and April in the number of customers accessing our data via MCP servers. We're also transforming our own products with very strong feedback on the Workspace AI tools we introduced in Q1 and an exciting pipeline of additional enhancements this quarter. The group's innovation goes far beyond AI. We executed the first transaction on our private securities market in Q1, expanding private market funding through our public markets infrastructure. We're making excellent progress on post-trade solutions in partnership with 11 global banks. We're building digital markets capabilities, including a Digital Settlement House and a Digital Securities Depository, and forging a new distribution channel for financial models through our Model-as-a-Service offering. I'll say more in a moment about our strong commercial and strategic progress. But first, I'll hand over to MAP to give color on the record financial performance. Michel-Alain Proch: Thanks, David. Overall, as David said, it was a very good quarter and further proof of our all-weather model. It was a strong quarter for our subscription businesses. All of them accelerated in Q1. Data & Analytics was up 5.1% as the strong growth sales at the end of last year flow through to higher revenues. We saw particular strength in Data & Feeds up 7.3%. The contribution from pricing and retention in D&A was unchanged compared to last year. FTSE Russell was up almost 9%. Subscription revenues accelerated as the rate of contract renewals normalized, as we said it would. Growth in asset-based revenue was also strong, reflecting product inflows and higher market levels. And Risk Intelligence grew double digits, 10.5%, reflecting strong demand for our business critical screening and identity verification services. Together, those businesses grew 6.3%, a strong acceleration from the 5.2% last quarter and on track for our expectation of around 6.5% growth for the full year. The quality of our market infrastructure really stands out in the kind of market environment we saw in Q1. David will give you more detail on this in just a moment, but you can see the financial impact on that on this slide. Markets revenue were up 15.5%, driven by strong performance across all the businesses. Cost of sales benefited from the action we took last year on the SwapClear revenue surplus. And as a result, gross profit was even stronger than total income, up 11.5% in Q1. Clearly, we have had a very strong start to the year. The outstanding performance from markets, combined with the great visibility we enjoy in our subscription businesses sets us up very well to deliver on all guidance for 2026. And in particular for revenue, we are confident in reaching the upper half of our guidance. In addition to our ongoing investments in the business, we are also returning surplus capital. We repurchased shares worth GBP 1.1 billion in the first quarter. Just over GBP 400 million of this was from buybacks announced last year and nearly GBP 700 million was from the latest buyback announcement in February. Combining the rest of this year's GBP 3 billion buyback and dividends, we will be returning nearly 10% of our market capitalization to shareholders over a 15-month period. As a reminder, even with our high level of investments and large shareholder distribution, we expect to end the year around the middle of our leverage range. This is all from me, and I will pass back to David. David Schwimmer: Thanks, MAP. Customers increasingly want to use our data in AI applications, opening up a new distribution channel. We are embracing that through our LSEG Everywhere strategy, delivering AI-ready data to our customers in their preferred environment, embedding our data in their AI-powered solutions and agents. We're continuing to see strong uptake on MCP distribution. In the roughly 4 months since launch, we now have 90 customers who have connected to our MCP server directly or via one of our AI partners. And we have a pipeline of over 60 more customers looking to connect. This is great progress given the onboarding process can take a few weeks. You can see from the pie charts that we are seeing a good global spread as well as broad-based interest across buy-side, sell-side and corporate customers. And we're seeing roughly half connect through Claude with the rest split between direct connections and other third parties. In terms of data sets, we are adding new ones to MCP all the time. Just this week, that included estimates, company fundamentals and corporate actions. And overall, we now have over half of our nonreal-time data available via MCP. So the platform is becoming more attractive every day. Over the coming weeks, we will add transcripts, Lipper funds, FTSE Russell indices and much more. While we are currently focused on driving adoption, we're refining our commercial policies, and we'll share the framework at our H1 results. So strong progress on our AI-ready data, and we are also making great strides embedding AI into Workspace. Our Workspace AI search product is in pilot with around 1,500 users today, and we expect to launch general availability in the next few months. Our Workspace AI deep research capability answers complex prompts with leading models from Anthropic, OpenAI and Google using our trusted data. We have around 1,600 customers in pilot and deep research is benchmarking very well against competitor products. We're adding much more data over the coming months and rolling it out more extensively throughout 2026. Today, over half of the take-up is coming from the investment management sector, where we have traditionally had lower penetration, so a positive sign. We're also seeing really deep engagement with our products. When global uncertainty and market volatility rise as they did in Q1, our customers turn to us, a testament to their trust in our solutions. We saw record use of Workspace in Q1. Our oil tools, which have long been popular with users, saw a 75% sustained uptick in usage. Our shipping data experienced a threefold increase in demand. In Data & Feeds, our real-time business data traffic grew 33% in Q1, and this has continued into Q2 with a new all-time high in early April. We're also really scaling up in some of the new channels we have added in recent years, making it easier for customers to access our data. Following the enhancements we made in 2023, we have accelerated growth in our cloud-based real-time offering, Real-Time Optimised, and use of that platform rose fourfold in Q1. I've spoken before about the power of the analytics API we built in partnership with Microsoft. In Q1, we drove 44% growth in data consumption through that channel. And making Tick History more easily available via cloud-based solutions continues to drive strong demand with 39% growth in the use of that data in Q1. Turning to our Markets businesses. As you know, we have intentionally positioned ourselves in areas of strong structural growth, driving the electronification of fixed income trading with Tradeweb, supporting cross-border flows in FX and helping customers manage risk and optimize their capital in our post-trade businesses. We achieved exceptional volumes in interest rate swaps on both our trading and clearing platforms as customers adjusted to shifting market expectations in Q1. Market conditions also drove strong volumes across the rest of the fixed income franchise as well as FX. That was on top of the strong double-digit growth we have consistently been delivering in FX clearing. In Equities, we also achieved strong trading volumes. Technology is accelerating the pace of change in our industry. We are investing and innovating to take advantage of that. Our index business, FTSE Russell, is expanding its presence in the digital asset space, attracting 8 digital asset ETFs to track its benchmarks in Q1. We're also seeing good demand for our private markets indices with StepStone. As markets digitize, we're on track to deliver 2 new digital markets capabilities, Digital Settlement House and Digital Securities Depository in Q2 and H2, respectively. I'll pick out just one more example from this slide, Model-as-a-Service. We made financial models from Societe Generale available through this channel in Q1, the first time we have expanded our analytics API to third-party models. We're adding models from our post-trade business later this quarter, taking further advantage of the powerful distribution capability of the analytics API we built with Microsoft. So to wrap up, this has been a record quarter of growth that puts us in a strong position to deliver on all our targets for the year. We're driving adoption of our AI-ready data across the industry through a range of AI partnerships. Our innovation is creating powerful new platforms for long-term growth. And we are returning significant surplus capital to shareholders, GBP 1.1 billion in Q1 and more than GBP 3 billion over the next 12 months. We're very excited about the opportunities ahead of us this year and beyond and are very well positioned for continued growth. And with that, I'll pass to Peregrine for Q&A. Peregrine Riviere: Thank you, David. [Operator Instructions]. Thanks, operator, over to you. Operator: [Operator Instructions] Your first question is from the line of Tom Mills at Jefferies. Thomas Mills: I think you've mentioned that you'll be looking to share more on the commercialization MCP as a distribution channel at 1H. I just wondered if you could give us a sense of your early conversations with larger customers, appreciating we're only about 4 months since launch. Is there a recognition on their part that this ultimately won't be included in existing agreement, will be [indiscernible] charges there? And just I noted that you said that you're seeing larger buy-side adoption in this channel versus the [indiscernible]. Why do you think that is? David Schwimmer: Tom, we are definitely seeing an understanding and recognition from our customers that this is incremental. This is a new product, a new service. So it has been specifically laid out in our -- for example, our data access agreements. A big part of those discussions, those negotiations are around the existing perimeter of what we provide. And I think it's very clear to them that MCP and the AI distribution channels are outside of that perimeter. So actually, a lot of the discussions that we are having with our customers are around their eagerness both to access the product and frankly, to understand what the commercial model will be. And so we are in early discussions with a half dozen or so about the commercial framework. And as we mentioned, we will be sharing that framework with the market in our half year results. So on the buy-side, I think it's just the utility. I think our customers are finding it very helpful, attractive product, easy to use. And so we're not particularly surprised that we're seeing that kind of traction. Operator: Your next question is from the line of Mike Werner of UBS. Michael Werner: I appreciate the presentation. A question on the MCP server. Apologies, I'm going to be focusing on this a little bit. I guess, can you give us a little bit more color as to the economics of the MCP server? If we think about you setting it up and the investment, how should we think about ultimately the variable costs? Is this something where there's a lot of operating leverage or there is a significant amount of consumption-based costs tied to the usage of the server? Michel-Alain Proch: Mike, it's MAP speaking. So in terms of economics, as far as MCP is concerned, a couple of points that I can make. As our clients are using LLM models to access MCP, so being OpenAI, Claude or Gemini. It's our clients who are paying the tokens to the LLMs. So this cost is with our clients. Then the cost we have for MCP is mostly coming from 2 things: First, the cloud cost and the cost of the data platform. Both of these costs are indeed variable. So that's something we want to take into consideration while we are establishing the commercial policy for this new product. Operator: And your next question comes from the line of Hubert Lam of Bank of America. Hubert Lam: I've got one question. On D&A growth, it was 5.1% in the quarter and only up marginally from the 4.9% in Q4. Can you talk about the different dynamics within the division where it seems like Data & Feeds had decent growth, but workflows slowed marginally? And also, I guess you touched upon it in terms of the enhancements in the Workspace, I guess would this be helpful in terms of driving up further growth within Workflows in terms of pricing or greater demand in the future? David Schwimmer: So I would not overinterpret any modest tick up or tick down in terms of workflows in particular. We continue to see really strong interest in the new functionality of Workspace and interest as well in terms of the new functionality that is Open Directory and how that will continue to be expanding over the course of this year and beyond. So we'll continue to add capabilities, add functionality, add product in there, new private markets data in there as well, which is also getting some good interest. So I wouldn't get -- as I said, I wouldn't overinterpret any kind of modest ticks up or ticks down in terms of where workflows are. And then Data & Feeds business is doing very well. We touched on this in the presentation, but very high demand for the content that we're providing in Data & Feeds as well as Workspace. And we will continue, as you know, to invest in that platform and look forward to continued growth there. Maybe just the last point -- sorry, Hubert, last point I should emphasize. I think everyone knows this, but just to be clear, no MCP revenue in here. Operator: You have a question from the line of Arnaud Giblat of BNP Paribas. Arnaud Giblat: Yes. Just continuing a bit on the MCP theme. I'm just wondering, out of the 150 clients that have signed up or signing up, how many are new clients to you? Are there any substantial new logo wins of size? Just wondering how this is driving incremental growth in the business? David Schwimmer: Arnaud, I cannot give you that answer off the top of my head. What I can tell you is that it's a broad range. We're seeing some large institutions like the big global banks. We're seeing smaller institutions like hedge funds. One dynamic that I can share with you is that the onboarding process can be much quicker with some of the smaller institutions. They're really eager just to get on. There's not a lot of focus or review on some of the compliance or regulatory aspects, whereas with the larger institutions, the onboarding process can take, I'll say, a few to several weeks. And there can be a couple of meetings where we explain the content, we explain how it works, go through a number of the security issues, then there can be some legal discussions and then there's the actual onboarding. So just in terms of timing, that's probably the area where at this point, I can give you the most insight that the bigger institutions tend to be slower than some of the smaller, more nimbler institutions. I hope that helps. Operator: And your next question is from the line of Enrico Bolzoni of JPMorgan. Enrico Bolzoni: I just wanted to follow up on your very latest comment, David, on the -- for example, on the fact that it's faster to onboard a smaller institution. So on one hand, I would think on top of my head that it would be easier to generally onboard clients via MCP relative to what has been historically. But AI is a very powerful technology, and I think that there might be some concerns and risk in terms of the perimeter of the usage of data, what AI actually might end up using. So my question is, do you expect that as this type of connectivity increases as a proportion of your, let's say, total clients and total revenues, the sales cycle will actually expand or will it actually shrink over time? David Schwimmer: I'm sorry, Enrico, when you say the same cycle, I just want to make sure sales cycle. Enrico Bolzoni: Yes. So basically, it's going to take -- you think over time, over the next, let's say, 3 years, is it going to take longer actually to onboard clients or actually it's going to be faster, so you'd be able to do it quickly. I'm just concerned about all the implication of AI for risk, for securities and making sure that the perimeter is well defined. I know there's a lot of legal implications when contracts are signed that involve AI technology. David Schwimmer: Yes, I would expect it -- well, first point I should make, it's already quicker relative to the historical onboarding in terms of what I'll call traditional or conventional products if we were setting someone up for a traditional API. So it's already quicker than that. And I would expect over time that it accelerates as our customers get more accustomed to the technology, as there is more and better understanding, particularly as we put our commercial framework out there later this year. This is all very new. Just to remind everyone, we turned this on, I think, December 23rd. And so we're just a few months into this, both in terms of having our own data sets available in this manner and in terms of our customers really figuring out how to use it. And so a number of them have been in what I'd describe as exploration mode here. But as the comfort level increases and I'm sure that on our end, we'll look to facilitate and accelerate our own processes as well, I would expect to see the sales cycle actually becoming a little bit shorter. Operator: Your next question is from the line of Julian Dobrovolschi of ABN AMRO-ODDO BHF. Julian Dobrovolschi: I have one on the subscription growth. Wondering about the sustainability of it. So you ended the quarter at 6.3%, which I think is quite healthy. But I think you also indicated that this is partly attributed to normalization in FTSE Russell mandates renewals. So I was just wondering how much is from onetime boost the performance that we have seen in Q1 versus a structural step-up in underlying run rate, please? Michel-Alain Proch: Yes. So just to reframe the conversation. So we posted indeed 6.3% for the subscription business in Q1. We reconfirm our guidance of 6.5% for the entire year, which would mean that in the next 3 quarters, we will be between 6.5% and 6.6%. In order to do so, we have a growth which is broad-based both in DNA, FTSE and Risk Intelligence. I have already indicated that we expect Risk Intelligence to carry on being double digit. As far as FTSE Russell is concerned, you're right on the fact that after 2025, which was a bit difficult, we see FTSE Russell going back on a growth trajectory to the high single digit that we used to have and an acceleration in -- progressive acceleration in D&A. So that's the 3 elements that is converging to 6.5% for the year. And as I was saying, we are very confident in it. Operator: Your next question is from the line of Ben Bathurst with RBC Capital Markets. Benjamin Bathurst: My question is also on MCP. Presumably, there are also some customers that have elected not to take it up at this stage. I just wondered what the typical pushbacks you're hearing when this is the case? Is it that customers aren't ready or that customers are using other MCP providers or any other reasons? And are there any actions you're planning to take to address any of these points to push connectivity up through the year? David Schwimmer: Thanks, Ben. So we're not seeing a lot of pushback. I think to the extent that we have had any questions, it's really been about the availability of certain data sets. So we've shared it with some customers, and they have been looking for particular specific data sets. And so sometimes if those data sets are not yet on, they're a little bit less interested. But as we mentioned this morning, we're adding more data sets all the time. We're now over 50% of all of our nonreal-time data sets available through MCP, and that continues, that just making it more and more attractive. Operator: Your next question is from the line of Oliver Carruthers of Goldman Sachs. Oliver Carruthers: Oliver Carruthers from Goldman Sachs. I've got another MCP question, which follows on a little bit to your answer to the last one, David. But it seems like some of your data and analytics competitors are also making their data sets available via [indiscernible] clients, via MCP servers, but they're only making their data sets partially available. So can you talk a little bit about your philosophy of how you're going to set the perimeter for what data sets you make available for your clients via MCP and then particularly in the context of your LSEG Everywhere strategy, which to me feels quite differentiated in this context? David Schwimmer: As I think you all are aware, we're very comfortable making our data available through MCP. And we are adding more and more of our data sets to it. We think it is a very helpful and valuable distribution tool. We think it works very well in terms of, I'll call it, cross-selling. It's a much stronger cross-selling machine than any human could be. We have about 1,500 data sets. And so if you are submitting a query through your model that goes into our MCP server, the way that works is that it is looking across the data sets that it has access to, to respond to that query. So it is a very powerful natural cross-selling machine. It's also a great lead generation machine because to the extent that we have data available in our MCP server and a customer does not have the license to that data set, then we can structure it so that, that becomes lead generation for us. And then we can interact with that customer and let them know that there is data available that would be responsive to their queries and expand their licensing. So I understand some of our competitors have more of a closed box mentality to this kind of opportunity set. That's not our approach. And from what we hear from a lot of our users and customers, they prefer our open model in this new era of very powerful AI distribution channels. Michel-Alain Proch: And if I may just add, David, we are adding data sets on a fortnight basis. Actually, we added yesterday, Reuters News and macroeconomic. So now we have Reuters News, we have fundamentals, estimate peers, and of the pricing corporate action, ESG ownership, company officers and directors, macroeconomics that we just put yesterday night. And in front of us in 2026, as mentioned in the slide, the major one that are awaited by our clients is deal and ownership data and transcript and filing. And then we will add commodities and Lipper fund data and finally, FTSE Russell. So you see it's a very busy pipeline of data set onboarding that we have in front of us. Operator: Your next question is from the line of Ian White of Autonomous Research. Ian White: I'm also on MCP, if that's okay. Maybe can you just elaborate a little bit more around the strategy with respect to MCP. I see that you kind of led with sort of real-time pricing data Tick History, while others have led with maybe more sort of company fundamentals, transcripts, kind of research content. Is there any strategic reason that you sort of see it differently to peers in terms of prioritization? Or is it a case of adding what is readily available more or less as quickly as possible? And can you just elaborate for us what's the end state here? And when will we reach that? Do you anticipate having more or less everything available via MCP in the medium term? And when is the medium term effectively? David Schwimmer: Thanks, Ian. So just, I guess, I'd say a slight correction. We do not make our real-time data available through MCP because of the latency requirements of real time, that is -- could you do it technically? Yes, you could do it. It's just given the current construct and the customer demand, that's not practical. So it's really just a function of making the data sets available in part relative to what we see in terms of customer demand and in part, making sure that the data sets are structured in a way so that they can be interoperable. And this is actually an important point that people often don't get. If you put a bunch of different data sets in an MCP server sort of willy-nilly, and they're not structured in a way to be interoperable, that can confuse the model in the same way that if you have a model accessing different data sets from different MCP servers that are not designed to be interoperable, that can confuse the model. So we are making sure that we're providing our data sets into our MCP server in a manner such that they are all designed, architected to be interoperable so that a model that is accessing data or content through our MCP server is going to get a very consistent experience with the interoperability amongst the different data sets, which just leads to better performance, higher accuracy in the model. So that's an important point that sometimes gets lost in terms of understanding how this works. In terms of end state, I expect that we'll have the vast majority of our DNA data available this half. And then as MAP mentioned, there's more coming in terms of FTSE Russell and other data from broader parts of LSEG over the second half. So we see really significant opportunity there in terms of creating an MCP channel to access the vast amount of data that we have across LSEG. Michel-Alain Proch: No, I would just add, it's really about what David said, it's -- the reason why we are able to put new data sets on the fortnight on MCP is because these data sets have been rearchitected by our team through our partnership with Microsoft. So it's all the work that we have been doing at rearchitecting the data with Microsoft, which is now coming to fruition and which is allowing us to be so fast at getting the data set ready for MCP. So as David said, by summer, we will be done for all nonreal-time data sets. Operator: [Operator Instructions] And your next question is from the line of Andrew Lowe of Citi. Andrew Lowe: I'll take one outside of MCP, if that's all right. There's been growing debate about your FXall business. So could you just talk us through the sort of planned investment within that business, where do you think you need to step up functionality? What's going to change over the next year or 2, and what the synergies are with the rest of your business? David Schwimmer: So FXall has had a very strong performance, as you would have seen in Q1. We have been continuing to invest in the capabilities in FXall really over the past couple of years and continuing to improve in its functionality, in its speed, in the interface. And I would say probably the area to touch on for this year is the fuller integration from FXall into Workspace and the opportunities that, that brings with this integrated front-end system. We've got FXall also plugged in as of a year or 2 ago into Tradeweb. We have straight-through FXall execution capabilities into ForexClear, so the kind of end-to-end processing. So again, strong performance this year, continued investment and continued improvement in its functionality, and we think it's a great business. Operator: You have a follow-up question from Arnaud Giblat of BNP Paribas. Arnaud Giblat: Yes. Just in your prepared remarks, you talked a bit broadly about the momentum you're having in post-trade services. I'm just wondering if there are any specific milestones you want to flag here in terms of activity pipeline? David Schwimmer: Arnaud, I just want to make sure I heard you right. The momentum in post-trade services, is that what you were asking about? Arnaud Giblat: Yes, yes. And specifically the partnership with the banks. David Schwimmer: Yes. Got it. Yes. It's going well. We're seeing -- we -- in Q1, we put trade agent out there, which is a very efficient, helpful platform in terms of OTC processing. We are seeing significant onboarding of new customers. And the real area of focus, now that we have the banks fully involved as of the announcement in Q3 of their investment, there's now active ongoing discussion across the business of really creating more integrated functionality. So when we talked about this business last year, you would have heard us talking about Quantile and Acadia and the different -- SwapAgent and different parts of it coming together. Now it's becoming much more of an integrated offering, and there's good engagement and dialogue with the banks as partners in terms of where we're taking this business. So good progress and good onboarding. It, at this point, has good growth. It's not a huge contributor to the business yet, but we expect -- as you have seen us deliver on in other parts of our business, we expect a nice long runway of growth. Operator: You have a follow-up question from Enrico Bolzoni from JPMorgan. Enrico Bolzoni: Sorry, just one follow-up to clarify as I think there's been a bit of confusion around it. Can you just please, to clarity, confirm that the derivative hedgings or the FX impact that you experienced in this quarter, that was about, I think, GBP 5 million positive, is not included in the reported constant currency growth rate, just for the detail to be clear? Michel-Alain Proch: Yes. Sure. No, I confirm that the embedded derivative impact of GBP 5 million is not recorded in the organic growth. Operator: And this concludes our questions via the conference line. I will now hand the presentation back to David Schwimmer, Chief Executive Officer, for closing remarks. David Schwimmer: Great. Well, thank you all. Thanks for your questions. To the extent you have any further questions, you certainly know where to find us. Peregrine and the team would be happy to hear from you and wish you all the best. Thanks a lot.
Tuukka Hirvonen: Good afternoon, and welcome to Orion's Q1 2026 Results Webcast and Conference Call. My name is Tuukka Hirvonen, and I'm the Head of IR here at Orion. In a few moments, we will kick off with the presentation by our CEO, Liisa Hurme, after which you will have the possibility to ask questions either from Liisa or from our CFO, René Lindell. We will be first taking the questions through the conference call lines. And after that, we will turn on to the webcast chat function. So you may also type in your questions using the chat function of this webcast. And to our Finnish-speaking viewers, this event is held in English. But afterwards, later this afternoon, you will find a Finnish interview of Orion's CEO, Liisa Hurme on Orion's website. And just before letting Liisa to step in, just a reminder about this disclaimer regarding forward-looking statements. With these words, I'd like to hand over to Liisa. Liisa Hurme: Thank you, Tuukka, and good afternoon on my behalf as well, and welcome to listen Orion Q1 2026 results. Some highlights from this Q1. All our businesses performed solid in a solid way and very well, I would say so. And we also have good news regarding our clinical pipeline. We've been granted -- ODM-212 has been granted orphan drug designation in mesothelioma by FDA now in April. And we also started a new Phase Ib/II study called TEADCO which is a basket trial evaluating ODM-212 in combination with standard of care treatments in patients with selected advanced solid tumors. And I will talk more about that later on. Also, we have strengthened our executive team. We've appointed Berkeley Vincent as an Executive Vice President to lead Innovative Medicines division and as a member of my executive team, as of April 8. So let's look at the financials. Net sales, a healthy growth of almost 18% compared to the previous year's quarter 1. Also, operating profit growth 47%, which brought us to operating profit margin of 27.5%. And earnings per share increased 47%. Looking at net sales in more detail. Innovative Medicines drove net sales growth with royalties and tablet sales. But as I already mentioned, all the divisions are performing well, of course, in relation to the size of the division. So branded products growth was EUR 5.2 million, generics EUR 1.9 million; and Animal Health, EUR 1.1 million. And even Fermion external sales grew EUR 1.8 million, ending up to EUR 480 million of net sales during Q1. And the operating profit consists, of course, the royalties here in the Column 3, close to EUR 41 million and change in sales volume of EUR 21 million. We, of course, see some effect on decreasing prices, as we usually see the biggest products suffering of this are, of course, Simdax and Dexdor, but there are the generics as well. This comprises of EUR 9.3 million. That also includes FX and changes in cost of goods. No major milestones received in Q1, and then we also see increase in our fixed cost. And thus, our operating profit was close to EUR 150 million during Q1. Now to Innovative Medicines. The division growth was close to 54%. And here, we can see the Nubeqa royalties and tablet sales of EUR 145 million -- close to EUR 145 million, some other business of EUR 5.4 million, which is usually sales of services to our partners resulting EUR 150 million of net sales. And as we remember from the previous years, we start with the lower royalty rate from Bayer in the beginning of the year. So the royalties are tiered during the financial year. And we see in Q1 clearly lower income of Nubeqa compared to the last quarter of previous year, but clearly, a higher revenue, Nubeqa revenue compared to the previous year's quarter 1. And royalties were EUR 95 million and tablet sales to Bayer, EUR 50 million. Branded products, close to 7% growth compared to previous year with EUR 82.2 million. Easyhaler continues to drive growth in this division, especially budesonide-formoterol as the recent changes in treatment guidelines from last year favor the use of combination products over the mono products, and we've been able to really increase our sales according to this new guideline. And the good growth momentum in women's health therapy area continues with the HRT products. Generics and Consumer Health, 1.4% growth. It's according to market growth, maybe slightly below that, but this is only 1 quarter, and we all know that this is really a very wide portfolio in many different geographies. So this is a very good achievement for the first quarter. And Animal held 3.3% growth. Of course, again, a very wide portfolio, both for companion animals, and livestock and a global portfolio and the growth comes from all of the different geographies in both segments or both units. When we look at the top 10 products, of course, we see the Nubeqa as we discussed, driving the growth; Easyhaler, 7% growth; Entacapone slightly minus compared to the previous year's quarter 1. But this is mainly, again, timing issue of deliveries to different regions and different partners. Same goes with the Dexdomitor and the Animal Health DDA portfolio #4 here, which grows almost 11%, and that is, again, a result of deliveries leaving during Q1. And as I mentioned, women's health continues good growth trajectory with almost 15% growth. Burana slightly decreasing, almost 6%. And that's also a kind of more of a timing issue and depends on the season. But then we see 3 of our generics; Trexan, Quetiapine and Fareston which have a very, very healthy growth. This is partly due to the previously mentioned timing of deliveries to our partners but also showing that, for example, Trexan is a golden standard treatment, globally used both in cancer and autoimmune diseases and also solid position in our top 10 products. And Simdax, as I already mentioned, facing a heavy generic competition in Europe. Now Innovative Medicines during the quarter 1 comprised 36% of our net sales and generics, 32% and branded products, 20%. Animal Health and Fermion together were 11%, 12% of our net sales. Our clinical development pipeline has now -- the list is now a bit longer with the new combination study for ODM-212, but I'll go through the list to remind us what we have now going on. So the two 1st ones are studies on Nubeqa, the DASL-HiCaP for the neo-adjuvant use of darolutamide in prostate cancer; ARASTEP for the biochemically reoccurring prostate cancer; OMAHA-003 and 004 studies for metastatic castrate-resistant prostate cancer with opevesostat molecule that Orion has developed and then out-licensed to MSD. Then a bit of an odd product on this list, which is otherwise oncology products or molecules is levosimendan. It's a old classic from Orion's portfolio, the same molecule as we have in Simdax and that's developed for pulmonary hypertension, and there are two Phase III studies ongoing with that by our partner Tenax. Then two Phase II studies, again, with opevesostat for women's cancers like breast, endometrial and ovarian cancer -- MSD -- by MSD. And this is, of course, to test whether this mechanism of action would also work for hormonal cancers in women. CYPIDES is still ongoing. That was the Phase II study that was used when the Phase III studies with opevesostat started. So the results of that study were used for planning of that -- those Phase IIIs. TEADES is a monotherapy study, a Phase II study for ODM-212 for malignant pleural mesothelioma, and also for epithelioid hemangioendothelioma. These are 2 very rare cancers, solid tumors, and we think that this molecule, based on its mechanism of action, should have a direct antitumor activity to these cancer types. And the newest addition, TEADCO, co referring to combinations. The indications here, the cancers are mesothelioma, non-small cell lung cancer and pancreatic cancer. Here, we are combining ODM-212 with some known drugs that are used for these specific cancers. And we use the other kind of a mechanism of the inhibition, which would fight for the drug resistance or prevent the drug resistance, that patients usually throw to these currently used treatments. Sustainability is another topic. Some key figures of Orion sustainability programs. We've been able to decrease our greenhouse gas emissions by 13%, and this is scope 1 and 2, so doesn't include the Scope 3. Our injury rate is 4.9, and there is clearly room to improve there. For this year, we have very ambitious targets for LTIF. And then 2 things regarding more of a kind of code of conduct or how we operate within own company and with our suppliers, this has to do with the code of conduct. In Orion, 98% of our employees have carried out or done the training for code of conduct. Also, we do this code of conduct training and agreement with our suppliers, and 96% of our suppliers are also adhered to code of conduct, our third-party code of conduct practices. We have specified our outlook for this year. We gave our outlook in January. And now after Q1 when 1/4 of the year has already passed, we are a bit more wiser, and we are able to increase the lower limit of our range by EUR 50 million, both on net sales and operating profit. So the net sales range was EUR 1.9 billion to EUR 2.1 billion in the original outlook, and now it's from EUR 1.95 billion to EUR 2.1 billion. And same with the operating profit, which was previously EUR 550 million to EUR 750 million, and now it's from EUR 600 million to EUR 750 million. And here are some upcoming events for this year. And I think at this point, I thank you for your attention, and I think it's time for questions. Tuukka Hirvonen: Yes. Thank you, Liisa, for the presentation and set up for today. And now let's turn on to the question. We will first start with questions on the conference call line. So at this point, I would like to hand over to the operator. Operator: [Operator Instructions] The next question comes from Alex Moore from Bank of America. Alexander Moore: Two for me, both on Nubeqa. So you previously mentioned a quarterly royalty reporting can be impacted by last month estimates and some reconciliation effects. I was just wondering for Q1, is there any particular conservatism or phasing assumptions baked into your sales estimate for March? And then separately, can you give me high level color on whether the reconciliation for sales in December was meaningfully positive or negative in terms of impact on your reported royalty for the quarter? And then secondly, based on your current assumptions for full year sales run rate and tiered royalty rate, do you see consensus expectations of around 50% growth for Nubeqa sales this year as achievable? Rene Lindell: Yes. Maybe I can take that one. So I'll start first with basically December numbers. So we always try if possible to close the year with the actual reports and that we managed to do last year. So there was no reconciliation or overflow from '25 to '26. Naturally, as we said in the last month of the quarter, within the year are based on estimates that we then have and the latest data we have, and then we'll be updating in the second quarter, and then we will discuss that, of course, in Q2, but we are not giving details between -- in between months of how the Nubeqa accruals and actuals go. And then, yes, we are very happy, of course, that Bayer is also optimistic on the full year of Nubeqa and so are we. And of course, we do our own scenarios and try to make a balanced outlook for the year that includes various scenarios. But other than that, not commenting on Bayer's estimates. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have 2 questions. Starting from the guidance upgrade, I think you mentioned that you were just wiser after Q1. Can you specify was the upgrade just based on Q1 performance? Or have you also upgraded assumptions related to the rest of the year? Rene Lindell: Yes. Maybe I can comment that. So as Liisa said, of course, we have 1 quarter behind us, and that was solid across the businesses. And also, I think Nubeqa performing very nicely in the numbers and in the market. So I think it's a general -- I think if we look at really the lower boundary, we also see that the probability for that old outlook, lower limit starts to be quite low and made sense to raise that lower limit to a bit higher. And when it comes to other aspects, some also effect from the fact that we have a little bit more information on the U.S.A. tariffs for pharma for this year that the impact would be earliest for October quarter. And that -- as that information came through that also reduces a little bit of the downside risk, although being said, it is still something of which is then end of the year, what the impact will be, if any, at that point of time. Sami Sarkamies: Okay. And then my second question would be related to Nubeqa product deliveries. These grew only 30% in Q1. I think they were also a bit small in Q4. So should we just assume that inventories at Bayer have become lower in the last couple of quarters, and these product deliveries will pick up at some point in time during the rest of the year? Liisa Hurme: Well, I think the tablet deliveries from Orion to Bayer is not a very good -- I would say, not a very good lead indicator how Nubeqa sales would develop or how the inventories that the supply chain is really, really long if you think the global supply chain. So it's -- I would advise not to look at that tablet number or tablet sales. We ship according to buyer's forecast. Of course, here for the shipments there is the same factor than for any other shipments that sometimes they leave on a certain -- last day of a certain month or then first day of the next month. So there might also be a big change or big differences depending on when the shipments leave Orion. So that's not a very good and reliable indicator for prognosing inventories or future sales. Rene Lindell: Perhaps I can continue here a little bit that we do expect for the full year that we will have higher tablet deliveries than what we had in Q1. So it wasn't yet I think, representative of the average level for the year. Liisa Hurme: No, no. This is exactly what I mean, and -- yes. Sami Sarkamies: Okay. And then, actually, I have one more question regarding the new combination study for ODM-212. Can you tell a bit more about the study, how many patients were recruited? When are you expecting readouts? And then it would be interesting to hear what is currently the market for the drugs that you will be combining ODM-212 with? Liisa Hurme: Well, I think I'll start with the studies. These are not huge studies. I don't have the exact number of patients unless my colleagues here have that. But let's remember that both of these indication, even though they are big ones. So we are now carrying out Phase Ib/2. So we are even first trying different dosing with some of the combined drugs. So -- and for the results and readouts, I would be on a safe side to say that we can expect those during '28. And the markets for the drugs that we are combining, I'm not going to share here the market details of those drugs, but those are listed -- the ones that we combine with, are listed in the press release currently. Sami Sarkamies: Okay. So assuming additional studies for these patients. . Liisa Hurme: Yes. . Sami Sarkamies: Are these blockbuster products? Liisa Hurme: Oh, yes. Indeed, some of them are. Tuukka Hirvonen: They are. But then again, 1 needs to remember that their indication may be wider than the one we are targeting with this combination. So we have listed the active ingredients in the press release we announced earlier this morning. So with that, you can definitely find out the brand names for these products. But again, please bear in mind that their indication may be wider than the one we are targeting with these trials. Sami Sarkamies: Okay. Thank you. I don't have any further questions . Operator: The next question comes from [ Matty Carola ] from OP Corporate Bank. Unknown Analyst: Firstly, about royalty rate. So what should we think about during this Q1? Is it comparable what we saw last year, first quarter? Or is it higher as now the sales, of course, grew from Bayer to Q1 last year? Tuukka Hirvonen: Apologies, Matty, the line was a bit bad right now. There's somewhat echo. Could you please repeat your question? Unknown Analyst: All right. Hopefully, it's better now. Yes, I was asking about the royalty rate during the Q1. So is it at the same level than last year? Or is it higher now as the Nubeqa sale has grew from last year? Rene Lindell: I don't think we comment on the royalty rates in that perspective as to where the tier breakpoints or so you'll have to probably wait for that calculation to be done a bit later during the year. Tuukka Hirvonen: Growing faster compared to previous year, we will be reaching the higher tiers earlier than last year. So in that sense, in Q1, also probably the average is somewhat higher than last year. Unknown Analyst: All right. Maybe then another question regarding the sales and marketing costs as they've been increasing. So could you roughly say how much there is like the actual costs? And how much are the end royalties? These are kind of causing the cost growth. Rene Lindell: Yes, of course, and he royalties are paying a role in their part, but also we have added sales force also to support, especially branded products in some European countries. So you will see both effects there visible that, of course, with Nubeqa growing quite a lot from last year's Q1, then, of course, those would be also visible in the sales and marketing. Unknown Analyst: Okay. And one more question regarding the R&D pipeline. So as you did have said that there is this one kind of the old study, which is not covering oncology. So I think it was last year exactly when you were putting this Tenax study in your pipeline. And could you remind us what was the reason to add that study back then to your pipeline? Why it was not there prior to year ago? You want to [indiscernible]? Liisa Hurme: Yes. That's a very good question, and thank you for asking so that we can remind -- I think that was the time when Tenax started the Phase III program for pulmonary hypertension. They had been working with levosimendan for a while, doing some confirmatory studies, but that was exactly the time when they were able to start the first study and then eventually later on last year, they started the next study or the second study for pulmonary hypertension. So there is no other reason for that. Operator: [Operator Instructions] The next question comes from Anssi Raussi from SEB. Anssi Raussi: Ssian Ssirau from SEB. One question from me regarding Nubeqa. So when we think about this early-stage indication for Nubeqa, what would be a reasonable time line to expect that you would expense for you because I have understood that Bayer is fully responsible for the development for now. Liisa Hurme: Indeed. This relates to the DASL-HiCaP study and the readout for this study, if I remember correctly, it's '28. Tuukka Hirvonen: Estimated in '28. Liisa Hurme: Estimated in '28. I think that the latest point for us to jump in and use our opt-in would be when we see the results of the study. Operator: The next question comes from Iiris Theman from DNB. Carnegie. Iiris Theman: I have just 1 question. So what pipeline is do you expect in the next 12 to 18 months? Liisa Hurme: Well, I'll start with our ambition to start Phase I study, at least one Phase I study with our biologics during this year, by the end of '26. And then if you ask for the next 12 months, of course, then we move to enter in clinical stage. So I think those are the one -- the major initiations of new projects. And then regarding the results, no major results that we would be expecting this year. Tuukka Hirvonen: With the exception of the LEVEL trial -- Phase III trial by Tenax in Q3 this year. Liisa Hurme: Yes. Thank you, Tuukka. But then in '27, the... Tuukka Hirvonen: ARASTEP. Liisa Hurme: ARASTEP will -- there will be a readout for ARASTEP in '27. Then again,-- what else did we have in '27? Tuukka Hirvonen: Current estimate for the women's trials with opevesostat. Current estimate is in the end of '27. We'll see how that pans out. And also for our first ODM-212 Phase II, so with the mono trial, current estimate is also in the end of '27, but it may move either direction, depending on recruitment rates and so forth. Iiris Theman: Okay. And anything about opevesostat, ODM-208 for prostate cancer? Liisa Hurme: Readout for both of the studies is '28. Tuukka Hirvonen: Yes. The estimated final readout is in summer '28 for both of these trials. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Tuukka Hirvonen: Thank you, operator. Then we'll turn to the webcast questions. So again, you still have the opportunity to type in your questions by using the webcast chat, if you wish. We have here 1 question coming from Shan Hama from Jefferies. So Shan is interested to hear that could we please provide an update on opevesostat timing. And if we could still see interim data this year following Merck's comments in '25 ASCO, so last year. Liisa Hurme: Well, I think I can only repeat what we said a minute ago that the readout for both -- the readouts for both of the studies are estimated to happen in '28. And regarding any interim results or interim analysis, I don't have information on that. So that should be asked from MSD. Tuukka Hirvonen: Exactly. Thank you, Liisa. So we have no further questions either from the webcast, and I think that we don't either have any follow-ups on the conference call line. So I think it's time to wrap up and some closing words, if we wish, Liisa. Liisa Hurme: Yes. I thank you for your attention and very good questions. And of course, I hope that you will be attending our upcoming events this year and have a nice rest of the day. Thank you.
Operator: Hello, and welcome to Gecina Q1 2026 Activity Conference Call. [Operator Instructions] Today, we have Benat Ortega, CEO; and Nicolas Dutreuil, Deputy CEO in charge of Finance as our presenters. I will now hand you over to your host, Benat Ortega, to begin today's conference. Thank you. Benat Ortega: Good morning, everyone. It's a pleasure to share an update of the execution of our strategy today. One word to begin with on rental income. Our rental income increased in Q1 on a like-for-like basis, up 2.3% to EUR 176 million. This again shows our ability to outperform indexation, supported by rental uplift and a consistently high level of occupancy. As expected, indexation is decelerating, reflecting the slowdown in inflation and construction costs in France last year with the usual lag effect embedded in our leases. On a current basis, rental income reflects the impact of the significant disposals executed last year as we recycled mature capital from residential assets into higher-yielding opportunities in the office segment. Occupancy remains high and broadly stable year-on-year with more than solid activity in Paris and an acceleration of our residential occupancy. The temporary increase in vacancy in Boulogne reflects the time required to release surfaces vacated following lease maturities last year. But we have signed several leases in Boulogne during Q1 and public transport will improve significantly with the upcoming arrival of a new metro ring line next year after some delays. Turning now to leasing activity. We started 2026 with a solid leasing momentum. It's been 23,000 square meters signed between January and March, securing EUR 18 million of annual rents on an average lease maturity of around 7 years. Around 1/3 of this performance relates to renewals, illustrating our ability to anticipate lease maturities and secure occupancy ahead of time, while the remaining 2/3 comes from new clients, reflecting continued business development. The development of our fully managed offices is also progressing very well. These represent more than 16,000 square meters and EUR 16 million of annual rents, marking a 33% increase compared to the figures we shared at the end of 2025. We are convinced there is a strong demand for high-quality, well-designed spaces offering more services and greater visibility, and we will continue the rollout of our food service business in the next quarters. On the residential side, leasing dynamics are also positive with 335 leases signed, up 12% on a like-for-like basis. This confirms both the strength of our operating housing platform and the relevance of our diversified offering. Let me now spend the time on the pipeline. We continue to see a lengthy activity and interest across all our developments, and that includes also T1 Tower now named Shape. Discussions are active and well qualified, involving a diversified mix of large corporates as well as midsized or small tenants. On several assets, we are running parallel expression of interest and discussions, which is a positive sign for demand depth. 60% of Signature, the first asset to be delivered end of '26 is now secured, including a landmark deal with the global real estate expert, JLL on almost 7,000 square meters and ongoing negotiations are occurring on several other floors. As you would expect, discussions are at different stages of maturity. For assets with later delivery dates, conversations are naturally at early stage, while visibility and conversion tend to improve as construction progresses and projects become more tangible for tenants. Lastly, portfolio rotation continued in 2026. The EUR 200 million disposals at 3.5% yield all at the full year are now fully completed. And in addition, we have secured a further EUR 50 million of disposals at a 2.2% yield, reflecting the quality and maturity of the assets sold. These proceeds will fund the EUR 265 million of development CapEx currently being invested in the four large flagship projects we are -- you are familiar with, targeting double-digit yields on CapEx. It clearly illustrates the value creation embedded in our capital recycling strategy. The repositioning of T1 is also progressing as planned. The tenant has moved, allowing us to start works early May, around 15 months ahead of lease expiry while securing rental income until June 2027 and therefore, meaningfully reducing the expected void period during renovation. Overall, these actions are fully aligned with our core objective of improving returns for shareholders while preserving a resilient and future-proof leverage profile. We remain disciplined and pragmatic in our capital allocation, continuously assessing all options with no taboo. One last word before turning to your questions. Based on the performance we have seen so far and our current visibility, we confirm with confidence the guidance we have already shared with recurring net income expected in the range of EUR 6.7 to EUR 6.75 per share. Operator: [Operator Instructions] The next question comes from Florent Laroche-Joubert from ODDO BHF. Florent Laroche-Joubert: I would have maybe two questions. So the first one on the leasing side. We understand that you have discussion in progress and you are confident about the leasing of your development project and prime assets. But what about Boulogne? So we have seen that vacancy has increased this quarter. So do you think that now we have touched a low point? And when do you think that Boulogne can be positive in terms of leasing activity and in terms of occupancy for Gecina? Benat Ortega: Yes. On Boulogne, I think we are close to the low point, obviously. We are releasing progressively the square meters we have available. We have 3 buildings there. We have signed, as I said, several leases already in Q1. I think leasing is under progress. So we should improve progressively the situation. And as I mentioned, the metro line, we are expecting the metro line for now three years. The train station is finalized and it should open probably late this year or early next year, and I think it will improve significantly the attractivity of that area. Florent Laroche-Joubert: Okay. So now meaning that we can expect more positive to come from Boulogne or neutral... Benat Ortega: Yes, it will progressively ramp up. Yes. Florent Laroche-Joubert: Okay. That's good. And maybe a second question on share buyback. So we understand that maybe you are today more open for share buyback. So how do you -- would you like to include it in your allocation policy and maybe at what share price could be interesting for you to look at share buyback according to the current market condition from the recent data? Benat Ortega: I wouldn't say we are more open or less open. Like we mentioned in the earlier calls, we have a triangle approach on capital allocation. Obviously, it starts from disposals, it needs to be in line with the objectives we have for the balance sheet. And then once we have the cash, we need to assess which is the best option. Obviously, and the best options depend on opportunities on the market and the share price and therefore, always linked to the cost of capital and the best use of the capital. So that's why we said with no taboos, we will find the best options based on those 3 elements, which is balance sheet, disposals and then use of proceeds. Operator: The next question comes from Valerie Jacob from Bernstein. Valerie Jacob Guezi: I just have some follow-up questions from the question that was just asked. Maybe on the vacancy, how do you see your vacancy rate evolving during the year? Do you think that it will -- in the office market, do you think you will go back up to where it was? Or do you think you will stay here or deteriorate? If you could give us some guidance on how do you see this evolving, that would be helpful. Benat Ortega: Yes. Thank you, Valerie for your question. As I always said, vacancy can fluctuate from a quarter to another around the figures we post in average. So this quarter, it was slightly down on the office. At the same time, you might have seen that it was significantly up on the resi. So I will not read across one quarter figure to determine what should be for the full year. That's a bit the situation. Like you saw office CBD, which was a big question on the market following ImmoStat news. We grew a lot our rents in Paris. We grew occupancy. Reversionary was significantly higher than last year. So I think -- but again, 18% reversion or uplift in average for Q1. I will not draw a line saying that it's annual figure. So I think it was excellent in Paris, a bit tougher in Boulogne, but big picture, we grew more than 1% our like-for-like above inflation. So big picture, I think it was a positive quarter and on long-term vacancy, I think it will improve over time, fluctuating obviously, from quarter to another. Valerie Jacob Guezi: Okay. And maybe also a follow-up on the share buyback. So I mean, I understand that you said if you dispose of some assets, you have all options. But maybe do you have any sort of financial metrics to share with us on, you want to reinvest at sort of 7%. And if you don't, then below this level, you think that share buyback will be more accretive? Maybe just like if you can share some numbers on how you think about it? Benat Ortega: Sure. I think the metric which is important is keeping our LTV where it is. So that's really our DNA. I think we don't want to buy growth with debt these days. I think the market is uncertain. Rates are pretty high this time. So I think keeping our A- rating is clearly a clear line for us in terms of strategy. That being said, then we calculate our cost of capital based on the current share price. We look at potential acquisition and what they can deliver and assess which is the best option, like I said. So based on a stable LTV at EUR 70 or EUR 80 per share, the equilibrium is around 6.57% acquisition. So that's a bit -- basically the metrics with the same LTV. I have in mind that the equivalent to buy EUR 100 million of assets is EUR 70 million share buyback to keep the same LTV. So that makes a bit the metrics flying on both cases. Operator: The next question comes from Benjamin Legrand from Kepler. Benjamin Legrand: Can you hear me? Benat Ortega: Yes. Benjamin Legrand: I just had one more time, a question about Boulogne, more for 2027. If you do expect some big tenant to be leaving at that time or not? Benat Ortega: No, in 2027, no major expiring in Boulogne. Have in mind that, over the last 3 or 4 years, 4 of our 5 assets have been vacated, and we have been capable, in fact, to release almost full Horizons Tower to 70% of Sources and probably we have released or renewed half of the Citylights. So obviously, it's a challenging area, but we see a decent leasing activity on the ground in Boulogne. So that's why I was commenting about the ramp-up after those departures from '22 to '25.` Benjamin Legrand: Okay. And if I may ask a second question. You are mentioning 6.5% to 7% acquisition would be interesting for you instead of share buybacks. I was just wondering if you could add more colors about the investment market today, if you see that kind of potential acquisition coming on to your table at the moment or if the market is really muted or not? If you could add some colors. Benat Ortega: Yes, sure. It's -- the investment market is pretty complex to read, especially after the rate increase, after the Iran war. It plays two roles. Obviously, more complex to sell at tight yields, and at the same time, it gives more room for maneuver to buy assets. So I would say the -- as long as we can continue to dispose at decent prices, obviously, it gives more opportunities to buy on the right locations, the right assets to generate growth in the future. But the investment market is pretty quiet since now more than that. Benjamin Legrand: But are sellers willing to be selling at 6.5% at the moment? Or do they prefer to just keep... Benat Ortega: No. The best assets, well-restructured, trade at significant lower yields. Some deals were even occurring during Q1, below 4% yields. But this is not the type of assets we try to buy. We try to buy complex situations where our integrated platform can generate better growth than other players. So typically where there is development risk or leasing risk or the capacity to generate better rents through our fully serviced office business. So we tend to be an operator instead of just an investor, and that's where there might be a gap between what can generate a passive investor and what we can generate. And that's typically what we did on Signature, on the Rocher-Vienne acquisition. There was clearly a difference in the underwriting assumptions between what we did and what basically we are delivering, and we are delivering over budget, especially in terms of rents and what a passive investor can generate. So that's those fractions where we play our role. Operator: The next question comes from Veronique Meertens from Van Lanschot Kempen. Veronique Meertens: I wanted to focus a bit on the resi bit. Obviously, a very strong performance, plus 7.5%. Could you give some additional color on the exact drivers? Is that mainly coming from those transformations and the service product? Or do you see a strong performance in the resi segment in general? And also, again, some disposals in that market. How are those discussions going? Do you see more potential there? And who are the buyers there at the moment? Benat Ortega: Two questions in one. We commented on last year, on the fact that we were significantly transforming the way to operate our resi platform. Coming from really traditional resi where it was just flat by flat pre-leasing, no furniture, no service and so on, where we have transformed our business model towards different kind of offerings in the same building with services on top, so that each square meter has the best profitability. So each time a flat is vacated, we try to find the best way to maximize shareholder value. Therefore, sometimes it can be co-living. So we split into several rooms, we provide services to students and then we lease up the rent. Sometimes it's just furnishing the flat. Sometimes it's B2B deals with, I don't know, expats or embassies. So each time for one flat, we try to find the best solution. Obviously, it's more management intensive. So we have to change our processes, our teams, our concierge and so on to be capable to address this more premium and valuable clientele. But that's starting to pay off with an improved occupancy and also uplift -- more regular uplifts because those tenants tend to rotate faster and we can capture better growth. More generally speaking, in terms of resi, in terms of leasing, we are not really a fREIT proxy of the market. Our portfolio is 80% in Paris. Everything is next to Paris. So obviously, we have a high-end clientele, international clientele, with affluent people. And therefore, we -- the role we have is try to offer them services that they can't find elsewhere, fitnesses, co-working places, laundries, experience homes that they can't find in that super fragmented living space in Paris. Paris is mainly owned by individuals owning one flat, and we can provide something really different. And that's a different situation against other cities where you find more institutional investors, which are delivering those projects. So we make the difference with the fact that we own large buildings, and we can offer services that they can't find in the, let's say, general market. In terms of disposals, the disposal activity, a bit like in offices is pretty quiet, but we have found different type of investors willing to buy some residential assets last year and when we continue this year. It can be pension funds, it can be insurance companies, it can be state-owned entities which are willing to expand their living platform. So we see decent appetite on the living as a whole. So bed and shed looks attractive these days. And then we need to find the guys which are willing for the most prime location, willing to pay for the decent price. Veronique Meertens: Okay. That's helpful. And maybe one additional question on the resi. Looking at your credit rating, does S&P take into account that you have sort of like a diversified portfolio? In other words, could it have an impact on selling more resi towards your credit rating? Or is that not an issue at all? Benat Ortega: The credit rating is obviously a series of combining objectives between liquidity on the bond market, additional undrawn credit lines that we are providing future liquidity. It's also LTV. It's also ICR, which is excellent for us. It's also the quality of the portfolio we own, both resi, that plays a role, but also the primness of our office portfolio and the liquidity of the assets that shows that we have capacity, in fact, to manage those credit objectives. So it's really the combination of all that. Resi with its stability and growth that you can see obviously plays a role, but it's in a general equilibrium that we try to keep. So everybody has in mind the 40% LTV, but it's more than that. It's also liquidity on the debt side, liquidity on the asset side and asset quality. Veronique Meertens: Okay. So -- but you don't per se, foresee an issue if you were to sell more resi, that S&P could look at you differently? Benat Ortega: Not specifically if we do it well on all the other criteria. Operator: The next question comes from Ana Escalante from Morgan Stanley. Ana Taborga: I have a question regarding your target yields for acquisitions and marginal CapEx. I just wondered whether you are thinking about the headline rents or you are thinking about cash returns? Because as we have seen incentives in Paris are quite high, particularly in the peripheral areas but in Central Paris above 15%. So my question is how you look at these returns, right? And how do they look on a cash perspective right on headline rents? Benat Ortega: When you look at our Signature acquisition, the incentives are pretty low and rents are probably 20% higher than what we expected. So I think we have shown through that acquisition that we are careful in our underwriting, and we can generate decent returns on what we buy. Ana Taborga: But what's your guidance... Benat Ortega: Return on CapEx are higher than double digit. So they are significantly above 10% return on CapEx. Ana Taborga: But in terms of cash returns, both on acquisitions and CapEx, what are your hurdle rates, more or less? Benat Ortega: I will rephrase what I said earlier. I just said that because one of your colleagues asked me the question, at between EUR 70, EUR 80 per share, the equivalent to 6.57% return, cash flow return. So that's a bit what we try to achieve. Operator: The next question comes from Francesca Ferragina from ING. Francesca Ferragina: Still another little question on the investment. There is a pretty sizable portfolio coming to the market in Brussels, the one related from Aedifica Cofinimmo. What's your view on the merger market? And do you have a knowledge of this portfolio? Benat Ortega: You are referring from -- about the office portfolio of Cofinimmo. Francesca Ferragina: Yes. Benat Ortega: We are mainly a capital city -- large capital city operator. So what we like is diversified leasing base, strong and profound leasing market, which is probably not the pure definition of the Brussels market. So very happy to be in Paris, like you saw, that's the way for us to generate growth is, especially the diversity of the tenant base we have and the performance of our leasing market. Operator: There are no more questions at this time. So I hand the conference back to Benat Ortega for any closing comments. Benat Ortega: Thank you all for listening to the call, for your questions and see you during the next quarter. Bye-bye.
Emelie Alm: Good morning, everyone, and welcome to the presentation of the first quarter results 2026 for Husqvarna Group. My name is Emelie Alm, and I'm joined here today by our CEO, Glen Instone; and our CFO, Terry Burke. So Glen and Terry will walk you through the presentation, and then we will have a Q&A session. [Operator Instructions] So with that, I would like to hand over to you, Glen. Glen Instone: Thank you, Emelie, and a warm welcome from my side. So let's jump straight into the presentation. Q1, to summarize, off to a very solid start despite, of course, the continued uncertain market sentiment that we see out there, particularly around geopolitical tensions. We've seen a strong growth in our core portfolio, our key strategic growth areas. We're very pleased that our EBIT has expanded with some 10% given the strong product mix, but also a very good start to our savings program. From a strategic execution perspective, we've got a very good 2026 ahead of us in terms of product launches, and Q1 has started very well when it comes to our product launches ahead of the season. We made a very good start around the strategic portfolio management that we launched back in December, and we'll come back to that later in the presentation. So all in all, 2% organic sales growth, EBIT expansion to just over SEK 1.7 billion and a 12.3% operating margin. So to highlight some of the strategic areas during the quarter. Innovation. We're very, very proud, and I'm really happy to really talk about our innovation that we're bringing to the market in season '26. All 3 divisions are contributing here. Very happy to see the strong range of residential robotic lawnmowers that are coming for the small and midsized gardens, our 300 Series range, really moving the needle towards boundary wire-free AI vision technology. We also have an enhanced range of 400 Series product under the NERA brand, NERA range that also continues to expand and enhance our vision offering. Likewise, in the Gardena division, a strong range of watering products that really enhanced the first quarter result with the simply classic range of nozzles and sprayers as well as a strong range of watering controls. In Construction, we've actually brought a good new range of floor saw blades to the market that really enhances our sawing and drilling business portfolio unit. So that's just a flavor of what we brought during the first quarter. So a strong innovation pipeline already coming through in the first quarter. From a portfolio management perspective, when we launched this in December, we continue to enhance our operating model. This is where we will look much more strategically at our portfolio, grow in certain areas and, where we are not performing as well as we should be, we clearly need to turn it around or, in some cases, exit that portfolio. What I am pleased to see is we already see early signs of this coming through, and we see that in the results. We've enhanced a lot of our leaders. We've changed some leaders during the first quarter of this year to really drive those business portfolio units. So the operating model starts to get traction. Operational excellence. I'm really pleased that we got off to a good start when it comes to our savings program. We launched a SEK 4 billion cost-out program, and we've made a good start with some SEK 245 million in the first quarter, really coming through from some savings we found in sourcing and actually simplifying design, really, really supported by a strong complexity reduction already during the first quarter. So all in all, off to a good start. If we look at the sales development. Then as reported, our sales was minus 5%. That is actually including a currency headwind of minus 7%. So organically, we grew with 2%. We've seen organic growth in the Husqvarna Forest & Garden division with 3%, growth in the Construction division with 1% and a 1% organic sales decline in Gardena. As mentioned, very strong growth in our key portfolio areas, particularly around robotics, watering and handheld products. What I am pleased to say is actually we've seen a growth in all of our regions so far in quarter 1. So we're very pleased to see that. It's been some time since we've reported a strong growth or growth across all of the regions. Just to remind you what we launched back in December around the business portfolio units. We'll come back to this time and time again. We have clear segments that we're operating in what we call profitable growth. You see there are 5 key business portfolio units. Really pleased to actually say 4 of the 5 have shown growth actually during the first quarter of 2026. In the middle of the page, we have 3 which we are in increased profitability, where we really expect to grow in line with the market. In the profitable growth segment, we expect we can grow actually beyond the market. On the left-hand side is the turnaround segments where actually we've seen a continued challenge during the first quarter in all 3 of those areas. We'll come back -- and I'm very pleased actually with the plans we have in place around all of the areas, but particularly around the turnaround business portfolio units. And we'll come back to you in due course and report on them. From an earnings perspective, Terry will take us through the bridge later in the presentation. But as mentioned, we managed to expand the operating income to just over SEK 1.7 billion from SEK 1.56 billion in the prior year, resulting in a 12.3% operating margin corresponding to 10.6% last year. And really, this is a volume increase, a price increase, improved product mix, but also the result of strong cost savings. We did, however, have a currency headwind as well as a tariff headwind that culminated to some SEK 115 million and, again, Terry will take us through more of the details later in the presentation. Going into the divisional performance. If we look at Husqvarna Forest & Garden first. We saw a 3% organic sales growth, growth in all regions, which we're very pleased to see and growth in our key segments: key segments of robotic lawnmowers and key segments of handhelds. Both residential robotic lawnmowers grew as well as the professional robotic lawnmowers. So very pleased to see. So from an earnings perspective, of course, we got an improvement from the volume and improvement from the mix, but also, of course, a contribution from the cost-out program. There was a slight positive tailwind from FX impacting the Forest & Garden division, which, of course, also improved the margin. From a Gardena perspective, the top line organically declined with 1%. However, I would say it is fairly polarized. And by that, I mean we saw a strong growth in the strategically important watering business portfolio unit and a continued decline in the Powered Garden area. So strong, strong growth in watering, as I said, and we're very pleased to see that. However, the challenge remains around the Powered Garden business portfolio unit, and we'll continue to define and refine that turnaround plan, and we'll come back in due course. But I'm very pleased with the plans that the team have in place to turn around this BPU. So despite the tough top line, actually, the division managed to improve the earnings, which we're very pleased to see. So we actually saw a 10% expansion in the EBIT, really driven by strong product mix because of the watering growth and a continued strong development around the savings program, negative impact from lower volumes, negative impact from tariffs and also a slight negative impact from FX of some SEK 13 million. Moving over to Husqvarna Construction division. We actually saw a growth of 1% organically. Actually, we saw a growth in the North America region and a softer European situation. However, strong growth when it comes to sawing and drilling, one of the profitable growth areas within the portfolio, and also growth when it comes to surface preparation as well as a strong aftermarket development in the quarter. However, a continued negative when it comes to the Compaction Placement and Demolition part of the portfolio, again, in the left-hand side of that previous page I showed you. Construction is actually more exposed to FX, and we saw a negative headwind of some SEK 43 million because of the heavy presence in North America but also actually a negative headwind by way of tariffs and raw materials. So despite those headwinds, we still managed SEK 110 million in operating income in the quarter for Construction. So all in all, we're very pleased with the divisional performance. At that, Terry, I pass over to you. Terry Burke: Thank you, Glen, and good morning from my side to everybody. The Q1 EBIT bridge: 2% organic sales growth and a 10% EBIT growth moving to a 12.3% margin. If I walk you through the bridge, starting from the left going over to the right. We had a positive volume impact in the quarter. As we talked about, we had organic sales growth and we also had favorable mix. The favorable mix was really coming from robotics growth, handheld growth and watering growth. Those were the main drivers for the positive mix. However, this was partly offset by inflationary cost pressures that we've incurred during the first quarter. Moving on to the next bucket, cost savings. We've delivered SEK 245 million of cost savings during Q1, and we feel very pleased about that. We have guided roughly SEK 800 million for the year. We still hold to that SEK 800 million. We were able to take, let's call it, perhaps some of the lower-hanging fruit early in the year. So that feels good that we're able to address that, and we continue to drive our cost saving program. As Glen mentioned earlier, cost savings predominantly coming through from sourcing and design to value. Moving on to price. We had a small positive price. This is a net price improvement in the quarter. We did have price decline in the robotics. And of course, the other categories had a positive price development, ending up with a small net positive in price. Transformational initiatives is something, of course, we want to continue to invest in. These are our strategic areas. And we invested some SEK 50 million during quarter 1. Currency, we had quite a significant currency headwind last year. This has now slowed down. We only have a negative SEK 30 million in quarter 1. So that was good to see that, that's starting to play out. Just to give you some feel for how we see currency for the rest of the year, we expect another negative quarter in quarter 2 and then a slightly positive in the second half of the year. So for the full year, we expect a negative currency of some SEK 60 million to SEK 100 million negative, depending, of course, how it plays out. Tariffs in quarter 1 was a gross negative SEK 85 million. Our previous predictions, previous tariff rates, we talked about some SEK 200 million to SEK 250 million gross headwind for this year. We now see that being around a negative SEK 150 million, so a slightly improved situation from the tariffs. So negative SEK 85 million, and the rest of that SEK 150 million negative direction will come during Q2. So with that, we landed just above SEK 1.7 billion of EBIT, 12.3% margin. Cash flow. Maybe the first thing to point out is we have changed the way we report cash flow, just to make people aware that now, going forward, we will talk about free operating cash flow. Previously, we reported on direct operating cash flow. What you can see in the quarter was a negative SEK 1.1 billion. And really, this is impacted by timing, and the real movement was the change in net working capital. There's two elements to that. One is we currently stand with higher accounts receivable at the end of Q1, and that was really driven by a stronger sales development in the second half of Q1, which meant we ended the quarter with higher accounts receivable. The second one was we had lower trade payables. And I would say we are more normalized on our trade payables levels now. Last year was slightly inflated. So a more normalized situation there. But there are timing issues for both of them, and worth pointing out, quarter 1 is traditionally a negative cash flow quarter. Return on capital employed, one of our new financial targets and metrics that we launched in the Capital Markets Day in December. We've improved our return on capital employed to 7.6% from a 6.5% same time last year. So it's good to see how we've started to see an improved situation here. That's really driven by a couple of factors. First of all, we have an improved operating income. And secondly, we are seeing lower capital employed, which you can see on the chart in front of you, around SEK 3.5 billion on average lower capital employed over the last 12 months. And that's really driven by we've lowered our borrowings. We've had a couple of good years of cash flow, we've been able to lower our borrowings, and that has had a positive effect. So good development on the return on capital employed. Balance sheet. We continue with a solid balance sheet and a good financial position. Maybe a couple of things to call out here. Inventory, we are some SEK 900 million higher. If you adjust for currency, it's actually just above SEK 1 billion higher inventory. And we would say we are ready for the season to start. Quarter 1 is a sell-in season. Quarter 2 is really, we talk about, where the music plays and the sellout when the season starts. So we have good season readiness. We have good inventory around us. So we're ready to go for the season. Trade payables, I did already cover that in the cash flow part. But just again to highlight, we have higher trade receivables. It's a timing effect due to the stronger sales development in the second half of Q1. Borrowings, we've lowered by some SEK 1.5 billion compared to March '25, as you can see. And trade payables, as I mentioned earlier, some SEK 1 billion lower, and that's really again a normalized situation this year compared to slightly above normal last year timing effects. So moving on to our debt position. Our net debt/EBITDA ratio is now at 2.0 compared to 2.5 this time last year. So again, we're driving this in the right way. We lower our borrowings. Our net debt position is SEK 13.8 billion, which is pretty flat to previous year, which was around SEK 13.7 billion at that time. So a good progress on our net debt/EBITDA. Our debt maturity profile, I would say, is healthy, as you can see in the bottom chart here. And we also successfully refinanced a new 5-year bond of some SEK 1.1 billion during February 2026. We remain investment grade, BBB- with a stable outlook. With that, Glen, I pass back to you. Glen Instone: Thank you, Terry. And just to wrap up the quarter 1 presentation. So as said, a solid start to the season despite the uncertainty we see in the world. Organic sales growth of some 2%, growth in 2 divisions and a slight decline in one. A good expansion of our operating income, some 10% expansion driven from volume improvement, a stronger mix and a good start to the savings program. From a strategic perspective, just zooming out, good product launches, a great innovation pipeline. We're making good progress with the strategic portfolio management. So I'm very, very pleased with the start of the year. Good savings, good innovation and operating model starts to get momentum. So with that, Emelie, I think I'll pass back to you. Emelie Alm: Super. Thank you, Glen, and thank you, Terry. So with that, we would like to open up the Q&A session. And I will actually start with one question from the webcast, and it's from Adela Dashian from Jefferies. And I mean, we updated the tariff guidance already so you have this scenario in there already. But how do you see the April change to the Section 232 impacting our tariffs? Terry Burke: Yes. And that is all included in the communication that I gave you. We think we see a roughly exposure of SEK 150 million gross tariff impact for the year. As I said, SEK 85 million is already taken in Q1. So there's a little bit more to come. But I think the important thing is, of course, mostly mitigated through price increases. Emelie Alm: Thank you. And operator, do we have any questions on the conference call? Operator: [Operator Instructions] We have a question from Fredrik Ivarsson, ABB. Fredrik Ivarsson: Maybe first question on demand. We've seen consumer confidence coming down quite significantly, at least in some countries. Can you say anything about how consumers have reacted initially? I know it's early in the season, but any signs from that in terms of consumer behavior? Glen Instone: Fredrik, I think it's fairly early to say. Of course, as we mentioned, Q1 is our sell-in quarter, really preparing for the season. And now we're hoping that Q2 is, we often say, where the music plays, where the demand really happens. So I think it's a little bit early to say, but we're very, very happy with our sell-in and very, very happy with our strong product launches. But too early to say around the consumer demand at this point. Fredrik Ivarsson: Okay. Fair enough. And then a follow-up on the amendment of the 232 tariff. So you lowered the tariff guidance a little bit. Is that due to the amendment of Section 232? Terry Burke: It's all factors considered. Of course, there's been quite some changes. So I think it's a lot of moving parts. But ultimately, it's everything that we know of today and, of course, it can change. But everything that we know of today is all baked into those numbers that we communicate now. Fredrik Ivarsson: Okay. But should we assess that under this new sort of tariff structure, you actually expect lower tariffs? Terry Burke: Yes, yes. Fredrik Ivarsson: Okay. Okay. Good. And then on the current raw material cost inflation, can you say anything about what you're expecting in terms of input cost inflation and where you potentially could expect that to hit your P&L in terms of timing? Glen Instone: Yes. If we look at this, of course, what's going on in the world right now, particularly the Strait of Hormuz impact, we're seeing that would impact us across two areas, raw materials and logistics. We think full year impact this year would be around SEK 300 million as we know today, if it continues through the remainder of the year. That will be SEK 100 million secreting to logistics and SEK 200 million relating to raw materials. And really, the main raw materials that are impacted are plastics, aluminum and steel. And they take account of about 60% of our raw materials, and they are three main raw materials that are exposed. But we would see again around SEK 200 million from raw materials in the remainder of the year given what we know today. But just to highlight though, of course, mitigated by price. We will pass that price on. Yes, that's the gross impact. Fredrik Ivarsson: Very clear. And last one maybe. And potentially I missed this, the line broke up a little bit, but did you say anything about the growth in robotics? Glen Instone: We did. So we had a strong growth in robotics actually, particularly if I look at this in the three areas, we should say. Strong growth in professional robotics under the Husqvarna brand, strong growth in residential Husqvarna robotics as well. And we actually saw a decline in the Gardena-branded robotics, but overall, a growth in robotic lawnmowers. Operator: The next question is from Bjorn Enarson, Danske Bank. Björn Enarson: Talking a little bit about the good development in Q1 and what that is telling you. I mean, are we basically saying that the expectation are kind of downbeat and this is kind of a normalization? Or do you believe that retailers and dealers are turning more positive on the season, betting on the staycation kind of environment, if you understand that? Glen Instone: Yes. There's probably a part of that in there, Bjorn. I think the big thing is during your Q1, it's very much preparing for the season. Strong portfolio, strong innovation, so a strong sell-in in preparation for the season. That's how we're seeing this. Anything to add, Terry? Terry Burke: I think we can only control, of course, what we can control and we feel in a good position going into the season. Of course, it's highly uncertain how things are playing out. But there is an argument for a positive staycation effect, but there is also a counterargument of weak consumer sentiment, holding their money given the highly uncertain times and cost of living increases. So it's very, very difficult for us to judge and have an opinion. But we're ready for the season to start. Björn Enarson: But given that Q1 developed well, I mean, that must say something about sentiment among dealers, although they're coming from low level, if you understand what I mean. Glen Instone: Yes. That's absolutely valid, Bjorn. We do see maybe a positivity from our channel partners that are willing to take in the inventory. And of course, they've selected Husqvarna Group as their supplier. So that is a positivity. And again, well prepared for the season with what we have in the channels. Björn Enarson: Yes. And second question, I mean, you're talking a bit about the inventory situation that you are well prepared but, also again, that it's very uncertain given where the world is here and now. How should we think about that, I mean, if it's not developing along the lines of your expectation? Are we in a difficult situation? Or how should we look upon this level of inventories? Glen Instone: So I think you look at inventory in sort of two lenses here. One, of course, is our inventory that we hold in preparation for the season. And as Terry mentioned, this is slightly higher in preparation for Q2, and we feel well prepared. And then, of course, is the inventory with our trade partners as well that we monitor. And again, we seem to be on a somewhat normalized level overall with our trade partners, 1 or 2 high levels on some segments. But we're keeping a very, very close eye on the inventory levels both, of course, with our trade partners and also making sure we address our own internal inventory levels. Björn Enarson: Okay. And then maybe a quick one on the Gardena robotics. You talked about it was a decline. Was this a little bit of an intentional decline? Or I mean, are you losing share due to that you don't want to participate full out? Or is it a mix within the mix situation, where low end of the low-end robotics are perhaps growing better, et cetera? Glen Instone: No, we did expect a decline this year. It's a double-digit decline for robotics. We knew that from the listing situation. We knew that from the competitive landscape. So it was very much in line with what we thought going into the year. At the same time, the new product launches we've had under the Gardena brand in robotics, particularly the Gardena SILENO sense, that's been well received. So we've got some positivity within the general decline for Gardena robotic lawnmowers, but in line with our expectations for Q1. Operator: Next question is from Alexander Siljestrom, Pareto Securities. Alexander Siljeström: A couple of questions from me. Starting off with the cost savings program that came through there in Q1. Obviously, very impressive. Do you expect sort of the same rate here in Q2? And also if you could talk about the sort of full year guide on the run rate. Terry Burke: Yes. First of all, I absolutely agree. We feel pleased with quarter 1, how that has developed, and SEK 245 million is a good number for quarter 1. As I did say, perhaps we picked up on a little bit of the low-hanging fruit during that first quarter. So that was also important. We are working hard. We are driving cost out of this organization. We were very clear on that at the Capital Markets Day. We have a big target and we are working hard towards that target. We hold at the SEK 800 million for now. Again, we are working hard towards it. So we'll have to see how that plays out. But for now, we still stay with the SEK 800 million as the guidance for the year. Alexander Siljeström: Okay. Cool. And anything for Q2? Should we expect sort of SEK 200 million then there given the target or SEK 250 million? Or is it too early to say? Terry Burke: It's too early to say. But I mean, directionally, I'm thinking it's going to be around the same, SEK 200 million, SEK 250 million. Alexander Siljeström: Yes. Cool. And then maybe just on the growth in the robotics segment. You mentioned that Gardena was down double digits. Could you talk about the growth for sort of the non-Gardena robotics, so residential Husqvarna and professional? Was that in the sort of double digits or high single digits? Or any color there? Glen Instone: So if we look at the Husqvarna robotics, we did have a double-digit growth very much across two different segments, professional and residential, and very much in line with the guidance we provided at Capital Markets Day. So we're pleased with the start for Husqvarna. Very strong innovation pipeline, great product launches in Q1, and we feel we're very well prepared and we're really taking the shift as we move over to boundary wire-free and different vision technology. Alexander Siljeström: Cool. And maybe just a final one on North America. Impressive that you're back to growth there as well. Could you talk about sort of the main product segment drivers that you saw there and also maybe the impact from the storms? Glen Instone: Yes. So I think it's a valid point you raised on storms. We actually saw a good growth in handheld products in North America, which is good to see. Actually, a decline with wheeled. We saw a growth in the whole construction assortment in the quarter as well in North America, and we also saw a growth in watering under the Orbit brand in the Gardena division in the quarter. So growth in construction, growth in handheld products and growth in watering products in the U.S. Operator: Next question is from Johan Eliason, SB1. Johan Eliason: Yes. I guess this was me. It's Johan Eliason from SB1. Can you hear me? Emelie Alm: Yes, Johan. Johan Eliason: So I was just wondering a little bit about the robotics, coming back to that. You mentioned strong growth for the professional and the Husqvarna-branded residential. How would you say the margins for you are developing on those products and categories in a year-over-year perspective? Are you holding up the margins on that part of the robotics business, improving or declining? And any indications there would be helpful. Glen Instone: By and large, Johan, we are holding up margins with the Husqvarna-branded robotics, very much in line with our business plans. So holding up the margins, to answer, yes. Johan Eliason: Good. And on the Gardena where you see the decline, is there a mix? So you said that the new introductions are at least doing well there. Is that allowing you for a sort of a positive margin mix so you can hold it there as well? Or how should we think about the margin year-over-year on those products? I remember you did have some price cuts a year ago maybe and then still some sellout. So maybe that is also helping that part of your robotics offering more. Glen Instone: Yes. We mentioned price in the presentation. And the negative price on robotics, it really came from the Gardena assortment, particularly the older technology. Whereas the newer technology, the new launch I mentioned, that held up. So we see more positive margin from the new products and a negative margin from the older products. But all in all, margin has moved down for the Gardena robotics assortment. Terry Burke: And maybe just to be clear. The Gardena robotic is margin decretive both to the division and to the group. Johan Eliason: Okay. Okay. Good to know. Then if we look at the consumer segment now when you are transitioning to the wire-free solution. The total cost for the consumer, including with the old solution, wires and then maybe having some external help to install it vis-a-vis buying the wire-free solution today, is that a bigger total ticket for the consumer on the Husqvarna-branded side? Or is it lower? Or it's basically the same? Glen Instone: It's basically the same. Actually, Johan, we see very comparable prices year-on-year in the marketplace if we -- say, for 1,000 square meter machine, we see very comparable prices. Of course, it's higher technology and, hence, we need to take cost out of the system to maintain those margins. And that's exactly what we're doing. Emelie Alm: Thank you. Before we go on with the conference call, we can maybe have a follow-up. It's from Stefan Stjernholm regarding the inventory level at resellers. So if you can elaborate a bit on the regions and so on. Glen Instone: Yes. Stefan, so if we look at the inventory in the trade, which I understand your question is, we actually we see it normalized in Gardena, per se, with the exception of watering, and it's slightly higher given we've had a strong Q1 sell-in. So that's where it actually stands out as being slightly higher. I say that's applicable globally. If we go to Husqvarna Forest & Garden division, handheld is normalized globally. We have wheeled normal in Europe, normal to slightly higher in North America. And robotics is normal to slightly higher globally as well, again, with a very, very strong sell-in in Q1 in preparation for the Q2 season. And Construction, I would say across the board is normalized. There is still a reluctance to take on too much inventory from our construction partners. That has been the case for the past couple of years given the uncertain times we're living in. So I would say a normalized situation within Construction. Operator: We have a follow-up question from Fredrik Ivarsson, ABG. Fredrik Ivarsson: A short follow-up on the cash flow and the timing impact. Should we expect that to sort of fully reverse in Q2? Terry Burke: Yes, Fredrik. As I said during that slide, it's really a timing issue. And of course, having a stronger second half to quarter 1 from a sales perspective meant that the accounts receivable landed higher at the end of the quarter. It's purely a timing impact, and that will flush through during Q2. So yes, I would say it will all get corrected just as the timing flows through. Glen Instone: We're happy to have higher accounts receivable, Fredrik. Good indication of strong sales. Emelie Alm: Thank you. And with that, operator, I don't think we have any further questions. Or do we? Operator: There are no more questions from the phone. Emelie Alm: Okay. And we've been through all the questions on my iPad here. So with that, would you like to wrap up a little bit? Glen Instone: Absolutely. So again, thank you for joining our quarter 1 report. Off to a solid start. This is a journey we're on and it's a long transformation journey, but again, good to get a strong Q1 behind us. We are executing on our strategic areas, very strong portfolio management, good cost savings and a very strong innovation pipeline. So at that, we wrap up. Thank you. Emelie Alm: Yes. Thank you. Thank you for listening. Terry Burke: Thank you.
Operator: Ladies and gentlemen, welcome to the Schindler Q1 Results 2026 Conference Call and Live Webcast. I am Valentina, the Chorus Call operator. [Operator Instructions] the conference is being recorded. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Lars Brorson, Head, Investor Relations. Please go ahead. Lars Wauvert Brorson: Thank you, Valentina. Good morning, ladies and gentlemen, and welcome to our Q1 2026 results conference call. My name is Lars Brorson. I'm Head of Investor Relations at Schindler. I'm here together with Paolo Compagna, our CEO, and Carla De Geyseleer, our CFO. As usual, Paolo will discuss the highlights of our Q1 results and our 2026 market outlook, and Carla will take us through the financials. After the presentation, we are happy to take your questions. We plan to close the call at 11:00. With that, I hand over to Paolo. Paolo, please go ahead. Paolo Compagna: Thank you, Lars. Good morning, everyone. Glad to be back to report on our Q1 results. And overall, I'm pleased with the start we made in '26, continuing our strong operational momentum from the last year. At the same time, we faced a very volatile macro environment, which we are responding to more during this call. Let me start with growth. In terms of order intake, we grew close to 3% in Q1. Well, this is still not the growth level we would be happy with, but let us look together at 3 important points. First, we are pleased with our product momentum. We are seeing very good traction with our new modular platform and the new installation markets. You remember this was started to be rolled out '24 in Europe, and continued in other zones in '25. Not only is growth picking up here, but we are also seeing very visible improvements in terms of field installation efficiencies, which helps. Secondly, the ramp-up in our new mid-rise product in the U.S. continues to exceed our expectations. And thirdly, the rollout of our standardized modernization packages is gathering pace. Also increasingly facilitating growth in modernizations outside of our existing maintenance portfolio. And finally, in terms of large projects, we are seeing some improvements here, too. Large projects grew in Q1 versus the first quarter of last year, and our project pipeline looks promising for the rest of '26. An additional word on modernization. Growth here continues to stand out. Order intake was up 15% in the quarter. And I'm really pleased to see that our revenue growth was even higher. Our backlog execution continues to move in the right direction globally, and all our regions grew modernization revenue by double digits in the first quarter. We continue to expand our supply chain and field installation capacities which make us confident that we will continue to execute our modernization backlog successfully throughout '26. Looking at total group revenue growth, we were off to a slightly softer start in '26 growing 1.7% in Q1. Revenue in our new installations business was down high single digits in the quarter, with China still the main headwind. But we confirm our full year guidance of a low to mid-single-digit growth as Carla will share with you the details later. Now operationally as I said, I'm very pleased with the quarter. Our operating margin expanded by another 100 basis points to 13% in Q1. Seasonally, our lowest margin quarter of the year. And operating cash flow was strong again this quarter at over CHF 500 million. But let me briefly also talk about the broader operational environment as we see it today. It is clear that the crisis in the Middle East brings some challenges we need to respond to. As the revenue contribution from the Middle East makes up less than 2% of the Schindler Group, the top line actually -- the top line impact actually remains modest. But serving our customers in this region has been met with some challenges in the past 2 months, particularly for the new installation deliveries. We have currently around 200 units produced, which I don't hold or in transit and which we are actively looking to deliver to customer sites via alternative routing to still active parts. But outside of that, even the broader impact on our supply chain remains limited, we are facing some additional cost inflation in terms of logistics, fuel and energy costs and commodities. Carla will provide you all the details on the expected cost impact. In terms of mitigation measures, we are actively working on pricing actions in order to offset this cost pressure. Both list prices as well as surcharges across new installation, modernization and our service businesses. as well as working closely with our supply chain to manage efficiencies on the supplier side as well. Currency translation is significantly impacting our financial performance with the continued appreciation of the Swiss franc. This quarter, we faced an FX headwind of over CHF 200 million to our order intake at 7%. And Q1 match with that 1 of the highest hit quarters on record in terms of FX headwinds. Last but not least, a word on sustainability and our consistent effort in product development. We are pleased to be awarded the ESG Award '26 for our low carbon emission steel elevator pilot at the MIPIM '26. Many of you know the MIPIM is one of the leading real estate events globally in the annual calendar. The award comes at a time when we all are reminded of the importance of energy efficiency, and we are proud to be leading the industry with the first ever low carbon emission steel elevator installation. Turning now to Slide 4 and our order intake in the first 3 months of the year. In service, our maintenance portfolio continued to expand with the strongest growth in Asia Pacific, excluding China. In Americas, while we saw growth in value terms, our selectivity was leading in units recaptured to a modest decrease, confirming our overall strategy. But next, we expect to see a gradual improvement over the coming quarters. In modernization, we have been able to continue with the strong momentum recorded in '25, with the only exception being Asia Pacific, excluding China, where orders marginally decreased primarily due to lack of large projects in the quarter. China again was the standout with growth well into double digits as we continue to benefit from the bond program further scaled up from '26 -- up for '26 from the 120,000 elevators units replaced last year. In new installations, our global order volumes declined by more than 5% to China. In the rest of the world, our NI, New Installation orders grew double digit, driven by EMEA and Asia, again, excluding China. Moving to the market outlook on Slide 5. We have decided to keep our outlook unchanged for the time being, while continuing to closely monitor the effects from heightening geopolitical tensions on construction markets, both in Middle East and globally. Foreign investment has played a significant role in driving growth within Middle Eastern real estate markets in recent years. Therefore, we remain attentive to any potential impact on investment flows to the region. Construction input costs were still at elevated levels already prior to the onset of the conflict in Iran 8 weeks ago. These, together with rising oil and gas prices are likely to contribute to further cost increases placing burden on builders and subsequentially on homebuyers. The surge in inflation has also altered the global interest rate outlook from a trajectory of steady reductions to one that now carries an increased risk of further rate hikes with implication for both demand and supply within the real estate sector. In spite of these challenges, we did observe robust activity modernization markets across nearly all regions. However, at this time, we are not revising our outlook upwards, preferring to await confirmation of the continued strength in the coming quarters. In installation, just to call out a few selected markets, construction activities continued to gradually pick up in Germany with multifamily building permits up close to double digits on the 12-month rolling basis and strong growth in new orders recorded by builders in the residential sector. Activity in Brazil remains solid, driven by affordable housing. And in the U.S., there have been mixed signals as multifamily permits and starts have risen in spite of Architectural Billings Index remaining below 50 for 33 consecutive months. In China, construction remains under pressure with all key lead indicators such as floor space started and real estate investment down by more than 10% again in Q1. With that, let me turn over to Carla to walk us through our financial results in more details. Carla Geyseleer: Thank you, Paolo. Good morning, everybody. A pleasure to have you on the phone. So let's take a look at the financial results. So Slide 7, so the usual summary slide of the current quarter compared to the last 4 quarters. As Paolo said, we are pleased with the operational momentum in the first quarter. Margins up 100 basis points year-on-year, both reported and adjusted EBIT. And another quarter with a very good operating cash flow, even if we didn't quite hit last year's exceptional high level for the first quarter. Finally, we moved our net profit margin into double digits, which is also a very pleasing development. Now a quick word on currency. As mentioned, we have been facing accelerating FX headwind in recent quarters. And in terms of the revenue impact, it amounted to more than CHF 180 million in the first quarter, so close to 7%. And this obviously comes from the appreciation of the Swiss franc versus our main currency exposures, particularly the dollar. But the headwinds from some of our smaller exposure such as the Indian rupee are also having a notable impact. Now looking back over the last 10 years, the cumulative FX impact shaved off over CHF 3 billion of our top line and over CHF 350 million of EBIT. Now moving to our top line development on Slide 8. So giving you some insights what we see in our different regions and in our different segments. So first of all, regionally, we grew the order intake and the revenue in local currencies in all regions outside of China. At the order level, China cut 1.5 percentage points of group growth in the quarter with order growth as a result, 4.3%, excluding China compared to the reported 2.8%. The standout region was Europe, particularly Northern Europe, which showed high single-digit order growth in the first quarter on a reasonably tough comparison from last year. So overall, very pleasing to see growth here, including a very good development in Germany. Now looking at our business segments, as Paolo mentioned already, modernization contributed strongly to the order intake and the revenue in the first quarter, both growing at 15%. New installations saw order intake stabilized this quarter, but revenues declined high single digit with China down over 20%. And finally, growth in service business continues to be accretive to the group growth overall. From this slow start of the year, now we expect to see a modest but gradual improvement over the next 3 quarters, consistent with our full year guidance of low to mid-single-digit growth. Growth in our order backlog was up 2.5% year-on-year, 3% sequentially in local currency, driven by modernization, which was up 15% year-on-year and the backlog margin improved somewhat sequentially. Now moving to EBIT and EBIT adjusted. So you can see here on the slide, the FX impact is also hitting our EBIT bridge. This quarter, minus CHF 23 million. Now the good news is that we are more than offsetting this by operational improvements, which was plus CHF 33 million in the first quarter, which is in line with the quarterly levels we saw throughout '25. So we are maintaining our productivity momentum with savings coming from SG&A, procurement, supply chain and field efficiencies. Particularly, the latter has picked up in recent quarters, which is pleasing. Now price and mix were contributors to the CHF 33 million operational improvement, but less so than efficiencies. So our equation, pricing plus efficiency outweighing inflation remains firmly positive with both inflation and pricing likely to gradually increase over the coming quarters. Now moving on to the net profit and the operating cash flow on Slide 10. So good development in net profit driven by our operational improvement, which is more than offsetting a decline in financial income as well as FX headwinds. And now margins into double digits. And operating cash flow was good, reaching CHF 532 million for the quarter, just shy of last year's exceptionally strong performance. Again, uptick in our operating earnings drove the strong performance whilst net working capital improved, but less so than in the first quarter last year and hence, a bit of a headwind in our year-on-year bridge. We will continue making progress on our net working capital initiatives, and I expect us to have another good year for operating cash flow in line with the last 2 years. And I expect as a result that we continue to show industry-leading cash conversion levels that means converting well above 100% again in '26. Now moving to the next slide. In terms of full year guidance, obviously, we confirm the full year guidance. So in terms of our revenue growth guidance of low to mid-single digits in local currency in '26, we expect a modest gradual acceleration in -- from the 1.7% in quarter 1. And that assumes continued strong double digit in modernization, stable mid-single-digit growth in service and a gradual easing of the headwind in new installation from the high single-digit decline in quarter 1. Now on to the margin guidance of 13% in '26. So the improvement versus '25 is clearly driven by continued productivity improvement, increasingly from field efficiencies. So we expect an acceleration here to offset a moderation in procurement and SG&A savings such that we can achieve the same overall level of incremental savings in '26 as we did in '25. Now a little reminder on the mix, which we have as a headwind in '26. Mix was a tailwind in quarter 1, but we expect that to neutralize over the coming quarters. Let me also say a few words on cost inflation. So based on our current assessment, we face some additional inflation from energy, commodity and commodity. So firstly, on logistics and fuel cost, we estimate that each of these add approximately CHF 15 million, 1-5, to our annual cost. So CHF 30 million in total on a 12-month basis. Outside of that, energy is a small cost category for Schindler and the inflation would amount to less than CHF 1 million. That is electricity usage in building and so on. And finally, on raw materials, there is no change to the CHF 15 million, CHF 20 million annual cost inflation estimate that we shared with you in February. And so that is primarily associated with the higher copper and aluminum prices. So putting all of this together, we face up to CHF 50 million of additional cost inflation on an annual basis from the elements I just outlined. And obviously, we are working hard on mitigating to offset these elements. Now touching on tariffs. It remains a bit of a moving picture, but our estimate of the annual gross P&L impact remains largely unchanged from what we shared in February. That is approximately CHF 15 million, 1-5, based on current tariff levels. And again, we continue to work hard at mitigating the impact, including making appropriate price adjustments. So in conclusion, let me end by thanking together with my colleagues in the Executive Committee, all our employees around the world. And as you know, unfortunately, many of them are operating in exceptionally challenging circumstances, not least in the Middle East currently. So a big thank you to our colleagues there. And with that, I hand over to Lars. Lars Wauvert Brorson: Thank you, Carla. Let me remind you of our Capital Markets Day, which is scheduled for the 3rd of June this year at our headquarter in Ebikon. Switzerland. We look forward to seeing many of you here as our campus. Please note that the registration to the event closes on the 15th of May, and the number of participants are limited. So with that, we are happy now to take your questions. I would like you please to limit yourself to 2 questions only, given the limited time we have available. With that, operator, please. Operator: [Operator Instructions] The first question comes from Andre Kukhnin from UBS. Andre Kukhnin: Really, the main question I have is that now we are heading into this, again, heightened inflation environment. And given the track record across the whole industry of, say, 2022. Can you really confirm to us that the industry attitude towards pricing has changed structurally and now that you have the contract price escalation clauses in place and that you can price proactively as inflation ramps up and therefore, avoid that kind of gap in potential gap in profitability. If we could talk about that, that would be great. And then yes, I have a quick follow-up on U.S. service orders as well, if that's okay. Paolo Compagna: Andre, thank you for the good question. Yes, obviously, we can confirm your expectation that the lessons learned in '22, how to face inflationary jumps up and down has shaped the industry as well as ourselves. So number one. Number two, in the actual situation, what is happening is a very proactive pricing, number one, you mentioned yourself, following the -- in the meantime, established discipline in contracts and all that as well as, as I mentioned before, that we are applying where possible, surcharges to address the super high-speed increasing gasoline, oil costs, energy costs. which maybe was not very much the case in '22, right? It was more on commodities and material. So well, to summarize, your assumption is right. We are executing pricing according to the contracts, yes. And obviously, all of you know, there might be also a timing effect how these pricing actions will come to the books as when you price NI, it comes then when you build NI with a longer term, right? Modernization somewhere in between. And on services, the timing to see the pricing and the subsequent benefit of it might be shorter. Andre Kukhnin: That's really helpful. My second question is just on the U.S. service orders in your slides that showed us down in Q1. I think that's in units. Could you just talk about how it's done and how it's performed in value? And how do you see the outlook for this segment for the rest of the year, please? Paolo Compagna: Yes, very good question. Thank you for that. That helped me clarifying something which I was mentioning before. In value, important to know, we grew in Americas and U.S., too. So service value is growing. On units, as we report on units, we have a slightly decrease, which is mainly due to some -- yes, I call it, selectivity, some larger accounts we on purpose didn't rebook as we didn't pursue to continue to fully stick with our overall strategy we have. So now to the second part of your question, Andre, very clear. We and also myself expect in the course of the year also to -- not to recall to recap or to catch up on unit growth. So value is already and units should follow during the year. Operator: The next question comes from Daniela Costa, Goldman Sachs. Daniela Costa: Just wanted to ask you sort of on the path of light savings and efficiency from here and also on mix, you gave great detail on the whole inflation items and commented already a lot on price. I wonder on those 2 elements and the cadence from here. That's the first question. And the second question, just for an update on where -- how do your view stand regarding when service regulation could change in China? Paolo Compagna: Maybe, Carla, you can elaborate on the efficiency gains, and then we can come back on China. Carla Geyseleer: Daniela, so happy to take your question. So yes, as I said earlier, it is clear that we have these inflationary impacts, but we expect them to be offset by the pricing. Paolo just outlined our view in terms of pricing. There might be here or there a bit of a timing effect, but that clearly will not realize. So from that perspective, the increased inflation will be offset by the pricing. Coming to the real efficiency, there is not as such a big change to what we shared before. So we are still looking for the approximately CHF 200 million of efficiency coming in, mainly the 4 pillars that you're well aware of. So it's clear that the composition slightly changed, but the overall numbers, they stay in line with the projections that we shared. Does that answer your question, Daniela? Daniela Costa: Yes. Maybe just of the CHF 200 million sort of how much is left? Carla Geyseleer: Well, I mean, it's clearly that the main contributions are coming from supply chain and procurement saving and what is currently picking up is the field efficiency savings. So whatever now in the future will be a bit going on the moderate side in terms of incremental from supply chain procurement or the SG&A will be picked up or will be offset by the pickup in the field efficiency, both in the -- well, actually in the 3 activities and NI, Mod and in the service. Paolo Compagna: Coming -- let me catch up on China. That's a very good question. And so regulation in China, let me start. Whenever it will come, I said it also before, you remember, this will have a positive and welcome impact to the industry and also to us. However, it has been just postponed for another 6 months. Now it's expected that it would be published earliest, end of this year and being enforced end of next year. So well, if we put these 3 informations together, it's become obvious that any impact can only be expected in the course of '28. Well, now we can be philosophical and it's quarter 2, quarter 3, I don't know. So hence, we have to be a bit more patient, then I think we can have a full insight into the expected benefits first when we have studied documents, again, maybe Q1 next year, we have a better insight. However, it's important to know that by now, in all our plans, expectation outlooks, we didn't include yet any significant contribution of it already now. So therefore, yes, we have all to be patient and catch up on this in my personal opinion, in 1 year from now. Unfortunately, we can see. Operator: The next question comes from Midha Vivek from Citi. Vivek Midha: I have 2 questions. My first is on the order intake, particularly in Europe, EMEA up double digits for the quarter. The market outlook is still for 0% to 5% growth on a full year basis. I was wondering if you might be able to give us some color maybe breaking that down between how much you think was underlying market developments in the quarter itself? How much was a pickup in the larger project orders and whether you think there was any contribution from any market share gains? Paolo Compagna: Vivek, thank you for the question. I'll address all the points one after the other. Number one, EMEA up, yes. It's not a big secret, maybe with some differences between Central, Northern European countries and yes, most famous EMEA at the moment. But we are pleased to see that Europe, as EMEA for us, or Europe is contributing positively to our order intake, which was a bit expected, so number one. Number two, how it is between pickup on large projects and rest of the business. This is also, I must say, different country by country, as you can imagine, we see now also to be anticipated a bit of a slowdown in large projects signed in the whole Middle East region is not a secret, the large project pipeline list was or is including also a portion of those projects. And we are always a bit more on the conscious side. Now we don't have to say we keep it on the list, but we don't count on them short term, while the rest of the projects still look promising. Talking countries and markets, well, I was mentioning before, we are happy to see Germany picking up as we were saying last year, let's keep the fingers crossed that now the darkest period is behind us in Germany, and we can confirm at the moment, everything is confirming is right. But also other markets are coming nicely in Spain, Italy, there's many more. So summarizing on the commodity sector going well in the commercial segment, different country by country, large projects, as you can imagine yourself, is now a bit in the light of geopolitical movements, different between infrastructure projects, which continues and private finance projects, which one could say, they might be a bit delayed until the financial situation now globally speaking, has been clarified. Vivek Midha: Very clear. My second question is a follow-up on the cost inflation topic. One cost item you didn't mention, particularly on the raw material side with steel. Would you be able to give us a quick summary of your exposure there and what sort of assumptions you've made around that? Carla Geyseleer: When it -- Actually, when it comes to the steel, we locked in actually for the longer term. So it creates less volatility for us for the remainder of the year, to be honest. That's why I didn't mention it. Vivek Midha: Very clear. So is there a -- how much of a price increase do you need to put through just relating to the steel on the new orders? Paolo Compagna: That's a good question. But actually, the price increases placed in the new orders now are less related to one single component, right? It's a more general price increase you place, right, to the customers. At the moment, obviously, there are more items contributing to the price increases. And I was mentioning before to Andre, we have learned in '22, I guess, the whole industry, but we Schindler -- we also learned in '22 how to address pricing much better than ever done in the past. So that here, I must say it's a bit difficult to assign to each inch of the price increase, one component. And we also have copper moving, we have oil moving, we have energy moving. We have wage inflations moving, very different country by country. So actually the pricing you set in the new orders now is a combination of all these and also not a secret, is also a bit different country by country as reflecting on especially wage inflation, this varies a lot among the countries. Operator: The next question comes from Nick Housden from RBC Capital Markets. Nicholas Housden: Firstly, I was just hoping you could comment on the growth components in service, so kind of the mix of unit growth, price net of mix and churn and then also dynamics in the repair business, which from competitors, it sounds like that's been quite strong recently. Paolo Compagna: Well, looking at value growth in service, I must say the unit growth and the value growth, one could say is quite aligned. So it's not that we are generating an additional value growth by overpricing anything. So at the moment, we can confirm that our growth in value is, if you look to the different markets, very much in line with our growth in business -- sorry, in units. Carla, something? Carla Geyseleer: Yes. Well, I mean maybe just adding when it comes to the portfolio and in units, we definitely are positioned very favorable when it comes to the churn rates when we see what is going on in the market. And I think that is a very, very good point. And we still are on a neutral basis when we compare the churn with the recoveries overall. So that is -- yes, that is where we are in terms of portfolio evolution. And as Paolo mentioned already, in terms of pricing, I think we remained also very disciplined there, and we will continue. So whatever comes from inflation, we will definitely make sure that it is recovered. Nicholas Housden: Okay. Great. And then my second question revolves around the sequencing of growth for sales in Americas new installations. I think we've had a couple of decent years of order intake in units. And I would imagine that pricing has also been quite solid there. So I'm just curious as to when we start to see that feeding through a bit more meaningfully into new equipment sales growth. Paolo Compagna: Well, difficult to say in which months we see it, but we can confirm that at the moment, the positive trend we were also referring in the past continues. So now let us keep the finger crossed, nothing changes, right? So now very soon, we will also see it contributing subsequentially to our order intake as well as I was also mentioning last quarter, and it is unchanged. We are also participating more and more in large projects, which then going forward will also contribute on both order intake. And then yes, with the time line you have for -- to generate -- sorry, to create the revenue also contributing there. So we don't change our constructive positive outlook on the U.S. in terms of new installations. So yes, your observation is right. Revenue will be subsequently generated large projects a bit slower, commodities coming linear, not to forget modernization, which is also coming very strongly and with a shorter delivery time, obviously, right, between the order intake and contribution to revenue. Operator: The next question comes from Martin Flueckiger from Kepler Cheuvreux. Martin Flueckiger: First one is on your remarks regarding building permits ramping up in Europe over the last few quarters. Now I appreciate those comments, but I've recently also checked that according to ECB, European Central Bank data, the mortgage volumes in Europe have started to turn more or less flattish. They were down in January, but slightly up in February. If you compare that to the growth we have seen, which was clearly double digit, up to 40%, 50% or more percent in 2025, depending on the month, that seems to be noteworthy. I was just wondering whether you had any thoughts on that development with regards to financing decisions in Europe being postponed, which ultimately could hit your residential exposure to the region? That's my first question. And my second question is on CapEx. I noticed CapEx was up sharply year-on-year in Q1. Just curious how we should think about that number going into the remaining quarters and what kind of comments you could make on CapEx guidance for the full year? Paolo Compagna: Martin, let me take the first one and the second one, I will happily pass to Carla for the CapEx. That's a good one. How would we expect the financing structures, availability, especially in Europe, I think, is your question, might impact the green shoots we have seen coming, especially let's talk about the largest markets we have like Germany, Spain, Italy and so on. So first of all, by now, in the residential segment, and allow me to split briefly in 20 seconds in segments, then we and we personally expect in the worst case, a bit of a different scenario in residential, one could expect based on the strong demand we have in all large markets and already made decisions on financing, on building permissions and so on, we would expect a more resilient new installation order intakes going forward. So other words, the expected growth rates in commodity -- sorry, in residential, we might still expect. When it goes to large projects, I was moving -- mentioning before, I would move to a more differentiated picture. We see at the moment everything which is more related to infrastructure, public investments is continuing as planned. So here, I would also -- I see your point of volatile mortgages and so on, but it doesn't play a big role here for the moment. And yes, you have a good observation. Fully private finance developments might see a bit of a delay. However, if I look over Europe at the moment, day-to-day, still decisions made to progress on projects, excluding Middle East. So all in all, if we have to expect some changes going forward, I think it's appropriate to be more conscious on large projects, private finance, followed by large projects, infrastructure which we see more safe kind of sort of saying. And residential, we would expect for '26, more or less flat. I hope this addresses your first question, and Carla takes up on CapEx. Carla Geyseleer: Yes, Martin. So thank you for the question. Good observation. So yes, our CapEx investments in Q1, they amount to CHF 46 million versus indeed CHF 18 million last year. And that is actually a replacement -- a real estate replacement investment. So it comes from the purchase of a land plot in Switzerland, yes, for replacement of a factory. So that is actually what's there. So it's not like a trend to further increase now the CapEx going forward. So it's actually, I would say, a one-off that you see there. Operator: The next question comes from Martin Husler from Zurcher Kantonalbank. Martin Huesler: I have 2 questions. The first one, when it comes to claiming a refund of overcharged U.S. tariffs, what is your approach here? Carla Geyseleer: Yes. Obviously, we are looking into that. We are doing our homework, and then we will conclude at the right time to file for it. Martin Huesler: But your guidance of impact of U.S. tariffs doesn't actually include any, let's say, payback of what you paid? Carla Geyseleer: No, no, absolutely not given the uncertainty about the timing, et cetera. So when it comes, it comes, yes. So it's an upside, but we don't count on it in the numbers that I shared. Martin Huesler: And then the next question, maybe a bit of a broader one. When it comes to consolidation in the sector and the opportunities to expand your service footprint, mainly, I guess, what is the reason for a rather cautious approach for external growth that we see for Schindler? Paolo Compagna: Martin Well, conscious approach, I leave it to you to judge. What we said and we are working on is, yes, we like to expand our portfolio footprint also by inorganic investments, I think, is what you referred to, right? What we said is, at the same time, we would not jeopardize our overall strategy, which we call profitable growth. by doing things which afterwards look good but aren't. So this being said, when we look at external opportunities, is what Carla always calls the bolt-on acquisitions and even maybe large acquisitions, we always prove them against our midterm strategy, and we will talk a lot also on the upcoming Investors Day with you guys. So therefore, I would not confirm that we are not interested in expanding our footprint inorganically, you were saying externally. But yes, I would confirm that we still make sure it fits to us and it fits to what we promise to every one of our investors we intend to do in the next many years with the portfolio. Carla Geyseleer: Yes. If I just -- Martin, we have our own criteria for actually assessing opportunities and if they fit our plans, yes or no. So we stick to this criteria. What is clear for us, what we are not going after that is overpriced assets and also loss-making business. So there, we are -- stay away from because we -- I think we would -- if we acquire things, we want to actually generate a return on it. Operator: The next question comes from John Kim from Deutsche Bank. John-B Kim: On modernization, I'm wondering if you could characterize what you see as the trajectory on contribution margins over the next 2 to 3 years? And also maybe a bit of color here, given the strength of China on unit counts and the bond program, how you see kind of mix geographically evolving from current level, I suppose? Paolo Compagna: John, let's take the second part first. Now do we see a geographical mix. First of all, well, I must say, if we look at the distribution of the installed units on this planet, obviously, there will be over the years, an increasing contribution also modernization coming from China. So the longer term, we look at the modernization business, and I'm talking 5 to 10 years, the more the contribution will be out of China, obviously, right, as the half of the units installed on this planet are, for whatever reason, installed in China. So this is anticipated at the moment, obviously, the biggest potential for the very next years in terms of value, in terms of margins is obviously there where the installed base is much more aged and the market is much more mature. So obviously, you can -- it's the Americas, Europe and Asia Pacific outside of China. This is the second part of the question. So the first one, and then I will leave to Carla to give more color, if you like. Well, we expect the modernization business also in terms of contribution to the bottom line to continuously improving and continuously evolving. As mentioned before, we are doing a lot in terms of products, in terms of processes, in terms of expanding capacities, production as well as installation. We talked about in the past also here, we will have some more points for you when we see us in June. So there, we can only expect over the course of the next years, an increasing contribution. But Carla, please, anything to add on that? No? Okay. John-B Kim: And one follow-up, if I may. Historically, you provided some very useful color on segmentation in Chinese real estate markets, tiers of cities and so forth. I'm wondering if there's anything you could help us on here in the current outlook. Paolo Compagna: I think with more details, we can also touch on China. But for now, we have segmentation in tiers, I must say one has to ask if we -- if you focus on profitability, and we have reassessed a lot of our organization in China and also going forward, there's still a big difference between Tier 1, Tier 2, Tier 3 cities. Segmentation remains very similar in terms of business opportunities. And hence, when we will share with you where we like to go in the next couple of years, you will also understand what we plan to do in which segment within China to secure that China contributes to our overall plan going forward. Operator: The next question comes from Lewis Merrick from BNP Paribas. Lewis Merrick: You mentioned wanting to grow in the U.S. service market and reverse the trend you've seen in 1Q. One of your peers is also seeing challenges growing there. I'm just wondering, are you seeing the competitive environment potentially heat up in the U.S. market? Or are there any early green shoots you can point to supporting a turnaround? Paolo Compagna: Yes. Lewis, that's a very good question. Now I think you're referring more to the service segment, right? U.S. to U.S., and allow me that I talk about us and not about competition. In the U.S., what we see is a clear trend of increasing presence, let me do it very politely this way, of the ISPs, very active in the market, which are shaping kind of, if I may say, the service business in the U.S. It's not Americas, it's the U.S. There's a lot of contribution into that from private equity going into that segment in the ISPs. And hence, yes, the service market environment is changing in the U.S. Is it changing for stay there forever? I don't know. But what I can confirm is that we are adjusting and working on it heavily and in high speed. And it's the reason why before I was confirming that we expect our numbers to catch up and continue to improve throughout the year. Operator: The next question comes from Philip Buller from JPMorgan. Philip Buller: I have 2 questions, please. Firstly you're obviously working very hard to mitigate input cost inflation. Is your policy regarding hedging on some of those costs changing in any way given the volatility? And the same on FX. The underlying results are obviously good, but FX has been overshadowing that now for quite a long time. So is there anything you plan to do differently in relation to hedging, be that on the cost or FX side? And the second question, I know you don't want to front run the CMD, but can you remind us of what the right level of leverage is for Schindler. I appreciate the comments on M&A needing to have the right returns profile. So how does that pipeline look today and the valuation of those assets? Is that screening well for you relative to potential cash returns to shareholders? Carla Geyseleer: Yes. Thank you very much for the multiple questions. So I try to take them one by one. So obviously, we have -- when it comes to the hedging of the raw materials, there is no change in policies because I believe that we hedge what we can hedge. Now in terms of the FX impact there, of course, we did quite some work over the prior periods and especially then contracts that are in our -- yes, strong Swiss franc. I mean we convert most of them already in non-Swiss currency. So quite a lot of energy went into that. So in order to de facto come to a hedge. And when it comes to the capital allocation question, I'm actually yes, looking forward to give you more insight into the Capital Markets Day, also what the next follow-up is because, yes, our share buyback program advances very well. So if you can give a bit of patience there, I will definitely give full insight into that topic. Operator: The next question comes from Rizk Maidi from Jefferies. Rizk Maidi: Just maybe a little bit of clarification on the pricing element when it comes to service. It doesn't feel like this according to my calculations that pricing was not a big component within the service growth. Maybe if you could just shed a bit of light there and give us a flavor on how do you see it sort of by region? And then secondly, I would like to shift away, hope you don't mind me doing this from -- away from the results, but just take your view on potential large consolidation in the industry. We know this is quite a very consolidated industry. So what kind of impact do you see in the market in terms of density pricing if 2 of the largest -- your largest peers merge? Paolo Compagna: Maybe, Carla, I'll take this one. So the first one. The first one on the contribution of the pricing to the service and bear with me that we don't go now into region by region. But overall, we can say the contribution from pricing is in the mid-single-digit range. So therefore, I was saying the overall growth is not overinflated by pricing. This was my message before, and thank you for helping me clarifying it. So -- but nonetheless, the pricing contribution is in the mid-single-digit area, and that's actually what normally you do every year as you cope normally also with inflation. We did in the past, we do now and maybe now actually right now with an additional component to offset the Middle East crisis FX, as mentioned before. Coming to your second question about larger consolidations and without looking at any specific one, our view is, first of all, if there's a consolidation on highest level, and we can name it, if the 1, 2 of the big 4 would go together, I personally already expressed our opinion and my personal opinion very clearly in the past, one has to ask mid-first and long first, where is the benefit for whom. And this explains for me also the subsequential impact on what you were just mentioning, pricing and movement in the markets. Consolidation on high level always, we have to ask, is there a benefit for the customer? Yes, no, the answer you can give yourself. Is a benefit for employees? You can give your benefit -- the answer yourself. Is there a benefit on underlying efficiencies by consolidation, which could bring some benefits to the bottom line? Well, here, one can speculate and say, yes. Good. Let's take this one. To get to these benefits, you have to do a lot before. And here, I like to share our and my very personal opinion. You have to put it in the timing. It is quite often intense time, which is not 1, 2 years. It will be longer until you can at all generate these underlying efficiency benefits in your books. In all that period, this consolidation would just work against benefits for customers and employees. If you put it on this high level, then the answer is, for me, quite subsequentially logical that it might have a short-term impact on pricing. However, the opportunity also for others to grow and expand customer and business baseline would also increase. So here, I must say for the industry, there might be a reshaping, there might be changes. However, this also bears opportunities for the others. Different when you look at consolidation on lower levels is what we have talked a lot about in the past is what then has a totally different consequence to the market. But you were explicitly mentioning, I think, the larger scale consolidations. Operator: The next question comes from Aron Ceccarelli, Bank of America. Aron Ceccarelli: My first one is on tariffs. I understand the situation remain extremely fluid at the moment. You highlighted the CHF 15 million that you announced at the beginning of the year. Could you perhaps elaborate a little bit on the new 232 regime, perhaps expanding on your exposure to Mexico and Canada? And if this CHF 15 million, you think could be revised upward because of these new changes? That would be my first question. Paolo Compagna: Thank you. Talking exposure to tariffs for us, it remains unchanged since the last adjustments, which you know they were adjusted for Switzerland. So there is no change. And Carla has mentioned before, in our numbers, we are sharing with you today and in the outlook we don't foresee any downside at all and also, for the moment, no upside. So first part of the answer. Second part of the answer, special exposure to Canada and Mexico. This is for us quite limited as we have our supply chain base distributed in other markets. So it's not Canada and Mexico. It's 5 other places in the world. And this actually reduced our exposure to tariffs a lot. So for the moment, no impact to our bottom line and to the numbers presented by Carla. Carla Geyseleer: Yes. Just maybe to add and to be concrete on numbers. So initially, we talked about around CHF 20 million. This CHF 20 million, they came down now to CHF 30 million. So yes, so we go clearly as it just decreases the impact for the reason mentioned here. Aron Ceccarelli: That's clear. The second question is on pricing and your backlog. I understand there will be a lag on the effect of pricing on new orders. I wanted to understand to what extent if there's any kind of ability to go and reprice some of your existing orders in new equipment and perhaps maybe modernization eases because of the churn. But trying to understand, considering the current situation, if there's any chance you are able to go to your customers with an existing orders and say, look, things have changed, we might have to revise price upward. Paolo Compagna: Thank you. First of all, do we do it where it is possible? Yes. Is it everywhere possible and in every contract? No. So therefore, do we expect some impact on the backlog positively from pricing? Yes, but it might remain minor that it is not critical to be now disclosed here, right? So therefore, the effort we are doing, and I said before, we are quite diligent in our pricing discipline, I must say. However, looking explicitly at new installation orders, it also plays a role how old this order is. So therefore, it's quite of -- not volatile, it's quite of a diverse picture. So -- but I can confirm where possible and together with the customers, we address it. In some cases, it's obvious, it doesn't work. Lars Wauvert Brorson: Thank you, Aron. Thank you. We'll take the final question, please, and then we'll close out for today. Operator: Last question comes from Midha Vivek from Citi. Vivek Midha: It's a follow-up on one of the questions on CapEx, just more broadly on cash conversion. You mentioned earlier, this should be again a year of over 100% cash conversion. Your cash conversion has been very strong over the last few years. For how long can you continue with this sort of level of cash conversion? And what should we bear in mind regarding the moving items within that? Carla Geyseleer: Well, I'm actually, yes, very convinced that we can continue with this nice cash generation. Yes, first of all, I mean, we believe or we are clear, I think, where we go in terms of profit. And when I look at the net working capital, I can tell you, I still see my pockets where I can further optimize and I will not let go. So based on the combination of the 2, I feel comfortable making that statement. So I don't know if that answers your question, but I'm very passionate, I must say, about it. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Lars Brorson for any closing remarks. Lars Wauvert Brorson: Thank you very much, operator, and thank you all for attending this call today. Please feel free to reach out to me and the Investor Relations team for any follow-ups you might have. The next scheduled event is our Capital Markets Day on the 3rd of June, and we look forward to seeing many of you there here in Ebikon, of course. With that, thank you, and goodbye. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Good morning, and welcome to the LSEG First Quarter Results 2026 Investor and Analyst Call. [Operator Instructions]. I would like to remind all participants that this call is being recorded. I will now hand over to David Schwimmer, Chief Executive Officer, to open the presentation. Please go ahead. David Schwimmer: Good morning, and welcome to our first quarter results. I'm joined by our CFO, MAP; and our Head of IR, Peregrine Riviere. Q1 was a record quarter for the group and a perfect example of the value of our model. Our leading multi-asset class trading venues have been critical sources of liquidity, price discovery and risk management, while customer engagement with our trusted data to inform their decision-making has reached new highs. This is reflected in revenue growth of almost 10%, the highest since the acquisition of Refinitiv 5 years ago. This strong start puts us in an excellent position to deliver on our financial targets for the year. And as you will have seen from this morning's announcement, we expect revenue growth to be in the upper half of the 6.5% to 7.5% guidance range. We continue to take an agile approach to capital allocation. In the first quarter, we used the dislocation in our share price to buy back GBP 1.1 billion of shares. Including dividends, we expect to return more than GBP 3 billion over the next 12 months. Q1 was also a quarter of strong strategic progress. We're continuing to innovate and invest to capitalize on the opportunities that the ongoing technological change across our industry is creating. Our LSEG Everywhere strategy is embedding our AI-ready data across financial services, driving further growth in March and April in the number of customers accessing our data via MCP servers. We're also transforming our own products with very strong feedback on the Workspace AI tools we introduced in Q1 and an exciting pipeline of additional enhancements this quarter. The group's innovation goes far beyond AI. We executed the first transaction on our private securities market in Q1, expanding private market funding through our public markets infrastructure. We're making excellent progress on post-trade solutions in partnership with 11 global banks. We're building digital markets capabilities, including a Digital Settlement House and a Digital Securities Depository, and forging a new distribution channel for financial models through our Model-as-a-Service offering. I'll say more in a moment about our strong commercial and strategic progress. But first, I'll hand over to MAP to give color on the record financial performance. Michel-Alain Proch: Thanks, David. Overall, as David said, it was a very good quarter and further proof of our all-weather model. It was a strong quarter for our subscription businesses. All of them accelerated in Q1. Data & Analytics was up 5.1% as the strong growth sales at the end of last year flow through to higher revenues. We saw particular strength in Data & Feeds up 7.3%. The contribution from pricing and retention in D&A was unchanged compared to last year. FTSE Russell was up almost 9%. Subscription revenues accelerated as the rate of contract renewals normalized, as we said it would. Growth in asset-based revenue was also strong, reflecting product inflows and higher market levels. And Risk Intelligence grew double digits, 10.5%, reflecting strong demand for our business critical screening and identity verification services. Together, those businesses grew 6.3%, a strong acceleration from the 5.2% last quarter and on track for our expectation of around 6.5% growth for the full year. The quality of our market infrastructure really stands out in the kind of market environment we saw in Q1. David will give you more detail on this in just a moment, but you can see the financial impact on that on this slide. Markets revenue were up 15.5%, driven by strong performance across all the businesses. Cost of sales benefited from the action we took last year on the SwapClear revenue surplus. And as a result, gross profit was even stronger than total income, up 11.5% in Q1. Clearly, we have had a very strong start to the year. The outstanding performance from markets, combined with the great visibility we enjoy in our subscription businesses sets us up very well to deliver on all guidance for 2026. And in particular for revenue, we are confident in reaching the upper half of our guidance. In addition to our ongoing investments in the business, we are also returning surplus capital. We repurchased shares worth GBP 1.1 billion in the first quarter. Just over GBP 400 million of this was from buybacks announced last year and nearly GBP 700 million was from the latest buyback announcement in February. Combining the rest of this year's GBP 3 billion buyback and dividends, we will be returning nearly 10% of our market capitalization to shareholders over a 15-month period. As a reminder, even with our high level of investments and large shareholder distribution, we expect to end the year around the middle of our leverage range. This is all from me, and I will pass back to David. David Schwimmer: Thanks, MAP. Customers increasingly want to use our data in AI applications, opening up a new distribution channel. We are embracing that through our LSEG Everywhere strategy, delivering AI-ready data to our customers in their preferred environment, embedding our data in their AI-powered solutions and agents. We're continuing to see strong uptake on MCP distribution. In the roughly 4 months since launch, we now have 90 customers who have connected to our MCP server directly or via one of our AI partners. And we have a pipeline of over 60 more customers looking to connect. This is great progress given the onboarding process can take a few weeks. You can see from the pie charts that we are seeing a good global spread as well as broad-based interest across buy-side, sell-side and corporate customers. And we're seeing roughly half connect through Claude with the rest split between direct connections and other third parties. In terms of data sets, we are adding new ones to MCP all the time. Just this week, that included estimates, company fundamentals and corporate actions. And overall, we now have over half of our nonreal-time data available via MCP. So the platform is becoming more attractive every day. Over the coming weeks, we will add transcripts, Lipper funds, FTSE Russell indices and much more. While we are currently focused on driving adoption, we're refining our commercial policies, and we'll share the framework at our H1 results. So strong progress on our AI-ready data, and we are also making great strides embedding AI into Workspace. Our Workspace AI search product is in pilot with around 1,500 users today, and we expect to launch general availability in the next few months. Our Workspace AI deep research capability answers complex prompts with leading models from Anthropic, OpenAI and Google using our trusted data. We have around 1,600 customers in pilot and deep research is benchmarking very well against competitor products. We're adding much more data over the coming months and rolling it out more extensively throughout 2026. Today, over half of the take-up is coming from the investment management sector, where we have traditionally had lower penetration, so a positive sign. We're also seeing really deep engagement with our products. When global uncertainty and market volatility rise as they did in Q1, our customers turn to us, a testament to their trust in our solutions. We saw record use of Workspace in Q1. Our oil tools, which have long been popular with users, saw a 75% sustained uptick in usage. Our shipping data experienced a threefold increase in demand. In Data & Feeds, our real-time business data traffic grew 33% in Q1, and this has continued into Q2 with a new all-time high in early April. We're also really scaling up in some of the new channels we have added in recent years, making it easier for customers to access our data. Following the enhancements we made in 2023, we have accelerated growth in our cloud-based real-time offering, Real-Time Optimised, and use of that platform rose fourfold in Q1. I've spoken before about the power of the analytics API we built in partnership with Microsoft. In Q1, we drove 44% growth in data consumption through that channel. And making Tick History more easily available via cloud-based solutions continues to drive strong demand with 39% growth in the use of that data in Q1. Turning to our Markets businesses. As you know, we have intentionally positioned ourselves in areas of strong structural growth, driving the electronification of fixed income trading with Tradeweb, supporting cross-border flows in FX and helping customers manage risk and optimize their capital in our post-trade businesses. We achieved exceptional volumes in interest rate swaps on both our trading and clearing platforms as customers adjusted to shifting market expectations in Q1. Market conditions also drove strong volumes across the rest of the fixed income franchise as well as FX. That was on top of the strong double-digit growth we have consistently been delivering in FX clearing. In Equities, we also achieved strong trading volumes. Technology is accelerating the pace of change in our industry. We are investing and innovating to take advantage of that. Our index business, FTSE Russell, is expanding its presence in the digital asset space, attracting 8 digital asset ETFs to track its benchmarks in Q1. We're also seeing good demand for our private markets indices with StepStone. As markets digitize, we're on track to deliver 2 new digital markets capabilities, Digital Settlement House and Digital Securities Depository in Q2 and H2, respectively. I'll pick out just one more example from this slide, Model-as-a-Service. We made financial models from Societe Generale available through this channel in Q1, the first time we have expanded our analytics API to third-party models. We're adding models from our post-trade business later this quarter, taking further advantage of the powerful distribution capability of the analytics API we built with Microsoft. So to wrap up, this has been a record quarter of growth that puts us in a strong position to deliver on all our targets for the year. We're driving adoption of our AI-ready data across the industry through a range of AI partnerships. Our innovation is creating powerful new platforms for long-term growth. And we are returning significant surplus capital to shareholders, GBP 1.1 billion in Q1 and more than GBP 3 billion over the next 12 months. We're very excited about the opportunities ahead of us this year and beyond and are very well positioned for continued growth. And with that, I'll pass to Peregrine for Q&A. Peregrine Riviere: Thank you, David. [Operator Instructions]. Thanks, operator, over to you. Operator: [Operator Instructions] Your first question is from the line of Tom Mills at Jefferies. Thomas Mills: I think you've mentioned that you'll be looking to share more on the commercialization MCP as a distribution channel at 1H. I just wondered if you could give us a sense of your early conversations with larger customers, appreciating we're only about 4 months since launch. Is there a recognition on their part that this ultimately won't be included in existing agreement, will be [indiscernible] charges there? And just I noted that you said that you're seeing larger buy-side adoption in this channel versus the [indiscernible]. Why do you think that is? David Schwimmer: Tom, we are definitely seeing an understanding and recognition from our customers that this is incremental. This is a new product, a new service. So it has been specifically laid out in our -- for example, our data access agreements. A big part of those discussions, those negotiations are around the existing perimeter of what we provide. And I think it's very clear to them that MCP and the AI distribution channels are outside of that perimeter. So actually, a lot of the discussions that we are having with our customers are around their eagerness both to access the product and frankly, to understand what the commercial model will be. And so we are in early discussions with a half dozen or so about the commercial framework. And as we mentioned, we will be sharing that framework with the market in our half year results. So on the buy-side, I think it's just the utility. I think our customers are finding it very helpful, attractive product, easy to use. And so we're not particularly surprised that we're seeing that kind of traction. Operator: Your next question is from the line of Mike Werner of UBS. Michael Werner: I appreciate the presentation. A question on the MCP server. Apologies, I'm going to be focusing on this a little bit. I guess, can you give us a little bit more color as to the economics of the MCP server? If we think about you setting it up and the investment, how should we think about ultimately the variable costs? Is this something where there's a lot of operating leverage or there is a significant amount of consumption-based costs tied to the usage of the server? Michel-Alain Proch: Mike, it's MAP speaking. So in terms of economics, as far as MCP is concerned, a couple of points that I can make. As our clients are using LLM models to access MCP, so being OpenAI, Claude or Gemini. It's our clients who are paying the tokens to the LLMs. So this cost is with our clients. Then the cost we have for MCP is mostly coming from 2 things: First, the cloud cost and the cost of the data platform. Both of these costs are indeed variable. So that's something we want to take into consideration while we are establishing the commercial policy for this new product. Operator: And your next question comes from the line of Hubert Lam of Bank of America. Hubert Lam: I've got one question. On D&A growth, it was 5.1% in the quarter and only up marginally from the 4.9% in Q4. Can you talk about the different dynamics within the division where it seems like Data & Feeds had decent growth, but workflows slowed marginally? And also, I guess you touched upon it in terms of the enhancements in the Workspace, I guess would this be helpful in terms of driving up further growth within Workflows in terms of pricing or greater demand in the future? David Schwimmer: So I would not overinterpret any modest tick up or tick down in terms of workflows in particular. We continue to see really strong interest in the new functionality of Workspace and interest as well in terms of the new functionality that is Open Directory and how that will continue to be expanding over the course of this year and beyond. So we'll continue to add capabilities, add functionality, add product in there, new private markets data in there as well, which is also getting some good interest. So I wouldn't get -- as I said, I wouldn't overinterpret any kind of modest ticks up or ticks down in terms of where workflows are. And then Data & Feeds business is doing very well. We touched on this in the presentation, but very high demand for the content that we're providing in Data & Feeds as well as Workspace. And we will continue, as you know, to invest in that platform and look forward to continued growth there. Maybe just the last point -- sorry, Hubert, last point I should emphasize. I think everyone knows this, but just to be clear, no MCP revenue in here. Operator: You have a question from the line of Arnaud Giblat of BNP Paribas. Arnaud Giblat: Yes. Just continuing a bit on the MCP theme. I'm just wondering, out of the 150 clients that have signed up or signing up, how many are new clients to you? Are there any substantial new logo wins of size? Just wondering how this is driving incremental growth in the business? David Schwimmer: Arnaud, I cannot give you that answer off the top of my head. What I can tell you is that it's a broad range. We're seeing some large institutions like the big global banks. We're seeing smaller institutions like hedge funds. One dynamic that I can share with you is that the onboarding process can be much quicker with some of the smaller institutions. They're really eager just to get on. There's not a lot of focus or review on some of the compliance or regulatory aspects, whereas with the larger institutions, the onboarding process can take, I'll say, a few to several weeks. And there can be a couple of meetings where we explain the content, we explain how it works, go through a number of the security issues, then there can be some legal discussions and then there's the actual onboarding. So just in terms of timing, that's probably the area where at this point, I can give you the most insight that the bigger institutions tend to be slower than some of the smaller, more nimbler institutions. I hope that helps. Operator: And your next question is from the line of Enrico Bolzoni of JPMorgan. Enrico Bolzoni: I just wanted to follow up on your very latest comment, David, on the -- for example, on the fact that it's faster to onboard a smaller institution. So on one hand, I would think on top of my head that it would be easier to generally onboard clients via MCP relative to what has been historically. But AI is a very powerful technology, and I think that there might be some concerns and risk in terms of the perimeter of the usage of data, what AI actually might end up using. So my question is, do you expect that as this type of connectivity increases as a proportion of your, let's say, total clients and total revenues, the sales cycle will actually expand or will it actually shrink over time? David Schwimmer: I'm sorry, Enrico, when you say the same cycle, I just want to make sure sales cycle. Enrico Bolzoni: Yes. So basically, it's going to take -- you think over time, over the next, let's say, 3 years, is it going to take longer actually to onboard clients or actually it's going to be faster, so you'd be able to do it quickly. I'm just concerned about all the implication of AI for risk, for securities and making sure that the perimeter is well defined. I know there's a lot of legal implications when contracts are signed that involve AI technology. David Schwimmer: Yes, I would expect it -- well, first point I should make, it's already quicker relative to the historical onboarding in terms of what I'll call traditional or conventional products if we were setting someone up for a traditional API. So it's already quicker than that. And I would expect over time that it accelerates as our customers get more accustomed to the technology, as there is more and better understanding, particularly as we put our commercial framework out there later this year. This is all very new. Just to remind everyone, we turned this on, I think, December 23rd. And so we're just a few months into this, both in terms of having our own data sets available in this manner and in terms of our customers really figuring out how to use it. And so a number of them have been in what I'd describe as exploration mode here. But as the comfort level increases and I'm sure that on our end, we'll look to facilitate and accelerate our own processes as well, I would expect to see the sales cycle actually becoming a little bit shorter. Operator: Your next question is from the line of Julian Dobrovolschi of ABN AMRO-ODDO BHF. Julian Dobrovolschi: I have one on the subscription growth. Wondering about the sustainability of it. So you ended the quarter at 6.3%, which I think is quite healthy. But I think you also indicated that this is partly attributed to normalization in FTSE Russell mandates renewals. So I was just wondering how much is from onetime boost the performance that we have seen in Q1 versus a structural step-up in underlying run rate, please? Michel-Alain Proch: Yes. So just to reframe the conversation. So we posted indeed 6.3% for the subscription business in Q1. We reconfirm our guidance of 6.5% for the entire year, which would mean that in the next 3 quarters, we will be between 6.5% and 6.6%. In order to do so, we have a growth which is broad-based both in DNA, FTSE and Risk Intelligence. I have already indicated that we expect Risk Intelligence to carry on being double digit. As far as FTSE Russell is concerned, you're right on the fact that after 2025, which was a bit difficult, we see FTSE Russell going back on a growth trajectory to the high single digit that we used to have and an acceleration in -- progressive acceleration in D&A. So that's the 3 elements that is converging to 6.5% for the year. And as I was saying, we are very confident in it. Operator: Your next question is from the line of Ben Bathurst with RBC Capital Markets. Benjamin Bathurst: My question is also on MCP. Presumably, there are also some customers that have elected not to take it up at this stage. I just wondered what the typical pushbacks you're hearing when this is the case? Is it that customers aren't ready or that customers are using other MCP providers or any other reasons? And are there any actions you're planning to take to address any of these points to push connectivity up through the year? David Schwimmer: Thanks, Ben. So we're not seeing a lot of pushback. I think to the extent that we have had any questions, it's really been about the availability of certain data sets. So we've shared it with some customers, and they have been looking for particular specific data sets. And so sometimes if those data sets are not yet on, they're a little bit less interested. But as we mentioned this morning, we're adding more data sets all the time. We're now over 50% of all of our nonreal-time data sets available through MCP, and that continues, that just making it more and more attractive. Operator: Your next question is from the line of Oliver Carruthers of Goldman Sachs. Oliver Carruthers: Oliver Carruthers from Goldman Sachs. I've got another MCP question, which follows on a little bit to your answer to the last one, David. But it seems like some of your data and analytics competitors are also making their data sets available via [indiscernible] clients, via MCP servers, but they're only making their data sets partially available. So can you talk a little bit about your philosophy of how you're going to set the perimeter for what data sets you make available for your clients via MCP and then particularly in the context of your LSEG Everywhere strategy, which to me feels quite differentiated in this context? David Schwimmer: As I think you all are aware, we're very comfortable making our data available through MCP. And we are adding more and more of our data sets to it. We think it is a very helpful and valuable distribution tool. We think it works very well in terms of, I'll call it, cross-selling. It's a much stronger cross-selling machine than any human could be. We have about 1,500 data sets. And so if you are submitting a query through your model that goes into our MCP server, the way that works is that it is looking across the data sets that it has access to, to respond to that query. So it is a very powerful natural cross-selling machine. It's also a great lead generation machine because to the extent that we have data available in our MCP server and a customer does not have the license to that data set, then we can structure it so that, that becomes lead generation for us. And then we can interact with that customer and let them know that there is data available that would be responsive to their queries and expand their licensing. So I understand some of our competitors have more of a closed box mentality to this kind of opportunity set. That's not our approach. And from what we hear from a lot of our users and customers, they prefer our open model in this new era of very powerful AI distribution channels. Michel-Alain Proch: And if I may just add, David, we are adding data sets on a fortnight basis. Actually, we added yesterday, Reuters News and macroeconomic. So now we have Reuters News, we have fundamentals, estimate peers, and of the pricing corporate action, ESG ownership, company officers and directors, macroeconomics that we just put yesterday night. And in front of us in 2026, as mentioned in the slide, the major one that are awaited by our clients is deal and ownership data and transcript and filing. And then we will add commodities and Lipper fund data and finally, FTSE Russell. So you see it's a very busy pipeline of data set onboarding that we have in front of us. Operator: Your next question is from the line of Ian White of Autonomous Research. Ian White: I'm also on MCP, if that's okay. Maybe can you just elaborate a little bit more around the strategy with respect to MCP. I see that you kind of led with sort of real-time pricing data Tick History, while others have led with maybe more sort of company fundamentals, transcripts, kind of research content. Is there any strategic reason that you sort of see it differently to peers in terms of prioritization? Or is it a case of adding what is readily available more or less as quickly as possible? And can you just elaborate for us what's the end state here? And when will we reach that? Do you anticipate having more or less everything available via MCP in the medium term? And when is the medium term effectively? David Schwimmer: Thanks, Ian. So just, I guess, I'd say a slight correction. We do not make our real-time data available through MCP because of the latency requirements of real time, that is -- could you do it technically? Yes, you could do it. It's just given the current construct and the customer demand, that's not practical. So it's really just a function of making the data sets available in part relative to what we see in terms of customer demand and in part, making sure that the data sets are structured in a way so that they can be interoperable. And this is actually an important point that people often don't get. If you put a bunch of different data sets in an MCP server sort of willy-nilly, and they're not structured in a way to be interoperable, that can confuse the model in the same way that if you have a model accessing different data sets from different MCP servers that are not designed to be interoperable, that can confuse the model. So we are making sure that we're providing our data sets into our MCP server in a manner such that they are all designed, architected to be interoperable so that a model that is accessing data or content through our MCP server is going to get a very consistent experience with the interoperability amongst the different data sets, which just leads to better performance, higher accuracy in the model. So that's an important point that sometimes gets lost in terms of understanding how this works. In terms of end state, I expect that we'll have the vast majority of our DNA data available this half. And then as MAP mentioned, there's more coming in terms of FTSE Russell and other data from broader parts of LSEG over the second half. So we see really significant opportunity there in terms of creating an MCP channel to access the vast amount of data that we have across LSEG. Michel-Alain Proch: No, I would just add, it's really about what David said, it's -- the reason why we are able to put new data sets on the fortnight on MCP is because these data sets have been rearchitected by our team through our partnership with Microsoft. So it's all the work that we have been doing at rearchitecting the data with Microsoft, which is now coming to fruition and which is allowing us to be so fast at getting the data set ready for MCP. So as David said, by summer, we will be done for all nonreal-time data sets. Operator: [Operator Instructions] And your next question is from the line of Andrew Lowe of Citi. Andrew Lowe: I'll take one outside of MCP, if that's all right. There's been growing debate about your FXall business. So could you just talk us through the sort of planned investment within that business, where do you think you need to step up functionality? What's going to change over the next year or 2, and what the synergies are with the rest of your business? David Schwimmer: So FXall has had a very strong performance, as you would have seen in Q1. We have been continuing to invest in the capabilities in FXall really over the past couple of years and continuing to improve in its functionality, in its speed, in the interface. And I would say probably the area to touch on for this year is the fuller integration from FXall into Workspace and the opportunities that, that brings with this integrated front-end system. We've got FXall also plugged in as of a year or 2 ago into Tradeweb. We have straight-through FXall execution capabilities into ForexClear, so the kind of end-to-end processing. So again, strong performance this year, continued investment and continued improvement in its functionality, and we think it's a great business. Operator: You have a follow-up question from Arnaud Giblat of BNP Paribas. Arnaud Giblat: Yes. Just in your prepared remarks, you talked a bit broadly about the momentum you're having in post-trade services. I'm just wondering if there are any specific milestones you want to flag here in terms of activity pipeline? David Schwimmer: Arnaud, I just want to make sure I heard you right. The momentum in post-trade services, is that what you were asking about? Arnaud Giblat: Yes, yes. And specifically the partnership with the banks. David Schwimmer: Yes. Got it. Yes. It's going well. We're seeing -- we -- in Q1, we put trade agent out there, which is a very efficient, helpful platform in terms of OTC processing. We are seeing significant onboarding of new customers. And the real area of focus, now that we have the banks fully involved as of the announcement in Q3 of their investment, there's now active ongoing discussion across the business of really creating more integrated functionality. So when we talked about this business last year, you would have heard us talking about Quantile and Acadia and the different -- SwapAgent and different parts of it coming together. Now it's becoming much more of an integrated offering, and there's good engagement and dialogue with the banks as partners in terms of where we're taking this business. So good progress and good onboarding. It, at this point, has good growth. It's not a huge contributor to the business yet, but we expect -- as you have seen us deliver on in other parts of our business, we expect a nice long runway of growth. Operator: You have a follow-up question from Enrico Bolzoni from JPMorgan. Enrico Bolzoni: Sorry, just one follow-up to clarify as I think there's been a bit of confusion around it. Can you just please, to clarity, confirm that the derivative hedgings or the FX impact that you experienced in this quarter, that was about, I think, GBP 5 million positive, is not included in the reported constant currency growth rate, just for the detail to be clear? Michel-Alain Proch: Yes. Sure. No, I confirm that the embedded derivative impact of GBP 5 million is not recorded in the organic growth. Operator: And this concludes our questions via the conference line. I will now hand the presentation back to David Schwimmer, Chief Executive Officer, for closing remarks. David Schwimmer: Great. Well, thank you all. Thanks for your questions. To the extent you have any further questions, you certainly know where to find us. Peregrine and the team would be happy to hear from you and wish you all the best. Thanks a lot.
Unknown Executive: [Interpreted] Distinguished leaders, investors and analysts, good afternoon. Thank you for joining us today for the China Oilfield Services Limited, COSL First Quarter Earnings Conference Call. COSL is one of the world's largest integrated oilfield-service providers. Our services span every stage of oil and gas exploration, development, and production. Our operations are categorized into 4 segments: geophysical and engineering exploration, drilling services, well services and marine support services. By leveraging our integrated capabilities, we provide clients with full life-cycle oilfield solutions. We remain highly responsive to evolving trends in the international oil and gas market while steadfastly prioritizing technological innovation as our leading strategic driver. We continue to refine our lean cost-control measures and actively promote the synergy between domestic and international markets, the so-called dual circulation strategy. We are committed to translating our premium equipment and technical prowess into a leading market position, striving to deliver robust performance to reward our shareholders and society at large. Please allow me to introduce the members of our management today joining us, Mr. Qie Ji, our Chief Financial Officer. Today's conference will consist of 2 parts. First, our CFO, Mr. Qie Ji, will provide an overview of the company's performance for the first quarter of 2026, and then this will be followed by a Q&A session. I will now turn the floor over to our CFO, Mr. Qie. Ji Qie: [Foreign Language] Unknown Executive: [Interpreted] Thank you, Mr. Qie, for the presentation. We will now proceed to the Q&A session. To allow more investors the opportunity to participate, please limit yourselves to no more than two questions. Before asking your question, please state your name and the company's relation. Please note that [indiscernible] interpretation will be provided throughout the Q&A session. We kindly ask you to [indiscernible] after each question to allow time for interpreter. [Operator Instructions] Unknown Analyst: [Interpreted] So I am [indiscernible] Everbright Securities. I have 2 questions, starting by the first question. As we can observe that with China's national strategy of ensuring national energy security, COSL has seen increased production output as well as reserves, in particular, with remarkable achievements in the deepwater area and South China Sea. We have also seen that you have increased the utilization of your semi-sub platform in deepwater area in Q1. So the first question concerns, can you give us a guide on the day rate forecast and operational volume of your deepwater platform throughout the year? So that's the first part of the first question. And the second part is, how do you see your competitiveness against international oil service giants? And the second question is we have observed that oil prices have been skyrocketing since beginning of March and have remained at high level, in particular, given the high oil prices and given the current geopolitical conflict, China's national energy security becomes all the more important. Me and a lot of other investors all agree that Chinese government will do more in safeguarding its national energy security. So the question is, how do you see the status quo of your operational volume? And do you have any forecast for your operational volume down the road as well as CapEx forecast? Do you feel the same as I have just introduced, in particular, how is your order reflecting such a new situation? Unknown Executive: [Interpreted] So you have touched upon 2 questions. One more concerning the macro side and other more about our forecast. I'll try to answer both of the questions briefly. So firstly, on the whole, our deepwater semi-sub platforms have been doing quite well for the first quarter of this year, mostly benefiting from our overseas operations, especially operations in Brazil, south part of Brazil, which have seen obvious -- clearly improved operational days because that platform was not became operational until September last year. As for the Chinese business, our semi-sub platform's operational days or operational volume have maintained relatively stable as new prices become executed. While to be honest, some of the semi-sub platforms, the price have increased slightly. This offset the slight decrease of the actual operational days of our semi-sub, which maintained the overall increase of our drilling platform services. As for the full year cost because we are waiting for the whole year cost, from our clients, we maintain dynamic conversations with them, hoping to satisfy their requirements of resources in either against the geopolitical situation in the Middle East or in the new era of the 15th Five-year plan period. As for the second question, I think that we still need to investigate and analyze how things change regarding the oil prices and regarding the Middle East situation because we were seeing spot prices as high as more than $110 or $120 and even higher. And at one time, WTI was even higher than Brent. However, over the past couple of days, we do see spot went down to about $80 plus. So such volatility has already become something that we can barely make any forecast about. I still believe that oil and gas suppliers will make sustainable and rational judgment on their part. As for domestic China situation, CNOOC is working to become a leading supplier contributing to oil and gas production increase in China domestic. And we have also seen that their crude output for Q1 increased and they contributed a large part of the output increase of crude oil coming from China. So again, to align with the first question, we will keep observing CapEx adjustment and whole year forecast adjustment made by CNOOC, and we will provide resources to provide guarantee to their request. Lawrence Lau: [Interpreted] Lawrence from BOCI, Bank of China International. I also have 2 questions. The first question is that I've seen that in the first quarter of your finance expenses, there was a large part of exchange losses. So can you walk us through to what extent or how large such losses and why there was such a loss? And secondly, I would like you to walk us through the income and profit performance of the first quarter. Unknown Executive: [Interpreted] Okay. Thank you very much for asking the questions. Regarding your first question about our finance costs, indeed, in Q1 2026, we have seen exchange losses to the amount of around CNY 300 million, CNY 303 million to be more specific, which is CNY 208 million higher than the same period last year, mainly because of the accounting denomination currency that we use, and we have business dealings with overseas subsidiaries and the balance contributing to such number that you have seen. It's not necessarily a result of our increased business scale overseas. However, as we keep dealing with our overseas intermediaries, the balance and the number will always be there. To elaborate further on this question, we are very much aware of either exchange profits or losses as a result of the situation that I just introduced and how it affects or even disturbance the operating performance of the company, we are even bothered by that. So we are currently examining and looking at some possible solutions to take measures at the right time, we choose the timing to take measures for the purpose of closing any influence on the normal operation of the company as a result of such FX exposure arising from accounting treatment. Measures include, but not limited to, adjusting the functional currency that we use in bookkeeping. And then when it comes to a specific breakdown of our revenue and profitability, on the whole, things are better than expectation in terms of segment breakdown. For our drilling service, domestic and overseas revenue, operating margin, and operating profit, all 3 are better compared with the same period last year. In terms of the well services, domestic and overseas, with especially overseas revenue performed better than expectation. Operating profit margin reached around 18%, 1-8-percent and both domestic and overseas well service revenue and profit have increased year-on-year. As for geophysical and vessel service, both performed stable. And to add one more thing about the operating profit. So for the first quarter of this year, operating profit of COSL reached CNY 1.53 billion, an increase of 22% year-on-year. Both domestic and overseas have increased 20% year-on-year, which means that the company's normal operations have been rather good, excluding or aside from whatever impact that we suffer from the exchange losses. Beina Yan: [Interpreted] Yan Bei Na From CICC. I have 2 questions. The first question is about your jackup because I've noticed that your jackup platforms utilization days in Q1 of this year went down a little bit because of some scheduled repair and maintenance scheme. So the question is, after the maintenance and repair complete, do you see their utilization days increase in Q2 compared with this quarter? And my second question is about your business in the Middle East because we do see some pause in the operation of some contractors in the Middle East in March. However, starting from mid-April, a lot of contractors have recovered their operations. So I wonder how that will impact your Middle East operation. Unknown Executive: [Interpreted] So to firstly answer your first question. Indeed, in Q1, our jackups repair days have increased significantly compared with the same period last year. Such repair has already been planned for by the company. And you will find that throughout the year of this year, there will be more repair days -- scheduled repair days of our platforms compared with previous years. And for Q1, mostly such repairs are concentrated in our jackup platforms domestic, and our semi-subs repair have maintained stable. But you will also find that whatever impact the increased repair days of our platforms has on our company's revenue has already been offset by the high day rate of China domestic jackups and semi-subs and the execution of the high day rate in Norway and increased part contribution by Brazil. There is one more thing I want to add for the first question because there is a part about our repair plan for Q2. Such plan will be very much aligned with the operational plan of our clients. So that's about the first question. As for the second question, the situation in the Middle East, the war occurred or took place in the Middle East on the 20th of February. So in Q1, the situation didn't impact us in a major way. However, we do gradually start to feel such impact starting from mid or late March. Specifically, our jackup and semi-subs in Saudi Arabia and Kuwait maintain operational and keep charging. However, the land rigs in Iraq have been affected by the decreased output in Iraq and such impact is already being felt. Then regarding your question about the Middle East changing situation, we basically will take 2 measures in response. One is to try to scale up our businesses in the Middle East. Let me give you some examples. We have recently secured a long-term large value contract for our well service in that region. And also, we have secured a turnkey or EPC contract for our drilling service in Iraq. In addition to that, given our global landscape, leveraging such advantage as a global player, we try to have opportunities in ASEAN as well as in America as an EPC contractor. We already see progress in both fronts. The increased business, we hope, can hopefully offset the impact as a result of Middle East. And on the other hand, we keep a close eye on the Middle East situation and make plans so that we are always ready when our clients are ready to resume their operations in that region. In another -- thirdly, we will seek opportunities as maximum as we can try to replace some of the players. Unknown Analyst: [Interpreted] From Guosen Securities. My question is, I noticed that a couple of days ago, COSL announced a cooperation framework agreement with a player in Kazakhstan because when it comes to the Middle Asia, COSL is a new player. Middle East -- Middle Asia features new in your global landscape. So can you walk us through the overall market of oilfield services in the Middle Asia or specific in Kazakhstan? And I would appreciate it very much if you can give us more details on how -- when do you expect the cooperation become more of a substantiality. Unknown Executive: [Interpreted] Thank you for the question. Due to the limitation of my professional knowledge, I can only share with you to the best of my knowledge for COSL and for CNOOC, Middle Asia or Central Asia has been an area that we have left for a long time and the reentry into this place is something of significance. So not long ago, the Chair of the Board, Mr. Zhao, went personally to Kazakhstan to sign the cooperation framework agreement that you have just mentioned, which will add a very promising point to the global landscape of COSL. So we did have conducted some preliminary investigation into the basic oil reserve situation of that country, and we find that mostly the reserves are in the mudflat area and very much prone to extremely cold weather. So the plan will mostly request efforts by our colleagues from the cementing business area, directional drilling, LWD and the colleagues specializing in other areas to work together. We are currently having discussions on doing some -- on creating operational plans for some test wells. As more of the details of such plans are coming out, we will be happy to share with all of you more details. Unknown Analyst: [Interpreted] From Bank of America. I have 2 questions. So for the first question, I would like to pursue further on the exchange losses because we know that exchange profits or losses, only transactional differences are recorded in your profit. As for translational differences, such differences are recorded in your OCI. So I wonder whether the appreciation of RMB has affected your dollar-denominated contracts already signed. And also, I would like to ask because you mentioned that your semi-sub platform day rates have increased. So may I ask whether such increase is observed in domestic China? Or is it because you have made adjustment of your day rate because of the RMB appreciation trend that you expect will continue down the road? And one more part of the question is if RMB keeps appreciating, whether exchange losses will keep being recorded in your profit in the future? And my second question is regarding your well service; can you walk us through it more? Unknown Executive: [Interpreted] So to answer the question, let me give you a very simple example using specific numbers so that you understand it more easily. Let's assume that the parent company, transmits USD 100,000 to its overseas subsidiary, so the USD 100,000 is reflected on the balance sheet of the parent company at RMB 700,000 if the exchange rate is RMB 7. In an extreme situation, if the exchange rate goes to RMB 6, which means on the balance sheet of the parent company, the RMB 700,000 becomes RMB 600,000 and the RMB 100,000 is naturally recorded as the exchange loss. For the overseas subsidiary because the RMB 100,000 is not -- USD 100,000 does not change because everything is priced in U.S. dollars. In doing balance sheet consolidation, USD 100,000 can be balanced out, but the RMB 100,000 as a result of exchange loss is recorded as finance expense. So if, say, RMB keeps appreciating against the U.S. dollar, the exchange loss that you will find on our balance sheet will expand as a result of the example that I just mentioned. So we are working on taking different measures, trying to narrow the USD 100,000 exposure, taking different means, for example, including narrowing it from USD 100,000 to USD 10,000 in order to minimize the impact. But if you take a look at a longer timeframe, throughout the 14th Five-year plan period in between the 2 years of '21, '22, there was 1 year a major exchange profit and the next year, a major exchange loss. But the overall impact on the company's balance sheet throughout the 14th Five-year plan period was CNY 40 million, 4-0-million. As for the second part of your first question, you have actually raised 3 questions. So the second part of your first question regarding the semi-subs, on the whole day rate of our semi-subs for this year did not change in any major way. However, there was indeed one semi-sub in domestic China, the day rate has increased significantly in Q1, and its utilization rate reached almost 100%, which greatly contributing to the revenue increase of our semi-sub. As for overseas semi-sub platforms, because we have signed long-term fixed rate contracts with the clients, therefore, didn't -- there wasn't any major change. As for the well-service business segment, in Q1, the revenue was CNY 6.07 billion, an increase of 5% year-on-year, mainly benefiting from the integration trend of our overseas business, which is growing very fast. In Q1, net margin was CNY 1.11 billion, an increase of 18% year-on-year. Both domestic and overseas have increased, especially overseas net margin has increased. As for the well service margin rate, in Q1, the margin rate was 18.2%, an increase of 2 percentage points year-on-year. Domestic margin rate exceeded 20%, becoming a main contributor of our profit margin increase in Q1, mainly because last year, there were certain one-off factors reducing our margin and such factors becoming absent this year contributed to the margin increase. Going forward, we will continue to work harder in securing new contracts for our well-services. As mentioned, despite the worst in the Middle East, we still managed to secure one high-value long-term contract for cementing service. I believe that the impact -- for all the impact, there will be such impact is only short term. As you can see, we still have 4 well-leader drill lock systems operating simultaneously in Iraq, which will help us to gain increasing market recognition and help us accelerate our business scale up in Middle East. Operator: [Interpreted] In the interest of time, this will be the last investor. Unknown Analyst: [Interpreted] From Changjiang Securities, the question is about your shareholder return plan for the 15th Five-year plan period. Do you have any plan to increase your dividend payout to the shareholders? Unknown Executive: [Interpreted] Thank you very much for the question. Giving back to investors or investor return, it is fair to say it's a purpose and the center of focus of all the business and operational activities of the company. As you can see, the increased EPS is a reflection of the 20% net margin increase of the net profit attributable to the shareholders, which is a testament to the fact that we respect and give back to shareholders. So for the -- throughout the 14th Five-year plan period, you noticed that our revenue or our turnover increased from CNY 30 billion to CNY 40 billion and to CNY 50 billion, exceeding CNY 50 billion. We are still making plans and adjusting plans for the 15th Five-year plan period. But the hope is in the next 5 years, our revenue can achieve another milestone increase as we have seen before. As for the dividend payout, we, of course, hope to fully share our growth with shareholders. This is very much dependent on the business growth of the company and strong cash flow situation of the company. And on the whole, the payout ratio, we hope the payout ratio shall be stable with the increase. Operator: [Interpreted] Thank you for the questions, and thanks to Mr. Qie and the management team for their detailed insights. We would also like to express our sincere gratitude to everyone for your ongoing interest in and support for COSL. Due to time constraints, this earnings conference call is now drawing to a close. If you have any further questions, please feel free to reach out to our IR department any time. This concludes our conference call for today. Thank you all and have a nice day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Angus Bean: Good morning, everyone. Welcome to DroneShield's First Quarter of '26 4C results. It's a pleasure to be speaking with you this morning. So my name is Angus Bean. I'm the CEO and Managing Director for DroneShield. And I've got with me Josh Bolot, who is our Head of Investor Relations and Strategy and we're pleased to present our results to you this morning. Firstly, many of you have seen the news. DroneShield completed a leadership transition in the last couple of weeks of both our CEO, Oleg Vornik and our chair. We announced the market that our chair, after 10 years, Peter James, would not be standing for reelection, and we have had the appointment of -- sorry, for election our incoming Chair, Hamish McLennan. The news of this leadership transition has been received very well. And I'd like to thank, obviously, the whole 500 staff of DroneShield for their support during the last 2 weeks as well as our investors, various stakeholders and our partners around the world in the support of this transition. We'd also like to invite you to attend or join online, our AGM at the end of May, and we look forward to having another update of the business at that time. I'd like to also touch on what I've been up to in the first 2 weeks as CEO of DroneShield. Many of you have seen me in the past over the last 10 years in previous roles as Chief Technology Officer and Chief Product Officer. And it's a pleasure and an honor to step into the CEO role. In my first 2 weeks, it's a bit about listening. It's been about speaking with our team, understanding what they need, what their challenges are and making sure that we're all working together. DroneShield is now a sizable global entity and making sure that the team are moving together is a core part of my role. We've also been speaking to shareholders, understanding their views on the business, learning how we can improve and really listening to where they believe the business can be taken in the future. And we thank you for all the input from all our shareholders around the world. And lastly, we've been speaking with our partners who more and more we rely on to provide great commercial and technical opportunities for us around the world. So thank you for all of our partners. Let's move into the presentation. As many of you would have seen by now, we released our numbers yesterday, and these are outstanding results. This is the second highest quarter in terms of revenue on record for the business, and it demonstrates the continued momentum that -- and leadership that DroneShield has in the counter-drone market. Already, by this early stage in 2026, we have $155 million of committed revenue, which is an outstanding result for a business that only a few years ago was doing sub-$50 million on an annualized basis. So to be here in April with $155 million revenue committed for the year is an outstanding result. Interestingly enough, we are seeing, in our opinion, a better ratio between the larger military contracts that we at DroneShield have become known for, but also an increase in repeat and recurring smaller orders which is lending itself to allow the business to be much more predictable and allow us to make better decisions in the future. We are just as comfortable executing on these large military contracts as we are with the more sustained revenue streams from both military and the emerging nonmilitary market, which by dollar value individually are less, but certainly at a much significantly higher volume. And that's really good to see. It allows us to make better decisions as a business. You'll also note an increase in our Software-as-a-Service revenue stream for the quarter. One of our objectives, and we'll speak more about this later in the presentation, is to get to the point where we have above 30% recurring revenue as part of our business strategy. And so this is a great first step in moving in that right direction. In terms of financial discipline, you will also recognize this is our fourth consecutive quarter of positive net operating cash flow. Again, an important milestone for the business as we are proving operating leverage is increasing and our ability to operate the business is improving. In terms of momentum, I'd like to give a -- I'd like to give a bit more of a history analysis of the numbers. What you can see from the years of 2021 and 2022, is the early adopters, some small trial and test evaluations of our technology. Through 2023 and '24, we had a significant increase in those revenues, and that was primarily through first-time buyers and customers rolling out our products in a minor way. In 2025, we had an outstanding year. And this really represented the first time that militaries were buying as part of defense programs of record and part of much larger military programs that takes a number of years to come to fruition. 2025 really recognize that for us and as you can see in 2026, the results so far are very positive as both militaries are continuing to buy as part of much larger planned procurement activities. And this is where DroneShield really sees a lot of our business coming through in the future. We've spoken to some of the company highlights and the financials but it's important to understand what the future and also the company's position. Our sales pipeline remains strong at $2.2 billion. This is the same update we provided just over 2 weeks ago in March -- sorry, at the end of March. We have 312 deals in the pipeline, 15 of which have a value over $30 million. So the pipeline remains strong. We do have a number of deals that are outside of these 312 , but these are yet to be fully qualified. And so these are unweighted and not -- and at various stages of development in terms of the sales maturation cycle, but $2.2 billion pipeline remains a strong pipeline for the next couple of years. Operationally, we're in a great place. We have over 500 staff now in 7 different countries with a large portion of our capital being invested into research and development, which is becoming the norm in the defense and military industry where companies are being asked to self-fund programs and then the output of those programs is being procured at scale by militaries around the world. Our cash balance remains strong, again above $200 million cash balance, which really gives us the ability to be flexible and jump on opportunities when we see them. Globally, we are increasingly seeing a very turbulent and perhaps a chaotic environment where the world is moving to a multipolar order, and that is causing large tensions around the world. Our 2 primary markets remain the United States and Europe. The U.S., for example, we are seeing the confluence of 2 really significant trends. One is the regulatory environment and the second is the unlocking of significant revenue -- significant -- of significant budgets for defense and non-defense spending. In terms of the regulatory environment, we recently saw the Safer Skies Act, which unlocks 17,500 state and local law enforcement to actually start going through the process to procure counter-drone equipment, which was previously unavailable to them. The programs of records such as JIATF401 now are really taking -- starting to take place. We have the Department of Homeland Security also allocating significant budgets to Counter-UAS. A headline for us for this update is the recent receipt of a FIFA World Cup associated order, which is critically important, as DroneShield has done a number of headlines, both executive protection and sporting events around the world in the past. But the FIFA World Cup is an important one because it demonstrates, again, this idea that local law enforcement, who is the end customer are also starting to adopt counter-drone technologies, specifically those that DroneShield offer. This is a very positive sign. Europe and the U.K. remain a core part of DroneShield's strategy. Many of you are aware, we moved our Chief Commercial Officer, Louis Gamarra, and his family to Europe. And so our center of sales gravity is now in Amsterdam where we've recently opened our new headquarters. We've also opened up production in Europe as well, and we'll continue to expand that. And that allows us to be compliant with the Readiness 2030 or ReArm Europe Plan where we need to be at 65% European industry content to be part of that program. So we are now compliant and we have already started receiving orders through that umbrella. Outside of those 2 major markets, we still see strong growth in Asia, Latin America and the Middle East. And these are -- we are continuing to grow our sales and commercial operations in these areas. Australia remains our home, and we are really proud as an Australian business. We are part of the flagship LAND 156 program on both Line of Effort 2 and Line of Effort 3, and we anticipate to see additional orders from Australia in the months and years to come. In terms of our competitive differentiators, we have both technical and commercial differentiators. Our technical team, which I'm incredibly proud of, we have over 350 world-class engineers, developers and designers. We are able to take this technology from the ground up from the chip all the way through to the end product manufacturing. So we have full in-house capabilities to provide these world-leading technologies and we are in full control of that manufacturing cycle. Additionally, over the last 10 years, DroneShield has developed significant amounts of data on various types of drones, whether that be radio frequency recordings through to radar data, through to acoustic recordings. And so DroneShield holds one of the largest counter-UAS appropriate datasets in the world, which is a core tool and a core differentiator for us. This is something that is incredibly hard to replicate in a short space of time. Commercially, we are a truly global company now. You've seen that we've bolstered our -- both our U.S. and our European presence as well as our presence here in Australia. And fundamentally, our 70 distributors around -- 70 partners around the world remain a core part of the business and that the DroneShield's hub-and-spoke model continues to prove to be effective. In terms of the vision for 2030, this is something that Josh and I will be speaking more and more about over the next few months. It's exciting. We're seeing continued growth of our military market. In addition, we are seeing that now the green shoots of this commercial or nonmilitary market, which we have anticipated for almost a decade. DroneShield is incredibly well positioned as our technologies can be utilized in both military and nonmilitary markets, particularly with the regulatory change we discussed. DroneShield will remain a flexible organization in terms of how we approach the market. And so we have a multichannel market approach where we can either be the prime, the subprime, the partner or go through a regional distributor, or go direct to end users. So DroneShield, we take a multichannel approach there, and it really depends on the environment and the requirements of that location. In terms of the revenue target, we have a -- our big goal is to hit $1 billion annualized revenue with 30% of that is recurring revenue in the next few years. This is a substantial uplift on numbers that were already a 4x increase on previous years. But to fuel that, we are seeing strong diversification across our end users, geographies and our products, both hardware and software. And so we feel that the DroneShield business is in a very strong position in terms of its diversification across all those metrics. We also -- you'll also see, and you'll hear from us again in the next few months around DroneShield beginning to monetize our whole of lifecycle solutions. Today, we do some of the harder parts, which is new sales and new product development. DroneShield will be getting into additional services, both software and recurring services to continue to -- continue to strive towards that $1 billion annualized revenue and that 30% recurring revenue number. Our global presence, as I mentioned, remains strong with headquarters now in Australia, the United States and Europe, but you'll also see us continue to expand on our regional hubs in Asia, Middle East and Latin America. And finally, regional manufacturing in core markets will be a core part of the strategy over the next few years. I think this slide does a lot of work in terms of explaining how we see the counter-UAS ecosystem. DroneShield is very well positioned, providing layers 1 and 2 of the counter-UAS industry. In most cases, for most customers, the first technology they will look to employ is a radio frequency detection, and if they're able to, defeat solution. This, as many of you know, is DroneShield's bread and butter and has been a core technology that we continue to build on today. This is the most cost-effective and most reliable way to down the most amount of drones or deal with the most amount of drones that we see in the market today. So radio frequency continues to be a core technology being deployed by Tier 1 militaries and security operators around the world. Once the customer buys enough and they're starting to scale up their usage of those RF protection devices, often the next thing they need is a way to orchestrate them together. And that's where our DroneSentry-C2 comes in. DroneSentry-C2 allows an operator to have multiple devices deployed on a Google map style interface and they can then operate those devices fully remotely. We also released DroneSentry-C2 Enterprise at the end of -- excuse me, of last year that allows customers to also manage multiple sites themselves, so another layer above that DroneSentry-C2. From there, often, our customers ask us for additional layers of protection, and that's where we rely on our partner network of radar, optical and various other technologies where DroneShield provides layer 3, 4 and 5 solutions as part of that C2 solution. This is a constantly evolving technology field, where new technologies or various adaptations of existing technologies is constantly changing. And DroneShield can remain relevant in all of these areas by partnering, and through our extremely good test and evaluation team we can find the best sensors and effective technologies around world, integrate them into our C2 and offer them to our end users. You would have seen recently this included the recent signing of an MOU with Origin Robotics, an interceptor drone company out of Latvia. Over the last 10 years, DroneShield has developed a comprehensive suite of solutions across the 3 core operational scenarios that we see in counter-drone and these are dismounted, on the move and fixed site. DroneShield now offers solutions for all of these categories. And in addition, late last year -- sorry, in 2025, we offered our first SentryCiv product, a product that is specifically designed for the nonmilitary market. This is something that you'll continue to see from us in the future as we refine our approach to the emerging nonmilitary market. We've talked a little bit about the Software-as-a-Service, and we'd like to unpack exactly how that works. So we have 3 layers of software at DroneShield at the device layer, the site layer and at the enterprise layer. DroneShield now, again, over the last few years developed all their solutions from the ground up ourselves. And we can now successfully apply a Software-as-a-Service subscription to each of these layers, meaning that customers that are utilizing all 3 layers have a multi-software SaaS applied to their solution. And if you think of this as close to antivirus analogy, this is something that our customers are really fond of in terms of they need ways to keep their software updated to the latest software as similar again to antivirus. The longer you go without updating the software, the more likely that the drone technology may have changed and you may miss some significant change. So DroneShield has a strong pull to its Software-as-a-Service revenue streams through the need to keep those software up-to-date on each level of those devices. I'd like to acknowledge our senior leadership team. Again, over the last few years, we've strengthened our leadership team and we now feel very well positioned to continue to refine that and continue to build out the organization to achieve our significant revenue targets in the future. Lastly, as we mentioned at the top of this presentation, we have announced changes to our Board and our Chairman of 10 years, Peter James has decided to retire from the Board and he will not seek reelection at our next AGM. And Hamish McLennan has been -- will be appointed as the Chairman following our AGM in May. All right, and for last point on the Board. As we have previously announced, we will be -- we are reviewing and we have an ongoing process to seek additional Board members to continue to grow the experience and also the skill sets that our Board can offer the business to support that growth. Thank you for listening to the presentation this morning. I think one of the most important part of these presentations is to dive into some Q&A. And I'll hand over to Josh to start that process, and we'll also start taking some questions from the Q&A posted in the Zoom link. So Josh? Joshua Bolot: Thanks, Angus. And thank you for those investors and interested parties who have submitted questions in advance. That's been very useful. I will also combine those with some that we've received online and please continue to submit those. One question which has come through has been regarding the global conflict and escalation of global conflict and the widespread commitments in higher defense spending in the counter-drone space and how that's feeding into our revenue pipeline -- potential revenue pipeline. So maybe you want to talk a little bit about that and also the commercial fields that we're now moving towards. Angus Bean: Thanks, Josh. That's right. Well, firstly, the global situation, as we mentioned, does seem to continue to deteriorate and that puts DroneShield in a very important position as drone technology is one of the core disruptors and is essentially revolutionizing the military and security environment. DroneShield we find ourselves as an Australian business in a strong position to create these solutions and provide them to our end users, our Western allies around the world. Even in the last week, we've seen significant budget allocations from Australia, from the Philippines and from the United States specifically calling out counter-UAS as a core part of their expanded defense budgets. Our view is that this is driving the exceptional results that we've announced this morning with $155 million of committed revenue for 2026 at this very early stage. And so we'll continue to execute well, keeping our heads down and focus on both our product development strategies as well as our commercial strategies to take full advantage of these additional budgets being allocated at a rapid clip. Joshua Bolot: Thanks. The next question relates to revenue and profit guidance assessments. I'll address that one. DroneShield does not provide revenue or profit -- or earnings guidance. We share information about our progress, which includes, obviously, periodic financial reporting, the presentations to investor groups, including these and those which we lodge with the ASX and material contracts and that threshold for material contracts is over $20 million now and as well as other trading updates. And we feel this is the right approach given the nature of the industry we operate in. And as the company moves towards a more predictable style of revenue, for example, the recurring revenue, the SaaS lines over the next few years, that will help provide a greater granularity around that. In regards to the material contracts of $20 million, and this may cover off a few other questions. There was a question about the frequency with which we announced those. I think what's important right now is that 3 weeks ago -- just under 3 weeks ago, we announced the revenue pipeline. So the committed revenue for the year was at $140 million. Today, it's sitting at $155 million and we have not announced any material contracts over that period. So that provides an indication of a number of smaller sub-$20 million orders that are constantly being received from existing end users as well as new end users. And that's a very important sign of just the general maturity of the business as it's growing. So that kind of addresses that one. The other part, which we want to talk about is that the revenue and the trading update that was provided at the -- in the early days of April was prepared just as April was beginning. And there was a slight variation between the Q1 revenue change in -- on the 8th of April and what we've ultimately reported yesterday. That they should be taken in context that a comprehensive month end takes longer than a few days. An order delivery, which was made in the closing days of March was only notified to DroneShield during that month end process. And we recognize revenue when customers confirm the receipt of the day that they receive it. The suggestion that this might lead to bringing forward revenues is incorrect, and it still remains our second highest revenue quarter and the highest cash receipts quarter. Angus, the next one, which I might put to you is we're on government panels both in Australia and other jurisdictions. What's the commentary around the Australian panels? Angus Bean: That's right. So Australia's flagship defense counter-UAS program is called LAND 156, it's run by the Australian Army. And we are on 2 of the 3, and we hope to be on the third when the time is right, but we are in 2 of the 3 of those lines of effort. We've already received orders under the second line of effort, and we are on the panel, as you mentioned, Josh, for Line of Effort 3 and things are starting to move quickly where we're involved in a lot of good discussions with the Australian Department of Defense around LAND 156. Joshua Bolot: Great. The other discussion has been -- it's come through a few times. I'll address it because it will take a few questions off the register. The question is regarding dividends and the intention to pay off the dividend reinvestment scheme. DroneShield is a high-growth focused company and it has not paid dividends today. There is no current intention to do so as it is maintaining cash balances for reinvestment in product, potential acquisitions and other such opportunities. The Board does assess the situation from time to time, and will advise the market when there are updates to the dividend policy. A broader question here, Angus, is regarding the movement of technology towards other drone and robotic technologies seen in the market. There's been a question received online regarding non-aerial counter-drone defeat and maybe that expands the conversation towards our product development pipeline as well. Angus Bean: Thanks, Josh. So DroneShield, absolutely. We've updated our approach. And if you look at a lot of our documentation, we now refer to instead of just counter-UAS, which is counter uncrewed aerial vehicle. We often say UXS. And the X means multi-domain, okay? And so over the next few years, we are going to see an increase in ground UGVs, the surface of the water, USVs, and even underwater autonomous vehicles emerging. DroneShield and DroneShield's Technologies, we believe, are very applicable as these new types of threats emerge, and we have some of the core building blocks, whether it be the radio frequency, the radar and obviously, our C2 is the core orchestration layer to counter these emerging multi-domain assets. And so DroneShield, yes, we are opening our aperture as the technologies change and as we see essentially the super cycle and the trend go towards replacing human inventory and humans on the battlespace with a more robotic and autonomous vehicle selection. So DroneShield, we are one of a handful of companies around the world that has the proven expertise to execute the technology stack that will be utilized against these types of technologies in the future as well as the vision to counter these types of technologies in the future. Joshua Bolot: Thanks. The next question we've received is in relation to the staff costs and administration and corporate costs and that we've received this offline as well as online. So first I'll address that. The comment in -- this refers to a comment in 1.2F of the 4C, where there were some additional wordings regarding the salaries of the engineering team. This is an inadvertent error from a version control in the preparation of the 4C only. It has never appeared in prior 4C's and it does not impact the underlying numbers or methodology. The engineering team has always been in the staff costs of Line 1.2E and as they are in this 4C. So the commentary there is an inadvertent comment. On the matter of staff costs more generally, during the fourth quarter of 2025, there were some exceptional one-off items in the staff cost number. This led to it being higher in that quarter compared to those of the current Q1 2026. Without these one-off costs, Q4 staff costs, which were higher and would have set somewhere between those of this current quarter and those in Q3. So that addresses those matters. The next question regarding -- we've received online is regarding the transition changes. And I think it's fair to say we've addressed those quite thoroughly in the communications in early April. But importantly, there has been a considered plan with Angus joining and with Oleg's decision to step back. He still remains an adviser to the company and has -- and provides regular support where required, including in discussions with staff, with end users and with partners around the world. So we obviously understand that, that news would have been a surprise to some, particularly after so many years and developing the company from it's really embryonic stage. But after nearly over a decade after nearly 12 years, a decision for someone to step back and have personal reasons why they'd like to do that, I think, should be respected. The next question, which I'll bring to from the floor, let me just bring that up for a second. Perhaps you just want to talk a bit about the head count and where you see the main areas of our head count moving. Angus Bean: Sure. So as we've mentioned, we have about 500 staff across the world at the moment. We've -- over the last couple of years, many of you know, we've substantially increased our head count and we will continue to do so in a controlled way throughout '26 and '27, and you'll see a lot of that head count growth will be in our critical regional hubs of our new headquarters for Europe in Amsterdam and our headquarters for the U.S. outside of Washington, D.C. And so control growth will continue into the future in terms of the head count. And obviously, that is in response to the dramatically increasing demand that we're seeing for our products. Our demand on our commercial and sales teams, but also as we are rolling out larger and larger amounts of our multisite multi-center solutions, our field service engineering, training staff to provide those full programs into those end customers around the world. Joshua Bolot: There's been a question regarding the sales pipeline. I know we've addressed that. And a little bit about the frequency with which that's going to be reported. At the moment, it has been reported at the end of March and was there a decision to update it again now? Angus Bean: Thanks, Josh. So look, we felt that it wasn't appropriate to update the pipeline again so quickly after updating it only just 2 weeks ago. So the pipeline we've published for this update is the one that is relevant for this allocation of reporting and so we felt that was the appropriate way, and we'll continue to update the pipeline and obviously, our progress towards that pipeline throughout the year. Joshua Bolot: Great. A question regarding local and international competitors and how we differentiate ourselves in the global marketplace. Angus Bean: Thanks, Josh. DroneShield has a number of critical differentiators, both technical and commercial, as we mentioned. We are one of the most experienced, if not the most experienced counter-UAS company globally. And so although the DroneShield is a core part of this massive groundswell towards counter-UAS, there are competitors around the world. But very little have the scale of operations, the experience to roll out their solutions now at the quality level but also at the scale that many of our end users now demand. So DroneShield, we're in a very strong position. Additionally, being an Australian business and as we mentioned, around defense we are only regulated in most cases by our Australian Defense Export Controls office, which is a really good thing because we have no U.S. defense export controls on our -- most of our core product line items. We are bound by EAR out of the U.S. government for some of the radar technology that we integrate and we import from the U.S. but our core product lines are only controlled by the Australian Defense Export office, which we have a great relationship with. Joshua Bolot: Thanks. There's been a few questions online and also in advance regarding governance and remuneration. So I'll take those ones on. In terms of remuneration, the question is about the remuneration structure and incentives that align with shareholder value. I think there's been a clear move in making sure that their alignment and structures that work with both the shareholder expectations of value creation and growth and retention of staff. This includes the setting of performance metrics, which involve strong revenue growth targets of $300 million, $400 million and $500 million in 12-month periods over the next 3 years, also includes staggered vesting periods, 50% on achievements of that target and 50% after 12 months of continued service as well as minimum shareholding policies for key management personnel. The Remuneration Committee of the Board receives advice benchmarking and feedback from consultants as well as shareholder advisory groups. There will be further discussion of this in the Notice of Meeting for the Annual General Meeting, and we encourage everyone to read through that as well as attend and ask at the AGM. In terms of the remuneration and incentive structure of Angus, of the newly appointed CEO and Managing Director, these were shared in the leadership transition announcement. In relation to that, more generally, there have been questions regarding the governance steps, which have been initiated as a result of entering the S&P ASX 200. As indicated, we did -- we did initiate a search for additional non-exec director. And in that process, Hamish McLennan was identified. In speaking and identifying Hamish and his engagement with the company, we found a global leader who had worked across many industries, both in Australia and international markets, bringing a range of skills, both of a business nature and of the governance nature, which are highly useful in our business. So we look forward to welcoming him on the Board. The search for additional directors has not ended, and we will continue to do so and update the market along the way. We believe that the Board will evolve as the company matures, and that's consistent with any other company of this nature. The next question, which I'll address to you, Angus, is regarding the interplay of third-party products, the interoperability and how the -- how those conversations are sold to end users in the context and trends of our product versus the interoperable third-party products. Angus Bean: Sure. That's a great question. So DroneShield has those really core technology building blocks of radio frequency RF detection and defeat. We have our C2 and our sensor fusion layer. And as we mentioned, in layers 3, 4 and 5, which we offer to end users. That is a conversation mostly that happens with the end user. We have deep relationships now as we are on some really important programs around the world with what are they seeing in terms of the needs of the operators in the field. What are they seeing in terms of the need to secure low-altitude airspace, to secure air bases. And so we understand we have a very strong funnel of information in terms of the future needs and requirements of those operators. And so we take that into account and then we essentially do global searches around the world for best-of-breed types of sensor and effector technologies. And as we've announced of 3 almost consecutive partnerships over the last few months, Origin Robotics, OpenWorks and Robin Radar. We believe these are 3 absolutely exceptional organizations providing a great product and also opens up new markets and new regions for us. So you'll continue to see us do that. DroneShield, we are very focused on our C2 and our core technologies. But we acknowledge that we will need additional layers to be able to be that full turnkey counter-UAS provider but that doesn't mean that DroneShield needs to develop all of these technologies in-house ourselves, and specialization is really important. And so you'll see us continue to partner with the best of the best around the world. Joshua Bolot: There is a question regarding -- and we received this question outside of reporting periods as well regarding the large contract, which is a -- large possible contract, which is sitting in the pipeline. And I think we've previously talked about a number of $750 million, the status on that at the moment. Angus Bean: That's -- yes, that's right. That's a significant goal for us, and it's a contract that, as we've previously discussed, is a follow-on contract from some of the larger contracts that DroneShield received in previous financial years. So we are essentially the incumbent in terms of the technology provider for that contract. And so we feel in a strong position. And I myself have, recently in the last couple of months, met with the end user and decision-makers around that contract. We will continue to update the market on any -- with any confirmed information around that contract, but we won't be advising anything further at this stage outside of the contract remains in the pipeline, and we have great relationships with end user. Joshua Bolot: Thank you. There are a few questions regarding manufacturing. And I think those have largely been dealt with, but just to reiterate, at the moment, the majority -- the vast majority of our product is manufactured in Australia, and that's very important because that allows us to service the markets that we do and with relative ease. We have recently announced the manufacturing capability in Europe, and that is a very important facilitator for us to work towards the ReArm Defense Readiness Program in Europe, and we're very pleased to have that in effect now. The U.S. will come -- had a similar arrangement in place later in the year, and we'll update the market regarding that through a press release. I think more generally, a discussion regarding our approach to manufacturing might be worthwhile sharing. Angus Bean: Sure. So DroneShield, we generally take a light CapEx approach to manufacturing, where we are not involved in the fabrication of most of the parts, and we outsource that to a great supply chain of partners, as Josh mentioned, most of which are here in Australia. And so we don't need to be -- we can be very light on CapEx in terms of manufacturing. We don't require to essentially buy and maintain large mechanical equipment to do that. We utilize our supply chain for that. But what we do are the really important high IP and high-value add components of that manufacturing process. And so that often is the electronics subassembly process, the quality assurance and checking process and the final field testing of the solution prior to it being deployed into the field. So that's where -- that's how we do our manufacturing process. And as you've seen recently in Europe, we've successfully now transplanted our manufacturing setup to a completely external manufacturer -- contract manufacturing arrangement in Europe and that, again, shows that the way we design and develop our solutions. This model is very possible. While there is a lot of IP and know-how in terms of the manufacturing of these goods, the core really difficult part of what we do is actually the software and the encryption of that software that gets loaded onto the devices and so we successfully transplanted that production into Europe, which we're really happy with now. And as Josh mentioned, we are also looking at production options for the United States. But again, the core technology and the core software platform will be distributed from our team here in Australia. Joshua Bolot: One of the questions which has come through is regarding our views around profitability versus growth. I think the company has worked exceptionally hard to reach the pivot point that it has in the last 12 to 18 months, where particularly over the last 4 quarters, it is operational net cash flow positive. And in 2025, announced underlying EBITDA of close to $37 million, which is a 17% margin. I think what we've indicated to the market regarding our operating cost base provides an indication that we are looking at profitable growth within the business as we bring additional product lines and solutions online matched with the growth in the recurring revenue stream. In essence, we do look at -- when we are at opportunities we look at the payback period of new product investment. We do look at that from a number of angles both in terms of the return on investment that it will generate from delivering it into the market. The other thing that we've thought about is when we are looking at acquisitions, is the speed with which we may be able to do a similar thing or the same thing versus acquiring that. So to date, the company has not made any acquisitions, and it constantly is put different ideas and different opportunities. We balance that off with our internal investment and the payback period for those. I think that's quite a useful thing to think about because we do have a useful level of cash available for growth, be it organic or acquisition based. There's been a few questions, particularly around the commercial market. So one question is regarding the progress on SentryCiv to date and the types of customer scenarios that has been used and the growth that we expect there. I think we both know have some really good interesting case studies around that. And also how that will play out over time with things like Safer Skies and the split between commercial and military. So that's a broad question, but I think they go together. Angus Bean: Thanks, Josh. That's right. So the commercial market, as we mentioned, we believe, is now after almost a decade of talking about and monitoring the situation is coming online. Let's say, the nonmilitary market. And DroneShield, as I mentioned, we are in a strong position with already our first product. It's really specifically designed for that nonmilitary market, our SentryCiv product. The SentryCiv product is a high SaaS, almost entirely SaaS-based product, again, feeding another strategy that we developed to feed into that 30% recurring revenue base over the next few years. And it is -- we've made now a number of sales around the world of the SentryCiv product. But these sales, obviously, we don't publish as they are below the $20 million revenue number. But I'm really encouraged and excited to see the quality of the customers who are procuring this. We are talking about really major law enforcement and major, let's say, commercial operators around the world. And so our relationships are deepening with those commercial operators and those law enforcement markets that were previously unavailable to us, either through regulatory or through their lack of finances to actually go out and procure counter-drone equipment. So we are monitoring the commercial space very closely. We are starting to move the business more in that direction, bringing on our product teams specifically designed for that growing segment. But similarly to the way we have successfully penetrated the military market over the last decade, we will -- we don't want to go too early -- too hard too early. We want to mature that approach with the market and make sure every step along the way we take to capture that market is the correct one. And so we will -- you'll continue to see sort of a steady stream of movement in that direction as we continuing our core short-term revenue driver of the military market is self-sustained as well. So yes, we're really excited about the potential emergence of this commercial sector and the green shoots we saw in the first quarter of this year. Joshua Bolot: Thank you. There's a lot of -- a few questions regarding how we interact with the primes of the industry, both as customers, competitors and partnership arrangements with them. I think that's a broader question, particularly some of the companies that people have talked about in the U.S. and Europe. Angus Bean: Sure. So I think one of the most common misconceptions about DroneShield, and we get the question a lot, which is are you concerned about these really significant defense primes who have traditionally been very dominant players in the defense space for many years? And do you see them as a threat to the business? Our honest answer is in almost all cases, these defense primes are our customers much more than they are our competitors. And so whether it be in the U.S. or even now across Europe, we are actively selling to defense primes who are taking our technologies and our products and integrating them into their existing defense programs or into their larger defense rollouts as they capture them. So often, the defense primes are a partner of DroneShield. And as I mentioned previously, DroneShield, we remain very flexible with our approach to market where we can go direct, we can be the prime, subprime, contractor or even engage the market through an authorized distributor in country. So we're really flexible with that, and it will really depend on the region and on how we approach each of those markets. Joshua Bolot: There's a couple of short ones, which I'll just quickly rattle off. Do we deal with the Ukraine? I think we previously identified that we have less than 5% of our revenues currently based on sales to the Ukraine market. To market, obviously, that we've been very supportive of in the earlier stages of the conflict there. And the -- it is still a presence in our revenue, but it is not more than 5% at the moment. A question regarding our security and processes to ensure that we, I guess, commercially and militarily cautious in our approach, both in terms of making sure that our intellectual property is protected and our employees are appropriately vetted. So I don't know if you want to talk about that. Angus Bean: Yes, sure. No, that's a great question. So DroneShield, we are a DISP-certified organization, DISP, defense industry security program. And that is the major defense and security program that's rolled out here in Australia. And we are then -- we essentially govern the business via the rules of DISP. And that sets out very clearly what we need to do from an employee vetting perspective through to a cybersecurity and physical security controls perspective as well as provides a lot of insight in terms of the governance, policies and procedures that we need to have as part of an organization. So it's great actually to work with the DISP team as they provide for you the frameworks that you need to implement and then our significant security team then essentially rolls that out across the business. We are continuing to uplift that DISP certification, but also our general security posture across the organization and globally as DroneShield becomes a supplier of main stage, as we mentioned, larger programs of record. Our security needs to mature and continue to mature to make sure we meet the market where it is and make sure we protect the business. Joshua Bolot: Interesting question, actually. And it's inventory related. I think I'll start off with the answer and then we'll work towards the forward-looking part of the answer. So it's regarding inventory obsolescence. And what's happened in the past, I mean, we announced a one-off inventory impairment, the significant item of $8.5 million in the FY '25 results. That product is still in our warehouses and available for sale, it is still an effective product, and there are still sales of those, albeit at a slower rate. I think more generally, though, the question which comes through, which is how we deal with inventory obsolescence with the release of new hardware as we move into that expanded product set. Angus Bean: That's a great question, Josh. So yes, certainly, that is something that we are considering deeply. And one of the things we're going to talk about, particularly in the second half of this year as we bring on our next-generation platforms which I am dying to speak about, but we will hold off for now, is obsolescence. The good news here is the products that initially we'll bring on to the market do not directly replace any product lines that we see today. And so the product lines that you see on the website currently, we will continue to provide to end users for the next few years to come. And so this is not an immediate impact and much of the next-generation platforms will be slight variation in terms of product positioning or a completely different technology itself. And so we will -- there won't be any necessary disruption in terms of obsolescence but it's certainly something we need to manage. And as we grow our product lines, we are trying to be very strategic about the use of our core components. And for example, using the same chipset, if we can across multiple product lines, allowing us to then order at much higher volumes of an individual item, therefore, getting a better price per item. But then that product -- that chipset that is being used -- utilized in multiple different DroneShield product lines. So we've already started to roll this out in a lot of the core technology platforms that you'll see from us over the next 2 years. Essentially, we'll use a lot of the same family of chips and same core componentry. So again, reducing the chance of either component obsolescence or product obsolescence. Joshua Bolot: There are actually a number of questions, which are very interesting in relation to different trends and different things which people see in social media and whether they're kamikaze drones, whether they're fiber optic, whether they're real, whether they're AI. Maybe you just want to talk about how we assess each one of those developments and where it leads into our product road map. Angus Bean: Thanks, Josh. It's a broad question, but I will do my best. Look, essentially, counter-drone, this is, as we've discussed, one of the most -- drone technology itself is one of the most disruptive elements to the defense and security apparatus around the world as we speak, and DroneShield is one of a handful of companies that are incredibly well positioned with the experience, but also the operations and funds to execute on that emerging trend. There is a lot of noise. There is a lot of diverging technologies being developed. And there's no question, we need to make really good decisions around the technologies we invest in the future, whether that be technologies we choose to develop ourselves. The potential use of an M&A activity to acquire technology new to the business, or as you've seen from us recently, just choose to partner and create really good agreements that are beneficial to DroneShield with Tier 1 technology providers around the world. So we're going to take a balanced approach to that, and we'll assess each of those technologies based on its own merit as to which one of those 3 avenues we want to go down to attain that technology for our end users. The great hedge, I guess, we have from a technology perspective is our DroneSentry-C2 platform that essentially allows us to roll with the technology and integrate various different types of technologies, sensor or effector and provide that as a fully consolidated solution, full turnkey for our operators or if technologies evolve and our customers more increasingly so already have our technology in country in operation, we can augment their existing solutions with this new technology over time. So -- and it is one of the reasons I believe that when Oleg decided to step down as CEO and the Board ran their process that they did end up selecting the Chief -- previous Chief Technology Officer to essentially run the business as I believe that my personal -- personally one of the best positioned people in the organization to make some of those hard calls. Joshua Bolot: I think we'll use this as the last closing question, and it might tie nicely to some closing remarks as well. In relation, I think we've answered the vast majority of questions. And there are some questions, which, unfortunately, we're just not able to answer in a public forum or generally because of operational security reasons or for other reasons, it's just not appropriate for us to provide commentary on those matters. But I think the one which might encourage towards a broader answer and a closing statement is regarding the things that you see happening in the next 2 to 5 years in the business, which will help to get us towards that 2030 vision. Angus Bean: Sure. Thanks, Josh. So look, in terms of what do we need to do? The position that the DroneShield company finds itself in is very strong. And that is, again, to highlighted and demonstrated by this first quarter of '26 update. And so both financially, operationally and technically, we are in a good position. Many of you have mentioned in the comments, these are lofty ambitions, the $1 billion annualized revenue and 30% of that being recurring revenue. These are significant uplifts on where we are today. But we do believe these are achievable. And certainly, we are redesigning and reshaping the organization, gearing up to really go after these ambitious goals. And I certainly wouldn't have stepped into the role and wouldn't have the excitement that I do have if I didn't feel these were achievable. In terms of what we need to do, it's a continuation of our current existing R&D strategy. We currently hold a 2-year product and technology road map that we believe will set the business up really well for the growth that's required to hit those numbers from a product and technology perspective. You will see us, as I mentioned, continue to grow our regional hubs in both the U.S. and Europe. Both of these footprints now are generating good revenue for the business. You've seen a number of those larger deals, most recently out of Europe, but I think there were some comments before about not announcing any U.S. contracts, and I'd like to highlight what Josh was mentioning is that we have received a number of U.S. contracts, but many of them, if not all of them, have fallen under the $20 million, but the volume of those contracts has increased. And that's perfectly fine for us as a business as well. And if anything, it allows us more predictability and more certainty in the organization. So outside of growing the regional hubs, we'll continue to grow our partner base both commercially and technical in the future. And this is something that DroneShield as an Australian business, one that is highly trusted and respected in the sector, we are in a great position to utilize that goodwill and utilize the trust that we do have to partner with some of these great organizations and either enter new markets or augment existing solutions around the world. Joshua Bolot: Thank you. Thank you very much, Angus. I think we're just on 10:00. So we appreciate the time that many hundreds of people -- hundreds of people have used to listen to this update. And as Angus mentioned, we have our Annual General Meeting with the Notice of Meeting coming out in the -- by the end of the month. The Annual General Meeting is on the 29th of May, and we encourage everybody to either attend in person or online. Thank you. Angus Bean: Thank you, everyone.
Henrik Høye: Hello, and welcome to the presentation of the first quarter 2026 results for Protector. We always start with all the employees. And just before we started now, there was a moment of silence, and that was the same when we started with the employees. And then I had a conversation with some people on the first row about -- and I said that I'm quite good at awkward silence. And the reason why I'm good at awkward silence is because I'm bad at small talk. So I'm not uncomfortable when it's quiet for a couple of minutes right before we start. But what we did focus on in that session is about our vision for 2030. In March, we met, it was about 550 out of 700 people in Oslo to discuss, have workshops on 3 elements that are part of our vision for 2030. And the first one is about people. The second one is about data and third one is about innovation. And it's about thinking differently. Back in 2021, we came out of a situation of poor profitability and that we needed more discipline in our underwriting and our profitability focus. And then we decided that growth was something that had to come second. It still is. Profitability is first. But we can now with a stronger basis, stronger profitability basis, have been more bold and have higher ambitions also when it comes to growth going forward. So a lot about -- a lot of it is about being the challenger and redefining what the challenger is in 2030. It is something else than what it was before and what it is today. The sector is developing. We're growing and the world around us is developing. And in that technology and AI is very important. And we have 2 targets, and they are the same as they were in 2025 for 2026. One is profitable growth. That will always be there. The other one is data. Last year, we focused on measuring data points and following up. So we have targets on data points. This year, we're shifting the focus to the value of that data. So we need to get something out of the data. An example can be that we want more recourse on the claims handling side, then we need better data in order to get more recourse or on the underwriting side, we want more relevant and bigger inbox from the brokers, and we want to quote more of that volume. The market history shows that's more about the market. So let's not target that, but we want to see more relevant business. Then we need more data to provide to the brokers, and we need to be the best one at providing data to the brokers in order to get to that place. So -- and then obviously, using AI will not be any value if we don't have good data. So that's a prerequisite for getting value out of all the projects we have. And we have solutions and functionality with AI technology in Protector today. There are examples in claims handling and in underwriting and all employees use it on a daily basis to become more efficient, but we're yet to find the way of really changing the way we work. And one focus area we've had is that if you're good at something, when you've done a process many, many, many times and you are to improve that process, you do it with incremental improvements because you know how it's done. But what's important when you have a technology that can support you in creating higher value is to think about where you want to go. And that's actually quite difficult if you're good at doing the process. So I think that we are very good at -- we have good processes, and we are good at following those processes. But that makes us -- it's a big change to say this is where I want to go. And that's where we need to be in order to make change. So we're focusing on the outcome and the target. And then we start seeing some change, some different approaches to how we do things. But it's a big focus. We're still investing and it hurts and it costs to increase data quality, quantity, structure and availability. And it costs resources and money to test and fail with AI solutions many times. But it's very interesting, and it is a great opportunity to understand our culture in a new way and a better way. Okay. That was this morning and some insight into the cultural part, which is extremely important in Protector. The first quarter is -- the growth has been basically announced previously after the quarter 4 when we talked about 1st of January. And what you can see is that the number is lower, meaning that February and March are lower than the January figure was, and that's true for basically all countries, except for the U.K. Combined ratio is very strong. I'll get back to that because you need to normalize it. There are very few large losses there. And maybe the most important figure here is the one that comes from the U.K., and I'll get back to that when I talk about the volume and the growth later on. One information here, we always really -- since we only work with insurance brokers, we have defined quality together with the brokers, and we do broker satisfaction surveys. And in new markets, we have always done it 18 months after the first policy in sets. And in France, we have now -- we're not 18 months in, but close to 18 months in. We've conducted our first survey, and we have very good results from that survey, both on the general sales underwriting service and on claims handling, the brokers we work with because we only send it to the ones we work with. So the others don't really have a lot of feedback to us. So that's 40-something brokers that have responded to this survey. So fairly small. It's very early. So the first survey, you don't -- we haven't had the opportunities to make many mistakes. But it is an indication that what we have delivered during those first 13, 14, 15 months is something that the brokers appreciate more than what the competitors have delivered. So it's a good start, but let's see when we do the next one, and it's even more important further down the line. So to the volume. And I'll spend the time on 1st of April U.K. because I think that's quite important here. 1st of April 2023, we won a lot of business in public sector and housing in the U.K. The market was hard, meaning that the rates were higher. And some of that business has been out to tender, 1st of April 2026, but not a lot of it. So we've kept a lot of that volume in our books. And what has been out to tender, we have rewon approximately 80%. So that means that the portfolio that we have that has delivered and delivers very strong profitability is very stable in public sector and housing. And that could have been different. I've previously said that we don't know when our business, when our portfolio goes to market, if the rates are too low, we won't win it back or then we will lose it. And what is for sure is that the rates will go down when it goes out to market because the rates have fallen in the market in general. So we have a renewal rate in those sectors above 100%. That is that we're retaining most of the clients, and we have inflation and there is some exposure growth for those clients, and we even have some rate increases. So the rate is above 0. The rate, if you adjust for inflation, is above 0 in public sector and housing in total for 1st of April 2026, which is a very strong result, and it could have been very different. The new sales is another story. So the rates have been falling, and we have seen approximately half of the volume as we saw last year, which was similar to the year before. And we have quoted slightly less. So there have been some clients that we don't like, that we don't have risk appetite for. The hit ratio is slightly lower, very similar for local authorities, public sector and quite a lot lower on housing associations. So that's due to pricing. Competition coming back into the market and pricing being lower. So the result on public sector and housing is -- it's a very strong result, and it's driven by that not a lot of volume has been out in the market and that we have had discipline in the underwriting. And it's strong discipline to end up with this result. And then that's only the limited segment, public sector and housing. Commercial sector is much bigger. We have a much smaller market share. And so that's where the potential is large, and that's what's driving the growth. So that's where we have the new sales in 2026. It's still a softening market in the U.K., especially on property, but it's flattening out somewhat. So we are able to convert some of our quotes to wins more than what we have done before, and we're also quoting -- seeing more and quoting more. And then we have the real estate segment, which I have talked about before. We have opened that segment. But I've also said that I don't expect us to quote a lot of business before the fourth quarter of 2026. We are quoting some business both some in the smaller segment of the real estate segment and also some of the larger clients. What we see is that rates are low as in commercial sector for now, but we are converting some. So we have some hit ratio on what we are quoting. But don't expect a lot to come from that segment before -- or we don't expect to quote a lot before fourth quarter inceptions. And then the market will be what it is. So we may not win a lot in fourth quarter, but we are more confident today with more data and more knowledge about the real estate sector that this is a segment for us. So it's very similar to the housing sector where we have had very good success. So low deductibles and cost advantage is very important. I forgot to say before I started that -- I see that they're speaking in the front here. So I forgot to say that questions during the presentation are welcome and better during the presentation than keeping them all for after. So if you have any questions, the volume side. Unknown Analyst: [indiscernible] Just on the sort of lower-than-expected tenders out there, and I appreciate that being on the public sector and housing side. But do you have any reflections of why that is? Because just intuitively, given the -- all of the comments on price pressure and a softening market, if I were to sort of renew my insurance, it feels like this is the time to do it. But now instead, customers are sort of exercising their options to automatically renew on what seems to be a bit old terms. Why aren't more sort of using this opportunity? Is that a negative read to sort of expectations for the even better prices going forward? Or what are sort of your reflections on that? Henrik Høye: I mean we don't really know. But there are several reasons that drive it. And one is that some of the capacity -- the public sector housing is in a way, a bit of a strange market because it's mostly when new capacity comes in, it comes in through the existing incumbent insurers, Zurich Municipal is one very large player or it comes through MGAs. And these MGAs are not really -- they don't really necessarily have the credibility and the trust from the brokers to be place business with. So then they are waiting with bringing it out to market. the local authorities, they are looking to have a reform in the U.K. to merge some of the local authorities and become more efficient or at least that's the ambition. So they are -- there is some uncertainty there, which makes them honor the long-term agreements or an optional year in the long-term agreements. And then obviously, the insurers are doing a lot to keep the clients. So they're doing something on the renewal side in order to avoid competitions. And that's -- we do that and our competitors do that. So I think there are several reasons why you see that type of lower tender volume in the market. But at the same time, your last comment or assumption, that's an interesting one because we do have a -- we have higher uncertainty on inflation now, and it's a dangerous combo with softening rates and higher uncertainty, and it only goes one way, then on inflation. So to expect that the softening will continue in that type of an environment with post-COVID learnings not too far away, then at least I think that that's a way of discrediting the market and our competitors because the right thing to do would be to now change. Unknown Analyst: And just a quick follow-up on that. Let's just assume that those volumes are sort of rolled over to potentially coming out in 2027, both in terms of the market, but also your -- you mentioned sort of like the portfolio composition of a lot of volumes being won in '23 and '24. And given the sort of dynamics with 3- to 5-year contracts, will then '27 be sort of like a very important year with a lot of volumes, both from volumes being basically postponed into '27, but also on your portfolio with a lot of tenders and a lot of sort of contracts having to be renewed then in '27? Henrik Høye: So both '27, '28 and even '29 are important renewals of that portfolio. So it's -- in a way, we've talked about this before, and we have some estimates of how that volume will be tendered, but we don't know exactly. So -- but let's say that we expose 20% in '27 and maybe a bit more in '28. And then the rest -- we've had some exposed now, obviously, than the rest in '29. And then it depends on the market how that is. But -- but the rates we have from there, and this is also something I've said before, they are not something that we expect to be in the portfolio over time. So that will normalize. And in a way, that market -- those market conditions are better if you have a cost advantage when there is a bit tighter margin than when the margin is very high because then everyone earns money. We go to the claims side, and we like to focus on the risks and the opportunities for improvements. That's on motor this quarter. Obviously, one quarter is short, we write and say that you need to understand that quarterly volatility must be expected both ways when it comes to growth and profitability in Protector to see it over time. But it is a fact that the underlying realities, if you correct or if you adjust the claims ratio for first quarter '26 and compare it to an adjusted figure for first quarter 2025, it is a worsening. So that's a fact. The reason for it is motor. Motor is poor profitability. Property has a very strong and stable profitability, and that's our largest product. And there are not any other problem areas on the product side. So it's motor. So good news is that motor is very short tailed, so you see it very quickly. And it's also easy to understand that if you have many claims, more claims than you had last year as a client and the broker understands this and it's unprofitable, you can adjust prices. But what surprised us is that the claims inflation, which is not only prices, but also frequency increases was higher than what we have seen previously. So there is something that could be volatility. But the way we see it is that we don't think of it as volatility and bad luck in the first place. We first try to find out if there is a reason, if we can find the reason and if there is a systematic problem. So that's how we started. Parts of it, it's in particular from Norway and Denmark. That's where the worsening is the worst or the biggest. And we also grew -- we had a strong growth. 1st of January in Norway, in particular. And parts of that portfolio, the new portfolio is not performing well. So we need to understand if we've done mistakes there or if that also is some kind of coincident or volatility. So we're obviously already looking into it. And so there is something there that we need to understand. And there are actions we need to make. And in addition, you have more uncertainty on inflation going forward. So that's a focus area. But as I said, the good thing is that this is something that we see, we can quickly understand it, and we know it's possible to do something about it. And we also know that we have very good processes of doing something about it on a client level, which gives good results on renewal pricing and adjustments. But we're not very concerned about it. No change in risk appetite. We still believe that motor is an area where we should continue growing. Any questions on claims development? When you look at the time lines here, you see on the large loss side that it's -- we're not at the 8% that we now have as a normalized level, but we still believe that, that's a sensible normalized level. And on the runoff side, I have mentioned previously that best estimate is important for us, both on the case reserving and on the actuarial reserving. But coming from a period with more uncertainty, you can expect that, that uncertainty ends up on the conservative side. It could obviously go both ways, but that's some of what you're seeing now. On the cost side, which we haven't talked about, we talked about the growth and the claims development. On the cost side, there is a reduction. You'll see that broker commission is higher. That's because we grow in France where broker commission is higher. But if you adjust for that, it's a slightly bigger decrease from last year, but most of it is due to the share price reduction and the long-term bonus plan that we have talked about before that has gone the opposite way. So there's no real reduction in cost quarter-over-quarter. And again, that's investing in data and in AI. But obviously, at some point, we need to see that in the cost ratio. And I think there are good -- we have good solutions and good process improvements that have -- that will drive a reduction and scalability in -- on the cost ratio going forward. Investments, that's volatile, as you all know. And on the equity side, we had a big loss in the quarter. Most important thing -- or the 2 most important things to mention is the increased yield. So the yield has gone up due to the interest rate increase. And the other thing is that in the equity portfolio, there was a mistake in the presentation that we sent out on estimated intrinsic value discounts, not that, that necessarily is something everyone believe in, but that said 30%, it is -- the correct figure is 37%, which makes more sense when the equity portfolio has had a loss. So -- but the point is on the equity side is that the underlying performance of the companies has been good. So it's been okay for some time. We've had some poorer performing companies. Now it is -- has turned around. So that's on a good trend. And so that's positive. And just as an example of the volatility, if you look at the equity portfolio today or a couple of days ago, year-to-date, we're plus, and you could figure that out because we have the list of equities. And so the loss is gone and there is a positive return. As of today, but tomorrow could be different. Any questions on the investment side? Yes. Profit and loss, the only thing that you see is that the tax rate is high. That's obviously due to the profit coming from insurance side and there's tax on that and that the reduction of the profit comes from equities where there's no tax. Capital position. So in the quarter, the largest reduction in the requirement on the capital side that comes from a reduced equity portfolio. So that has some effect. There is also some reducing effects on the requirement from the exchange rates, the Norwegian kroner strengthening in the quarter. And then when it comes to the dividend here, the most important factors for that dividend is obviously that we have a faster stress strong capital position. But we also have the U.K. portfolio, we have a high earnings capacity going forward. There's an increased yield in the bond portfolio, but the insurance portfolio is stable. So we know the earnings capacity from that portfolio and more transparency in that following 1st of January and 1st of April in the U.K. And then the French market now has 5 quarters, and we don't see any signs of that being mispriced or that we've had wrong clients coming in. So we're more confident in the French portfolio, even though it will be volatile, but we see some good development in the French portfolio. And we -- even though we see lots of opportunities for the future, we don't have in the short term, i.e., a year, we won't have many new markets started within 1 year. And during that time, we have a high earnings capacity. So that's -- those are the reasons for the dividend. Obviously, we would have liked to have opportunities to use that capital for -- at any time, but this is more a time element. And in the meantime, we will earn some more capital. So that's it on the summary. Any more questions? Unknown Analyst: Just a bit more big picture, the developments in the different markets, and I appreciate maybe U.K. being sort of like the main focus more than concern maybe. But just in terms of your competition, I appreciate that more in general, the underlying claims ratio is up, but some of it is due to frequency, but in some way, I guess, pricing also has an impact on that. Where do you see your competition in terms of their profitability amid a market softening. Is this sort of like a timing issue that the industry will, on a relative basis, bleed out for a few years and then we'll back -- we're back to the '22, '23 situation in the U.K. where you had pretty much the market for yourself? Or is it a change in your competition as -- are there more efficient players out there now versus before? Just any comments to sort of ease our nerves that this is not, in fact, a structural issue. It's more of an irrational behavior type of thing? Henrik Høye: I think it's interesting. But first, predicting where the market will go is very -- we don't spend a lot of energy on that because that's difficult. But we don't see any competition that is different, rather on the opposite where we see MGAs with high cost structures. So there, you know that one element is their commission level. And that commission level is in many cases, almost all cases, double of our cost ratio. And then there is a carrier behind and there's other cost elements to it. So that's -- and those are the ones that drives price in the U.K. market, if we focused on that. In the Scandinavian market, we don't see any large changes or the Nordic market. The French market is a bit early to say, but we don't see -- so if there is a difference between the French market and the U.K. market because there are large markets, there are many players, many of the same players. So if there is a difference, it is that the brokers have a larger part of the value chain in France, which gives the relevant part of the cost ratio that where we have an advantage, a smaller part to play. But at the same time, we see a change in that, that there will be -- it's not sustainable that the brokers have that large part of the value chain over time. So we don't see any signs of that. But obviously, we're paranoid about our cost position in the areas where -- that we need to improve that. because someone could come or competitors can improve. So we need to continue that journey of improvement, and we are focusing on that. So that's important. But we don't see any signs of it. And how the market cycle goes. The historical facts are that the market cycles are long in the Nordics. They're shorter in the U.K. U.K. motor, the market cycles are -- they can be almost quarterly. And that's driven by the consumer sector, but it is contagious to the sectors we are in. So -- and in a way that it's it must be a good place to be if you have a consistent approach and a disciplined approach to underwriting. And there are quick market cycles. You don't need to be part of the cycle that is unprofitable. So if you stop there and then you can be part of something that goes up, that must be a good thing. And it is, in many ways, irrational. And some of the segments we're in, we see irrational behavior now. So there is no way we would -- and maybe we're wrong, but some of those segments where you know that they're not excluding escape of water claims from their cover, our competitors because then they wouldn't be able to win clients. Those escape of water claims, they won't change a lot. They cost GBP 3,500 per claim and the frequency of them, in general, you can predict fairly easily. And when insurance is priced on the level of those claims, then you don't have anything for cost margin and large losses. So then at some point, it will stop. So in some of those segments, we think -- Thank you. Unknown Analyst: Could you please elaborate on what are the main opportunities and what are the main trends you see, when are they coming? Henrik Høye: So it's elaboration on AI and main opportunities, main threats. And I think I said some words previously. But what we -- so one example of a threat is that we have one distribution channel and thinking about whether that distribution channel is present sometime in the future and how that broker part of the value chain will be when you can use agents for parts of that work as a client. That is an interesting exercise, not because we necessarily -- we could argue against or for that scenario that brokers have a smaller role and that we lose that distribution. So it's not necessarily believing or not believing in the scenario, but it's a very interesting exercise to do both together with the brokers, but also for ourselves. And I think the outcome of that is that we will deliver -- as we go, we would deliver better to the brokers. And if that scenario ends up being, then we're prepared for them not being there. So that -- and that's agentic wording, marketing and pricing that can be done. But for the type of clients we have, remember that the average size of our clients is probably something like EUR 150,000. So -- and U.K. has very large clients. That -- to use an agent to quote that is a bit more complex because the data is it's not available like it is in the consumer sector where you have exactly the same cover and exactly the same exposure. So here, there are very many tailor-made solutions. So that -- but what we believe is that we can obviously get efficiency gains from AI solutions, we already do. So we can do more quotes, we can do more claims per person. And in parts of the processes, we have HQ wise, we can do a lot more on HR and compliance and all the requirements that come from the outside, much more efficient. But that's kind of obvious that you can get efficiency gains from large language models. What we focus on is to increase the decision-making ability for Protector that we are more precise in our decisions. And that's more dependent on data than technology because the technology is there. So that's -- and I don't know if it's answered your question exactly, but some words on that. No more questions? Thank you.
Operator: Good morning, ladies and gentlemen, and welcome to the First Quarter of 2026 Earnings Conference Call for CVB Financial Corporation and its subsidiary, Citizens Business Bank. My name is Sherry, and I'm your operator for today. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed. E. Nicholson: Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2026. Joining me this morning is our Chief Executive Officer, Dave Brager; and our President, Clay Jones. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com, and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2025, and in particular, the information set forth in Item 1A risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Dave? David Brager: Thank you, Allen. Good morning, everyone. For the first quarter of 2026, we reported net earnings of $51 million or $0.38 per share, representing our 196th consecutive quarter of profitability, which is every quarter for 49 years. We previously declared a $0.20 per share dividend for the first quarter of 2026, representing our 146th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 13.4% and a return on average assets of 1.33% for the first quarter of 2026. Our net earnings of $51 million or $0.38 per share compared with $55 million for the fourth quarter of 2025 or $0.40 per share and $51.1 million or $0.36 per share for the prior year quarter. Results of the first quarter of 2026 reflects solid growth year-over-year across several financial metrics, including pretax pre-provision income growth, net interest margin expansion, loan growth and growth in deposits and customer repurchase agreements. Pretax pre-provision income grew by $4 million or 6% over the first quarter of 2025. Our net interest margin expanded by 13 basis points over the prior year quarter to 3.44% as our earning asset yields increased by 7 basis points, while our cost of funds decreased by 7 basis points. Average loans grew by $157 million or approximately 2% from the first quarter of 2025. We also increased our average total deposits and customer repurchase agreements by $288 million or 2.4% from the first quarter of 2025. Now let's discuss loans further. Total loans at March 31, 2026, were $8.64 billion, a $280 million or 3.3% increase from the end of the first quarter of 2025. This increase was driven primarily by growth in commercial real estate loans of $141 million, a $62 million increase in dairy and livestock and agribusiness loans and a $43 million increase in construction loans. We also had $34 million of growth in SBA 504 loans and C&I loan outstandings increased by $10 million over the prior year. Total loans declined by $56 million from the end of 2025 as dairy and livestock and agribusiness loans declined by $117 million due to the seasonal peak and line usage that occurs every calendar year-end. The seasonal decline is evident by the decrease in line utilization rate from 78% at the end of 2025 to 69% at March 31, 2026. C&I loans decreased quarter-over-quarter by $21 million as line utilization decreased from 32% at the end of 2025 to 30% at the end of the first quarter of 2026. Partially offsetting the decline in line usage from the end of 2025 was commercial real estate loan growth of $57 million, SBA 504 loan growth of $13 million and construction loans increasing by $22 million. Loan originations have started off the year at a strong pace as originations for the first quarter of 2026 were approximately 90% higher than the first quarter of 2025 and 15% higher than the fourth quarter of 2025. Our loan pipelines remain relatively strong, although rate competition for high-quality loans continues to be intense. C&I loan originations have stayed relatively consistent over the past 5 quarters, but commercial real estate loan originations have been strengthening. Loan originations in the first quarter had average yields of approximately 6%, which was roughly 25 basis points lower than the prior quarter. Our average loan yield was 5.32% for the first quarter of 2026, compared to 5.47% for the fourth quarter of 2025 and 5.22% for the first quarter of 2025. During the fourth quarter of 2025, we collected $3.2 million of interest on a nonperforming loans. Excluding this additional interest income, our loan yield would have been 5.32% for the fourth quarter of 2025. We experienced $9,000 of net recoveries during the first quarter of 2026 compared to $325,000 of net recoveries for the fourth quarter of 2025. Total nonperforming loans increased by $1.5 million to $6.1 million at March 31, 2026, which represents 0.07% of total loans. The increase is primarily due to the downgrade of a $2.9 million C&I loan for which we established a specific reserve in our allowance for credit losses. Classified loans were $83.1 million at March 31, 2026, compared to $52.7 million at December 31, 2025, and $94.2 million at March 31, 2025. Classified loans as a percentage of total loans were less than 1% at March 31, 2026. Now on to deposits. Our average total deposits and customer repurchase agreements for the first quarter of 2026 were $12.5 billion, which compares to $12.2 billion for the first quarter of 2025, and $12.6 billion during the fourth quarter of 2025. Our noninterest-bearing deposits declined on average by $112 million compared to the first quarter of 2025 and by $107 million compared to the fourth quarter of 2025. On average, noninterest-bearing deposits were 58% of total deposits for both the first quarter of 2026 and the fourth quarter of 2025, compared to 59% for the first quarter of 2025. Interest-bearing nonmaturity deposits and customer repurchase agreements grew on average by $400 million from the first quarter of 2025. Our cost of deposits and repos was 82 basis points for the first quarter of 2026, compared to 86 basis points for the fourth quarter of 2025 and 87 basis points for the year ago quarter. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and income. E. Nicholson: Thanks, Dave. Pretax pre-provision income was $71.6 million in the first quarter of 2026, compared to $71.9 million in the fourth quarter of 2025 and $67.5 million in the first quarter of last year. After adjusting for acquisition expense and gains on OREO, our operating income grew from the first quarter of 2025 by $8 million, reflecting positive operating leverage of 6%. The growth in operating income was driven by growth in net interest income of $7.4 million by 7% rate of growth. Net interest income was $117.8 million in the first quarter of 2026, compared to $122.7 million in the fourth quarter of '25 and $110.4 million in the first quarter of 2025. Interest income decreased from the fourth quarter of 2025 by $6.9 million due primarily to 2 fewer calendar days in the first quarter, a $134 million decrease in earning assets and the $3.2 million of non-accrued interest paid during the fourth quarter. Interest income increased from the first quarter of 2025 by $6.1 million as our earning asset yield increased by 7 basis points from 4.28% to 4.35%, and our average earning assets increased by $336 million. Interest expense declined from both the prior quarter and the prior year quarter. Interest expense was $31.3 million in the first quarter of 2026, compared to $33.3 million in the fourth quarter of 2025 and $32.6 million in the first quarter of 2025. Our cost of funds decreased from 1.01% in the fourth quarter of 2025 to 97 basis points in the first quarter of 2026. Our cost of funds was 7 basis points lower than the first quarter of 2025, even though the average balance of interest-bearing deposits and repos increased by $400 million. Noninterest expense -- noninterest income was $14.3 million in the first quarter of 2026, compared to $11.2 million in the fourth quarter of 2025 and $16.2 million in the first quarter of 2025. The fourth quarter of 2025 included a $2.8 million loss on the sale of securities, while the first quarter of 2025 included a gain on sale of [indiscernible] of $2.2 million. The quarter-over-quarter increase in noninterest income also included a $1.1 million increase in the cash render value of bank-owned life insurance. Trust and investment services income grew by $313,000 or 9% from the first quarter of 2025, but decreased by $307,000 over the fourth quarter of 2025 due to lower brokerage fee income. Our allowance for credit loss was $80.2 million at March 31, 2026. In comparison, our allowance for credit losses was $77 million at December 31, 2025. The $3 million increase in the allowance was primarily due to the establishment of a specific reserves totaling $3.2 million. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at March 31, 2025, was modestly different from our forecast at the end of 2025. I'm sorry, the resulting economic forecast at March 31, 2026, with modestly different than the forecast at the end of 2025. Real GDP is forecasted to be below 1% in the second half of 2026 and stay below 2% through 2027. The unemployment rate is forecasted to reach 5% by the middle of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue their decline through the end of 2026 before experiencing growth in the back half of 2027. So switching to our investment portfolio. Investment securities totaled $4.8 billion at March 31, 2026, a $116 million decrease from the end of 2025. Available for sale or AFS investment securities were $2.59 billion and their held-to-maturity investments totaled $2.25 billion. The unrealized loss on AFS securities increased by $2 million from $308 million on December 31, 2025 to $310 million. Our $700 million in fair value hedges generated negative carry in the first quarter of 2026, resulting in a $1.1 million and $750,000 decrease in interest income compared to the first and fourth quarters of 2025, respectively. Now turning to our capital position. At March 31, 2026, our shareholders' equity was $2.3 billion, a [ $93 million ] increase from the first quarter of 2025, including the $52 million increase in other comprehensive income. The company's tangible common equity ratio was 10.5% at March 31, 2026, while our common equity Tier 1 capital ratio was 16.3%. Our tangible book value per share increased over the last 12 months by 9% from $10.45 at March 31, 2025, to $11.42. I'll now turn the call back to Dave for further discussion of our expenses. David Brager: Thank you, Allen. Noninterest expense for the first quarter of 2026 was $60.6 million, which includes $1.1 million in onetime merger [indiscernible] acquisition of Heritage Bank of Commerce and $500,000 in provision for off-balance sheet reserves. Regulatory assessment expense decreased by $1.6 million as a result of the unwinding, the remaining accrual for the special FDIC assessment. Excluding acquisition expense and the provision for off balance sheet reserves, the level of core operating expense was essentially flat to both the prior quarter and the first quarter of 2025. Our efficiency ratio was 45.8% in the first quarter of 2026, compared to 46.3% in the fourth quarter of 2025 and 46.7% in the first quarter of 2025. Noninterest expense, excluding acquisition expense as a percentage of average assets totaled 1.55% for the first quarter of 2026, compared to 1.53% in the fourth quarter of 2025 and 1.58% for the first quarter of 2025. This concludes today's presentation. Now Allen and I and Clay will be happy to take any questions that you might have. Operator: [Operator Instructions] And our first question will come from the line of David Feaster with Raymond James. David Feaster: I wanted to start on the deal and welcome to the call, Clay. So I know we're only a week into this, but I just wanted to get a sense of how to [indiscernible] quarter. How has it gone thus far? Like what are your top priorities just in these first few weeks after the deal is closed from an operational perspective. And Dave, I know like the goal is always to CVB, the bank. Like where are you focused initially and you see the most opportunity to add value? David Brager: Yes. So I think initially, David, obviously, we're just trying to acclimate all the new associates that have joined us through the merger. So Clay has been -- Clay and his team, the former Heritage folks have been drinking through a firehose. There's a lot of training, a lot of information that's going on. We're looking at how we set up accounts, how we structure relationships. All of those things are part of that initial time frame. Clay and Julie, who joined our Board were in our first Board meeting yesterday. So they're getting acclimated. Clay is going to be spending a lot of time down here. We'll be spending a lot of time together. We sort of restructured the organization to involve the new senior leaders that are joining us, Clay and his former senior leadership team that are remaining. So there's just a lot of education about the culture of our bank. The way we do things. And that's not an event, it's a process. So it's going to take some time to do that. But all in all, things went very well and closed weekend and it will continue to get easier and better as we go forward. But I'd love to [indiscernible] give his perspective as well. Unknown Executive: Yes, David, I think, Dave, the integration is going just fine. As Dave said, the team is just getting acclimated to do reporting lines and new systems and reporting lines. So it's all going just fine. I think the primary focus we have is one thing close to our customers and clients and making sure that they hear from us often and also just keeping a close eye on our associates to make sure that they're keeping pace with the integration and the training. David Feaster: Okay. That's great. And I know we didn't include much in the way of optimization. Look, the deal gives you a ton of financial flexibility, right? Didn't really include any optimization in guidance outside of maybe some of the purchase mortgages that we talked about with the deal closed, and all this financial flexibility, has your thoughts changed at all about opportunities to optimize things or deploy excess liquidity just given the fully marked balance sheet? E. Nicholson: David, you're right, we do have some ability to restructure the balance sheet a little bit. We have announced and do have a sale in place for the single-family mortgage pools of Heritage. Beyond that, we're still evaluating it. I think we'll come out of the quarter with a balance sheet and a plan that you'll be able to see on the next quarterly earnings, but a lot of moving parts right now and it does give us a fair amount of optionality. David Feaster: Okay. And then just last one for me. The commentary on the origination activity is extremely encouraging. I wanted to dig into that a bit. How much of the improvement that you're seeing is you gaining share at this point and your bankers being more productive versus improving demand. And just kind of curious, how do you think about the growth outlook, just in light of the competitive landscape that you alluded to, which it sounds like it's primarily on the pricing side. And then just again, the expansion in the Bay Area? David Brager: Yes. Well, obviously, we're not going to compete on the credit quality side. We're going to maintain that pristine credit quality. And when you're fighting for those types of deals, you have to price them in a way that you can win them, assuming that you're monetizing the rest of the relationship as well. But I think, initially, I would say, to answer your question more specifically, I would say, initially, it was just there was more opportunity out there. I think what's happened over the last couple of quarters, for example, and with the increase in the opportunities that we're seeing, I think that we're in a very good position from a liquidity perspective, from a market perspective, obviously, from the Heritage -- the former Heritage perspective, there's some significant opportunity there just with the capacity of the combined organization relative to pull them at house lending limits, those types of things. So we view it as very positively. We need to get them integrated and understand how we look at it. But from a credit perspective, very similar; from a pricing perspective on the lending side, very similar. On the deposit pricing side, that's probably a little more work that we're going to have to do ultimately. But at the end of the day, we're going after the same types of relationships we were going after the same types of relationships. So I think it's our people recognizing that, hey, we're ready. But a lot of it is just there's a lot going on out there, but there's a lot of competition. So that's primarily why even though in some ways, the treasury rates have gone up a little bit. And our loan origination yields have gone down slightly just because we're having to compete if we want to win. David Feaster: Is our pipelines still holding up pretty solid? And do you think you can kind of hold new origination yields in the 6% realm? David Brager: Yes. I mean, I would say that it's going to be around that 6% range. Going forward, obviously, it depends on the mix of real estate versus C&I and then the utilization of that because we're actually getting better rates on the C&I stuff than on the real estate stuff. And that was part of the reason the net interest margin -- well, there's a lot of -- the Fed lowered rates in December, there was a number of things that happened and our yields stay the same, essentially the same if you exclude the [indiscernible]. And so I think that was a big victory for us. And if this loan demand remains and we're continuing to book what we've been booking, I think that's a big tailwind for us as we keep going through the year. But yes, pipelines are holding up and there's plenty of opportunities for us out there for the right relationships. Operator: One moment for our next question. And that will come from the line of Kelly Motta with KBW. Kelly Motta: Maybe building upon David's question, I do appreciate the color on pipelines, and it's all quite encouraging. I'm wondering in your markets if you're seeing any increased competitive dynamics, notably, I think, growth at Wells was a lot stronger with the asset cap coming off. I'm just wondering if there's been any notable shifts or change in dynamics in your markets? David Brager: Yes. I don't know if I would say there's been any noticeable shift. I mean it's always extremely competitive, especially for the types of relationships that we're looking for. There are some banks. You mentioned Wells Fargo. I would -- there's other banks. Pat Premier was not as active for the last few years, Colombia is going to be much more active. I mean there's a number of organizations. The Fifth Third, the regional banks, BMO. There's a number of banks that are coming into our market. And plus, you always have the big guys. And so I think there is maybe some increase at the higher end of sort of our typical type relationship we go after. But it's not significantly different than before. I don't know, Clay, do you want to. Unknown Executive: No. I echo Dave's comments here. The market continues to be very competitive. I don't think there's been any recent shifts in competitive nature of the clients that we go after in the Bay Area, it continues to be just as competitive as it is here. David Brager: Yes. And Kelly, I would just say this, we're -- our bankers are most successful in their new customer origination, new relationship origination business, it's with the biggest banks. We provide a super high level of service that allows us to compete. We have the product array, and I think that's another sort of tailwind from the Heritage merger as far as both combined organizations being able to provide that wide array of products and services to our relationships and prospects. So there are some very positive things that are occurring. And as we get everybody integrated and acclimated, it should improve. Kelly Motta: Got it. That's really helpful color. Turning to capital, your level levels should still be quite robust pro forma for the merger just closed. You had been a bit active in the buyback prior to announcing the deal, which put that on hold, wondering any updated thoughts on capital management, buybacks, future deals, the work things? David Brager: Yes. So I'll sort of start with the tail end of your question first. Look, we want to make sure we integrate Heritage appropriately. That is our #1 focus. So unless there's something that's really unique or an opportunity that's really unique and something we've been looking at, I would say we're more focused on the integration of Heritage than additional M&A. We do recognize that we have an enormous amount of capital and prior to us getting in conversations with Clay and Heritage, that was something that we were very active in, and we repurchased 4.2 million shares last year, and we'll continue to evaluate that. Obviously, the combined company's earnings, we'll be looking at the dividend, ultimately, this quarter is really where we're going to get all the -- Allen can opine on this as well, but we're going to get the balance sheet set up the way that we want it set up and then we'll be working on those capital management things and definitely, buybacks are going to be part of that strategy going forward. So I don't know, Allen, do you have anything you want to add? E. Nicholson: Kelly, as Dave said, it will be noisy in Q2, a little bit more noise in Q3. But as we get into Q3, I think we'll have a lot more visibility into our capital. And of course, as you pointed out, our pro forma is already very strong. And historically, we've been able to generate a lot of organic capital. And we'll definitely have to evaluate all those things that Dave mentioned. Kelly Motta: Got it. If I could just slip it in as a follow-up. You mentioned the resi mortgage, it's held for sale right now. Do you anticipate that off the balance sheet by quarter end? Or is there a possibility that could stick around a bit longer than perhaps we expected an announcement? E. Nicholson: No, we do expect it to be off the balance sheet by the end of the quarter. Operator: One moment for our next question. And that will come from the line of Matthew Clark with Piper Sandler. Matthew Clark: I want to start on the C&I credit that you assigned some specific reserves to. And then the other classified credits that migrated. I know classified overall still sub 1%, but just wanted to get some color on what happened there and plans for resolution and timing possible? David Brager: Yes. So I'll start with the nonperformer. So that C&I loan was impacted by one of their customers who declared bankruptcy. So we have shored up our collateral position. We did put a specific reserve because at the time we had not shored up the collateral position in the way that we wanted to. So I don't really anticipate, there could be some challenges there, but we're very proactive when we create things and when we look at things and how we classify them. So just being very transparent, it's -- for lack of a better term, they're a marketing company for a larger organization and they sell agricultural products. So it's something that we've been involved with since one of these customers, but we just wanted to make sure that we elevated it to that level. As far as the classified loans, it's really centered in two relationships. They both happen to be C&I. We're in very good collateral positions in both of those deals. That makes up the majority of the increase in the classified loans. One of the companies is in the midst of a sale and that could happen. I mean we're obviously prepared if it doesn't. But they're both within their collateral guidelines and we think one of them is just a situation with the operations, and they're working hard on that. So again, just being very proactive and it's something that happens now and again. And -- but nothing systematic or endemic of the rest of the portfolio. These are just 2 separate situations. Matthew Clark: Okay. Great. And then just a few housekeeping items. Do you plan to do the CECL double count here in 2Q, resulting in an outsized provision? Or are you not [indiscernible] ? E. Nicholson: Matthew, we elected the new accounting, so there won't be a double count. Matthew Clark: Okay. Great. And then accretion expectations? I know the marks can still move around a little bit, but I assume you have preliminary marks at this stage. Any guesstimate, I mean we have our own, but I just wanted to check in to see what you thought may be quarterly -- normal accretion -- normal accretion might be per quarter? E. Nicholson: Too early, Matt. Too early, sorry. We'll have -- we'll be able to give you better answers next quarter. Matthew Clark: Okay. And then just -- I think there was a special FHLB dividend. Can you just quantify that this quarter? E. Nicholson: I think it was about $400,000. Operator: One moment for our next question. And that will come from the line of Andrew Terrell with Stephens. Unknown Analyst: Maybe just wanted to start off. I know you guys don't generally guide, but with the merger closed in the second quarter, the kind of range of forecast for the margin for 2Q or pretty widespread. I was hoping you could maybe just help us out. I don't know if you have kind of day 1 pro forma margin, what the general kind of impact is to your reported margin when you layer in heritage. Just any kind of guardrails you could put kind of around margin expectations for us? E. Nicholson: Andrew, once again, sorry, it's a little bit too early. Dave said we closed 4 days ago. We did include on Page 31 of the investor presentation, the pro forma loans and deposits for the combined organization, excluding the mortgages we're selling. So at least, I mean, you can look at that from a starting point, but we are still evaluating the balance sheet in terms of what we're going to do with repositioning the bond portfolio, repositioning some of our wholesale funds. So unfortunately, it's too preliminary for me to give you much more information. Unknown Analyst: Okay. Does the yield on Page 31 of the deck for HTPK loans, the 560, does that include the single-family yield? And I'm assuming the 560 is pretty out of mark? E. Nicholson: Yes. There's no mark. And if you look at the pro forma yield of 547, that's excluding the single-family. And that's on a combined basis, of course. Unknown Analyst: Got it. Okay. When we talked some in the past just about maybe some of the opportunity to upsize some of the legacy Heritage relationships and maybe that some of that was already occurring pre deal close. Just can you remind us general kind of opportunity set there? How that influences kind of how you're thinking about loan growth throughout the year? Unknown Executive: Yes, Andrew, no question about it at deal announcement, we gave a mantra to the team to make sure that we captured all of those clients that we're growing and that we're reaching our upper limits at Heritage. We now have greatly expanded that capacity and those clients obviously have extended their runway with Heritage significantly. So there's great opportunities in terms of our largest clients that on a going forward basis. I would add to that, too, as Dave said, there's some additional synergies amongst the 2 firms as combined in terms of ag, dairy, lending, mortgage origination, trust, wealth services, international services. So there's just a wide variety of opportunities that our relationship management teams and calling officers are engaged in. So going forward looks good. David Brager: Yes. And I would just say, I want to Clay to answer that first just from the perspective of the former Heritage offices. But from the overall perspective, Andrew, just to your question, a lot of this is 4 days in, they're drinking through the firehose, trying to figure out everything. And so we're working on it. But just overall, pipelines have remained strong. The relationships, we haven't had a lot of turnover in relationships. We're seeing opportunities for us to do maybe a little bit better than we did last year as far as loan growth. But I do think that as we get through the second quarter, we'll have a much better idea. And you're right. I mean I've always said sort of low single-digit growth. I mean that could be mid-single-digit growth. But we just need to make sure that we understand the relationships as we look out on the opportunities that are out there. But for now, we're sort of sticking with what we've been doing and what's been done in the past. So I don't know if that gives you a better answer, but we're still kind of in -- we want quality stuff, and we're having to price it aggressively. And so I think that is going to be somewhat of a limiting factor as well. But on the positive side are definitely the things Clay said, not just on the loan side, but on the overall relationship side. Operator: [Operator Instructions] One moment for our next question. And that will come from the line of Gary Tenner with D.A. Davidson. Gary Tenner: One follow-up on the initial loan growth commentary. In terms of the strengthening of the commercial real estate segment from a demand and production perspective, how much -- could you kind of parse that a little bit in terms of more -- is it more customer activity? Is it borrower is getting more comfortable with the rate environment we're in and moving forward on projects? Is it CBB getting more competitive on pricing? Just kind of parse out kind of the moving parts that's attributed to that strength? David Brager: Yes. Well, I definitely think it starts with potential borrowers out there. It's, I mean, our existing customers, it's -- our bankers' ability to go and attract new relationships to the bank. So I think that's driving some of it. I think also, Gary, I'd say our average size of new loan origination has creeped up a little bit as well. There are a number of things that are sort of assisting us in reaching that low single-digit growth that we had last year. So I think that's part of it. I don't know that we're getting more aggressive on pricing than we have been in the past. We were always aggressive for the right relationships. Obviously, the loan pricing is just one component of the overall relationship. We have to look at the deposit side, we look at the fee income side. We look at how we monetize the entire relationship. And so that -- I don't know that we're getting more aggressive, but I definitely think customers are more used to the rate environment and money can't sit on the sidelines for that long. So there are people that are doing things, and we're seeing some of that activity and capturing a good part of it. But yes, I think it's all of those things that are sort of contributing to those opportunities. And we just 90% of the new loan originations in the first quarter over the first quarter of last year, it's basically double what we did last year, and that's -- I think that speaks to just the opportunities that we're seeing and the opportunities that we're winning. Gary Tenner: Appreciate that. And actually, as a follow-up there, any particular asset class within [indiscernible] that you're seeing more activity in or maybe is driving more of the [indiscernible]? David Brager: Yes. I don't know that there's a specific asset class. It's pretty well balanced between all asset classes. I will say even it's probably easier to parse it out by owner or non-owner. We were doing a lot of owner-occupied in the past. The thing that was really missing was investor commercial real estate really across all classes, multifamily, industrial, retail, I mean, we are seeing much more investor commercial real estate than we have in the past. I mean, going back the last year has been pretty steady in that area. But before that, we weren't really seeing any investor commercial real estate. Nobody was doing anything. So I think it's just more investor real estate across all asset classes and those opportunities, we've been doing pretty well with. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brager for any closing remarks. David Brager: Great. Thank you, Sherry. First, I would like to welcome Heritage Bank of Commerce customers, associates and shareholders to Citizens Business Bank. The merger with Heritage Bank Commerce marks the most strategic and largest acquisition by asset size in our history, bringing together 2 premier relationship-focused business banks and advancing our long-standing objective of expanding citizens throughout California by entering the Bay Area. Our team is eager to build on the strong customer and community relationships that Heritage has established, and our performance in the first quarter demonstrates our continued financial strength and focus on our vision of serving the comprehensive financial needs of small to medium-sized businesses and their owners. Our consistent financial performance is highlighted by our 196th consecutive quarters of profitability and our 146th consecutive quarters of paying cash dividends. I would like to thank our customers and associates for their continuing commitment and loyalty. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in July for our second quarter 2026 earnings call. Please let Allen or I know if you have any questions. Have a great day. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Freeport-McMoRan First Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. David Joint, Vice President, Investor Relations. Please go ahead, sir. David Joint: Good morning, everyone, and welcome to the Freeport conference call. Earlier this morning, FCX reported its first quarter operating and financial results. A copy of today's press release with supplemental schedules and slides are available on our website, fcx.com. Today's conference call is being broadcast live on the internet. Anyone may listen to the call by accessing our website home page and clicking on the webcast link. In addition to analysts and investors, the financial press has been invited to listen to today's call. A replay of the webcast will be available on our website later today. Before we begin our comments, we'd like to remind everyone that today's press release and certain of our comments on the call include non-GAAP measures and forward-looking statements, and actual results may differ materially. Please refer to the cautionary language included in our press release and slides and to the risk factors described in our SEC filings, all of which are available on our website. Also on the call with me today are Richard Adkerson, Chairman of the Board; Kathleen Quirk, President and Chief Executive Officer; Maree Robertson, Executive Vice President and Chief Financial Officer; and other senior members of our management team. Richard will make some opening remarks. Kathleen will review our slide materials as well as Maree then we'll open up the call for questions. Richard? Richard Adkerson: Thank you, David, and welcome, everyone. We are now in the 20th year since Freeport combined with Phelps Dodge to create the modern Freeport by forming a global leader in copper. Our strategy was set after I became CEO in 2003, just as China merges the dominant source of copper demand. Our decision to build our company around copper was a good decision then and has only gotten better over time. We were in Chile last week for the Annual Global Copper Conference, which I first attended in 2004 and learned that the then expected supply response to China's demand would be more muted than expected. This year, there was a strong positive consensus by attendees by copper's future. We are now in a new area of growth about copper, which is broad-based and driven by the growing demand for electricity. Simply, electricity equals copper. Our assets at Freeport are long-lived and have embedded major growth options, which we are advancing for the future. We have exciting growth ahead in the Americas with significant opportunities to improve profitability using modern technology. Grasberg will continue as a major long-term contributor to our growth and profitability with high grades of copper and gold. The extension of our rights to operate beyond 2041, pursuant to our recently signed MOU with the Government of Indonesia is positive for continuity of these benefits from this remarkable world-class history. We just celebrated our 59th year of successfully operating in Indonesia. I personally been engaged since 1988. Our team there is best-in-class in large-scale Block Cave mining. Kathleen will review with you our operating results and outlook, including our plan to restore full production at Grasberg. I personally have complete confidence in our teams addressing the current challenges. I'm personally proud of Freeport's global team, and how our company is so well positioned for the future. Kathleen? Kathleen Quirk: Great. Thank you, Richard, and thank you all for participating on our call today. We will review our first quarter performance and update you all on our initiatives, projects and outlook for the future. It's an active time for our teams across our global business as we work to restore large-scale production at Grasberg safely and sustainably, drive value through operational excellence and new technology initiatives in the U.S. and prepare for a new and exciting phase of organic growth. Starting on Slide 3, we provide the highlights of our first quarter. Our sales of copper, gold and unit costs were better than our forecast and the favorable metal price backdrop allowed us to generate growth in revenues, EBITDA and cash flow compared with last year's first quarter despite our Indonesia operations operating at reduced capacity. The strength and diversity of our portfolio comes through in the results with our U.S. mining operations contributing 2.5x more operating income in the first quarter of this year compared with last year's first quarter, with strong conversion to the bottom line. We were successful in completing the required remediation at Grasberg to commence our phased ramp-up initially in production blocks 2 and 3 in the Grasberg Block Cave. This was an important milestone and involved impressive execution by our team. I'll cover in more detail the challenges encountered with material handling bottlenecks and the initial ramp-up, how are we addressing the issues and the impacts on our ramp-up forecast. As Richard mentioned, a notable highlight of the quarter was the memorandum of understanding reached in February with the Government of Indonesia to extend their operating rights for the life of the resource. This is an important long-term value driver for Freeport, the government and the many stakeholders who benefit from our long-standing operations in Indonesia. We are advancing our future growth plans and submitted an environmental impact statement in March for a major expansion project in Chile. We're progressing several initiatives to scale our innovative leach project and completing our work to be in a position to potentially greenlight our brownfield expansion project at our Bagdad mine in Arizona later this year. We returned approximately $300 million to shareholders in the first quarter including common stock dividends and the purchase of 1.7 million shares of our common stock. Our balance sheet is solid, and we're in a strong position to invest in our future growth while returning cash to shareholders. Moving to Slide 4. We summarize our priorities for 2026. These are the same priorities we set at the start of the year, and each of these represent areas of meaningful value creation. Strong execution of our plans, including achievement of a successful ramp-up at Grasberg, crystallizing the value of our leach opportunity, adopting new technologies to improve performance and investing in profitable growth will enable us to build significant value in our business. We know we will face challenges along the way, as evidenced by the current situation at Grasberg, but I'm confident our highly experienced team will address and successfully overcome any challenge with urgency and determination. Turning to the markets on Slide 5. As a leading global supplier of copper, Freeport benefits from copper's increasingly important and critical role in the global economy. As we look forward, we see rising copper demand associated with massive requirements for the power grid to support new technologies. Copper superior conductivity makes it the metal when it comes to electrification and the world is becoming much more electrified. Copper price have averaged over $5.80 per pound year-to-date and reached an all-time high, exceeding $6 per pound in the first quarter. Demand signals remain strong. Our customers in the U.S. continue to report rising demand associated with AI data centers and related energy infrastructure, which has more than offset weakness in private construction and in the auto sector. Recent reports from China reflect a significant resurgence of demand with significant power grid spending and significant draws on Chinese exchange inventories in recent weeks. As we step back and assess the fundamentals, we expect the market will require additional copper supplies to meet growing demand. At Freeport, we have a valuable geographically diverse portfolio of copper assets and are strategically well situated for the long term with large-scale production facilities, long-life reserves and resources and a portfolio of low-risk brownfield expansion opportunities to serve a growing market. Turning to operations on Slide 6. We summarize the operating highlights by geographic region. Looking at the U.S., production was above the year ago quarter, but a bit lower sequentially compared with the fourth quarter of 2025 and our expectations. Our operating teams continue to focus on our operating disciplines, improving unplanned downtime and achieving sustained maximum output from our existing assets. We're really encouraged by the recent improvement in our mining rate, particularly at Morenci, where we achieved a 19% increase in rates compared with last year's first quarter. Sustaining the higher mining rates will translate into improved copper production over time, and we expect copper production to grow over the course of the year. Our innovative leach initiative continues to show real promise. We are deploying our first internally developed additive and have a line of sight to a new additive which shows significant promise in lab test. We have commenced the pilot test at Morenci to increase the temperature of our stockpiles by applying a heated leaching solution to the stockpiles. We know that higher temperatures will enhance recoveries and our work is focused on finding the most effective engineering and cost solution to achieve this. We remain encouraged with the ability to scale to 300 million to 400 million pounds per annum in the 2026, 2027 time frame, which will unlock our path to 800 million pounds per annum from this initiative. We're continuing to lean heavily into incorporating innovation into our basic mining practices and see great potential for the tools that AI and other tools will offer to enhance operating performance. In South America, the Cerro Verde team did an excellent job navigating the first quarter with severe flooding in the Arequipa region and with challenges with mill efficiencies. We continue to expect stable production levels at Cerro Verde and some growth at El Abra, a project in Chile in partnership with CODELCO over the next couple of years. There's a lot of activity going on at El Abra currently with a leach pad extension and plans to conduct testing in late '26 of heated stockpile injections to enhance leach recoveries. As I mentioned, we filed our environmental impact statement for a major expansion at El Abra in March. This project will transform El Abra from a relatively small producer to a large-scale contributor within the Freeport portfolio. We summarized the highlights on the Grasberg restart, and I'll provide more detail on our progress in the slides ahead. We reached agreement with our insurance providers during the quarter for a $700 million insurance recovery, which was the maximum limit under the policy. We expect to collect the proceeds during the second quarter. In Indonesia, we continue to operate one of our two smelters with available concentrate and the new smelter remains on standby status, with an expected restart later this year. Next several slides, we're going to take you through the Grasberg update, what we've accomplished to date, and where we're moving forward as we go through 2026. There's a summary on Slide 7 of the current status of the Grasberg Block Cave. Over the last several months, we were successful in completing the activities required to restart mining and production blocks 2 and 3, and we commenced mining on a limited basis in March. As a refresher, production blocks 2 and 3 were not directly associated with the external mud rush, which occurred in production block 1C, which is located closer to the surface and beneath the low spot in the former open pit. The location and characteristics of production blocks 2 and 3 do not have the same exposure to an external mud rush as we had in production Block 1C. However, production in production blocks 2 and 3 was temporarily suspended in September 2025 to install concrete plugs to isolate production block 1C panels and ensure no connection to the surface, complete cleanup of material on the extraction and service levels, restore infrastructure on the service level and strengthen our case management plans. This was a huge undertaking and the team did a great job executing this plan. After we completed the projects and regained access to the area, we conducted inspections and sampling of the more than 600 draw points in production blocks 2 and 3 and was able to determine that the material characteristics within the cave changed significantly over the period of inactivity with a larger proportion of wet ore within the cave compared to when we suspended operations in September 2025. This increase in what material was associated with surface water, which percolates through the pave rock within the mine and is removed from the mine through gravity drainage. Under normal conditions, active mining, assist and managing the accumulated water within the cave. We have significant experience in mining wet material, our systems to extract the ore from the draw points rise fully autonomous remote loaders that are capable of safely handling that material. The challenge we are currently addressing is downstream of the extraction level and relates to the material handling systems for loading ore onto our automated trains. Historically, we had a higher ratio of dry material, which allowed us to manage the wet material by blending to a consistency suitable for loading through chutes onto the trains. With the current conditions, we will need to install specialized equipment on the shots to regulate the flow of ore for train loading. We've been testing this equipment over the past few years in connection with our long-range planning in anticipation of potential changes in ore conditions over time. We understand the engineered solution to this issue, but it will take time to make the modifications which limits production in PB 2 and PB 3 to what our existing chute designs can handle. We expect that the majority of these bottlenecks can be addressed by mid-2027. In parallel with addressing the shot infrastructure in PB 2 and 3, we're also continuing to work to prepare for a future start-up of production block 1 south and advancing a series of derisking initiatives on surface drainage and other risk mitigation strategies, including the recent installation of new imaging technology to enhance cave monitoring. Our current forecast reflects our best estimate of the time frame to address the current bottleneck. Still very early in our initial ramp-up and a number of factors could affect rates positively or negatively as we go through the coming months. This is a timing issue with a designed engineer solution, not a significant cost issue and not a change in the ultimate recovery of the resource. We're confident in the ability to restore large sale production safely and efficiently as we go forward. On Slide 8, just for some background, we provide a summary of what we presented in January and an update of our current status. As indicated, the initial restart commenced slightly ahead of our schedule. We were previously targeting production rates in PB 2 and PB 3 to ramp up to 100,000 tonnes per day in the second half of this year. With the current material handling constraints, we now expect to be limited to approximately 60,000 tonnes per day from production blocks 2 and 3 in the second half of 2026, increasing to the 90,000 tonne per day range by mid-2027 as modifications, the ore loading infrastructure are completed over the next several months. As additional information in the reference materials on Page 39 that provides details on the ramp-up. On Slide 9, this is an illustration of the draw point comparison of the current draw points compared to September of 2025. This is a planned view of the GBC extraction level withdraw points in PB 2 and 3 color-coded to show the number of wet and dry draw points prior to suspending mining in September 2025 compared to what we're currently seeing today. As shown in September 2025, 30% of the total 635 active draw points were wet compared with 45% currently, a 50% increase in the wet draw points. For blending purposes, we require a minimum of 1:1 ratio of dry to wet material measured within each panel to meet the requirements of our existing shot design. Currently, there are 10 panels out of a total of 23 compared to only 1 in September, which do not meet the 1:1 dry-to-wet ratio criteria, resulting in a derating of production until the chute modifications are in service. We're continuing to monitor the draw points to determine potential changes and the possibility that conditions could become drier as mining rates continue. However, we believe proceeding with these modifications will provide more robust material handling systems and enhanced flexibility as we go forward over the long term. On Slide 10, we show a diagram to illustrate the mine layout and the planned modifications downstream of the extraction level. As illustrated, mining occurs on the extraction level, and that's not where the issue is. The issue is with the ore sent to the haulage level through ore and chute passes. The bottleneck we are addressing relates to the shots that are used to load the automated trains at the haulage level, and we show photos of the current shot design and the replacement equipment to regulate the flow of what material into the railcars. This is a robust solution. There's additional information on Slide 37 in the reference materials to show you the design of these regulators. Summing this up, we provide on Slide 11 on reports of PTFI's revised 5-year production forecast. We've incorporated adjustments to our ramp-up schedule. And over the 5 years, the revision for the Grasberg district reflects an approximate 9% in reduction for copper and 7% for gold with the largest impacts in 2026 and 2027. Again, this material is not lost and is expected to be recovered over time. As I mentioned, we're in the early stages of the ramp up. There are a number of factors would provide upside to these estimates as well as a number of risks. Again, this is not a resource recovery issue or a significant cost issue to resolve. It's a timing issue, and we will work to optimize the plans as we go forward. Our team is highly experienced, and we're confident in our ability to successfully address the current bottlenecks and restore large-scale production safely and efficiently. Moving to our growth, which is a very exciting feature of report. As I mentioned, we're looking at the fundamental outlook for copper. It's very clear additional copper supplies are required to support energy infrastructure, new technologies and more advanced societies. At Freeport, we benefit from a portfolio of organic growth opportunities, which can be developed from our known resources in jurisdictions where we have established history and experience. Our projects in Indonesia also have the benefit of high gold content that come with copper. Because our projects are brownfield in nature, we benefit from leveraging existing infrastructure, economies of scale, experienced workforces and relationships with key stakeholders to move more quickly with less risk than a greenfield project. We're entering a period of growth in our Americas business with near- and medium-term opportunities to scale our leach initiative and double production at our Bagdad mine in Arizona. We have longer-term growth in the Safford/Lone Star District and an exciting project at El Abra in Chile. We're using innovative approaches with our projects to improve efficiencies, reduce costs and reduce capital intensity and shorten the lead times for our projects. The high potential low-cost innovative leach initiative is a great example of this, and it's likely one of the highest NPV opportunities across the industry. We have projects in the 2026 pipeline to test injection of heated solutions into our stockpiles, which together with additives have potential for significant recovery gains. This year, particularly in the second half, will be an important year as we get results from our heat trials, advance our additive deployment and work to scale next year to 400 million pounds per annum from this initiative and to define our path to 800 million pounds by as soon as 2030. The expansion opportunity at Bagdad is moving toward an investment decision. We're advancing engineering, retesting our capital cost estimates and economic evaluations and working with our vendors to secure pricing on major components. We're continuing to advance our work on tailings infrastructure there to further enhance optionality on the timing of the project. As a reminder, there are no permitting hurdles, and we've done a significant amount of work, planning and early works so that we can complete the project within a 3- to 4-year time frame. Studies are continuing in the Safford/Lone Star District to evaluate the optimal expansion and development options, and we continue to work to capitalize on the large undeveloped resource we have at Safford/Lone Star in an established U.S. mining district. At El Abra, we have a great opportunity with our partner, CODELCO, to develop a large-scale expansion. This is a significant resource with total copper reserves at El Abra approaching the size of the large position we have at Cerro Verde. As Richard mentioned, we were in Chile last week, and the project is being received very positively by our stakeholders. The Chilean government is enthusiastic about the project and is working with us to achieve a timely review of the application. We're also continuing to progress the Kucing Liar project in Indonesia, to sustain a low-cost, long-term production profile in this prolific district. On Slide 13, to wrap up my comments and then Maree will cover the financials, a significant portion of our reserves, resources and future growth are in the United States. Freeport is an important copper -- American copper producer and is by far the largest contributor to the U.S. copper market with an established and successful franchise dating back to the late 1800. We call ourselves America's Copper Champion, and we are aggressively pursuing a series of initiatives to enhance our U.S. business through innovation, automation and investment in expanded facilities. These initiatives are designed to add production at a low incremental cost and improve profitability and resiliency of our valuable U.S. business. In an industry where development lead times can span more than a decade, our U.S. business is strongly positioned with the potential for a 60% increase in copper production over the next several years. Our team is excited about these opportunities, and they represent a significant value driver for all of Freeport. As I mentioned, they were working to improve our cost position in the U.S., and we've got our sights on targeted reductions as we go into 2027 and beyond. While we're currently facing some new challenges with rising energy costs and other consumables, the work we are doing within our control will make our U.S. business more resilient, more profitable and meaningfully more valuable. I'll turn the call over to Maree, who will review our outlook, and then we'll take our questions -- your questions. Thanks. Maree Robertson: Thanks, Kathleen. On Slide 14, we show our 3-year outlook for sales volumes of copper, gold and molybdenum. The outlook incorporates the adjusted ramp-up schedule for Grasberg that Kathleen reviewed earlier, which is the primary change from our prior estimates. As discussed earlier, these changes are timing in nature and will be recovered in the future. We expect growing volumes in 2027 and 2028 as we reach full recovery at Grasberg. We provide quarterly estimates on Page 27 of the reference materials. As ramp-up progresses, our second half volumes are expected to be approximately 30% higher for copper and approximately 50% higher for gold compared with the first half, driving earnings and cash flow in the balance of the year. On Slide 15, we highlight renewed cost pressures we are experiencing since the onset of the conflict with Iran in late February. The price of diesel fuel, which we use to support our whole trucks in the Americas and for a portion of our power plant in Indonesia has been totaled with the most significant impact in Indonesia. To date, it has been more of a cost issue than a sourcing issue, but we continue to monitor the separation carefully. For reference, a sharp rise in diesel prices in March equates to an approximate $500 million cost increase on an annualized basis. We are also monitoring the sulfuric acid situation where prices where prices more than doubled on the spot market. We do not have significant exposure to the spot market, and we are further insulated to the sulfuric acid market volatility through our natural hedge from our smelters. We have incorporated recent diesel prices in our updated forecast and have also incorporated updated assumptions for higher gold and molybdenum prices. With these updates, and the revised production profile, our current outlook for net unit costs is expected to average $1.95 per pound of copper for the year compared with the prior estimate of $1.75 per pound. The primary driver of the change reflects the lower contribution of Grasberg volumes. Putting together our projected volumes and cost estimates, which show modeled results on Slide 16 for EBITDA and cash flow at various copper prices ranging from $5 to $7 copper. Whilst we do not project prices, we modified the range to show sensitivities with upside and downside to the current prices. These are modeled results using the average of 2027 and 2028 with current volume and cost estimates and holding gold flat at $4,500 per ounce and molybdenum flat at $25 per pound. Annual EBITDA would range from approximately $14 billion per annum at $5 copper to $21 billion at $7 copper. With operating cash flows ranging from approximately $10 billion per year at $5 to $16 billion at $7 copper. We saw sensitivities to various commodities on the right. You will note we're highly leveraged to copper prices with each $0.10 per pound change equating to approximately $400 million in annual EBITDA in the 2027, '28 period. We will also benefit from improving gold prices with each $100 per ounce change in price approximating $110 million in annual EBITDA. With our long lead reserves and large-scale production, we are well positioned to generate substantial cash flow to fund future organic growth and cash returns under our performance-based payout framework. Slide 17 shows our current forecast for capital expenditures in 2026 and 2027. Capital expenditures are similar to our prior estimates and are expected to approximate $4.3 billion in 2026 and $4.5 billion in 2027. The discretionary projects are expected to approximate $1.6 billion to $1.7 billion per year in 2026 and 2027. With roughly 50% related to the Kucing Liar development and the LNG project at Grasberg. The balance includes acceleration of tailings and other infrastructure to support Bagdad expansion the Atlantic Copper Circular Project, which is expected to be completed during 2026 and capitalized interest. The discretionary category reflects the capital investments we are making in new projects that under our financial policy, a fund with the 50% of available cash that is not distributed. These projects are value-enhancing initiatives and are detailed on Slide 37 in our reference materials. We continue to carefully manage capital expenditure, and we'll continue to deploy capital strategically to projects with the best return and risk reward profiles. Finally, on Slide 18, we reiterate the financial policy priorities centered on a strong balance sheet, cash returns to shareholders and investments in value-enhancing growth projects. Our balance sheet is solid with investment-grade ratings, strong credit metrics and flexibility within our debt targets to execute on our projects. We have no significant debt maturities through 2026 and have substantial flexibility for funding the 2027 maturities. Since adopting our financial policy in 2021, we have distributed $6 billion to shareholders through dividends and share purchases and have an attractive future long-term portfolio that will enable us to continue to build long-term value shareholders. Our global team is focused on driving value in our business, committed to strong execution of our plans, providing cash to invest in profitable growth and return cash to shareholders. Thank you for your attention. We'll now take your questions. Operator: [Operator Instructions] Our first question will come from the line of Carlos De Alba with Morgan Stanley. Carlos de Alba: So maybe I wanted to explore a little bit on the level of confidence that you have on the new guidance for Grasberg. Obviously, a surprise on the reservations. But as you see -- as you move forward, are there any specific points or areas where you think there might be a higher risk for the potential reductions to production or ramp up that maybe we should be aware of that might realize or not, but you could maybe Kathleen highlight for us what those will be, that will be great. Kathleen Quirk: Yes. Thank you, Carlos. The main thing that we are doing to resolve the issue is to install these regulators into the shoe calories. Right now, we have the capacity to mine the material, but we're limited because of the need to have a certain type of consistency to go through the chutes. And so when we think about what the risk to the ramp-up are at this point, it is a really a construction schedule a delivery schedule from our vendor, who we were already working with. We've got the -- some of the equipment is already on site. It will be installed on a phased basis. and we have over the coming months, additional equipment that will be coming to us so that we can install these -- we call them spilmenators into the -- onto the shots. So really, it's a situation where the bottlenecks will be addressed by the installation of this equipment. And we have equipment on site now. We've got equipment on order, and it's a matter of meeting that execution timetable. I want to go back to this team and what this team accomplishes in terms of the ability to construct things at Grasberg. This is not a lot different than a lot of the things that the team has done in the past. The work that they did to prepare for restart was a really busy schedule, a lot of moving pieces, and the team did an excellent job with the support from our centralized team to execute the plan, and we'll approach this in the very same way. It's got one of the highest net present values in the business right now to get this up and running. And our team is all over it. We have confidence in the ability to meet the plan. Now the risks are that there could be delays in getting the materials. There could be construction delays, but that has been -- we've managed that through this plan that we put forward, and we'll stay on top of it until it's done. Mark Johnson is on the call as well. And Mark, if you want to add any color to what we're doing there, please go ahead. Mark Johnson: Yes, Kathleen. We've had one of these silminators what we -- it was a prototype about a year ago that we call Version 1. What we're installing now is a reengineered version of that, Version 1.5. We've got the first one installed last week, independent of some of this recent realization on the shift in material types. So we're testing that starting this weekend. As you mentioned, we've got a number more at side. Our fabrication is taking place in Indonesia. And the group that's doing it has been very responsive to our needs. We're looking at wrapping up the capacity of that plant in Indonesia. And then also the team is looking at other ways to shorten the construction cycle on the chutes. So I -- what we've taken and what we put into the plan is what we know we can do from the past. And then like you mentioned, we'll be continuing to look for things to do that we could optimize and make that installation just that much more simple and quick. Kathleen Quirk: Carlos, one other thing, and Mark can add to this, but we want to reiterate that this is -- we're in the very early stages of the ramp up. And so the sampling that we did of all of the the draw points is, as of the present time, we have a process where we sample and inspect the draw points on a regular basis. As we continue to mine, it could be that some of this bottleneck gets resolved and our traditional blending systems can accommodate the material. We have not counted on that in this forecast. We've counted on using this more robust system of regulating the flow in the chute, but we could have a situation where the material becomes dryer as material is mined. And Mark, you can add to that if you'd like. Mark Johnson: Yes. It was kind of the unfortunate timing of ramping up just as we were doing the forecast process, really at the beginning of March, I think our forecast based on the knowledge at that time, would have been very similar to the previous estimate. So what we've done, as Kathleen has mentioned, as we started mucking, we had a higher incident of spills occurring. Some of the material that we began mucking shifted to a weather material. So what we've done is implemented what we know today and use that as our basis. What we do know is, as we mark the porosity of the material above will improve. And that's the sort of upside we might have is that as we get a broader footprint, as we begin mining more draw points, more panels that some of these could convert back to where they were. It's a process where we -- as we're mucking, we do a very frequent assessment. So it's a very dynamic process. We already mined each panel, as Kathleen mentioned, remotely. It only takes 1 draw point within a panel to be wet that we do the remote mining. So we were set up to do that from the onset. And now it's just a matter of that ratio within each panel. There's also implications from panels adjacent to a wet panel. The team has also been very innovative on being able to remotely manage other aspects within the panel like rock breakage and hung up panels. And so it's more than just the remote mucking. There's a number of other initiatives that we're pursuing that will increase the availability of the draw points. Carlos de Alba: Maybe a very, very quick follow-up. Can the regulators handle a dryer material if the ratio improves over time? Mark Johnson: Yes. Yes. It's really about being able to shut off the flow if it gets very sloppy, and it's a very innovative design, where the gate and the hydraulic grams, actually, as the material starts to flow it assists in us being able to shut off the flow if we need to. So it's a matter of preventing spills from the -- from happening on our haulage level onto the trains. But it will also handle the dry material. Kathleen Quirk: It's a very flexible, robust system. And as we mentioned, we had planned over the long term to install it, and now we're accelerating that to make the system more flexible and robust to handle any type of material. Operator: Our next question will come from the line of Alex Hacking with Citi. Alexander Hacking: Not to Monday morning quarterback, but you've got a very experienced team there at Grasberg. How is this issue missed in the initial assessment that water would start to build up as mining was halted. And then maybe in layman's terms, like why not add more drainage to the mine? Kathleen Quirk: Mark, why don't you take the last part of that and what we're doing. In terms of the first part of that, Alex, we have monitoring of the water coming in and out of the cave. And so there was nothing that was detected of any significance or any significant concern. It's just a matter of getting access to each of these draw points and to be able to inspect them, and we couldn't do that until we got access in this March time frame. The -- it doesn't take a lot to -- for something to move from dry to wet, and it's just a small amount of moisture. So this isn't like a lot of water or some big overwhelming situation, it's just the nature of what's led or moist versus what's completely dry. But we do have a number of initiatives, and that's what I wanted Mark to cover a number of initiatives that we started after the incident last September to address a more robust drainage system. But the one we have now within the Block Cave in terms of the gravity drainage is very good. The one that we are pursuing is additional drainage from the surface. But Mark, why don't we cover through that, and we've got some information in the supplemental thoughts on it as well. Mark Johnson: Right. Yes. The slide that you're referring to is 41%. But Alex, what we have right now and what we've had in place for years is that we have a pretty comprehensive drainage plan from the surface in the open pit where the pit has not been impacted. You're aware that as we Block Cave, there's a subsiding zone where the rock breaks. And where we have the wet muck coming from is the rainfall that falls onto that broken material. Our drainage system, both for groundwater and for the surface area that's been unimpacted is very robust. It's been in place functioning. But what the wet muck generation comes from the daily rainfall, it falls on to that rock. It works its way down through the cave. And as it gets to a draw point, that draw point turns into somewhat of a funnel where it concentrates some of that flow that's within that broken rock. And as Kathleen mentioned, it's only a couple of percent difference in moisture content that can convert material from a dry material that we can handle easily to a weather material that we need to manage much more significantly. So it's not a matter really of drainage, but what we are doing as a result of the external mud rush, the other incident, obviously, that's put us into the situation in the PB 1 area is that we're looking to be able to drain the water away that collects within the cave, essentially in that shape of the old pit. And so we're drilling into some of that broken rock above PB 1. And we're seeing some initial indications even with the smaller diameter drill holes that we've been able to access some of that water, that's encouraging. We're getting some other drills that will drill those sort of holes much quicker and a bigger diameter. Those are on schedule. They're coming in should be drilling by the end of June. And then we got some other initiatives that are more focused on the PB 1, reopening of taking away that surface water that ponds or pools and any mud like material, any liquefiable material that might gather in the pit bottom. Operator: Our next question will come from the line of Chris LaFemina with Jefferies. Christopher LaFemina: Just a couple of follow-up questions on Grasberg and kind of following up on what Alex just asked. So if we look at the portion of wet draw points before the mud rush ancient, I think you said it was 30% and it's 45% now. So my first question is, what sort of variability is there around that number? In other words, was at 30%, but sometimes 35%, sometimes 25%. What level of confidence do you have in the ratio of dry to wet today. And that's the first question. Second question is on the -- like when did you identify that the -- there were too many wet draw points. I think there was a media report a couple of weeks ago that indicated that Freeport was actually ahead of schedule on the blockade ramp. And that's -- maybe that was an incorrect media report, but I'm wondering if this is something that you just learned very recently and was not an obvious problem just a few weeks ago. Kathleen Quirk: Chris, on the diagram, we show on Slide 9, the number of draw points dry-tow comparison, the important thing to look at here is also the panel. So in September, we had only 1 panel within PB 2 and 3 that didn't meet the ratio. And so we were dealing with that with lending and so that was only one that we were addressing. On now, you've got 10 out of the 23 that don't meet the one-to-one. So the -- that -- what it ends up doing is derating the production of the whole panel because you can only produce the -- at the level of the 1:1 until we get these enhanced material handling systems installed. So that's an important factor in what's going on within each panel. In terms of the variability, Mark can comment further on this. But we wouldn't have had significant variability in the past, but we do have ongoing monitoring that looks to see for our processes to monitor these draw points for planning and management systems. But since we started mining, we have had some draw points that were wet initially in March go to dry and vice versa. So it is a little bit of a dynamic situation right now in the very early days of the ramp-up. As Mark talked about earlier, the timing of all this is we had just really commenced the ramp-up, and so there was new information that we were getting along the way in April as we were going through the forecasting process. Freeport, we did not modify any of our guidance, the actual progress we were making on the ramp-up in terms of -- or the products we're making on the restart was very good. As I mentioned, we got that done ahead of schedule. Some of the media reports that you may be referencing relate to some of the discussions in Indonesia, where there could be government people that are asking questions about the plan or media asking about the plan. And those would have been based on our original plan because we had not formalized our forecast until recently. Again, the recovery and the preparedness to get to the ramp-up was going very, very well, and it's only this new information that has been unfolding in recent weeks at where we had to address the forecast. Again, it's very early days and things can move from here, but we do have a solution. We're going to execute against that solution, and it's a positive long-term solution to giving us flexibility to deal with these sorts of things as we go forward over the long term. Mark Johnson: I might just add, since the start of the Grasberg, we've also had a model that predicts the future of that wet to dry ratio. And all the way through the life of PB 2 and 3, that ratio is generally 2:1 that we have 2 draw points of drive to 1 wet. There'd be some panels that are -- that vary -- the variability is more across the footprint. But broadly, we had a much better ratio that we've been forecasting and using that as part of our mine plans, that's a big part of the reason that we built GBC to be able to be remotely mined from the onset. So we've been working on this for quite some time. It's a bit of a complex model. It's both material characteristics from size and then managing how the water makes its way through the broken rock mass. So our indications were that were much different over the longer term. It didn't indicate the need for the stilminators at this point of the mine. As Kathleen mentioned, we were working on that and saw certain panels that would require that. But what we've looked at now is a much more taking what we have today and just applying that, making sure that the chutes themselves are not the bottleneck. So the current plan is that that will replace all the chutes that will have that additional flexibility. Operator: Our next question will come from the line of Nick Cash with Goldman Sachs. Nicklaus Cash: Just wanted to switch gears a little bit here. You mentioned deploying the first initially developed additive and working on a second additive in North America. How established are the supply chains for each of these? And how quickly can you scale those additives, and how much of the $800 million guide incremental for leaching is a result from these new additives? And then lastly, given the increased deal cost and global supply chain pressures, is there any risk for the $2.50 unit cost targets for North America in '27? Kathleen Quirk: Thank you, Nick. The -- in terms of the additive, the one that we're deploying now, and we started with one stockpile of Morenci and are now deploying it more broadly across the stockpiles at Morenci is readily available. And that is -- we've got a supply chain for it, and it's being applied and the results will continue to evolve as we go through the year, and that's the data that we want to see. In the lab, the additive that we're referring to, we've got two additional additives that we're focused on and maybe more after that. But we call them our next-generation additives. We've seen with these additional additives, performance in the lab that is a multiplier effect of benefit above the one we're using now. So we have been working with potential suppliers on those. It's not as easy to find, and we may have to have it made as the ones that we're using now. But we've been conducting some meetings in recent months with anticipation that we will commercialize one or more of those additives, and that's really showing potential. And to answer your question about the scaling, it's the combination of additives and heat that is going to get us to the 800 million pounds. So we can -- at the current levels, all of the initiatives we're doing on precision leaching, all those things, all the things we're doing on leach everywhere, we've got helicopters that are adding irrigation lines to places that we couldn't access before. All those things are sort of operational work that we're doing, and that will allow us to be in this 250 million pound, 300 million pound range. The rest of it really comes from the additives and heat. And it's not just one by itself because the combination of using an additive on side of heat could give you a 1 plus 1 equals 2.5 or 3. And so that's why this heat work is very important as well to get to our ramp-up rates. We've just started at Morenci. We've got a pilot where we're heating the rafinite that will go is we just really just literally just started this to heat the rafinite to try to raise temperatures within the stockpile. We're doing that on a test basis. We have our idea to put in some modular units of heat that could be applied to all of our stockpiles. Initially, we're using natural gas to heat, but we're very excited about potential to have geothermal heat at Morenci, and we've got promise there. We're actually doing some drilling to define a geothermal resource that would be a low-cost way to heat the stockpiles. So we know that heat works, raising the temperature of the stockpile will add volumes of significance. And that, combined with the additive, we have a path to getting to 800. We've got to solve what's the right additive for different material types. And we've got to solve the engineering of how to best get the temperatures raised in the stockpile. Cory Stevens is on. He and his team are leading this effort, and I'll ask Cory to make any -- and I'll come back to your 250 question, Nick. But Cory, if you want to add any color to what I just said, that would be helpful. Cory Stevens: Yes. Thanks, Kathleen. Yes, so Kathleen said it, we've got a pilot going. We're using that to calibrate or heat models and what we would expect to see at Morenci. And in parallel, we've got a bigger project going where we're going to be tripling the size of that for our El Abra operation that's going to add some volumes there. And additionally, we have a number of other targets where we're looking at a modularized version that can be deployed more readily across the portfolio, particularly in North America. We're pretty excited about where we're headed on that front. Additionally, there's options with chemical heat using pyrite and air. Here in the second quarter, we're going to be starting our -- what we call our perfect pile in New Mexico, and that will have a next-generation design on being able to leverage heat from the natural pyrite that comes with the process there? Kathleen Quirk: Nick, on the 250 question with the changes in consumable costs and energy costs, we're reviewing what all that means, and it's been a volatile situation. But in terms of where we were on that, if you looked at the energy cost, asset costs, all the various consumables in place in recent quarters, together with the addition of these low-cost incremental pounds of getting to our 400 target sometime next year. That would bring us -- so we had a path to get to 250. We now need to look at what the right environment is for things that we don't control like the cost of diesel or other inputs. And so that will cause us to relook at the 250, but the point is, is that with the input costs that we've had in place over the last several quarters and the addition of these very low-cost incremental pounds, we see being able to get our U.S. cost down significantly closer to where we are in South America. So that is still intact. We just need to continue to monitor what impact these commodity input costs will have on our cost structure. But the things that we can control, we're working very hard and have confidence that our unit cost will trend lower, all other things being equal. The sulfuric acid situation, while Maree said, we don't have a lot of spot exposure this year, we'll have to see how that unfolds as we get into next year. And while we're hedged naturally because we have the smelters, the cost of the assets that we buy will be shown in the operating cost for the U.S., and we'll have an offset elsewhere with the smelters that we have where we actually produce and sell assets. So I hope that helps you give you some color around that. Operator: Our next question comes from the line of Bob Brackett with Bernstein Research. Bob Brackett: Staying on the leaching theme. You all have been on a tear in terms of getting patents. I think you've had more patents in the last 3 years, a couple of dozen that you've had in the previous 10, many related to leaching. What's the philosophy of those patents? Are they sort of defensive to make sure you can execute on your inventory on your resource, or could they be potentially offensive where you could be partner and get access to additional resources with your technology? Kathleen Quirk: I'll let Cory add to this, but it's really both. Our focus -- we've got 40 billion pounds-plus of copper in these stockpiles, which have been treated as waste in the past. And so there is a huge value opportunity for us and that's our immediate priority to recover some of that copper that's sitting there in stockpiles, which needs a catalyst to produce it. So that is our first priority. The second is, yes, we could leverage technologies that we develop to potentially partner with others, potentially having synergies in an M&A transaction, et cetera. But it's -- our first priority is to maximize the value of our own work here. The team we have working on this, we have a technology center in Tucson, and the team we have working on it is really, really strong. We've added to the team, recently added some chemists and some other disciplines to the team. So we have a multi-disciplined team, working not only on what's the best additive, but also what's the best way to commercialize and our corporate development team has been actively involved in that as well. So it's -- like I said, it's a very high net present value project and would transform our U.S. business and something that we're making a lot of advances to, and we're going to crack the code as we go forward. Cory Stevens: Yes, Kathleen, you nailed it, really, we're moving forward with this powerful group of innovators and fill in the pipeline. The 42 billion pounds that are within our existing stockpiles don't count the other options that we have within our company for below cut-off grade material that we're currently considering ways today that could be extremely valuable for us in the future as these options materialize, it's a very competitive market. And so we're being very careful to protect our interests as we come up with these innovations. Operator: Our next question comes from the line of Lawson Winder with Bank of America Securities. Lawson Winder: If I could, I'd like to follow up on the theme of industry cost pressures and just get a sense for what you provided on the slides, and maybe this is best addressed by [indiscernible], just in terms of the sensitivity of diesel. So it's interesting. So versus the Q4 slides, it looks like diesel sensitivity has actually increased. Can you maybe just walk through why that would happen, why there'd be a large impact on EBITDA now than there was 3 months ago? Kathleen Quirk: PAll right that Maree reviewed has our sensitivities to copper and all of our input costs, et cetera. And so what we do to calculate the sensitivities is use what's in that forecast for diesel price assumptions and then measure a 10 -- plus or minus 10% change to that. So we have now incorporated a higher cost of diesel in our assumptions than what we had previously, and that's why a 10% change is more than what it was before. Is that the question you were asking? Lawson Winder: Yes, Yes. No, that's exactly right. It just seems like it was a bit nonlinear. So that's it. I guess you're just assuming much higher diesel is a base case at this point? Kathleen Quirk: Right, yes. So we'll have to monitor that. We'll have to monitor it as we go. But in our forecasting process, we typically use the prices in effect around the business been volatile, but the price is in effect at the time of the forecast. So those '27, '28 have higher diesel costs than we would have had 3 months ago. Lawson Winder: Okay. That makes perfect sense. And then just thinking about industry cost pressures. I mean there's -- we heard of explosive costs being higher, grinding media, you mentioned some insulation from sulfuric acid. When you think of some of the other key cost items for your business, are there other places where you feel there's some level of insulation? And then where are some of the other items where there might not be and there could be more exposure there? Kathleen Quirk: It's been very regional, Lawson. So as Maree mentioned, we have we've had a significant rise in diesel costs, but the most significant impact has been in Indonesia and other Asian regions have experienced that inflation more significantly. We haven't seen a lot of things in terms of what we buy, being adjusted at this point. But that will be something that lags, and we'll have to see how long the situation continues and whether it will start to flow through other components of our costs. But some of the things that trade on the spot market, you can see have reacted. But a lot of our consumables are contractually negotiated. So we'll have to just continue to to monitor those. Operator: Our next question comes from the line of Katja Jancic with BMO Capital Markets. Katja Jancic: Recently, we saw there was a change to Section 232 tariffs impacting derivative products. Do you see any impact from that, or do you expect any impact from that? Kathleen Quirk: Not associated with what we sell. So that we have changed a lot of the codes for what gets tariffed. It did not change anything with respect to the refined copper cathodes at this point. And as you know, actually this is -- that is something that the government said they were going to be reviewing potentially by middle of this year. Katja Jancic: And then maybe just quickly, I know you mentioned the support acid, you're hedged, but can you let us know how much of it you actually do purchase in U.S. for your U.S. operations? Kathleen Quirk: It varies, but we do purchase some assets in the U.S. We also have -- of course, we have the smelter, which provides a base load of asset to our U.S. operations. We have actually a sulfur burner where we buy sulfur and convert that to acid at our Safford operation. And so it varies what we buy in terms of the amount of assets [indiscernible]. We internally generate a big portion of what's needed in the U.S. And then, of course, in Spain, where we have a smelter, that's all sold externally. And then in Indonesia, we sell acid, and we'll be selling that Grasberg ramps up, we'll be selling more acid because we'll start to operate both smelters in Indonesia. So we're net long. And we do have -- in South America, we do buy acid. And as we said, we don't have a lot of exposure to the spot market at this point in time. But if this continues, we'll have to look at what it means for 2027. Operator: Our next question comes from the line of Timna Tanners with Wells Fargo. Timna Tanners: Two questions from me. I wanted to follow up on the Grasberg forecast. I know you talked about it being a timing issue, but I just noticed an it's small, but it does look like some of the revisions extend out to 2029. So I just wanted some color there. And then pivoting to Peru, if I could, just would be interested in your thoughts on the upcoming political election given your presence at Cerro Verde. Kathleen Quirk: On the Grasberg, the real impact, the real significant impacts were in '26 and '27. We do have a small impact in '28 and '29, but those are really on the margin, there really wasn't any. We don't -- we're not projecting any sort of issue related to this material handling issue as we get into those periods. That is just the normal forecasting updates and the founding it's pretty close to where it was. Timna Tanners: Got it. Okay. And then your thoughts on Peru, if I could. Kathleen Quirk: Politically, we work with any administration. There's been -- as you know, there have been many presidents in Peru in recent years. And so we're prepared to work with any administration that comes in. And we have a really good relationship with -- which is really important in Peru with the local communities. We know we have to earn that every day, but that's really important at the local levels as well in Peru as we manage our risk there, having that relationship and having the partnership that we have on water that we supply to Arakuipa has been been really positive for Cerro Verde. But in terms of changes in administrations will just continue to work, do the right thing, good corporate citizen in Peru with great benefits to the community. So that's been a real positive for Cerro Verde for many years, and we expect that in the future as well. Richard Adkerson: Yes, let me just add that what Kathleen mentioned about our relationship with Arakuipa is really special and our team down there, deserves a lot of credit for the way that they've built relationships with the community when so many other mining operations down there, face a lot of challenges from the community. So that's -- and we've dealt with a whole wide range of presidents, politics are very complicated, but you can look at our operating record and see how we've operated at Cerro Verde throughout all of that terminal, and I'm confident we'll continue to do so. Operator: Our next question will come from the line of Orest Wowkodaw with Scotiabank. Orest Wowkodaw: A couple for me, please. I noticed the idle cost recovery costs at Grasberg went up to $1.3 billion from $900 million previously, in terms of costs that are being excluded from your reported cash costs. Is that -- I'm just wondering, is that incremental dollars going out, or is that you're just shielding more of that from being included in cash costs? Kathleen Quirk: That's basically the -- because we're not at full capacity in the second half a portion, and it will be -- start being just a declining portion, but a portion of our cost are expensed and don't go through the inventory and cost of sales. So it's really -- it's not an increase in cost. It's really characterization of whether it's included in our unit costs, or how it's treated for accounting purposes. So we're just following the accounting guidance and as we modified the ramp-up schedule since we're not at capacity yet, a portion of our costs are treated as idle and those are expensed right away. So that's really what that is. It's really no change in absolute absolute costs other than the input cost that we have with [indiscernible], et cetera. But in terms of the idle cost methodology, that's consistent. Orest Wowkodaw: Okay. Perfect. And then just coming back to the operating recovery at Grasberg. You've identified the chutes as being a bottleneck here for the more substantial level of wet ore. Are there any other potential bottlenecks ahead as this will get solved that could play into the recovery rates? Kathleen Quirk: This is the big one. As Mark was saying, we -- our plan in terms of mining has been to have the mining capacity and the loading capacity at the distraction level to handle what material. So this is really just a logistical of how to get it loaded onto the trains. So this is really the -- solving this issue will get us where we need to be in terms of the large-scale ramp-up. Orest Wowkodaw: Okay. But the wet versus dry doesn't impact the capacity of the trains. Is that correct? Kathleen Quirk: Right. Operator: Our final question comes from the line of Daniel Major with UBS. Daniel Major: Two quick follow-up questions. Firstly, just looking at Slide 9 of the presentation again. It doesn't look like there's been any significant change in the ratio of wet to dry in PB 1S or in the other sections. Is that the right read, so no change there? Kathleen Quirk: Well, this really was the -- this really was the comparison in PB 2 and PB 3 of wet to dry. So PB 1, we're still doing our work on PB 1 to be in a position to restart PB 1 South by middle of next year. So this chart really just deals with the wet to dry in PB 2 and 3. In terms of the overall the overall contribution of PB 1 and then ultimately, PB 1C, it's relatively small that we have in these forecasts. So our focus -- our initial focus is to get scale from PB 2 and PB 3 and then optimize the situation at PB 1S. And then as Mark said, as we get more of our derisking done with the work we're doing with the drainage at the surface consider reopening PB 1C. But this plan largely particularly in '26, '27, '28 time frame is largely from the PB 2, PB 3 ramp-up. Mark Johnson: I'm sorry, go ahead. . Daniel Major: No, maybe you were answering that. I mean I was just going to say, are you also then installing the similar modifications to the systems in PB 1S to ensure that you can achieve nameplate capacity even if the ratio is higher in that zone as well. Kathleen Quirk: Yes. So that was already planned, that was already part of our plan, is to have these devices in the panels and the chutes and PB 1, 2 calories in PB 1. But go ahead, Mark. Mark Johnson: That was what I was going to add. I was just going to let them know that Daniel know that the chutes in PB 1 were damaged with the external mud rush. So the plan was to replace them with the newer technology. Daniel Major: Okay. And then just a final one. What is the CapEx associated with these modifications? And there's been no change to group CapEx guidance? And if you've deferred CapEx, is there any implications on the mine plan beyond 2030. Kathleen Quirk: These are not terribly expensive equipment that we're installing. We've added something on the order of $60 million to $70 million in CapEx associated with this and had some timing variances within the plan that offset that. So it's not a major cost driver, particularly considering how much copper and gold production you get from having this. So it wasn't a big cost didn't show up as a big cost bearing capital cost payers. Operator: And I will now turn the call over to management for any closing comments. Kathleen Quirk: Well, thank you, everyone, and thanks for taking so much time with us, and we'll continue to report our progress as we go forward and we're available if anybody has any follow-ups. Thank you very much. Richard Adkerson: Thanks a lot, everyone. I can assure you we're going to be transparent and all things that go on with this ramp up. Thanks a lot. Operator: And that concludes our call for today. Thank you all for joining. You may now disconnect.
Operator: Hello, everyone, and welcome to the Southwest Airlines First Quarter 2026 Conference Call. I'm Nick and I will be monitoring today's call, which is being recorded. A replay will be available on southwest.com in the Investor Relations section. [Operator Instructions] Now Danielle Collins, Managing Director of Investment Relations will begin the discussion. Please go ahead, Danielle. Danielle Collins: Hello, everyone, and welcome to Southwest Airlines First Quarter 2026 Earnings Call. In just a moment, we will share our prepared remarks, after which we will move into Q&A. Joining me today are Bob Jordan, our President and Chief Executive Officer; Andrew Watterson, our Chief Operating Officer; and Tom Doxey, our Chief Financial Officer. Before we begin, A quick reminder that in today's session, we will be making forward-looking statements, which are based on our current expectations of future performance, and our actual results could differ materially from expectations. Also, we will reference our non-GAAP results, which exclude special items that are called out and reconciled to GAAP results in our earnings press release. With that, I'll turn the call over to Bob. Robert Jordan: Thank you, Danielle, and good morning, everyone. We appreciate you joining us today. First quarter 2026 represents an important milestone for Southwest as all our previously announced initiatives are now in place and contributing to our results and what a difference a year makes. That broad set of commercial, operational and cost and efficiency actions represent a fundamental transformation of our business model, and is translating into strong customer demand for our new product, strong financial results and strong margin expansion. The financial tailwind provided by these initiatives is meaningful, as indicated by our results. Our first quarter EPS of $0.45 was in line with our guidance in January and represents a significant year-over-year improvement from a loss of $0.26 per share, or an adjusted loss per share of $0.13, and these results were delivered [indiscernible] backdrop of significantly higher fuel costs, which represented a $0.22 EPS headwind in the quarter further illustrating the underlying momentum that we're seeing across the business. First quarter operating margin of 4.6% was an 8.1 point improvement year-over-year, or 6.6 points on an adjusted basis, a powerful change in how the company generates earnings. We also generated $1.4 billion in operating cash flow in the quarter, an increase of 65% from the first quarter of 2025. Now that the contributions from our initiatives have kicked in, I want to reflect on two potential narratives that have been brought up occasionally regarding Southwest Airlines. The first being, because we don't serve long-haul international markets, and like material exposure to premium segments, we would be unable to generate margins that are in line with carriers that do have those attributes. And second, that our customer base is somehow different and would therefore be unwilling to respond to our product changes, and pay more for segmented products and seat ancillaries. As evidenced by our first quarter results, we are proving those arguments wrong. Southwest has significant fundamental and enduring [indiscernible] the largest domestic network, the most nonstop flights, and a #1 position in nearly half of the 50 largest U.S. airports. Operational excellence that resulted in Southwest being named the Wall Street Journal's Best U.S. Airline of 2025, cost discipline and operational efficiency, and importantly, legendary service and hospitality provided by our incredible people. Those core strengths, coupled with our new product offering, are fundamentally changing the financial margins that we produce. Our transform business model is being stress tested and this unique environment of geopolitical upheaval and much higher fuel prices. Against this challenging backdrop, our first quarter operating margin of 4.6% and our year-over-year unit revenue growth of 11.2% demonstrate the strength of our new model. Moreover, in the second quarter, we expect unit revenue growth between 16.5% and 18.5%, which I expect to be industry-leading by a wide margin. That's all proof that our existing customer base, and the new customers we are attracting, want and are willing to pay for our new products and our product attributes. In other words, they love the Southwest product. While the external environment remains uncertain, we are confident about how we are positioned, a wholesale change to the business model and product offering that is being battle-tested by higher fuel prices and geopolitical tensions, yet is producing top-tier industry financial results. Looking deeper at the results, demand remained strong across geographies, customer segments and both business and leisure. And the customer take rate for our enhanced product offering and seating ancillaries is strong as well. Passenger revenue growth, operating revenue and unit revenue each set first quarter records with March marking our largest operating revenue month in our history. Going forward, we remain squarely focused on continued margin expansion and are taking actions to further improve financial results, including aggressively optimizing our product and revenue initiatives such as the recent increase in bag fees, taking targeted actions to further reduce nonfuel costs, and drive efficiency across the business. And you saw a portion of that come through in our first quarter CASM-X increase of 2.3%, well below our guide of 3.5%. Continuing enhancements to our product offering, such as our new partnership with Starlink. By the end of the year, Starlink will be available on at least 300 aircraft, and roughly 2/3 of our fleet will be equipped with in-seat power, and larger overhead [indiscernible]. We expect these changes, combined with recent product enhancements to continue to drive growth in corporate business travel. We are aggressively managing our network, reducing lower return flying and redeploying that capacity to higher margin opportunities, such as the recently announced suspension of operations at [ Chicago Air and Washington Dulos ], and we had a handful of flights at both airports, which were underperforming. And we entered 2026 with a disciplined capacity plan, and now expect full year capacity growth of approximately 2% at the low end of our prior 2% to 3% range, driven by ongoing schedule optimization and network refinement. Turning to the outlook. There is significant economic and geopolitical uncertainty, and it's not possible to know with confidence all the ways the industry could be inactive. That said, we do know two things. Fuel prices are much higher. And if that is sustained, it will require higher ticket prices to offset that increase in fuel. Given the ongoing macroeconomic uncertainty, updating our full year adjusted EPS guide of $4 would not be productive at this time. Achieving this outcome would require lower fuel prices, and/or stronger revenue performance to offset higher fuel expense. We will continue to monitor conditions closely and provide updates to our guidance as appropriate. For the second quarter, we expect EPS in the range of $0.35 to $0.65 using an average fuel price range of $4.10 to $4.15 based on the forward curve as of April 16. The EPS guide represents significant [ expected ] earnings and margin expansion year-over-year. In closing, while fuel is an external factor, and we were operating in a volatile macro environment, our first quarter results are proof there is strong customer demand for our new products. Our initiatives are working. Our significant core strengths remain and that combination is producing top of industry margins. I want to say how proud I am of our people. The progress we are seeing across the business is the direct result of the work they do every day, delivering for each other, our customers and our shareholders. We are just 18 months removed from announcing our initial transformational initiatives, and I could not be prouder of our teams for the discipline and excellence, which they continue to deliver. And with that, I will turn it over to Andrew to cover revenues and operational performance. Andrew Watterson: Thanks, Bob. The first quarter was an important one for our operations as our teams delivered industry-leading reliability while executing a significant amount of change across the airline. This included the successful implementation of assigned seating and extra legroom on January 27. The with the operation ranking first among our peers, an on-time performance and completion factor on launch day. Q1 RASM was up 11.2% year-over-year, well above our guidance of at least 9.5%, reflecting the contribution from our new product offering, as well as broad [indiscernible] across the network. Operating revenue of $7.2 billion was an all-time record for first quarter. We also announced adjustments to our network. As Bob mentioned, we announced the suspension of operations at [ O'Hare and Dulles ], where we'll be consolidating our operation in Chicago Midway, [ Rigan National ] and Baltimore, and [indiscernible] capacity to high-performing opportunities. At the same time, we are seeing strong performance in markets where we've added capacity, including San Diego, Orlando and Nashville. We will continue to evaluate future network and capacity adjustments that we feel will be accretive to our performance. Separately, we are seeing our initiatives resonate with customers, as demonstrated by several examples. We have seen a meaningful shift in customer purchasing behavior. The mix of customers buying up from our base product increased from approximately 20% at 2025, to roughly 60% in the first quarter of 2026, with ancillary upsell performance also meet expectations. We're also seeing clear traction with business travelers. Managed corporate revenue increased 16% in the first quarter and 25% in March, marking the largest quarter and month in our history. And reinforcing that our enhanced product is resonating with higher yield customers. At the same time, engagement across our [indiscernible] program continues to strengthen. Enrollments increased 37% year-over-year. And the number of customers earning tier status rose 62%, demonstrating both strong acquisition of new customers and deeper loyalty from existing base. We continue to deliver a safe and reliable operation, improve efficiency across the system and support the continued evolution of our product offering. Our people have done an outstanding job navigating a period of significant change. I want to thank them for their continued dedication. With that, I'll turn it over to Tom. Tom Doxey: Thanks, Andrew. We continue to demonstrate strong cost discipline to start the year with first quarter CASM-X up 2.3% year-over-year on a capacity increase of 1.5%, and in spite of a 1.2 point headwind from the removal of 6 seats on our 737-700 fleet to accommodate new extra [indiscernible] seating. Fuel prices increased meaningfully during the quarter. We have forecasted a first quarter price per gallon of $2.40 and ended up at $2.73 per gallon, increasing fuel expense by approximately $164 million. In spite of the dramatic increase in fuel cost and other operational headwinds experienced during the quarter, we hit our EPS guide. We also delivered the highest adjusted net margin of the large U.S. airlines during the first quarter. With our cost discipline, initiative contribution revenue strength and operational excellence, allowing us to deliver the margin expansion that Bob outlined earlier. We ended the quarter with $4.8 billion in liquidity and a leverage ratio of 2.2x. Having a strong investment-grade balance sheet, and high relative margins within the industry is a key strategic advantage for Southwest, especially during times of industry stress, where our strength creates the opportunity for further separation between Southwest and other airlines. During the quarter, we entered into a $500 million secured term loan facility backed by a small portion of previously unencumbered aircraft, which we used to pay down the final portion of our payroll support program loans [indiscernible] would have otherwise moved to a higher interest rate in the second quarter. We also returned capital to shareholders through share repurchases of $1.25 billion and $93 million in dividends. We have $450 million remaining in our current share repurchase authorization. Looking ahead, our focus remains on managing what we can control. Driving efficiency, maintaining disciplined cost management and investing smartly in our product and operations. We expect second quarter CASM-X to increase 3.5% to 4% year-over-year on a capacity increase of 0.5% at the midpoint. Consistent with Bob's comments, based on what we see today, we continue to expect margin expansion and earnings growth in 2026, and will continue to be nimble and opportunistic in the way that we manage the business. And with that, I'll turn it back to Danielle for Q&A. Danielle Collins: Thank you, Tom. This concludes our prepared remarks. We will now open the line for analyst questions. To help us manage time efficiently, we ask that you please ask you 1 or 2 questions back to back at the onset. Operator: [Operator Instructions] And the first question will come from Mike Linenberg with Deutsche Bank. Michael Linenberg: My two questions here. Just, Andrew, the upsell out of the bottom bucket from 20% to 60%, do you have a sense of what that average increase in fare is going from that 20% to 60%? And then just my second question to Bob. Just thoughts about potentially competing against the government controlled or a government-owned carrier. I mean, whether it's sound industrial policy or not? So I'll let you roll that one over. Andrew Watterson: Yes. Thanks. It's Andrew. So I'll start with the first one. I'm not going to break down it [indiscernible] product by fair product, but I will say that, obviously, we had an 11.6% yield increase year-over-year. And at least half of that came from people voluntarily decided to pay more by buying up. So we have, kind of, secular yield trends going on, and then we have people voluntarily buying up, which creates the extra yield boost. And so net-net, we're super pleased with it. Robert Jordan: Mike it's Bob, and on the second -- with [ Spirit ]. I mean, it's a tough situation. We've got a lot of people that are affected, but it's a tough industry. I mean, things come around. I've been here 38 years, you have you have wars. You have fuel spikes. You have economic issues, recessions. And you got to be prepared for the long term as a business because the shocks are going to happen. And that's why we've created a very resilient business here at Southwest Airlines to prepare for those things. On competition, we're focused on improving ourselves and competing with the top of the industry. And it's showing in the results. If you look at the first quarter, you got an 8-point margin expansion year-over-year. Our net margin is going to be the best amongst the large U.S. carriers. If you look at the second quarter guide and the spread between our unit revenues and our unit cost is a 14-point expansion. So we're focused on building a resilient business continuing to optimize from the transformation. Our customers love the products, and that is where all of our focus is. Operator: The next question will come from Jamie Baker with JPMorgan. Jamie Baker: A couple for Tom. So the first question has to do with the second quarter RASM guide. I realize you hadn't previously given us the synced guide, nor had your competitors. But there was enough info out there that we all kind of backed in how the second quarter was looking before the start of the war. And that's my question. Since the war start, we've seen several points in second quarter RASM improvement on your competitors, but your second quarter guide seems, kind of, in line with what we were thinking before the war. Maybe we just got lucky, but for the sake of investors on the call, can you tell us how many points of RASM improvement went into this second quarter outlook as fares began to rise? And then second, still considerable consternation [ around your ] traffic liability. It's flat year-on-year. I know there was some language in last night's 10-Q. Maybe the way to clear this up would be -- and I don't know if you have your finger tips, but under the old methodology, what would the ATL have been at the end of the first quarter? I'm asking because squaring a flat ATL out with such strong revenue growth is -- well, it's difficult for me, and we continue to take a lot of questions on it. Andrew Watterson: Jamie, it's Andrew. Tom -- give me the first one, he'll take the second one. The RASM guide is us looking at our current trends, which have accelerated and projecting that forward. I know many airlines were talking about fuel recapture and making assumptions about fuel recapture. I think we're -- that's sort of a dangerous game. We are taking our current trends, which are very strong. We have even stronger yield traction than we did in Q1, once again, with stable volumes. We're taking that and pushing it forward. If there were an acceleration in the environment from today, then there would be upside to that. But [ we'd ] rather just take the current trends and project that forward to get a good [ center cut ] RASM guide. Tom Doxey: Yes. Jamie, on the ATLs, talking about old versus new methodology, we're not going to get into the detail of exactly what the different percentages are and how they allocate between the different buckets. So we've talked about is that what we've moved toward, as we have this new agreement with Chase, is very much industry standard. It's very much where a lot of our peers are in the way that we either bank into ATL loyalty revenue or recognize it in one of the revenue categories. And I think as you look at ATLs just generally, there's nothing unusual to note. You look at the sequential trends, you look how it compares to other carriers. There's nothing unusual to note in what those trends are. Operator: The next question will come from Conor Cunningham with Melius Research. Conor Cunningham: Maybe following up on that response to Jamie's first question. Just -- why is it a dangerous game to assume some sort of fuel recapture throughout the remainder of the year? Is it that you're fearful of demand [indiscernible]? Just -- I think there's a big debate on just how straightforward like recapture is in general. So if you could just talk about that. And then, Tom, the capital allocation [indiscernible] clearly things are changing a fair bit. Your free cash flow profile probably took a step back with the rise in fuel. So just trying to understand the buyback going forward from here, you bought back a lot in the first quarter. Your leverage has gone up a little bit. You've talked about that. But if you could just frame up the changes in how you think about capital allocation? Robert Jordan: Conor, thanks. It's Bob. I'll take the first, and then Tom will take the second. Just on the fair environment generally. Certainly, we've seen a willingness to move fares along. There's been constructive pricing behavior. But at the end of the day, this "percent of fuel recovery", which is really what you would put on top of your trend, it's going to be dictated by market conditions, not by some academic formula, or target of calculated recovery. So based on that, we believe what is most fair is to put current trends in because you cannot predict at what point consumers and demand is going to be -- you're going to begin to see demand destruction based on the pricing environment. So we've run current trends through. If we see upside to that, then that's upside to our guide. And bottom line, we're focused on what we can control. We're taking actions against pricing like [indiscernible] increase. We're taking actions, obviously, along the broader pricing front. We have made some close-in demand shaping reductions to capacity. We already had low capacity in place for the year. So we're taking actions against the things that we can control, aggressive cost discipline, and the fare environment will ultimately play out based on market conditions. Tom Doxey: And Conor on capital allocation, as we mentioned in the prepared remarks, having a strong and efficient investment-grade balance sheet is a key [indiscernible]. You hear others talk about their desire to get there. The fact that we're there gives us the ability, of course, to borrow lower rates. And as we think about how we move forward, and just how we navigate, it's all about staying within guardrails that keep us there. And we've been very consistent about what those guardrails are about liquidity, see where we are relative to that this quarter. And then we've actually floated down on the debt ratio despite of being in, I think, a more challenging environment as the business and the EBITDA generation that has occurred in business has improved, we've actually floated down on that debt ratio. And maybe just as a side note, that ratio is a gross debt-to-EBITDA ratio. And so it's, I think even compared to some of the others out there, a very conservative way to look at it. So as it relates to share buybacks, it's always going to come back to staying within those guardrails. And we don't know exactly what's ahead, but we've seen incremental cash generation from the business, versus where we were before in spite of today's environment, and we'll just follow that and stay within our guardrails. Operator: The next question will come from Catherine O'Brien with Goldman Sachs. Catherine O'Brien: So my first question, really, it's hard to tease apart of the macro from the initiatives, hence the move to EPS guidance. But there were a couple of things you thought could drive upside to your EPS outlook in January, including a step-up in close in extra legroom purchases from corporate travelers and potential market share gains. Can you update us on those efforts specifically, how they've been going versus your initial plan? And then second, a related question and a bit of a follow-up to Mike's. Great to see the big step-up in buy-up in 1Q puts the launch of your new seating products. Can you just break down how much of that is cash sales, loyalty points being redeemed in credit card perks? Andrew Watterson: The [indiscernible] we gave in our prepared remarks, the corporate numbers have responded. You saw that they were back weighted to March. So once the assigned seating and [indiscernible] went in place, we saw an uptick both from current customers, but also new customers. So we're seeing an acceleration of new unique customers in our corporate channels which indicates a kind of desire now to fly Southwest Airlines. And well also within the same existing network of accounts we've seen buy up to the higher fares as corporate policy allows them to buy up. So those numbers we quoted are indicative of the consumers behaving like we anticipated. And as far as the redemptions, I think cash has accelerated more than redemptions on the fare products, which is consistent with what we wanted to do. We went to more variable burn in our earning -- excuse me, on our rep awards last year. And so that tends to do on the best flight to put your redemption mix down, the cash mix up. Operator: The next question will come from Ravi Shanker with Morgan Stanley. Ravi Shanker: So maybe just kind of similar but different on the theme of RASM. To the extent possible, if you looked at your earnings for the year, ex fuel on both cost and revenue. So let's say, you were to use Feb 28 assumptions. Do you think you're still on track for at least [ $4 ] of EPS for the full year. And I think you have pointed to upside to that? And maybe as a follow-up, what innings do you think you're with -- you're in when it comes to monetizing some of these internal initiatives and kind of how much do you have left in the [ tank ]? Robert Jordan: Yes, Ravi, thanks so much. The -- I think the short story is, but for fuel, everything is on track and performing, sort of, at or maybe slightly better than we expected. It's really just a story of fuel. I mean it's a $0.22 headwind in the first quarter. It's a $1 billion headwind in the second quarter or 10 points of margin. So it's very material. But no, yes, the only change to how we were thinking about the full year right now is fuel. And I just did want to address the guide as well. There's been some reporting that we pulled our guide. We did not pull our full year guide. There are scenarios where absolutely we could still hit the $4. It depends on fuel and revenue trends from here. We just felt like it was not productive to introduce a new guide, or a range, given how volatile fuel is day to day to day. On your second question of what inning are you in, in terms of optimizing the current initiatives? I do believe we have a ways to run. Our original forecast, or the plan, would be to get to full run rate because these bake in over time based on the booking curve, to get to run rate here in the third quarter. And then, of course, we have opportunities to optimize fair product buy up, optimize the way we think about seat ancillaries. And then on top of that, we're going to continue to continue to enhance the product. You saw the Starlink announcement, continue to make a push into business who loves the new product. I mean the fact that March revenues on the business side were up 25% is a huge indicator of that. But yes, we're -- our run rate was expected in the third quarter on the initiative performance, and then we have room from there. Operator: The next question will come from Scott Group with Wolfe Research. Scott Group: So I just wanted to follow up on that sort of last answer, Bob. Like your comment that the only change really is fuel and everything else is sort of in line, maybe slightly better. I mean, I guess it feels like everyone else is saying, yes, fuel is a lot higher, but now our revenue assumptions are a lot higher, too, as where the whole industry is sort of working to pass through fuel. Would you not agree with that sort of comment? And then maybe just along those lines with fuel, like there's certainly a sense of, hey, the industry -- this is the first sort of like big fuel spike where you guys aren't hedged and that's, sort of, helping the industry pass through fuel quicker? Like are you approaching fuel pass-through differently than maybe you have in the past? Or maybe do you think you're approaching it differently than the industry? Robert Jordan: Yes. The first question, where would we be but [indiscernible] is all again hypothetical. You're trying to compare what would the industry have done with pricing and fares as compared to what is happening today. With the rise of fuel, no doubt, there is -- it's a more constructive backdrop, I believe, in terms of pricing. So yes, I think it's fair to say that the pricing environment is stronger, and we didn't give you a range. We gave you at least $4. So we did not give you what that upper range would be. But it's a more instructive fair environment, certainly than I would have expected. And then you just look at Southwest performance. We are demonstrating incredible cost discipline. In the first quarter, you had cost come in -- unit costs come in at [ 2.3 ]. And then you had a [ 1.2 ] headwind in that from seat removal. So the cost discipline, which is [indiscernible] It's not timing. It's not odd transactions. It's structural improvements in cost is certainly helping here at Southwest as well. Which is the whole point about the fact that looking at revenue trends, it's going to take -- revenues is going to take fuel, but our $4 is absolutely not off the table. And then on hedging, we've talked about this many times. Hedging had become very expensive. The cost of hedging, because of volatility we were spending about $150 million a year in hedging. So just -- if you look back over a period of time, we just made no sense to hedge. And of course, I mean, you can't predict an extraordinary circumstance like a war. If we all could, you'd hedge and then you wouldn't, and that's -- it's unreasonable to think you could do something like that. I do think the fact that we are all basically unhedged puts the industry in a position where you're going to take -- and we're all going to take actions to deal with the fact that fuel is rising at an extraordinary rate, which again is why you're seeing a constructive pricing environment right now. Operator: The next question will come from Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: This might be tricky to -- this might be tricky to announce sequentially here. But just the first was on fleet requirements. How has your plan for retirements or used aircraft sales changed, if at all? And if you could walk us through any cash flow or cash flow 1 and 2 P&L impacts from aircraft sales? And then Bob, my follow-up. Organizationally, Southwest has been very focused on rolling out these initiatives, executing on these initiatives. Are you now in a better place, or more prepared to consider potential consolidation scenarios? Tom Doxey: Duane, I'll take your first one on the fleet side. You've seen the numbers that we've talked about for this year and the [ 60s ] for aircraft coming in new from Boeing. No change there. We're feeling confident about what we're seeing out of Boeing every month. Things seem to just be getting better and better there about their ability to deliver on time. And so the retirements that we have are very much tied to the aircraft that are coming in. You've seen what we've guided around -- both for this year and kind of high-level commentary that we've given for the next several years around capacity. No major changes there. And so the quantity of retirements really will just depend on the timing with which those new aircraft deliver, which again are becoming more and more predictable by the week. Robert Jordan: Duane on your second. The -- organizationally, I think the -- there's been a lot of organizational efficiency that's been put into place here at Southwest at both on the front line and then especially here in sort of the corporate side of the business in the last year. The business is moving at an incredibly agile pace in terms of change. You're seeing that come through in the execution of the transformation and then continuing to add focus on our customer, add attributes at our customer [indiscernible]. So we're moving at a pace that I've just not seen here at Southwest. So our ability to deal with any issue, I think, is better than it was a year or 2 ago, period. We don't comment on what consolidation and what could happen in the industry. There's lots of rumors out there. We're focused on what we can control. There's no value in focusing on rumors. There's no value focusing on fuel because you don't have one thing that you can do about it. But things change and if the -- if some of that were to become real, then obviously, we would take a look and decide what our response to that would be. But we don't comment on those things. Operator: The next question will come from Atul Maheswari with UBS. Atul Maheswari: Based on the full year guide on capacity, it implies that the back half capacity growth, it's going to be closer to 3%. So you're accelerating capacity in the back half at a time when others are cutting. So just some rationale for the implied capacity growth acceleration in the back half in this fuel backdrop [indiscernible] And then as my second question on the cost out performance. I know you mentioned those are structural. But if you could provide some key buckets of the cost outperformance, or the improvement that you're seeing currently, that would be helpful along those lines. If I can add just one quick one is, what's [indiscernible] what should we think about the CASM-X in the back half on the 3% [indiscernible] growth? Robert Jordan: Yes. Atul, it's Bob. I'll take the first, and then Tom will take the second on cost. Our -- we entered the year 2026 with a very disciplined cost plan. Capacity up 2 to 3. We've been modestly trimming that as we move throughout the year. I would call that sort of normal demand shaping where you take a look in their flights that just don't make sense anymore, and you either cut that capacity, or you cut that capacity and then you redeploy. We've also had aggressive with moves like you saw with [indiscernible] and [ Dallas ] to take underperforming markets and deal with those and then move capacity to markets that are performing, the San Diego and Nashville, et cetera, of the network. We've taken our second quarter capacity down, as you saw. We're now expected to grow roughly 0.5 point. And I just would point to the fact that we'll continue that close in demand shaping and capacity activity in the third quarter. We'll do that in the fourth quarter. So I understand your point, but I would not read through -- I wouldn't read that through as the final number. But again, you've heard others talking about cutting capacity. We started there. We started with a well thought out conservative, constructive capacity plan for the year at 2 to 3 points, and that's now become 2. So you're seeing others come back to us, not others go below our capacity plans. Tom Doxey: And Atul, on the cost question. The cost performance that you're seeing, and Bob referenced this a bit earlier. But this is structural, this is representing great work that's happening across a lot of the teams, not relating to timing or transactions or other things. And as you think about some of the bigger buckets that are there, for us, the people expense represents just shy of half of our cost structure. And so we need to make sure that as we're operating that we're doing that in an efficient way. You've heard us talk a lot about how important it is that we continue to run a really high-quality operation. It is a cost-efficient thing to be running as good an operation as we are now. And so we look to be as efficient as we can be out there. Some of the other big buckets that we have, technology for one, we have come a long way. Lauren and her team are just phenomenal in the tool that they built. But we did have a bit of catch-up that we were doing, and that gives us the ability to kind of back up a bit, while still maintaining the strong trajectory in technology transformation. So you're seeing some savings there. And then maybe the third and final bucket I'll raise is just on the, kind of, maintenance and fleet side of things. As you're going through a replacement of older, less efficient aircraft and replacing those with brand new, more efficient 737 MAXs, you just want to make sure that you're doing that as far as component maintenance and other things. You're doing that in the most efficient way that you can. I think we are one of the best in the world at doing that type of optimization work. And you're seeing that showing up in the number quarter after quarter after quarter as we do that. Operator: The next question will come from Savi Syth with Raymond James. Savanthi Syth: Maybe, I think Duane, just to follow up on Duane's question there. Just curious what the aircraft sales benefits were in 1Q and expected in 2Q in the P&L, in terms of understanding what the core cost is? And maybe for the second question, just to follow up on that. Just how are you thinking about aircraft sales going forward? Because it feels like as you catch up to this kind of delayed MAX delivery that we will see this kind of continue for a few years yet. So just kind of curious your thoughts there. Tom Doxey: Yes. Thanks, Savi. We had 5 aircraft sales that we did. There were three 737-700s. There were two 737-800s that we sold. So those 5 aircraft. And about a $30 million or $40 million book impact there. So not super material to the cost numbers that you saw. So everything you're seeing in the cost numbers is around the structural changes that we're making in the business. Operator: The next question will come from John Godyn with the Citigroup. John Godyn: Bob, I wanted to follow up on the topic of consolidation. And it's not about rumors, news or anything like that. I mean you were pivotal and central to the [indiscernible] deal many years ago. I feel like there must be learnings from that. There must be kind of a philosophy on when consolidation, or being involved in it matters? And adds value, when it doesn't? I think [indiscernible] just more historical context and plugging into the company's philosophy today rather than any commentary on what's going out there right now? Robert Jordan: Yes, John, thanks for the question. And it's pretty basic to my mind. Again, as you sort of go back and reflect on [ AirTran ], it -- and yes, it was involved in that deal heavily. It's, number one, [indiscernible]. In other words, you have the pieces they get put together have to result in synergies. They have to result in goodness in terms of geographies served. You have to be compatible enough thinking about things like aircraft holders. So at the end of the day, if it doesn't paper out financially and other -- it doesn't make sense to pursue. Second, you've got to have a chance to pass [indiscernible] and get it approved. If it's -- no matter how good it might look if you have too much overlap as an example and your odds of approval it's too risky. And no matter what you think, it's not something that you can pursue. And we've always been pro competition, pro-consumer here at Southwest. So the combo has to be something that's good for your customers. It's got to -- in particular, add geographies, add to the network, potentially add products, but serve them in a better way. And that's how we thought about [ AirTran ]. It met all of those. The geographic combination made sense. The synergies were there, the cultures were similar. And at the end of the day, that was a great thing for Southwest Airlines. It can't be simply because, hey, it's good time to do something, or the rest of the industry is doing something. It has to make sense fundamentally. Operator: The next question will come from Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: Just curious on -- just within the outlook for 2Q RASM, or just even kind of broadly over the balance of the year, do you anticipate load factors getting back up into the 80% range? And it's just one concern we hear a lot from investors, like is longer than the 70% range. There's like that risk that there's maybe -- or a concern that there's share loss in some of the more competitive markets? Andrew Watterson: Yes, I'll take that. So if you look at our Q1 RASM and you kind of put back to Q1 of 2019, you see our RASM on a [indiscernible] basis has outperformed the carriers to report so far, the big 3 in particular. And so obviously, that's the metric that matters. But the year-over-year, year over 6 years, you drive RASM. Bob mentioned we [indiscernible], and I got employee questions about, hey, Andrew, the flights are always full. Well full flight does not mean a profitable fight. And so one of the most [indiscernible] things you can do in the airline business is chase market share or chase volume. You have to go after RASM and our RASM is performing with us on a year-over-year basis, [indiscernible] year-over-year basis, [indiscernible] 7-year basis. It is working for us. And so we'll continue to focus on that. And that [indiscernible] going up, so be it. And in our calculations, we look at the incremental cost to carry as well as [indiscernible] we get as we price and we accept them reject demand every day. So for us, it's working, we'll continue to push RASM as hard as we can, and we're seeing extraordinary good yield protraction right now, and that's that drives -- that's a vehicle for high RASM, we will pursue it. Operator: The next question will come from Brandon Oglenski with Barclays. Brandon Oglenski: I mean, maybe if I can just follow up on that because there seems to be like this fickle market view that a high-teens RASM guide is somehow indicative that Southwest is incrementally losing share. And I know we've kind of beat around the bush on this, but I don't know, Bob or Andrew, do you want to comment on that? And then maybe incrementally for the second part of my question, how dynamic have you gotten to pricing these incremental products that you just haven't had before? Is there more upside to come on figuring out what people's value they put on these products is? Andrew Watterson: Sure, I'll start. I mean you're growing slower, as Bob mentioned. So therefore, your share will drop, and that should be fine. You look at the number of people on board your aircraft, once again, footing back to preendemic, the number of the people in the aircraft is flat to up. The aircraft have gotten bigger. So our aircraft size is 160. The big 3, I think, is about 120, 130. So it's a much bigger aircraft size. Other airlines with big aircraft also see this challenge. So I don't think it's anything to do about inherently [indiscernible] to Southwest Airlines. You see all the metrics we talk about is we have always been attractive. We got incrementally attractive with these new products. And we were monetizing that mostly on the back of yield in a high-fuel environment, that is the path to prosperity is giving it on the back of yield. Robert Jordan: And I just want to add a little perspective here because now the narrative is, yes, [ 17.5% ] guided RASM is not enough. And then even though load factor is up somehow, we must be losing share, and there's -- our customers love these new products, and there's incredible demand. But if you just go back a bit here over the last 18 months, the narratives about Southwest from the naysayers, I think they're becoming increasingly desperate a bit here. First, it was Southwest won't change. And then it became, well, Southwest can't execute the changes that they've talked about. And then it was, well, they got them done but their customers aren't going to want to buy the new products. Now there's some wonky argument about accounting and ATL and then we're losing share. And if you just step back, ignore all that junk and look at the results, terrific product demand. Best net margin of the large U.S. carriers, a 17.5% unit revenue growth in the second quarter, which is off the charts. Business revenue up 25% in March. The transformation is working. Customers love the product, and it is transforming our financial results. And I just would say, too, you've got to always examine the motives of those that are pushing [indiscernible], especially one that's increasingly irrational. Operator: The next question will come from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe just related to all the fuel comments and capacity comments, Bob. I could see why you're frustrated at the same time [ to ]. I guess at what fuel price do you make further changes to capacity? And as a follow-up to that. How do we think about when fuel prices and how fuel prices impact your aircraft sales or deliveries? And how you think about changing them for how long they stay at these elevated levels? Robert Jordan: Yes. I'll -- maybe Tom on the second one. The -- I'll take the first one. It's really hypothetical because fuel has been around -- I mean really day-to-day, you're seeing 8%, 10% moves day-to-day. We are -- again, and you're not in control of exactly how fast and how much you can raise fares. There's market dynamics at play. But there is a lot of constructive fair movement. We're seeing that. And as clearly revenues and therefore, fares are underneath the increase in fuel. So we've not caught the increase in fuel by any stretch of imagination, which is why you're continuing to see fares move in the industry. So I can't predict exactly where fuel is going. And so therefore, I can't predict exactly where [indiscernible] and fares are going. Which is why I indicate we're just using the forward curve. We'll continue to be dynamic. We'll continue to react. We came in again to the year with a very disciplined capacity plan and we'll continue to be aggressive in redeploying capacity to better performing markets. And then, yes, it really -- if fuel really moves up from here, obviously, we would take further actions. But I think trying to -- trying to indicate what those might be is just speculation at this point. Just so that we'll be aggressive though. Tom Doxey: And then the follow-on question on aircraft, having such a large fleet of mostly unencumbered owned airplanes gives us tons of flexibility. So that will really just be an output of how and where we're looking to grow, and to what levels and the flexibility is there to retire or retain to adjust to whatever the environment might be. Operator: The next question will come from Dan McKenzie with Seaport Global. Daniel McKenzie: So my question is similar to a prior one trying to get at M&A philosophically. And I guess my question really is, how [indiscernible] is the investment-grade rating? And is that something you'd ever be willing to put at risk temporarily if it de-checked all the boxes that you talked about, Bob? And then Secondly, I guess, Andrew, Southwest is doing so much on merchandising. And just going back to that question about how much room is left in the tank. The revenue upsell at the time of sale seems pretty compelling, pretty -- communicated pretty well. But I'm curious how big the upsell opportunity is after the sale, what you're doing here? And what percent of revenue that could ultimately be? Tom Doxey: So Dan, I'll take the first one, and this goes to comments I made earlier. The investment-grade rating for us is a differentiator. There are only 3 airlines in the world that have an investment-grade rating. And so as we look at the activities that we do, just know that, along with the guardrails that I referenced earlier are a filter that we use to evaluate different opportunities or different decisions that we make within the business. Andrew Watterson: And on your second question, I think when we originally gave some of our values before for initiatives that you kind [indiscernible] extra legroom. We talked about how we expected the kind of that to improve as we kind of bake it in from this year into next year. So obviously, there is still upside to come from it. The time of sale, we are seeing very good traction as we indicated by our in our prepared remarks. But we're also still continuing to optimize that. We're happy with it. The stand-alone seats. Some of that comes at sale, but there is a very kind of sharp inside the week before departure booking curve there, and we have dynamic pricing tools that we have deployed to help us that, and we expect a benefit there, all those in the same vein that we expect to improve from this year into next. And there's also other opportunities that Bob talked about that we're looking at to make taking into the next level, including getting some more share shift on this. So overall, as Bob said, it's working better than we expected. There is implied room to come in our business case, and we think there's room on top of that for upside. Operator: The next question will come from Chris Wetherbee with Wells Fargo. Christian Wetherbee: I just want to try to make sure I understand this. I [indiscernible] ask this question that's been asked a bunch of time, but I'm just curious. Since March 1, how many fare increases have you put through? Just putting initiatives aside, I guess, how many have you participated in the industry just to give a sense of kind of how that's played out? Andrew Watterson: I count 5 broad industry-wide fare moves and another one underway today. Christian Wetherbee: Have you participated in all of them? Andrew Watterson: Those all stuck and which means all care has participated. Operator: The next question will come from David Vernon with Bernstein. David Vernon: So I guess I should say, yes. So if you look about the Rapid Rewards information that's in the earnings release, they were talking about enrollments up 37% [indiscernible] Is there any -- is there any color you can give us around how the card program is performing as far as total spend or sign-ups for the card? Just trying to figure out like how the card program is performing during this period? Andrew Watterson: I would say that we saw improvement with the rollout in the mid last year of the new card. Our remuneration was up 8% approximately year-over-year, which is, I think, just shy of the other airlines, and we don't yet have a high fee credit card which is a source of much of the gains across the card industry. And so we're really encouraged that without that key aspect, we're at 8%, and we expect that to accelerate if we can offer that kind of card. Operator: The next question will come from Chris Stathoulopoulos with SIG. Christopher Stathoulopoulos: Okay. I'll keep it to one call. So -- one question. On demand elasticity destruction, although I prefer the former, I guess, term there. If you could contextualize the part of your network that is perhaps more resilient than others. So whether it's some inherent pricing power due to network architecture or otherwise, as we consider what is likely going to be, I guess, some weakening in certain parts of this K-shape recovery, however you want to describe it. But parts of your network that you believe for whatever reason, are more resilient, or have some inherent pricing power around them? Andrew Watterson: This is Andrew. We are seeing extraordinarily strong fares and strong demand across the entire network across all customer segments across different travel types. The only place seen weakness are the mix in [indiscernible] and Hawaii because of weather and political activities. And even those have seen a sequential improvement in the last couple of weeks. So it is -- when we say broad-based, we very much mean broad-based. Robert Jordan: And the other thing I would add, just with the fundamental change in the financial performance of the business and the fundamental change in our margins, whatever is happening in the customer response. So at some point, you do begin to see some pushback on fare increases, which, again, as Andrew said, there's absolutely no sign of that obviously, with higher margins now, top of the industry margins and that performance allows us to look at the business and markets in a different way because they're performing. So markets flipping from a performer to an underperformer is very different when you're near breakeven than when you're producing top of the industry margins. Danielle Collins: Thank you for that, Bob. We'll have time for one last question. Operator: And the next question will come from Michael Goldie with BMO Capital Markets. Michael Goldie: Going back to costs for maintenance expense, is the performance that we're seeing driven by delivery of new aircraft and then divesting of older equipment, or is anything else changing that's driving that maintenance performance? And then just a follow-up on headcount. We've seen head count per ASM climb quite a bit since 2019. I get that part of that is investing in network resiliency. Are we at the right levels? Or are you going to grow into these resources over time? Tom Doxey: Thanks, Michael. So on the maintenance side, there's several buckets that are there. What you referenced, which is the ability to be efficient in the way that you are retiring a fleet type, that's certainly part of it. And I think we've consistently quarter-to-quarter-to-quarter, got more and more efficient in the way that we're doing that, especially as it relates to the 737-700, the smaller, less fuel-efficient aircraft as we're bringing the new MAXs into the fleet. So that is definitely a contributor. And we have many, many years ahead of that continuing to occur for us as we continue that transition with hundreds of airplanes, new airplanes on order. Apart from that, though, there is efficiency around the way that we're managing our supply chain and other elements of the program that are also contributing to that maintenance expense being as efficient as it has been. And then to your second question on headcount. So much of the head count expense that we have is variable. And so yes, we do look at head count in and of itself as it relates to the front line, but it's really more about having the right number of people so that you have the right folks in the right places so that you're not having to have more premium pay and other things that would result from not having kind of an efficient set up across our operations. And then on the indirect side for headcount, you've heard us talk about the fact that we, year-to-year, are keeping head count [indiscernible] flat, which as we go through attrition and other things, you'd probably see the head count come down just a bit to be able to enable the dollars to stay flat year-to-year-to-year. Danielle Collins: That wraps up today's call. We appreciate everyone for joining us. Operator: The conference has concluded. Thank you all for attending. We'll meet again here next quarter.
Operator: Hello. Welcome to Oceaneering's First Quarter 2026 Earnings Conference Call. My name is Sarah, and I will be your conference operator. [Operator Instructions] With that, I will now turn the call over to Hilary Frisbie, Oceaneering's Senior Director of Investor Relations. Please go ahead. Hilary Frisbie: Thanks, Sarah. Good morning, and welcome to Oceaneering's First Quarter 2026 Results Conference Call. Today's call is being webcast, and a replay will be available on our website. With me today are Rod Larson, President and Chief Executive Officer; and Mike Sumruld, Senior Vice President and Chief Financial Officer. Rod and Mike will provide our prepared remarks, and then we'll take your questions. Before we begin, please note that statements made on this call about our future financial performance, business strategy, plans for future operations and industry conditions are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our remarks also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our first quarter press release, which is available on our website. I'll now turn the call over to Rod. Roderick Larson: Good morning, and thanks for joining the call today. I'm pleased with our first quarter results, which reinforce our confidence in the year ahead. We generated consolidated revenue and adjusted EBITDA consistent with our guidance and drove strong commercial momentum, capturing new awards and extensions across the portfolio. At the segment level, Aerospace and Defense Technologies or ad tech posted significant year-over-year revenue growth as expected, indicating steady demand across our defense portfolio. Despite softer energy center activity, subsea robotics or SSR and manufactured products, both delivered year-over-year increases in revenue, demonstrating the resilience of our portfolio. Overall, this positions us well to deliver on our full year guidance. Importantly, we further solidified our outlook with a strong first quarter order intake of approximately $1 billion, 1 of the healthiest intake since 2020, which resulted in a constructive first quarter book-to-bill ratio. SSR awards totaled approximately $300 million, including projects extending to 2031, which improves our visibility into utilization levels across the next several years. In addition, we secured multiple survey contracts for the Ocean Intervention 2 that will keep the vessel highly utilized for the next 3 quarters and showcase its range of capabilities, including simultaneous operations. Ad Tech added approximately $175 million in new contract awards, exercised options and increases to existing contract values. We also progressed on the technology front. As we shared on our last earnings call, we formally introduced Momentum, our next-generation electric work-class ROV, which delivers improvements in supervised autonomy, endurance and reliability. We expect to mobilize it on one of our U.S. Gulf vessels during the second quarter. We continue to develop our autonomous systems portfolio, including our Freedom platform. One commercial unit is currently operating in West Africa and we are moving towards testing and customer demonstration of a specialized Freedom vehicle for the Defense Innovation Unit or DIU, which reinforces our position as a provider of dual-use technology in the energy and growing defense markets. In ad tech, we delivered the U.S. Navy submarine rescue diving and recompression system following a multiyear complex rebuild and recertification of this globally deployable mission-critical capabilities. Beyond our subsea markets, I am very proud of the support we provided to NASA's Artemis program and the safety of its astronauts, applying decades of deep sea harsh environment experience to the unique demands of space. The successful launch and return of ARTEMIS I showcased this work, incorporating our advanced products and technologies. We value NASA's trust in us. Alongside these milestones, we are always navigating an evolving geopolitical environment. Let me address the impact of Middle East conflict on ocean nearing before Mike gets into our detailed financial results. First and foremost, the safety of Oceaneering is our top priority and all in the region are accounted for and safe. We have enacted established protocols are in frequent contact with our teams in the region and are taking necessary precautions to safeguard our people and property. Operationally, we've experienced intermittent disruption during this period, though the consolidated financial impact has thus far been modest. Integrity Management and Digital Solutions, or IMDS, has the greatest exposure in the region and has therefore been the most effective. We are coordinating closely with our customers and partners to manage these impacts and are monitoring conditions closely. So with that context, I'll turn the call over to Mike to summarize our first quarter results, and then I'll be back to provide our outlook for the second quarter and full year of 2026. Mike? Michael Sumruld: Thanks, Rod, and good morning. Let me share our first quarter 2026 consolidated financial results. Overall, results were in line with the guidance we provided last quarter. As expected, we saw lower activity in our energy portfolio and significant improvement for AdTech. Compared to the first quarter of 2025, revenue was $692 million, representing a 3% improvement with year-over-year revenue increases in SSR, manufactured products and ad tech. Operating income was $57.8 million, down 21% and Net income was $36 million or $0.36 per share, down 28% and adjusted EBITDA was $83.7 million, down 13%. The consolidated year-over-year comparisons are materially impacted by the record first quarter that our offshore project Group, or OPG delivered last year. Turning to our cash flow and liquidity. We utilized $59.1 million of cash for operating activities, largely for payment of performance-based incentive compensation and increased customer receivables. We invested $17.4 million in organic capital expenditures with approximately 54% allocated to growth and 46% allocated to maintenance. This resulted in negative free cash flow of $76.5 million, an improvement of $30 million compared to the first quarter of 2025. We ended the quarter with a cash balance of $607 million and $215 million available under our secured revolving credit facility, resulting in total liquidity of $822 million. Since we're discussing liquidity, let me address our share repurchase activity. We remain committed to an opportunistic and disciplined approach. Given the heightened market volatility tied to the Middle East conflict and the resulting swing in our share price, we chose not to repurchase shares in the first quarter. We will evaluate share repurchases as the year progresses as returning capital to our shareholders continues to be an important component of our capital deployment strategy. Now let's look at our business operations by segment for the first quarter of 2026 as compared to the first quarter of 2025. The SSR operating income of $55.5 million was down 7% on higher revenue. Average ROV revenue per day utilized increased from $10,788 and to $12,401 driven by improved pricing and discrete first quarter items that boosted ROV revenue are not expected to repeat. Specifically, we mobilized ROV systems for upcoming projects, which contributed revenue without associated ROV days utilized. We also completed a discrete cost reimbursement scope of work that contributed revenue with minimal margin. Looking ahead, we expect full year 2026 average ROV revenue per day utilized to exceed 2025, but we do not expect to maintain the first quarter rate. SSR EBITDA margin declined to 32%, driven primarily by lower ROV utilization, which decreased to 61% and as activity softened in both drill support and vessel services. We also saw our geographic mix shift somewhat to lower profitability regions as expected. We incurred cost to prepare the Oceaneering Intervention 2 for operations and continue to invest in the Freedom vehicle ahead of upcoming defense customer trials. We expect SSR margins to rebound in the second quarter as utilization increases in ROV and survey. For the quarter, the revenue split between ROV business and our combined tooling and survey businesses, as a percentage of our total SSR revenue was unchanged from the first quarter of 2025 at 79% and 21%, respectively. Our OV days utilized in favor of drill support was 67%, while vessel-based services were 33% compared to 62% and 38%, respectively, in the first quarter of 2025. As of March 31, 2026, we had ROV contracts on 83 of the 143 floating rigs under contract or 58% market share. We maintained our fleet count of 250 ROV systems. Turning to manufactured products. Revenue increased 6%. Operating income was $26.1 million or 18% of revenue, which is up 37%, excluding the $10.4 million theme park ride inventory reserve taken in the first quarter of 2025. Revenue results benefited from the receipt of steel tubes, but at no margin, while operating income improved on continued execution of higher-margin backlog and strong performance from our rotator valves business. Our backlog was $492 million on March 31, 2026, down $51 million from the first quarter of 2025. Our book-to-bill ratio of 0.91 was similar to the same period last year. We've seen backlog decline over the past 2 quarters, largely due to the timing of awards. While this segment is a lumpy project-based business, where backlog can change meaningfully from quarter-to-quarter, we have not seen a change in underlying demand. Our sales pipeline is healthy with a robust level of tendering activity and substantial opportunity value, and we expect to rebuild backlog in the coming quarters as projects move to award. OPG's results decreased as activity returned to more typical seasonal levels compared to a record first quarter last year, which included higher vessel utilization and a better service mix in the U.S. Gulf and international locations. Revenue was $135 million and operating income was $18 million resulting in a 14% margin. Favorable project mix partially offset the lower activity supported by installation work and continued execution on an international intervention project. [ IMDS' ] revenue, operating income and margin decreased due to lower activity in West Africa and Australia, the latter of which was the result of our decision to exit a low-margin contract. We entered 2026 expecting growth in the Middle East based on several recent contract awards and initially realized some of these benefits as the year started. However, the Middle East conflict and associated activity declined led to regional results that were essentially flat compared to the first quarter last year. Ad Tech revenue increased to $131 million, reflecting higher volumes in our Oceaneering Technologies, or OTC and Marine Services division, or MSD, business lines. In OTECH, growth was primarily tied to the large contract awarded in 2025, which is progressing on schedule. MSD results improved due to increased volume in submarine, maintenance and repair work and an increase in dry deck shelter overhauls. Operating income and margin decreased primarily due to a net $5.5 million accrual related to the expected resolution of a previously disclosed contract dispute. While the agreement remains subject to final approval, we expect that it will resolve the matter, reduce uncertainty and enable the team to focus on program execution and continued customer support. We anticipate settling our obligation over the life of the associated multiyear contract. Our unallocated expenses of $49.3 million were consistent with our expectations for the quarter and increased year-over-year due to a combination of wage inflation, foreign exchange impacts and increased IT costs. Let me turn the call back to Rod to discuss our outlook for the second quarter of 2026. Roderick Larson: Thanks, Mike. We expect to build on our first quarter results with sequential improvement. The quarter is shaping up as planned to support our guidance, even though we expected our consolidated results to be down year-over-year. On a consolidated basis, we expect our revenue to increase and EBITDA to be in the range of $100 million to $110 million. Comparing our second quarter 2026 to 2025 by segment, for SSR, we expect increased revenue and flat operating income due to changes in geographic mix and increased survey activity. As previously communicated, we anticipate an improving geographic mix and higher utilization in the second half of 2026. For manufactured products, we expect revenue and operating income to both increase by a mid-single-digit percentage. For OPG, we expect flat revenue and decreased operating income with modestly lower vessel utilization in the U.S. and West Africa and a project mix shift to lower-margin inspection, maintenance and repair, or IMR work. For MDS, we expect revenue and operating income to decrease due to lower activity in West Africa and Australia. Middle East activity remains uncertain and will depend on how regional conditions evolve. For Ad Tech, we expect significantly higher revenue and higher operating income. We project unallocated expenses to be approximately $50 million as wage inflation, foreign exchange impacts and increased IT costs are expected to persist. Returning to our 2026 outlook. Our full year plan is progressing as expected despite the uncertainty in the Middle East. We anticipate an acceleration in energy market activity in the second half of the year, with the potential to add incremental work in our OpEx-oriented work streams earlier. Against that backdrop, we are reaffirming our consolidated guidance ranges of low to mid-single-digit revenue growth and EBITDA of $390 million to $440 million. Comparing our full year 2026 to 2025 by operating segment. For SSR, we continue to forecast low to mid-single-digit percentage revenue growth. Average ROV revenue per day utilized is expected to increase slightly compared to our 2025 average. We anticipate that our ROE fleet utilization will be in the mid-60% range with higher activity levels during the second and third quarters that we will maintain our drill support market share in the 55% to 60% range. Tooling and survey results are expected to increase with improved utilization of the Ocean Intervention II based on recent contract wins. For the year, SSR EBITDA margins are forecasted to be in the mid-30% range. For manufactured products, we expect higher operating income on slightly lower revenue with operating income margins to range in the mid-teens. We expect high absorption in our umbilicals plants and a strong year from rotator products, which recently won its largest ever contract. Based on our current sales funnel, which indicates that backlog will build in the second and third quarters, We forecast the book-to-bill ratio will be in the range of 0.9 to 1.0 for the full year. For LPG, we expect lower revenue and significantly lower operating income with margins to range in the mid-teens. This reflects our forecast for lower margin IMR work in the U.S. Gulf and lower activity in West Africa, which we expect will be partially offset by ongoing intervention work in the Caspian and an upcoming installation project in North Africa. For MDS, despite the recent drop in Middle East activity, we continue to forecast revenue growth, supported by demand for our digital and engineering services. Operating income is still expected to increase, but by less than we previously anticipated, with margins in the mid-single-digit range. For AdTech, operating income is expected to increase on significantly higher revenue with margins in the low teens. Demand for our OTEC and MSD services should increase and recent government actions have provided funding consistency across our larger programs, giving us increased confidence in our outlook for 2026 and beyond. In summary, while conditions remain fluid, our expectations for the second quarter and full year of 2026 are unchanged. We are confident in our ability to deliver, supported by our first quarter order intake and our sales funnel for the rest of the year. The visibility provided by our consolidated backlog, the breadth of the geographies and end markets we serve, the flexibility provided by our healthy balance sheet and the commitment of Oceaneers worldwide. We appreciate everyone's continued interest in Oceaneering, and we'll now be happy to take your questions. Operator: [Operator Instructions] Your first question comes from Eddie Kim with Barclays. Edward Kim: The SSR awards of $300 million you booked in the quarter was a big number. Just curious how much of it was secured before or after the Iran conflict. And just broadly, as the Iran conflict and the resulting increase in oil prices we've seen, has that sort of increased customer inbounds for more ROVs and other parts of your business? Roderick Larson: I'd characterize it this way, I think you'd be hard-pressed to try to see an inflection point or anything in the orders. I think everything was kind of underway anyway. So not a big thing. I will call out this, but 1 of the things that's interesting about the order is that when you think about it is just a near-term or long-term effect on oil prices, we had an increase in longer-term contracts. So we averaged above 1 year for the contracts that were awarded, and we had some out to 5 years. So I think the longer term says that there's more than just a blip going on here. . Edward Kim: Got it. Got it. And just sticking on SSR, your ROVs full year utilization you maintained at sort of the mid-60s even though first quarter was a little bit low. -- at 61%. Obviously, you expect utilization to increase the remainder of the year. What gives you that confidence? Is it just more rigs -- offshore rigs going to work in the back part of the year or something else? Roderick Larson: Yes. Yes, and definitely, the back half helps, but also just -- I mean, the biggest part is the seasonality, right? We do get busier on vessels, especially in the second and third quarter. So we've got that going on plus some of these contracts that I just talked about will pick up in the fourth quarter. So we'll have some mobilizations in there as well. Edward Kim: Understood. And if I could just squeeze 1 more in, if I could. The ad tech contract dispute impact in the first quarter, it seems like on EBITDA, maybe it was a couple of million dollars and then how much -- what do you say is the be Iran war impact. Is that another couple of million? And is that going to linger into second quarter, which I assume is embedded in your second quarter guide, but just curious on both fronts... Roderick Larson: I don't think Iran affected the results on that. What I would say is I think it did help us clear up the funding. We mentioned that we got the funding came through and people back and made sure that the programs continue. It was more about just making sure the funding was in place than it was about any activity directly related to Iran. . Michael Sumruld: Yes. And the overall impact on our EBITDA was a net $5.5 million just when you're building out your model versus 2. Operator: Your next question comes from Keith Bachman with Pickering Energy Partners. . Keith Beckmann: I just kind of -- I wanted to dig into the ROV pricing discussion a little bit more. Obviously, it looks -- it was up in 1Q pretty significantly. You guys talked about some items that may not be repeatable. Is the -- is the 4Q 25% exit rate on revenue, kind of the right way to think about things going forward given some of the earlier impacts that you guys have mentioned or just anything on pricing on that front? Roderick Larson: I think revenue per day, yes, it is. I mean, we're still expecting to average higher year-over-year. So I think it's still a good starting point. We -- like we said, there were some one-offs that topped up revenue but didn't have much of an effect on EBITDA. Some of those things fall back and then we kind of go back to a more normal continuous improvement of the day rate. Keith Beckmann: Awesome. That's really helpful. And then the second question I wanted to ask was just around -- you guys have brought up this, I think, a few times before, but I just wanted to get a sense of kind of talk about lower profitability depending on working in certain regions. Could you kind of outline maybe higher profitability versus lower profitability regions a little bit for me? Roderick Larson: Yes, sure, sure. What we've referenced before in the Q4 call and here is the geographic mix for SSR. And typically, what we see, although not bad, and we've seen improvement over the last year, The margins in the North Sea and Brazil tend to trail the Gulf of America or Gulf of Mexico, your choice and West Africa. And we just see that mix shift towards those lower-margin locations in the first part of this year. I think we're seeing that come to fruition. But do based on line of sight, I think that, that shift is going to move back towards really, Gulf of America as we move into the latter part of the year. . Michael Sumruld: And then the second thing to watch is just the mix of work because the IMR work tends to be less differentiated, which means it's not as high margin as, say, the well remediation type work, the light well intervention or construction. So those are the things. As we get more of that work, we start to see the margins go up. Roderick Larson: Yes, which you could potentially see with everything going on to hope, but I think it's a possibility that you might see more of that intervention work. Keith Beckmann: Awesome. That's really helpful. I appreciate it. If I could slide 1 more and if you guys all fine. I wanted to ask around the -- you guys have brought up no share repurchase activity this quarter. Is there a chance that there could be a change of how you guys are thinking about deploying capital given maybe energy security risks create opportunities that could be there, maybe not in the immediate term. But I'm just trying to get thoughts on capital deployment, maybe if CapEx and returns there could be a better way to utilize capital. Just your thoughts on that right now, given we're in a much different situation than we were to start the year. Roderick Larson: You're thinking about it the right way. I mean, we definitely -- we've always said organic growth, potential inorganic growth that we think is really good and then return to shareholders. And so -- as those things become more attractive, you see -- 1 of the things I would tell you, as we work -- do this work with ad tech, we're prime on projects now. We're starting to see people that we work with that we think we look really good as potentially being part of Oceaneering those things -- the more work we do, the more we see those opportunities. So yes, if we have an opportunity to deploy capital that way, we would definitely redirect. Michael Sumruld: Yes. And I think it's fair to say that we feel like we've got the capital necessary to return some to the shareholders. We just need to be cautious about when we're choosing to do so and find those opportunistic moments. And it was just such a challenge in the first quarter, Keith, to do that. It was just swinging too much either direction, in our opinion. Operator: Your next question comes from Josh Jane with Daniel Energy Partners. Joshua Jayne: First question from me. It sounds like you're anticipating some incremental spending on OpEx items later in '26 and into '27. Maybe just some incremental color would be great and just maybe weave in some of the sense of urgency from customers just given what's happened over the last 8 weeks. Roderick Larson: Yes. I mean 2 really kind of -- it's 2 different stories. So if I start with -- we talked a little bit earlier about the increased oil price puts more money in the customers' pockets also improves the economics on well intervention and workovers and well remediation. And we've already seen customers starting to ask about, hey, is there going to be vessel availability during the season, right, so Q2, Q3. So I think some of that could come in. I mean, those things are pretty quick to turn around, so we could pull some of that into Q2, but definitely could fall into this year. . The other side is we see some resolution of the conflict in the Middle East. All those facilities that are close to the action are going to have to be looked at before they start up. So we think that there could actually be a little bit of a way of coming here on the Middle East IMBS activity because that would definitely have a scramble to put resources there to check these things out so they can start up the plants and the refineries there. So I think those are the 2 fronts we're watching carefully. Michael Sumruld: Yes. And on the latter, the couple of contracts that we won earlier this year, at the end of last year that started up before the activity declined due to what happened I think that just bodes well for us moving into the latter part of this year as well if that additional activity shows up. Roderick Larson: Exactly. It was a great time for us to improve our footprint there. Joshua Jayne: Understood. And then just my second one. You mentioned the Ocean Intervention too. I think that was the vessel that I board last summer. And from the commentary, it sounds like the opportunities are accelerating for simultaneous operations. Could you just talk a bit more in detail on the scope of work and how eager customers are to book an asset like this today versus where you were maybe 6 to 9 months ago? Roderick Larson: Yes, absolutely. I think for us, the exciting part is it's given us a chance to flex a little bit on the autonomous side or the remote operations that when we talk about SIMOPs, we're talking about operating the the ASP, the autonomous surface vessel that we bought. So that we're doing surveys with that along with doing the towed sonars and things off of the OI and some of the other things that we deploy from the Ocean Intervention too. . So it's this ability to almost do the work at 2 boats at once using lower cost, more efficient technology and the customers are really getting excited about it. Especially when we go into remote areas where there's not as many assets available I think that tends to be pretty exciting. So we did some trial work here in the Gulf and then we hope to get outside the Gulf and user as well. Operator: This concludes the question-and-answer session. I'll turn the call to Rod Larson for closing remarks. Roderick Larson: Well, since there are no more questions, I'll just wrap up by thanking everybody for joining the call. This concludes our first quarter 2026 conference call. Have a great day. . 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 the Valley National Bancorp First Quarter 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Gianetti, Investor Relations. Please go ahead. Andrew Gianetti: Good morning, and welcome to Valley National Bancorp's First Quarter 2026 Earnings Conference Call. I am joined today by CEO, Ira D. Robbins and CFO, Travis P. Lan. Our quarterly earnings release and supporting documents are available at valley.com. Reconciliations of any non-GAAP measures mentioned on the call can be found in today's earnings release and presentation. Please also note slide two of our earnings presentation and remember that comments made today may include forward-looking statements about Valley National Bancorp and the banking industry. For more information on these forward-looking statements and associated risk factors, please refer to our SEC filings, including Forms 8-K, 10-Q, and 10-K. With that, I will turn the call over to Ira D. Robbins. Ira D. Robbins: Thank you, Andrew. Valley National Bancorp delivered another strong quarter. With net income of approximately $164 million, or $0.28 per diluted share. Excluding certain noncore items, adjusted net income was $169 million, or $0.29 per diluted share. Despite traditional first quarter headwinds, including elevated payroll taxes and a lower day count, adjusted pre-provision net revenue increased to $253 million during the quarter, providing a strong jumping-off point for the rest of the year. While Travis will provide additional detail on the financial performance, I wanted to spend my time discussing strategic execution and long-term value creation. We have spent the past few years deliberately reshaping this organization. We have strengthened our balance sheet and upgraded our operating model while supporting incremental investments in talent, technologies, and capabilities that we believe will be impactful over the long run. The cumulative impact of those efforts has become increasingly evident in our recent financial results. Just as importantly, these enhancements have positively impacted our daily operations and ways of working. Strategically, our focus is consistent and clear. First, we are building a higher-quality and increasingly resilient funding franchise. Our emphasis on core deposit generation is not just about short-term pricing advantages. We are focused on winning primary operating relationships, deepening engagement across our client base, and creating a stable funding engine that can support growth aspirations across cycles. The combination of scalable specialty deposit verticals, enhanced treasury management capabilities, and an improving client experience has enabled us to better compete across markets and channels. Secondly, we are pursuing diverse, relationship-focused loan growth. We are intentionally allocating capital towards businesses, geographies, and industry verticals where we see durable demand and strong risk-adjusted returns. This includes business banking and middle market opportunities in our high-quality markets, as well as specific niches like health care, where we have a differentiated value proposition. To fund the strategic growth, we have remained disciplined, selectively exiting lower-return transactional clients that do not align with our future strategic focus. This is not about maximizing short-term growth. We are building a relationship-focused portfolio that we believe will perform consistently across economic environments. Thirdly, we continue to focus on operating leverage and scalability. Many of the investments that we have undertaken over the last few years, including our core conversion, data infrastructure enhancement, and organizational redesign, were made with a long-term lens. As a result, we are increasingly able to grow deposits, loans, and revenue faster than our fixed cost investments and without adding unnecessary complexity. We view this as a critical advantage for a regional bank that operates in an underserved size range but still competes regularly with upmarket institutions. That brings me to Valley National Bancorp’s positioning around artificial intelligence, which we believe represents a meaningful inflection point for the banking industry. Valley National Bancorp’s approach to AI reflects a balance between our pragmatic relationship-led culture and the acknowledgment that these technologies can enable us to reimagine how work gets done across our company. We believe these rapidly accelerating capabilities can augment productivity of our associates, enhance decision-making, improve operational efficiency, and most importantly, position Valley National Bancorp to better serve our diverse client base. Our dedication to improving the granularity, consistency, and infrastructure around our data over the last few years has been a key underpinning in our ability to effectively utilize AI tools today. We invested early in AI talent and advanced analytics, and have embedded certain capabilities into our operating model in the wake of our core conversion. Already, AI is helping our bankers prioritize opportunities and better understand client needs. We have already utilized AI to improve access to our internal knowledge base, to rethink legacy back-office processes, including card service requests, certain elements of underwriting, and risk monitoring, and to accelerate data analytics and software development. Specific use cases implemented to date include a customer-facing voice AI agent that proactively contacts past-due auto loan customers to motivate payment; fraud tools to verify transaction legitimacy and to prioritize suspicious activity alerts; and AI enhancements to our sales process to optimize the next best product offer. These are small examples of a much broader effort to unlock our associates to spend more time doing what they do best: building relationships and delivering high-value advice. We expect these capabilities will continue to translate into higher productivity, better risk outcomes, and a more consistent client experience with less friction, all while preserving the human element that defines our brand. Looking forward, our priorities remain consistent. We plan to continue to selectively invest in growth, maintain our balance sheet discipline, and deploy capital thoughtfully. We are confident that the foundation we have built positions Valley National Bancorp to navigate uncertainty, capitalize on opportunities around us, and deliver sustainable returns over time. With that, I will turn the call over to Travis P. Lan to walk through the financial results in more detail. Travis P. Lan: I wanted to start by giving a brief update on our 2026 financial expectations. As a result of continued strong core deposit growth, solid loan demand in our markets, and a favorable yield curve backdrop, we believe that annual net interest income growth will trend towards the higher end of our previously provided range. We expect more meaningful acceleration in the second half of the year, with no significant change to our expectations for noninterest income, noninterest expenses, or credit costs. We believe there is modest upside to our previous guidance range and existing consensus estimates. From a balance sheet perspective, we continue to believe that our CET1 ratio will remain towards the higher end of our target range. Slide 12 illustrates the execution of our capital strategy during the quarter. We generated over 30 basis points of regulatory capital in the period. Over half of this supported well-funded organic loan growth, and we used roughly a third of our capital generation to buy back stock. Relative to last quarter, slightly more capital was used for the buyback. Slide 13 illustrates the strong momentum in our deposit gathering efforts. During the quarter, we increased direct customer deposits by over $900 million, which enabled us to pay off nearly $300 million of maturing higher-cost brokered deposits and $350 million of higher-cost FHLB advances. As a result of the strong direct deposit growth, loans to non-brokered deposits improved to 106% from 107% last quarter and 112% a year ago. Total deposit costs declined 18 basis points during the quarter, reflecting proactive reductions in core customer deposit costs and the funding rotation I just mentioned. We remain laser-focused on improving our funding profile to further de-risk our balance sheet and drive continued profitability improvement. We anticipate that total deposit growth will be towards the high end of our 5% to 7% guidance range for the year. Turning to slide 16. Total loans grew nearly $700 million, or 5.5% annualized during the quarter. Owner-occupied CRE, particularly within our health care specialty vertical, continues to contribute to our growth as regulatory CRE declined modestly. C&I loans grew nearly $150 million during the quarter, reflecting strength across existing geographies and business lines, as well as contributions from newly onboarded talent. We anticipate that loan growth for the year will be between the midpoint and high end of our previous 4% to 6% range. Slide 19 illustrates the fourth consecutive quarter of net interest income expansion, which occurred despite day count headwinds associated with the first quarter. This increase was the result of solid loan growth, core deposit generation, and repricing dynamics on both sides of the balance sheet. Net interest margin was flat from the fourth quarter, which, combined with our continued repricing tailwinds, positions us well to achieve the year-end margin guidance that we laid out previously. Despite the expected normalization of noninterest income from the fourth quarter, we posted strong first quarter results as compared to one year ago. On a year-over-year basis, noninterest income was up 18%, driven primarily by capital markets and deposit service charge revenues. These results are in line with our expectations and we believe set the stage for further improvement throughout the year. Turning to slide 22. Reported noninterest expenses increased to $310 million in the first quarter, from $299 million in the fourth quarter. On an adjusted basis, however, noninterest expenses were effectively flat as seasonal payroll tax headwinds were largely mitigated by modest reductions in other compensation costs, professional and legal fees, and adjusted FDIC insurance expense. As a result of our cultural focus on expense control, Valley National Bancorp’s efficiency ratio declined to 53.1% in the first quarter, from 53.5% in the fourth quarter and 55.9% a year ago. We continue to believe that positive operating leverage will accelerate throughout the year, which is expected to result in an efficiency ratio trending towards 50% by 2026. Slide 23 illustrates our asset quality and reserve trends. Nonaccrual and accruing past due loans each declined modestly during the quarter, primarily as a result of positive migration of CRE out of each bucket. Net charge-offs as a percentage of total loans declined to 14 basis points from 18 basis points last quarter, and the modest uptick in provision expense reflected the quarter's strong loan growth. Allowance coverage remained generally consistent around 1.2%. We do not anticipate material changes to this level throughout the year. Turning to slide 24. Tangible book value increased approximately 1% during the quarter, as solid retained earnings growth was partially offset by an OCI headwind associated with our available-for-sale securities portfolio. Regulatory capital ratios declined modestly as a result of strong loan growth and our stock buyback activity. Based on our preliminary analysis, we estimate that regulatory capital ratios would increase between 80 and 100 basis points under the proposed Basel III standardized approach. Until those rules are formalized, we continue to anticipate that our CET1 ratio will remain towards the higher end of our targeted guidance range. With that, I will turn the call back to the operator to begin Q&A. Thank you. Operator: Thank you. For your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Manan Gosalia with Morgan Stanley. Your line is now open. Manan Gosalia: Hi, good morning. My first question is on the NII side. You are pointing to the higher end of the NII guide. Strong deposit growth already, strong loan growth. Can you talk about some of the inputs around the NII outlook today versus your outlook in January, and the ways in which you can drive funding costs lower even if we do not get more rate cuts? And then, Ira, you spoke about investing in AI early and the benefits that that should drive going forward. Are there any areas where you think you need to accelerate the spend there, or is a lot of the investment spend going to be self-funded from here? If you can just help us with how to think about the expense outlook this year and next year and how we should think about the operating leverage going forward? Travis P. Lan: Yeah. Thanks, Manan. This is Travis. Relative to where we were coming into the year, we had assumed two Fed cuts as of 12/31. Obviously, those are out of the forecast. But as we have said pretty consistently, we are neutral to the front end of the curve. So the elimination of those cuts in the model is not overly impactful to our NII outlook. We are more exposed to the belly and longer end of the curve, and there has been some migration higher there, which has been incrementally helpful. From a deposit cost perspective, even if we are unable to materially reduce core customer deposit costs in a vacuum, we still have what we view to be pretty significant tailwinds from the structural rotation of higher-cost wholesale funding into lower-cost core. And that is what I think has given us so much confidence about the margin trajectory you have seen play out over the last year or two, and why we continue to have confidence through the end of year and into 2027. Ira D. Robbins: Thank you. I think it is a significant opportunity for us and really for the entire industry as to how we think about how we service clients from an operating expense perspective, and then also how we enhance the revenue side of it as well. I think for us, when we think about the expense that would go into it, we have always been very mindful of what the efficiency ratio is within the organization and how we self-fund a lot of what we have done here. We have spent about $450 million on CapEx in the last seven to eight years versus a $50 million number in the seven- to eight-year cumulative period before, while still maintaining a very efficient organization. When I became CEO, I think we were 3,350 employees and $20 billion in size. Today, we are 3,607 employees and $64 billion in size. So having a more efficient organization, the more we can press that, provides an opportunity to really enhance the AI spend as well as other opportunities within the organization. Just over the last year, we declined about 100 employees within the organization, and as we think about the reduction in some of those roles, we are definitely enhancing the opportunities and reinvesting some of that back into AI that we think is going to be a lot more productive moving forward. Manan Gosalia: Great. Appreciate the color. Thank you. Operator: Thank you. Our next question comes from the line of Freddie Strickland with Hovde Group. Your line is now open. Freddie Strickland: Hey, good morning. I was just wondering if you could talk about competitive landscape on the retail deposit side, maybe how that has changed and whether that has really shifted as broad expectations and more cuts seem to fizzle out? Travis P. Lan: Yes. Thanks, Betty. This is Travis. Look, it does remain competitive out there for, I would say, consumer deposits. I mean, rates have kind of backed up; you see it in the offered rates that are posted in branches and online. I would just say for us, the consumer element is a component of our anticipated deposit growth. The majority does come from the commercial side, and that would include small business and business banking in that as well. There, we are competing with the relationship, the service model that we have, the treasury platform that we can provide. So, obviously, rate will always be an element of how you compete for deposits, but it is not the only one. I think that is what has enabled us to differentiate ourselves from a deposit growth perspective while also driving down costs. Freddie Strickland: Great. Thanks, Travis. And just on the common equity Tier 1 guide, you mentioned it in your opening remarks, but can you just refresh us on capital priorities and does that CET1 direction mean fewer buybacks or simply more generation? Or are you taking into account the Fed moves there? Just wondering if you can talk a little bit more about buybacks relative to the CET1 ratio. Travis P. Lan: Yes. Thanks. So we have been pretty consistent that we have this range or target range of 10.5% to 11% on CET1. But throughout 2026, we anticipate staying at the higher end of that range. I think one key element, for us, the number one priority for capital utilization is to support high-quality, well-funded loan growth. And as we have seen good activity in the first quarter and the pipeline is building as well, and we anticipate, as we said, that loan growth will trend towards the higher end of our range, we want to be able to support that. So we bought back 4 million shares this quarter. In aggregate, it was about $52 million of capital we utilized for the buyback. I would anticipate that pulls back a little bit because as we look at the loan growth opportunities for the next couple of quarters, we want to make sure that we are preserving the capital to support that. So we anticipate remaining active to some degree, but it would not surprise me if it is a little bit less than what the first quarter was on the buyback. Freddie Strickland: Alright. Great. Thanks for taking my questions. Operator: Thank you. Our next question comes from the line of David Chiaverini with Jefferies. Your line is now open. Brooks Dutton: Hey, guys. Brooks Dutton on for Dave this morning. You know, with your CRE concentration ratio trending lower, 329%, what is the long-term target for this metric? How does that influence you guys' 4% to 6% loan growth guide for the remainder of 2026? And then just on fee income, there is lower capital markets activity quarter. Can you guys talk about your run-rate expectations for 2026 as we progress through the year? Ira D. Robbins: I think we were very diligent within the last two-ish years in identifying a certain runoff portfolio that really was transactional for us. So they did not really bring the deposit relationships that we were looking for. So those tier three clients continue to run off, which creates capacity for a lot of other loan growth within the organization. I think when we think about absolutes, getting under 300% as an absolute number is a longer-term priority for us, and we think that we are trending there. But there is really very little pressure from an external perspective that we feel that we need to accelerate that. These are good quality loans, but I think maybe it is just not hitting the return hurdle that we are looking for. So for us, it really becomes how do we rotate the profitability of clients from certain under-ROI clients into higher-ROI clients. And that is really what is driving how we think about the runoff of the CRE portfolio. Travis P. Lan: Yes. Thanks. We did indicate on the fourth quarter call that fee income in general was about $7 million elevated in a variety of ways. One of that was $4 million or $5 million of elevation from a swap perspective in the fourth quarter. So that normalized as expected. The $10 million in Capital Markets in general is a good starting point. I would anticipate that we see growth throughout the rest of the year. Operator: Thank you. Our next question comes from the line of Janet Lee with TD Cowen. Your line is now open. Janet Lee: Good morning. For loan growth, is the more growth coming from nontransactional CRE and then still, you know, pretty robust growth in C&I there, should we expect the mix—should we expect more of growth to also come from CRE in the future quarters versus what you expected in the prior quarter? Or how should we think about mix of loan growth as we head into the rest of 2026? Travis P. Lan: Yeah, Janet. Maybe I will start, and Gino can add some commentary in terms of what we are seeing in the pipeline. But coming into the year, we had guided to about $2.5 billion of loan growth, of which $1 billion was C&I, $1 billion was CRE, and $500 million was consumer and resi. Within that $1 billion of CRE, we anticipated a couple hundred million would be regulatory CRE—so investor and multifamily. As you saw in the first quarter, that was a slight decline. I would anticipate maybe seeing a little bit of regulatory CRE growth throughout the year, but the majority will remain in kind of owner-occupied and C&I, with support from the consumer areas as well. So maybe, Gino, just about what you are seeing across the markets. Gino Martocci: I will just add we continue to invest in new talent primarily for C&I. Talent, upmarket C&I and business bankers as well, are focused on C&I and deposit-rich businesses. Our C&I pipeline is up $1 billion since the end of the year, so we expect to see continued C&I growth throughout 2026. Travis P. Lan: Both because of the investments we made and because our clients continue to invest. We have relatively robust economies. We are in affluent markets, whether that is Coral Gables, Tampa, Morristown, Manhattan, or Garden City. All of those markets remain strong and robust, and our clients, despite the noise out there and some of the headwinds from input costs, continue to remain confident and continue to invest. We are supporting. Janet Lee: That is helpful. And your credit was very stable this quarter, but your criticized and classified loans were up a little bit, driven by C&I special mention loans. Could you provide some color on the trend you are seeing? And do you still expect the trajectory of criticized and classified to decline from here, or should it stabilize over the near term? Mark Sager: Hi, Janet. The stabilization of criticized in first quarter is just a normal phenomenon of year-end financial collection and some migration. We do anticipate that we will still see a decline in the criticized throughout the year, noting we had the big decline in Q3 and Q4. And we still have an expectation for the year to be down. Janet Lee: Got it. Thank you. Thank you. Operator: Our next question comes from the line of David Smith with Truist Securities. Your line is now open. David Smith: Hey. Good morning. Ira D. Robbins: Morning, David. David Smith: Can you give us a sense of where new loans are coming on the books today and how spreads have trended over the quarter given everything that is going on? And did you have the spot deposit rate for March 31? Travis P. Lan: Yes. This is Travis. New loan yields declined modestly by—I think it was about 6.75% last quarter. It was maybe 6.55%, 6.60% this quarter. We are seeing modest spread compression in certain asset classes on the commercial real estate side. I think that led to a little bit more runoff in the regulatory CRE book than maybe we had anticipated coming into the year. But spreads have remained generally stable in most of our target portfolios. It obviously remains competitive for high-quality customers that we are banking, but I do think we have reached an air pocket from a size perspective. We are one of very few banks remaining in this size category that can offer all the products and services of a large bank with the high-touch service and quick response and credit underwriting of a more community-oriented bank. I think that is playing well for us to be able to grow without necessarily seeing spreads collapse. Yeah. I do. Interest-bearing spot deposit cost was 2.95% versus 3.02% at December. All-in was 2.26% spot deposit cost versus 2.32% at December thirty-first. So down six basis points from the December to the March. David Smith: Got it. Thanks very much. Operator: Thank you. Our next question comes from the line of Anthony Elian with JPMorgan. Your line is now open. Mike Petrini: Good morning. This is Mike Petrini on for Tony. So I will start on NIM. How are you guys thinking about NIM trending for the rest of the year? You mentioned coming into the year that the three-thirty mark was sort of what you expected. How do you guys see that trending? And on loan growth, now that you are sort of at the mid to high end of that 4% to 6% range, what categories do you feel more encouraged on now than you did before? Any color on the expected growth trajectory of the different categories over the rest of the year would be great. Travis P. Lan: Yes. So coming into the year, we had anticipated a slight decline in margin in the first quarter and then building up to that $330 million level by the fourth quarter. And the reality is we posted a better starting point. And so I would anticipate that there is some upside to that $330 million fourth quarter 26 target that we have laid out. Again, I think the funding profile is better than we had maybe anticipated. The interest rate backdrop remains supportive of the margin expansion. And we saw the structural tailwinds that we outlined on the net interest income side of the deck, showing the fixed-rate asset repricing and then the fixed-rate liability repricing as well. When you add it all up, I think we feel better about the margin guide than maybe we felt coming into the year, even though coming into the year was strong as well. Gino Martocci: Our pipeline remains very robust. It is basically double what it was a year ago. It is primarily concentrated in C&I and health care. We have got a very terrific health care franchise with very experienced people, and that business continues to grow. We do have a reasonable amount of CRE demand that is offset by the runoff of the nonregulatory book. And it is robust growth across all of our geographies, whether it is Florida, New York, New Jersey, and even in our growth markets. We are seeing good growth in Illinois, LA, etc. So we expect a very robust origination year. Operator: Thank you. Our next question comes from the line of Matthew M. Breese with Stephens Inc. Your line is now open. Matthew M. Breese: Hey. Good morning. Ira D. Robbins: Morning, Matt. Matthew M. Breese: Maybe just a quick one on expenses first. Just given some of the moving pieces, severance, etc. What is a good starting place for the second quarter on salary expenses? Is $150 million the right place to be? Any other moving parts there? And then one thing I have not heard a lot about, but I have heard a lot of your peers talk about is just the extent they are seeing payoffs and prepayments. First, maybe just your thoughts on that—are you seeing that as well but able to offset it? And then secondly, is there prepayment penalty income going in the NIM? I would love to get some sense for how that has trended and if it is extensive. Are we modeling too much of it right now? Travis P. Lan: Matt, I think that is right. And I would just say the first quarter payroll tax impact was about a $7 million headwind. That declines by about $4 million in the second quarter. At the same time, our merit bonuses only went into place mid-March, so there is no real impact from that in the first quarter. Those two things effectively balance out. So if you take the severance away from the compensation line, I think that is a good starting point. The only element, and this moves around quarter to quarter, is we did see some higher insurance costs in that line in the first quarter. So it is possible that we could outperform from that perspective, but I do not think that would be overly material. Yeah. I do not think—first of all, it does go through our NII, although it is not an overly material number. Prepayments this quarter declined to about $1.2 billion. They have been running at around $1.4 billion for the last couple of quarters. So we saw a slight decline in prepayment activity. But it has been fairly consistent when you look back over, you know, five or eight quarters or so. So I do not think it has been a material moving piece in terms of balances or the NII. Matthew M. Breese: Okay. And could you remind us of what the accretable yield that is flowing through the margin is? And that was what it was last quarter too? And then last one for me, just on asset quality. The big areas of concern for the industry—I would love your thoughts on NDFI—not that you have a ton of it—and then office commercial real estate. Any sort of green shoots there or anything that is keeping you up at night? Travis P. Lan: Yeah. It is, like, $10 million this quarter, which has been consistent. It is about $4 million on the security side and $6 million on the loan side. This quarter—excuse me—was $9.5 million this quarter. It was $10.9 million last quarter, so a slight decline. Mark Sager: Hey, Matt. NDFI has never been a big portion of our portfolio. We have about 2.6% of the portfolio in NDFI, compared to 7% for our peers. That number for us also—we have mentioned in the past we have had a focus on capital call facilities out of our fund finance group. Those are exceptionally well structured to entities with a strong history and a very strong LP base. So we view that as safe lending. But yes, as you have mentioned, it is a small part of our portfolio. As it relates to the office portfolio, we have that breakout in our deck. We continue to be very granular in that space, diversified by geography, more suburban than urban. And we definitely are seeing more rational transactions happen in the office space. If it has not hit bottom in all markets, it is close to bottom, and we are seeing new lease-up activity, a reduction in subleasing in the majority of our markets. So not actively growing that portfolio, but our concerns on that portfolio have definitely abated. Gino Martocci: Hey. It is Gino too. I will only add that in the last two quarters, there has been record leasing in New York City, and record rents—especially your Class A properties. You can see upwards of over $200 a square foot in rent. So some of the concerns about loan demand and other things that are happening just are not materializing with corporations in their leasing strategies at least. Matthew M. Breese: Thank you. Operator: Thank you. As a reminder, to ask a question at this time, please press—Our next question comes from the line of Christopher Edward McGratty with KBW. Your line is now open. Christopher Edward McGratty: Oh, great. Good morning. Travis P. Lan: Good morning. Christopher Edward McGratty: Travis, going back to the capital, just to push a little bit on the buyback. I mean, your ROE is going in the right direction, generating more capital. Can you not do both—high end of growth and buybacks—or maybe it is more of a back-half year as you kind of talk about the near-term loan growth? But I guess, what is the hesitation, especially with the Basel III proposal? Travis P. Lan: I do not think that there is any hesitation. I just think we have a very robust pipeline, and we want to make sure that we are well positioned to support that loan growth, Chris. So again, we bought back $50 million of stock in the first quarter. Something in that $40 million-ish—$40 million to $50 million—range still feels reasonable. The average price we bought it back was below where the market is today. So that is another element that plays into it, but we will remain active in the buyback. I just indicated that I think it will be a little bit lighter than the first quarter. Christopher Edward McGratty: Okay. That is better color. Thank you. And then, Ira, I did not hear M&A or strategic mention at all. I am getting an updated view there if there is a change. Thanks. Ira D. Robbins: Yeah. I mean, from an M&A perspective, I do not think anything has really changed. I think, from a historical perspective, it has been important for us to remain shareholder friendly and do what is in the best interest of the shareholders, and I do not think that is ever going to change here. Christopher Edward McGratty: Thank you. Operator: Thank you. And I am currently showing no further questions at this time. I would now like to hand the conference back over to Ira D. Robbins for closing remarks. Ira D. Robbins: I just want to thank everyone for their interest and look forward to speaking to you next quarter. Thank you. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the First American Financial Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] A copy of today's press release is available on First American's website at www.firstam.com/investor. Please note that the call is being recorded and will be available for replay from the company's investor website and for a short time by dialing 877 660-6853 or 201-612-7415 and by entering the conference ID 37-5-9993. We will now turn the call over to Craig Barberio, Vice President, Investor Relations, to make an introductory statement. Craig J. Barberio: Good morning, everyone, and again, welcome to First American's earnings conference call for the first quarter of 2026. Joining us today on the call will be our Chief Executive Officer, Mark Seaton, and Matt Weisner, Chief Financial Officer. Some of the statements made today may contain forward-looking statements that do not relate strictly to historical or current fact. These forward-looking statements speak only as of the date they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. For more information on these risks and uncertainties, please refer to yesterday's earnings release and the risk factors discussed in our Form 10-K and subsequent SEC filings. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors. For more details on these non-GAAP financial measures, including presentation with and reconciliation to the most directly comparable GAAP financials, please refer to yesterday's earnings release which is available on our website at www.firstam.com. I'll now turn the call over to Mark Seaton. Mark Seaton: Thank you, Craig. We are pleased to report continued momentum in the first quarter, generating adjusted earnings per share of $1.33, a 58% increase from the prior year. In commercial, revenue grew 48%, achieving a record for a first quarter. Notably, we closed 20 orders, generating more than $1 million in premium, double the amount from last year. In our National Commercial Services division, we are seeing broad-based strength with 9 of our 11 asset classes up year-over-year. Data centers remain a meaningful tailwind with revenue tied to this sector increasing 76% relative to last year. We are also seeing strong activity in our Energy Group, which grew 250% and was a top 5 asset class during the quarter. Residential purchase revenue continues to lag. We have been more bearish on the purchase market this year than most public forecasts, and that view is proving accurate as purchase revenue declined 4% year-over-year. On the refinance side, we saw a modest benefit during the quarter when mortgage rates dipped into the low 6% range. While this provided some lift in the first quarter, volumes have since softened as rates moved higher again. Another key earnings drivers are bank, First American Trust, which continues to provide a steady stream of investment income. During Q1, average deposits totaled $6.8 billion, up 19% from last year. Growth has been driven by both commercial deposits and deposits from our -- outside of our captive title business. During the quarter, 29% of deposits came from sources beyond our captive title business, including $1.4 billion from ServiceMac and an additional $300 million from 1031 exchange deposits. Our agent banking strategy is also gaining traction with 284 agents currently banking with First American Trust, up 26% from last year. These balances are expected to grow as the market recovers. The bank continues to serve as a countercyclical earnings driver with meaningful long-term growth potential as we expand servicing 1031 exchange and agent banking deposits. Our primary strategic focus is to leverage AI across our business to amplify the talents of our team, better serve our customers and strengthen our operational capabilities. Over the past year, we launched an enterprise AI platform that helps product teams develop, govern and deploy secure compliant AI systems. This platform is an internal system that will allow us to deploy products faster and at scale. While we regularly discuss our 2 major enterprise initiatives, Endpoint and Sakura, we are also seeing incremental gains across the company. One example is in our Agency division, where we are deploying AI-driven tools that expand our quality control capacity by more than sixfold. We have also introduced AI-assisted examination capabilities that reduced order processing time by roughly 30 minutes per file. Importantly, these examination capabilities are not confined to our internal operations. This quarter, we are extending these same AI-driven tools into agent net, our title agent-facing platform, leveraging our proprietary data, domain expertise and proven production performance to deliver value to our customers. AI-driven efficiency improvements like these not only enhance our operating leverage, allowing us to scale efficiently as volumes recover, but also provide revenue opportunities by enabling us to deliver new solutions to our clients. We are also redefining how we build software. Today, 25% of our engineers are trained in Agentic AI development and are moving from concept to production in weeks rather than months. Productivity will continue to improve as the rest of our product engineering teams complete training this quarter. The impact goes beyond speed. Our teams are spending more time solving customer challenges ensuring every investment drives real value. We are embracing this transformation and believe we are in the leading edge of our industry in adopting these capabilities. Turning to Endpoint. We have outlined a plan to scale the platform across First American Title local branch network by the end of 2027, and we remain on track. Endpoint is live in Seattle, where we have opened around 310 orders and closed 150 orders on the new system with each transaction, we continue to learn and improve. In this pilot, we have automated approximately 30% of the tasks required to close the transaction allowing our people to focus more on customer-facing activities and complex issues. These automation rates will only increase over time. We are expanding the endpoint pilot this quarter to First American titles escrow officers across the state of Washington, an important milestone. We expect approximately 80% to 85% of our local branch network to be on endpoint by the end of next year. This represents a significant transformation, not just a technology rollout but a standardization of workflows that shift the nature of work from executing tasks to verifying them. The real value of AI lies not only in the tools themselves, but in how workflows evolved to fully leverage them. While substantial work remains, we are confident and energized by the opportunities ahead. With SEQUOIA, we also continue to make strong progress. As a reminder, SEQUOIA is our AI-powered title decisioning platform. We are currently live with refinanced transactions in 8 counties across California and Arizona in our direct division, where we have fully automated title decisioning 35% of the time. The more complex challenge has been purchased transactions. And last month, we reached a key milestone by launching SEQUOIA for purchase transactions. Today, in 3 counties, we are automating title decisioning for 13% of purchase transactions instantly determining insurability at order open. Over time, our automation rates will improve, and ultimately, we believe we can deliver instant title decisioning for 70% of purchase and 80% of refinance orders in markets that we have title plants. This is made possible by our industry-leading title plant data, underwriting expertise and innovative technology. By the end of this year, we plan to expand SEQUOIA across California and Florida with a national rollout planned for 2027. Looking ahead, we are optimistic about our earnings trajectory. Our commercial business remains strong. For the first 3 weeks in April, our opened commercial orders are down 4% relative to last year. But as we experienced this quarter, the fee profile matters more in commercial than the number of orders. And given our strong pipeline of sizable commercial transactions, we still believe 2026 will be a record year in our commercial business. On the purchase market, we remain more cautious than the consensus view. So far in April, open purchase orders are down 3% as the sluggish home sale trend continues. While the residential market remains at trough levels, we are focused on rolling out our new AI-powered title and escrow platforms, which will provide greater operating leverage when the market recovers. From a capital management perspective, we continue to deploy earnings into opportunities with the most attractive risk-adjusted returns. We are taking a disciplined approach to acquisitions, focusing on the right partners rather than growth for its own sake. As our stock has pulled back while our earnings and outlook have strengthened, we have taken the opportunity to repurchase shares. Matt will discuss our financial results and capital management in more detail. And with that, I'll turn the call over to him. Matthew Wajner: Thank you, Mark. This quarter, we generated GAAP earnings of $1.21 per diluted share. Our adjusted earnings, which exclude the impact of net investment losses and purchase-related intangible amortization were $1.33 per diluted share. Focusing on the Title segment, adjusted revenue was $1.7 billion, up 17% compared with the same quarter of 2025. Looking at the components of title revenue, we saw strong growth in commercial and refinance partially offset by weakness in purchase. Commercial revenue was $271 million, a 48% increase over last year, reflecting both increased transaction volumes and significantly higher average revenue per order. Our closed orders increased 9% from the prior year and our average revenue per order was up 36%. Purchase revenue was down 4% during the quarter, driven by a 6% decline in closed orders partially offset by a 3% improvement in the average revenue per order. This reflects continued weakness in home sale activity. Refinance revenue was up 76% compared with last year, driven by a 57% increase in closed orders and a 13% increase in the average revenue per order. This growth was supported by a temporary decline in mortgage rates during the quarter, though activity has since softened as rates have moved higher. Refinance accounted for just 8% of our direct revenue this quarter and highlights how challenged this market continues to be compared to historic levels. In the Agency business, revenue was $759 million, up 16% from last year. Given the reporting lag in agent revenues of approximately 1 quarter, these results primarily reflect remittances related to fourth quarter economic activity. Information and other revenues were $269 million during the quarter, up 14% compared with last year. The increase was driven by revenue growth at the company's subservicing business higher demand for noninsured information products and services and refinance activity in the company's Canadian operations. Investment income was $154 million in the first quarter up 12% compared with the same quarter last year despite the Fed cutting rates 3x. The increase in investment income was primarily due to higher average balances driven by commercial, 1031 exchange, subservicing and warehouse lending activity. Investment income did from our bank subsidiary shifting its asset mix to fixed income securities, which earn a higher yield and are less sensitive to changes in short-term interest rates. Personnel costs were $546 million in the first quarter, up 13% compared with the same quarter of 2025. The increase was mainly due to incentive compensation expense resulting from improved financial performance and higher salary expense. Other operating expenses were $277 million in the quarter, up 13% compared with last year, primarily attributable to higher production expense driven by higher volumes and increased software expense. Our success ratio for the quarter was 58%, which is in line with our target of 60%. The provision for policy losses and other claims was $40 million in the first quarter or 3.0% of title premiums and escrow fees, unchanged from the prior year. The first quarter rate reflects an ultimate loss rate of 3.75% and for the current policy year and a net decrease of $10 million in the loss reserve estimate for prior policy years. Interest expense was $27 million in the current quarter up 34% compared with last year due to higher interest expense in the warehouse lending business and on deposit balances at the company's bank subsidiary. Pretax margin in the title segment was 9.6% and or 10.4% on an adjusted basis. Moving to the Home Warranty segment. Total revenue was $110 million this quarter, up 2% compared with last year. The loss ratio was 36%, down from 37% in the first quarter of 2025. The improvement in the loss ratio was due to small reductions in the number and severity of claims. Pretax margin in the Home Warranty segment was 23.5% or 23.8% on an adjusted basis. The effective tax rate in the quarter was 22.9%, which is slightly below the company's normalized tax rate of 24%. Our debt-to-capital ratio was 32.2%, excluding secured financings payable, our debt-to-capital ratio was 21.9%. As Mark mentioned, our stock has pulled back while our earnings and outlook have strengthened, so we took the opportunity during the quarter to repurchase 556,000 shares for a total of $33 million at an average price of $6.21. So far in April, we repurchased 296,000 shares for a total of $18 million at an average price of $61.61. We will continue to take an opportunistic approach to buybacks based on valuation, available capital and our outlook. Now I would like to turn the call over to the operator to take your questions. Operator: [Operator Instructions] Our first questions come from the line of Mark DeVries with Deutsche Bank. . Mark DeVries: Thanks. As I know you're aware, there have been a lot of talk about new entrants leveraging AI to potentially disrupt the title insurance industry. Mark, could you just talk about the ways in which you're evolving, whether it's endpoint, Sequoia, other things to try to fend off the competition. And also, any kind of just inherent advantages you have moats that really should help you, again, hold up well against this competitive threat? Mark Seaton: Yes. Thanks, Mark. Just in terms of AI just in general, I mean these are new tools available to us that weren't available a year ago. And so we've seen what they can do. We do think they're going to change our industry for the better, not just on the operating efficiency side, but it's going to allow us to reach new customers and service routers better. And so we're really leaning into it. And we're just all in on AI, and we feel like we need to win in our industry with -- we talked a lot about SECOIA and endpoint on this call and prior calls, and we feel really great about those capabilities. In terms of the competition, I mean, there's a lot of talk about what AI can do, but we really have significant advantages. The first thing is -- and this is really for all type of companies, distribution is hard to get. And we've got thousands and thousands and thousands of local relationships all over the country. We've got 800 offices and big counties and small accounts all over the country. It's hard to replicate that. It's hard to get that. And it's hard to change how real estate is transacted in the U.S. A lot of people try something very slow to change. So distribution is very it's hard to get. Second thing is our title plans are a big advantage. It's a big advantage. We could not automate title like we are without our title plants. And not only are we automating it, but we're putting our balance sheet behind it. We're ensuring it, right? And so we're not -- when we automate things, we're not changing our underwriting standards. We're not creating new alternative products that shift risk on to consumers. We're putting our balance sheet behind it. And so our balance sheet is an advantage. Our data is an advantage. And I think I couldn't say this 3 years ago, but I think I believe this now, I think our technology is an advantage. I think when you look at our our industry, we don't really compete on the basis of technology at all. It's really -- it's a people business, it's a service business. But I think over time, data and technology become more and more important. And by those measures, I think we've got a big advantage. Mark DeVries: Okay. Got it. I know in the recent past, you've been able to kind of significantly expand your title plant footprint through kind of leveraging technology to make that process more efficient. Are you still generating efficiency gains there that could potentially have you with like kind of full coverage over the next several years? Or are there markets where that's just never going to make sense? Mark Seaton: I think there are realistically the submarkets where it probably doesn't make sense. We're in 1,850 counties now. That represents 82% roughly of all real estate transactions that's national coverage. We are always looking to build new plants, but it's more of 1 or 2 us here or there. I mean there's there are certain very, very rural markets where we're just -- there's just not enough business in those markets to scale. So we have a national footprint now. I don't -- I think when looking back 5 years ago, there were definitely some markets, I can think of Chicago in some places in Texas where we wish we had tied-up plans. Well, now we have them. So we've got a national footprint -- we've been -- the ability for us to post our plants has just gotten better and better and better over time. And we're clearly the industry leader here. And we sell this data to our competitors, we sell it to the industry on kind of a one-off basis, but we use it to really power our tools, and that's a big advantage. So I think for the most part, we're really in the markets we want to be with the title plans. I don't see another big wave of expansion geographically right now. Mark DeVries: Got it. Makes sense. And just one quick follow-up on endpoint. I think you -- I know it's really early stage in the role. I think you alluded to being up to kind of 30% automation so far. But my recollection is you've talked about automating a much higher percentage of the process there. Can you just remind us where you think that number ultimately goes? Mark Seaton: Yes. So first of all, we're really pleased with the progress with endpoint, and we're really focusing on continually improving the product and also getting ready here for our first conversion where we're going to convert first market and title escrow authors onto the new endpoint platform. . Our Washington team is very excited about this transition and it's going to happen at the end of this quarter. So we're excited about that. We're at 30% automation rates right now. It's going to take a few years, but ultimately, we think we can be 80% to 90%, something like that. And really what this gives us is it gives our people the ability to spend more time going out and getting business, dealing with customers in an escrow transaction, there's always things that go wrong. There's complex things that go wrong. And we can spend more time doing those things and less on the administrative part of it. I think the work-life balance of our escrow officers is going to get a lot better and it will allow us to have a lot more operating leverage when the market comes back. And there's not a system -- there's nothing like it out there. Again, everything is done manually today. And we are gradually getting to this automation rate. But I think 80% to 90% of scale, once it's mature, I think, is a good goal, but we've got a lot of work to do before we get there. Operator: [indiscernible] of Maxwell Richard with Truist. Maxwell Fritscher: I'm calling in for Mark Hughes. -- commercial ARPO has obviously been on a huge run. What are your expectations there for the balance of 2016? Do you see that being sustained? And I guess, looking looking at your current pipeline? Mark Seaton: Thanks, Max. Well, we have a lot of momentum in commercial right now. I think the whole industry is benefiting from this. I mean our revenue was up 4%. And we're very confident that Q2 is going to be another similarly strong quarter in commercial, and 2026 is going to be a good year. I mean, it's going to be a record year for us. And I think the commercial market has legs I think internally, we're always a little bit hesitant like how long is this going to last. But we think that there's going to be a couple more years here of at least strength in commercial market. There's a lot of tailwinds that we have right now. Like back in 2022 when interest rates spiked the bid-ask spread between buyers and sellers really widened, which caused the market to fall. But since then, like we're in a very different environment now, we've got price stability which gives investors confidence to invest. Sales growth has been persistent and it really helps with confidence because there's more recent and reliable comps in the market. Commercial lending has been on the rise. There's a lot of equity capital in the business -- on the sidelines. -- refinance volumes, there's a refinance ball we're going through right now. And so there's a lot of tailwinds, and we're just seeing it all across our business. And on top of that, we've got really a new asset -- new material asset class, which is data centers. We're working on data center projects in 25 states right now. And energy projects for us are really starting to pick up too. And we -- and it takes time, like energy, like we closed the deal this quarter. We started it 10 years ago. It's a very long-tailed business, maybe not all that's probably an extreme example. But there's just a lot of momentum, and we see it in 2016 and beyond. So we're very pleased with the team and what we're doing there. Geoffrey Dunn: Got it. And then you had mentioned refinance activity in Canada. Can you elaborate on the dynamics there? Is that activity expected to be sustained as well? And also, what's sort of the difference in the market there versus in the U.S. Mark Hughes: This is Matt. I'll take that one. So in Canada, they don't have the concept of a 30-year fixed rate mortgage. So their mortgages tend to be 3- to 5-year in duration and then they need to refinance. So we're really just coming to a refi wave or a refi wall that's coming. We saw it last year. We believe it's going to persist through this year and into next year. So -- we expect the refi tailwind to continue throughout the year here and into next year for Canada. Unknown Analyst: And then if I may sneak 1 last 1 in here. Are there any updates you can share on the regulatory environment? Mark Seaton: The regulatory environment, I mean, there's different components to that. I think on the state level, it's fairly benign at the moment. There's always some things happening here or there. But I would say it's fairly benign. I think at the national level, there's been a lot of talk about this title waiver pilot over time. It's we've talked about on these calls, it's immaterial. They've extended it until November of 2027. That's not new news. That's been around for a little while. So there's not there's always things going on. There's nothing I would point to specifically. Thank you. Operator: Our next questions come from the line of Terry Ma with Barclays. Terry Ma: So I think you called out 20 deals this quarter within Commercial with over $1 million in premium. Kind of any color on kind of what sectors those deals are kind of focused on? And then as you kind of look forward, like, is the breakup of like your deal pipeline kind of similar? And do you expect a similar number of deals with higher premium? Mark Seaton: When we look at the big deals, the biggest asset class was energy deals. We closed a lot of big energy deals. The second biggest asset class was industrial and data centers, we kind of split data centers, some of are industrial and then some of them are development sites. But industrial was our second biggest like megadeal asset class. And we did a couple of multifamily retail deals, but most of it is energy and industrial and data centers. And it's going to continue. Like I said, I mean we're working on data center deals. We've been working on energy deals and we're just seeing huge transactions, some of them already closed here in the second quarter, and we feel like the pipeline this year is looking very good. Terry Ma: Got it. That's helpful. I think last quarter, you said a bigger driver of the commercial growth or at least the revenue growth would be from volume rather than pricing. Is that still the thought? Or do you think there's a little bit more benefit from just the ARPU growth this year? Mark Seaton: Well, we've been surprised. I think that heading into the year, we thought it was going to be a record year in commercial than it is, but it's even better than what we thought it was going to be, and it's really driven by our own boat. So I think we've been a little bit you can say that the order counts have been below our expectations, but the fee per file has more than exceeded that. So that's the trend that we're seeing this year so far. Geoffrey Dunn: Got it. Okay. And then just 1 more question. A follow-up on your comment about title plants being a competitive advantage. Can you maybe just talk about how hard it would be for an entrant with AI or otherwise to kind of replicate that? Maybe just talk about what the barriers are to kind of reconstruct that advantage. Mark Seaton: Yes, sure. So first of all, if you want to build a title plan, you have to go out and buy the images. I mean you have to go out and buy the deeds and all the -- you have to go to 1,850 counties and you have to purchase, acquire the source documents that you need to build the title plan, very expensive just to buy the source documents. Once you get the source documents, you have to have the title skill, I would say, to understand what documents are relevant, what documents are not, how to post the plant every county is different. The syntax is different on what's the deed versus the warranty. There's a lot of nuances county by county and building a plan -- now I will say that it is cheaper to build a plant today than it was 2 years ago. There's no question about that. I mean, AI is really helping with that, and we've seen the benefit. I mean, we used to do it all manually today -- and today, about 85% of the time we posted digitally. And 15 or so percent of the time, we're not really sure there's some of these documents are hand written in some cases, and we have to have people look at it. So we've gotten cheaper to build a plant. But the big thing is you have to buy the source documents and every county or state have different rules about how far you have to go to search, like in places like Oregon, you've got to go all the way back to patent. You got to get the source documents all the way back to the beginning of the patent. Texas is 15-year search. So it is very, very difficult. And I know there's been like some talk of -- well, our title plan is useful or not. I'll just tell you this. People are still buying our title plants at a higher clip today than they were before. And a lot of the participants that are saying, oh, title plants are maybe not going to be around. They're coming to us and wanting to buy title plant data from us. So I think there's a lot of noise out there. But the reality is we think it's really valuable and time will tell. But we like -- we think it's a big strategic advantage to have our plans. There's no question about that. Operator: [Operator Instructions] Our next questions come from the line of Bose George with KBW. . Bose George: On the home warranty business, can you remind us what the good run rate margin for that is and also just the seasonality? Craig J. Barberio: Bose, thanks for the question. This is Matt. Yes. So typically, we look to have margins in the mid-teens for home warranty throughout the year. The seasonality is Q1 and Q4 typically are stronger quarters and then Q2 and Q3 typically have higher rates of claims, and it's really just driven by the weather and HVAC claims typically. Bose George: Okay. So this quarter, from a seasonal standpoint, is probably kind of roughly in line . Ryan Gilbert: Yes. I mean this quarter was definitely a good quarter. And I know last year, we talked about how last year, we had maybe higher margins than typical, and we didn't expect that to persist. I'd say Q1 was largely in line. Our expectation right now is that Q2 and Q3, we'll see more of a typical weather pattern. So you'll see claims pressures maybe in Q2 and Q3 compared to last year. Bose George: Okay. Great. And then actually, switching to investment income. In terms of the escrow deposits being able to utilize them more, is there more room to do that at the bank? . Matthew Wajner: So yes, so I'll answer what I think you asked, and then you can ask me if there's anything else there. So yes, I mean, we can put more deposits at our bank. We can grow our deposits at the bank. We definitely have more room. We have capital available there right now to grow deposits. And if we need to, we can contribute more. As a strategy, we keep some of our escrow deposits at our bank, some escrow deposits at a third-party bank. But as Mark mentioned, our strategic initiative has really been to grow deposits to the bank outside of our captive title business. For example, subservicing 1031 in agent banking. And that's really been kind of the driver of the growth that we've seen at the bank. And Bose, just 1 thing I'll add to that, too. One thing I'll add just real quick, Boss we -- at times, we've talked about how -- like when the Fed cuts 25 basis points, we lose roughly $15 million of investment income as a general rule of thumb. Well, we've been able to buck that trend. Like in the last year, the Fed's cut 3x, and yet our investment income is up 12% year-over-year. And so we're really proud of the fact that we've been able to grow our investment income despite Fed cuts for the reasons that Matt has mentioned. Operator: Our next questions come from the line of Oscar Neves with Stephens. Oscar Nieves Santana: So I have 1 on tech. Mark, you mentioned earlier that as you continue deploying endpoint in Sequoia, you also continue to learn and improve the product. And I was just wondering if you could share some color on those learnings. Mark Seaton: Well, the way the technology is built now, I mean, it's just moving at rapid fire pace. And like, for example, in endpoint, every time we do something manually, right, we can go back and very quickly now change the software, so the next time it doesn't have to be manually. We call it human in a loop, right? So the AI, we assume the AI can do the work, but there's times when it can because the machines haven't learned. And so every time human goes and makes an adjustment, then we go back and fix the software and make an upgrade, so that you don't have to make that adjustment next time. It's the same thing for SEQUOIA, right? And so the way the technology is built now, we've got the human loop process, where every time the human intervenes, we try to make it better the next time around. And we can iterate very, very quickly. And so that's why when we roll something out, 30% of automation rates for being this young of a product is fantastic, and it's just going to get better and better and better over time as the machines learn. -- and there's a big advantage for sort of getting their first to market, and we feel like we're doing that. Oscar Nieves Santana: That's very helpful. And sort of related to that, you highlighted that the title segment. Well, you mentioned the title segment margins were very strong, and they were driven by commercial and also some expense management. Can you break down the relative contributions between mix, pricing expense management? And how much more margin improvement you could -- you think is possible as those technology -- legacy technology platforms roll off? Mark Seaton: Well, I'll -- there's a lot there. I'll just say that when we look at the margin growth this quarter relative to last year, I mean, we grew margins 250 basis points in the title segment. . And really, the driver was the fact that question is has sort of exceeded our expectations. And so when we look at our success ratio this quarter, it's 58%, and we try to target 60% or less. If we get 60% or less, we say that's successful. And so we thought we did a good job of managing our expenses while revenue has been rising. I think when we look forward, we're going to see incremental gains because of technology over time. It's not going to happen in 1 quarter, we're not going to wake up and just be a 20% margin business. But I think these incremental gains will just start to compound over time. As we roll out our platforms nationally next year, and it's not just about those 2. I mentioned in my prepared remarks, we've got incremental gains happening and our team is excited about it. We're giving our team new tools to win. I hear stories every single day about AI is helping our employees. And these things will start to add up over time. And so I think whatever our normalized margins have been in the last 10 years, I think the next 10 years, they're going to rise, and we we'll see how far. But we've got new tools available to us that we didn't have that will make our business more efficient than it's been. Oscar Nieves Santana: Yes, that helps. And 1 last 1 around capital allocation. Maybe for Matt, you talked about your opportunistic approach around buybacks. So on that topic, first, if you can remind us how much is still available under the current repurchase program. And then what's the company's current thinking around capital allocation priorities for the remainder of the year, including M&A and buybacks? Craig J. Barberio: Yes. Thanks for the question. So under the current program, if you take into account what we've already purchased through today in April, we have a $248 million remaining on the program. So that's where we are. And then when it comes to capital allocation, like nothing's really changed from what we've discussed in the past, right? So our priority when we think about what we want to do with our capital is our priority is to reinvest in our business. We've been doing that. Mark has talked a lot about where that reinvestment is going. And then we also look to do acquisitions, right? And that's to the extent we haven't done a material 1 for a while now but we're open to it, but it needs to make sense for us, right? So the valuation needs to be right and the fit needs to be right. And there are things that are in the pipeline, but we'll see how that turns out. And then with our excess capital, we look to give that back to shareholders. We do that through dividends and share buybacks. I know the last couple of quarters, we haven't been buying back shares. In Q1, we decided that the circumstances had changed, right? Like we've talked about before, we're opportunistic when it comes to buying back our shares. And in Q1, we saw that our stock was under pressure while our earnings and our outlook has strengthened from where we thought we were going to be at the beginning of the year. So we took that opportunity to buy back shares. And we'll continue to take an opportunistic approach to buybacks based on valuation, available capital and our outlook. Operator: Thank you so much. There are no additional questions at this time. That does conclude this morning's call. We'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 77 660-6853 or (201) 612-7415 and by entering the conference ID 137-59-993. The company would like to thank you for your participation. This concludes today's conference call. 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Operator: Good morning, and welcome to the Getty Realty Corp. first quarter 2026 earnings call. This call is being recorded. After the presentation, there will be an opportunity to ask questions. Prior to starting the call, Joshua Dicker, Executive Vice President, General Counsel, and Secretary of the company, will read a safe harbor statement and provide information about non-GAAP financial measures. Please go ahead, sir. Joshua Dicker: Thank you, operator. I would like to thank you all for joining us for Getty Realty Corp.'s first quarter earnings conference call. Yesterday afternoon, the company released its financial and operating results for the quarter ended 03/31/2026. The Form 8-Ks and earnings release are available in the Investor Relations section of our site at gettyrealty.com. Certain statements made during this call are not based on historical information and may be forward-looking statements. These statements reflect management's current expectations and beliefs and are subject to trends, events, and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Examples of forward-looking statements include our 2026 guidance and may include statements made by management including those regarding the company's future financial performance, future operations, or investment plans and opportunities. We caution you that such statements reflect our best judgment based on factors currently known to us and that actual events or results could differ materially. I refer you to the company's Annual Report on Form 10-K for the year ended 12/31/2025 as well as any subsequent filings with the SEC for a more detailed discussion of the risks and other factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. You should not place undue reliance on forward-looking statements, which reflect our view only as of today. The company undertakes no duty to update any forward-looking statement that may be made during this call. Also, please refer to our earnings release for a discussion of our use of non-GAAP financial measures including our definition of adjusted funds from operations, or AFFO, and our reconciliation of those measures to net earnings. With that, let me turn the call over to Christopher Constant, our Chief Executive. Christopher Constant: Thank you, Joshua Dicker. Good morning, everyone, and welcome to our earnings call for 2026. Joining us on the call today are Brian Dickman, our Chief Financial Officer, and RJ Ryan, our Chief Investment Officer. I will lead off today's call by providing highlights of Getty Realty Corp.'s first quarter financial performance and investment activity, RJ Ryan will then discuss our portfolio and investments in greater detail, and Brian Dickman will provide additional information regarding our earnings, balance sheet, and 2026 AFFO per share guidance. I am pleased to report that Getty Realty Corp. is off to a strong start in 2026, highlighted by a 13.1% year-over-year increase in our annualized base rent, a 6.8% increase in our AFFO per share, and an increase to our full-year 2026 earnings guidance. The foundation for this growth is our in-place portfolio, which is essentially fully occupied, achieved 100% rent collections, and continues to demonstrate stable rent coverage. Despite volatility driven by current geopolitical events, our tenants and their businesses have once again proved their resilience and ability to perform during rapidly changing operating conditions. Building on that foundation is the impact of the capital we deployed in 2025 and year to date. We are seeing the benefits of investments we have made in our platform to accelerate growth, including a larger investment team, new technologies, and improved processes. And we expect to capitalize on constructive transaction markets for convenience and automotive retail properties throughout the year. Year to date, we have invested more than $34 million at an initial cash yield of 8%. Beyond what we have closed, we have approximately $125 million of investments under contract, as well as a pipeline of transactions under signed nonbinding letters of intent that is in excess of the pipeline which was disclosed at the time of our recent equity offering. This pipeline is supported by a robust capital position as our recent capital markets activities have provided us with significant liquidity and attractive cost of capital to fund our 2026 business plans. We currently have more than $170 million of unsettled forward equity, and our $450 million revolver is completely undrawn. When we look at the spectrum of opportunities under contract and in our pipeline, we are confident that we can deploy this capital accretively as we move through the year. As we think about the rest of 2026 and beyond, I take great comfort in the quality of our portfolio, including its proven durability and ongoing diversification. I have no doubt that the platform we have built can drive disciplined growth as we continue to lean into our expertise in sourcing, underwriting, and closing investments in our core convenience and automotive retail sectors. We remain committed to our disciplined underwriting approach, which prioritizes owning real estate in high-density or growing metro areas with excellent access and visibility in retail markets and which is leased to creditworthy operators under a long-term triple-net lease. The sectors we invest in are large and fragmented and benefit from prevailing consumer trends for demand, convenience, speed, and service. As these industries continue to consolidate and become more institutional, we believe our direct sale-leaseback approach and deeper relationships in our target segments uniquely position Getty Realty Corp. to grow with both established and emerging retailers. With that, I will let RJ Ryan discuss our portfolio and investment activities. RJ Ryan: Thank you, Christopher Constant. At quarter end, our lease portfolio included 1,186 net lease properties and two active redevelopment sites. Excluding the active redevelopment, occupancy was 99.7% and our weighted average lease term was 10.1 years. Our net lease portfolio spans 45 states plus Washington, D.C., with 61% of our annualized base rent coming from top-50 MSAs, and 77% coming from top-100 MSAs. Our rents continue to be well covered with a trailing 12-month tenant rent coverage ratio of 2.5x. Turning to our investment activities, for the quarter, we invested $30.3 million across 29 properties at an initial cash yield of 8%. The weighted average lease term on acquired assets for the quarter was 8.8 years. Highlights for this quarter's investments include the acquisition of 22 properties for $27.3 million, including 16 auto service centers and six drive-thru quick service restaurants, and $3 million of incremental development funding for the construction of multiple new auto service centers and drive-thru quick service restaurants. Subsequent to quarter end, we invested an additional $4.1 million, bringing our year-to-date total investments to $34.4 million at an 8% initial cash yield. Our year-to-date activity included the acquisition of several net leases that we view as a complement to our core sale-leaseback business. This drove a shorter weighted average lease term than our typical investment activity but also led to us adding 11 new tenants to the portfolio and executing granular acquisitions with an average $1.2 million purchase price. Looking ahead, as Christopher Constant mentioned, we currently have approximately $125 million of investments under contract and a significant pipeline of investments under signed letters of intent. These transactions are spread across our four convenience and automotive retail sectors and are predominantly relationship sale-leasebacks and development funding opportunities with new 15- to 20-year lease terms. The initial cash yields for these investment opportunities are in the mid- to high-7% area. Moving to our asset management activities, as previously announced, we extended five unitary leases totaling $11.3 million of ABR, or 5% of total ABR, during the first quarter. The net benefit of these lease extensions was an increase to our weighted average lease term and a significant reduction in ABR expiring in 2027. In addition, we sold two properties during the quarter for gross proceeds of $3.7 million. With that, I will turn the call over to Brian Dickman to discuss our financial results. Brian Dickman: Thanks, RJ Ryan. Good morning, everyone. For 2026 Q1, we reported AFFO per share of $0.63, a 6.8% increase over Q1 2025. FFO and net income for the quarter were $0.69 and $0.43 per share, respectively. A more detailed description of our quarterly results can be found in our earnings release, and our corporate presentation contains additional information regarding our earnings and dividend per share growth over the last several years. Starting with some color on G&A expenses, management focuses on the ratio of G&A, excluding stock-based compensation and nonrecurring retirement costs, to cash rental and interest income. That ratio was 9.2% for the quarter ended 03/31/2026, a 130-basis-point improvement over the same period in 2025. As we mentioned on our last call, we expect G&A growth to be less than 2% in 2026 and for our G&A ratio to fall below 9% as we focus on controlling expenses and continuing to scale the company. Moving to the balance sheet and liquidity, as of 03/31/2026, net debt to EBITDA was 5.1x, or 4.2x including the impact of unsettled forward equity, both of which compared favorably to our target leverage of 4.5x to 5.5x. Fixed charge coverage for the quarter was 4x. During the first quarter, we received $250 million from our previously announced unsecured notes issuance and used the proceeds to repay the borrowings under our revolving credit facility. We ended the quarter with $1 billion of total unsecured notes outstanding, with a weighted average interest rate of 4.5% and a weighted average maturity of six years. We have full borrowing capacity under our $450 million revolving credit facility and no debt maturities until June 2028. In February, driven by our growing investment pipeline and the strong performance of our stock to start the year, we raised $130 million of new common equity in an overnight offering. Those shares were sold on a forward basis, and we currently have a total of 5.5 million shares subject to outstanding forward sales agreements which, upon settlement, are anticipated to raise gross proceeds of approximately $171.5 million. As Christopher Constant mentioned, we are in a very strong capital position with more than $625 million of total liquidity and have more than sufficient capital to fund our under-contract pipeline and additional investments as we continue to source new opportunities. With respect to our earnings outlook, as a result of our year-to-date activities, we are increasing our full-year 2026 AFFO per share guidance to a range of $2.50 to $2.52 from the prior range of $2.48 to $2.50. As a reminder, our guidance reflects the current run rate from our in-place portfolio with certain expense and credit loss variability and does not include any prospective investments or capital markets activities. We think this approach remains appropriate for our business and look forward to updating everyone on the positive impact that our investment program has on our earnings as we move through the year. With that, I will ask the operator to open the call for questions. Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. You may press star then 2 if you would like to remove yourself from the question queue. Please press star then 1. The first question we have comes from Mitch Germain of Citizens Bank. Please go ahead. Mitch Germain: Thank you, and congrats on the quarter. Christopher Constant, what do you think is driving the increased momentum in the investment pipeline? You know, obviously, I know you have made some investments in people. Is it more, you know, sellers kind of rationalizing what their pricing expectations are? Is there anything you can point to? Christopher Constant: I think it is a little bit all of the above. Right? Obviously, with more dealmakers at Getty Realty Corp., there is more business development activity. As the portfolio has grown, we obviously have more relationships that we can tap into. But I do think there is an element of businesses are growing. The theme around consolidation certainly continues in all the sectors we invest in. And as folks are looking at their capital needs, I do think the sale-leaseback market is becoming more attractive, and it is a complement in certain cases to their other capital sources like debt or even equity. So I think it is a mix. What I would say is that most of our conversations are around growth, and folks are constructive in terms of what the current price dynamic looks like across the sectors. We certainly feel that in our portfolio and in our pipeline, and I think that is why you hear some of the positive tone in our language in the script and in the quarter. Mitch Germain: Are you becoming any more selective with regards to what sectors you are allocating capital to? Or are you open for business across everything that you are investing in? Christopher Constant: We are focused investors. So I think by nature, that makes us somewhat selective. But within the four sectors that we invest in, we are equally excited about all four of them. The broader pipeline under contract, and what is behind that, includes numerous opportunities across all of those verticals. Mitch Germain: Great. Last one for me. Brian Dickman, you talked about scalability of the platform. Can you highlight maybe some of the things that you have accomplished to get a little more efficient? Brian Dickman: Yeah. I think you have heard both Christopher Constant and RJ Ryan, and even past calls, Mark Olear, talk about the things we have been doing around technology and process improvement. So certainly, I think those things are having an impact. But also, I think we all understand that net lease platforms are inherently very scalable. We have been investing in the platform for a number of years, and combined with some of the market dynamics Christopher Constant went through, we are just, I think, really starting to bear the fruit of those efforts. Mitch Germain: Congrats. Operator: The next question we have comes from Upal Rana of KeyBanc Capital Markets. Upal Rana: Great. Thank you. Christopher Constant, with the pipeline growing, I am just curious what you are seeing out there in terms of larger portfolio deals? Christopher Constant: Yes. I mean, I think obviously what we closed this quarter was more granular in terms of maybe some more individual asset acquisitions. But the broader pipeline and the opportunities that we are underwriting has a mix of what I would call midsize to larger portfolios. And again, I just go back to what I said on the earlier question, which is our operators are looking to continue to grow and consolidate. And that kind of mid-market M&A transaction or a larger portfolio certainly feels like there is a component for sale-leaseback financing to help get those deals done. Upal Rana: Okay. Great. And then, Brian Dickman, your cost of capital has not materially improved this year, and you have nearly $170 million in the forward equity and also the revolver. So I want to get your thoughts on your strategy on use of capital as we go through 2026 and maybe any additional appetite to raise even more capital? Brian Dickman: Yeah. Thanks, Upal Rana. Fair observations and not lost on us on cost of capital, but I would say that our strategy, as it were, around capital raising and capital allocation really has not changed. We are going to maintain leverage in that 4.5x to 5.5x range. We are going to look to keep the pipeline at least partially funded so that we know we have some certainty around that cost of capital. So I think those fundamental components have not changed. As you look to this year, I think you will see us draw on the revolver for the debt piece and settle that equity again to maintain leverage. And then as far as additional equity beyond that, I think as always, it is going to be a combination of the pipeline, the magnitude of that pipeline, where those deals are being priced, and then where the stock is trading, where our cost of capital is. But I do not see any change in strategy. I think if you look over the last several years, that is how we have executed, and I would anticipate us doing the same thing throughout this year and beyond. Upal Rana: Okay. Great. Thank you. Operator: The next question we have comes from Michael Goldsmith of UBS. Please go ahead. Michael Goldsmith: Good morning. Thanks for taking my question. Can you just talk a little bit about bad debt? Are you seeing any challenges within the portfolio? And then also, can you update us on how bad debt is baked into your 2026 guidance and if that has changed since the start of the year? Thanks. Brian Dickman: Michael Goldsmith, I will touch on that. Working backwards, we use about a 25-basis-point assumption for credit loss. We did not experience any of that in the first quarter. I would say that is also conservative relative to looking back over longer periods of time. So that continues to be what is baked into the guidance on a go-forward basis. And then the portfolio itself is quite healthy. There is nothing that rises to the level of a watch list for us, and there is nothing that we are anticipating in the near to medium term that gives us any significant concerns around credit loss in the portfolio. As we know, these are nondiscretionary, defensive, essential-type businesses. Obviously, there is a lot of geopolitical and macro noise, but as we sit here today, the tenants continue to perform. The businesses continue to perform. And while we do think it is prudent to have an assumption in our guidance for credit loss, there is nothing imminent that gives us any concern, as I said. Michael Goldsmith: Thanks for that, Brian Dickman. And I think this was touched on on some of the other net lease earnings calls, but 7-Eleven closing some stores — more of the smaller locations — just wanted to get a sense of how that, if any way, influences your portfolio or how you are thinking about your portfolio and how to be positioned in the c-store space going forward? Thanks. Christopher Constant: Sure. I will start, and maybe RJ Ryan wants to add a few comments here. 7-Eleven is a tenant of ours, but they are not in our top 20. On a broader scale, this is a trend that we have been talking about with investors for years. The c-store is getting larger. It is getting more complex. The importance of food, beverage, and brand to drive customer visits inside the store — this is not a new trend. With a portfolio the size of 7-Eleven’s, of course they have stores that are smaller, and they are focused on the larger store to compete with other brands that may be even slightly ahead of where they are. From our standpoint, given that we have been around the store business for a very long time, this is very consistent with what our tenants are doing. If you look at the acquisition activity that we closed in c-store last year — I think our big transaction in the fourth quarter — the average store size was either 7,000 or 8,000 square feet. That is what the modern c-store looks like: heavy food, importance of brand, loyalty programs, and, of course, they do still sell fuel and traditional merchandise, but it is far more than just the old-line c-store. The other thing I would say is we do have some of the older assets that were part of the legacy business. Those are the leases that got renewed this quarter. They are still profitable. When you have a really well-located, maybe slightly smaller store, those still make money for our tenants. We were really pleased to get those leases extended, and our tenants wanted to stay there. RJ Ryan: I echo what Christopher Constant says. 7-Eleven did announce those closures. Again, I would highlight they also announced about a third of those closures, numerically, as planned reopenings or new stores in that larger format. I think it is a reflection not only of the industry, but frankly, of what Getty Realty Corp.'s investment strategy is and what we have executed on certainly over the last several years, if not beyond, and how our portfolio has evolved. It just shows the evolution of the C&G space and where we and others are focused. Michael Goldsmith: Thank you very much. Good luck in the second quarter. Thanks, Brian Dickman. Operator: Thank you. The next question we have comes from Brad Heffern of RBC Capital Markets. Brad Heffern: Yes. Hey, good morning, everyone. Question about the war and gas prices. I know most of the c-store margin is inside the store, but sometimes they do struggle to pass on higher gas prices right away, or maybe customers have less money to spend inside the store. There can be a working capital draw too. I am just curious: Do you think there will be any net impact on your tenants from this? Or do you think they will be able to withstand it? Christopher Constant: It is a great question and one that we have gotten in a lot of our meetings recently. Going into the year, the nice part about our business on the fuel side is that we were starting at retail fuel prices that were less than $3 a gallon nationally. We also entered the year at fuel margins on average that were north of $0.40 to maybe $0.45. That is not a historical record high, but that is a very healthy number. And you are right, typically our tenants have struggled to pass on 100% of the increase where there has been a rapid movement up in oil. What I would tell you is that if you look at some of the national data, almost all of that increase has been passed on. So if margins were in the high $0.40s, they are still nationally above $0.40. And then what does happen on the backside is when the price of oil does come down, typically our tenants are able to maybe widen out their margin a little bit or hold retail pricing. So to date, tenants continue to see the fuel margin — the fuel side of the business — remain healthy. Conversations we have had with tenants are more about the duration of this, the health of the consumer, and continuing to drive traffic in the store. We are having conversations on a regular basis with tenants, and again, what you see in our portfolio is the c-store business is still highly profitable. The gas piece is still highly profitable. And tenants are just trying to drive traffic in the store for the higher-margin side of their business. Brad Heffern: Okay. Got it. Thank you for that. And then, Brian Dickman, on the guidance, you obviously closed acquisitions in the first quarter. It does not seem like enough to make the guide go up by 1%. So can you walk through what drove that? I am assuming part of it was the equity raise, but anything else you would call out? Brian Dickman: Yes. There are really two components. The equity in and of itself would not have impacted the first quarter. You do have the impact of the investment activity. You also have the actualization of whatever was assumed around the credit loss and expense variability that we speak to as driving the variability in the range. Again, we had no credit loss in the first quarter. Expenses generally came in at or below budget. So it is really the combination of those two things — the actual performance against what was forecasted plus the investment activity. And then also, candidly, sometimes when you are dealing in hundreds here and dealing in pennies, the rounding also will get you. So it may not have been a full two pennies, but on the round, that is where it came out for us. Brad Heffern: Okay. Got it. Thank you. Operator: Thank you. The next question we have comes from Wes Golladay of Baird. Please go ahead. Wes Golladay: When you look at the cap rates, I think you are guiding to mid to high 7s. It is a little bit lower versus what you have done in the last few quarters. Is that primarily just due to a mix where there are fewer developments or just different categories in the pipeline? Christopher Constant: I think it is all of the above. Obviously, with the equity that we raised, there are a lot more transactions, broadly speaking, in the market that are maybe in and around that 7.5%. This allows us to grab some of those deals, maintain that healthy spread that we are looking for, and blend those with the deals that are in high 7s approaching 8%. I think that is why you saw our pipeline go up and why we still talk about some of the activity behind that. Do you want to add to that, RJ Ryan? RJ Ryan: Yeah. That is the range we have been operating in and around for quite some time. To Christopher Constant’s point, I expect us to still be quite active in that mid to high 7% range. But we do have an opportunity to expand our activity on the lower end and still blend in that mid to high 7% range. We feel pretty confident in our ability to do so. Wes Golladay: Okay. Thanks for that. And just one housekeeping question. What are you looking at for G&A for the full year? Brian Dickman: It should be right around $20 million, Wes Golladay. Plus or minus. Wes Golladay: Okay. Thank you very much. Brian Dickman: And that is on the cash G&A number. Just to be clear, I think we are at 5.2% for the quarter. First and second quarter tend to be a little elevated. It moderates over the second half of the year. So that $20 million range would be the cash G&A number. Wes Golladay: Okay. Thank you very much. Operator: The next question we have comes from Jenna Gallen of Bank of America. Please go ahead. Thank you. Good morning, and congrats on the first quarter. Jenna Gallen: Can you broadly break down how much of the $125 million pipeline is acquisitions and how much is development funding? If you can remind us, developments — is that typically a three-, four-, five-quarter construction timeline? RJ Ryan: Hi, Jenna Gallen. It is RJ Ryan. The $125 million pipeline is — and it echoes what we said on our last call about 60 days ago — tilted towards the development funding, which is generally that three- to 12-month time horizon. Christopher Constant: We have added additional more traditional sale-leaseback, acquisition-leaseback type transactions, but the pipeline itself, as it sits, is skewed more towards that development funding. Operator: Thank you. Jenna Gallen: Thank you. Operator: The final question we have comes from Michael Gorman of BTIG. Please go ahead. Michael Gorman: Yeah. Thanks. Good morning. Just a quick one from me. Obviously, rent coverage remained pretty strong in the quarter versus the fourth quarter of last year, but there were some noticeable moves within the different buckets you break out in the presentation. Anything specific to point out there in terms of tenant trends moving between those different categories? Or anything in particular that you are seeing on the consumer side that may be driving some of those moves between the different buckets that you break out? Thanks. Brian Dickman: Hey, Michael Gorman. The short answer is no. One thing I would just highlight: we are on a three-month lag. So the data we are looking at is through 12/31/2025. It would not have captured the first quarter performance, although Christopher Constant referenced some of the conversations and anecdotal information we are getting from tenants such that we are not expecting significant changes in Q1 either. Back to the data you were referencing, when we look at it at a slightly more granular level — by lease, by property type — we see very, very consistent results versus the prior quarter. Sometimes, a tenant or a lease will just split on one side or the other of where the breakpoints are, and we actually see that quite a bit. A tenant that is around 2.5x might be 2.4x one period and 2.6x the next, and you do see that more than you might expect around some of those breakpoints. But from the high-level perspective, it is very similar, very consistent, very stable quarter over quarter across all four property types. Michael Gorman: Great. Thank you very much. Thank you. Operator: At this stage, there are no further questions. I would like to turn the floor back over to Christopher Constant for closing comments. Please go ahead, sir. Christopher Constant: Thank you, operator, and thanks to everybody for participating on our call this morning. We are really pleased with the start of the year. We look forward to getting back on the phone with everybody when we report our second quarter in July. Unknown Speaker: Thank you. Operator: Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Good day, and welcome to the Pool Corp. First Quarter 2026 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Melanie Hart, Senior Vice President and Chief Financial Officer. Please go ahead. Melanie M. Hart: Welcome to our first quarter 2026 earnings conference call. During today's call, our discussion, comments and responses to questions may include forward-looking statements, including management's outlook for 2026 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of any non-GAAP financial measures included in our press release will be posted to our corporate website in the Investor Relations section. Additionally, we have provided a presentation summarizing key points from our press release and today's call, which can also be found on our Investor Relations website. We will begin today's call with comments from Peter Arvan, our President and CEO. Pete? Peter Arvan: Good morning, everyone, and thank you for joining us. As we begin the 2026 season, the industry continues to work through a period of stabilization. Consumer discretionary demand remains measured while the installed base continues to drive steady maintenance activity. Q1 is our smallest and most weather-sensitive quarter and our focus entering it was on executing cleanly through the shoulder period to position us for the core season ahead. Our team delivered a solid start with sales growth of 6%, operating income growth of 7% and a 10 basis point of operating margin expansion exceeding our expectations for the quarter. Execution was steady across our geographic footprint with strong maintenance volumes and improving trends in several discretionary categories. A solid start like this reinforces rather than changes our full year view, we are confirming our full year diluted earnings per share range of $10.87 to $10.17, which includes the $0.02 of ASU benefit realized in the first quarter. Reviewing sales by geography, California grew 10% and Texas 7%, supported by constructive weather and strong maintenance demand. Arizona grew 1% and Florida declined 1%, reflecting steady maintenance activities, offset by weather and some softness on the irrigation side in Florida. Across the markets, our teams adapt quickly to local conditions and our differentiated product portfolio, proprietary brands, technology platforms and supplier partnerships built and refined over many years, continued to widen the structural advantage that define our position in this industry. These are not advantages that can simply be replicated by adding locations. In our other key businesses, Horizon net sales declined 2%, consistent with the broader discretionary environment we've seen persist. In Europe, sales grew 5% in local currency, building on the improved trends which we exited in 2025. By product category, we saw broad-based growth. Chemicals grew 8% on strong volume with standout contributions from our proprietary and private label lines, which carry structurally higher margins and are gaining traction across the enterprise. Building Materials grew 5%, continuing to build on our national pool trend offering. This, we believe, builds upon our growing share in this category given the backdrop of muted new construction market. Equipment grew 7% on price and solid volume and commercial was flat for the quarter, largely due to project timing, but exited the quarter with slight growth. Turning to our 2 strategic aftermarket channels, independent retail and the Pinch A Penny franchise network. Sales to independent retail customers grew 3%, a solid setup as they prepare for the core season. And Pinch A Penny franchisee sales to their end customers grew 4% and our franchisees opened 7 new independently owned franchise locations in the quarter. On the digital side, POOL360 increased to 13% of net sales in the first quarter, up from 12.5% a year ago. Our teams continue to make steady progress engaging customers through enhanced offerings and most recently -- or most recently POOL360 unlocked. Between our digital investments, and our distribution network, we are well positioned to continue deepening customer engagement across both professional and DIY end markets. Consistent with what we have discussed last quarter, we remain disciplined on our sales center expansion -- capacity expansion and are focusing on driving more value from our existing footprint. We consolidated one sales center into its existing market in the quarter, bringing our total to 455 sales centers. We still expect to open 5 new sales centers for the full year. This is a measured productivity first posture, the right stance given the current environment. We have made several investments in our network, our technology and our people over the past several years, and our focus now is on leveraging those investments rather than adding to them. You should expect our expense growth rate to moderate as we grow into the capacity that we have already built. As we look at the rest of the year, the macro backdrop has not changed materially from what we described entering 2026. New pool units for 2025 came in at 58,000. While we expect 2026 will be close to that level, it is important to remember that the center of gravity of our business is the 5.5 million in-ground pools already installed. We serve that installed base with a combination of product innovation, customer experience and go-to-market capabilities that no 1 else in the industry can match. Our growth thesis does not require a recovery in new pool units. It is anchored in maintenance, remodel and share capture across product categories for the existing installed base. Our teams remain focused on executing the plan we have set out entering the year, maximizing share across product categories and investing deliberately in technology, private label and partnerships that extend our reach. Over nearly 4 decades, we've built something that goes well beyond distribution, an integrated platform of supplier relationships, proprietary products, technology, franchise networks and field expertise that no one can replicate. We have deliberately invested in that platform so that we perform in the environment we are in today. And so that we are in a fundamentally stronger position whenever the cycle turns. The depth, the reach and the relationships that we have built are unmatched, and we are getting stronger and not standing still. We look forward to sharing more about our strategic priorities and capital allocation discipline at our Investor Day on May 12. I want to thank our team, our vendor partners and our customers for the work and the trust that underpins what we do. Our people are the reason we start each season ready to win and their efforts in Q1 set us up for the season ahead. I will now turn the call over to Melanie Hart, our Senior Vice President and Chief Financial Officer for her commentary. Melanie? Melanie M. Hart: Thank you, Pete, and good morning, everyone. We are happy to share a solid first quarter with net sales increasing 6% compared to the prior year period. The 6% increase reflects approximately 3% from pricing, 3% from volume in our maintenance and discretionary categories and 1% from customer early buys and foreign currency translation. Pricing contributed approximately 3% to sales growth in the first quarter. This reflects an estimated 1% to 2% full year price realization from current year increases supplemented by an approximately 1% incremental benefit from mid-season pricing actions that were implemented at the end of April of the prior year. We expect this pricing contribution to normalize in subsequent quarters when fully reflected in our year-over-year comparison. Within our chemical product lines, we have observed some moderation in pricing from levels seen at the beginning of the quarter. But at this time, we are not realizing a significant impact on consolidated net sales. We will continue to monitor market conditions. Volume growth was a meaningful contributor to our top line performance with our maintenance and discretionary product categories, delivering a combined 2% increase driven by improved demand across equipment, parts and chemical volumes. The positive momentum we experienced in building materials during the back half of 2025 carried into the first quarter, providing support to overall sales growth. Build and material sales for the quarter increased 5%, and we are encouraged that our results continue to track ahead of permit data. Permit data remains lower than prior year levels through the end of the first quarter. Finally, the benefits we saw from early buys and foreign currency translation provided an approximately 1% tailwind to reported sales in the first quarter. We do not anticipate currency to be a material contributor to full year results as the favorable translation impact is expected to diminish in the seasonally stronger second and third quarters as the sales base increases. Gross margin for the quarter was 29%, a decrease of approximately 20 basis points compared to the prior year period. Primary drivers of the year-over-year change during the quarter were product mix, inbound freight associated with stocking levels through the season and increased early buy activity. Product mix was the most significant driver of the year-over-year variance. Equipment sales grew 7% in the quarter and given the lower relative margins of this category, the strong volume performance diluted consolidated gross margin. We view this growth as strategically positive. Customer early buy activity also increased in the quarter. As is typical with early buy programs, these sales reflect modest discounts from regular season pricing and therefore, carry somewhat lower margins than our in-season business. The increase in early buy volume is consistent with our go-to-market strategy and positions us well for the selling season ahead. Customer mix and chemical margins were also modestly below prior year levels, though neither represented a material individual driver of the variance. Partially offsetting these headwinds, we continue to realize benefits from our pricing initiatives and ongoing supply chain actions. First quarter gross margins are in line with our historical seasonal patterns and should not be viewed as sequential from fourth quarter levels. Operating expenses for the first quarter were $247 million or a 5% increase over the same quarter in prior year. The increase was driven by the addition of 6 greenfields opened after March of last year, technology cost and overall inflationary increases. As discussed on our year-end call, our 2026 operating plan is focused on unlocking efficiency across the 50-plus greenfield locations opened over the past 5 years, combined with process improvements resulting from our ongoing investments in POOL360 and its expanded capabilities. First quarter results are tracking in line with that plan. Operating income of $83 million increased $5 million or 7% compared to the prior year. We realized a 10 basis point operating margin improvement. Interest expense of $12 million reflects the incremental borrowings associated with share repurchase activity during the quarter. Diluted earnings per share of $1.45 increased $0.03 compared to the prior year. Prior year included a $0.10 ASU benefit versus $0.02 in the current quarter. Excluding the impact of ASU in both periods, diluted EPS increased $0.11 or 8% for the first quarter, reflecting our ability to generate earnings growth with top line expansion. Moving to our balance sheet and capital allocation. Consistent with our normal seasonal pattern, we executed our vendor early buy programs to ensure appropriate inventory coverage heading into the season. Inventory at March quarter end was $1.7 billion, 14% higher than first quarter last year and an increase of approximately $200 million from year-end as product was received and positioned across our network. Our current inventory includes stocking for new locations and acquisitions added to the network, new product introductions resulting in a broader product range and cost inflation relative to the same period last year, with some opportunistic purchases made ahead of currencies season price increases. Inventory investment is concentrated in our fastest-moving product lines, and we would expect a normal seasonal reduction in inventory levels as we move through the peak selling season. We ended the first quarter with total debt of approximately $1.2 billion and a leverage ratio of 1.7x, which is within our stated range. As is typical, debt levels will increase through the first half of the year as seasonal inventory builds and early buy payments come due before declining in the back half of the year as receivables are collected. Net cash provided by operations was $25.7 million for the first quarter compared to $27.2 million in the prior year period, with the year-over-year change primarily driven by higher inventory purchases in support of the upcoming selling season. During the quarter, we repurchased approximately $64 million in shares, an increase of $8 million over the prior year period, with $271 million remaining under our current repurchase authorization. We will continue to execute share repurchases in an opportunistic and disciplined manner, consistent with our capital allocation framework. Even with our first quarter trends tracking ahead of our expectations, full year guidance remains unchanged. We continue to expect a 1% to 2% pricing benefit for the full year of 2026 from vendor cost increases and related price pass-throughs. Combined with growth from the installed base of pools and the absence of any meaningful recovery in discretionary spending, we expect top line performance to be a low single-digit growth on a same selling day basis. Gross margin for 2026 is expected to remain consistent with 2025, supported by continued supply chain efficiencies, pricing strategies and higher private label sales offsetting the prior year margin benefit from mid-season price increases. As indicated at year-end, first quarter reflected the highest year-over-year expense comparisons. We expect expense growth to moderate on a quarter-over-quarter basis throughout 2026 as we focus on capacity absorption and a prior year new sales center opening. Incremental incentive-based compensation, if earned, will be recorded in proportion to estimated operating income growth and the costs associated with new sales center openings in 2026 are expected to be weighted towards the back half of the year. With the share repurchases during the quarter, our projected interest expense is now a range of $49 million to $51 million. We would expect second quarter to have the highest interest expense of the year following the payment of early buys. Our estimated full year tax rate remains approximately 25% with the second quarter rate to be approximately 25.5%. Our guidance does not include ASU benefits beyond the $0.02 recognized year-to-date as we continue to expect the full year impact to be less than prior year. We are expecting approximately 36.6 million weighted average shares outstanding for the rest of the quarter and the full year, updated for our first quarter share repurchase activity. Guidance remains unchanged with a diluted EPS range of $10.87 to $11.17 including the $0.02 ASU tax benefit recognized in the first quarter. The midpoint reflects a 2% to 3% growth over prior year. Pool Corp's first quarter results demonstrate the earnings power of our model. even in a market that has not yet seen a full recovery in discretionary activity. Pricing discipline, supply chain execution and the growing contributions of POOL360 are working as intended and our network continues to expand in a way that strengthens our competitive position for the long term. We entered the peak season with confidence in our team, our inventory position and our ability to deliver. I will now turn the call over to the operator to begin our question-and-answer session. Operator: [Operator Instructions] The first question comes from Susan Maklari with Goldman Sachs. . Susan Maklari: My first question is on your ability to realize the return on investments that you talked about coming into this year. As the pool season start come together. Can you talk about your competitive positioning? What you're hearing from the sales centers and your customers in there? And just how you're thinking about that overall positioning as we move into the spring summer? Peter Arvan: Sure. When we think about getting ready for the season, we think about making sure that we have all of the sales centers ready for the surge of business that happens during the second and third quarter. That means that having the right inventory in the right location, having a staff that is fully trained and frankly, excited about the season having all of our new products ready to be introduced to customers working really hard on early buys to make sure that we have the product out in the field at our customers' locations ready to sell, making sure that we have explained all of the new product offerings that are available to our customers so that they can help grow their business and that our marketing programs are finally tuned to kick off the demand creation efforts that we do, they are very unique in the industry. And then it's a matter of making sure that in the sales centers that our teams are ready for the surge of business and that we've taken advantage of the investments that we've made in capacity creation so that we get better every year. We have a performance-based culture and every year, there is a drive to make sure that whatever we did last year, that we do better this year, whether it is our productivity levels in the sales centers. whether it is our efficiency in serving customers and how quickly we get them in and out the door. All of those things are part of the overall customer experience that we focus on. And especially with the newer locations that we opened up in the last couple of years, the newer ones are the ones that we pay the most attention to, to make sure that they're ready to start without missing a beat. Susan Maklari: Okay. That's helpful. And then, I guess, given the geopolitical environment and the moves that we're hearing in consumer sentiment. What are you hearing from your customers on the ground? Has there been any change in how they're thinking about their backlogs or consumers' willingness? And what are you seeing on those discretionary side of the business? Peter Arvan: I think that we continue to watch the health of the consumer. We watch housing turnover, frankly, the age of the installed base all matter. What -- it's early in the year to look at permit data and try and draw any conclusion for where we will end up because the first quarter is just so small relative to that. So there's a lot of -- first quarter is really kind of selling season and now the builders are trying to lock down contracts. So I can tell you that I've heard everything from very optimistic, and I'm sold out to other areas where they're still trying to pursue contracts to make sure that they can lock up the season. So on balance, I would say, relatively unchanged with some green shoots, I would say. Susan Maklari: Okay. All right. That's encouraging. Good luck with the quarter. Operator: The next question comes from David Manthey with Baird. David Manthey: Pete, as you mentioned, I realized the first quarter is seasonally volatile, but we saw a couple of decent-sized changes in some of the supplementary information you provided. So chemicals staged quite a turnaround here. Florida, I guess it had been growing a little bit. Now it's down 1% and California and Texas are booming. I'm just wondering if you can talk about those to the extent there's any signal there versus noise in the first quarter. Peter Arvan: Yes. I'd be careful about drawing huge conclusions on first quarter, but I'll give you just a couple of things to think through. In terms of Chemicals, first quarter is actually one of the quarters that -- so when you're trying to sell a program to a dealer, dealers typically don't convert during the season, they convert after the season and then they would load their inventory into the stores for the upcoming season. So as you know, with our private label chemicals, our legal and easy floor lines, which we believe are best-in-class, especially when paired with the technology tools and the water testing apps that we have and water testing strips, everything for the integrated systems, I think we saw good traction from the dealers and specifically on the retail side, that has helped our traction that we're seeing on the chemical side. And frankly, the teams are out hunting that business because I think we've got a great value proposition. When I look at California and Texas, California, I think, benefited a little bit from weather. California was pretty hot in -- earlier in the first quarter, which is atypical. So that weather pattern helped. And I think the same was true for a bit of Texas. But again, it's so small and relative to the grand scheme of things that I don't know that I would draw a whole lot of conclusions from that. But I can tell you, the team did a very good job of explaining the value proposition and winning share at the dealers in the first quarter. And I think that's just a result of conveying a very strong message or the best value proposition in the industry. David Manthey: Yes. And second, you've talked about growth in OpEx expected to slow through the remainder of the year. And Melanie mentioned that. Could you tell us, does that still kind of anticipate that full year OpEx will be in that 60% to 80% range relative to gross margin or sales dollar growth. Is that -- I know that's a target. But based on your guidance ranges and how you're looking at the business, is that still the target for 2026? Melanie M. Hart: That is the long-term target, but you should remember for 2026, we do also have that incentive comp reload, so -- where we do expect to get some leverage for the year, some of that natural leverage will be offset by that rebuild on the compensation side. So it will be a little bit lower than our normal long-term algorithm. David Manthey: And that comp reset was -- I think you talked about $15 million. Is that still the case? Melanie M. Hart: Yes, at the low single-digit growth. David Manthey: Got it. Peter Arvan: What we're counting on, Dave, though, is the absorption as the new sales centers that we've opened last year and the year before, as they continue to gain traction and the absorption rate on that cost improves. And when you couple that with slowing of adding new investments to the business, because I think we're adequately invested in most areas right now. I think the results for the back half of the year are encouraging. Operator: The next question comes from Ryan Merkel with William Blair. Ryan Merkel: I wanted to start with gross margin. Peter, Melanie, can you quantify the impact to gross margin from the customer prebuy and then also the higher equipment mix -- and the reason I asked is I think last quarter, you guided gross margin slightly up year-over-year in the first quarter. So curious what was different versus what you thought? Melanie M. Hart: Yes. So we're not going to provide a kind of detailed quantification of that. But if you think about what we have talked in kind of relative margins, so we generally will talk about kind of building materials, having the best margin and then after that would be chemicals and then after that would be equipment. So with the equipment being the higher portion of the first quarter sales and really kind of outgrowing our expectation that's really where we saw some dilution of the consolidated margins. Ryan Merkel: Got it. So in my own words, it sounds like the equipment growth surprised you in 1Q versus what you thought? Melanie M. Hart: It was a very pleasant surprise. Ryan Merkel: Okay. Got it. All right. That's good to hear. And then second question is, can you just comment on what you're seeing so far in April? And how does that compare to March. And I'm just curious if March had a weather boost and trying to figure out if that's continuing into the second quarter. Peter Arvan: Yes. I think we're -- I don't know, most of the way through April, and I would -- I guess I would characterize April as expected. So it's -- for what we have contemplated within our guidance and with the plan, I mean, April is going as expected. Operator: The next question comes from David MacGregor with Longbow Research. David S. MacGregor: I guess I wanted to just ask about pricing and inflation and demand elasticity. And I guess in the past, where within the mix have you seen this sort of first appear? And do you feel your private label offering is sufficient breadth to maybe offset by capturing the down market shift? And would that downshift be margin accretive? Peter Arvan: Yes, I'll take that, David. Just the way, I wouldn't want anybody to position our private label as a down price offering. We look at our private label and have intentionally focused on making sure that it is a very high-quality product. So we're not actually selling it saying, "Hey, we're trying to make -- we're trying to have a cheaper offering, we're trying to have an offering that has tremendous value and is very high quality. I think when it comes to the inflation, where we have seen it, and I've commented on this before, obviously, inflation drives the -- it's most prevalent in discretionary when you get into the cost of a new pool. And then when you get into on the maintenance side, there are some parts of maintenance that are -- that we would call semi-discretionary. A pump and a filter nondiscretionary, if those need to be replaced or repaired, they have to be replaced or repaired. But you get into heaters and/or lights, something like that. If somebody doesn't want to fix that, if there is one that is -- that needs to be replaced, you don't actually have to have that to continue to safely operate the pool. So in some areas, that's where we have seen some decline in demand. But I would tell you that that's already in and baked in. So we're not seeing that either change materially from what we've seen over the last couple of years. David S. MacGregor: Okay. Got it. And thanks for the clarification on the private label. I guess second question is just on equipment sales, which obviously look encouraging, I guess, at this point, which you saw this quarter. Any sense of how much deferred investments may be in the market there? And just, I guess, given the rate of catch-up following prior downturns, what could that contribute to growth over the next year or 2? Peter Arvan: Can you clarify your question. I just want to make sure I answer the right question. On your comment on deferred. David S. MacGregor: Well, I'm just -- I'm getting the sense of the equipment sales, there's been some deferral with the downturn. And so now it looks like we're starting to see people spending money on equipment again. And so I'm just trying to get a deferred pending may have occurred there. Peter Arvan: Yes. I think there is -- as a couple of pieces of equipment transition to longer life items. So like when the industry moved from single speed pumps to variable speed pumps, by their very nature, variable speed pumps last longer -- sometimes up to 2x longer than a single-speed pump. So if you go back to 2018 when that regulation went into effect, then you just do the -- you extend out the life of a variable speed versus single speed, those variable speed pumps that were installed very early on in the transition that would have gone well past the normal life of a single-speed pump. Those will now start coming into the replacement cycle, we believe that. And the same thing as it relates to like incandescent lights, which were much shorter life than the LEDs that we replace them. And those 2 -- as we work through that cycle, you'll start to see more replacement for that. So that's all encouraging for us for the future. Operator: The next question comes from Scott Schneeberger with Oppenheimer. Scott Schneeberger: I'm going to focus a bit on pricing. I guess, Melanie, for you, you discussed that we're going to be lapping the tariff pricing that started in April last year. I'm just curious how we should think about that. Did that ramp much in the second quarter? Will we see that as a comp in the second quarter not really until we get to the back half. Just curious how we should think about the cadence and the impact of that since it's a full point in the guidance calculation. Melanie M. Hart: Yes. So when you look at full year pricing, we are at the 1% to 2%, which is based on the current year increases. And so in the first quarter, we had that incremental 1% that was really the tariff price increases that we saw last year. In second quarter of last year, we did have some benefit from those price increases, so we will be lapping that. So at this point, for the remainder of the year, we would expect pricing to be more in that 1% to 2%, just reflecting the current year cost increases. . Scott Schneeberger: And then with this really solid move in the first quarter in Chemical, and I think 1 of you mentioned that there was some good private label, which is higher margin activity there. Could we see upside this year just a little bit behind the strength there and the possibility for persistence in it and also the margin element of the private label with the chemical impact? Peter Arvan: Yes. We're very encouraged by chemicals in the first quarter because that's the nondiscretionary part of the business. and it really goes in 2 channels, right? It goes to the pro channel, which is -- that's your day in, day out, foot traffic into the branches, which is very encouraging. And that's driven by the value proposition that we have. That's the 40-year relationships, that's the expertise in the branch, that's the footprint. That's the customer experience they get there, the tech platform and frankly, the quality of the private label product that we're selling. And then the other side of that is going to be the independent retail taking that product on and putting it on their shelves and that being their go-to brand for the season. So we're encouraged by the results in the first quarter. And we think that as the season progresses, that will be just a good tailwind for us. Operator: The next question comes from Garik Shmois with Loop Capital. Garik Shmois: Just on the expectation that you have for operating expense growth to moderate -- you mentioned improved operating leverage on recent greenfields. I'm wondering if there's anything else besides that in the calculation? Are you expecting certain cost actions in addition to better operating leverage? Melanie M. Hart: Yes. So we are focused on ensuring that the greenfields that we put into place that we're continuing to get those up to fleet average. So there's our concentrated effort on that, which does drive operating leverage at those locations. And then along with that, we are constantly kind of evaluating from both a seasonal standpoint and a market standpoint, ensuring that we're operating effectively within our capacity creation efforts. So we've talked about utilizing the benefits of POOL360. So looking at -- as we continue to increase our sales through POOL360 at each location, that gives us the opportunity to evaluate our operating model in those locations. Garik Shmois: Okay. A follow-up question is just on chemical prices. There's a comment I think in the prepared remarks, they moderated in the quarter, but you're not seeing an impact to sales. Just wondering if you can assess if there's going to be a risk that it becomes a bigger headwind in future quarters at all? Peter Arvan: Yes. I don't know. From where we sit right now, our view is that prices are fairly stable. So I don't -- I mean, that could change, but from where we sit right now, I don't see it in any meaningful way. I mean, it could happen market to market. Somebody, a competitor could do something in a market, but I don't see anything structural that -- where there's a setup for that to change. Operator: The next question comes from Sam Reid with Wells Fargo. Richard Reid: Just wanted to quickly dive into the inventory comment around new product introductions. Specific examples, but also, are you doing any more, say, around like white label China import product? I just want to better understand some of the nuances there on the inventory line. Peter Arvan: Yes. Our job as the distributors to make sure that we have the best product offering for our customers, no matter where it comes from. So I wouldn't say that there is a -- if you look at our private label products, the -- much of that product is domestically produced, and there is some of it that comes in from import and that's frankly always been the case. But our view on new products is not new products, lower cost for the sake of lower cost what we look for is new products that have new technology that help us expand the market. So we look for highest quality features and benefits that our customers and their customers would want would want to drive demand. So I mean in no way, shape or form, do we go out and look for, hey, I just want to find the cheapest pump, the cheapest filter if that was our goal, our product mix would be very different than it is today. We focus on having the best product, highest quality professional grade products that will help our customers grow their business. Richard Reid: All helpful, Pete. And maybe just a quick one on the prebuy activity during the quarter. I mean, you did break out the prebuy contribution in your bridge. I'm just curious though roughly what is the gross margin for a customer that prebuys a product versus, say, a non prebought product. Would just love maybe that split on your gross margin line, just so we could better understand the impact to gross margins in that first quarter from prebuys. Peter Arvan: Yes. We typically don't break that out. I mean because there is no one answer, it varies, right? It varies by customer, it varies by the products that varies by the products that they buy, and so the overall mix. So unfortunately, I can't give you an answer that says, "Hey, it's, this many bps for that type of customer versus a customer that buys normally because it depends on when they buy, how much they buy and what they buy and how large of a customer they are for us. Operator: The next question comes from Collin Verron with Deutsche Bank. Collin Verron: I just wanted to follow up on the equipment and the replacement cycle. Can you just put some numbers around what the useful life of the equipment is now -- and just given that useful life, do you see a replacement cycle in the next couple of years just because we're coming up to 5 or 6 years post COVID when there was a lot of demand. Peter Arvan: Yes. Let me characterize it like this. The life of -- expected life of equipment varies tremendously, based on what the product is and the operating conditions that it's used, whether it's in a seasonal market or whether it's in a year-round market and whether the product is properly maintained or not and with weather events. In general, part of the value proposition of a variable speed pump is that it runs instead of that full rate under full load all the time. It runs at a lower load which extends the life. It could extend the life by 30%, 40%, 50%, it really depends on many, many other factors. But in general, it has extended the life span of pumps, doesn't really have much of an impact on filters or anything like that. Heaters, it's really a function of water quality, more than anything else. If you maintain great water chemistry that can extend the life. You could have a brand-new product with lousy water chemistry and destroy it very quickly. So -- but in general, we look at 2 categories for life expectancy changes that were a bit design, if you will. One is the variable speed pump certainly last longer than the single-speed pump in the range of what I just discussed. And then if you look at LED light bulbs for the pool, those certainly on an apples-to-apples basis are going to outlast an incondici. So since the time that both of those products were introduced we see that there should be opportunity for that replacement market coming up. Operator: The next question comes from Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Just want to come back on inventories, 14% growth. I think you mentioned that the broader product range and service levels, but just maybe how would you characterize inventories where you want them to be? And then just back on that broadening the product range. Can you talk -- give us some examples about the new tech or expanding the market type products that you mentioned in the prior comments? Peter Arvan: Yes. So in terms of the inventory, if I look at the -- certainly, the level of inventory is up. If I look at the profile, the profile is what I would characterize as extremely healthy. actually very astute buyers when it comes to buying inventory. So if I look at the dollars and where those are, if they're not sitting in a significant amount and a bunch of new products that don't have any sales history. They're sitting in very high moving very high moving items. So I really -- from an inventory perspective, I spend very little time worrying about the inventory levels because I think the team has -- does an amazing job controlling inventory, and we generally do what we say every time. When I think about new products, I'll give you an example. So on our private label line, we have a regular chlorine tablet, which has been around forever in the pool industry. And now we also have a proprietary product, which is an extreme tab. The Extreme tab has additives in the tablet that distinguish it from a standard tablet. It has more additives in it that produce a better quality pool that has inhibitors that has as algecides and then it has clarifiers and other products that distinctly differentiate that product. And our customers and their customers see a big benefit from that. So that tab -- or that product is growing nicely. Another example would be our -- something in our filter cartridges. So we have a proprietary [indiscernible] antimicrobial cartridge filter, which is much faster to service and has a very low micron filtration rate, which again helps produce a clearer pool, and that's especially important when you think about LED lights, which are getting brighter and brighter. So anytime somebody upgrades their lights, if the water quality isn't really good, you'll start to see those suspended particles. So great filtration to complement lights matters a lot, and we're right there for the customers to provide those products. Jeffrey Hammond: Okay. Those are great examples. Just on pricing, I think you mentioned you expect it to moderate. I'm just wondering if you're hearing of any potential follow-on price increases, whether it's freight inflation from higher gas or oil-based products. I think we heard about some pricing actions in [indiscernible] coordinators, Section 232 kind of tariff update. Any chatter of any follow-ons coming? Melanie M. Hart: Yes, there has been some chatter. I would tell you when we look across our product category from where we kind of stood this time last year. Last year, when we talked about the impact from the tariffs, we did have an incremental 1% that we added to pricing for the forecast for the year. At this point, some of it's noise. We've gotten some notices from vendors, but I would say it's not as widespread as we were at about 30% of our cost of product this time last year where we had announced price increases per se, and we're just not at that level at this point. So we don't have as much of an impact expected. So we're still kind of waiting to hear from if other vendors have reactions to what's going on in the market. Operator: The next question comes from Steve Forbes with Guggenheim. Unknown Analyst: This is Jake Nivasch on for Steve. Just 1 for me. I wanted to dig into POOL360 a little bit. So it's nice to see that penetration levels continue to increase as seen from this quarter from the prior year period. And just curious what the expectation is for the year for this platform, I guess, from a penetration standpoint. And I guess, as a follow-up, curious about what the customer retention looks like utilizing this platform. Where are you seeing when perhaps some of the newer branches, perhaps they're utilizing that a little bit more than some of the older vintages? Or is it the dynamic not really related to that? Just any sort of update there would be great. Peter Arvan: Yes. We're actually very encouraged by POOL360. We think it is a structural differentiator for POOLCORP, both in customer experience and certainly from a cost-to-serve perspective, which is why we've had so much focus on it. What's interesting is, is that there are some regional differences in the adoption rate. There are some -- we have some [indiscernible] very high utilization, some well over 30% in the tool, and we have some that are lower. So some of that is just some -- which seem to be regional differences and some of it is just opportunity on our part. So we continue to focus on improving the quality of the tool every day people wake up and say, "How do we make it better, how do we make it better, how do we make it better, what new features that we have to add, how do we communicate those, how do we train the customers and our branch teams on those features. So there's a range. So I don't think we're anywhere near as a company near entitlement of our penetration. As last year, we ended for the total year at 17%. And as I mentioned, we have some branches that are well over 30. So for me, I don't see any reason why the company couldn't ultimately exceed 25% target and maybe higher in the future, it all depends. So it's important that we remain flexible with our customers though, would not try and force them into using it. We do business with our customers the way they want to do business with us. Some of them embrace the digital tools, some people like the face-to-face. Operator: The next question comes from Shaun Calnan with Bank of America. Shaun Calnan: Just first, can you talk about what you think growth be better early by this year? Do you think customers are more worried about potential price increases? Or do you think this is like a view that they're more optimistic on 2026? Peter Arvan: Yes. I don't know that it was a fear of price increase. I think it's a couple of things. I think that early on in the year, there is always a fair amount of optimism because customers don't know what they don't know. And by nature, our customers tend to be fairly optimistic. So that's a portion of it. I think to scale it, when you look at some of these early buys, I don't know that there's any risk for any of the customers with an early buy. It's not like they're buying a year's worth of inventory. So they're buying some inventory to start the season. So I don't know that anybody is betting the farm on what they buy. So I would say it's a function of our sales efforts, the quality of our products and how well we serve the customer more than anything. Shaun Calnan: Okay. Got it. And just as a follow-up, you had mentioned being able to get some discounted equipment last quarter, did you pass that discount along to your customers? And was there any change in the structure of your early buy discounts? Peter Arvan: I assume you're referring to early buys. And early buys are just as part of the normal course of business. And I think we had a question earlier about pricing on early buys. And again, the answer is it just depends on the customer or the product mix they're buying, how much they're buying, and things like that, there is no formula that says, this means that as it relates to the price increases. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Arvan, President and CEO, for closing remarks. Peter Arvan: Yes. Thank you all for attending today's call. We look forward to you joining us -- joining our Investor Day webcast on May 12, when our executive leadership team covers strategic initiatives and our long-term financial outlook in more detail and on July 23, when we announce our second quarter 2026 results. Have a wonderful day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the first quarter investor conference call. [Operator Instructions] Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information is filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is April 23, 2026. I would now like to turn the call over to Chief Executive Officer, Mr. Scott Patterson. Please go ahead, sir. D. Patterson: Thank you, Olivia. Good morning, everyone. Thank you for joining our Q1 conference call. We reported solid results this morning that were generally in line with expectations. I'll provide a high-level review, touch on some highlights and then pass to Jeremy Rakusin for a more in-depth discussion of the results. . Total revenues were up 5% over the prior year, with the organic growth accounting for over half of the increase. [ EDA ] for the quarter was up 2%, reflecting a modest an expected decline in our consolidated margin. Jeremy will walk through the detail in a few minutes. And finally, our earnings per share for the quarter were $0.95, up 3% over the prior year. Looking at our divisional results. FirstService Residential revenues were up 4% in the seasonally weak first quarter. All of the growth was organic. We had a solid core contract wins and renewals in our core management business at the upper end of expectations. And as we discussed in our year-end call, divisional growth was tempered by modest declines in ancillary services, including pool construction and renovation and contracted labor for commercial maintenance. Looking forward at FirstService Residential, we expect similar or slightly better organic growth in Q2 and some sequential improvement for Q3 and Q4. Moving on to FirstService Brands. Revenues for the quarter were up 6%, balanced between organic growth and tuck-under acquisition. Organic growth was again this quarter driven by increases at Century Fire. Organic revenues within restoration, roofing and home services were all approximately flat with the prior year. Looking more closely at our segments, our restoration brands, First ONSITE and Paul Davis together were up mid-single digit over the prior year, and as I said, flat organically. We're pleased with the performance in Q1 after entering the quarter with a soft pipeline relative to prior year due to the mild weather we experienced in Q4. We saw increased activity from winter storm work that benefited both our brands. The work was primarily quick-turn water mitigation and very little carried into Q2. As a result, our overall restoration backlogs at quarter end are at similar levels to year-end and down modestly from the prior year. Based on current activity levels and the quarter end backlog, we expect Q2 revenues to be flat to slightly down from prior year levels. Moving now to our Roofing segment. Q1 revenues were up 7% over the prior year, driven by tuck-under acquisitions, primarily Lakeland, Florida based Springer Peterson during Q3 last year. Organically, revenues were flat with the prior year and in line with our expectation. We expect a similar result in Q2 with single-digit top line growth from acquisitions and approximately flat revenue organically relative to a year ago. Outside of data center work, the new construction market remains depressed, and the commercial reroof market is flat to slightly up while becoming increasingly competitive. We have a strong team in our roofing platform and solid underlying branch operations. We firmly believe we're in a position to accelerate when the market improves. Moving to Century Fire. We had a strong quarter with total revenues up over 10% and organic growth at a high single-digit level. The Century results continue to be balanced between strong growth in repair, service and inspection revenues supported by solid growth in installation and contract revenues. The backlog is robust we expect a similar result in Q2 and for the balance of the year. Now on to our [ Home Services ] brands, which as a group generated revenues that were up slightly from year ago levels, modestly lower than our expectation. We started the quarter with an uptick in lead flow and some optimism. However, this dissipated moving into February and reversed with the onset of the Middle East conflict. Leads and activity levels dropped immediately. Our teams made a decision to increase promotional spending and marketing spend to maintain momentum and capacity utilization as we ride out the storm. We were successful in holding our revenue, driving higher conversion rates and larger job size and certainly taking share in a tough margin. It did impact our margin for the quarter, and Jeremy will speak to this in his comments. Our lead flow for Q1 was down double digit with a steeper decline in March. It remains at depressed levels and is moving in line with consumer sentiment, which is 10% lower than a year ago. It's expected to increased gas prices and inflation in general will dampen home improvement demand in Q2 beyond what we foresaw at the beginning of the year. Based on our sales and backlogs currently, we expect to get close to prior year revenues in Q2. This outlook is impressive in the current environment and again, reflects on the tenacity and commitment of our teams. We do remain optimistic that there is pent-up demand in the market and believe we could see a pop in activity with stability in the Middle East and reduced concerns around inflation. On the acquisition front, we acquired 2 of our larger franchises during the quarter. Our Paul Davis franchise covering the Cleveland and Akron markets and our California Closets operation that owns the franchise territories encompassing Indianapolis, [indiscernible] Lexington and Cincinnati. As a reminder, we've had company-owned operations at Paul Davis and California Closets for many years now. We selectively acquire franchises if we believe we can drive incremental growth in the market in partnership with local operators, always in the best long-term interest of the brands. We have other tuck-unders in the pipeline across our segments and expect to complete further deals over the balance of the year. I will now pass over to Jeremy for his comments. Jeremy Rakusin: Thank you, Scott. Good morning, everyone. We reported consolidated first quarter results in line with the outlook we provided on our prior year-end call. And in particular, top line performance in each of our brands matched our expectations, as you just heard from Scott's walk-through of each business line. Highlights of the consolidated quarterly results included revenues of $1.32 billion, reflecting 5% growth over the $1.25 billion last year. Adjusted EBITDA of $106 million, up 2% year-over-year, with an 8% margin, down 30 basis points versus the 8.3% margin in Q1 '25 and adjusted EPS at $0.95, a 3% increase over the prior year. Our adjustments to operating earnings and GAAP EPS in arriving at adjusted EBITDA and adjusted EPS, respectively, are consistent with our approach in prior periods. Turning now to the segmented results for our 2 divisions. I'll lead off with FirstService Residential. The division generated revenues of $546 million, up 4% over last year's first quarter while EBITDA was $46 million, a 10% growth rate over the prior year. This resulted in an EBITDA margin of 8.4%, a 50 basis points increase over the 7.9% level in Q1 '25. The margin expansion was driven by broad-based labor cost efficiencies across our operation. This encompassed both a continuation from last year of the initiatives around our client accounting and portfolio management functions as well as other productivity gains across our teams. Now to FirstService Brands, where we reported revenues of $771 million for the current quarter, up 6% over last year's Q1. Our EBITDA for the division was $64 million, a 5.5% decline versus the prior year quarter. The resulting margin was 8.3%, down 100 basis points compared to last year's 9.3% level and primarily driven by our Roofing and Home Services businesses. The [indiscernible] in our roofing platform was expected. As we indicated on our February year-end call, the forecast decline was due to job margin pressures in a heightened competitive environment against the backdrop of dormant commercial new development activity. At our Home Services business, we saw the need during the quarter to increase our marketing spend to preserve our top line performance in the face of macroeconomic uncertainty and the weakening consumer sentiment that Scott referenced. Remodeling spending in our home improvement brands is influenced by interest rate levels and consumer sentiment and home affordability indices, all of which have been undermined by recent geopolitical developments. Periodically, in the past, when we have encountered these types of exogenous challenges impacting our key performance indicators, we have tactically deployed promotional initiatives to support the brand and our market share. We expect to continue with these investments at least over the short term, covering the second quarter but we'll be keeping a close pulse on our leading indicators to pull back the spending once the environment improves. A second factor contributing to the first quarter margin compression at our Home Services brands was reduced capacity utilization of our frontline teams. While we delivered revenues in line with prior year, job volumes declined, and we were reluctant to flex our labor cost down in portion to these reduced activity levels until conditions stabilize, and we have greater clarity of market demand trends. With respect to our consolidated operating cash flow we generated $88 million during the first quarter, a sizable level during our seasonal trough first quarter and up more than double compared to Q1 2025. Capital expenditures during the quarter were $28 million, slightly below prior year, and we now expect to have our full year CapEx coming modestly lower than the initial guidance of $140 million. The resulting high free cash flow conversion rate is a function of our business model and focus around generating cash even when we have periods of more tempered growth on the P&L. This translated into further deleveraging on our balance sheet, where our leverage is measured by net-debt to EBITDA ticked down to a very conservative 1.5x compared to 1.6x at prior year-end, and versus the 2x level at Q1 last year. We have a well-balanced mix of floating and fixed rate and varying maturities of debt instruments. And lastly, our liquidity reflecting cash and undrawn credit facility balances exceeds $1 billion, the highest level in the history of the company, which puts us in a strong financial position to deploy capital as opportunities in our acquisition pipeline arise. Looking forward, in the upcoming second quarter, we are forecasting similar year-over-year trends as we just saw in Q1 across both divisions. We see a continuation of similar EBITDA margin expansion and growth in the FirstService Residential division. This will be largely offset by brands division declines, reflecting the ongoing margin pressures in Roofing and Home Services I referenced earlier and which are dictated by the current uncertain geopolitical and macroeconomic environment. This all aggregates on a consolidated basis for Q2 and to mid-single-digit top line growth and EBITDA performance flat to slightly up compared with the prior year. That concludes our prepared comments. Olivier, you can now open up the call to questions. Operator: [Operator Instructions] Our first question coming from the line of Stephen MacLeod with BMO Capital Markets. Stephen MacLeod: Thank you. Just wanted to ask about the roofing vertical, which obviously you're seeing some pressure and both in the end markets as well as from competitive intensities. And I'm just curious, are you still expecting that some of those reroofing jobs are being delayed into later points in the year or beyond this period of geopolitical and macro uncertainty? D. Patterson: I think, Stephen, it has delayed a rebound. The reroof market, certainly stabilizing, but stubbornly weak. I think the persistent uncertainty does continue to impact decision-making around major projects, I mean we're seeing it in some of our other businesses. So we do believe we'll grow organically this year. We expect to. We expected to see some organic growth in Q2, but I think that the rebound has been pushed out. We do expect to see sequential improvement in Q3 and Q4. There are opportunities that were delayed last year that we're seeing scheduled now. We're bidding work, we're winning work. Generally, we're feeling optimistic. We believe that we're -- we have a very solid branch network, and we're poised to really take advantage when the market improves. Stephen MacLeod: Okay. That's helpful color, Scott. And then maybe just with respect to capital allocation. You have a strong free cash flow. Leverage is not very high. You do have an NCIB outstanding. Just curious if you would consider a buyback in -- or being active on the buyback in this -- given where the stock is and given sort of some of the weakness in terms of the outlook. Jeremy Rakusin: Yes, Stephen, it's Jeremy. Yes. No, it's 1 of the alternatives that's always in the forefront of our minds, particularly over the current environment. And as you said, leverage giving us ample room. First and foremost, we're a growth company and we're looking to deploy capital towards those growth initiatives and supporting the brands where we have capital allocation opportunities. So I think that's our primary focus. You're right, we can pull the trigger on the NCIB at any point in time. we have given consideration to -- but I think for now, it's a pause just given potential opportunities in the pipeline, the growth mindset and really where the uncertainty is in the geopolitical and it influences stock market valuations. Stephen MacLeod: Okay. That's great. And then maybe just finally, just on the M&A. Scott, you referenced that you have done some tuck-ins recently. I guess when you think about M&A and the outlook from here, would it mostly be kind of bringing in those company turning franchises into company-owned? Or do you see other alternatives in your other verticals as well? D. Patterson: No, I really think it's tuck-unders in the other verticals. Nothing has really changed as we approach the company-owned strategies at Paul Davis or California Closets. Those will be very episodic, 1 or 2 a year at each brand. So we're not looking to accelerate that. Operator: Our next question coming from the line of Daryl Young with Stifel. Daryl Young: I just wanted to touch on Century Fire for a second. It seems to continue to defy gravity and amid a soft commercial construction market. So I'm just wondering, has there been any regulatory changes that might help explain some of the growth here in terms of maybe frequency of inspections or system retrofits or anything else that can explain that growth? D. Patterson: No. The growth has really been in the service repair and inspection side has been very consistent in the last number of years, and it continues to be a driver for them. There's just a real focus on it across all the branches. And they're still in the process of layering in service expertise at some of the branches that were primarily installation focus. So there's nothing on the regulatory environment, certainly that we're aware of that's accelerated the growth in the service side. It's just a continued focus on it. Daryl Young: Okay. And then with respect to restoration, the outlook is maybe a little bit lighter than I would have expected in the short term. Is there any loss of market share or anything going on with national accounts that might explain that as well? Because I would have thought there's a lot of white space from a geographic expansion perspective. D. Patterson: No. I mean I think we are definitely holding our own. These storm events are all very, very different from 1 to the other and what areas they impact, where we have branches relative to the affected areas. So we feel -- we continue to feel very good about our position in the marketplace as it relates to national accounts. And it's just -- this is a weather influence business. And it's hard for us to call from quarter-to-quarter. We do see some activity. We have some large loss opportunities. So there's potential upside. But based on where our backlogs are, we do think the revenues will be flat, perhaps even down a bit in Q2. Operator: Our next question coming from the line of Stephen Sheldon with William Blair. Stephen Sheldon: Nice to see strong margin improvement once again in the residential segment with the labor efficiency gains we've called out. So curious if you see opportunities to leverage AI and other businesses and segments, similar to what you've done in potential around client accounting and call center operations. Jeremy Rakusin: Yes. Stephen, Jeremy. In our brands businesses, obviously, we've done it in residential, as you're aware, and that's part of the efficiencies. And the brands businesses, all of them are exploring tools to be more efficient on the front lines. I can point out 1 example of restoration where walk-throughs job estimating and scoping. AI tools are being used to speed the process, be more productive for those estimating teams and also helping enhance the accuracy, making sure nothing is missed and we captured in that scoping exercise. That would be 1 example to call out, but all of our brands are using AI in an early stages, incremental way as we speak. Stephen Sheldon: Got it. Makes sense. And then on roofing, I guess how are you thinking about the margin trajectory over the coming years? Those activity hopefully picks back up? Are there still a lot of levers to pull where there could be structural margin improvement over the medium term and a better backdrop with more pricing power and things like that? I guess what -- how are you thinking about the long term or the medium term margin trajectory there? Jeremy Rakusin: Yes. I think short to medium term, meaning 2026. We've called the margin compression right on the outset again largely due to competitive pressure. So once we get through that and once new construction, new development sort of resumes its normal course, we think the competitive pressures in reroof will abate, we'll get more pricing power. The other thing that's tempering our margins a little bit. We're pulling together 1 ERP financial reporting platform for all of our branches. That's a bit of investment that we knew about into '26 and '27. And once we get that and again a better environment, I think there are opportunities. There could be opportunities even on the cost synergy side around procurement, using our scale to garner materials at better prices and just as we scale up the platform. But I think that's too early to map out at this juncture. But directionally to your question, yes, there would be opportunities medium to long term. . Operator: Our next question coming from the line of Erin Kyle with CIBC. Erin Kyle: Jeremy, just a follow-up on the margin side on the residential side. Good to see that margin strength in the quarter. Could you maybe expand a bit more on the labor and cost efficiencies we achieved. It was my understanding that most of those cost savings are EBIT implemented in 2025. So is it the AI efficiencies that you're speaking to that's kind of contributing to the efficiency in the quarter? Or how do we think about that? Jeremy Rakusin: Yes. So a portion of the 50 basis points would have been a continuation of last year's initiatives around client County that's offshoring a lot of some of the financial statement and accounting functions, lower cost opportunities there as well as AI-driven portfolio management efficiencies where we can reduce head count in our call centers and enhanced portfolio manager productivity. So that's just a continuation. And then a little bit on the mix. Scott spoke about the exit from low-margin accounts at the beginning of the year around ancillary, commercial maintenance and pool reno services. Those are lower margins. So we get a little bit of a tick up. And then really, a little [indiscernible] we're a 20,000 associate division, very labor-intensive. So both the timing around contract wins and when we add head count to support that as well as just incremental pockets of efficiencies across our 100-plus offices. Those would be the sort of 3 or 4 reasons that aggregate to the 50 basis points. We'll see more of it in Q2 and then I believe, it will flatten out to second half of the year. . Erin Kyle: That's helpful color. And then maybe just on the M&A side. If I go back to M&A spending and looking forward for the rest of the year here, you touched on the tuck-in acquisitions of franchise operations that was announced a few weeks ago. Just wondering, maybe more broadly, what you're seeing in terms of the broader market valuations remain elevated and what the strategy would look like and keep that. If deals do remain elevated, do you expect to do more of those franchise operation, acquisitions? D. Patterson: I think this year will play out similar to last year where we allocated about $100 million for acquisitions. Multiples do remain high across all the platforms. And the market, it's still active, but it's still slower than we've seen in previous years. I think many sellers are waiting for more stability in the [indiscernible]. Certainly, in roofing and restoration, we've seen deals pull back. Results are generally down. So sellers are waiting until there's a rebound. But we do have prospects in the pipeline across most of our segments and believe we will close incremental tuck-unders over the next 3 quarters, not -- probably not incremental franchise acquisitions because we're just not aggressively pursuing those. Those -- I mean, we obviously know all our franchisee owners and we're taking that 1 step at a time as a transition makes sense for those owners and families. Operator: Our next question coming from the line of Tim James with TD Cowen. Tim James: First question, just returning to the residential segment. You mentioned some headwinds there in property management related to pool construction and some commercial maintenance, I think it was. I was wondering if you could elaborate on what the drivers of that are or what you think they may be? And kind of how sustainable that you expect that pressure to be as you go through the balance of the year? D. Patterson: Right. We've been in the pool management, renovation construction business for many, many years. And the renovation construction side of it is facing the same headwinds we're facing in roofing in many of our businesses just with the reluctance to allocate CapEx to major projects and the deferral. We are entering seasonal period, and we'll see a resumption of that activity, probably not at the same level as prior year. So it will continue to be a bit of a drag on our organic growth. And then the we referenced the other ancillary service, which is the provision of janitorial front desk personnel to the multifamily market, primarily in the Northeast, and there were a few contracts and with -- they tend to be REITs and owners of several buildings. And often you -- when you win or lose a contract, it can be for a number of buildings. And we just made a decision on price to move away from some contracts, which will continue to be a drag of a -- modest drag. But we feel very good about where we are with our core management business, solid quarter and end of '25 in terms of renewals, retention and wins, and expect that it will -- the core business will hold our growth in this division at mid-single digit, and we expect to see incremental sequential improvement through the year. Tim James: Okay. That's super helpful. Just turning to the home services and the promotional activity that you kind of kicked up in the first quarter there. It sounds like that's due to sort of the macro environment, the overall demand environment. I'm just trying to understand when you step up promotional activity in an environment that's impacting all your competitors, is the idea here that your competitors are getting more aggressive on pricing and therefore, you're trying to offset some of that and sort of get the brand back in front of them? Or I'm just trying to understand, I know you've had experience with this in the past, so maybe it's more a matter of refreshing on kind of the success that, that drove and how it works. D. Patterson: Yes. Certainly, there's some of what you suggest. The key -- the real key for us is try to maintain momentum and take share in a very tough environment, and then keep our teams busy. I mean, we invest a lot in training our people. And with the lack of clarity we have today, we don't want to move quickly to adjust that unless we have more clarity about the market that we're dealing with. And as I said in my prepared comments, we do believe it could turn positive quickly. with some stability and clarity around the Middle East and inflation. So we're currently trying to ride out the storm, as I said. We've got our fingers on the dial around the marketing spend and the cost structure. And if we -- Jeremy mentioned it in his prepared comments, if we do see [indiscernible] that this is a prolonged downturn, we will adjust quickly. Tim James: Okay. The last question, just turning back, and you've touched on the kind of the M&A environment. But I just wanted to kind of focus in on 1 particular aspect here. And I'm wondering if you're seeing any evidence or hearing of any evidence that kind of the recent challenges related to funding for private equity, if that's had any impact on their approach to M&A in the markets, in the industries where you're looking in terms of their activity levels, their pricing behavior? Just if you're seeing any sort of knock-on effect from that at all? D. Patterson: The 1 thing I would say that while it appears that the multiples are not trending up or downward they remain very high. But the number of bidders for opportunities is probably lower right now. As you suggest, some funds and buyers have pulled back. So there aren't as many people at the table but the valuations appear to be holding. The other thing I would say is that for the first time, we're seeing and hearing about distressed platforms, particularly in the roofing space where the bank is getting involved either through their special loans group or in 1 instance even taking control. Operator: Our next question coming from the line of Himanshu Gupta with Scotiabank. Himanshu Gupta: So first on the restoration business. It looks like organic growth is likely to be flat in the first half of the year. What are your expectations for full year 2026. I think previously, we got an impression that it could be high single-digit growth business for the year. D. Patterson: Jeremy, why don't I let pass that to you. Jeremy Rakusin: Yes. I mean, Himanshu, our expectation is mid to high historically, we've looked at it since we've owned the commercial restoration business, and we've averaged about 8% organic growth. But it's not a business that goes in a straight line. Scott spoke about the weather-driven events where we're positioned, where our branches are. So a quarter-to-quarter fluctuation is 1 thing that people should realize this business can be a little more -- have greater fluctuations in terms of top line and bottom line from quarter-to-quarter. And also, we exited we exited '25 on a very mild weather year. So the backlog that Scott mentioned, entering 2026 we're quite low. We did get a shot in the arm from winter storm [indiscernible], but it was a small event. So it's still an early part of the year, the backlogs from last year, again lower due to mild weather. And we just think that the randomness of weather is 1 aspect. But on average, we do expect weather events to resume their normal level of activity, and we've captured share over the years. So that's why we feel confident in doing better in the half of the year and for the year than we do in the front half of the year being flat. Himanshu Gupta: Got it. through the color Okay. And then now moving on to roofing segment, and I know a bit of discussion already has happened so far. Can you speak about the roofing backlog? I mean in terms of quality of the backlog or directionally, how is it trending? D. Patterson: Yes. It's down modestly from a year ago, really due to the shift from having some new construction of backlog down to primarily reroof. And -- but it's stable the last few quarters and starting to build. Our branches are bidding work and generally active and winning. And as I said, we're feeling optimistic that we just need to battle through this period of uncertainty because the reroof market, the fundamental demand drivers are there. And we feel like we're in a great position to capitalize on it. Himanshu Gupta: Got it. And is the new roofing mostly tied to industrial warehouses, new supply, construction cycle? Is it a thought to add exposure to data center here, I mean, given that you're seeing a fair amount of construction? D. Patterson: I mean the new construction outside of data centers, office, retail, industrial, those markets are all weak if you look across North America, there are pockets of activity. But generally, those areas are weak. Data centers is -- it's a big driver of the new construction market. Himanshu Gupta: Yes, fair enough. And I assume you don't have much exposure to the data center within the roofing segment? D. Patterson: Not on the roofing side, no, we don't, Himanshu. Himanshu Gupta: Yes. And there is no thought to add exposure in that segment anytime soon? D. Patterson: Well, it's not so easy to add exposure. The operations that comprise Roofing Corp of America, have not historically participated in data centers. And part of the reason is that the focus has been reroof and repair and maintenance. That's our strategic focus long term. So I mean we will be opportunistic, but it's not something we're aggressively pursuing, no. Himanshu Gupta: And my last question is on FSR on the residential side. I mean, do you have visibility in terms of new contract wins or losses in the next 3 months or 6 months? Any color there? D. Patterson: Yes. We have visibility in that business, absolutely. And as I said in my comments, I believe, will be -- show growth at similar or up in Q2 and for the balance of the year. Operator: Next question in queue coming from the line of Daryl Young with Stifel. Daryl Young: Just 1 quick follow-up. You mentioned some distress in roofing. What would your appetite be to take on a more complicated acquisition that maybe has some distress? And then secondly, has your appetite in roofing to deploy capital into roofing changed at all just given the market dynamics you've seen over the last 12 months? Or is it still a core vertical for the long term? D. Patterson: It's very much a core vertical for the long term. We're focused on an active in terms of looking at opportunities. And certainly, most of these businesses were familiar with and have a have a view on in terms of their position in their local markets. So we're keeping a finger on the pulse of all the activity in the roofing space and absolutely interested in opportunities as they present. Operator: Our next question coming from the line of Stephen MacLeod with BMO Capital Markets. Stephen MacLeod: Just 1 follow-up question. I just wanted to ask about -- I just want to confirm on the FSR margin side. Because I believe you talked about inorganic sales growth being up and sequentially improving through the year. So just on the margin side, would you expect a similar trend on margins. Just noting that last year, you had very strong kind of margins in the 11% range in Q2 and Q3. Were there -- were those anomalies to the high side? Jeremy Rakusin: Well, I said in my prepared comments and in some of the Q&A, we expect the trend in Q2 to resemble Q1. So we're up 50 basis points, something of that order [indiscernible] wouldn't assume anything more than that. And then I think we've flattened out in the back half of the year of Q3 and Q4 on a year-over-year basis. . Operator: And I'm showing no further questions in the queue at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.