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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.
Operator: Greetings, and welcome to the Reliance Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kim Orlando with Investor Relations. Please go ahead. Kimberly Orlando: Thank you, operator. Good morning, and thanks to all of you for joining our conference call to discuss Reliance's First Quarter 2026 Financial Results. I am joined by Karla Lewis, President and Chief Executive Officer; Steve Koch, Executive Vice President and Chief Operating Officer; and Arthur Ajemyan, Senior Vice President and Chief Financial Officer. A recording of this call will be posted on the Investors section of our website at investor.reliance.com. Please read the forward-looking statement disclosures included in our earnings release issued yesterday and note that it applies to all statements made during this teleconference. The reconciliations of the adjusted numbers are included in the non-GAAP reconciliation part of our earnings release. I will now turn the call over to Karla Lewis, President and CEO of Reliance. Karla Lewis: Good morning, everyone, and thank you for joining us to discuss our first quarter 2026 results. Reliance is off to a strong start to 2026, capitalizing on favorable market fundamentals with first quarter volumes, pricing and earnings exceeding our expectations. Strong pricing and demand momentum continued to build throughout the quarter across our diversified product and end market portfolio. Our first quarter tons sold were a record and were up both sequentially and year-over-year. A result that's especially notable given the unusually strong tariff-driven demand pull forward in the prior year period. For the 13th consecutive quarter, we significantly outperformed broader industry shipments. Average selling price per ton sold also rose over the prior quarter, surpassing our expectations. Strong execution converted a 15% increase in sales, driven by higher shipments and prices into significant operating leverage driving over 30% year-over-year growth in our non-GAAP pretax income and nearly 37% year-over-year growth in non-GAAP earnings per share to $5.16. As previously announced, we also secured 2 significant government contracts in the first quarter to supply the Department of Homeland Security border wall and Joint Strike Fighter projects through our AMI Metals wholly owned subsidiary. We were excited to win these contracts which collectively represent up to approximately $3 billion in revenue and further reinforce Reliance's role as a trusted partner on critical U.S. infrastructure and defense programs. These wins illustrate our ability to support large and complex projects by leveraging the scale, logistics capabilities, processing expertise, deep supply chain relationships and existing operating infrastructure of the Reliance family of companies. Our diversified platform allows us to concurrently meet the needs of large program partners as well as small order quick-turn customers. As a reminder, our first quarter results did not include any contributions from the border wall contract. Our disciplined capital deployment and strong cash profile give us the flexibility to execute on both our growth and stockholder return activities concurrently. In the first quarter, we generated strong operating cash flow even with a typical seasonal build in working capital. Our full year 2026 outlook for capital expenditures is approximately $300 million with a little less than half directed towards strategic growth investments that enhance our processing capabilities, strengthen our ability to serve customers, expand our footprint and grow volumes in attractive markets. In the first quarter, we increased our dividend rate by 4% to an annualized $5 per share and repurchased $234 million of our shares. Our strong balance sheet and liquidity position remain key competitive advantages, affording us the ability to invest in our business, pursue strategic acquisitions and return capital to our stockholders while maintaining our disciplined approach to capital deployment. In summary, we are encouraged by rising customer optimism and activity across our broad end markets with continued momentum in the infrastructure, data center, energy and defense sectors. As we enter the second quarter, extending lead times at our mill suppliers also bode well for a continued strong pricing environment or access to metal becomes a strategic advantage. Reliance's unique scale and capabilities, along with our domestic mill relationships and exceptional teams position us well to further capitalize on the opportunities ahead in 2026. I'll now turn the call over to our COO, Steve Koch. Stephen Koch: Thanks, Karla, and good morning, everyone. Our first quarter performance reflects strong execution across our operations and a continued commitment to safety and customer service. I want to thank our teams for their hard work and discipline, which continue to differentiate Reliance in the marketplace. Turning to our demand and pricing trends. Record tons sold increased 9.4% from the fourth quarter of 2025, exceeding our expectations of up 5% to 7%. Year-over-year, tons sold increased 2.7%, significantly outperforming the service center industry, which reported a decline of 5.1% over the same period. Our nearly 8 percentage point outperformance in the first quarter and sustained outperformance over 13 consecutive quarters reflects the advantages of our operational scale, commercial diversification and unmatched processing capabilities. Carbon volumes remained our primary growth driver with particular strength in nonresidential construction and manufacturing applications. Aluminum and stainless product volumes also contributed to year-over-year volume growth at higher per ton profitability levels. Our first quarter average selling price increased 5.3% from the fourth quarter of 2025, exceeding our expectation of up 3% to 5%. Carbon steel, aluminum and stainless steel product pricing all trended upward amid tight supply, extending lead times and improving demand conditions. As Arthur will discuss in our outlook, we believe that these market dynamics will continue to support strong pricing in the second quarter of 2026, elevating a strategic advantage we hold in accessing metal from our domestic mill partners. Turning to our end markets. Nonresidential construction represented roughly 1/3 of our first quarter sales, primarily from carbon steel tubing, plate and structural products. First quarter shipments remained strong supported by Data Center and related energy infrastructure projects continuing at record levels, along with overall strong demand in heavy civil and public infrastructure work. Our strong position in these markets outweighed lower activity in certain private nonresidential construction markets. Our nonresidential construction market participation is further strengthened by our involvement in the Department of Homeland Security border wall project with activity commencing this month. General manufacturing also represented about 1/3 of our first quarter sales. Our participation in this market is highly diversified across products, industries and geographies. Shipments grew year-over-year driven by strength in industrial machinery, including data center equipment, shipbuilding programs, military programs, consumer products and construction machinery. We are also capturing rising nuclear-related demand driven by emerging small modular reactor programs and data center energy requirements. Aerospace products accounted for approximately 10% of our first quarter sales. Commercial aerospace demand remains subdued as elevated inventories persisted across the supply chain though we expect conditions to gradually improve in 2026 as OEMs work through record backlogs and increased build rates. Defense and space-related aerospace programs remained robust during the quarter. Automotive, which we primarily serve through our toll processing operations, represented 4% of our first quarter sales. As a reminder, our toll processing volumes are excluded from our tons sold. Underlying demand has remained stable supported by our recent capacity investments and our ability to quickly adapt to the variable demand of the automotive market. Lastly, we are seeing encouraging improvement in demand in the semiconductor market with momentum building in 2026. In summary, Reliance continues to be defined by our people, our strong domestic mill relationships and our focus on delivering unmatched customer service. The strategic investments we've made across our footprint are generating tangible returns and our disciplined commercial and operational approach continue to drive the profitability that differentiates us. I will now turn the call over to our CFO, Arthur, to review our financial results and outlook. Arthur Ajemyan: Thanks, Steve, and thanks, everyone, for joining today's call. We delivered a strong first quarter with sales up 15% year-over-year on stronger-than-anticipated shipments and pricing. Our gross profit of $1.2 billion was up 23% compared to the fourth quarter of 2025 and up 13% compared to the first quarter of 2025. On a FIFO basis, which is how we evaluate our ongoing performance, non-GAAP FIFO gross profit margin expanded to 30.1% compared to 28.5% in the fourth quarter of 2025, and was only slightly below 30.4% in the prior year quarter. Our pricing discipline enabled us to pass through higher mill pricing on most products in the first quarter and expand margins. Higher-than-anticipated material costs resulted in the first quarter LIFO expense of $37.5 million, above our $25 million estimate prompting us to raise our full year LIFO outlook to $150 million from the prior $100 million annual estimate. Accordingly, we expect LIFO expense of $37.5 million in the second quarter of 2026. I'd like to also briefly address the impact of incremental Section 232 tariffs on our gross profit margins and profitability. The 50% Section 232 tariffs have had the most impact on aluminum gross profit margin as pricing for many common alloy aluminum products increased significantly without a corresponding significant increase in demand. Despite the moderate negative impact on the gross profit margin, our aluminum gross profit dollars are up about 18% compared to the first quarter of 2025. Overall, the current pricing environment is resulting in higher gross profit dollars across our product portfolio and contributing to improved profitability despite variation in margin performance for certain products. Non-GAAP SG&A expense increased 6% compared to the first quarter of 2025, driven by higher incentive compensation from improved profitability, inflationary impacts on compensation and related benefits and higher variable warehousing and delivery costs associated with our increased tons sold. On a per ton basis, non-GAAP SG&A expense increased 3% due primarily to higher incentive compensation. Our growth in shipments from continued market share gains and improved gross profit dollars drove improved operating leverage and resulted in a 33% year-over-year increase in non-GAAP pretax income to $354 million with an 8.8% pretax income margin, which was up 120 basis points. Our non-GAAP first quarter earnings per diluted share grew nearly 37% year-over-year to $5.16. For reference purposes, LIFO expense per share amounted to $0.54 for the quarter compared to the $0.36 assumption in our guidance and $0.35 in the prior year quarter, stemming from higher-than-anticipated carbon steel and aluminum product cost increases. Moving on to our balance sheet and cash flow. Cash flow from operations in the first quarter was approximately $151 million, reflecting typical seasonal working capital build from increased shipment activity as well as the impact of higher metals pricing. Our inventory turn rate based on tons improved to approximately 5x compared to 4.9x a year ago, while accounts receivable DSO of 42 days was consistent with the prior year. During the quarter, we funded $64 million of capital expenditures, paid $67 million in dividends and repurchased $234 million of our common stock at an average price of $299 per share. We have approximately $529 million remaining available under our current share repurchase program. As of March 31, our total debt was $1.7 billion. Our leverage position remains very strong with a net debt-to-EBITDA ratio of 1, giving us substantial liquidity and flexibility to continue executing on our capital allocation priorities. Looking ahead, we expect both demand and pricing to remain healthy in the second quarter of 2026, generally in line with Q1, subject to ongoing risks from domestic international trade policy and the conflict in the Middle East. We anticipate second quarter 2026 non-GAAP earnings per diluted share in the range of $5.15 to $5.35, up 16% to 21% year-over-year, including an estimated $37.5 million of LIFO expense or about $0.54 per diluted share. Please refer to our first quarter earnings release for further details on our Q2 outlook as well as anticipated contributions from the border wall contract. In closing, we're very pleased with our first quarter performance, our solid volume growth, continued market share gains and disciplined pricing supported improved operating leverage and stronger earnings. This concludes our prepared remarks. Thank you again for your time and participation. We'll now open the call for your questions. Operator: [Operator Instructions] And our first question will come from Martin Englert with Seaport Research Partners. Martin Englert: Questions on the guidance here. And just looking at the current quarter FIFO gross profit margins improved to about 30% from the 28.5% last quarter. Even accounting for the new DHS contract in the mix for 2Q, given the improving broader price backdrop as well as volumes, do you think you're being conservative with the implicit 2Q FIFO gross margins in guidance? Or are there other factors to be considering here like a lagging catch-up in margins and the inflationary price factors with aluminum here? Karla Lewis: Martin, so on the guide for Q2 around gross profit margin, which we don't explicitly provide guidance on. Q1 was a good strong pricing environment with a lot of products having price increases, which gives us an opportunity to drive our margins up a bit for a temporary period. We expect some continued price improvement in Q2, but not to the level of Q1. So we will start to see the higher cost metal hit the inventory and kind of normalize a bit towards -- we believe, towards the end of the quarter. So probably not stronger, we have less upside than in Q1 from a price increase dynamic. And then on the border wall, the margins -- the gross profit margins will bring our consolidated number down a bit just based on the product mix what we're selling and the services we're providing. But as we mentioned, extremely low operating cost on the volume there, which will help us leverage our expense line and give us very strong earnings from the border wall project. Martin Englert: I guess looking another step ahead here and coming back to your comment on maybe by the end of the quarter, so not as much of a price increase or momentum quarter-on-quarter, but maybe things begin to normalize relative to the inventory costs coming through. So looking further ahead, then does that offer some opportunity for some partial normalization in FIFO gross margins understanding that you'll have this contract in the mix, and that will be something that's dilutive, but not added it to the bottom line? Karla Lewis: Yes, I think that's right, Martin. It's -- that's the way the dynamics typically work pricing drives a lot of the margin upside and then to the extent it normalizes or comes down, but you also need to underlying demand there as well to support that, which we, at this time, feel really good about 2026 across demand across most of the products and end markets we're selling into, which provides a good backdrop from a pricing standpoint. So it was good strong price increases in Q1. We expect prices to remain at good levels. Just again, maybe not increasing at the same pace. Martin Englert: Okay. So some transitory issues and I shouldn't say issues, but trends and items sort of normalizing some of the pricing moving through the distribution channel as it relates to the cost pushing through, not too different than what we saw in recent quarters here, given the inflationary impact of 232 tariffs, yes. Karla Lewis: Correct. Yes. Martin Englert: Okay. If I could one more. I was just curious on your thoughts for -- it seems like areas of the defense are strong semiconductor improving, which I think it's been a while since we've seen any positive news on that front. And I think I've also heard like within oil and gas, maybe if you can just touch on the margin profile of these product lines that serve these end markets and potential mix implications as we're moving through 2026. Karla Lewis: Yes. We don't really talk about how they affect gross profit margin by product, Martin. And it does vary, but it also depends how much value-add processing we're doing. So -- you're right, Defense continues to remain strong across a lot of the different products we sell. Semi, it's a small part of the business, but it has been lagging. We -- not at a gross profit margin line, but we have talked about some of our niche semiconductor business being very high-value types of products, and that has been down, but we're happy to see some improvement beginning. But as far as at a consolidated level, nothing really to comment on as far as change in product mix or financial guidance. Arthur Ajemyan: And Martin, I would add that from an end market perspective, we saw the ISM manufacturing index for 3 consecutive months, stay above 50%, and we saw that translate into some increased activity in the first quarter. So -- and we noted that in our release that the manufacturing end market, we saw increased year-over-year tons. So -- we're looking at that as a good tailwind, and we have a lot of different products with value-added processing that go into that end market, which, as we all know, hasn't been doing really all that great for the past 3 years. So there's some potential tailwinds there. Martin Englert: Yes. It's nice to see some nascent signs of recovery with activity amongst the end users there. Congratulations on the results and the contract wins there. Operator: And our next question comes from Bennett Moore with JPMorgan. Bennett Moore: Karla, Steve, Arthur, congrats on the strong quarter. I guess I wanted to get a better idea of how we should think about the cadence of these DHS volumes ramping throughout the year? And is the pricing structured such that if broader market pricing were to fall that you could actually offer down protection to gross margins in such a scenario? Karla Lewis: Bennett, as far as the cadence on the border wall project, as we mentioned, we began shipping this month in April. And so we're still in a bit of start-up ramp-up phase. So we included in our Q2 guide. Our current estimate of volume activity in the quarter. We do expect that to increase as we move into Q3 and beyond as the program really gets up and running. But there's not a committed shipment schedule. So it could vary from quarter-to-quarter, but we do anticipate higher activity as we move into Q3 than what we projected for Q2. And as far as the pricing, we can't get into the specifics on the pricing, but we do have the contract volume up to certain dollar amounts over the period through 2027. Bennett Moore: Understood. Coming to aluminum, I mean, we've certainly seen another spike in pricing. I guess I'm just wondering if you're still able to cover your costs at this stage is 50 bps still the right way to think about the margin impact and if possible, could you share what the -- what share of aluminum was in relation to the LIFO expense past quarter? Karla Lewis: Yes. So Bennett, you're correct. I think the dynamics in aluminum, in particular, continue where -- we -- unlike this time last year, our companies now have been able to push through the 50% tariff to our customers, but we're not necessarily getting a full margin on that 50% tariff cost, which puts a little pressure on the overall gross profit margin from our aluminum products compared to periods where we did not have a 50% tariff that we had to cover and try to push to our customers. And then you're right, it also gives us kind of a double hit on LIFO because LIFO in our view, was not intended for periods with 50% tariffs, and so we have to take a LIFO charge on top of the tariff costs that we need to push through, so that does -- right now, while these 50% tariffs are in place and with the market where it is, it is a bit of a drag. We think that's transitory and while we have these tariffs in place. However, the aluminum prices are significantly higher. So even though we're not getting the percentage margin on that, we are getting significantly higher gross profit dollars on our sales of aluminum that we then have to help cover our SG&A and other costs and contribute at a higher level to earnings dollars. Arthur Ajemyan: Yes, I was just going to say that we're on that moment, I'm despite the margin distortion that Karla mentioned, gross profit dollars are up year-over-year to the tune of almost 17%, 18%. So it shows that profitability has improved significantly on those sales is just to Karla's point, when you introduce a 50% tariff that creates some noise. And the LIFO noise is also substantial from aluminum last year, nearly half of our LIFO expense was related to aluminum this year. It's tracking at a little less than half, maybe over 1/3. So -- I mean, let's just say, prices level off and say where they are. Come next year, you're not going to have that headwind from LIFO on aluminum that's contributing to this temporary margin compression dynamics. So net-net, these tariffs have contributed to higher profitability across our product portfolio including aluminum. Karla Lewis: And on the LIFO side, just as a reminder, when we book expense, it increases our LIFO reserve that is then available to come back into income in future periods when prices come down. Operator: [Operator Instructions] We'll go next to Samuel McKinney with KeyBanc Capital Markets. Samuel McKinney: And we talked about the rapid rise in aluminum pricing being a drag on gross margin, just given it's been tough to get ahead of that and I know tariffs are still impacting that market. But am I wrong in my thinking that the first quarter sequential gross margin expansion does seem to reflect a better job of navigating that market versus the back half of last year? Karla Lewis: Yes. I think that's fair. And again, we want to be clear it's a drag on the gross profit margin percent but not on the gross profit dollars. But yes, you're thinking about that correctly that I think incrementally, each quarter coming out of Q2 last year when the tariffs hit, we've made progress against that. As we talked about, overall demand improving a bit, too, including for some of the aluminum products. So that helps us on passing through cost if demand is stronger. So yes, so we would agree with the way you're thinking about that, Sam. Samuel McKinney: Okay. And then on the border wall contract, you're expecting it to be a solid earnings contributor despite the relatively lower selling price versus the rest of your business. But when you talk about the operating network, if you could just discuss with us some of the operating levers you think you can pull as these tons grow over the course of this year and probably into next? Karla Lewis: Yes. So price is lower on those products. But with the services that we're providing, which a lot of that on these -- on the tons for the border wall, it's a lot of storage handling. We are doing some value-added processing, but our operating costs are pretty low based on the volume that the kind of SG&A percent is lower than it is in the rest of our business. So at these volumes, low cost structure, it's a good driver to earnings plus one of the reasons we believe that Reliance was awarded this contract. And by the way, back in 2008, our AMI business secured smaller than this, but a pretty decent-sized border wall. They called us the Sense contract, and they performed very well under that. This is much larger in scale with the tonnage and a short time period to be able to provide these services. And we need multiple locations to store and provide the logistics under the contract to really meet their requirements. And with the Reliance network of companies, our AMI company is working with other Reliance companies utilizing some of their property, which also keeps our costs lower. We didn't have to go out and secure some of the new equipment or property to be able to service the project. Stephen Koch: Yes. And I'd like to add to that, a majority of the products being shipped into our Apollo structural sections, but there's also a lot of sheet that we're utilizing one of our processing plants in Texas -- So like Karla mentioned, we have planned to set up all along the border. So we're going to be shipping products out of Texas and out of California. We really appreciate all of the support we've received from our domestic mill suppliers because as everybody knows, that supply is a little bit tight right now. Hot-rolled coil is on limited availability, and we're able to get as much as we need to meet our customers' demands. Operator: We'll go next to Nick Cash with Goldman Sachs. Nicklaus Cash: Just a quick one on the current inorganic growth pipeline. Again, you have been a little bit since you guys have done pretty much meaningful acquisition, just wondering how the pipeline currently looks and how you're thinking of capital allocation between organic and inorganic growth going forward? Karla Lewis: Nick, from a kind of acquisition pipeline, I'd say it remains pretty consistent with what we've talked about the last few quarters. There are opportunities out there. And we see a kind of steady stream as we have for the last year or so. Some companies we like. So we're always looking at what's out there and evaluating how they might fit into Reliance, then, of course, we have to see if we can agree upon valuation with the sellers. And where we've had a consistent appetite to acquire good companies. We just -- it's somewhat dependent on who's ready to sell their companies because a lot of the companies in our space are privately owned family companies. And so we wait for them to be ready to sell. Like I said, then there's valuation. So we've no change in our appetite for that, but we've also been in a strong financial position for the last few years where we haven't had to, to choose between our capital allocation priorities. We've been able to execute on the acquisitions we like while at the same time, continuing to grow organically and providing strong returns to our shareholders through our consistently increasing dividend as well as, I think, a reasonable level of activity on our share repurchases, and there's no change to that. Nicklaus Cash: Appreciate that. And if I could just one more. Going out data center and energy infrastructure. Just real quick, what percentage of non-resi tonnage is data center-related how has that mix shifted year-over-year? And then within energy infrastructure, I guess, how much solar exposure do you guys have? Karla Lewis: Yes. So Nick, unfortunately, I mean, we wish we could give you that number, but with the customers that we sell to because we're not typically selling direct into the OEM or the project. We're selling to fabricators and contractors with multiple projects. Well, certainly, we often know what project is going into. We don't have a good way to quantify. But I think we've been seeing increasing activity for data center. And Steve, I don't know if you have anything to add on that or on solar? Stephen Koch: Yes. So Nick, unfortunately, we don't have a lot of direct exposure to the solar market, but our suppliers, our mill suppliers have a lot of the -- they're getting it no direct, which is consuming a lot of tube and hot-rolled coil, which is keeping the mill is already busy and keeping prices at a really good level for the market. Operator: We take a follow-up question from Bennett Moore with JPMorgan. Bennett Moore: I wanted to come back to the semiconductor markets real quick. And I'm wondering -- what sort of opportunities do you see to gain share, I guess, from foreign ship makers? And if you could remind us what that qualification process looks like and the timing to do so? Karla Lewis: Yes. So -- we -- I think we've talked different times before on the call, Bennett. So from our semiconductor exposure for the most part, while there are a lot of ancillary things around it that we're selling into the equipment, semiconductor chip equipment manufacturers. And that's where we've seen some positive activity. The last quarter or two, we've seen that improving. And there have been some shifts by those customers to foreign locations. We do have a location in Singapore that helps support some of our customers over there in that market as they've shifted a little more there. And then our other kind of specialty semiconductor company. They do sell to the chip makers, equipment makers, they have locations in the U.S., South Korea and China. And -- but they also -- a big portion of their business also sells into the building kind of the interior plumbing of the chip facilities as they're being built. And that's where we have seen pullbacks by a lot of those customers or just delays in building the chip plans, especially here in the U.S. But that's a good market for us. And that company of ours has had -- there's a lot of interest. They've been working on some capabilities to sell more into the data center market. And we're expecting to start to see some increased activity for that company around the data center market in the near term. Stephen Koch: And as far as qualifications go, a lot of our customers who had moved over to Asia and they're moving back because of the onshoring coming back. We're already certified within and already picking up some business. Bennett Moore: And I guess I'll squeeze one more, if I can. I wanted to ask about the second contract, the defense contract, I think, for Lockheed programs, upsized renewal here, but are you able to help contextualize what the margin profile looks like for this contract relative to the overall business given the H1 is a little bit below? Karla Lewis: So the -- we already have those programs -- those existing programs under contract with Lockheed Martin. And -- so there's no significant change in impact of the new contract when it begins in 2027. We do expect about 10% higher volumes -- it's a larger contract with multiple programs, including the Joint Strike Fighter. So it will add but should not be a noticeable shift on any margin profile. Operator: And we have a follow-up from Martin Englert with Seaport Research Partners. Martin Englert: For the DHS contract, any more you can share with the volumes associated with Phase 1 and the incremental volumes -- the rest of the contract, I guess, completes? Karla Lewis: Yes. So Martin, we have not disclosed tonnage under that. We did disclose dollar amounts, which were Phase 1 and Phase 2, the total is $2.2 billion. Phase 1 is $1.4 billion, which runs through... Arthur Ajemyan: Mid-2027. Karla Lewis: Yes, I think at the end of Q2, 2027. Operator: And this now concludes our question-and-answer session. I would like to turn the floor back over to Karla Lewis for closing comments. Karla Lewis: Thank you, and thanks, everyone, for joining us today and for your continued support of Reliance. In summary, just a reminder of Reliance's unique scale, diverse portfolio, financial strength, domestic mill relationships and expanding service capabilities that enable us to support our customers reliably and to capitalize on the significant opportunities ahead in 2026. And I'd really like to thank our Reliance family for all that they did for a very strong first quarter we look forward to them doing throughout the rest of 2026 and doing it safely. So again, appreciate all of our employees throughout Reliance. And before we wrap up, I also want to note that we'll be in Boston next month for KeyBanks, Industrials and Basic Materials Conference. And in June, we'll be at the Wells Fargo Industrials Conference in Chicago, and we look forward to connecting with many of you there. Thanks again, everyone. Goodbye. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to the First Quarter Conference Call for Graco Inc. If you wish to access the replay for this call, you may do so by visiting the company's website at www.graco.com. Graco has additional information available in a PowerPoint slide presentation, which is available as part of the webcast player. [Operator Instructions] During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute for looking statements for the purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. Actual results may differ materially from those indicated as a result of various risk factors, including those identified in Item 1A of the company's 2025 annual report on Form 10-K and in Item 1A of the company's most recent quarterly report on Form 10-Q. These reports are available on the company's website at www.graco.com, and the SEC's website at www.sec.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The company undertakes no obligation to update these statements in light of new information or future events. I will now turn the conference over to Chris Knutson, Vice President, Controller and Chief Accounting Officer. Christopher Knutson: Good morning, everyone, and thank you for joining the call. I'm here today with Mark Sheahan, David Lowe and Sanjiv Gupta. I'll begin with a brief overview of our first quarter results and then turn the call over to Mark for additional commentary. Yesterday, Graco reported first quarter sales of $540 million, up 2% from the same quarter last year. Acquisitions contributed 5% growth and currency translation added 3% growth, partially offset by a 6% decline in organic sales. Reported net earnings were $119 million down 5% or $0.70 per diluted share. Excluding excess tax benefits from stock option exercises, adjusted non-GAAP net earnings were $0.66 per diluted share, down 6%. Gross margin decreased 60 basis points versus the first quarter last year. The benefit from our pricing actions helped offset higher product costs from lower factory volume, lower margin rates from acquired operations and incremental tariffs. Tariffs increased product costs by $7 million in the quarter. Operating expenses increased $9 million or 7% in the quarter. Excluding $5 million in incremental expenses from acquired operations and the effects of currency translation expenses were flat. In the quarter, the operating margin rate in both our contractor and expansion market segments was 24%, consistent with the same period last year. Industrial segment operating margin was 32%, down from 34% in the prior year quarter. The decline is due primarily to unfavorable volume and tariffs that were not offset by price realization. Total company knee operating earnings decreased $6 million or 4% in the quarter. Operating earnings as a percentage of sales were 26% compared to 27% in the same period last year. The adjusted effective tax rate was 20%, in line with our expected full year adjusted tax rate of 20% to 21%. Cash provided by operations totaled $120 million for the year, down $5 million or 4%. Cash provided by operations as a percentage of adjusted net earnings was 107% for the quarter. Year-to-date, uses of cash include share repurchases of 189,000 shares totaling $16 million, dividends of $49 million and capital expenditures of $12 million. These uses were partially offset by share issuances of $40 million. A few comments as we look forward to the rest of the year. Based on current exchange rates and assuming similar volume, product mix and business mix as in 2025, currency is expected to have a 1% favorable impact on net sales and a 2% favorable impact on net earnings for the full year 2026. For the full year, we continue to expect unallocated corporate expenses of $40 million to $43 million and capital expenditures of $90 million to $100 million, including approximately $50 million for facility expansion projects. 2027 will be a 53-week year with an extra week occurring in the fourth quarter. And finally, in the attached materials, we updated our outlook slide to highlight performance by segment and region, with the size of each color dot indicating its relative size versus the others. With that, I'll turn the call over to Mark for more details on our segment and regional performance. Mark Sheahan: Thank you, Chris. Good morning, everybody. Overall sales increased 2% in the quarter with acquisitions contributing 5% and foreign currency adding another 3%. That growth was partially offset by a 6% decline in organic revenue. Organic revenue started the year slower than expected, particularly in January. The business activity improved steadily as the quarter progressed, with bookings up 3% at actual currency rates, driving nearly a $26 million increase in backlog, primarily in our Industrial segment. If those orders have been converted to revenue at the end of the quarter, organic revenue at actual currency rates, would have increased 2% and total sales, including acquisitions, would have been up 7%. The Middle East region represents about $35 million of sales on a full year basis for Graco. To date, we've not seen any significant impact on demand or operations, though the environment remains uncertain. We are staying close to our customers and channel partners and are monitoring order patterns and logistics carefully. From an exposure standpoint, the Contractor segment will be the most impacted primarily related to our protective coating product application. Let me provide some additional color on our segments and regions. In the Contractor segment, sales increased 2% in the quarter, with acquisitions and currency translation each contributing 3%, partially offsetting a 4% decline in organic revenue. Within the segment, our form polyurea and protective coatings businesses continued to be bright spots, supported by strong global demand tied to infrastructure, border wall and data center projects. That said, construction demand remains softer than we would like, particularly in the Americas. Housing starts are expected to be relatively flat year-over-year with fewer new home sales and only modest improvement in existing home sales. Overall, the market has shown limited growth over the past 4 years, and we expect those conditions to persist this year. Turning to the Industrial segment. Sales increased 4% in the quarter, with acquisitions contributing 8% and currency translation adding another 4%. This growth was partially offset by an 8% decline in organic revenue. Despite the organic decline, bookings were up 5% at actual currency rates, driving a $23 million increase in backlog. If those orders have been converted to revenue within the quarter, organic revenue at actual currency rates would have increased 6%. Industrial Americas performed well delivering revenue growth despite lower project-based activity in our Powder group. Bookings in the region were up double digits, supported by broad-based strength across multiple end markets. EMEA and Asia Pacific were more heavily impacted by the timing of completion and acceptance of project-based activity, which drove the decline in the quarter. That said, both regions saw activity improve as the quarter progressed, with quoting levels moving higher. In our Expansion Markets segment, organic revenue declined 5% in the quarter, driven primarily by our semiconductor business, which was coming off an exceptionally strong prior year comparison. Semiconductor delivered its largest quarter of the year in 2025, growing 51%. Despite the tough comparison, semiconductor demand remained solid with first quarter bookings up at least 20% in each region. We're also seeing improvement in our environmental business. While the year started slowly, activity has picked up meaningfully with a strong start to the second quarter and bookings are trending positive year-to-date. Moving on to the outlook. Despite the slow start to the year, we're encouraged by demand trends across our broader end markets. We saw a meaningful pickup in both ordering and porting activity in our industrial and semiconductor businesses throughout the quarter. And based on current order rates, Strength in these areas should help offset continued softness in the Contractor segment. As a result, we're maintaining our 2026 revenue guidance of low single-digit organic growth on a constant currency basis and mid-single-digit growth, including contributions from acquisitions. Looking ahead, second half comparisons are more favorable, reflecting an easier contractor comparison in the third quarter and the expected timing of project activity in the industrial businesses towards the end of the year. Finally, I'd like to take a moment to welcome Sanjiv Gupta at Graco. Sanjiv comes from General Motors, where he spent more than 20 years in finance and operating roles across the globe, most recently as CFO of GM International. He brings deep experience across corporate finance, operations, manufacturing and supply chain and a strong track record of leading global teams. In addition, I want to recognize and thank David Lowe for his more than 30 years of dedicated service as he prepares for retirement. David's leadership deep financial expertise and steady guidance have played an important role in shaping our company and supporting our long-term success. On behalf of the entire organization, I want to thank David for his many contributions and wish him the best in his next chapter. In closing, I want to take a moment to recognize an important milestone for our company. On April 26, we will celebrate our centennial. This milestone reflects the strength of our people, the durability of our business model and the deep relationships we've built with customers and partners around the world. While we're proud of our history, this anniversary is really about the future, continuing to invest in innovation, supporting our customers and building on the foundation that has sustained the company for a century. That concludes the prepared remarks. Operator, we'll open it up for questions. Operator: [Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets. Deane Dray: Thank you. Good morning, everyone. Can I add my welcome to Sanjiv and to wish David all the best. Since we're in kind of an uncertain macro here, Mark, maybe you can just kind of take us through the major verticals and kind of what surprised you versus expectations? I know housing remains tough, but semiconductor looks like that's a positive side. And then just same thing on the geographies. And if you could elaborate a bit more on the Middle East exposure for contractor. Mark Sheahan: Yes. I guess I'd start at a high level and just say that our industrial bookings in the quarter were actually up mid-single digits, which was good. And unfortunately, we weren't able to convert that into revenue that you all saw. But in terms of how that mid-single-digit booking growth took place. It was really across multiple product categories, look at finishing process, our lubrication businesses, both ALE, automatic lubrication as well as our vehicle service business and a little bit of pressure in our sealant and adhesive business offset some of that. But overall, I was pretty happy with the growth in industrial in the quarter. . The powder business, again, was influenced mostly by some project activity on the bookings front that booked right at the end of the quarter that we just couldn't convert. Now those projects usually take time between booking and billing. And then the overall game of powder business, again, in aggregate was in line with our long-term expectation for the full year of kind of the low single-digit organic growth, constant currency. Obviously, the home center and the paint channel continue to be a little bit of a headwind for us. I wouldn't characterize them as down significantly, but they were down in the quarter. We did see nice growth in the areas that I mentioned in my script on the high-performance coatings and foam business that wasn't quite enough to offset all of the headwinds that we had in the traditional paint and home center channels. But overall, booking for the quarter was only down 1%, which is okay in an environment where we're still experiencing some pain. When it came to the environmental business, yes, the bookings and semiconductor were fantastic. We're starting to see a little bit of a pickup on our environmental business. And I would say that the HIP high-pressure business that's in there as well is also experiencing kind of growth within line of what we're expecting for the full year. Geographically, you've seen the numbers, but Europe is doing okay. Asia is somewhat influenced by the adhesive business that I referenced Previously, on the industrial side, we're off to a bit of a slower start, but the team is pretty optimistic that we'll be able to make that up as we finish out the next 3 quarters of the year. And North America has been okay here so far this year, where booking rates are up kind of in our low single digit -- low to mid-single-digit guide. So all in all, I wish we would have been able to convert more of the bookings into billings. It's only 13 weeks, and we do feel like we've got -- given the order momentum that we've got a good chance to be able to get to our low single-digit guide for the full year. Deane Dray: Great. And then just if you could follow up with any specifics around the Middle East exposure, you called out contractor. And then I'll give you my follow-up question. Just you said tariffs were a $7 million bad guy for the quarter. Can you talk about pricing? How much price action have you taken? And is this a potential year of a second price increase what's your crystal ball say? Mark Sheahan: Yes. So I'll handle the Middle East and give just a quick thing on the tariffs, but I welcome my colleagues here to chime in on those as well. Middle East has not been a problem for us so far. As I said, we're kind of monitoring the situation. We don't have any hung up orders or anything like that, that we're really that concerned about. Maybe the bigger concern would be with respect to if this blockade extends for a longer period of time, it will create some pressure with respect to the materials that we move. So you think about paints, adhesives, those are materials that require quite a bit of petroleum-based products. And to the extent that there is pressure there and those products increase in cost to consumers, et cetera, that may eventually make its way into our business right now, we're not that worried about it. My personal belief is that things will get cleaned up and we'll be able to move forward. But that's probably the bigger unknown risk for Graco and every other company that's out there moving those kinds of materials, at least here in the short term. On the tariff front, I would say, overall, we're doing a good job. I think we've really offset the cost pressures that we've seen in the P&L from input costs so far year-to-date. And really, the pressure that we saw in the gross margin line in the quarter was really in a couple of areas. One, obviously, volume, running a little bit below what we were planning for, really due to the cadence of the orders coming in at a softer pace at the beginning of the quarter versus what we saw sort of at the end of the quarter. Our pricing actions are really offsetting a lot of that activity that we've had. I also point out that the mix in the quarter, the mix of the products that came in was a little bit unfavorable for us as well. So I really have no concerns on the gross margin line for the rest of the year. I think the teams are doing a great job managing operating expenses, which are actually flat to down slightly in the quarter. So we're managing the P&L appropriately given the level of business that we had in Q1. Any other comments from you guys? David Lowe: Well, on the pricing side, I think that we have -- the way that we are looking at it, we have covered tariff costs, and there have been some volume-related some volume-related things that made that a little less effective. But we have for the -- in most of our businesses beginning last year we were -- we have been pursuing around the world our annual pricing adjustment drumbeat. In fact, we started a little earlier in the regions than we would ordinarily -- the -- here in North America, we have a handful of key channel partners that we have agreed to pricing adjustments that are going to begin to become call it, live early or sometime in Q2. So we're feeling really good about the implications of what those can also help us with as we get through the balance of the year. Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. . Mitchell Moore: This is Mitch Moore on for Jeff. Just on the low single-digit organic guide, just maybe with the start -- with the slower start of the year, I think it implies mid-single digit-ish growth through the remainder of the year. Could you just help us frame the segment level building blocks to get you there? And what's giving you confidence in that outlook? Mark Sheahan: Yes. If I had to point to one thing, I'd say we're up low single digit on our bookings for the first quarter. So I think our bookings rate lines up with what the guide was -- and so that gives us the confidence that we're going to be able to get within that guided range when we look out through the whole year. I don't know if you guys have any other comments you want to make. Christopher Knutson: I'll also say that, as Mark mentioned, the backlog build in the quarter, but -- also subsequent to the end of the quarter into April here, we've also seen another $21 million build in the backlog. So the order rates are there to support it. It might be a little bit lumpier on a quarter-by-quarter basis, but we have confidence we'll get there by the end of the year. Mitchell Moore: Okay. Great. And then just for my follow-up. I know we touched on tariffs a bit, but just -- is there any update you guys can provide with the updates to the Section 232 tariffs and if that changes your expectations for price costs for the year? Christopher Knutson: I will say that the change with the 232, where they're moving from a direct aluminum and steel to the full component. We're still working on assessing how much that's going to impact us. We do have some highly manufactured equipment. So when you switch to a full value of the imported goods, it would imply a higher tariff. But for us, a lot of our stuff is already manufactured here. So a lot of the import of the aluminum and steel is typically in its raw form. Operator: Our next question comes from Bryan Blair of Oppenheimer. Bryan Blair: Thank you. Good morning, everyone. Welcome, Sanjiv. And congratulations, David, I think you ended up a little short of Dale's tenure, but a great run nonetheless. . David Lowe: Hey, I can stay at -- maybe, consider staying another 18 years. Bryan Blair: All right. I would like to follow up on the backlog expansion in Q1 and then Q2 to date. -- just to level set, how much of the total build has been your Game business? Have there been project argument deferrals? Or is this strictly a matter of order timing -- and is this type of backlog build or the magnitude of it significantly out of the ordinary for the early part of the year? Mark Sheahan: Yes. I think that they're pretty similar. I think if I look across the legacy Graco Industrial businesses and the backlog that we've built there as well as the backlog that we built in the game business, including projects, et cetera, I didn't see anything jump off the page at me that says that they're heavily weighted toward the powder business. I think it's generally pretty consistent across both those segments. David Lowe: And I would add, especially the orders that we've seen since the close of the quarter, it's been quite balanced in the -- to use our internal terminology, the Industrial division, which is the legacy Graco the original legacy Graco plus the game of business. As part of this exercise, we ran some stress tests -- and being an old sales guy, I kicked the tires pretty hard on not just the industrial side but also on the contractor side. And I kept -- I kept coming to the same place that given the level of activity we're seeing in industrial and not really relying on a meaningful uptick in contractor low single digit is achievable. . Bryan Blair: Okay. I appreciate the color. And following up on the revised tariff framework again, just to level set, is there a meaningful assumed change in net cost impact for your operations? And perhaps more importantly, as a largely domestic manufacturer, do you see any incremental competitive advantages or opportunities under the new structure? Mark Sheahan: Yes, I don't think there's any obvious competitive advantages. And the way I'm thinking about the tariffs here short term and long term. The big question is, I think, at a stick. Are we going to have -- the tariffs that are in place today, obviously, the Supreme Court ruled the way they did, but they put in new tariffs. So -- when you look at -- if they stick incrementally, it's not going to have a big impact to Graco in terms of the absolute level that we're paying. I will note, and we did talk about this, we will be applying for our tariff refunds like every other company. And as those come in, we -- our intention would be to highlight those in results so that you know what they are as they come in. At this point, until we actually see the refunds, we're not really going to talk about the levels or the amounts or anything like that. So I think from a modeling perspective, it would probably make some sense just to leave them out. And when they come in, we'll break them out and then you can now they are. But to answer your question again, to reiterate, when you just think about the absolute level of tariff that this company is incurring, when the new structure that's in place, it's pretty similar to what we experienced before the new structure was put in place. Operator: Our next question comes from Matt Summerville of D.A. Davidson. Matt Summerville: Maybe just a minute on contractor. Can you talk about what kind of sell-in, sell-through trends you're seeing in both the home center and propane channel? And then can you also talk about how we should be thinking about the new product load-in this year maybe relative to last? And then I have a follow-up. Mark Sheahan: Yes. In terms of sell-in, sell-through, there's not a big difference. I think most of the channel partners that we do business with have been pretty careful with their inventory. And I think that they're continuing to be careful with their inventory. So I would characterize our sales and our bookings to be really pretty similar to what they're experiencing out the door. -- basis, which I think makes sense given the environment that they're playing in. We do have, as every year, products that we're launching and we're planning to launch products here in Q2. I would not be baking in any large incremental increase compared to last year. I think it's a fairly stable, fairly similar new product launch here for the contractor business, what we've experienced in the past. We've got a couple of things that we're excited about for sure that we can talk about after they're actually launched. But again, I think it will be kind of a similar year to what we saw in '25. David, if you got any... David Lowe: Yes. I -- just a coincidence, I had a conversation with commercial management earlier this morning. And just to underline 2 of Mark's points. On the home center side, the positive side of the story is the foot traffic has not deteriorated year-over-year. And the -- although it still remains off the record levels that we saw in '20 and '21 and such. So there's an opportunity for recovery there. Those channel partners do, I would say, a very good job managing their working capital, and we feel pretty good the inventory level there is satisfactory. On the paint store side, always of interest to us. I think the key point there is we feel -- on the -- I'd say at the ground level of the business, our commercial team indicates that the sell-through has been satisfactory. And so that in that really important space for us, call it, the retail demand is pretty -- is also pretty close to the wholesale, which is important, especially as we get some of these new products launched to that channel. And so I think that the -- where we are at vis-a-vis our partners is they're ready to go and ready to order when they see retail demand out the door demand increase . Matt Summerville: Got it. And then as a follow-up, maybe can you guys comment on how you're thinking about the M&A outlook, funnel actionability to the funnel depth, if you will, and where you may be seeing most activity? Mark Sheahan: Yes, I'd characterize the market is still pretty favorable. I think that there's properties out there that we're interested in. Our pipelines are well populated. We're having discussions with a lot of different companies. I do think there's been over the last year or so, a renewed appetite on the part of sellers to take a look at opportunities to realize value and they're looking at strategic buyers in a lot of cases. And -- we're going to remain active. We like businesses that -- where we can add value. I see a fair amount of opportunities within the Industrial segment, in particular. -- contractor also has a couple of things, but there's probably more lively stuff in the industrial side right now. Interestingly, I did go back and I looked at some information back from 2012 until the end of last year and 2012 was the year that we acquired Gema. About 30% of Graco's revenue that we finished the year with in 2025 is acquired businesses. So we have had a pretty good track record of acquiring businesses, integrating them, maintaining and improving our profitability over that time horizon. And that's really what we're trying to do with our M&A growth going forward. We have a target long term, 10% top line growth, 1/3 coming from M&A. And if you look back historically, we've been able to do that. So we're proud. The teams are doing a good job and hopefully, we get some more opportunities here as we finish out the year. Operator: Our next question comes from Brad Hewitt of Wolfe Research. Bradley Hewitt: So at the gross margin line, it looks like incrementals were about 25% in the quarter. Should we think about that year-over-year margin pressure is largely driven by a pension price cost? Or are there any other factors you would highlight there? Mark Sheahan: I think it's mostly mix and a little bit on the volume side. But Chris, if you could probably give more color on that. Christopher Knutson: It was mixed volume and acquired businesses that really impacted for the quarter Price cost was not a headwind outside of having lower factory volume to absorb the overhead. . Bradley Hewitt: Okay. Great. And then maybe switching over to the backlog side of things. Just curious if you can elaborate a little bit more on visibility of kind of expected backlog conversion as it relates to the rest of the year? And do you see any risk of project cancellations or maybe slippage of backlog conversion into next year? Mark Sheahan: Yes, I don't think we see any risk at this point. It's always there, but it couldn't happen, but nothing that we're concerned about on stuff that we've already booked and they're in our backlog. And I think that we said in Chris' comments that we expect most of that will convert in the second half of the year. It's hard sometimes to know the exact timing, but this is not something that we're going to keep on the books for more than that period of time. David Lowe: Yes. The risk of -- Mark is right. The risk cancellation, be it in our legacy business or in even our game business. with their direct system sales activity in my experience is quite low. In the legacy business, typically, -- our stuff is among -- I'm thinking of an industrial implication for sealant equipment or for something in the paint shop. Our stuff is some of the last that is actually ordered in a project. And -- so for example, the expansion of a paint line. I mean, we're literally being dropped in a month or 2 before it's going to be commissioned and come on stream. So things that we have in our pipeline in that business is quite tangible and rarely is it canceled altogether. On the -- in the -- on the Gema powder equipment side, I'd say that program -- that organization is even 1 step more sophisticated in direct sale activity for systems is to accept an order requires a down payment, a very meaningful down payment approaching half the project cost. And so the buyers are very committed if an order receives gets developed to that point and shows up in our backlog. In my experience, I was involved with the team at Gema for a few years. I think in the 8 or 9 years, I was involved over all that time, one project was canceled. Operator: Our next question comes from the line of Joe Ritchie of Goldman Sachs. Joseph Ritchie: David, thank you for all the help throughout the years. Wish you the best in retirement and Sanjiv, welcome. So Yes. So maybe my first question. I just want to make sure that I fully understand the -- like the backlog conversion on the powder finishing systems. So was this simply that just the orders that you were expecting to come through in the first quarter came through later than you expected them to come through? Or was there anything else related to either supply chain or manufacturing that also impacted the conversion? Mark Sheahan: Yes, I don't think there was any crazy stuff. We did get a couple of nice orders right at the end of the -- right at the end of the quarter, but we were also converting on to the backlog that we had built in the month of February out at that same time. So they kind of offset one another. But no, we're not constrained in our operations. We're not constrained with the supply chain. -- is really just kind of the cadence of these orders coming in, and we will get them out the door. We just didn't get them off the door by the end of March. Joseph Ritchie: Okay. All right, helpful. And I know you touched on the margin headwind, I think, in the first quarter being largely driven by lower volumes. I'm just curious, like with the acquisitions also coming through the industrial segment, how much of an impact did the acquisitions have to the margin degradation in 1Q? Christopher Knutson: On a total company basis, it's about 50 basis points related to the acquired revenue on a total company basis. So the stuff going through industrial was by far the majority. Joseph Ritchie: Okay. All right. Cool. And then one last one. So last quarter, I think we talked a little bit about these like upfront licensing revenues that you were seeing from some of your OEM customers. I didn't hear it get called out today. Just any progress on that specifically would be helpful. Mark Sheahan: Yes. We've got a couple of other ones that we're working on, but we didn't really book anything here in Q1. So that's why we were silent on it. We still like the prospects for potential to get future license agreements with a lot of the technology. We've got it running through Graco products. Every time we meet with customer or an OEM. They're excited about the compact size of these motors, the fact that they take less material that they're high torque. So we're hopeful that we're able to do more in that area, but nothing in Q1. David Lowe: Yes. I know we've talked about this before, Joe. It's sort of strategic -- it's a master class in strategic selling. Frequently, we are cultivating very large companies with large decision-making bodies and organizations and keeping their processes moving 1 large organization can be relatively responsive, quick and enthusiastic -- another organization can be equally enthusiastic, but the decision-making process moves at a different pace. So I think the nature of this is while we're excited and Mark is right about the technology, the visible results that you're going to see over time are not going to have the same degree of predictability as our standard products business. Operator: Our next question comes from Andrew Buscaglia of BNP Paribas. Andrew Buscaglia: Good morning, everyone. So yes, so it seems sort of starting out a little beat with 2 years ago, same scenario, all end markets are down. And that year, you kind of struggled to overcome things. So my question is, we're kind of 2 years later, kind of in the same setup. And the question does arise amongst investors. Like is there something -- this seems to be cyclical, but is there something more structural? And maybe does Graco needs to think about -- I don't know if it's a change of tack in terms of how you get volume, whether it's to touch your pricing or what. But I think at this point, you're 3 years in, and it just seems like the top line can't grow. So are there other discussions you guys have around anything around if there is anything under the hood structurally that's changed in the last 3 years? Mark Sheahan: I will just say that we have grown the top line. And I will say that, of course, every day, we come in here, and we're doing everything we can to grow the business. when you're reporting every 13 weeks, sometimes the quarters can look better than maybe the overall business might look and sometimes they don't look as good. We have been fighting some pretty substantial headwinds with respect to half of the revenue of the company that's tied to contractor and construction. And if you look at the macro data on anything, any metric that you look at over the last 4 to 5 years, that has been a really tough market to be in. And I'm proud that our teams have actually been able to drive the results that we have driven given the environment that we're in, we get up every day. We're working hard. We're pushing our teams. We're launching products. Our teams are incentivized around growth. So there's absolutely no reason why they shouldn't be driving for better results. There's nothing structurally wrong with the company. It's still extremely profitable. It still generates a tremendous amount of cash. And we have been also very active on redeploying that cash, both through the form of share buybacks as well as M&A. So No, there's nothing here that I think we need to do that's different. I think that we're doing everything that we can as we always have done. Andrew Buscaglia: Well, on that note, I think there's a little bit of there's some enthusiasm with this recent reorganization that there's something outside of what the market is giving you that you can find some incremental growth. And I guess where are we seeing that or to date, like -- where is that evident in your numbers? And will we see more a more pronounced impact going forward from that change you guys made a year ago? . Mark Sheahan: Well, again, we did guide to low single-digit growth, organic constant currency for the full year. For the quarter, our industrial business was up mid-single digit. -- growth, which was nice to see. Our expansion markets group is up high single digits growth. And those were offset by the fact that our contractor business was down 1%. So again, going back to the earlier comments, we're happy with what we're seeing. We'd like it to be better, obviously, we're pushing the team hard. We still feel confident that we're going to get to the guide that we talked about a couple of months ago. Operator: [Operator Instructions] Our next question comes from Walter Liptak of Seaport Research. Walter Liptak: I wanted to ask, just get a better understanding of kind of the monthly trends. You talked about January being weak. I wonder if you could attribute that to anything. And then February, we have the war kind of heating up, but it doesn't seem like from what you said about orders that, that has been impacting the trend for orders too much. But -- so I guess I'm asking like what are you hearing from customers, both in North America and other parts of the world. And as we got more of this behind us, are you getting more confidence that the customers can just kind of work through these macro uncertainties? David Lowe: Well in our businesses, there's different kinds of decision makers. On the contractor side of the business, maybe the decision making you typically can be quicker. -- or a little more reactive because generally, the buyers represent -- they're smaller organizations or entrepreneurs and such. There, I would say not -- despite all the challenges of the world and our contractor business, which, again, Mark reminds -- is reminding us that it's 50% of our overall construction broadly defined. The largest market there is here in North America and specifically the U.S. And really, we haven't seen a change in the, I call it, the momentum of that business for a while and certainly not in the last couple of months despite all the global noise because the fundamental issues are -- remain the ones that you're familiar with about affordability and even mortgage rates. I would say that as focusing on the micro and not the macro, I was really excited when for a few days, the 30-year mortgage rate got below 6% in late February. And now of course, it's, I want to say, about 630 or 635 currently. I think it gets more the world and decision-making when you look at industrial companies and how they make their decisions. And while I've got a list here I'll spare everybody in the interest of time, -- for example, we would say, "Oh, the auto industry market was slow for us. The auto OEM market was slow for us. We had some tough comps, and we didn't see too much activity in the first quarter. But actually, we feel pretty good about our pipeline in the automotive industry, even in some markets like China where think of combustion conversion to and requiring additional investments in the body and the pink shop. We're seeing greater inquiries and expanded pipeline from before the end of the quarter, even through the current period. And it suggests to me that big picture, big manufacturers, they know the world is a noisy place. But if they're committed to moving in certain directions, they're going to make those investments. So it's a long-winded way of saying I don't see a lot of demand implications on the things -- on the new things that we have been absorbing here in the first 4 months of the year. Walter Liptak: Okay. Great. And then I guess thinking about the second quarter and maybe the delays of the timing of shipments, especially for some of those powder orders, do we get like a normal seasonal bump up in the second quarter plus some of the orders that should have shipped in the first? Is that how we should think about it? Mark Sheahan: Yes. I think for the contractor business, our history has always been that Q2 is the top quarter. So I don't see any changes to that cadence. And I think on the orders that we just got in and recently, I mean, those are probably going to go off more in the back half with respect to the powder business. But for the legacy industrial business, we should be able to move those a little bit quicker. Walter Liptak: Okay. Great. And then maybe a last 1 for me is on buybacks. You guys weren't too aggressive in the first quarter. How are you thinking about buybacks versus M&A deals can you do both? Sanjiv Gupta: This is Sanjiv Gupta. So I -- maybe I'll take a shot at it. So again, I think very consistent with how we've always done it. We be very disciplined with our capital allocation framework. And obviously, the goal here is to drive shareholder return while having our financial flexibility. So a strong balance sheet we'll continue to preserve that. And then whatever operating cash flow we generate, which we have been generating very positively, we'll be using that cash to fund our growth. We've talked about internal growth that will be invested in projects which meet our return thresholds. And second priority would be the growth, which is external growth through disciplined M&A. Mark talked about it. And that really needs to meet our share needs to create the shareholder value and meet the return and integration threshold for us. And you've seen that recently with our current acquisitions, COROB, Color Service and Radia. And then in terms of shareholder return, obviously, we'll continue with the dividend. And any excess cash will be returned to the shareholders, and we'll be doing it very opportunistically as we've always done. So in summary, very consistent with our capital allocation framework, which we have deployed in the market that will continue. Operator: Thank you. If there are no further questions, I will now turn the conference over to Mark Sheahan. Mark Sheahan: Okay. Thank you very much for participating today. I look forward to seeing you some time down the road here, and thanks again for your interest in Graco. Operator: This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.
Operator: Good day, everyone, and welcome to Enterprise Financial Services Corp First Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions]. I'd now like to hand the call over to Jim Lally, President and CEO. Please go ahead. James Lally: Thank you all very much for joining us this morning, and welcome to our 2026 first quarter earnings call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer, and Doug Bauche, Chief Banking Officer of Enterprise Bank & Trust. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday. Please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K for reasons why actual results may vary from any forward-looking statements that we make today. Our financial scorecard begins on Slide 3. The solid financial performance that we've generated over the past several years continued into the first quarter of 2026. For the quarter, we earned $1.30 per diluted share compared to a seasonally strong $1.45 in the linked quarter and $1.31 in the first quarter of 2025. This level of performance produced a return on assets of 1.16% and a pre-provision ROAA of 1.65%. I would characterize our performance in the quarter as solid and on plan. Net interest income was relatively stable when compared to the linked quarter at $166 million while net interest margin expanded 2 basis points to 4.28%. This reflects both better seasonal performance in our deposit balances and net interest margin expansion resulting from our relationship-oriented business model where our clients receive value-added service from our teams and returned for a few extra basis points when it comes to loan and deposit pricing. Our well-positioned balance sheet continues to be the strength of our company, as it provides great flexibility with respect to capital planning. Capital levels at quarter end remained stable and strong, with total stockholders' equity at $2 billion and the tangible common equity tangible assets ratio of 9%. At this level of TCE, we were able to produce a return on tangible common equity of 12.53%. Our strong return profile allowed our tangible book value per share to remain level at $41.38 despite the fact that we utilized approximately $27 million of capital to repurchase 483,000 shares at an average price of $56.13. In addition to this, given the strength of our earnings and our confidence in our continued execution, we increased the dividend by $0.01 per share for the second quarter of 2026 to $0.34 per share. Turning to Slide 4, you will see that loans dipped slightly in the quarter. Three things led to the slight decrease, the first is that several significant closings that we expected to see in Q1 have slid into the second quarter and have closed or will close in the coming weeks. The second reason for this decline was a $100 million pay down in our low-income housing tax credit portfolio. These paydowns happen annually and are the proceeds from successful sales that occurred in the fourth quarter of 2025. Another positive from these payoffs is the fact that the majority of these loans were made in 2021 and 2022 and the fixed rates earned on these loans are lower than what we can earn on this cash in our investment portfolio today. The final contributor was the sale of $25 million of SBA loans in the quarter, which produced a gain of $1.4 million. Doug will provide much more color on the performance of our markets and businesses in his comments. Our diversified deposit base continues to be a differentiator for us. We did experience a typical first quarter deposit outflows due to our heavy concentration of commercial-oriented accounts. We've worked extremely hard to blunt this trend through growth of our national deposit verticals as well as through market and business diversification within both the Commercial Bank and our more granular business banking and consumer relationships. The composition of deposits also remained stable as our percentage of [indiscernible] to total deposits remained at 33%. These trends were aided by a continued reduction in the overall cost of deposits to 1.52%, a 12 basis point drop in the quarter and 31 basis points when compared to the first quarter of 2025. It was on our 2025 first quarter earnings call that we first spoke with the 7 Southern California loans that ultimately landed in OREO. Our contention a year ago was that we would favorably work through these loans without a loss. Today, I'm pleased to report that we continue to make progress on this and currently have 4 of these properties under contract, representing total OREO balances of $46 million, with great progress on the other 3 properties being made. I would expect to report positive further progress in the remaining quarters of 2026. Additionally, the remainder of the portfolio continues to perform as expected. Ken will make additional comments about asset quality and provision expense in his comments. Turning to Slide 5. You will see our priorities for 2026. We made significant strides in asset quality improvement during the quarter and I'm confident that this will continue throughout 2026 highlighted by the expected sale of the 7 Southern California properties that are currently in OREO. I'm still bullish on overall mid-single-digit balance sheet growth for the year. Our ability to produce well-priced diversified deposits has been proven over the last several years, and I have a great degree of confidence that this will continue throughout 2026. However, the longer that uncertainty is the byproduct of the conflict in Iran, borrower sentiments may be cautious, which could impact future loan growth. Over the last few weeks, I have had the opportunity to visit with many clients representing the first array of businesses and industries. They continue to perform well, but their confidence to make large investments in capital expenditures or to think about any type of strategic hires or M&A is truly day-to-day. Like I stated on previous calls, entrepreneurs need to be able to see 90 to 120 days into the future to confidently make these strategic decisions and the recent volatility in the current environment could have an impact. Obviously, a quick resolution or stabilization of the current state changes this immediately. Finally, like many of our clients, we too are focused on efficiency gains through automation and expansion of our existing technology framework. This is a daily opportunity for our company, and we are excited about the progress we are making. Overall, I'm very pleased with our results for the first quarter of 2026. We are positioned extremely well for just about any environment. We have wonderful markets of growing diversified deposit base and an extremely strong balance sheet. We have used these tools to grow tangible book value per share over 10% annually for the last 14 years, and are in great shape to accomplish this again in 2026. With that, I would like to turn the call over to Doug Bauche. Doug? Douglas Bauche: Thank you, Jim, and good morning, everyone. Turning to Slide 6, you'll see the breakdown of our loan portfolio by asset class. Successful attraction and on-boarding of new clients across our footprint drove $97 million in Q1 loan growth and our core C&I and owner occupied real estate portfolios and $21 million in loan growth from our Life Insurance Premium Finance division. Those advancements, however, were largely offset by the anticipated $101 million reduction in our low-income housing tax credit portfolio via the successful completion of affordable housing projects and sale of state tax credits. The weighted average fixed coupon on the $101 million in tax credit loans paid off in the quarter was 3.29%, providing us the opportunity for redeployment of that capital at higher earning yields in the current environment. Furthermore, as Jim mentioned, we executed on the sale of $25 million of SBA guaranteed loans in the quarter. The Sponsor Finance portfolio declined $33 million in the quarter as payoffs from the sale of sponsor-owned portfolio companies exceeded new originations. Overall, I am pleased with the mix and breadth of our loan funding pipeline, and I remain cautiously optimistic about our ability to achieve our loan growth objectives for the year. The elevated geopolitical risks Iran conflict and market complexities may, however, result in our organic growth being more uneven over the next couple of quarters. Slide 7 demonstrates the continued strong diversity of our loan portfolio across our geographic markets and specialty business lines. The Specialty Lending portfolio at just over $4 billion inclusive of tax credit lending, sponsor finance, SBA and life insurance premium finance has remained relatively flat year-over-year. However, our core geographic markets in the Midwest and Southwest have delivered 6% and 25% year-over-year growth rates, respectively, which includes loans acquired in the branch acquisition that closed in the fourth quarter. In the West region, our investments in new talent in 2025 in Southern California are showing positive momentum. Leveraging market disruption, we are experiencing a growing pipeline of quality CRE and C&I holistic relationship opportunities that will translate to solid organic growth during the year. Turning to deposits on Slides 8 and 9. Reductions in the quarter within the core geographic portfolio reflect anticipated seasonal outflows and client balances of $272 million mainly associated with distributions, bonuses and tax payments. A material portion of this reduction was offset by continued growth within the national deposit verticals which grew by $187 million or roughly 20% annualized in Q1. On a year-over-year basis, total client deposits, excluding brokered funds, are up 10%. The national deposit verticals profiled on Slide 10 continue to provide differentiated and attractive sources of funding, while also diversifying our overall deposit base and somewhat softening the seasonality of our other channels with over $4 billion in deposits across our property management, community association and legal and escrow businesses, the average earnings credit is an attractive 2.59%, considering no incremental expenses in branches or branch personnel. Lastly, Slide 11 profiles the mix of our core deposit base which continues to be well diversified and highly relationship-oriented with just over 33% of these accounts being noninterest-bearing and 80% of them using some form of treasury management [indiscernible] online banking they offer operational stability and a solid base from which to expand other fee-generating revenue streams, including card and merchant services. Now I'll turn the call over to Keene Turner for his comments. Keene Turner: Thanks, Doug, and good morning, everyone. Turning to Slide 12. We reported earnings per share of $1.30 in the first quarter on net income of $49 million. Excluding certain nonrecurring items, earnings per share on an adjusted basis was $1.31 compared to adjusted earnings per share of $1.36 in the linked quarter. Pre-provision earnings were $70 million, a decline of $4 million from the linked quarter. The $0.05 decrease in adjusted earnings per share and the $4 million decrease in pre-provision earnings was primarily due to lower tax credit income and the impact of 2 fewer days on net interest income. The decline in tax credit income was expected as it is typically highest in the fourth quarter of the year. The provision for credit losses decreased from the linked quarter due to the decline in both net charge-offs and total loans. The primary driver of the provision this quarter was a qualitative factor that was added to recognize the potential impact on credit losses from the conflict in Iran. The increase in noninterest expense in the period was mainly due to typical seasonal increase in compensation and benefits and to a lesser extent, the first full quarter of run rate expenses from the branch acquisition that closed last October. These increases were partially offset by a decline in onetime acquisition costs related to the acquisition. Turning to Slide 13 and with more details to follow on Slide 14. Net interest income for the first quarter was $166 million, a decrease of $2 million from the fourth quarter, which was largely attributable to fewer days in the first quarter. Interest income declined $7 million from the prior period. The largest contributor was an $8 million decrease in loan interest as our yields fell 13 basis points on variable rate resets amidst Fed easing, along with a $17 million decline in average loan balances. This was partially offset by $1.9 million of additional earnings in the investment portfolio with average balances higher by $159 million and an 11 basis point improvement in the securities yield. The rate on loans booked in the quarter was 6.58%, and the average tax equivalent purchase yield on investment was 4.51%, both of which are additive to their respective portfolio. Interest expense declined $5 million compared to the linked quarter as a result of lower funding costs. Interest expense on deposits decreased by $5.5 million as average interest-bearing balances declined $89 million, and the rate on interest-bearing deposits moved 15 basis points lower. This was partially offset by higher interest expense on customer repo accounts due to seasonally higher balances. Our net interest margin for the first quarter was 4.28% and an increase of 2 basis points in the quarter. Our cost of interest-bearing liabilities declined 15 basis points led by lower rates on non-maturity deposits and borrowings, which more than offset the 9 basis point reduction in yield on earning assets. Net interest income remained slightly asset sensitive, primarily in parallel interest rate simulation with each 0.25 point cut in rates, reducing net interest income $1 million to $2 million per quarter or a couple of basis points of net interest margin. Including deposit-related noninterest expense in this analysis, we modeled that we are effectively neutral to modestly liability sensitive as we continue to have success growing the related deposit balances. We anticipate the recent steepening of the yield curve will favorably impact pricing on fixed rate loans and the reinvestment of cash flows in the investment portfolio. With the Fed seemingly on hold, we expect our net interest margin to remain in the low to mid 4.2%. As we execute on our growth plans for 2026 and remain committed to disciplined pricing on both loans and deposits, we look for net interest margin to be stable in this range with consistent growth in net interest income over the next few quarters. Slide 15 reflects our credit trends. Net charge-offs totaled $4.4 million in the first quarter compared to $20.7 million in the linked quarter. We made progress in the quarter reducing nonperforming assets with the full repayment of 2 loans and total principal repayments of $21 million on nonaccrual loans. We also foreclosed on the last property related to our largest nonperforming relationship and are actively working out these properties. As Jim noted, 4 of the 7 properties in this relationship are under contract, and we expect contracts for the other 3 properties in the near future. Net charge-offs totaled 15 basis points of average loans compared to 21 basis points for 2025. The provision for credit losses was $7.2 million in the period compared to $9.2 million in the linked quarter. The provision in the quarter was mainly due to net charge-offs and a qualitative adjustment to the allowance for potential impact of the Iran conflict. While we have not seen a direct impact on credit quality from the conflict that started at the end of February, we have recognized the impact that oil prices and market uncertainty can have on economic factors used to forecast losses in the loan portfolio. Slide 16 shows the allowance for credit losses. The ratio of allowance to total loans increased to 1.21% compared to 1.19% at the end of 2025. When adjusting for government guaranteed loans, the ratio increases to 1.32% of total loans, which shows the strength of our reserve coverage. On Slide 17, first quarter noninterest income was $19.1 million. This was a $6.3 million reduction compared to the linked quarter. The decrease was primarily due to other real estate owned gains and seasonally strong tax credit income during the fourth quarter of 2025. The first quarter included two mitigants from higher income from private equity fund distributions and a gain on the sale of guaranteed SBA loans. Turning to Slide 18. First quarter noninterest expense of $115 million was relatively comparable to the linked quarter as it included a full quarter of operating expenses related to the branch acquisition that closed in the fourth quarter. Noninterest expense in the fourth quarter included $2.5 million of onetime branch acquisition costs and a reversal of accrued FDIC special assessments. Excluding the impact of these nonrecurring items, noninterest expenses were $2.5 million higher than the linked quarter, which includes the first full quarter run rate of expenses from the acquisition. First quarter noninterest expense included seasonal impacts in compensation and benefits. Deposit costs were lower than the linked quarter by $1.5 million, which was largely driven by the expiration of certain allowances that were not utilized. Other expenses decreased from the linked quarter, primarily due to a recovery of a credit card loss event that was incurred in the fourth quarter. The core efficiency ratio was 60.2% for the quarter compared to 58.3% in the linked quarter. Our capital metrics are shown on Slide 19. The tangible book value per share of $41.38 was relatively stable with the linked quarter. Strong first quarter earnings effectively offset the fair value reduction from the impact of higher interest rates on our available for sale securities portfolio. We continue to proactively manage excess capital, repurchasing 483,000 shares of common stock for approximately $27 million. At an average price of $56.13 per share, this was an attractive multiple of tangible book value. Our tangible common equity ratio was 9%, stable with the linked quarter. The quarterly dividend was increased by $0.01 to $0.34 per share for the second quarter of 2026 continuing our record of increasing the dividend 9 consecutive quarters. This was a strong start to the year to 1.2% return on average assets and a 13% return on average tangible common equity. We're well positioned with a strong earnings profile, balance sheet and capital position to support further organic growth across our markets. I appreciate your attention today, and we'll now open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jeff Rulis of D.A. Davidson. Jeff Rulis: I'll tread lightly on the credit side. I know it's been exercising patients, but just to kind of go along the 4 properties that are under contract. I guess if you could touch on potential timing for sale. And then as we recall, I think those were pretty attractive. The real estate was really never a question on the valuation. It's just a fight to get to them. And I guess, so the question that second piece is any anticipated gains with those sales? James Lally: Yes, I'll take that one, Jim. Jeff. So 3 of the 4 should transact yet here in the second quarter and the fourth one later this year. And as it relates to the contracts we have in hand, they support how we've identified them in our financial statements. Jeff Rulis: Okay. And gains or losses, a little early to kind of... James Lally: It is early, but we feel confident about how we recognize things in the fourth quarter of last year, and how the things should settle out. Jeff Rulis: And on the other 3 properties you sounded optimistic on those as well. Any sort of differences in those? Or it's just sort of, again, its timing of the contracts and potential sales there's nothing, I guess, different from 4 versus the 3 still to may be dealt with? James Lally: It's timing. You're right. It's timing. You remember, one, we had a little while to get our hands on, which we have now. I've identified several different potential buyers. So now it's a bit of a -- let them fight that out to get the best outcome we can. Jeff Rulis: Got it. And then hopping over to the margin, Keene, I think our prior conversations were more of a margin to step down to 4.20%, I think as the rate environment has altered and it sounds like you've got some pretty good earning asset repricing opportunities within the book, but you pointed to the yield curve as well. Just want to check on the low to mid-4.20%. What's kind of the time line of that? Is that just through the end of the year? And I don't know if you've talked about your positioning thereafter -- any additional color on the margin? Keene Turner: Yes. Jeff, margin in March was a little bit of a step down from the -- what we reported here in the first quarter. So our guide is I would say today's run rate, and I think we see it holding stable through the end of the year. I think we had a little bit of balance sheet contraction here in the first quarter. And then with the shorter days, you get a little bit of a false positive in terms of margin popping. But we feel good about day count in our favor now. Really how the shape of the curve and where intermediate term rates are for reinvestment, both on the loan and securities portfolio and I think any amount of growth from a loan perspective that we can get an overall balance sheet growth, which we anticipate will happen here starting in the second quarter. I think we feel really, really good and optimistic. And I think we see margins being reasonably stable for that time frame. So we're positioned to defend it if necessary. We've been able to reprice deposits extremely well when the short end of the curve has come down. I think we continue to feel good about that if that's the case. But right now, it's status quo. And what I would say is historically status quo is good for us because it allows us to just go play offense bring clients on, expand the balance sheet and not to worry about doing as much repricing activity when that arises. So it's business as usual from a growth perspective. Jeff Rulis: Got it. Yes, I heard your message of a stable margin, but consistent NII growth is probably more important. Operator: Your next question comes from the line of Damon DelMonte of KBW. Damon Del Monte: I hope everybody is doing well. Keene, just looking for a little commentary around the outlook for expenses over the coming quarters here in '26. Do you expect much growth off of first quarter's level? And any insight in there would be great. Keene Turner: Yes. I think the first quarter is always seasonally heavy on compensation. We do expect that to alleviate slightly, albeit we will have a full run rate in the second quarter of merit that occurred in March and day count also moves against us there a little bit. So I think there's a little relief there sequentially, on the comp piece. And then we did have a benefit on the deposit expense line item. So that we expect to step up back to more of that $27 million level. So the way I'm thinking about it is that from a pre-pre perspective with day count and that reversal, we're sort of on the same run rate here to start the second quarter. And then whatever growth and other items we can get will accrue to our benefit. But I think the sequential change in expenses will be paid for in net interest income, and then maybe some other items. So that's sort of how I'm thinking about the expenses here moving into the 2Q and beyond. Damon Del Monte: Got it. Okay. So a step up from this quarter's $115.1 million, but then that's kind of offset by NII growth, is that... Keene Turner: Yes. That's essentially how I think about it. I think this is like a very base kind of earnings quarter where we can have mostly positive progress here for second, third, fourth quarter as we get more days, more growth, maybe some more contribution from some of the episodic fee items, things like that. Damon Del Monte: Got it. Okay. Great. And then could you help us think a little bit about the provision going forward. Nice to see the NPLs come down this quarter. I'm assuming you're still making progress on the remaining ones and you're going to have some loan growth. So is the provision kind of going to be driven by a similar level of net charge-offs over this quarter and kind of maintaining the loan loss reserve in that north of 120 basis points? Keene Turner: Yes. I think charge-off wise, charge-offs are sort of on from a basis point perspective, what we'd think about on a recurring basis. And then we just -- we took the opportunity with some of the uncertainty that's around the economic forecast, but really wasn't in the base yet to provide some additional reserves for that uncertainty. So I think, again, back to my comments, I think that positions us well, both with some of the progress we're making on credit as well as just having some of the economic data, whether it was in the underlying forecast or whether we put it on top, just absorbed into what we're thinking here. And then to the extent that we have growth and charge-offs, that will drive provisioning, but I think it can abate a little bit just given we took some of the bad news here in the first quarter and put it in a spot where it's there for reserves if we have businesses that are stressed by oil prices or whatever other items are caused by what's going on. Damon Del Monte: Okay. Great. And then I guess just one more quick one on capital and your view on capital management. Things are going well. strong capital levels bought back some stock this quarter. Can we assume that you guys will remain active in the market given the current levels of stock price? James Lally: David, this is Jim. Absolutely. We'll continue evaluating the merit of further repurchases and our other levers with respect to dividends, we'll continue to evaluate, but really, it's about growth. And as it relates to M&A, it still remains a low priority for us. So you're looking at repurchases and growth is the priorities for capital. Operator: Your next question comes from the line of Nathan Race at Piper Sandler. Nathan Race: Maybe for Jim or, Doug, curious if you can just comment on what you're seeing from a pricing perspective on new loan production -- on a blended basis and if you've seen kind of new loan production kind of incremental deposit growth being margin accretive and relative to the overall loan portfolio yield as well. Douglas Bauche: Yes, Nathan, it's Doug here. Thanks for the question. We are clearly seeing competitive pressures, kind of squeezing spreads and credit across all of the footprint today. we look at loan yields, I think at the end of Q1, yields were 6.2%, 6.3%, somewhere in that range. And given the current environment, right, we think we can continue to originate credit and that low to mid-6% range. And as we talked about, just some redeployment of capital from payoffs in the [indiscernible] portfolio that provides us some real advantage there of really 200 to 300 basis points of additional margin on that $100 million portfolio that paid off. So it's tough out there, right? But our team does a good job to price both to win and yet to work to protect our margin with every basis point that we can. Nathan Race: Okay. Got it. That's helpful. And then just the expectation that loan growth in the mid-single-digit range for this year is going to be funded by a deposit gathering or maybe can you just comment on kind of excess liquidity that you have come off the bond portfolio and just kind of other sources of funds to loan growth? Keene Turner: Yes, I think we expect to keep the the securities portfolio at a similar proportion. So I think our expectation is that will continue to grow it over the course of the year. That means that we're going to out fund loan growth with deposit growth, both in the commercial bank and the specialty and consumer bank. So that's our plan. I think that's the thing we're probably most confident about is our ability to grow deposits. We like the environment for deployment, whether that's in the securities or loans. And I think you heard from Doug, we'll continue to be disciplined on loan side, both on credit and pricing. And I think we think that sets up for a good performance in 2026 and beyond. So that's the playbook we've been running for the last few years, and I think that's the playbook for '26. Nathan Race: Okay. Great. Maybe one last one for Jim. Just curious if you can comment on any M&A appetite these days. Obviously, you guys have a nice organic trajectory in front of you and some nice earnings tailwinds over the balance of this year. But just curious if there's any opportunities on the M&A front that are interesting for you guys these days? Or is just kind of the focus on organic growth, buying back the stock, just given where the current is today? James Lally: Yes, Nate, we're focused on is executing the plan. We've got some work to do relative to growth and certainly, we have to execute the plans relative to sales of these assets that we have and what have you. But it's a low priority, and we just got to keep focused on making sure that the plan we put forth is executed perfectly. And that's where our fourth tender associates are focused on today and tomorrow and into the future. Operator: [Operator Instructions] We don't have any further questions in the conference line I would now like to hand the call back to Jim Lally, President and CEO, for closing remarks. James Lally: Thank you, Ellie, and thank you all for joining us this morning and for your continued interest in our company. We look forward to talking to you at the end of the second quarter, if not sooner. Have a great day. Operator: Thank you for attending today's call. You may now disconnect. Goodbye.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to the PG&E Corporation First Quarter 2026 Earnings Release. [Operator Instructions] I would now like to turn the call over to Jonathan Arnold, Vice President of Investor Relations. You may begin. Jonathan Arnold: Good morning, everyone, and thank you for joining us for PG&E's First Quarter 2026 Earnings Call. With us today are Patti Poppe, Chief Executive Officer; and Carolyn Burke, Executive Vice President and Chief Financial Officer. We also have other members of the leadership team here with us in our Oakland headquarters. First, I should remind you that today's discussion will include forward-looking statements about our outlook for future financial results. These statements are based on information currently available to management. Some of the important factors which could affect our actual financial results are described on the second page of today's earnings presentation. The presentation also includes a reconciliation between non-GAAP and GAAP financial measures. The slides along with other relevant information can be found online at investor.pgecorp.com. We'd also encourage you to review our quarterly report on Form 10-Q for the quarter ended March 31, 2026. And with that, it's my pleasure to hand the call over to our CEO, Patti Poppe. Patricia Poppe: Thank you, Jonathan. Good morning, everyone. I'm pleased to be with you this morning to report another quarter of strong progress on multiple fronts. Today, we announced core earnings per share for the first quarter of $0.43. This strong start puts us solidly on track to deliver again and reaffirm our full year 2026 core EPS guidance of $1.64 to $1.66. At the midpoint, our guidance implies 10% growth over 2025 and would mark our fifth consecutive year of double-digit core earnings growth. Looking forward, we're reaffirming our EPS growth guidance for 2027 through 2030, which is unchanged at 9% plus annually. We're also reaffirming our 5-year capital and financing plans, including 0 new equity issuance needs through 2030. We continue to deliver for our customers on affordability. On March 1, we lowered electric rates for the fifth time since January 2024. For our most vulnerable residential customers, bundled rates are now down 23%. For other residential customers, rates are down 13% over that same period. In February, our Diablo Canyon nuclear power plant received the final state permit approvals needed to support extended operations through 2030. And in early April, the Nuclear Regulatory Commission granted Diablo Canyon, a 20-year license extension. These actions underscore Diablo Canyon's critical role in supporting California's reliability and clean energy goals, although further action by the state is required in order to operate beyond 2030. Turning to Slide 4. We remain focused on helping California build a durable, long-term wildfire solution. The CEA's report and recommendations provide a strong foundation as the legislature begins the next phase of this important work. We were encouraged to see the CEA emphasize the cost of inaction, noting that, and I quote, "Inaction perpetuates unaffordability for consumers and hinders the ability to attract the capital required to maintain safe, clean and reliable infrastructure." This is a strong call to act for California policymakers. As we said last quarter, the CEA report marks the beginning of the legislative phase. With the session running through August, policymakers now have the opportunity to evaluate a menu of options across multiple pathways. We remain encouraged by the progress toward meeting the commitment made by the legislature last year, to find and implement a long-term [ pole of society ] solutions. That commitment began with last year's SB 254, followed by the Governor's executive order, the CPUC submission to the CEA and now the CEA's report. As I said last quarter, the status quo is neither sustainable nor affordable, and California needs a model that works for all stakeholders, whether they are those affected by wildfires utility and insurance customers, communities, the state and the capital providers needed to support a safe, reliable and clean energy system. Turning to Slide 5. Our focus on wildfire mitigation remains clear and unwavering. We know this work is never finished, which is why we continuously look for better and more effective ways to strengthen our mitigation. Our operational mitigations, including PSPS, EPSS and continuous monitoring, are making us safer every day and position us to respond effectively whatever the weather conditions. Looking forward, our long-term infrastructure hardening plans will combine safety and improved reliability and lower maintenance costs. Undergrounding is an important driver of customer affordability too, reducing the need for and expense of annual inspections and vegetation management. As you heard on our last call, the CPUC has now provided a clear path for us to request additional undergrounding through a 10-year plan. We're still on track to make this filing with the OEIS in the third quarter, including our next approximately 5,000 miles and covering years 2028 through 2037. Combined with the 1,900 miles of undergrounding we expect to have completed by the end of 2027, plus an additional 4,000 miles of overhead hardening, this would result in nearly 11,000 miles of planned system hardening through 2037 or more than 3/4 of the high-fire threat miles we plan to harden based on our current risk modeling. We'll provide more detail in our 10-year filing. But in the meantime, we calculate that our undergrounding to date, over 1,200 miles has already allowed us to avoid more than $100 million of maintenance spend, which otherwise would have been paid by customers. That is exactly the kind of durable affordability we're working hard every day to deliver for our customers. Looking at Slide 6, you'll see our simple affordable model as amplified last quarter, giving us line of sight to customer bill growth of 0% to 3%. We call that our [ path to flat ], a destination our customers would love. As noted earlier, in March, we implemented our fifth reduction in electric rates in 2 years. That's real progress on affordability, and this progress matters most for customers who need it most. Since January 2024, electric rates for our most vulnerable customers are down 23%. For our other residential customers, rates are now down 13%, about $300 less per year. That is real money. Turning to Slide 7. You can see the progress we're making in enabling rate reducing load growth. Projects are moving through our development pipeline with our final engineering stage increasing to 4.6 gigawatts since our year-end update. This progression from application to preliminary engineering and on to final engineering is a natural and expected part of the project cycle and reflects healthy forward momentum. We also recently initiated our third cluster study, and the results reinforce that there's strong interest across our service area. In total, customer interest exceeded an additional 10 gigawatts, spanning multiple regions, including Silicon Valley and the Central Valley. Importantly, this demand remains diversified. There's no single project driving these totals. We're committed to only adding load that is definitively rate reducing. We simply need to get the pricing right. Projects from this latest cluster study, which meet the rate-reducing threshold will move through preliminary engineering over the next 6 months, refilling the pipeline funnel from the top as earlier projects mature. Importantly, this growth is occurring alongside significant resource additions across California. Since 2020, CAISO load-serving entities have added more than 33 gigawatts of new resources to the grid, including over 7 gigawatts in 2025 alone. In addition, the CPUC is continuing their practice of issuing [ new build ] procurement orders, which have resulted in 22 gigawatts under contract through 2029. This kind of growth is good for customers and good for California's economy. Every gigawatt of new data center load can contribute to affordability by reducing electric bills by 1% or more, while also supporting thousands of construction jobs and generating hundreds of millions of dollars in additional tax revenue. Before I hand it over to Carolyn, I'd like to tie all of this together with my story of the month. This quarter, that story is about continuous monitoring and how we are shifting from reactive maintenance to proactive, data-driven risk management. Continuous monitoring uses sensors, our smart meters, analytics and machine learning models to identify emerging issues on the system before they turn into outages, ignitions or safety events. It's allowing us to see developing conditions in real time and intervene earlier, often before there's any customer impact. We're seeing tangible operational benefits from this approach. Continuous monitoring helped us avoid approximately 12 million unplanned customer outage minutes in 2025 and another 4 million minutes in the first quarter of 2026. In many cases, these interventions occurred before customers were even aware there was a problem. Since the beginning of last year, we've had 1,484 good catches where sensor data flagged developing weaknesses or active events on the grid. 23 of these could have become ignitions but didn't. Identifying stressed equipment early also allows us to fix issues at a lower cost and avoid more expensive emergency repairs down the road. In fact, over that same 5-quarter period, early detection of stressed equipment helped us save an estimated $8 million of capital spend through lower cost repairs and over $1 million in expense by reducing time spent responding to emergency asset failures. Continuous monitoring is also improving how our teams work in the field. More precise diagnostics mean our troubleshooter spend less time searching for problems and more time fixing them, improving both productivity and safety. Taken together, our continuous monitoring program is an important step forward and an example of how we manage risk, control costs and deliver reliable service. With that, I'll turn it over to Caroline. Carolyn Burke: Thank you, Patty, and good morning, everyone. Turning to Slide 9. You can see our first quarter 2026 earnings walk. Core earnings for the quarter were $0.43, up $0.10 from the first quarter last year, putting us in position to once again deliver on our plan. Customer capital investments contributed $0.06, -- of that, $0.02 reflects ongoing execution of our capital plan and the associated return on rate base, including CPUC ROE. We also have a $0.04 benefit related to February's final commission decision in our 2023 [indiscernible] application. Nonfuel O&M savings contributed an additional $0.02, partially offset by our decision to redeploy $0.01 back into business. Timing and other was a $0.03 tailwind in the quarter compared to the prior year. As we look forward to the balance of 2026, you can count on us to remain focused on disciplined execution and delivering our guidance while taking a thoughtful approach to redeploying savings in ways that benefit customers and help to derisk 2027 and beyond. On Slide 10, there is no change to our 5-year $73 billion capital plan through 2030. We continue to see strong demand for customer beneficial investment across the transmission and distribution systems, and we still see at least $5 billion of incremental customer investment opportunity outside the current plan. We have flexibility in how and when we may pursue these additional opportunities to ensure we're making the right decisions for customers and investors. Our preference today remains making the plans better by prioritizing bringing in investments, which enable new beneficial load and help lower rates for our core customers over time, or we could make the plan longer by extending the duration of our top-tier rate base growth. A third option, though not one we're considering right now is to make the plan bigger by adding to our current $73 billion plan envelope. Taken together, these options give us confidence that we have flexibility in the plan and that we can continue to deploy growth capital in a disciplined way while at the same time, supporting affordability, growth and long-term value creation for owners. Turning to Slide 11. Our Five-Year Financing Plan is also unchanged from our prior call. The plan continues to be built on conservative assumptions, which align with the guideposts I've previously shared. First, our plan is built to require no new common equity through 2030. Second, we remain focused on achieving investment-grade ratings, including sustaining FFO to debt in the mid-teens. And third, we continue to target ramping up to a 20% dividend payout ratio by 2028, then maintaining that level through 2030. In February, we took advantage of favorable market conditions to execute 2 financings. We issued $1 billion of parent-level junior subordinated notes opportunistically starting to address 2027 parent funding needs. There is no change to our guidance for a net $2 billion of financing from parent debt and other through 2030. At the utility, we issued $2.2 billion of first mortgage bonds covering roughly half of our 2026 utility debt needs, which remain unchanged. From a capital allocation perspective, and in light of encouraging indications that the state is serious about pursuing additional wildfire reform, we continue to see our current plan as the right one for both customers and investors. However, I'll reiterate that if we stop seeing progress towards reforming the wildfire risk model, you can be sure that we will actively reevaluate all aspects of our capital allocation plan. On Slide 12, we continue to make steady progress toward investment-grade credit ratings, and I'm encouraged by the momentum we're seeing. Following our fourth quarter call, Moody's revised their outlook to positive, reflecting continued improvement in our credit trajectory. Our focus on strong financial ratios, discipline to hold the company leverage and continued progress on wildfire mitigation directly supports the criteria for potential upgrades. As I've noted before, achieving investment grade is a key milestone for us. It will lower our borrowing costs and translate into hundreds of millions of dollars in customer savings over the life of the debt we issue, creating a durable affordability driver for customers, not currently assumed in our plan. On Slide 13, we're reinforcing that we continue to see a path to deliver 2% to 4% long-term reductions in nonfuel O&M even after absorbing inflation and other cost pressures. Executing against our simple, affordable model is how we keep our capital program affordable for customers and sustained reductions in nonfuel O&M are a key element allowing us to grow our plan and fund the investments our system needs while also protecting customer bills. In addition to the great example of continuous monitoring Patti mentioned, we continue to innovate and drive efficiencies in our field operations by applying technology. By leveraging satellite and LiDAR, we're improving the quality and consistency of inspections while reducing the volume of patrols, lowering contractor reliance and enhancing safety in the field. Taken together, these changes are expected to deliver $24 million in annual O&M savings this year alone. This is another tangible example of how targeted technology investments support our long-term nonfuel O&M trajectory. Slide 14 highlights major regulatory and legislative milestones we're monitoring this year. On the regulatory front, following our fourth quarter call, we received our 2025 safety certificate from the CPUC, which is valid for 12 months through early March 2027. Additionally, as Patti mentioned, we're on track to file our 10-year undergrounding plan with the OEIS in the third quarter. I'll end here on Slide 15 by pointing out our differentiated story. We're proud of what we've accomplished, and we know there's still plenty of opportunity in front of us to continue delivering for our customers and our investors. We're focused on doing just that day in and day out. With that, I'll hand it back to Patti. Patricia Poppe: Thank you, Carolyn. Before we take your questions, I'd like to recap where we stand as we are building California's energy future. We delivered a strong first quarter, putting us firmly on track for another year of double-digit earnings growth. Safety remains our highest priority. We continue to strengthen our wildfire layers of protection. We continue to make real progress on affordability with a 23% reduction for our most vulnerable customers since January 2024. At the same time, we're seeing good progression of our rate-reducing large load pipeline, and we're encouraged by California's focus on constructive wildfire reform. . With that, operator, please open the lines for questions. Operator: [Operator Instructions] Your first question comes from the line of Shar Purreza with Wells Fargo Securities. Shahriar Pourreza: Patti, you've been vocal about not wanting to see the can kick down the road on legislation. I mean, obviously, that would be a bad outcome in your view. I guess, how should we think about capital allocation, like the buybacks in case some aspects of the CEA report get passed, but we don't get something that is all encompassing. So step in the right direction, but not the Goldilocks scenario. Is some progress about outcome [indiscernible] key aspects get pushed into '27, it's obviously a tight window and California is dealing with a lot. Just get a sense there. Patricia Poppe: Yes. Thanks, Shar. First and foremost, I would just reiterate that we're encouraged by the progress to date. We do think the right conversations are happening with the right folks, and we feel good and encouraged about that. I'll just offer that there's obviously minimum outcome to prevent additional costs being born by shareholders and this tail risk being able to be measured and understood. We know that that's a very important floor for an outcome here. And as we've been very clear, we've been reiterating wide and far the value of the investor-owned utility model. We've been advocating for the importance of the capital that we are able to attain from the capital markets from our investors and how important that is to making our infrastructure investments affordable for California that as we spread out the cost of infrastructure over time because of the great capital that is deployed by our important owners, that is good for customers. And so an important outcome of SB 254 is that we can attract low-cost capital to invest in that infrastructure to help California grow and make our energy cost more affordable for customers here. So I'll say all that backdrop to say that we feel like our capital allocation and our model is working. We're lowering rates while we're deploying our capital today. We think right now is not the time to change that plan, we know that the simple affordable model is the best plan for customers and investors. And so we're very bullish on that. Now to the ultimate heart of your question, if that doesn't occur, if we don't get a minimum outcome that's essential, then obviously, we'll have to look at and we will not avoid looking at our entire capital allocation plan, the whole financial plan. I'm not going to rack and stack how we would think about that here on this call, but I will just say that all aspects of the plan will have to be on the table, and we'll take a look at doing what's best in totality. But for now, we are encouraged by the progress that's being made and the level of attention to the issue. Shahriar Pourreza: Got it. Perfect. I appreciate that. And good luck there. Patti, just lastly, I mean, I know obviously, you keep highlighting the data center opportunity in the context of savings and kind of bill reductions, probably that's the right messaging in this environment. But is there kind of a point you can convert that into sort of like an earnings impact like some of your peers. I mean 4.6 gig in final engineering is somewhat material. I guess at what point does large load growth drive significant new transmission investments. Patricia Poppe: Well, I would say that it is. We are and we shared at the -- on our Q4 call that we've added more CapEx for transmission into our $73 billion capital plan. Given all of our circumstances, we think our $73 billion plan is the right plan. The idea that we would make that bigger would take some other changes, I would say, over time. And so right now, as Carolyn has been very consistent in sharing that we want to make the plan better. And when we say better, what we mean by that is by pulling in that transmission and data center load growth, if it makes it more affordable for customers, that's better. And so we've been very disciplined about our cluster study work. And when we talk about final engineering, we're sharing real costs with our potential large load customers and they're signing on for them that are absolutely not just from a a sound bite or a marketing perspective but an absolute rate reducing new CapEx investment. And so that makes our capital plan even better. There will come a time, I think, particularly after SB 254 Phase II resolution at the end of the legislative session that we should look at if the conditions are such that we could make the plan bigger, but that's just not now. Operator: Your next question comes from the line of Nicholas Campanella with Barclays. Nicholas Campanella: I just wanted to ask a follow-up on just the legislation and just there was a lot put forward by the CEA, like 3 separate phases. It's a big menu of things. And I guess just -- where are you kind of drawing the line? And what is sufficient? Is it more about having some type of permanent cap if I'm reading your response correctly? And then I just in the last legislative session, shareholders did have to kind of participate in some instances there. So how are you kind of thinking about that for Phase 2? Patricia Poppe: Yes. Nick, the most important thing, we think, is the whole of society approach. We think the governor was clear and the CEA report reflects that there are multiple aspects of wildfire liability reform that would be important for all California because remember, all fires in California are not caused by utilities. Insurance access in California is a real challenge to homeownership. We have a housing crisis in California, making sure that we have an insurable housing market is very essential for the state. So well beyond utility concerns the CEA report reflects a whole of society approach. We think that's smart because we're Californians too. And we care about what happens here and what happens to all Californians, not just those impacted by a utility wildfire. Now that being said, I am the CEO of the utility. So I do have a point of view that we need to make sure that the tail risk of wildfire liability is one that shareholders and investors can model can predict and know how great the risk is so that you can feel comfortable investing your clients' pension funds and retirement funds into our infrastructure here in California. So our minimum is very important that we have an ability to see and model and quantify what that tail risk is. Now on shareholder contributions, as were required in the 254 Phase I, that is a question that's part of a total look of the value of the fix, the totality of the legislative action will determine whether there's any reason to make additional contributions. And so the package would have to be looked at as a package. And if it doesn't improve the status quo then contributions would be unacceptable. But if there's a dramatic improvement to the status quo, we obviously would be in dialogue with policymakers. Nicholas Campanella: That's very clear. I appreciate that. And then I just had another question because it's kind of come up to the foray recently. Just the governor election in the state for various reasons has been more of a focus for folks. And I know that there's been some calls from various candidates on returns and affordability and maybe even notably a rate freeze. But I do recognize on slides and in the simple affordable model, you're showing that you're pretty well positioned against that. So just what's the strategy here to kind of make that resonate with new policymakers? And then, I guess, just how high grade is the plan if we were to kind of go that way with some of the more draconian things that are being piched right now? Patricia Poppe: Yes. Look, the good news is this. Number one, whomever is elected governor of the state of California, we're going to want what they want, and that's affordable utility rates. The even better news is performance is power, and we are performing. As I mentioned, we've reduced rates 5x in the last 2 years. Our most vulnerable customers' bills and rates are down 23%. That is meaningful progress that we can point to. And so politicians have to say what they have to say, I guess, to get elected. But when it comes down to brass tacks, and we actually have to do what's promised, I think our performance is a key enabler to our ability to work with whomever is elected to do exactly what these politicians want. We want the same thing. We want a healthy, vibrant California powered by PG&E and the IOU model is essential to the growth and prosperity of California. Operator: [Operator Instructions] Your next question comes from the line of Steve Fleishman with Wolfe Research. Steven Fleishman: Just I think your comments are pretty clear on what you kind of want out of a law. Just when you look at the different proposals or structures that were in the wildfire report, are there any of the ones that best met what you want and you think other parties stakeholders as well. Patricia Poppe: Yes. I think Steve -- I think this whole of society look is super important. So the 3 pillars, the looking at hardening our communities from spread is so important. It's 1 thing to prevent an ignition. But when the 100-mile per hour winds are here, we need to make sure that our communities are ready and that they are built purpose, just like in hurricane zones, making sure that we get those building codes and implementation of those codes, that would be very important to derisking our communities. . So obviously, that's a good thing. The liability limits and liability reform is something that we feel strongly should be looked at, particularly when a utility can demonstrate prudence and can demonstrate that through their wildfire mitigation plan, they are prudent. And then finally, any kind of state, backstop obviously helps to manage that tail risk. But what I'll tell you is there's lots of paths to odds here. There are all sorts of vehicles and methods and mechanisms. And so the report, I thought did a good job of outlining multiple paths, not -- we don't need everything in that. In fact, some of them were intentionally this or that. And so I think now is the heavy lifting for the legislature to really consider what's the totality package. What is the state's ambition to truly create a wildfire liability construct that works for everyone and works best. And we're, as I've said, encouraged by the conversations that have ensued so far. Steven Fleishman: And then I guess 1 related question. Just somebody brought up the governor election and obviously, we had this shake up occur. Is there any way to interpret whether that actually adds more impetus to address this wildfire law this year or the other way around? Is it disruptive to it? Just any thoughts there? Patricia Poppe: I would say the Governor Newsom has done incredible work over his time as Governor to address these major fundamental issues with wildfire risk in the state. I think he's probably the leading governor in the nation who has taken and led his legislative bodies through major reform in this area on his watch. . So as he indicated, and we're just -- from the reports and the executive order that he issued, I think he expressed interest in having a real fix but he can't act alone. He's got to have the legislature with him. And so it's been good to see legislative leadership describing a desire to really get into this issue. And so I look forward to them being able to do their job. And I think unrelated as much to the governor's election, but for the fact that it's Governor Newsom's last year in office here in California, I think he's made it clear that he'd really like to see action on this. Operator: Your next question comes from the line of David Arcaro with Morgan Stanley. David Arcaro: I was wondering on the data center side of things. When might you expect to refill that bucket of application and preliminary engineering within a pipeline? And maybe more broadly, just what has been the pace of data center demand and conversations that you've been seeing? Patricia Poppe: Yes. I would say, first of all, the cluster study that we've initiated, we call it Cluster '26, our third cluster study has initiated -- has shown significant demand as we look at how we do the engineering, we do that over the next 6 to 8 months. We do parallel engineering of all the projects. This has been a real enabler to minimizing costs for any 1 project maximizing shared infrastructure investment and really getting a clear eye of where the capacity needs to be either added or leveraged where we have existing capacity. And so one of the, I would say, the big developments we're seeing lately is more interest outside of just the Bay Area. And so that's exciting. I'll just tell you, I was at a conference in EEI Key Accounts Conference with all our large customers, and I was on a panel with, I'll just call a Class A data center developer. And as he and I were talking before we went on stage, he -- and this is a major data center developer was unaware, we had additional capacity here in California. And so I think we still have a job to get the word out that California is open for business. We've added 33 gigawatts of capacity to the California grid, and we've got 22 gigawatts more under contract for the next 4 years. That is significant capacity being added on a grid that is underutilized because of our low air conditioning demand. So we really have an opportunity to serve these large load customers and I think word's getting out. And our third cluster, cluster 26 really has demonstrated that. So I would say, as you can see, as we indicated, 10-plus gigawatts showing interest. That's in the early phases of that cluster study. And as we do the engineering, obviously, some of that will fall out. We don't -- we've seen that over time. But as you can see, we continue to move closer and closer to actual construction and being online. We still expect to have about 1.8 gigawatts online by 2030. And again, these are multiple projects, no one silver shovel, as I like to say. So this is, I'd just say all good for California, for California's tech industries, for the customers who leverage technology and for all of the people who use the grid in California, this is a big win-win. David Arcaro: Great. Yes, that's helpful. And I guess, I think you kind of alluded to this also in that response. But I was just curious, I mean, you've got significant electric bill reduction coming as you start to bring this online. So could you just help with a sense of when those data centers are coming online and when customers would end up seeing some of that bill reduction to kind of add on top of what you've been highlighting and achieving on the affordability side of things. Patricia Poppe: Yes. So the 1.8 gigawatts will be online by 2030. We forecast that to be about a 1% to 2% rate reduction for that time period. And so when you add that into our simple affordable model, remember, this is the way that we've been reducing rates already. There's very limited large load that's contributed to the 23% rate reduction for our most vulnerable customers and 13% rate reduction to date. That's been delivered through a simple, affordable model. Converting our capital O&M ratio to a more capital less O&M, reducing our maintenance costs through more efficient operations. And as Carolyn mentioned, $26 million of savings by transforming how we do inspections. Those inspections are all O&M. So one of the secret sauces here at PG&E is our O&M reduction capacity and that is the most beneficial, quickest way to lower rates for customers. Of course, investment-grade credit metrics would also help lower bills for customers and large load as we transition forward is in the future years, our pathway, as we like to say, our path to flat. That is being driven by all of those factors. O&M reductions, more efficient financing and large load and the large load in the latter half of the plan. Operator: Your next question comes from the line of Anthony Crowdell with Mizuho. Anthony Crowdell: Follow-up to David's question on the -- I'm curious on the conversion from final engineering to construction, just your confidence in obviously, you've had an increase there, up to 140, just as that 4,600 now is in final engineering. Confidence of converting it to the construction mode. And then I have a follow-up. Patricia Poppe: Yes. So first of all, one thing to remember about how this large load gets approved and financed here in California. Our generation capacity is driven through the California Energy Commission, CAISO and the CPUC. And that's why we've added 33 gigawatts that process is working really well. I know that some of the ISOs across the country are struggling to get new large load built. We're getting capacity added to the grid. So in order to get one of these large load customers, they can leverage that capacity that's been added to the grid without having to do one-on-one contracts per se. So when we talk about final engineering, we're predominantly talking about transmission and the transmission engineering that's required because in a lot of cases, we're able to just do a direct connect, dual feed with a backup online on-site in order to deliver the reliability that these large data centers require. So to answer your question specifically, Anthony, we think there's a high conversion, but we've not been at this stage with this volume before. And so we're buttoning up all the final details with our counterparties. But the fact that they're moving forward, they're putting money on the table, these aren't final agreements, but they're awfully close, and they're putting real forecasted expectations for bringing load online that -- and so we'd say that process is working, but these will be important tests here, these final -- these 4 gigawatts to see how much of that actually goes to construction, but we're pretty optimistic than a lot of it will. And so that's why we forecasted 1.8 gigawatts by 2030. Right now, that's -- you can use that as simple math, but those numbers could change here in the coming months. Anthony Crowdell: Great. And then a follow-up on the $5 billion of incremental investment opportunities. And I know I think third quarter, you're going to file an undergrounding plan, and the miles are kind of subject to approval, how much of the $5 billion of incremental opportunities is dependent on the approval for the undergrounding plan or the undergrounding plan would be incremental to this $5 billion? Patricia Poppe: Unrelated. We built in a level of undergrounding and around $1 billion a year in our $73 billion plan, and that's what's built into our assumptions. So when we talk about the $5 billion, we talk more about accelerating reliability improvements, accelerating new business connections, accelerating these large loads, including more and more transmission infrastructure investment in our plan because right now, we're making trades between where best to deploy capital. We have plenty of capital to deploy, and we're really working from an affordability and our balance sheet are key drivers to how much capital we deploy, which is why we love our plan. We think it's the best. It really threads the needle for customers and investors. And so anything we add to the plan at this juncture means something else is coming out. And so that's why we would say that the $73 billion incorporates all of those things. Operator: Your next question comes from the line of Gregg Orrill with UBS. Gregg Orrill: I Was wondering about settlement discussions in the rate case, if you've had any and just your general thoughts on how that's going and settlement is at all likely> Patricia Poppe: Yes. I would say, first of all, evidentiary hearings will be here throughout May, and I think that's an important step in the process. That may create an opportunity for settlement. And so we would never rule out settlement. Obviously, we've settled cases in the past. But we've also gotten pretty strong indications from the CPUC that they like to do a fully adjudicated GRC. So we're open to both. We think we filed a great case. We think given our commitment to affordability and our follow-through on what we promised the commission, we would be doing with rates, and they're watching it happen. I think we enter those discussions as a real, trusted counterparty, and we look forward to the hearings throughout May. . Operator: Your next question comes from the line of Ryan Levine with Citi. Ryan Levine: Two questions. One, just in general, how does the summer look for weather into wildfire season? And then secondly, as you continue to look to optimize capital allocation into potential scenarios around CapEx, whether it's growth or something else. How do you look at what credit metrics to maintain on your holding company leverage? Patricia Poppe: Well, I'll take a weather question, and then I'll pass off to Carolyn on the credit metrics. On the forecast for weather, look, one thing I've learned, we have incredible scientists here at PG&E who are extraordinary weather predictors. But our strategy is not to count on weather prediction, we count on being ready every day. And so regardless of the conditions, we are in a position and a posture to respond and to be prepared and to prevent. As I shared in my prepared remarks, this continuous monitoring application to our grid is extraordinary. I cannot overstate how exciting it is to us here at the company to look at the potential of being able to move from a reactive grid operations to proactive grid operations with visibility, knowledge and forethought before conditions materialize. And before a branch grows into a tree, before a line has any kind of degradation, we can see it. Before a transformer might have early signals of failure, we are moving into a fully predictive grid posture. We're not there yet, but boy o boy, are we making progress and this continuous monitoring gives us a lot of confidence heading into this wildfire season that we have the posture required to prevent catastrophic wildfires. And so we're just -- we're working hard to make sure that we deploy those sensors and leverage that technology as quickly and as affordably as possible because it is so beneficial. I'll go ahead and kick it over to Carolyn for the credit metrics question. Carolyn Burke: Yes. Just on -- so just -- as a reminder, stepping back, like our current plan is certainly built around 3 things, as we've said. No equity, particularly at today's low valuation. We want maintain the common dividend, which provides us with flexibility. And then we do have some modest debt levels at parent level, sorry, debt financing in the plan at the end, but we are maintaining that 10%, and that's all built around maintaining our IG-level credit metrics today. post SB 254, I think that what you're getting at and looking at a different capital allocation if we said everything is on the table at that point in time. And so all elements of that plan that I just went through, will be on the table to be considered at that point in time. And what I will say is that you can just really count on us to look at market conditions. We're going to be looking at what's going on with our stock price, what's going on with interest rates, what is the overall environment, and we'll come to that conclusion at that time. Ryan Levine: Okay. And I appreciate the maybe sensitivity, but is there any color you could share around whether special dividends or ratable dividends or buybacks that we should consider in those type of scenarios? Patricia Poppe: Ryan, it's Patty. Yes, as I've said, we're just not going to rack and stack the alternatives here today. We're going to make sure that we do first things first, and that's to get a solid SB 254 outcome. Operator: Your next question comes from the line of Richard Sunderland with Truist Securities. Unknown Analyst: Just 1 for me. Given the transparency in the SB 254 Phase 2 process, recent CEA report, do you expect any new look to the legislative process this summer, like in earlier bill introduction or more debate on public text or I guess anything else that offers more external insight into where the process stands. Patricia Poppe: Well, we don't know exactly what -- how the legislature is going to approach this, but we do know that the Assembly Energy Committee Chair, Cottie Petrie-Norris had indicated that she had hoped to hold hearing sometime in May, which would be -- she said that in public statements. And so we're hoping that, that gets followed through on. We do think hearings will be important because it's a complex subject, and we think the more are legislators and these important committees both the insurance and the energy committees and the Senate and the assembly understand the alternatives. They'll see what the CEA report really was conveying that in action is not a good path forward. In action would be really just not an option. It's unaffordable. It's too expensive and too regressive. And we know our policymakers when they understand that we'll want to take the appropriate actions. And the good news is the CEA report provides multiple alternatives for consideration that would dramatically improve the status quo. So we look forward to those hearings and look forward to the discussion how it transpires here over the legislative session between now and the end of August. Operator: Your next question comes from the line of Carly Davenport with Goldman Sachs. Unknown Analyst: This is [indiscernible] on for Carly. I had a question on the CAISO transmission project. Could you give us a sense of where things stand in terms of getting to a final approved status? Are there any projects that you're more optimistic could clear the final iteration this year? And then how should we think about the financing strategy for these projects? Patricia Poppe: Yes. Thanks. Great questions. We're excited to report the transmission planning process from CAISO is has completed, and they've awarded 25 projects for '25 '26 planning, totaling $4.16 billion of projects for PG&E. This is a big improvement for PG&E. I think there was a period of time where the CISO was not sure that PG&E could follow through and do these transmission projects at this scale. And their determination certainly has shown that they have confidence that of 26 projects, 25 were awarded to PG&E. And we're proud of that. And all of those projects are currently built into our $73 billion capital plan. So no change to the capital plan there, just our ability to go ahead and execute those. Unknown Analyst: That's great. And then a quick follow-up on Diablo Canyon. Now that you got the license renewal, how are you thinking about appetite from the state to keep the plant on longer term? Patricia Poppe: Yes. Well, thank you for asking this question. I always love to talk about Diablo Canyon. Look, we're very happy with the NRC's 20-year license renewal, and that was a big milestone for the team. I think they've earned that with their performance, their continued delivery of clean energy for the state of California, one of the best operated nuclear plants in the country, proud of their performance, and we think that performance was essential in that license renewal. Now it is up to the legislature on whether the plant would be extended beyond 2030. I think the CPUC has been very clear that there's a real cost benefit and the billions of dollars of savings for customers by having Diablo remain online. And there's a recent study by MIT that confirmed and validated CPUC's understanding -- or CPUC's forecast. So I think with affordability top of mind, I leave it in the hands of the legislature to take the necessary actions to extend the life beyond 2030. But the economics certainly work. Operator: This concludes the question-and-answer session. I will now turn the call back over to Patti Poppe for closing remarks. Patricia Poppe: Thank you, Jeannie. Well, Thanks, everyone, for tuning in today. We know a lot of eyes, including ours, are on Sacramento and wildfire liability reform, and you can rest assured that our eyes are also on running a great utility. The PG&E transformation is on track. We have never been stronger or better positioned to serve, and it is our honor to do so. Thank you for joining us today. Stay safe out there. Operator: Ladies and gentlemen, that concludes today's call. Thank you again for all joining. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation's First Quarter 2026 Earnings Conference Call. [Operator Instructions] A replay of the call and the accompanying slides are available on our Investor Relations website. Please review the forward-looking statements and non-GAAP disclosures on Slide 2. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir. Jason Darby: Thank you, operator, and good morning, everyone. We appreciate your participation in our earnings call. With me today is Priscilla Sims Brown, our President and Chief Executive Officer. Additionally, Sam Brown, our Chief Banking Officer, is here for the Q&A portion of today's call. We'll look forward to your questions and try to limit repeating details you've already reviewed in the earnings materials. I'll now turn the call over to Priscilla. Priscilla Sims Brown: Good morning, everyone, and thank you for joining us. I want to begin by thanking our colleagues across the bank as always for their continued focus and execution and our customers and shareholders for their trust and partnership. Overall, we delivered a very strong first quarter that underscores the strength of our balance sheet and purpose-driven model. We grew net revenue by 9.7% to $93.4 million. We expanded net interest margin 9 basis points to 3.75%, increased on-balance sheet deposits, $229 million to $8.2 billion and maintain strong Tier 1 capital at above 9.3%. Before commenting on the additional reserves we took this quarter, I'd like to dive into our results just a bit deeper. Our deposit franchise continued to perform exceptionally well with broad-based strength across our core segments. Political deposits increased $133 million to $1.9 billion as the midterm elections approach. The labor franchise generated $106 million of growth, and not-for-profit deposits grew $115 million. Deposit mix was also improved with average noninterest-bearing deposits increasing to 41% of total deposits. Finally, super core deposits are approaching 60% of total on-balance sheet deposits, demonstrating the stable, durable funding that is unique to Amalgamated. We chose to keep more deposits on balance sheet this quarter to drive core net interest income as the portfolio repositioning from selling lower-yielding securities is largely behind us. We plan to manage through the midterm election cycle with sufficient off-balance sheet deposits to absorb expected political deposit outflows after the elections which should result in no borrowings post election. Loan growth was solid with net loans up approximately $66 million or 1.3% led by strong commercial real estate lending production. Loans in our growth mode categories, C&I, commercial real estate and multifamily grew $109 million or 3.3%, reflecting solid originations, healthy mission in demand and continued credit discipline. Our PACE portfolio also expanded with total assessments of $15.8 million of 1.2% and bringing our PACE portfolio to approximately $1.3 billion. Now let me briefly address the additional reserves we took in the quarter, and Jason will have some further details as well. Included in our results was an incremental $9.2 million provision tied to a single borrower multifamily relationship that moved to nonaccrual during the quarter. The underlying collateral supports our position, and we are aggressively pursuing resolution options to preserve and optimize value. We view this as an isolated event with one borrower, which does not change our performance outlook. The reserve bill impacted earnings per share by $0.23 and yet we delivered solid core earnings of $0.80 per share. With the momentum we saw in the quarter, we are focused on executing and delivering on our revenue and earnings targets over the balance of the year, and you will see our optimism when Jason discusses our guidance increase in just a few minutes. Looking ahead, our strategy builds on who we are and why customers choose amalgamate it mission-focused organizations and individuals who see confidence that their capital is responsibly aligned with a partner who shares their purpose. That focus resonates nationally with customers in every state enabling relationship-based banking and efficient growth within our model. We see real opportunity to expand thoughtfully and consolidate market share in our core segments as we continue investing in people infrastructure and technology to support disciplined profitable growth, including progressing past $10 billion in assets. Now I'll turn the call over to Jason. Jason Darby: Thank you, Priscilla. I'll keep things moving so we can get to Q&A. On Slide 3, net income was $25.2 million or $0.84 per diluted share while core net income, a non-GAAP measure, was $24.1 million or $0.80 per diluted share. The GAAP to core difference was driven primarily by strong off-balance sheet income as ICS fee income increased $1 million versus the linked quarter. And we anticipate ICS fee income will be strong throughout 2026, and we also plan to keep more deposits on balance sheet to build the bank's core earnings power. Net interest income increased 3% to $80.2 million, in line with our quarterly guidance. Additionally, our net interest margin expanded to 3.75% driven by higher-yielding commercial loan originations and modest reductions in overall funding costs, though we expect our net interest margin to moderately decline in the second quarter related to balance sheet growth. On Slide 4, core noninterest income increased $1.1 million to $11.2 million, primarily from higher commercial banking fees and also $0.7 million of discrete billing income. Noninterest income has continued to deliver solid growth over the past year, reflecting meaningful progress towards our 85/15 diversification objective. Expenses decreased $0.5 million, while core expenses increased $0.3 million to $45.3 million. The rise in core expenses was mainly due to branch renovation and relocation costs and professional fees partially offset by a decrease in advertising expenses. Core expenses are tracking to our $188 million full year target. Our core efficiency ratio improved to 49.55% and demonstrating profitable scale and keeping us on track to deliver our 2026 goals. Now despite the reserve increase headwind, I'll address shortly, the quarter showed continued momentum and resilience across key metrics. Tier 1 leverage remained strong at 9.33% and revenue per share exceeded $3 for the first time in the bank's history. Illustratively, excluding the reserve build, return on average assets would have been 1.41% and return on tangible common equity, 15.76%. And while the setback is clear, we remain encouraged by our trajectory and the strength of the franchise value we've built. Now let's go to Slide 10 and spend some time on credit quality. Last quarter, we discussed one borrower in our D.C. market that showed stress related to their use of the Section 8 rapid rehousing program resulting in increased reserves of $1.9 million across 3 loans and a related $10.3 million increase in nonaccrual multifamily loans. There were also another 3 loans totaling $26.2 million with this borrower and a minority sponsor that were moved to criticized status. At that time, we were working with this bar and the minority sponsor to restructure this portion of their portfolio. Before we close the first quarter, the borrower indicated an expected default resulting in the classification of all 10 loans within the $78 million relationship, which included the 4 remaining performing loans of $41.5 million. Additional specific reserves, $9.2 million were established across the relationship at varying levels based on loan level assessments, including consideration of collateral values reflected in third-party appraisals, occupancy and in-place cash flows. Reserves on this borrower relationship now total $11.1 million. We are evaluating resolution alternatives, which may include foreclosure, note sales or other exit strategies, and while the bank has not historically taken title to foreclosed properties, it is prepared to do so if necessary, and we'll engage an experienced third-party property manager to preserve and maximize value prior to disposition. As a result, nonperforming assets rose to $99.3 million or 1.08% of total assets, while criticized and classified loans increased $51.6 million primarily related to downgrades on the single borrower, I just discussed. The allowance for credit losses increased to $68.2 million, representing 1.35% of total loans, providing appropriate reserve coverage. Excluding the provision increase discussed above, the provision expense would have been $4.2 million, primarily driven by expected consumer charge-offs and adding a specific reserve on a multifamily loan that moved to nonaccrual status during the quarter, offset by credit losses releases due to lower required reserves on C&I and consumer loans. In keeping with our practice of helpful disclosure, we have added a slide on Page 12 illustrating our D.C. Metro area real estate exposure. We believe this situation to be borrower specific and we'll be happy to answer follow-up questions. I'll wrap up by turning to guidance on Slide 13, where we are raising our targets. Net interest income target is raised to $333 million, and core pretax preprovision earnings target is raised to $183 million. This guidance raise is connected to our new annual balance sheet growth target of approximately 8% for 2026 as we derive more core earnings power from deposit gathering. We anticipate this to have a powerful and sustained positive impact on NII growth, and we estimate net interest income to increase to between $81 million to $83 million in the second quarter. I do want to close on a positive note because we've accomplished a great deal. And even as we work through the specific challenge, our fundamentals are strong. we've delivered consistent revenue growth, exceptional deposit gathering, continued loan growth, disciplined cost management and solid capital, all of which keep us confident in our ability to deliver on our targets for the balance of the year and into the future. We're now ready for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of David Konrad with KBW. David Konrad: I've got a few questions here. One on the credit, obviously. Just talk a little bit about -- I mean 2 questions here, a little bit about your comfort with loan-to-value of about 85% on this relationship and maybe closer to 60% on the rest of your D.C. exposure. So as you work through this, a, do you think you have enough margin here with that loan to value? And then, b, this is probably a more difficult question, but any idea on any thoughts on the strategy like timing of resolution, what we should expect over the coming quarters? Jason Darby: Sure. David, it's Jason. I'll answer the second question first and then talk a little bit more about the LTVs. From a resolution perspective, it's difficult to say the news is fairly new to us, and there were ongoing negotiations with the borrower that have since been changed. So where this just will end up from a resolution perspective, I don't have the best answer for you in terms of predictability. But what I can say is the reserving that we took for the current quarter was really designed to limit any volatility that you might see going through the P&L into future quarters. And if I think about broadly how timing might play out, we talked last quarter about this borrower relationship and where it was heading and there were 3 loans that were classified as nonaccrual at that point in time, totaling about $10.3 million. those would probably be the most likely to resolve sooner. The other ones where there is better collateral value and the bank is considering pursuing foreclosure amongst other options, there may be a longer tail on that, but I am confident that the volatility through the P&L will be well contained with the amount of reserves that we put up in the current quarter. And maybe that leads into an answer now on the valuation. And we think of this borrower relationship and we are best to carve it out of that, DC profile that we provided for investors in the earnings deck. So we think of this as a separate situation from a value perspective. If I look broadly across the relationship, it's 10 different loans that total $78 million, four them or $41 million weren't performing status before we received notification of the intent not to pay. So the reserve that we put in place that now totals $11 million effectively get us to that 85% valuation. And we think that we took a very conservative approach with that valuation at this point in time, for the purpose of making sure that we accounted for cost to sell or other types of embedded expense that might be recognized in relation to the situation that we're going to have to deal with here for the next few quarters. But the reality of it is we think that, that reserve is pretty well contained at the moment. I wouldn't say that it's evenly distributed across all the loans. I think it's more weighted towards some of the loans that we previously disclosed and what I also hope is that, that allows for us to have staged exits to the property situation as time unfolds. David Konrad: Okay. That makes sense. Maybe moving to better news, the outlook, the improved outlook. Net interest income for the full year, the net $331 million to $333 million range, just wondered, Jason, if you could break down a little bit on the guide in terms of how you think both NIM will progress through the year, but also the balance sheet side as well? I mean you talked a little bit about that going into next quarter. Jason Darby: Certainly. Yes, I think the balance sheet size, let's start there because that will be a key driver of how the margin will ultimately start to play out. But the balance sheet ought to end up on a spot basis at around $9.6 billion. It's potentially moving around a little bit, but that's moving up about $400 million from our original target. So we had originally targeted 5% growth going to $9.2 billion. We're now targeting $9.6 billion by the end of the year or around 8% growth. Now we've gotten through a fair amount of that in the first quarter or the first quarter alone, the balance sheet grew to about $9.2 billion, and that was about $400 million of growth right there -- I'm sorry, $300 million of growth right there. So we're going to start to see the benefit of that asset expansion rolling through NII. We've projected $81 million to $83 million of NII for the second quarter, and we expect that to ramp upward as we continue to go throughout the year. And so as I think about the margin, we will see a little bit of compression when we get into the second quarter. There'll be a little bit of nonaccrual impact from the loans that we've just discussed that we'll have to bake into the margin. But as we continue to move throughout the year, we're expecting to see it expand and expand modestly from where we are today. I wouldn't expect it to be materially different, but I do expect it to expand to be modestly above where we are today after accounting for a slight reduction or compression in margin in the second quarter. I don't know if I got everything there, was there a follow-on you wanted to ask you on the guidance? David Konrad: No, no. That was perfect. And maybe the last one for me is just the fee income outlook as well with some of the changes there. Jason Darby: Yes, fee income. We're actually quite happy about that. It's been gradually but noticeably growing. I think where we are throughout the rest of the year is going to be ratable to what we saw in the first quarter on a core basis with modest improvement, the GAAP number was a little bit higher because of the fact that we had nice ICS income, and we had a little bit of BOLI that was discrete benefit that we received. But overall, I think we're looking at just about $9.8 million to $10 million per quarter in fee interest income, and that will be evenly distributed across nice growth in Commercial Banking and continued acceleration of trust-related revenue as well. Operator: Our next question comes from the line of Justin Crowley with Piper Sandler. Justin Crowley: Just wanted to go back to the multifamily relationship that migrated in the quarter. Can you give a little more detail on what was so unique or isolated about the situation and with this borrower, and just what gets you to a point where you're feeling good about risk in the rest of the portfolio? Priscilla Sims Brown: Justin, we're going to be somewhat limited, obviously, as we are in the midst of negotiations with this borrower on talking about it in too much detail, though, I'm sure you'd love to know more, you can understand where we are on that. I guess I'll just start by reiterating some of the points we've made, which is this reserve build and nonaccrual increase is driven by this one single borrower event primarily. And what happened was pretty clear. It was a notice of intent to default which occurred after the quarter, but before we closed the books. There was no broad portfolio weakness. The notice triggered an accounting requirement that moved additional previously performing loans into nonaccrual. And then the borrower does have ties to DC Rapid Rehousing and Section 8 programs as well, but management really wants you to clearly understand that this was the borrower's behavior and financial condition is the driver, not the subsidy program itself. We review the exposure across Rapid Rehousing more broadly. We looked at exposure across the broader D.C. metro profile. And when I say that, I mean not just DC directly, but the states surrounding it. So we really, really looked carefully at that whole kind of metro area to see whether there were any other sort of similar characteristics. We also, as you know, have provided quite a lot of detail on our New York portfolio in the past. That's still there. We looked at that real carefully. We looked at California, be it a smaller portfolio. We found very little, and we certainly see no -- we see limited migration just outside of this relationship in any of these other areas besides what we've disclosed. I would also just say that the reserves were established conservatively upfront to limit future P&L volatility. But we also want to retain flexibility to pursue an exit, an accelerated resolution, if that proves to be the right thing for preserving value for shareholders. Sam and Jason, I don't know if there's anything you want to add to that? Justin Crowley: Okay, this was -- I mean -- yes. I mean -- so this -- it wasn't specific to the Section 8 housing program. This was more borrower specific in terms of what has driven the weakness in the situation. Priscilla Sims Brown: Rapid Rehousing and Section 8 are different. Section 8 is a federal program. Rapid Rehousing is a city program which is established to take people generally off the street and give them housing temporarily under a year. And that's what we looked at really carefully. We looked again at all of the Rapid Rehousing relationships we have. This borrower certainly had an overdependence on the program. But the issues here were specific to the borrower himself, his own behaviors and his own financial condition. Justin Crowley: Okay. Got it. And then I guess, shifting gears a little. On political deposits, you saw the increase for the quarter, a little bit of a slowdown from last quarter, but still moving higher. Just wondering if you could provide some color on what you're seeing there and how you think that trends as we head into the midterms later this year? Priscilla Sims Brown: Yes, Sam, I'll ask you to address that, but what I will say is, Justin, as you've observed and you've seen it in our deck, there's a general trend that continues to follow on each cycle, which is it builds over time, each trough is bigger than the trough before it. So they keep climbing the low points bigger than the low before and the high point is bigger than the high point before. And we don't see any indication that this will be different. And Sam, I don't know if you have any other... Sam Brown: Yes. Justin, it's Sam. I would just add a couple of quick points. I think you're exactly right that we see these political deposits very much on track with prior trend. We're very pleased with our ability to have demonstrated all the way back to 2018, the predictability and the repeatable nature of how those deposits come in and out. And at $133 million, certainly excellent growth, that would also just point you to the really strong diversified growth across all of our segments that contributed to this. Certainly, same political labor, nonprofit, all contributing over $100 million to our base, really smooths those ins and outs out and have contributed to quarter after quarter, how our great team has been able to continue to grow the book. Priscilla Sims Brown: That's a great point, Sam, because it's been the trend for quite a while now. We really are seeing strength not only in additional deposits to existing clients, but also new clients across segments. Justin Crowley: Okay. Got it. I appreciate that. And then just on loan growth. A lot of that once again coming from the multifamily side, is that like -- is that an area that you think continues to drive loan growth from here? What's the right way to think about that complexion as we get through the year? Sam Brown: Yes. Great question, Justin. We're really pleased with the pipeline we've got ahead of us. Certainly, at 250% RBC, we still have a lot of availability under a concentration limit. The pipeline has a lot of -- there's plenty of exposure for market rate from strong mission-aligned subsidy programs like those benefit from 421a in New York, all with really tightly underwritten financial metrics, ratios and also, we've got a lot of addition of enhanced structural protections that reflect our elevated standards as we continue to grow the company. So I think you'll see strong growth, strong risk metrics, and we're going to continue to keep going and all the ways you would want to see us perform. Jason Darby: Yes. So I'll just quickly add. I think the targets that we set out about 1.5% to 2% sequential loan growth in the net book, we're prepared to stay with those targets. We think they're very appropriate. Obviously, we're balancing between our grow more portfolios and those that are running off. So we'll expect to see a little bit higher growth rate just in the portfolios of C&I, multifamily and [indiscernible] versus the net book. And then we still have our PACE portfolio targets as well, Justin. So you should think of those as complementary from a growth perspective on the asset side, and the opportunity for the bank to continue to have balance in loan generation is something that we are very focused on. So we did have a nice quarter with multifamily. We expect to see a little bit more balance between our C&I and multifamily portfolios as we move throughout the balance of the year to help meet those targets. Justin Crowley: Okay. Great. And you mentioned on the PACE side as you continue to add to that portfolio. And I think in the past, you talked a lot about a lot of potential, specifically in the CPACE area. So -- and I think you have talked at length about the partnership that you're in. So just curious how you're thinking about growing that book as that business ramps higher? Sam Brown: Yes. Justin, it's Sam again. CPACE has been really tremendous for us. You obviously saw a really nice number in the last quarter. You saw more growth this quarter. We really like the pace at which those assets are coming on, no pun intended. That announcement of that partnership with Electrify in October has been very strong. We're seeing a lot of contribution to the pipeline for that. And I think you're going to see this continue to be a strong component of how we're going to grow the asset base, and we're picking up some nice yield growth over the quarter as well. Operator: We have no further questions at this time. Ms. Sims Brown, I'd like to turn the floor back over to you for closing comments. Priscilla Sims Brown: Thank you, operator, and thank you all for listening in. As we step back and think about the quarter, we feel that it was a very strong quarter. We delivered solid execution across the franchise, which allowed us to favorably revise our guidance. We're building on a consistent pattern of quarterly outperformance. Our financial and capital position remains strong. Our balance sheet is built to withstand adverse scenarios and at the same time, we're well positioned for accelerated disciplined growth. And just as importantly, this quarter reinforces our risk discipline. When we identified an issue, we acted early, we acted conservatively. We expanded the disclosure to you and we confirm that the impact is contained without losing momentum anywhere else in the business. That combination of performance, discipline and capital strength is exactly how we are positioning the bank for the long term. We thank you for your support, and we look forward to answering your questions after this call. Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Banner Corporation First Quarter 2026 Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Mark Grescovich, President and Chief Executive Officer of Banner Corporation. Mark, please go ahead. Mark J. Grescovich: Thank you, Tiffany, and good morning, everyone. I would also like to welcome you to the First Quarter 2026 Earnings Call for Banner Corporation. Joining me on the call today is Rob Butterfield, Banner Corporation's Chief Financial Officer; Jill Rice, our Chief Credit Officer; and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking safe harbor statement? Rich Arnold: Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. These statements include descriptions of management's plans, objectives or goals for future operations, products and services, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available in the earnings press release that was released yesterday and our recently filed Form 10-K for the year ended December 31, 2025. Forward-looking statements are effective only as of the date they are made, and Banner assumes no obligation to update information concerning its expectations. Mark? Mark J. Grescovich: Thank you, Rich. As is customary, today, we will cover four primary items with you. First, I will provide you high-level comments on Banner's first quarter 2026 performance; second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders; third, Jill Rice will provide comments on the current status of our loan portfolio. And finally, Rob Butterfield will provide more detail on our operating performance for the quarter as well as comments on our balance sheet. Before I get started, I wanted to thank all of my 2,000 colleagues in our company who are working extremely hard to assist our clients and our communities. Banner has lived our core values, summed up as doing the right thing for the past 135 years. Our overarching goal continues to be to do the right thing for our clients, our communities, our colleagues, our company and our shareholders and to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report again to you that is exactly what we continue to do. I am very proud of the entire Banner team that are living our core values. Now let me turn to an overview of our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $54.7 million or $1.60 per diluted share for the quarter ended March 31, 2026. This compares to a net profit to common shareholders of $1.30 per share for the first quarter of 2025 and $1.49 per share for the fourth quarter of 2025. Our strategy to maintain a moderate risk profile and the investments we have made and continue to make in order to improve operating performance have positioned the company well for the future. Rob will discuss these items in more detail shortly. The strength of our balance sheet, coupled with the strong reputation we maintain in our markets will allow us to manage through the current market uncertainty. To illustrate the core earnings power of Banner, I would direct your attention to pretax pre-provision earnings, excluding gains and losses on the sale of securities, changes in fair value of financial instruments and building and lease exit costs. Our first quarter 2026 core earnings were $66.3 million compared to $58.6 million for the first quarter of 2025. Banner's first quarter 2026 revenue from core operations was $169 million compared to $160 million for the first quarter of 2025, an increase of nearly 6%. We continue to benefit from a strong core deposit base that has proved to be resilient and loyal to Banner, a very good net interest margin and core expense control. Overall, this resulted in a return on average assets of 1.37% for the first quarter of 2026. Once again, our core performance reflects continued execution on our super community bank strategy, that is growing new client relationships, maintaining our core funding position, promoting client loyalty and advocacy through our responsive service model and demonstrating our safety and soundness through all economic cycles and change events. To that point, our core deposits continue to represent 89% of total deposits. Reflective of this performance, coupled with our strong regulatory capital ratios, and the fact that we increased our tangible common equity per share by 11% from the same period last year, we announced a core dividend increase of 4% to $0.52 per common share. Finally, I'm pleased to say that we continue to receive marketplace recognition and validation of our business model and our value proposition. Banner was again named one of America's 100 Best Banks as well as one of the best banks in the world by Forbes. And Newsweek named Banner Bank, one of the most trustworthy companies both in America and the world again this year. And just recently again, named Banner one of the best regional banks in the country. Additionally, J.D. Powered Associates named Banner Bank the Best Bank in the Northwest for retail client satisfaction for 2025. Our company was certified by Great Place to Work, S&P Global Market Intelligence ranked Banner's financial performance among the top 50 public banks with more than $10 billion in assets. And as we've noted previously, Banner Bank again received an outstanding CRA rate. Let me now turn the call over to Jill to discuss trends in our loan portfolio and for comments on Banner's credit quality. Jill? Jill Rice: Thank you, Mark, and good morning, everyone. As detailed in our press release, we again had a strong quarter of loan originations, in line with that reported in the fourth quarter and 61% higher than that reported in the first quarter of 2025. Still, significant commercial real estate payoffs coupled with expected paydowns within the ag portfolio, offset production such that portfolio loans decreased $14 million when compared to December 31, 2025. Year-over-year loan growth was modest at 2.4%. Production within the commercial real estate portfolio continued to be meaningful with owner-occupied CRE up 3% in the quarter and 15% year-over-year and investor real estate up 1% in the quarter and nearly 8% year-over-year. Those increases, however, were almost entirely offset by the significant commercial real estate paydowns within the multifamily portfolio, down 6% in the quarter and 9% year-over-year as stabilized properties moved into the secondary market. Within the construction portfolios, the 12% increase quarter-over-quarter in commercial construction reflects the continued funding of previously approved projects. In addition to the multifamily payoffs noted previously, we had two large land development projects payoff, which resulted in a 7.5% decrease in balances this quarter. We are continuing to see an elongation of the days on market within the for-sale 1-4 Family construction portfolio, given the elevated interest rate environment and general economic uncertainty. Still, the level of completed and unsold inventory remains within historical norms and the builders continue to have strong balance sheet and profit margins to work with. In total, the 1-4 Family construction portfolio continues to represent a modest 5% of the loan portfolio, and the total construction portfolio, including land and land development continues to be acceptable at 14% of the loan book. After declining 3% last quarter, C&I line utilization moved closer to normal, increasing 2% this quarter. In total, commercial loans were up a modest 1%, both in the quarter and year-over-year. Agricultural balances as expected, were down 6% in the quarter as crop proceeds reduced line balances and the decline reported year-over-year reflects the collection and payoff of multiple classified ag balances. Shifting to credit quality. Our credit metrics remained strong. Delinquent loans increased 2 basis points and now represents 0.56% of total loans which compares to 0.63% reported as of March 31, 2025. Adversely classified loans increased by $42 million in the quarter, representing 2% of total loans and total nonperforming assets at $51.7 million represent a modest 0.32% of total assets. The increase in adversely classified assets is centered in three relationships, operating and manufacturing, residential construction and wholesale agricultural deposits. As of March 31, the allowance for credit losses totaled $160.4 million, providing 1.37% coverage of total loans, consistent with prior quarters. Loan losses in the quarter totaled $1.5 million and were offset part by recoveries totaling $253,000. The risk rating migration discussed previously coupled with the net charge-offs resulted in a provision of $1.3 million to the reserve for credit losses loans. This was offset by a release from the reserve for unfunded commitments of $2.1 million for a net provision recapture of $796,000. The first quarter of 2026 continued to be impacted by economic uncertainty given persistent inflation, the higher for longer interest rate environment and increasing geopolitical issues. Through this, we have maintained consistent underwriting standards, which include a focus on strong sponsors, properly margin collateral, seasoned repayment sources, and in the vast majority of cases, personal guarantees, and we continue our practice of robust quarterly portfolio reviews in order to identify any emerging issues early. We remain well positioned to weather the uncertain economic environment ahead. With that, I will hand the microphone over to Rob for his comments. Rob? Robert Butterfield: Thank you, Jill. We reported $1.60 per diluted share for the fourth quarter compared to $1.49 per diluted share for the prior quarter. The increase in earnings per share compared to the prior quarter was primarily due to the current quarter having lower expenses, a recapture of provision for credit losses. In addition, the prior quarter included a decrease in the valuation of financial instruments carried at fair value and a loss on the disposal of assets. Core pretax pre-provision income for the current quarter increased 13% or $7.7 million compared to the quarter ending March 31, 2025. Our performance metrics remain solid as we reported a return on tangible common equity for the current quarter of 14% and return on average assets of 1.37%. As Jill previously mentioned, loan balances were essentially flat during the quarter as the good loan production was offset by an increase in payoffs. The loan-to-deposit ratio ended the quarter at 85%, giving us ample capacity to continue to support existing clients and to add new clients. Total security balances were relatively flat as normal portfolio cash flows were mostly offset by security purchases. Deposits increased by $97 million during the quarter due to core deposits increasing $165 million or 5.5% on an annualized basis. The increase in core deposits was partially offset by time deposits decreasing $67 million, mostly due to $50 million of brokered CDs maturing during the quarter, ending the quarter with no brokered deposits. Core deposits ended the quarter at 89% of total deposits. Total borrowings decreased $142 million during the quarter, ending the quarter with no outstanding FHLB advances. The tangible common equity ratio increased from 9.84% to 9.97%. As a reflection of our robust capital and strong liquidity positions, Banner repurchased 250,000 shares during the quarter and declared an increase in the quarterly dividend of $0.52 per share. Net interest income decreased $2.3 million from the prior quarter due to a combination of lower earning assets and 2 fewer interest earning days in the current quarter. Partially offset by an 8 basis point increase in net interest margin. The decrease in average earning assets was primarily due to average interest-bearing cash and security balances decreased to $953 million. Tax equivalent net interest margin was 4.11% for the current quarter compared to 4.03% for the prior quarter. Funding cost decreased 9 basis points due to deposit costs decreasing 8 basis points. Deposit costs benefited from a full quarter of the deposit pricing reductions implemented in the fourth quarter of last year. We also benefited from an improved earning asset mix as lower-yielding cash and security balances or a smaller percentage of earning assets. The improved earning asset mix offset the 3 basis point decline in loan yields. The average rate on new loan production for the current quarter was 6.69% compared to 6.88% for the prior quarter. Noninterest-bearing deposits ended the quarter at 33% of total deposits. Total noninterest income increased $3.9 million from the prior quarter, primarily due to the prior quarter, including a loss of $1.4 million on the disposal of assets and a fair value decrease of $2 million on financial instruments carried at fair value. While the current quarter had a $1.7 million fair value increase on financial instruments carried at fair value, partially offset by a loss of $1.2 million on the sale of securities. Total noninterest expense was $1.5 million lower than the prior quarter, with decreases in occupancy and equipment, marketing and legal expense being partially offset by an increase in salary and benefits. Our strong capital and liquidity levels continue to position us well to support our existing clients and to add new clients. This concludes my prepared comments. Now I will turn it back to Mark. Mark? Mark J. Grescovich: Thank you, Jill and Rob for your comments. That concludes our prepared remarks. And Tiffany, we will now open the call and welcome questions. Operator: [Operator Instructions] Your first question comes from the line of Jeff Rulis with D.A. Davidson. Ryan Payne: This is Ryan Payne on for Jeff Rulis. Just starting on the margin, had some deposit fluctuations and lower CD balances this quarter benefiting the NIM. But just trying to gauge your thoughts on expectations for the margin ahead. Robert Butterfield: Yes, sure. This is Rob. So we typically see an increase in funding costs during the second quarter as clients start to use deposit balances to make tax payments early in the quarter, and we supplement that temporary decline in deposit balances with some FHLB advances. We think that this should be mostly offset by an increase in loan yields as adjustable rate loans continue to reprice up and the new loans coming on are still coming on at higher yields than the average overall portfolio yield, which suggests that NIM would be relatively flat probably in the second quarter, which is similar to what we saw last year where the Q2 NIM was flat compared to the first quarter. We could see some expansion in NIM in the third quarter due to funding costs coming back down as FHLB advances are replaced by deposit increases in the typical seasonality we see in the third quarter. And in addition, we would expect that loan yields would increase in the third quarter as well as long as the Fed remains on pause. So we would expect some net interest margin expansion in the second half of the year. Ryan Payne: Helpful. With the loan production impacted by payoffs this quarter, where do you see payoffs trending from here and maybe your overall expectations for growth? Jill Rice: Sure, Ryan. So we had anticipated that the headwinds of commercial real estate payoffs would potentially offset growth into 2026. I expect that they will slow. I'm not prepared to tell you that they're done coming in, but I think that the rate of payoffs will slow down. Still, the loan production volumes, which were solid and indicative of future loan growth, the strong backlog of construction fundings we have is meaningful and our pipelines are strong. So we're still sticking with the mid-single-digit growth rate for 2026. Ryan Payne: Got it. Last for me, capital priorities. We have the dividend increase and buyback. What's your appetite for continued buybacks here? And where would you see M&A on the list of priorities? Robert Butterfield: Yes. It's Rob again. So as you know, we did increase the core dividend by 4% this quarter, which was the second increase we've done in the last 3 quarters. Our goal from a dividend perspective is to pay out 35% to 40% of earnings as a core dividend. And in addition, we did do those share repurchases again in the first quarter. That's the third quarter in a row that we've done that. As we think about capital priorities, we always look at the different opportunities we have there, which certainly include additional share repurchases that we could consider in the second quarter. But ultimately, it's really depending on market conditions on where the stock price is trading and other things as we evaluate the best use of our capital. And as always, we just continue to look at different ways we can deploy capital. Mark, as far as M&A, do you have any? Mark J. Grescovich: Yes. Thanks for the question, Ryan. Our position on M&A hasn't changed since I've been here, which is we look and try to partner with folks that will be a great fit for Banner, add additional density to our market and be very good core deposit franchises. and it has to be very opportunistic. And so we're very selective on the M&A front. We feel very good about our organic opportunities to continue to grow the bank and improve profitability. But if an opportunity exists in which we can add additional density with a good core deposit franchise and a strong bank, we certainly would look to do that. Operator: Your next question comes from the line of Matthew Clark with Piper Sandler. Matthew Clark: Good morning. On the funding side of the equation for the margin outlook, on the deposit side, if you had the spot rate on deposits at the end of March? And then how are you thinking about deposit pricing going forward with the Fed on hold, do you think you'll just be managing as best you can to hold that level? Or do you feel like there are opportunities to trim exception-based pricing in CD rates? Robert Butterfield: Sure. Thanks, Matthew. It's Rob. So the spot price the cost of deposits from March was the same as the quarter. It was pretty much across the board at that 135 basis points. Early in the quarter in January, we did make some additional rate reductions really in response to the December Fed rate cut that we saw, and we did that in early January. So really, the whole quarter benefited from that. As we think about going forward, while the Fed is on pause, I don't think you're going to see much change in our core deposit pricing for our core products. Where we might get a little bit of benefit is on the CD pricing side of it just because the cost of our CD book, we would expect to continue to trend down for the next few quarters as the lag effect of the rate cuts that we saw the Fed do in the fourth quarter. The average rate of the new CDs coming on is around 3% right now. The CDs rolling off are around 330. Approximately 40% of our CD book matures in the second quarter. So we would expect some there. But what I'd say is what happened is now that the expectation is the Fed will be on pause through the remainder of the year, maybe seeing the rate cut late in the year, fourth quarter or something like that. We are seeing some additional pressure on deposit pricing right now where we are seeing some competitors start to increase some of their promotion specials on deposits right now. So I'll caveat with that as we ultimately we'll have to respond to what the market is doing. Matthew Clark: Okay. Great. And then on the service charges and fees line this quarter, up pretty nicely in a quarter with 2 less days. Did you do anything -- did you change your product pricing there at all? Or what can you attribute that to? And is that sustainable? Mark J. Grescovich: Yes. So we didn't change any of our pricing there. We did renegotiate our MasterCard contract. So we're seeing a little bit of benefit from that from the first quarter. So otherwise, I think if you look at the trending there, the first quarter is probably a pretty good trending when you look at that. Matthew Clark: Okay. And then on the noninterest expense run rate, down nicely pretty broad-based outside of the seasonal increase in comp. Anything unusual there? Is that more partly a seasonal decline relative to the fourth quarter? I'm just trying to get a sense for that run rate going forward. Robert Butterfield: Yes, there certainly is some seasonality to that. Typically, the first quarter, we have lower advertising and marketing expense in the first quarter than the campaigns that we run throughout the year start to ramp up. So that's a bit lower. And the fourth quarter did have kind of a legal settlement charge in there of around $1 million that didn't carry forward into the first quarter. If you think about the remainder of the year, we've talked about expecting normal inflationary increase in '26 compared to '25. And I think if you look at the full year, that's still my expectation. And Q2 will be higher from a salary and standpoint and benefits just because we do our annual salary increases really in mid-March. So you didn't really see that impact in the first quarter. So I would expect expenses to be a bit higher as we move throughout the year. Matthew Clark: Okay. Last one for me, just back to M&A. Have there been -- have you seen or heard of an increase among sellers or maybe being more willing to talk. Just trying to get a sense for a change relative to last quarter. Mark J. Grescovich: I don't -- Matthew, this is Mark. Thank you for the question. I don't think that there's been a change in behavior. I think there are a number of folks that are trying to strategically figure out what the best next step is. And as you might expect, given my earlier comments about who we think would be a good partner with Banner in which we could leverage our balance sheet to service their clients in a more robust way. The universe is still fairly limited. on the West Coast. And we know that the partners that would make a lot of sense for Banner. So I wouldn't suggest that there's been an increase in conversations, but I wouldn't be surprised if folks as they go through and are delivering on their first quarter strategic plan are trying to figure out what the best thing to do for their organizations are. Operator: Your next question comes from the line of David Feaster with Raymond James. David Feaster: I wanted to maybe touch on, I guess, two things. From -- on the loan growth side, originations have held up pretty well. How is demand? Like have you seen any -- I mean, obviously, there's a lot of macro uncertainty. I'm curious if that has impacted demand and pipelines at all from your standpoint? And then just -- I was hoping you could give some color on the payoffs and paydowns that you're seeing. Like what's driving that? Is it deleveraging, asset sales, competition and losing some deals? Just kind of curious on those two fronts. Jill Rice: So in terms of pipelines, David, -- everybody is telling me that they're busy. They're having good conversations and moving things forward, whether it's early on in the discussions or whether it's my credit team busy working through deals. So demand is out there. I can't say that the level of economic uncertainty doesn't cause -- give some pause, but there is still demand. And as we move through them, we certainly see pricing being pushed and multiple banks going for these same deals. So it's tough out there, I guess, I would say, in terms of getting to the close, and I feel good about what we have been pulling through in terms of originations and what that means for our future growth. As to -- what was the second part driving the payoff... Yes. So if you think about it, they're just delayed. Many of these loans we ultimately expected to pay off, we expected them to pay off 18 months ago, and they sat waiting for what was going to be the lower rate environment in those mini perm loans that we offer at the end of the construction and/or as they were stabilizing and getting stronger. So it is delayed payoffs, not losing because we don't want them or to competition, but to the secondary market that offer terms that most regional banks don't offer, long-term interest only, nonrecourse, those sorts of things. So again, expected, they just are lumpy because of the delay from 18 months ago. David Feaster: Okay. That's helpful. And then there's been a lot of disruption across your footprint. I mean, over the past 12, 18 months, I mean, really from top to bottom, right? I wanted to get a sense of how you've been capitalizing on that, your appetite for new hires potentially coming out of some of those deals or just hires in general? And what markets or segments you might be interested in adding talent to? Jill Rice: So I'll start and then if Mark or Rob want to jump in behind me. If you think back to the last several quarters, we've talked about the personnel we've added because of the disruption in the -- across the footprint. And really, when we find good strong bankers in the markets, we want to add them. This last quarter, we've added a commercial banking center manager. We've added multiple portfolio managers and some treasury management personnel. So it isn't about one business line or one market. When we find the right people, we're adding to improve our talent. Mark J. Grescovich: And David, I would just follow up with that. This is Mark. It's been across the geography. So it's not specific to any particular area. I think we've done a very good job of adding talent into the organization. And as you've heard me say before, we tend to do this as a rifle shot, not a shotgun shot, right? So that we end up doing this because we know who the good bankers are, we court them over time. And when the timing is right, because there is disruption, we find that we are a good source for them to join our organization. David Feaster: Okay. And Mark, maybe just another higher-level one. I'm curious how you and your team are thinking about technology. I think investors, when I have conversations and there's a lot of conversations around AI and stable coin or digital deposits in general. I'm just kind of curious, how are you thinking about those two issues today? And what are some of the things that you're working on? And how do you see this kind of playing out for Banner? Mark J. Grescovich: Thank you for the question, David. I'm going to ask Rob to answer that because we've made some -- a series of investments. But at the same time, we've set up a governance structure, I think, that will help guide us as a lot of this technology and AI infrastructure is evolving. Rob? Robert Butterfield: Yes. Thanks for the question, David. So as Mark mentioned, we do have a fintech council committee that we have internally that evaluates all the different kind of new AI type technology or even different technology products that are being offered by fintechs out there. And so we try to stay on top of what the current pulse is on that stuff. And we have started to adopt some AI technology. At this point, it's more turning on AI within existing software platforms. And of course, we've made some significant investments that we've talked about recently with the new loan and deposit origination system that went fully live last year. And then we also have a lot of conversations around tokenized deposits, stable coin, that type of stuff as well. We -- as part of our annual strategic planning process, we've brought in different experts in those fields to talk to our executive committee to make sure we understand what's out there. And so while we haven't necessarily have any plans to roll that out in the short term, we're really staying on top of what all the different kind of payment channels are out there and keeping our pulse on that kind of stuff. Mark J. Grescovich: So David, just to follow up on that. When you think about regional banks like us have to -- we want to be very cautious and make sure that we're protecting the data integrity of our clients. So examples of AI would be BSA AML in which you can really utilize some of the tools there and certainly the call center which will allow you to be more responsive to your client base over a 24 period of time. So those are the kinds of things, I think, when you think of regional banks, the investments we'll be making in AI. Operator: Your next question comes from the line of Andrew Terrell with Stephens Inc. Andrew Terrell: Most of mine were addressed already, but just on the margin, and you guys have kind of consistently been outperforming the kind of margin expectations you laid out. I know in the past, we've talked about no rate cuts better for kind of the near, medium-term margin trajectory. It seems like kind of the backdrop we're getting now, but still sounds like relatively flattish in 2Q and maybe some back half expansion opportunities. I guess the question is why not more constructive on the margin? And can you walk us through the puts and takes and specifically kind of the limiting factors for the margin term? Robert Butterfield: Yes. Thanks, Andrew. It's Rob. So if you think about the second quarter, and I talked about it a little bit, I'm just looking at normal seasonality there. We always see deposit outflows early in the quarter. You have to supplement those with FHLB advances. And typically, the second quarter has been a little bit better for us from a loan growth standpoint as well, and we're going to be funding those loans with FHLB advances. So I think just naturally, you're going to see funding cost increase in the second quarter. And some of that will be offset by the repricing of loan portfolio. So that's why I'm thinking more flat for the second quarter. And if you look at last year, it's the same seasonality we saw last year. First quarter last year, we saw net interest margin expansion. Second quarter was flat. Third quarter is typically one of the better margin expansion quarters for us. So I think that's where you're going to see some additional expansion again, would be in the third quarter because funding costs will come back down as deposit flow in. So we'll pay off FHLB advances. We'll get the benefit of the asset growth that we saw in the second quarter. And so -- and then in addition, naturally, you're going to see loan yields also increase in the third quarter. So I think the third quarter will probably be the strongest quarter for the remainder of the year from a net interest margin expansion standpoint. And we -- if the Fed is on pause, then we would expect some additional margin expansion in the fourth quarter. But I don't think you're going to see the benefit on the funding side at that point. What you're going to see is just kind of the loan yield continuing to reprice up, which is repricing up about 3 basis points a quarter right now while the Fed is on pause. Andrew Terrell: Great. No, I really appreciate it. And then last question for me. Just I guess, looking back, last time you were generating a comparable, call it, 130-ish ROA consistently was back in 2018, 2019. Your stock was trading 4x higher on an earnings multiple, call it, 40%, 50% higher on tangible book value multiple then. Your capital is 200-plus basis points better today, your allowance is 30 basis points higher. The growth environment feels a little bit slower than then. I guess with that as a backdrop, why not get more aggressive on the buyback here? Mark J. Grescovich: I mean I think any time you look at the capital priorities, we're weighing all the different options there, Andrew. We've certainly had the conversations around the level of share repurchases and where they should be, where we repurchased shares at last quarter. The earnback on that is attractive. The multiple is attractive. So we're just trying to balance the different ones. But to your point, if we think about the TCE ratio right now approaching 10%, that's above where we'd like it to be. So we will have to address that over time as we think about different capital actions. Ideally, we'd like that to be about 100 basis points lower than it is today. So we're continuing to have those conversations and think about the best use. Operator: Your next question comes from the line of Charlie Driscoll with KBW. Charlie Driscoll: This is Charlie on for Kelly. Most of mine have been answered. Just kind of want to give you guys the opportunity to take a step back on credit here and talk about what you're seeing. It feels like NPAs kind of stabilize here, but just any color you can give us on what's in that portfolio? Any areas of concern if things do take a downturn? Just high level here. Jill Rice: So I'll just start by saying that when the portfolio is as clean as it is, you're going to see fits and starts of things moving in and out of adversely classified and NPAs. When you look at the nonperforming loans, relatively flat this quarter, but centered in consumer and small business and ag-related businesses. Average loan size of nonaccrual loans is less than $250,000 and the largest loan is approximately $3 million. So nothing that is extremely worrisome in terms of that portfolio. And in the substandard, we're early to downgrade. We work them as fast as we can. And so some of them may sit there a little longer because we're slower to move them on up and out. We don't want them bouncing around. But when you think about that portfolio, the changes when they've gone in there, it's idiosyncratic. There's no one industry that's raising alarms. And we just are beginning to see the impact of the higher interest rates and wage inflation and other economic factors strained certain business operations. Operator: That concludes our question-and-answer session. I will now turn the call back over to Mark Grescovich for closing remarks. Mark J. Grescovich: Great. Thank you, Tiffany, and thank you all for your questions and your attention today. As I stated, we are very proud of the Banner team in our first quarter 2026 performance. It's been a strong kickoff to the full year. Thank you for your interest in Banner for joining our call today. We look forward to reporting our results to you again in the future. Thank you, again, everyone, and have a wonderful day. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Good day, and welcome to the First Industrial Realty Trust, Inc. First Quarter 2026 Results Call. [Operator Instructions]. I would now like to turn the conference over to Art Harmon, SVP, Investor Relations and Marketing. Please go ahead. Art Harmon: Thanks very much, Dave. Hello, everybody, and welcome to our call. Before we discuss our first quarter 2026 results and our updated guidance for 2026, please note that our call may include forward-looking statements as defined by federal securities laws. These statements are based on management's expectations, plans and estimates of our prospects. Today's statements may be time sensitive and accurate only as of today's date, April 23, 2026. We assume no obligation to update our statements or the other information we provide. Actual results may differ materially from our forward-looking statements and factors which could cause this are described in our 10-K and other SEC filings. You can find a reconciliation of non-GAAP financial measures discussed in today's call in our supplemental report and our earnings release. The supplemental report, earnings release and our SEC filings are available at firstindustrial.com under the Investors tab. Our call will begin with remarks by Peter Baccile, our President and Chief Executive Officer; and Scott Musil, our Chief Financial Officer, after which we'll open it up for your questions. Also with us today are Jojo Yap, Chief Investment Officer; Peter Schultz, Executive Vice President; Chris Schneider, Executive Vice President of Operations; and Bob Walter, Executive Vice President of Capital Markets and Asset Management. Now let me turn the call over to Peter. Peter Baccile: Thank you, Art, and thank you all for joining us today. I'd like to express my congratulations and gratitude to our team for their efforts in getting 2026 off to an excellent start. We delivered some significant development leasing wins and signed a key renewal in Southern California for our largest remaining 2026 expiration. . We're also capturing significant value creation via a pending $131 million land sale that I'll detail shortly. Turning to the overall market. Industry fundamentals continue to steady. According to CBRE, national vacancy was stable at 6.7% at the end of the first quarter. Net absorption was a solid 43 million square feet modestly below new deliveries of 55 million square feet. New supply nationally continued to be disciplined with starts remaining muted at 39 million square feet. The national construction pipeline is 237 million square feet and highly pre-leased at 39%. In our portfolio, overall touring activity has increased for our availabilities with decision-making accelerating for space sizes under 200,000 square feet within our development portfolio. With respect to potential economic and demand consequences from the conflict in the Middle East, thus far, we've seen no discernible impact to leasing activity, but this is a risk we'll continue to monitor. From a portfolio standpoint, our in-service occupancy at quarter end was 94.3%, in line with our expectations. Since our last earnings call, we made further progress on our 2026 rollovers. We've now taken care of 61% by square footage and our overall cash rental rate increase for new and renewal leasing is 41%. This includes our largest remaining 2026 expiration, the 556,000 square footer in Southern California for which we achieved a cash run rate change that significantly exceeded the top end of our annual guidance range of 40%. Moving now to development leasing. We saw some broad-based success across several markets, inking 383,000 square feet in total. These included a full building lease for our 155,000 square foot first Wilson 2 project in the Inland Empire. We also signed several sub-100,000 square foot leases in the markets of Chicago, South Florida, Central Florida as well as Central Pennsylvania. There, we leased a 54,000 square foot space at the recently completed first phase of First Park 33 in the Lehigh Valley. As I noted in my opening comments, we're pleased to share with you that the ground lessee of 100 acres of land in the 303 quarter in the Phoenix market exercised its option to purchase the site for a sales price of $131 million. The proceeds are approximately $30 per land square foot, which is more than 3x industrial land values in that market. We expect this transaction to close in June. Before I turn it over to Scott, I would like to remind you of two upcoming property tours we will be hosting. On May 12, we will tour our Inland Empire portfolio, and on June 4, we'll be touring our Central New Jersey assets. Please reach out to Art Harmon to register or for more information. With that, I'll turn it over to Scott. Scott Musil: Thank you, Peter. First quarter 2026 NAREIT funds from operations were $0.68 per fully diluted share compared to $0.68 per share in the first quarter of 2025. The first quarter 2026 FFO per share was negatively impacted by $0.04 per share of advisory costs related to the contested proxy campaign that was initiated by landed buildings. . Excluding these costs, our FFO per share was $0.72. As we noted on our fourth quarter earnings call, FFO in the first quarter was impacted by higher G&A costs due to accelerated expense related to an accounting rule that requires us to fully expense the value of granted equity-based compensation for certain tenured employees. Our cash same-store NOI growth for the quarter, excluding termination fees, was 8.7%. The results in the quarter were primarily driven by increases in rental rates on new and renewal leasing, lower free rent and contractual rent bumps, partially offset by lower average occupancy. Summarizing our leasing activity during the quarter, approximately 2.4 million square feet of leases commenced. Of these, 300,000 renew, 2 million were renewals and $100,000 were for developments and acquisitions with lease. Before I discuss guidance, let me update you on the 3PL tenant on our credit watch list. If you recall, we were collecting rent directly from a subtenant while working through the collection process. We are pleased to announce that we signed an agreement with the 3PL that required a lump sum payment of approximately 60% of the balance Otis at December 31, 2025, which we received in March. In addition, the agreement calls for scheduled payments to pay off the remaining past due rent by the end of 2026. Now moving on to our guidance. Our guidance range for 200 NAREIT FFO is down $3.05 to $3.15 per share, reflecting $0.04 per share of incremental advisory costs relating to the land and buildings contested proxy campaign. 2026 FFO guidance range, absent these advisory costs is $3.09 to $3.19 per share, which is unchanged compared to our last call. Our other major operating metric guidance assumptions are as follows: average quarter-end in-service occupancy of 94% to 95%. This range now reflects approximately 1.3 million square feet of incremental development leasing and the 708,000 square footer in Central Pennsylvania, all to occur in the second half of the year. Cash same-store NOI growth before termination fees of 5% to 6%. Guidance includes the anticipated 2026 costs related to our completed and under construction developments at March 31, for the full year 2026, we expect to capitalize about $0.08 per share of interest. Our G&A expense guidance range is $42 million to $43 million which excludes the $5.6 million of incremental advisory costs related to the content proxy campaign. And our guidance assumes that the aforementioned forecasted land sale in Phoenix will close in June. Let me turn it back over to Peter. Peter Baccile: We are optimistic about the activity levels we are seeing across our availabilities. As always, our team is focused on taking care of our customers gaining new ones and sourcing and executing on profitable investments to drive long-term cash flow and value for shareholders. . Operator, with that, we're ready to open it up for questions. Operator: [Operator Instructions] The first question comes from Craig Mailman with Citi. . Craig Mailman: Peter, you mentioned that touring activities improved, velocity in the 200,000 square feet has improved. Could you talk about other of your peers have talked about the data center adjacent demand. Could you talk about how much of this improvement is that segment of demand versus just either e-commerce or other broader industrial demand? Peter Baccile: I mean, from what we're seeing, most of it is just broader industrial demand, 3PLs continue to be very active. Manufacturing has picked up, and that includes data center tech aerospace, et cetera. So that's picked up but it looks more like broader demand for industrial than completely data center-driven. . Craig Mailman: And then -- sorry, Scott, I know you had mentioned the Central PA is now second half. Could you just talk about kind of the activity you're seeing at Denver and Central PA and kind of the prospects today versus maybe on the fourth quarter call? Scott Musil: Craig, it's Scott. I think you mentioned that we pushed it to the second half, the 708,000 square footer. That's always been in the second half of the year for our 4Q guidance call. So I wanted to clarify that -- and then I'll turn it over to Peter for an update on that vacancy in the Denver development. Peter Schultz: Craig, it's Peter. So in Denver, we continue to have interested prospects for our large vacancy there. Activity or decision-making, I would say, for larger users has been slow. Limited competitive supply. There were just 2 buildings that came back that will compete with us 1 from a business failure from another landlord and another from a lease expiration. But we continue to have prospects. They're just very slow in their decision-making. Smaller midsized tenants in Denver continue to be pretty active. Moving to Pennsylvania. To the second part of your question, Pennsylvania probably is our most active or certainly one of our most active markets across the country in terms of prospect activity across a range of sizes in the industries, including Peter's comments about 3PLs being very active. We have several prospects for our 708,000 square foot building in Central Pennsylvania . All but one of which are full building users and all of those continue to be engaged in discussions with us. Operator: The next question comes from Nick Thillman with Baird. Nicholas Thillman: Maybe touching a little bit, Peter, just thought process on starting some new projects here given the land bank is a little bit more heavy concentrated in, say, the i.e., you did sign a lease there. But just how you're viewing the landscape and just thought process on overall activity and if that would warrant some starts here in the back half of the year? Peter Baccile: Sure. We continue to evaluate opportunities for new starts. We're not going to guide on volume, of course. -- and the markets that we're focused on continue to be markets like Dallas, Delaware, which is really the South Philly submarket. Lehigh Valley PA, we have opportunity, South Florida -- and of course, we're continuing to try to acquire additional opportunity in the way of land and some of the other markets that we've been in and most active recently. So -- that's -- those are the markets we're focused on. Yes, we do have very good sites in Southern California, but those markets still have a number of availabilities. So they are markets where we're going to be starting projects anytime soon. Nicholas Thillman: And then, Scott, maybe just on the 3PL tenant. What was the lift in same-store from that within first quarter? And then can you just provide an update on what the bad debt expectations are for the full year? And I know boohoo, from the standpoint of just the credit agreement that you're covered for the full year, but just any updates on that kind of as well. Scott Musil: Okay. So the 3PL tenant, no impact to same-store -- we never reserve that tenant back in 2025 when we discussed it being on our watch list. We just made you guys aware of it. We always thought it was collectible. . We updated you on this call with the big payment we received and the agreement we reached with the tenant. So again, there's no impact to FFO or same-store related to that. On boohoo, they continue to be current on their rent. They pay right at the end of the month, every month. And Peter, I'll turn it over to you to update them on the sublease potential in this space. Peter Schultz: Thanks, Scott. Boohoo continues to market the building for sublet. There are a declining number of available 1 million square foot plus buildings in Pennsylvania activity. As I mentioned a few minutes ago, continues to be very good at that level as well. . Amazon is about to ink 2 more million square foot plus buildings in Pennsylvania as of today. So that's in process. And there are relatively few options. There likely will be some more starts in that size range given the strength of demand, but boohoo continues to market the building for sublet. Scott Musil: And Nick, you had one other part of the question, our bad debt expense was $100,000 in the first quarter compared to our guidance of $250,000, and we kept our guidance the same in 2Q, 3Q and 4Q at $250,000 per quarter. Operator: And the next question comes from Nicholas Yulico with Scotiabank. . Viktor Fediv: This is ViKtor Fed on with Nick. So you posted really strong Q1, and it seems like year-to-date activity is also solid. So just trying to understand what's driving your decision to maintain your full year FFO and same-store NOI guidance instead of raising it? Scott Musil: Okay. So Nick, this is Scott. We did lease up 400,000 square feet of development leasing. It did have slightly positive impact on our FFO compared to guidance. That's being offset by a couple of things. One is we have in our guidance, the land sale that's expected to close in June. That's the lease piece of land. So there's slight dilution from that sale because we're assuming the funds are used to pay on the line of credit. And the other piece of it is like what we do every quarter when we update guidance. We look at all of our leasing assumptions and guidance and we update them accordingly, and we make adjustments as we see fit. So that's the reconciliation. Viktor Fediv: Got it. And then a quick follow-up on the disposition of land, -- so how does this transaction kind of inform the time line and strategy for unlocking like similar higher and better use value for the rest of your land bank? Just how many similar opportunities you might have within your portfolio? Peter Baccile: Yes. As you know, we have taken a pretty close look at every asset that we own, land and income-producing real estate properties. And -- we've narrowed it down now to about a handful of opportunities where we think we might be able to push forward and create significant value. We're in the process now of trying to secure power. That's a very lengthy process. And so we'll see where that goes. If we're successful with that, that would add significant value above and beyond the value of the industrial value for those particular assets. Operator: And the next question comes from Todd Thomas with KeyBanc. Todd Thomas: First, I just wanted to follow up on the Central PA vacancy. I was just curious where things stand with the tenants that you're engaged with the regarding a lease or a sale is a sale still a potential outcome that's being contemplated? Peter Schultz: Todd, it's Peter. All the prospects we're engaged with or for lease only today. Todd Thomas: Okay. And then you talked about the increase in demand from tenants looking for space 200,000 square feet or less, that generally aligns with some of the more recent development starts. And I'm just wondering what the holdback is from increasing starts here a little bit more meaningfully. What are you sort of looking for in order to increase development start a bit further? Peter Baccile: Yes, that's a market-by-market question. For example, as you know, we've got a number of availabilities in South Florida. We also have a number of opportunities to -- for new starts there. We want to make sure that we're not too concentrated with development in any one market at 1 time. And we just completed the project in the first phase of the project. in Central Pennsylvania. And that we've signed a small lease, a 54,000 square foot lease there. We'd like to see a little bit more leasing there before we begin Phase II. So it's really more of a concentration question. Operator: And the next question comes from Michael Carroll with RBC Capital Markets. . Michael Carroll: Scott, I wanted to circle back on your comments regarding the land sale. I mean how much rent is the JV paying on that land today? I mean just given the sale is 3x the industrial land value, I think that the corresponding cap rate would be pretty low and not dilutive to earnings. Scott Musil: Well, it's not in the JV. This is on balance sheet. And in the supplemental Mike, if you look, we disclosed the cap rate, it's about a 5.3% cap rate. We got a great rent from the tenant when we leased the land to them back a couple of years ago. Dave Rodgers: Okay. And then I just wanted to confirm, too, that you didn't change the expected timing of the 1.3 million square feet remaining development leasing in the PA space. Those are still the same timing as it was in the prior guidance that you provided in 4Q? I believe it was, but I just wanted to confirm that. Scott Musil: That's correct. The only difference is the development leasing in the fourth quarter was $1.7 million. Now it's $1.3 million, and the decline has to do with the 400,000 square foot of development leases that we signed. . Operator: The next question comes from Rich Anderson with Cantor Fitzgerald. . Richard Anderson: So on the release 556, Kay, can you go through the economics of that transaction? I don't know if that's been provided some place, if I missed it, I apologize. . Peter Baccile: So John, do you want to cover that? . Johannson Yap: We can really go through the lease rate or the economics. But I can tell you, it's long term, we're very happy about the long-term renewal -- the space is very critical to the tenant, and it significantly exceeds the high end of our rent change guidance of 40%. . Richard Anderson: Okay. So okay. up more than 40%. Is that right? . Art Harmon: Yes. Yes. . Richard Anderson: Okay. Second, I asked this question on EastGroup, I kind of buttered the question and see if I could do it better here. On the -- on the data center demand that you're seeing, I'm wondering how siloed that is in the confines of your broader business. I mean, to what degree is the data center demand sort of informing your core tenants, your kind of consumption-oriented tenants. -- and telling them I better act now because space is getting taken by this other way of using industrial space. And from your point of view, how does it change your strategy from a development point of view? Does it does First Industrial have to go about things differently depending on the customer, whether it's a supplier or it's a consumption-oriented or e-commerce or whatever, like I'm curious how this is disruptive in any way or it's just pure new demand, and that's -- it's as simple as that. Peter Baccile: We've talked in the past about what would be a catalyst for tenants to begin to make decisions faster. The decision-making now for a couple of years has been fairly slow, especially on the kind of larger spaces. And that -- the topic that you're discussing does create a cost to waiting. So it does help on the margin. The other topic, of course, is power. And while data centers need a lot of power, warehouses need their fair share as well. So that's also a topic. So these are both helpful on the margin to get tenants to make decisions sooner. But it hasn't really created a wave of new lease signings. Peter and Joe, do you want to add anything to that? . Peter Schultz: The only other thing I'd add to that, Rich, is there is a little bit of incremental demand as we commented earlier, from tenants that are supporting the construction of data centers and infrastructure. So we are seeing a little bit of that, but I wouldn't call it material to the overall demand profile. Johannson Yap: Just to add just a little bit more detail there. If you look at the data center development, there's a lot of infrastructure-related switch gear, semiconductor, hikes, electrical supply, a lot of that and that has to be manufactured and distributed. And data center involved businesses need space to either distribute that equipment start at equipment and fulfill that equipment in or out of place in the U.S. So at the end of the day, they need warehouses where they can store these goods or do some light assembly. So that is the incremental demand that both Peter have mentioned. But if you look at the Q1, '26 they are not the biggest users. In fact, I think they're growing, but that didn't even make the top 10. The biggest ones are the 3PLs, consumer goods, like Peter mentioned, broad-based construction and food and beverage. Richard Anderson: I guess just to finish the question. From your point of view, when do you need -- if you're building something spec, when do you need to know that you're going to have an alternative user in the building? And how does that inform your development process? Or can you just -- or do you not need to know necessarily any specific time frame? . Peter Schultz: That's not going to change our process or our philosophy around the quality location features and functionality that we build. . Operator: And the next question comes from Caitlin Burrows with Goldman Sachs. . Caitlin Burrows: Maybe it lines up with the markets you mentioned you'd be most interested in building. But can you go through which markets maybe three are strongest versus weakest today on demand and rents and what's driving that difference? Dave Rodgers: Do you want to talk about PA? . Peter Schultz: Sure. Caitlin, it's Peter. I would say, as I mentioned a couple of minutes ago, Pennsylvania is probably our most active market from a tenant perspective across really all size ranges reflective of the deal we signed in our just completed project in the Lehigh Valley. The activity we have on the 708, the activity from market participants for large buildings over 1 million square feet. Very, very active. We're seeing good activity in South Florida. We're seeing a little less activity in Nashville than we've seen in the last couple of years, but pretty tight from a supply standpoint. And as I mentioned, in Denver, slower decision-making from larger tenants. But overall, markets are performing well. along the East Coast, rents are stable and still trending up a little bit? So pretty good shape there. Jojo, you want to talk about the West. Johannson Yap: Yes. Thank you, Peter. If you look at gross leasing, Dallas, Houston and Phoenix have exhibited significant gross leasing. And that's been really continuing since the second half of '25 through Q1 of '26. What's most interesting is that gross leasing actually in the IE has been positive from Q-to-Q. And if you look at just activity from the large spaces over there, that's been pretty good in IE. But at the same time, in i.e., you have space ranges from 200,000 to 400,000 square feet is abundant in the market today that the -- basically the market has to digest antennas in that size range, 200 to 400 has quite a bit of choices. Caitlin Burrows: Got it. Okay. And then maybe to talk about SoCal a little bit more. So you mentioned that other leases you guys did with the rent spreads meaningfully above 40%. I guess, can you go through what you're seeing more broadly from a leasing spread perspective in SoCal, I imagine some are up, some are down. Is it mostly a function of lease vintage certain building space types act 1 way versus another. Just what's the range you're seeing there? Johannson Yap: Sure, sure. In terms of rent spreads, we will continue to see rent change, positive rent change in SoCal because when you look at it, it has come down from the high of Q1 2023. But the growth from recolte coal significantly still exceeds that. So over the next couple of years, we will still see positive rent change. In terms of actual Q-to-Q -- quarter-to-quarter in terms of rent growth, it's been flat. There are some deals that actually have shown some growth, but overall, it's been flattish. Operator: The next question comes from Jason Belcher with Wells Fargo. Unknown Analyst: Wondering if you could talk a little bit about your investment or capital allocation preferences in the current environment and how you're thinking about deploying capital for, say, acquisitions versus development versus share repurchase? Peter Baccile: Sure. Look, we're going to -- the primary driver of our growth will continue to be speculative development. We're also always in the market, making offers for opportunities to acquire cash flowing buildings in the past that you've seen the majority of our capital go into development. So maybe 20% -- 25% cash flowing buildings. And with respect to the share purchase opportunity, the share authorization Look, again, the primary use of our capital is going to be to support the growth of development and acquisitions. But there have been several market disruptions in the recent past where our stock price has been pretty negatively impacted to levels that belie fundamentals and our long-term prospects. And we have a very strong belief in the long-term value of our shares. So in those periods of dislocation we've concluded that would be value-enhancing to shareholders to opportunistically acquire shares. You can figure out, I suppose, on your own, what that means in terms of allocation to that versus the other 2 categories. Unknown Analyst: Great. And then just as a follow-up. Can you give us an update on how your embedded rent increases are trending and what you're incorporating into newly signed leases. And if you can touch on any shifts you've seen there in recent quarters? Christopher Schneider: Yes. If you look at where we're at on the completed 2026 deals that we've signed the overall bumps are about 3.6%. And if you look at the entire portfolio as far as in-place funds in 2026, we're at about 3.4%. So we're still holding pretty strong. Scott Musil: And if you're asking about the rental increase side of it, we're still consistent with our cash run rate change guidance of 30% to 40% for 2026 is I think we -- as Peter mentioned in the script, I think we're at about 41% for the leases that we've signed already in 2026. The reason that's a little bit higher is that 556,000 square foot renewal that Jojo spoke about that was significantly higher than the top end of our 40% range. Operator: Our next question comes from Vince Tibone with Green Street Advisors. . Vince Tibone: Some of the development leasing this quarter was for smaller suites within larger buildings. Curious if that reflects any change in strategy and kind of willing to carve up some of these boxes have taken a little longer to lease into multi-tenant spaces or suites? Or was that always the business plan for those properties? . Peter Schultz: It's Peter. Yes, that was always the plan for those buildings. So they're all designed for multi-tenant use. Certainly, over the last several years, we've been fortunate to see some full building users. . But we always design flexibility into our buildings. As I mentioned on the question about our building in Central Pennsylvania for 708 just to contrast that size range really good activity there that we're seeing today, and there's a lot of activity for larger buildings from tenants in Pennsylvania and some of the other big markets. So I wouldn't take that tenant demand is limited to under 200,000 we built those buildings because we felt those pockets were underserved, and we're seeing the results of that. The Lehigh Valley building that Peter mentioned, we just completed and we've seen good activity there and already have our first deal signed. Vince Tibone: No, that's really helpful color. I appreciate that. And then maybe staying on development a bit. It seems that the 1 million square foot plus box is where you're seeing the most favorable kind of changes in supply/demand dynamics right now in most markets. . I'm curious, are you willing to kind of go spec at that ultra-large size range? I know you've done some of that in the past, but generally have been a little smaller billing size, like if demand stays strong for this ultra large box, could you pivot or don't go a bit more larger ultra large box when you're doing more some of these new spec deals?. Peter Baccile: Sure. I mean we're always looking to maximize value of our land. We continue to seek out new land investment opportunities and some of which would involve large-format properties -- large-format buildings. It's part of the game plan. As you know, we do own some sites in SoCal that could accommodate very, very large format buildings. And we continue to evaluate those in light of the economic realities and leasing realities of that market. Operator: The next question comes from Vikram Malhotra with Mizuho. . Vikram Malhotra: I guess just first one to clarify, you're ahead on your development lease-up. You've got good rent growth, like rent spreads that you cited and good visibility. . So I'm wondering two things that you can maybe be more specific, like one, why not move up the occupancy guide specifically like what's the offset to not moving that up given the leasing? And then can you be more granular on like why the guide didn't go up because even what you described, it would still suggest you should be trending at least $0.01 or $0.02 higher. Scott Musil: Vikram, this is Scott. And -- so the answer is, yes, we did pick up a little bit of FFO due to the 400,000 square feet of development leasing we announced -- that was offset by two items. One had to do with the projected land sale that we have in our guidance, that's a lease parcel. So when we sell that land parcel, we lose the NOI and we're paying down the line of credit. So there's a little bit of dilution there. And then the other item has to do with just our normal process of going through our lease availabilities and our leasing assumptions on a quarterly basis when we update guidance. We made assumptions to some of those -- we did not make changes, though, to the 1.3 million square feet of development and the 700,000 square feet that we have in our guidance. So it's more some changes in some of the quarter leases. So those are the pieces. Vikram Malhotra: But just to clarify, the occupancy piece, I don't think the land would sale would impact that, right? Like what offset the occupant? Is it just you've assumed lower real . Scott Musil: We made some slight adjustments to some core lease-up assumptions as well. And also keep in mind that occupancy, we provide a range to it and we're comfortable with that occupancy range. Vikram Malhotra: Got it. Okay. And then just maybe stepping back, you announced the buyback, you're doing use property tours. There's a change in sort of the Board as well. I'm just trying to understand, like can you walk through kind of each of these actions, like what are you sort of aiming for? There's obviously in the background, the quasi, I guess, activist that's pushing I'm just trying to understand like all these different actions, like are they related? Are they independent? What are driving those three things? Peter Baccile: A lot of topics in one question. Okay. So the whole topic around the new director, as you may know, we unexpectedly lost a director last year who passed away. Again, unexpectedly. At that point, we determined it would be prudent to go ahead and start a process for a new one. That process was extended on two occasions. First, to consider the candidacy of the LNB nominee, Pass nominee and then again to consider the canadacy of the two individuals that the L&B nominee suggested we talked to. So that whole process was well underway long before those conversations began. With respect to the share buyback, Look, we took a look at what happened to our stock in certain periods, okay, such as COVID, such as when Amazon announced they were pulling back in April of '22. The tariffs impact on the shares, less so the war in the Middle East. And when you look at those time periods, you see significant falloff in share price when the fundamentals and long-term prospects for our shares did not. And those are times that will continue to happen with the volatility that we have experienced and will continue to experience. And so it just simply makes sense to be in the market supporting the long-term value of our shares during those time periods. That, again, is a conversation that we have had with the Board for a long time. I've now forgotten the rest of your question. Vikram Malhotra: Property tour . Peter Baccile: Property tours. I would say, look, yes, we want to do whatever we can to get the word out on not only the transformation that we have completed, but also what's going on right now in some of our markets, we want you guys to be able to get to know our market leaders it just makes sense to take the opportunity to enhance shareholder engagement. . Operator: The next question comes from Brendan Lynch with Barclays. Brendan Lynch: You mentioned winning concessions contributed to the strong cash NOI growth in the quarter. Can you provide some more additional color on the current trends that you're seeing with concessions and what we should expect going forward? . Peter Schultz: Yes, Brendan, it's Peter. Generally speaking, we're seeing rent concessions at half of 1 month to 1 month of rent per year of term. And I would say that's drifted upward a little bit, which is more of a market by market and in some cases, asset by asset, and that's on new leases. TIs have been roughly the same, just depends upon the specific requirements of the tenant. Johannson Yap: And renewals have been pretty steady, still very low renewals and TIs -- in over renewals. . Brendan Lynch: Okay. Great. And another question. We've seen a lot of discussion recently about how brokers are going to be disintermediated by AI or at least the broker fees are going to be pressured lower -- what is your view on how that cost dynamic will evolve for First Industrial and for the industry in general going forward?. Peter Baccile: View on that, Joe. Johannson Yap: Yes. There's -- we don't see material impact right now on AI in terms of brokerage services. Again, when we hire brokers, I mean, we feel we hire the best. They bring value to the table in terms of our leasing efforts. We've seen more very quick flow, efficient flow of information back and forth in the industry. but brokers play a key role in the industrial leasing business. Peter Baccile: Yes. AI is going to provide a lot of data maybe these transactions happen more quickly for that reason, but intermediaries do bring value. And those negotiations, it always helps to have some distance. And we don't see the value of that community lessening over time because of AI. Operator: [Operator Instructions] Our next question comes from Michael Mueller with JPMorgan. Michael Mueller: I guess first, are the light assembly data center users that you've referenced -- are they generally shorter-term lease takers of space? Or are you seeing long-term leases there? And I guess at the completion of the data center, are they expected to kind of stick around or just that's the end of the lease may go away and space goes to a different type of user? Johannson Yap: Let me give you some color there, Michael. The light assembly, usually, they're long -- midterm to longer-term leases because the assembly of the equipment -- it depends on how much data center development, a particular tenant is fulfilling. And if you have a multi-facet for example, development going on that the tenant is falling, that would take anywhere for a couple of years to long term as much as 10 years. So it really depends on what they're fulfilling. It also depends on how many regions that particular prospect will be serving. As you know, data center development and data center buildings take a longer time than industrial buildings. So that's another piece of color there. But yes, so in terms of data center development, we cannot predict. You know as much as we do, if you look at the industry news and how much the hyperscalers 1 we will put out in the marketplace, and that's pretty -- it seems like a pretty long term, pretty huge dollars. Michael Mueller: Got it. Okay. And then just a quick second one. Are there any notable disposition expectations beyond the Phoenix sale that's expected to close this year or just expected to be nominal. Peter Baccile: No, there's really nothing else in the hopper that looks like that. . Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Peter Bacilli for any closing remarks. Peter Baccile: Thank you, operator, and thanks to everyone for participating on our call today. You've got -- if you have any follow-ups from our call, please reach out to our Scott or me, and have a great day. . Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Independent Bank Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brad Kessel, President and CEO. Sir, please go ahead. William Kessel: Good morning, and welcome to today's call. Thank you for joining us for Independent Bank Corporation's conference call and webcast to discuss the company's results for the first quarter of 2026. I am Brad Kessel, President and Chief Executive Officer, and joining me this morning is Gavin Mohr, Executive Vice President and our Chief Financial Officer; as well as Joel Rahn, Executive Vice President and Head of Commercial Banking for Independent. Before we begin today's call, I would like to direct you to important information on Page 2 of our presentation, specifically the cautionary note regarding forward-looking statements. If anyone does not already have a copy of the press release issued by us today, you can access it at our website, independentbank.com. The agenda for today's call will include prepared remarks, followed by a question-and-answer session and then closing remarks. Independent Bank Corporation reported first quarter 2026 net income of $16.9 million or $0.81 per diluted share versus net income of $15.6 million or $0.74 per diluted share in the prior year period. Highlights for our first quarter include a net interest margin of 3.65%, which is a 3 basis point increase on a linked-quarter basis; an increase in net interest income of $500,000 or 1.1% over the fourth quarter of 2025; an increase in tangible common equity per share of common stock at $0.33 or 5.9% annualized from December 31, 2025; a return on average assets and return on average equity of 1.24% and 13.43%, respectively; net growth in total deposits was brokered time deposits of $80.4 million or 6.9% annualized from December 31, 2025; net growth in loans of $31.8 million or 3% annualized from December 31, 2025; an increase in tangible common equity ratio to 8.7%; and finally, the payment of a $0.28 per share quarterly dividend on our common stock on February 13, 2026. Our first quarter results reflect the strength of our core fundamentals, including growth in net interest income, expansion in net interest margin, continued growth in both loans and core deposits. Our balance sheet growth remained disciplined with $80.4 million in core deposit growth and just under $32 million in total loan growth, including $53.8 million or 9.9% annualized in commercial loans, reflecting continued execution of our strategic plan. Credit quality remains sound, while geopolitical uncertainty has increased, we have not seen a direct impact on our customers yet, and we continue to monitor conditions closely. Profitability remains strong, again, with a return on average assets of 1.24% and return on average equity of 13.43%. We remain encouraged by our momentum and are optimistic about our opportunities and confident in the benefits of our recently announced merger with HCB Financial Corp., which will provide enhanced shareholder value. Moving to Page 5 of our presentation. Deposits totaled $4.9 billion at March 31, 2026, an increase of $80.4 million from year-end. This growth occurred in noninterest-bearing, savings and interest-bearing checking and reciprocal, offset by a small decline in time deposits. On a linked-quarter basis, business deposits increased by $94 million, retail deposits increased by $28 million. These were offset by a $42 million decrease in municipal deposits, primarily due to seasonality. The deposit base is comprised of 47% retail; 38% commercial; and 15% municipal. On Page 6, we've included in our presentation a historical view of cost of funds as compared to the Fed fund spot rate and Fed effective rate. For the first quarter, our total cost of funds decreased by 13 basis points to 1.54%. At this time, I'd like to turn the presentation over to Joel Rahn to share a few comments on the success we're having in growing our loan portfolios as well as a brief update on our credit metrics. Joel Rahn: Yes. Well, thank you, Brad, and good morning, everyone. On Page 7, we share an update on loan activity for the quarter. We started the year with loan growth of $32 million or 3% on an annualized basis. Commercial loan generation was solid with approximately $54 million of quarterly growth or 9.9% annualized. During the quarter, our residential mortgage and consumer installment loan portfolios declined by $4.5 million and $17.5 million, respectively. Our strategic investment in commercial banking talent continues to supplement our loan growth. During the first quarter, we added 2 experienced commercial bankers in West Michigan, bringing our total to 50 bankers comprising 8 commercial loan teams across our statewide footprint. Compared to a year ago, we have added a net of 5 experienced commercial bankers to our team. Looking ahead, based on a strong pipeline, we believe we will continue low double-digit growth of our commercial loan portfolio in 2026. We continue to see market share opportunities from regional banks in both talent and customer acquisition and are seeing steady organic growth from existing customers. Looking at the commercial loan production activity for the quarter, the mix of C&I lending versus investment real estate was 57% and 43%, respectively. And for our commercial portfolio, our mix is 68% C&I and 32% investment real estate. Page 8 provides detail on our commercial loan portfolio concentrations. There's not been any shift -- significant shift in our portfolio over the past year with the portfolio remaining very well diversified. Our largest segment of the C&I category is manufacturing at $191 million or 8.4% of the total portfolio. In the investment real estate segment of the portfolio, the largest concentration is industrial at $212 million or 8.8%. We outlined key credit quality metrics and trends on Page 9. We continue to demonstrate strong credit quality. Total nonperforming loans were $27.5 million or 64 basis points of total loans at quarter end, up slightly from 54 basis points at 12/31. It's worth noting that $20 million of this total is one commercial development exposure that we discussed in previous quarters. We continue to work through the challenges of this particular project and are appropriately reserved for any loss exposure. Past due loans totaled $8.2 million or 19 basis points, basically unchanged from 12/31/25. It's worth noting that $4 million of total delinquency was 1 commercial loan that was in process of renewal and was completed after quarter end. It's not reflected on this slide, but also worth noting that we realized net charge-offs of $266,000 or 2 basis points of average loans for the quarter. This compares to $68,000 or 1 basis point in Q1 of 2025. At this time, I'd like to turn the presentation over to Gavin for his comments, including the outlook for the remainder of 2026. Gavin Mohr: Thanks, Joel, and good morning, everyone. I'm starting at Page 10 of our presentation. Page 10 highlights our strong regulatory capital position. Turning to Page 11. Net interest income increased $3.2 million from the year ago period. Our tax equivalent net interest margin was 3.65% during the first quarter of 2026 compared to 3.49% in the first quarter of 2025 and up 3 basis points from the fourth quarter of 2025. Average interest-earning assets were $5.21 billion in the first quarter of 2026 compared to $5.09 billion in the year ago quarter and $5.16 billion in the fourth quarter of 2025. Page 12 contains a more detailed analysis of the linked quarter increase in net interest income in the net interest margin. On a linked quarter basis, our first quarter 2026 net interest margin was positively impacted by 2 factors: The change in interest-bearing liability mix added 1 basis point and a decrease in funding costs added 10 basis points. These were offset by a change in earning asset mix and yield of 6 basis points and interest charged off on a commercial loan of 2 basis points. On Page 13, we provide details on the institution's interest rate risk position. The comparative simulation analysis for first quarter 2026 and fourth quarter 2025 calculates the change in net interest income over the next 12 months under 5 rate scenarios. All scenarios assume a static balance sheet. The base rate scenario applies the spot yield curve from the valuation date. The shock scenarios consider immediate, permanent and parallel rate changes. The base case modeled NII is slightly higher during the quarter due to $70 million of earning asset growth and 1 basis point of modeled margin expansion. Earning asset expansion was centered in commercial loans of $54 million and overnight liquidity up $40 million. Runoff and lower-yielding investments in consumer loans helped fund earning asset growth. Asset and liability yields were stable during the quarter with asset yields up 2 basis points and liability costs 1 basis point higher. The NII sensitivity to lower rates declined modestly, while the benefit to higher rates remained largely unchanged. Reduced exposure to lower rates is due to $75 million of notional for purchases and the termination of $87 million of short-term pay fixed swaps and a slight shortening in the maturity structure of time deposits. The overall position is closely matched for smaller rate changes of plus or minus 100 basis points. The bank has modest exposure to large rate declines and benefits from larger rate increases. Currently, 38.2% of assets repriced in 1 month and 49.3% reprice in the next 12 months. Moving on to Page 14. Noninterest income totaled $12 million in the first quarter of 2026 compared to $10.4 million in the year ago quarter and $12 million in the fourth quarter of 2025. First quarter 2026 net gains on mortgage loans totaled $1.3 million compared to $2.3 million in the first quarter of 2025. The decrease is due to lower profit margins. It was partially offset by a higher volume of loan sales. Mortgage loan servicing net was a gain of $1.6 million in the first quarter of 2026 compared to a loss of $0.6 million in the prior year quarter. The change due to price was a gain of $0.9 million or $0.04 per diluted share after tax in the first quarter of 2026 compared to a loss of $1.5 million or $0.06 per diluted share after tax in the prior year quarter. The decline in servicing revenue compared to the prior year quarter is attributed to the sale of approximately $930 million of mortgage servicing rights on January 31, 2025. As detailed on Page 15, our noninterest expense totaled $38.3 million in the first quarter of 2026 as compared to $34.3 million in the year ago quarter and $36.1 million in the fourth quarter of 2025. Compensation expense increased $1.4 million, primarily due to salary increases that were predominantly effective on January 1, 2026. Litigation expense was $1.5 million in the quarter attributed to an accrual established for losses we consider probable as a result of all of our outstanding litigation matters in aggregate. Advertising expense increased $0.3 million in the first quarter of 2026 compared to prior year quarter, primarily due to a retroactive new deposit account opening incentives attributed to accounts opened in prior periods. We recorded merger expense -- merger-related expenses of $0.3 million in the first quarter of 2026. Nonrecurring noninterest expense items totaled approximately $1.9 million in the first quarter of 2026. Turning to Page 16 is our update for our 2026 outlook to see how our actual performance during the first quarter compared to the original outlook that we provided in January of this year. Our outlook estimated full year loan growth of 4.5% to 5.5%. Loans increased $31.8 million in the first quarter of 2026 or 3% annualized, which is below our forecasted range. Commercial loans increased $53.8 million in the first quarter, while mortgage and installment loans decreased. First quarter 2026 net interest income increased 7.3% over 2025, which is within our forecasted range of 7% to 8%. The net interest margin was 3.65% for the quarter and 3.49% for the prior year quarter and up 3 basis points from a linked-quarter basis. The first quarter 2026 provision for credit losses was an expense of $0.4 million, which was below our forecasted range. Moving on to Page 17. Noninterest income totaled $12 million in the first quarter of 2026, which was within our forecasted range of $11.3 million to $12.3 million in the first quarter. First quarter '26 mortgage loan originations, sales and gains totaled $130.6 million, $84.1 million and $1.3 million, respectively. Mortgage loan servicing net generated a gain of $1.6 million in the first quarter of '26, which is above our forecasted range. Noninterest expense was $38.3 million in the first quarter, above our forecasted range of $36 million to $37 million. Nonrecurring expense items included $1.5 million accrual and litigation expense and $0.4 million in retroactive new to deposit account opening incentives attributed to accounts opened in prior periods. Our effective income tax rate was 16.6% for the first quarter of 2026. Lastly, there were no shares of common stock repurchased in the first quarter of 2026. That concludes my prepared remarks. I would now like to turn the call back over to Brad. William Kessel: Thanks, Gavin. We've built a strong community bank franchise, which positions us well to effectively manage through a variety of economic environments and continue delivering strong and consistent results for our shareholders. As we move through 2026, our focus will be continuing to invest in our team, investing in and leveraging our technology while striving to be Michigan's most people-focused bank. At this point, we'd now like to open up the call for questions. Operator: [Operator Instructions] Our first question is going to come from the line of Brendan Nosal with Hovde Group. Brendan Nosal: Maybe just starting off here on the net interest margin. I think when you offered your initial margin outlook for '26 a couple of months back, you embedded 2 rate cuts in that outlook. Just kind of curious if we don't get any rate cuts over the course of this year, does that change the margin calculus versus your initial outlook one way or the other? Gavin Mohr: Not measurably, Brendan. That forecast holds. Brendan Nosal: Okay. Great. Maybe digging deeper on the deposit cost side of things. Just kind of curious like what the competitive environment for core funding is like across your markets. And I'm asking because I'm getting very different answers to this question based on market to market across the Midwest. So I would love to hear what you're seeing across Michigan. William Kessel: Brendan, I think it continues to be very competitive. In the Michigan markets, we've got a heavy field of credit unions. So I think oftentimes, they can lead the pack. But I think it oftentimes depends if you look at the competitor and sort of their balance sheet profile, you can sort of see who's maybe fighting a little bit higher -- harder with higher pricing than others. Our focus continues to be led by that commercial effort. And our goal is to have the operating accounts for our business clients and then also for our municipal clients. And we continue to hold, retain but add to that portfolio. And so I'm really pleased with that. But it is competitive, no doubt. Brendan Nosal: Okay. Okay. Good. I'm going to try and sneak one more in here. The world has changed geopolitically quite a lot over the past 3 months and there could be knock-on impacts to the domestic economy. So I guess when you look at the outlook you provided for 2026, are there any areas where you're feeling either better or worse today versus when we last spoke 3 months ago? William Kessel: I think -- and I'll let Joel jump in here, too. But I think we continue to be very optimistic about how we expect 2026 to unfold. One of the things that we do at Independent is rescore the entire retail portfolio for their credit scores twice a year. And we recently got the results from that rescore. And I continue to be very pleased in seeing very solid scores for the portfolio, not a lot of change in the various bands. Of course, we lend predominantly up in that 750-plus FICO area, at least north of 700, and those bands continue to be strong. So I'll let Joel maybe comment a little bit on the commercial side. Joel Rahn: Yes. It just -- it so much is dependent on how long the conflict lasts and what it does to prolong high energy prices. And it's probably the same thing I said maybe a quarter ago. It's just -- the duration of this, the high energy prices could be a drag on the economy and to state the obvious. And if that happens, you could see loan growth muted, I suppose, but we've not seen that yet. And business owner confidence is still unchanged, relatively high. So we have businesses that are making the decision to expand and construct new facilities, et cetera, despite the news headlines of the day. So only time will tell if that's a smart move on their part or not, but it's just -- it's such a fluid environment, Brendan. So we're just watching it carefully, and we'll react accordingly. Operator: Our next question is going to come from the line of Adam Kroll with Piper Sandler. Adam Kroll: I'm on for Nate Race. So maybe a question on expenses. I know there were some onetime items that kind of drove them higher in the first quarter. But if I strip those out, I get to a core number around $36.4 million. So I guess, do you still feel comfortable with the $36 million to $37 million run rate guide excluding the deal? Or do you expect those to trend higher? Gavin Mohr: No, we feel good about that, excluding the deal and the nonrecurring. Adam Kroll: Got it. And then how should we think about the cadence of cost saves associated with the deal? Gavin Mohr: Yes. So it was announced 50% phased in, in year 1 and fully phased in, in year 2. And just to point out, that's 50% half a year. Adam Kroll: Got it. And maybe a last one for me is just, Gavin, I was wondering if you could provide us with some updated thoughts on how you're thinking about deploying some of the excess liquidity brought over from the HCB deal? Gavin Mohr: Yes, we're not going to -- we're not ready to give direction specifically on that, Adam. I would say that -- as we think about how the banks come together, clearly, our first choice would be to deploy it through the commercial bank. And then from there, we would just move down asset classes in terms of yield. We're going to have opportunity to address maybe wholesale funding if we don't have a pipeline to absorb it as well as potential securities purchases. But that's still all very much in the analysis phase. Operator: [Operator Instructions] I'm showing no further questions at this time. And I would like to turn the conference back over to Brad Kessel for any further remarks. William Kessel: In closing, I'd like to thank our Board of Directors and our senior management for their support and leadership. I also want to thank all of our associates. I continue to be so proud of the job being done by each member of our team. Each team member in his or her own way continues to do their part towards our common goal of guiding customers to be Independent. Finally, I'd like to thank each of you for your interest in Independent Bank Corporation and for joining us on today's call. Have a great day. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Operator: Good morning, and thank you for joining us today for QCR Holdings, Inc.'s First Quarter 2026 Earnings Conference Call. Following the close of the market yesterday, the company issued its earnings press release for the first quarter. If anyone joining us today has not yet received a copy, it is available on the company's website www.qcrh.com. With us today from management are Todd Gipple, President and CEO; and Nick Anderson, CFO. Management will provide a summary of the financial results, and then we will open the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future are forward-looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's SEC filings, which are available on the company's website. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. As a reminder, this conference call is being recorded and will be available for replay through April 30, 2026, starting this afternoon, approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I will now turn the call over to Mr. Todd Gipple at QCR Holdings. Please go ahead. Todd Gipple: Good morning, everyone. Thank you for joining our call today. I'd like to start with an overview of our first quarter performance, and then Nick will walk us through the financial results in more detail. We are pleased to deliver the most profitable first quarter in our company's history. This performance was driven by healthy loan and deposit growth, significantly lower noninterest expense and modest margin expansion. We maintained excellent asset quality and generated meaningful growth in tangible book value per share while returning capital to our shareholders through opportunistic share repurchases. We also continue to make further investments in our digital transformation as we build a more modern, scalable bank for our clients and employees. Strong performance in our traditional banking and wealth management businesses partially offset the linked quarter reduction in our capital markets revenue. Capital Markets results were in line with our expectations given typical first quarter seasonality and were equal to our 5-year average for Q1 production. As a result, we delivered a very strong return on average assets of 1.40% and earnings per share growth of 31% compared to the same period last year, highlighting the strong earnings potential of our diverse business model. Our traditional banking business continues to deliver solid organic growth supported by healthy commercial and industrial activity across our markets. Our multi-charter model enables us to consistently gain market share with locally led community banks to build deep relationships with high-value clients and communities where they live and work. Our digital transformation remains on track with the successful completion of the second of 4 core system conversions in early April. Modernizing our technology stack will deliver meaningful benefits for both our clients and employees, expanding our service capabilities, enhancing the client experience and driving operating leverage. Our Wealth Management business also delivered very strong results with annualized revenue growth of 14%. Our success in this business continues to be driven by the experience of our team and the power of our relationship-driven model, which connects our traditional banking clients and key professionals in each of our communities with our dedicated wealth advisers across our markets. We are deepening client engagement and reinforcing wealth management as a key driver of our sustained top-tier financial performance. Our LIHTC lending business also continues to perform as the demand for affordable housing remains robust, driven by a lack of supply and ongoing affordability challenges nationwide. We view LIHTC lending as a highly profitable, annually consistent and differentiated line of business for QCRH, anchored by our deep network of developer relationships, and historically high-quality assets our platform delivers. Our LIHTC business has consistently delivered strong results, demonstrating our success in navigating various interest rate cycles and dynamic market conditions. Our strong relationships with industry-leading LIHTC developers, combined with market demand position us well to grow this business and further strengthen our financial performance. Given the strength of our pipeline in our traditional and LIHTC lending platforms, we are reaffirming our guidance for gross annualized loan growth of 10% to 15% over the final 3 quarters of 2026. We are also increasing the lower end of our capital markets revenue guidance by $5 million, now targeting a range of $60 million to $70 million for the next 4 quarters. In combination with our LIHTC permanent loan securitizations launched in 2023, we have also begun partnering with private investors and LIHTC Construction loan sale transactions. These transactions enable us to expand our permanent LIHTC lending capacity, which will drive increased capital markets revenue. The ability to sell off these LIHTC construction loans allows our team to say, yes, when our developer clients would like us to provide the construction financing for their projects, in addition to the permanent financing that generates our capital markets revenue. This is allowing us to grow our market share in the affordable housing space. During the quarter, we identified a total of $523 million in LIHTC loans, both construction and permanent for securitization and sale. The transactions are planned to close during the second quarter and will mark our fifth permanent loan securitization and our second construction loan sale. This is our LIHTC flywheel in action. Strong demand for affordable housing, reinforced by the federal government's commitment to increase LIHTC tax credits, combined with our deep developer relationships and our exceptional client service, positions us to capture market share from the larger competitors in this space. LIHTC Industries proven long-term performance drives investor demand for these assets, enabling us to execute LIHTC loan securitizations and sales. These transactions allow us to proactively manage concentration risk, balance sheet growth, liquidity and capital levels while generating increased capital markets revenue. We are building an asset-light, capital-efficient and revenue-heavy business in affordable housing. While securitizations and LIHTC construction loan sales temper near-term on balance sheet growth, they enhance long-term profitability by creating more capacity. The balance sheet capacity created by these transactions is then rapidly redeployed into new originations, allowing us to replace the earning assets quickly and expand our capital markets revenue to more than offset the foregone interest income over time. These loan sales and securitizations are also allowing us to strategically manage our total assets under the $10 billion asset threshold this year. We anticipate growing beyond $10 billion sometime in 2027, and we plan to be fully prepared for the associated organizational impacts by mid-2028. Building on the planning efforts we began in 2023. Our company is executing at a high level across all 3 of our core lines of business. Our team has driven a 5-year earnings per share CAGR of 14% and a 5-year tangible book value per share CAGR of 12.5%. Our continued investments in talent, technology and strategic growth, combined with disciplined expense management, position us to sustain this top-tier financial performance. I am grateful for our 1,000 teammates that take exceptional care of our clients, our communities and each other as they deliver long-term value for our shareholders. I will now turn the call over to Nick to provide further details regarding our first quarter results. Nick Anderson: Thank you, Todd, and good morning, everyone. We delivered net income of $33 million or $1.99 per diluted share for the quarter. Net interest income was $67 million and increased slightly on a linked quarter basis when adjusted for fewer days in the first quarter. Our NIM TEY increased 1 basis point from the fourth quarter of 2025, which was below the low end of our guidance range. Our robust deposit growth came early in the quarter from our correspondent business, which carries higher pricing. And when combined with loan growth occurring very late in the quarter, margin expansion was muted. The increase in our margin was driven by significant improvements in the cost of funds, partially offset by a reduction in our earning asset yields. We continue to have a disciplined approach to deposit pricing. And combined with the liability-sensitive balance sheet, our cost of funds betas are more than 1.5x those of our earning assets during the current rate-cutting cycle. Since the Fed began cutting rates in 2024, our cost of funds have declined by 79 basis points compared to only a 47 basis point decline in earning asset yields. While we continue to benefit from repricing lower-yielding loans into higher market rates, the opportunity is naturally moderating as the rate cutting cycle matures. During the quarter, new loan origination yields exceeded those on loan payoffs by 22 basis points. However, loan growth arrived very late in the quarter and average loan balances were down $109 million contributing to the decline in the loan yield compared to the prior quarter. While our balance sheet has moved closer to neutral since the rate cutting cycle began, we remain positioned to benefit from future rate reductions with rate-sensitive liabilities exceeding rate-sensitive assets by approximately $900 million, providing upside to margin in a declining rate environment. For future cuts in the Fed funds rate, we estimate 1 to 2 basis points of NIM accretion for every 25 basis point cut in rates. If the yield curve steepens, we'd expect NIM expansion at the top end of that range. And if the yield curve remains relatively flat, we would expect NIM expansion at the lower end of the range. Supported by our late first quarter loan growth, we are guiding second quarter NIM TEY ranging from static to an increase of 3 basis points, assuming no further Fed funds rate changes. Upside in our second quarter NIM is supported by repricing opportunities on approximately $163 million and fixed rate loans currently yielding 6.2%, which we would project to reset nearly 25 to 30 basis points higher. We also anticipate continued CD repricing during the second quarter, with approximately $400 million of maturities, currently costing 3.7%, which we expect to retain and reprice nearly 25 to 30 basis points lower. We project investment yields to expand, supported by a solid pipeline of new municipal bonds priced well above 7% on a tax equivalent basis. Additionally, we are planning to offtake approximately $523 million of LIHTC loans through the securitization and loan sale in the second quarter, which should be moderately NIM accretive and is reflected in our NIM guidance. Noninterest income totaled $23 million in the first quarter, including $11 million from Capital Markets revenue and $5 million from Wealth Management. Our LIHTC lending team closed 13 projects during the quarter, including three with new developers as we continue to expand our LIHTC platform. Our wealth management team delivered strong results this quarter, adding 80 new client relationships and $177 million in new assets under management. While market volatility pressured AUM levels, new client growth largely offset that impact. Wealth Management revenue was up 3% from the prior quarter. This business continues to provide stability, recurring fee income and meaningful diversification to our overall revenue mix. Now turning to our expenses. Noninterest expense for the first quarter was $52 million compared to $63 million for the fourth quarter. The $11 million decrease was primarily driven by a $5.5 million reduction in salaries and benefits expenses associated with variable compensation related to earnings performance. In addition, we experienced lower professional and data processing costs due to the timing of digital transformation activities and the impact of the debt extinguishment loss in the prior quarter. Our flexible cost structure, particularly variable compensation tied to performance is designed to support operating leverage while preserving flexibility through various revenue cycles. As a result, expenses were well below our guided range, highlighting our expense flexibility. This structure closely aligns our underlying cost base with performance, supporting a pay-for-performance culture and value creation for shareholders. Our significantly lower noninterest expenses resulted in an adjusted core efficiency ratio of 57.7% for the first quarter. For the second quarter, we are guiding noninterest expenses to be in the range of $55 million to $58 million, which assumes capital markets revenue and loan growth are within our guided ranges, while also continuing to invest in our digital transformation initiatives. This outlook reflects our disciplined approach to expense management aligned with our 965 strategic model, which targets noninterest expense growth of less than 5% annually while enhancing operating leverage and profitability. Moving to our balance sheet. Total loans grew $145 million for the quarter for 8% annualized, excluding the planned runoff of the M2 equipment finance portfolio. There are $523 million of LIHTC loans identified for securitization and sale included in the held-for-sale category. These loans consist of a $207 million pool of LIHTC construction loans identified for sale to a new private investor and a $316 million Freddie Mac LIHTC tax-exempt permanent loan pool securitization. Continued execution of our LIHTC offtake strategies has increased our confidence to supporting larger transactions and a broader range of developer opportunities. Complementing our loan growth, core deposit growth accelerated during the quarter, increasing $409 million or 23% on an annualized basis. Average deposit balances only rose by $31 million or 2% annualized compared to the fourth quarter as we actively managed our excess liquidity off balance sheet to optimize balance sheet efficiency. We remain highly focused on expanding core deposits and improving the deposit mix across our markets. Our deposit mix improved this quarter, driven by higher noninterest-bearing balances and a reduction in higher cost CD and broker deposits, further strengthening our funding profile. Asset quality remained excellent during the quarter. Nonperforming assets totaled $43 million, a decrease of $439,000 from the prior quarter, which resulted in the NPA to total asset ratio remaining static at 0.45%. The ratio of criticized loans to total loans and leases was 2.01%, remaining well below the company's long-term historical average and near the 5-year low of 1.94% established in the prior quarter. The marginal increase in criticized loans was primarily driven by one large credit, which is expected to be resolved favorably later this year. The company recorded total provision for credit losses of $2.5 million during the quarter. down from $5.5 million in the prior quarter, primarily due to the reclassification of Light Tech construction loans to the held-for-sale category as these loans are expected to be sold at par. Net charge-offs were $4 million during the first quarter of 2026, a decline of $300,000 from the prior quarter. Between the start of the first quarter and April 20, we returned almost $25 million of capital to shareholders with about 288,000 common shares repurchased at opportunistic valuations. Since we began repurchasing shares in August of last year, we have repurchased 566,000 common shares, returning a total of $46 million to our shareholders. These repurchases demonstrate our capital allocation flexibility, enabling opportunistic repurchases when they create value and align with our strategic and financial priorities. We delivered another quarter of strong growth in tangible book value per share, which rose $1.33 to over $59, reflecting 9% annualized growth. Over the past 5 years, tangible book value has grown at a compound annual rate of 12.5%, highlighting our continued strong financial performance and long-term focus on creating shareholder value. Our tangible common equity to tangible assets ratio decreased 2 basis points to 10.31%. The common equity Tier 1 ratio increased 2 basis points to 10.54%, and our total risk-based capital ratio decreased 19 basis points to 14%. These quarterly changes reflect the combined impact of strong earnings and share repurchases during the quarter. The total risk-based capital ratio was also impacted by a reduction in subordinated debt capital treatment on our 2019 issuance and lower ACL balances. Finally, our effective tax rate for the quarter was 7%, down from 8% in the prior quarter, reflecting lower pretax income and an increase in the mix of our tax-exempt income relative to our taxable income. Our tax-exempt loan and bond portfolios have continued to support a low effective tax rate. Assuming a revenue mix in line with our guidance ranges, we estimate our effective tax rate to be in the range of 8% to 10% for the second quarter of 2026. With that added context on our first quarter results, let's open the call for your questions. Operator, we are ready for our first question. Operator: [Operator Instructions]. Today's first question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Thank you. Good morning, guys. Yes. Maybe first on the capital front. You've got the two securitizations planned for the second quarter. I apologize if I missed it, but do you have a sense for how much capital that will add to the stack. And then the follow-up is on the buyback side. Just do you plan to use that in buybacks? Or you're at, I think, 10.5% CET1. Is that a good bogey for you guys to settle near going forward? Or do you want to keep growing? Todd Gipple: Yes. Thanks, Danny. Appreciate the question. Actually, through the term loan securitization, we don't really free up regulatory capital because we're retaining B pieces historically. And that's okay, but it does free up GAAP capital. As you noted, we're getting into the mid-10s in terms of total risk base and CET1. And so 25 basis points gets freed up from the construction loan participation and that will allow us to continue to be fairly opportunistic with respect to buybacks. So we're getting up to really above our long-term target in terms of capital ratios. And so we would continue to be opportunistic. As you know, there's really 4 things to do with capital, retain it for organic growth, and that's a little less demand for us as we're going more asset-light and capital efficient in the LIHTC business. M&A is not a current priority for us. So then you get to returning capital. We did raise our dividend modestly and it remains a modest dividend because we believe at current valuations, the stock repurchases, buybacks are really the best use of capital. And so we're very pleased to have accomplished what we have already -- and really the answer is we would continue to be opportunistic when it comes to buybacks at current valuation levels that makes sense. And we tend to not just look at where we're at on a current price to tangible book or price to earnings, we really look at where earnings in TBV are headed. And considering we're growing those that are more than 10% CAGR. And gives us even more confidence to be buying shares. So kind of a long answer to your short question, but frees up about 25 bps, and we would continue to be opportunistic in share buybacks. Daniel Tamayo: That's great, Todd. I appreciate all the color there. And then maybe one on the margin. So we've got the guidance for the second quarter. Feels like maybe we're approaching stability. Curious for your thoughts on that. And then longer term, do the securitizations continue to be kind of modestly accretive every time you do them? Or is there a point where they are breakeven or don't impact the margin as much as we look forward for future securitizations. Nick Anderson: Thanks, Danny. I'll answer several data points here, maybe for that question. And when you think about our Q1 average earning assets, we were about $8.6 billion, considering the Q1 loan growth being back-end loaded. And then assuming we hit the midpoint of our loan growth, call it, 12.5% here for the rest of the year. I assume roughly middle of the quarter for offtakes. We expect average earning assets would be down about $200 million. So I'm going to translate that then into NII and NIM. Our core margin, we continue to expect to grind higher by a couple of basis points with loan and CD repricing plus. And then to your other question, the offtakes here in Q2, they are expected to be slightly accretive, and I'm going to call that about a basis point here for Q2. In addition, when it comes back to full circle to NII, we've got an extra day in Q2, and all of that leads us. I think we're going to feel pretty confident about holding Q2 NII static. When you think on the go-forward picture on future offtakes, I don't think we're going to anchor every transaction to being perfectly neutral quarter-to-quarter. Future LIHTC rotations likely to be less dilutive than it was in Q4. Q4 was -- we had a fair amount of well-priced assets that were part of that package transaction. Some of the transactions here in at lower yields. And so we also are combining that with our securitization. So we get a little bit of upside between the two transactions. So I think any time we're taking decent assets off the books. If we can hold neutral grade, I think our expectations might be a little dilutive, but certainly not to what we experienced during Q1 with the impact from the Q4 transaction. Operator: And our next question comes from Damon DelMonte at KBW. Unknown Analyst: This is [ Matt Rank ] filling in for Damon. Hope everybody is doing well today. My first question, thanks for the comments on the digital transformation. But just curious if any of that modernization includes anything with artificial intelligence. And maybe if you guys have identified any use cases, like could that technology speed up the LIHTC flywheel, so to speak, or help with wealth management, anything like that? Todd Gipple: Sure. Matt, thanks for joining. Give our best to Damon. We are really excited about the digital transformation that we're undergoing here, and I'll give you a little background to get to your AI answer, but we're halfway done. The first or conversion was candidly our most simple, and that was last October when we went from a Jack Henry product to another Jack Henry product, where we've landed at Jack Henry Silver Lake. The one we accomplished just after the end of the quarter, first weekend in April is candidly our most rigorous one. It was the first one going from Pfizer signature, the Jack Henry Silver Lake. It went really, really well. and we really wanted to accomplish that first one and have it go well, of course, we've got another one coming up in October and April. So in April 27, we expect to be all done. And the answer to your AI automation question is really about the decision we made a couple of years ago to partner with Jack Henry for our new core. We believe them to be the furthest along with respect to AI with respect to automation opportunities, the open architecture that they have has allowed us to integrate it with roughly 30 other -- a little over 30 other products that link to our core. That's gone really well. It's been a lot of hard work. But they are, we believe, furthest along in terms of giving us and their other bank clients a lot of capabilities when it comes to AI. That will come from our large third-party vendors. We're not going to be standing that up ourselves, but they are well down the path. With respect to how that impacts us in the future. I think it's going to be more about our retail and commercial banking. I do think there will be some artificial intelligence, certainly, that will help us in the wealth management space. When it comes to LIHTC assets, there are some conversations more around blockchain with respect to tracking those assets and the securitization and sale of those assets being more efficient with blockchain. So it's more about blockchain when it comes to LIHTC. So thanks for the great question. We are really excited about our digital future and we're about halfway down -- a little over halfway done with the core conversions. Unknown Analyst: Okay. Great. And then just one more question for me. The loan loss reserve came down this quarter. So just wanted to get your thoughts on how we should think about that level going forward. Nick Anderson: Sure. So Matt, while provision was down, that was really due to the reclassification of the LIHTC loans to held for sale. So we used some of the provision in -- or the ACL in that regard. But we did, and we believed it was important, we did hold our coverage ratio static at 1.26%. So while our provision was down we maintain the same level of reserves that we had previously. So just -- I appreciate the question because it will help be clear that we didn't soften reserves. We didn't light and reserve levels. We kept those static. The reduction in provision was about reclassifying a fair amount of loans to held for sale. Operator: [Operator Instructions]. Our next question today comes from Nathan Race at Piper Sandler. Hello, Nathan, is your line on mute perhaps? All right. It appears that we're not receiving any audio from Mr. Race's line here. So we're going to move on to our next questioner, which is Brian Martin at Janney Montgomery. Brian Martin: Guys, good morning. Can you just -- maybe I missed what you were saying there in terms of just -- I think I got the big picture on the being kind of neutral, but just kind of with the earning assets land in the next couple of quarters as you kind of roll through the growth and the offtake in terms of -- it sounded like it might be down 20 or so next quarter in the second quarter, given what happens? And then thereafter, it's stable to growing with the balance of the portfolio? Or just second and third quarter, just as you -- if it happens mid-quarter, just kind of how to think about those next 2 quarters from an average earning ascent standpoint. Nick Anderson: Yes. Thanks, Brian. Certainly, a lot of noise, here in Q2 as you think about the transaction and trying to model some of that out. But yes, you are correct. When you think about Q2 average earning assets, we're thinking about that being down about $200 million. But that assumes we're hitting a pretty strong loan growth for the quarter. And then we also then have the offtake kind of pegged up for mid-quarter of Q2. Now when you get to Q3, when we think about some of the noise, that temporary noise associated with the transaction, you'd start to see that to stabilize and to see some growth from there. Brian Martin: Got you. Okay. And just the margin, obviously, you gave some comments about next quarter's margin. But just the longer term, I think the -- maybe the question earlier just about it before in a period of stability here. The bias would be trending upward. I mean, you had some nice improvement on the funding side this quarter with the deposits. I don't know that -- just the timing of the loan growth coming on and I guess, any additional improvement on that funding side, but it feels like the margins kind of flat to up rather than down. Is that -- as you kind of look in the out quarters without putting words in your mouth, does that seem like how we should be thinking about it? Nick Anderson: Yes, Brian, that is how we're thinking about it, and we continue to grind out every basis point from our core margin. And as you mentioned, a lot of that is coming from our loan and deposit repricing. We continue to DRIP loans -- or sorry, DRIP deposit pricing on our nonindex deposits DRIP lower here as we can. But yes, our expectation is that we can continue to grind out every basis point here. even into Q2 with all the activity going on, but beyond that into Q3. I think something else that will contribute to that is our expectation on the stronger loan growth as well. Brian Martin: Got you. And the loan-to-deposit ratio, I guess, as you kind of move through all the noise here, I guess, where do you expect that to kind of settle out over the next couple of quarters given the dynamics here. There's a lot of moving parts in there. Nick Anderson: Yes. So we did drop quite a bit to 87% this quarter. Certainly, that's below our historical. When you think about Q2, we're expecting that to fall more into a range between 90% and 95%. I'd probably land at 92.5% longer term here. Brian Martin: Got you. Okay. And then last two, just -- I know you talked about the buybacks being the most opportune based opportunity short term. But as you kind of roll through the modernization of the technology and you're more asset-light or, I guess, does M&A become a bit more important or more interesting, I guess, are more likely as you kind of look out into 2017? And you managed below $10 billion this year, but going over, I know it doesn't have a big cost negative to you guys, given the planning you've done, but just in terms of going over with more size. Is that something you would think about as you go into '27? Todd Gipple: Yes, Brian, that's a fair question. I appreciate you asking. Our interest in M&A will grow a bit after we get all the way through this digital transformation. I've been careful to say in the past, we're not necessarily in blackout with respect to that because of the conversions we're doing, we would certainly have the ability to do something if it made a lot of sense. I would tell you our interest in M&A would be less about the gyrations of going over $10 billion. I continue to feel very good about that. But as you know, a lot of conversations are starting these days, and there certainly is more chatter around M&A. We think we are a really great partner for the right potential partner. But I would just say activity around that is ramping up in terms of conversations, but our strike zone remains very, very small. There's a whole host of metrics with respect to a potential partner that we would have to hit. Probably the main one would be at the pace we are accreting TBV and earnings per share it's going to have to be a very good strategic and financial transaction because we do not want to go backward. And so that means it would have to be an excellent partner, and there are some out there. it'd have to be a really well-done financial transaction because we have great momentum organically, and we really don't want to take a step backward in M&A. So probably the punchline there is open to it, but very tight strikes out. Brian Martin: Yes. And then nothing near term, more -- a little bit more in the out years -- or out quarters. Todd Gipple: Sure. Operator: [Operator Instructions]. Our next question comes from Nathan Race from Piper Sandler. Nathan Race: Sorry about the technical difficulties earlier. Todd Gipple: No worries. Nathan Race: I apologize, I hopped on late, but just in terms of kind of the cadence of capital markets revenue and just kind of some of the impacts you saw from a revenue perspective this quarter, I mean, how much did count the volatility in rates versus maybe some seasonality impact, what you saw in terms of capital markets transactions closing. And then do you also expect as you look out over the next 12 months to has some seasonally kind of lighter volumes as well in the first quarter. I guess I'm just trying to understand is the updated guidance is going to be kind of more loaded over the next 3 quarters. Todd Gipple: Sure. No, Nate. I appreciate the ability to clarify some of that. So in Q1, we saw very typical seasonality for Light tech, and it really didn't have anything to do with rates or any macroeconomic headwinds or candidly, even the war, just the affordable industry tends to work really hard to close a lot of deals at year-end. And then we have a pretty slow start to the new year. And actually, we did 13 projects right on top of historical Q1 average of $11 million. So landed about where we expected. We'll tell you that over the last couple of quarters, we've raised our guidance range, and that's because of all that we're able to do with some of these transactions on perm securitizations and construction loan participations. So back in Q3, we raised our guide from $50 to $60 million up to $55 million to $65 million in the Q4 call in January, we raised the top end of the range to $70 and left the bottom. Now this quarter, we're moving that floor up as we've become more confident about future pipelines I would just say I wouldn't get too focused on the precision of those guidance ranges. It's more about the direction that they're going up, you know us really well. We have a very strong say-do ratio, and we want to keep it that way. But again, the gist of this is our pipeline is shaping up as strong as it's ever been as we get further into the year. So Q1 seasonality was really just about the industry seasonality. We're very optimistic about the pipeline we have. We're good at closing deals these 13 projects we did in Q1, even though it was a slower quarter, three of those projects were with first-time new developers. So we continue to expand our roster too. So we're very excited about the future of LIHTC, having construction offtake allows us to say yes more often to clients. and to consider candidly slightly bigger deals. So we are very excited about the future of that. That's why we've gotten to the $60 million to $70 million guidance range. Nathan Race: Understood. That's really helpful. And just going back to the margin outlook and just with the expectations for some additional construction LIHTC securitizations or sales. Curious what pricing is on that product. I imagine it's higher than what you see on a perm basis or maybe even across some other commercial segments. So just trying to get a sense of what these additional securitizations, how that's going to impact loan yields, not only in the second quarter, but as you perhaps do additional construction sales or securitizations in the future. Nick Anderson: Yes. When we look at the impact on margin for future loan sales, I mean, we continue to expect to overcome any dilution that might come from additional loan sales certainly, pricing on some of the loans that we sell are going to vary depending on tax or tax exempt. Yes, it's probably more deal dependent, if you will. And also when you think about the timing of some of these transactions, these are both of the light tech construction transactions were with our first -- with first-time partners. And so we are focused on getting deals done and not that we took the ball off the economics, but we -- some of the deals that we are doing the offtake for have been in the portfolio for a minute. So those come with prices that were higher as they were originated in a higher rate environment. Now our speed to execution in the future is likely to be much shorter. And so I would expect the disconnect between the portfolio that we are offtaking to current rates would be smaller. Todd Gipple: And Nate, I guess I'd just tag on here and say the upshot of both transactions that we'll close here in Q2 is just a slightly improved margin, maybe a basis point. And that will fluctuate from time to time. There will be times where depending again on the mix of the other side of the balance sheet, we could see a little bit of margin accretion. We could see a little bit of margin contraction but it's all going to be really tight to static. We do not anticipate having to take significant margin pressure when we're taking these off the balance sheet. So yes, I really appreciate the question, just to be able to be clear about that, that we don't expect significant impact on margin when we're doing this. Nathan Race: Got it. That makes sense. And just as these securitizations play out and just given the loan growth outlook, curious if we can expect some additional reserve releases going forward going forward, similar to what we saw this quarter. or kind of how you guys are thinking about kind of just the reserve trajectory, maybe on a dollar basis, just as some of these loans are offloaded? Todd Gipple: Sure. So I guess what I would say is there may be another construction loan participation at the end of the year. that's really going to be based on where we land on gross loan growth. If we're more in the lower end of our guide at 10%, we probably don't need it. If loan growth is more robust, and we're closer to the 15% in the guide, we're likely to do another construction offtake later in the year. And if we did that, there would be another bit of lightening of provision when we have that happen. Absent that, provision would really come down to something a lot more consistent with what we've done over the last 6, 8 quarters. were in that $4 million or $5 million range. And I would tell you, my expectation on provision would be what would vary there would just be the pace of loan growth. We really aren't seeing any challenges in terms of the portfolio. So any modification in that kind of steady rate of provisioning would really be more about the level of loan growth. Operator: And that concludes our question-and-answer session. I'd like to turn the conference back over to Todd Gipple for any closing remarks. Todd Gipple: Thank you all for joining us today. We really appreciate your interest in our company, and we look forward to connecting with you sometime soon. Have a great rest of your day. Operator: Thank you, sir. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.
Operator: Good morning, and welcome to the Ryder System First Quarter 2026 Earnings Release Conference Call. [Operator Instructions] Today's call is being recorded. [Operator Instructions]. I would now like to introduce Ms. Calene Candela, Vice President, Investor Relations for Ryder. Ms. Candela, you may begin. Calene Candela: Thank you. Good morning, and welcome to Ryder's First Quarter 2026 Earnings Conference Call. I'd like to remind you that during this presentation, you'll hear some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in economic, business, competitive, market, political and regulatory factors. More detailed information about these factors and a reconciliation of each non-GAAP financial measure to the nearest GAAP measure is contained in this morning's earnings release, earnings call presentation and in Ryder's filings with the Securities and Exchange Commission, which are available on Ryder's website. Presenting on today's call are John Diez, Chief Executive Officer; and Cristy Gallo-Aquino, Executive Vice President and Chief Financial Officer. Additionally, Tom Havens, President of Fleet Management Solutions; and Steve Sensing, President of Supply Chain Solutions and Dedicated Transportation Solutions, are on the call today and available for questions following the presentation. At this time, I'll turn the call over to John. John Diez: Good morning, everyone, and thanks for joining us. The Ryder team delivered solid first quarter results that exceeded our expectations. Our performance was driven by better-than-expected used vehicle sales results in fleet management. I'll begin today's call by providing an update on our balanced growth strategy, and an overview of our Port-to-door logistics offering. I'll also provide you with key highlights from our first quarter performance. Cristy will then provide you with an overview of our segment performance, and we'll discuss our capital spending and capital deployment capacity. I'll then review our raised outlook for 2026. Let's begin with a strategic update. I'm proud of the team's ongoing execution and our balanced growth strategy, which remains consistent and focused on clear priorities. We're building upon our transformed business model and the actions taken to derisk the portfolio, enhance returns and cash flow and strengthen the model's resiliency. Derisking actions included significantly reducing our reliance on used vehicle proceeds to achieve our targeted returns. Our multiyear lease pricing and maintenance cost savings initiatives continue to contribute meaningfully to our increased return profile and positive free cash flow over the cycle. Accelerated growth in our asset-light supply chain and dedicated businesses, has resulted in a more resilient business mix that is less capital intensive. We remain focused executing on our strategic priorities of operational excellence, customer-centric innovation and profitable growth. Operational excellence is where we stand out and what enables us to leverage our full end-to-end capabilities to solve our customers' toughest logistics and transportation challenges. We're investing in customer-centric innovation that enables a proactive supply chain. Giving our customers a competitive advantage. In RyderShare and RyderGyde, we're embedding a genetic AI in order to enhance capabilities and drive the evolution of these proprietary platforms. We're also leveraging AI use cases across the company, including FMS customer service and roadside assistance where Gentek AI is enhancing the customer experience while improving effectiveness. Additionally, we continue to deploy automation and robotics in our warehouses to drive operating efficiencies. We remain focused on profitably growing our contractual relationships. Over 90% of our revenue is generated by long-term contracts. Our high-quality contractual portfolio has proven to be a key driver of business model resilience over the cycle. Our transform model has demonstrated the effectiveness of our balance growth strategy by outperforming prior cycles. Our 3 complementary business segments are leaders in North American logistics and transportation with secular trends that support further growth opportunities. We're encouraged by the earnings power and resilient performance of our transformed business model. And believe that executing on our balanced growth strategy will continue to enable us to outperform prior cycles and position us well to benefit from a cycle upturn. Our scaled port-to-door logistics and transportation offerings provide rider with significant opportunities for long-term revenue and earnings growth by addressing many of our customers' toughest challenges. Our port-to-door solutions give customers end-to-end control from pickup at any North American port to final delivery. We combine warehousing, fulfillment, cross-border cross stocking, lease and maintenance, transportation logistics, contract packaging and last mile delivery with powerful technology and our supply chain experts to give real-time visibility, flexibility and speed. Whether our customer needs a complete solution or support at any discrete step, Ryder can provide a solution that aims to perfect their supply chain. As we continue to pursue profitable growth opportunities, we're focused on higher-return segments and verticals and increasing our share of wallet with our port-to-door offerings. By executing relentlessly, investing in our future, and growing our contractual relationships, we're well positioned to profitably grow our businesses, creating value for customers and shareholders. Turning to Page 6. Key financial and operating metrics have improved since 2018, reflecting the execution of our strategy. In 2018, prior to the implementation of our balanced growth strategy, the majority of our $8.4 billion of revenue was from FMS. Ryder generated comparable EPS of $5.95 and return on equity of 13%. Operating cash flow was $1.7 billion. This was during peak freight cycle conditions. Now let's look at Ryder today. In 2026, we expect our transformed business model to deliver meaningfully higher earnings and returns than it did during the 2018 peak. Through organic growth, strategic acquisitions and innovative technology, we shifted our revenue mix towards supply chain and dedicated, with approximately 60% of 2026 expected revenue generated by these asset-light businesses compared to 44% in 2018. Our 2026 updated comparable EPS forecast range of $14.05 to $14.80 is more than double 2018 comparable EPS of $5.95. Our return on equity forecast of 17% to 18% is also well above the 13% generated during the 2018 cycle peak. As a result of profitable growth in our contractual lease, dedicated and supply chain businesses, forecasted operating cash flow of $2.7 billion is up approximately 60% from 2018. In 2026, the business is expected to outperform prior cycles, even when comparing the pre-transformation peak to the current market environment. Moving to key performance highlights from the first quarter. The Ryder team delivered our sixth consecutive quarter of comparable EPS growth in a challenging freight environment. Comparable EPS for the quarter was up 3%. Results reflect the strength of our contractual portfolio and resiliency of our transformed model. Return on equity was solid at 17%, in line with our expectations given where we are in the freight cycle. We're on track to deliver $70 million in incremental benefits from strategic initiatives during 2026. These initiatives are part of a $170 million multiyear program launched in 2024. Consistent execution on these initiatives is the key driver of expected earnings growth in 2026. And finally, freight cycle conditions in the first quarter were better than our expectations. Used vehicle sales results were higher year-over-year for the first time since third quarter of 2022. Out performance was driven by higher retail volumes relative to our expectations and retail pricing was stable sequentially. The sequential change in commercial rental demand was in line with historical seasonal trends for the first time in 3 years. We also experienced improved contractual sales activity. Supply Chain generated record sales in the first quarter, continuing the momentum from prior year record sales and reflecting the value of our solutions. We're also encouraged by stronger sales in fleet management and dedicated, segments which have been experiencing sales headwinds reflecting freight market conditions. Sales for both segments during the quarter were above prior year and ahead of expectations. That said, these conditions remain below normalized levels and geopolitical and macroeconomic factors continue to influence the pace and durability of the recovery. I'll now turn the call over to Cristy to further review our first quarter performance. Cristina Gallo-Aquino: Thanks, John. Total company operating revenue of $2.6 billion in the first quarter was in line with prior year as contractual revenue growth in supply chain was offset by lower revenue in Dedicated. Comparable earnings per share from continuing operations were $2.54 in the first quarter, up 3% from the prior year, reflecting benefits from share repurchases, partially offset by lower earnings. The decline in earnings was due to lower supply chain performance compared to a robust prior year, partially offset by a lower tax rate driven by discrete items in the quarter from stock-based compensation tax benefits. Return on equity, our primary financial metric was 17%, in line with the prior year. Free cash flow increased to $273 million from $259 million in the prior year, reflecting reduced capital expenditures, partially offset by higher working capital needs. In Fleet Management Solutions, operating revenue was consistent with prior year. Earnings before taxes were $99 million up versus prior year, reflecting continued execution on our strategic initiatives. Used vehicle results reflect a year-over-year improvement and better-than-expected performance. In rental, demand remained below prior year, but we are encouraged that the sequential seasonal decline was in line with historical trends, as mentioned earlier. Lower rental activity was partially offset by higher rental power fleet pricing, which was up 3% year-over-year. Rental utilization on the power fleet, was 68% and up from the prior year of 66% on an average fleet that was 13% smaller. Fleet Management EBT as a percent of operating revenue was 7.9% in the first quarter, up from prior year, but below our long-term target of low teens over the cycle. In used vehicle sales, year-over-year used tractor pricing increased 6% and truck pricing declined 5%. On a sequential basis, pricing decreased for both tractors and trucks, with tractors down 3% and trucks down 4%. Sequential pricing reflected a lower retail sales mix as retail pricing remained stable. In the first quarter, 61% of our sales volume went through our retail channel, down from 69% in the fourth quarter. Our retail mix was above prior year levels of 56%. During the quarter, we sold 4,600 used vehicles, up 1,000 units sequentially and down versus the prior year. However, volumes for trucks, our largest inventory class were up year-over-year. Used vehicle inventory of 9,500 vehicles is slightly above our targeted inventory range. Used vehicle pricing remained above residual value estimates used for depreciation purposes. Slide 21 in the appendix provides historical sales proceeds and current residual value estimates for used tractors and trucks for your information. In supply chain, operating revenue increased 3%, driven by new business in omnichannel retail, partially offset by lost business and lower volumes in automotive. Earnings before taxes decreased 17% from prior year due to lower automotive results and, to a lesser extent, productivity of new business ramping up. Year-over-year comparisons were challenging in supply chain due to record first quarter performance in the prior year. Supply Chain EBT as a percent of operating revenue was 7% in the quarter at the segment's long-term target of high single digits. In Dedicated, operating revenue decreased 5% due to lower fleet count reflecting the prolonged freight downturn. Earnings before taxes were below prior year, reflecting lower operating revenue, partially offset by strategic initiatives [indiscernible] Dedicated EBT single-digit target. Next, let me cover capital expenditures. First quarter lease capital spending of $314 million was below prior year, reflecting the timing of replacement activity. In 2026, we're forecasting lease spending to be $1.9 billion, reflecting higher replacement activity versus the prior year. First quarter rental capital spending of $37 million was below prior year as expected. In 2026, we're forecasting rental capital spending of approximately $100 million. reflecting lower planned replacement activity. Our ending rental fleet is now expected to decrease 3% during 2026, and our average rental fleet is now expected to be down 11%. The rental fleet remains well below peak levels as we manage through an extended market slowdown. We continue to closely monitor market conditions and may increase our planned capital expenditures if improved market conditions persist. In rental, in recent years, we shifted capital spending to trucks versus tractors as trucks have historically benefited from relatively stable demand and pricing trends. At quarter end, trucks represented approximately 60% of our rental fleet. Our full year 2026 capital expenditures forecast of approximately $2.4 billion is above prior year. We expect approximately $500 million in proceeds from the sale of used vehicles in 2026, in line with prior year. Full year 2026 net capital expenditures are expected to be approximately $1.9 billion. In addition to increasing the earnings and return profile of the business, our transformed contractual portfolio is also generating significant operating cash flow. Improving the overall cash generation profile of the business is one of the essential elements of our balanced growth strategy. Better earnings performance is driving higher cash flow generation and, in turn, is delevering our balance sheet at a more rapid pace. This momentum is creating incremental debt capacity given our target leverage range of between 2.5 and 3x. As shown on the slide, over a 3-year period, we expect to generate approximately $10.5 billion from operating cash flow and used vehicle sales proceeds. Our operating cash flow will benefit from increased contractual earnings. This creates approximately $3.5 billion of incremental debt capacity, resulting in $14 billion available for capital deployment. Over the same 3-year period, we estimate approximately $9.5 billion will be deployed for the replacement of lease and rental vehicles and for dividends. This leaves around $4.5 billion, which equates to approximately 60% of our quarter end market cap available for flexible deployment to support growth and return capital to shareholders. We estimate about half of our flexible deployment capacity will be used for growth CapEx, and the remaining will be available for discretionary share repurchases and strategic acquisitions and investments. Our capital allocation priorities remain focused on profitable growth, strategic investments and returning capital to our shareholders. Our top priority is to invest in organic growth. Aligned with these priorities, in the first quarter, we funded lease and rental replacement CapEx of approximately $400 million and returned $272 million to shareholders through buybacks and dividends. We've been executing under our discretionary 2 million share repurchase program authorized in the fourth quarter of 2025. Our balance sheet remains strong with leverage of 269% at quarter end, in our target range and continue to provide ample capacity to fund our capital allocation priorities. With that, I'll turn the call over to John to discuss our outlook. John Diez: Thanks, Cristy. We've increased our full year 2026 comparable EPS forecast to a range of $14.05 to $14.80, above prior year of $12.92. Our increased forecast reflects stronger-than-expected first quarter performance, a modest improvement in used vehicle market conditions and continued strong contractual performance. Our 2026 ROE forecast is unchanged at 17% to 18% and is in line with our expectations given current market conditions. Our free cash flow forecast of $700 million to $800 million is also unchanged from our prior forecast and reflects higher replacement capital expenditures. Our second quarter comparable EPS forecast range is $3.50 to $3.75 above prior year of $3.32. Our transform model is well positioned for earnings growth. We continue to expect 2026 earnings growth to be driven by incremental benefits from multiyear strategic initiatives, which began in 2024, with total expected benefits of $170 million. These initiatives represent structural changes we're making to the business and are not dependent on a cycle upturn. Through year-end 2025, we realized $100 million in benefits, leaving $70 million of incremental benefits expected in 2026. In Fleet Management, we expect our multiyear lease pricing and maintenance cost savings initiatives to benefit 2026 results. In Dedicated, we expect benefits from margin improvement actions related to our Flex operating structure in 2026. In supply chain, we continue to focus on optimizing our omnichannel retail warehouse network through continuous improvement efforts and better aligning our warehouse footprint with the demand environment. In 2025, we downsized and exited select locations, which will benefit future performance. In addition to driving outperformance relative to prior cycles, our transform model also provides a solid foundation for the business to meaningfully benefit from the cycle upturn. By the next cycle peak, we expect to realize meaningful improvement in pretax earnings. We estimate that this potential benefit could be $250 million with the majority expected to come from the cyclical recovery of rental and used vehicle sales in FMS, with additional benefits from higher omnichannel retail volumes, leveraging our rationalized footprint. We expect to recognize these benefits over time as freight market conditions improve. Based on our increased forecast, we expect to realize approximately $10 million of upterm benefits in 2026 and primarily from higher used vehicle sales results. In addition to benefiting our transactional businesses, we also expect additional opportunities for profitable contractual growth as freight conditions normalize. We've been pleased by the business's resilience and performance during the prolonged freight market downturn and are confident each of our business segment is well positioned to benefit from the cycle upturn. Our transformed business model continues to deliver value to our customers and our shareholders. We continue to outperform prior cycles, and our results are benefiting from consistent execution and the strength of our contractual portfolio. We continue to see significant opportunity for profitable growth, supported by secular trends, our operational expertise and ongoing momentum for multiyear strategic initiatives. We remain committed to investing in products, capabilities and technologies that will deliver value to our customers and our shareholders. That concludes our prepared remarks. Please note, we expect to file our 10-Q later today. At this time, I'll turn it over to the operator to open the call for questions. Operator: [Operator Instructions]. We will take our first question from Ravi Shanker with Morgan Stanley. Unknown Analyst: This is Nancy on for Ravi. I know you had sort of pointed to roughly $10 million of benefits in 2026 from upturn conditions. What are sort of keeping you from being able to unlock more of the $250 million that you pointed to at peak with sort of your current momentum in the year? Or is there some conservatism embedded in this $10 million expectation? John Diez: Nancy, John here. Yes, we had set out that we had about a $250 million opportunity as we saw cycle conditions to improve. We did see in the first quarter good activity from UBS from our used vehicle sales. Primarily retail volumes came in better than what we had expected, and we also saw stability I would say, in UBS pricing, that stability was a little bit sooner than what we had expected coming into the year. So both of those components is really what's taken us to a higher expectations for the balance of the year and part of the reason for the raise in the guide. As to your question, what is, I guess, preventing us from raising it further at this point. Clearly, a big component of the $250 million is attributed to rental and another component attributed to used vehicle sales. There may be opportunities with used vehicle sales to continue moving up. Obviously, we're seeing capacity continue to exit the market. We have also seen that -- we do expect later on this year that we're going to see significant increases on new equipment, which will provide support for higher used vehicle sales pricing. We just haven't put that into the forecast because we need to see more development on that side to kind of get confident in that activity. On the rental side, which is a big component of that $250 million, I would say it's probably as big, if not bigger, than the used vehicle opportunity. We continue to see rental kind of get to normalized levels. We saw a seasonal trend in the current quarter. Nothing for us to get excited about. And that's why you probably didn't see from us any sort of upside momentum on rental for the balance of the year. We do expect that as things continue to improve. And if market conditions continue to improve, customers are going to need rental activity and rental assets in the months ahead. But none of that is -- that rental upside is contemplated because we just didn't see any breakout performance or anything in the Q1 that led us to believe that's going to hold. Unknown Analyst: That's helpful. And then one more quick question on used vehicle sales. With sort of the supply side regulations cracking down, is there a risk to use vehicle sales as trucks potentially flood the market from these carriers exiting? Or is there enough strength from an improving market to offset? John Diez: Well, I kind of mentioned I do think there's some structural changes happening in the marketplace that are going to provide upward momentum irrespective what you're seeing in the regulatory side on drivers. The driver impact that you're seeing is primarily on the over-the-road activity and for-hire carriers, which will impact our sleeper class. We think we're well positioned with our used truck inventory. If you look at it, 60% of it is comprised of trucks with 40% being tractors. And I would say a bigger portion of our inventory on the tractor side is CAPS, which is a different application than the over-the-road activity. So I think we're pretty well calibrated there. We don't think that's going to be a meaningful impact even if things continue to or there's pressure on the sleeper class moving forward. Operator: [Operator Instructions]. We'll take our next question from Jordan Alliger with Goldman Sachs. Jordan Alliger: Question on Dedicated. Sorry, getting back to this capacity and trucking is tightening driver situations tightening, I'm just sort of curious, have you or do you expect to see a significant step-up in inquiries around the Dedicated business, the dedicated pipeline, I would think that this could work to that business operations advantage. John Diez: With regards to what we're seeing in the marketplace and Dedicated, clearly, we've talked about the fact that a tighter driver market is good for dedicated long term. We did see in the quarter, and we mentioned that on Slide 7. We did see stronger sales activity in both Dedicated and Fleet Management. We have seen a number of inquiries and the level of commitment and activity from customers to sign up for longer-term contracts up in the quarter. which was very encouraging. So clearly, there are signs out there that we are seeing pressure on that side. That's going to bring more demand for us. So we're pretty excited if, in fact, the market changes from a driver perspective and driver availability has shown even as we exited the quarter, the level of activity and turnover and also increase has gone up, but certainly, we're excited about the opportunity to be able to sign more dedicated activity as the market becomes more challenging. Jordan Alliger: And just as a dedicated follow-up, given where margins start at the first quarter, started at the first quarter and then sort of the the longer-term high single-digit sort of target. I mean, can you maybe give a little thought or color around potential step-up trajectory in Dedicated as we look ahead to the balance of 2026 from a margin standpoint? John Diez: Yes. So typically, Dedicated does have some seasonality when you look at the quality of earnings. Second and third quarter are typically our strongest quarter. So you should see a meaningful step-up of 200 to 300 basis points as we get through the middle part of the year. And then Q4 typically has a little bit of a step back. We do expect to get to the high single-digit level for the full year. And that business has consistently done that. In fact, I think 8 out of the last 10 years, the Dedicated business has delivered to high single digits, and we're confident that we're going to get back to that level as we get through the year. Operator: We'll take our next question from Harrison Bauer with Susquehanna. Harrison Bauer: Great. I was curious if either John or Tom, if you could provide some maybe demand commentary as it relates to trucks versus tractors -- you mentioned some strengthening and maybe some lease signage on the FMS front. So curious if that's truck or tractor base. John Diez: Yes. I'll make some general comments here, Harris, and I'll turn it over to Tom. I will tell you One of the things that we did see in the quarter was on the used vehicle side, we saw better pricing on the tractor side. So retail pricing was up both sequentially, which was very encouraging for us. And then when you look at the activity across the different classes and the different services that we offer, -- we continue to see good demand across the truck class in both rental and lease, but I'll let Tom maybe give you a little bit more color on what he's seeing within the lease space. Tom Havens: Yes. So as we mentioned earlier, demand and the fleet were both down year-over-year. But as Christie mentioned earlier, we are seeing a trend that's a little bit better than what we had expected. And particularly on the truck classes, the demand was higher than what we had expected. So that was the a bigger driver of the uplift versus what we had expected. We also saw pricing up in rental was up about 3% year-over-year as well, which was coming from both classes really, but that was good to see that our pricing discipline held as we saw the demand maybe tick up just slightly versus our expectations and as mentioned earlier, kind of in line with what we would typically see historically. Harrison Bauer: And then maybe could you provide some updated thoughts on any potential prebuy for either tractors or truck, how that might be affecting your business and then what's contemplated in your guide for this year? And then maybe even potentially some early thoughts on how that could affect 2027 and your investment next year. John Diez: Yes. I'll make some comments and have Tom weigh in as well. With regards to the prebuy in our guidance, we don't have any meaningful pre-buy activity contemplated. Typically, where the pre-buy comes into play for us is on the sales side, we'll typically see a front-loading of sales activity for lease. And then you'll see the benefits of that play out a little bit sooner. Obviously, with used vehicles, we do expect, and we haven't seen yet what the OEM's price increase will look like. We do think that price increase will be meaningful, certainly in that 10% to 15% range at a minimum, which will provide some support for used vehicle sales. But I'll let Tom add some additional color on the prebuy activity. Tom Havens: Yes. We've been obviously out talking with our customers about this and the potential price uplift that are expected in 2027. But as John mentioned, those aren't in the marketplace yet. and our customers, very few some have, some have looked and have taken advantage of what you would expect to be lower pricing than going into 2027 and have ordered vehicles, but we haven't seen any like large uptake in any way or any large volumes in that area. And then maybe just one other point for us, if we do see things starting to turn, particularly in rental, we still -- we would expect to potentially place an order and believe we have slots to be able to get vehicles, maybe not necessarily driven by a pre-buy but driven by any demand that we would see coming here in the second quarter if things change. Operator: We'll take our next question from Rob Salmon with Wells Fargo. Robert Salmon: A quick follow-up in terms of the contractual sales activity that you had noted the improvement in FMS and DTS. Could you give us some kind of color about what that's up and when you'd expect to see kind of the fleet to start to grow in those 2 end markets? Obviously, the cyclical factors are continuing to pressure fleet sizes here. So just curious for some color on the activity, how that's compared to recent quarters and when we can kind of inflect a positive growth. John Diez: Yes, Rob, the contractual sales, a few highlights there, which I think are meaningful. Number one, we did see strong sales activity across all 3 segments. And I know your question was aimed at DTS and FMS, but our supply chain business really saw robust sales activity with another record performance in the quarter, which really demonstrates the value from our solutions that the customers are seeing as most of the activity came from expansion business. So our existing customers are seeing the value we deliver for them. and are awarding us accordingly. On the Fleet Management and Dedicated side, we did see a reversal trend. If you look at where we've been the last several quarters with stronger sales across the board. We saw some numbers we haven't seen in several years. So that's really encouraging for us. Whether or not that will continue, obviously, we would like to see that continue, but the start of the year was stronger than what we had expected. And the more important piece for us is we started seeing customers begin to commit to long-term leases at a higher rate. And then we did see, as I mentioned earlier, more dedicated activity with our pipeline and dedicated being at the highest levels we've seen. So we did see good activity. First quarter was strong. And we're hopeful that will continue. As far as lease fleet growth at both dedicated and fleet management, these have significant lead cycles, I would say, so as we start putting together a few quarters back to back, you'll start seeing the fleet level off at the end of the year and into next year, you should start seeing the growth assigned to those wins. So that's the trajectory of how we see the fleet growth moving. Robert Salmon: Really helpful. And in your prepared comments, I didn't hear you mentioned kind of the SCS. You talked about the momentum in terms of the business, but I didn't hear you reiterating kind of getting back to the double-digit targets towards the end of the year. Maybe can you give us an update on that? -- what you saw from the lost customer that was alluded to in the presentation and how we should think about margins trending from 1Q. John Diez: Yes. I'll let Steve comment on what he's seen. We did make mention of the record sales. We do expect, as we exit the year, we're going to get back to near low double-digit target levels on growth. And clearly, based on the last quarter's performance, Q4 of last year and Q1 of this year, as we look ahead to 2027, I think we're well positioned to hit our target growth levels. But I'll let Steve add a little bit of color what you're seeing on sales and the progression of the revenue base. John Sensing: Yes, Rob. Again, a healthy pipeline continues to strengthen. As I said last quarter, it's all about our relationships from our vertical leads all the way through our sales team and more importantly, the frontline operators and how they execute, focus on continuous improvement and innovation. So those deep relationships allow us to expand with our customers. As John said, last year was a record sales year. Q1 was record this year. We should be exiting at low double digits or we're approaching in Q4 of this year. So we feel really good about that. You also asked about margins. Last year, Q1 was 8.7%. That was a record quarter. While we had some challenges last quarter due to -- we did have some lost business in automotive where a customer was trading dedicated service for truckload. As that tightens back up, we could see that come back around in the upcoming years. We still were challenged with volumes across OEMs as they retool and balance through EV and ice production. So that will continue here through the first half, and we expect that to return close to normal in the back half. So we feel really good about that. And again, Q1 of this past year was the second highest Q1. So still performing in a high single-digit range. Operator: We'll take our next question from Ben Mohr with Citi. Benjamin Mohr Mok: Wanted to just ask more about your guide raise, which is on the used vehicle sales and strong contractual performance. you had guided last quarter to -- for 2026, UBS having kind of being flat versus the $22 million from last year -- congrats on the strong $12 million in 1Q. How do you expect used gains to trend through the rest of the year? And what would you see as an updated target for the full year? John Diez: Yes, Ben, with regards to our used vehicle sales and the guide, a few things. Number one, really excited about the fact that we came out of the box really strong with our initiatives are really on track for the $70 million. So the majority of the year-over-year improvement is still tied to our strategic initiatives and the execution on the team. As far as used vehicle sales, which is part of the reason for the rate, I would say we do expect used vehicle gains to come in about $10 million higher. We pointed to that in our slide with regards to the $250 million, we put in $10 million in the current 2026 year. How that will play out over the course of the year. It really depends on the level of wholesale activity. There may be quarters where we may do more wholesaling than retailing. So it's not going to be a linear, I would say, progression and be a little bit lumpy. You saw a pretty strong print in the first quarter. That may stay at that level or if not may come down a little bit as wholesale activity goes up in the latter part of the year, but we do expect the full year to be up about $10 million, up from the $20 million that we gave last year. Benjamin Mohr Mok: Great. And on the other part, the strong FMS contractual business performance, can you parse out what part of that is volume? What part of that is price what part of it is the strategic initiatives in 1Q and then maybe a similar kind of parse out for the remainder of the year? John Diez: Yes, I would say the majority is going to be driven by the strategic initiatives. Tom, I'll let Tom give you a little bit more color. But if you look at the 2 biggest components are pricing initiative that continues to deliver strong results coming into 2027. That was the reason why we upsized our strategic initiative overall target and the catalyst for raising it to $70 million in 2026. So that's behaving as we would expect. And then if you look at our maintenance initiatives, that continues to be a big part of the story. As far as volumes, we haven't seen outside of the volumes we saw in used vehicle sales, we haven't seen a big move there from our original expectations, but I'll let Tom give you a little bit of color here. Tom Havens: Yes. John is right on it. There's no fleet increases that impacted the results in FMS, it's all related to the strategic initiatives around pricing and maintenance. And I think your specific question was around how much of each, and it was about of each. 50% of the benefit was from price, 50% of the benefit from the maintenance initiatives. Benjamin Mohr Mok: Great. Appreciate the time and insights. Operator: We'll take our next question from Scott Group with Wolfe Research. Scott Group: So can you help us think about the progression from Q1 to Q2? I think you said dedicated margins should improve 200 to 300 basis points sequentially, but -- how should we think about the other 2 businesses sequentially within the guide? And I don't know any thoughts on how fuel is impacting the the P&L right now, I think it's generally a pass-through, but I don't know if there's a big wholesale retail spread. I don't know if that's sort of helping the numbers right now or not. Unknown Executive: Yes. So Scott, a few points there. I think you could expect all 3 businesses are going to continue to get better as we get through the year. Clearly, our fleet management business in rental, in particular, a return to seasonal progressions will help that business, and that's a part of it. If you look at our fleet, our lease portfolio, certainly, the pricing and maintenance initiatives are playing a big part in that as well. So you should expect all 3 of the businesses, fleet management, dedicated and our supply chain business as volumes typically are stronger in the middle part of the year. for all 3 of those businesses, they're going to benefit from higher revenue base going into the year. As far as Steel, we did see a few, which is generally a pass-through for us, not be a meaningful part of the story. We do benefit every now and then when we have rapid changes in energy prices, and we saw that in Q1. So that benefited a little bit the Q1 results, but nothing meaningful as we look forward. Scott Group: Okay. Helpful. And then I just want to follow up on rental. I don't know if you -- maybe I missed this, but can you just talk about the utilization trends throughout the quarter, what you're seeing so far to start Q1. And then just looking at the rental fleet, it's about as small as a percentage of the relative to the full-service lease fleet as I think we've ever seen. How do you think about starting to grow the rental fleet again in an up cycle? just that's the question. John Diez: Yes. So on the -- I'll pick up where you left off, the rental fleet clearly is significantly lower than the peak fleet levels I think we're down nearly 10,000 units from peak levels. So as demand comes back, we're more than ready to implement our asset management actions. I'll let Tom talk through those. And then clearly, even if we see activity rise here over the next several weeks, we have the ability to go out and put some orders in and take advantage of vehicles that can be delivered later in the year and meet that demand. But I'll let Tom make a few comments with regards to that and utilization. Tom Havens: Yes. So from an asset management perspective, the first lever you pull is you stop sending trucks to the UTC to our used truck centers, so you can immediately increase the fleet and capture demand with existing fleet that you have in the business, which gives you time then to place orders and allow the OEMs to deliver new vehicles to you. So we're obviously looking for those trigger points to to start making those decisions. As we said, we haven't started to do that yet. Hopefully, we'll have to. And then just looking at the utilization trends. You asked about the utilization trends. So I will point out, and we've mentioned it on the call that demand and fleet obviously down quite a bit, double digits on both year-over-year. But the utilization was better than what we had anticipated in -- so the January, February, March number is just the trend. We started in January at 67%. And that went to 79% in February and then just slightly above 70% in March. -- the Sorry, today. So 67%, 69% to 70%, sorry, I misstated that. And that was about 270 bps above prior year in the quarter. And then here going into April, we're still about at that 270 number better than last year going into April. So that's what we're seeing. So we're kind of seeing that same trend rolling into April. Operator: We will take our next question from Brian Ossenbeck with JPMorgan. Brian Ossenbeck: Just coming back to the sales in SCS, it sounded like a lot of that was just expansion of business with existing customers. you could share some color in terms of what verticals those would be? And then what is it taker, you're expecting to see some pickup and maybe some new customers, new logos. Is that in the pipeline? Do you have visibility to that? John Diez: Yes. Brian, I'll let Steve add color. The majority was expansion, but we did see a number of new names also added to the portfolio. John Sensing: Yes. Last year was about 80% expansion. So you had 20% of new names. We've had several new names that have started here in Q2 that we sold late last year. So we'll continue to do that. I think the great story there is any time we get a new name in within the next 2 to 4 years, because of our execution, innovation, continuous improvement, we expand with those. So those numbers are typically expansion is typically about 70%. So last year, it was just a tad bit higher than normal. Brian Ossenbeck: Any vertical... John Sensing: Yes. The majority of it was coming out of the omnichannel retail over the past, call it, 6 months. We're still seeing good pipeline activity in CPG and solid pipeline activity in our transactional businesses. That's our co-pack co-man type business. We're seeing good activity in our e-com I'd say last mile right now is a little slower than normal, but good diversification there. Brian Ossenbeck: Okay. Steve, just to make sure I understand the outlook and expectations for UBS for the rest of the year. It sounds like the first quarter was a little bit better and you're expecting some improvement from here, but it doesn't I didn't hear that you're expecting some big ramp-up from here on out. But I just wanted to make sure I understood what the -- what your guidance assumes right now and if there's any distinction between truck and tractor considering your mix is a little bit different than it has been in prior years. John Diez: Yes. What we guided to here is a modest improvement, and we did exit Q1 with higher pricing than what we had expected. So we reached stability on pricing a little bit sooner relative to our previous guide. And we are seeing improved pricing across both tractors and trucks relative to where we expected to exit Q1 originally. So a little modest improvement for the balance of the year, driven by higher levels of pricing across both tractors and trucks. Operator: We'll take our next question from Jeff Kauffman with Vertical Research Partners. Jeffrey Kauffman: And John, congratulations Pleasure to have you leading our call. So a lot of questions have been asked, but I want to go back and kind of hammer a little bit on what gives you confidence? And you talked a little bit about customers are coming back for longer contracts. Some things like that. But in terms of metrics, I mean, the rental fleet utilization was up 200 basis points in the first quarter, but 6% is a pretty low number historically for the first quarter. And the rental state is down 11%, you've shifted the mix to trucks from tractors. So one of the questions I have is does this give you a little less bounce into the up cycle than you would traditionally have. So it was a little safer on the downside, but does it rob some of the potential upside to both gains on equipment sales and operating margins in the next up cycle. So I guess my 2 questions are, what metrics can you look at that tell you hey, things really, really feel like they're turning here. I mean the truckload guys are pointing to a lot of things. What can you point to? And then does this strategic shift to favor trucks more. Is that more a function of the environment, and that's just the way it is? Or did you make that decision? And is it going to cost us a little bit of upside when the cycle does turn? John Diez: Yes. So I think I think a few points to take stock of before I get into our metrics specifically, we are looking at broad market conditions. And when we look at what's happening with capacity, and active truck utilization, we've seen 3 consecutive months of truck utilization above 95%. We haven't seen that in some time since 2021. And so that's a great indicator that capacity is coming out of the broad market. We are seeing and we do expect higher costs for new equipment later in the year, which is going to put a premium on existing units and I think we're well positioned to deal with that with our rental fleet, as you called out, a very low utilization levels. So I have plenty of upside there to take advantage of the equipment that's sitting today and deploy that for customers. As far as evidence that things are turning, we to normalized levels, I would say, in rental, but it's still soft as you indicated, and we agree with that. But the things we could point to, clearly for us are UBS, we saw retail producing sequentially stabilize with tractors up 1%. We did see rental even though it's still below normal levels. Sequentially, kind of we saw that seasonal uplift that we would see coming out of Q4 into Q1. Contractual sales was the best we've seen in a few years. That really gave us some confidence and encouragement that, hey, customers are coming back in. They're looking to add fleet and make commitments. You see if you go to our stats in the back in the presentation, if you look at redeployments and extensions, they were built up. That's a good indication for us. So I would encourage all to take a look at those statistics, which really pop when you start seeing things move up. And then lease power models, even though not a meaningful improvement, we're up in the quarter year-over-year. We did see our lease power miles start coming back up. So those are all great indicators for us that things seem to be looking to get some steam. Obviously, we would need to see that progress as we get into the year before we could start making decisions on adding fleet, especially to our rental fleet over time. Jeffrey Kauffman: And the second part of the question on leverage this cycle with a larger percentage of trucks versus tractors. John Diez: Okay. Yes. With regards to rental, clearly, for trucks, we've seen that market activity. It's kind of more of a secular move with last mile coming out of COVID. We're seeing more truck demand. That has moved us to reshape some of the things we do on our rental fleet and even as we go to market with our lease activity. With regards to tractors, obviously, there's going to be a little bit of pressure there with what we're seeing on the over-the-road space with drivers, regulations, et cetera. that may put a little bit of pressure. But clearly, if the tractor market comes back, that's the 1 asset class that we can order and get the equipment quickly. So that is something that will participate in that space as well. But I think we're well positioned to take advantage of the secular trends and what we're seeing on the truck side. Operator: Thank you. At this time, there are no additional questions. I'd like to turn the call back over to Mr. John Diez for closing remarks. John Diez: All right. Thank you, everyone. Appreciate everyone joining us today, and we look forward to seeing you out on the road. Take care. Operator: That concludes today's call. We appreciate your participation.
Operator: Greetings, and welcome to the Third Coast Bank First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Natalie Harrison, Investor Relations. Thank you. You may begin. Natalie Hairston: Thank you, operator, and good morning, everyone. We appreciate you joining us for Third Coast Bancshares conference call and webcast to review our first quarter 2026 results. With me today is Bart Caraway, Founder, Chairman, President and Chief Executive Officer; John McCarter, Chief Financial Officer; and Audrey Spaulding, Chief Credit Officer. First, a few housekeeping items. There will be a replay of today's call, and it will be available by webcast on the Investors section of our website at ir.thirdcoast.bank. There will also be a telephonic replay available until April 30 and more information on how to access these replay features was included in yesterday's earnings release. Please note that the information reported on this call speaks only as of today, April 23, 2026, and therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener or reader is encouraged to read the annual report on Form 10-K to better understand those risks, uncertainties and contingencies. The comments made today will also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures were included in yesterday's earnings release, which can be found on the Third Coast website. Now I would like to turn the call over to Third Coast Founder, Chairman, President and CEO, Mr. Bart Caraway. Bart? Bart Caraway: Good morning, everyone, and thank you, Natalie. Welcome to the TCBX First Quarter 2026 Earnings Call. I'll begin by discussing the company's progress in the quarter. John will cover the financial performance in more detail, then Audrey will provide a credit quality update. Then I'll close with a few thoughts on management's outlook. As we look at our first quarter, let's start with the broader context. This quarter marked a significant milestone for Third Coast highlighted by a successful addition of Keystone Bank shares to our platform. The Keystone merger acquisition had a substantial impact on our results this quarter, driving solid growth in loans and deposits, expanding our customer base and strengthening our presence in the key markets in Central Texas. which translated into an expanded balance sheet. Specifically, assets increased by 23.2%, loans by 19.5% and deposits by 23.5% from year-end. Equally important is the strength of our underlying business. Our loan pipelines are robust, customer activity is healthy and the strategic investments we continue to make in our platform are already gaining traction. This includes enhancements to our leadership team and the purposeful build-out of several key divisions. Within our corporate banking group, we have added seasoned best-in-class relationship bankers in Houston and Dallas, including experienced teams focused on select dedicated verticals. We also launched our asset-based lending platform, adding to our credit product suite. We believe these will be an important contributor to our loan growth and fee income. In addition, we have expanded our public funds and correspondent banking teams, further diversifying our funding base and expanding our reach across Texas and Beyond. While many of these teams are still early in the ramp up, we believe these combined investments position us to drive organic growth at meaningful levels. reinforcing our long-term goals of scalability, disciplined growth and sustainable profitability. Overall, we believe the first quarter demonstrates headway in building a stronger franchise while staying true to our fundamentals that have consistently driven our success and performance. With that, I'll turn the call over to John to walk through the financial results and provide additional details on the quarter. John? John McWhorter: Thank you, Bart, and good morning, everyone. As Bart mentioned, the Keystone transaction is the primary factor influencing the quarter-over-quarter changes in our financial results. Keystone added roughly 20% to our loans and deposits and roughly $3.3 million in merger-related nonrecurring noninterest expense. I'll focus my comments on providing clarity around those impacts, along with our underlying trends. Starting with expenses. Our noninterest expenses were higher during the quarter, largely due to Keystone related items as well as sign-on bonuses for several recent senior-level hires. During the first quarter of 2026, the company recorded $3.3 million in Keystone merger-related noninterest expenses, primarily consisting of $1.6 million in legal and professional, $1.3 million of salary and benefits and $400,000 miscellaneous. Additionally, the company recorded $644,000 in salary and benefits attributable to sign-on bonuses during the first quarter. This is the second consecutive quarter of above average hiring. These expenses are nonrecurring and reflect the near-term cost of integrating Keystone and onboarding new talent. Diluted earnings per share for the quarter was $0.88, but excluding merger expenses, would have been $102 million. Also excluding merger expenses, return on average assets would have been 1.25%. Net interest income was $53.6 million for the first quarter, marking a 2.7% increase from the previous quarter. driven by higher than average earning assets following the merger and offset by a lower net interest margin. The margin decline resulted primarily from the merger, but also from the reversal of $996,000 in accrued interest from 2 loans placed on nonaccrual. Turning to loan growth. Excluding Keystone, loans were up approximately $45 million for the quarter, whereas quarterly average balances were up over $100 million. and the second quarter has started even stronger with April month-to-date loans already up over $100 million. Pipelines are full, and some of our new lenders are just getting started. Lastly, I might mention that tangible book value ended the quarter at $31.7 which compares favorably to 31.69, which was the guidance that we gave in October of last year when we announced the acquisition. Most of our expense savings will be realized in the third and fourth quarters of this year. With that, I'll turn the call over to Audrey to discuss asset quality. Audrey Duncan: Thank you, John, and good morning, everyone. I'd like to provide a summary of asset quality for the first quarter. Nonperforming assets to total assets increased by 11 basis points from the prior quarter. The increase in nonperforming assets was primarily due to 1 CRE loan of approximately $17.1 million being placed on nonaccrual as well as the addition of $1.8 million in purchased credit impaired loans from the Keystone acquisition, which are on nonaccrual. This increase was partially offset by a $5 million decline in loans over 90 days past due and still accruing. When placing the $17.1 million loan on nonaccrual as well as a $602,000 loan, we reversed $996,000 in accrued interest which impacted our margin. On April 7, the bank foreclosed on the property securing the $17.1 million CRE loan. Our LTV on the property based upon a 2026 appraisal is just under 70%. It is also worth noting that $5.3 million of our nonaccrual loans are fully guaranteed by the SBA. The allowance for credit losses totaled $51.5 million, representing 0.98% of gross loans as of March 31, 2026. compared to $43.9 million or 1% as of the previous quarter end. The increase was primarily due to the day 1 allowance related to the Keystone acquisition. We recorded net recoveries of $4,000 in the first quarter. Our loan portfolio remains well diversified and reflects organic production as well as contributions from the Keystone portfolio with actions consistent with the prior year. Commercial and industrial loans are 42% of total loans while construction development and land loans were 17%, owner-occupied CRE was 11% and nonowner-occupied CRE was 18%. I'd be happy to answer any questions regarding asset quality during our question-and-answer session. With that, I'll turn the call back to Bart. Bart? Bart Caraway: Thank you, Audrey. As we move further into 2026, we are increasingly confident in the direction of the franchise and the strategic foundation we have put in place. We believe we are building 1 of the best platforms in the country and across our footprint. With our expanded corporate banking, including ABL, along with our public funds and correspondent banking capabilities, which position us to continue scaling the company in a disciplined and thoughtful way. We believe these groups combined with our core teams represent durable long-term growth engines that will drive organic growth, diversify our balance sheet and deepen client relationships over time. We believe when these teams gain scale, they will drive even stronger pipelines and profitability, with the potential to generate over $1 million in fees per month and extend our quarterly loan growth target range to $75 million to $125 million. Underpinning all of this is our continuous improvement mindset, which is now deeply embedded across the organization. was started as a 1% improvement challenge has evolved into a culture centered on execution, accountability and delivering consistency across outcomes for our stakeholders. And we believe that continues to be a key differentiator for Third Coast. Ongoing consolidation across the banking sector continues to strengthen our scarcity value and positions us at the early stages of unlocking additional upside for our franchise. Finally, I want to thank our team for their exceptional work this quarter and extend a warm welcome to our Keystone customers and shareholders. We appreciate your continued support in Third Coast and look forward to building on this momentum. With that, I'll turn the call back over to the operator to begin the question-and-answer session. Operator: [Operator Instructions] And your first question comes from Matt Olney with Stephens. Matt Olney: I'll start with the net interest margin as you guys mentioned some noisy results this quarter with Keystone, and I heard the commentary about the nonaccrual impact to the margin as well. Any color you can give us as far as expectations for the margin in the near term? John McWhorter: Sure. So Matt, this is John. Last quarter, I guided to a number in kind of the 390 range. And I think Third Coast stand-alone before this interest reversal, that's exactly where we were. So the interest reversal is worth about 4 basis points. And then, of course, we merged with Keystone. their margin was about 350. So you average kind of all that out and assuming nothing unusual next quarter, and I think we're about 3.75 for the margin going forward. Matt Olney: Okay. Perfect. Appreciate that, John. And then on the loan growth front, it sounds like 2Q is up to a really strong start. We'd love to hear more about the drivers of what you're seeing there. Any of this from the new producers hired or market disruption? Just more commentary on the pipeline would be helpful. Bart Caraway: Yes. That very observational obi. I think it's both what you mentioned. One, we have both some new team members and some team members that are last year that are obviously have some good volumes. And at the same time, we are seeing some opportunities from some of the disruption in the market. And I think the combination has actually basically really got a -- really robust pipeline. A matter of fact, I think the first quarter maybe have masked a little bit of how good it was because we had an exceptional number of payoffs or otherwise, our loans would have been up quite a bit more. So we're still seeing the pipelines grow right now, and we feel pretty good where we stand. The market is good. These producers that we're bringing are highly productive and have a loyal customer base. And at the same time, some of the disruption is starting to play out, where we're able to basically compete and win some business that we've been after for a while. So all in all, despite all the other macro headwinds, it's actually looking really good for us in terms of our growth and volumes. John McWhorter: Yes. And Matt, I might add that with the market disruption, that's really what's given us the opportunity to hire a lot of these people that we've talked about over the last couple of quarters. So we've paid sign-on bonuses to some of these people, again, 2 quarters in a row, I don't necessarily envision that happening in the second quarter of this year, but many of the people that we hired were exceptional. They were great opportunities, just ones that we couldn't pass up that will very much contribute to our growth going forward. But it's not an every quarter sort of thing. I think, I said the expenses related to that were about $650,000 and we likely -- I mean, who knows, maybe we have other opportunities, but I don't think it will be of that magnitude. I think most of who we wanted to hire recently, we've hired in the last 6 months. Bart Caraway: And if I could add on to that, like the folks that we've hired are people that have had long-term relationships with the existing leadership here. So these aren't new people that are unknown to us or people that either worked with before or had long-time relationships with, that we've been after for a while. And once again, similar to what happened right after the pandemic, there's a lot of dislocation and disruption that's allowed us to finally get them over the fence. Matt Olney: Yes. Okay. Makes sense. And you guys seem to be in a nice spot to take advantage of all disruption. All back in the queue. Thank you. Operator: Your next question comes from Michael Rose with Raymond James. Michael Rose: Maybe just following up on mass loan growth. Question, it looks like in the quarter, if I exclude Keystone, you were kind of below that $75 million to $100 million range that you talked about previously. Was there any sort of elevated pay downs or anything that may have impacted the organic growth? Or maybe if you can just parse out what it is. And then, I think, Bart, I heard you say given some of the hires that you've made over the past couple of quarters that, that -- maybe that range on a go-forward basis is $75 million to $125 million. So a nice kind of uptick there. I assume that there's some time that it will take for some of the newer hires to get ramped up. So should we expect an acceleration to kind of the mid to higher point of that range in the back half of the year? Just trying to frame out the loan growth outlook? Bart Caraway: Yes. Good comments. Early in the quarter, we actually had such strong loan growth that we thought were going to be above budget on it. But then we had some significant paydowns that came through, and it was -- the timing of it we thought was going to be kind of spread out over a few quarters, and it just happened to be kind of all in 1 quarter. And they were significant enough that they offset a lot of that growth. So I don't expect that to continue. Those headwinds probably kind of came first quarter. We'll maybe have a few -- I always have a few surprise paydowns of somebody sales or what have you. But I think the pipeline has grown that if we even mirror what we did last quarter, we're going to have pretty strong net loan growth. So that's why John and I in order talking that we feel like it's probably going to be this year is going to turn out to be a little better than what we even anticipated on the loan growth. Having said that, obviously, it's always lumpy. I can't control the timing of when these loans close. But prospectively, we look like it's going to be a very strong loan year for us. Michael Rose: Very, very helpful. And then just as it relates to the $17.1 million credit that was added to the nonaccruals. Is that a credit that you previously talked about? I just -- I don't remember or recall and then it seems like you have an appraisal on the property. I mean, what's kind of the expectation here for resolution? Is it a couple of quarters? I know it's hard to kind of parsed out individual credits, but just given the magnitude of size here, just trying to better understand the -- when it could eventually come out of the run rate. Audrey Duncan: Sure. I can give you some more color on that. I don't think we have talked about the loan previously, but it is a seasoned loan and we originated it in 2021. So it's been on the books and paying for many years. They had a significant decline in occupancy due to a tenant bankruptcy. So that kind of precipitated the issue there. The LTV adds just under 70% based on a new appraisal within the last 90 days, and that's the as-is value. on the current occupancy. We're getting ready to list it with a national broker, and we're working on some additional leases to increase the occupancy. But yes, I would think, yes, it's probably going to be a couple of quarters. Michael Rose: Okay. Perfect. I appreciate that, Audrey. Maybe if I could just slip in 1 more. It looks like on the deposit side, the growth on an organic basis was actually pretty strong. Obviously, some of the mix change was due to the acquisition. But just as we kind of think about deposit growth as we move forward, I think, Bart, you previously talked about it kind of somewhat matching loan growth. Is that kind of still the expectation there? John McWhorter: Yes. So Michael, 1 thing that I wanted to point out there, we had a lot more cash at quarter end. And the reason for that is we sold the Keystone investment portfolio, 100% of it. thinking that we were going to fund up a bunch of loans and replace it before quarter end and that didn't happen because we had those big loan payoffs. But -- so their investment portfolio, it was roughly $75 million in April. Our loans were up more than $100 million. So that's going to be a big help to the margin. And just the fact that the loan-to-deposit ratio was lower for the quarter. We do try to fund to the extent that we can just in time funding, and we really thought we were going to have more loan fundings. We weren't expecting the payoffs. They almost all came out of 1 lenders portfolio who's no longer with the bank, and we weren't sad to see those loans pay off. But going forward, I'd expect the loan-to-deposit ratio to creep up a little bit more and we've already reallocated that cash into loans, so that should help the margin as well. Operator: And your next question comes from Wood Lay with KBW. Wood Lay: I had a couple of follow-ups on credit. I was just curious, are there any trends to note and criticized or classified loans this quarter? Audrey Duncan: Well, obviously, the $17.1 million, that was an increase in classifieds for the quarter. We had a couple of CRE loans that were downgraded during the quarter, but they are both current now. We've got low LTVs on current appraisals. Those LTVs are closer to the 50%, 60%, and we're not expecting any issues there. Those are actually moving in the right direction. Wood Lay: If you take out $17 million, it really is pretty moderate. Audrey Duncan: Yes. If you take out the $17 million, in fact, classifieds were up about $15 million. So we actually had some net reduction there if you excluded that $17 million. Our NPAs actually would have declined 15 basis points had it not been for the $17 million loan. Bart Caraway: So I think I would comment that I still feel the portfolio looks really good. I mean, we're not seeing any macro trends or any micro trends on it. I think the story was the 1 property we took back other than that, I think we're seeing some really strong economic environment for us. We're seeing basically our customers pretty stable and navigating through all the chaos and disruption that's out there. portfolio looks pretty good, I think. Wood Lay: That's great to hear. And maybe just last for me. We're just looking for an update on how the integration of Keystone is going, when core conversion is scheduled? And do you still feel good about all the assumptions that were laid out at deal announcement. Bart Caraway: Yes. I mean I think it's actually going better than expected. It's a good cultural fit. We love the market. And thus far, the teams really kind of rallied and kind of worked well together. I'd say the conversion is going to be in July. And thus far, it's been going very, very well. If you remember, we did do a core conversion last summer. And so I guess everybody is already acclimated to change, and we're very familiar with our system. So converting a bank onto our system versus doing a whole bank conversion is a whole lot easier. So -- and by the way, we have a whole ERM team and project management team that kind of rides heard on this. And so it's very organized and we feel like everybody has the up-to-date training to be able to make this pretty seamless. John McWhorter: Yes. And Woody, as far as the assumptions and the cost saves, we're running 2 different banks today on 2 different systems. So obviously, that's more expensive. So we won't realize any of the cost saves from data processing until August, will be the first month of savings there. Keystone needed a full-blown financial statement audit, so we didn't have any savings there. So going forward, we do expect more. We obviously don't need auditors out there anymore. We won't have examiners obviously, the data processing will happen in the third quarter. So most of the expense saves are are still to come. I think we had forecast $6 million in savings and a lot of it is those couple of categories is the professional fees and the data processing fees and things like that. Operator: Your next question comes from Bernard Van Gist with Deutsche Bank. Bernard Von Gizycki: Maybe just on expenses from here, how do we think about maybe whether it's the quarterly run rate for the rest of the year? Or how to think about it just from here until the end of the year, just given some of the lumpy M&A-related costs, which I believe they're nonrecurring that you've highlighted. I'm not sure if there's any spillover in other merger-related costs that you want to highlight. And then just as those cost saves as they come in, are they fully realized in 3Q and 4Q? Or does that spill over in 2017? Just any thoughts you can break out in expenses. John McWhorter: Yes. So the last thing first. I think by January 1 of the next year, we will have 100% of the cost saves, but some of them we won't have until year-end, some things that we're accruing for an some expenses. But as far as expense run rate, it's hard to put a handle on. I mean, obviously, you could take this quarter and minus out the $3.3 million and then maybe the extra bonuses that we paid out, that's another $650,000. I mean that's kind of a good starting point for that, but we're spending time and effort on conversion, merger-related stuff. So we're not quite to a point where I can give you a good run rate number, but it's certainly this quarter minus the merger expenses and probably more than that. Bernard Von Gizycki: Okay. Got it. And then what about like fee income? Just any thoughts on -- with the new hires, obviously, the Keystone. Just anything we should be thinking about going forward or how we can think about for the rest of the year in fee income? John McWhorter: Yes. So we guided to $4 million for the quarter, and that's almost exactly where we were, I think it will be a little bit higher going forward. But again, we're not a huge fee income shop. So it's not going to be materially different. I think it's going to be between that $4 million and $4.5 million range. Operator: Your next question comes from Matt Olney with Stephens. Matt Olney: Just want to go back to the net adverse margin outlook. John, I think you said that $3.75. I was struggling to get to that number. I heard your commentary about the liquidity and the impact of that kind of late in the quarter and so far, early what you're seeing in April? Any other color that can help us get to that $3.75 number. Was there any impact of securitization or anything else that can help -- can I speak to the noise that we saw in -- moving from the results in the first quarter to that $3.75 million in 2Q? John McWhorter: Yes. I think if you add back the reversal of interest, that's going to be worth about 4 basis points. So it's not too terribly far from the $3.75 million, just to start with. I think the rest of where I'm thinking we get there is through better loan fees. The loan fees were a little late this quarter. It looks like they're running heavier. We didn't talk about securitizations. We obviously didn't do 1 in the first quarter, but we are -- we're always looking at it working on them. I can't say for sure that we'll do 1 in the second quarter, but I think the odds are probably more likely than not that we will be able to do another securitization this quarter. And if -- if we do, it will look similar to the last ones where there's a fair amount of fee income associated with it, and that goes into the margin. And I'm not considering that in the $3.75 number that would push it even higher if we were able to do that. Bart Caraway: And when we start running a little bit higher loan-to-deposit ratio, that will certainly help. Again, we had such a strong start, the first part of the quarter, had the payoffs. I think that would have made somewhat of a difference on the margin as well. And as we're able to kind of dial that in a little bit, I think that's going to kind of help our margin over the next couple of quarters. Matt Olney: Yes. Well, definitely some noisy trends given all the moving parts, but I appreciate you kind of walking through all the items. Operator: Your next question comes from Dave Storms with Stonegate. David Storms: Just wanted to maybe start with maybe some underwriting following the merger. Has there been anything that's been learned either from the Keystone way doing things or doing things or maybe any synergies that can be picked up in underwriting? Bart Caraway: I think it's all kind of in process. So they had a few products a little different from ours. It's been kind of interesting that we might be able to take and evolve at the same time, I think being able to overlay our bigger legal lending limit and some of the things that we do, particularly on the corporate side of it is going to open up some business for them on some probably bigger loans and bigger relationships. So -- but it's only been a few weeks since we brought them on board. And I think that's going to play out as we kind of get this thing integrated. And it will be a lot easier when they're on our system as well. David Storms: Understood. And then just thinking about the long-term NIM trends, before Keystone, you're trending in the plus 4% range. I guess what would it take to get the portfolio back to that again, thinking over the longer term? John McWhorter: I'm sorry, I didn't follow the question, Dave. David Storms: No, sorry. Just long-term NIM trends. I know you're talking about maybe 3 quarters, but just before the merger, you were around 4%, low north of that, is it possible to get back to that range? And kind of what would that take? John McWhorter: That's probably optimistic at that point because we have a relatively high cost of funds. I mean, the way we would get there would be through more loan fees, which we think is possible. I mean that certainly would be a goal and an aspirational sort of goal number. We think as we get bigger and lead more deals, there'll be more loan fees associated with it that will help the margin, but 4% is probably pretty optimistic for our way of doing business. And I think it's a way of upper anyway. Operator: Thank you. And there are no further questions at this time. I'll hand the floor back to Mr. Caraway for closing remarks. Bart Caraway: Well, thank you, Diego, and thank you, everybody, for joining us for our earnings call for 2026 and look forward to talking to you all next quarter. Thank you for your support. Operator: Thank you. This concludes today's call. All parties may disconnect.
Operator: Good day, and welcome to the AZZ Inc. Fourth Quarter Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Phillip Kupper, Managing Director of 3 Part Advisors. Please go ahead. Phillip Kupper: Good morning. Thank you for joining us today to review AZZ's fiscal 2026 Fourth Quarter and Full Year Results for the period ended February 28, 2026 joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast of today's call is available at www.azz.com/investor-events. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including delays in the annual report on Form 10-K. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures, which should be considered supplemental and not as a substitute for GAAP financial measures. We refer shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson. Thomas Ferguson: Thanks, Philip. Good morning, everyone, and thank you for joining us today. We delivered a strong close to the year and achieved record sales and profitability for the third consecutive year. I'm especially proud of how our teams recovered from the major winter storm in late January to finish a strong fourth quarter. Full year sales totaled $1.65 billion adjusted EBITDA surpassed $367 million and adjusted earnings per share grew 19% year-over-year to $6.19. Our performance reflects the strength of our strategy disciplined execution, operational excellence and commitment of teamwork and values-based culture across the organization. During fiscal 2026 we further fortified our competitive position by driving market share gains across our segments. AZZ continue to win by delivering superior customer service and operating with discipline and consistency while leveraging our proprietary technologies and galvanizing research capabilities to create differentiated value. Throughout the year, we made organic investments across both of our segments to enhance operating efficiencies and support our long-term growth. A key milestone was the completion of our greenfield precoat metals facility in Washington, Missouri, this investment advances our organic growth strategy and strengthens our free code Metals segment, expanding AZZ's participation in the growing alminum coatings and beverage-related end markets. We further expanded our Metal Coatings platform last year through the acquisition of a galvanizing facility in Canton, Ohio, which extended our footprint and broadened our service offering for new and existing customers. At the same time, we continue to evaluate acquisition opportunities through a disciplined capital allocation framework while growing an active strategic pipeline of deals. Jason will cover our fourth quarter results in detail. So I'll focus my remaining comments on the significant secular tailwinds that continue to propel our long-term growth. We are seeing momentum across our end markets driven by infrastructure-related investment themes that are reshaping the industrial landscape. These include industrial reshoring, bridge and highway investments, hyperscale data center expansion, investments in power generation, transmission and distribution and continued growth in renewable energy. Each of these trends are structural multiyear and increasingly central to our customers' capital spending priorities. As we've seen throughout the year, these markets rely heavily on galvanized steel and coated metal solutions areas where AZZ brings meaningful scale, deep coding experience, operational reliability and exceptional value. Our diversified portfolio positions us uniquely to be able to support large-scale complex projects across multiple end markets and states often simultaneously, and to do so with consistency and speed. Together, these demand drivers and our differentiated operating model allows AZZ to capture market share and deepen existing customer relationships. Dave will share additional details on how industry dynamics translate into project activity in just a moment. We continue to drive incremental improvements across our network using our digital galvanizing system in metal coating plants and coal in precoat metals these systems [indiscernible] customer engagement, while driving productivity and margin improvement across our operations. together, these custom digital capabilities reinforce our competitive advantages and support consistent profitable growth. With that, I'll turn it over to Jason. Jason Crawford: Thank you, Tom, and good morning. Starting with a summary of results for the year. In fiscal 2026, which ended February 28, 2026, we reported record sales of $1.65 billion up 4.6% from the prior year. For our core segments, we increased metal coating sales 14.1% and generated strong EBITDA of over $235 million or 31% of sales. For pre-court metals, despite a modest 2.3% sales decline driven by industry-wide softness in residential and other key markets we generated solid EBITDA of $176 million or 19.8% of sales. Consolidated gross margins remained robust at 23.9% and operating income from the year rose by 12% to $165 million. Also, for the full year, GAAP net income comparisons included 2 noteworthy matters. First, in 2026, our Vail joint venture generated equity and earnings from unconsolidated subsidiaries totaled $210 million, primarily driven by successfully divesting businesses within the joint venture which I will discuss in more detail in a moment. Second, for the fiscal year 2025, GAAP net income available to common shareholders included our preferred stock redemption premium expense totaling $75 million. Adjusted net income, excluding these items, plus intangible asset amortization and restructuring charges resulted in adjusted EPS of $6.19, an increase of 19% on the prior year. In addition, consolidated adjusted EBITDA increased year-over-year to $367.6 million or 22.3% of sales, up from 22% of sales a year ago. Shifting to our quarterly results. We reported record fourth quarter sales of $385.1 million represent a 9.4% increase from $351.3 million in the prior year period. This was supported by strong double-digit sales growth from our Metal Coatings segment, up 25.7% year-over-year. Compared to the prior year, Q4 results benefited from continued momentum from higher infrastructure-related demand and less impact from inclement weather. Precourt metal sales were down 2.4% for the same quarter of the prior year, primarily due to continued lower end market demand and pockets of construction, transportation and HVAC. The company's fourth quarter gross profit was $87.6 million or 22.7% of sales, up 30 basis points from 22.4% of sales in the same quarter of the prior year. Selling, general and administrative expenses totaled $30.5 million in the fourth quarter or 7.9% of sales. This compares favorably with last year's fourth quarter which reported $38.2 million or 10.9% of sales, inclusive of $6.7 million in accrued costs related to legal, retirement and severance expenses. Operating income for the quarter was $57.1 million or 14.8% of sales and exception 330 basis point improvement compared with $40.4 million or 11% of sales in the fourth quarter of the prior year. Also in the fourth quarter, we reported a net loss from the AVAIL joint venture equity and earnings of $21.7 million primarily reflecting a loss in the sale of the welding services buses and an unfavorable prior period adjustment from AVAIL. Excluding the loss on sale and prior period adjustment transactions, the Val joint ventures, equity and earnings for the quarter was approximately $700,000 compared with $3.7 million for the fourth quarter of the prior year. Interest expense for the fourth quarter was $11.2 million, an improvement of $6.2 million from the prior year, driven by debt paydown from continuing operations debt paydown from the Vale joint venture distribution, the issuance of an AR securitization loan with favorable pricing and a favorable repricing of the term loan. The fourth quarter's income tax expense was $8.7 million and GAAP net income was $5.9 million compared to GAAP net income of $20.2 million for the fourth quarter of the prior year. We reported adjusted net income of $40.4 million, excluding intangible asset amortization and valet loss discussed earlier resulting in adjusted diluted EPS of $1.34, up 36.7% versus a year ago. Fourth quarter adjusted EBITDA was $81.3 million or 21.1% of sales compared to $71.2 million or 20.2% of sales for the same period last year. Turning to our financial position and balance sheet. Consistent with our capital allocation priorities for the year, we executed with discipline across our balance sheet, growth investments and shareholder returns. We reduced debt by $385 million and ended the year with a net debt-to-EBITDA ratio of 1.4x providing significant financial flexibility moving forward. We continue to invest in the efficiency of the core buses. During the year, we invested $80.8 million in capital expenditures, a growing portion of which was dedicated to internal growth initiatives. Also included in the year within our capital expenditures was approximately $7.9 million on our new Washington, Missouri facility over the past 3 years, we've invested approximately $125 million in this aluminum coil coating facility with the team delivering the project on time and on budget. With the facility now fully operational, volume continues to ramp in alignment with our partner customer and was profitable at the contribution margin level in Q4. Finally, winning offer investments for the year. We further strengthened our Metal Coatings segment by acquiring a galvanizing facility in Canton, Ohio for approximately $30 million, demonstrating our commitment to grow the core businesses organically and inorganically. At the same time, we remain committed to returning capital to our shareholders. During the year, we paid $23 million in cash dividends and repurchased $20 million and shares at an average price of $98.28 per share. Together, these actions reflect a disciplined approach to capital deployment and our focus on creating long-term shareholder value. For the remaining AVAIL joint venture invent, we account for our 40% interest as equity and earnings on unconsolidated subsidiaries, which also constitutes a separate operating segment. In 2026, Arval generated equity and earnings of $210 million, which includes the sale of its electrical and welding businesses and provided cash distributions of $287 million during the year. ESG's cash flows from operations of $525 million includes $273 million of cash distributions from Aval net of the associated taxes paid. The remaining $14 million of cash distributions from AVAIL were classified as cash flows from investing activities. Finally, as expected, 2026 cash taxes were higher in the year associated with higher equity and earnings from Avail offset somewhat by positive effects from the 1 big beautiful Bill Act on depreciation, R&D expenses and interest expense. With that, I'll turn the call over to David. David Nark: Thank you, Jason. Good morning, everyone. Consistent with our disclosures found in the company's 10-K, Total sales for the full year grew at 5% as compared to the prior fiscal year. Construction, our largest end market, grew at 3%, while Electrical & Industrial delivered strong double-digit sales growth, resulting in 17% and 15% growth rates, respectively. As Tom noted, AZZ continues to benefit from early stages of a longer investment cycle driven by sustained U.S. infrastructure-related spending and the continued expansion of large data centers. These often pair with the construction of significant co-located power generation, driving our electrical, industrial and construction end market results. Our consumer end market performed well, growing at 6% on higher volume of coated aluminum, driven by the shift from plastic to aluminum in the beverage market and the continued ramp of the new Washington, Missouri facility while our transportation category declined by 3% due to weaker overall on-demand for semitrailers. Looking forward, industry research characterizes the AI data center build-out as more structural rather than cyclical and the U.S. data center electricity demand is expected to roughly double by the end of the decade. Despite ongoing geopolitical and interest rate uncertainties, we believe AZZ's demand is driven by fundamental shifts in the economy rather than traditional construction cycles. External forecasts indicate that the U.S. hyperscale data related spending will be approximately $700 billion in calendar year 2026, with AI investments accounting for the majority of that capital. This infrastructure heavy spending environment aligns well with our end markets. Modern data center construction requires advanced corrosion protection and usually drive significant investments in on-site power generation, grid reinforcement and transmission infrastructure. These are complex multiyear projects that require substantial hot-dip galvanized content. As a result, our Metal Coatings segment is well positioned to support this expanding market. Excluding data centers, we anticipate nonresidential construction will continue to remain subdued in fiscal year 2027, primarily driven by interest rates, geopolitical and lingering tar-related uncertainties. Within the residential housing market, current industry research indicates that single-family housing starts are expected to be at to down low single digits as a large stock of homes already under construction dampens new starts. Additionally, Current estimates project 30-year fixed mortgage rates will remain above 6%, limiting affordability and slowing demand for new construction. As a result, builders are increasingly focused on finishing existing projects and offering incentives to reduce current inventory. We expect the softness in both residential construction may provide a headwind for our precoated Metals segment in the current fiscal year. With that, I will now turn the call back over to Tom. Thomas Ferguson: Thank you, Dave. We anticipate the number of data center projects entering the construction phase in 2026 will increase, which will drive further infrastructure build-out. Importantly, our customer demand is not isolated to data centers. We are seeing continued strength across key end markets, including bridge and highway construction, power generation and electrical transmission and distribution all of which are supported by long-term secular tailwinds. These projects drive sustained demand for hot dip galvanizing services and may create incremental opportunities for pre-coated metal solutions. . We win in competitive markets because we provide delivery, reliability, high quality and speed of execution. While we are off to a good start in the first quarter, it is early in the year. So today, we are reiterating our fiscal 2027 guidance. Sales are expected to be in the range of $1.725 billion to $1.775 billion adjusted EBITDA in the range of $360 million to $400 million and adjusted diluted earnings per share in the range of $6.50 to $7. We estimate debt reduction in range from $130 million to $170 million in fiscal 2027. We are confident that our strong financial and market positions will enable us to capitalize on strategic growth opportunities, while executing on our broader capital allocation plans. Due to our strong balance sheet and desire to provide above-market growth, we will remain selectively aggressive in our approach to M&A opportunities. We focus on investments to strengthen our metal cans and precoated metal segments, expand our geographic reach and deepen customer relationships. Using a proven disciplined playbook, we are pursuing opportunities that reinforce our competitive advantages and deliver sustainable returns for our shareholders. As we look ahead, we are confident in AZZ's ability to consistently improve performance and execute at a high level, while delivering profitable growth and long-term value for our shareholders. Finally, I'm proud to recognize AZZ's 39th consecutive year of growth and profitability from continuing operations. This achievement is a direct result of the dedication, expertise and commitment of our employees across the organization. Our focus on safety, quality, customer service and execution continues to differentiate AZZ and I want to sincerely thank our teams for the outstanding work they do every single day. Now operator, we would like to open the call for questions. Operator: [Operator Instructions] The first question today comes from Ghansham Panjabi with Baird. Ghansham Panjabi: I guess, first off, on Metal Coatings, obviously, a very big year last year from a volume standpoint, including what you delivered in the fourth quarter. If you could just share with us, what are you embedding for growth specific to fiscal year '27 for the segment? And then for pre-code, if I understood you correctly, I know you called out some headwinds as it relates to residential construction. Are you expecting a worsening of the trend in terms of volumes or just headwinds that may be offset with other tailwinds, including your Washington a Missouri plant. . Thomas Ferguson: Yes. I can pick that up. So from a metal coatings point of view, if you look at the projections for the next year, somewhere in the mid-single to upper single digits for that business. Obviously, ending the year very strongly, and that builds momentum coming into the year. As you look at the pre-cometals business, probably in and around where we've seen them. So relatively flat year-on-year as you look at the overall market, where the benefit is, obviously, they've got better comps year-on-year to compare against versus the pre sorry the Metal Coatings business, we've got a little bit more difficult comps. So on high mid- to high single digits, they are relatively flat. Ghansham Panjabi: Okay. And then for pre-code, just to clarify, what is your exposure towards residential construction for that segment? Thomas Ferguson: Yes. I think if you look at overall, the market that they cover, so if you look around 75% of their end markets are driven by construction. And then around about 1/3 of that has that residential exposure. Ghansham Panjabi: Okay. And then just for my second question, as it relates to zinc prices and just maybe you can comment on your rumtrial basket trends in context of what's been happening with commodities more broadly, obviously, the events in the Middle East, et cetera. What are you seeing at this point? And how are you managing through that? Thomas Ferguson: Yes. I think from a zinc perspective, there hasn't been much effect. Prices were trending up before all of the disruption. And as you know, that's about to months in our kettles and we were feeling that coming into the year anyway. So we've but there's general inflation going on within both segments, whether it's pay prices going up, which also which is more of a pass-through on the precise side, but on the albanizing side, it's acids, caustics, chemicals, as I like to call it, super open do all that stuff is inflating. And we that's why we come value pricing. We try to keep up with pricing. The 1 thing we're doing from a surcharge perspective is in relation to transportation, fuel costs, things like that because we do have a large fleet of our own trucks and trailers. So there were using surcharges to offset that and make sure we protect our margins. We're not seeing that change. There's hardly a day goes by anymore that we don't get some price increase from suppliers. And so both segments are pushing price to offset that and maintain margin. And it seems to be expected in the marketplace now because everybody is facing the same issues. Operator: The next question comes from Daniel Rizzo with Jefferies. Daniel Rizzo: So just thinking about the preco market, obviously, higher interest rates are an issue, but are there other meaningful affordability issues that you can pinpoint for the commercial market. I mean, I think we all understand what happens with residential, but for nonres, I was wondering if there's other things that are kind of a factor that are hindrance besides, again, high interest rates. David Nark: Yes, Daniel, really pretty much everything we've described in the remarks. When you think about nonresidential, we've seen project costs overall from some of our end markets and customer go slightly up and get inflated due to some of the things that Tom mentioned. Obviously, when we put our budget together, the war in Iran had not started yet. But so we've seen some escalation there. And again, interest rate uncertainties, I think, are going to be the main thing on the residential side. Thomas Ferguson: And I would add that 1 of the things we are facing is availability is sub-grade. It's with tariffs on imports, domestic supply ramping up there are some constraints in terms of available sub strength to be painted. So some of our customers are experiencing that. So which drives them to wait and probably to inventory less wait until it's closer to the demand for the season to go ahead and place orders to be able to best utilize the substrate that's available. So that's 1 of the things we're seeing, which tends to drive us to it fits our profile, quick turnarounds, small lots, lots of customization. So it's that's a little bit of an underlying trend, which does increase cost on projects and also makes demand a little less harder to predict because they're not buying to normal inventory trends. Daniel Rizzo: More so for metal coatings, are backlogs a thing, just given the size of your projects and what people are planning out, I assume years ahead. But I was wondering if you have a sizable backlog or that's not something that's not part of your business. Thomas Ferguson: Yes, it's really not part of our business. We I say this jokingly. A lot of our sites, they look out on the yard and then that's their demand and backlog for the week. But and we're really good at turning stuff. And so our customers depend on the fact that we're very, very reliable. They get it to us on Monday. We're going to have it back to them on Friday. So we're aware of it because in our sales process, we're forecasting it. So as customers are communicating to us what their demand is going to be month in, month out. and even week out. So we feel really good on the metal side right now. Most of our customers it's a broad-based growth profile in infrastructure. So it's not any 1 whether it's data centers, pull our substations and then all the stuff that has to go in, whether it's roads, lighting, electrical systems to support data centers in substations and things like that. So it's a really broad-based market and our network of facilities plays well to it. So we don't record backlog that way, but we can look forward and say, our customers are bullish on demand in the metal coatings space. Operator: The next question comes from Adam Thalhimer with Thompson Davis. Adam Thalhimer: Congrats on the strong quarter and the strong year. On the data center piece, how are you guys handling the demand? I mean, do you have certain facilities that seem to be dedicated towards those projects? And then from a disaggregated sales standpoint, do you put that revenue into construction or into industrial or some other bucket? Thomas Ferguson: I'll let David answer the second part of it. On the first part, we just had our annual Metal Coatings, plant managers and sales managers meeting and so we've got 120 folks in there, and there was hardly a 1 single plant manager or sales manager, I talk to that isn't working on one, 2 or 3 data center projects at any given time right now. So very, very broad-based. It's what they like about us is we've got a network of facilities and so we can handle large projects across multiple facilities or in many cases, on facility can handle the entire project. So gives them surety of delivery, reliability of execution, all those kind of things that just play well for pick and AZZ for your galvanizing. In terms of how we coat it. That gets a little dicier, so I'll turn that over to David. David Nark: Yes. Thanks, Tom. There's some variation in how it gets coated based upon how the order really comes to us, whether it's from a general fabricator or a dedicated project development team, et cetera. So sometimes you'll see that show up as you can see in our results by electrical and industrial because we know we can visually see it. And we know that, for instance, it's a monopole and that's obviously going to be in electrical whereas some of the structures, and you've been to some of our plants, Adam. So you've seen some of the things that we're working with. It can be a little more unclear as to if it's going into a data center or if it's going into an LNG project, for instance. So that sometimes we'll get a little bit more clouded and will go into either construction or industrial as a result. Adam Thalhimer: Okay. Good color on that. And then I wanted to ask about M&A potential M&A. You mentioned a pipeline of deals. Can you just update us on what the pipeline looks like and potential timing? Thomas Ferguson: Yes, the pipeline is looking good, particularly on the Metal Coatings side. They're mostly what we're looking at, they're one-off sites. And so if you just kind of take our average fleet sales and EBITDA, call it $15 million in sales. $4 million to $6 million in EBITDA. That's kind of the size that we're looking at in terms of bolt-ons. . We've got 3 or 4 in fairly active discussions. We've got 1 underway in due diligence. So love to get 1 closed in before we talk again and then see if David and his team can get a couple more close this year. On the precut side, we've got 1 that I'll call in active discussions. It's not a big one. So it's kind of a single line sort of thing. And that bot sums it up. There's obviously the bigger things that we're looking at, but they're going to be further out. I don't know that I project any of the larger ones for this year. Operator: The next question comes from Nick Giles with B. Riley. Nick Giles: My first question was just CapEx is around $90 million at the midpoint. I saw in the assumptions that hot dip capacity expansions are part of that. Can you just speak to what the potential EBITDA impact could be? And how much of those expansions are embedded in this year's guide versus something that may be more visible next year? Thomas Ferguson: Yes. I think as we're looking at adding kettles, we're adding 1 here in North Texas because of demand. It will be starting up here in the next month or so. So it's going to have some impact. I'm struggling to want to publicly say what a new cattle is worth in terms of EBITDA. But it is going to have an impact. It's at a large site. So it's going to give us incremental capacity. The other things we're doing, and we are looking at other locations to add kettles those are fairly quick. We could put them in, and we approved the 1 I talked about just a few months ago, and it will be up and running this quarter. or June 1. So not long cycle times on these things. hopefully has a couple of million impact in EBITDA. If you ask the Metal Coatings team, they would say it's embedded in their forecast. If you ask me, I'd say maybe, maybe not other things we're doing in ground line coating that's common with poles and towers and things like that. So doing more of that just because transmission distribution continues to boom. So adding that capability. Once again, $2 million or $3 million investments for nice incremental sales and EBITDA. Jason, do you want to add any color to that? Jason Crawford: I mean, I think it's if you look at the growth in that business continues to go in the right direction and some of these cats are getting ahead of the curve and making sure when the volume hits then we're in the right place to go deliver against that. I would say the forecast and guidance that we have at the moment, plus or minus includes it. Really, you look, it's more kind of long-term returns. Thomas Ferguson: I mean the good news is they're really low-risk investments because the demand is already there. . Nick Giles: Understood. Appreciate that, guys. And you know the stock has obviously been on the nice run. So just was curious to ask about your appetite to do more buybacks here? Or would you prefer to keep more cash on the balance sheet just for some of those M&A opportunities that you mentioned? Thomas Ferguson: Yes. I think given the activity we've got on the acquisition side, we're committed to minimizing the dilution with stock buybacks. And so we remain committed to that. so that remains in terms of capital allocation strategy. Given the list of possible or even becoming more probable deals that we can get done. I like using the cash for that because that's going to set us up. It brings immediate EBITDA uptick for us. And as you know, our guidance does not include the M&A incremental that we would pick up. Operator: The next question comes from Gerry Sweeney with Roth Capital. Gerard Sweeney: Tom, Jason and Dave, the we've hit upon Metal Coatings quite a bit. But just 1 follow-up question, especially on the transmission and distribution. It sounds like you talk a lot to some of the metal fabricators, et cetera. But I'm just curious as to do you ever talk to some of the end users or the end purchasers and how much visibility you have on that? Or how forward out do you can you see or at least some discussions in general terms? Thomas Ferguson: Yes, I'd say we look at the general end user trends in terms of their spending and where they're going to be adding capacity and things like that. David can add more to it. But we attend a variety of conferences where we're in touch with that. And a lot of that is generally available capacity additions in terms of gigawatt additions so that kind of stuff. We're in contact with them. We compare that to what our customers are telling us and then we look at the general available market trending data. And David can put some color on it. David Nark: Yes. Thanks, Tom. Yes, Gerry, I would add to that. We've been more active than we have in the past and marketing directly to the industry and end users of it. Metal Coatings team, in particular, has put together a nice bit of marketing materials. And as Tom mentioned, has recently been to some industry conferences as well to showcase our capabilities for that market. So we're pretty pleased with what we're seeing there. And again, it shows up in the results and it also shows up in some of the backlog that those GCs and others that are calling on them share with us that give us a good forecast. Gerard Sweeney: Got you. And then just 1 more quick question. Just on the Washington facility. I think you mentioned that it was profitable on a contribution basis. And in the fourth quarter. What utilization is that running at? And how should we think about that sort of ramping up through the rest of the year, if it's not already there? Thomas Ferguson: I'd say it's at about 40% now. It's going to continue to ramp and we've got yes, it's got to produce around 45,000 to 50,000 tons this year and we're feeling pretty comfortable with the trends that it's going to get there. And so that's really going to ramp up as we get to second quarter, third quarter, fourth quarter. But we're watching that positive trend month in, month out, Jason, I don't know if you want to add something there. Jason Crawford: Yes. No. I mean it's very much ramping up to our expectations, getting to that 40%, 50% here in the first quarter or sorry, getting beyond the 40% closer to the 50%, there's 3 different processes and the 3 processes are at slightly different stages. But all signs in terms of the plans for the year are very much in alignment with expectations. Operator: Next question comes from John Franzreb with Sidoti & Company. John Franzreb: Congratulations on a great year, guys. Just want to stick with the Washington facility. What was the revenue contribution of that business in fiscal 2026? Thomas Ferguson: I think it was about $11 million or so in revenue. . John Franzreb: For the full year? Thomas Ferguson: Yes, for the full year. I believe that's... John Franzreb: All right. And I'm curious about filling the balance of the plant. I think you had about 75% of it allocated where do you stand on the remaining 25%? Thomas Ferguson: We've got a lot of interest in it. We're trying to make sure we take care of our partner first. And so, so we're continuing to ramp their volume up. As you know, the aluminum business is booming. So but yes, we won't have any trouble filling that capacity once we've taken care of our partner first. And so we would hope to by, call it, by the end of the third quarter to be in a position to start filling the balance of that. John Franzreb: Got it. Got it. Understood. And I just got off a conference call where the company mentioned that there was a concern about municipality spending in the coming year. Is that something that you share? Any kind of commonality with? I'm just kind of curious about your thoughts there. Thomas Ferguson: Yes, it's interesting because a lot of the communities we're in. We tend to be heavily concentrated in the Midwest, the South and the West, a little bit up in Canada. Most of the municipalities we're talking to are in good shape. They've still got like here in DFW, there's still a lot of growth in housing, multi-unit housing commercial construction. So we still got a lot of companies moving. And that's kind of the story throughout as, which is our biggest concentration of capacity for galvanizing. So every 1 of those communities is struggling with their budgets, but every 1 of the communities has to make these investments. So it's yes, it just is what it is. As you move up further through the Midwest. Mostly, I'd say 2/3 are very comfortable. They're moving forward with these infrastructure projects because they have to and then even in the other areas, the difficulty, I think the difficulty here is if you've got a big data center moving in, and it's going to require you to expand roads, you're going to have different means on your electric utilities. I think those are still being sorted out. So not that we're having direct conversations with those municipalities, but just kind of looking at the challenges that they're facing, how do they balance their budget when you've got this big facility coming in, which and it's going to require infrastructure. It's going to require water is going to require electricity some of the bigger data centers, they're building as David pointed out, they're now building the power generation concurrently with it. But you still got to give roads and other infrastructure, things to it. So I don't know. It's a challenge. I don't see it creating problems for us this year. But I think as you go out further, that's going to become a bigger question for a lot of these municipalities. Operator: [Operator Instructions] The next question comes from Eric Boyes with Evercore. . Eric Boyes: First, could you please remind how paint pass-through is typically incorporated in pre-code. Is it directly itemized for customers? And how many months of paid inventory does precoat generally carry? Thomas Ferguson: Yes, Eric, I can pick that up. So generally, the paint is not itemized and obviously, the end customers have a very good understanding and typically have a relationship with the paint companies. So any paint pricing that comes from the paid companies has generally passed on for 1 through to the end customer. And that's something that's within the industry and not just within AZZ. Eric Boyes: Great. I appreciate that, Jason. Thomas Ferguson: And then sorry, you asked about inventory, sorry. We have very, very tight in inventory. All inventory is bought to customer order. So as you can appreciate there isn't any speculation in terms of the manufacturing within that business. given it's all custom colors, et cetera, et cetera. So generally, we have around about 3 or 4 weeks' worth of inventory on hand. We hold a little bit more of the common product in terms of primes and backers, but when you really get to the top coats and the customization, then it's pretty much coming in the door to align with the production schedules. Eric Boyes: Got it. I appreciate that. And then second follow-up. I think you said earlier on the call that Precoat is expected to be roughly flat year-over-year. But on kind of a quarterly cadence, is that assuming some contraction in the first half? And then in the back half, we see some end market normalization? Or is that more kind of flattish across the year? Thomas Ferguson: Yes. I mean I think we're looking at it more flat across the year. And I would say, from a conservative point of view, we keep getting signals, things are turning and not quite a transition into results, et cetera. The only thing I feel to mention in the first part of that question, that Girsham had provided is the addition and growth associated with the new Washington facility really. So when you start to add that into the equation, then Precoat should show growth quarter-on-quarter as we go through the year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks. Thomas Ferguson: I just want to thank everybody for joining us today. Hopefully, what you're taking away is we feel like we're off to a good start this quarter, feel good about the year at this point, even with all the external things that may be going on out there, what's within our control, we feel very good about, and we feel that we've got great teams working real hard to do everything they can for our shareholders. So look forward to talking to you at the end of the first quarter. Thank you. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Teck Resources Limited's First Quarter 2026 Earnings Release Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. This conference call is being recorded on Thursday, 04/23/2026. I would now like to turn the conference over to Emma Chapman, Vice President, Investor. Please go ahead. Emma Chapman: Thank you, Operator. Good morning, everyone, and thank you for joining us for Teck Resources Limited's first quarter 2026 conference call. Today's call contains forward-looking statements. Actual results may vary due to various risks and uncertainties. Teck Resources Limited does not assume the obligation to update any forward-looking statements. Please refer to Slide 2 for the assumptions underlying our forward-looking statements. We will reference non-GAAP measures throughout this presentation. Explanations and reconciliations are in our MD&A and the latest press release on our website. On today's call, Jonathan Price, our CEO, will provide highlights for the first quarter 2026. Crystal Prystai, our CFO, will follow with further details on our operational performance and financials in the quarter. Jonathan will then wrap up with closing remarks and an opportunity for Q&A. And with that, over to you, Jonathan. Jonathan Price: Thank you, Emma, and good morning, everyone. We will start with the highlights from the first quarter 2026 on Slide 4. We delivered a very strong start to the year with robust financial results reflecting both disciplined execution across our operations and the cash flow generation potential of our portfolio. Our adjusted EBITDA more than doubled to $2.1 billion in the quarter, driven by record quarterly copper sales volumes, higher commodity prices, and the continued success of our optimized feed strategy in Trail Operations. This has supported robust cash generation with $1 billion in cash flow from operations contributing to a $338 million increase in our net cash position over the quarter. And with ongoing cash generation into April, we further increased our cash by nearly $300 million since March 31, and our current liquidity is $9.8 billion as of yesterday. Throughout the quarter, we made considerable progress against our key near-term priorities. Our merger of equals with Anglo American obtained regulatory approval from South Korea and advanced integration readiness. We have strong performance across all operations and are tracking well against our plans with no changes to our previously disclosed annual guidance. At QB, the team delivered consistent performance, production in line with Q4 2025, and record quarterly copper sales. We also made significant progress on the tailings management facility, or TMF, including completion of Rock Bench 4. And we continue to advance the Highland Valley mine life extension project with detailed engineering now over 90% complete and procurement nearing completion; our capital guidance of $2.1 to $2.4 billion is unchanged. All in all, it has been another strong quarter of performance in which we demonstrated the resilience and potential of our assets and further improved our strong balance sheet. Turning to an update on the merger of equals with Anglo American on Slide 5. We continue to make progress with regulatory approvals. As mentioned, we received approval from South Korea in the first quarter and the approval from China is advancing. At the same time, we are making good progress on our integration planning work to ensure readiness to close and to position the combined business to hit the ground running from day one. We are moving steadily closer to creating a leading global critical minerals champion and realizing the significant value creation potential of Anglo-Teck. We continue to expect closing of the transaction within twelve to eighteen months from the announcement last September. Turning now to safety on Slide 6. Teck Resources Limited had very strong safety performance in the first quarter. Our high potential incident frequency rate for Teck Resources Limited-controlled operations remained low at 0.05 in the quarter. This is below our 2025 annual rate of 0.06, which matched Teck Resources Limited's best ever annual result. Health and safety remain core values for Teck Resources Limited; we are focused on continual improvement and our vision of everyone going home safe and healthy every day. Turning to QB's performance in the first quarter on Slide 7. I was at QB last week, and I am incredibly pleased with the performance of the team there and the progress we are making at this tier-one asset, executing on the TMF action plan and driving operational stability. In the first quarter, we delivered robust and consistent performance with strong production at 56,000 tonnes. This was in line with Q4 2025 despite a planned maintenance shutdown and a shorter operating month in February. Mill availability of 92% was lower quarter-on-quarter; we completed our planned scheduled maintenance in January, which also had a slight impact on overall asset utilization in the quarter of 87%. Despite this, asset utilization in the quarter remained above the range assumed in our 2026 guidance. Throughput improved slightly quarter-over-quarter, reflecting enhancements in operational discipline and integration across the mine and the plant. Recoveries at 83% benefited from stable, continuous operations. Overall, there was continued operational stability in QB, with enhanced reliability and consistency in plant operations during the quarter. Slide 8 highlights the development of QB's TMF. At site, I was able to see the significant progress the team has made in advancing development of the facility. These photos show the progress that we have made since many of you visited QB in November 2025. In the first quarter, we successfully completed Rock Bench 4. You can see that the dam crest has widened significantly, which enabled the raising of the dam wall with no associated downtime of the mill. We also advanced construction of the paddocks and development of the sand dam, as evidenced in the picture on the right-hand side, as sand production and quality improved from the installation of new cyclone technology late last year. Overall, sand deposition rates improved in the first quarter, and continued improvement is expected throughout the year as we progress construction of the sand dam. Slide 9 summarizes the status of QB's TMF development work, which remains on track. Construction of the mechanical rock benches is aligned with our plan, with the completion of Rock Bench 4 in Q1. We now expect to complete Rock Bench 5 by the end of the second quarter, adding further width to the dam crest. With the installation of the new cyclone technology late last year, and the associated improvements in sand deposition, we expect to continue to advance development of the sand dam and enable steady-state operations by year-end. We have decided to install a secondary sand cyclone system to further improve sand quality. The timing of installation will be determined in the second half of this year. And finally, the schedule for installation of the permanent infrastructure remains under evaluation and will be confirmed later in the year. While we have made significant progress on the TMF, there is still much work to be done throughout the remainder of the year, importantly, completion of the development of the sand dam, and we remain acutely focused on closing out all remaining objectives. Turning to the Highland Valley mine life extension on Slide 10. The project includes enhanced mine infrastructure, an expanded mobile equipment fleet, and a new maintenance shop. The infrastructure work includes a new tertiary grinding mill and replacement of an AG mill with a SAG mill, upgrades to the flotation circuit, and upgraded power and water systems. Construction activities continue to ramp up across these work fronts and are progressing to plan. We have commenced construction of the new maintenance shop, made substantial progress along the tailings corridor, and advanced installation of pilings for the new tertiary mill. The early productivity indicators are positive. Detailed engineering is now over 90% complete, and procurement awards are now over 95% complete, with our focus now shifting to expediting the fabrication and then ensuring that timelines for delivery to site are maintained. We invested $188 million in the project in the first quarter. Our capital expenditure guidance for the project is unchanged at $900 million to $1.2 billion this year, which is a peak year for project spend, and $2.1 to $2.4 billion overall. There is also additional capitalized stripping at HVC to develop future mining areas, and this is expected to continue to ramp up over the remainder of the year. While we expect some impact from higher diesel prices, our 2026 guidance for capitalized stripping is unchanged at $450 to $500 million for the entire copper segment. This project will enable average annual copper production of 132,000 tonnes per annum at Highland Valley and extend the life of this core asset to 2046. With that, I will hand over to Crystal. Crystal Prystai: Thanks, Jonathan. Good morning, everyone. I will begin with our financial performance in 2026 on Slide 12. As Jonathan mentioned earlier, our adjusted EBITDA more than doubled to $2.1 billion in the quarter, with margins expanding to 53% from 40% in the same period last year. This was driven by our highest ever quarterly copper sales volumes and significantly higher commodity prices, with copper prices averaging a record $5.83 US per pound in the quarter. There was also a meaningful contribution from increased by-product revenue, particularly from silver. We continue to focus on cash flow generation through our optimized feed strategy at Trail Operations. This strategy continues to deliver positive results. Gross profit before depreciation and amortization from Trail significantly improved to $258 million in the first quarter compared with $80 million in the same period last year. We continue to assess our feedstock strategies and remain agile to implement initiatives that will enhance Trail Operations' profitability and cash flow. Slide 13 summarizes our financial performance in 2026 compared to the same period in the previous year. The 125% increase in our adjusted EBITDA was primarily driven by higher primary and by-product prices, resulting in a total increase in adjusted EBITDA of over $1 billion. Lower smelter processing charges remained a tailwind as the concentrate market continues to be tight. Controllable factors made a positive contribution to EBITDA, with higher sales volumes resulting in a $232 million increase. Higher copper volumes were marginally offset by lower zinc sales from Red Dog, which were in line with our expectations. Now looking at each of our reporting segments in greater detail, starting with copper on Slide 14. In the first quarter, our gross profit before depreciation and amortization in copper increased 158% from the same period last year to $1.8 billion, primarily driven by record quarterly average copper prices and copper sales volumes and lower net cash unit costs. Gross profit margin before depreciation and amortization improved substantially to 52% from 47% in the same period last year. Operational performance was strong across all assets in our copper segment. Copper production increased 32% from Q1 2025 to 140,000 tonnes, including the significant increase in QB's production to 56,000 tonnes. We also achieved record quarterly copper sales at QB, which exceeded production at 70,000 tonnes, drawing down inventory built at the end of 2025. These sales were supported by normal operations at the ship loader at QB's port facility following the completion of repairs and return to service in February. Highland Valley's production increased 11,000 tonnes from Q1 2025 due to increased mill throughput and higher grades, partially offset by lower recoveries as mill feed continues to be dominated by softer ore from the Lornex pit. Antamina's production grew 41,000 tonnes due to higher-grade copper-only ore, as expected in the mine plan. And Carmen de Andacollo's production increased to 14,000 tonnes due to higher copper grades and recoveries. Our copper net cash unit costs were significantly lower than the same period last year, down $0.27 US per pound, reflecting higher production, lower smelter processing charges, and higher silver and molybdenum by-product credits at QB and HVC. Looking forward, all of our annual guidance for 2026 to 2028 for our copper segment is unchanged. This year, we continue to expect further growth in copper to 455,000 to 530,000 tonnes compared with 454,000 tonnes last year. Turning now to our zinc segment on Slide 15. In the first quarter, gross profit before depreciation and amortization increased 72% from the same period last year to $387 million, driven by higher commodity prices and, as I mentioned previously, our continued focus on our optimized feed strategy at our Trail Operations. Gross profit margin before depreciation and amortization expanded to 37% compared to 29% in the same period last year. At Red Dog, zinc production of 106,000 tonnes reflected lower grades as expected in the mine plan, and zinc sales were above our quarterly guidance range at 52,000 tonnes. Despite the lower production, we reduced our zinc net cash unit cost by $0.08 per pound compared to the same period last year, due to higher by-product revenue, largely driven by increased silver prices, as well as lower smelter processing charges. Refined zinc production at Trail Operations increased 16,000 tonnes compared to Q1 2025, as the zinc electrolytic plant was running at full capacity in the quarter. Looking forward, we expect Red Dog zinc sales for Q2 2026 to be between 30,000 and 40,000 tonnes, consistent with the normal seasonality of sales. Our annual zinc guidance for 2026 to 2028 is unchanged, and we continue to expect zinc in concentrate production of 410,000 to 460,000 tonnes and refined zinc production of 190,000 to 230,000 tonnes in 2026. Looking more closely now at our unit costs on Slide 16. In the first quarter, our net cash unit costs in both our copper and zinc segments decreased significantly compared with the same period last year. This was a function of disciplined execution at our operations with higher production and improved by-product pricing. The current conflict in the Middle East results in some inflationary and supply chain risks, largely from diesel prices and, in particular, diesel imports into Chile. This inflationary risk to cost needs to be seen in the context of the material benefit on our unit costs from additional by-product revenue, which currently more than offsets the impact of higher diesel prices. Our annual net cash unit cost guidance embeds conservative by-product prices below those achieved last year and below current spot prices. If current commodity prices persist, this would be a benefit to our realized net cash unit cost for the year. Our annual 2026 net cash unit cost guidance ranges for both copper and zinc are unchanged, and we have provided sensitivities for our net cash unit cost to by-products and WTI prices. The largest sensitivities are currently expected to be from silver and the WTI oil price as a proxy for diesel. In our copper segment, our annual net cash unit cost guidance for this year remains $1.85 to $2.20 per pound, compared with $2.03 US per pound last year, and reflecting the growth in copper production that we continue to expect this year. For every $10 US per ounce change in the silver price, our copper net cash unit costs are expected to move $0.02 US per pound. Our 2026 guidance range embeds an assumption of $36 US per ounce, and the spot price is currently trading at around $80 US per ounce. For every $10 US per barrel change in the WTI oil price, our copper net cash unit costs are expected to move $0.03 US per pound. Our 2026 guidance is based on a WTI oil price of $65 US per barrel, and the spot price is currently around $93 US per barrel. In the zinc segment, we continue to expect our annual net cash unit cost for this year to be between $0.65 and $0.75 US per pound, compared with $0.30 to $0.33 US per pound last year, reflecting the expected decline in zinc production volumes this year. For every $10 US per ounce change in the silver price, our zinc net cash unit costs are expected to move $0.05 US per pound. And for every $10 US per barrel change in WTI, our zinc net cash unit costs are expected to move $0.01 US per pound. At Red Dog, we take delivery of all of our required diesel during the shipping season, and we are still consuming fuel shipped in 2025. We are continuing to actively monitor the situation for any potential for further disruptions, including in the cost and supply of inputs. Turning now to our operating cash flow outlook on Slide 17. With the cash flow we have already generated from operations in Q1 of this year, our illustrative EBITDA and cash flow from operations have further improved based on several copper pricing scenarios. Assuming an average copper price of $5.50 US per pound for the rest of the year, we could generate $6.6 billion in EBITDA and $5.5 billion in operating cash. And if copper prices remain at current levels close to $6 US per pound for the remainder of the year, this could increase to around $7.1 billion in EBITDA and $5.9 billion in operating cash flows. These cash flows are primarily driven by our copper segment, including QB, with a significant contribution from our zinc segment. This illustrates the cash flow potential of the business, particularly if current copper prices are sustained. We expect strong operating cash flow conversion, particularly at QB. Turning to our balance sheet on Slide 18. Cash flow from operations in the first quarter was strong at $1 billion. This was despite an $834 million build in working capital due to seasonal working capital outflows throughout the quarter, including payment of the NPI royalty, as well as an increase in receivables at the end of the quarter due to higher sales volumes and higher commodity prices. As a result of our strong operating performance, we are building cash, with a $338 million increase in our net cash position in the quarter to $488 million. We have continued to generate cash into April, with a $276 million increase in our cash balance from March 31, and our current liquidity is $9.8 billion as of yesterday. The cash flows generated from operations also support our capital investments as we continue to execute the HVC MLE project this year. We continue to maintain investment-grade credit ratings and to pay our regular base annual dividend of $0.50 per share, or $61 million in the first quarter. Overall, robust cash flow generation is strengthening our balance sheet and ensuring our resilient position. With that, I will hand back to Jonathan for closing remarks. Jonathan Price: Thanks, Crystal. I will come back to our key near-term priorities to wrap up on Slide 20. First, we are working on securing the remaining regulatory approvals for our merger of equals with Anglo American while advancing our integration planning. Second, we are focused on continuing to deliver safe, stable, and predictable operational performance against our plans and guidance. Third, we are pushing hard to progress the TMF development to achieve steady-state operations at QB this year to underwrite the full value of this extraordinary asset. And finally, we are advancing construction of the Highland Valley mine life extension project. With these key near-term priorities, we are setting a strong foundation for our next chapter at Anglo-Teck as a global top-five copper company, as we continue with our relentless focus on unlocking value for our shareholders. With that, over to you, Operator, for questions. Operator: Certainly. You will hear a tone acknowledging your request. We ask that you please limit yourself to one question and one follow-up. If you are using a speakerphone, please ensure you are using the handset before pressing any keys. The first question comes from Liam Fitzpatrick with Deutsche Bank. Liam, you may go ahead. Liam Fitzpatrick: Good morning, Jonathan and team. First question, just on QB, around the installation of the permanent infrastructure. Can you outline some of the key factors that will drive the timing there? And does it pose any risk to the production guidance that you have given? Jonathan Price: Liam, thanks for that question. Firstly, I will say it poses no risk to production guidance, but I will let Dale Webb, our SVP of LatAm, talk through some of the timing considerations. Dale Webb: Thanks for the question, Liam. I think the primary drivers are really our progression in terms of getting the tailings dam to steady state, and that is on track to achieve by year-end. Once we are able to achieve that, then we will find an operating window where we have an extended period of time where we do not need to do additional lifts, at which point we can implement and install that infrastructure. We would be looking at a period of time in 2027 to do that. That would be preliminary at this stage, and it is under constant review as we progress the build of the tailings dam. Liam Fitzpatrick: Okay. Thank you. And my follow-up is on the Trail asset. This has not been my biggest focus when looking at the numbers, but it has become quite material. Can you help us understand what a sustainable level of EBITDA for this asset will be moving forward? Q1 does look exceptional, but how should we think about 2026 and beyond? Jonathan Price: Yes, thanks, Liam. I will get [inaudible] to just start with a little bit on the operating strategy at Trail, and then perhaps Crystal can comment on the financial outcomes. Unknown Speaker: Good morning, and thank you, Liam. As Crystal stated in her opening comments, our strategies have remained consistent for the past eighteen months. There are two key drivers to profitability. One is our feedstock from concentrate and non-concentrate sources. We work closely with the commercial team to set up the feed strategy in advance to optimize pricing. Also note it is an integrated zinc business; our principal feed source is from Red Dog. The second driver is capacity of the plant. We are focused on operating discipline. We have plant shutdowns this year in May and October, approximately 15 to 20 days each. Crystal Prystai: Thanks. Look, I think the future profitability of Trail as we think forward every quarter is going to depend heavily on commodity prices, the TC environment, and FX rates. Those are all going to be drivers. And as noted, the feedstock is going to be really critical to that. So what you are seeing is by-products really driving the profitability in the quarter. I think it is challenging to measure that sort of EBITDA, but you really have to think about your views on commodity prices. We can have further discussions about the modeling offline if that is helpful. Liam Fitzpatrick: Okay. Thank you. Operator: The next question comes from Myles Allsop with UBS. Please go ahead. Myles Allsop: Great, thanks, and congratulations on a good quarter. Maybe just firstly on the merger with Anglo. How are the discussions progressing with the Chinese regulators? Is there anything untoward? And how quickly, once approval comes through from China, can you actually complete the merger and move forward? Jonathan Price: Yes, thanks, Myles. On the first point, the interactions with SAMR, the regulator in China, are proceeding very much in the normal course. We continue, both ourselves and Anglo American, to respond to information requests, which is quite typical at this point in time. Right now, we have not received any requests for remedies arising from this process. So it is very much a normal, two-way, technocratic process, if I can put it that way, and we will continue to remain very engaged in that. As I mentioned before, we do not see any change to the timelines for closing of the transaction, with the twelve to eighteen months from the date of announcement still remaining our best and current view. With respect to completing or closing the transaction post the receipt of the China approval, of course we would look to do that as quickly as possible. There will be a number of considerations that flow into that, but I think you could expect to see one following the other in pretty short order. Myles Allsop: Okay. Thank you. And then on the TSX index, how have those discussions been progressing? Is it looking like you may get index inclusion now? Jonathan Price: There have been a few green shoots coming in that conversation of late. As you know, it is something we have been focused on since the announcement of the transaction, but I will let Emma provide a little bit of an update as to where we are right now. Emma Chapman: Hi, Myles. The good news is we have seen some really positive momentum coming from S&P and the TSX to find a practical solution to enable Anglo-Teck to retain indexation as a combined entity on the TSX. This is ultimately being driven by market participants who really want this outcome. There is currently a consultation process ongoing which could help shape what the potential framework could look like to enable that indexation. At the moment, we are hearing pretty positive feedback from the market that there is an incentive to try and find a positive solution. We just need to establish the timing of what that process could look like and hopefully see a conclusion reached ahead of close of the deal. We will work closely with the market, and we will work closely with S&P and the TSX to try and get that determination for investors. Myles Allsop: Great. Thanks. I will jump back in the queue. Jonathan Price: Thanks, Myles. Operator: The next question comes from Anita Sarney with CIBC. Please go ahead. Anita Sarney: Hi, good morning, Jonathan and team. Thanks for taking my question and congratulations on a good quarter. Just a couple of questions. I want to follow up on the indexation. I think S&P was soliciting feedback from investors. Do you have any idea when you would hear whether or not you would be included in the index? Is there any timeframe? Emma Chapman: We have not had any specific timeframe, Anita. I think there are obviously some variables that are uncertain, such as the closing of the transaction. From the feedback that we have received from the market, there is a desire to try and accelerate getting a conclusion done so that it is in advance of the close of the deal. But I do not believe that a set process or timeline has been established at this point. We will again try to work as closely as we can to facilitate an accelerated decision from S&P and TSX. Jonathan Price: I think all we know in addition to that, Anita, is that they make these decisions on a quarterly basis, and there is a consultation period ahead of each quarter. So to Emma’s point, it is about timing that consultation to be as close as possible to completion of the transaction. Anita Sarney: Just on QB as well. Is there anything that we need to be thinking about as the year evolves in terms of capacity within the tailings dam? At this stage, is there sufficient capacity ahead of you for Q2 and Q3, or could that be a bottleneck going forward? I understand the mill is running well, but I am just thinking about the capacity for deposition. Jonathan Price: At a very high level, we have signaled that we expect Rock Bench 5 to be completed within this quarter, within Q2. Assuming we deliver that, then we expect to be able to operate throughout the remainder of 2026 unconstrained by the dam and by tailings capacity. Anita Sarney: Another question. The NPI at Fourmile has come up. Are there any plans for you to monetize that, or how are you thinking about that royalty that you have? Jonathan Price: No specific plans for that right now. We view that as a valuable asset that we have in the portfolio, and it is a reflection of what is actually quite a large portfolio of various royalties associated with prior exploration projects that we have had in the Teck Resources Limited stable. We are obviously very pleased to see how that project will advance over time. There is a lot of technical work that has to still be done around the Fourmile development, and that will further inform the value of the royalty that we hold. It is something that we will remain very close to, of course, but that is one for the future. Anita Sarney: Thank you. That is it for my questions. Operator: The next question comes from Craig Hutchinson with TD. Please go ahead. Craig Hutchinson: Just on the potential for the JV between QB and [inaudible]. I think you had mentioned in Q1 that you are starting to have discussions there. Can you provide any updates on where things stand with regard to a future JV between those two assets? Jonathan Price: Thanks for that, Craig. We remain very focused on unlocking the full potential of QB and Collahuasi for all shareholders and stakeholders. We are absolutely convinced that that combination will offer the fastest route to new copper growth; it will have the lowest risk, the lowest capital intensity, and therefore the highest returns relative to any standalone alternatives for either site. However, progressing with QB–Collahuasi and the synergies there will not in any way preclude further expansion of either QB or Collahuasi in the future. We see that district as one that will be able to offer a significant expansion of multi-decade copper growth for all parties. There is a lot of work going on around that right now. We are progressing with scoping studies, we are progressing with permitting strategies, and we are having engagements between the parties and stakeholders more broadly. So lots happening on that front, but, of course, nothing concrete to announce at this point. Craig Hutchinson: And then one more question for me. On Highland Valley, it was really strong grade this quarter. What does the cadence look like from a grade perspective for the balance of the year? Does it drop off fairly significantly in Q2, or is it steady state and then rolls off in the second half? Anything on grades would be helpful. Thanks. Jonathan Price: We do expect to see some reduction in grades, but perhaps I will ask [inaudible] to comment a little more. Unknown Speaker: Thanks very much, Craig. The grade in Q1 2026 was expected and in line with our plan and within our annual guidance range. Grades in the first quarter were slightly higher than projected; that was a function of sequencing within the mine plan. We do expect some additional downtime in the second half of the year associated with the mine life extension project. As Jonathan mentioned, we are going to convert the autogenous mill to a SAG mill and install the tertiary grinding mill, so connecting those two things will impact capacity, but all is consistent with guidance. Jonathan Price: Guidance is unchanged, Craig. Craig Hutchinson: Great. Thanks, guys. Operator: The next question comes from Carlos De Alba with Morgan Stanley. Please go ahead. Carlos De Alba: Yes, thank you. Good morning, everyone. Sorry if this question was asked before or the topic was addressed; I joined a little bit late. Have the Chinese authorities indicated any potential request in terms of asset divestitures or something of that nature as they go through the review of the proposed transaction? Jonathan Price: Hi, Carlos. Yes, we did address this earlier. Essentially, that process is unfolding under the normal course in terms of the regulatory review.
Operator: Greetings. Welcome to LSI Industries Fiscal 2026 Third Quarter Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Jim Galeese, Chief Financial Officer. Thank you. You may begin. James Galeese: Welcome, everyone, and thank you for joining today's call. We issued a press release before the market opened this morning, detailing our fiscal '26 third quarter results. In addition to this release, we also posted a conference call presentation in the Investor Relations section of our corporate website. Information contained in this presentation will be referenced throughout today's conference call included are certain non-GAAP measures for improved transparency of our operating results. A complete reconciliation of GAAP and non-GAAP results is contained in our press release and 10-Q. . Please note that management's commentary and responses to questions on today's conference call may include forward-looking statements about our business outlook. Such statements involve risks and opportunities and actual results could differ materially. I refer you to our safe harbor statement, which appears in this morning's press release for more details. Today's call will begin with remarks summarizing our fiscal third quarter results. At the conclusion of these prepared remarks, we will open the line for questions. With that, I'll turn the call over to LSI President and Chief Executive Officer, Jim Clark. James Clark: Thank you, Jim. Good morning, everyone, and thank you for joining us today. Before Jim Galeese walked through the numbers for Q3, I wanted to take a few minutes to step back and frame what you're seeing this quarter in the context of the journey we've been on. When I joined LSI in late 2018. We were a company doing just under $300 million in revenue with EBITDA margins in the low single digits and a stock trading around $2.5. We were fundamentally a lighting company. A good one, but just a lighting company. The question at that point was whether we could build something more durable, more differentiated and ultimately more valuable. . In 2019, we introduced our 2025 plan with a goal of reaching $500 million in revenue and 10% of EBITDA by 2025. We achieved that plan early in fiscal 2023, and that gave us the confidence to move forward with our Fast Forward plan, targeting $800 million in revenue and $100 million in EBITDA by 2028. But the more important change was not just in the numbers. It was in how we thought about the business. We made a deliberate decision to organize around vertical markets instead of products. That changes how you operate. how you invest and how you grow. It also changes how you show up with the customers. We chose markets where there is a sustained need to reinvest in the physical environment driven by the consumer experience. When one brand raises the bar, the competitors have to respond. That creates an ongoing cycle of investment, and that dynamic continues to work in our favor. As we've discussed before, we grow in 2 ways: first, by adding new vertical markets; and second, by expanding what we provide within the markets we already serve. When we can provide lighting, display, mill works, graphics, and program management as a single integrated solution, we become more relevant to the customer. We participate in more of the projects, and we build deeper relationships over time. That is where we create real value for our customers and for our shareholders. Over the last 5 years, we've deployed more than $500 million across 4 acquisitions, including Royston. Each one has added the capability and strengthened our position in the verticals we serve. Just as important, we have done this in a disciplined way, supported by the cash flow of the business. We've been very intentional about what we buy, how we integrate it and how it fits into our broader platform. Today, with roughly 3,000 people in LSI and 23 U.S.-based manufacturing locations and a pro forma revenue run rate approaching $900 million, the platform we set out to build is taking shape. It's broader, it's more capable, it's more resilient than the business we started with. The focus is now on execution and continuing to scale what we have built. One of the things I'm most proud of is our high CD ratio this team has built over time. We set our expectation carefully, we deliver against them, and that consistency has been a key part of building credibility with our customer and our investors, and it's something we work hard to protect. The acquisition and integration of Royston is a significant opportunity. It expands our capabilities and strengthens our position across multiple vertical markets. Our approach will be disciplined and consistent with how we've managed prior acquisitions. We will take the time to integrate it the right way, align it with our operating model and make sure we're capturing the value we expect. As we move through that process, we will evaluate the business through the lens of our vertical market strategy and our focus on margin quality. Where there is strong alignment, we will invest and grow where there is less alignment, we will be thoughtful about how we serve those areas going forward. That is the part of how we built this business and it will not change. That discipline has been a defining characteristic of the company, and it will continue to guide us. We believe the platform we built is the right one. The markets are there, the capabilities are in place, and the team is strong. The opportunity now is to execute and to continue to build on that foundation. Now before I turn things over to Jim Galeese, I wanted to make a few brief comments on the quarter. We delivered solid third quarter results with growth across segments and continued strong cash generation. The performance reflects ongoing momentum in our key vertical markets and the operational discipline of the team. We are seeing the benefit of the model we've been building with more consistent activity across our core customers and improved execution across the business. Looking ahead, we expect a solid fourth quarter, and we feel good about how the business is positioned as we move into the next year. While there will always be moving pieces in the near term, the underlying demand drivers in our vertical markets remain intact, and we believe we are well positioned to continue to build on the progress we have made. It's an exciting time for LSI. We have a lot of opportunity in front of us supported by a stronger and more capable platform than we've had at any point in our history. I still feel like we're in the third inning of a 9-inning game. And our job is to stay disciplined and continue to execute. With that, I'll turn it over to Jim for a more detailed walk-through of our Q3 financials. James Galeese: Good morning, everyone. Fiscal Q3 was an eventful quarter for LSI. Successfully delivering solid operating results and taking the next step in advancing our vertical market strategy with the acquisition of Royston Group. The 6-day Royston stub period is included in our third quarter performance and key metrics, including and excluding Royston, are contained in the press release and as follows: Total sales increased 14% versus prior year to $150.5 million. and increased 9% excluding Royston. Adjusted earnings per share were $0.28 and $0.27 excluding Royston, or $0.07 above the prior year quarter of $0.20. Adjusted EBITDA was $15 million or 10% of sales. Adjusted EBITDA, excluding Royston was $14.1 million above prior year, with adjusted EBITDA margin of 9.8%, an increase of 130 basis points over last year. Free cash flow for the quarter was $11.8 million excluding acquisition-related costs, continuing a high conversion of earnings to cash. Post transaction, our pro forma TTM net debt-to-EBITDA is 2.7x. Now a few comments on the performance of our 2 reportable segments. All segment comments exclude the Royston stub period. Our Display Solutions segment had a strong quarter, with sales and adjusted operating income increasing 14% and 64%, respectively, versus last year. Grocery vertical sales increased double digits over last year. We conduct business with over 15 sizable change in this vertical, representing thousands of combined locations, and we're experiencing increased activity with many of these customers. Refrigerated display case products are the lead in our solution set to this vertical, but we've been successful in growing our position in nonrefrigerated or ambient product placements as well with improved margins. Orders in the grocery vertical were 20% above last year, and we exit the third quarter with a backlog also above prior year. The refueling C-store vertical generated high single-digit sales growth over record Q3 sales realized last year. The mix of large multi-quarter, multiyear programs, along with a growing mix of shorter-term medium-sized projects is driving the increase. Orders for the quarter were double digits above prior year with a book-to-bill over 1. Included is over $5 million of program work awarded to LSI by the largest C-store chain in North America. All to be completed by the end of the calendar year. We are encouraged to see this customer begin increasing investment levels after several years of low activity. Total sales for the QSR vertical were down versus last year, reflecting a mix of growing chains, continuing to invest and other chains taking a bit more cautious approach as they finalize plans to adapt to changing consumer habits. Concept and development work remains high in this vertical. Shifting to lighting. Sales increased 2% despite changes in market environment. While code activity remains active, the quote-to-order conversion period lengthened in the quarter. after several quarters of improving time lines. We had a sizable number of quotes expected to convert to orders in the third quarter, which have been extended. We believe macro developments are influencing project proposal and approval activity. Our focus on national accounts continues to move forward with both the number of accounts and projects expanding, both sequentially and to last year. We continue to effectively manage margins, aligning project pricing to changes in material input costs. Lastly, a few comments on our outlook for the fiscal fourth quarter. Our Display Solutions segment, including both LSI and Royston is expected to have a solid quarter. Sales are projected to increase on a mid- to high single-digit percentage basis when compared to the prior year quarter reflecting ongoing favorable customer program activity in the grocery and refueling C-store verticals. This builds on the strong fourth quarter of fiscal '25 which generated 13% year-over-year comparable growth. Conversely, near-term softness is expected in the Lighting segment, impacted by a lengthening project quote-to-order conversion cycle macro factors as well as challenging prior year comps. Recall that lighting sales increased 12% year-over-year in Q4 fiscal 2025. Q4 Lighting segment sales are expected to decline mid-single digits versus last year. As a result, on a consolidated basis, we expect net sales growth in the low to mid-single-digit percent range in the quarter versus prior year. Importantly, we continue to maintain both our price and cost discipline across the organization, ensuring that we continue to realize healthy margins across both of our segments, consistent with our focus on profitable growth. I'll now turn the call back to the moderator for the question-and-answer session. Operator: [Operator Instructions] Our first question comes from Aaron Spychalla with Craig-Hallum Capital Group. Aaron Spychalla: Maybe first for me on the guidance. Can you just kind of, Jim, unpack that a little bit? I just want to make sure I heard it's apples-to-apples as if you owned Royston last year. And then maybe just following on that, almost 2 months since the acquisition has been announced. Can you just talk about the response you've seen from customers, how quickly you can maybe capture some of the revenue synergies from the expanded offerings you have now? James Clark: Aaron, this is Jim Clark. Thanks for being on the call. Jim Galeese will give you a recap here in a second, but I just want to make a comment on one thing. You're right, we announced Royston in late February, but remember, it was not a simultaneous Simon close. I know you're aware of it. We've only had Royston for about 28 days today marks 28 or 29. So a little patience on how Royston contributes going forward. I think we picked up 6 days here in but the graph that Jim put in the release and everything shows the difference between Royston and with and without Royston. But I know your questions were more about forecast forward. So I'll let Jim kind of comment on what he had to say. James Galeese: Yes, with regards to the -- as you know, the Royston Group will from a reporting perspective to go into our Display Solutions segment. And so when I comment the Display Solutions segment will be up high single -- mid- to high single digits. That is on a comparable basis. So that's pro forma comparing Royston their expectations for Q4 to last year. and LSI expectations for Q4 to last year. So it is comparable. And I will say both pieces of that business will realize growth in the fourth quarter. So I hope that helps. So yes, I know that we've disrupted the equilibrium here a bit with the acquisition and the metrics. So some clarity is required. Aaron Spychalla: No, that's great. I appreciate the color. And then on the $5 million program work on C stores, can you just talk about that? Is that part of a larger multiyear program? And just how do you see growth broadly in that vertical in the coming years? James Clark: Well, Aaron, Jim Clark again. I mean I think it's just a normal part of our business. I mean I think we're calling it out because it -- as a customer we've been pursuing to get some recarby here for quite a few years. I don't want to go into who the customer is, but we're encouraged by it. And that's why we called it out. But it's a nice program, and it's the first of customer that's been absent for a few years. So we're excited about it. James Galeese: And Aaron, I take just another proof point as to the overall level of activity that's going on in the C-store vertical. You're very familiar with [indiscernible], contributing to our growth and undergoing change, the sheets, the wall loss, quick trips with a [indiscernible], et cetera. The whole vertical, the environment remains very positive. So it's encouraging to see this large customer, start to begin to invest because, frankly, they're a bit behind. Aaron Spychalla: Understood. And then maybe one last one on the EBITDA margin for Display Solutions, 12%. Can you just talk about some of the drivers there and confidence sustainability? And just maybe talk a little more broadly on some of the cost synergies you think you can realize with Royston in the coming years. James Clark: Yes. I mean, first of all, this is normal course of business, right? We've talked about this for years. The more -- the greater share of wallet we get, the more customers we get engaged, the larger the projects become the bigger our share of wallet becomes with each of those customers, that creates efficiencies that are realized in the business, and we've been making continual progress on that. There's also a lot of behind-the-scenes activity that are going on. I think I mentioned about 15 years ago, we hired a procurement lead that has been phenomenal. He's been a phenomenal asset for us. He's doing a great job with the whole team, really energize that, really looking for opportunities. Same thing on the operations side. We are operators at our core. I'm a commercial guy, but we're an operating company. All of the changes, all the investments, although they are small, they're meaningful. We make those investments to get those improvements. And I think you're seeing a lot of those things pay off. The jump on the display side is obviously Royston is unlike EMI who was dilutive from a rate standpoint, Royston is accretive. So we get the benefit of Royston coming on board. We get a pretty significant number from Royston and we get an accretive rate in dollars, those combinations help there. But I want to make sure I'm underlining the fact that we've been doing our own work and we'll continue to do our own work in improving the core LSI margins prior to Royston. And it's a combination of both of those that is kind of responsible for that number. James Galeese: To recognize what Jim said, our operations team just did a terrific job this quarter. You may recall this quarter a year ago, we were dealing with the surgeon business on the post Kroger Albertsons scenario. So we are taking that business to meet customer demand, but we are fulfilling it on a very inefficient basis. given we were bringing people back that we had to shed resources that we had to shed so building our capabilities back. So the demand patterns have become much more predictable, if you will, allowing our factories now to really get into a very solid rhythm. And I think that was quite evident in our fiscal Q3 results in display. Operator: Our next question is from Min Cho with Texas Capital Securities. Unknown Analyst: Congratulations on your strong quarter here. Just a follow-up on Craig's question a little bit. So it sounds like the that you have pretty good visibility into the timing of your current rollout. So you do expect to see the efficiencies that you saw this quarter continue for the next several quarters, if not longer. James Clark: Yes. Thank you for calling in. Thanks for the question. Yes, I mean we -- these are -- we generally look at these as kind of permanent improvements, right? We look at it as a ratchet that goes up, but it doesn't come down. Now obviously, there's things that affect that. But these type of improvements we do operationally tend to be long lasting and sustainable and the answer is yes, we expect them to continue to provide benefits into Q4 and into Q1, and we are focused on continuing to improve those even further. Now with all of that said, though, I do want to mention, we just acquired a very large company. Part of our secret sauce has always been our integration rhythm and how we come up to speed with these companies, and we try to use the resources we have within our business to do all of those activities. So I'm not worried or concerned about anybody's efforts being diluted or moving backwards but we will maybe perhaps shift priorities to help bring Royston on a little bit faster than maybe we would have and that maybe slows down some of our future activities on improvements in operations. But I think the takeaway message would be that we still see a lot of opportunities, areas for improvement in operations, and those will be ongoing. We see opportunities with Royston. We like the way the company operates. We like the people that are there. We like the culture that's there. We're going to learn from them as much as they learn from us. So we'll be working that together and those combinations -- that combination will continue to persist in terms of opportunities for many quarters to come. Unknown Analyst: Great. Excellent. And in terms of your Lighting business, I know you've been growing your national accounts base, but do you have a general breakout of what percentage of sales is coming from national accounts versus non because your commentary almost sounds like it's suggesting that it's mostly that the softness is really in your nonnational accounts. James Clark: Yes. I mean, we don't break it out and probably it's more for convenience than anything else. I mean we track these numbers, obviously, we track how they perform independently. But to start breaking them out, I mean, we could get into the weeds really fast. But I think your comment is spot on. We do expect to continue to grow in the areas we're investing in. And some of the larger -- we're back to this larger project activity, which is we don't feel as though any of it's in jeopardy. We don't feel as though any of it will go away. We do see a disruption in timing right now with some of the larger project activity just kind of slowing down to make sure that all the other elements are catching up and they're not paying a premium to rush something while another element is delayed or something like that. So I don't -- I'm happy with the progress we've made in Lighting. As Jim mentioned, it was 12% growth last year in this quarter. we've maintained growth in pretty much every quarter over the last year or more. I think this is just a reflection in some slowdown in the 90-day window of the Q4 period right now. I don't look at it as something systemic or something to worry about long term. James Galeese: Yes. As best we can tell, our Q3 performance, 2% growth was clearly a market outperformed as compared to the competitive environment and the competitive environment is seeing the same things. We are and we will continue to generate market performance, driven in some context because of our increased penetration in national accounts activity, which we identified about a year ago is a real opportunity for our business. and our sales leadership is doing an excellent job in pursuing that. And it is, as Jim just mentioned, some of these more sizable projects in the general C&I side of the equation that is just a question of timing. Unknown Analyst: Got it. Also, I know that you've both been spending some time reaching out to some of Royston's largest customers. Can you just talk about the general feedback that you have received? And also given the closing opportunities -- cross-selling opportunities. Is there a difference in how you expect to bid for projects going forward? James Clark: Yes. So I think I did mention in the call that we were actively reaching out to Royston as top customers. And thanks to Royston on that and our own team, they work together extremely well and the customers on Royston side were more than generous with their time and taking the time to talk with us. And our biggest thing is we were working to make sure there wasn't a misinformation out there. what kind of changes, how do we normally operate. And some of these customers, as we talked about before, they're completely new or distant from LSI. We also called some of our own customers. It was a great exercise and one that was met with a great deal of interest and a great deal of opportunity, I think, going in front of us. So I think that there was a number of questions, but probably the #1 question was, what can we expect for change. And our answer was, listen, whatever -- however you have been doing business with Royston in the past, you can continue and we'll be able to continue to do it like that in the future. The second question tended to be around -- we had some customers ask if there were going to be changes to billing and invoicing and things like that. And no, there will not be. We'll force any customer to do anything in the short term, but we will look for opportunities to be more efficient and to serve the customers in a way that they want to be served. And if that is separate billing, we'll continue to do that. And if that's a combined billing opportunity, we will do that. And then probably the third question was, what about how will the company run differently? And the answer was much like the first question. We don't anticipate the company running any differently. We take a very deliberate approach to our integration. We want to preserve the culture that is at Royston, we want to learn from each other. We want to respect the work that they've done and we don't want to destroy any of the value that they bring to their customers or we bring as a bigger entity. So those were the big questions kind of summarized and I will say it's not the first time we've done this, but it was probably the best coordinated, and I think that speaks volumes to the experiences that LSI is gained. And I think it speaks volumes to the professionalism that offered the team was fantastic to work with. Operator: Our next question is from Amit Dayal with H.C. Wainwright. Amit Dayal: Congrats on the execution so far, guys. Most of my questions have been asked, but I'll try to touch on sort of the macro drivers. Jim, you commented earlier, but it was a very different business when you came in as CEO, and today, it's a very different business. So in that context, like what are the macro drivers we should sort of keep in mind while it's sort of thinking about the future of the company? James Clark: Yes. I mean, as I said in my comments, it is a very different business, but it's still fundamentally based on the same strategy that we launched in 2019, 2020, '23, where we perfected our Fast Forward plan, it is a new category as far as we're concerned. And it does make it difficult from a public market standpoint, I think we're always caught in that mix. Are we construction materials? Are we building materials? Are we clean tech with LED lighting? Or are we -- what are we exactly? And I'm always concerned that we get penalized or that we could get penalized for a lack of understanding. But I think as you look at the evolution of what we've done, it's becoming more and more clear that we're a cuter experienced company, right? We are -- there's a creative element, there's a manufacturing element. There's an operations element, there's a service element and it's how we're executing across all of that whole band, if you will, that's really separating us. We're solving problems for customers that never had a solution like LSI offers, one stop, one call, one shop, we're able to come in there and be more efficient and be more integrated and provide a more uniform package, look and feel, and that could go all the way down to the type of wood species we use across multiple this level, and it's us being on site delivering multiple solutions and being visible that I think is the most rewarding aspect from a customer standpoint. We're there, we understand the project better. We understand the people better. We understand how it all fits together better, and we're able to deliver it as one company. So it's really a unique proposition. And I do feel like we're creating a category of one. And the definition will continue to become clearer and clearer as we move forward. Amit Dayal: Understood. And then just on the cadence of revenues with this acquisition now under your belt. How should we think about quarterly revenue flows that may change from sort of the historical way the company has performed? James Clark: I mean, I think Jim had brought it up briefly. I think it's going to -- with the activity we did with the acquisition, having a few more shares out there looking at all the assumptions we had 3 months ago where it's going to be kind of a refreshed look. But in terms of revenue, I think it stays completely on point to the way we've been operating the LSI business continually. We want to have a high safety ratio. We want to continue to execute and perform to the numbers that we project and that we think we're going to reach. They are growth oriented. The company is still very much growth-oriented, so you can continue to look for us to focus on growth, both top line and bottom line. I think with any acquisition and certainly with the acquisitions we've done and as I commented a few minutes ago in my opening comments, we'll look very closely at the business that Royston brings to us and look for very effective ways to serve those customers and look for ways that we can continue to work on this concept of greater share of wallet instead of providing 1 or 2 items, how do we provide 4 or 6 or 8 items. So I think we have a really good opportunity to make this -- to create revenue growth in front of us. With that said, I also feel like we're in the third inning of a 9-inning game. It takes time to get engaged in projects and do go through the customer education process anybody that's expecting that we pick up a new customer or a great new revenue stream in 30 days, that's not the timing, right? I mean it typically takes us 12 to 18 months to get engaged with the project to make sure that we've provided the design... Unknown Executive: Network and the concept phase, et cetera. James Clark: Yes, that concept phase, that piloting phase, and then that turns into a project. So believe me, nobody is more impatient than I am and nobody respects speed as an asset greater than I do, but there is a natural flow to these things. With all of that said, you're going to see LSI continue to grow. Obviously, this is a relatively large acquisition with Royston. Like I said, we like the people that are there. We like the culture. We like to hustle that we feel like it's very similar to ours. And I think we can go do great things together. Amit Dayal: Just last one, maybe. Are you using any AI capabilities to potentially accelerate the integration, accelerate cross-selling opportunities. Any background on maybe using new technologies to accomplish these things a little faster? James Clark: I mean I think there's lots of things that can be done specifically with new technology tools that are available. There are things that are kind of mechanical things that can be done much faster. There's another resource there to model things. But at the end of the day, it comes down to people. And I will tell you that in every acquisition we've done, the greatest asset we have acquired is the people of the businesses that we've acquired. I mean, I have to be honest, there isn't any business that we've acquired there aren't competitors to and there aren't other companies that can provide it. The real value in the acquisitions we've done has been the people that we've acquired and had become part of the LSI team. And I don't know if that can be rushed without exposing too much room for breakage. And we don't want to do that. We want to learn collaboratively. We want everybody to have a voice. We want to have a greater level of understanding why are they doing it this way? This is the way we do it. They do it different, which is best should both processes exist? Is there a way to trim one or the other? Should we melt these 2 processes. And that comes through thoughtful conversations and that comes through giving everybody an opportunity to have a voice and I think that certainly, Amit, you've been covering us long enough. You know speed is something that I wanted to -- I always want it to happen faster. I always want it to happen faster. But we'll do it in a way that's responsible and we'll do it in a way that it creates an opportunity for everybody to contribute. So I think that we're going to have some -- we have a great compelling story. We're going to continue to have growth and I don't know if the risk to accelerate something for short-term gains is worth the long-term opportunity here. But believe me, we'll be looking for every opportunity to make it go faster than we can. Operator: We have reached the end of our question-and-answer session. I would like to turn the floor back over to Jim Clark for closing comments. James Clark: Listen, I would just say, first of all, thank you for everyone that dialed in. I will say we ran into a little technical issue here today where the population of our call actually exceeded the line limits we had. So we'll be expanding that a little bit going forward, and I apologize to anybody that may have had a hard time getting on. We're a different company today, and that's another element we needed to do adjust. I appreciate the questions that everybody answered. I'll close with just a few thoughts. We feel really good about where we are as a company. The strategy is clear. The platform is taking shape and most importantly, the team continues to execute. I think the third quarter reflects that with solid performance and really continued momentum in our key vertical markets. I can guarantee we're going to stay disciplined, particularly as we integrate Royston and we continue to make decisions that support long-term value creation. We set our expectations carefully and we deliver against them. Looking ahead, we're very confident in the direction of the business and on our ability to continue to deliver focused execution. And so with that, I'll say thank you, and thank you for your time and interest in LSI. Operator: Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.
Operator: Greetings, and welcome to the First Quarter 2026 Meritage Homes Analyst Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now turn the call over to Emily Tadano, VP of Investor Relations and External Communications. Please go ahead. Emily Tadano: Thank you, operator. Good morning, and welcome to our analyst call to discuss our first quarter 2026 results. We issued the press release yesterday after the market closed. You can find it along with the slides we'll refer to during this call on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our home page. Please refer to Slide 2, cautioning you that our statements during this call as well as in the earnings release and accompanying slides contain forward-looking statements. Those and any other projections represent the current opinions of management, which are subject to change at any time, and we assume no obligation to update them. Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on this slide as well as in our earnings release and most recent filings with the Securities and Exchange Commission, specifically our 2025 annual report on Form 10-K. We have also provided a reconciliation of certain non-GAAP financial measures referred to in our earnings release as compared to their closest related GAAP measures. With us today to discuss our results are Steve Hilton, Executive Chairman; Phillippe Lord, CEO; and Hilla Sferruzza, Executive Vice President and CFO of Meritage Homes. We expect today's call to last about an hour. A replay will be available on our website later today. I'll now turn it over to Mr. Hilton. Steve? Steven Hilton: Thank you, Emily, and welcome to everyone joining today's call. Today, I'll begin with a brief overview of market trends and highlight our first quarter results. Phillippe will then discuss our strategy and provide an operational update. Finally, Hilla will review our financial performance and share our 2026 forward-looking guidance. Entering 2026, we are cautiously optimistic that lower interest rates and tenant demand will translate into a solid performance for homebuilders, balanced by more muted volatility. As you well know, a few weeks in the year, many of our markets were impacted by a severe winter storm where sales activities were halted for several days. As we were starting to recover from the lost phase of sales, military operations in Iran commenced at the end of February, increasing interest rates, price -- gas prices and inflation, all of which negatively impacted consumer confidence. Despite these challenges, our first quarter 2026 sales orders totaled 3,664, 5% below last year's first quarter as our slower absorption pace was almost fully offset by our increasing community count. While we still believe the long-term fundamentals for the home industry are strong, we also acknowledge that the current market conditions are causing potential homebuyers to hesitate and that capturing demand for the near term will require higher-than-anticipated use of incentives. Looking to our operations, our 60-day closing guarantee, available supply of new completed spec inventory, and year-over-year improved cycle times contributed to another quarter with exceptional backlog conversion rate of 254%. We delivered 2,967 homes and home closing revenue of $1.1 billion this quarter. However, the slower start to the spring selling season and increased incentives resulted in home closing gross margin of 17.5% and diluted EPS of $0.82 a share. As of March 31, 2026, our book value per share increased 6% year-over-year. And with that, I'll now turn it over to Phillippe. Phillippe Lord: Thank you, Steve. Given the current under in the macro climate, I am proud of the Meritage team for navigating these choppy waters. We started the year with 336 active communities which we then grew to 345 by March 31, another company record. In the near term, we expect total volume and top line results will largely be driven by increased community count, not higher per store absorptions. Our first quarter 2026 ending community count of 345 was up 19% year-over-year compared to 290 at March 31, 2025, and up 3% sequentially compared to 336 at December 31, 2025. During the quarter, we brought on 40 new communities throughout all of our regions. We reiterate our expectations of 5% to 10% full year community count growth for 2026. We continue to lean into our strategy in this competitive market. Through our 60-day closing guarantee, move-in ready homes and strong realtor engagement, we offer certainty and consistency to our customers. Despite the current headwinds that you've mentioned, we believe that long-term demand remains supported by favorable demographics and undersupply of affordable homes in the U.S. and when demand normalizes, our strategy and increased store count will provide a competitive advantage and allow us to increase our market share. In volatile times, we believe keeping a strong balance sheet and a critical focus on capital allocation will place us on a solid footing when the market stabilizes. Once again, we intentionally stepped up our share buybacks repurchasing $130 million worth of common shares in Q1, which was above our previously announced target of $100 million in quarterly programmatic spend in 2026, taking advantage of the significant discount to intrinsic value for our share price. Additionally, we increased our dividend 12% to $0.40 per share. We will continue to seek balance between growth and shareholder returns given the current market backdrop. Now turning to Slide 4. First quarter 2026 orders were 5% lower year-over-year, primarily due to an 18% decline in average resort space, which was mostly offset by a 17% increase in average community count. The cancellation rate of 11% remained slightly below the historical average of mid- to high teens as we benefit from a quick sale to close process. Our first quarter 2026 average absorption pace was 3.6 compared to 4.4 in the prior year. This quarter, we again committed to finding the right balance between velocity and margin in the current macroeconomic environment and did not pursue 4 net sales per month where community level market dynamics would not support it. While other long-term -- while over the long term, we strive to be a 4 net sales per month in all markets as we believe we best leverage our fixed cost at that volume. In geographies where demand is meaningfully inelastic due to affordability or competitive attention, we moderated our pace to avoid further deterioration to margins to ensure we are optimizing the underlying value of our land. ASP on orders this quarter of $382,000 was down 5% from prior year due to an increased use of incentives and discounts as well as geographical mix shifting from the higher ASP West region into lower ASP each region. We saw a nice uptick in March. [indiscernible] quite as strong as typical spring selling season. After a slow start, April is feeling the same as March. Consumer psychology remains fragile and can be driven by daily news announcements, but we still believe that pent-up demand will materialize once macroeconomic conditions stabilize. Moving to the regional level trends on Slide 5. As always, sales performance was driven by local market conditions in the first quarter. All markets require additional incentives in some markets such as Dallas, Houston and Phoenix, consumer demand is comparatively more elastic where incremental volume is achievable with only small incremental incentives. New other markets such as Austin, parts of Florida and Charlotte continue to be tougher selling environment. Turning to Slide 6. We've been rightsizing our start pace, and we have inventory to align with our faster cycle times. We maintained a sub-110 calendar day instruction schedule for the fourth straight quarter, allowing us to carry less home inventory without constraining availability to meet consumer demand and preferences. In Q1, we moderated start to approximately 2,500 homes. 30% less than last year's Q1 and 6% lower than Q4. We traditionally align our starts pace with our sales pace, but due to faster cycle times and you need to work through from inventory in certain locations, we reduced our start pace this quarter. We expect our go-forward start pace to more closely align with our sales expectations as we progress throughout the year. With nearly 70% of Q1 closings also sold during this quarter, our backlog conversion rate was 254%. As a result, our ending backlog declined 7% year-over-year from approximately $2,000 as of March 31, 2025, to approximately 1,900 homes as of March 31, 2026. We reiterate our long-term backlog conversion target of 175% to 200% as respect to carry fewer fair specs in the future. Internally, we look at our inventory as a combined total specs and backlog because more than half of our deliveries consistently come from inter-quarter sales since we began our new strategy 6 quarters ago. We had around 6,600 spec and backlog units at March 31, 2026, 25% less than the approximate 8,800 units we had at March 31, 2025. We ended the quarter with approximately 4,700 spec homes, down 30% from approximately 6,800 specs in the prior year and down 90% sequentially from Q4. The 14 specs per store this quarter was a huge level -- lowest level since early 2022, but appropriately aligned with our current absorption targets. This translated to a little under 4 months of intentionally at the low end of target of 4 to 6 months supply specs due to the slower demand expectations and improved cycle comps. Comparatively, in the first quarter of 2025, we had 23 specs per store or 5 months of supply. Although our completed specs units decreased 17% year-over-year, our completed specs as a percent of total specs were 46% at March 31, 2026, down from 50% in the fourth quarter of 2025. Still above our target of approximately 1/3 complete specs. We will continue to focus on bringing this ratio down in Q2. With that, I will now turn it over to Hilla to walk through our financial results. Hilla Sferruzza: Thank you, Phillippe. Let's turn to Slide 7 and cover our Q1 results in more detail. First quarter 2026 home closing revenue of $1.1 billion was 17% lower than prior year due to 13% lower closing volume and a 5% decrease in ASP on closings, reflecting a tougher demand environment this quarter. As Phillippe noted, with nearly 70% closings also sold in the current quarter, the events impacting Q1 performance are already mostly reflected in our P&L, while our closings and revenue reflects our intentional decision to limit incremental incentives and focus on both margin and pace, overall ASP and closings were still impacted by the increased use of incentives as well as the geographic mix shift towards the East region. For closing gross margin of 17.5% for the quarter was 400 bps lower than prior year's 22% as a result of the increased use of incentives, higher lot costs and lost leverage, all of which were partially offset by improved direct costs, decreased compensation expense and faster cycle times. First quarter 2026 home closing gross margin included $2.4 million of real estate inventory impairment and $1.4 million in terminated land a walkaway charges compared to no impairment and $1.4 million in terminated land deal walkaway charges in the prior year, coupled with about 20 bps from lost leverage unanticipated higher closing revenue. These impairments also impacted margins by about 30 bps. Our current land basis is primarily from 2022 through 2024 and will continue to negatively impact margins in 2026. Based on what we're seeing in the market today, we expect some margin relief will start at the tail end of 2027, and due to some lower land basis and land development costs we have recently started to experience. In Q1, we had direct cost savings of nearly 5% per square foot on a year-over-year basis as we were able to flow to the income statement, the lower costs from our extensive vendor negotiations, However, lumber costs have started to trend higher this quarter, and as a result of the Iron conflict, we are monitoring any potential long-term inflationary impact on oil prices. Although we do not anticipate a notable material gross margin impact this year, our long-term gross margin target remains at 22.5% to 23.5% in a normalized market when incentives and interest rates stabilize near historical averages. SG&A as a percentage of home closing revenue in the first quarter of 2026 was 11.8% compared to 11.3% for the first quarter of 2025 despite curtailing discretionary spend. Although SG&A dollars declined year-over-year, we lost leverage on lower home closing revenue and had to spend more sales and marketing dollars to earn each sale. As we look specifically at external commission costs, we believe our strategic focus on partnering with the external broker is a key digger to our success. Our broker relationships remain strong with co-broke percentages consistently in the low 90% range and a healthy percentage of our total sales volume generated by repeat sales from our realtors, all while maintaining our external broker commission cost relatively flat as a percentage of home closing revenue year-over-year. With our continued investment in technology, we are driving long-term improvement through back-office automation. This will position us to operate more efficiently as closing volumes increase, supporting our continued commitment to a long-term SG&A target of 9.5%. The first quarter's effective income tax rate was 23.7% this year compared to 23.3% for the first quarter of 2025. We expect a minimal impact in the second half of 2026 after the elimination of the energy tax credit program at June 30 as our eligibility for such credit was significantly reduced starting in 2025 when the higher construction threshold went into effect. Overall, lower home closing revenue and gross profit led to a 51% year-over-year decrease in first quarter 2026 diluted EPS to $0.82 from $1.69 in 2025. Before I move on to the balance sheet, I wanted to cover our customers' first quarter credit metrics. As expected, FICO scores, DTIs and LTVs remain consistent with our historical averages. Despite market volatility, we haven't seen much movement in these metrics over the last year or 2, validating our belief the hesitation in the market is at least partially a psychological decision versus a purely financial one. On to Slide 8. Our balance sheet remains healthy at March 31, 2026, with cash of $767 million, nothing drawn under our credit facility and a net debt to cap of 17.4%. As a reminder, the ceiling for net debt-to-cap ratio remains in the mid-20% range. As we've been more selective with land deals and timing of land development, our land spend was down 30% year-over-year this quarter, totaling $326 million in Q1. Given current market conditions, we are reiterating our forecasted land acquisition and development spend of up to $2 billion in 2026. We returned $162 million of capital to shareholders via buybacks and dividends this quarter, up from $76 million in the same period last year. We bought back over 1.8 million shares in the first quarter or 2.7% of shares outstanding at the beginning of the year for $130 million, nearly 3x more than Q1 of 2025 as we believe this was the right use of our cash under current market conditions. We repurchased the shares this quarter at an average 6% discount to book value. With $384 million remaining available under the repurchase program, we reiterate our plan to programmatically buying back $100 million in shares for each remaining quarter in 2026, assuming no additional material market shifts. We increased our quarterly cash dividend 12% year-over-year to $0.48 per share in 2026 from $0.43 per share in 2025. Our cash dividend this quarter totaled $32 million. For the first quarter of 2026, the $162 million of capital we returned to shareholders was 295% of our quarterly earnings. Slide 9. In the first quarter of 2026, we secured almost 400 net new lots under control, which included the impact of about 850 terminated lots. In the first quarter of 2025, we put nearly 2,200 net new lots under control. As of March 31, 2026, we owned or controlled a total of about 75,500 lots, equating to 5.2 year supply of the last 12 months closings. In today's market conditions, we believe that this is the right amount of the needed year supply of lots to meet our growth targets. We also had approximately 14,600 lots, though we're still undergoing diligence at the end of the quarter, which is another potential 1-year supply in the pipeline that we can choose to control. When it comes to financing land purchases, we target around 40% option lots. About 70% of our total lot inventory at March 31, 2026 was owned and 30% options compared to prior year, where we had a 62% owned inventory and then 38% option lot position. As we shift more land to off balance sheet, we are doing so very slowly and cautiously remaining hyper-focused on margin and IRR and only considering land yields with sufficient margin to absorb the additional costs as we do not believe that all or most land today belongs off book. While we have set 40% of our initial off-book target, our actual percentage will be solely turned higher or lower by the underlying financial metrics of each deal and its ability to appropriately bear the burden of the incremental cost. Finally, I'll direct you to Slide 10. Based on current market conditions, we are updating our guidance for full year 2026 on closing volume and revenue to at or within 5% of full year 2025 results. For Q2 2026, we are projecting total home closings between 3,650 and 3,900 units, home closing revenue of $1.37 billion to $1.47 billion, pump closing gross margin around 18%, an effective tax rate of 24.5% to 25% and diluted EPS in the range of $1.18 to $1.46. With that, I'll turn it back over to Phillippe. Phillippe Lord: Thank you, Hilla. In closing, please turn to Slide 11. Before we conclude, it's worth reinforcing what sets Meritage apart. We are a top 5 homebuilder focused on spec building that is supported by streamlined operations. Our go-to-market strategy differences from peers and is anchored on 3 tenants, our 60-day closing guarantee, moving ready inventory and strong realtor engagement together, who we are and how we operate, give us a competitive advantage in the intel space to provide homebuyers, certainty and consistency. Amid today's market backdrop, our priorities are central on balance sheet strength and disciplined capital allocation. We are maintaining a to cap construction land deals off balance sheet where appropriate. This approach gives us flexibility to moderate land spend and accelerate the return of capital to shareholders through a combination of share buybacks and dividends. . We incur our strategy with our growing community count, faster cycle times and a disciplined cash commitment framework, we believe Meritage is well positioned to capture incremental market share as demand conditions improve and normalize and to continue creating long-term shareholder value. With that, I will now turn the call over to the operator for instructions on the Q&A. Operator? Operator: [Operator Instructions] We'll take our first question from Trevor Allinson with Wolfe Research. Trevor Allinson: First one is on your spec count, which you noted a little lost it's been in several years. I think we've heard other builders talk about a reduction in specs across the industry helping take some pressure off of margins here. So appreciating you guys operate a spec model. Are you seeing both your lower spec count and also kind of industry lower spec count is the market pressure here? And is that something you expect the support of the margins moving forward even if demand makes choppy? Phillippe Lord: Yes. Thanks, Trevor. I think that's absolutely the condition we're seeing. A lot of builders are either pivoting away from carrying as much inventory -- finished inventory as they did before during COVID and supply chain environment and they're moving to reduce finished inventory, selling loans earlier in cycle. And then some folks are pivoting more to a BPO model, which is clearing out a lot of inventory in the market. So I think we saw across all of our markets, less finished inventory that we were competing with and we're optimistic as we move throughout the year, that creates a better environment for margin stability on a go-forward basis, specifically for our strategy where we are focused on continuing to build stacks and carry them to a later stage. Trevor Allinson: Okay. That's really very helpful. And then second one, you guys talked about your off-balance sheet portfolio. Can you talk about what portion of that portfolio is held by land banks versus more traditional land options or other structures. And then any detail on how those agreements are structured with an eye on your ability to walk away? And then just generally, your view on use of land bankers moving forward for your off-balance sheet needs. Hilla Sferruzza: Yes, I can take that one. So about 38% of our total inventory control is off book. Of that, about 1/3 is with land bankers. So all in, only about 10% of our total land supply is with traditional land bankers at this point in time. As far as structure, we don't cost collateralize. So we always have the ability, if any deal go sideways to walkaway from that deal without maybe some other hooks and implications that would make us state in a transaction that doesn't structurally work or financially work any longer. So we're very cautious from that perspective. So the only thing at risk for us would be the deposit and any other ancillary costs. Phillippe Lord: And the only thing I would add is, as Hilla said, it's a very small percentage with true lot financing. But because it's not cross collateralized, I think working through those deals on a one-by-one basis is much easier. We have had some scenarios that have gone back to our land bank finances and asked for some more time to stabilize the market, stabilize our inventory levels. And again, working on one deal creates more of an opportunity to do so. Hilla Sferruzza: Yes. And I think we addressed this in our prepared remarks, because we're very selective at the get-go as to what deals even go off book, they typically have a little bit of breathing room on the margin versus having arbitrary targets where we're forcing deals off book to hit a percentage. So for us, the ability to work with our partners, our off book partners is pretty high since they understand the transaction and see the margin profile and are willing to work with us on terms if we need them. Operator: Our next question comes from Stephen Kim with Evercore ISI. Stephen Kim: If I could follow up on the land bank question. Can you give us a sense for roughly what percent of your land bank deals you've been -- you've extended your takedown schedules. And am I right in thinking that in a typical land bank deal, any individual land bank dealers to extend, let's say, 6 months that, that might drive roughly 100 basis point lower gross margin on the remaining loss versus the initial expected lot price? Phillippe Lord: Thanks, Stephen. So first part, again, we have such a -- such a small percentage of our land book is land banker lot financing. So even as you look at what percent of our deals required us to restructure. And when I see restructure, maybe we needed a quarter delay in the next take to buy sometimes to get to do some inventory or stabilize kind of margins or what not, for the most part, that was very small as well. Most of our deals are performing fine. We're continuing to take back down, and we're moving through the inventory as we planned. As far as your other question, I think it's a little bit of an oversimplification. It really depends on the deal, how many lots are buying per quarter, the structure of the deal. In some cases, I think some land bankers are willing to actually give you a take for no carry just to keep you in the deal rather than taking back the lots and owning the loss. I think we're sort of in that environment today, at least with our folks. So it's just -- it's hard to answer. It really depends on your relationship, and it depends on the deal. I guess if all things being equal, they were going to charge you for those delays. Your math might be closed. I don't know, Hilla, if you want to add anything to it? Hilla Sferruzza: Yes. I mean, it depends what part of the cycle and how many assets you still have on book part of that math and, of course, what your interest rate is. But for us, when you look at it, good thing -- bad things don't get better with age. So if we're asking for sold, it's typically for us to rework a product lineup or to value engineer something we're not just holding and crossing our fingers and thinking something arbitrary is going to get better in 3 to 6 months. So again, that's kind of the [indiscernible] of being very selective as to what deals you're putting in an off-book structure in the first place. But yes, I mean, there's definitely -- if you can't work a free be, it's typically in to cost you whatever your interest burden is for that 6 months hold. So yes, there needs to be an implication, but 100 bps a little heavy. Stephen Kim: Okay. Appreciate that. Yes. And I also appreciate your comments about how there's a human component to this. It's not all just simply math. I think that's an important point to make. If I could also talk about your long-term gross margin target of 22.5% to 23.5%, which obviously is where you weren't that long ago and is but something that's quite above where you are currently. You've talked in the past, Hilla, about the importance of volume in achieving your level of gross margin. And so am I right to assume that, that long-term target is consistent with at least 4 per community absorption rate? Or do you think there's an opportunity to hit that gross margin level long term with a lower level of absorptions than you had envisioned in the past? Phillippe Lord: Steve, I'll take part of that question. This is Phillippe. So I think it's a lot easier to get to our long-term goal around 22.5% at 4 net sales per month. We're just way more efficient at that level we leverage our fixed and variable overhead much more meaningfully. We're able to navigate cost, the cost -- the vertical cost environment more effectively. So the path at 4 net sales per month is much easier. If we were to run it at something less than that, then the offset would have to be in margin, direct margin, which you might be able to hold on to your margins at a slower pace and try to drive it. So there is a path at [ 3.5 ], if you will, versus 4. But I think long term is the way to get there. Hilla Sferruzza: Yes. I think, Phillippe is exactly right. There's 2 components. The first is just absolute value -- absolute volume and the second is volume per store. We're much more efficient at 4-plus. So we definitely want that because costs at the local store level, the superintendent and the cost of running that location are leveraged better, but there's also costs at the division level that get better leverage period with volume. We think that there is an opportunity for both. Right now, the opportunity for us is at a higher store count. So hopefully, you'll see that improvement just between Q1 and Q2, right, the volume that we are guiding to on closing on Q2 is nicer than where we are today, and we guide to a higher margin than where we ended the quarter and part of that is going to be the incremental leverage. But once we get back to that for net sales per store average, there is another bump for us on incremental leveraging above that. Phillippe Lord: And we see our path from where we are to where we want to go both this year and the future years is really driven by the following things, but the volume, we have the higher store count, so we think we can get incremental volume, less inventory in the market to compete with, so a stronger pricing backdrop and then reducing our incentives over time, a lot of the incentives that are currently in the market are psychological. We're trying to convince folks that it's a good time to buy. It's part of affordability and part psychology. So we're optimistic that as long as nothing from the macro environment continues to erode, we can see a path there. Operator: Our next question comes from Alan Ratner with Selman. Alan Ratner: First question on the margin guide, and I think you, Phillippe, kind of touched on it in Steve's question, but I just want to dig a little deeper. So immutably I was pleasantly surprised to see that you expect to hold margins roughly steady quarter-over-quarter. I would have thought just given kind of what we're hearing from other builders, what we're seeing in the macro environment that there might have been some additional pressure there, at least flowing through in [ 2Q ]. So it sounds like some of that is top line leverage, but I'm curious if you feel like now that you've reset some of the absorption goals at least for the near term, whether the kind of 18% margin in the current backdrop is something that might be sustained through the year if market conditions remain fairly steady with where they are today. Phillippe Lord: Yes. A lot of questions in there that I'll answer all of them for you because they're all very good. I do think that -- there's a couple of things we see that feel like it's forming sort of a potential floor. Now this is, again, I don't know what's going to happen geopolitically. I don't know what's going to happen with a lot of things that are outside of my control that can impact this. But in the industry, we see a couple of things. Number one, we see inventory levels stabilizing, which I think is really good for pricing stability and confidence for the consumer. When there's less inventory out there, I think consumers feel a little bit more urgency than when there's a lot out there. So I think that is helpful. . I think the volume is critical. We have the highest community count we've ever had. We're projecting more community count growth through the rest of this year. And even at these slower absorption paces, we think we can get there and not have to give up more margin to get there. So we're optimistic about that. And then look, in the beginning of this -- of Q1, we actually started feeling better about things, the weather kind of [indiscernible] off, February was okay. We had the war in Iran and people took a step back in certain markets. But March was pretty good. So we started feeling like we had some stability and some predictability in the market. It's just really hard to tell every week, whether that's going to be something that's maintained and sustainable? Or there's going to be something else that drove the consumer off their game. But I feel a lot better about where inventory levels are, and I feel a lot better about the communities that we've opened and the opportunity those give us to gain volume throughout the year. Hilla Sferruzza: Two other points on margin, Alan, the first -- and we talked about it a little bit on our last earnings call that as we continue to improve on our direct costs, as we work through our finished spec inventory, you're going to start to see even better direct costs coming through. So that's a benefit that you'll see starting in Q2 and continuing through the latter part of the year, obviously, all new communities are all with the new cost. So the more volume we have from those, the better that piece is. And then just kind of doing math, if you look at our closings this quarter and what we're guiding to for next quarter, the back half of the year is going to be higher volume at our current projections. Even at the low point of the full year guidance that we provided. So again, that leveraging component that we're talking about is going to have an even more material impact for us through the back half of the year. Alan Ratner: Great. All right. Perfect. I appreciate all the detail there. Second question, I know you don't give specific cash flow guidance, but the last couple of years, cash has been a drag as you've been ramping the spec supply as you've been gearing up for this very significant community count growth it feels like both of those are kind of hitting an inflection point here where spec inventory is coming down a little bit. Community count is still going up, but not at the same rate it was. Pretty strong cash flow in the first quarter, at least seasonally speaking. So can you give any guidance or color on where you expect the cash flow to shake out for the year? Are we past kind of the biggest burn period and maybe cash should start to improve even if earnings are under pressure on a year-over-year basis? Hilla Sferruzza: Yes. I mean we don't have specific cash flow guidance, as you noted, but the discipline to get down to $14 million specs per store is an incredible effort by the team, especially if you think that just a year ago, we were at 23 specs per store, that's relieved a lot of cash. That was kind of a more measured approach on land development while definitely increasing shareholder returns, but not by an equal offset is letting us kind of hold steady. So if you think about the fact that we have these faster cycle times and we're trying to time start with sales pace, you really shouldn't see something too detrimental occurring on the cash flows and any cash position where we are is probably a good place for us with the size of the balance sheet that we have. So I think that you're going to see this kind of maintenance of cash flow. The outsized return to shareholders for the balance of this year, as we've already articulated in our programmatic repurchase plan. But I think that you should see a more measured cash utilization as we're bringing stores online, but a lot of the spend has already been incurred, and we're definitely monitoring the WIP units and the stick some brick costs that were spending before we close the home. Operator: Our next question comes from Michael Rehaut with JPMorgan. Michael Rehaut: I wanted to start off with just kind of broader thoughts around the demand backdrop. So far, this earnings season, we've heard slightly different narratives across the spectrum. Some builders kind of more leaning towards kind of a net commentary that maybe trends are a little bit more stable. Also incentives and levels maybe also kind of stabilize and you kind of noted also a little bit about maybe inventory coming down somewhat, which has been helpful. At the same time, you've kind of highlighted some choppiness across your footprint, notwithstanding perhaps March coming back a little bit stronger. But I was hoping to get a sense of with what it sounds like from your commentary, maybe a little bit more on the cautious side, if I'm interpreting that correctly. Is it certain markets that you're exposed to? You highlighted parts of Florida, Charlotte, Austin, is it maybe the price point that you're offering or the fact that you're maybe still in kind of that spec area, which I think, by definition might cause a little bit more competition. Just trying to reconcile kind of where you are within the industry and how to better understand your positioning and how that relates to your commentary? Phillippe Lord: Yes. Thanks. I feel like you kind of answered your own question, but I'll try to add some more to it. I think we're more cautious than maybe the opposite of being cautious. I think a part of it is our buyer profile seems to be lacking the confidence that may other buyer profiles have. They're stressed more from an affordability standpoint, cost of living. So it does feel like the procurement of those sales is very high, which makes us there cautious. I think the other thing is our footprint, we're in the Sunbelt states, primarily those were the states where prices got the most stretched during the last 5 years. Affordability got the most stretched. There's probably higher levels of inventory that we compete with. We're going to head-to-head with a line of other entry-level builders that do similar things to us. So for all those reasons, I think when you look at our buyer profile and our geographical footprint, we feel cautious right now. Michael Rehaut: Right, right. No, understood. Secondly, there was a question earlier about cash flow and community count. And obviously, we reiterated your outlook for this year and you still have very strong growth kind of flowing through in 2026. How should we think about '27, '28 given your current land position, particularly since with volumes being such a big driver of leverage and maybe you're a little less confident at least in the near term around getting significant improvements in absorption? How should we think about community count growth over the near to medium term, 2 to 3 years out? Phillippe Lord: Yes. Great question. I feel really good about 2027. I mean, as I indicated in the script, we will have 5% to 10% community count growth this year over last year. So we're going to 2027 with that, I feel like we'll be able to hold or grow that incrementally in 2027, really hard to pin that down just yet until schedules are dialed in and whatnot. So I don't want to commit to anything in 2027, but we have the ability to grow our community count in 2027, if it makes sense. We're obviously rationalizing all new land or as Hilla said, we're phasing developments a lot more slowly these days. So we'll have to see how that all plays out in the back half of this year. 2028 is pretty far out there. We have 75,000 lots. So we have the ability to grow in 2020 as well. We're being very conservative on new land deals, although land prices have stabilized in some places come down, terms are better, they're still somewhat difficult to underwrite in the turn incentive environment. So we've been very slow to ramp up new land, and I think we'll continue to do so. We have enough land to get where we need to go. And I think if we need to do things to plus up 2028, I think the opportunities will be there. So I don't have a lot of visibility in 2028 right now, but I feel good about on 2027. Hilla Sferruzza: The goal is not to shrink right? We have the ability to maintain or grow and we'll take our cues from the market. Operator: Our next question comes from Susan Maklari with Goldman Sachs. Susan Maklari: My first question is on the cancellation rate that you saw in the quarter. I think you mentioned in your prepared remarks that it stayed low. Can you talk to how your strategy of quick close is helping buyers even though they are seeing -- you are seeing a lot more caution in there and how that came through in that cancellation rate this quarter? Phillippe Lord: I mean it's really low. So until it rises, we're not getting to kind of tension to it. I think a lot of the cancellations that are happening have a lot more to do with the buyer stepping away and just [indiscernible] a good time. But again, it's a very low amount because we have such a quick sale to close. We got a closing ready guarantee because homes are ready to go. So as you buy it, you're picking up your furniture our can rate is extremely low, and we expect it to remain that way given our strategy. I think when people can start to imagine moving into the house 60 days, they start planning their lives. And so it's extremely low. We expect it to remain very low. I'm not sure I'm answering your question. If there's another question, let me know. Hilla Sferruzza: Just Susan, I think, everything we said is dead on pretty much the amount of time that it takes them to the time we enter into the sales contracts until the time they close the house, they spend getting documents to the mortgage company. There's not a lot of time rethink and tour other homes that maybe get convinced away from the commitment that they already made. So they're so hyper focused on just getting everything to the finish line that that's really helpful for us and a cancellation rate perspective. And even though our commitment is 60 days, it actually happening much faster than that at 254% backlog conversion, we're getting folks from sales to movement in less than 60 days. So they literally don't have any time to second guess decision to fall out is typically an event outside of not watching the home that's causing them to have a cancellation. It's something that occurred either in their financial position or in their personal life. That's causing the cancellation rate. It's very rarely that they still continue to tour homes thinking they're moving at that house in 40 days. And they fall along with something else and walks away from the deposit. Hopefully, that's helpful. Susan Maklari: Yes. No, that is helpful. That gets to my question. You're not seeing any change there. Obviously, the strategy of that quick close is helping you keep those people engaged and get them through that process, which is great to hear. So that's good. My second question is on the SG&A. You mentioned that obviously, there was some impact of less leverage overhead leverage that you saw this quarter. I guess, as you think about the back half of this year, how are you expecting that to come through to -- or what will that address SG&A? And then as we think over time, can you talk a bit more about the back office automation and other savings that you're implementing? Hilla Sferruzza: Yes. So we definitely -- typically, Q1 is our high watermark for SG&A, we have some certain retirement compensation triggers that disproportionately skew expenses into the first quarter anyway. And based on our full year guidance for closings, it's going to be our lowest level quarter on closings. So definitely some lower leverage opportunities for us on SG&A costs in Q1. So you should definitely see an improvement in that target for the balance of the year in every one of the upcoming quarters. As far as the back-office automation, there's a tremendous amount that that's still done in homebuilding, taking one piece of paper and typing it into another system, whether it's a closing document, something for title, escrow, mortgage, a lot of people doing things that are not their job decryption, right, their job is an analyst, it's not a typist. So we're finding ways for AI and technology to interpret documents and auto feed, a lot of data into our systems, which should help us gain efficiencies and is part of the path for us on getting to that 9.5% SG&A target in the future. Obviously, those numbers become being more meaningful at higher volumes, it would require -- would have required more manhours to do some of those tasks. It helps you not just with cost, but also with accuracy and rework. So we're pretty excited about [indiscernible] initiatives. There's also a lot of customer-facing initiatives, whether -- it's something that we'll be rolling out. I don't want to steal the thunder from our sales and marketing teams so stay tuned for some fun announcements about some of our customer-facing solutions that we have, both back-office and customer-facing tools. that should both drive SG&A leverage benefits in the very near term. Operator: Our next question comes from John Lovallo with UBS. John Lovallo: So you opened 40 new communities in the quarter, which I think is a pretty solid result. We typically would think of these newer communities having a higher absorption just given higher levels of interest and wait lists and things of that nature. So the question is, I mean, did you experience higher absorption in these new communities and then how many more communities should we expect as we move through the year? Phillippe Lord: Thanks, John. I think most of the communities we opened up in Q1, a lot of them opened up the last month of the quarter. They kind of hit what we bought and met our expectations, that would they exceeded our expectations. I wouldn't say they underperformed, they kind of did what we thought they were going to do. Probably Q2 will tell us more about whether they're hitting their stride, but they've seen -- they're all very good locations, strong position, strong margins, strong pricing. So I think we feel really good about them. And then as we said on the script, we expect 5% to 10% range of growth year-over-year. So I think you can expect a little bit more here in the back half of this year to get us to that number. We'll see how everything goes around opening those up. But we're committed to a 5% to 10% year-over-year growth in our community count this year. John Lovallo: Okay. That's helpful. And then in the prepared remarks and I think in the press release, you guys called out some storm impact in the first quarter, which makes sense. Curious if those deliveries were actually captured in the quarter? Or do you expect those to be captured in the second quarter? And if there's any way to quantify the number of units? Phillippe Lord: Yes. I mean, January was softer than we thought. And I think the primary reason for that, given what we saw in February and March was the storm there were multiple markets that were impacted by that storm. In some cases, mobility was impacted. And so we just didn't see the traffic that we would have thought we would have saw towards the end of January. And as you can see from our guidance, we missed our guidance, and we think that was why. I think that incremental volume that we thought we were going to see in January didn't materialize and if we would have closed an extra 200 to 300 homes, we probably would have been a lot closer to what we thought we were going to do. Those buyers are March depending. And so they'll probably close in into Q2, but our business doesn't really work that way. And we later -- so whether we got that buyer or not, it can either happen next month or the month after that, and we're really just a just-in-time business at this point. So hopefully, that's helpful and answers your question. Hilla Sferruzza: Yes. I mean it's lost days of sale. You don't double up when the stores open back up and you capture 2 days of sale in 1. So there are basically 3, 4, 5 lost days of sale in a large portion of our markets in January. And that -- those are sales that are -- we're not somehow recaptured in the next month. So we were trying to press on the gas and figure out a way to accelerate that. And then as we mentioned, the kind of consumer confidence, maybe put a little bit of a damper when inflation and interest rates and gas prices increase. So we view those as true lost days. Now we're working to catch up. You see our projections for Q2 are a lot healthier than Q1, but I don't know that they were like somehow recaptured in February. Operator: Our next question comes from Jay McCanless with Citizens. Jay McCanless: First question I had, Hilla, in script, I think you talked about land vintages mostly being 2022 to '24. But I missed some of your other comments around that. I guess how much of either total lots now or owned lots running at that vintage or in that vintage area? Hilla Sferruzza: That's pretty granular. So I mean we always have like some long-term communities that we're in Phase 6, and we have some new communities and we're probably buying 25 that we're selling at right now. So we're not giving that level of breakout, but for the most part, it was only just commentary as to why the lot cost is running a little bit hotter. We tend to have community sizes between 100 and 150 and at about [ 3.5 ], [ 4.5 ] net sales per store, you can do the math as to how quickly we burn through those. So for the most part for us, everything is live. I think was the intensive that comment, what we're experiencing and what we have been experiencing at the elevated land development cost burden, that's running through our numbers currently, but hopefully, we should be a tail end of that by the end of '27. Jay McCanless: Okay. That's great. And then the second question I had on the West segment, a fifth quarter in a row were orders down year-over-year and kind of stuck at this mid-80s community count maybe what's the strategy near term? Are there some older dated communities you have to sell through there before you can start to grow that again? Just maybe a quick take on what you're doing in the West segment. Phillippe Lord: Yes. I think you talked about the Western region, which is California, in Colorado and Utah, those are certainly some of the more challenged markets. I think the narrative on Denver is pretty clear. The narrative on what's been happening in Northern California is pretty clear. Arizona is kind of what it is, Sokol's been okay and you take a pretty strong market. But just in general, the West region has been in a tougher place to do business. The affordability has been a lot of pressure on the buyers. There's a lot of competition. land prices are super sticky. Regulatory environment is really high. So we've been intentionally trying to reallocate a significant part of our business to the east of the West region. It doesn't mean we're not in those markets. We don't believe in those markets, but we're being much more strategic. The value of your land book is high and it's very irreplaceable. So we're willing to run that region at a slower pace and try to maximize the margin. of that land book because it took a long time to put together. And so you'll continue to see the West region be a smaller part of our business long term. Jay McCanless: Okay. Great. And if I could sneak one more in. Phillippe, I was encouraged to hear what you're saying about external inventories. I mean if we think about time, whether it's 12, 18 months, any commentary you have on when you think external expect inventories to be down to a level that will give you guys some better pricing power? Phillippe Lord: Yes. Great question. I think the builder group in general did a great job these last quarters navigating some of their aged inventory. I think there's still a little bit of overhang out there. Even our numbers were still a little high on the finished spec that we're carrying like to carry a little bit less. I think there's still some other folks that are navigating as well, but the effort was significant. So I already feel better in general, as we go into Q2 that the environment is less competitive. But I do think there's still some more to go. But I think as we work to got the rest of this year, I can see going into 2027, but a much different sort of competitive inventory environment. I think the other thing I mentioned is important is just there's a pivot away from specs in general in our industry for a lot of reasons, depending on who your consumer segment is and the markets you're in. So I think that's helpful for us because we're not hitting away from stacks. That's our business. And so less competition in the spec entry-level business, move-in ready business, it creates a better and competitive environment for our products specifically. Operator: And our final question comes from Jade Rahmani with KBW. Jason Sabshon: This is Jason Sabshon on for Jade. I wanted to ask you about AI across various surveys, the construction industry ranks quite low in terms of the expected AI impact. And you commented on deployment opportunities in back office automation potentially customer acquisition. But are you seeing any other areas of the business where it could potentially make a difference, be that supply chain management or construction management? Hilla Sferruzza: I mean, AI is going to have a place in every sector of every business. I think it's just deployment and low-hanging fruit. So I think we're starting off with some very easy pieces and hopefully making the mistakes and things that are easily -- easily fixable as we grow a new muscle in our skill set. But yes, eventually, it's going to be a component of everything, everything that we do, the more that we manage our data and are able to use AI on -- in a holistic way in all of our data. We try to also look at things as limited by a system. So if you think about your data and a data warehouse and then you can clearly everything in AI from that perspective, then there is no limit as to what functional area is benefiting for your AI initiatives. So yes, it's definitely something that we're hyper focused on the opportunities for savings on the cost side are massive when you're thinking about it from that perspective. But we're going to walk -- or crawl walk run, right? So we got to take the easy steps first and then advance on to beyond that. Jason Sabshon: Got it. And then just as a final question. Is there a certain level of mortgage rates or the tenure that you'd expect to drive an inflection in buyer activity? Phillippe Lord: Good question. It feels like as being sort of moved that to [ 6 ] or slightly below [ 6 ]. We really see buyer psychology change below that level. And I think anything below that on your way to [ 5 ] will just be really unleashed demand because of the affordability piece. So that's kind of how we yield about it [ 6 ]. It's sort of lower is good for our business. Below that just provides more tailwind for our industry. Thank you operator. I'd like to thank everyone who joined this call today for your continued interest in Meritage Homes. We hope you have a great rest of the day and a great weekend. Thank you. Operator: This concludes today's Meritage Homes First Quarter 2026 Analyst Call. Please disconnect your line at this time, and have a wonderful day.
Operator: Hello, and welcome to Globe Life Inc. First Quarter Earnings Release Call. My name is Morgan, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Stephen Mota, Vice President of Investor Relations, to begin today's conference. Thank you. Stephen Mota: Thank you. Good morning, everyone. Joining the call today are Frank Svoboda and Matt Darden, our Co-Chief Executive Officers; Tom Kalmbach, our Chief Financial Officer; Mike Majors, our Chief Strategy Officer; and Brian Mitchell, our General Counsel. Some of our comments or answers to your questions may contain forward-looking statements that are provided for general guidance purposes only. Accordingly, please refer to our earnings release and 2025 10-K on file with the SEC. Some of our comments may also contain non-GAAP measures. Please see our earnings release and website for discussion of these terms and reconciliations to GAAP measures. I will now turn the call over to Frank. Frank Svoboda: Thank you, Stephen, and good morning, everyone. In the first quarter, net income was $271 million or $3.39 per share compared to $255 million or $3.01 per share a year ago. Net operating income for the quarter was $274 million or $3.43 per share, an increase of 12% over the $3.07 per share from a year ago. We are very pleased with the results of our operations this quarter. Despite the challenges faced by working class Americans in the current economic environment, Globe Life has now produced double-digit growth in net operating income per share in 7 of the last 8 quarters and the 1 quarter that didn't have double-digit growth was close at 8%. On a GAAP reported basis, return on equity through March 31 is 17.9%, and book value per share is $77.3. Excluding accumulated other comprehensive income, or AOCI, return on equity of 14%, and the book value per share as of March 31 is $98.56, up 12% from a year ago. Now in our insurance operations. Total premium revenue in the first quarter grew 6% over the year ago quarter. For the full year, we expect total premium revenue to grow approximately 7%. Life premium revenue for the first quarter increased 3% from the year ago quarter to $853 million. Life underwriting margin was $349 million, also up 3% from a year ago. For the year, we expect life premium revenue to grow between 3% and 3.5%. As a percent of premium, life underwriting margin was 41%, same as the year ago quarter. While we anticipate life underwriting margin to be between 42% and 45% for the full year 2026, we do expect it to be around 41% for both the second and fourth quarters and higher in the third quarter due to the anticipated remeasurement gain from assumption updates that will take place in the third quarter, as Tom will discuss in his comments. In health insurance, premium revenue grew 13% to $417 million, and health underwriting margin was up 12% to $95 million. For the year, we expect health premium revenue to grow in the range of 14% to 17%. This is due to premium rate increases in our Medicare supplement business as well as strong sales activity in both our United American and Family Heritage divisions. As a percent of premium, health underwriting margin was approximately 23% in the first quarter, same as the year ago quarter. For the full year, we anticipate health underwriting margins to be between 23% and 27%. Administrative expenses were $94 million for the quarter, an increase of approximately 8% over the first quarter of 2025. As a percent of premium, administrative expenses were 7.4%. For the year, we expect administrative expenses to be approximately 7.3% of premium. Over the long term, we anticipate that expanded implementation of AI applications across the company will help drive this ratio lower. We believe Globe Life is positively positioned to benefit from AI due to the high-volume nature of our business, including the number of applications received and policies issued calls received by our customer service representatives and number of claims reviewed in pay. Of course, these AI-driven improvements would not be limited to administrative expenses, we expect enterprise-wide benefits including significant benefits to our distribution and underwriting activity in particular. I will now turn the call over to Matt for his comments on the first quarter marketing operations. James Darden: Thank you, Frank. We had strong first quarter sales results as the total Life net sales grew 6%, and the total health net sales grew 58%. I'm pleased to point out that we have seen growth in net life sales in each division for the last 2 quarters. Given the current economic environment, these results are indicative of the resiliency of our business model. Now I'll discuss the trends at each distribution starting with our exclusive agencies. At American Income Life, life premiums were up 5% over the year ago quarter to $459 million and the life underwriting margin was up 7% to $209 million. Net life sales were $101 million, up 3% from a year ago due to improved agent productivity. The average producing agent count for the first quarter was 11,064 down 4% from a year ago due primarily to a decline in new agent retention. Short-term declines in agent count are not necessarily a problem as we can see improved sales productivity among our veteran agents when they have more time to focus on sales. Now that being said, long-term growth is dependent on agent count growth. As we discussed in the last call, at the beginning of the second quarter, we have implemented compensation adjustments for our middle management team that is designed to emphasize new agent recruiting and retention of new agents. We expect these adjustments to have a positive impact on our overall agent count during the second half of this year. Despite these short-term challenges, I am very pleased with the improvement in agent productivity we have seen over the last several quarters. Our investments in branding, lead generation and technology are paying off. And overall, I'm very optimistic regarding the long-term prospects for American Income. At Liberty National, the life premiums were up 4% over the year ago quarter to $100 million, and the life underwriting margin was up 11% to $35 million. Net life sales were $25 million, up 13% from the year ago quarter due primarily to agent count growth. Net health sales were $7 million, down 3% from the year ago quarter as more emphasis has been placed on life business. The average producing agent count for the first quarter was 4,031, up 9% from a year ago. I'm excited about the strong life sales and agent count growth we are seeing and confident we will continue to see growth at this agency as we move forward. In Family Heritage, the health premiums increased 10% over the year ago quarter to $123 million, and the health underwriting margin increased 11% to $44 million. Net health sales were up 22% to $33 million, and this is due to increases in agent count and productivity. The average producing agent count for the first quarter was 1,561, up 10% from a year ago. We continue to see strong agent count growth at Family Heritage. This is resulting from the continued focus on our recruiting and growing agency middle management. Now in our direct-to-consumer division, the life premiums were down approximately 1% over the year ago quarter to $244 million, while the life underwriting margin increased 15% and to $74 million. Net life sales were $27 million, up 8% from the year ago quarter. Now as we've discussed before, the value of this division extends well beyond DTC sales and due to the support it provides to our agencies. We've seen improved conversion of the direct-to-consumer leads shared with our agencies, which has also led to margin improvement. This allows us to invest more heavily in advertising and other lead generation activities, further increasing lead volume, which in turn leads to additional sales in both our direct-to-consumer and agency channels. We expect this division to increase leads generated for our 3 exclusive agencies during 2026 by approximately 5% to 10%. At the United American General Agency, here, the health premiums increased 22% over the year ago quarter to $194 million, and the health underwriting margin was $5 million, up approximately $4 million from the year ago quarter. Net health sales were $62 million, and this is an increase of approximately $34 million over the year ago quarter. Sales were strong across the division in both the Medicare supplement and the [indiscernible] business due primarily to tailwinds from the continued movement of Medicare beneficiaries for Medicare Advantage to Medicare supplement and the further development of our group worksite business. As an additional note, I would remind everyone that we do not market Medicare Advantage plans. Now I'd like to discuss projections. And based on these recent trends and our experience with the business, we expect the average producing agent count trends for the full year of 2026 to be as follows: at American Income, low single-digit growth; and then at both Liberty National and Family Heritage, low double-digit growth. Our life sales for 2026 we expect the following: at American Income, mid-single-digit growth; Liberty National, low double-digit growth; direct-to-consumer, low single-digit growth. For health sales for 2026, we expect to be as follows: Liberty National, mid-single-digit growth; Family Heritage, low double-digit growth, and United American high teens growth. I'll now turn the call back to Frank. Frank Svoboda: Thanks, Matt. We'll now turn to the investment operations. Excess investment income, which we define as net investment income less required interest was $37 million, up approximately $1 million from the year ago quarter. Net investment income was $290 million, up 3%, while average invested assets grew 2%. Required interest grew 3%, slightly lower than the 4% growth in average policy liabilities over the year ago quarter. Net investment income also increased 3% from the fourth quarter as we had higher returns from our limited partnerships. As a reminder, the income reported from these investments is based on income earned by the partnerships in the quarter and will vary from quarter-to-quarter. For the full year, we expect both net investment income and required interest to grow around 4%, resulting in excess investment income growth between 4% and 4.5%. In the first quarter, we invested $419 million in fixed maturities, primarily in the industrial and financial sectors. These investments were at an average yield of 6.23% and an average rating of A and an average life of 42 years. We also invested approximately $147 million in commercial mortgage loans and other long-term investments with debt-like characteristics. These non-fixed maturity investments are expected to produce additional cash yield over our fixed maturity investments while still being in line with our overall conservative investment philosophy. In the first quarter, the earned yield on our total long-term invested assets, which includes our fixed maturity, commercial mortgage loans and other long-term nonfixed matured investments, was 5.5%. For the full year, we expect the average yield earned on our long-term investments will be between 5.45% and 5.5%. For just the fixed maturity portfolio, we anticipate the earned yield for 2026 will be around 5.3%. While we do own some floating rate investments, they are well matched with floating rate liabilities on the balance sheet. Now regarding the investment portfolio, invested assets are $22 billion including $19.1 billion of fixed maturities and amortized cost. Of the fixed maturities, $18.6 billion are investment grade with an average rating of A. Overall, the total fixed maturity portfolio is rated A-, same as a year ago. Of our total investment portfolio, only 1% is in senior direct lending and asset-based finance [indiscernible] and another approximately 1% is in traditional private placements. Our fixed maturity investment portfolio has a net underlying loss position of $1.6 billion due to current market rates being higher than the book yield on our holdings. As we have historically noted, we are not concerned by the unrealized loss position and is mostly the interest rate driven and currently relates entirely to bonds with maturities that extend beyond 10 years. We have the intent and, more importantly, the ability to hold our investments to maturity. Bonds rated BBB comprised 41% of the fixed maturity portfolio compared to 45% from the year ago quarter. This percentage is at its lowest level since 2003. As we have discussed on prior calls, the BBB securities we acquired generally provide the best risk-adjusted capital-adjusted returns due in part to our ability to hold securities to maturity regardless of fluctuations in interest rates or equity markets. That said, our allocation of BBB-rated bonds has decreased over the past few years as we have found better risk-adjusted, capital-adjusted value in higher-rated bonds given the narrowing of corporate spreads. While the concentration of our BBB bonds might still be a little higher than some of our peers, remember that we have little or no exposure to other higher risk assets. Low investment-grade bonds remained near historical lows at $511 million compared to $506 million a year ago. The percentage of below investment-grade bonds to total fixed maturity is just 2.7%, consistent with year-end 2025. The total exposure to both BBB and below investment-grade securities as a percent of our total equity, excluding AOCI, is at its lowest level in over 25 years and is among the lowest of our peers due to our low overall leverage. Due to the long duration of our fixed maturity liabilities, we predominantly invest in long-dated assets. As such, a critical and foundational part of our investment philosophy is to invest in entities that can survive through multiple economic cycles. While there may be uncertainty as to where the U.S. economy is headed, we are well positioned to withstand a significant economic downturn due to holding historically low percentages of invested assets in BBB and below investment-grade bonds as a percentage of equity. In addition, we have very strong underwriting profits and the long-dated liabilities, so we will not be forced to sell bonds in order to pay clients. With respect to our anticipated investment acquisitions for the remainder of the year, at the midpoint of our guidance, we assume investment of approximately $800 million to $900 million of fixed maturities at an average yield of between 5.9% and 6.1%. Including the expected investments in commercial mortgage loans and other long-term investments with deadline characteristics, we expect to invest approximately $1.1 billion to $1.2 billion across all asset classes at an average yield of 6.3% to 6.5%. Now I will turn the call over to Tom for his comments on capital and liquidity. Thomas Kalmbach: Thanks, Frank. First, let me spend a few minutes discussing our available liquidity, share repurchase program and capital position. The parent began the year with liquid assets of approximately $80 million and ended the quarter with liquid assets of approximately $85 million. We anticipate ending the year with liquid assets within our target range of $50 million to $60 million. During the quarter, the company purchased approximately 1.4 million shares of Global Life Inc. common stock for a total cost of approximately $205 million at an average share price of $141.24. We accelerated a portion of our 2026 anticipated share repurchases given favorable market conditions in the first quarter. Including shareholder dividend payments of approximately $20 million, the company returned approximately $225 million to shareholders during the first quarter of 2026. In addition to liquid assets held by the parent, the parent will generate excess cash flows during 2026. The parent's excess cash flow, as we define it, primarily results from the dividends received by the parent from its subsidiaries less interest paid on debt and is available to return to shareholders and the return in the form of dividends or through share repurchases. We continue to in the growth of our -- invest in our growth through making investments in new business, technology and insurance operations. It should be noted that the cash received by the parent company from our insurance operations is after our subsidiaries have made these substantial investments and acquire new long-duration assets to fund their future cash needs. We will continue to use our cash as efficiently as possible. We believe that share repurchases provide the best return yield to our shareholders over other available options. Thus, we anticipate share repurchases will continue to be the primary use of the parent's excess cash flow after the payment of shareholder dividends. In our guidance, we anticipate distributing approximately $90 million to our shareholders in the form of dividend payments over the course of the year, which reflects the recently announced 22% increase in the annual dividend rate per share. In addition, we have increased the range for anticipated share repurchases to $560 million to $610 million for the full year. As a reminder, our excess cash flow estimates for 2026 do not anticipate any additional cash flows to the parent resulting from the establishment of our new Bermuda entity in 2025. As discussed in our last call, we anticipate filing for a simple jurisdiction in the second quarter and we'll provide an update on our next call. With regards to the capital levels at our insurance subsidiaries, our goal is to maintain capital within our insurance operation at levels necessary to support our current ratings. Globe Life targets a consolidated company action level RBC ratio in the range of 300% to 320%. Although this target range is lower than many of our peers, it is appropriate given the stable premium revenue from a large number of in-force policies, the nature of our protection products with benefits that are not sensitive to interest rates or equity markets, our conservative investment portfolio and strong consistent underwriting margins, which result in consistent statutory earnings at our insurance companies. As of year-end 2025, our consolidated RBC ratios of our U.S. subsidiaries was 316%, which provides approximately $95 million of excess capital above what is needed to meet our minimum target capital level of 300%. For 2026, we intend to maintain our consolidated RBC within the targeted range of 300% to 320%. Now with regards to policy obligations for the current quarter. For the first quarter, life policy obligations as a percent of premium declined from 36.3% in the year ago quarter to 35.4%, slightly favorable to management estimates and is consistent with the continued favorable trends in mortality. Health policy obligations as a percent of premium were 56.3% compared to 55.6% from the year ago quarter. This was consistent with management estimates for the quarter, reflecting first quarter claims seasonality at United American. As a reminder, we intend to update our life and health assumptions annually in the third quarter. And thus, we have -- there have been no changes to our long-term assumptions this quarter. Finally, with respect to our 2026 guidance. For the full year of 2026, we estimate net operating earnings per diluted share will be in the range of $15.40 to $15.90, represent 8% earnings growth per share at the midpoint of the range. The increase in our prior guidance is probably primarily due to the impact and timing of anticipated repurchases for the share, refined estimates of potential positive impacts of third quarter life assumption updates and increased estimates of full year investment income. The guidance range reflects the estimated before tax benefit from anticipated assumption updates of $70 million to $110 million expected in the third quarter. This range is higher and narrower than last quarter's call due to continued refinement to estimates. Given the estimated benefit from assumption updates in the third quarter, we anticipate the third quarter life margin as a percent of premium will be in the range of 49% to 54%. We anticipate recent favorable mortality trends will continue through 2026 with full year normalized life underwriting margin as a percent of premium, which excludes the impact of the third quarter assumption update, of approximately 41% at the midpoint of our guidance. As previously mentioned, we expect health premium to grow in the range of 14% to 17% for the full year. This health premium growth is benefiting not only from strong growth in Medicare Supplement sales in 2020 by -- and anticipated in 2026, but also from approximately $65 million of additional premium from approved rate increases on individual Medicare supplement policies that will be received in 2026, primarily in the last 3 quarters of the year. Our full year guidance, we anticipate United of Americans health margin as a percentage of premium to be in the range of 8% to 9%. However, we anticipate the average underwriting margin as a percent of premium to be approximately 10% over the last 3 quarters of the year as the impact of premium rate increases are realized. Finally, I do want to point out that at the midpoint of our guidance, normalized EPS growth, which removes the impact of assumption updates in both '25 and '26 is approximately 11%. At the midpoint of our guidance, the projected 3-year compound annual growth rate of normalized EPS is 11.5%. Those are my comments. I'll turn the call back to Matt. James Darden: Thank you, Tom. Now those are our comments, and we will now open up the call for questions. Operator: [Operator Instructions] Your first question comes from Jack Matten with BMO Capital Markets. Francis Matten: I said one on lapse rate trends, which takes higher. I think especially for first year lapses at American Income. I guess can you talk about what you're seeing in terms of consumer behavior? Is this more kind of macro-driven affordability issues or anything related to distribution? And any thoughts on your outlook for lapse rate trends from here? Thomas Kalmbach: Yes. Thanks for the question. Yes, we do expect lapse rates to remain elevated for '26 versus the pre-pandemic. And we've seen that over the past few years as well. And I think the experience we expect is going to be more consistent with last year, given the economic stress that is on our policyholders from the current economic environment and overall price inflation. With regards to AIL, first quarter lapse rate, they definitely were high relative to recent experience. We consider this more of a fluctuation at this point, and we'll continue to monitor it. But no -- really just considered a fluctuation. James Darden: I think as we've indicated before, is that we do have impacts from macroeconomic environments. The resiliency of the business, though, is that I would say what we're seeing now is consistent with historical norms and other economic cycles. So we'll get a little bit of fluctuations based on what's going on in the economy. But overall, fairly resilient as that moderates between a fairly narrow band of our experience. Frank Svoboda: Yes. And Jack, the other thing I was just going to add is that I think when you kind of look at some of the trends at Liberty and even DTC a little bit, some of that is just mix of business. So we do know that the worksite as L&L has continued to grow that site, that worksite business as it's growing some of the lapse rates in the early issue years are always higher than the later issue years. And so is that -- as you continue to grow the sales there, then you -- those renewal lax rates just tend to drift up a little bit. So we do think that we're seeing that a little bit. And then we talked a little bit just -- some of the lapse rates at DTC on the internet business are just historically higher than what they are. So as that becomes a greater proportion of our total sales, that probably moved that up a little bit. But it is interesting. I think when you look at some of the economic forces, the renewal rates at DTC are continuing to be right in line with prepandemic experience. And so we're not seeing it consistently across the board on all the agencies. [ So that to us ] while the economy has some impact, surely, there's some other factors that are going on with the business that's being written today. Operator: Got it. That's helpful. And maybe just follow up on some of the AI benefits that you referenced in your prepared remarks. I mean any way you could maybe unpack or quantify some of those benefits you expect over time, whether it's on the expense ratio or for productivity? I guess to what extent are you kind of seeing those already? I think you talked about higher productivity at American Income along with agent count trends there. I just wonder if you could talk about how you're seeing that play out so far? James Darden: Sure. On the administrative side, what we anticipate is over time as those things get implemented, that we should be able to moderate our expense growth commensurate with our premium earnings growth. And so we would expect a little bit of margin expansion over time as those things get implemented as we're able to grow our revenue faster than our expenses. And so as we implement those right now, we've got a variety of different in addition to what we've deployed pilots going on. So we're very optimistic on the future, as Frank had mentioned in his prepared remarks on where we're headed. On the sales side, we do anticipate that there will be a benefit. And it kind of shows up in a variety of different areas. We've talked about in the past, our investments in technology, and we have seen improvements in that. So we know that to the extent that we can deploy technology that improves our agent experience and that can be in multiple facets from the fact to the extent that we can onboard and train agents quicker and more effectively and get them producing and more effective sooner. We know our agent productivity will go up, but we also know our agent retention will go up as well. And so anything that we can do there to deploy technology that helps on that agent recruiting and onboarding as well as just overall efficiency, we'll have longer-term gains. And we anticipate that to be a tailwind as we think about what our overall sales growth is going to be in the future. So those are embedded for '26 in our projections, and I anticipate that '27 will be -- continue to benefit from those technologies as we get those rolled out. Thomas Kalmbach: Yes. I would just add from an admin expense perspective, we're really looking at the margin improvement, bringing that 7.3% of admin expenses as a percent of premium down closer to 7% a bit over the next few years. And so that's kind of really how we're talking about some of those improvements to be reflected in admin expenses. Operator: Your next question comes from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Could you provide some clarity on what's driving the higher buyback for '26? Just maybe a little bit more color there. Is it related to higher capital generation and other source? Maybe just get into a little bit more detail. Thomas Kalmbach: Yes, Wilma, we were able to finalize our 2025 statutory earnings. And as we looked at excess cash flows, it still within the range that I provided on the last call, $600 million to $700 million, but it was just a little bit higher and that allowed us to the opportunity to have some additional share repurchases. Frank Svoboda: Yes. And then Wilma, I'd just add as far as the kind of the timing was concerned, we really did take a look at the opportunities that kind of presented itself during the first quarter, and there was a period of time where the shares had dropped below $140 per share and really saw that as a good opportunity for us and the shareholders. And so we did take that opportunity to accelerate, do a little bit more in the first quarter than what we had anticipated originally in that quarter. Wilma Jackson Burdis: And then it seems like the life sales agent count and even premium growth are coming in a little bit lower than your prior expectations. Could you just give us a little bit more color on what's driving that, whether it's macro, just something in that kind of [indiscernible] process? Just a little bit of color would help. James Darden: Sure. I'd say we need to break it down between the components of our distribution. Liberty is growing both the agent count and the sales growth and consistent with earlier expectations, and we're really pleased with the trend that we're seeing there. From an American income perspective, I've mentioned this before, but our -- when we talk about our incentive compensation at the agent level, we're always trying to strike a balance between incentivizing and rewarding for recruiting and onboarding and training of new agents versus sales. And so what we're seeing is that we're -- the compensation structure is driving a little bit more sales than the sales productivity. And so that's why we have some sales growth, but it's the agent cap growth is behind a little bit of where we had originally anticipated. We do, as I've mentioned in my prepared remarks, believe that some of the changes that we've made that will be -- that are implemented here at the beginning of the second quarter, those don't turn around things that immediately the day you put them in, takes a little bit of time for that to get into the agency operations and change behavior because when we talk about recruiting new agents, there's a time line and a pipeline associated with that. So we anticipate over the second half of the year, we'll start getting that agent count growth we're looking for. And then if I talk about the life sales at our direct-to-consumer channel, what's going on there is just we looked at what happened in Q1, we're pleased with the continued sales growth that started the last half of last year. But we just looked at really our comparables of how strong the growth was in Q3 and then into Q4 for 2025. And so we just tempered, I'll say, slightly our sales projections there. Overall, we're still very pleased with the sales growth that we're getting at our direct-to-consumer channel. And so the nice thing about having the 3 different agencies, particularly if you look at recruiting, is we go to market very similarly on agent recruiting between the 3 agencies. And so when I see growth at 2 of our agencies and strong growth, I know that it's really not a macroeconomic environment concern or issue. It's much more specific to the particular agency growth aspects that we have there. And so that's why I feel very confident about the overall environment provides a good environment for us to continue to grow our agent count across the agencies. So a little bit of tweaks in our compensation system, we think, will play out well because the overall macroeconomic environment, we believe will still be strong for growth going forward. Operator: Your next question comes from Wes Carmichael with Wells Fargo. Wesley Carmichael: I had a question on United American. I think the guidance there. I think your guide for health sales was in the high teens, but you had, I think, 122% growth in the first quarter. Are you thinking that sales growth might be a little bit negative over strong growth last year? How are you thinking about the remaining quarters of 2026? James Darden: Yes. You may recall that on the last call, we guided to kind of flat sales, just considering the significant growth that we have in 2025. And really the dynamics that are going on there looked at our strong growth in sales during the first quarter of '26. And that, as a reminder, is a elevated premium levels because our price increases went in for new sales in the first quarter, even though a lot of the in-force premium increases come in primarily in the second quarter. And so we really want to see how the market played out. And so very pleased with that. So we upped our guidance related to our overall year for 2026 sales. But we are cognizant that when you start looking at our fourth quarter, in particular, sales for the General Agency division, we nearly -- where we over -- we doubled our sales last year. And so really, the sales growth above that is just cognizant that we've got a real high level to continue to grow. And it will be interesting to see is the continued tailwinds that we're seeing right now of the Medicare Advantage market and the benefit that we're getting from Medicare supplement sales, how that plays out for the rest of the year. So it's really not, in our view, a softening over the remainder of the year, just recognizing the high hurdle to overcome to continue to grow on top of that significant growth we had last year. Frank Svoboda: Yes. I would just say, Q2 and Q3 are probably still slight improvements over last year, but Q4, as Matt said, is what's just a little bit -- right now, we anticipate not quite at that same level. Wesley Carmichael: All right. That's very helpful. And then my follow-up on Bermuda, I know in the prepared remarks, you mentioned that you're working to file reciprocal jurisdiction in the second quarter. But I just want to see, have there been any other developments around that initiative since the last earnings call, either with regulators or expectations around cash flow or near-term reinsurance sessions? Thomas Kalmbach: There are really no other developments. We're working through getting our financial statements. The audits complete on those. And so really no changes to kind of our thoughts around the business plan and our expected capital generation. James Darden: And I think on the next call, we should have a more significant update based on the activity plan for here in the second quarter. Operator: Your next question comes from Andrew Kligerman with TD. Cowen. Andrew Kligerman: My first question is around the assumption updates, just fantastic to see that come through. You talked about an estimate of 49% to 54% life margin third quarter versus the full year at 41%. So I'm wondering, is this the gift that's going to keep on giving? What should we be thinking about assumption update potentials in 2027, '28, '29? Just it sounds like things have gone really well in terms of your assumptions. And I would like to know how you're thinking longer term about it. Thomas Kalmbach: I think, Andrew, first of all, we take a really disciplined approach as far as how we update assumptions and want to actually see the results emerge before we actually make some of those changes to our long-term assumptions. So I think this year is, we are seeing some continued mortality trends that multiple quarters of favorable mortality trends that are informing our assumption update this year. I think if we continue to see those current mortality at these current levels, I think there's always the opportunity or the potential for additional assumption updates as we move forward. So no real quantification of those at this point, but I think there is potential for those. James Darden: Well, I think the other thing that is important, past just the third quarter assumption updates and the benefits that we're getting there, which most likely will moderate over time. But that means that we're setting our new long-term assumption at a higher margin, right? So we should have earnings on the book of business overall at a little bit higher level on a go-forward basis because it's just indicative that we don't need as much reserves as we originally thought on that book of business. So that's how I kind of think about it as just the long-term stability and the growth of that underwriting margin, those are kind of indicators that we're resetting to a new higher level since they're positives in the last several -- in Q3 as we've looked at the last several years. Unknown Executive: And I think you can really see that, Matt, and looking at normalized underwriting margins over the past few years by moving the impact of the assumption update, you can really see the trend in the overall improvement in underwriting margins. Frank Svoboda: That's right. The one thing -- Andrew, I was just going -- on your Q3 comments, and as Tom noted, the range on that is in that 49% to 54%. And so if we kind of take that assumption update of 70 to 110 that Tom had in his comments, so you have in that one quarter and 8% to 13% kind of bump, if you will, in that underwriting margin in that quarter, which off of the 41% kind of normalized margin that we're really expecting over the rest of -- in each of the quarters. Yes, I just -- if we continue to see the current mortality levels that we're seeing today as we continue to see that come in over time, that will work its way into those longer-term assumptions. Andrew Kligerman: That was very helpful. And my follow-up is around the health underwriting margin, 23% in the first quarter. And then you guided to 23% to 27%, which is kind of wide. Agent's wise, could you kind of walk us through the next few quarters? Would it be more likely closer to 23% in the second and then we could see a significant bump in the last 2 quarters? How do you think about the cadence? Frank Svoboda: No. I think, Andrew, that actually in the remaining 3 quarters, as you would expect that full health margin to be north of 25%, at least we anticipate to be north of 25%. And in fact, you're probably a little bit lower out of those 3 in the fourth quarter just because that's, again, a little bit higher seasonality. So you have a little bit higher claims in that fourth quarter. So that's probably more closer to that 25% range. But then over the -- so that kind of brings up where we were at around 23% up to, again, the midpoint of that range that we give is around 25%. And so I think you'll see -- we expect to see pretty good margins over the next 3 quarters. Operator: Your next question comes from Pablo Singzon with JPMorgan. Pablo Singzon: First question is with insurance moving in larger volumes from [indiscernible], is there a greater risk of anti-selection from your end? I know most cases, you can underwrite, but I was just wondering if higher sales might have contributed to some of the margin compression you experienced in the health business? Thomas Kalmbach: Yes. I don't think it's a function of selection that's impacting the margins in the first quarter. I think it really is some seasonality of claims in the first quarter as well as the fact that the rate increases that we filed last year will largely come into effect in the second, third and fourth quarter. As I mentioned on our last call, the premium increases that we filed for was $80 million to $90 million on a 12-month run rate. And we expect about $65 million to be received over the course of 2026 and then the remainder being received in 2027. And so we didn't receive very much of that in the first quarter. We'd expect to be on average about $20 million of additional premium in each of the next 3 quarters, which will help improve overall margins. But I don't think it's any selection at this point. So I don't think that's one of the drivers. Mike Majors: Well, yes, there was higher utilization across the entire industry for Medicare supplement over the last couple of years. What is unique to us... Thomas Kalmbach: And we have been seeing medical trends really stabilize and be relatively flat over the last couple of quarters. So that actually bodes well as well. Pablo Singzon: Got it. That makes sense. And then for my second question, so mortality has been a net contributor to your assumption updates in your quarterly [indiscernible] gains. I was wondering if you could speak about the lapse component of your [indiscernible] gains as well as the morbidity side for the health business. Have those factors been generally positive or negative? But clearly, [indiscernible] has been good, but I was just curious about how those other assumptions have been playing out for you? Thomas Kalmbach: Yes. On the Life remeasurement gains, it's largely mortality claims, mortality claims that are driving the remeasurement gains. I think it's about kind of in our in our work, we look at kind of how much is mortality and how much is all there, and it's about 70% mortality and 30%, all other things from a remeasurement gain on a quarterly basis. And on the health side, it's -- I think a lot of that is being driven by kind of what the future rate increases are doing to result in remeasurement gains. So that's -- it's more on the impacts to premium -- future premiums than it is on claims, although claims are positive as well overall, providing some health remeasurement gains. Operator: Your next question comes from Randy Binner with Texas Capital. Randy Binner: It's a follow-up to Andrew Kligerman discussion with you on the -- I think you kind of answered more of the quantitative changes with the mortality assumptions. But I was wondering if you could share kind of more like qualitative assessment of like lifestyle behavior. It's just it's a significant shift. It's obviously very positive. But is there something changing with the cohort of insureds that's kind of worth noting in this change in the numbers? Thomas Kalmbach: I don't think it's really a function of the cohort changing. I think it is just continued trends and we see continued favorable mortality and part of circulatory [indiscernible]. We see continued trends and favorable cancer death, nonlung cancer gets, which are really favorable. And then the other thing that's maybe happening on a macro basis is the non-medical deaths are actually really seem to be improving, and that would include suicide and homicide and the drug and alcohol abuse. So I think that's probably one area where we're seeing a little bit more improvement from a [indiscernible] purpose that actually impacted the overall mortality. Frank Svoboda: Yes, I was going to note that on the nonmedical side because in the late teens and then especially in the early days of COVID, we had really seen a spike a lot of the opioid and just some of the other suicides and that type of a thing. And so we really did see a large increase there. It's probably been 7, 8 years ago now and had that for a few years, and that's been really good to see that temper here the last couple of years. And we've seen really -- even though the nonmedical accounts for only about 20% of our claims, we're seeing some really significant changes in that. And I think that does have some impact, as Tom mentioned, they're a result of some of the societal impacts and that type of thing. And maybe some of the battles against the opioid crisis and that type of thing has maybe been a benefit there as well. Randy Binner: That's great color. And then one more, if I could, as a follow-up to the discussion on the American Income agent count. I guess I heard about the initiatives, and I think it was going to describe more of an issue of getting agents in the door. But is there is the retention of folks they are changing at all kind of after year one? Are you kind of keeping the same percentage? Or has that changed as well? James Darden: The -- it's a little bit of both. It's a little bit of just recruiting activity, and it's more of the agent retention in the first 6 months. And we really focus on our agent retention in the early days because we are recruiting folks that are new to the industry, some are new to direct sales. And so we know that the extent of people getting onboarded, trained and producing and having a sustainable income really drives that long-term agent retention. So we really focused on the early days. And so again, it's not our -- from a corporate perspective, we're doing all that activity. That is our middle managers out in the field that are spending time, recruiting agents, training them and the whole onboarding process and in addition to they're doing their own direct sales. And so that's what I'm describing when I say we're trying to make sure that our incentive compensation system appropriately rewards between those 2 activities because it is a balance. There's only a certain number of hours in a day as they would say. And so when I talk about we're tweaking that a little bit, what I really like to see, as I've mentioned, is we've got 3 quarters in a row where we've got improvements in our agent productivity, just that agent count and a little bit higher turnover in that first year than what we've historically seen. So we know we need to move the pendulum. We want to pin on a swing back a little bit and move the incentive a little bit more on focusing on getting those agents trained and onboarded. So that's kind of the overall dynamics of what's going on with American Income. But like I said, if you look at the growth and the retention at the other 2 agencies that tells us that it's really specific to this particular distribution versus a more macro view. Frank Svoboda: Randy, I was going to add one more thing to our discussion around some of the mortality trends that we're seeing and that just before we leave that. I think a question that we get fairly often to when we are talking to folks, do we think that the new drugs that are coming out and weight loss treatment and those type of things are, is that being -- having an impact -- and we really do think that's probably a little bit too early, especially for our insured population, just getting access to those drugs and affordability over time. I mean we're really optimistic that over time that, that -- that could have some really positive benefits to our mortality experience especially some of the side effects from diabetes and those type of things, if they're able to kind of delay death from some of those [indiscernible] health benefits and causes. And then I kind of look at 2, and I don't think we have this empirically, but you look at the higher utilization that we've been seeing on the [indiscernible] subside and so you have a lot of more senior folks that are going to the doctor more often, they're getting with the doctors. I think people post-COVID -- there's been an increase in just taking care of themselves and getting some of that. I see that in just some of the utilization numbers. And so I tend to think that maybe that has a little bit of some impact on that as well. Randy Binner: Okay. And thanks for the clarification on American Income. Operator: Your next question comes from Suneet Kamath with Jefferies. Suneet Kamath: I wanted to come back to this idea of the resiliency of your customer base. Clearly, showing up in the first quarter results, but if I just think about what's going on macro-wise with the war, a lot of those developments on things like gas prices sort of happened later in the quarter. So I guess the question is, are you seeing anything as we start traveling through 2Q that suggest that maybe there's incremental pressure? Is it too early to see the pressure from things like higher gas prices? James Darden: I think what we've seen historically during different economic cycles is, there might be a little bit of pressure, particularly in that first year. What happens, what we've seen through like early 2000s, great financial crisis, those type of cycles is -- we actually see a benefit a lot of times in growth in sales, growth in agent recruiting. And what we see with the in-force is it's very resilient because after that policy has been in the customers' budget, for a couple of years, it's very resilient. And the renewal persistency rates just do not move very much. And I think that gets back to the affordability of our policies, the average premium, depending on the distribution for a rounding sake is $40 to $60 a month on average. And so that's just not a significant component of a consumer's wallet that they're spending on other things really, that's really not the first or the second place that we've seen that they look to scale back just because it's not significant dollars on a monthly basis as well as it's been in their budget for quite some time. And the consumer also knows that is kind of a security perspective is that periods of uncertainty or high inflation or things like that, my coverage for my family and the protection orientation of how we sell these products is not something that I really want to get rid of as well as I know if I cancel my policy, but I want it long term, I have to go back through underwriting, requalify and the policy may be more expensive because my age is older, my health may be in a different spot than I originally took it out. So from our perspective, as we look at it over decades, we see slight movements, but we do not see significant movements from that resiliency perspective. Frank Svoboda: And I would just say what we're really hearing from the field in more recent times. And is that while there might be a little bit harder, you're not really seeing a major pushback from the consumers at this point in time. And maybe it's an extra call we get the sales. I mean the thing that helps having the exclusive distribution and contractors wanting to make their own money. And so they're maybe they have to make an extra call or 2 during the week in order to get a sale, but they're continuing to work because they want to have their level of income. And then I would say Matt noted on prior calls as well, and we've been seeing this quarter too where that average premium just continues. We would think that if we're seeing to a lot of stress within the consumer that they would choose down, and they would say, maybe I can't afford $35 a month. I really want to have this. Let me add something for $25 a month, but we're really not seeing that. We're still continuing to see the average premium monitor issues holding steady, if not decreasing just a little bit. Suneet Kamath: Okay. That's helpful. And then I wanted to circle back to AI real quick. It was helpful to get some of your thoughts on where the expense ratio could go. But are you seeing any additional threats emerge in terms of your target customer base or your distribution channels where new entrants are coming in, that may have a different distribution strategy to sort of attack your target market? James Darden: Yes. I think what's important there is a vast majority of our growth in sales are coming through exclusive agency channels. We don't see or experience a lot of competition in those channels at the at the time of sale. Our agents are out generating their own activity, referrals, working leads, those type of things. And so it's not sold to consumers that are actively looking for a supplemental health policy today or basic protection life products today. The direct-to-consumer channel is more subject to competition because that is going after consumers that are actively looking and shopping and things like that. And so we do recognize there's a little bit more challenges as AI comes into play from entrance. And frankly, that's an easier market to get into from a new entrant perspective, the barrier to entry, the cost of entry is a lot less than agency sold business. And so that's why I mentioned earlier, we think AI is going to be a benefit to our agency sold business. It's not subject to a lot of competition. It's harder for new entrants to get into that market. And the beauty about our marketplace is that a significant number of people in our targeted demographic is not -- income demographic is not saturated. So when we sell more we are not having to take market share from somebody else. Over 50% of that population doesn't have life insurance and then it's even more significant when you talk about underinsured or they just get a little bit through work that doesn't travel with them because it's a group policy. And so we're very optimistic of where that goes, and we are focused on more direct competition in our direct-to-consumer channel. That's why you'll hear us over time, we think that's more of a low single-digit growth because there is going to be a certain subset of the population. We believe that's smaller that is more active and looking than the majority of our agents sold business. Operator: Our next question comes from Mark Hughes with Truist. Mark Hughes: Just a quick one for me. You talked about the investment in lead generation. Can you talk about the trajectory you're spending there, whether they're are any new technologies or new approaches you're using? And does AI have any meaning for lead generation? James Darden: Yes. And so a lot of our lead generation is coming through our direct-to-consumer advertising. And so the benefit that we've had over the last year or 2 has been capitalizing on that investment spend and not just converting that advertising spend into sales of just the direct-to-consumer channel, but a lot of the leads and inquiries that we're getting, we're moving that to an agency channel that has a higher conversion rate. So we have significant growth in just the total volume of leads, which would be equating to the spend in that area last year. And as I mentioned in my prepared remarks, we're probably going to be another 5% or 10% growth in the number of leads. The dynamic going on there is, over the last several years, until 2025, you heard me talk about we continue to scale back our advertising spend because the costs were going up and the lease conversion was going down. Well, now that our overall aggregate conversion ratio is going up when I look across both our direct-to-consumer and agency channel, that gives us more money to spend on generating more leads. So we're increasing our advertising spend to generate more leads. And that will be something that continues to grow in itself. So to the extent that we have this better conversion, we have more leads being utilized by our agencies. I anticipate throughout '26 and then into '27, if that trend continues, to continue to spend more on advertising that benefits both sides of the equation, meaning both our direct-to-consumer and agency channels. So as far as the AI business in that -- no, I was going to say, I think you had a comment about AI is that on the consumer channel -- as you might imagine, the way consumers may be looking for life insurance or responding to ads, I believe that a lot of these AI platforms are going to convert into some sort of advertising revenue model. And we will be there as part of that. And I think that's where our deep experience in advertising in these online channels will come into play. And frankly, the volume of dollars that we spend is very significant. With some of the big platforms we participate in their beta programs, and we're there with the seat at the table, so to speak, with these advertising platforms as they look to convert and monetize some of this AI technology. And it's much like what we saw in some of the early days with Facebook and some of the others as they convert into advertising platforms. Operator: Your next question comes from Ryan Krueger with KBW. Ryan Krueger: Just a quick one. On the life margin, and maybe this is -- there's some rounding here, but I think you said you expected 41% in the fourth quarter. I would have thought there would be some improvement given the lower net premium ratio after you factor in the remeasurement from the assumption review in the third quarter. So just curious how you're thinking about the benefit on a go-forward basis from the assumption for [indiscernible]? Thomas Kalmbach: Yes. Right. I think fourth quarter is one of those quarters that also has a little bit of seasonality in it. So that offsets some of the benefit that you get from a lower net premium ratio. And then also, the net premium ratio changes are relatively small. I mean, there are small incremental changes that happen each time we make an assumption update. But I think for the fourth quarter, it's probably more of a seasonality thing. Ryan Krueger: Okay. Maybe just one follow-up on that issue is -- would you expect -- do you think 41% roughly is the right margin at this point, stripping out assumption review impacts? Or could there be some upside as we go out further? Thomas Kalmbach: I do. I think that's a pretty good normalized underwriting margin. We've seen mortality come down, so obligation ratios have come down. We've talked about amortization coming up a little bit, but it's really kind of aligning around that 41%. Frank Svoboda: And I think, Ryan, you got to think of it as around that. So if it's 40%, it could be if it 41.1%, 41.2% we're still thinking of that as being around 41%, same as 40.8% or something like that. So it's going to move by a few tenths of a point, but it's going to be pretty close to around that. So you do have some of the impact of the amortization that's coming into play as well. I'd just add that, and that continues to grow just a little bit each quarter, just as the new renewal commissions at American Income come into amortization. So you'll see some benefits on the policy obligation percentage a little bit more than that. I think that gets offset a little bit by the higher amortization. Operator: Your next question is a follow-up from Wilma Burdis with Raymond James. Wilma Jackson Burdis: Just wanted to confirm. I know you mentioned earlier that the cash flow generation was a little bit towards the higher end of the range. So if you could just give us a little bit more clarity on where the cash flow generation ended up? Just remind us of the range? And then if there was anything in particular that drove it towards the higher end? Thomas Kalmbach: Yes. Last quarter, excess cash flow, I said was going to be between $600 million and $700 million. I think as I look at it now, probably narrow that range to $650 million to $700 million. And so that excess cash flow, the midpoint of that is right around the $675 million side. Frank Svoboda: We got -- we have a better visibility, clearly, on the amount of dividend distributions coming out of the sub from that perspective. So you're down -- the downside clearly is much less, but -- and we're able to kind of get the sense of that as Tom said, in that upper part of the $600 million. Operator: That concludes our Q&A session. I will now turn the conference back over to Stephen Mota, Vice President of Investor Relations for closing remarks. Stephen Mota: All right. Thank you for joining us this morning. Those are our comments, we'll talk to you again next quarter. Operator: That concludes today's call. Thank you for attending. You may now disconnect, and have a wonderful rest of your day.
Operator: Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead. Zack Moxcey: Good morning, and thank you all for joining us as we discuss the first quarter 2026 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Chief Accounting Officer; and Shannon O'Callaghan, Senior Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. And now if you please turn to Page 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page in our press release and in our SEC filings. You should listen to today's call in the context of that information. Now please turn to Page 3. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets and financial impacts associated with our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now if you please turn to Page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Neil Hunn: Thank you, Zack, and thanks to everyone for joining our call. As we turn to Page 4, you'll see the topics we will cover today. We'll start by highlighting our Q1 enterprise performance, then Jason will walk through the enterprise financials, our balance sheet and provide an update on our share repurchase program. Then we'll discuss our segment highlights and outlook and introduce our Q2 and increased full year 2026 guidance. Finally, we'll close with a few summary points before opening the call for questions. So let's go ahead and get started. Next slide, please. As we turn to Page 5, I want to highlight 3 takeaways for today's call. First, we delivered a strong start to 2026 and are raising our full year debt guidance. Our Q1 results exceeded expectations across every key metric. Total revenue grew 11%, organic revenue grew 6%, EBITDA grew 8%, free cash flow grew 11% and DEPS was $5.16. Importantly, enterprise gross retention remained strong, consistently in the mid-90s area. On that foundation, enterprise software bookings were also strong, core up low double digits on a TTM basis. This continues the momentum from our last call and bolsters our confidence for the balance of the year. On the back of this quarter's performance, we're raising our full year DEPS guidance to a range of $21.80 to $22.05, up $0.50 at the midpoint and more on this later. Second, we're continuing to accelerate AI velocity across the portfolio. In Q1, AI innovation continued to broaden across our businesses, move deeper into core products and increasingly show up in both product road maps and customer conversations. Businesses like CentralReach, ConstructConnect, Vertafore, iPipeline, Aderant, DAT, Subsplash and SoftWriters all released meaningful new AI-enabled product capabilities during the quarter. The signal from our own portfolio that AI can be a meaningful growth driver in vertical software keeps getting clearer by the day. On the AI accelerator team at Roper, as a reminder, this is a central strike team that partners directly with our operating company to accelerate AI product development and capture reusable patterns for deployment across the portfolio. The team is ramping quickly. The team's first partnership was with Vertafore, helping deliver AI agents unveiled at their customer conference last week. This is exactly the kind of portfolio impact we envisioned when we invested in this team, and we expect the pace of partnerships with our operating companies to accelerate throughout the year. And our third takeaway centers on capital deployment. Since November last year, we've repurchased 6 million shares for $2.2 billion, including 4.9 million shares for $1.7 billion year-to-date in 2026. Importantly, our Board authorized an additional $3 billion of repurchase capacity, giving us $3.8 billion of remaining authorization and north of $5 billion of total capital deployment capacity over the next 12 months. Our approach remains unchanged. We're disciplined and unbiased between acquisitions and opportunistic buybacks, focusing on driving the best risk-adjusted long-term cash flow compounding per share for shareholders. Our M&A pipeline today is targeted, focused on high-quality strategic opportunities where we're developing deep relationships and real conviction, and we expect to remain active and disciplined long-term buyers. Before I turn it to Jason, one theme you will hear throughout today's call, organizational velocity across our portfolio continues to build. The investments we've made over the past 2 years in leadership, in AI, in modern engineering practices and operational rigor are working and demonstrating meaningful results. Our businesses are releasing innovation faster, executing sharper and moving with more confidence. And that's what gives us conviction in the balance of the year and beyond. So with that, Jason, let me turn the call over to you. Jason Conley: Thanks, Neil, and good morning, everyone. I'll take you through our first quarter financial performance, starting on Slide 6. As you heard, we delivered a strong first quarter, finishing well above the high end of our DEPS guidance range and ahead of expectations on organic growth. Revenue of $2.1 billion was up 11% with organic growth of 6% and acquisitions contributing 5%. Importantly, recurring software revenue growth across our software segments was again strong at 7%, which continues to be the best indicator of business health and durability. EBITDA of $797 million was up 8% over prior year. EBITDA margin was 38.1%. Our core EBITDA margin was down 70 basis points in the quarter, driven by lower gross margins in our TEP segment due to mix of more consumables at NDI and Verathon, coupled with higher input costs at Neptune. Core EBITDA margins in our software segment expanded 40 basis points, which includes continued investment in AI. DEPS of $5.16 was above our guidance range of $4.95 to $5 and up 8% over prior year. The upside was driven by the combination of stronger organic growth, a lower tax rate and the benefit of lower share count resulting from our net purchasing activity in Q1. Free cash flow of $562 million was up 11% over prior year. On a trailing 12-month basis, free cash flow is now $2.5 billion and has compounded at a 19% CAGR over the last 3 years or 15% excluding the impact of Section 174. We continue to view free cash flow per share as the most important metric in evaluating our progress. And on that basis, we were up 15% versus the prior year, given the combination of growing cash flow and a declining share count. Relatedly and for modeling purposes, we exited Q1 with [ 102.4 ] million shares outstanding. Now if you turn with me to Slide 7, I'll walk through our financial position and capital deployment update. We exited Q1 at 3.1x net debt to EBITDA, which is up modestly from 2.9x at year-end, given the $1.5 billion we deployed towards share repurchases in the quarter. We have $383 million of cash and $2 billion drawn on our $3.5 billion revolver. Importantly, we closed on a new 5-year $3.5 billion revolving credit facility during the quarter, which provides ample liquidity and improved pricing and terms. This also enhances our cost of capital strategic advantage in the face of an increasingly constrained private credit market that other market participants looking to make acquisitions will be facing. Even after significant repurchase activity in Q1, we maintained over $5 billion of annualized capacity for capital deployment, which speaks to the strength of Roper's cash generation engine. Neil highlighted the share repurchase activity in the opening. To put it in perspective, our cumulative 6 million of share repurchases is about 6% of shares outstanding and brings us back to a share count we have not seen since 2017. Additionally, our Board approved expanding our share repurchase authorization by another $3 billion, which provides capital deployment flexibility and reflects continued confidence in our vertical market software position, enhanced capabilities and execution velocity to capture the AI opportunities in front of us. On M&A, the pipeline of high-quality opportunities remains very attractive. As we've discussed, we believe the structural dynamics in the PE-backed software market and a constrained private credit market continue to create a compelling environment for Roper. We remain active and disciplined. With that, I'll turn it back over to Neil to discuss the segment performance and outlook. Neil? Neil Hunn: Thanks, Jason. As you turn to Page 9, let's review our Application Software segment. Revenue for the quarter grew 12% in total and organic revenue growth was 5%. EBITDA grew 13%, EBITDA margins were 42% and core margins improved 50 basis points year-over-year. The quality growth here is notable. Recurring and reoccurring revenue, about 85% of the segment grew in the mid-single-digit plus range, while nonrecurring was essentially flat. Stepping back at the segment level, 3 themes stand out for the quarter. First, enterprise gross retention remained strong, consistently in the mid-90s area. On that foundation, enterprise bookings were also strong in the quarter, consistent with the momentum we described in our January call and supportive of our confidence for the balance of the year. Second, our SaaS transitions continue to advance meaningfully. Several of our larger businesses made real progress on ground to cloud conversions and on bringing new cloud-native products to market. And third, AI progress continued to build to signal of shifting from product investment to product shipping and you'll see this clearly in the 3 company highlights to follow. First, Aderant delivered a record quarter, strong revenue growth and a new Q1 bookings record. Strength was broad-based with particularly strong SaaS momentum on Sierra, Onyx and viGlobal. Aderant also launched AI-driven talent evaluation within viGlobal, continued the rollout of a Stridyn AI platform and completed a record number of Sierra Cloud migrations in the quarter. Simply put, Aderant is winning in the legal market and doing so from a position of strength. Second, Vertafore delivered a solid quarter, steady mid-single-digit revenue growth with EBITDA ahead of revenue. Recurring revenue continued to build across agency, MGA and carrier with MGA again leading on double-digit growth driven by strong bookings and high retention. And last week at their Accelerate user conference in Las Vegas, Vertafore unveiled its new Velocity AI platform, along with a suite of AI agents embedded across the product portfolio from reference connect and reconciliation to submission processing and e-mail agent automation. AI is a meaningful TAM expansion opportunity for Vertafore, and they're quickly moving to capture it. As I mentioned earlier, this is where the Roper AI Accelerator team had its first impact and is exciting to see. And third, CentralReach continues to execute ahead of our deal model. Recurring software revenue grew well north of 20% with margins expanding, demonstrating the operating leverage in this business as it scales. And most importantly, CentralReach continues to be one of our strongest AI proof points. AI-generated session notes have dropped from 5 to 10 minutes to about 30 seconds, giving clinicians back roughly 8 hours a week to work with autism learners. BCVAs are saving 140-plus hours a year on report authoring and review and daily claim generation is 6x faster. Customers are responding. AI and AI influenced bookings were 75% of new business in the quarter, up from 0 2 years ago. This is a textbook example of how the AI right to win, we believe exists across our portfolio. CentralReach sits inside mission-critical workflows, has proprietary data and is translating that advantage into real growing AI revenue. Prior to turning to the outlook for this section, I'll provide an update on Deltek and the GovCon market. Importantly, Deltek grew recurring revenue in the mid-single-digit plus range in the quarter, driven by strong private sector demand, partially offset by continued softness in GovCon enterprise. SaaS remains strong with ground-to-cloud conversions trending positively. Consistent with January, we're still waiting for the GovCon inflection. This is not new. We continue to work through the tail of last year's disruption to federal procurement, agency reorganizations and broader budget uncertainty, which has delaying decision-making, particularly on large enterprise perpetual deals. Longer term, we remain encouraged. The One Big Beautiful Bill is a meaningful positive for defense and government contracting spend, but the benefit reaches us only after our customers win awards and invest in systems, and that takes a bit of time. Consistent with January, we are not baking into our guidance any GovCon inflection or any OBBB benefit and rather we'll adjust as conditions warrant. Turning to our outlook for Application Software. We expect organic growth for the balance of the year to be in the mid-single-digit plus range, lower in Q2 on some nonrecurring timing, improving in the back half of CentralReach turning organic and easing nonrecurring comps. Please turn us to Page 10. Total revenue growth in our Network Software segment was 14% and organic revenue grew 5% in the quarter. The quality growth mirrored application software. Organic recurring grew mid-single-digit plus, nonrecurring declined mid-singles as customers move to our cloud offerings and bookings remained strong here. EBITDA margins were 50.7%, down 460 basis points year-over-year, while core margins held steady, down just 20 basis points. The gap reflects 2 dynamics: our acquisition of Subsplash, a faster growth business with a lower but steadily improving margin profile and our ongoing investment in DAT, particularly Convoy. Stepping back at the segment level, we see similar themes playing out here that we described in Application Software. First, enterprise bookings were strong and gross retention remained high across our network businesses, together giving us improved visibility into the balance of the year. And second, AI progress is tangible and shipping to customers today. Let me highlight 3 businesses in this segment. First, DAT is executing well against a mixed freight backdrop. ARPU expansion continues and adoption of our digital freight marketplace solutions remain strong. On the macro, spot rates are up 20% to 30% year-over-year and the carrier side of our ecosystem grew in Q1 for the first time in several years, real green shoots, particularly in the second half of the quarter. That said, a sharp diesel spike compressed carrier margins late in the quarter, and our guidance continues to assume no meaningful freight market recovery. Our early-stage investment in Convoy inside DAT represents a material TAM expansion opportunity. Today, DAT is a subscription-based 2-sided network. Brokers and carriers pay to access the largest freight marketplace in North America. With Convoy, DAT is evolving into a full end-to-end agentic and ML-powered marketplace, participating in the workflow and the economics of the transaction itself, a meaningfully larger and more valuable business over time. The innovation that enables this transformation exists and is working in the market, and we continue to enhance and extend the tech. In the most recent quarter, DAT's RateView AI agent moved into live production, replacing manual rate lookups with instant conversational lane rate guidance. Convoy's [ Load Notes ] is turning brokers freeform emails and chat messages directly into bookable loads eliminating manual data entry and Loadlink's voice-to-post is enabling hands-free load posting. [ The AI ] work at DAT is not theoretical, it's shipping in production and delivering incredible value to customers today. Turning to ConstructConnect, another strong quarter with recurring revenue up double digits and continued breakout from Boost, their AI-based takeoff solution. AI Auto Count, which reads construction schedules, launches this quarter. Most importantly, ConstructConnect has now moved its entire product and engineering organization into agentic coding processes and tools shipping 4x the features versus a year ago. Broadening this across the portfolio to drive multifold product velocity gains is a key priority and an exciting one for enterprise. And third, Foundry returned to year-over-year revenue growth in Q1 with Nuke closing the quarter at record ARR. Net retention returned above 100% for the first time since the 2023 actors and writers' strikes and our recent Griptape acquisition extends Foundry's leadership into AI orchestration across the visual effects and animation pipeline, enabling studios to securely coordinate multiple AI models and agents in their production and post-production workflows. Finally, and prior to turning to our segment outlook, I'd like to make a couple of quick callouts. SoftWriters launched its AI-enabled order entry product last week, a meaningful workflow enhancement for long-term care pharmacies and Subsplash released Trends AI, giving ministry customers the ability to generate custom data insights through natural language prompts, a key unlock for this customer constituency. Turning to our outlook for network software. We expect organic growth for the balance of the year to be in the mid-single-digit plus range. A couple of quick callouts. Subsplash turns organic in Q4 and margins will reflect continued investment in our freight platform acquisitions for the balance of the year. Now please turn to Page 11, and let's review our technology-enabled products segment. Revenue here grew 9% in total and 7% organic, significantly better than expected, driven by strength at NDI and Verathon. EBITDA margins were 33.6%, down 260 basis points year-over-year, reflecting 2 dynamics: first, input cost pressure at Neptune, principally bronze ingot inflation; and second, a mix shift at both NDI and Verathon towards faster-growing consumables, which carry lower gross margins but more durable reoccurring revenue profiles. Let me start with NDI. Another record quarter driven by exceptional demand for their electromagnetic tracking solutions across cardiac, neurological and orthopedic precision measurement applications. The EP market, in particular, is a strong multiyear growth vector for NDI. Procedure volumes continue to grow, leading OEMs are introducing new tracking-enabled catheter platforms. NDI has a unique right to win as a sensor layer. Great job by Dave and the entire team at NDI. Turning to Neptune. Revenue declined low single digits in the quarter, which was better than expected, driven by strong execution from Don and the entire team in [ Tallahassee ]. The market dynamics were largely as expected with lower mechanical meter volumes partially offset by strong static meter growth. Importantly, Neptune's cloud-based software adoption continues to scale nicely, though off a small base. Consistent with our Q4 commentary, we're not underwriting a Neptune recovery in our 2026 guidance, and we'll continue to monitor underlying demand. Rounding out the segment, Verathon delivered solid growth, supported by strong BFlex and GlideScope demand, and we're optimistic about new product launches planned for the balance of the year. Turning to our TEP outlook. We expect organic growth for the balance of the year to be in the mid-single-digit range, lower in the second quarter as we face a tougher Q2 comp. We expect net raw material pressure to continue in the second quarter and improving in the back half of the year. With that, please turn us to Page 13. On this slide, we'll cover our Q2 and full year 2026 guidance. Specifically, we're raising our full year 2026 DEPS guidance to $21.80 to $22.05, up from $21.30 to $21.55, a $0.50 increase at the midpoint, which passes through our Q1 beat and the impact of our already executed share buyback. We're maintaining our full year total revenue growth guidance of approximately 8% and organic revenue growth of 5% to 6%. For the full year, we continue to assume a tax rate in the 21% area and a bit below that in Q2. For Q2, we're establishing our adjusted DEPS guidance of $5.25 to $5.30. To reiterate key assumptions from our segment commentary, full year guidance assumes no meaningful improvement at Deltek's GovCon market or DAT's freight market and modest top line weakness at Neptune versus a year ago. Finally, on capital deployment, we're entering the balance of 2026 with meaningful optionality. We have $5 billion of firepower available over the next 12 months, a targeted M&A pipeline and $3.8 billion of remaining share repurchase authorization, giving us substantial flexibility to act opportunistically. We will remain disciplined and unbiased between acquisitions and opportunistic buybacks based on what drives the highest and most durable cash flow per share compounding. Now please turn to Page 14, and then we'll open it up for your questions. We'll conclude with the same 3 takeaways with which we started. First, we delivered a strong start to 2026 with 11% revenue growth, 6% organic revenue and 11% free cash flow growth. Retention and bookings remain strong and position us well heading into the balance of the year. Based on this, we've raised our full year DEPS guidance by $0.50 at the midpoint. Second, we are accelerating AI innovation across the portfolio. CentralReach, ConstructConnect, Vertafore, DAT, Aderant and others continue to move AI deeper into their products and increasingly into customer activity, and our AI Accelerator team continues to build velocity across the portfolio. Finally, on capital deployment, as we discussed earlier, our Board authorization of an additional $3 billion of share repurchase capacity gives us $3.8 billion of remaining authorization. Alongside that, we have $5 billion of capital deployment firepower available over the next 12 months, supporting our targeted M&A pipeline. We will remain disciplined and unbiased between acquisitions and opportunistic buybacks based on what drives the highest and most durable cash flow per share compounding. As we wrap up, some additional color on the M&A market. A quarter ago, our pipeline was at record levels. Shortly after our call, the broader public software valuation drawdown caused sellers to pause most active processes. We remain active and our pipeline leans more proprietary. That said, we expect M&A activity to pick back up, timing of which is still to be determined. But when it moves, a large number of opportunities are likely to emerge and we're in an advantaged position to capitalize on this. We remain very bullish about being a high conviction acquirer of vertical market software businesses with deep proprietary moats where AI accelerates growth. The signal on that thesis from our own portfolio is becoming clearer and clearer. So in closing, the ingredients for accelerated cash flow per share compounding are coming together. Our portfolio is the strongest it has ever been. Our organizational velocity is accelerating. AI is both TAM expanding and growth enabling, and we're excited to see our product work translate into higher growth. Our capital deployment capacity and flexibility are significant differentiators and our discipline is unchanged. This is how we compete and win and how we continue to compound for our shareholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from Dylan Becker with William Blair. Dylan Becker: Nice job here. Maybe, Neil, starting for you. I think it was clear in your commentary, you kind of talked about the accelerating pace of innovation and the right to win and TAM expansion -- kind of TAM expansive nature of AI. But if we think about kind of the embeddability piece and monetization of the platform, I guess, maybe how that layers in incremental conviction as well, too, right? Is that something that can lower friction around adoption? Is that something that can increase kind of the likelihood of success and value alignment with customers, but maybe how the platform positioning and embeddability of agents maybe layers in kind of incremental confidence in that right to win around agents? Neil Hunn: Yes. I just want to -- so if you're asking about embeddability, I want to make sure you're a little muted on that. I want to make sure I'm answering the right question. Dylan Becker: Yes. So the ability to kind of embedded it into the existing platform, right, and kind of the [indiscernible] value. Neil Hunn: Yes. So a few things I'd start with on this. So it really starts with what sort of we talk about internally all the time about the AI, the product magic. We're able to create products now across many, if not all of our software businesses or when the customer sees in early betas and early trials like what the product can do, like their eyes sort of pop out of their head. It's like truly like a magical experience. [indiscernible] know software could do that, right? So that's what gets us like really excited. We just saw it last week, for instance, at the Vertafore Customer Conference, just sort of as an example. So in terms of monetization, generally -- so that's one. I'll start there. Second is we believe that the right to win here is sort of on-stack AI embedded natively in workflows is a winning play, a huge incumbent advantage. So it is the second thing. Third thing, monetization, I think, for us is -- there's not going to be a one size fits all. There are some businesses today that already price on a consumption basis, think like SoftWriters and pharmacy automation or what Convoy does at DAT. So I think those will be monetized on a consumption basis. Also those customers' unit economics generally are driven on their own consumption, so it aligns with the customer unit economics. I think more broadly, though, the monetization is going to be one that sort of, as you alluded to your question, balances adoption and long-term monetization. So I think that's going to not be largely consumption-based. Our customers very much are saying very clearly, they need to be able to plan for and budget what the spend is going to be. So it will likely be some sort of a subscription with an overage based on utilization of the AI tools. I think that aligns nicely with adoption because then the customers are going to be focused on how to realize the magic value, if you will, and not be worried every time they press a button, it costs money. But then when that gets fully adopted and there's like deeply embedded in workflows, we'll be able to sort of grow with that utilization. Jason Conley: I would just add that our CentralReach business is furthest along in this journey. They've been out in the market with AI products for 1.5 years or 2 years, and all of their AI is incremental. It's based on learners, which you could say is some form of consumption, right? It's not based on practitioners but learners, but that's been -- and customers are seeing real value, as Neil highlighted on the prepared remarks in terms of workflow efficiency and better revenue realization. Dylan Becker: Very helpful. And maybe, Jason, kind of just sticking with you quickly as well, too. Obviously, kind of reiterating the full year revenue guide, 5% to 6% organic. We just did 6% this year. We've got some mechanics kind of layering in and easier comps in the back half as well, too. But maybe kind of just give us a broader sense of how the start of the year kind of layers in conviction and maybe that kind of conservative view that we continue to take to the guidance framework here going forward. Jason Conley: Yes. Yes. Look, it's a strong start to the year, very encouraged by what we've seen. But we're just one quarter in. So we want to sort of see how things play out. As Neil talked about, we have a couple, like you said, mechanical things in the second quarter nonrecurring in AS will be a little bit more impacted than the first quarter. And then we're just -- in TEP, we're comping a high watermark in Q2, but that will ease off in the second half. And then as we've talked about, the second half will improve in software with Subsplash and CentralReach turning organic. And then we have just some easing comps in AS. So all that just sort of blends into our sort of holding the range at this point, but we'll see how it plays out. Operator: Your next question comes from Brent Thill with Jefferies. Unknown Analyst: This is Leah on for Brent Thill. Neil, just curious to hear your thoughts on the private markets given ongoing volatility. Can you just tell us a little bit more about what you're seeing right now and if it's changed your outlook at all? Neil Hunn: Talking about private markets on M&A? Talking about? Unknown Analyst: Correct. Neil Hunn: Yes, sure. So as I mentioned in the prepared remarks, it's definitely been with the public market drawdown. It's been -- it's gone from the busiest we've been in a long time to the least busy. We're still busy. We're still active. As I mentioned, it's more proprietary. It's certainly more targeted. But it's actually -- we think the M&A setup has actually improved a bit for us over the last 90 days in the context that the LP pressure that we've talked about now for a couple of years continues to exist. That does not change in any capacity. If anything, it's maybe increased over the course of the next 90 days. The other thing that's happened that's been -- everybody is widely reported, people understand is now we got the private credit dynamic that also is putting pressure on the asset class. So for us, it's -- we think the combination of those 2 will likely service more quality assets in the processes, and we're a very advantaged buyer in that regard. But the timing is still to be determined. We're modeling out what these maturities look like on the private credit side. There's not a meaningful maturity cliff this year. But if you're a private equity sponsor seller, you want to think about divesting an asset well before maturity. So that's something that [ Jen ] and her team are sort of lining up. So we think there's an opportunity here to get potentially, I should underscore potentially to acquire AA+ assets at differentiated values given the backdrop and the dynamics here. The timing of this is to be determined, but we'll stay active in process and prosecute the opportunities in front of us. Jason Conley: Yes. And I would just reiterate, we refinanced our 5-year revolver this quarter at a very good cost of capital, sort of tightened up the spread a little bit. So shout out to Shannon and Dave Baker for getting that done this quarter. Just a great job there. And just positions us well. We have a lot of balance sheet flexibility, and we'll be able to move quickly when the opportunities arise. Unknown Analyst: Got it. That's helpful. And then just on Deltek's government contracting business, did you see any impact in the quarter at all from the war in the Middle East? And is it having any impact on your outlook for the remainder of the year? Neil Hunn: Yes. We asked that very specific question on our call down with Deltek. And the short answer is very little, if any. There certainly is a sliver of the sort of aerospace defense subsector of government contractors that are focused on munitions and sort of war efforts. So that's a small sliver of the population of the broader, I'd say, contractor population. So it had, if in effect, a minimally negative impact just in terms of those contractors are focused on the war efforts and not on contracting for ERP software, but it wasn't material in the quarter. Operator: Your next question comes from Joseph Vruwink with Baird. Joseph Vruwink: I think all Application Software is facing this question around whether AI-related spending grabs an outsized wallet share and maybe the incumbents get squeezed along the way. I think the interesting thing about Roper is you have exposure to markets like legal and health care. I think those are the 2 biggest vertical AI adopters so far. And then I think your respective software exposure there is still doing pretty well. What's your take on this topic? And have you seen any changes year-to-date as we've also seen the big ARR numbers come through from the frontier model providers that make you more concerned in coming quarters? Neil Hunn: I would say we're -- the punchline on that, the TLDR is no. No impact on sort of the budget budgetary spend that we sort of compete for. I think the double-click on that is the obvious answer, which is -- and this is a personal opinion that I think a lot of these surveys around IT spend are a little misleading because the whole point of the AI effort is we get to go monetize labor spend. So it's about a whole different bucket of opportunity to capture and provide value to the end market. In the particular -- in the -- across the whole platform, we're not seeing sort of an impact to us relative to allocation of budget, especially not in legal and health care as we talked about Aderant, which is amazing in the quarter. It's been an amazing few years here at Aderant. Unknown Analyst: Great. That's helpful. And then I heard enterprise bookings up low double digits over the trailing 12 months. I'm curious what they were in the quarter? And I think your definition excludes price. Maybe can you just comment on pricing power in the aggregate? Jason Conley: Yes. So it was certainly above the double digits. We had an easier Q1 comp last year. I think the TTM is definitely the right way to think about it. Yes. And then in terms of -- it does not include price, you're right. And prices held up very well. I think what we've said historically, we're very thoughtful across the portfolio about pricing, and you have to earn the right, and companies are doing that as part of our strategic plan work that we do is understanding that dynamic. And so we've continued to do that methodically over the last half decade or so. Neil Hunn: Yes, I would -- the only thing I'd add on pricing in addition to what Jason said is we actually think relative to what the market will bear on pricing, we have underutilized that lever in growth. And so it's not like a pan portfolio [ go raise ] pricing. That's not how we operate at Roper. But as Jason said, it's like where you have earned the right with your product, your product value and your customer relationships to take a little bit more pricing then we are doing that. And -- but it's a very strategic. It's a very earned process. And we would hope that we would see a little bit, I don't know if it's 50 or 100 basis points over the portfolio of software and pricing impact or increase over the next couple [ of 3 ] years. Operator: Your next question comes from Terry Tillman with Truist. Terrell Tillman: I wanted to build on the prior question on legal tech because, yes, it's in the media reports and some remarkable growth from some of these SaaS natives there. But I'm curious, though, Neil, you've called out Aderant, a couple of years of amazing. And it does seem like it's like clockwork showing up in the segment level slides every quarter on record this or that. How much more sustainability is there in terms of just the momentum in terms of getting folks to move to SaaS? And just can this train keep going just on the momentum with Aderant? And then I had a follow-up. Neil Hunn: Sure. So it's -- Chris and the team there have done a great job. I mean I'll give you a little bit -- a longer answer here. Aderant has been really good for a very long time for us. But what's been happening underneath the hood has evolved to sort of keep it good. It started with how do we just -- how do we just take it to our competitor and outcompete them in the marketplace. And that's how we went from 35%, 40% market share in large law to 60%, 65%. We just absolutely compete in one, and Chris and his predecessor team did a wonderful job in that sort of era of growth. Well, that era of growth we could see was going to end at some point, so we had to evolve. That's where we sort of said, okay, let's -- we have this installed base of customers, how do we sell them more things? And so we then prosecuted both an organic and inorganic strategy to add the number of bolt-on products that we could or sort of integrate in modules that we could sell to this large law customer base that made strategic sense. So we prosecuted -- are prosecuting that strategy. Then came along cloud, right? This was a constituency that did not want to move to the cloud and COVID happened. So we rapidly cloud-enabled the totality of the product set. And then we're now in the -- still early innings, maybe third or fourth inning, maybe not even that late of moving this customer constituency to the cloud of that lift and shift. And now we have the tailwind of the AI benefit in terms of being able -- so there's -- it's a multiple growth driver story and I think there's quite a long way to go on this. But part of the benefit of owning any business for the long arc of time is you're always looking out horizon 2 and horizon 3 for what you have to build either organically or inorganically to sustain or improved growth rates. Terrell Tillman: Yes, that's very helpful. And the follow-up is just what we're seeing though is with particularly -- not necessarily generative agentic. I mean, that's a pretty big lift in shift in change management, customers being comfortable having things to go autonomous and even getting it beyond kind of the experimental space. So are you seeing with some of the businesses, you actually have to hire -- put in forward deployed engineers or kind of change how you go to market or help the customers and it does create some kind of incremental costs or just handholding? Just anything about how you help them consume this agentic stuff? Neil Hunn: Yes, I think that's -- the short answer is yes. I think we mentioned last quarter that this year is going to be just a massive learning year for us across the enterprise on -- I'll put in like the commercialization bucket of these AI tools, of which FTEs are certainly a component. How do you position it? How do you sell it? How do you price it? How do you get it implemented? How do you get utilization pull-through? How do you drive renewal rates high? I mean that whole customer journey is going to be across the portfolio, a huge set of learnings for us. We have -- I'll spare you the details on inside the portfolios, but we have portfolios where -- businesses where the uptake has just been very natural. We haven't had to have the 4 deployed engineers because when you press the magic button and you get productivity savings that immediately that productivity savings has taken in the customers' operation is something that they can go do tomorrow. In other cases, there's some trepidation. If I press this button, do I lose my job, and you've got to sort of go through the whole change management process of that. I think in almost every case, folks don't -- our customers, they don't lose -- it's not -- lose their job. It's how do you sort of do task replacement, task augmentation and they can go play offense inside their customer to go compete and win. But it's certainly sort of an expect -- sort of something you have to overcome in that regard. So yes, we do expect across a certain part of the portfolio to do some version of a forward deployed engineer. Yes. Final thing I'd say on that is I think it's kind of from an investment point of view, it's probably more of a reallocation or rebalancing of investment from customer support, customer service to FTE. So I don't know if it's like a huge cost increase. It's just a resource allocation dynamic. Operator: Your next question comes from Joe Giordano with TD Cowen. Joseph Giordano: Just curious on your talk about like embeddability and subscription plus overage in the future. Like I get the view of like I don't want our customers to think every time they click a button and it cost them money. I fully get that. If these things become embedded and like the efficiencies potentially require less people at your customers, like how do you kind of judge the ROI of the investment necessary to kind of -- I say -- maybe not saying to kind of stay in the same place. Like the product is getting better, but you're getting like the same kind of subscriptions and it's like costing you more to maybe achieve that now than it did in the past. So how do you kind of evaluate the ROI on the required spend to kind of get to that place? Neil Hunn: Yes. I think it's -- so this is -- these are very hard dollar ROIs. I mean we've said publicly, for instance, at DAT Convoy to manually broker load, it's somewhere between $100 and $200 of labor to do that. You use our load automation, it's somewhere in the $40 range. So it's a demonstrable hard dollar ROI. Similar things can be said that, for instance, at Vertafore, one of the agentic tools they released last week. It's a reconciliation tool, the time and motion study is it's like 17 minutes per reconciliation. Our tool does it in 30 seconds. Then you do these like the scores of these a day. So you can sort of see the time savings and then you can get to a financial ROI. So these are pretty hard ROI and products and that sales teams are taking that message to the market and the customer base. Jason Conley: Yes. And I would just say that -- sorry, Joe, I would just say we're using local smaller language models, maybe even older versions. So you're not consuming a lot of tokens when you're doing this activity. So it's -- and you can continue to change the prompts to make it more efficient over time. And so we've even -- even at Vertafore, we've taken that cost of goods down meaningfully in a matter of weeks. So I think it's still very accretive from a margin perspective. Joseph Giordano: Yes. That's kind of what I'm getting at more of the ROI from Roper standpoint. I get how -- I get the ROI from the customers. It's more like if we're spending money to develop new AI tools that are then embedded in the product that we're already offering, like how is the ROI on the increased investment do you need in 2026 versus the investment you needed in 2021 to get the same customer and keep the same customer happy. Jason Conley: Well, and I would just say on the development front, I mean, we're seeing demonstrable efficiencies, right, with the frontier models itself. So we're getting a lot more output and a lot more road map to consume. So if you talk about just OpEx investment, we're not assuming -- we're assuming productivity, but we're taking that back into the road map. So I don't think it changes fundamentally our P&L structure and our margin profile. Neil Hunn: Joe, apologies for missing the point -- the thrust of your question. Operator: Your next question comes from George Kurosawa with Citi. George Michael Kurosawa: On the AI strike team, led by Shane and [ Eddie ] that you put together, it sounded like they completed their listening tour last quarter and have now been put out into the field. It sounds like some really success at Vertafore. If you could just touch on how they ended up sort of stack ranking the opportunities that they see in front of them and then maybe the scope of their involvement and how much it's led to an improvement in Velocity? Neil Hunn: Yes. So I'm delighted to double-click into that. So just to remind everybody sort of the 3 objectives of this AI, this Roper sort of accelerator team. One, and first and foremost, is to sort of coach and teach, right? This is about enablement of our 21 software companies to do what they've already learned on their own relative to AI and agentic development and then do it even better. So that's number one. Second is to partner shoulder to shoulder and build. And then the third one is to, where appropriate, build sort of shared componentry that we can -- where we can share some common run time or routines on the AI front across the Roper companies where it makes sense. So that's sort of the goal and focus of this group. In terms of the -- where we're allocating the team, this is very much an executive leadership team focus. It is basically size of prize and impact is how we're sort of force ranking of this. In terms of Vertafore, it is one of our largest opportunities, if not the largest opportunity we have from an agentic automation point of view. I think there was 6 or -- 6 agents released last week at their Accelerate conference. That is just the very, very beginning. The model that -- and then we -- this quarter, we'll sort of broaden that from one engagement with one business to be -- it's now 6 as the team grows and we have the now 5 additional businesses that are sort of in the early stages of partnering with. And the final thing is about speed. I mean, I think the unlock here is, at least, I think Amy and the team at Vertafore would agree is our team, the Roper team sort of partner -- very much partnered. So you can imagine leadership resources in our team working hand-in-hand with engineers on the Vertafore team on how to do this AI development, one, because there's a little bit of art to this and not just science. Number two, there is a speed coefficient that our team brings given their history about sort of modern day, like current very contemporary practices of agentic development and just the pace. And then there's just good old-fashioned change management. How do you sort of break bottlenecks and barriers to go fast. And we saw literally, I know it's sort of an overused term, but 10x kind of productivity gains partnering with Vertafore on some of this development in terms of speed and quality. So we're super encouraged. It's very early days. I don't want [ Shane and Eddie ] to hear this and think they've manifested fully. They've got a lot of work to do, but it could not have gone better, in my view, in the first 6 months. George Michael Kurosawa: Okay. That's great to hear. And then I wanted to ask kind of more broadly, when you look across the portfolio, it seems like AI commercialization is in sort of different stages. You've got businesses like Aderant, CentralReach that seem to be resounding successes. When you -- others seem to be coming up right behind them. When you look across that landscape, any pattern matching in terms of why some of these businesses seem to be moving a little faster than others? Is it primarily customer-driven? Or what would you attribute the relative successes there to? Neil Hunn: I think it is -- Jason, I'll give an opportunity if he wants to add anything. I think if there's a pattern match there, when you have -- there's 21 software companies in the business. And while we want everyone to be going as fast as they possibly can, you have an array of where people are in their maturity. And where we're most advanced, they're the ones that got after and we're able to sort of get the agentic SKUs into the just in development first into the market first. And sort of now the next wave of this -- we talk a lot about CentralReach and Aderant and Convoy and DAT, they're the tip of the spear. Now we have like 10 or 12 companies, maybe couple more like just now just getting to market with real agentic magic SKUs versus like chatbots and embedded sort of GenAI search inside of existing products where the value unlock is. And so we can -- and we also think a little bit offline about sort of more deeper operational pattern recognition, but that's what I would say about the commercialization phase [indiscernible] you sort of had product ready first. Jason Conley: That's right. Yes. And I think the benefit of being part of Roper, we set our [ President Summit ] a couple of months ago, and we did an AI sort of showcase for those that are further along. So it just helps with the learning acceleration. But I would agree with Neil, that it's those that embrace and saw a true customer problem early on and they got after it a little sooner, but others are coming up the curve very quickly. Operator: Your next question comes from Clarke Jeffries with Piper Sandler. Clarke Jeffries: I just wanted to follow up on the comments around ground to cloud conversions advancing meaningfully. I'd love to understand the impact of SaaS transitions broadly in the Application Software segment? Is that contributing points of growth today? You made the comment around 85% of the segment is in the mid-single-digit plus range in growth, while nonrecurring was essentially flat. So I just wanted to know if it's something that would be of increasing benefit or already playing out in that segment? And then one follow-up. Jason Conley: Yes, happy to take the question. So just as you think about the percentage of products that are cloud-enabled, it's 2/3 or so today. So we have about $1 billion of maintenance. And we think that, that will convert over, say, the next 5 to 10 years or so, and that should convert at 2 to 2.5x lift from maintenance to SaaS. And so today, we're kind of -- if you think about the percentage that we have to go, we're sort of in the first or second inning of that journey. And so it does add, call it, 50 to 100 basis points of growth a year should for the next 5 to 10 years. Neil Hunn: The only thing I'd add is we -- when we talked about this in the past, Clarke, we've also said we are very much pacing this ground-to-cloud conversion at our customers' pacing. We're not like forcing it to them. I'll say with the advent of AI, I should have mentioned earlier on the monetization, another monetization method for AI is embedding the AI sort of features in the cloud product. And that is a very compelling pull to make this transition go a little bit faster. So instead of 8 to 10 years, maybe it's 4 to 6. I don't know what the right number is, but we would expect to see that go a little bit faster. The other thing is we made a tremendous amount of investment over the last 3 years getting product enabled that was because we're going to our customer pacing, there was an urgency to get products enabled and now we are extraordinarily product-enabled. So basically feature parity, if not more so in the cloud product than on-prem. So I think the setup here is a little bit better than it was a few years ago. Jason Conley: Yes. And I would just say it's mostly -- and it's going to be Aderant is a little further along. As you know, power plants in the early innings, but definitely much more cloud-enabled today than they were. And then when you think about those are a little bit further behind, it's more health care, but that's our Clinisys business and labs. That's just kind of the nature of that end market. And so those -- so we see the areas of Aderant and [indiscernible] being those that will be more near term in terms of cloud migration. Clarke Jeffries: Perfect. All makes sense. And then one thing that kind of stood out to me was the margin impact in the Application Software segment. The margin impact of businesses owned for less than 4 quarters was actually positive year-over-year. Just wanted to unpack that. Is that -- is the takeaway here that even the earlier-stage acquisitions last year are getting to margin parity quickly? Jason Conley: So in Application Software, it's our CentralReach business, and that business is -- it's a very -- the business has ample R&D investment. I think R&D as a percent of revenue is like 20%, but they just have extremely strong incrementals. They're very cloud-native platform. And so as they expand, they have very good incrementals there. And when we talk about the acquisitions in our network software segment, we've talked about our -- the business Convoy that we added on to DAT. It's a technology investment. We're super committed to that investment to automate the spot freight market over time. So that actually has a drag on margins. That plus our Subsplash business, which is a lower margin, faster-growing business that as they grow, they will scale margins. But you can see in our network segment, it does have a pretty meaningful drag on margins. Now over time, as Convoy continues to grow, that should be a tailwind as we go into the out years. But this year, it is a little bit of a drag on margin. Operator: Your next question comes from Josh Tilton with Wolfe Research. Joshua Tilton: And congrats on a really strong start to the year. I will keep it to one given the hour. But my question is just basically you're very clear that the guidance still doesn't assume a recovery at Deltek and DAT for the rest of the year. Can you just remind us the confidence that you have in the rest of the application network software business and kind of offsetting that weakness throughout the year? Jason Conley: I'd say just to go through the segments. So that Application Software, we feel good about sort of what's going to happen in the second half. We just talked about CentralReach just having a set a really strong start under our ownership and a lot of that's recurring. And so that's just going to flow through in the second half. We've talked about being 80 basis points or so of accretion in the second half for that segment. We still feel good about that. And then in network, DAT is looking good in the first quarter. We'll see sort of how things play out. Foundry will continue to be sort of getting better throughout the year. They had a great start to the year. And then some turns organic in the fourth quarter, and that's sure accretive to the segment. So yes, I feel good about the rest of the segment or the rest of the business. Operator: Your next question comes from Ken Wong with Oppenheimer. Hoi-Fung Wong: Just one for me. sounds like the kind of the downtick in 2Q is just purely due to tough comps, but just wanted to kind of make sure and clarify any geopolitical macro dynamics that you guys baked into that assumption as well, given kind of the current situation that arose? Jason Conley: No, not at all. I mean this is just like timing really in the AS segment. It's our nonrecurring perpetual activity. And so that's squarely what it is. We have clear visibility to that. And then on in TEP, no, I think we're comping 9% quarter as a high watermark last year. So it's just sort of a comp in the second quarter in TEP. It will get better in the second half. So nothing geopolitical at all. We are mostly U.S., as you know. So we don't see anything in the Middle East. Operator: Your next question comes from Julian Mitchell with Barclays. Julian Mitchell: Maybe first off, I just wanted to try and put a finer point on the full year guidance. So is it fair to say that the sort of core EBITDA guide is essentially unchanged and it's really a kind of share count-driven guide? And maybe help us understand what the share count assumption is now at the sort of guidance midpoint. And I think the guide embeds has no extra buybacks beyond today. Just wanted to check that. Jason Conley: That's correct. Yes. So we had about a couple of hundred million of share repurchase between the end of the quarter and today. And so I think as I mentioned, the ending share count for Q1 is 102.4 million and then you've got some, obviously, dilution to add on top of that. So that's what we're assuming. But yes, you're right, it's -- we've mainly flown through the first quarter beat and then the buyback activity for the balance of the year. Neil Hunn: In the first quarter beat for us, Julian, was partially from our [indiscernible] operating and partially buyback. Julian Mitchell: That's helpful. And within the network business, DAT has had a very tough sort of demand or macro backdrop and it's been executing well within that. Finally, the last 6 months, there's better signals in the freight markets in the U.S. maybe sort of flesh out a little bit more what you're seeing in that business? And sort of what's dialed in for that transport linked business in the U.S. for the balance of the year, please? Neil Hunn: Yes. So as we mentioned in the call, we're not in the guide, there's not an assumption for improvement. Also, I'll just double-click a little bit on the prepared comments. So for the first time in -- look -- Jason, in a couple, 3 years, we've had carrier, the carrier count side of the network increased which is certainly a green shoot that we've been waiting quite a time. Now we've had some head [indiscernible] intra-quarter on that number in the past. And so we're going to remain cautious also the input costs or diesel costs certainly not helpful. So carrier margins or profitability would be a little bit challenging. And so -- but we're cautiously optimistic that there might be a freight recovery rejection rates got better, the rates got better as we talked about, 20% or 30% better. So we'll see how it plays out, but we've underwritten no improvement in the outlook. Operator: Your next question comes from Deane Dray with RBC Capital Markets. Unknown Analyst: This is Kenny [indiscernible] on for Deane. I wanted to ask about Neptune business. So one of your peers have some meaningful project delays disruption in the quarter for their water meter business. Have you seen anything similar in terms of the industry dynamic or even any market share changes during the quarter? Neil Hunn: Yes. I appreciate the question. So for us, on our Neptune business, we would say largely no. We've not seen a project -- any project delays. Now the backdrop on that is slightly different than the competitor you described. And Neptune plays in the segments that are on the smaller municipalities. So it's -- we have never had a large amount of project-based work, generally speaking. So it's really not an apples-to-apples sort of question. The other part of this is we had a pretty decent sort of short-cycle demand in the quarter. I think that's largely because we -- and I'm not commenting about our competitor because we don't know their business the way they do. But we -- Neptune did a good job managing channel inventory in 2025. And so the hope or expectation is we'll be able to ship closer to retail in 2026 on the short cycle side, and I think we saw that play out at least early in the year in Q1. Unknown Analyst: If I can have a follow-up. If you just if you could unpack the cost pressure dynamics for the Neptune business or even at the overall TAP segment level, either in the magnitude or the time line to offsetting those that will be helpful as we kind of think about the segment's incremental margins moving forward? Neil Hunn: Sure. Let me -- I'll take a crack at this, but I definitely want to ask Jason to sort of correct and sort of amplify anything. So in Neptune, it's really the ingot cost. And what we decided to do, I think [ Don and the ] team did a very sort of wise thing here. We did -- if you remember, 3Q, really July of last year, we pushed the sort of, call it, tariff or a raw material sort of surcharge into the market. It really had a negative demand impact in the short run. The signal from the customer was, hey, we certainly appreciate, we've got to onboard sort of global price inflation, but we'd rather do it through regular weight pricing versus surcharging. And so we will sort of -- we expect, by the way, a cost -- the baseline assumption we have is ingot cost is going to stay high. I mean, this is with all the data centers and just the demand for copper, this is a derivative impact to that. So our baseline assumption is this input cost is going to stay high for a while. So it will just be corrected or the margin will be captured through regular way pricing, which takes a couple of quarters to sort of work through backlog and get into the market. So we're taking a longer view on that. In terms of the balance of the segment, it's really -- it's both Northern Digital and it's Verathon. These are businesses that are per our strategy for the market opportunity are becoming more reoccurring in nature, reoccurring consumables, which is a great thing about the predictability of growth and the absolute levels of growth in the businesses, but the consumables come with a lower GP percentage. So GP dollars are going up, the GP percentages may be a little pressured on those 2 businesses. Now they also do a very good job managing below GP to EBITDA ROP, where we don't think there'll be a lot of OP compression over the long arc of time because they do have natural leverage in the business. Those are the mix at play. Jason, anything you want to amplify there? Jason Conley: No, I think you have covered it. Thanks. Operator: This concludes our question-and-answer session. We will now return back to Zack Moxcey for any closing remarks. Zack Moxcey: Thanks, everyone, for joining us today. We look forward to speaking with you during our next earnings call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Acme United Corporation First Quarter 2026 Financial Results Call. At this time, I would like to turn the call over to Walter Johnsen, Chairman and CEO. Please go ahead, sir. Walter Johnsen: Welcome to the first quarter 2026 earnings conference call for Acme United Corporation. With me is Paul Driscoll, our Chief Financial Officer, who will first read a safe harbor statement. Paul? Paul Driscoll: Forward-looking statements in this conference call, without limitation, statements related to the company's plans, strategies, objectives, expectations, intentions, and adequacy of capital and other resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, among others, those arising as a result of a challenging global macroeconomic environment characterized by continued high inflation, high interest rates, and the imposition of new tariffs or changes in existing tariff rates. In addition, we have experienced supply chain disruptions in the past, and we may experience these disruptions in the future. We are also subject to additional risks and uncertainties as described in our periodic filings with the Securities and Exchange Commission and in our current earnings release. Walter Johnsen: Thank you, Paul. Acme United Corporation had a difficult 2026. While our net sales increased 14% to $52.3 million, our net income was $985,000 compared to $1.6 million last year, and earnings per share were $0.24 compared to $0.41 last year. As you may remember, we purchased MyMedic for $18.6 million during 2026. The company sells directly to consumers and is cyclical, with most of the profits generated in the fourth quarter of the year. It also generates high gross margins, which it spends on advertising, promotions, new product development, and customer support. Our sales increase of 14% in 2026 includes approximately 8% from MyMedic, which was at breakeven in the P&L. Revenues excluding MyMedic increased 6%. The company's gross margins in 2026 were 39.7% compared to 39% last year. When the impact of the high gross margins at MyMedica are removed, the core gross margins declined due to higher costs and tariffs. We turn our inventory about twice per year, so the costs reflected in the first quarter were from products made and purchased when the tariffs were at their peak. We expect to run through these items during the second quarter with a return to normal levels in the third quarter. Shortly after the war in Iran began, we started purchasing higher-than-normal quantities of raw materials and finished goods inventory. So far, we have purchased approximately $10 million of incremental inventory. While we hope for a quick end to the war, we are planning and acting to be prepared for increasing costs and shortages. Operationally, we are working to increase the revenues of MyMedic by expanding its retail distribution and building a strong core of nonseasonal business. Our teams are integrating product lines, leveraging our purchasing strengths, and reducing duplicate expenses with the goal of generating significant profits throughout the year. The project is well underway. We are completing the move into our new Spill Magic facility in Mount Pleasant, Tennessee. Production has begun there even as additional equipment is being installed. Orders for the business are strong, and we are experiencing record growth. In Europe, sales increased 19% in local currency to €4 million. Our growth there includes the acquisition last November of Schmidaglet, a small direct-to-consumer company, which is exceeding expectations. Our first aid business in Europe had record performance, and we continue to expand its product line and sales team. The Westcott cutting tool business overcame market headwinds and increased 10% in Europe. In Canada, First Aid Central had a strong quarter and the cutting segment also grew. Overall, our Canadian business increased 16% compared to 2025. I will now turn the call to Paul. Paul Driscoll: Acme United Corporation's net sales for 2026 were $52.3 million compared to $46 million in 2025, a 14% increase. Excluding Miemetic, sales increased 6%. Net sales in the U.S. segment increased 12% in the quarter, driven by higher sales of first aid and medical products, including MyMedic products. Net sales in Europe for 2026 increased 19% in local currency compared to 2025 due mainly to the new line of cutting and sharpening tools. The base business had a good performance with a sales increase of 12%. Net sales in Canada for 2026 increased 11% in local currency due to higher sales of first aid products. The gross margin was 39.7% in 2026 versus 39% in 2025. The favorable mix from higher-margin direct-to-consumer mimetic products was mostly offset by the impact of increased tariffs. SG&A expenses for 2026 were $19 million or 36% of net sales compared with $15.5 million or 34% of net sales for the same period of 2025. The higher SG&A was primarily due to the addition of the Mimetic business. The higher percentage of sales was due to the higher amount of advertising needed for the direct-to-consumer MyMedix business. Net income for 2026 was $1 million or $0.24 per diluted share compared to net income of $1.7 million or $0.41 per diluted share for the same period of 2025, a decrease of 40% in net income. The decline in net income was primarily due to the higher tariff and MedNav costs we experienced in the first quarter of this year. The higher tariff spending commenced in July 2025; however, the costs were capitalized into inventory and we started to realize the full impact to earnings as the high-cost products were sold in 2026. We expect the tariff impact to gradually lessen over the next three quarters as the tariff rate declined in November 2025 and again in February 2026. Additionally, the incremental cost to enhance the quality assurance protocols at the MedNap facility will not repeat in 2026. Now to the balance sheet. Net debt increased from $27.2 million at 03/31/2025 to $38.6 million at 03/31/2026. During the twelve-month period ended 03/31/2026, we paid $146 million for the acquisition of the assets of MyMedic, distributed approximately $2.4 million in dividends, and purchased the cutting and sharpening line of products in Germany for $1.6 million. Additionally, we generated approximately $14.2 million in free cash flow before the purchase of a new $6 million manufacturing and distribution facility in Tennessee in July 2025 to expand our Spill Magic business. Walter Johnsen: We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. You may press 2 if you would like to remove your question from the call. Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Richard Dearnley with Long Park Partners. Please proceed with your question. Richard Dearnley: Good morning. Could you put a dollar amount, or a rough dollar amount, on what the quality assurance protocols are involving? Walter Johnsen: Sure. Some background on that: last March, the FDA inspected our facility in Brooksville, Florida, where we make alcohol prep pads and BZK wipes, and lens wipes. They found a number of deficiencies, mostly in our documentation of good manufacturing practices, or documentation of some of the equipment being qualified. It is a lot of work to get it to the state it needs to be to address the U.S. hospital market, and that is our goal. We hired a consulting firm to work with us to upgrade in response to the FDA audit, which was very helpful, to upgrade the entire facility. Paul, last year it was about $1.2 million? Paul Driscoll: It was about $1 million in consulting last year, in addition to some equipment we purchased. In the first quarter of this year, it was about $300,000. Walter Johnsen: For example, we have upgraded the microbiology lab that we really did not have before, and we have upgraded the chemical laboratory for testing. In total, it is about $1.25 million to $1.3 million so far. That is all aimed at qualifying the MedNap products for hospital use. Paul Driscoll: Well, it is not getting approval per se. We could sell them now, but we wanted to have it done right. Walter Johnsen: In fact, our products do get sold into hospitals now. But when we get done with the project, and we are about three-quarters done, we will have a facility that we will be very proud to take major distributors in the United States to visit and do their own audits, and we will have confidence that we have done the best job we can for the quality of the products that will go out. We are three-quarters through. It is all expense, but I view it as an investment. Richard Dearnley: That tags along to the comment about investing in automation everywhere. Could you size the other investments? Last year, you were talking about $2 million, and I believe the year before was $2 million. Is that the current run rate? Those investments tend to have large productivity payoffs. Walter Johnsen: You are addressing something that is important to us. The automation we have been doing over the past few years has been with robotics. One of the big projects is taking the bulk product—for example, bulk BZK wipes that we produce at MedNap—and putting them automatically in packages that then go into the refills in our first aid kits. As you know, the refill business is an important part of our company, and by automating it, we are reducing cost on a product line that is very consistent and growing. Some of the projects we are doing right now relate to automating, in the Spill Magic facility, the packaging of the Spill Magic powder and putting it into different-sized packages, and that has a pretty big payback. I do not remember the exact number, but maybe it is about $500,000. It is important because we have business that will keep that machine going. Another area is in our Rocky Mount facility. I would not call this automation, but we have reconfigured the entire process flow so that we have fewer people, and we have some small automation that we can put in—for example, drones that are doing daily cycle counts. When we are doing our numbers, we tend to have high confidence that the cycle counts hold, and when we do physical audits at the end of the year, it speeds up the time we are down while we are doing them. There are other things. You may have seen robotics that can vacuum your floor in a home. There are industrial ones like that which scrub the floor in our 340,000 to 370,000 square foot facility in Rocky Mount so that it is a very clean warehouse handling a lot of medical items. It is now done with some robots. There is another robot machine that we are working on in Brooks, Florida. That has all been purchased, and we have some business for lens wipes. The repetitive loading into the boxes can be done with robotics with sight sensors, and that is being worked on and should be online by June. Those are some examples. Richard Dearnley: The MyMedix DTC business—does any of their expertise in DTC translate over into either your first aid or Westcott business somehow? Walter Johnsen: Our last two acquisitions, the small Schmiedelgla acquisition in Germany and MyMedic, are both direct to consumer. As you may know, that means you are using social media as a selling tool, and you are putting ads in places like Twitter, Facebook, and LinkedIn. Of course, there is Google search. There is a consistent pattern of videos that are delivered onto the site, and the purchases are coming directly off the website. In the case of MyMedic, that is our first step in the United States to do direct to consumer. It lends itself to selling things like craft items because you can demonstrate there is a lot of differentiation in the product. When we do new product introductions, you have a ready platform of potential customers who are following you. The benefit of MyMedic is we are not establishing a social media base; we have a half-million social media followers today, and we put out videos every two days. Sometimes it is how to use first aid kits. Sometimes it is success stories and life-saving stories on what the use of a bleed control kit did and how it saved somebody’s life. In other cases, it is for training or new products. As we get experience with it, I hope that we broaden the amount that we bring of our other product lines, and I think in the Westcott line that would be in the craft area. Richard Dearnley: I see. Good. Thank you. Walter Johnsen: Thank you. Operator: Thank you. Our next question comes from the line of Timothy Call with The Capital Management Corporation. Please proceed with your question. Timothy Call: Congratulations on so many accomplishments within just two quarters. You can handle the short-term volatility, and long term you have completed two complementary acquisitions. You have consolidated facilities, expanded capacity, allowed for future capacity expansion, and immediately expensed upgrades in technology and automation. Do you see all of these achievements made within the last six months adding to your long-term sales, margins, and earnings growth over many years? Walter Johnsen: Well, Tim, you try so hard to have your accomplishments, and then when you get a setback because of a tariff or changes that you are not priced for, it is frustrating. But you right it the best you can. As I hope we laid out, as we look through the coming quarters, the impact of the tariffs will be less, and we are hedging by buying $10 million of inventory for potential shortages or price increases as a result of the war in Iran. Hopefully, that is just extra inventory and we sell it over due course, but we are preparing in case this is an extended conflict. Yes, we certainly see these achievements contributing to long-term growth. As an example, we spent $6 million to buy the facility in Mount Pleasant, Tennessee, for Spill Magic, and Spill Magic now has room to grow. For those that may need a refresher, the products we sell there are used to clean up oily spills, bodily fluids, and blood. The opportunity to create some new products and hit them in scale and do it in that facility is exciting. We are out of the Smyrna, Tennessee, facility at the end of this month, and Spill Magic will be fully operational—basically there now—in Mount Pleasant. As I mentioned earlier, the automation we are putting in is expensive and heavy, and you want to do it once. Now we have a home to be able to place it properly. I would not say this is a trend, but we have been having very good success with Spill Magic since we purchased the property. It is almost like it has willed itself to say, “We have room to grow, so let’s do it.” This past quarter it was up, I think, over 30%, Paul? Paul Driscoll: Yes. Walter Johnsen: It was a good quarter and it is making progress. Timothy Call: With these two new acquisitions—your past acquisitions have benefited from cross selling and your wider geographic footprint. They are getting new retail channels and distribution networks. How long could it take these two recent acquisitions to experience sales growth from these different avenues? Walter Johnsen: I was just on the phone with First Aid Central, our Canadian subsidiary, literally an hour ago. We were talking about MyMedic and its product line. We would produce them in Canada, meeting Health Canada specifications, and we are very excited about launching that way sooner than we expected. The reason is because the name recognition is actually carrying over into Canada, and we had no idea. You have name recognition and a half-million followers, and when we put the products into production in Canada, we are expecting some growth, and that would be happening this year. As an aside, having spoken to our Canadian team literally today, we are about to add another 30% capacity to our operation in Laval, outside of Montreal, because of growth. Timothy Call: Well, thank you for all your hard work and success. Looking forward to the long-term growth of the company. Walter Johnsen: Thank you very much, Tim. Operator: Thank you. Our next question comes from the line of Georgy Vashchenko with Freedom Broker. Please proceed with your question. Georgy Vashchenko: My question is about the cutting and sharpening segment. It was under pressure in 2025. What were the revenue trends in Q1? Did they recover? Walter Johnsen: The cutting and sharpening area last year was impacted when the tariffs were instituted in April. You may remember it was called Liberation Day, and it was April 2—a day I remember. At that point, the tariffs stopped a lot of things that would have been going forward as promotions because you could not price product when there were costs as high as 145% in tariffs. The retailers could not price, so the promotional activity for things in the summer, the fall, and the winter were basically stalled. That was one of the reasons that Westcott, in particular, had a decline. Paul, what was the decline last year? Paul Driscoll: It was about 10% overall on the company line, and Westcott was down about 10%. Walter Johnsen: In the first quarter, you are going up against comparables without the tariffs having been put in place. Westcott was down, what, about 8% or 10% this first quarter? Paul Driscoll: I think it was fairly small—maybe 2%. Walter Johnsen: So it is coming back, but the big part coming back is really second, third, and fourth quarters where last year we had no promotions. This year, unless something happens dramatically with the war, we are expecting good promotional activity, and in fact we are actively quoting. That is a roundabout way of saying I think we have easy comparisons coming in the second, third, and fourth quarter for the cutting and tool measuring area, and we should be showing growth. Georgy Vashchenko: Thank you. Operator: Once again, our next question comes from the line of Jake Patterson with Helanta Investment Group. Please proceed with your question. Jake Patterson: Hey, just a couple quick ones because most of them got answered already. On SG&A, I know you said there was $300,000 of one-time expenses in there. Is $19 million minus that—so about $18.7 million—a fair run rate to look at for the rest of fiscal 2026? I know you said you had some savings you could pull out of MyMedic, but I am just curious. Paul Driscoll: As a percentage of revenue, it is probably around 33% for the full year as a target. Jake Patterson: Got it. I think the gross margin in the legacy business was down. Is there any way you can give a number for that? Paul Driscoll: I would say about 200 basis points, driven primarily by tariffs. Jake Patterson: And then CapEx for 2026—you mentioned some automation investments and Canada expansion. Do you have any range for CapEx expectations? Paul Driscoll: We are looking at about $7 million. Jake Patterson: Okay. Thanks. That is it for me. Paul Driscoll: Thank you, Jake. Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Johnsen for any final comments. Walter Johnsen: I would like to thank the audience for asking some very probing questions. Having hopefully given some very thoughtful answers, this call is complete. Thank you for joining us. Goodbye. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to the RLI Corp. First Quarter Earnings Teleconference. After management's prepared remarks, we will open the conference up for questions and answers. Before we get started, let me remind everyone that through the course of the teleconference, RLI Corp. management may make comments that reflect their intentions, beliefs, and expectations for the future. As always, these forward-looking statements are subject to certain factors which could cause actual results to differ materially. Please refer to the risk factors described in the company's various SEC filings, including in the Annual Report on Form 10-K as supplemented in Forms 10-Q, all of which should be reviewed carefully. The company has filed a Form 8-K with the Securities and Exchange Commission that contains the press release announcing first quarter results. During the call, RLI Corp. management may refer to operating earnings and earnings per share from operations which are non-GAAP measures of financial results. RLI Corp.'s operating earnings and earnings per share from operations consist of net earnings after the elimination of after-tax realized gains or losses, and after-tax unrealized gains or losses on equity securities. Additionally, equity in earnings of unconsolidated investees and related taxes are excluded from operating earnings and operating EPS to present a consistent approach in excluding all unrealized changes in value from equity investments. RLI Corp.'s management believes these measures are useful in gauging core operating performance across reporting periods, but may not be comparable to other companies' definitions of operating earnings. The Form 8-K contains a reconciliation between operating earnings and net earnings. The Form 8-K and press release are available at rlicorp.com. I will now turn the conference over to RLI Corp.'s President and Chief Executive Officer, Craig Kliethermes. Please go ahead. Craig Kliethermes: Good afternoon, everyone. We appreciate you being with us today. With me are Aaron Diefenthaler, our Chief Financial Officer, and Jennifer Klobnak, our Chief Operating Officer. I will begin by saying we feel good about how we started 2026 and the position we are in as we move through the year. For the quarter, we generated an 86% combined ratio, premiums grew 3% led by casualty, and net investment income increased 15%, continuing to be a meaningful contributor to overall results. Compared to a very strong first quarter last year, results were still excellent, but a bit more tempered, driven primarily by catastrophe activity, disciplined growth, and normal variability that comes with taking on insurance risk. Stepping back, the underlying business is performing well and consistent with our expectations. The insurance marketplace continues to be dynamic. We are seeing more competition in some areas from broker-owned facilities and MGAs that operate with incentives that are not always aligned with long-term underwriting profitability. In the most competitive spaces, we are picking our spots, finding rate adequacy on accounts where it is still available, focusing on producer relationships, and adding value to customers that want our expertise and service. We are seeing rate acceleration and market disruption in wheels-based products. There is opportunity here when done with discipline and vigilance. Our underwriting and claims expertise positions us to select the right accounts, achieve the rate we need, and drive better claim outcomes over time. Adding to the general market disruption is the emergence and rapid adoption of artificial intelligence, along with the regulatory uncertainty that comes with it. We are encouraged by what we are seeing with AI, not as a headline, but as a tool. It is helping us put better data in the hands of decision makers, making us more responsive, more efficient, and easier to do business with, while keeping human intelligence and judgment at the core of everything we do. Market dislocation creates opportunities for those with the confidence and financial strength to act. We have both. Our efforts will continue to be grounded in the same timeless core values that have guided RLI Corp. for over sixty years: community, customer focus, and continuous improvement. We like the position we are in, we are seeing opportunities in the right places, and we believe we are well positioned to continue delivering consistent, profitable results over time. With that, I will turn it over to Aaron to walk through the financials in more detail. Aaron Diefenthaler: Thanks, Craig, and good afternoon, everyone. Last evening, our first quarter release reflected an increase in gross premiums of 3% with strong contributions from our casualty segment. Operating earnings were $0.83 per share compared to $0.89 last year and were supported by solid underwriting performance and a 15% increase in investment income. As a reminder, in 2025, we began to exclude earnings of unconsolidated investees from our definition of operating earnings. All comparables in our release reflect that change. Underwriting income was $58 million in the quarter, benefiting from $35.5 million of favorable prior-year reserve development, offset by $16 million of catastrophes and a higher underlying combined ratio. On a GAAP basis, first quarter net earnings totaled $0.60 per share, compared to $0.68 in the year-ago period. As was true in 2025, the largest driver of the differential from operating earnings was the negative return in our equity portfolio and the associated $39 million of unrealized losses. At the segment level, casualty growth totaled 10% for the quarter, with significant contributions from personal umbrella and commercial transportation, both of which continue to benefit from rate increases. In terms of the underwriting results, casualty posted a 97% combined ratio, outperforming 2025 by 2 points and inclusive of higher levels of favorable prior-year development at $14.5 million. Casualty reserve development was broad based, with executive products, general liability, professional services, and transportation contributing to the release. It should be noted that of the $16 million of catastrophe losses disclosed in the quarter, $2 million was attributed to packaged businesses in casualty. Property experienced a 9% decline in gross premium, largely due to rate decreases in E and S property, while marine and Hawaii homeowners again offered offsets. Contributing to the bottom line in property’s 62% combined ratio was $20.6 million of favorable prior-year reserve development on these shorter-tailed lines, offering a 16-point benefit to the segment loss ratio. Catastrophe events, including the recent storms in Hawaii, totaled $14 million for property, up a bit from events in Q1 2025. Surety’s top-line gross premium was down about 1% from last year, and the segment reported a 94% combined ratio, largely attributable to limited favorable prior-year development compared to a strong release last year. As a reminder, surety loss activity can be variable and can have a significant influence over shorter periods. Operating cash flow in Q1 totaled $43 million, down $60 million from last year, and was influenced by some tax credit purchase activity, bonuses paid, and higher paid losses. The tax credit purchase is notable, as it had a significant impact on the 18.5% effective tax rate in the quarter. Despite more modest cash flow, we still had reinvestment opportunities, with fixed income purchase yields averaging 4.8% in the portfolio, approximately 50 basis points above our book yield. Recent capital market volatility has moderated and we have primarily focused on putting money to work in investment-grade fixed income. Total return for the portfolio in the quarter totaled a negative 0.4%, with income partially offsetting price declines for both stocks and bonds. Turning to the liability side of the balance sheet, we found an opportunity in late February to access the capital markets and raised $300 million of long-term debt. With our history of consistent financial results, we believe RLI Corp. has a terrific credit story. This issuance carries a coupon of 5.38% and a ten-year maturity, and returns our leverage profile to our historic average. Alongside the long-term debt, we repaid and resized our revolving credit facility with PNC Bank. That backstopped liquidity in our line of credit is now $150 million in size and replaced the prior transaction. Looking at overall results, when we isolate comprehensive earnings of $0.32 per share and adjust for dividends, book value per share increased 2% from year-end 2025. Finally, I will mention the recent rating action from AM Best, which upgraded the RLI Corp. group of companies to A++. This puts RLI Corp. in a distinguished category of high-quality P&C companies that have similar financial strength. We view the action from AM Best as a recognition of our long track record of underwriting results. All in, we are very pleased with the start to the year. And with that, I will turn the call over to Jennifer for more details. Jennifer Klobnak: Thank you, Aaron. We are pleased to report another quarter of underwriting profit, and we were able to achieve some growth even as market conditions have become more challenging in many of our businesses. Casualty segment premium increased by 10% and rates were also up 10% for the quarter. Personal umbrella led the way with 23% premium growth. Rate increase for the quarter was 16%, and we expect increases to continue as recent rate approvals earn into the book. Our investments in data and analytics are paying off in that we can make local, targeted improvements to the book over time. Our new business growth has shifted from more hazardous states like California, Florida, and New York to less litigious states like those in the Midwest, as we have increased rates, selectively reduced commissions, and worked with our producers to proactively manage growth over the last few years. We expect growth to persist as the new business pipeline remains strong and as we continue to ensure adequate rates are earned throughout the book. Transportation premium grew by 27%, with auto liability rate increases on renewals up 15%. In addition to rate, the growth was driven by several new business opportunities with insureds who invest in superior risk management and where we can achieve adequate return. Submissions were up 15% as competitors in some classes within the book are pulling back. New claim counts were down 14% compared to 2025. We believe our investments in loss control and claim service are valued by our customers and will have a positive impact on their bottom line and ours. E and S casualty premium was down 4%, with a slow start to binding business this year due to concerns with the economy, supply chain, interest rates, and inflation impacting investment decisions in the construction industry. Despite this, new business submissions are up 14% as continuous in-person marketing is keeping us on our producers' radar. Calls are up as well, reflecting a solid pipeline of construction projects. As expected, there can be significant delays between the time we release a quote and when that business is bound. We believe construction activity will rebound as economic conditions stabilize, and we are well positioned to respond. Recognizing ongoing severity in the commercial auto liability coverage, our appetite is more limited for auto on excess liability business. This appears to be a more conservative stance than our competition, but we believe it is a disciplined approach to underwriting in this environment. The theme with our package businesses is that the growth is being driven primarily by rates. Both premium and rates are up 5% to 6%, with higher increases related to the auto exposure. This business focuses on architects, engineers, and contractors and rounds out our diversified construction industry portfolio. In surety, premium was down 1% in a very competitive market. Single-digit growth in contract and transactional was offset by a small decline in commercial surety. Within contract surety, growth is occurring at the top end of the market, driven by large infrastructure projects, including data centers. Our focus, however, is on small to mid-sized contractors who work on smaller projects, or subcontractors working on those large projects. While bid activity is increasing in our space, we are not yet seeing that translate into meaningful growth. Our bottom line was impacted by one large contract surety loss arising from a prior-period claim. This was an isolated incident and is not indicative of a change in risk or approach for the broader book. In commercial surety, our renewable energy portfolio portion is maturing with fewer new business opportunities due to slowing investments in that industry. Across our surety division, we are well positioned with local expertise, continued producer engagement, and new transactional surety system functionality that provides full lifecycle capabilities to our producers. Our opportunity pipeline is healthy; we are focused on execution. The property segment's premium was down 9% as the business mix shifted from catastrophe to non-catastrophe premium. The top line reflects the continued competitive environment; our underwriters are still finding profitable opportunities. We had an excellent start to the year, producing a 62% combined ratio despite increased catastrophe activity in parts of our book. E and S property premium declined 16% in the quarter as market capacity remains plentiful. Consistent with market commentary, rate change on renewal business was down 19% for hurricane and 16% for earthquake. While new business submissions are up, winning business has become more challenging. We are seeing increased competition from the admitted space, where programs have been created for certain classes like hotels and restaurants. These programs were available before the last hard market with similar terms and conditions. We will remain disciplined and patient and wait for those opportunities to come back to the E and S market over time. While we are giving back some rate, the accounts we bind are priced above our technical benchmark pricing, meaning we believe we are achieving adequate returns on the business. We also saw some benefit from reduced reinsurance costs and experienced manageable spring storm losses, resulting in a material contribution to the bottom line from this division. Marine had their largest premium quarter since inception with almost $47 million of premium, an increase of 4% from 2025. Submissions and quotes continue to increase, particularly for our inland marine business. Loss activity came in as expected, and we again benefited from favorable reserve releases, which allowed marine to contribute meaningfully to our bottom line. Hawaii homeowners premium and rates each grew 12% in the quarter. Our service-oriented teams continue to identify growth opportunities on the island. We responded to several Kona storm events, which were a combination of high winds and excessive rain, deploying our local claim examiners to visit impacted insureds and address their needs. While these events affected our bottom line results in the quarter, past experience shows that this timely in-person response drives stronger relationships and results in increased opportunities over the long term. Overall, our insurance portfolio is very healthy. We achieved modest growth driven primarily by rates, and we realized another quarter of underwriting profit. We continue to make investments that we believe will drive long-term profitable growth. On that note, we are always looking for talented underwriters and claim professionals who are ace players and are interested in contributing to a true underwriting company where they can be creative, make long-term bottom-line decisions, and collaboratively improve our products for our insureds and our relationships with our producer partners. They own their results with their compensation and shared rewards based on their decisions, and they will become RLI Corp. associate owners who benefit from our diversified product portfolio that has produced solid, stable results over time. Adding to our team is one way that should help us continue to achieve profitable growth over the long term. We are encouraged by our positive start to 2026 and remain optimistic about the year ahead, knowing that our team is capable of navigating this evolving market. We will now open the call for questions. Operator: Question and answer session will begin at this time. If you are using a speakerphone, please pick up the handset before pressing any numbers. Should you have a question, please press 1 on your telephone. If you wish to withdraw your question, your question will be taken in the order that it is received, and your line will remain open for follow-ups. Please stand by for your first question. Our first question comes from Michael Phillips from Oppenheimer & Co. Michael, please go ahead. Michael Phillips: Thanks. Good afternoon, everybody. Curious how you would classify in your GL book the overall competitive environment this quarter versus recent previous quarters? Jennifer Klobnak: I would say for GL, we have personnel around the country that are working with our wholesale partners, and it does vary by region a bit. We have noticed, because the construction industry is a bit paused in the Northeast where we have a fairly sizable book, I think the political environment there caused people to pause on investing for a period of time. We also had quite a bit of weather in the first quarter, and so I think the start of construction projects is paused. We write a lot of our policies on a project basis, so it is very specific to when that project kicks off. With the weather improving, we are hoping that we will see more business bind as those projects do get kicked off as we are into the spring. On the West Coast, it has been a healthy spring. We have ramped up a bit our focus on project policies, as opposed to a practice policy where we cover that contractor for the whole year with whatever they are doing, and more contractors seem to be buying coverage in that manner. So we have seen some success in that region. Our GL pipeline is full. We have more quotes out there; we did have more quotes for the first quarter than we did last first quarter. It is just a matter of that business binding, and some of those quotes can remain outstanding for six to twelve months. Our wholesalers will keep us up to date on the status and then we wait. Sometimes we have to revise those quotes when the time comes, but at other times we are comfortable with those terms and go forward. So it was a bit slow. We heard from our wholesale producers that they were a good slow in the quarter as well. We feel like we are not an outlier there, but we are hoping that the construction industry does pick up a bit going into the rest of the year. Michael Phillips: Okay, Jen, thank you. You mentioned in your earlier comments about your plans for more state diversification in your personal umbrella book. Any early impacts you have seen? You took a pretty big rate hike in California there. Early impacts of what is happening in California from that? Jennifer Klobnak: Yes. Our last rate hike in California was effective on December 1, and we did get a 20% rate increase there. We are still seeing some growth in California, but it is at a much smaller pace than it was before. Keep in mind, we have made a few different changes to how we approach that business in California. A couple of years ago, we increased our attachments so that our underlying attachment is at $500,000 versus previously $250,000. We have also selectively reduced commissions, and that has been a more recent change that is being digested by our producers now. That could potentially further impact that growth rate. However, the business seems to keep coming to us. We are not seeing a lot of back activity by either primary carriers or other competitors that is too successful in that space. So it seems that the opportunity continues; we just want to bind that business on our terms and make sure that we are comfortable that the terms we are providing are going to equate to an underwriting profit for the book of business. Michael Phillips: Okay. Thank you, Jen. And then just lastly, you have talked for the last couple quarters about the transportation claim count information coming down. To play devil’s advocate, is there anything that would cause more of a delay in the claim reporting and maybe pick up later, or is that truly a reduction in ultimate counts that you think could happen? Jennifer Klobnak: I am going to guess here because I do not know exactly, but I am going to guess that they are down for a good reason. Part of that is that our policy count has reduced a bit, particularly in places like public auto where you have a bus and you might have multiple claimants impacted. With a smaller policy count, and continued investment in loss control activities where we are monitoring those insureds and really trying to engage with folks who appreciate risk management—whether it is the telematics and the cameras, and then also training their drivers and reacting to what they are seeing in terms of their driver behavior—I would say that probably is translating to reduced claim count. I think that is a legitimate data point, but obviously we continue to watch that over time. We cannot control when an accident happens; we are going to respond to it when it does. So my answer is: cautiously, I believe that is a real trend. Michael Phillips: Okay. Wonderful. Thanks so much for your time. Thank you. Operator: Our next question comes from the line of Mark Hughes with Truist. Mark, please go ahead. Mark Hughes: Thank you. I wonder if you could talk a little bit about the property business. You were still down this quarter, a little bit less than last quarter, though. Is the market still adjusting, which is to say pricing continues to decline sequentially? Is it at a point where maybe it might stabilize in the second half? How do you see that kind of near-term trajectory? Jennifer Klobnak: It is a good question. We are in the market every day, hoping that it becomes more stable, but at this point we are not seeing signs of that yet. Competition remains very active in that space. As you saw, our rate decreases continued a bit. We individually underwrite that business, so for every account we are looking at how we can win the account. We look at the individual risk characteristics. It appears that some of our competition probably has more global mandates on how they approach accounts. As an example, we might find an account where we think that the valuation is not up to date, and we are going to want to put coinsurance on that account to make sure that when the loss happens, that valuation is reflected in the results of how that claim is handled. Some folks appear to be waiving those types of terms across the board, and that is where it gets difficult to win that business. By individually underwriting it, we can decide where it makes sense to waive certain coverages or exclusions and where it makes sense to be a little more aggressive and win that business. We try to protect our renewal book. We are increasing limits that we are willing to offer a bit. We are not a big line player; we probably offer between $10 million and $20 million of limit for the most part. We can selectively go above that, but that is our sweet spot. Others do have more limit, but I will tell you some of the brokers have determined that it is in their best interest to have multiple carriers on an account. In some cases, while we might want the whole account limit, they are trying to share that so that when the next hard market comes, they have a variety of carriers to choose from. For us, again, it comes down to each account and trying to battle it out to win that business if it is a good account. We are, on the edges, moving some business to the admitted market, as I mentioned. Some of that—what we call E and S light business—where it is in the market for E and S only because it is located in Florida, for example, is coming back to the admitted space. We recognize there could be an event; there is likely to be an event this year, and some of that business then will flow back into our space. We have been doing this a long time. We are not excited about being patient about the market improving, but we can be patient. That is what we do, and that is what we will continue to do. Mark Hughes: Understood. On the surety—and I am sorry if you did touch on this before—reserve development, the favorable development in Q1, definitely still on the positive side of the ledger, but not quite as much as you had seen in the first quarter in prior years. Was there anything that you saw that drove that—any particular claim or two—or what was the driver behind that? Aaron Diefenthaler: Both in my commentary and Jennifer’s, we referenced the fact that results in surety can be variable around a small number of losses. As Jennifer mentioned, one particular loss on the contract side was in prior years, so that was a headwind to the results we saw there. If you look back at last year’s release, it was a very robust prior-year release in last year’s Q1, so there is a comparable issue going on, and there is some loss activity as well weighing on this year’s outcome. Mark Hughes: Understood. Thank you. Then just one clarification: I think you were talking about what you heard from the wholesalers being a bit slower in the quarter. Was that on the construction GL part of the business, or did I mishear that? Jennifer Klobnak: Yes, that was specifically for our construction-related GL business through the wholesalers. Mark Hughes: Okay. Thank you very much. Aaron Diefenthaler: Thank you. Operator: Our next call comes from the line of Andrew Anderson with Jefferies. Andrew, please go ahead. Andrew Anderson: Hey, good afternoon. Looking at the casualty ex-cat, ex-PYD loss ratio and taking into account the $2 million of cat that you had mentioned, it seems like the casualty underlying loss ratio was up slightly. Would you characterize that as just business mix, or was there any change in loss trend assumption? Aaron Diefenthaler: Absolutely business mix more than anything else, Andrew. If you think about where we are growing, there is a mix influence. Andrew Anderson: Okay. And transportation growth was quite strong. Jennifer, I know you talked about it a bit, but despite a cautious industry backdrop, how are you balancing exposure unit growth here with still severity concerns, recognizing you did get quite a bit of rate as well? Jennifer Klobnak: It comes down to risk selection. Our transportation team is part of a very strong feedback loop with both claim and the data that supports what is going on in their business. They are committed to getting rate above trend for the year, and you can see they are demonstrating that they are doing it, but they are also being very selective on risk. They tend to be picky regardless, but I think they are probably even more focused on that this year. They are finding some accounts that have good risk management where we can get the rate we need. In this business, you have a little bit more transparency because people tend to have loss activity. You can see actual loss history for accounts, and you can evaluate what their safety practices are and what the cost of those would be going forward so you can loss-rate these accounts, which is helpful. We are winning a few pieces of business with a few folks pulling back in places, and some producers are finding us helpful and are looking for more business that we can help them with. We get a lot of submissions in; we still decline 90% of the submissions that we receive, so you can see we are still being selective. We are considering that severity is up, looking at rate being adequate, but then it all comes down to that risk selection and picking the right accounts. There is nothing magical about it. It is about due diligence, doing your underwriting, asking a lot of questions, and not broad-brushing it. That is our approach, and hopefully, it will work out for the year. Operator: Thank you. Our next call comes from the line of Gregory Peters with Raymond James. Mitchell Rubin: Hey, good afternoon. This is Mitch Rubin on for Greg. In surety, with the large contract loss in the quarter, should we expect any further development on that claim in coming quarters, or is the impact largely contained in this quarter? Thanks. Jennifer Klobnak: I would say that we reserved for basically the worst-case scenario on that claim, so I would not expect adverse development on that claim. I would also reiterate that that is a single claim. We do not see a systemic issue in the book. It was just one individual circumstance for a particular contractor. Mitchell Rubin: Got it. Thank you for the answer there. And as a follow-up, some peers have pointed to recent softening in financial lines. Are you seeing similar pressure in your executive products or professional services books? Jennifer Klobnak: The executive products group that focuses on directors and officers and other fiduciary and management liability coverages has been in a soft market for a couple of years now. I would say that market is actually stabilizing. If you look at rates in that book, they were flat for the quarter, which in this case is a win. There has been a little bit of consolidation among carriers in that business. It would be nice if that translated into less capacity and maybe a more stable and even hardening market, but that has not happened yet. There are just a few folks that are buying each other out and it has not impacted capacity. In the professional lines space, where we write errors and omissions coverage, I would say that continues to be a very competitive environment, but we are winning business. We did see some growth in that space and a little bit of rate. Again, individual underwriting and long-term relationships with these producers—we have been doing that business almost twenty years. It is a stable marketplace, and we try to get a few more new accounts each year. That is the trend we have been on for several years now. Aaron Diefenthaler: Thank you. Operator: If there are no further questions, I will now turn the conference over to Mr. Craig Kliethermes for some closing remarks. Craig Kliethermes: Well, thanks, Aaron and Jennifer, and thank you all for your questions. Before we wrap up, I want to leave you with a few thoughts on how we are thinking about the business going forward. The current environment presents both opportunity and temptation. There are always ways to grow if you are willing to stretch. We also know that not all growth is created equal. Our focus remains on underwriting discipline, understanding the risk, pricing it appropriately, seizing market opportunities, and having a willingness to step back if conditions do not support our expectations for risk-adjusted returns. That approach has stood the test of time. It is how we deliver consistent results through the peaks and troughs of the market cycles. We do not expect it to get easier. As Kara Lawson, Duke’s women’s basketball coach, said, it never gets easier. You just have to handle hard better. That is part of the job. The challenges are what prepare you for success. As we look ahead, we are optimistic not because the environment is easy, but because we know how to operate in environments like this. Our ownership culture makes us different, and we are willing to do the hard work. We are staying true to the vision that has guided this company—building a strong community, helping our producers and customers solve real problems, and taking responsibility for continuously improving and making RLI Corp. better every day. We are proud of what we have built, but we are even more focused on what comes next. We like our position, trust our process, and we are confident in our ability to deliver differentiated performance over time. Thank you for your time and continued interest in RLI Corp. We look forward to speaking with you again next quarter. Operator: It looks like we had a couple of folks queue up while you were offering those final remarks, Craig, so we will afford a couple more opportunities to ask questions. Apologies for the back and forth. Our next question comes from the line of Hristian Getsov from Wells Fargo. Hristian, please go ahead. Hristian Getsov: Hey, good afternoon. Thank you for fitting me in. I just had a question on the net retention in property that ticked up 5 points. I wanted to confirm that the uptick was purely reflective of lower reinsurance costs. And as we get to the midyear renewals, are you thinking about any changes from a reinsurance strategy standpoint, given the lower cost? Jennifer Klobnak: That is correct that the savings from reinsurance cost is why we retained more of our premium for the property business in the first quarter. For midyear renewals, what we have coming up is mainly on our D&O and errors and omissions coverages—those specialized coverages I just spoke about—as well as a little bit of an earthquake cover that we have. Most of our reinsurance costs are renewed on 1/1—about 60% or so. We have just completed our surety renewal, and we have marine coming up. I do not anticipate any huge changes in reinsurance the rest of the year. I think the reinsurance market is a bit soft, so it is definitely a buyer’s market, but I am not going to predict anything material in terms of change for those renewals. Hristian Getsov: Got it. Thank you. And then I had a question: given the private credit concerns we have seen in the market, a lot of the MGAs out there are PE-backed or backed by other forms of alternative capital. Have you seen any alternative capital injections in the space start to moderate, or do you think that will not really turn the market until we get a large cat event? Aaron Diefenthaler: I do not know that it has necessarily moderated as a form of capital to the MGA space, but I will say that there are MGAs that have been backed by private capital in which that private capital is coming to the end of the life of its particular fund that the MGA sits in. There have been a few more opportunities showing up with MGAs that would like to exit and move on to new ownership. That is the influence that we see. Hristian Getsov: Got it. And if I could sneak one more: for the increased admitted competition that you flagged, is that dynamic mainly on the property side, or are there any other lines, particularly in casualty, where you are also seeing an increased level of activity? Jennifer Klobnak: We are seeing it a little bit on the casualty side—not to the extent of property—but we do see with some of our contractors, where we are being a little pickier on the auto coverage, that some standard markets say, “We like the GL,” and so they will cover the auto as well. We might lose it for that reason. I would not call that a material impact on our book, but we are seeing that on the edges. Hristian Getsov: Great. Thank you. Operator: Our next call comes from the line of Meyer Shields from Keefe, Bruyette & Woods. Meyer, please go ahead. Meyer Shields: Thanks so much, and thanks for fitting me in. Aaron, is there anything quantifying the large surety loss so we can get a sense of what the underlying results are like in that segment? Aaron Diefenthaler: If you look at our retention around surety today, that retention is $5 million in terms of reinsurance picking up any additional loss, and that is where Jennifer put her comment in around any further development being somewhat contained. Meyer Shields: Okay, that is helpful. Second question—and I am not sure that this is a legitimate one—but we have seen property premiums declining for a few quarters. The underlying operating or underwriting expenses are still going up. I understand that underwriters are going to be retained, but are there any opportunities worth pursuing so that, assuming that premium volume in that segment keeps falling, you do not have a consistent upward headwind of underwriting expenses? Jennifer Klobnak: We are always looking for opportunities, and I would say our E and S property underwriters are out in the market. We have had a number of events and one-on-one meetings with producers to look for other ways to participate in that marketplace, and there are some. We are hitting on some of those. It is not enough to offset some of our main business, but it is there. I will say we are also looking more broadly. Obviously, marine is growing and Hawaii homeowners as well, to help round out our property exposure because we do think property is still well priced in general. So we will use the tools within the business unit, but also outside of the business unit, to make sure that we are seeing enough business and trying to offset some of that decline. Meyer Shields: Okay. Perfect. Thank you so much. Operator: Ladies and gentlemen, if you wish to access the replay for this call, you may do so on the RLI Corp. homepage at rlicorp.com. This concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.