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Operator: Hello, and welcome to Clover Health's First Quarter 2026 Earnings Call. [Operator Instructions] Also, as a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. Ryan, you may begin. Ryan Schmidt: Good afternoon, everyone. Joining me on our call today to discuss the company's first quarter 2026 results are Andrew Toy, Clover Health's Chief Executive Officer; and Clay Thornton, the company's Interim Chief Financial Officer. You can find today's press release and the accompanying supplemental slides as well as the company's most recent investor deck in the Investor Events and Presentations section of our website at investors.cloverhealth.com. This webcast is being recorded, and a replay will be available in the Investor Relations section of the Clover Health website. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties, including expectations about future performance. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings, including in the Risk Factors section of our most recent annual report on Form 10-K and other SEC filings. Information about non-GAAP financial measures referenced, including a reconciliation of those measures to GAAP measures, can be found in the earnings materials available on our website. With that, I'll now turn the call over to Andrew. Andrew Toy: Thank you, Ryan, and thank you, everyone, for joining us today. Entering 2026, our first quarter results demonstrate how market-leading growth, GAAP net income profitability and full risk can scale together in Medicare Advantage. This quarter, we grew membership 51% year-over-year, while generating GAAP net income of $27 million. We believe that this demonstrates our ability to empower physicians with technology to deliver earlier and better care, finance best-in-class benefits, drive strong retention and strengthen our cohort economics over time. The clearest example of that is in our core New Jersey markets, where our model is most integrated and where that integration is translating into market leadership. Coming into 2026, outside of special needs and employer retiree plans, Clover is now the largest PPO in New Jersey. We believe this concentration creates a virtuous cycle where growth drives deeper clinical integration and continued investment in core markets, reinforcing provider alignment and strengthening the underlying economics of the business over time. Also, as we attract and retain more members under our technology-driven care model, we expect that to translate into continued earnings expansion. Our business model is also structurally different from most Medicare Advantage plans. This is why we believe our model compounds better over time. We operate on a wide network PPO structure where we retain full economics and generally do not delegate risk downstream. As new members join, we view their cost of acquisition and first year medical costs as deliberate upfront investments as they are not yet fully under our care model. These new members create a near-term headwind, but also establish a strong profitability tailwind as those cohorts mature under our platform. In that first year, we are assessing their health, enrolling the sickest into the home care and, of course, getting as many members as possible Clover Assistant visits. This provides us with what we consider to be best-in-class cohort improvement. Put another way, we believe the total lifetime value of a Clover member significantly exceeds that of other plans. We deliberately designed the model this way. Better clinical engagement driven by technology at the point of care is what we believe improves both member outcomes and plan economics. That same model is foundational across our MA business and Counterpart Health. Other plans note our leading wide network PPO, our total cost of care and our nation-leading HEDIS performance and ask us if we might be able to help them do the same. Counterpart is what lets us say yes to that. Importantly, 2026 is also our second consecutive year of strong MA plan growth, and we believe we are significantly better positioned than we were a year ago. We benefit from a higher Star rating, and we kept benefit design stable year-over-year. Notably, beginning in OEP, we also decided to moderate in-year growth to prioritize clinical integration. We grew significantly in AEP and moderating the rest of the year makes sense to us as we can focus on the experience and care of our new members. Our model is also differentiated by the data foundation we have built over time. We recently announced an expansion of our capabilities here, becoming one of the first payers active on the new CMS aligned networks. This allows us to access more data earlier in the member life cycle and power more effective AI-driven insights. AI runs on data, and we believe we are one of the only plans who view interoperability not as an IT-driven compliance project, but as a core capability. We believe this is a key structural advantage and will be reflected in the performance of our care model as we scale. Let's turn to care we delivered within the quarter. Clover Assistant and Clover Care services are driving both wide network clinical engagement and supporting higher acuity members in the home. During the first quarter, over 1/3 of our members received Clover Assistant-powered care, in line with expectations and tracking toward our full year targets. We have also meaningfully increased engagement for higher acuity members with our home care division enrolling a record number of patients for this point in the year. This matters as we continue to see meaningful differences in outcomes and cost performance for members who are actively engaged in these programs. While still early in the year, our start to 2026 builds on the foundation we established in 2025 and reflects the consistent year-over-year execution of our strategy. Clay will cover this in more detail, but we believe initial trends are developing in line with expectations. Looking ahead to 2027, it's too early to discuss our bids in detail, but we feel good about how we are positioned. We've built our model to thrive across both 3.5 and 4-Star ratings, and we believe the CMS rate notice came in at a reasonable place. First, CMS did not finalize the proposed risk model changes, resulting in a more stable outcome on the risk adjustment side than many expected. While this stability is supportive to the broader industry, it's important to note that our model is built to perform through clinical engagement and care management. We do not rely on rate inflation in the same way others do. We have also consistently supported efforts to strengthen risk adjustment. By aligning payments more closely with actual care delivery, we believe our model is well positioned for an environment that moves in that direction. Second, on the changes surrounding unlinked chart reviews, we expect a minimal impact from this change year-over-year. Further, we support the underlying broader shift toward aligning payment with care delivered at the point of service. Our model has long been grounded in encounter-based claims-linked documentation with Clover Assistant enabling earlier and more accurate diagnosis within physician workflows. In our comments to CMS, we highlighted a specific issue around members who switch plans since the new plan may not always have access to the prior encounter data needed to link historical chart reviews. We were pleased to see CMS address that issue through the switcher exception, which we believe supports fair competition and more accurate risk adjustment for growing plans like ours. Lastly, beyond the final 2027 rate notice, we think the direction of the STAR program is gradually becoming more aligned with how quality should be measured. That said, there is still significant work to be done. We continue to believe the program should place more weight on the measures most directly tied to clinical outcomes, measurable improvements in member health and evidence-backed clinical actions. We built Clover around physician enablement, interoperable care coordination and supporting physicians in providing earlier diagnosis and management of chronic disease. We think our historical market-leading HEDIS performance reflects that. While we still think further reform is needed, we are encouraged by CMS' recent steps to move Stars in a more outcomes-oriented direction, and we believe plans such as Clover built on delivering better health outcomes will be very well positioned over time. Taken all together, we feel good about our strong start to the year and long-term positioning. Our cohorts are developing as expected. Our care model is scaling and our leading operational indicators are performing as anticipated. We expect to deliver full year GAAP net income profitability in 2026 and to continue improving both care and economics over time. Finally, I'm delighted to introduce Clay Thornton, Clover's Interim Chief Financial Officer. I've worked closely with Clay at Clover for several years in his role as CFO of our Medicare Advantage plan. He's been deeply involved in building and scaling the financial foundation of the business, and we're excited for him to step into this expanded role. With that, I'll turn it over to Clay for the financial update. Clay Thornton: Thank you, Andrew, and thanks to everyone for joining. Over the past 2 years leading the Medicare Advantage finance organization here at Clover, I've been directly involved in building and scaling this model, and I'm looking forward to bringing that perspective to our discussion today. First, let me start with the headline for the quarter. We delivered positive GAAP net income while continuing to grow at a market-leading rate with performance that was broadly in line with our expectations and reflects continued improvement in our underlying earnings power. At the same time, I want to acknowledge upfront that it is still early in the year. While we're encouraged by what we're seeing, we are approaching the rest of 2026 with appropriate discipline as we continue to evaluate how our newer cohorts develop. Next, I'd like to discuss our strong first quarter 2026 performance in detail, starting with membership and revenue. We grew Medicare Advantage membership by over 52,000 lives year-over-year to approximately 156,000 members, driving $749 million in total revenues, up 62% year-over-year. Breaking that down a bit further, first, our growth was driven primarily by a strong AEP, where we saw both high enrollment and best-in-class retention, which we view as one of the most important leading indicators of long-term cohort profitability in Medicare Advantage. Retention is ultimately what allows the economics of our model specifically to compound over time. And second, during OEP, we began to intentionally moderate the pace of new member growth, prioritizing operational readiness and clinical capacity following a very strong AEP. That moderation was a deliberate choice in our model. Additionally, within each enrollment period, we continue to intentionally prioritize growth in our core markets and plans where Clover Assistant coverage and impact is highest. This reinforces that our growth this year is aligned with where we have the strongest long-term unit economics. Finally, I'd like to highlight that the strength of our benefit design continues to be a meaningful driver of our growth, and we view this as an important strategic lever as we look ahead to 2027. Turning next to consolidated gross profit. Consolidated gross profit during the first quarter was $160 million, up 47% year-over-year, reflecting strong revenue growth alongside stable medical cost performance. Let me spend a minute here on the underlying trends. First, inpatient utilization was meaningfully lower year-over-year in the first quarter. Lower flu and COVID-related utilization contributed approximately 25 to 30 basis points of favorability to our overall margin relative to 2025. More importantly, though, we are seeing early evidence that increased clinical engagement is helping to effectively manage utilization, particularly among higher acuity members. Enrollment in our Clover Care Services program is up approximately 90% year-over-year, reflecting our ability to engage members earlier and more proactively to manage care. While inpatient trends were favorable, outpatient utilization and cost continues to be elevated, but largely in line with our expectations. We saw an acceleration here in the back half of 2025, and that has continued into early 2026, reflecting an increase in service intensity and provider billing patterns. We are actively addressing this by leveraging our data advantage and AI-driven insights to drive more effective medical expense management here. Within supplemental benefits, we've made substantial progress on dental cost management following the targeted remediation and recovery actions implemented in 2025, and we continue to view dental care as a critical component of overall health care. While utilization has remained stable year-over-year, we are seeing meaningful cost reductions driven by structural changes in how we approach out-of-network dental claims, which historically introduced variability if not tightly managed. And lastly, on Part D, performance is developing in line with our expectations as we move into the second year of the IRA implementation. We feel good about how this is trending so far, but we will continue to closely monitor ongoing impact to Part D performance, most notably the impact of risk adjustment normalization and trend acceleration among non-low-income members as the year progresses. We continue to view consolidated gross profit as the clearest overall indicator of underlying insurance plan performance and are pleased with our first quarter results, particularly as we scale and manage through our evolving cohort mix. At a high level, though, we focus less on any single quarter's utilization and more on whether cohorts are tracking to expected maturity curves as that is ultimately what drives long-term economics in our model. To do this, we evaluate performance at the cohort level through contribution profit, which allows us to directly assess the underlying unit economics of each cohort as members mature under our care. All that said, insurance BER was 86.5% for the quarter, reflecting both strong performance alongside our ongoing investment in quality improvement for our members. Turning to SG&A. Adjusted SG&A during the first quarter was $119 million or 16% of revenue, improving approximately 200 basis points year-over-year and broadly in line with expectations. This improvement is the result of efficiencies of scale in our fixed cost structure, improved efficiency and variable operating costs through vendor optimization, more disciplined variable growth spending relative to prior years, and the early impact from automation and AI-driven workflows. We expect all of these to be durable drivers of efficiency as we scale. At the same time, we are continuing to invest in these capabilities, particularly in our AI and data platform, which we believe is a structural advantage in how we manage both medical costs and operating expenses and an increasingly important driver of efficiency as we scale. We are also intentionally investing in Counterpart Health, both in product development and go-to-market capabilities. We view these investments as strengthening the clinical and economic performance of our own MA members while also creating incremental long-term growth opportunities outside of our core insurance business. We are beginning to see early traction within Counterpart with growing provider adoption in markets where we do not currently operate plans, and we expect to expand that footprint further over time. As we've communicated previously, our near-term focus remains on expanding total lives on the platform to position Counterpart as a long-term growth engine alongside our Medicare Advantage business. During the quarter, we did also experience modest variability in our SG&A, driven by higher variable costs associated with strong OEP retention as well as some timing-related operational expenses. Turning to profitability. We generated $27 million of GAAP net income in the first quarter, improving by $29 million year-over-year with adjusted EBITDA of $40 million, increasing 56% year-over-year. Both reflect continued improvement in underlying earnings power as our cohorts mature and our operating leverage improves. On the balance sheet, we ended the first quarter with $418 million in total cash and investments with no debt outstanding. Cash flow from operations was $108 million in the quarter, driven by strong underlying business performance alongside timing-related working capital favorability as a result of our strong membership growth. Given current performance and cohort trajectory, we remain confident in our ability to self-fund growth while continuing to strengthen our unregulated cash position through disciplined capital allocation and ongoing operational initiatives. Turning next to guidance. We expect to meet or exceed our full year 2026 outlook across all metrics. That being said, we will revisit our full year 2026 guidance across all metrics following our second quarter results when we expect to have a more complete baseline through which to evaluate performance trends and inform our outlook for the second half of the year. As we think about the remainder of 2026, though, there are a number of things we feel particularly good about. First, our strong retention, which drives a more favorable cohort mix; second, our continued growth in clinical engagement, particularly in home-based care delivery; third, our ability to expand Clover Assistant reach and impact across both new and returning members as we scale; fourth, encouraging early trends in inpatient utilization and supplemental benefit cost management, both tracking in line with or better than expectations, and lastly, the efficiencies of scale we are beginning to realize as our membership base has roughly doubled over the past 2 years. At the same time, and as I mentioned earlier, we are closely monitoring outpatient and Part D impacts alongside the pacing and impact of our Counterpart Health investments. Taken all together, while we are encouraged by the start to the year and the leading indicators we are seeing, we are maintaining a disciplined posture until we have more data to inform our views of how our newer cohorts will perform throughout the year. Looking beyond 2026, as Andrew noted, it's still too early to speak specifically about our 2027 bids, and we'll provide more detail on our next call. That said, we believe the strength of our benefit positioning this year provides us with meaningful flexibility in how we approach growth versus margin in 2027, allowing us to make deliberate choices rather than react to market conditions. And more importantly, we believe that our model uniquely allows our underlying earnings power to compound over time as returning cohorts grow and mature. As a reminder, we are managing a membership base today that includes a large number of first and second year members, which are much earlier in their lifetime value curve relative to more mature cohorts. As we move into 2027, we expect a large portion of our membership base will be progressing favorably along the lifetime value curve, including our 2025 cohort entering year three, which we expect to be a meaningful tailwind to both margin and cash generation. We also expect continued efficiency gains, particularly within SG&A, driven by increased scale alongside the effects of our AI and data platform to further enhance cohort economics. That dynamic, the compounding effect of cohort maturation and continued SG&A optimization through AI remains central to how we think about long-term value creation. In conclusion, we are encouraged by the start to the year, and we're seeing the model perform as expected, but we're maintaining discipline as we move forward. I look forward to updating you as the year progresses. And with that, I'll turn it back to Andrew for closing remarks. Andrew Toy: Thanks, Clay. To close, I just reinforce a few simple points. We're seeing strong growth and profitability come through at the same time with cohorts developing as expected and our care model scaling as designed. As we move through 2026, we remain focused on engaging more members earlier in their life cycle while balancing profitability with ongoing investment in our care model, technology and long-term capabilities. It's still early in the year, but taken all together, this gives us confidence not just in delivering our 2026 goals, but in the durability and compounding nature of the model over time. We're building Clover for an AI-first personalized health care world, and we find that incredibly exciting. With that, we're happy to take your questions. Operator: [Operator Instructions] Our first question comes from Richard Close from Canaccord Genuity. Richard Close: Okay. Congratulations, first of all. Clay, you've been here at Clover for a couple of years. I'm just curious to really get your perspectives. You've been in MA for a while prior to Clover. So really what attracted you to the company? What's different in terms of this model versus maybe other models that you've seen before? Clay Thornton: Yes. Thanks for the question, Richard. So there's quite a bit that's different and quite a bit that attracted me to the company. So first off, purely from the financial lens, I love that Clover takes full risk on the economics of its population. That's very unique in the Medicare Advantage industry. Like you said, I've been in the space for most of my career. And most of our peers are delegating a large portion of their risk down to their providers. Clover does not do that. So we take full risk on the economics of our population. The second is how we engage with the wide network on the PPO, using the Clover Assistant platform to engage that wide network and drive clinical and economic results is very unique in the space, and it's inherent in the results we see today. Richard Close: Okay. That's helpful. And then with respect to the SG&A, I was wondering if you could go into a little bit more details on what that variability is that you called out. Clay Thornton: Yes. So there were a few onetime nonrecurring expenses in the first quarter, Richard. I'll just give you an example of one of them. When our membership grows and our reserve number grows, there's a noncash expense that hits the SG&A line called claims adjustment expense. It's effectively a reserve that we set up on SG&A to cover the future liability for paying those claims. So we had that expense in the first quarter won't be recurring for the remainder of the year. There were a couple of other things like that as well. Operator: [Operator Instructions] Our next question comes from Jonathan Yong at UBS. Jonathan Yong: I guess just in relation to the new versus existing cohorts, can you talk about how the new members are kind of shaping up in terms of the RAF scores and just their overall health, at least in the early days of what you can see? And similarly, kind of how is the existing cohort kind of trending? Are there any areas that kind of give you pause at this time? Or is everything trending better than what you initially thought? Clay Thornton: Yes. Thanks for the question, Jonathan. So first off, on the new members or the returning, we have pretty good visibility into the leading indicators through the first quarter and feel great about how those are tracking. I mentioned inpatient and dental as two in particular that are tracking either in line with expectations or better. So feel really good there. As it relates to the RAF scores, we have good visibility there as well. When we provided guidance back in February, we already had 2 months of MMR. So had good feel of what that population was and how they were going to track for the rest of the year. And so far, things are tracking in line with expectations there. Jonathan Yong: Okay. Great. And then just curious if there was any positive or negative prior period development within the quarter related to last year's claims. And then just going back to the G&A question for a second. I don't see, I don't know if the G&A was, the G&A ratio was reaffirmed with this guidance. I assume it was, but I just want to get clarification on that. Clay Thornton: Yes. So, first on G&A, we didn't officially guide to G&A. What we said back in February was we are committing to 100 to 150 basis points of SG&A improvement during 2026. So, in the first quarter, we delivered 200 basis points of improvement. So feel really good about how we're tracking there. You could consider SG&A in our broad statement around feeling good about meeting or exceeding expectations. And then as far as the first question, could you repeat that, Jonathan? Jonathan Yong: Just if you had any prior year development within the quarter, prior year. Clay Thornton: Yes. We did have some modest unfavourability actually in the first quarter, which is going a bit of the opposite direction of 2025, just normal restatements and reserves, also some slight unfavourability on the revenue side. Operator: [Operator Instructions] There are no more questions. This will complete the allotted amount of time for questions. I will now turn the call back over to Andrew Toy for any closing remarks. Andrew Toy: All right. Thanks, everybody, for joining us today. Thank you for the thoughtful questions. We appreciate everyone's continued interest in Clover, and we definitely look forward to updating you all on our progress as the year progresses. Everybody, have a nice evening. Thank you so much.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Ingevity First Quarter 2026 Earnings Call and Webcast. [Operator Instructions] I will now hand the conference over to Mickey Walsh, Head of Investor Relations. Please go ahead. Michael Walsh: Thank you, and good morning. Last evening, we posted a presentation on our investor site that you can use to follow today's discussion. It can be found on our website, ir.ingevity.com under Events and Presentations. Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release. We may also make forward-looking statements regarding future events and future financial performance of the company during this call, and we caution you that these statements are just projections and actual results or events may differ materially from those projections as further described in our earnings release. Today, you will hear from Dave Li, our CEO and President; and Phil Platt, our CFO. Our prepared comments will focus on results from the first quarter of 2026 from continuing operations and recent business highlights. We will take any questions related to the quarter during the Q&A session right after the prepared remarks. Dave, over to you. David Li: Thank you, Mickey, and good morning, everyone. Please turn to Slide 4. This quarter marked another strong period of execution and results for our company. Starting with our strategic portfolio transformation, we were pleased to complete the sale of the Ozark Materials, Road Markings product line, on April 15 to PPG in an all-cash transaction valued at approximately $65 million. This follows the divestiture announced in January of our North Charleston CTO refinery and a majority of the Industrial Specialties product line for approximately $93 million of net proceeds. Together, these actions, along with the ongoing sales process for our APT business underscores our commitment to simplifying this portfolio, sharpening our strategic focus and reducing earnings volatility. From a financial perspective, I'm proud of what our team delivered in the first quarter. Against the backdrop of global volatility and uncertainty, we achieved 4% sales growth and an industry-leading EBITDA margin approaching 36%. These results reflect disciplined execution and strong commercial performance across our businesses, particularly in Performance Materials and Pavement Technologies, and demonstrates the resilience of our business model. Importantly, this strength enabled us to repurchase approximately $52 million of shares in the quarter ahead of plan, as we opportunistically deployed capital amid market volatility. Performance Materials delivered growth in net sales, segment EBITDA and margin, driven by price increases and a continued shift in consumer preference from battery electric vehicles towards hybrids. We remain confident in the long-term role of our activated carbon solutions will have in automotive applications, while actively investing to expand into filtration. Although we are still in the early stages of this effort, it is encouraging that we already have a presence in food and beverage, medical and pharma and consumer applications. Our focus now is to enhance profitability in these areas by leveraging our technical expertise, sharpening our commercial approach and strengthening our value proposition. Turning to Performance Chemicals. Pavement Technologies delivered pricing gains and improved mix. However, overall results were partially offset by weaker operating performance from the now divested Road Markings product line. Advanced Polymer Technologies continue to face tough competition with a slight gain in volume, balancing out price weakness. We've also introduced surcharges in April to offset higher costs, mainly raw materials and energy related to the Middle East conflict. Our business remains resilient in the face of macroeconomic uncertainty, and I'm proud of our performance this quarter and encouraged by the stable demand trends that we are seeing early in the second quarter, which we believe will position us well for the year. With that, I'll turn it over to Phil. Phillip Platt: Thank you, Dave, and good morning. Please turn to Slide 5. Sales grew 4% to $258 million in the quarter, largely driven by annual price increases in Performance Materials and Pavement Technologies and further supported by favorable foreign exchange in Advanced Polymer Technologies or APT, for short. In the first quarter, we recorded a GAAP net income of $23.4 million, which included approximately $23 million of pretax special charges, $16 million of which related to the final litigation settlement payment to BASF. For the remainder of my remarks, I will focus on non-GAAP financial results, which excludes special charges. Adjusted gross profit of $132 million increased 4% over the same quarter in 2025 with gross margin of 51%. Once you remove the noise for the inventory build in the first quarter of both years, the margin actually expanded in 2026 compared to last year. Adjusted EBITDA of $92 million was similar to the first quarter of the prior year. The pricing actions I previously mentioned and higher volume in Performance Materials were partially offset by weaker operating performance in Road Markings and lower asset utilization in APT. In addition, the first quarter this year has a benefit of inventory build in Performance Materials, which I will discuss later. Adjusted EBITDA margin was 35.5% compared to 36.8% in the first quarter of 2025. Diluted adjusted EPS improved 14% to $1.15 as lower borrowings reduced interest expense and our share repurchases, which we resumed in the third quarter of last year, reduced overall share count. Overall, it was a solid quarter with robust results from Performance Materials and Pavement Technologies, making for a strong start to the year. Moving on to Slide 6. The top left chart shows free cash flow from the first quarter of 2026 compared to the same quarter in the last 4 years. As you can see on the slide, Q1 of 2025 is an outlier relative to the typical Q1 free cash flow. The prior year's first quarter benefited from a working capital release of approximately $15 million associated with the now divested Industrial Specialties product line. As a reminder, Pavement Technologies is predominantly North American-based with approximately 70% to 75% of its sales recognized in the second and third quarters of the calendar year. As a result, we typically build inventory in advance of the paving season, resulting in lower to negative free cash flow in Q1. In addition, in the first quarter of 2026, we built inventory in Performance Materials ahead of a planned outage in the second quarter. These 2 factors together resulted in free cash flow of negative $12 million in the quarter. Our free cash flow in the quarter does not include the $93 million of proceeds from the Industrial Specialties sale as we define free cash flow as operating cash flow, less CapEx. We accelerated our share repurchases in the first quarter beyond the ratable cadence we had planned, deploying $52 million to repurchase approximately 775,000 shares. Proceeds from the Industrial Specialties divestiture and the volatility caused by the Middle East conflict have allowed us to pull forward our planned repurchases. Our remaining share repurchase authorization at the end of the first quarter was approximately $246 million. We remain committed to derisking our balance sheet and reducing net leverage to our target of 2 to 2.5x, while being opportunistic with share buybacks. And with that, now let's turn our attention to segment results, starting with Performance Materials on Slide 7. Sales of $155 million were 6% higher than the first quarter of 2025. We implemented our traditional low-single digit pricing actions at the beginning of this year. In addition, we continue to benefit from a shift in consumer preferences towards hybrid vehicles after the expiration of the EV credits in late Q3 of the prior year. As a reminder, hybrids use our more advanced and higher-value carbon solutions, which benefited segment results through our favorable mix. Segment EBITDA increased 10% to $92 million from the higher prices and volume, along with the favorable benefit recognized in the quarter associated with an inventory build in preparation for planned shutdowns in the second quarter of this year. This also contributed to an EBITDA margin of 59% compared to 57% in the prior-year quarter. We expect this benefit to reverse in the second quarter, bringing full year EBITDA margins for the business back in line with our guidance of around mid-50s. Moving on to Performance Chemicals on Slide 8. Performance Chemicals results presented here exclude the divested Industrial Specialties product line. You can access recast data for 2023, 2024 and 2025 on our website under Financial Information-Other. Additionally, first quarter results include Road Markings as the sale was not completed until April 15 of this year. Beginning next quarter, this segment will be renamed Pavement Technologies. However, because Road Markings divestiture does not meet the criteria for discontinued operations due to the materiality of that business, historical segment results will not be recast to remove Road Markings. Segment sales in the first quarter of 2026 were comparable to the prior-year period. Pavement Technologies sales were flat as gains in price and mix were offset by lower volumes, reflecting minor shifts in timing to the start of the paving season. Sales in Road Markings declined 10%, driven by continued competitive pressure impacting volumes, while pricing remained stable. Segment EBITDA declined by $5 million and EBITDA margin reduced to 1%. This decline was driven by lower plant utilization in Road Markings. In comparison, the first quarter of 2025 benefited from approximately $4 million of favorable timing between production and sales. Also, this quarter had higher supply chain costs and SG&A related to the indirect costs from the sale of the Industrial Specialties business. As a reminder, we are on track to eliminate these costs by the end of the year. Please turn to Slide 9. APT delivered 5% growth in sales in the first quarter, supported by favorable foreign exchange as volume growth was offset by lower price due to unfavorable mix. We are encouraged by the strong volume growth sequentially led by the Asia Pacific region. As a reminder, this segment faced headwinds from the indirect impacts of tariffs that began in the second quarter of prior year, as well as continued weak end market demand for most of the last year. However, the declining trend seems to have stabilized for now, and we are beginning to see some modest recovery. Segment EBITDA of $7.6 million and EBITDA margin of 17.2% were meaningfully lower than the prior year due to the lower plant utilization. In the first quarter of last year, we benefited from favorable production throughput as we built inventory ahead of an extended planned shutdown in the second quarter of 2025 to install boilers. Almost all of the COGS delta you see in the red bar on the slide can be attributed to last year's inventory build. Outside of this, APT segment delivered steady performance in a depressed demand environment. To wrap up, the first quarter demonstrated our ability to execute our portfolio simplification strategy, while delivering solid operating performance. Our teams remain focused on maximizing value through disciplined pricing and driving commercial and operational excellence with safety at the forefront of everything we do. Looking ahead, we expect to reach and maintain our target leverage ratio of 2 to 2.5x this year and to complete $300 million of share repurchases through 2027. I will now turn the call back to Dave to share additional color on guidance for 2026. David Li: Thanks, Phil. Turning to Slide 10. We are reaffirming our previous guidance shared in our last earnings call in February. The current full-year outlook excludes the contributions from the Road Markings divestiture beginning April 15 and is reflected in the bridge on the bottom left of this slide. We expect 2026 adjusted EPS to be in the range of $4.70 to $5.20, delivering meaningful growth over last year. Sales are expected to be between $1.05 billion and $1.15 billion, and adjusted EBITDA between $370 million and $395 million. Note that the exclusion of Road Markings is expected to lift Performance Chemicals margin to the high teens compared to prior projections of mid-teens. Also, we are on target to eliminate the $15 million of indirect costs associated with the divestiture of Industrial Specialties, achieving run rate savings before the end of this year. We expect to generate free cash flow of $215 million to $245 million. This amount does not include approximately $113 million in pretax litigation-related payments to BASF in the second quarter. We plan to use the free cash flow to continue buying back shares, in line with our prior guidance of $300 million of share repurchases through 2027. We continue to be disciplined in our cash allocation strategy and have repurchased almost $15 million worth of shares already in the second quarter. Additionally, regarding leverage, our plan remains to reduce and maintain net leverage within our long-term target range of 2 to 2.5x in 2026. Finally, the sale process for APT is progressing well, and we remain encouraged by the engagement and interest. We are working hard to bring the process to conclusion before the end of this year and we'll continue to provide updates as we advance the transaction. Looking ahead, we expect to continue executing our portfolio transformation, while optimizing performance across core businesses. We remain disciplined in our capital allocation with a continued focus on share repurchases and debt reduction, and we are encouraged by our strong start to the year and are confident in our ability to deliver solid execution and results throughout 2026. With that, I'll turn it over for questions. Operator: [Operator Instructions] Your first question comes from the line of Daniel Rizzo with Jefferies. Daniel Rizzo: I guess just to start with you -- you mentioned hybrids are driving growth or healthy growth for activated carbon in Performance Materials. I was wondering if that's exclusively a North American thing or if there is some -- if it's broader than that, if you're seeing increased hybrid sales elsewhere where they're outpacing EVs in other regions in the world like Europe and Asia? David Li: Dan, thanks for your question. And as you mentioned, yes, hybrid -- the shift to hybrids is a positive for Ingevity, and I think it really -- just because of the smaller engine sizes, it requires more advanced carbon content from us. We're definitely seeing that shift in North America where the adoption of pure EVs has modulated. But I would expect that to be a trend that we see globally. I think even in places like China, the adoption of pure EVs has also moderated as those government subsidies has gone down. So I think hybrids are going to be a bigger and bigger part of the picture. And I think longer term, obviously, that's a positive for us, just requiring more advanced content from us. Daniel Rizzo: And then you mentioned building up some inventory, but that was in response to potentially some planned outages. But I was wondering if you're going to keep inventories elevated just because of ongoing volatility, maybe some issues with higher logistic costs, higher raw material costs, if that's going to kind of change your short-term outlook for what you do with working capital. Phillip Platt: Dan, this is Phil. No, I think what we would expect is our inventory to drop back down after those planned outage in Q2. David Li: I'd say in general, Dan, obviously, there's a lot of uncertainty from a macroeconomic perspective. But we feel like maybe with the exception of APT that we're pretty well insulated, and so although we're watching the situation, monitoring closely, we feel like we're pretty well insulated. Operator: Your next question comes from the line of Jon Tanwanteng with CJS. Jonathan Tanwanteng: Congrats on a nice quarter. David Li: Thanks, Jon. Jonathan Tanwanteng: I was wondering if you could address or maybe give us a little more color on what your underlying assumptions are for inflation across each of your businesses? And number two, what's your ability to price through all of those are? I think my understanding is that a lot of your Performance Materials pricing is fixed, and I'm wondering if that's impacting your ability to be flexible or put things in place and surcharges? David Li: Yes. If I heard your question, you were a little bit soft. Was it talking about inflation and our ability to flex pricing in our different businesses? Is that right? Jonathan Tanwanteng: That's right, yes. David Li: Right. So a few things just to highlight. We mentioned that we went through with our typical annual pricing increases in PM. And I think those were successful, and I think they obviously reflect the value that we bring and obviously, the close customer relationships and the trust that we've built with that customer base over time. We did mention that we're putting in place some surcharges, particularly in APT to offset some of the energy and logistics pricing or cost increases that we've seen. I think we have some flexibility in the business, but obviously, we want to manage that closely. Phil, what else would you? Phillip Platt: Yes. The only other thing is we have seen some small raw material price inflation. As Dave mentioned, we've been able to pass that along to customers in surcharges. We have seen some small upticks in logistics costs, but again, we expect and have been successful in being able to pass those along. David Li: And I think, Jon, in general, obviously, we're a global company, but having a very strong focus in the U.S. market, producing in the U.S. as well, I think, has been a benefit to us, especially in this environment. Jonathan Tanwanteng: Okay. Great. I was wondering if you could also talk a little bit more about the APT sales process. How much progress you've made there, number one? And number two, if your overall expectations or if the most recent tone from potential buyers has shifted or changed at all over the last quarter, especially with the market volatility that's out there? David Li: Yes. Thanks for the question. Again, it's part of our broader portfolio transformation. We've been pleased with the progress. So we announced 2 divestitures, one that closed earlier this quarter or in January and then one that was a signing close of Road Markings. And then the remaining business that we've talked about divesting is APT. We're encouraged with the progress there. So we continue to advance that transaction. We've had strong interest, and we continue to be confident that we'll announce something before the end of the year. Operator: [Operator Instructions] Your next question comes from the line of Mike Sison with Wells Fargo. Abigail Eberts: This is Abigail on for Mike. So you noted volume growth in Asia in APT. But in past quarters, you said you've been facing competitive pressure, specifically in China. Has that changed at all? Or have other positive tailwinds more than outweigh that? Phillip Platt: Yes. What we saw this quarter and the trend continues to -- we continue to see that trend in the early part of Q2 is our competitors in Asia are actually pretty impacted by the Middle East conflict, and so we've been able to step in and provide volume in the shadow of that. So taking advantage of what's happening in that region of the world to supply those customers. David Li: And Abigail, just to remind you, obviously, APT was coming off a pretty prolonged period of demand weakness. So we are starting to see some of that come back. And as Phil mentioned, some of those costs and supply chain challenges have impacted some of our Asian competitors a bit more. So we're the beneficiary of that. Abigail Eberts: Okay. Got it. That makes sense. And then on Performance Materials, can you just give us an idea of the size of the EBITDA impact of the planned turnaround next quarter? Phillip Platt: Yes. You can see it in the bridge. It's, what, $5.3 million on the bridge, but it's actually around closer to $6 million of an impact this quarter of a benefit that we expect to reverse in next quarter as those outages... Operator: This concludes the question-and-answer session. I will now turn the call back to Dave Li for closing remarks. David Li: Thank you again for joining us today. I'd like to close with a few key takeaways. First, we're making great progress on executing our portfolio strategy. Second, we continue to see positive momentum in our core businesses. Third, the resilience of our businesses is enabling us to deliver strong results consistently regardless of the macroeconomic environment. And finally, we remain disciplined, yet opportunistic, with our capital deployment strategy. Thanks again to everyone for your support of Ingevity. And with this, we will close the call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Unity Technologies Q1 Earnings Call. [Operator Instructions] I will now hand the conference over to Alex Giaimo, Head of Investor Relations. Alex, please go ahead. Alex Giaimo: Thank you. Good morning, everyone. Welcome to Unity's First Quarter 2026 Earnings Call. I'm joined this morning by our CEO, Matt Bromberg; and our CFO, Jarrod Yahes. Before we begin, I want to note that today's discussion contains forward-looking statements, including statements about goals, business outlook, industry trends and expectations for future financial performance, all of which are subject to risks, uncertainties and assumptions. You can find more information about these risks and uncertainties in the Risk Factors section of our filings at sec.gov. Actual results may differ, and we take no obligation to revise or update any forward-looking statements. Finally, during today's meeting, we will discuss non-GAAP financial measures. These non-GAAP financials are in addition to and not substitute for measures of financial performance prepared in accordance with GAAP. A full reconciliation of GAAP to non-GAAP is available in our press release and on the sec.gov website. With that, I'll turn it over to Matt. Matthew Bromberg: Thanks, Alex, and good morning. On behalf of everyone at Unity from across the globe, I'd like to thank each of you for joining us today. It is a privilege to be with you this morning. Unity is on an incredible trajectory, growing rapidly on both the top line and the bottom line while also shipping the most ambitious product road map in our history, a product road map that we believe will transform both Unity and the future of interactive content creation. Our first quarter results reflect this momentum with Unity posting strategic revenue growth of 35% year-over-year and our best adjusted EBITDA margin in over 2 years at 27%, up 65% year-over-year. As Jarrod will share in more detail later, we expect the second quarter to bring more of the same with guidance for strategic ad revenue to grow 50% year-over-year, including robust Vector revenue growth as well as year-over-year margin expansion. This organic growth trend, combined with operating discipline means that we now expect our business to become GAAP profitable by the fourth quarter of 2026, an important financial milestone and a reflection of the kind of company we want to run over the long term. This is another topic that Jarrod will address in more detail in just a bit. Unity's tremendous financial performance, a passion for execution and a deep commitment to our customers have also positioned us well to take advantage of the massively positive forces we're seeing in the marketplace, driven by the adoption of AI across our industry. Our research is telling us that 90% of game developers are already using AI in their workflows, and these tools are accelerating the production of new games. We're also seeing this up close every day in our work with studio partners, both large and small. Newly released mobile apps are up 60% year-over-year across both iOS and Android with a particularly noticeable uptick in more recent months. And remember, mobile games continue to account for the majority of all new app releases worldwide. These are the trends propelling our business forward. Newly published Made with Unity games were up 12% over the prior quarter in Q1, with new Unity sign-ups showing 20% quarter-over-quarter growth, the fastest growth we've seen since 2020. So more games are being made. That's great for Unity. And because AI is making game creation more approachable, there are also more creators. That's great for Unity. And with more creators and more games, the need for game discovery becomes ever more acute as many more titles compete for consumer attention. So helping match consumers with the next game they want to play becomes even more critical than it is today, and that's great for Unity as well. Crucially, while these developments are driving significant change for many developers and publishers, we expect they will also be strong drivers of growth for the entire industry for many years to come. But AI is not just accelerating adoption of Unity's platform in the marketplace. It's also propelling the pace of our own product development. Unity is truly meeting the moment by building new products that we believe will form the foundation of the next generation of interactive content creation and marketing. Let's start with Vector, the AI system that sits at the heart of Unity. Improved performance and enhanced returns for our advertising customers drove another quarter of 15% sequential growth, the fourth in a row, exceeding our own already ambitious expectations. Our Vector revenue in the first quarter of 2026 is 80% larger than 1 year ago, an astonishing result. But what we're really excited about is just how young Vector still is. We believe we've just begun to see the impact it will have for our customers and our business. Most notably, later this quarter, we'll see Unity's runtime data graduate to our live production models for the first time. Our conviction remains high that real-time sequential behavioral data will provide a significant future catalyst for growth. We're now ingesting this data inside Vector, and we are very encouraged with the results we're seeing in testing. And with opt-in rates to our developer data framework remaining at over 90%, adoption rates continue to scale each day, enhancing our unique competitive position. But Vector is about much more than just advertising. At its heart, Vector is personalization AI, designed to understand how and why games appeal to players. It's trained on 20 years of game making on the one side and interaction with billions of consumers on the other. Our vision is for these 2 domains to interoperate so that we can better understand both what appeals to players as well as how those appealing experiences are designed, constructed and delivered. Vector is where these 2 domains come together, and it's now at the center of our product development across both Create and Grow. Our first Vector-driven enhancement for the Unity engine, Unity AI, went into public beta earlier this week, and the response from creators has been really gratifying. Unity AI is an integrated agent tuned specifically for Unity. It has full context for your project and is custom-made for Unity workflows. So it knows both your game and our software better than anyone else, and it writes code directly in a Unity project. From scene hierarchies, packages, code, assets, all the way down to performance controls we've never made available before. It knows not just how to make a game, but how to make a game that runs well across every platform, fully in service of the individual creator's vision. The Unity AI interface also offers extreme flexibility so that our customers can work not just faster and more efficiently, but more creatively. For example, we've remarked on many occasions that generic world models would be a great source of prototyping material and that game engines like Unity could ingest those pixels, transform them into Unity scene and enable developers to build deep interactive content and systems around them. Well, that's just what Unity AI now does. It ingests image pixels, outputs primitives and does mesh up scaling and textures, constructing the entire content pipeline almost instantly. Image data is thus transformed into production-ready format, massively accelerating the process of game development. You can check it all out, including a cool video introduction at unity.com/features/ai. The conversation about world models and game engines has been framed as a contest, but I think that framing misses what's actually happening. Today, the most ambitious interactive experiences will combine what generative systems do best, speed, personalization and the ability to produce variation at a scale humans can't with what engines do best, which is determinism, persistence and the consistency players and developers depend on. As neural capabilities continue to advance, new forms of interactive entertainment will emerge, and they will look quite different from the games we play today, different modalities, different form factors, things we haven't yet imagined. We don't think the future is a threat to what Unity does. We think it's the reason Unity exists. In fact, Unity has a pipeline of new products scheduled for release before the end of 2026 that we believe have the potential to accelerate this future massively and redefine our industry. These new launches are AI native, yet integrated with authoring tools robust enough to produce professional results, not just for today's professionals, but for the motivated and talented millions of new creators who will be inspired by all these new capabilities. These creators, both professional and otherwise, need tools and technologies that will enable their inspiration to become more than just an experience to enable them to become a real system, a real game, distributed everywhere, rendered at high fidelity even on mobile devices, tied to our advertising and monetization capabilities, driven by data and AI, but not defined by them. Empowering this new creative class and realizing the next era of the democratization of gaming is very much in Unity's DNA. Here's what's crucial to understand about the future of interactive entertainment. Great experiences will still come from human creative vision. AI models are powerful precisely because they're trained on what human creators have made. The bottleneck in the future isn't generation that will become a commodity if it hasn't already. The bottleneck is effective direction and realization. It's how a creator takes a spark of an idea and transforms it into a deep, engaging commercial system that is distinctive rather than generic. That can be distributed and enjoyed at high fidelity on any device that has a business model to sustain its creator. That's a tools problem. And it's a creator meets technology problem, and those are exactly the problems Unity has spent 20 years solving and will continue to solve. Our role in this future is to build the tools that human creativity shape what AI can do so that the results reflect the creator, not the average of the training data. So you can see what an incredible opportunity we have. All of us around the world feel so privileged to be delivering the kind of extraordinary business results we are today and are also on the precipice of so many incredible advancements in the near future. There is no company in the world better positioned to win in this marketplace than we are. With that, I will thank you once again for your time, and I'll pass it over to Jarrod for a deeper dive on our business results. Jarrod? Jarrod Yahes: Thanks, Matt, and good morning, everyone. Unity had an exceptional first quarter of 2026 with strategic revenue growth accelerating and adjusted EBITDA margins expanding rapidly. We are in our best financial position in years with a portfolio that's driving faster revenue growth alongside robust margin expansion. We're in the enviable position of posting these impressive results while simultaneously investing heavily in AI to drive further growth and create new revenue streams for Unity in the future. First quarter results were driven by strong performance above our expectations across both Create and Grow. Strategic Grow revenue in the first quarter was $279 million, representing 49% year-over-year growth. Revenue upside compared to our guidance and our expectations was once again driven by the exceptional performance of Vector. While our growth was impressive, it does not yet reflect any impact from our runtime data, which we believe will provide us with a sustainable competitive advantage for many years to come. In Create, strategic revenue was $154 million, up 15% year-over-year. The consistency of this business over the last year has been phenomenal with 4 straight quarters of mid-teens year-over-year growth. Performance is driven by the continued impact of our annual price increases, meaningful strength in China as well as strength in our nongames industry business. All of this is as a result of dramatically improved products, delivering performance and stability to customers, enhancing Unity's core value proposition over time. Over the past 2 years, we've made a firm commitment to performance and stability, resulting in a 22% decrease in user-reported issues since the launch of Unity 6 and improved satisfaction from our customers. This has allowed us to maintain a robust 70% market share in mobile game creation while passing along moderate price increases and allowing us to invest aggressively in our products. We expect our business model in Create to evolve as we roll out new AI products. The new pricing models we've introduced with Unity AI, which account for the number of first- and third-party agent connections in addition to seats, ensures our pricing scales fairly with usage rather than penalizing creators who use AI to be more productive. Over time, we expect this will allow us to scale revenues from both agentic and human consumption. Ultimately, customers value outputs, not inputs, and we expect that business models will completely adapt to that preference. We welcome that and the minimum commit model we maintain with our enterprise customers and the new consumption elements of our pricing model are very well suited to that evolution. The Unity commerce platform is also on track to launch this quarter, and we already have a set of committed partners like Voodoo games and SciPlay working with us to ensure we do it right. Developers shouldn't have to be fintech experts to run a global business. That's why we think our Unity e-commerce platform is so vital. By providing a single native dashboard to manage catalogs and pricing across mobile, web and PC, we're removing the massive overhead of juggling multiple SDKs and payout systems, providing a turnkey solution for global payments. Now turning to our profitability in the first quarter. Adjusted EBITDA was the best in over 2 years at $138 million, growing 65% year-over-year. Adjusted EBITDA margin was 27% and improved 800 basis points year-over-year. Our margin expansion is primarily driven by operating leverage, resulting from accelerating revenue growth with high flow-through margins, which enables us to simultaneously reinvest aggressively in our strategic AI initiatives while also expanding margins. Adjusted sales and marketing and G&A have both declined year-over-year and as a percentage of revenues. And we have deliberately redeployed much of that capital into R&D, where our adjusted R&D spend is up 9% year-over-year and AI-focused R&D, where spend is up 17% year-over-year, inclusive of AI-focused hiring and cloud inference training costs. We expect AI-focused R&D spend to continue to climb with any margin impact more than offset by operating leverage and further cost efficiencies. In terms of cash and our balance sheet, our cash balance of $2.15 billion continues to increase each quarter as a result of our robust free cash flow. We also have a $558 million convert coming due in November of this year, and our current intention is to reduce leverage and pay it off using cash on the balance sheet. Before diving into our second quarter guidance, I want to spend a moment outlining Unity's path to GAAP profitability, the time line of which has been substantially pulled forward. There are 3 factors contributing to this. Firstly, adjusted EBITDA margins are up 800 basis points, as we have discussed. Secondly, stock comp expense is down 20% in dollar terms and is down markedly as a percentage of revenue to 15% this quarter. And lastly, we expect materially lower M&A amortization that runs off almost entirely at the end of Q4 2026. As a result, we now forecast Unity to be GAAP net income profitable by the fourth quarter of 2026. With that, let's turn to guidance for the second quarter. For the second quarter, we're guiding to total strategic revenue of $455 million to $465 million, implying year-over-year growth of 29% to 32%. In strategic Grow, we're forecasting year-over-year revenue growth of 50% to 52%, driven by continued robust growth in Unity Vector. And in strategic Create, we're forecasting 11% to 14% year-over-year revenue growth, excluding the impact of a large customer win we're comping from 2025. As a result of our recent strategic decision to sunset the ironSource Ad Network and sell our Supersonic publishing business, our guidance moving forward will be focused on our strategic revenues. Beginning in the second quarter, there will no longer be any nonstrategic revenues in Create. In Grow, we expect $50 million in nonstrategic revenues in the second quarter. As a reminder, the second quarter incorporates 1 month of the ironSource Ad Network revenue given the closure on April 30. As we move to the third quarter, we expect about $45 million in nonstrategic revenue until we complete the exit of our Supersonic business. For the second quarter, we're guiding to adjusted EBITDA of $130 million to $135 million, implying adjusted EBITDA growth of 44% to 49% year-over-year. We forecast that with continued strong revenue growth, high flow-through contribution margins, combined with cost reductions associated with our strategic actions, that adjusted EBITDA margins will further improve in the back half of 2026. As a result, Unity is poised to expand margins in 2026 to record levels while simultaneously bringing to market an incredibly exciting pipeline of products that will transform the process of game creation. With that, I'd like to thank you for joining us on Unity's First Quarter 2026 Conference Call. Let me turn the call over to Alex so that we can take your questions. Alex Giaimo: Thanks, Jarrod. Operator, we are now ready for questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Cost with Morgan Stanley. Matthew Cost: I have one for Matt and one for Jarrod. Matt, just following up on the Unity AI public beta, obviously, a major step forward in terms of putting those tools in the hands of creators. There have been some demos from some of the companies behind the frontier models where they sort of showcase making games as a use case for some of these cutting-edge models from these big AI companies. I guess when you think about how that compares to what you can do with Unity AI and your ability to get in front of the next generation of game creators with Unity AI, given that there's going to be this proliferation of other tools that can make some sort of games. I guess, where do you feel you sit in the future of these new AI game creation tools? And then for Jarrod, just on commerce, there was a really great update to hear about how you have some pretty high-profile partners at launch. I guess, how did those conversations evolve? How enthusiastic are the customers that you're talking about potentially working with on commerce? And this seems like a product that could be very needle-moving financially if it starts to get some real traction. So is there any way you can help us dimension how impactful that could be financially? Matthew Bromberg: Matt, thanks for your question. Good morning, and good morning to everybody. Unity AI is an integrated agent that's tuned specifically for game development and for use of Unity. General -- as I kind of talked about in the opening, general purpose coding agents are really powerful, but what they lack is Unity engine-specific context as well as the context of the project you're building itself. And that gap matters a lot when shipping a real game across multiple platforms. So if you think about the kind of differentiation, you've got full project context, so it's easier scene and the packages and the assets and the code and a unified system. And then Unity-specific tuning for workflows that are platform aware and aware of your asset pipelines and how they're going to get integrated. What we're seeing in -- it's only been about a week, but we're seeing really strong attachment rates in that product. So 70% of the users who adopt it are continuing to work with the product 5 days in. So that tells us that we are on the right track. And of course, we'll be tracking that as we go forward. This kind of attachment appears to be a function of better performance of our AI product than just generic models alone because those models aren't exposed to the context engineering that we bring to the table on our own products. It makes the AI more efficient. It makes it less expensive. It means less prompting is required and it's faster. Now we've just launched again this earlier this week, but we're really, really excited about it. And as I also mentioned a couple of minutes ago, what's really exciting for us also is that Vector, which I think historically, most folks have thought of as having -- being built really just for our advertising business is -- has really come to the center of everything we're doing. So Unity AI is the first Vector-driven advancement for the Unity engine itself, meaning the same personalization AI thesis that sits underneath our grow business is also powering our Create business. So we're just -- we're very excited about the future of this space, and we're really confident in our ability to combine the best tools and technologies, the robust systems and authoring tools monetization capabilities, distribution capabilities that we do, and we combine the best of what's happening in AI. And what we're seeing is that is driving our business forward. That is why we have more sign-ups to Unity than ever before. It's why there are more games being created by Unity than ever before. It is why our advertising business is in better shape than it ever has been before. Jarrod Yahes: And Matt, with respect to the update that we provided on our commerce product, we too are also extremely excited to be working with landmark customers like SciPlay and Voodoo on the launch of our commerce product. As we've mentioned in the past, value to Unity is going to come in a number of ways. Including data, economic revenue share and really helping our customers with merchandising and web shop optimizations and analytics. We're excited about the potential here. This is a classic example where providing customer value and product value and create can really help the entirety of the Unity platform, including Vector. And Unity is extraordinarily well positioned to offer this product where it can help our game developers solve a real-world problem that they're encountering, which is really ensuring that they can accept IP in an economically viable way, minimize their engineering overhead and also maximize the value of the data that they ingest as part of their IP processes. So we're really excited about the progress here, and we're really excited about taking this forward with the 2 customers that we spoke about. Operator: And your next question comes from the line of Alec Brondolo with Wells Fargo. Alec Brondolo: Maybe a couple for me. I think first, is there a specific expectation for Vector sequential growth in the second quarter? I think you said robust in the prepared remarks, but I think investors are looking for a little bit more granularity there. Second, I think people are trying to unpack like why the runtime data is powerful. And as I've heard you guys talk publicly over the last several weeks, as I speak to people in the industry, I think this idea of sequencing keeps coming up, right? The idea that if we can understand what the user is doing in the app in order in a sequence, that's kind of a powerful predictor as to their likelihood to convert. And so could you maybe just like help us understand that in a little bit more detail? Like why do you think sequencing is going to be such a powerful avenue of conversion prediction in the mobile game and app space? And lastly, just maybe one on the Unity AI beta. How do you think about first-party agents relative to third-party agents? Is there still a commitment to allowing third-party agents to interact with the Unity engine via an MCP connector as you roll out the Unity AI beta, are you agnostic to whether it's a first-party or third-party agent that the customer uses? Or would you prefer them in the 1P product? Matthew Bromberg: Alec, that's quite a question. We're going to -- hope to provide some time for others as well. But let me take a -- one at a time. Let's start with Vector. Vector is an AI prediction engine. And the reason Vector is continuing to grow as we're doing a better job predicting which customers are going to like which games and matching those customers with the publisher of the corresponding game. It's a process of continuous improvement, and it's pretty straightforward at a high level. We improved product, which makes it easier and more effective for our customers to use, so they buy more. So an example, we rolled out last quarter a day 28 ROAS product, which enables our customers to plan and predict their return on a 28-day basis instead of just a 7-day basis. And it's driven an incremental lift of 80% for campaigns and showing a 37% ROAS improvement versus the old day 7 benchmarks. So that's an example of a product improvement. It helps customers, it helps return. They buy more, we deliver value, they spend more. So that's product improvements. The second piece is signal improvements. We try to improve the signal, the quality of our data. And then when we -- every time we do that, it enables us to retrain our models, which are self-learning. We retrain them around that better signal and around the increased demand that we're creating. And that constant process of optimization is what makes the product work. And all of that results in better return for customers, which drives more demand. And then you start the process again, better signal, better models, better ROAS, better product, more ad spend and you begin again. That's the flywheel of our business. And as I've said many times, what is really exciting for us is we're still at the very, very early part of Vector product that didn't even exist a year ago, a little more than a year ago. And we just -- we feel really, really good about our continued ability to run that flywheel that I just described. So the growth is a function of the success of that process. And we've had about 4 straight quarters of 15% quarter-over-quarter growth. That growth has been broad-based. It's been balanced across different geos, different campaign types, different platforms and different genres. And as you point out, our Q2 guide doesn't yet reflect any of the runtime data contribution, which is we think going to be an incredibly important catalyst for us, and I think was the part two of your question. So moving to runtime data. We're really excited and encouraged by what we're seeing in offline testing, and we are expecting to graduate our testing to live production models during the course of Q2. The runtime data is a kind of signal of the value which is going to build over time and compound. As we've said many times, it's not something we expect immediate spikes around, but we think it will be steady, meaningful improvements of quality in the model and the data over time. And as you point out, what we believe is really quite valuable about runtime data is that it's real time, so it's not delayed. It is sequential, which means it helps us to understand not just what consumers are doing, but what they're doing in, which if you think about your behavior in your own life, the order in which you do things is critical to understanding what it is that you're doing. So if you combine that behavioral data from inside games, which is informed also by the context of the games themselves, which are running on our run time. It's not click data, it's not conversion data, it's not post-back data. It's a different category of signal. And we're excited about the impact we think it will have. As I mentioned in the prior remarks, we're seeing really positive 90-plus percent opt-in rates into our developer data framework. So the volume of the live published games is increasing and scaling, and we're excited about the impact it is going to have on our business in the back half of '26 and going forward. Operator: And your next question comes from the line of James Heaney with Jefferies. James Heaney: Yes. I mean I know it can be difficult to predict. But based on the guide for strategic grow revenue, I mean, you've been pretty consistent, I think, in sort of this mid-teens sequential growth trajectory. Is there a way that you can help sort of frame up the composition of growth between model enhancements and self-learning? Any way to frame that up? And then I had another follow-up for Jarrod. Matthew Bromberg: Yes. So James, just as we think about strategic grow, we're extremely excited about the trajectory of growth. It's over 50% year-over-year. 80% of that strategic grow revenue line is now the Unity Ad Network powered by Unity Vector. And so that's really the driver of that substantial growth. As Matt mentioned, there are numerous constituents to that growth, which include model improvements, product enhancements as well as data and signal. We don't break out or delineate the individual contributions in a quarter of any one of those. But suffice it to say, we are powering along all 3 of those axes, with one of the most interesting and proprietary elements of it, our runtime data on the come. So we're enthusiastic about it, and we're confident in the future. James Heaney: Great. And Jarrod, while I have you another one on just additional margin levers that you have at your disposal. I mean, I know there's definitely a ton of natural leverage that you get from the growth of Vector, but are there any other places where you see room to continue slimming down the cost structure and getting to these milestones that you called out? Jarrod Yahes: Yes, James, absolutely. I mean, for us, we are very deliberate about the way that we think about margin expansion in the business. We've seen consistent operating leverage in G&A and sales and marketing. You should expect that operating leverage to continue as we automate the way that we operate internally and as we automate the way that we face our customers and interface with our customers and deliver our products and services. There's a couple of catalysts that I would call out separately. Firstly, with respect to some of the strategic actions that we announced, while the second quarter does start to see an impact of some of the revenues of those actions, the costs haven't come out of the business as of yet. That will take place over the back half of the year. And so that is an opportunity for margin expansion with us as we look towards the back half of 2026. The other piece that we would call out is we are currently in the midst of the strategic process for Supersonic. The profitability of Supersonic is such that as we divest the business, that will naturally cause our margin profile to improve. We expect at least 200 basis points of operating profit improvement upon the divestiture of that business. And so beyond the normal cost effectiveness and cost actions that we take to operate more prudently, we have sort of 2 known catalysts in the back half of the year that we expect, which should improve margins even from current run rate levels in the first half of the year. Operator: And your next question comes from the line of Vasily Karasyov with Cannonball. Vasily Karasyov: I wanted to ask you about Unity Vector performance domestically and internationally. Are you seeing any differences in adoption in revenue growth rates? Anything -- any findings in the past year that would be useful for us to know. Matthew Bromberg: No, we're seeing very, very broad strength in Vector growth across all geographies, campaign types, genres, et cetera. And we're really pleased with that. So there's nothing I'd call out for you. Vasily Karasyov: And the same for expectations for the runtime data integration? Matthew Bromberg: Indeed. Operator: And your next question comes from the line of Clark Lampen with BTIG. William Lampen: Did I get all the unmute correct here? Can you guys hear me? Matthew Bromberg: We can. William Lampen: Okay. Perfect. So Matt, I appreciate some of the data points and I guess, comments that you made upfront around release volume sign-up trends. I can't recall a lot of quarters over the past couple of years where we've had those sort of positive callouts. At the risk of connecting dots, it feels like browser AI tools, a lot of the work on the product side that you're doing with Create is closing some of the gaps that might have been sort of temporarily created at the upper end of the market. I'm curious how you guys see this sort of collectively changing the commercial opportunity for the Create business as it relates to sort of both professionals and hobbyists and maybe what that means for segment growth near to medium term? Quick follow-up, I guess, just for Jarrod. You talked about the rundown of M&A amortization. Is it possible to give us a feel for how big that is? When going back to some of the filings, we thought that, that was a number that maybe was around $200 million. Are we right to think about the change in D&A being something in that magnitude when we look at '27 and beyond? Matthew Bromberg: Thank you. Good to hear from you this morning. Yes, listen, we've been on a journey, a product journey over the last couple of years, and it's been a really exciting one. And as you recall, the first stop on that journey was ensuring that our software for our core professional audience was stable and performant that the product road maps and were sound and reflected what customers wanted from us and that we delivered those advancements in a timely fashion and backed up our promises and delivered on those promises. We talked a lot at the beginning, as you recall, about rebuilding the relationship and the trust we have with our customers. That part of the process has been really gratifying. It's one that continues. As Jarrod pointed out, we have never had a product that is as performing and stable as it is now. Issues with the product are down more than 20% over the last quarter and that will continue to keep going down. And that's just a critical part of any business. As we look forward, as I talked about in the upfront remarks, we're extraordinarily excited about 2 avenues of growth. The first one is that we believe, and as I talked about and as you rightly pointed out, I think we are seeing the evidence in the marketplace that advancements in AI are creating the opportunity to be more effective and efficient in building. That is a very important advantage for our professional customers. And I have noted before that having spent many, many years developing games, I can tell you that the biggest and most frustrating part of the time line of building a game is building the systems that are largely common and very similar in a genre from game to game. And so you know that a lot of what you're building has been built before, many times. And what you're itching to do is get to the part of the development process where you can create differentiation, where the part that you're really excited about when you begin. Tools that enable more efficiency, allow you to get to that creative head end much faster and will ultimately result in better games and will drive the creation of more games more efficiently, and I think will be great for our industry and great for our customers and will drive more usage of our tools. And as we talked about, over time, now and over time, our tools will merge with the best of what is available in the market from a neural perspective and combine those neural capabilities with the systemization, the syndication, the commercialization that we do best. And that's all going to be great for our professional customers. But we're equally excited about the creation of a new class of creators that ultimately is going to be much, much larger than the professional class. There will be distinctions as there always have been and there always will be between those that are capable of creating professional hit interactive entertainment and a class of, call it, prosumers who will, however, be newly enabled and capable of creating very high-level interactive entertainment. And if you think about the hundreds of millions of folks around the world, for example, who are creators on social -- various social networks who are mostly doing -- creating linear video. We believe in the future, all those creators will be adding interactive elements and interactive entertainment to the kinds of things that they're creating because that is, by far, the most direct way to increase engagement. And engagement, as always, is the coin of the realm here. So the tools that we -- and the history we have, the unique ability to build products that are informed and leverage the best of neural technologies, but also take advantage of 20 years of understanding of game consumers and how games are built so that we can use context engineering to make our products work better than generic AI-driven products will benefit both professionals and this prosumer class, which is going to be a whole new set of Unity customers. And we're going to build products for both of them, and we're really excited about that future. Jarrod Yahes: And Clark, to your question on amortization, we are extremely pleased to be able to talk about the pull forward of Unity's time line towards becoming a GAAP profitable company. This is something that for us is a result of a lot of hard work on the part of the team in terms of driving margin expansion and exerting discipline around the way we run and operate our business. You should expect M&A amortization to fall off quite precipitously this year. From the first quarter where we experienced $117 million of amortization, we would expect $80 million of amortization in each of Q2 and Q3, dropping down to $55 million of amortization in the fourth quarter. And in calendar year 2027, that amortization for the full year should be sub-$25 million, so dramatically lower levels of M&A amortization, that combined with lower levels of stock comp, vastly improved profitability is really creating the glide path for GAAP profitability in the fourth quarter of 2026 for Unity. William Lampen: Jarrod, any chance you might be willing to give us a little detail around the SBC trends? Like where could those go, I guess, maybe not quarter-by-quarter, but just sort of directionally, is that sort of compressing in the same way that we're seeing with amort? Jarrod Yahes: So we experienced $76 million of SBC this quarter. That's down 20% year-over-year. It's down to 15% as a percentage of revenue. It's literally been cut in half as a percentage of revenue year-over-year. You should expect it to remain relatively stable at current run rates, which as we grow our business, will also take it down as a percentage of revenues. Operator: And your next question comes from the line of Andrew Boone with Citizens. Andrew Boone: I wanted to ask about AI and the increased use of tokens across the platform. Matt, as I think about what the potential is in terms of moving towards more of a usage model, can you help us unpack how the business model has to evolve as AI just becomes more of the centralized piece of Unity? And then for Create, you guys mentioned strength in terms of the nongame portion of Create. Can you guys unpack that? We haven't had an update there in a while. What's going on with that portion of the business? Matthew Bromberg: Yes. So let me talk a little bit about the future and the future of our business model. As we've said this morning, AI-driven products are effectively a productivity enhancement for our customers. And the principle is that pricing should scale with usage and value created. And we don't want to penalize our creators for being more productive. Because ultimately, as Jarrod noted at the outset, customers value the outputs, not the inputs. And our models are adapting to that preference. So our current relationship with our large enterprise customers is already one that leverages an idea of minimum pricing that's only partially driven by the number of seats and it's really very amenable to modifications that reflect consumption. And so the business model is evolving very organically is in the right place. And ultimately, it's driven by the quality of the products you have in the market and how much value created. As we talked about, we believe we can create and drive distinct value and our products are going to be better. And if we can deliver a differentiated value with these products because the context matters to the performance of the AI, and we can deliver product experience that's going to be fundamentally better and more performant, then we feel really good about our ability to inflect new areas of growth like consumption into our models. The pricing of UDI currently reflects that, and it reflects not just a consumption model, but also a recognition that concurrency is important. So you will be -- in the future, we will have, of course, both human beings as well as agents interacting with our software working together and our pricing comprehends that. Jarrod Yahes: And Andrew, in respect of Create, we're really pleased to see the step-up in growth that we've experienced over the course of the last several quarters. There's a number of things that are working well for us that we've called out. Our industry business outside of gaming continues to grow very strongly. We're really a leader in auto HMI. There's a range of use cases where people are looking to have indirective content for extremely sophisticated models available across a range of platforms and operating systems, which really plays to Unity's strength. So we believe in that business. We're seeing good strength and pull-through in that business. We're not going to discretely call out the revenue growth or the contribution of that business. Operator: And your next question comes from the line of Jason Bazinet with Citi. Jason Bazinet: I'm guessing the single biggest driver of the Vector growth is just improved conversion rates. And I guess if you could confirm that. And then is there any way you can sort of frame maybe in terms of multiples, like where your conversion rates now are versus what you see as best-in-class or where this could go? Matthew Bromberg: Jason, thanks for the question. The way we've articulated this a little bit earlier in the call in our prepared remarks is, I think, the right conceptual model for you to think about. The improvements are multifaceted and happen at each portion of the development of Vector, quality of signal, optimization of models, improvement of returns and all of that process that I've been through is really the right way to think about it. Jason Bazinet: But don't all those drive to a conversion rate? I mean, at the end of the day, if you're making product enhancements. Matthew Bromberg: They ultimately drive to advertiser return and advertiser return drives revenue. One of the things to think about at a high level, just notionally is that industry conversion rates are in the single digits. So when you think about opportunities for improvement in our business and an improvement in the -- for everybody in the industry, they're almost infinite. And this is why this is so incredibly exciting. As we get better and better at this, there is so much headroom for everybody in the industry to be better at conversion at a high level. Operator: And your next question comes from the line of Omar Dessouky with Bank of America. Omar Dessouky: Can you hear me? Matthew Bromberg: Yes. Omar Dessouky: It's Omar Dessouky. So let's see. For the remainder of this year, you're going to get some runtime data. Your engineers are going to be experimenting and hopefully finding improvements to your models with every passing month. I wanted to know how you think about the evolution of cloud costs and your contribution margin in the context of that and whether you want to maintain some minimum kind of contribution margin above which investments would not exceed. Matthew Bromberg: So Omar, it's a great question. We've experienced 82%, 83% adjusted gross margins, which are inclusive of our cloud costs as the largest contributor to that COGS line. It is true that when we are in the process of investment and testing, those cloud costs can bump up in any one particular quarter, and we typically see an operating leverage that follows as a result of the revenue growth that comes from those investments. We do believe that as this business scales and grows, that there is an opportunity for long-term operating leverage with respect to cloud costs. If you look at larger competitors in this space, their cloud costs as a percentage of revenues are materially lower than Unity's at a larger size and scale in a similar business. And so that is a significant opportunity for us. The reason why we don't talk about gross margin leverage and commit to that in concrete terms is we really want to make sure that we preserve the flexibility for our teams to invest in AI and to invest in Vector and make sure that they have those degrees of freedom to invest for growth. That is our current focus. And so if given a preference of optimizing cloud costs versus accelerating revenue growth in the future, we would tilt towards accelerating revenue growth in the future with the knowledge that we will optimize cloud costs over time as the business scales and grows. Omar Dessouky: Okay. So if I'm looking at the second quarter, it looks to me like your margins are guided down a little bit. Does that come from operating expenses or from this kind of contribution gross margin leverage, right? Obviously, you have runtime data coming online. I would imagine you're running more experiments. Is that the driver of the slightly lower margin? Is it something else? Or am I missing it? Matthew Bromberg: There's a couple of components of that. One is we're continuing to invest heavily from a cloud perspective. And so as I mentioned, the gross margins would bounce around based on where we are in that investment cycle. I would say the larger contribution is the fact that we have taken some strategic actions, which are bringing down total revenue in the second quarter. There's 2 fewer months of the ironSource Ad Network, the cost of which are still in the system in the second quarter, and we would expect to leave the system in the back half of the year. So it's that operating deleverage that hits us in the second quarter, but we know we're going to get those costs out in the back half of the year. Operator: And your next question comes from the line of Bernie McTernan with Needham. [Operator Instructions] Stefanos Crist: Can you hear me? Matthew Bromberg: Yes, sir. Stefanos Crist: This is Stefanos Crist calling in for Bernie. You mentioned the run time would be steady improvements. Could you maybe give us more detail maybe what you're seeing on the tests you're running? And when do you think that could show meaningful revenue contribution? Matthew Bromberg: Yes. As I noted, we're really excited and encouraged by what we're seeing in our off-line testing currently, and we expect to graduate that testing to our live production models during the course of this quarter. And not to be a broken record, it's the kind of signal that builds over time and compounds rather than producing immediate spikes. We think of it as a long-term quality enhancement, a really durable mode and differentiation, but we're not expecting immediate spikes. And other than that, I would just I would observe again that we couldn't be more excited about it. Operator: And your next question comes from the line of Benjamin Black with Deutsche Bank. Benjamin Black: It seems that the 2028-day ROAS targeting release was a decently sized unlock. So maybe talk about the feedback you're getting from your clients. And Matt, you spoke about a promising product road map at Vector. So beyond runtime, where do you think Vector could benefit from upgrades? And Jarrod, I can't help but notice that cash is piling up on the balance sheet. Your free cash flow is improving. I'd be curious to hear throughout capital allocation priorities and how you think philosophically about supplementing the business with perhaps inorganic growth. Matthew Bromberg: Yes. Listen, the set of product improvements that we have planned for Vector over the course of the next quarter is really exciting, and it's designed really to provide 2 different kinds of advantages for customers. The first kind is like the kind of day 28 product, more flexibility and more insight that will enable greater spend. Keep in mind, as I said before, we are very much at the beginning of this -- of the process of Vector. It's still a very young product. And so from a features perspective, just setting aside the model and the efficiency model from the features perspective, there is still much, much more that we can do and that we're really, really quite excited about. The second piece of improvement for our customers that we're working on is ability for them to automate meaningfully in terms of how they interact with our systems and enabling them to buy more efficiently, track performance more efficiently in a more automated fashion, which we think is going to really help drive greater conversions and more spend as well. Jarrod Yahes: And then to your second question, you are correct. Cash is building up on the balance sheet. We have $2.15 billion of cash as of the first quarter. It's a function of extremely strong free cash flow. On a trailing 12-month basis, free cash flow is up 50% to $463 million, up from $308 million last year. So there's a tremendous amount of free cash flow the business is generating with and we're poised for margin expansion in the back half of the year as well. Right now, we are planning on paying off the '26 convert that's coming due in November. Other than that, in terms of uses of cash, we're really focused on our product road map, organic investment in our business. We think we have an extraordinarily exciting AI road map in front of us, and there is a high threshold as we evaluate M&A opportunities. So I think you'll see us be prudent with our cash, not distract our product teams and make sure we can execute on the really strong organic growth opportunity we have in front of us. Operator: This concludes the question-and-answer session. I will now turn the call back to Alex for closing remarks. Alex Giaimo: Thank you, everyone, for joining this morning. Look forward to speaking to everyone throughout the quarter. Have a great day.
Operator: Good morning, and welcome to the Kinaxis Inc. Fiscal 2026 First Quarter Results Conference Call. [Operator Instructions] I'd like to remind everyone that this call is being recorded today, Thursday, May 7, 2026. I'll now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis Inc. Please go ahead, Mr. Wadsworth. Rick Wadsworth: Thanks, operator. Good morning, and welcome to the Kinaxis earnings call. Today, we will be discussing our first quarter results, which we issued after close of markets yesterday. With me on the call are Razat Gaurav, our Chief Executive Officer; and Blaine Fitzgerald, our Chief Financial Officer. Some of the information discussed on this call is based on information as of today, May 7, 2026, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set out in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well in our SEDAR+ filings. During this call, we will discuss IFRS results and non-IFRS financial measures, including adjusted EBITDA. A reconciliation between adjusted EBITDA and the corresponding IFRS result is available in our earnings press release and MD&A, both of which can be found on the Investor Relations section of our website, kinaxis.com and on SEDAR+. The webcast is live and being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis. We have a presentation to accompany today's call, which can be downloaded from the Investor Relations homepage of our website. We will let you know when to change slides. Finally, I want to remind you that our user event, Kinexions, will take place from June 1 to June 3 in Las Vegas. All sessions on the second and third are open to investors. You can review event details at kinexions.com. And if you're interested in joining us, please reach out to me directly at rwadsworth@kinaxis.com before registering as we have capacity limitations. Over to you, Razat. Razat Gaurav: Thanks, Rick, and good morning all. Turning to Slide 4. I'm extremely pleased with how the team performed in the first quarter. Momentum from our last year has continued with a record Q1 performance. Our great start to the year is evidenced by performance in our 2 key growth metrics. Our SaaS revenue grew by 21%, a significant jump compared to 16% growth a year ago. This provides us with a tremendous start towards our SaaS growth guidance for the year. Our ARR balance grew by 20%, accelerating from 14% growth in Q1 2025. All this growth translated to significantly improved profitability in the first quarter. We achieved record quarterly profit and adjusted EBITDA, and our adjusted EBITDA margin was 32%. Blaine will speak to details soon. Our momentum as the leader in AI-driven supply chain planning and orchestration continues to accelerate in an environment that is characterized by the following: firstly, there's heightened levels of volatility in supply and demand with ongoing levels of geopolitical and structural shifts; secondly, significant push to create new levels of productivity and working capital efficiencies while improving customer fulfillment service levels; and thirdly, a growing phase of innovation and change in underlying data architectures and agentic AI in an effort to create new levels of intelligence, efficiencies and automation. Customers are exploring new forms of intelligent decision-making, governance, operating models and process automation, leveraging a mix of predictive, prescriptive, generative and agentic AI. Their feedback gives us confidence that Kinaxis is on the right side of an exciting opportunity to transform the ways of working across the entire supply chain and deliver unprecedented levels of value to our customers. The opportunity ahead is significant, and the latest innovations in data architectures and AI are providing us a tremendous tailwind. Turning to Slide 5. It was a record Q1 for new business in total, business from new customers and from expansions with existing customers. Almost double the amount of total new business we signed in Q1 2025 and won 60% more than in any previous Q1, measured by average annual contract value. Our average deal size was over double what we experienced in the first quarter last year. Once again, we saw a disproportionate strength from contracts with 1 million plus in average ACV, winning several more than we did a year ago, including our largest initial customer contract ever, both by annual and total contract value. We'll provide you with specifics on the number of $1-plus million deals annually but our early success. And pipeline suggests that 2026 could be another strong year in this regard. On to Slide 6. Just under half of the new ARR we added in Q1 came from some exciting new customers, most of which were enterprise or large enterprise class. I'll highlight a few wins. In consumer products, we were thrilled to win Pernod Ricard, the world's leader in premium international champagnes and spirits. They have over 200 iconic brands, including ABSOLUT, Beefeater, Chivas Regal, G.H. Mumm, Glenlivet, Havana Club and Jameson. Pernod Ricard is going to be deploying our Maestro platform for end-to-end planning across their global supply chain network in an effort to improve service levels and gain cost efficiencies. In our chemicals vertical, Tesa has become a customer. Tesa develops over 7,000 innovative adhesive solutions and is active in 100 countries. Tesa is looking to leverage Maestro to help shift from regional silos to a centrally governed global supply chain model to support rapid growth, new product launches and other strategic initiatives. We have continued our amazing run in the energy sector. Last quarter, we won Marathon Petroleum, and now we've added the largest renewable energy company in North America. The company uses a diverse mix of energy sources, including natural gas, nuclear, renewable energy and battery storage. Their expansive asset base requires better end-to-end processes to ensure the right parts are in the right place at the right time. They're also looking to improve demand forecasting using outside-in data and machine learning techniques so they can quickly respond to new opportunities. The energy sector is undergoing massive investments to support the demands of the new AI economy and the surge in the build-out of data centers. So we expect this to remain a strong sector for us ahead. In life sciences, we won a large vital organ therapy company, which for 70 years has driven meaningful innovations in kidney care. They're going to be deploying Maestro for end-to-end intelligent planning capabilities. We also won a couple of mid-market life sciences companies, ALK, an allergy treatment specialist headquartered in Denmark; and Laboratoires Théa, which researches, develops, manufactures and commercializes a wide variety of eye care products. In industrial manufacturing, we won a significant contract with a global Fortune 500 company. This well-known leader is known to -- is looking to replace siloed business unit decision-making with our unified platform covering S&OP, demand planning, distribution, inventory, shop floor scheduling and more. They're also going to be deploying Maestro Agents to gain intelligence, productivity and automation. In the mid-market tier of high tech, there are electronics [ manufacturer ] of Weidmüller exist. There are still dozen prospects in our vertical market, and we have never positioned to win. Along with success made in Q1, I think a lot of our addition came from existing customers. So the new application with the largest single expansion business and distribution [Technical Difficulty] expansion with all-time optimization and forecasting, with most of the expansions in the first quarter. The success is demonstrated via mathematics, namely algorithmics and machine learning models remain at the very heart of customer needs for powering high-impact supply chain decisions. Our exciting new generative and agentic AI capabilities make it easier and more effective to leverage these advanced capabilities, but will not [Technical Difficulty]. Working together, all these technologies provide us with an incredible opportunity to further expand our impact into broader supply chain orchestration use cases. We have over 400 customers, a growing set of capabilities to sell a highly focused go-to-market team. So there are -- there's a massive room for expansion within the existing installed base. On to Slide 7. While winning business with the world's biggest and best supply chains is the best validation we can receive, it is a tremendous honor to be ranked as a leader in Gartner's Magic Quadrant for the 12th consecutive time. And in such a prestigious spot. Gartner published 2 Magic Quadrants this time around, one for discrete industries and another for process industries. It is a testament to the powerful flexibility of Maestro that we placed so well in both. The reports support our long-held view that differentiation in our business is not about stand-alone planning features. It's about how well platforms enable fast, connected and automated decisions across the supply chain. With respect to AI, the report shows that most vendors in our space leverage it, but with varying impact. The real value is seen as coming when AI is embedded directly into decision flows and execution rather than fragmented or assistive approaches. We see ourselves positioned well here. Maestro is infused with AI end-to-end and is the world's most sophisticated context and digital representation of the physics of the real-world supply chain. It enables rapid scenario planning, synchronized decision-making and continuous and concurrence planning. Moving to Slide 8. As you will recall, we've already launched Maestro Agents, including out-of-the-box capabilities and Maestro Agent Studio, which gives supply chain teams a no-code way to compose AI Agents tailored to their unique needs. Our agents, which embed large language models, including OpenAI's ChatGPT, Google Gemini and Anthropic's Claude in training and in testing, make it easier for users of any skill level to access the full power of Maestro. They also enable automation of processes that would otherwise be impossible, difficult or inefficient for human users to undertake and create a practical foundation for more autonomous supply chain operations that deliver faster, better decisions with even greater confidence. In Q1, we more than doubled the number of paying customers for our Maestro Agents, and we are in discussions with many more. The application of AI and agentic AI in supply chain planning, decision-making and orchestration is moving very rapidly, and there's no shortage of ideas for how to use it. One way we've been able to support customers in helping them prioritize specific high-impact use cases, we know will deliver value quickly. For example, we recently offered customers packages for up to 6 agents where deployment and knowledge transfer are supported by our forward-deployed engineers with full implementation done in as few as 4 to 8 weeks. The package includes predefined agents that target some critical decisions, ensuring data integrity, anticipating demand and supply risk, improving forecast accuracy, evaluating demand shifts and optimizing inventory and supply outcomes. We also have launched our Maestro Agent Studio to enable composability of agents tailored to our customers' unique needs. Our start-up package, combined with forward-deployed engineers, aims to kick-start that process and quickly demonstrate value by absorbing real plan of work, standardizing analysis, creating automations and accelerating decisions. Our world-class customers move carefully and thoughtfully and they undeniably move forward. I'm certainly biased, but it's difficult to imagine any customer not using our AI agents in the coming years. As I've described before, the next steps in our AI journey are to add the following: orchestrator agents that coordinate and sequence multiple agents across concurrent supply chain workflows; secure connections and interoperability between Maestro Agents and external agents and systems; and expanded data context and semantics through an extensible ontology layer that enables composable agents to reason consistently across larger data sets and analytical environments beyond Maestro for true supply chain orchestration. Initial versions of these initiatives will be available within 2026 and will open a much larger opportunity for Kinaxis. Stay tuned for additional announcements on this front at our Kinexions event in early June in Las Vegas. Lastly, with respect to internal use of AI, we continue to prioritize this usage for improved efficiency, better results and increased velocity. I'll provide some examples. In R&D, we found that AI-assisted work is 25% faster on average. And over 90% of requests to move code into production now include some AI-assisted elements. Our business development team has dramatically improved efficiency and conversion by using AI for deep research on prospect accounts that could benefit most from Maestro. AI identifies the use cases, finds the right contacts, writes e-mails and follows up, all referencing the specific prospect context. Our professional services team is using AI to increase our assurance that partner deployments are following all the rigorous standards that get quicker answers to the field to unique deployment challenges. We will continue to emphasize the use of AI for innovative ways to improve operations company-wide and transform our internal ways of working. The search for a new CFO is going very well, and we have been working with the top-tier executive search firm to engage with over 200 potential candidates. At this time, we're in our final stretch of decision-making with a very short list of candidates. As it was when I joined Kinaxis, most of these candidates will need some transition time from their current roles. We will provide formal feedback when the process is complete. Meanwhile, Blaine is leaving us with a high functioning finance team to allow for a seamless transition. As I said on the last call, I can't thank Blaine enough for successfully steering Kinaxis through great growth opportunity and change and to leave us in such a tremendous shape today. Over to you, Blaine. Blaine Fitzgerald: Thank you, Razat. I couldn't be more excited than to complete my time here with such a stellar quarter. Like recent periods, Q1 was beyond expectations in several key areas and establishes even greater confidence in meeting or beating our 2026 targets. If you look at Slide 9, turning to the numbers and compare to Q1 2025 results, total revenue was $165.6 million, up 25%, largely driven by very strong SaaS revenue growth and higher-than-expected subscription term license and professional services revenue. SaaS revenue was $102.9 million, up 21%, thanks to recent strong momentum winning new business, including record levels in Q4 2025 and our strongest Q1 ever. Subscription term license revenue was $19.1 million, up 111%. The result was a couple of million dollars higher than expected as a new customer joined us under the hybrid model. Under that model, we deliver Maestro from a hosted environment, but the customer has an option to move the deployment on-premise, which triggers term license accounting. You should adjust your annual term license estimates accordingly. Professional services revenue was $38.7 million, up 16% and stronger than expected due to higher realized rates as we work to ensure that pricing fully reflects our premium services. We continue to successfully shift services work to systems integrator partners, and we'll continue to focus on that in 2026. The strong first quarter result doesn't currently change our view that professional services revenue will grow in low single digits for the full year. Maintenance and support revenue was $4.9 million, down 11% due to some contract changes, including success moving a couple of large customers from a hybrid hosted model to SaaS. We mentioned in last call that there is ongoing interest in such transitions. As a result, we now expect maintenance and support revenue to decrease slightly and consecutively in the remaining quarters this year. Our gross profit was up by 32% to $114 million for a 69% gross margin, up from 65% due to a higher software margin, higher professional services margin and a more favorable revenue mix as professional services declined as a percentage of total revenue. Our software margin was 81%, up from 80%, largely due to higher subscription term license revenue. Professional services gross margin was 27% compared to 21%, reflecting the higher realized rates in the quarter as mentioned. Adjusted EBITDA was up 62% to $53.6 million, beating our record from last quarter and reflecting strong revenue growth, higher gross margin and efficient operations. Adjusted EBITDA margin was 32%, up from 25%, which sets us up well for our full year target. It's important to note that the positive impact from high-margin subscription term license revenue decreases substantially in future quarters this year. Our profit in the quarter was a record $29.4 million, higher than any previous quarter and compared to $15.9 million in the first quarter last year. We are very proud of that result. Cash flow from operating activities was $59.1 million, up 87%. Cash, cash equivalents and short-term investments were $327.6 million, up from $324.7 million at the end of last year despite $62 million deployed under our share buyback program this quarter. Moving to Slide 10. Our trailing 12-month free cash flow margin was extremely strong at 24%. Given timing variations in individual quarters, we believe focusing on the trailing 12-month figure is most suitable. If you look at Slide 10, it illustrates our significant progress over the past 3 years. That said, it's worth highlighting that free cash flow margin in Q1 was an incredible 35%. Our organic cash generation muscle is now very well developed. Turning to Slide 11. Annual recurring revenue grew 20% compared to the first quarter of 2025 and now sits at $447 million. We added $14 million to our ARR balance during the first quarter. This is a record for our Q1, even as our conservative approach to measuring ARR left significant committed future amounts out of the calculation. And despite foreign exchange movements in the period, reducing the balance by $2.6 million. As Razat mentioned, ongoing strength in million dollar-plus ACV contracts helped drive this great result. We also continue to convert very well on opening pipeline in the quarter, and our gross dollar retention remains very strong. On Slide 12, SaaS and total RPO balances and growth remain very robust, with SaaS RPO at $905 million and total RPO at $949 million, highlighting the strength and visibility in our business. The balance remains slightly below $1 billion as Q1 is typically a low renewal quarter, which limits RPO growth. Over the last 3 years, SaaS RPO has a cumulative average growth rate of 20% and total RPO has a CAGR of 19%. We look at 3-year growth rates to help normalize for the impact of normal customer renewal cycles. On Slide 13, despite total revenue, SaaS revenue and adjusted EBITDA results coming in ahead of our expectations, we are maintaining all aspects of annual guidance, which we provided only 60 days ago. The political, economic and foreign exchange environments remain extremely volatile. So we feel that the approach is prudent. It is still early in the year, and we will gather more information and review our guidance assumptions next quarter. In any case, we exit the first quarter even more confident that we will achieve or beat our goals for 2026. Slide 14, we maximized our normal course issuer bid shortly after our last quarterly call, doubling the repurchase limit to approximately 2.8 million shares or 10% of our float at October 31, 2025. During the first quarter, we repurchased 570,204 shares for an investment of approximately $62 million. We see tremendous value in being aggressive on our share buyback program, while public markets continue to misvalue complex AI-enabled enterprise SaaS companies like ours. As I said last call, Kinaxis' business has never been in better shape over my 6 years here. It's hard to imagine that our quarterly revenue is now approaching Kinaxis' full year revenue in the year before I joined. It's been a privilege to be part of that growth. ARR and SaaS growth are accelerating. RPO is closing in on $1 billion, and profitability is up and has a higher ceiling in the years ahead. Kinaxis is only at the beginning of its AI journey, which I'm confident will add even more opportunities for growth. I want to thank again the whole Kinaxis team, which is truly PFA, and all of you, our investors and analysts. I hope to see you again down the road. I will now turn the line over to the operator to start the Q&A session. Operator: [Operator Instructions] Your first line comes from Kevin Krishnaratne. Kevin Krishnaratne: A couple of questions on Maestro. I think, Razat, you said something about how the release is allowing your customers to do things that were really complex, sometimes impossible. So can you talk about maybe the pricing here? And how are customers thinking about the ROI on their side? Are they maybe hiring fewer demand planners? Or are they just going faster on plans? Razat Gaurav: Yes. I think it's part of an adoption journey, Kevin. And so really, right now, what we're finding is a lot of the focus with our customer base is in gaining efficiencies, productivity, but also on driving working capital efficiencies and cost efficiencies and service level improvements in their supply chain. That's the bigger value proposition in the near term. Clearly, in the midterm, there's going to be opportunities to further consolidate and scale to a much larger extent with fewer headcount and planners, but that doesn't seem to be the initial focus for our customer base. Kevin Krishnaratne: Got you. And it certainly seems like a big opportunity, some education and handholding on your side. You talked about the FTEs. I'm just curious to how do you work with your partners and SIs to make sure that you're getting this technology properly deployed and scaled over time? Razat Gaurav: Yes. Look, we've done a few things there. Firstly, we have almost doubled our investments in training enablement for our partner ecosystem. That's a really important initiative for us this year and that's really well on track, and we're going to continue to see us make a lot of investments. That's the first part. Second, we're working with fewer set of partner organizations, but we are going deeper in the skill development, the talent development with them. And then thirdly, when partners do lead implementations, which we are perfectly fine with, we are insisting that we have a level of engagement to ensure that we are reviewing the solution design, we are reviewing the integration architecture, we're reviewing some of the testing and things like that before they go live. And we have a package now we call that the Guardian package that we are insisting that every customer uses when they are selecting partners. And that's something that is becoming -- getting a lot of ground. And all the mature partners we have, they like our level of engagement in the implementations, even though they take the bulk of the implementation work, they like to have Kinaxis experts involved in it to make sure we are doing it properly and we're mitigating any risks going forward and ensuring the right outcomes for our customers. Operator: Your next question comes from the line of Richard Tse at National Bank Capital Markets. Richard Tse: Blaine, I just wanted to say it's been a pleasure working with you and all the best with your new opportunity here. If I kind of look at the growth here, it's obviously accelerated quite a bit this year versus last year. How would you attribute that growth to sort of just an improving sort of macro for supply chain? Or is it specific more to Kinaxis and what you've done on the execution side? I'm just trying to kind of gauge where that incremental is coming from. Razat Gaurav: Yes, it's a good question. I think it's a combination of factors. Clearly, there are some structural shifts that are happening geopolitically, from a tariff perspective, just overarching demand-supply volatility that provide us some good tailwind. It builds the need and the case for the Maestro platform. So that's definitely a factor. But I think beyond that, there are, I think, 3 other factors as well. Firstly, we're seeing a significant push for replacement cycle of old legacy supply chain planning deployments where customers are fed up of those old legacy deployments, and they're looking for a more modern solution that is usable and is on a single platform and there's really purpose-built for taking them to the agentic era, right? So there's a significant push for a replacement cycle that is underway. And at the end of last year and in Q1 this year and as well as in our pipeline, we are seeing continued increase of those replacement opportunities. So that's an important factor. The second one I'll tell you is I think beyond just the macro tailwinds, we're seeing that the Chief Supply Chain Officers are under more and more pressure from their CFOs and their CEOs and their Boards to create the next big wave of efficiencies in terms of working capital efficiencies because supply chains account for a very large percentage of the balance sheet and inventories that they carry account for a very large part of the working capital. And also in certain industries where logistics costs are a big part of the percentage of cost of goods sold and with the increase in the fuel prices, there's a lot of pressure for reducing the cost basis as well. So all of these factors are also creating a bigger need for our platform. And then the third thing I would say is I think we -- our execution has improved dramatically. And we've really rehauled our overall go-to-market engine. We've added capacity and we're going to continue adding capacity through the course of this year in terms of quota coverage. And we're just winning more business, including competitive business, and we're expanding within existing accounts as well. Richard Tse: Okay. And I just have one other quick one in terms of the expanding business. Of the wins today, like how many would you say are being kind of influenced by the fact that you've got a pretty progressive road map for AI, particularly with sort of Maestro Agents? Like is that kind of part of the decision-making you think in terms of what you're doing there? Or is it still a bit early for that? Razat Gaurav: Yes, it's a good question. I'll tell you, in all -- I mean, obviously, with our existing customers, we are very actively engaged with them and they're coming on the adoption journey with us. But in net new accounts where there are evaluations happening, the underlying platform capabilities for agentic AI, the underlying capabilities for being able to have composability for agents and the out-of-the-box agents we have is playing a bigger and bigger role in the evaluation process. And every pursuit cycle that we're engaging involves demos of these newer capabilities. And there's a growing trend where they become part of the solution set that our customers are buying even in net new logos. So it's becoming a bigger and bigger factor, I would say, in net new accounts. Operator: Your next question comes from the line of Stephen Machielsen at BMO Capital Markets. Stephen Machielsen: Blaine, it's been great working with you over these years. I want to dig into the spending environment. So on one hand, you've got global volatility in oil prices, supply chains, underscoring the need for your software. But on the other hand, enterprises will often delay decisions during these kinds of periods of uncertainty. What's the dynamic you're seeing with your prospects today? And how might that vary across the different verticals and geographies? Razat Gaurav: Yes, there's definitely some differences by industry verticals and geographies there. There are some verticals like the high-tech value chain or the energy sector that is feeding into the surge in the build-out of the AI data centers where those needs are very, very urgent and they're not waiting for the macroeconomic uncertainty to sort of settle itself. They're really moving ahead with those investments. There are other industries like aerospace and defense, where we're seeing similar trends. And then in industries where there are more chronic disruptions and sort of inflationary cost pressures, our solution and what we at Kinaxis and what Maestro [Technical Difficulty] builds a bigger business case for our sponsors and our champions in these organizations to get additional funding to move ahead with these initiatives, right? So we're frankly not seeing any delays or inertia in decision-making. Now I would call out that to be the case, especially in North America. Our North America business had a fantastic Q4. They've had a fantastic Q1, and the pipeline has tremendous momentum for us in North America. Slightly different dynamic in Europe. Europe, we are seeing -- we had a very strong Q4 in Europe. And we are seeing good pipeline momentum there, but the pace of decision-making doesn't seem to have the same sense of urgency as in North America. And then in Asia Pacific, it's a different dynamic based on which country you're talking about between Japan, Taiwan and India, which is where we operate. In India, we're seeing a lot of deal flow and a lot of momentum in organizations that are looking to scale up and looking to become more competitive, continue to invest in our solutions. And so it varies by industry and vertical. In general, we have not seen the slowdown with any of the macro issues. In fact, if anything, it's been a little bit of a tailwind. Stephen Machielsen: Okay. That's some really helpful color. So I know you've been calling out some of your larger deals, especially this quarter. Did you say that you signed your largest initial deal ever? Razat Gaurav: That's correct, both in terms of ACV, average annual contract value and in terms of total contract value, that's right. Stephen Machielsen: All right. I'm going to go in a different direction. I just was wondering if you could comment on how you're ramping up your reseller channel? Like how has the progress been there? I guess, going to the smaller deal size? Razat Gaurav: Yes. That's an important area for us because, of course, we are adding direct quota-carrying capacity in our go-to-market engine. But resellers play a really important role, particularly in segments of the market where we don't have our own direct coverage. So that includes many countries and regions around the world as well as certain segments of the market that are more down market. So we have a pretty good, robust global reseller program. We are actively evaluating and recruiting and developing partner relationships where appropriate with them. We do want to make -- continue making investments in training and enabling them and making them more proficient. And then we also have an offering, a sort of a rapid quick start offering where it's still our Maestro platform, but we've really simplified the template and usage for it because a lot of these resellers are selling to customers that are at a different phase of maturity as organizations, and they want something that can be implemented very quickly, have lower total cost of ownership and can lead to more rapid time to value. And so a combination of the product packaging as well as the training enablement and then our global reseller program is important. We had a pretty good year last year with this program. This year, we're looking to continue that growth momentum with the reseller program as well. Operator: Your next question comes from the line of Lachlan Brown at Rothschild & Co Redburn. Lachlan Brown: Blaine, wishing you all the best on your next opportunity. You added $5.7 million of SaaS revenue in the first quarter, which I believe was your last quarter of SaaS revenue dollars added sequentially. And I believe this did come ahead of your initial expectations. So could you just run us through the core drivers behind this? Was it on pricing, cross-selling, commencement of large new contracts or anything else to call out within that number? Blaine Fitzgerald: Yes, great question. So we had a pretty healthy balance of new name accounts as well as expansion that obviously contribute to that. It was almost like 50-50 for where we ended up. At the end of the day, it comes down to like execution of that go-to-market team that is doing extremely well. They're converting at a very, very high clip to a point where when Razat joined, he said I've never seen conversion at this. These are levels that are extremely high, which we're obviously very, very proud on. Obviously, the strength of Q4 really helped us out and put us in a great position. So it was just compounding at this stage. A great Q4 and then a great Q1 is helping us hit those high numbers. It's a situation where CFO is pretty exhilarating to be in a position where you get to go out and have these amazing numbers that you get to brag about. And we gave our guidance in a, I think, fairly prudent way. I'd say we are very, very, very confident, more confident probably than we've ever been before that we're going to at least hit those numbers. And I hope that my successor is going to be very happy with me giving them a reward to be in a position to potentially give you some, I guess, increases in those guidance in the future. But we've been in a very fortunate position to have some great execution on the go-to-market side. The other piece I would just kind of end with is like you asked a question about expansion and AI, and an earlier question came from that. And we called out ADF and agentic AI, both of those products are our fastest-growing products right now, and there's a lot of high demand. So we're in a fortunate position that what we've been innovating for has led to where we're at right now. And maybe one of the unsung kind of metrics that usually a CFO wouldn't want to brag about right now is just the R&D increase. We are investing for the future right now. The innovation that we're doing is what's getting us the wins against all of our competitors and the future competitors because they're seeing that we're investing in our product and making this product top right of any Gartner MQ that's out there. So we're in a great, great position. Lachlan Brown: And the comment on agents ties nicely into my next question. So with the new paying customers on Maestro Agents, how has their usage been? Has that come in above, below expectations? And has this changed your thinking around how you're bundling MAU usage within subscription? Razat Gaurav: Yes. No, we're really happy with the traction we're getting with the early adopters of our Maestro Agents. It's been a lot of fun. And actually, they'll be presenting and discussing some of those early wins at our Kinexions event. And it's always exhilarating to hear our planners who our users talk really about how they can do things in minutes or seconds, what would take them hours or days. So I think that's really on a really good, strong trajectory. Of course, as we are landing new customers with our agentic capabilities, we want to make sure we're also working with our partners and our forward-deployed engineers to make sure we can think through the outcomes and the use cases and get them the value. So that continues to be a really, really important focus area for us. In terms of the MAU pricing, as you know, we launched that last quarter in Q1. And all new proposals going out to customers and to prospects involve that Maestro activity unit structure, which is a consumption and value and outcome-based pricing structure. We've continued to get good feedback from customers and prospects. And we're continuing to refine the details and the minutia details of the metrics. But all the telemetry is in our platform as well, both for ourselves as well as for our customers to track it. And then just to remind you later this year, in July this year, all renewals we're going to be doing with our customers is also going to involve the MAU pricing structure. So it's just -- it's a great sort of trajectory for us to tie the movement and the emphasis we have around our AI-oriented use cases and road map and the agentic capabilities with this MAU-based pricing structure. Operator: Your next question comes from the line of Paul Treiber at RBC Capital Markets. Paul Treiber: Just in terms of -- you mentioned pricing, you also mentioned that you're seeing larger deal sizes. The -- could you dig into further on the deal sizes, that reflect more so momentum of larger customers? Or are you also seeing an increase in the economics per customer? And then with the changes in your pricing structure with AI and other aspects of your road map, how do you think about the average economics per customer going forward? Razat Gaurav: Yes. Look, I think -- well, firstly, it's a very good question. And what I'll say is between sort of winning business with large organizations,and sort of the deal sizes, what I'll say is that both are important factors, right? I mean, I think we are selling to large enterprise organizations that was a big contributor of our bookings in Q1. Some of the large wins were with some of the largest companies in the world. But also, I think the scope of the capabilities we are taking to market has broadened, right, as we've innovated and brought new capabilities to market. Blaine talked about ADF, which is our machine learning-based forecasting capabilities that is using outside-in data and using sophisticated machine learning techniques that we feature engineer for improving our customers' approaches to how they think about demand of the organization or another capability that we introduced, which is our enterprise scheduling capabilities, right, which is using sophisticated scheduling, genetic algorithms and optimization capabilities to bring efficiencies to the shop floor of these manufacturing organizations and bring an integrated approach to supply planning with production scheduling. All these expansion capabilities, and of course, now we have these agentic capabilities that we are also adding on to our footprint. So all of these capabilities are adding -- are creating fantastic opportunities for us to both cross-sell to existing customers, but also when we land net new logos, they're becoming a broader footprint. And a lot of times, customers are working with us because we were able to bring that end-to-end solution with a platform that understands the complexity and the physics of the supply chain, and then we are adding these intelligent algorithms, these intelligent agents on top of them to really be able to create the next wave of value. So it's, I think, a combination of larger organizations, but also a broader set of capabilities. Paul Treiber: That's helpful, and great to hear. The second question, just on -- there's obviously a lot of interest for customers to use AI to develop more software internally. Based on the feedback that you've seen or heard from customers, where are they delineating between software for supply chain or within the enterprise that they're looking to build themselves versus what they would use a partner like Kinaxis to provide? Razat Gaurav: Yes. Look, this is a good question. And I think most of our customers are still calibrating where they work with Kinaxis versus where they do in-house development. What I can tell you is, as we are making investments in our underlying platform, we are providing capabilities more and more where customers can both use out-of-the-box capabilities that we embed in our products and our capabilities, but also we are able to provide extensibility and composability in the underlying platform we have. So when there are unique capabilities that our customers need or use cases where we need to extend what we are able to do, we are being able to facilitate that in a very supportable, maintainable and sustainable way, right? And going forward, I think the ability of our platform to provide for that composability and provide for all the extensibility will allow both our customers and our partners to develop capabilities on our platform. And -- but when they develop capabilities on the platform, it's not to write custom applications or custom solutions like in the traditional or legacy approach to it. It's really going to be allowing them to compose solutions, compose agents, compose micro apps while taking into account all the different pieces of the LEGO blocks that are part of our platform. And so that's an important trend that we're seeing. Supply chains, the extended supply chains deal with the minutiae of operational details. There's a lot of variance in the needs by industry, by vertical, by geography, by country, by operational function. And so being able to have a platform that is flexible, extensible and composable gives them that ability to leverage all the knowledge we've been able to accumulate over the years and all the reflections we have of -- the digital representation of that physical supply chain and the intelligent library of algorithms we have together with our semantic and ontology layer to really be able to compose applications when needed as well. So our vision is to not only play in out-of-the-box packaged applications, but to also play a growing role in organizations that do want to innovate and in the DIY space as well. Operator: Your next question comes from the line of Stephanie Price at CIBC. Stephanie Price: Hoping you could talk a little bit about where you are in the partnership strategy. How should we think about partnerships with companies like Databricks and NVIDIA contributing to growth? And also, how do you think about growth with the traditional SI partners here? Razat Gaurav: Yes. It's a good question. So look, I mean, obviously, we've been working with our SI partners for several years, and we're going to continue working with them. They are playing a bigger and bigger role as we scale up the business. And like as I mentioned earlier in the call, we're really doubling down and investing in the training and enablement and ensuring that we still have an active involvement in those implementations through the Guardian package that we now have with these SI partners. In terms of the rest of the ecosystem, beyond the SIs, there's some important ecosystems that we are becoming a part of in a more and more active and strategic way. Of course, we work with 2 hyperscalers, Google and Azure. And we're actively working with them. You'll be hearing some announcements coming up at Kinexions along these lines and some of the more innovative work we're doing with some of these hyperscalers. In addition to the hyperscalers, Google and Azure, we're also working actively with NVIDIA. We had made that announcement in our partnership to innovate our optimization engines and our MIP solvers using NVIDIA's cuOpt, which is an innovative capability that they've just launched recently and it runs on their GPUs. And we're getting deeper and deeper into that NVIDIA ecosystem. And then with Databricks, that's an important relationship because we're building out our extensible data fabric. That's a relationship we entered last year. We are continuing to leverage their machine learning pipelines as we enable capabilities for forecasting and machine learning-based forecasting for our customers. So that component that we are OEM-ing from Databricks is also very important. But I envision that the ecosystems like NVIDIA and Google and Azure will become more and more important for us. And then there's another element, which is we have -- we OEM and we leverage the LLMs as well, right? So OpenAI, Google Gemini as well as Anthropic Claude. So there's different ecosystems emerging. We want to, of course, play appropriately in those ecosystems. With the hyperscalers, with the SIs and in some situations with some of these other folks, we are engaging and partnering in certain accounts as we engage with customers, as we engage with prospects as well. And you're going to see us continue to double down and focus on developing these ecosystem relationships even further going forward. Stephanie Price: Maybe for my next question. Obviously, Kinaxis has been doing well in multiple areas and definitely results this quarter were very good. Is there anything worrying you, Razat, as you now have kind of been in the seat for the few months here? And how are you thinking about the business and the evolving landscape here? Razat Gaurav: Well, I worry about everything. But look, it's -- the business clearly has a lot of momentum right now. And -- but we're not being complacent about it, right? If I look at it with all the new wins and the growth we have, we have to stay anchored and focused on ensuring our customers are getting value. We are doing that with a lot of investments we've made in our delivery organization, in our customer success organization,and with our partner ecosystem, right? So I mean, we only retain the right to continue growing as long as we can keep making our customers successful and ensuring that they're getting value from our solutions. That's a really important focus for us. Of course, beyond that, we are accelerating our innovation cycles. We've increased our investments significantly in R&D, as Blaine mentioned earlier. And the investments in R&D are not from the point of -- or a vantage point that there's a great white shark that is coming to eat us. It's really to really focus on the fundamentals of what are the needs of our customers, what are they trying to achieve and then map that to all the new and exciting technologies, whether they are new data architectures or new generative and agentic AI capabilities, how can we marry those together to create the next wave of value for them. And so that's a very big focus area is our innovation road map, and you're seeing us continue to innovate so we can leverage our fantastic core we have, which is Maestro and the end-to-end planning capabilities and that representation of the concurrent supply chain, but also extend beyond that with an extended platform to get into agentic orchestration across the end-to-end supply chain, right? And that's where we are investing in the data fabric and the semantic and ontology layer and the knowledge graph and the agentic studio. So a lot of things to get done, but all exciting. And all of that only happens as long as we can retain and attract the best talent and our people, right? The company has a fantastic culture. We are not taking that for granted. We're making sure that we continue to retain the innovation culture, the collaboration culture, the product-centric and customer-centric culture, but we also need to make sure we attract the right talent as we aspire to bigger dreams and bigger goals. So those are the things that I'm working on is making sure we continue delivering on customers, making sure we continue to execute on our innovation road map and continue to make sure we retain and attract the best talent possible. Operator: [Operator Instructions] Your next question comes from the line of John Shao at TD Cowen. John Shao: I just want to ask about token costs, which seems a concern for some software investors. I know your pricing model is hybrid and consumption based. But could you still remind us the guardrails you have there to make sure it's not going to be a gross margin headwind? Blaine Fitzgerald: Yes, that's a great question. And we've heard in a lot of different companies having to worry that tokenized costs and the change in tokenized costs will elevate the amount of cost of goods sold as you go forward. We're in -- I think just like everyone else, we're still in early days. We're not seeing that impact at this stage. It will be something we'll have to figure out. And at the same time, we're having some almost tokenized pricing that we are bringing to our customers. So we're trying to offset that cost with our own pricing strategy as we go forward. But it's still too early to determine how that's going to play out. Just like any other new change, we expect that there's going to be a price elevation in the short term, and then it will start to work its way out and be a little bit more efficient as we go forward. But today, it doesn't have any impact on any of our numbers, including in our short-term forecast. Razat Gaurav: Yes. And just to add a little bit to that, right? So I mean, tokens come into play on 2 fronts. One on the internal usage of AI and code assist and other LLM capabilities. And there, now we are allocating a token budget to all our engineering teams and we have seen situations where some of the most productive engineers are blowing through that. And actually, frankly, we're celebrating that to some extent because the numbers are not something we can't manage within our budgetary guidelines and our forecasts. But what we're seeing in terms of outcomes, in terms of velocity and productivity improvements and speed is just fantastic. So that's on the internal side. With our customers, we have put in place a telemetry like I mentioned. So the MAU construct factors in tokens, like Blaine said, and we monitor that telemetry. Our customers can monitor that telemetry. And when customers reach at the top end of that, we do engage our commercial teams to engage with the customers to see if they need to top up on that, right? So we are well protected from that regard. Of course, we're also watching closely what are the pricing trends for unit costs from LLM providers. Obviously, we've been beneficiaries of those unit costs coming down in the last 2 years pretty dramatically, but we are watching that pretty closely as we go forward. Operator: Your next question comes from the line of Mark Schappel at Loop Capital. Mark Schappel: Razat, there's been considerable recent discussion about kind of the software power center kind of shifting from traditional applications to these orchestration layers. That seems to be a trend that you guys are embracing. I was wondering if you could just elaborate maybe on how real that shift is you're seeing? And then also maybe just elaborate on your orchestration capabilities. Razat Gaurav: Yes. Look, I think the underlying data architectures are shifting. And I'll talk about ourselves a little bit. The key sort of capability we have, orchestration is -- it means different things to different people. For us, really, what it means is to leverage our underlying platform and our sort of understanding of the physics of the supply chain and to really help our customers plan, make decisions, take actions and to really be able to achieve the outcomes and then to go through the learning cycles as they go through that. That's the orchestration loop as we think of it, right? So planning, decision-making, actioning, execution, achieving the outcomes and the results and then going through the learning cycles. And I think what's most important and, frankly, the big effort to achieve this vision is not so much on the underlying technical architectures or the product capabilities or the agentic capabilities. It's more importantly in working with organizations on how they need to rethink their ways of working. And these organizations are Fortune 1000 companies that we're working in, in the 7 verticals we work in, right? And it requires -- I mean, there are some use cases that can have a quick hit with creating productivity and automation and repetitive tasks and things. Those are the low-hanging fruit and easy things to facilitate through agentic workflows. But to really truly get into orchestration across functions, across planning horizons of strategic decision-making versus tactical decision-making versus execution, it requires organizations to rethink their fundamental operating models, their underlying processes, how they're organized, how they think about their metrics. And that takes time, right? And that's why as we -- I think in my humble opinion, I think most people are over-expecting what impact these orchestration capabilities will have in the enterprise in the near term. But I think they're also underestimating the impact in the mid- to long term. But it's not just a technology-driven approach you've got to also make fundamental changes to your organization structure, operating models, processes, metrics and things like that to really transform your ways of working, right? And that's why the work we do together with our partners is very critical in achieving the true outcomes from this vision. Operator: Your next question comes from the line of Suthan Sukumar at Stifel. Suthan Sukumar: Congrats on a very impressive quarter. With respect to my question, I just had a -- I wanted to chat on the competitive landscape with AI. How are you guys positioning Maestro Agents versus the agentic frameworks that are offered by some of the incumbent underlying platforms like SAP that your customers already use? I'm just wondering, is this more of a share of wallet discussion at the orchestration layer? Or is there a coexistence and interoperability here that can be leveraged? Razat Gaurav: Yes, I think you were cutting out a bit, but I think I got the gist of the question. Look, I think what I'll say is most organizations are early in the journey to really leverage these agentic orchestration capabilities, right? Customers have done pilots with agents, they have put many agents in production, including with ourselves, and they're seeing good results when it comes to getting productivity and automation improvements. But to really truly do orchestration, I fully expect that companies will have to have orchestrator agents work across a very heterogenous systems landscape, right? And in that regard, our philosophy and our approach is to be interoperable, right? We're not trying to be everything to everyone. But as we have sort of architected our platform and as we are making investments in the go-forward road maps in our platform, we're really architecting in a way that we can be interoperable, right? In the end-to-end world of supply chain, any supply -- any Fortune 1000 company may have anywhere from 10 to 100 applications that power that end-to-end supply chain, right? And so we had to really have the ability to really be able to integrate to those systems and work across those systems. And the orchestration use cases that agents can facilitate will also need to traverse a pretty diverse systems landscape. That's where this semantic and ontology layer is very important because it provides the context for what these orchestrators do. It provides a common taxonomy. And then these agents have a chance of traversing that heterogenous landscape. And of course, as companies are doing that, they're always looking for opportunities to consolidate that heterogeneous landscape and to simplify them, but they continue to be fairly heterogenous in that end-to-end supply chain world. So our design principle is really around interoperability and coexistence. And at the same time, we expect that we'll have our own agents that will play the orchestration role. And at the same time, I expect that there'll be orchestrator agents from third parties where they leverage the Maestro platform for making decisions and for doing computations that we are very good at doing for supply planning, for demand planning, for inventory optimization, for production scheduling and things like that. So I think it will work in both ways, and that's how we're architecting our platform. Operator: We've reached the end of the Q&A session. I'll now pass the call back to Rick for closing remarks. Rick Wadsworth: Thank you, everyone, for participating on today's call. We appreciate your questions and your ongoing interest in Kinaxis. We look forward to speaking with you again next time when we report second quarter results. Bye for now. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning, and good evening. Thank you all for joining the conference call for the SK Telecom earnings results. This conference will start with a presentation followed by a Q&A session. [Operator Instructions]. Now we will begin the presentation on SK Telecom's First Quarter of Fiscal Year 2026 Earnings results. Tae Hee Kim: [Interpreted] Good afternoon. I am Tae Hee Kim, IRO of SK Telecom. I'd first like to ask for your kind understanding that the earnings call started later than scheduled. Let us now begin the earnings conference call for the first quarter of 2026. Today, we will first deliver a presentation on the financial and business highlights, followed by a Q&A session. Please note that all forward-looking statements are subject to change depending on various factors such as market and management situations. Let me now present our CFO. Jong-seok Park: [Interpreted] Good afternoon. This is Jong-seok Park, CFO of SK Telecom. At the beginning of this year, we said that we would focus on strengthening fundamental business competitiveness centered on customer value and restore profitability through sophisticated AI business in 2026. The first quarter was a significant period in which this direction began to translate into actual results. Thanks to [indiscernible] efforts to regain our customers' trust, the company recorded a net subscriber add this quarter and the fundamentals of our core telecom business are rapidly returning to normal. The performance of the AI business is gradually improving as a result of business restructuring based on a strategy of focus and prioritization. As these changes led to actual results, we were able to post earnings similar to the levels prior to the cybersecurity incident. With business performance returning to normal, the company has decided to resume dividend payments starting this quarter. Dividend per share for the first quarter is KRW 831 (sic) [ 830 ]. We are pleased that we were able to deliver on the promises that we made during the last earnings call. We will make every effort to restore the dividend level by normalizing earnings on a full year basis through continuous improvement of the telecom business fundamentals and creation of additional results from the AI business. Let me now report on the financial results for Q1. Consolidated revenue posted KRW 4.39 trillion, up 1.5% Q-on-Q on the back of MNO revenue growth driven by subscriber growth and the growth trend of the data center business. We posted KRW 537.6 billion in consolidated operating income. Our quarterly operating income exceeded more than KRW 500 billion, which is attributable to extensive efforts to regain customers' trust and company-wide initiatives to improve productivity. Let me now present business highlights by business line. MNO achieved a handset subscriber net add of approximately 210,000 in the first quarter, which is a substantive outcome of diverse measures taken to innovate customer value and restore customers' trust. Yet we are not complacent, but remain committed to further strengthening business fundamentals and competitiveness with customer-friendly products and services. We have expanded customer benefits and usability by restructuring the membership program, and we're currently overhauling price plans to offer more choices to customers. The fixed-line business is also producing stable results, thanks to continued subscriber net adds, an increase in the share of subscribers signing up for higher price plans, including Giga price plan and a stronger subscriber retention trend. We will do our utmost to achieve the dual objectives of subscriber recovery and profitability enhancement through constant change and execution based on the philosophy that customers are the essence of our business. In the AI business, the effects of the strategy of focus and prioritization are gradually becoming visible. AI data center revenue is maintaining a growth trend year-over-year, driven by Pangyo Data Center and higher utilization of Gasan Data Center. The construction of Ulsan AI Data Center is underway, and we plan to pursue additional scale-up by building new data centers in areas, including Seoul. New opportunities are emerging for our AI data center business due to the surge in demand for AI data centers from global tech companies. Based on business experience and differentiated competitiveness across the entire value chain of AI data centers, we will actively pursue partnerships with global players and keep expanding our AI infrastructure business. Within AI B2C business, the agent business is evolving in a direction that creates synergy with the telecom business and enhances fundamental competitiveness. We plan to improve ADAS performance by linking it with our proprietary AI foundation model to strengthen its own competitiveness. With the increase in AI adoption, the B2B market is undergoing structural change driven by AI transformation and new AI-based markets are taking shape. SK Telecom will secure leadership in the rapidly evolving market by utilizing full stack AI capabilities across infrastructure, models and agents and mobilizing the customer base and execution capabilities secured from our B2B business. We ask for the continued support and interest of our investors and analysts as we overcome the crisis and continue driving change and embracing challenges to achieve greater growth. Thank you. Operator: [Interpreted] [Operator Instructions] The first question will be provided by Seung Woong Lee from Yuanta Securities. Seung Woong Lee: [Interpreted] I'm Seung Woong Lee from Yuanta Securities. I have 2 questions. First of all, as you mentioned during your earnings presentation, the company started quarterly dividend payment starting from Q1. And I'd like to understand the overall shareholder return plan and the size of the shareholder return for the entire year of 2026. Secondly, I can see that the company was able to produce earnings results that are similar to the levels prior to the cybersecurity incident. Is it safe to understand that this type of trend will become a new normal? And I'd like to get some guidance from the company on the full year basis earnings outlook. Jong-seok Park: [Interpreted] First of all, thank you for your questions. I'd like to comment on the question on our annual earnings outlook, and then I'll move on to addressing your second question on shareholder returns. First, on our annual earnings outlook. In the first quarter, our operating profit posted KRW 537.6 billion, and the trend has reversed from the downward trend after the cybersecurity incident and shown an upward trend to be approaching the pre-incident levels. Our goal is to improve the full year earnings further from the current levels. For our telecom business, thanks to our efforts to restore customers' trust, which is our #1 priority in 2026, we achieved a net addition to handset subscribers in Q1, contributing to the recovery of the bottom line as well as the top line. For our AI business, we are reviewing and implementing various measures to improve the structural profitability by pursuing pivoting and discontinuation of low-margin businesses through the strategy of focus and prioritization. In addition, data center business is seeing a meaningful growth trend and the B2B business has revised its strategy to focus on AI full-spec capabilities. And we believe that these businesses will drive revenue and contribute to bottom line improvements for the remainder of the year. And finally, we are working to improve productivity in terms of business operations and processes through enterprise-wide AI tool adoption and AX transformation of call centers, and these measures are having a positive impact on cost efficiency improvement. So in short, we will do our utmost to recover the annual [indiscernible] to be higher than the pre-incident levels through profitability recovery of the telecom business, expansion of growth businesses centered on AI data centers and continuous productivity enhancement. Now I'd like to speak about shareholder returns for 2026. As was announced earlier, we resumed quarterly dividend payments with the DPS for the first quarter of KRW 831 (sic) [ 830 ]. I'd like to thank our shareholders very much for their kind understanding and patience. As earnings continue to recover this year, we plan to conduct dividend payments as stably as possible. As for the size of the dividends for the whole year, when concrete full year earnings become more materialized, the Board of Directors will have discussions and make decisions in consideration of business performance and financial structure. I won't be able to share with you any specific number at this point, but I promise that we will do our utmost to restore the dividend levels to the previous levels. At the Annual General Meeting of Shareholders in March, the company transferred capital reserves of KRW 1.7 trillion to retained earnings to allow tax-exempt dividends, which is expected to deliver substantive benefits to shareholders. And for your reference, according to relevant law, tax-exempt dividends are possible from the 2026 year-end dividends. Operator: [Interpreted] The following question will be presented by Joonsop Kim from KB Securities. Joonsop Kim: [Interpreted] I'm Joonsop Kim from KB Securities. I have 2 questions, one on MNO marketing, the other on AI DC. You have produced a recovery trend in terms of the net subscriber adds as well as market share. So I'd like to understand the overall subscriber market share target for SK Telecom and the marketing direction and how you're planning to strike a balance between profitability and marketing. Secondly, you reported that the AI DC revenue in the first quarter has increased by 89% year-over-year. And I'd like to understand how this AI DC business is making meaningful contribution to your profitability. If you can give us some color, I would appreciate it. Jong-seok Park: [Interpreted] Thank you for your questions. I'd like to address your question on our AI DC business, and I will hand over to [indiscernible] in charge of MNO support, who will answer your question on our MNO subscriber targets. First, let me comment on the time line as to when AI DC business will be able to make meaningful earnings contribution. First of all, I'd like to remind you that we only announced the AI DC revenue numbers, and we do not disclose any other indicators, including profitability-related indicators. We're aware that the market is interested in knowing this, but please understand that we are doing so in consideration of various factors, including the domestic data center market situations. Nevertheless, what I can say is that the AI DC business is comparable to the existing telecom business in terms of profitability, and there's much room for the AI DC business to become even more profitable going forward. Since AI DC is our key growth business, we will think of what we can share to help investors better understand our AI DC business performance. Now I'd like to turn to [indiscernible] in charge of MNO support to answer your question on our MNO subscriber targets. Unknown Executive: [Interpreted] I'd like to comment on our MNO subscriber target. The New Year 2026 started with the number of handset subscribers reduced by around 986,000 year-over-year. Reflecting on our performance in the first quarter, we were able to achieve a net add in subscribers on the back of changes in the competitive landscape, back-to-school marketing to attract new subscribers and S26 flagship handset marketing. As a result, we were able to achieve a net addition to our handset subscribers of 208,000. Throughout the year, we will continue to make efforts to recover subscribers by targeting new segments, including foreigners and strengthening competitiveness in terms of products, services and sales channels. When we continue to strengthen fundamental competitiveness through business operation focused on profitability, we believe that the subscriber base and the market share will naturally grow. And based on this approach, we will avoid engaging in excessive spending competition aimed solely at increasing subscriber numbers, but rather focus on market operation on securing high-LTV subscribers. Operator: [Interpreted] The following question will be presented by Aram Kim from Shinhan Securities. ARam Kim: [Interpreted] I'm Aram Kim from Shinhan Securities. I'd like to ask you 2 questions. First of all, telecom's equipment providers, both in Korea as well as abroad are focusing on developing AI-RAN, which is about using telecommunications network infrastructure for AI functions such as inference. So I'd like to get SK Telecom's view on AI-RAN. And secondly, there is an increasing demand and growth for AI traffic. And I'd like to understand what this increase in AI traffic, what kind of business opportunities will this bring to SK Telecom as a telco? Jong-seok Park: [Interpreted] Thank you for your questions. On your questions on AI-RAN as well as business opportunities brought by AI traffic, [indiscernible] in charge of Network Strategy will address them. Unknown Executive: [Interpreted] I'm [indiscernible] in charge of Network Strategy. I'd like to first talk about expected benefits and commercialization plans of AI-RAN. AI-RAN is evolving in 2 domains. One is to improve telecommunications network infrastructure using AI and the other is to use wireless network infrastructure as a platform to provide AI services. So in the first domain, we expect to be able to automate base station operations through AI-based failure prediction, optimization of traffic and resources and power efficiency improvement. This will lead to higher efficiency and improved customer experience. As for the second domain, we may be able to create new business opportunities and generate profit from the provision of AI services such as inference and media processing by utilizing AI computing resources at the base stations. We are actively participating in technology research and standardization together with global players and manufacturers such as Samsung, DOCOMO and NVIDIA for the evolution of AI-RAN. However, AI-RAN is still in an early stage, so we will consider the adoption of AI-RAN by comprehensively considering various aspects such as technology maturity, standardization, validation on commercial networks and other aspects. We will continue to maintain technology leadership in the next-generation network technology areas, including AI-RAN and use the technology leadership to proactively secure new business opportunities. Next, I'd like to make some comments on AI traffic. While there is a significant increase in AI traffic, the share of AI traffic in the entire traffic is still not very high. However, we're considering ways to make AI traffic increase with a connection with AI-RAN and how to distribute traffic across the networks. So we will continue to look into technology to be able to do so. Operator: [Interpreted] There are no questions in the queue right now. Tae Hee Kim: [Interpreted] This concludes the earnings conference call for 2026 first quarter of SK Telecom. If you need further explanations or have additional questions, please contact IR at any time. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Fredrik Ruden: Good morning. Welcome, everyone, to EG7's First Quarter Earnings Release. My name is Fredrik Ruden, Deputy CEO and CFO. And with me, I have my colleague and the company's CEO, Ji Ham. We will start with the presentation and then end with a Q&A session. And if you have any questions, please e-mail our Investor Relations e-mail address. By that, I hand it over to you, Ji. Ji Ham: Thanks, Fredrik. Good morning, everyone. Thank you for joining us this morning. And let's go to the first slide. We'll start off with our first quarter key performance figures here. For the first quarter, we came in with SEK 345 million of net revenues. That's down 24% in SE year-over-year, 13% organic in local currencies. Adjusted EBITDA came in at SEK 51 million, down 31% compared to last year, and EBITDA margin came in at 14.8%. That's 140 basis points lower than last year's numbers. Net profit-wise, we're returning to profitability with SEK 21 million of net profit compared to a loss of SEK 18.5 million last year and operating cash flow is strong with 5x the multiple compared to last year, coming in at close to SEK 90 million and EPS on a diluted basis of SEK 24 -- SEK 0.24. Next slide, please. So here, we showcase the net revenue bridge from last year to this year. So we wanted to demonstrate some of the key components that contributed to that decline. Underlying business is stable, but there's two major components that reduced our revenue for year-over-year. The first part of it being a significant FX impact. We had SEK 50 million of impact, about 11% of our net revenue contributing to our decline. And also Fireshine. So Fireshine, one of our publishing businesses last year in Q1 2025 had three physical titles that it released, which contributed SEK 96 million. That revenue is not present for this quarter as their revenue pipeline is more backloaded this quarter as well as this year. As a result, this missing revenue is also contributing to a revenue decline for this year, but that's timing related, not structural related. Otherwise, the organic growth for the other business units, including Daybreak, Big Blue Bubble as well as Piranha all showed positive growth, resulting in about SEK 40 million of growth year-over-year. When you account for all that, we end up at SEK 345 million of net revenue for Q1. But once again, two major components, one is FX. The other one is the backloaded revenue for Fireshine with timing that contributed to this decline versus any kind of structural issues with their business. Next slide, please. Some of the key strategic actions that we took this quarter. The first one is cost discipline. We continue to look at our business that may be underperforming, and we're actively looking to optimize in order to sustain our profitability in the long term. So we had restructuring with Petrol where we reduced about SEK 13 million of annual cost. Piranha, the same, we reduced about SEK 15 million of additional costs given their revenue level in order to get to sustainable profitability. Also contributing to a lower cost going forward would be reducing for remuneration by about SEK 4 million in total, about SEK 32 million of annualized run rate savings going forward. Additionally, we had a reduction in a liability to Daybreak earnout about USD 11 million that was paid in the first quarter. We had this tax receivables obligation that Daybreak earnout to the sellers that's been on the balance sheet for some time. We wanted to clean up our balance sheet. This should be resulting in about $1 million to $3 million of annual cash flow retention going forward for the next 12 years or so. And this generated about $16 million of profit onetime gain for our P&L as the -- what was booked on the balance sheet versus the purchase price resulted in this positive gain. And thirdly, we have the Proposed Cold Iron acquisition M&A. This is restructuring of the existing deal largely. We have a publishing deal in place where Daybreak is investing and publishing the new title that we disclosed earlier today, Aliens: Fireteam Elite set to release third quarter of this year. So we have the structuring change namely where we're shifting the publishing deal into an acquisition to really clean up this related party issue. So with that said, the structure remains largely the same where Daybreak would be fully recouping all the investment that it made, including any expenses that are going in for publishing prior to any kind of profit share that happens. There is an upfront payment that's going to be made along with this transaction, and that is tied primarily to the back catalog revenue that Cold Iron receives for the first title, Aliens: Fireteam Elite, and we expect that investment upfront purchase price to generate a positive yield with the remaining term for that particular title and continuing performance from that back catalog revenue going forward. Next slide, please. On the live-service side, we have continuing momentum here. We have 91% of our group net revenues coming from what we consider to be more predictable service revenues. So you have live-service revenue as well as back catalog revenue that contribute about SEK 314 million of net revenue for first quarter. And this declined only about 1.5%. So we have continuing very good sustainability of this revenue base and contributing to that with Daybreak, where we actually saw very strong growth year-over-year, 16.8% local currency growth from last year. And Daybreak represents 55% of group net revenues, which is significant. And this particular growth was driven largely by EverQuest, DC Universe Online as well as Palia from Daybreak's portfolio. Palia once again, doing well in terms of revenue growth. We saw 160% growth year-over-year, local currency. and it just celebrated 10 million lifetime players just last month. And we have a significant update coming up in next week, Royal Highlands expansion that's happening on May 12, which we expect to see another step-up in terms of user engagement growth going forward. Big Blue Bubble returned to growth again. So it's been about seven quarters since we saw year-over-year growth with Big Blue Bubble with My Singing Monsters strong performance in Q4 with the viral uptick again with their new influencer strategy, Clubbox, which has been doing really well, and they're continuing to see that sustained momentum around their business and the game. And that we saw a 3.6% increase in their net revenue year-over-year for Big Blue Bubble. Piranha also had a nice quarter, about 26% of local currency-based net revenue growth year-over-year. MechWarrior 5: Mercenaries DLC 8 also coming up later this month and EBITDA margin at 39% for Q1, which was a nice profitability for them. Next slide, please. So 2026 is shaping up to be one of our most robust pipeline in terms of our product slate in our history. We have Far, Far West from Fireshine that just released last week on April 28 as early access, 96% positive -- overwhelmingly positive rating on Steam as an early access title, which is amazing, together with that they shipped 700,000 units in the first week. We're seeing a nice momentum with this title. It's early access. It's only on PC, but we expect this game to continue to grow and sustain not only the sales, but being able to eventually bring this product out to multiple platforms, including consoles. We're very excited for that prospect going forward. So in Q2, we additionally have Palia: Royal Highlands, as we talked about from Daybreak, that's coming out next week, and we have MechWarrior 5: Mercenaries DLC 8 coming out later in May. And additionally, going forward, we have Fireshine, another title, Denshattack! mid-June time frame, which has a nice following on the wish list as well as. We're excited for that title also. Q3, the biggest release will be Aliens: Fireteam Elite 2, which we disclosed earlier today. And then we have an announcement with the reveal of the trailer that's going to be happening in about 8 hours tomorrow morning or tomorrow morning, California time. So we're very excited to finally bring this game, reveal gameplay and the trailer, et cetera. We're partnering with IGN who have an exclusive announcement relating to this title for the first 24 hours before we take it global. And in July, we have EverQuest Legends that's coming out from Daybreak as a more casual, more approachable type of gameplay that EverQuest team is being able to bring, which we're very excited about, and we're targeting that release for July. And we have My Singing Monsters anniversary, more collaborations with influencers, Clubbox strategy that we're going to be leveraging there as well to continue to drive engagement and user growth as well. And Fireshine has a couple of additional products that are coming out in Q3. And for the remainder of 2026, we have Fireshines with unannounced titles, six of them -- and we had live-service updates, expansion tax, et cetera, that we're very excited about that we continue to do year after year. So when you look at this overall slate for 2026, it is our biggest slate in EG7's history. We're very excited to be executing against this for the remainder of the year. Next slide, please. Fredrik, over to you. Fredrik Ruden: Thank you, Yi. In the first quarter, net -- sorry, next slide, please. In the first quarter, net revenue was SEK 345 million, down from SEK 455 million, representing a 13% FX-neutral decline. As I already mentioned, Daybreak, Big Blue Bubble, Piranha delivered growth in local currencies, but the unfavorable comparison is attributable to product release timing differences in Fireshine. The headwind currency effect in the quarter was SEK 50 million. LTM net revenue was SEK 1.5 billion and adjusted EBITDA margin was 15%. Both these KPIs are lower than historic average. Given our exciting release pipeline and cost optimization measures, the company is well positioned for solid potential growth in both top and bottom lines for the remainder of the year. Next slide, please. More predictable revenue comes from the live-service and back-catalog titles. Revenue from this portfolio was SEK 314 million. Of the last 12 months, net revenue amounted to SEK 1.5 billion, of which SEK 1.3 billion derives from the more predictable revenue base. This portfolio has delivered a stable, highly predictable cash generation for many years. In 2025, 69% of this portfolio was Big Blue Bubble and Daybreak, excluding Palia, the 2 most cash-generative businesses who generated 22% EBITDA margin in the full year 2025. And you can assume that to have grown a little bit in local currencies given the organic growth that we have in those businesses. Next slide, please. Daybreak is the largest contributor to the net revenue, generating SEK 190 million. This is flat in Swedish krona compared with last year, but the strong 17% organic growth in local currencies. The underlying operational growth in Q1 comes from 122% growth in Palia. And as I mentioned, the growth in local currencies was 160%, which is an increase from the 70% that we had second half of 2025 compared to 2024, which was the first period after we consolidated Singularity 6 where Palia is included. And it was also a strong performance from both DC Universe and EverQuest. The adjusted EBITDA came in at SEK 30 million, corresponding to 16% EBITDA margin. Big Blue Bubble delivered net revenue of SEK 61 million, corresponding to a 4% organic growth in local currency. After implementing a new influencer strategy, we had an activity peak in December and a more stable performance throughout Q1. This gave an adjusted EBITDA at SEK 30 million, which means first time in the past 12 months back at Daybreak's level of contribution. Next slide, please. As already mentioned, Fireshine had a soft quarter and challenging comparable figures, which is explained by release timing effects. Net revenue was SEK 45 million and the comparable figure last year was SEK 145 million, of which SEK 96 million came from three specific physical releases: Sniper Elite, The First Berserker and Atomfall. Given the low level of revenue, Fireshine did not reach profitability this quarter, but the start of Q2 is promising following the successful digital release of Far Far West, which over the first weekend reached over 500,000 units and now is up at 700,000. Petrol generated SEK 28 million in net revenue with yet another negative EBITDA. Based on this, we have executed a cost optimization restructuring in that business unit with the aim to deliver profitability from Q2 and on. Next slide, please. Piranha delivered a net revenue of SEK 21 million, corresponding to 12% growth of 12.5%. Adjusted EBITDA was SEK 8 million, corresponding to a 39% margin, up from 17% Q1 last year. And to strengthen Piranha 's long-term profitability further, cost-saving measures were executed in the beginning of the year, aiming to save approximately SEK 50 million on an annual basis would start Q2 2026. Next slide, please. Our financial situation remains solid. Operational cash flow increased to SEK 89 million from SEK 80 million last year. And the main difference is attributable to the increase is attributable to timing effects of collecting sales money from quarters with high sales. And Fireshine had a good sales in Q1 2025, as mentioned, but the cash did not flow through until Q2. We see an similar adverse similar effect, but smaller this year following the release of Jurassic in December 2025. We invested SEK 174 million, where SEK 101 million is the accelerated settlement of the earn-out to the seller of Daybreak and SEK 48 million represents investments in Palia and Cold Iron. The level of investment in the more predictable revenue base remained low. By accelerating the settlement of the earnout to the sellers of Daybreak to improve the next 12 years cash generation by USD 1 million to USD 3 million per year, we also drained the cash to the level where we reached a net debt of SEK 55 million. The cash [ box ] was SEK 293 million. And together with the unutilized rolling credit facility of SEK 100 million and a bond frame of SEK 1 billion, EG7 has plenty of financial strength going forward. And that's all from the financial discussion. So over to you, Ji. Ji Ham: All right. Let's go to the next slide, the last slide, key takeaways. All right. To summarize. So I think the first thing is that our underlying business continues to be very resilient. 91% of our net revenues is what we consider to be very predictable with live-service games and also that catalog sales and the decline of that year-over-year slight at 1.5% and some of the decline in terms of our net revenues where we had 24% decline in [ SEK ] is clearly explained by really two components here which is the FX related as well as Fireshine release slate more backloaded this year compared to last year. So we feel very good about our underlying business with nice foundation of our live-service games. Momentum is strong. Secondly, with our live-service games where Daybreak showed very nice growth for the quarter, close to 70%. Palia, one of the newer games that is continuing to build momentum around new players with 160% growth year-over-year. And Big Blue Bubble was back to growth, and we're seeing those trends that could be sustainable on the local currency organically growing, which we feel very good about for 2026 and beyond. And we continue to evaluate our business in a very disciplined way operationally, continuing to make sure that a lot of the business units that we have are operating well and maintaining sustained profitability and cleaning up balance sheet and simplifying things where it makes sense, earn-out where they break being settled, which should be increasing our cash flow generation for the next 12 years by $1 million to $3 million a year. And Q2 is off to a great start, Far Far West, really kicking it off with the released last week, 700,000 units 1 week is an amazing start. So we're very excited for this title and what it could achieve going forward. And Palia up next week with this big annual expansion coming out. And following that, we have multiple additional titles that are releasing throughout the year, including Aliens: Fireteam Elite 2, which we're very glad to finally reveal coming in late Q3 alongside a number of the other titles like EverQuest Legends that we're very excited for. So 2026 is going to be one of our most the strongest pipeline in our history and combining that with the additional, I would say, simplification of the overall structure with Cold Iron, which used to be owned by Daybreak, -- now we get to bring it back. And I think the deal structure that we're proposing is quite disciplined and clean in terms of maintaining the economics where EG7 Daybreak does have that first recoup priority over the investment that is making. So that's not changing and any funding upfront that we're making for the transaction. Relatively small, that is meant to really purchase the back catalog revenue from the first title, which we think would also generate a positive return for that investment here. So overall, net revenue top line number was down. But quarterly, we feel pretty good about the Q1 performance and looking forward to Q2 and beyond for the rest of the year. So that's the end of the presentation, and then we'll switch over to Q&A. Fredrik Ruden: Yes. So here is the question from [ Ilya ]. When will the Steam page for Aliens: Fireteam Elite 2 go live to enable wish list tracking? Ji Ham: It should be happening along with the games trailer release, which is happening at 8:30 a.m. Pacific Time or I guess -- yes, tomorrow morning, Pacific Time. So it's happening in less than 8 hours. Fredrik Ruden: Yes. And also a question from Ilya about marketing. When will the active marketing campaign begin for Aliens: Fireteam Elite 2 not just press announcements on outlets like IGN, but paid user acquisition, trailers, [ influencer ] activations and platform features. Ji Ham: Yes. So I mean that there's a full go-to-market plan relating to the games release. So tomorrow morning, once again, Pacific Time, we're revealing the trailer exclusive with IGN for 24 hours. And after that, it's going to be going broad with some media spend behind it in order to push and broaden the awareness relating to the titles announcement. And over the next number of months, we will continue to invest in awareness and marketing that builds up to the eventual release in Q3. So more to come on that front. But yes, we have a robust marketing plan going forward to support its release. Fredrik Ruden: Also one question from Ilya about the Cold Iron acquisition rationale. since EG7 hold the economic rights to Aliens. So what is being purchased with additional consideration? Ji Ham: Yes. So once again, in terms of the economics of the deal, there's really two components to it. One is the upfront $3 million payment. And as I mentioned before, that's largely tied to the acquisition of the back catalog revenue from the first title that Cold Iron continues to monetize. So that's the first component. Second component is related to really this title and the studio itself. The economics that we have for the transaction itself is very much the same as what the publishing deal is, but we get to bring it in. This related party situation with this particular studio and the game has been, I think, a confusion for the market, investor base, et cetera. But without changing the economics, being able to bring this in where Daybreak EG7 would be owning the studio, being able to have full control over this project on top of that, bringing in the talent to be able to utilize a lot of the technology, a lot of the investment that went into building Aliens: Fireteam Elite, the first game as well as the second game, that expertise around third-person action shooter, being able to bring that in-house for other types of games in this big genre that we could be investing and making going forward is also very attractive. So I think from an overall structure and overall economics perspective, not a lot of change other than really bringing this in the -- under the same umbrella as it used to be, where Cold Iron used to be owned by Daybreak and being able to also price out the transaction in a way that upfront consideration is meant to generate a positive return against the back catalog revenues that Aliens: Fireteam Elite continues to generate, we think it's structured quite nicely for the benefit of all the shareholders and ultimately, with potential upside from what we could do with Cold Iron going forward beyond just the Aliens: Fireteam Elite 2. Fredrik Ruden: I can take this one. What explains the high other revenue in Q1? So normally, we have items that is not related specifically to selling games that are accounted for in other revenue. And in this quarter, specifically, it's -- the amount is close to SEK 20 million or around SEK 20 million, which is higher than it normally is. And the explanation for that increase in Q1 is the accelerated earnout to the sellers of Daybreak because we had a book value of that liability, which was approximately SEK 60 million higher than what we paid. So we have a profit of SEK 60 million, and that is what is included in other revenue. Here is one question from. Could you elaborate a little on Fireshine 6 unannounced games? Is it digital only? Ji Ham: So the games that are unannounced are smaller digital games that they will be disclosing over the number of months going forward, yes. But we can't provide much more information on those at this time. Fredrik Ruden: So here is some questions from Hjalmar at Redeye. What potential do you see for Far Far West from here? Is the strong sales trend continuing? Do you expect it to be a game with a long tail revenue? And how large is the potential audience? Ji Ham: Yes. I mean it's difficult to say ultimately what the ceiling is for the particular title, but I think certain data points that we already have in the first week are very, very encouraging. So prior to the game's release, you had over 700,000 wish list. On top of that, in the first week, we sold 700,000 units, and it's a 96% overwhelmingly positive rating on Steam, which is highly unusual for an early access title. So I think the combination of how well it's received by the community, which speaks to the quality and the type of game that it is, it's a Co-Op Shooter, which also has elements of what made Deep Rock Galactics of the world really popular. So the overall combination that makes this game not only high quality but unique in terms of its gameplay as well as having certain tried and true gameplay elements that a lot of the community already very much enjoy from other popular games. The overall combination has resulted in this great success. And we're really excited for it. It's only on PC so far on Steam. It's only been a week. We think there's a nice runway for this popular -- this title to continue to generate popularity and continue to attract users as a Co-Op game that there should be also word of mouth as people talk to their friends about picking up and play this game. So a lot more to come. I think very exciting once again, just the first week, but we do have to see how the trend unfolds from here on out. But a lot of the data points point to a sustained success going forward, not only on PC, but being able to go multi-platform. Fredrik Ruden: All right. And another question for Hjalmar is what we can expect financially from Far Far West. Should we expect profitability in line with the historical digital publishing levels? And the answer to that is yes. And obviously, digital releases, they are also scalable. So depending on the success and the number of units, it could be higher margins, but it's -- you can assume same as historical profitability more or less. Here is a question also from Hjalmar. What should we expect for EverQuest Legends? Any notable impact on financials in Q3? Ji Ham: Yes. I mean we don't know. We expect that it's something obviously brand new that we haven't tried. It is a more casual version of EverQuest, also very much solo, meaning you don't have to play and you don't have to have a lot of other people playing with you, which is very different from EverQuest. So we do think that it sits next to EverQuest live currently, where that's the traditional tried and true. We know exactly how that game plays and so many people love and continue to play the game. But we also wanted to make this EverQuest Legends available to more casual players, players that do not have the time commitment required to play the EverQuest live as it is today. So we're really extending the audience where we get to hopefully recapture some of the labs players that may have left because they just don't have the time and they can't get a lot of their friends to pick up the game and play together. So now or you could play it on your own. So we're very excited for that, and there's nice momentum around the beta, lots of people, a lot of community activity and support on [ Discord ]. So we're seeing a nice momentum around it. So we're looking forward to bringing this out to the community in the next couple of months. But as to ultimately how we could do, we're optimistic. We're not investing heavily into it. It's a relatively small investment. So we expect that this is going to be a positive outcome. But as to how big and how long the runway is, I think that's something that we need to see before we could provide any further, I would say, guidance around it. Fredrik Ruden: All right. Another question from Hjalmar. Do you see potential growth in the My Singing Monster revenue from now? Based on the new initiatives? Or is it more likely to remain stable? Ji Ham: We're excited for its return to growth, right? So Q1, we're seeing positive year-over-year growth for the first time in seven quarters. So it's been some time. We saw that huge uptick back in 2022, 2023 and now being able to get back to growth again from last year with the successful rollout of this Clubbox strategy that really took a hold up sort of their future going forward in terms of what they want to do starting in Q4 last year. We had [ Pain ] also collaboration that just happened last week, and we're seeing nice response from that. And I think Big Blue Bubble has been quite successful being able to attract influencers that really like the game and being able to work with them to bring out fresh and attractive content for a lot of the audience where we get to collaborate with influencers, a broader audience as well. So there's more collaborations to come. And I think that Blue Bubble feels very good about the momentum they have and the expectation is that there's a shot being able to show additional growth going forward. Fredrik Ruden: There's a question how we should market [indiscernible], but it's an angle more to do we get any support from the IP owner with regards to marketing? Ji Ham: Yes. I mean, look, I think in terms of how a lot of these work would be -- you're working in partnership with the franchise owner. And the benefit of working on titles with well-known IP like in Aliens IP is that Disney and 20th Century, they continue to invest, right? So whether it's a TV show or movies or et cetera, even other video game titles, we do think that all boats rise as Disney and 20th Century continuing to invest, which they have been for the last couple of years. So we're looking forward to that type of support. And of course, from Disney's perspective, they want this to be successful, and they're going to be pushing on their side as well to get the awareness up and for us to be able to collaborate partner really pushing the game and get the awareness out and getting this in players' hands for them to really enjoy. Fredrik Ruden: How firm is the release window in late Q3? Could it also be Q4? Ji Ham: We have a very high degree of confidence at this point, not to say that it couldn't slip because this is game development. It could always happen, but at the same time, based on our current trajectory, we're feeling quite confident. Fredrik Ruden: What are your expectations for investments after the release of Aliens: Fireteam Elite 2? Ji Ham: Yes, I think a combination, right? So we continue to look at various opportunities, both on the M&A side as organic investments in our projects. So we do think that market has interesting opportunities. We haven't announced anything. There's nothing, I would say, that's very actionable at the moment, but we're looking at a lot of transactions. So it's going to be the same strategy, a combination of looking for good value with significant upside that those types of deals we like to do in the marketplace together with that, looking for opportunities to invest in our own projects. EverQuest Legend, smaller investment, but that's our own project or it's our own IP that we get to grow. We see upside from a number of Daybreak existing portfolio of titles that are older. But nonetheless, we're demonstrating that there's still growth left to do because our view is that ultimately, no one else will make another DC Universe online. No one else will ever make another Lord of Rings online, meaning these are one-of-a-kind unique properties that Daybreak EG7 currently control and continue to service, and we want to be able to continue to expand. So those types of investments are what we continue to consider. Palia, we're very happy about where it's trending and more to come in terms of where else we're going to be specifically investing in. but our strategy will largely remain very similar. Fireshine continuing to invest in cool products like Far Far West. So we like the opportunities that are out there. And I think a number of our business units are doing a great job investing smartly and yielding positive returns with those investments being made. Fredrik Ruden: I think we have a couple of more questions. How big is the Palia: Royal Highlands expansion? Do you expect to increase the player count? And what is the potential for incremental monetization following that update? Ji Ham: Yes. I mean I think the expectation is that with this particular update, just as we experienced last year with the big expansion update, -- we'll see a nice influx of new players and then also bringing back reactivating a lot of the lapsed players. So we expect to see a nice uptick in our user base and engagement. And there are new content and new features that are rolling out with this update next week that is meant to really provide additional ways for players to be able to engage and enjoy the game. But alongside that, there will be additional options for people to also spend. So there's mounts coming and there's a number of other very cool gameplay-related enhancements that I think players will really enjoy. And combination of all that is what -- what we're looking for, not only an increased overall active user base, but also monetization that goes alongside that. Fredrik Ruden: What should we expect from Petrol going forward? Will it be profitable following the latest cost optimization? Ji Ham: That's the expectation. I think, unfortunately, we've been saying this for the last few years. But at the same time, gaming market on the sort of lower to middle sort of tier has been more challenged versus the big guys, right? So on the marketing side, it tends to be where a lot of the gaming spend first gets pulled back. But nonetheless, we're seeing positive signs. They're continuing to lock up additional contracts with some of the big publishers. They tend to focus heavily on AAA guys, whether it's Activision or Take-Twos of the world. And they're seeing good results there. So in terms of revenue uptick, additional opportunities on contracts, et cetera, those are becoming more firm and growing. And along with that cost cut that we just recently implemented, we expect them to be at a profitable level and then be able to sustain that going forward. Fredrik Ruden: Thank you, Ji. I think by that, we close the Q&A session. And if you have any further questions, you can continue to e-mail the Investor Relations e-mail address, and then we will answer you in due time. And with that, I think this presentation is over. So we thank you all for listening in. Ji Ham: Great. Thank you, everyone.
Operator: Ladies and gentlemen, thank you for standing by. Hello, and welcome to the Taseko Mines Limited 2026 First Quarter Earnings Conference Call. Please note that this call has been placed on mute to prevent any background noise. I would now like to turn the conference over to our Vice President of Investor Relations, Brian Bergot. Please go ahead. Brian Bergot: Thank you, and welcome, everyone, to the Taseko Mines Limited 2026 First Quarter Conference Call. The news release and regulatory filing announcing our financial and operational results was issued yesterday after market close and is available on our website at tasekomines.com and on SEDAR+. I am joined today in Vancouver by Taseko Mines Limited's President and CEO, Stuart McDonald, Taseko Mines Limited's Chief Financial Officer, Bryce Hamming, and our COO, Richard Tremblay. As usual, before we get into opening remarks by management, I would like to remind our listeners that our comments and answers to your questions will contain forward-looking information, and this information by its nature is subject to risks and uncertainties. As such, actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, I encourage you to read the cautionary note that accompanies our first quarter MD&A and the related news release, as well as the risk factors particular to our company. These documents can be found on our website and also on SEDAR+. I would also like to point out that we will use various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in the related news release. Finally, all dollar amounts we will discuss today are in Canadian dollars unless otherwise specified. Following opening remarks, we will open the phone lines to analysts and investors for questions. I will now turn the call over to Stuart for his remarks. Stuart McDonald: Thank you, Brian, and welcome, everyone, to our first quarter earnings call. As usual, I will start with an overview of our recent operating results, and Bryce can then review the financial performance. It was an exciting quarter for us with the startup at Florence and first copper from that new operation, but I will start today with our Gibraltar mine, which had another solid quarter. Steady production that we saw in the second half of last year continued into the first quarter. The mine produced 30 million pounds of copper and just over 700 thousand pounds of molybdenum, which was generally in line with our expectations. Head grade of 0.25% was slightly above our life-of-mine reserve grade, and copper recoveries of 83% also benefited from the higher-quality ore from the lower benches of the Connector Pit. Mill throughput was slightly lower this quarter as we focused on optimizing copper recoveries from the higher-grade ore, and we also had some unplanned mill downtime. Overall, it was a good production quarter at Gibraltar. We did see some operating cost increases in the period as Gibraltar's C1 cash cost increased to $2.63 US per pound produced. That is about 6% higher than the previous quarter and was impacted by inflation in a few areas, most notably diesel prices and explosives. With the situation in the Middle East, diesel prices have increased about $0.50 per liter compared to last year—those are Canadian cents—which represents $0.15 US per pound of copper at Gibraltar. We are also seeing higher costs for explosives as the market for ammonium nitrate has been affected by a plant outage in the US. Repairs and maintenance was also higher this quarter, although that was more of a timing issue related to some key repairs, and we do not expect that level of spend to continue for the rest of this year. Offsetting those factors was a strong quarter from molybdenum production, which continues to provide a meaningful by-product credit, and we expect similar moly grades for the remainder of this year. Gibraltar's SXEW plant also contributed 733 thousand pounds of copper cathode production in Q1, and we were able to keep that plant running through the winter months, which was a positive. We stopped leaching operations at Gibraltar in April to complete the tie-in of a second leach pad, and that should support higher cathode production going forward. Turning to Florence now, it was a major milestone that we achieved in late February with first copper cathode production. This is a testament to the perseverance and technical expertise that our project team demonstrated over the last decade to bring this project through the PTF test program, permitting, a well-executed capital project, and now finally into commercial production. In Q4, we started injection of solutions into the wellfield, and the initial flow rates were higher than expected. This allowed for faster acidification of the ore body, and solution grades increased faster than planned, reaching targeted levels in January. The commissioning of the SXEW plant was completed in mid-February—it was a few weeks behind schedule—and by that time, we had built up an inventory of copper in solution, and we harvested 1.5 million pounds of cathode over the remainder of Q1. In recent weeks, our operating team has done an excellent job of stabilizing the whole circuit from wellfield through to cathode production. We now have approximately 90 production wells producing copper at a consistent daily rate in the range of 55 thousand to 60 thousand pounds a day. This is in line with our expectations for the initial wells at this stage and represents another significant de-risking step for the project. Now our focus is on ramping up, which means expanding the wellfield to increase flow rates and copper production. We currently have five drill rigs operating, and after a slow start, we have seen drilling productivities improve in the last few weeks. This month, an additional 20 production wells will come online. Then later in the summer, an additional group of 26 new wells will begin producing, and further groups of wells will be added every month for the remainder of the year. As the wellfield expands, we will see higher solution flows and PLS grade, which will allow us to achieve a 30 to 35 million pound target for the year. It is important to note that production will not be perfectly correlated to the number of wells, as each ore block has a slightly different ramp-up profile, and the new wells added to the perimeter of the wellfield will improve the performance of the existing inner wells. We continue to expect 30 to 35 million pounds of copper production from Florence this year, with production weighted to the second half as new wells are put into production. Our target is still to achieve 80 to 85 million pounds of copper production next year, in 2027, which is the steady-state capacity of Florence. Lastly, a quick update on Yellowhead. Our project team remains quite busy advancing environmental assessment work, and following on from the community open houses that we hosted last fall, we are now incorporating feedback from stakeholders to complete the detailed project description. We expect to file that this summer, which will lead towards a readiness decision and the next phase of work. Also, just last week, the Government of British Columbia announced the addition of new major projects to its priority projects list, and Yellowhead Copper was included. This is a clear message that the province recognizes the value of our Yellowhead project. We are continuing to work closely with the Simpcw First Nation, the Province of BC, and the Government of Canada to move the permitting process forward as efficiently as possible. I will now turn the call over to Bryce. Bryce Hamming: Thank you, Stuart, and good morning, everyone. Overall, despite some cost inflation at Gibraltar, the strong production and sales translated to another strong financial performance in the quarter. As Stuart mentioned, Gibraltar copper sales were 27 million pounds in the quarter, lower than the 30 million pounds that we produced due to shipment timing. This included 938 thousand pounds of cathode sales. This build-up of concentrate inventory is expected to be sold in the second quarter. Moly sales were 708 thousand pounds and benefited from higher moly grade in the Connector Pit. Together, copper and moly sales generated $237 million of revenue in the quarter, which is the highest quarterly revenue generation for the company to date. Moly revenues were more than double the same period in 2025, benefiting from the higher production levels and roughly 25% higher moly price, and today it is over $28 per pound. Total site costs in the first quarter were $142 million, which includes $15 million of capitalized stripping costs. This is 13% higher than Q4 last year and includes the cost inflation that we talked about. For the quarter, Taseko Mines Limited generated $94 million of adjusted EBITDA, $115 million of earnings from mining operations, and $94 million in cash flow from operations. Net income in the quarter was $17 million, or $0.05 per share, and on an adjusted basis was $28 million, or $0.08 per share, after removal of unrealized fair value adjustments. Financial performance and adjusted earnings were impacted by the copper collars we currently have in place. We put these collars in place last year to support our project finance and our ramp-up of Florence Copper. These collars reduced our effective selling price to $5.40 US per pound in the current quarter, as compared to the LME, which averaged around $5.83 in the quarter. As a reminder, these collars roll off in June, with 27 million pounds remaining for the second quarter, at which point we will begin realizing the full LME price up to a much higher level of $7.50 and $8.50 US per pound. There is no limit after Q3 at the moment. It is also worth noting that as Florence begins to generate free cash flow later this year, we will likely revert to our previous practice of just purchasing out-of-the-money copper price puts with shorter time horizons—say, a quarter or two out—which is to protect against shorter-term copper price volatility. That lower strike will have a modest payment of premium to provide that downside protection, and that strategy of purchasing copper puts outright does not limit our copper price upside. Now that we are getting to the end of our development and ramp-up of Florence, Florence Copper reported sales of 600 thousand pounds of cathode in the quarter, with a balance of production of 900 thousand pounds in finished inventory. We also had 600 thousand pounds of copper in solution as what we call work-in-progress inventory. Direct costs associated with the cathode production at Florence in the quarter were $10 million, which is split across these inventory amounts. Our operating segment note—refer to Note 22 in our financials—now shows our revenue and cost of production at Florence, and it showed $4.5 million for the quarter, so no initial profit was recognized on our first sales of Florence cathode. In the first quarter, we capitalized $21 million of commissioning and start-up costs incurred at Florence. We also capitalized wellfield development costs of $18 million for new wells being constructed. These drilling and well development costs will continue to be capitalized as sustaining capital throughout the operation’s mine life, and they will be depreciated over the useful life of the well on a units-of-production basis from the copper recovered. Next quarter, with increasing production from Florence’s SX facility, we will see much less capitalized site operating costs, with most of the operating cost expensed as cost of production as cathode is sold. We ended the quarter with total available liquidity of $322 million, including $169 million of cash. With stable cash flows being generated from Gibraltar combined with our rising production and cash flow from Florence, our liquidity should be maintained in the second quarter and begin increasing in the second half. As our liquidity grows, we will look to begin opportunities to reduce debt and delever later this year. I will now turn the call back to the operator for questions. Operator: We will now open the call for questions. A quick reminder before we start the Q&A: press star and the number one on your telephone keypad to raise your hand and enter the queue. If you would like to withdraw your question, simply press star one again. We will take our first question from Dalton Baretto from Canaccord Genuity. Please go ahead. Dalton Baretto: Thank you, operator. Good morning, Stuart and team. I am trying to unpack this whole diesel and asset exposure a little bit more. I know you have some context on that. Let us start with the diesel. I know you highlighted the impact on C1 cost, but outside of that, when you look at your cap strip at Gibraltar and then the wellfield deployment at Florence, what sort of impact would you anticipate there? Thank you. Stuart McDonald: Hi, Dalton. It is Stuart here. In total, across Gibraltar, we are using roughly 40 million liters of diesel a year across capital and operating. We have seen about a $0.50 Canadian per liter increase—roughly $20 million Canadian year-over-year is what you are seeing across that. Of course, at Florence, it is a very different type of operation. We do not really use any diesel or any fuel to speak of, so that is the impact on diesel. Dalton Baretto: And then just on the assets, Stuart, it is great to see you guys are locked up for the rest of this year. Are you starting to have conversations with your suppliers about next year yet, both around availability as well as around pricing? Richard Tremblay: Yeah, Dalton, Richard here. We have maintained contact with our current supplier and, obviously, discussions around next year are on the agenda, but nothing in any kind of formal or detailed or specific way. We are definitely watching the market and seeing what is happening. Dalton Baretto: But have you been given any comfort around availability? I mean, I am assuming pricing is a separate conversation, but just around availability. Richard Tremblay: Yes, and availability seems like it will be there. It will be more of a price discussion. Dalton Baretto: Great. Thanks, guys. That is all from me. Operator: Star and the number one on your telephone keypad. Again, that is star and the number one on your telephone keypad. We will take our next question from Craig Hutchison from TD Cowen. Please go ahead. Mr. Hutchison, you might be muted on your device. Craig Hutchison: Good morning, guys. Thanks for that. Just on Florence, I appreciate you guys have given some guidance around back-half weighted, but can you provide any more clarity in terms of what we can expect for the cadence? Should we expect a material uplift in Q2, or something similar to Q1? Just anything in terms of what we should be modeling from a cadence perspective would be appreciated. Thanks. Stuart McDonald: Hi, Craig. As I mentioned in my remarks, we are running right now at a daily production rate around 55 thousand to 60 thousand pounds a day—about 1.5 to 1.8 million pounds a month. That is kind of April and May. We will have new wells coming on in May, which will start to produce copper in June, but generally I would not expect a major uplift in production in Q2 from that kind of monthly rate. I think you will start to see a much bigger increase in Q3 and Q4 when we have additional, larger portions of the wellfield starting to open up. That is why we have indicated it is quite heavily weighted to the second half of the year. Craig Hutchison: Okay, great. Maybe shifting to Yellowhead. You guys mentioned it is on the new major projects list for British Columbia. What does that mean from your perspective? Does that mean there is going to be some effort to fast-track permitting? Is there certain financial support you will get from the province? And I guess you also mentioned dialogue with the federal government as well. Anything in terms of where you see permitting going and what kind of support you are receiving from different levels of government? Thanks. Stuart McDonald: Thanks. We certainly appreciate that it was good recognition to be included on that list, but the reality is we do not see any significant change in the permitting process. We have been working closely with all levels of government for the last couple of years, and between the Simpcw First Nation, the Province of BC, and the Government of Canada, everyone is focused on trying to have an efficient permitting process and not have duplication of work across different agencies. That is really where our focus has been. We do not see much changing on the permitting track as a result of that announcement. On government support more broadly, we do think we have good support from the Province and the Government of Canada, and we have some dialogue ongoing as well. Yellowhead would be a major new copper mine—it has the potential to be the second-biggest copper mine in Canada—and that, of course, is getting attention. Nothing tangible yet to announce, but certainly progressing on some good discussions across governments. Craig Hutchison: Okay, great. Maybe one last question would be just New Prosperity. Anything new on that front in terms of moving that project forward? Thanks. Stuart McDonald: No major updates to report. We are focused on expanding our relationship with the Tŝilhqot’in Nation, continuing to work with them following on the dialogue that we completed last year, but otherwise no significant updates there. Operator: We have reached the end of the Q&A session. I will now turn the call back over to management for closing remarks. Stuart McDonald: Great. Thanks, everyone, for joining today, and we will talk to you next quarter. Thank you. Operator: The meeting has now concluded. Thank you all for joining, and you may now disconnect.
Operator: Hello, and welcome, everyone joining today's Americold Realty Trust First Quarter 2026 Earnings Call. [Operator Instructions] Please note this call is being recorded. It is now my pleasure to turn the meeting over to Rich Leland. Please go ahead. Rich Leland: Hello, and thank you for joining us today for Americold Realty Trust's First Quarter 2026 Earnings Conference Call. In addition to the press release distributed this morning, we have filed a supplemental financial package with additional detail on our results. These materials are available on the Investor Relations section of our website at www.americold.com. This morning's conference call is hosted by Americold's Chief Executive Officer, Rob Chambers, along with Chris Papa, our Chief Financial Officer. Management will make some prepared comments, after which we'll open up the call to your questions. Before we begin, let me remind you that management's remarks today may contain forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those anticipated. These forward-looking statements are based on current expectations, assumptions and beliefs as well as information available to us at this time and speak only as of the date they are made. Management undertakes no obligation to update publicly any of these statements in light of new information or future events. During this call, we will also discuss certain non-GAAP financial measures, including NOI, core EBITDA and net debt to pro forma core EBITDA and AFFO, among others. The full definition of these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures are contained in the supplemental financial package available on the company's website. Please note that all warehouse financial results are in constant currency and reflects the Q1 2026 same-store pool unless otherwise noted. Now I'll turn the call over to Rob for his prepared remarks. Robert Chambers: Thank you, Rich, and thank you all for joining our first quarter 2026 earnings conference call. Before we begin, I would like to formally welcome Chris Papa to the team as our Chief Financial Officer. Chris started with us in February and brings more than two decades of experience, leading investment-grade rated and publicly traded REITs. Since joining the team, Chris has been fully engaged, meeting with leaders across the business, spending time with our investors and our customers and touring our facilities. He brings a unique mix of qualifications and experiences and I look forward to his many future contributions to drive our business forward. Turning to our first quarter financial results. We delivered AFFO of $0.29 per share above analyst consensus. Chris will review the full detail in just a few minutes, but I was pleased that all key metrics materialized in line or slightly better than our original guidance. I'm particularly encouraged that our physical occupancy was flat year-over-year, further supporting relief that inventories levels have largely stabilized. These trends have continued in April, and we believe that we should see a return to more normalized seasonal trends as we progress throughout the year. Our pricing metrics in the quarter also marginally overperformed expectations. Our commercial teams continue to lead with our value proposition, which we call the Americold Advantage, consisting of best-in-class service, technology solutions and a suite of services rather than simply competing on price as you see from others in our industry. Our customer churn rate remains low at 2.5%, further validating our view that service remains a top priority to our customers when considering their cold chain partner. During the quarter, we also successfully renewed 34% and of the year's fixed committed contracts that were either month-to-month are set to expire in 2026. This represents approximately $100 million of revenue and extends the weighted average duration of our future expirations. Importantly, we held our total rent and storage revenue from fixed committed contracts at 59%, very solid performance during a critical renewal period as customers continue to see the benefits of a fixed commitment structure. All of these metrics demonstrate our company-wide focus on commercial excellence as we navigate through the current market environment. Since stepping into the CEO role, I've been laser-focused on setting a strong foundation for future growth while ensuring that we deliver on our financial commitments. Despite a continued challenging macro environment, we've now delivered 3 straight quarters that either met or exceeded AFFO per share consensus. Beyond our financial performance, we also made significant progress this quarter on each of our 5 key strategic priorities. As a reminder, we launched these objectives late last year to strengthen the foundation of our organization and set us up for long-term success. They include delevering our balance sheet to maintain our investment-grade profile, actively managing our portfolio of real estate assets for maximum value, streamlining our operations and rightsizing our cost structure, identifying unique opportunities to drive occupancy growth across our network and selectively supporting our key customers and strategic partnerships. Perhaps the most foundational of these priorities are the strategic actions that we are taking to strengthen our balance sheet. Earlier this morning, we announced the formation of a new joint venture with EQT Partners, one of the largest purpose-driven real estate investors in the world. EQT is a sophisticated investor in the space as they own one of the largest cold storage providers in Europe. They will hold a 70% interest in the JV as part of their infrastructure portfolio with Americold contributing a seed pool of 12 properties across the U.S. worth over $1.3 billion. This represents a blended cap rate to the JV of approximately 7% for nearly $3,300 per pallet position. This is a significant premium to our public market valuation, which reflects the mission-critical nature of our assets. As part of the agreement, we will continue to operate the assets, providing continuity of service to our customers as well as providing ongoing asset management and development expertise to the JV. We anticipate closing the transaction in the third quarter at which point Americold will receive approximately $1.1 billion in proceeds, which we intend to use to pay down a portion of our outstanding debt. As many of you are aware, joint ventures are a common structure across the REIT industry, and I'm thrilled that EQT is a partner to help support our strategy. We expect to expand the platform in the future with additional development opportunities and we already have one exciting new project for consideration, which I will discuss in just a moment. As we look forward, our capital allocation priorities remain consistent, maintaining an investment-grade balance sheet, evaluating the portfolio for asset recycling opportunities and continuing our disciplined approach to new capital deployment. Our second priority is to actively manage our portfolio to address underperforming properties while pursuing the highest and best use of our geographically diverse network of real estate assets. During fourth quarter call, we indicated that we had identified 9 additional facilities to exit or idle in 2026. Two of these exits were completed in Q1. Both of these facilities were leased and we returned the keys to the owner at the end of the term after successfully shifting much of the customer inventory into our nearby facilities. These buildings will be torn down, removing over 62,000 pallet positions from the Atlanta market. Of the remaining facilities, the majority have been idled and are actively being marketed for sale. We'll continue to do our part to remove excess capacity from the industry, we continue to see smaller, less sophisticated operators remain under pressure. In the quarter, we've heard of several smaller operators and new market entrants either shutting their doors or struggling to meet their financial commitments. In many of those instances, we've been the beneficiary of volumes coming back to Americold, given our status as an industry leader. Beyond just exiting facilities, we are also pursuing attractive triple net leasing opportunities across the portfolio. During Q1, we identified one of these opportunities and purchased an existing leased facility at well below market value and subsequently entered into a 15-year triple net lease with a new tenant to fully occupy the space. By eliminating the rent expense and acquiring the property at a discount, we are able to achieve an approximate 10% return on investment. We also signed several other new deals in the quarter, and have increased our annualized leasing revenue by over $4 million or about 7%, which you can see reflected on Page 24 of the financial supplement. These are all great examples of the disciplined process we are taking to creatively ensure we are receiving the best value possible from our real estate assets. Our third priority is to rightsize our cost structure and drive efficiencies across our operation. Late last year, we identified $30 million in potential savings within indirect labor and SG&A, and I'm pleased to report that all initiatives were completed in Q1 as expected. We are exploring additional cost actions, and Chris will discuss the details in a moment. While we are taking cost out of the business, we are being extremely cautious to ensure that we retain the high level of customer service that Americold is known for in the industry. This quarter, I'm pleased to announce that our Fort Worth railhead site received the Warehouse of the Year award from Kraft Heinz. This award was measured by performance KPIs, like turn times, inventory accuracy, fill rates and others. It is a great example of our relentless pursuit of efficiency and high-quality service resulting in meaningful value to our customers. Congratulations to our team in Fort Worth. Our fourth priority is driving organic growth by leveraging our operational expertise, scale and mission-critical infrastructure in adjacent and underpenetrated sectors. Late last year, we announced our initial win with On the Run in South Australia, one of the nation's most well-known convenience and petrol providers. And in February, we announced the expansion of our relationship to support their national network in Australia. As a reminder, we are providing tri-temperature warehousing services to replenish every product in the store and have expanded our coverage to 600 of their locations. Additionally, I am very pleased that we recently renewed our contract with KFC in Australia for an additional 10 years. Americold has been working with KFC stores for the last 30 years, and we will continue to support their restaurant network of approximately 500 stores on the East Coast of Australia for the next decade, providing tri-temperature warehousing and distributing all of their food and nonfood materials. Additionally, as part of this extension, we are implementing a technology solution that will generate restaurant-level sales forecast recommend replenishment orders and proactively optimize inventory positioning across the network. This technology will serve as the backbone of our store support solutions and is a great example of a Americold's differentiated offering and the value we can provide to our QSR multiunit customers. In North America, we successfully closed on a handful of new pet food and floral deals this quarter, expanding our presence in nonfood categories. Additionally, our initial outreach into pharmaceutical space resulted in a new storage commitment for probiotic products. While these floral pet food and pharma deals will not be material to our results this year, they remain a great example of our ability to capture business in multiple new markets, while the food industry remains under pressure. One area that we're particularly excited about is our e-commerce business. which has been growing at a double-digit rate. We're currently onboarding 3 new accounts and shipped over 1 million package last year. We've expanded our capabilities to 5 sites across the country and have the ability to cover 99.5% of the U.S. population in 2 days or less. Similar to our retail and QSR customers, e-commerce is operationally intensive which gives us an advantage in pursuing new business given our experience in the area and the strength of the Americold operating system. On to our fifth priority. From a development perspective, our expansions in Sydney, Australia and Christchurch, New Zealand were both delivered on time and on budget during the quarter. Both expansions are dedicated to large grocery retailers and add critical capacity to both markets where our existing facilities are nearly full. These facilities are great examples of the opportunity to strategically invest in markets that have not seen the level of speculative activity that has occurred in the U.S. Finally, as I mentioned earlier, one of the important benefits of our new partnership with EQT is the ability to pursue new development opportunities through the joint venture. While we have significantly narrowed our development pipeline and refined our internal requirements for capital allocation, there are certain customer-driven projects where it makes sense to support our key relationships. A great example of this is a new customer dedicated project that we're kicking off with the McCain Foods and [indiscernible]. McCain is a top 5 customer for Americold with a nearly 35-year relationship. We have an existing plant advantage facility that is located adjacent to their manufacturing plant [indiscernible] they want to consolidate portions of their cold storage network with an additional 56,000 pallet positions at the site. The project is backed by a 20-year fixed commitment agreement from McCain and given the attractive profile of the project, we believe that this is a type of project that could fit well in the joint venture. This is truly a win-win transaction for all the parties involved and we're honored that McCain chose us for this opportunity, and we look forward to servicing them for many more years to come. This win also highlights the importance of having a diverse network at every node in the supply chain. Customers evaluate their future networks, we continue to see large food manufacturers looking to consolidate significant piles of inventory back closer to production. This is an area where Americold is a clear industry leader, and we're positioned to take advantage of this trend, given our long-standing relationships and solutioning expertise. I am proud of our progress in each of our 5 key strategic priorities this quarter with the joint venture representing a meaningful step towards our long-term leverage goal. As we continue to relentlessly pursue cost savings, portfolio management and see our developments continue to come online, we're confident that our current playbook will build a strong foundation for future success. With that, I'll turn the call over to Chris to provide some additional details on our performance in the quarter. as well as some of the anticipated impacts to our financial statements for the new joint venture. Chris? Christopher Papa: Thanks, Rob, and good morning, everyone. I'm excited to participate this morning on my first call as Americold's Chief Financial Officer. As Rob mentioned, since joining, I have met with our leaders, investors, customers and towards several of our facilities. I have been impressed by the capability and discipline and service our teams bring every day. I believe the scale, diversity and mission critical nature of our assets, when coupled with our operational expertise, creates a compelling value proposition that is difficult to replicate. I look forward to helping unlock this value for our shareholders. One of my first priorities when I arrived was to fully engage in the strategic capital raise initiative that our management team and Board have been diligently pursuing for the past several months. I am very familiar with real estate joint ventures and the partnership with EQT not only strengthens Americold's balance sheet by funding debt repayment, improving liquidity and reducing future development risk, but also allows us to preserve operational control and cash flow from the assets. As Rob mentioned, we expect the transaction to close in the third quarter, at which point we will receive approximately $1.1 billion in cash proceeds. We plan to use these proceeds to repay all of our 2026, 2027 and a portion of our 2028 U.S. dollar-denominated debt maturities. We will continue to operate these warehouses and receive a management fee of approximately $15 million to $20 million each year. We will also receive 30% of the NOI generated by venture, which will be recorded on our P&L under the line item titled Income Loss from investments in partially owned entities. These 12 properties represent approximately $231 million in revenue and [ $103 million ] in NOI for fiscal 2025. At the end of Q1, our net debt to pro forma core EBITDA was 7.1x, and this transaction on a pro forma basis would reduce this by about 3/4 of a turn. This reflects significant progress toward our goal of 6x or less. We believe this joint venture, along with our portfolio optimization, ongoing cost actions and stabilizing industry fundamentals is a strong confidence in our ability to achieve this goal and we remain committed to maintaining our investment-grade profile. While we don't know the exact timing of when the transaction will close, we estimate that the JV could be a full year headwind to AFFO of approximately $0.10 per share or roughly $0.06 per share for the second half of 2026. The ultimate impact will depend on when the deal closes. Since the business is currently performing in line to slightly ahead of our expectations, we believe that we will be able to offset most, if not all, of this impact. We are proud of our ability to preserve our AFFO guide for the year and simultaneously executed a strategic transaction to reduce leverage and significantly improve our balance sheet position. We will provide more granular updates to our individual guidance components as the deal nears completion. Beyond the joint venture, I want to discuss our first quarter results, where we delivered AFFO per share of $0.29, exceeding analyst consensus. We were encouraged to see same-store physical occupancy stabilize with economic occupancy contracting slightly less than anticipated. While we are not updating our full year occupancy and pricing assumptions, this is certainly encouraging performance. Outside of the U.S., we were pleased to see throughput in both Europe and Asia Pacific increased from the prior year and Europe's physical occupancy increased by over 800 basis points in the quarter. This is very strong performance and reflects the positive impact of the new business that was won by the international team over the past couple of quarters. Our Q1 warehouse NOI decreased 4.5% as expected, driven by the ongoing pricing pressure in the storage market and lower throughput and as well as a modest $2 million headwind from energy costs this quarter. As a reminder, almost all of our customer contracts have the ability to pass through abnormal cost increases. In addition to the power surcharge mechanism, we also lock in power rates in deregulated states, which represents about 25% of our portfolio. We have pursued energy-saving best practices for many years and we are also leveraging AI to strategically pull power from the grid during nonpeak outers. As a reminder, power expense is only about 6% of our same-store warehouse costs and we plan to leverage all available mitigation strategies to continue managing these costs closely and minimize future P&L impacts. As Rob mentioned, one of our key priorities for the year is to optimize our cost structure. We were pleased to see core SG&A for the quarter came in relatively flat year-over-year, absent the impact of certain accruals that can fluctuate in Q1 and and served to offset the typical wage rate inflation across the business. Late last year, we identified $30 million in savings between both indirect labor and SG&A. We are pleased to report that these were fully executed and we reduced indirectly by over 400 positions in Q1. Additionally, we recently commenced the second phase of this project to identify further cost savings opportunities in other parts of our business as well as to explore ways to enhance efficiency within our organizational structure. Our goal is not only to reduce expenses but also to optimize how our teams operate and collaborate across the company. I look forward to sharing the outcome of this broader analysis with you on next quarter's call. Additionally, as Rob mentioned earlier, we have made great progress with our portfolio management initiative, which is another one of our 5 key priorities for the year. As a reminder, when a site has no customers and minimal operating costs or otherwise meets the held-for-sale accounting criteria. We moved their expenses to transactions, strategic initiatives and other costs on our P&L. You can see on Page 22 of the supplement that we have included additional detail regarding these costs, which have decreased substantially versus the prior year. we exit sites, we are often able to terminate the lease or find an interested buyer in a fairly short period of time. Proceeds from the sale of our own properties will assist with delevering our balance sheet. Additionally, since I joined the company, we have asked the team to do a review of our expansion and development projects to reassess our assumptions around the timing of stabilization dates, cash flows and expected yields given the duration of the current macro environment. While certain of these projects have been impacted more than others, many of them have, in some way, felt the effects of the soft market conditions that are impacting our industry. We will update you on the results of this review in the coming quarters. In the short time I have been with Americold, I have been impressed by the team's focus on delivering the strategic priorities for the year. I believe these priorities are the best blueprint to building a strong foundation for the future and that this team can bring that vision to life. I'd rather be part of such a talented group of people and look forward to leveraging my expertise to further unlock this company's potential. Now I would like to turn the call back over to Rob for some closing comments. Rob? Robert Chambers: Thanks, Chris. I'm very pleased with our results this quarter and remain confident in the long-term direction of our business. In my discussions with customers over the past several months, they remain cautious with their outlook for the year. However, they are increasingly mentioning investments in innovation as well as increased marketing and promotional spend, all with a focus on consumer value. These actions are intended to help drive organic volume growth. And in fact, we've seen this reflected in their earnings releases over the past several months with several customers regarding sales growth in the first quarter of the year. I hope to see this continue to gain traction as we navigate through the balance of the year. As I've mentioned in the past, this is not a team that is standing still and waiting for a rebound in demand. I'm very proud of the significant progress that we are making across all 5 of our key priorities while also delivering on our financial commitments. The formation of the joint venture is a significant accomplishment, strengthening the balance sheet, illuminating the disconnect between public and private markets and supporting future development. It is also a testament to this team and this organization's ability to execute as well as the Board's focus on unlocking shareholder value. With disciplined capital allocation, a sharpened focus on operational excellence and unwavering dedication to customer service, I believe we are well equipped to create meaningful growth over time. I want to thank our associates around the world for their continued hard work and our shareholders for their ongoing trust and support. Operator, we're now ready to open the call for questions. Operator: [Operator Instructions] We will take our first question from Michael Griffin with Evercore ISI. Michael Griffin: I wondered if you could give a little bit more color on the facilities being contributed to the JV? Where they are along the cold chain, the age, customer mix, kind of anything that might have stood out for these assets? And then would you say it's indicative of the portfolio quality overall of that, call it, [ 7 ] transaction cap rate? And then lastly, I know you mentioned the cap rate in the prepared remarks, how should we think about this deal on sort of the EV to EBITDA multiple basis? Robert Chambers: Thanks, Michael. So let me start with the portfolio that we're contributing to the joint venture. I think what you said is right. I mean the facilities are a good representation of the broader North American portfolio. So what we see would be facilities that are geographically diverse, facilities that are across each of the node in the supply chain along with some conventional and automation as well. So, we think it's a very good mix of facilities. It's one that EQT was certainly excited about being part of a joint venture. And from our perspective, we're also very excited that we'll continue to have a meaningful ownership stake in those facilities and be able to operate them and provide the level of continuity to our customers that they would expect. So, it's a significant accomplishment out of the gate here, and we're very excited about it. Operator: We'll go to our next question, Brendan Lynch with Barclays. Brendan Lynch: Maybe just on the physical occupancy growth that you saw in the quarter, can you disaggregate that between consolidation to fewer facilities versus just the industry improving? Robert Chambers: Yes. There's really essentially nominal to no impact on the consolidation of the facilities because we adjusted that same-store pool at the end of last year. So the impact of physical occupancy in Q1 was a result of of industry stabilization, along with a combination of new business wins coming in, some market share gains that we've seen as we've seen some of the the volumes that have previously been with some of the small providers come back in. So I think when you look at the overall impact of the the physical occupancy being flat to slightly up, it was driven by industry fundamentals, new business wins and some market share gains. Operator: We will come next to Viktor Fediv with Scotiabank. Viktor Fediv: I have a follow-up on this JV financials. So it looks like EQT will be retaining 70% and you will be getting $1.1 billion in cash proceeds, which kind of implies $1.6 billion of total value? Just trying to understand puts and takes here and what is involved. Christopher Papa: Well, I mean, the total transaction size is $1.3 billion. given the debt we're putting on the project and our equity contributed to the venture, we think we'll be able to pull out about $1.1 billion of proceeds from the venture. Operator: And we'll take our next question from Craig Mailman with Citi. Craig Mailman: I think Bert had asked earlier about the EBITDA multiple, I don't think I heard an answer on that. Does the 7 cap equate the [indiscernible] a 9% to 10% EBITDA multiple? Maybe give us some guide rails there. Then, Chris, to your commentary that you guys are putting debt in the JVs, is that [ 0.75 ] term reduction on debt to EBITDA? Is that on a look-through basis, like if you assume the JV debt, do you still get that 3 quarters of return reduction pro forma that? Christopher Papa: Sure. So I'll answer that -- the second question first. Yes, the 3 quarters in turn we talked about includes picking up our share of the debt from the JV. So we'd be picking up our [indiscernible] portion of that debt as well as the EBITDA. I'll let Scott address the EV to EBITDA question. Scott Henderson: Craig, if you think about the math around this point, $1.3 billion enterprise value for the JV, an NOI strip before fee of roughly $110 million. And then with a fee of around $17 million to get to a net NOI strip of below 90s and that gets you to the 7% cap rate that we quoted. So hopefully, those parts help back to answer the question on a yield basis, which you convert to a multiple. And when you think about the fee strip in this business, given the operational intensive nature and the amount of work that goes into, it looks a little bit different than I'd say your traditional industrial business. Christopher Papa: And Craig, I'd add that if you look at it on an EV to EBITDA basis, is this valuation implies a couple of hundred basis point increase over where the stock is currently tripping. Operator: And we'll go next to Michael Goldsmith with UBS. Michael Goldsmith: It seems like you were active on the renewals of fixed committed contracts during the quarter. So maybe can you talk a little bit about the negotiations with your tenants, what was the feedback from them? What was their ability to absorb pricing or they're asking for concessions? Just trying to get a sense of what you're hearing from your content base and how that ties to your overall pricing power? Robert Chambers: Yes. Thanks, Michael. I mean, I think the work that we did in the quarter on fixed commitments is one of the -- that's certainly one of the highlights of the quarter. As we mentioned in our prepared remarks, we were able to work through 34% of all VIX commitment contracts that were month-to-month or had expirations in 2026. We said now for several quarters, just as a reminder that these contracts tend to be relatively ratable throughout the year, meaning there's not a whole lot of outsized renewals in one quarter or another. So that 34% represents great progress in a single quarter. We continue to be very pleased by the conversations that we're having that we think are extremely constructive given the fact that our customers recognize the value of having that fixed commitment structure. So despite the fact that we recognize and acknowledge that there's more capacity in the industry than there has been historically. We've been able to maintain that 59% of our total rent and storage revenue being derived from these fixed commitment contracts. So I think the metrics speak for themselves. It's playing out probably slightly better than what we had planned in our guide. You saw that our economic occupancy was down slightly while our physical occupancy was flat. That's exactly what we assumed would have in a slight contraction, but it is less of a decrease in terms of economic occupancy than what we had planned. So very, very encouraged to see that. On the pricing side of the equation, our pricing metrics are marginally better than what we had guided to. Storage on a constant currency basis was down slightly year-over-year. that does tend to be -- the storage side of the business does tend to be the side of the business that gets discounted a little bit more than the handling just given the margin profile. So we're making sure we're being thoughtful. We're making sure we're market competitive on the pricing and that we're responding to the current environment. But at the same time, we continue to lead with our value proposition. And I think as this environment has played out longer. Really what customers are seeing is that customer service is the most important decision-making factor and who they partner with and price is important. But if your product isn't showing up on time and in full and if you can't invest in your customer base and you can't grow with them and you don't have the technology solutions and your only value proposition is price, you eventually return back to the industry leaders. And so that's exactly what we're seeing constructive conversation and I think great progress this quarter. Operator: We'll take our next question from Michael Carroll with RBC Capital Markets. Michael Carroll: Rob, is there a specific mandate for the new joint venture as and does Cold need to contribute future investments or development opportunities in the JV? Or does this need to be agreed upon by both parties to be able to do it similar to like the McCain development that you talked about in your prepared remarks? Robert Chambers: Yes. Yes. Look, I mean, we want to scale this venture. And so we're -- we'll be working to provide first looks of development opportunities to the joint venture. There's no mandate that if the venture passes on those that we can't do those on our own accord. So we'll be providing some first looks related to development projects to the venture. We think that's the best path forward given the opportunity to do some off-balance sheet development to ensure that it doesn't -- there's less volatility to earnings there. Outside of that, no mandate to contribute other stabilized assets. So, this is going to be a great partnership. We think we're confident we found the right partner in EQT given the level of sophistication in the space and the alignment of our mission and our values. So a big step for both parties. Operator: We'll take the next question from Nick Thillman, with Baird. Nicholas Thillman: Maybe you wanted to touch a little bit more on just the joint venture assets being contributed and the profile of them. As we think of it relative to your fixed commitment contracts, is it similar to that [ 60% ] of that revenue associated with those assets is similar in mix and then what the average duration of those contracts are on those assets being contributed? And then maybe secondly, just a point of clarification on the $110 million of NOI, does that include the handling and services NOI contribution as well? Robert Chambers: Yes. On the NOI, it does. It's both the storage and handling NOI. I'd say the portfolio is very representative of the broader Americold pool. So again, these sites are geographically diverse. There's some conventional, there's some automation, they are customer dedicated. They're a multi-tenant. They're fixed commitments, they are transactional agreements. So be thinking about it as very similar to the broader portfolio, the Americold wholly owned portfolio will look very similar pre and post and that's exactly what EQT was looking for, and that's exactly what we felt like was the right path to see the JV. Operator: And we'll take question from Mike Mueller with JPMorgan. Michael Mueller: I think this is a kind of a dumb clarification question. But the release says that EQT isn't baked into guidance. But Chris, we were talking about the transaction in your comments, you mentioned that you're kind of proud to maintain guidance, while this is kind of going on simultaneously. So I guess, is it in guidance? Or is it not guidance? Robert Chambers: Yes. Let me start and then Chris can jump in. I mean -- so look, I mean, we're sitting here on May 7. And as we look at the trajectory of the business and we look at the fact that the metrics were coming in line to above our expectations, absent the joint venture, we would be thinking about the business trending towards the higher end of our original guide. And now that we have this joint venture that is still subject to traditional closing conditions, and we don't have the final date of when the JV will be -- will close. When we look at it on a pro forma basis, what we can sit here today and tell you is when we factor in the closing of a joint venture assumed during the third quarter that we'll be able to absorb the impact of that JV and maintain our original guide. So as we get a little bit closer to the closing of the JV, we'll be able to provide more specific details around each one of the guidance parameters. But the punchline here is we're maintaining our guide inclusive of the impacts of the joint venture in 2026. Christopher Papa: And then just to be more specific about the guidance, the original guidance that we had given obviously did not include the JV, but it also did not include any incremental cost optimization initiatives. So those two things going, obviously in different directions, coupled with, as Rob said, our business performing slightly ahead of expectations, gave us confidence to keep it in that [ $120 million to $130 million ] range from an AFFO perspective. But we'll come back with more details in the second quarter as we get as the JV and the cost optimization materialize. Operator: And we'll go next to Alexander Goldfarb with Piper. Unknown Analyst: So question, as you guys were doing the strategic review, and I'm guessing that it's not done, how does exiting regions, there's discussion in the press that perhaps maybe certain regions overseas to exit or larger outright sales? Just trying to see, is the JV -- is this -- you're done? I mean you have 2 activists as part of the company. So is this JV done or there are other potential strategic initiatives and work that could include exiting, whether it's regions or larger parts, larger portfolios? Robert Chambers: Yes. Let me maybe just take a step back, so I can answer the question holistically. I mean, since I took the role in September, one of my first priorities was to sit down with the Board and really develop what our key strategic initiatives we're going to be for 2026. And top of the list was strengthening the foundation and delevering the balance sheet. And so knowing that, that was a priority, we started a process, right, then there to evaluate multiple different options to get there. And we've looked at different geographies, portfolio management, this joint venture opportunity. And during that review process, it was very clear that there was tremendous interest from institutional investors, not just in this asset class, but also to have a continuing partnership with Americold. And so as we started down the path of evaluating this option specifically, we felt like it met all of our objectives. This option obviously strengthens our balance sheet, it gives us the opportunity to pay down debt materially and then lower leverage. This transaction highlights the lower gap between public and private valuations in the space. Again, these facilities are being contributed $3,300 per pallet position. We trade at $1,500 per pallet position right now. So a significant premium. This supports our ability to do development with our key strategic comers in a customer-dedicated manner and it allows us to continue to have a meaningful ownership percentage in these facilities and provide the level of continuity to our customers that we expect and do it all with a partner that we really feel has the right level of sophistication, experience and is aligned from a values perspective. So this is to the right deal. We're confident in that. We certainly are always open to options that create shareholder value. I think we're doing within our priority list. Several other key initiatives, the portfolio optimization and management with the 19 sites over the last 2 years that we're idling and/or exiting as having a meaningful impact on our results. The great things that we're doing to grow this business organically, you can see in our occupancy and our pricing. So I think this puts us on a trajectory to get to our long-term leverage goal, but we're always open to continue to evaluate opportunities on a go-forward basis. Christopher Papa: And Alex, if you think about it from a balance sheet perspective, we talked about in our prepared remarks that this transaction, we expect to have an impact of reducing our debt to EBITDA of about 3/4 of return. It's a meaningful contribution toward our deleveraging but it also allows us to start thinking about things on a go-forward basis on a more targeted basis, continuing to do more targeted capital recycling plus the cost optimization initiatives that are underway. We'll continue to also move the needle on deleveraging down toward that 6x or less target. So I think we could be more surgical on a go-forward basis, but certainly, we're considering options as we continue to manage the business. Operator: And we'll take a follow-up question from Mike Mueller with JPMorgan. Michael Mueller: Real quick on a prior question about JVs, the JV and development. I think you said we're going to provide some first looks to the JV. So is it -- you have the choice to provide a first look on development to the JV? Or you kind of have to do all U.S. development first looks to the JV? Scott Henderson: Mike, it's Scott. Yes, we've given EQT, our exclusive partner to look at those joint ventures and then there's optionality. After that, if that does not go into the joint venture, but hopefully, that answers the question. And it's targeted to North America, Mike, and we'll be focusing on some potential expansion opportunities in the pool as well as things like build-to-suits like the project, Rob highlighted on the call. Robert Chambers: And I think as we wrap up here, I just want to highlight again, as we move forward and sitting here today in May, we've got very clear priorities. This team is now a track record of demonstrating our ability on executing against those priorities and delivering on our guide and our financial commitments. And so I thank all of our associates for helping us support that and delivering every day and look forward to continuing that track record. Operator: And that does bring us to the end of our question-and-answer session. We'd like to thank everybody for joining today's call. We appreciate your time and participation. You may now disconnect.
Operator: Good day, and welcome to this Tapestry conference call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone. Christina Colone: Good morning. Thank you for joining us. With me today to discuss our third quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry's Chief Executive Officer; and Scott Roe, Tapestry's Chief Financial Officer and Chief Operating Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today and in our presentation slides. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com/investors and then view the earnings release and the presentation posted today. Now let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities and our outlook going forward. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I'd now like to turn it over to Joanne Crevoiserat, Tapestry's CEO. Joanne Crevoiserat: Good morning. Thank you, Christina, and welcome, everyone. Our standout third quarter reflects the compounding benefits of our Amplify strategy. With the consumer at the center of everything we do, we are consistently translating insights into action at scale, delivering exceptional results with pro forma revenue growing 23% at constant currency, operating margin expanding 490 basis points and earnings per share increasing 62% versus prior year, each exceeding our expectations. This outperformance allowed us to confidently increase our outlook for the year, underscoring that our advantages are structural and sustainable. The enduring strength of our business has been built with intention and is reflected in our results, underpinned by a commitment to deep consumer connection, disciplined growth and sustained value creation. I want to recognize our exceptional global teams. Our performance is a testament to their passion, curiosity, creativity and agility. Now turning to the strategic actions from the quarter, which are driving our results today and continuing to expand our competitive advantages into the future. First, we built emotional connections with consumers acquiring over 2.4 million new customers globally in the quarter, driven by an increase in Gen Z. This continues to be a key driver of our growth as engaging consumers earlier supports higher repeat purchasing and lifetime value. Importantly, our Gen Z consumers have higher retention rates than the balance of cohorts highlighting the opportunity to build lasting relationships and meaningful value creation into the future. We also drove growth with our existing customer base, demonstrating broad-based strength. Together, these dynamics reinforce a durable and repeatable competitive advantage, our ability to consistently attract and retain new generations of consumers to our brands. Next, we delivered fashion innovation and product excellence, led by Coach, where the brand is strong and resonating globally. Importantly, we accelerated growth in our core leather goods offering, with healthy and diversified growth drivers in place, reflected in both higher AUR and unit volume. The combination of craftsmanship, creativity and value we offer to consumers at scale continues to be a clear competitive advantage and a structural strength of our business. And we powered global growth through compelling experiences, delivering double-digit gains in North America, Greater China and Europe, significantly outpacing the industry and growing market share in each of these regions. Our DTC-led business model creates a direct connection with our customers, enabling more relevant brand building and deeper insights, which together drive consistent execution and sustainable growth. This was evident again this quarter as we achieved over 20% growth in stores and online at strong and increasing profitability. Overall, we delivered another record quarter, highlighted by double-digit top and bottom line gains, demonstrating a differentiated business model built for high-quality and long-term growth. Now moving to our results by brand. Turning to Coach. The brand delivered another exceptional quarter with constant currency revenue growth of 29% and increasing profitability. We are executing our strategies with consistency, rooted in our blend of Magic and Logic, which is the creativity and passion of the Coach teams around the world paired with our systemic approach to understanding the consumer. There are several key indicators, reinforcing the strength of the brand and the durability of its growth. Customer acquisition once again drove our top line growth this quarter, with Coach welcoming 2 million new customers to the brand, a significant increase over the prior year. Gen Z acquisition accelerated meaningfully and their influence extended across generations, fueling broader new customer growth. Further, we saw strong and broad-based gains with our existing customer base. Together, these trends highlight the legacy of Coach and the relevancy of its expressive luxury position as the brand continues to build enduring consumer relationships that transcend generations. Our core leather goods assortment continued to lead with unit volumes increasing over 20% and AUR growing at a low double-digit rate, demonstrating multiple drivers of sustainable growth in our core. And momentum was strong across key geographies, including North America, up 27%; Greater China, rising 58%; and Europe, increasing 27%, highlighting the global resonance of the brand and the effectiveness of our regional strategies. Overall, Coach is bringing new consumers into the category and growing the market. And with a large TAM, we have under 1% share and meaningful opportunity ahead. Now to cover our third quarter results in more detail. Our creative teams are delivering innovation that is clearly resonating with consumers. Our icons continued to outperform consistent with our strategy with broad-based strength across our assortment. The Tabby franchise remained a standout while the New York family, including Brooklyn, Empire and the newly launched Chelsea drove strong Gen Z acquisition. Teri, Laurel and Rowan also delivered outsized gains, reinforcing Coach's leadership in its core category. Importantly, Coach's accelerated growth in leather goods highlights the timeless values of the brand and the value we offer in the luxury market. Looking forward, we believe our strong product pipeline and innovation supports further gains in both AUR and units, reinforcing the diversified drivers of healthy and sustained growth while never compromising our value proposition, a hallmark of the brand. Next, turning to Footwear. We delivered accelerated growth of approximately 20% in the quarter fueled by sneakers with the continued success of the Soho family. This family is resonating across channels, demonstrating the traction of the One Coach strategy beyond leather goods. Footwear remains a long-term growth opportunity for Coach, given our brand strength, low share of the market and the categories relevance to our target consumer. Touching on marketing. Our strategic investments continue to generate compounding benefits this quarter, reflecting a disciplined long-term approach to brand building at scale. We increased marketing spend by approximately 50% versus the prior year, with a continued shift to our top-of-funnel brand building to support sustained customer acquisition. Our spring campaign continued to build emotional connections with Gen Z consumers globally. Leading with insight and not just product, Explore Your Story was inspired by Gen Z's desire to turn to books and storytelling to find depth, community and a sense of self in an increasingly complex digital world. The campaign featured our global ambassadors, including Elle Fanning, Storm Reid, Paige Bueckers, and K-pop artist, So-yeon. On all metrics, this campaign is winning with our target consumer. Additionally, to support growth acceleration in China and in celebration of Lunar New Year, we partnered with CLOT, a world-renowned Chinese streetwear brand. The collaboration came to life through a fully immersive experience, bringing together gaming, a cafe, a bespoke collection shop and daily community activations. This engagement highlights the strength of our brand and a deepening understanding of the Chinese consumer that together represent a meaningful and lasting source of competitive advantage in the market. Collectively, these actions are driving cultural relevance and customer acquisition and reinforce our growing moat around consumer understanding and sustainable demand creation in our most significant markets. And finally, we are strengthening brand desire through distinctive, immersive retail experiences that elevate how consumers engage with Coach. During the quarter, we continued to roll out our new expressive luxury store concept globally. These stores are delivering higher traffic in dwell times, particularly with Gen Z reinforcing our strategy to scale this concept to more locations moving forward. We also opened 3 new Coach play stores in Japan and North America, locations that are fully immersive and localized. And we continue to open additional Coach coffee shops as we harness the power of the brand to engage with consumers in new and relevant ways. In closing, Coach continues to deliver outstanding results, reflecting the clarity of our brand vision and an unwavering focus on the consumer. Importantly, these results speak to the future as they are fueled by proven strategies, intentional investment, exceptional execution and structural advantages that enable us to consistently connect with consumers across generations and geographies. This reinforces our conviction that Coach will be a $10 billion brand over time with best-in-class margins, grounded in our commitment to nurture and build on what makes the brand iconic, enduring and loved by consumers around the world. Now moving on to kate spade. Our actions to strengthen the brand for long-term sustainable growth are underway. In the third quarter, revenue declined 11%. Top line trends improved sequentially, though fell slightly below expectations, which included pressure from our strategic pullback in promotions at retail. At the same time, gross margin and profitability exceeded plan, even with continued strategic brand investments to support a return to profitable growth. As we continue the work to unlock the full potential of kate spade, what gives us confidence is that where we focus and invest, we see signs of progress. This is true across brand consideration, handbags performance and customer acquisition as we welcomed 400,000 new customers to kate spade in the quarter. We also know that turnarounds take time and the path to long-term growth is not always linear. We are continuing to track the leading indicators of growth informed by our success and learnings at Coach. This gives us earlier visibility to evaluate where our efforts are taking hold and where we need to adjust our execution and investment, ensuring that progress is continued, tangible and sustainable. Now turning to our strategic initiatives in more detail. First, we remain committed to fueling brand desirability supported by marketing. Our Spark Something Beautiful campaign continued this quarter and drove a lift in both consideration and purchase intent, proof that when consumers see our brand and content, we see traction. We also know that we need more consumers to engage with our content as unaided brand awareness more broadly has not yet improved. And this is a key part of driving acquisition and ultimately, growth. As a result, we're scaling our marketing efforts to expand the reach of our campaigns while increasing activations with creators to support broader visibility and increased brand relevancy with our target audience. Next, we continue to build handbag blockbusters with a more focused assortment grounded in consumer insights. During the quarter, handbag blockbusters, led by the Duo and Margot outperformed the balance of the offering with strong Gen Z recruitment at higher AUR. The Duo Mini seen on Kendall Jenner sold out in stores and online, clear evidence that when we bring together consumer insights, creativity, value and cultural relevance, we are driving desire and demand for the brand. Overall, with a more targeted and relevant handbag offering, we drove higher full-price selling and handbag AUR growth at constant currency, consistent with our strategy. Moving forward, there is more work to do to strengthen our creative execution, and we are focused on bringing more innovation and distinctiveness to our assortment to drive stronger results at scale as we continue to build for durable growth. Finally, touching on our third strategic pillar, maximizing compelling omnichannel consumer experiences. We enhanced both our in-store and digital experiences, simplifying the customer journey and elevating engagement. As a result, Net Promoter Scores increased versus prior year, indicating that the consumer is both recognizing and valuing the enhanced shopping experience. In addition, our light-touch renovation test continued to deliver a lift in conversion and ADT and outperformed the balance of the fleet. We plan to expand this format to additional locations in North America by fiscal year-end. To close, kate spade is an iconic brand that holds a distinct place in the fashion and luxury consumer landscape. We made continued progress this quarter, and we remain intensely focused on the path to profitable growth. The leading indicators tell us that we're moving in the right direction. We also know there is more work to do to further improve our execution while scaling what is working today. We have the right strategies in place and remain confident in the meaningful long-term potential for the brand. Before turning it over to Scott, I'd like to leave you with these overarching takeaways. Tapestry delivered another record quarter and raised our outlook for the year. We are a consumer-obsessed organization of passionate brand builders with an agile, data-driven operating model. This is who we are and it's driving our results. From this position of strength, we are navigating a dynamic external environment with strategies that are proven and structural advantages that compound over time. We're moving confidently into the future with an unwavering focus on the consumer, applying our blend of magic and logic with discipline to deliver the creativity and value that together drive durable global growth and long-term value creation. I'll now turn it over to Scott. Scott Roe: Thanks, Joanne, and good morning, everyone. In Q3, our revenue, operating income, earnings and free cash flow outperformed our expectations, each growing double digits versus prior year and further reinforcing the structural, durable and diversified drivers of our growth. Turning to the details of the third quarter. I'll begin with a discussion of revenue trends on a pro forma constant currency basis. Sales increased 23% compared to the prior year and outperformed our expectations. These results reflect strong global momentum. By region, North American sales rose 20% compared to the prior year, fueled by a 27% increase at Coach with growth, market share gains and operating margin expansion ahead of plan. In Europe, revenue grew 21% above last year, driven by strength in our direct business, which was fueled by strong new customer acquisition, particularly among Gen Z. Growth continues to come through local consumer spending, contributing to strong market share gains in the region. Europe remains a significant opportunity for further growth given our low penetration and market position. And before moving on, I want to touch on the disruption in the Middle East. First, by saying that the safety and security of our people and consumers are a top priority. The region, which is operated through a distributor model represents less than 1% of our sales. And while we are closely monitoring the situation, we do not anticipate a material direct impact to our business at this time. Now turning to Greater China. Revenue rose 55%, growing ahead of expectations and driving significant market share gains. This outperformance was fueled by accelerated customer acquisition and broad-based growth across channels led by digital. During the key Chinese New Year holiday, we meaningfully exceeded our plan as we continue to win with Gen Z consumers, cutting through with creativity, relevant activations and focused investments in the region. Looking forward, we remain well positioned to drive strong momentum in this large and important market. In Other Asia, revenue increased 16%, led by growth primarily in South Korea and Australia. And in Japan, sales declined 10% as expected, driven by an intentional pullback in promotions. Now touching on revenue by channel for the quarter. We delivered gains across channels, fueled by direct-to-consumer growth of 23% compared to the prior year. This included an increase in digital of approximately 25% and over 20% growth in global brick-and-mortar sales with all channels at strong and increasing profitability. Moving down the P&L, we continue to drive healthy margin expansion versus the prior year delivering a third quarter gross margin of 76.9%, 80 basis points above our prior year. This was driven by operational expansion of approximately 190 basis points as well as a favorable impact from the divestiture of Stuart Weitzman of 70 basis points. These benefits fully offset a negative tariff and duty headwind of approximately 180 basis points, which included a 150 basis point negative impact on Coach's gross margin and a 440 basis point negative impact on kate spade's gross margin. And as compared to our plan, Tapestry gross margin was 180 basis points better than our forecast, with approximately half of the upside due to stronger operational performance and half due to lower tariffs. As a reminder, we have not implemented any price increases in direct response to tariffs, reflecting our disciplined and consumer-focused pricing strategy. Overall, our strong gross margin remains a core element of our value creation model, supported by our agile supply chain, which delivers craftsmanship at scale, a core competitive advantage of Tapestry. Turning to SG&A. Our expenses rose by 13% and leveraged by 410 basis points, inclusive of a 160 basis point increase in marketing, which represented 12% of sales. The leverage we drove in the quarter reflects our strong operational discipline and focused approach to reinvestment to drive long-term growth. So taken together, operating margin expanded 490 basis points in the quarter driving profit expansion of 55% over the prior year, which was ahead of expectations. And our third quarter EPS of $1.66 grew 62% over the prior year, also exceeding our guidance. Now turning to shareholder returns, starting with our dividend. Our Board of Directors declared a quarterly cash dividend of $0.40 per common share, representing $81 million in dividend payments for the quarter. Additionally, during the third quarter, we bought back $150 million worth of stock for a year-to-date total of $1.05 billion or approximately 9.3 million shares repurchased at an average stock price of approximately $112. In fiscal '26, we now expect to return approximately $1.6 billion or approximately 100% of our expected adjusted free cash flow to shareholders through dividends and share repurchases. This includes over $300 million in dividend payments for an annual rate of $1.60 per share as well as $1.3 billion in share repurchases, which is an increase from our prior outlook of $1.2 billion. Our significant return of capital to shareholders reflects the strength of our organic business, including our robust and consistent free cash flow, which is a differentiator of our model, providing flexibility to invest in growth while delivering meaningful returns to shareholders. And now before turning to the details of our balance sheet and cash flows, I'd like to reiterate our capital allocation priorities, which are unchanged. We have 2 foundational commitments. First, to invest in our brands and business to support long-term sustainable growth and to return capital to shareholders via our dividend with the goal over time to increase the dividend at least in line with earnings growth. Beyond these 2 foundational commitments, our robust cash flow generation provides us with balance sheet flexibility for value creation. This includes the opportunity for share repurchase activity under our previously announced $3 billion share repurchase authorization. And finally, utilizing our rigorous four-lens framework, we consistently evaluate opportunities for strategic portfolio management. Importantly, and as previously communicated, before moving forward with any acquisitions, we will ensure Coach remains strong and kate spade has returned to sustainable top line growth. These clear capital allocation priorities are underpinned by our firm commitment to a solid investment-grade rating and maintaining our long-term gross leverage target of below 2.5x. Now turning to the details of our balance sheet and cash flows. We ended the quarter with nearly $1.1 billion in cash and short-term investments and total borrowings of $2.4 billion. Together, this represented net debt of $1.3 billion. At quarter end, our gross debt to adjusted EBITDA leverage ratio was 1.1x, more than a full turn below our long-term target. Adjusted free cash flow for the quarter was an inflow of $229 million, and CapEx and cloud computing costs were $50 million. Inventory levels at quarter end were 3% below prior year on a reported basis, excluding the impact of Stuart Weitzman. In fiscal '26, we continue to expect inventory levels to be down modestly year-over-year on a reported basis. Importantly, our inventory continues to be current and well positioned globally. Now moving to our guidance for fiscal '26, which is provided on a non-GAAP basis and excludes the impact of Stuart Weitzman from our fiscal '26 expectations. We are raising our full year guidance, incorporating our third quarter outperformance, along with a stronger outlook for the fourth quarter. Now turning to the details. For the fiscal year, we now expect revenue to be in the area of $7.95 billion, representing pro forma growth of 16% in constant currency with FX planned to be an 80 basis point tailwind. Touching on sales details by region at constant currency on a pro forma basis: in North America, we now expect revenue to increase mid-teens; in Europe, we expect growth in the area of 20%; in Greater China, we now expect to achieve growth of over 30%; in Japan, we're forecasting a high single-digit decline; and in Other Asia, we anticipate low double-digit gains. And by brand, this guidance now incorporates growth of over 20% at Coach. At kate spade, we now expect a low double-digit decline. In addition, our outlook now assumes an operating margin of approximately 23%, which is up approximately 300 basis points compared to last year and 120 basis points above our prior outlook. We now anticipate gross margin to increase approximately 110 basis points, a meaningful improvement from our prior outlook. This assumes operational gross margin expansion of roughly 190 basis points due primarily to improvements in AUR. Further, we expect to realize a 60 basis point structural tailwind to gross margin from the disposition of Stuart Weitzman. These planned margin drivers are expected to fully offset a headwind from tariffs and duties in the area of 120 basis points as well as a modest FX headwind. This outlook embeds current U.S. trade policies and excludes any potential impact from IEEPA refunds on tariffs paid. On SG&A, we expect leverage of 190 basis points favorable to our prior outlook. This reflects our diligent expense control, partially offset by ongoing growth-focused investments. To this end, we expect marketing as a percentage of sales to now increase around 190 basis points versus last year, an increase of 60 basis points from our prior guidance and now approaching 13% of revenue. We will also realize a 20 basis point benefit to expenses from the sale of Stuart Weitzman. For some texture on operating profit by brand, we anticipate Coach will expand its operating margin. And at kate spade, we continue to expect a modest profit loss, reflecting outsized tariff impacts and brand investments. Moving to below the line expectations for the year. Net interest expense is expected to be approximately $60 million. The tax rate is expected to be approximately 17.5% and our weighted average diluted share count for the year is forecasted to be approximately 210 million shares, which includes the expectation for $1.3 billion in share repurchases. Taken together, we now expect EPS to be in the area of $6.95 representing growth over 35% compared to last year and ahead of our prior outlook of $6.40 to $6.45. Moving on, we now anticipate adjusted free cash flow to approach $1.6 billion. And finally, we continue to expect CapEx and cloud computing costs to be in the area of $200 million. We anticipate around 60% of the spend to be related to store openings, renovations and relocations with the balance primarily related to our ongoing IT and digital investments. Briefly touching on the shape of the year, our outlook implies balanced first and second half top line growth at the Tapestry level and by brand. At Coach, this is low 20s growth and down low double digits at kate spade. For Q4 specifically, our guidance embeds pro forma revenue growth of low double digits on both a reported and a constant currency basis. This incorporates a low teens growth rate at Coach, ahead of our prior expectation and representing growth of roughly 30% on a 2-year stack basis. And at kate spade, we expect a high single-digit decline in the fourth quarter. Turning to operating margin. We expect expansion of approximately 60 basis points, driven by a gross margin increase in the area of 130 basis points, partially offset by higher SG&A, which reflects strategic investment in brand building with an increase of over 300 basis points in marketing to drive long-term growth. And Q4 EPS is forecasted to be approximately $1.20, an increase of over 15%, including a tax rate of roughly 18%. In closing, we delivered another outstanding quarter with strong top and bottom line outperformance and significant cash flow generation, underscoring the compounding and diversified drivers of our growth. From this position of strength, we raised our outlook for the year, reinforcing our confidence and reflecting our disciplined and consistent execution. Supported by clear and proven competitive and structural advantages, we are well positioned to deliver sustainable value creation for years to come. I'd now like to open it up for your questions. Operator: [Operator Instructions] Our first question comes from Bob Drbul with BTIG. Robert Drbul: Congratulations on another great quarter, meaningful beat and raise. So based on your guidance, with the FY '26 EPS guidance in the area of that $6.95, I think that's what, 35% versus last year and 23% operating margin, you're on track to deliver on your Investor Day targets 2 years ahead of plan. So given this outperformance and your current expectations, can you help us think about the growth trajectory for FY '27 and beyond? Joanne Crevoiserat: And to your question, where do we go from here? We're just getting started. As we talked about at our Investor Day, we've reframed our TAM, our addressable market, and we have low share of a large TAM. And our goal is clear and unchanged to deliver durable growth that's defined for us as mid-single-digit revenue growth as a floor, well ahead of the category at best-in-class margins, which we expect will deliver exceptional TSR. And our performance this year and this quarter only gives us more confidence. So let's talk about what's driving our growth. The foundation that we talked about that we covered at our Investor Day is our transformation into a truly consumer-obsessed organization for passionate brand builders. And we're enabled by this agile, data-driven operating model that's driving innovation and impact across our business. This is now embedded at Tapestry. And our goal is to connect with new generations of consumers around the world. This is the fuel in our growth engine. And again, we shared a massive opportunity that we have across a large global addressable market. There is so much more room to grow, and our strategies are working. You can see that in our results this quarter. And we've done it with intention. We've built with intention and an eye toward the future. We're growing today in a healthy way. We're winning in our core leather goods category at higher margins and higher AUR. And we're seeing growth across generations and across geographies. And to your point, our guidance does -- this year does have us delivering our Investor Day targets 2 years ahead of plan across both revenue and earnings, and we're not finished. That's the best part. As we look to the future, we see significant opportunity to continue to build on our successes. We have structural advantages that allow us to grow in a dynamic environment. We play in an emotional category. We deliver great value, I think, unmatched value in the market with high margins and strong free cash flow that allow us to invest at scale, and we're investing today to drive growth in the future. You can see that in investments in product innovation with a strong product innovation pipeline. We're investing in marketing. We're investing in consumer experiences with new store formats. All of these investments are supporting our long-term growth opportunity. And while our teams are focused today on delivering a strong end of the fiscal year, we're moving forward with confidence. Operator: We'll move now to Ike Boruchow with Wells Fargo. Irwin Boruchow: I'll throw this one to maybe Scott and/or Todd. I guess Coach -- so Coach's growth is obviously exceptional. I think you raised over 20% for this year now. I guess my question is, how should we be thinking about the expectations for next year at Coach? I know it's a little bit early, but at Coach specifically, what are the growth rates that give you confidence for anniversarying a year as robust as this? And I guess what kind of visibility do you have as we think about a more normalized growth rate for the brand in '27 and into the future? Scott Roe: Yes, Mike -- Ike, thanks for the question. I'll start before I turn it over to Todd. By the way, Mike and Ike my favorite candy from my childhood, if you wonder where the reference came from. Joanne mentioned it, we're confident in mid-single-digit growth at the Tapestry level. That's our algorithm from Investor Day, and that's really underpinned by at least mid-single digit at Coach as a floor. And I'll just start by reminding you of what gives us confidence. So what is -- what underpins that algorithm. So first of all, it's AUR growth. And we've said that we believe that we can sustain over a long period of time, AUR growth of at least inflation plus a point. And as it relates to units, that's the focus on new customer acquisition. And we're investing behind increasing our sufficiency, increasing our reach and continuing to acquire those new customers, and you saw 2.4 million in the quarter we just reported. So the combination of AUR and units will be part of the growth algorithm. And on top of that, we see 1 to 2 points from new door expansions in our LRP. So all those things together give us great confidence in at least our floor of mid-single digits. So Todd, maybe a little more color on the strategies behind that. Todd Kahn: Thanks, Scott. I want to go back to what we talked about last quarter, where I shared with you my confidence performance indicators and those CPIs, again, this quarter were outstanding. Think about this for a minute, 2 million new customers, fantastic performance in every one of our major markets: North America, China, Europe. As Scott just mentioned, AUR and unit growth and just fantastic and great product innovation. So building on these exceptional results, let's address the long-term sustainable growth for our 85-year-old heritage brand. Something that Joanne talked about, but we have to keep reinforcing the TAM. And when we talk about the TAM, we're talking about our point of market entry of the Gen Z and soon Gen Alpha. And this group is just massive. We can literally add millions of new customers every quarter for the next 10 years, and we'll just scratch the surface. Second, our credibility and innovation in our core leather goods product is exceptional. We build on a consistency and a clarity of design that has been honed under an extremely stable and experienced team led by our Creative Director, Stuart Vevers. Third, our price and brand positioning of expressive luxury is truly the goldilocks of brand positioning in our industry. On the one hand, we're aspirational in design, fashion and quality, yet extremely approachable in price positioning. Fourth, our methodology to marketing is different and rare and it's working. We don't just simply look and say, here is a bag, let's go sell it. We look and seek out consumer insight and craft a story around that consumer insight that makes our brand and our storytelling even more compelling. And we don't just do that once or twice a year, we do it consistently throughout the year, and we back it by significant financial muscle. Coach is approaching $1 billion annual spend in marketing, and we're doing that in a way that is attracting new customers into our brand. That's that Coachenomics flywheel that we often talk about. That's a level of spend that few in our industry can match. And finally, our investment in stores and experience, coupled with our operational excellence will continue to raise the bar. And you see that in our launching of our new expressive luxury design stores. We're going to touch a majority of the fleet over the next couple of years and our One Coach initiative that brings innovation to the industry. So when you put all that together, I love the setup for next year and the years ahead. And I have more conviction now that the Coach goal of $10 billion at best-in-class margins is more attainable than ever. Scott Roe: And quick build on that. I didn't answer your other question about what are we seeing quarter-to-date. Quarter-to-date, we're right in line with the guide that we just gave. So what we see right now gives us confidence in the guide that we gave for the fourth quarter. Operator: We'll move on to Matthew Boss with JPMorgan. Matthew Boss: Congrats on another great quarter. Two questions. So Joanne, could you elaborate on the compounding flywheel effect of this new customer acquisition at the Coach brand? I know we've obviously touched on it, but maybe if there's a way to walk through the unlock that you've seen in the North American file and then the inflection that's now clearly underway in China? And just what does it mean for units, which I think still remain below pre-pandemic levels today? And then for Scott, just to Joanne's comment on we're just getting started, what does that mean for operational gross margin drivers in terms of AUR, AUC, just how to think about operational gross margin from here? Joanne Crevoiserat: Well, thanks, Matt. I'll kick it off talking about the consumer, particularly the young consumer. And first, I will say that our entire organization has become focused on how to maintain relevance with this consumer. So it starts with an insatiable curiosity about what is relevant and how do we meet them where they are. And what's important about the young consumer and our brands, both Coach and kate, is this is an authentic place. When we talk to consumers, we hear stories over and over and over again about remembering their purchase of the first bag and how important that milestone is in their life. We want to earn the right to be our consumers' first luxury bag purchase. And when we're at our best, we're growing the market because we're bringing more consumers into the market, and we're seeing that now. Just to touch on the environment for a minute. You saw our growth in North America this quarter, over 20% growth, 27% at Coach, 20% at Tapestry. These are numbers that are fueled by new customer acquisition. But what's also important to note is we actually saw the market also grow. We think the North America buyer market for handbags and leather goods grew mid- to high single digits. So we're seeing a consumer who is engaged in the category. And by the way, those market -- that market data is true in China and in Europe. We're seeing improvement in the sort of the context overall. But our strategies of getting behind a real focus on the Gen Z consumer is driving our business with new customer acquisition. We're also seeing higher retention rates with this customer. So they're coming back with more frequency. This is a customer that is very engaged with our Coach brand. And we love the new customer, this young customer for a number of reasons. First, when we capture that first luxury bag purchase, we engender brand love for a lifetime. Those are the stories I just mentioned. Second, we have an opportunity to drive higher lifetime value. That's just math, right? When we capture them early, we can retain those relationships over a long period of time. And we're focused on doing just that. And the data today tells us we're doing a good job. That means we have to deliver the innovation and quality and value that they respect and respond to every time they interact with our brand. So we're at every touch point, making sure that we're delivering a quality experience, whether it's the storytelling we're doing, the product we're delivering or the experiences in store and online. And as we're doing that, we're seeing a customer that's sticky, gives us a chance to drive higher lifetime value. The other important thing about the younger generation is that they have a reverse influence on all generations. So not only are we fueling this customer acquisition flywheel, but this customer is influencing all generations. So we're seeing growth in new customer acquisition in non-Gen Z, and we're seeing growth with our existing customer base. So the flywheel effect, it compounds and amplifies. And that is allowing us to drive brand heat, higher gross margins, invest more in marketing, and you see us do that and invest more in store experiences. And that's what creates the flywheel and compounding effect. Maybe turn it to Scott on the drivers of growth. Scott Roe: Yes. I love to talk about gross margin. So -- and the story is great here as well, right? If you think about what are those drivers, I kind of mentioned it earlier, right? First of all, AUR, driving our AUR, but within reason, right? I mean we're not being too aggressive. We value that $200 to $500 price point, as Todd has said repeatedly. That said, we still have a lot of headroom. If you look at our prices, they're just about where they were 15 years ago. And there's a lot of room to run, coupled with what Joanne was just alluding to, the brand love, right, and reinvesting back in the brand and getting noticed. So we're bringing innovative product, and we're bringing newness, which commands higher prices. At the same token, that doesn't work unless people know you're there. So that's why we are reinvesting in awareness, and that's helping to drive our AUR. AUC is -- and by the way, AUR is also structural, right? I don't want to forget that. So as we grow internationally, we're going to drive our AUR and also the One Coach initiative that Todd has mentioned, is also a driver of AUR. AUC, one of the things I'm particularly proud of. We got the best supply chain in the industry, in my opinion, right? And we're delivering a superior product that I'll put up against anybody, but we're doing it at scale, and we're doing it smarter than many because we're makers at heart. And we know how to engineer and make a product that most importantly, has a better outcome for the consumer. It feels better, looks better and works better, but we're also doing it more efficiently. And that allows us opportunities not to make it cheaper but to make it smarter and to drive AUC and to work smarter across our business. And then that -- those are the primary drivers of gross margin, but I also want to talk about op margin. You didn't ask that question. But this reinforcement in marketing, the flywheel that Joanne mentioned allows us to invest significant amounts of money in marketing and increase our reach, but we're getting tremendous leverage across the rest of the P&L. So leverage is another big driver of op margin even with our continued investment underscoring our pricing and our ability to take gross margin. Operator: We'll move on to Adrienne Yih with Barclays. Adrienne Yih-Tennant: Congratulations. So well done in a very dynamic, I'll say, environment. So with that, Todd, I'm going to start with you because I really wanted to go back to kind of like the structure that you've put in place over years and decades in terms of continuing to push forward with the innovation process on the Tabbies and the New York franchises and the Kiss Lock. How do you balance that kind of pushing on kind of that forward edge of risk taking when the environment looks a little bit dicey. And then how do you balance that with kind of core franchises and bringing all this newness? I've seen the Kiss Lock sell out, I think it's probably 4 times now, and we're waiting for the next batch of it. So just keeping that side of that tempo... Todd Kahn: Adrienne, you know somebody. Adrienne Yih-Tennant: I know Stuart. Todd Kahn: I'm sorry, but... Adrienne Yih-Tennant: Go ahead. Go ahead on that. Todd Kahn: Finish this. Adrienne Yih-Tennant: No. Well, the follow-up was that you're taking that and you're taking it to a market that's very competitive in Europe and that strength continues to grow. So it was kind of for both you and Joanne. So what is the driver that's really kind of turning on kind of Europe at this point? Todd Kahn: Okay. So let me start... Joanne Crevoiserat: Todd will start. Yes, the details on innovation. Todd Kahn: Yes. In so many ways, and I think it goes back to the stability and the clarity that Stuart and the entire Coach team brings. We -- over the last 6 years, we've become very focused on who the customer, this timeless Gen Z customer, our sweet spot of who we're designing for. So that's when we talk about data and how we use data. It's still -- what I always say is the most important thing is for our creators to have an informed gut. We're not outsourcing design nor are we outsourcing our commercial excellence to AI just yet. We are driving a business that is very connected to consumers. And I appreciate how much you recognize the innovation we're bringing. But in so many ways, we're doing it under -- with fewer SKUs. We're doing it in a much more controlled manner than ever before. And we're doing it by amplifying major families. Recently, we added to the New York family a Chelsea bag that spoke to this young consumer in a very authentic way in that $300 price point. So we're building on platforms that are very meaningful and give a clear point of view and perspective. When you walk into a Coach store, you know you're walking into a Coach store. When you see a Tabby bag on someone's shoulder, you see a definitive brand code with the C that is ownable and exclusive to us and then the quality. So that ability to amplify on the platforms we have is very significant. And then we do things where we intentionally have drops that sell out very fast. We had a pink drop that I thought was going to last between the third and fourth quarter. I think it lasts days, not weeks. Those are good problems to have. It shows how much brand heat exists in our -- in what we're doing. So we feel very good about that. You're going to continue to see innovation. I get this fantastic benefit of seeing product often a year before and just could not be more excited. Every time I walk into the showroom, before I see it, I have a little trepidation, can it actually get better? And every time it gets better and better and better and with greater clarity of vision. On your Europe question, all of the attributes of the Coach expressive luxury and this authenticity and talking to the consumer is working in Europe. And one of the best things I could tell you to do is we'll go to Selfridges on Oxford Street over the next couple of weeks and look at the celebration of Rexy, our Coach mascot, and just the pure fun and enjoyment we bring to the category. It's a wow, and the consumer is responding. So -- and when you think about Europe and you think about all the growth we've had, I think we've had 11 quarters of double-digit growth. We're still literally fundamentally talking about Europe and France and eye drops throughout the rest of Europe. Europe has a lot of countries and a lot of runway for us. Operator: We'll move on to Michael Binetti with Evercore. Michael Binetti: Congrats on a great quarter. Let me just ask one on the near term and then maybe one more a little bit longer term. Just I just want to confirm what we heard before on the quarter-to-date commentary for Coach. I think you said it was running low double digit -- sorry, low teens, Scott, in line with the guidance. Some of the data we see in China is still pretty strong in April. So maybe just some context on what drives that deceleration from the high 20s last quarter. Or if there's anything to remind us about in the cadence for the quarter of last year and fourth quarter that we should be thinking about as we shift through the near term? And then, Joanne, when the Gen Z cohort really cycles into the existing customer bucket, really starts becoming a bigger and bigger share of that bucket. What does the North America algorithm look like as that consumer shifts from being a large share of new customers being the majority of that existing customer bucket, like I said. And what does the spending profile turn into in that existing customer bucket as that demo mixes up over time? Scott Roe: Yes. I'll start, Michael. Let me just talk a little bit about our guide, what it means in Q4 and just remind you of some of the prepared remarks in terms of some context. But I want to be clear, we took up our guide for Coach in Q4, all right? Based on even coming off an exceptional Q3, we increased our expectations for Q4. And as I said earlier, based on what we're seeing in the business and our progress to date and the underlying signals, we have even more confidence in our growth in the Coach brand and thus the increase in the guidance. And remember, a few other things. We said from the beginning of this year in our initial guidance, it would be quarter-by-quarter, there would be some noise or there would be some dynamics. And we see that in the second half. I said in my prepared remarks, we have a balanced first half, second half on a 1-year stack, over 20% growth on a 2-year stack, over 30% growth and even on a 2-year stack, slight acceleration in the back half. But the calendar dynamics, just a few reminders of what those are. So first of all, Q3 had the benefit of the Lunar New Year outperformance, a little earlier timing of Easter. And I'm going to refer back to something Todd said, which is maybe underappreciated. We had a normal cadence for us as we have a new seasonal product launch like the pink signature that he referred to earlier, and it launches in Q3 and then it sells through Q3 and Q4. Well, guess what, it sold through better. And we saw more of those sales coming out of Q4 and into Q3. That's a great signal for the brand. That is a really strong underscore of the performance, but it does create some dynamics between the 2 quarters. So I'll leave it where I started it. We see confidence or we have confidence in Coach, and that's what gave us the confidence to increase the guide even on what was an exceptional Q3 performance. Joanne Crevoiserat: That's right. And maybe I'll build on that with your question about Gen Z. The fundamentals in our business remain very strong. And this is really an important part of it, and that is that this new consumer that we're acquiring, I talk about new customer growth is the fuel in our growth engine, and it is powering our growth engine. But what is, maybe underappreciated is the compounding benefit we get as these customers become part of our existing file, and we're seeing that growth in existing customers as well. So the metrics that we're tracking are both how are we -- how effective are we at acquiring that new customer, but also what are their repeat rates? Are they coming back to the brand more frequently, and we are seeing that. So as they join the brand, we see that stronger engagement, and that's the compounding effect we see in the flywheel. And part of the reason the Coach business has inflected so much, and that will continue to power our business into the future. It's why we have confidence. We're not going to take our eye off the ball on new customer acquisition. We continue to stay really close to the customer. There is no complacency in our business. We're staying very focused because these customers, what they value, how they shop, how they behave, that all changes constantly. And Todd mentioned it earlier, and soon there will be Gen Alpha, and they'll be part of this new customer acquisition strategy. So that's the formula for us. It's acquire that new customer, do it in a quality way and make sure that we can retain that customer and build that lifetime value over time. And we see that with compounding benefits for our business. Operator: We'll move now to Laurent Vasilescu with BNP Paribas. Laurent Vasilescu: Just 2 quick questions, if I may. Scott, since you love to answer gross margin questions. We are seeing inflation in nylon, polyester, cotton and there's less visibility in leather goods in terms of just [ leather ]. Curious to know what you're seeing in terms of inflation. And if there is inflation, are you anticipating to raise pricing? And then, Joanne, I think you mentioned you continue to see great traction in the expressive luxury concept. Can you maybe unpack a little bit about what you're seeing in terms of store productivity versus the rest of the store base? Scott Roe: Yes. I'll hit the first part on that on gross margin. What are we seeing in inflation, I think, was petrochemicals, those kind of things. So, so far, Laurent, not much. The one area where we've seen impacts right now that are clear and present are on fuel surcharges. Those are not material to us at this point in time, but we are seeing some modest cost pressure there. As it relates to more foundational things, we are a leather goods house. So the petrochemicals other than moving our product from A to B is not as relevant as maybe some of the other categories. But it's something we're watching closely. I think the longer these, whatever you want to call it, travails go on, then we'll continue to watch where those pressures might show up. But as of now, we haven't seen too much. I'll turn it, I think, to Todd on the productivity of stores. Todd Kahn: Yes. Thank you. Early days as we start launching our expressive luxury format. And when you think about the Coach fleet, we really have an expressive luxury, which is a more feminine, more inclusive design look and feel to the stores. There are elements of play. We have a pure-play format. And then we also have Coach coffee shops. All of it is in the service of creating environments that are compelling, that are engaging, that give a full experience. And so far, again, early days, we always see more productivity. When we redo the stores, it's compelling, and we'll learn from them. Very simple ideas like our craftsmanship bar used to be a bar. It's the -- our craftsmen stood behind the bar and engaged with the customer. Today, we're using roundtables. Why? Because it's co-creation. It allows the customer to sit with a craftperson to individualize a bag. Our coffee shops, this week, I think we'll have the sixth one in North America. The lift not only in the number of coffee and related product we sell, but the linger time and the overall performance of stores that are attached to coffee shops is magnificent. So we have a lot of good formats to engage this customer. It's based on consumer insight. We know Gen Z love shopping in the real world, and we're going to give them something compelling to come see not just once, not just twice, but very frequently. Operator: That concludes our Q&A. I will now turn it over to Joanne Crevoiserat for some concluding remarks. Joanne Crevoiserat: Thanks, Leo. Tapestry delivered another standout quarter, and we raised our outlook for the year, which is a reflection of proven strategies, disciplined execution and durable structural advantages that compound. We move forward with confidence, guided by our blend of Magic and Logic and an unwavering focus on the consumer. Together, these are the foundations of sustainable growth and long-term shareholder value. And to our global teams, this performance is yours. Thank you for the creativity and passion you bring to our work and to our customers around the world. And everyone who's joined us this morning, thank you for your interest in Tapestry, and have a great day. Operator: This concludes Tapestry's earnings conference call. We thank you for your participation.
Operator: Good day, and welcome to the Vistra Corp First Quarter 2026 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Eric Micek. Please go ahead. Eric Micek: Good morning, and thank you for joining Vistra's investor webcast discussing our first quarter 2026 results. Our discussion today is being broadcast live from the Investor Relations section of our website at www.vistracorp.com. There, you can also find copies of today's investor presentation and earnings release. Providing our prepared remarks today are Jim Burke, Vistra's President and Chief Executive Officer; and Kris Moldovan, Vistra's Executive Vice President and Chief Financial Officer. Other senior Vistra executives will be available to address questions during the second part of today's call as necessary. Our earnings release, presentation and other matters discussed on the call today include references to certain non-GAAP financial measures. All references to adjusted EBITDA and adjusted free cash flow before growth throughout this presentation refer to ongoing operations, adjusted EBITDA and ongoing operations adjusted free cash flow before growth. Reconciliations to the most directly comparable GAAP measures are provided in the earnings release and in the appendix to the investor presentation available in the Investor Relations section of Vistra's website. Also, today's discussion contains forward-looking statements, which are based on assumptions we believe to be reasonable only as of today's date. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied. We assume no obligation to update our forward-looking statements. I encourage all listeners to review the safe harbor statements included on Slide 2 of the investor presentation on our website that explain the risks of forward-looking statements, the limitations of certain industry and market data included in the presentation and the use of non-GAAP financial measures. I will now turn the call over to our President and CEO, Jim Burke. James Burke: Thank you, Eric, and good morning, everyone. Thank you for joining us to discuss Vistra's first quarter 2026 operational and financial results. 2026 is off to a fast start. As outlined on our year-end call, within the first week of the year, we announced the acquisition of the 5,500-megawatt Cogentrix natural gas generation portfolio as well as long-term power purchase agreements with Meta for approximately 2,600 megawatts of energy and capacity at our PJM nuclear sites. These actions further strengthen our generation footprint and enhance our ability to serve growing customer demand with high-quality dispatchable and zero carbon resources. The quarter also provided a good test for our generation fleet. Volatile weather created a dynamic backdrop that underscored the importance of operating assets safely and reliably, and I'm proud to say our team rose to the occasion. Within the geographies we serve, we are seeing a structurally improved demand environment. Load growth remains elevated. Hyperscalers are executing on record CapEx spending plans and our conversations with large load customers continue to advance. All of this reinforces our view that power market fundamentals will continue to improve through the end of the decade and beyond. We remain excited about the growth opportunities for new and existing generation. We are working with policymakers, regulators, transmission providers and our customers to create innovative solutions that can support new load while preserving an affordable framework for existing customers. With our large, diversified and flexible fleet, our development capabilities, innovative retail franchise and experienced commercial team, we believe Vistra is uniquely positioned to deliver on these initiatives, and we look forward to building on our early momentum throughout the rest of this year and beyond. Turning to Slide 5. Vistra delivered approximately $1.5 billion of adjusted EBITDA, a record result for a calendar first quarter. The strong financial performance is a direct result of the consistent execution of our generation, commercial and retail teams as well as diversification afforded by our integrated business model. This was particularly evident during the first quarter as we managed through a volatile weather backdrop. Weather was exceptionally mild across the geographies we serve for most of the period, especially in ERCOT, where the quarter was the second warmest first quarter since 1950, only to be interrupted by Fern, a protracted winter storm that brought significant snow and ice as well as below 0 temperatures to a significant portion of the country. Despite those conditions, our generation team performed very well during Fern with our natural gas fleet performing at 97% commercial availability and our nuclear fleet at 100%. During the milder portions of the quarter, our commercial team successfully optimized the fleet, responding to market conditions by backing down assets when warranted and buying low-cost power in the market. Importantly, Martin Lake Unit 1 returned from an extended outage late in Q1 and has been running well since. Moving to the outlook. We are reaffirming the guidance ranges for 2026 adjusted EBITDA and adjusted free cash flow before growth, both of which we introduced on our third quarter 2025 call. We are also maintaining our 2027 adjusted EBITDA midpoint opportunity range. Our confidence in the outlook continues to be supported by strong operational performance and our comprehensive hedging program, where we have successfully hedged a significant amount of our expected generation through the end of 2027. Our comprehensive hedging program, which focuses on opportunistically locking in value, ensures a more stable and resilient earnings stream across varying economic cycles. As a reminder, our outlook does not include any potential contribution from the pending Cogentrix acquisition nor does it include any uplift from the long-term power purchase agreements with Meta at our PJM nuclear sites. We expect to update our guidance ranges as well as our adjusted EBITDA midpoint opportunity following the closing of the Cogentrix acquisition. Finally, the amount of capital we expect to generate over the coming years provides flexibility to execute on both organic and inorganic growth opportunities as well as return a meaningful amount of capital to our shareholders. We can do both. Our approach remains disciplined and opportunistic, and that was reflected again this quarter. Through the design of our share repurchase program and given our increasing free cash flow yield, we accelerated share repurchases during the first 4 months of the year, deploying approximately $525 million. Combined with our first quarter dividend of approximately $75 million, we have already returned approximately $600 million to our shareholders this year. Turning to Slide 6. As we have outlined for the last 2 years, we continue to see a structurally improved demand environment that supports our long-term outlook. While large-scale data centers remain a key component of the expected growth, we expect incremental demand from multiple sources, including medium-sized data centers, increased industrial activity and ongoing electrification. In ERCOT, we believe annual load growth of at least 5% to 6% through 2030 is reasonable. And in PJM, 2% to 3% annual load growth appears likely to persist. Importantly, while these views remain below many third-party forecasts and ISO projections, they reflect what we believe to be the pace of physical development and are consistent with the perspective we shared nearly 2 years ago on our first quarter 2024 earnings call. While there are large interconnect queues in our major markets for both load and generation, we believe our estimates to be realistic load growth forecast that reinforce that competitive markets are ready to meet the coming demand. Since we expect overall load growth to outpace peak demand growth, a dynamic that should result in higher utilization of the existing generation and transmission infrastructure, we believe the existing grids can handle this level of growth successfully, providing a helpful runway to bring on additional generation resources later this decade and beyond. Moreover, utilizing the existing infrastructure more efficiently is key to preserving affordability. With more power moving through the system, fixed costs are spread over more volumes, which should support lower unit costs for customers over time. And third-party research confirms this dynamic. A Lawrence Berkeley National Laboratory study demonstrated that states with positive load growth over the last 5 years experienced a decline in inflation-adjusted prices on average, while states with flat load growth or a decline in load experienced double-digit inflation-adjusted price increases. Policymakers and industry participants, including large load customers are working on solutions to better manage the infrequent peak load and are willing to be creative. At Vistra, we remain focused on developing these solutions, including through the deployment of demand response capabilities or through distributed generation technologies as they could enable a faster time to power while awaiting a grid connection and help manage through super peak hours during the year, all while enhancing reliability and affordability. In summary, the load growth is real and is actualizing, and that creates meaningful opportunities for Vistra to support all its customers from residential to commercial and industrial, including data centers. Finally, turning to Slide 7. As we have highlighted, the load growth developing across our markets creates significant opportunities to deploy capital towards organic development projects that can further increase the earnings power of our business. As you can see on the page, we currently have approximately 4,500 megawatts of organic development opportunities that were recently completed or in process across our portfolio. They include contracted renewables such as Oak Hill 1, the recently contracted Oak Hill 2, Pulaski and the recently energized Newton project, high-return thermal additions such as our coal-to-gas conversions at Coleto Creek and Miami Fort, Texas gas expansions, including gas plant augmentations in our Permian new build gas units and longer lead time projects such as the PJM nuclear upgrade supported by our long-term power purchase agreements with Meta. These projects represent cost-effective and efficient ways to achieve incremental capacity with the majority expected to be online by 2028. At the same time, the development opportunity set is not limited to the projects shown here. The team remains hard at work advancing multiple additional gigawatts of opportunities across the generation spectrum. Uprates will continue to play an important role, and we see the opportunity for more than 200 megawatts at Comanche Peak and approximately 300 additional megawatts at our PJM gas sites. We see numerous development opportunities at existing coal and gas sites that provide options for meaningful contracts for existing capacity as well as capacity additions with favorable speed and cost profiles relative to greenfield projects. As we advance these projects, the team will look for ways to partner on these investments through long-term power purchase agreements with creditworthy customers. Now I'll turn it over to Kris to discuss our more recent financial results, outlook and capital allocation. Kris? Kristopher Moldovan: Thank you, Jim. Turning to Slide 9. Vistra delivered $1.494 billion in adjusted EBITDA for the first quarter of 2026, up approximately 20% from the same quarter last year and up nearly 85% from Q1 2024. Generation, which delivered $1.426 billion of adjusted EBITDA in the quarter, benefited from strong realized revenue across the fleet, higher capacity revenues in PJM and the contribution from the assets we acquired in late 2025 from Lotus. Retail, which delivered $68 million of adjusted EBITDA in the quarter, continues to benefit from strong counts and margins, partially offsetting extremely mild weather in ERCOT. It is important to note that we expected a year-over-year decline in the first quarter results for retail, and we continue to project retail's full year performance to moderate from the record result last year. However, retail remains on track to achieve its medium-term adjusted EBITDA target this year. Turning to Slide 10. We are reaffirming both our 2026 guidance ranges and maintaining our 2027 adjusted EBITDA midpoint opportunity range. Our confidence in our outlook and cash generation is supported by our comprehensive hedging program, the long-term power purchase agreements we have executed and the downside protection of the nuclear PTC, resulting in a highly hedged position in 2026 and 2027. As Jim stated earlier, our financial guidance excludes any potential impacts from the pending acquisition of Cogentrix and the long-term power purchase agreements at our PJM nuclear sites with Meta. Cogentrix is on track to close in the second half of this year, and we plan to update our guidance ranges and 2027 midpoint opportunity range thereafter. Importantly, we see multiple additional opportunities to further expand and stabilize our earnings potential. Customer engagement remains strong, and we are confident in our ability to create value and drive stronger financial results. Our near-term priorities include approximately 3.2 gigawatts of nuclear capacity at Beaver Valley and Comanche Peak that can be contracted on a long-term basis and ongoing opportunities with customers with respect to our existing gas plants as well as potential new construction. Finally, turning to Slide 11. Based on our outlook, we still have line of sight to more than $10 billion of cash generation over 2026 and 2027. After allocating approximately $3 billion to our equity holders through share repurchases and common and preferred dividends in 2026 and 2027, and approximately $4 billion towards accretive growth investments, including the Cogentrix acquisition, the development of the Permian gas units, the PJM nuclear uprate supported by PPAs with Meta and the development of Oak Hill 2 supported by a PPA with a large investment-grade counterparty, we continue to expect to have approximately $3 billion of additional capital available to allocate through year-end 2027. As always, we will be disciplined in how we allocate this remaining capital, balancing return of capital to our shareholders, further strengthening our balance sheet and strategically investing in attractive organic and inorganic growth. Our share repurchase program continues to create significant value. Since initiating the program in November 2021, we have retired approximately 169 million shares at an average cost of approximately $37 per share. We currently have approximately $1.475 billion of share repurchase authorization remaining. Pursuant to the opportunistic design of our 10b5-1 plan, our repurchase activity was accelerated in the first 4 months of the year as our free cash flow yield increased. We will evaluate our share repurchase authorization and availability throughout the year with the option to continue to accelerate share repurchases should market conditions warrant. Turning to the balance sheet. During the quarter, we received an upgrade of our corporate issuer rating to investment grade from Fitch Ratings. Combined with the upgrade from S&P Global Ratings late last year, we have now achieved investment-grade ratings from 2 rating agencies. We are pleased to see the recognition of our efforts to increase our earnings power, derisk our business model and execute on our disciplined capital allocation plan. With this milestone, the fallaway provisions in our senior secured debt agreements were triggered, releasing the liens on our assets under those documents. Achieving investment-grade ratings positions the company well to maintain financial flexibility and support long-term value creation. We will continue to target leverage metrics consistent with solid investment-grade credit ratings. As for strategic investments, we remain opportunistic yet disciplined, maintaining our mid-teens levered return threshold across organic or inorganic growth investments. In closing, Vistra remains well-positioned to create long-term value for our stakeholders. The resilience of our business is evident in our strong results and reaffirmed earnings outlook despite a volatile weather backdrop during the quarter. We see load growth materializing in our primary markets, and the team remains focused on positioning Vistra to win in that environment. With that, operator, we're ready to open the line for questions. Operator: [Operator Instructions] The first question comes from Shar Pourreza with Wells Fargo. Unknown Analyst: It's actually Constantine here for Shar. I appreciate the updates today. Maybe starting out on PJM. Do you anticipate the FERC PJM colocation rules to kind of start opening up more opportunities to do repeat deals like the Meta deal? Does the rule changes impact the framework of combining new capacity with contracting existing resources? And does this kind of, in your mind, extend beyond the nuclear assets over time? James Burke: Yes. Constantine, this is Jim. I'll start, and I'm sure we'll talk a lot about policy and PJM. So you'll hear from Stacey on a number of these topics. But we're encouraged by the colocation recognition. I think we're seeing in all markets, not just PJM that if we're going to hook this load up quickly enough, colocation with existing and colocation with new needs to be supported. There's obviously tariff work to be done and there's -- the details are going to need to continue to be worked out, and we hope PJM can move to support the colocation in the way that we think FERC was providing direction to support it. So we do think there's opportunity to do additional deals like the one we did with Meta doesn't need to just be with nuclear. I think we have opportunities to do it with gas as well. But this is a process. And we've seen that there's a back and forth on this, and there's coming to a common understanding that's needed. And so I can't say it's going to be quick or simple, but we're optimistic that the logic around colocation continues to get more and more support. And then it's just a matter of making sure we've got the avenues to be able to execute on it. I'm going to ask Stacey to share her perspective. Stacey Dore: Yes. Thanks, Jim. FERC's colocation order in December made it very clear that colocation is something that PJM must support. And so the filings are now just trying to sort through what the rules of the road are, and we do expect FERC to be motivated to act quickly on that. We've seen them recently order some pretty short time lines for PJM to respond to that order with compliance filings. And so we do think FERC is very focused on clarifying the rules of the road. And in the meantime, customers continue to explore colocation with us at both gas and nuclear sites. And so those contracting discussions can continue in parallel while the rules are clarified. And we think that has to be part of the solution for meeting this demand because there is a speed to power advantage while additional resources take longer to come on the grid. Unknown Analyst: That's really helpful. And maybe shifting to ERCOT, obviously, milder weather here in the quarter. Does that shift any of the expectations? And are you thinking of any offsets around '26 kind of just within the current guidance ranges? And maybe extending that to your views on the moving forwards in ERCOT? Is there a degree of load expectations shifting energy storage impacts? Any color that you can provide? James Burke: Yes. Constantine, what was noted, I think, in many external reports was just how mild this first quarter was, and we noted that. Fortunately, one of the benefits of our business is a highly diversified business, both generation and retail. So we saw some offsets. That's why we had a good quarter. So retail bore the brunt of some of the mild weather for this particular quarter. But the rest of the business, particularly generation had a good quarter. And I expect to see that integrated model continuing to be a strength for Vistra. So we don't feel the need to necessarily have offsets. Obviously, we'd always like to outperform. So you'd like to have the full performance of generation and retail all the time. But when you do see these offsets like this happen, that's why our model is designed the way it is. So I actually feel really good about how the integrated model performed. The second question, which is the ERCOT forwards. Obviously, we've seen ERCOT forwards come off. We didn't see much weather as a function of what we just discussed. I think that tends to read through to some of the future periods. I think the concern about the pace of load getting hooked up because there's a big discussion, obviously, about the batch process and how long is it going to take to get through the approval process. So I think there's a bit of a sort of a perspective at the moment of how quickly will the load come. And I think towards the back end of the decade, I don't think there's any doubt about how quickly the load is going to come. In our chart, we're showing very consistently this 5% to 6% compounding kind of load in ERCOT. But I think the market is expecting more than that. And what we're saying is I don't even think the market forwards reflect 5% or 6% compounding load. So I think there is a wide disparity in view out there because I think the market had a view that it was going to compound a lot faster than this. We did not. We actually have said the physical world takes much longer to develop than what people might imagine it takes, and we just think that's playing out. So I think there are folks trading around that. We feel very solid that the 5% to 6% is a good compound growth rate. I also don't believe the 400-plus gigawatts of interconnection. We've said that. We believe that ERCOT is looking at something in the order of probably 30 to 40 gigawatts of growth in total by 2030. We think 10 to 15 of that's likely large data centers. So I think there's just a lot of confusion out there because there's a lot of information people are trying to sort through. But we feel good about the position we have in ERCOT. We think it's going to be a market that's going to continue to strengthen through time. And I think because we're on both sides of it, both retail and gen, it can work for us from a durability standpoint with the integrated model. So I think we'll just have to see this play out, Constantine. We'd love to see the load hooking up a little faster than it is. But this pace of play is about what we expected, and we think the forwards would still actually improve from where they are even if the 5% to 6% were maintained. Operator: Our next question is from Steve Fleishman with Wolfe Research. Steven Fleishman: So just -- I heard Kris' commentary on the customer engagement being strong, both on the nuclear and the gas. But we did have Constellation come out in the last month or 2 and talk about a little bit of a pause from customers due to the kind of RBP uncertainty and some of the structural uncertainty, I guess, particularly PJM. So I'm curious just have you seen a similar change in tone from your customers? Or are you still seeing the same interest that you have talked about on the last call? James Burke: Yes, Steve, this is Jim. So I think it's logical that with the amount of information flying around that people are just even trying to digest it. I mean just yesterday, PJM put out a 70-page paper. I think it's actually quite helpful in raising the discussion around market design. So our partners that we're talking to, the customers we already have and the ones we hope to become customers, they look to us also for insights and guidance on how to navigate this. Because these deals, and we've maintained for several years, these deals are complicated. They take time. We have said that from the beginning, and I think we would still say that. And this just becomes yet another variable that we have to talk to them about. But the load is still coming. And the question really is going to be, when is there enough clarity on some of these that they feel confident it's time to go. And they have real questions, for instance, in PJM, how does participating in an RBP help or not with speed to market? Does connect and manage come into play? What does that look like? Some of those are unknowns, but they know they can't wait for clarity either. So our discussions are going in parallel. They're consistent. The activity level has remained as high as we've ever seen in this. So I don't see a change there. We'd all want clarity. They want clarity, and we're all going to work hard to get it. But Steve, I think the pace of play on this is where we expected it to be, and we're comfortable with where it is. But from a competitive markets person, I want the competitive markets to get as much of the opportunity to serve these customers as anybody. So we're eager to get on with any and all clarity. And I think that's how the customers feel too. But the pace of play is where we expected and it's still strong. And Stacey, anything you'd like to add to that? Stacey Dore: Continuing to engage at the same level that they have been. And I've said, I think, several times that there are uncertainties for sure on the regulatory front that you can contract around those uncertainties. It's just a matter of allocating risk. And so as Jim said, that's just another variable that comes into the negotiation. But of course, they want to understand how all of these rules of the road will work. And they talk to us about that. They get our take on the regulatory hurdles and the regulatory rules, and we work through that with them and try to help them come up with the solutions that deliver speed to power, which is what they want. And those solutions sometimes can include things like bridge power, for example, because they're not sure when they can get connected. So what we've been advocating is while we're working out the rules of the road, we really need to get load connected as quickly as possible because that's the best way to deliver for the customers, but also to address the affordability issue. Steven Fleishman: Okay. Great. And my follow-up is on that -- is actually on that topic on the bridge power. I think you mentioned called the distributed gen faster time to power in your remarks. Just could you talk about some of the options you're looking at there for customers? James Burke: Sure, Steve. So on the bridge power, the discussions, obviously, customers want to get power as quickly as possible. So bridge has become part of the workaround for these customers. Ideally, customers would like a grid connection and like it quickly. I mean that's the starting point. When they can't get that, then they look at bridge. And ultimately, that bridge might be longer in some cases, depending on how long it takes to get the hookup. The reason why colocation, we think, makes so much sense is there's less transmission work involved, so you could actually get the hookup quickly. But in the case where they decide to go down the bridge power path, we're having discussions with multiple parties about bridge power ultimately to get to grid connection. And that takes a variety of the technologies that you're familiar with. But more of our conversations have been leaning towards the use of gas in these bridge power solutions. And obviously, that's something we're comfortable with. But the customers ultimately are looking to scale up. And so it's more about how do you get started. And I think that gets to the earlier question, which is the pace isn't really slowing down. It's just the way in which folks are trying to get to market. They've had to be a bit more creative. And we're part of that with them. We wish it were simpler. We wish it could actually get to the existing grid because as we've talked about, there's plenty of existing gen capacity on the system. We just need to manage the super peak hours. I think that's being recognized more, but there's plenty of generation on the grid. And it's unfortunate we can't tap it as quickly as we'd like. So this bridge will be part of that solution. But hopefully, ultimately, we get all of this hooked up, and we're able to support the customer in the most cost-effective way possible. Operator: The next question comes from James West with Melius Research. James West: I wanted to get a framework or think about how to frame the conversations you're having with the data center hyperscalers. And with all the -- as you've alluded to several times, the kind of noise or the information in the system and in the regulatory environment, which is going through some changes and their own framework. But speed to power is still the most important thing for the hyperscalers. And so are they willing still to go bilateral in negotiations with you guys? And as we get some of this clarity, go ahead and contract well ahead of if it's PJM in an auction or batching if it's FERC? James Burke: Yes, James, I'm going to go ahead and let Stacey kick this one off. Stacey Dore: Yes. Thanks, James, for the question. Yes, they are willing to and are engaging in discussions about bilateral contracts even ahead of the rules for the backstop procurement being clarified. And I'd just go back to what's really important is that we talk about raising the bar on the interconnection queue because it's not as much -- I mean, certainly, the lack of clarity on some of the rules in PJM, as we just talked about, are impacting discussions. But really, what they want and what they -- what these customers start with is they want a grid connection and they can contract for generation, both existing and new, to bring their power, but they still have to get a load interconnection done. And so what we really would like for the focus to be on is how do we start raising the bar on these load interconnection queues and have the utilities, particularly in PJM, where they control the load interconnection process, get these customers hooked up as quickly as possible. And so those are the things that we focus on, and they are certainly talking to us about bilateral contracts. And we think bilateral contracts is a good way to solve the issues in these markets because it addresses the affordability issue. It addresses the resource adequacy issue and particularly colocation with existing plants where the customers are bringing back up generation, as we said many times, solves the super peak issue and takes advantage of the excess capacity that's on the grid today. James West: Right. Got it. That's very helpful. And then you mentioned -- you guys mentioned the shift a little bit towards natural gas. I'm curious in your conversations with the gas providers, upstream, both in the midstream providers, is the -- we have the resource. We know that in the U.S. we have that. That's very clear. But is the infrastructure in place to provide this increase in natural gas? Or is it getting in place? James Burke: Yes. Broadly speaking, James, it's like everything in this business, location matters. But in quantity of supply, plenty. I mean -- and I think that's why you're seeing some of the announcements, not just from us but other parties as to where folks are expanding. I mean even us putting capital to work in West Texas, where we see the Permian units having real opportunity, just like our colocation point, it makes sense to go where the resources are. So yes, there may be some infrastructure that needs to be built out. I'd call it modest like in some of our coal to gas conversions, but all that's factored into this. So as a country, we are blessed to have the gas resources that we have. I think the customers see that as a real opportunity. And obviously, speed to power, gas is available. And with the places where we're looking to go, you can get access to it even if there needs to be some laterals built that's not the biggest hurdle. So to me, it's smart. It's actually aligned with speed and affordability. And so I think working with our gas partners, and we've had some really good relationships over the years and developing them as part of this new load growth, they're excited about it. Like they see this as a real opportunity, too. And so I think this is a nice solution for the customer. Operator: The next question comes from Moses Sutton with BNP Paribas. Moses Sutton: I wanted to turn to the ERCOT batch process. You mentioned the 30-40 type number by 2030, that's about 5%, 6% CAGR. We have the same type of numbers in our own model. Do you expect all or most of that come through in batch 0? It seems a bit opaque that has 145 gigawatts in there. And then under the hood, how much would you look at in terms of nonfirm and CLR classification? And we could see Vistra is pretty heavy in the public proceedings there. So any color there would be quite helpful and how you think that plays out. James Burke: Yes. Moses, let me start. I think part of the challenge here, and this is something that is a positive about competitive markets, but could also be a challenge with competitive markets as the bar is really low to get into the load queue and it's low to get into the generation queue. And the resources to study this, both at the utilities as well as at ERCOT, there is ultimately a constraint. And the question before us, I think, is what's real. And we're trying to give a view as to what's real. We wish the bar were higher for both of the queues, but particularly now the load queue because I think what we run the risk of is that a bunch of projects get allocated some level of transmission, but they're not real and they're not going to move as fast as the projects that are ready and are real. I've heard that batch 0 could be as big as potentially even 100 gigawatts, okay? If we think the number is 10 to 15 of additional data center between 2025 and 2030, you don't even really need a whole lot of batch 0. You actually need what's already been allowed to ramp. It's been energized, but is not at the full take at this point in terms of peak capacity, plus what's in baseline, which could be about 17 gigawatts. So batch 0 could almost end up becoming on top of every estimate that we've provided. So -- but it's getting a lot of focus because people say, how are we going to serve hundreds, potentially 300 to 400 gigawatts of load. That is not helpful from a policy perspective. And if I were a policymaker, I'd be worried if that were the number. You can't get to that number with a $3 trillion to $4 trillion CapEx spend by the hyperscalers. You can't get to that number if it all came to Texas. And we think Texas is going to get more than its fair share, but it's not all coming to Texas. So in my view and where we've been trying to inform policymakers is we've been pushing that the world gets simpler if the commitments to be real move up. And we're still advocating for that. And I think that would speed up the load that's real. And I think it would also address some of these affordability and reliability concerns. So that zero is interesting. We'll see where it goes. But most of the numbers -- the numbers that we're sharing with you don't even really require a lot coming to fruition as energized load by 2030. Now we hope it comes, but there's already a lot that's being processed and will continue to be energized. Moses Sutton: Incredibly helpful. And I guess some of the parallel questions on PJM, with the behind-the-meter comments you made, how big -- you mentioned connect and manage. How big do you think it can actually be? Do you think the majority is headed that way? Is that going to be more of an Ohio story, Virginia? Any thoughts you can give on connect and manage beyond high level? James Burke: Yes. you've actually -- and we should probably have a bigger discussion offline, Moses, because I think the policy paper yesterday, which I mentioned already, I thought was incredibly helpful. It raises the level of discussion to where I think we ultimately should go, which is different products will probably have different attributes. Some products might actually be firm from a capacity standpoint. Some may not be. That could be a cheaper product. That could be one that gets you connected sooner. And that's ultimately a customer choice. And where I'd like to see the conversation go is where load-serving entities such as Vistra are actually looking at these as products that they're offering to their customers and customers are opting into the product that provides the attributes they're looking for, that could cover capacity, that could cover energy. I realize I'm moving forward in that discussion from white paper to recommendation. But I think where we're having trouble right now is we have a central body that's trying to make product choices for everybody and where to set that bar. And I think the hyperscalers are learning the opportunities to be flexible. You've seen some hyperscalers really lean into that with a lot of public announcements. We were part of announcements with Emerald AI about their tools to be more flexible, and they're doing some pilots in Silicon Valley with NVIDIA that I think will be very interesting from a demonstration of this capability. So I do think the world, as we look at trade-offs is starting to become more accepting of some level of flexibility in order to get speed. How soon does that materialize? I can't say and at what price because the question is where does an RVP clear and what does it cost to be firm versus potentially be connect and manage. I don't think we have those details yet. I think that's something we're very active in. But I think it's too early to call it. And I think customers, because they have choices as to where to go, they can decide which markets to go into, which states, obviously to go into. We serve a lot of them. So we hope to serve them in one of our markets. But I don't think we can give you a prediction of how much would be flexible and how much would be firm. And Stacey, welcome any feedback on this. Stacey Dore: Yes. Thanks, Jim. I would just add that, as Jim noted, the customers are willing to be flexible. And in some ways, the rules, especially in PJM, actually need to catch up to the customer because the customers just want to know what those rules are so they can make decisions about do they bring back up gen, how much do they bring, when are they going to have to turn it on. And so Connect and Manage, as an example, is behind from a process standpoint, the backstop procurement. And what PJM, I think, is hearing from customers and other stakeholders, and they're acknowledging this in the stakeholder meetings is that really those 2 things have to go together, the backstop procurement and Connect and Manage because customers will make decisions about how much generation they contract with when they understand what it means for their flexibility criteria. And I think PJM is trying to be responsive to that and potentially accelerating some of the connect and manage rulemaking, but we'll see how that plays out. In ERCOT, for example, we are starting to get more clarity around what the flexibility rules are. Some of the net metering arrangements that have been approved have now set some of those rules. And so as the rules are set, I think the customers, to Jim's point, will adopt the products that match what the availability of those products are. And so I just think the regulatory process in some ways, needs to actually catch up with the customer willingness to be flexible so that they can get connected. But again, it kind of we're maybe beating a dead horse on this. But again, it goes back to like can they get connected and when. And if they can, I think you'll see them be very creative around these flexibility solutions. Operator: The next question is from David Arcaro with Morgan Stanley. David Arcaro: I was wondering if you could comment on what the -- where is the conversation on contracting your remaining nuclear fleet versus potentially making more progress with the gas plants? James Burke: Sure. David, we can count on you for that question. So we appreciate it. I'm going to let Stacey comment. Thanks, David. Stacey Dore: Thanks, David, for the question. We do continue to have conversations on both. I'm not going to get into which is going to come first or predictions about dates because as we've said before, these are complex discussions. They're customer-driven. And we continue to make progress, and we feel very good about what our opportunity set is on across our portfolio, both gas, nuclear and even new build options. David Arcaro: Got it. Okay. And then maybe looking at Slide 7, I see you maybe more explicitly highlighting here development opportunities at gas and coal plants, the new gas plants that you mentioned there. Just curious, are you kind of intentionally moving more toward a new build strategy or looking more at hybrid offerings, combining new megawatts and existing gen as you're progressing these contracting conversations? James Burke: Yes, David, it's really customer-driven. I think part of what we've seen happen in the last 2 years, as we've talked about, customers came in with a set of what I call preferences and then those evolved to needs as they tried to figure out what the art of the possible was. I think that's still happening. I think that's why bridge power, which came up on one of the earlier questions. This discussion 2 years ago wasn't about bridge power. and it sort of has evolved to bridge power as an example. I think colocation was an early idea, then people are trying to figure out how the tariffs work. I think colocation is going to be coming back with new and existing into the picture. So I would not view this as we have a shift in strategy. What we're doing is kind of meeting the customer needs as the customer needs adapt, and they are different by hyperscalers or even different in different geographies. I think this 4,500 megawatts was as much a reminder to ourselves as it was to the market that we are developing a fair amount of assets, but not because we started off with just the intention of let's go develop a lot of assets. We have to steward the shareholders' capital. And if the right stewardship of that capital is not to do these kinds of projects, then we're going to make the right call. And I think Kris can talk at length about how we think about that. But we do want to meet customer needs, and we can do that and get the right returns for shareholders. That's a win-win, growing our business, meeting the needs of the customers, returning capital to shareholders. So I would not say that we have some commitment to a pipe or a commitment to build a certain number of megawatts as an overall theme because I think that can be limiting in terms of market opportunities. And we have been opportunistic. I think we've shown that, and we've been disciplined. So I see us sticking with that. Operator: Our next question is from Bill Appicelli with UBS. William Appicelli: Just going back to some of the commentary you had earlier around ERCOT and the forward curves. You talked about the incremental load growth you see over the next several years. I mean what do you think is driving that sort of mispricing that you see in the curve? Is that just a lack of conviction given all the sort of confusion out there? I mean, how much upside do you see just based on your load forecast? James Burke: Yes. I'm going to start, and I'm going to ask Shawn Stuckey to chime in. I think there's a couple of drivers. One is, I think folks are trying to get their head around what is a fair load forecast for the reasons we talked about earlier on the call and just the amount of discussion around the size of these batches and when are you going to get approvals to hook up the load. Again, I don't think that is actually driving what our view of a load forecast is in the near term, and we think the forward curves don't reflect even our view of a load forecast. I do think the amount of batteries that have come into the market for the last 3 years have returned virtually nothing to the owners of those batteries. And I do think the batteries will end up shaking out at some point because as we know, most of them are in the 1- to 2-hour variety. So when the higher load factor load does come on to the system, it's not designed to meet that high load factor customer profile. But the batteries have been a material increase in supply. And when you have a low volatility kind of environment because the weather has not been that strong, you haven't seen the clears be very high. So I think that's part of this backdrop that we're seeing and particularly since 2023 when you saw the kind of peak in the August '23 real-time prices. And we just haven't seen that level since then. Even though the underlying load is growing, the peak has not been growing quite as fast. So Shawn, I'd love to hear your comments if there's anything about how that's kind of worked its way through the forwards and anything you're seeing as sort of drivers that they could keep an eye on. Shawn Stuckey: Yes. Thanks, Jim. So what I would add to that is this is a recurring theme that we've seen across the ERCOT market throughout the years. The term markets really do trade off of near-term weather and near-term pricing. So expectations of load growth in the term is obviously a significant driver. But we've seen it time and time again, existing weather in cash really drives the forwards. And I think if you look at what happened around April 14, April 15, 2 things happened. ERCOT released their long-term load forecast. I think people looked at some of the numbers in there and started to wake up and sort of think about the possibility of what was realistic as well as what was not realistic in those load growth expectations. And there was also some heat that was showing up in late April. We did see some heat. We did see some pricing. And you've seen the forwards respond accordingly. You saw both summer and winter prices move up fairly materially. And I think that has been a recurring theme over time, and we expect that to continue. So I think it's kind of more of the same. William Appicelli: Okay. That's very helpful. And then just one quick follow-up. When you guys are talking about the gas bridge power, I mean, is that generally aero derivatives? Is that what you're looking at there? James Burke: Bill, we haven't been technology. We actually are talking to multiple OEMs about different technologies and some customers have different preferences to technology. So unless Stacey has a different view, based on the discussions I'm in with Stacey and her team, we're seeing all of the varieties coming through, and it sort of depends on availability, cost and the customer preferences. Stacey Dore: Yes, I agree, Jim. That's actually an advantage that Vistra has is we're driven by what the customer need is. We're not committed to one technology or another. So based on what their needs are, we're able to help them identify what's available and what would serve their needs, and that can be a variety of different types of OEMs and technologies. Operator: Our next question is from Julien Dumoulin-Smith with Jefferies LLC. Julien Dumoulin-Smith: Maybe to talk in a little bit of a different term or permutation here. Can you talk about like hedging capacity? We saw one of your smaller peers here put up a 12-year capacity deal here. Can you talk about how you think about hedging out maybe in a comparable way, any kind of MISO or MISO exports on term in a way that might sidestep additionality? And then separately, any ability to get term in PJM on capacity? How do you think about that opportunity here? And then I've got a quick follow-up. James Burke: Sure. So Julien, just to make sure I understand your question. I mean, our deals that we have announced include capacity as part of the construct. Obviously, there's different ways we can contract. But as we discussed what we've announced already with Meta as an example, we were contracting capacity and energy. So I just want to make sure I understand your question. Was it in light of everything... Julien Dumoulin-Smith: Yes, incrementally, right? James Burke: Yes, incrementally. Julien Dumoulin-Smith: In this day and age, if you can't -- if it's more difficult to get an energy and capacity contract, how do you think about just simply hedging capacity, right? I hear you. In fact, your earlier comments, you were very clear in saying, look, it seems as if you're maintaining length in '28 onwards when it comes to your energy hedging. And so especially given what your peers are doing in hedging their capacity, I'm trying to bifurcate how you think about the different attributes that you can monetize and especially being conscious that one of your peers got this long-duration capacity contract, MISO, you all being very heavily oriented in the Midwest in some respects, is there an ability to kind of lean on that side? James Burke: Yes. So the MISO fleet, as you know, has been going through a transition. That's one of the markets that we serve that is a coal-fired fleet. And there's a lot in that question, Julien, because there's a lot of overlay of what's happening with federal policies and obviously, state policies. I would turn the question a little bit broader to say those are great sites and opportunities for us to do things with parties that may not be with assets because in reality, the existing assets have a life to them. There's a debate about just how much more life is there, but it's not the same as the nuclear fleet. So I think you're going to see the development opportunities come to pass for us. And as we noted in our slides, we have hundreds of thousands of acres and 70 sites, but it's still going to be customer-driven. So I don't view MISO at the moment as we have an asset that's there, can I go get a 12-year contract off of it. I don't know that, that's going to be the right match for that type of asset. But I do think those sites have real opportunity for us to do things for customers that are probably going to be a little bit more organic and take the redevelopment of the site into consideration. Julien Dumoulin-Smith: And Jim, since you bring it up that way, I mean, you all have been pretty instrumental in Illinois and talking about storage. I haven't heard you talk much about it today in the context of additional capacity. How do you think about leading the charge on that front, whether it's in Illinois in response to both the backstop and/or the state mandates or frankly, across the footprint? I mean, complementing with storage, it seems like a ripe conversation for you guys in particular, but you haven't emphasized it here today, notably. James Burke: Yes. Well, that is probably because, Julien, the way we, again, think about our business is we start with a customer and what does the customer need look like. Batteries have different roles to play. Obviously, batteries on sites that might support data centers play a different role than just putting a wholesale battery out onto the system and hoping that it gets a fair capacity payment and maybe a spark or some sort of spread. And we've seen in ERCOT, that's been a difficult proposition. So when you look at the cost of these batteries, they have not come down in price as much as people might think. Obviously, there's ITC challenges if it's not more domestic in origin. But we don't see from our math that batteries inherently have a better IRR opportunity than some of the other dispatchable options. But again, we're going to be customer-driven in the way we think about this. And so there will be customers that prefer batteries. If that's part of the additionality for them, that's important. If the grid operators from an ELCC give credit for that or that helps with the flexibility requirement that they may have as part of their load ramp, then batteries will come into the picture. But I would tell you that simply the battery strategy as a wholesale product in the market, I would say, have debatable returns unless you can get a really long contract with an offtaker for it and reduce your market exposure. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jim Burke for any closing remarks. James Burke: Yes. I just want to thank everybody for joining. I think you can tell based on this call, it's a very busy time, but it's also incredibly exciting for Vistra. And we're going to provide you updates as we continue to execute on this strategy. It's also an important moment for all of us in the industry. And I think a lot of policy discussion is occurring, and Vistra is going to do its part to make sure that we're part of that and that we deliver reliably and affordably. I want to thank our team for their service to our customers and to our communities. And I want to thank our shareholders for their interest in Vistra, and we look forward to seeing you in person soon. Have a great rest of your day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and welcome to the AAON,Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Joseph Mondillo, Director of Investor Relations. You may begin. Joseph Mondillo: Good morning, everyone. The press release announcing our first quarter 2026 financial results was issued earlier this morning and can be found on our corporate website, aaon.com. Call today is accompanied by a presentation that you can also find on our website as well as on the listen-only webcast. We begin our customary forward-looking statement policy during the call, any statement presented dealing with information that is not historical is considered forward-looking and made pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995, the Securities Act of 1933 and in the Securities and Exchange Act of 1934, each as amended. As such, it is subject to the occurrence of many events outside of AM's control that could cause AAON's results to differ materially from those anticipated. You are all aware of the inherent difficulties, risks and uncertainties in making predictive statements. Our press release and Form 10-Q that we filed this morning detail some of the important risk factors that may cause our actual results to differ from those in our predictions. Please note that we do not have a duty to update our forward-looking statements. Our press release and portions of today's call use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP measures in our press release and presentation. Joining me on today's call is Matthew Tobolski , President and CEO; Andy Cheung, our new Chief Financial Officer, who joined the company in April and Rebecca Thompson, our Chief Accounting Officer. Matt will start with some opening remarks, Andy will follow with a walk-through of the quarterly results and Matt will finish up with our updated outlook for 2026. With that, I will turn the call over to Matt. Matthew Tobolski: Thanks, Joe, and good morning. Q1 was a strong start to the year and an important execution quarter for AAON. As the organizational leadership and capacity investments that we have been deliberately building began to show up more clearly in our results. In addition to delivering record sales and 37% earnings growth, we recorded a book-to-bill well above 1, resulting in backlog of $2.1 billion, more than double from a year ago and marking the sixth consecutive quarter at record levels. . Both brands continue to demonstrate the strength of their value propositions through highly engineered, configurable and custom solutions, consistent with the strategy we have executed against over multiple years. This led to strong customer demand and translated into solid growth in share gains during the quarter. Demand remained exceptionally strong in basics, supported by the strength of the data center market and our differentiated solutions that deliver improved performance, greater efficiency and ease of maintenance. Basics branded sales grew 72% year-over-year, even against a lofty comparison and sales in the prior year period nearly quintupled. Increased production from our expanded facilities in Longview and Memphis supported a higher throughput while we also continue to increase output from our Redmond side. Operationally, we executed well for our customers with all 3 facilities delivering record basics branded sales during the quarter. This performance reflects not just strong demand but improving execution driven by deeper leadership benches, clear accountability and more disciplined operating processes as capacity scales with a more mature operating structure. In addition to higher throughput, we delivered another quarter of strong bookings. Basics posted a book-to-bill ratio over 2, driving a record backlog of basics branded orders, up 160% from a year ago and 24% sequentially. Against the data center thermal management market growing at approximately 30%, our revenue and order growth raised supported continued market share gains at Basics. The AAON brand also performed well. gaining share even as market conditions remain soft and our extended lead times persistent. A key positive during the quarter was a notable improvement in production rates which drove AAON branded sales growth of 42% year-over-year and 11% sequentially. These improvements contributed to shorter lead times and a sequential reduction in backlog, though further progress is necessary. With volumes within the unitary HVAC market growing just modestly year-over-year, these first quarter results suggest meaningful share gains. Bookings of AAON branded equipment increased approximately 9% year-over-year and were up about 15% on a trailing 12-month basis. In the quarter, growth was driven by strength in our traditional transactional business while national account bookings were comparable with the prior year period. The improvement in transactional business reflects an acceleration in demand, which is encouraging considering this business was soft for much of last year. orders of alpha-class equipment, which comprise our AAON branded fully electric heat pump configurations also contributed to growth, increasing 56% during the quarter. The same strength that AAON branded bookings limited the sequential decline in AAON branded backlog even with meaningful improvements in production. An branded backlog declined 3% sequentially and remained up 26% from a year ago. As a result, we remain focused on further ramping production to work down backlog in normalized lead times. In the midst of such strong growth, we have been intentionally investing in people, processes and tools to build a top-performing operating organization, one capable of sustaining higher growth rates while expanding margins over time. These investments are now moving from build phase to execution phase. Last quarter, we discussed the investments we've been making in supply chain management and lean manufacturing. We continue to leverage these investments and expect to see accelerating benefits as the year progresses. Margin expansion remains central to our long-term value creation model. In the near term, we are intentionally prioritizing growth, customer delivery and system maturity over near-term margin maximization. That decision is reflected in the temporary use of outsourcing and ramp-related inefficiencies as we scale capacity. These are conscious, disciplined trade-offs made from a position of strength and visibility not demand-driven pressure or structural resets. We view them as economically positive decisions that accelerate market share gains and long-term returns on invested capital. Importantly, these decisions do not come at the expense of [indiscernible] growth. Longer term, as capacity builds out and internal capabilities mature, reliance on these temporary measures will decline driving margin improvement through better fixed cost absorption and productivity. As a result, we now expect higher growth for the year, albeit with more modest margins near term while continuing to see directional margin improvement as the year progresses. Before handing it off, I want to welcome Andy Chang, our new Chief Financial Officer. Andy brings a strong financial background and a proven track record of leadership across strategy, financial planning and analysis and capital management. His experience and disciplined approach will be instrumental as we continue to scale the business, enhance execution and drive long-term value creation. Andy's insights and partnership will further strengthen our leadership team and support our focus on growth, margin improvement and operational excellence. I'd also like to thank Rebecca Thompson for his steadfast service as CFO. I look forward to her continued contributions and a return to the Chief Accounting Officer role. And with that, I will now turn it over to Andy, who will walk through the quarterly financials in more detail. Chung Cheung: Good morning, everyone. I'll start this morning by first sharing how excited I am to join AAON and to have the opportunity to partner closely with Matt and the leadership team. I've held financial leadership roles across multiple industries in my nearly 30 years tenure, including an extensive amount of time in the industrial HVAC space with a consistent focus on driving operational efficiency. I'm pleased to bring that experience to AAON, and look forward to helping drive the next stage of profitable growth and value creation. The company's strong market position and the high growth opportunity is what initially attracted me to the role. And as I have become more familiar with the business over the past few weeks, I've been even more impressed by the strength of the underlying fundamentals and the sizable opportunity that lies ahead. I look forward to working with the team to support profitable execution, enhance returns and deliver long-term value for our shareholders. With that, let's turn to the first quarter financial results. First quarter net sales increased 54% year-over-year to a record $496.9 million. Growth was driven by strong performance across both basic and AAON brands. supported by elevated backlog levels and recent capacity investments that enabled higher production rates during the period. Basic branded sales increased 72% year-over-year. reflecting continued strong demand for data center cooling solutions and capacity gains from higher utilization of our facilities in Memphis, Longview and Redmond. AAON branded sales grew 42% in the first quarter, driven by improved production throughput as we work to reduce lead times at both our totall and long field facilities. Gross margin was 25.1% in the first quarter, down 170 basis points from 26.8% in the prior year period. Gross margin was impacted by an increased amount of outsourced components to drive growth and share gains and absorb fixed costs at the new Memphis facility as well as tariff-related and general inflation pressures of which are temporary, despite these lead-term margin impacts, earnings growth remained strong, reflecting our exceptional growth trajectory.As internal capacity scales, utilization and productivity increase, reducing reliance on outsourced components and resulting in better fixed cost absorption. Additionally, we have taken margin actions through pricing and mix and those actions are embedded in the backlog. SG&A expenses as a percentage of sales declined 220 basis points to 13.7%. Up 32% to $67.9 million. This reflects strong operating leverage and disciplined cost management, and demonstrates how our organizational investments are scaling as revenue grows. Driven by the strong top line performance, non-GAAP adjusted EBITDA increased 44% and from the prior year period to $78 million. Non-GAAP adjusted EBITDA margin was 15.7% compared to 17.6% a year ago. Diluted earnings per share in the first quarter of 2026 were $0.48, representing an increase of 37% from the first quarter of 2025. Turning now to the segment financials. Beginning with AAON Oklahoma. For the first quarter, net sales increased 51% year-over-year to $244 million. This outsized growth was driven by a strong beginning backlog and improve production throughput, which supported by higher backlog conversion despite a challenging industry backdrop. Results also benefited from a favorable comparison to the prior year period, which have been disrupted by the industry's refrigerant transition, contributing to regain market share. AAON Oklahoma gross margin was 26.3%, an increase of 120 basis points from 25.1% in the first quarter of 2025. Overhead expenses associated with the Memphis facility impacted segment margin by $9.8 million. Excluding these costs, Oklahoma margins were 29.6%. The remaining gap to our historical highs in the upper 30s is explained by 3 items: outsourcing, tariff-related pressures and general inflation none represent a structural change to Oklahoma long-term earnings power for its role as a core margin engine for AAON. All 3 have already been addressed with actions embedded in backlog, and new pricing actions. These temporary headwinds will moderate as the year progresses. AAON coil products sales were $117.6 million in the first quarter, an increase of $23.6 million or 25% compared to the prior year period. Growth was driven by $93.2 million in base branded liquid cooling product sales which increased 40% during the quarter. This strength was partially offset by a 12% decline in AAON branded output within the segment. AAON Coil Products gross margin was 24.1% in the first quarter compared to 31.8% in the prior year period. and up 280 basis points sequentially from 21.3% in the fourth quarter. The sequential margin expansion reflected improved operating leverage from higher throughput at the Longview facility along with a favorable mix of higher-margin basic sales. Sales at the basic segment grew 104% in the first quarter to $135.4 million. The robust growth was driven by sustained demand for data center solutions and new market share capture as basics continued its trend of strong order intake and growing backlog. Increased utilization of our Memphis facility was also a significant factor, providing additional production capacity that was additive to segment results. BSIC segment gross margin was 23.9%, essentially flat from the prior year period. The stable year-over-year margin reflected strong volume growth offset by incremental resources and investments lead to support the future growth and share gains. As utilization continues to improve, we expect basic segment sales and margins to expand through the balance of the year, with the second half weighted more favorably as fixed cost absorption improves. Turning now to the balance sheet. Cash, cash equivalents and restricted cash balances totaled $1.1 million on March 31, 2026, and debt at the end of the quarter was $425.2 million. Our leverage ratio improved to 1.71x, down from 1.77x on December 31. During the first quarter, cash flow from operations was a positive $34 million, the highest level since the third quarter of 2024. This is compared favorably to a $9.2 million use of cash in the prior year period and was driven primarily by higher earnings and improved working capital efficiency. Capital expenditures totaled $52.9 million, reflecting continued investment in incremental capacity to support future growth. Looking ahead, we expect continued profitability and productivity improvements throughout 2026, which we believe will drive further cash flow improvement and strengthen the balance sheet in support of future growth. I will now hand the call back to Matt. Matthew Tobolski: We entered the second quarter the significant production momentum and a strong backlog that provides excellent visibility through the remainder of the year. Production throughput continues to ramp across all of our facilities, positioning the business to benefit from higher volumes and improved utilization. With this operational momentum and backlog strength, our focus remains squarely on execution and delivering for our customers. In the near term, we expect temporary cost pressures from outsourcing as we support strong growth and continued market share gains. However, these impacts are transitory and as internal capacity expands, these cost burdens will diminish, allowing margins to improve with demand remaining robust production continuing to scale and capacity investments coming online, we expect improving margins over the course of the year as operating leverage builds. We remain focused on scaling the business efficiently and strengthening margins over time, while delivering for our customers and driving long-term value for our shareholders. For the year, we now anticipate sales growth of 40% to 45% at a gross margin of 27% to 28%. SG&A as a percentage of sales is expected to be between 14% and 15% and depreciation and amortization expenses are expected to be in the $95 million to $100 million range. These expectations reflect our confidence in demand, improving execution and the operating leverage embedded in our cost structure. Importantly, our full year outlook reflects a net improvement in both top and bottom line, with earnings up materially despite gross margins reflecting intentional timing and ramp decisions. The additional volume we are taking on this year carry strong incremental contribution and accelerate absorption, productivity and capacity payback. This is a timing issue tied to how we're choosing to ramp and execute. Not a reset in long-term margin structure. As absorption improves, outsourcing declines and pricing flows through, margin expansion follows as these temporary factors unwind. In closing, I want to thank our employees, our customers, sales channel partners and shareholders for their continued support. We are seeing clear momentum in our operations as recent investments translate into stronger execution. Our visibility, execution priorities and operating discipline position us well to continue improving performance and delivering long-term value. And with that, I will open the call for questions.[Operator Instructions] Your first question comes from Ryan Merkel with William Blair. Ryan Merkel: Congrats on the quarter, very well done. So Matt, you're not going to be surprised about my first question, which is gross margin. There's a lot going on but I think it would be helpful if you could just talk about Oklahoma because the margins there, I think you said normalized for close to 30%, but the quarter was 26. So that 500 basis points, if I have that right, can you just unpack each of the temporary issues? And then the second part of the question is, how should we think about 2Q and why will 2Q improve sequentially? What are the drivers? Matthew Tobolski: So touching on Oklahoma margins, just to clarify, the margin as reported includes the overhead impacts of the to Memphis investments and so when we back that out, the Oklahoma margin for the quarter is sitting around 30%. And so when we think about that 30% compared to 2024 high in the higher 30s, the 3 key drivers that are embedded in there is, first off, some intentional choices to outsource to help fuel the growth. And when we think about it from a system perspective, we've got demand coming across the entire platform for internal manufacturing resources. And so as we balance exactly where all those resources are driving kind of throughput for the overall enterprise, some of that decision, especially in coil production in places like Longview, we're centered on supporting some of the liquid cooling products we have. So because we tied up some of that capacity in the Longview site for basics, we did some more outsourcing in the Oklahoma site, which shows up in the overall margin. But beyond that, there's a little bit of price cost dynamic and a little bit of dilutive nature from the tariff surcharge and actual costs incurred. But I want to touch on the fact that the price cost issues and the tariff impact were identified and actually pricing actions have been taken at the back half of last year. So embedded in backlog is actually intentional actions to increase that price already. and we will continue to monitor the input costs and really maintain discipline around pricing strategy. Ryan Merkel: Got it. Okay. That's helpful. And then 2Q, can you provide us any kind of color on where you think the margins will land? Matthew Tobolski: Yes. I mean, Q2, we're expecting sequential improvement quarter-over-quarter in the Oklahoma segment. And so that includes both with and without Memphis. The only thing I'd touch on is Oklahoma does traditionally have seasonality in Q4 and Q1. So we anticipate seeing sequential progression in the Oklahoma segment margin in Q2 and Q3 and there still is a little bit of potential pullback in Q4 with normalized seasonality. But all in all, we expect to see consistent improvement kind of during the main peak months in the summer. Ryan Merkel: Got it. Okay. And then just quickly on basics, I mean the revenues and orders were way above what I was thinking and maybe even what you were thinking, if I go back to what you told us in 4Q. So why did basics revenue in the quarter beat so much and then what is embedded in the guide for basics growth at this point? Because I think prior, you had said 25% growth. Matthew Tobolski: Yes. So, it's a good question on what changed or what allowed us to accelerate the sales and the bookings guidance. And really, what I'd say is as we look kind of within our customer base as well as new customer conversations, we continue to see incredibly strong strength in the data center market from an underlying perspective. And as we mapped out kind of our execution plan to really capitalize on the opportunity, especially with our differentiated product, we made the choice to accelerate some of the productivity or production ramp, which is part of that additional cost structure that came in on the outsourcing. But when we saw the opportunity and we really mapped out how we can take advantage of that, we made it a point to really accelerate revenue, which allowed us to then also accelerate bookings. So as that demand really started to come online and show good legs and we gain more and more confidence in our ability to drive more volume through. It allowed us to continue adding more sales or bookings as well. So that's really the big driver of really the acceleration, both on the sales and the booking side. I would just say, high level, what's embedded in the overall guide for the year is when we zoom out and we look at kind of the new 40% to 45% kind of marker from a top line revenue perspective that implies roughly $1 billion in basics revenue for the year. Ryan Merkel: That's incredible. Okay. I'll get back in line. Operator: Your next question comes from Chris Moore with CJS Securities. Christopher Moore: Nice quarter. Maybe we'll start with -- on the rooftop side. So obviously, you're ramping production there, lowering the lead times sounds like you're taking some share. Just maybe you could talk a little bit about kind of what you're thinking about from the rooftop market for the balance of '26? Matthew Tobolski: Yes. I mean the rooftop market as a whole, we talked through last year of obviously making some great strides in our national account success throughout the calendar year. But as we came into 2026, we continue to see good strength in the national account structure. But beyond that, what we saw was some really -- some solid movement in the more traditional transactional market. And so a lot of that growth in bookings that we saw in the quarter actually was driven by the more traditional market, which from our vantage point, it shows signs of recovery. We look at the age or data kind of through second quarter it shows a low single digits recovery in volumes going through, which obviously we're outperforming on. So we're taking share. We're really capitalizing on the value proposition of the overall portfolio, seeing a lot of strength in the off glass heat pumps. We're seeing good strength out of in our local markets. And so we continue to expect to see ramping production in the Oklahoma segment through Q2 and Q3. And again, a little bit of question mark in Q4 on normal seasonality, but really see good strength from our value proposition and driving good revenue and share gains through the year. Christopher Moore: Got it. In terms of the premium pricing? Is that's still holding up? Matthew Tobolski: Yes. I think one thing to point out and kind of mentioned in my response to Ryan's question, but embedded in the backlog has been intentional pricing actions that we've been taking through the back half of last year. So it's important to note, implying there obviously is we're maintaining discipline on how we price our product and maintain that premium and we continue to see strength in bookings. So with that price, we continue to see the value proposition shine through with those share gains and outperformance on the overall bookings. So, we definitely think the pricing strategy remains intact. We see the value proposition very much intact, but continued focusing on delivering innovative products to the marketplace. Christopher Moore: Got it. And maybe just one on basics. And it sounds like you're talking about $1 billion in revenue this year. Just from a capacity standpoint, kind of where you'll be at the end of '26 and kind of what's your longer-term target in terms of data center capacity.? Matthew Tobolski: Yes. I mean, we've talked in the past and again, this is sort of what's rough napkin math in the past around about $1.5 billion of capacity. But last quarter, I indicated in a lot of the conversations and really response to questions, which was we truly see a lot of upside actually beyond that. So embedded inside the initial investments that we made in both Longview and Memphis is actually more revenue potential than that original $1.5 billion. We continue to work to really quantify that. Mix is obviously a huge component of that as we continue to capitalize on the market opportunity. But we definitely see the capacity embedded in there being above $2 billion per share. Christopher Moore: Got it, i'll leave it there. Matthew Tobolski: So we've got headroom I would just touch too. I mean there's obviously sequential investments that come along with more equipment. But I'd say the big lifts have already been embedded in the investments we've been making. Operator: Your next question comes from Noah Kaye with Oppenheimer. . Noah Kaye: Matt, Yes, another really strong orders quarter for basics. Can you talk a little bit about the nature of the orders you're seeing now, how that's evolving? Some of these wins is existing customers, new customers, mix -- any color on that and how that's informing your ramp at Memphis would be helpful. Matthew Tobolski: Yes, a great question. So when we look at the overall kind of what is embedded inside not only the bookings but also I'd say the pipeline, which I think is also equally as important about longevity. There is a solid base, obviously, of existing customers. but we continue to engage with and secure orders with new customer base as well. And so we see the delivery and the execution and the value proposition of the product, helping anchor continued orders from our current customers, but also we see continued engagement and a lot more opportunity with broadening that customer base, which, as we've talked about in the past, is actually one of the key focuses that we have as a business. We love -- we love the customer base that we have. We also want to be very intentional about diversification and ensuring we spread out the overall kind of concentration risk within a broader customer base. And so we continue to focus on that. We continue to see it driving success in the overall results. And just kind of maybe moving one step further beyond just the customer base, I also want to just talk about the kind of overall product portfolio embedded in the conversation. One thing we're seeing in the midst of all this is really a broad-based demand for our entire portfolio. So if not isolated on one product or another. We're seeing good strength and consistent strength in our traditional airside products that built the base brand from the beginning days. So we see the good strength in air side. We continue to see that market actually growing in demand for us, but also continued strength in the liquid cooling products with the CDUs, both liquid air and liquid conversations. But beyond that, we're also seeing really good strength and interest in our kind of AI-centric free cooling chillers. So systems that are intentionally designed to operate at optimized levels within higher fluid camps supporting AI workloads. We continue to see increasing demand and increasing success there. So really the wins both from a sales and a bookings perspective are pretty broad-based around the customer set and the overall portfolio itself. Noah Kaye: That's helpful. And then I think you mentioned around the basic segment. There was some outsourcing also helping to accelerate sales there. Was that also coils outsourcing? Can you give us any more color on what was being outsourced? Matthew Tobolski: Yes. There's a variety of things that we look at from an operational perspective to see where the constraints are. And one thing I always say is manufacturing is a world of uncovering the constraints. No matter how much you solve one problem, you move it to the next one. And so as we look at overall constraints and really map out the sort of rocks that are in the way from accelerating revenue growth, coils obviously are a conversation that we continue to invest to expand our capacity. So it's not a long-term outsourcing strategy on coils. It's just essentially as we continue ramping internal production. We're basically using that as a little bit of a short-term kind of hedge to be able to keep driving the volumes. But same thing, as we think about a Memphis coming online, we're adding a tremendous amount of internal manufacturing capacity in the Memphis site, whether it coil production, whether it's sheet metal, whether weld and coating, all these things that are part of the puzzle. And as we push to really accelerate growth, we understand kind of the ramp rates of some of those internal investments. And we balance that with outsourcing to ensure that we can drive volumes while continuing to mature the internal operating processes. So that's where we talk about. This is a temporary conversation on outsourcing. We continue to have more and more capacity internally coming online, which is what's going to help drive margin improvement as we keep getting that capacity to mature. Noah Kaye: Okay. That's helpful. Matt. One more is just for Andy. First of all, welcome to the call. Maybe you could just talk for a minute about your priorities in the seat. It's -- it's nice to come in a quarter where an operating cash flow is inflecting. But I know with your background, you probably see some more opportunities to improve operating cash conversion. Can you talk a little bit about that and just more broadly what you're focused on here in the near term? Chung Cheung: Yes, absolutely, Laura. I'm super excited to be joining AAON here. And as you can see, we have really strong fundamentals. In the last few weeks, I really learned a lot and starting to formulate my priorities. I would say, near term, I see 3 things as really important. One definitely is the margin discipline, the ability to grow our margin during this phase of ramping rapid growth. Second, as you mentioned, we do see opportunity in cash generation, particularly on working capital management. I think there are opportunities there. And then lastly, I think just from an overall finance function standpoint, the visibility, the connection with the rest of the management team, with our operating team, I think there's a lot that we can do to enhance the capability of the overall leadership team. So yes, I'm super excited. These are 3 things. I'm definitely going to share more of my view in the next call in the next couple of months. Noah Kaye: And we look forward to that. Operator: Your next question comes from Timothy Wojs with Baird. Timothy Wojs: I guess a couple of questions for me. Just on the gross margins, Matt, how much of the kind of reduction relative to the prior guide is actually the investments you're making and any changes to kind of the Tulsa guide versus just higher mix of data center revenue now being in the sales line? Matthew Tobolski: Yes. When we look at -- first off, when we look at the sort of kind of prior guide expectation to really where we delivered in Q1, I would say the biggest driver of that sort of miss or dislocation is really driven by the intentional actions and decisions we made to accelerate volumes. And so the incremental cost that put on obviously affected multiple segments. But by and large, that decision to drive more volume and in doing so, relying on some more outsourcing activities certainly was a big driver in that. And so that plus the Oklahoma margin conversation around a little bit of that price cost that also had some near-term pressures -- but beyond that, the additional pieces that are embedded in there is, as we look at the opportunity ahead, we look at that growth rate and we map out what it's going to take. We've additionally made some more investments internally within our people and our process and some other investments to support that level of growth throughout the year. So there's a little bit of front load as well that kind of midway through the quarter, we undertook to really help fuel that growth throughout the year. So I mean, there's certainly a variety of factors in there. The data center margin is lower that we talked about than the structural AAON Oklahoma margin in the high 30s. But again, we knew that going into the quarter, and that really wasn't the prime driver of that disconnect. Timothy Wojs: Okay. Okay. That's helpful. And I guess if $1 billion or so of basic branded is kind of the target for 26 now. I think it implies that there's no real change in the AAON branded sales, I guess, is that math right? Matthew Tobolski: Yes. I mean it's -- they're in line. I mean there's a little bit of upside, but it's not markedly different on the AAON side. Timothy Wojs: Okay. Okay. And then just the last one. Usually, you see kind of a several hundred basis point step up if you just look at also margins from Q1 to Q2. just from a seasonality and a revenue perspective? And I know you're kind of kind of chewing through some backlog. So how would you kind of specifically expect the Tulsa business to perform Q1 to Q2 relative to normal seasonality? Matthew Tobolski: Yes. I mean I would say you're going to be -- we anticipate being relatively in line with that normal seasonality. And so I would say you're going to see uptick or we anticipate seeing uptick Q1 to Q2. But I would say, additionally, acceleration in that growth and margin profile really into Q3 before we expect some seasonality. So Q1 and Q2, I'd say, rough order magnitude, you're in the ballpark of what we expect. Operator: [Operator Instructions]Your next question comes from Julio Romero with Sidoti & Company. Alex Hantman: This is Justin on for Julia. Can you give us an update on Memphis revenue contribution in Q1 specifically and help us frame the trajectory from roughly $25 million to $30 million in to where you expect Memphis to be exiting 2026 on a quarterly revenue run rate basis? Matthew Tobolski: Yes. We don't have Memphis explicitly called out in terms of that breakout of revenue. But what I would say is we anticipate -- I mean we saw a good contribution step-up from Q4 to Q1. That's obviously the big driver in some of that revenue gain for the quarter. We anticipate continuing to see growth in Memphis throughout the year. So as that facility continues to mature, and really gets more and more stability in the internal manufacturing process, it allows us to continue ramping that throughout the year. So we anticipate seeing strength and growth throughout the year. Really, the focus right now in Memphis is ensuring that we mature that operation and really drive consistent performance before we push the accelerator too hard. But we do see the opportunity throughout the year to keep driving sequential growth in that side of the business. Alex Hantman: Very helpful. And then with capital expenditures being deployed towards investments in capacity, can you give us a sense of where the capacity investment is being directed and whether the $190 million full year CapEx plan is still intact or whether the demand environment is causing you to revisit that number? Matthew Tobolski: Yes, it's a great question. And so really, when we think about where that $190 million is spread out, obviously, there's a huge concentration in terms of facility perspective on Memphis and continuing to build out Memphis throughout the year. So last year, obviously, we had a huge year of investment in putting more and more equipment into that facility. But obviously, that continues in this calendar year as we continue to mature that operation and build the back of house to sustain that continued growth. So I want to just anchor there for one second and say that initial investment in Memphis does provide a tremendous amount of revenue potential. So it's not like there's an immediate massive follow-up of additional CapEx to support the continued growth. We have made a lot of investments over the last couple of years fleet-wide, whether Longview, Memphis and really Tulsa, Redmond and the Kansas City site as well. So we've been making investments over the last couple of years, which obviously show up in our financials. But those investments we've been making in the last couple of years have been very much framed around that forward-looking growth potential. So the investments we're making this year, obviously centered in Memphis, but the investments we've been making are going to support a lot of this growth. It's not triggering some massive investment that we have to make to be able to support this rate of growth in that $2 billion marker kind of from a revenue perspective. Alex Hantman: And just to add on your question, we are still seeing $119 million is our current expectation for the year. Very helpful. and congrats on a nice quarter. Thanks so much. . Operator: This concludes the question-and-answer session. I'll turn the call to Joseph for closing remarks. Joseph Mondillo: Okay. We thank everyone for joining today's call. If anyone has any questions over the coming days and weeks, please feel free to reach out to me. Have a great rest of the day, and we look forward to speaking with you in the future. Thanks. . Operator: This concludes today's conference call. Thank you for joining. You now disconnect.
Operator: Hello, everyone, and thank you for standing by, and welcome to Great-West's First Quarter 2026 Results Conference Call. [Operator Instructions] It is now my pleasure to turn the conference call over to Mr. Shubha Khan, Senior Vice President and Head of Investor Relations at Great-West. Welcome, sir. Shubha Khan: Thank you, Jim. Hello, everyone, and thank you for joining the call to discuss our first quarter financial results. Before we start, please note that a link to our live webcast and materials for this call have been posted on our website at greatwestlifeco.com under the Investor Relations tab. Turning to Slide 2. I'd like to draw your attention to the cautionary language regarding the use of forward-looking statements, which form part of today's remarks. And please refer to the appendix for a note on the use of non-IFRS financial measures and important notes on adjustments, terms and definitions used in this presentation. And turning to Slide 3. I'd like to introduce today's call participants. Joining us today are David Harney, our President and CEO; Jon Nielsen, our Group CFO; Ed Murphy, President and CEO, Empower; Fabrice Morin, President and CEO, Canada; Lindsey Rix-Broom, CEO, Europe; Jeff Poulin, CEO, Capital and Risk Solutions; Linda Kerrigan, our Appointed Actuary; and John Melvin, our Chief Investment Officer. We will begin with prepared remarks, followed by Q&A. With that, I'll turn the call over to David. David Harney: Thanks, Shubha, and good morning, everyone. Please turn to Slide 5. We delivered a strong start to 2026 with double-digit earnings growth for Great-West in each of our operating segments. These results reflect the structural progress we've made over the past several years, including our shift to a more capital-light business mix, the operating leverage across our platforms and disciplined capital deployment. This quarter, we delivered 20% year-over-year growth in base earnings and 23% growth in base EPS, driven by strong underlying business performance and the continued execution of our capital return strategy. Q1 marks another important milestone for Great-West as it is the first time we have achieved all our potential objectives we set out at our Investor Day last year. This is the direct result of our focused strategies and disciplined execution, and we are confident in the medium-term outlook for our business. Our strong cash generation and balance sheet continue to provide significant financial flexibility with over $2 billion in Holdco cash at quarter end, even after nearly $600 million of share buybacks during the period. Please turn to Slide 6. As I mentioned, we delivered base earnings per share growth of 23% year-on-year primarily owing to strong growth in our capital-efficient businesses. Notably, Empower base earnings grew 23% year-over-year in U.S. dollars, driven by strong retirement and wealth growth and operating leverage. While Capital and Risk Solutions saw 41% growth with continued momentum in its capital solutions business, highlighting our position as a leader in retirement services and wealth management. Great-West saw a 10% year-over-year growth in total client assets to $3.3 trillion, of which more than $1.1 trillion represents higher-margin assets under management or advisement. Robust capital generation continued to reinforce our strong financial position this quarter. Despite continued share buybacks, we ended with a solid capital base including a LICAT ratio of 129%, Holdco cash of over $2 billion and a stable leverage ratio. Please turn to Slide 7. At our Investor Day last year, we reiterated our objectives for base EPS growth and dividend payout, introduced a new objective for base capital generation and raised our base ROE ambition. Our first quarter results were in line with all our medium-term objectives with base ROE exceeding 19% for the first time this quarter. Our success can be attributed to the market-leading strength of our businesses, the continued shift towards capital-light growth and disciplined capital management. I am very pleased with the progress we have made as an organization over the past several years to drive stronger returns. While market conditions have been supportive in recent quarters, the structural progress we've made puts us on course to deliver 19% plus base ROE on a sustainable basis. Please turn to Slide 8. Each of our segments delivered against their growth ambitions in the first quarter. As I mentioned, Empower grew base earnings at a double-digit pace year-over-year with strong operating margins and net flows in Retirement as well as impressive growth of 65% in the Wealth business. Canada saw growth across all lines of business with double-digit growth in both retirement and wealth assets. In Europe, Retirement and Wealth and insurance earnings growth were propelled by strong client asset flows as well as strong retail annuity sales. In Capital and Risk Solutions, there continues to be solid demand across geographies and product lines for capital solutions, which coupled with strong insurance experience, drove 41% year-over-year base earnings growth. Overall, I am very pleased with the strong start to 2026. Double-digit growth across all four. business segments drives continued confidence for the remainder of 2026. Before Jon covers our first performance in more detail, I will pass it over to Ed to talk more about Empower's results and the work done by his teams this quarter to meaningfully strengthen the long-term growth profile of the Empower business. Edmund Murphy: Great. Thank you, David, and good morning, everyone. Please turn to Slide 10. Empower delivered another strong quarter with double-digit base earnings growth reflecting continued momentum across our Retirement and Wealth lines of business. This drove Empower's base ROE to 20.8%, a key contributor in achieving Great-West 19% ROE objective. In our workplace business, strong equity markets drove double-digit year-over-year growth in client assets. Net plan flows exceeded net participant outflows in the quarter and we continue to expect positive net plan flows for the full year 2026. Operating margins also improved by over 300 basis points from a year ago, helped by improved credit experience and underscoring the strong operating leverage in the business. Empower Wealth continues to see outstanding growth with base earnings up 65% year-over-year. Operating margins held steady at 39% despite increased brand investment in Q1, further demonstrating the scalability of our wealth platform. With significant momentum in our underlying businesses, we are increasingly confident that Empower can capitalize on the growing demand for Retirement and Wealth solutions in the United States. We were encouraged by recent policy developments to expand access to retirement savings and support long-term financial security, including new Department of Labor safe harbor guidance, the administration's April 30 executive order and growing momentum around solutions such as Trump accounts. Together, these efforts highlight the importance of public-private collaboration and helping more individuals build confidence in their financial futures. Turning to Slide 11. Empower has built a very strong foundation as the second largest retirement plan provider with $2 trillion in client assets and as a leading wealth manager. We are still in the early stages of deepening the relationship with our 20 million customers. A key theme at Empower is building customers for life. That means being there for our customers throughout their financial journey. We have previously highlighted the value we provide during client rollovers, and it continues to be an important lever of growth for the business. We expect nearly $1 trillion to roll off the platform over the next 5 years. A significant portion of that money in motion will be eligible for rollover, and we are the #1 destination for those assets. As we look ahead, the opportunity to create value for our customers is much broader. Customers hold roughly 3x more assets off platform than on-platform. We are increasingly focused on building trust with our customers to earn the management of those assets as well. Workplace, rollover and crossover represent highly complementary mutually reinforcing channels. For example, by strengthening engagement, while customers are still in plan and before life events occur, we can increase the likelihood that they stay with Empower when they roll their assets into an IRA or seek out additional financial solutions. Meanwhile, customers that are more actively engaged with our workplace platform are more likely to aggregate their other assets with us. Please turn to Slide 12. Our strategy is simple, engage customers earlier and more proactively, make it easier to do business with us and then earn their trust and the right to serve them across their entire financial journey. To advance our strategy, we have embarked on our journey to realign the organization to strengthening our offering for customers while ensuring the durability of Empower's growth profile. In the last few months, we established greater organizational alignment between our Retirement and Wealth businesses and started realigning teams to encourage earlier conversations with customers, drive deeper relationships that support better outcomes. These efforts position us to better serve our customers long term. Looking ahead, we're focused on executing across several levers to drive continued growth. First, we have built out our product offerings into new areas such as stock plan services and consumer directed health savings, making Empower even more relevant across a broader set of customers and needs. Secondly, we are expanding access to financial solutions through continued investment in digital and AI tools to support greater personalization and a seamless end-to-end customer experience. We are also building deeper partnerships with plan sponsors and their advisers to drive advocacy, increase engagement and do more for participants to build greater trust. We are highly confident in the outlook for the business and our ability to continue delivering on our growth agenda in the years ahead. I'll now pass it over to Jon to talk through the broader financial results for the quarter. Jon Nielsen: Thank you, Ed, and good morning. Please turn to Slide 14. Great-West delivered double-digit base earnings growth across all segments in the first quarter, demonstrating continued execution against our strategic priorities. The first quarter results were driven by strong performance across our Retirement and Wealth businesses, continued momentum in new business volume and favorable insurance experience at CRS as well as improved credit experience across our investment portfolio. These results were achieved despite heightened market volatility, underscoring the strength of our diversified, increasingly capital-light business mix as well as the benefits of disciplined capital deployment. Our capital position remains strong with stable leverage and ample liquidity to support both organic growth and capital deployment. During the quarter, we repurchased approximately $567 million of common shares contributing to the 23% growth in base earnings per share year-over-year. Great-West also delivered base ROE of 19.1%, an increase of 190 points from the prior year. As David highlighted, we achieved our medium-term objective of 19% plus for the first time. The results this quarter reflect high-quality earnings with close alignment between net and base earnings. Turning to Slide 15. We are pleased that total credit losses for the first quarter were down year-over-year and lower than our expected range of 4 to 6 basis points on an annualized basis. As a reminder, total credit experience is the aggregate of credit experience shown in our drivers of earnings disclosure as well as in our Retirement and Wealth P&L statements, all of which are included in the supplemental information package. We continue to expect under normal conditions, credit experience would be at the lower end of the range. Turning now to our results by segment, starting with Slide 16. Base earnings in our Canadian operations increased 11% year-over-year, with robust growth across all lines of business. Retirement and Wealth results were driven by higher fee income as well as improving retirement flows. Group Benefits earnings were driven by strong operating leverage and were impacted by modest insurance experience gains. Finally, insurance and annuity results were supported by higher sales than a year ago, favorable mortality experience and higher net investment results. Turning to Slide 17. In Europe, base earnings increased 10% year-over-year in constant currency, primarily driven by higher global equity markets, trading gains and strong growth of the Group Benefits in force book. Bulk annuity sales, which tend to be lumpy, did not contribute significantly to the base earnings growth this quarter. However, the second quarter pipeline is very strong, and we expect this to translate to higher insurance earnings in the coming quarters, augmenting solid underlying momentum across all the other lines of business. Turning now to Slide 18. Capital and Risk Solutions delivered another strong quarter, with base earnings up 43% on a constant currency basis. We continue to see strength in demand for our capital solutions business globally. The pipeline for these solutions remains robust, and we expect new business volume to remain strong through the remainder of 2026. The strong CRS results this quarter were also driven by favorable U.S. mortality experience. Overall, this business will likely exceed our medium-term base earnings objective in 2026. Turning now to Slide 19. As we've highlighted previously, organic capital generation remains a key strength of our businesses. In the first quarter base capital generation exceeded 80% of base earnings, while free cash flow was 85% of base earnings. We expect both these measures to continue to be strong over time, as the relative earnings contributions from our capital-light businesses grows, while attractive organic growth opportunities in our more capital supported businesses may impact capital generation in any given quarter, we expect Great-West to remain highly cash generative. Turning to Slide 20. Great-West's strong free cash flow generation continues to support ongoing share repurchases and provides capacity for further capital deployment through the year. During the first quarter, we repurchased $567 million of common shares. We expect the return of capital to shareholders to be at least in line with 2025, especially if compelling strategic M&A opportunities do not materialize in the near term. Turning to Slide 21. Our LICAT ratio stood at 129%, up from 128% at the end of the fourth quarter, driven by strong capital generation and favorable seasonality in our Reinsurance business. Looking ahead, we expect to maintain the LICAT ratio above 125% and under normal operating conditions, even with elevated Reinsurance new business volume. The robust capital position, combined with the leverage ratio that remained steady at 28% and a Holdco cash balance of $2.1 billion provides a foundation for continued growth and capital deployment. Overall, we're off to a great start to 2026 and are very excited about the continued strong performance across all of our financial metrics. With that, I will turn it back over to David for his concluding remarks. David Harney: Thank you, Jon. Please turn to Slide 23. The momentum we built in 2025 has continued into 2026, and our first quarter performance reflects the strength and durability of the portfolio we've built. We've achieved our 19% base ROE objective for the first time this quarter. And based on the structural progress we've made across the business, I'm confident in our ability to sustain strong returns in normal market conditions. Looking ahead, we remain well positioned to deliver against all our medium-term objectives. Empower is on track to again deliver double-digit base earnings growth this year as it continues to expand its leadership position in U.S. Retirement and Wealth. CRS continues to outperform its growth ambitions with strong demand for its capital solutions expected to persist through 2026. At the portfolio level, our continued shift towards capital-light businesses supports our expectation to generate 70% or more of base earnings from these businesses over the medium term. This, combined with strong organic capital generation provides us with significant flexibility to invest in the business, pursue strategic opportunities and to continue returning capital to shareholders. We've built a well-diversified, capital-efficient organization with strong growth platforms, disciplined capital management and experienced teams across all our businesses. I'm confident in our ability to continue executing on our strategy and creating long-term value as we move through 2026 and beyond. Thank you. And with that, I'll turn it over to Shubha to start the Q&A portion of the call. Shubha Khan: Thank you, David. [Operator Instructions] Jim, we are ready to take questions now. Operator: [Operator Instructions] We'll hear first from Doug Young at Desjardins. Doug Young: Question on CRS, I guess for Jeff, can you remind us what's driving the improved outlook for Capital Solutions business? And in the same vein, can you remind what percent of CRS' earnings are from Capital Solutions? I think it was 50% not long ago. I would assume it's kind of tilted more towards that. So -- and I've got a follow-up. Jeff Poulin: Thanks, Doug. To answer your last question first, the percentage has gone closer to 60% Capital Solution, 40% Risk Solution. And it's the nature of the Reinsurance business, sometimes some products are more in demand than others. And we have seen a lot of demands for products on the capital solutions side. And it's coming from different products in different jurisdictions. So we're seeing a strong demand in Asia right now because they've got new regulations that are putting more capital demand on the companies. We're seeing it in Europe, where I think the companies are a little strained and then we're seeing it in some segments of the U.S. market. So it's demand across the board, which is a good, a perfect storm from our perspective, that everybody is looking for the types of products we're offering. And it's -- 2025 was an absolute great year from a new business perspective for us and '26 is starting the same way. So the outlook is really good from a new business perspective. Doug Young: Yes. And we talked on this before. Maybe just -- when I see something growing in the insurance world really, really fast and I somewhat get a little nervous. And we've talked about the risk controls that you have internally. But what's the like simple answer that you would get for someone that would look at this and say, man this is growing really, really fast. And this is a fairly complex business. Like how are you managing this risk so that there isn't any surprises? Jeff Poulin: Yes. We've got pretty strong controls. There's lots of levels of risk management within our operation. And I think that's what made us very successful over the years. We've got at every level of a transaction, we have a review and we decide to proceed or not proceed not more than 10% of the transactions we look at get closed. So we have a very, very stringent process to look at that. We try to be flexible with the clients, but at the same time, we're very disciplined at the risk reward needs to make sense, hence the great returns we're seeing. So I think it comes in lumps, this business is like that. We've seen that before. We've wrote a large book of longevity business in the past relatively quickly, and we're still benefiting from it now. I think that it's the nature of the Reinsurance business. Sometimes the demand on a given product is really, really strong. And other times, it's not. So you need to be patient and disciplined. Doug Young: Okay. And then, Jon, can you define -- I think you did this last quarter, but can you define what you believe Great-West Life's or what you calculate Great-West Life's excess capital to be? And how much is at the Holdco because I know you've got an amount there, but I think you want to hold some liquidity. How much is that the Opco and how much is the U.S. sub? And specifically in the Canadian Opco, when you think about binding constraints, what is that binding constraint there? Jon Nielsen: Yes. Thanks, Doug. Let me walk you through the different components. First, as you rightly call out, we have about $2 billion -- $2.1 billion of cash at the holding company. We typically like to have a few hundred million of liquidity there through the cycle, but most of that cash would be readily deployable. We didn't have the regulatory excess capital across the regulated entities. I call that about $2 billion. So you're at $4 billion. In terms of the minimum, I would say you'd kind of look at it as 120%, but we typically like to operate north of there in most transactions, but we could go down to 120% for the right opportunity. So then the other thing I think that we should point out is right now, we're running below kind of a normalized 30% leverage level. So that's another, call it, $1.5 billion, so around $5 billion of capacity there. And then as you're aware, Doug, and special situations for M&A, we have in the past managed to take our leverage ratio up given the exceptional cash flow and capital generation that we have, and we've used that cash flow generation not just from the acquired business, but from our ongoing operations to quickly pay down the leverage, we could see that as another lever to pull and that would be around, call it, $3.5 billion of capacity. So we have got a lot of capacity. But I wouldn't just look at the balance sheet. Look, I would also look at the point out how strong our capital generation is. It continues to be above 80%. All of our segments are throwing off free cash flow. Our free cash flow was over 85% this year. We're exceeding kind of continue to meet and exceed that medium-term objective. It's fungible cash. You can see it come into the liquidity of the holding company. So we're in a really strong position. Operator: Our next question will come from Tom MacKinnon at BMO Capital Markets. Tom MacKinnon: Yes. The -- when we look at CRS and you see insurance experience gains aligned or that hasn't -- that's kind of just hovered around 0 and then we see $47 million in the quarter. Have you done anything different with respect to your terms and conditions with respect to what you're reinsuring here to, I guess, increase the volatility or what you might get from mortality gains, U.S. mortality gains? In other words, when you see a $47 million U.S. mortality gain, that's kind of outsized, could we get a $47 million U.S. mortality loss? Or have you -- is there anything to read in here that you've changed anything to increase the volatility associated with that line? Jeff Poulin: Thanks, Tom. I don't -- I mean, your question is pertinent, but we we've announced last year that we're not in the mortality business anymore. So we really haven't changed the contracts. It's a runoff block at this point. So I think we feel very confident about our assumptions and they should hover around zero. Having said that, I think we had an exceptional quarter from a mortality perspective. It's been very good. We saw another reinsurer -- strong reinsurer in the U.S. announcing the same sort of results yesterday. So I guess mortality was good in the U.S. overall for the quarter and trying to explain volatility on mortality is a difficult thing to do. It will happen. And -- but you should assume that I think our assumptions are legitimate. I think they -- we feel pretty strongly they are. In the last two years, we're running at about 100% of expected. So we feel pretty strong about that. So it is -- it's big volatility, but it's within the range that we estimate it could be. So no real variance there. And of the $47 million, it's only -- I think it's $35 million that is associated to mortality. There was another $12 million there that is due to our longevity block that we onboarded that have been in the books for a while, but that we have booked to expected. And so we had transacted with the company and they paid us expected cash flows for a while. And then once we trued up to the real cash flows, we got the benefit of that. So it shows that we had strong pricing on that transaction. And it was significant enough that it made a difference for $12 million this quarter. But I mean that's unusual so we don't expect that to happen again. Tom MacKinnon: Okay. And then just with respect to Empower Wealth, Jon, in the -- in your fourth quarter conference call, you had highlighted that the fourth quarter margin for U.S. Wealth at 39.4% was higher than normal on seasonality of marketing expenses. And you said an operating margin of 35% better reflects the near-term margin expectation for U.S. Wealth. So why was it not 35% here that you had sort of guided to in your last conference call? Why was it up at 39%? Was there any more marketing expense timing issue there? Jon Nielsen: I think I'll hand it over to Ed, but I think we were a little bit lighter on first quarter marketing, and we expect a little bit to come through the fourth quarter. It's not that significant terms. But maybe, Ed, do you want to give some details? Edmund Murphy: No, I think that's right. It's more deferred spending. We had -- we're embarking on a new campaign and we pushed that out somewhat. I mean I think in terms of the full year expectation will be closer to where we are today, certainly above last year. But it's more timing, Tom. Operator: [Operator Instructions] We'll go to Gabriel Dechaine at National Bank. Gabriel Dechaine: I have a couple of questions here or lines of questions rather. First, on the bulk annuities business in the Europe segment, it sounds like you're similarly bullish there on the sales outlook for Q2 anyhow. I'm just wondering how do you factor in or what comments do you have about that competitive environment where there's been a lot of write-ups about the private equity players getting into that business, and you would think that would maybe dampen your outlook, but doesn't sound like it? And sticking to that topic, just to get a sense for how important it is in that insurance and annuities piece of the pie, how much of that is comprised of bulk annuities versus payout? Lindsey Rix-Broom: Thanks, Gabriel, for the question. And as you say, there is -- there has been increased competition coming to the market over the last 12 months. However, there are still really only 11 players in the market and there's significant demand for bulk annuities, both now and for the future and for the outlook. So we are kind of pleased with where we are. The pipeline, as you say, for Q2 looks very strong and indeed for the rest of the year. So we're optimistic in the outlook for us. I think we remain disciplined in our pricing, as we've said before, and look to continue to be able to make good returns in this area going forward. In terms of individual annuities and bulk annuities, we've had a continued strong performance in individual annuities, particularly in the U.K. market. That outlook remains strong and positive as well. So looking for a balanced performance across both bulk annuities and individual annuities for the future. Jon Nielsen: I'd just add -- just a comment to add on Page 34 of the SIP, you'll be able to see the split of the two categories, individual and bulk. We've done that to be able to monitor the lumpiness of the folks. Gabriel Dechaine: Okay. Great. I was looking at the slide deck, but -- yes. So moving over to the Empower and, Ed, you were talking about the regulatory changes, the Trump IRA accounts and all that. And I mean, I don't know how -- if you could size that opportunity, if that's possible? But on the flip side to that, I'm just wondering because this is another topic that's come up is the suitability of some investment classes for retail investors, private equity and private credit, whatever. What sort of guardrails do you have in place or responsibility even for what you offer to the customers such that if there ends up being some sort of an issue with the suitability that doesn't affect you? Edmund Murphy: So your first question, we see it as a tremendous opportunity. There's different numbers that get referenced, but somewhere between 40 million, 50 million Americans don't have access to workplace savings. So clearly, under the Trump administration, there's been this bipartisan focus both in Congress, but also from a regulatory standpoint to try to drive access and improve coverage. We're right squarely in the middle of that. So we're very active in advocating for those policies. It's hard to size it because at least initially, those are going to be smaller accounts. But as you think about the matching and the compounding effect, it will grow over time. So I'm pretty sanguine about where we are in terms of coverage and expansion, I think it's very constructive. And as I said, we're very much a part of that. The second question you had, I think, is a very important one. I do want to make it clear that the role that we play is not a fiduciary role as it relates to the relationships that we have with alternative managers that are on our platform. We don't act in a fiduciary capacity, we essentially are giving access to these investments. But ultimately, the decision as whether to include any investment for that matter, whether it's public equity, the 40-Act mutual fund or whether it's an alternative asset class, that decision is ultimately being made by the plan sponsor and their adviser. And the other thing I would just add is we are not advocating for -- at this point, we're not supporting stand-alone alternative investments inside the defined contribution plans at Empower. These are all structured as a multi-asset class vehicle through a collective investment trust, and it's supported within our adviser managed account program where there is an adviser, a financial adviser that's attached to each one of these offerings and the typical cap of what might be allocated to that collective investment trust is somewhere around 15% to 20% of the assets. So there's plenty of liquidity, both inside the product itself and then outside where people would be investing in public equities and public debt. And then I would just add that we have about 1,000 plans right now that are in some form of implementation, either they have implemented a vehicle or in the process of implementing a vehicle. So it's still sort of in a nascent stage. But obviously, the directive that came from the Trump administration, I think gave some sponsors comfort that if they follow ERISA standards that and take a thoughtful and practical approach that they're comfortable in going forward. So that's what we're seeing. Gabriel Dechaine: And what about the Individual Wealth business? Are you not a fiduciary there? Is there a similar discussion to be had or differently? Edmund Murphy: Yes, in the individual wealth business, those investors have to be accredited investors. And yes, so they have to meet the credit investor standards. And in doing so, we do act in advisory capacity. We do offer products through a relationship we have with a third party. That too, I would say, is very much in its nascent stages. And the reason is that the preponderance of our client base tends to fall into that mass affluent category. So many of them don't necessarily meet the credit investor standard. So we haven't seen, at this stage, we haven't seen much in the way of adoption of alternatives inside our wealth business. I think that will change over time for sure, as people look to diversify. But at the moment, that's not the case. Operator: Our next question will come from Darko Mihelic at RBC Capital Markets. Darko Mihelic: I just wanted to revisit Empower's flow situation because it does -- it sort of does change my model when I think of it. I mean you had positive flows, which is great. But the way you had described it earlier was that just the general nature of the business is one that would typically have outflows. Maybe I think the number you used previously was like 2% and then some of your efforts and work would maybe grind away at that, but generally, you end up in a place where maybe 1% kind of outflows is like the long-term expectations. So I realize you're doing a lot of work there. Has anything changed and how I should think about the flows and how I should put that into the model? Edmund Murphy: Yes. I think -- let me start with -- I think what you're referring to is flows in our workplace business, specifically participant flows. Obviously, we saw net plan flows for the quarter, and we expect net plan flows for the full year as we experienced last year. With respect to participant flows, you do have a lot of seasonality in that first quarter because that's when you see very high contributions coming into defined contribution plans. You're seeing profit-sharing contributions and the like. So that's not unusual to see a more favorable result in the first quarter. That being said, I think as you look out to Q2 and beyond, you're going to see more normalized participant outflows consistent with the guidance that we've given you in the past. In fact, if you look at what the equity markets have done, particularly in the last 30 or 40 days, you've got higher balances. And so disbursement dollars will probably be higher, right, due to market appreciation, you'll have higher balances in those accounts. So underlying all of this is the sort of demographic dynamic that's playing out in the U.S., where you are seeing net outflows on the participant side across really every provider in the marketplace. We obviously have built what we think is a pretty compelling hetero-s-mid on the wealth side. So we aim to capture some of that money in motion for sure. But the way you should think about this is that there will be a consistent in roughly 1% or so in participant outflows. And I think that will -- you'll see that play out in Q2 and beyond. And then finally, I would just say we continue to grow the business. So we're adding billions of dollars on to the platform through our institutional sales efforts. Our year in 2026 will look very similar to what we accomplished in 2025 on that institutional side. And then when you layer in the market appreciation, you've seen what's happened to our AUA. In fact, since 2021, our assets under administration in our workplace business has grown at a compounded annual growth rate of 11.5%. I think that may be the highest in the industry. Darko Mihelic: That's a great answer. And it is -- I mean I think it's 13% year-over-year this quarter in terms of AUM growth, but the revenue growth lagged. Maybe can you touch on that? Jon Nielsen: Maybe I'll start and then hand it back to Ed. This is Jon. in the quarter, there was a refinement that we made to some data that impacted the classification of certain of the transactional fees so we implemented that in the third quarter. So what it did is it was basically a reallocation between the asset-based fees and the non-asset-based fees. It didn't impact total fees or our financials. But it did reduce asset-based fees and increase the non-asset-based fees. It was about $14 million during the quarter. This had about a 5% impact on the growth rate because we didn't adjust the prior periods. That, Darko, had we applied it. It was about the same amount in the previous -- most recent quarters. I'll hand it back to Ed to kind of give the business context of the fees as well. Edmund Murphy: Yes. Thanks, Jon. The other dynamic, and we've talked about this in prior calls, is just what I would call the mix dynamic and how the business is playing out. So if we have a disproportionate amount of large mega corporate clients, those tend to be fixed fee. They're not asset-based pricing with those plans. And that's what we've seen more recently, when we're winning these large mandates, the pricing is a fixed fee pricing versus down market, call it, plans under $50 million in assets or $75 million in assets, those tend to be asset-based fees in terms of the -- how we get paid for the services is being paid through asset-based fees. I will say in that $75 million space and below, we're #1 in the market, and we have -- we're growing 20%, 25% a year in that pace -- that space. So we're taking business away from the competition. But it does get overshadowed a bit because of the mix issue, as I say, when you win these large corporate and government mandates, which we're winning. Darko Mihelic: I see. Okay. But your sweet spot is still actually the smaller mandates. So I should be thinking of it as more or less growing in line with AUM with the occasional quarter or two where you get a massive mandate. Is that the way I should think of it? Edmund Murphy: Well, I guess the one caveat I would say is, so we're competing in all markets, the government market, the large corporate market, the mega corporate market, the small market, the Taft-Hartley Union. So you're going to see some balance there because if you win a $15 billion, $16 billion, $17 billion mandate, that's going to skew and that's a fixed fee arrangement. That's going to skew the mix, if you will, right? So it adds to your AUA, but it's not generating asset-based fees. Now there are other ways we generate asset-based fees which we can get into. But with respect to the record-keeping administration piece of it, that would be a fixed fee type arrangement. So disparity, if you will, because of the fact that we're a diversified player and we're competing in all segments of the market. Operator: And next, we'll hear from Mario Mendonca at TD Securities. Mario Mendonca: Ed, maybe I'd just stick with you for a moment. Thoroughly the goal here, which I think you've described is to move that rollover rate up to something more in line with where the leaders are, what is your -- and this may ask you to take a kind of a wild guess here, but can that rollover rate for Empower approach the mid-20s over the next couple of years? Or is this a much longer-term endeavor to get it to that level? Edmund Murphy: I'm not sure over the next couple of years. And I'll tell you why. I mean, I think -- we have 20 million customers. But one of the things that we -- there are several things we need to do. One of the things we need to do is to raise aided awareness and raise consideration to a level of some of the more entrenched players. And that's why we've made a concerted effort to invest in the brand and to invest in advertising, but also to create awareness among those 20 million installed base of clients on the workplace side because there's obviously a meaningful subset of those customers that are not necessarily fully aware of our wealth capability. So it's a work in progress. There's the branding, there's. The awareness element of it. I think in terms of the offering itself, it's very competitive vis-a-vis the competition. So it's just -- it's something that, obviously, we need to continue to work on -- but as we've said at Investor Day and we've said at other times, the opportunity here is immense. If we build the trust with the sponsors, if we serve those individual investors well while they're an active participant in the plan, they will think about us and they will give us consideration to be their adviser hopefully in perpetuity. So I think the high 20s -- in the mid- to high 20s in the near term is probably too aggressive. Mario Mendonca: Okay. And then -- and again, this might -- I'm not sure how much you want to get to this. I clearly don't expect you to name names when we're talking about potential acquisition targets and -- but the question is this, is that file sort of active? Like are there active -- are you actively looking at potential acquisitions in this space? Because there are -- there's just so much speculation around the space right now. Is it -- would you call it actively looking? Or is it dormant right now? David Harney: Yes. Maybe I'll take that question, Mario. Like yes, you're dead right, we don't comment on individual opportunities. Like obviously, we're alert and very keen on any opportunities to come to the market, and we look at all opportunities. And maybe just to take a step back, and this answer won't surprise anybody we've said it many times before. But just to reiterate, again, our sort of growth targets, our medium-term growth targets are not dependent on acquisition activity. And you can see that just in the very strong performance of the business this quarter and the growth in all of the segments, which is achieving those targets. But we have firepower as well. And if opportunities come to the market, we will certainly look at them. We've executed very well just on recent acquisitions, both in workplace retirement and on wealth acquisitions. And we're very confident of our capability to execute there again if the opportunities come along. And again, we've been very clear just on the requirements for our acquisition activity. It has to hit our return targets on where we can execute synergies, I think that makes that very possible. And then it has to sort of -- we have to be very confident on execution capabilities. And then the right targets will add scale and will add capability to our businesses, and we're keen to look for opportunities that come along. Mario Mendonca: Okay. And I'll be really brief on this one. Going back to CRS. There's mortality risk, there's CAT, there's longevity. Those are the three big ones I can think of that you're exposed to in CRS. Am I missing anything? Like is there any concentration that concentrated risk that I'm not picking up on? Jeff Poulin: I think those are the main risks that we have on the risk business. Yes. Operator: And at this time, we have no further signals from our audience. Mr. Khan, I'm happy to turn the floor back to you, sir, for any additional or closing remarks that you have. Shubha Khan: Thanks, everyone, for joining us today. Following the call, a telephone replay will be available for one week, and the webcast will be archived on our website for one year. Our 2026 second quarter results are scheduled to be released after market close on Tuesday, July 28, with the earnings call starting at 9:30 a.m. Eastern Time the following day. Thank you again, and this concludes our call for today. Operator: Ladies and gentlemen, we'd like to thank you all for joining today's Great-West First Quarter 2026 Financial Results Call. You may now disconnect your lines. We hope that you enjoy the rest of your day.
Operator: Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the 5N Plus Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] I would like to turn the conference over to your speaker today, Richard Perron, President. Please go ahead, sir. Richard Perron: Good morning, everyone, and thank you for joining us for our Q1 2026 results conference call and webcast. We will begin with a short presentation, followed by a question period with financial analysts. Joining me this morning is Gervais Jacques, our CEO. We issued our financial results yesterday and posted a short presentation on the Investors section of our website. I would like to draw your attention to Slide 2 of this presentation. Information in this presentation and remarks made by the speakers today will contain statements about expected future events and financial results that are forward-looking and therefore, subject to risks and uncertainties. A detailed description of the risk factors that may affect future results is contained in our management's discussion and analysis of 2025 dated February 24, 2026, available on our website and in our public filings. In the analysis of our quarterly results, you will note that we use and discuss certain non-IFRS measures, which definitions may differ from those used by other companies. For information, please refer to our management's discussion and analysis. I would now turn the conference call over to Gervais. Gervais Jacques: Thank you, Richard. Good morning, everyone, and thank you for joining us today. Before we begin, I would like to say a few words. As you know, I'm transitioning to the role of Executive Chair. So this is my last earnings call as Chief Executive Officer of 5N Plus. It has been a privilege and an honor to serve as CEO, and I would like to thank our shareholders and the broader investment community for their continued support. I look forward to contributing in my new capacity to the company's strategic direction and long term development. I have great confidence in Richard as he steps into the CEO role. Richard has been instrumental in our success, and he is well positioned to continue executing on our strategy and take 5N Plus to the next level. Now turning to the quarter. Q1 2026 reflects a powerful start to the year with strong momentum across our core end markets above expectations. Performance was driven by sustained demand in Specialty Semiconductors, as well as favorable pricing conditions in Performance Materials. In Specialty Semiconductors, demand remained strong across our strategic sectors with backlog continuing to provide excellent visibility, supported by ongoing strength in terrestrial renewable energy and space solar power. Bookings are now extending even beyond 2028. Segment performance in the quarter was driven by demand in terrestrial renewable energy in large part, reflecting our expanded agreement with our strategic U.S.-based customer in this sector. As you will recall, under this agreement, volumes increased by 33% for the year of '25-'26 and will increase by a further 25% for the subsequent term through 2028. In Performance Materials, the favorable pricing conditions we benefited from in 2025 persisted longer than anticipated and contributed positively to results, once again, reflecting the agility of our global sourcing platform. Across the business, we remain focused on disciplined execution, productivity initiatives and capacity expansion plans. At our AZUR facility in Heilbronn, Germany, we initiated work on our latest and previously announced capacity expansion project. This follows the 30% increase in solar cell production capacity achieved in 2025. We have begun our work and are now progressing towards an additional 25% increase, which is expected to come online by the second half of 2026, in line with customer demand. As a reminder, this capacity expansion requires targeted investment because much of the equipment is already in place. Overall, our first quarter performance reflects disciplined strategy execution. We remain focused on the right value-added products in the right end markets, supported by agile operations and sourcing as well as strong customer relationships. At the same time, we are fully engaged to mitigate the best we can the pressure resulting from the uncertain economic environment. Before turning the call over, I would also like to mention that our new Chief Financial Officer, Alban Fournier, joined the company just a few days ago. We are very pleased to welcome him to the leadership team, and we look forward to introducing him to the investment community ahead of our next call. With that, I will now turn it over to Richard. Richard Perron: Thank you, Gervais, and good morning, everyone. Before turning to the financials, I too would like to acknowledge Gervais for his leadership and contributions to 5N Plus. Gervais and I established a strong working relationship over the years, and we will continue to cooperate closely in his capacity as Executive Chair. I look forward to building on the strategy we developed and deployed the success as a team. I also look forward to working closely with our new CFO, Alban, who is quite quickly setting up to speed on all aspects of the business and the rest of our leadership team. As we move into our next phase of growth, our focus remains on disciplined execution, scaling our position in high-growth end markets, thanks to our value-added expertise and driving operational efficiency. All of this is being pursued with a view to delivering long term sustainable value to our stakeholders. Turning now to our financial performance for the first quarter. Revenue for Q1 2026 was $117.9 million, an increase of 33% compared to $88.9 million in Q1 of last year, primarily driven by higher volumes in Specialty Semiconductors and stronger pricing in Performance Materials, all of which reflects a favorable product mix. Adjusted gross margin increased by 36% to $41.4 million, representing 35.1% of sales compared to 34.2% in the prior year, reflecting a favorable product mix and pricing above input costs. Adjusted EBITDA reached $29.2 million, up 41% year-over-year compared to Q1 last year. Net earnings were $17.8 million or $0.20 per share compared to $9.6 million or $0.11 per share in Q1 last year. In Specialty Semiconductors, revenue increased to $86.2 million, up 37% year-over-year, primarily driven by higher volumes in terrestrial renewable energy. Adjusted EBITDA increased by 42% to $25.1 million, reflecting higher demand in terrestrial renewable energy and improved unit costs from economies of scale. Adjusted gross margin remained strong at $34.4 million of sales compared to 35% in Q1 last year. The decrease reflects less favorable metal input costs, partially mitigated by economies of scale. Backlog remains effectively maxed out at 365 days, providing continued visibility into future demand. In Performance Materials, revenue increased to $31.7 million, up 21% year-over-year. Adjusted EBITDA increased by 67% to $10.1 million, supported by favorable pricing and product mix. Adjusted gross margin expanded to an impressive 37.8% of sales compared to 32.9% of sales in Q1 last year. The improvement also reflects favorable pricing and product mix, partly offset by less favorable metal input costs. Backlog represented 130 days of annualized revenue, reflecting contract timing and renewals. Cash used in operating activities was $13.5 million in Q1 compared to cash generated in the prior year, primarily reflecting higher working capital requirements to support increased volumes and sustained demand. Net debt stood at $74.7 million at March 31 during 2026 compared to $50.3 million at the end of '25, reflecting the working capital investment in the quarter. Despite this increase, our net debt-to-EBITDA ratio remains low at 0.71x, highlighting the strength of our financial position. Turning to the outlook. In Specialty Semiconductors, structural growth across our core end markets continues to support demand, particularly in terrestrial renewable energy and space solar power. Long-term customer agreements and FT backlog also provides strong visibility. In Performance Materials, favorable pricing conditions extended into the first quarter longer than we had anticipated. That said, we continue to expect a gradual normalization over the remainder of the year. More broadly, we continue to operate in a dynamic environment with anticipated cost volatility and inflationary pressures due to the current geopolitical context. While we delivered strong performance in the first quarter, we continue to expect higher input and operating costs to exert some pressure on margins over the course of the year. In this context, we remain focused on the elements within our control, disciplined execution, including on productivity initiatives and capacity expansion lans to support long term growth and drive economies of scale. Taking these factors into account, along with our strong first quarter performance, we're maintaining our full year adjusted EBITDA guidance of $100 million to $105 million. We expect a more balanced contribution across the year compared to our prior expectations. We also continue to actively evaluate external growth opportunities to further strengthen our leadership in Advanced Materials across our key markets. Overall, we are confident in the underlying growth fundamentals of our end markets, our competitive positioning within those markets and our ability to execute on our strategy to deliver sustained profitable growth. So that concludes our formal remarks. I will now turn the call back over to the operator for the Q&A with our financial analysts. Operator: [Operator Instructions] Your first question comes from Baltej Sidhu with National Bank of Canada. Baltej Sidhu: Congratulations once again, Gervais and Richard, on the transition. Just a few questions from me. So on the adjusted EBITDA margins in the SS segment, they reached a record high, partly driven by economies of scale. Just thinking looking forward, how sustainable are these margin levels going forward, just given the strong underlying demand? And is that a fair run rate assumption to consider going forward? Richard Perron: On a consolidated basis, yes. If we have any variations from a gross margin expressed as a percentage of sales, it's going to be quite limited. It's going to be quite reasonable, nothing drastic. The current margins we have is what we're expecting for the remainder of the year for the most part of the year. If anything -- if there's any variation from one quarter to another, it will be most likely due to the product mix rather than the fundamentals of our business. Baltej Sidhu: That's great. And then could you share an update on your pipeline in the Space segment? And are there any changes in the competitive landscape that you're seeing right now, whether that's capacity? And it seems like pricing has continued to stay above inflation. Just any commentary that you have around AZUR SPACE. Richard Perron: The market is essentially -- there's essentially no newcomers, and we have 2 competitors essentially and all 3 of us are all very busy. And like we often say in the, let's say, the history of the satellite industry for the actual products that we're supplying to that industry, the Space ourselves, we expect pricing to continue to be very extremely interesting and capacity to be maxed out. That's why we continue to -- again, earlier this year, we announced a further expansion of our production capacity. And going forward, we expect similar announcement will come as well. Baltej Sidhu: Perfect. And just one more here, just more on the terrestrial solar side. So in your CSR report last month, you highlighted Perovskite Precursors. Could you comment on the broader opportunity that you're seeing here and the path forward towards commerciality? Richard Perron: Sorry, I missed the beginning of your question. Baltej Sidhu: In the CSR report, you highlighted Perovskite Precursors for terrestrial solar. Just if you can comment on the broader opportunity and path towards commerciality. Gervais Jacques: Well, as you know, we've been working in our customers and the entire industry is working to develop Perovskite. Perovskite is quite promising, but this is something that still required the development in order to make sure that the efficiency could last with a long period of time. Then we know that Perovskite could produce energy for a short period of time, a few months, but could it last for 15 years? That remains to be seen. And this is why the different companies are working on that. Richard Perron: So it's still under a product development phase and then we'll follow qualification before full commercialization. Operator: Your next question comes from Nick Boychuk with ATB Cormark. Nicholas Boychuk: Coming back to Baltej's question on the consolidated gross margin profile, specifically for SS and your comments in the MD&A about the ongoing year's efficiency program. I'm curious how much of that is tied to either incremental capacity expansion within the existing 4 walls of terrestrial solar AZUR SPACE versus the optimization of margins and how much each could increase? If we are seeing your U.S. customer on the terrestrial solar side, expanding in the U.S. further, speaking about adding more capacity, would you be able to address that? Is that part of your ongoing program? Or is everything right now focused on margin enhancements? Richard Perron: Specific to the space industry, the combination of capacity expansion, the high demand, independent of the positions of our competitors from a margin perspective, we expect that it will continue to be good forward as the pressure on the actual -- on the volume that is required from a solar cell perspective continues to increase, and it seems to be the case for many years to come. Operator: Your next question comes from Michael Glen with Raymond James. Michael Glen: Yes, congrats, Gervais, on everything achieved during your tenure at 5N. And Richard, congratulations too, as you transition to your new role. Just Richard, you're talking about the metal input costs. Like can you give some insight into how those maybe trend in both segments through the rest of this year in both the Specialty Semiconductor and the Performance Materials? Richard Perron: We typically don't speculate on where the patients will go forward. But just in the last year, for all metals that we're using to make our products, there's been some substantial increase in the patients. Michael Glen: Would you be able to comment at all regarding how there would be some pricing mechanisms with your customers in the various segments? Richard Perron: Yes. Each segment and sectors within the segments that we serve, all contracts have their own behavior. But typically, within a certain range, it's a fixed price and after that comes a formula. In other contracts that are more long term, we have special clauses where adjustments are made in time based on the most recent notation. In other parts of our business, it's typically a formula that is applied -- a premium that is applied on top of the notation. So it varies from one product to another. We're always exposed but much, much less exposed than ever in the history of the company. But look, we're making products out of metal. So there's always a little exposure. But quite minimal today versus what we experienced in many years ago. The key is obviously the quality of the product portfolio today essentially being made of value-added products. So there could be a lag. So a lag could happen, but it will definitely not hurt our margins like in other industries, relying much less on the patients than in the past and other industries. Michael Glen: The sales gains you saw, you highlight the scale gains. Now does the scale gains that you expect from top line and revenue through the rest of the year, do you see that as being enough to offset the notation inflation that's been seeing? Richard Perron: That's what is foresees, yes. Michael Glen: Okay. And then just one clarification for me. So maybe I missed the first 4 minutes of the conference call. But in the MD&A, you talked about AZUR expanding by 30% of capacity. Is that a tick higher than the 25% that was... Richard Perron: Yes. The 30% is the capacity increase realized last year, out of which we'll get the benefits this year. And earlier this year, we made another announcement at 25%, out of which we'll get the benefit next year in '27. Operator: Your next question comes from Frederic with Desjardins. Frederic Tremblay: I just wanted to start with Performance Materials and the pricing there. You mentioned that it's been more favorable or favorable for longer than initially expected. Can you just remind us what's behind your view that this favorable pricing will eventually reverse? Richard Perron: It's essentially the continuation of last year where security of supply is the #1 priority these days on the current geopolitical context. And we're able to supply our clients with quality products on time without any interruption due to our footprint relations and processes in place. So that's what's behind. Essentially continuity of last year's theme, which is security of supply. Frederic Tremblay: Just on First Solar, they had good comments on U.S. bookings and manufacturing utilization in the Q1 results recently. Can you share anything about the volume trends that you're seeing there relative to the contracted volumes that you have with them? Are you -- in the past, you talked about selling spot volumes to them. Maybe general thoughts on the volumes that you're seeing now and expecting for the next couple of years with them? Richard Perron: The volume is essentially as per the contract, no changes to that. If anything, every volume of material that we're producing needs to be expedited to First Solar in the U.S. So the contract is essentially a take-or-pay commitment and there a desperate need for the products. So there's definitely no changes to the volume other than every volume produced needs to be expedited to First Solar rapidly. Operator: The next question comes from Nick Boychuk with ATB Cormark. Nicholas Boychuk: I was cut off on the question before. I just want to come back to that gross margin dynamic, specifically on the Specialty Semiconductor. I want to understand the new run rate that we're talking about here, the 34% plus. Does that factor in all of the efficiency improvements and gains that you're seeing from the improved economies of scale and cost per ton? Or could we actually see a further benefit into the year as things continue to progress? Richard Perron: The current margins that we are realizing is on the back of favorable market conditions and economies of scale. Going forward, we're applying ourselves to introduce various productivity initiatives and that on top of additional capacity and further economies of scale is going to bring additional benefits to the margins. That, to some extent, will obviously improve, but will mitigate any negative impact if any other factors were to increase in time due to inflation and else. Nicholas Boychuk: Then tying that into the unchanged guidance for the full year, what would have to happen over the next 3 quarters for either guidance not to be met or for things to be exceeded? Because on this new margin profile, assuming the top line persists and given the visibility you have there, it feels as if we're set up for a materially larger year. I'm curious if you can help me understand that. Richard Perron: Well, like we often bring -- I mean, in our business and many other businesses, you have typically 3 main risks. Commercially, as you know, a large portion of our business is under contract. So we have a pretty good idea of where it's going to land at year-end and the type of mix we're going to have both products and clients. What we don't know is the exact distribution per quarter. Technology-wise, this year, we're going to be essentially doing more of the same. So that's also well under control. So what we're left with is the operational risk, okay? Which -- to which will also include inflation and else. So look, if we have a stellar year in terms of energy, consumables, reliable equipment and else, yes, the likelihood to beat the guidance is very good. Otherwise, we still believe no matter what kind of headwinds we're going to have from those factors, we still believe the guidance we have on hand is a valid guidance. Nicholas Boychuk: Is there material energy exposure risk to some of your European assets? Richard Perron: Yes, mostly, mostly. But that -- I mean, obviously, we have different measures in place also to limit our risk, but we cannot control everything, as you can imagine, in today's complex environment. Operator: The next question comes from Yuri Lynk with Canaccord. Yuri Lynk: Yes. I want to come back to the guidance question, and maybe I'll attack it a different way. I mean, really strong start to the year. You're pointing to sustainable with some upside margins in Specialty Semiconductors. But to stay within the full year guidance, I mean, it's -- you're essentially downgrading the back half view versus what you might have had previously. So is that all within Performance Materials? Or am I misreading the implied guidance there? Just some detail on how your back half of 2026 outlook might have changed since we last spoke? Richard Perron: When -- before starting the year, what we anticipated was a stronger second half. Now we expect the whole -- the first 6 months and the last 6 months to be more and more aligned with similar level. So that's what we're seeing. The reason behind it is we expect some normalization of the margins under Performance Materials. Yuri Lynk: But that was the expectation previously, right? Would... Richard Perron: Yes, we expected that right from Q1. And as we've said, Q1 is a nice surprise from that standpoint. Yuri Lynk: Okay. So no real change to your Specialty Semiconductors... Richard Perron: Specialty Semi out of our 2 segments because we have long-term contracts, have a pretty good idea of the mix and the releases. No, it was originally -- and again, it was all essentially based on our expectations that Performance Materials will normalize earlier in the year, and we had an incredible Q1. But we continue to be prudent and believe that it will be normalized over the coming quarters. But it will still be an incredible superb business, obviously. Everything is relative here. Yuri Lynk: Yes, of course. I mean, we're more than a month into Q2. I mean, have you started to see that normalization? Or has those positive trends continued into Q2? Richard Perron: It's still positive. Yuri Lynk: So you'd say the outlook is fairly conservative for the year, the guidance? That's what it sounds like. Richard Perron: Yes. No, exactly. As I said, from an operational perspective, we remain prudent as to any inflation, operational challenges in the current complex environment and else. So we remain prudent. It's only 1 quarter out of 4. So years go by quickly, but at the same time, it's a little marathon that we have to go to. Operator: [Operator Instructions] Your next question comes from Michael Glen with Raymond James. Michael Glen: Just a follow-up on the working capital. You had the AR and the inventory build in the quarter. Maybe how should we think about those trending over the next few quarters? Richard Perron: As it is often the case, in the first half of the year, we typically carry a bit more net working cap than usual. But that being said, year-over-year because of the growth, the important growth under both, especially under renewable energy and space power, there will be an increase in the net working cap by year-end. But again, in the first half, a bit more pronounced than in the second half. But on a full year basis, you'll have a little increase in net working cap aligned with the growth. Michael Glen: Any notable updates that you guys can share with progress on M&A targets? Richard Perron: Nothing specific other than as we often say, we're highly motivated to complete the transaction. We're looking at many different files with an internal team dedicated to it and the help of external resources. So we're spending a fair bit of time looking at various files. So we're very serious about it. Operator: There are no further questions at this time. I will now turn the call over to Richard, for closing remarks. Richard Perron: Well, I would like to thank you all for joining us this morning, and we wish you all a good day. Thank you. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to Nexa Resources First Quarter 2026 Earnings Conference Call. Please note that today's event is being recorded and broadcast live via Zoom with access also through Nexa's Investor Relations website. A slide presentation accompanying the webcast is available for download as well as a replay of the conference call following its conclusion. [Operator Instructions] Now I would like to turn the conference over to Mr. Rodrigo Cammarosano, Head of Investor Relations and Treasury, for his opening remarks. Rodrigo Cammarosano: Good morning, everyone, and welcome to Nexa Resources first quarter 2026 earnings conference call. Thank you for joining us today. During the call, we will discuss Nexa's performance as detailed in the earnings release issued yesterday. We encourage you to follow along with the presentation available through the webcast. Before we begin, please turn to Slide #2, which contains our forward-looking statements disclaimer. We ask that you review the information regarding these statements and the associated risk factors. Joining the call today are our CEO, Ignacio Rosado; our CFO, Jose Carlos del Valle; and our Senior Vice President of Mining Operations, Leonardo Coelho. With that, I will turn it over to Ignacio. Ignacio Rosado: Thank you, Rodrigo, and good morning, everyone. Starting on Slide #3, our main highlights. The first quarter of 2026 was a strong start to the year. Adjusted EBITDA more than doubled year-over-year to $283 million with a margin of nearly 32%. Net income was $118 million or $0.67 per share, and net leverage continued to come down, closing the quarter at 1.59x, half a turn lower than where we were a year ago, benefited by a strong last 12 months adjusted EBITDA. Three things drove the results: a constructive price environment across our entire metal mix, most notably silver, where prices averaged 164% above the first quarter of 2025; higher sales volumes in both segments; and operating performance that continues to improve, particularly at Aripuana, which delivered another quarterly production record. The quarter was not without challenges, heavy rainfall at Cerro Lindo, and illegal community blockade at Atacocha and a shaft constraint at El Porvenir, all impacted the Peruvian production sequentially. Those issues have been addressed and the affected operations returned to normal run rates. In mining, zinc production reached 79,000 tonnes, up 18% year-over-year, with all 5 mines benefiting from improved ore grades. In smelting, zinc metal and oxide sales totaled 147,000 tonnes, up year-over-year and quarter-over-quarter, supported by ongoing operational improvements at our Brazilian smelters and continued solid performance at Cajamarquilla. The negative free cash flow in the quarter is consistent with our typical first quarter seasonality, reflecting working capital buildup and tax payments. We expect this to unwind over the coming quarters, reinforcing expectations of strong free cash flow generation in 2026. Let me move to Slide #4 for a closer look at the mining segment. Year-over-year, the 18% increase in zinc production reflects better ore grades across all of our operations. Quarter-over-quarter, the decline was driven by the temporary constraints at the Peruvian mines. Cash cost net of byproducts came in at negative $0.76 per pound, well below our 2026 guidance range, driven by stronger byproduct credits following from higher zinc, copper, silver and gold prices. Cost per run of mine was $57 per tonne, in line with guidance. The year-over-year increase was driven by the appreciation of the Brazilian real, higher maintenance costs and higher variable costs in specific operations. The financial picture for the segment is strong. Net revenues of $460 million and adjusted EBITDA of $231 million, translating into a 50% EBITDA margin, the kind of operating leverage we expect when prices and volumes both move in the right direction. On Slide #5, I will talk about Aripuana. Aripuana was the standout asset of the quarter. We produced 13,000 tonnes of zinc, a quarterly record since the operation reached commercial production, supported by higher grades, better plant utilization and improved operational stability. On the fourth tailings filter, construction and installation were completed in late April. Commissioning started now in early May and is expected to be concluded in the second quarter. Once fully operational, the filter materially reduces our exposure to weather-driven throughput disruptions during the rainy season. Exploration continued to deliver encouraging results in the quarter. At Massaranduba, we hit a 16.6-meter intercept grading, 9.6% zinc and 3% lead, additional confirmation of the long-term potential of the district. Now to Slide #6 for the Cerro Pasco integration project. Phase 1 of the Cerro Pasco integration project remained firmly on schedule during the quarter. We completed a slope stabilization at the construction site, started civil works and structural assembly of the pump building and concluded the manufacturing, testing and packaging of the main equipment, including the thickener and pumps, as you can see in the picture on the bottom of the slide. These are important technical milestones. Looking ahead, we expect civil works to be completed and electromechanical assembly to progress through the 2026. Construction is targeted for completion in the third quarter of this year with full project finalization expected in the fourth quarter of this year. We then begin the operating authorization process, which positions the start of the pumping for the second quarter of 2027. On the broader regulatory front, the second MEIA for El Porvenir and the third for Atacocha are under evaluation by SENACE, and we currently expect both approvals in the first quarter of 2027. Preparatory studies for Phase 2, including the Picasso shaft assessment also continued to advance during the quarter. This is one of the most important strategic levers in our portfolio. The integration extends life of mine at the Cerro Pasco complex beyond 15 years, lift the average NSR of the life of the operation and consolidates our position in one of Peru's most prospective polymetallic districts. Now on Slide #7, I will talk about our smelting segment. In smelting, zinc, metal and oxide sales of 147,000 tonnes were up year-over-year and quarter-over-quarter. The Brazilian units are recovering their production pattern with Juiz de Fora producing 56% more zinc than in the first quarter of last year and Tres Marias 17%. Cajamarquilla continued to operate at solid levels. Cash cost net of byproducts was $1.40 per pound, slightly above the upper end of our annual guidance, reflecting higher zinc LME prices and lower TCs impacting concentrate purchases. We expect this to ease modestly over the next quarters as our Peruvian operations return to normal run rates, reducing third-party concentrate need. Conversion cost was $0.34 per pound, in line with our 2026 guidance. Starting this quarter, we have expanded our earnings release to include byproduct sales performance, sulfuric acid, silver content and copper cement. As byproducts become a more expressive part of segment economics, we want to make those drivers more transparent for the market. Net revenues for the segment were $609 million with adjusted EBITDA of $51 million, an 8% margin. The margin reflects the structural pressure on global smelter economics from very low TCs. With that, I will hand the call over to Jose Carlos del Valle, our CFO, for the financial review. José del Valle Castro: Thank you, Ignacio, and good morning, everyone. Let's turn to Slide #8 for an overview of our financial performance. We started the year carrying momentum from our fourth quarter of 2025, a favorable price environment combined with stronger operational execution. Net revenues totaled $888 million, up 42% year-over-year and down 2% sequentially. The year-over-year increase was driven by higher metal prices across our portfolio, evidencing a $158 million larger byproduct contribution and improved performance in both the mining and smelting segments. The sequential decline reflects lower mining sales volumes, partially offset by higher smelting sales and stronger byproduct pricing. Adjusted EBITDA came in at $283 million, up 126% year-over-year with a margin of 31.8%. The year-over-year improvement reflects price realization, operational leverage from higher volumes in both segments and stronger byproduct credits. Sequentially, EBITDA was 6% lower, driven mainly by higher unit costs from increased third-party concentrate consumption required to compensate for the temporarily lower output at our own Peruvian mines this quarter. We expect this to normalize as those operations return to full run rates. Now to investments on Slide #9. We invested $72 million in CapEx during the first quarter, about 19% of our full year guidance, in line with the typical 20% to 25% first quarter pace. The bulk went into sustaining activities, mine development and tailing storage facilities. Phase 1 of the Cerro Pasco integration project accounted for $8 million in the quarter versus a $31 million guidance for the full year. We reaffirm our total 2026 CapEx guidance of $381 million with disbursements weighted towards the back of the year as project execution intensifies, particularly for Cerro Pasco Phase 1. On exploration and project evaluation, we invested $16 million in the quarter, mainly in exploration drilling and mine development. We also reaffirm our full year guidance of $86 million. With that, let's turn to Slide #10 to review our cash flow for the quarter. Starting with our adjusted EBITDA of $283 million and adjusting for non-operational items, our operating cash flow before working capital was strong at $308 million. From there, $72 million went to CapEx and $81 million went to pay interest and taxes. Working capital and other variations were negative $283 million in the quarter, in line with what we typically see in the first quarter of every year. Furthermore, this quarter, we made significant tax payments related to the stronger results we had in 2025, paid out annual bonuses and settled year-end confirming payables across our jurisdictions. As before, we expect this to reverse substantially over the coming quarters, both as part of the natural intra-year seasonality and as we push initiatives to continue to improve our cash conversion cycle. Moving along, we also see that foreign exchange added a positive $6 million. And on the financing side, in Brazil, we drew a new $40 million 6-month loan at a very competitive interest rate. This was partially offset by regular debt service and lease payments, resulting in a net cash inflow of $21 million. In addition, we distributed $25 million in dividends to non-controlling interest. With that, free cash flow for the quarter closed at negative $126 million. Let's move to Slide #11 to discuss liquidity, indebtedness and credit rating. Our liquidity position remains healthy. We ended the quarter with $716 million in total liquidity, including the undrawn $320 million sustainability-linked revolving credit facility. As you can see, our cash on hand alone is enough to cover pretty much all financial commitments over the next 4 years. Average debt maturities stood at 7.2 years at quarter end with an average cost of debt of 6.27%, an improvement from the 6.49% at the end of 2025. Net leverage continued to come down at 1.59x versus 1.69x in the prior quarter and 2.09x a year ago. The improvement was driven primarily by stronger last 12-month EBITDA of $929 million. Looking ahead, we remain committed to disciplined deleveraging, focusing on reducing gross debt over time, lowering interest expense and maintaining net leverage below 1.7x throughout 2026, while preserving our investment-grade rating and competitive cost of capital. With that, I'll hand it back to Rodrigo for the market fundamentals section. Rodrigo Cammarosano: Thank you, Jose Carlos. Turning now to zinc and copper markets on Slide #12. Zinc prices remain supported by persistent concentrate tightness and low LME refined inventories. The LME zinc price was up 4% during the period, closing at $3,185 per tonne. At the same time, smelter margins remain compressed. Spot treatment charges in China, both domestic and imported, continue at historically low levels, which highlights how acute the concentrate shortage is. While key smelting byproducts such as sulfuric acid have provided some partial relief to margins, they have not been sufficient to fully offset the impact of lower TCs. Looking into 2026, we do not expect a material recovery in TCs, particularly given that the annual benchmark has been settled at $85 per tonne. As a result, smelter margins are likely to remain under pressure. On the price front, zinc should continue to find support from solid fundamentals, including tight concentrate availability, low exchange inventories and resilient demand from galvanizing and infrastructure-related end users. On copper, supply fundamentals remain tight with ongoing concentrate scarcity and negative spot TC and RCs. Copper price presented some short-term volatility in the quarter linked to trade policies and inventory dynamics, but a structural setup remains constructive over the medium to long-term, supported by bullish demand expectations. Now let's turn to Slide #13 for a look at precious metals. Silver prices reached multiyear high during the quarter, briefly trading above $120 per ounce before retracting. The fundamentals continued to be supportive, a sixth consecutive year of structural deficit, combined with strong industrial demand from solar PV, electric vehicles, AI infrastructure and data center build-out. This carries greater significance for Nexa as we produce roughly 11 million ounces of silver per year, making us a meaningful player in the global silver market. Furthermore, in April, we reached a delivered threshold under our Cerro Lindo silver streaming agreement. As a result, the stream share of Cerro Lindo's production stepped down from 65% to 25%, with the remaining 75% now to be sold at prevailing market prices. At current silver levels, these represent an important recurring additional contribution to our cash generation from the second quarter onward. Gold prices also remained well supported through the quarter, driven by safe haven flows, sustained central bank purchases, a weaker U.S. dollar and elevated geopolitical uncertainty. Looking ahead, both metals should continue to contribute strongly to our cash generation and should provide diversification and countercyclical support to our polymetallic portfolio. Now on Slide 14 on ESG, we have made progress across our main priorities during the quarter. We expanded community and inclusion programs in Brazil and Peru, advanced education and infrastructure projects with local communities near Cajamarquilla and Aripuana and continued our operational efficiency and low-carbon initiatives across the operations, including a backfill optimization project at Cerro Lindo that delivered meaningful reductions in cement and water consumption. We also strengthened HS&E and ESG governance, including leadership level engagement and continued progress on environmental permitting at our Peruvian assets. Finally, in late April, we published our 2025 Annual Sustainability Report, our most comprehensive disclosure to date on environmental, social and governance performance. It is available on our Investor Relations website. With that, I will hand it back to Ignacio for the closing remarks. Ignacio Rosado: Thank you, Rodrigo. Before we open for questions, let me close on Slide #15 with a quick recap of our priorities and key business drivers. First, Aripuana. The fourth filter commissioning is being completed this month, which positions us to reach full production capacity in the second half of 2026. Combined with our long reserve life, the asset is one of the central pillars of our long-term cash flow generation. Second, Cerro Pasco integration. Phase 1 is on schedule for project finalization in the fourth quarter, setting up the start of pumping in the second quarter of 2027. The project extends the life of the mine beyond 15 years and improve the profitability of the complex. Third, exploration. The 2025 reserve update extended life of mine across all of our operations. We are not just replacing depletion, we are growing the reserve and resource base. And this year, on back of strong drilling results, we have revised our 2026 program upwards to nearly 67,000 meters, about 12% above the original plan, with the increase concentrated at the Cerro Pasco complex and other exploration projects. Fourth, growth. We continue to evaluate value-accretive opportunities in mining-friendly jurisdictions. Underlying all of this is a consistent set of priorities, financial and operational discipline, a stronger balance sheet, balanced capital allocation that includes shareholders' returns and an active ESG strategy. And most importantly, our absolute commitment to safety for our people and our communities. Before we move to questions, I would like to take a moment to recognize Mauro Boletta, our Senior Vice President of Smelting and Commercial, who is retiring at the end of this month after more than 40 years with the Votorantim Group. Mauro has been instrumental in shaping our smelting and commercial operations. And on behalf of the entire Nexa team, I want to thank him for his contribution and wish him the very best. With the first quarter Peruvian constraints behind us, the Aripuana filter commissioning underway and the Cerro Lindo silver streaming transition now in effect, we are entering the rest of the year with a strong momentum and a clear set of priorities. With that, let's open the line for questions. Operator: [Operator Instructions] The first question comes from Pedro Mello with Citi. Pedro Macedo Ferreira de Mello: My first question is regarding Cerro Pasco integration project. So Phase 1 of the project remains on schedule with tailings pumping start estimated for 2Q '27. However, the 2 environmental approvals for El Porvenir and Atacocha are only expected for next year first Q, leaving a very tight window. So my question is, what are the key execution and permitting risk that could delay the 2Q '27 start? And regarding Phase 2, when do you expect to have a clear investment decision on the Picasso shaft and underground integration alternatives? So this is the first one. And the second one relates to smelting segment where we saw a great improvement of results. So could you give us more color on what you expect in terms of driver for this segment results in the next quarters and why? And if we should expect this level of EBITDA near to $50 million per quarter going ahead? Ignacio Rosado: Okay. No, thank you for the questions. Regarding Cerro Pasco, what we said is the pumping system is going to finish this year. So December this year, that pumping will be up and operational. And the permits, the modification on the environmental impact studies for Atacocha and El Porvenir will be ready in the first half of next year, okay? So there is going to be an overlap. And what is key here is that we have more than a year of life of mine of our tailings capacity. So we keep track of the permits permanently, and we are very confident that the permits are going to come in the first quarter of next year. And given that we finished the construction and we have this cushion on capacity, it shouldn't be a problem for us to continue operating El Porvenir and Atacocha, okay? So we don't see any issues in that regard. Regarding smelting, it's a very important question because what happened last year is that we have some problems in -- operational problems in Juiz de Fora and in Tres Marias in Brazil that impacted their production. We started an assessment and a fast-track improvement on operations during the last quarter of last year. And now we are producing more because recoveries are high, because we're making sure that this -- all these bottlenecks in the operation are being taken care of. So the operation is going to evolve in the next 3 quarters, probably a little bit better than what we had in the first quarter. So we believe that this is a continuous improvement to come back to KPIs -- operational KPIs that we had in 2024 and 2023. Having said that, it's important to mention that all the smelters, Cajamarquilla is performing really, really well. But as we were saying in the call and I think in our press release, all of our smelters are facing a profitability problems in terms of the TCs. China is demanding a lot of concentrate. And even if we are improving operations, negative TCs or very low TCs are affecting all of our operations, which -- and this is very important for us as well, is being compensated by byproducts. The sulfuric acid market is very tight today. We are in a very good position for our production, especially for '27 because '26 is already being sold at a high part, and we closed a spot sale in a very, very important terms and silver and copper. So these byproducts more than offset the problem that we have in the TC front. We -- it's difficult to see how the smelting market is going to perform in 2027 or in the next few months because I believe that profitability drivers are going to change. But in any case, what we can be focused is only on operational improvements that are happening. And as I was saying, the second quarter is going to be better than the first one, and we will come back to normal levels, the ones that you have been seeing in 2024, okay? Operator: Our next question comes from Sathish Kasinathan with Bank of America. Rodrigo Cammarosano: Sathish, we cannot hear you. Operator: It seems that Sathish is having some technical problems. [Operator Instructions] Our next question comes from Adam Smiarowski. Adam Smiarowski: With the silver stream at Cerro Lindo -- sorry, can you hear me now? Rodrigo Cammarosano: Yes. Perfect. Adam Smiarowski: Perfect. Okay. The lower silver stream at Cerro Lindo, I was just going to see maybe how some of that extra revenue is going to be reinvested. Whether you're looking at capital returns or M&A or other sort of changes in capital allocation? Are you able to comment on that? Ignacio Rosado: Thank you for the question. To give some context, as you rightly mentioned, starting in the second quarter, we will begin to see the impact of the step down in the silver stream, which is going from 65% to 25% of the Cerro Lindo production. And to give you a sense of the impact, this is assuming Cerro Lindo producers, I would say, 3.6 million ounces per year at current prices, that's about $100 million more per year of cash generation, just to give you a sense of the magnitude of the impact. Having said that, this does not change our capital allocation strategy. As we have mentioned a number of times, our key goal is to reduce our gross debt. So this will help us to accelerate that process. And the idea is that any excess cash that we generate in this favorable price scenario will allow us to do this in a faster time frame. So this is consistent with our overall strategy that we have been communicating to the market in the past, and there's no change to that. Adam Smiarowski: No changes there, okay. Operator: Our next question comes from Peter Varga with EAM. Peter Varga: Can you hear me? Rodrigo Cammarosano: Yes, we can hear you. Peter Varga: A couple of questions. Do you have an explicit leverage target you want to reach and over what time frame? And also I would like to ask your CapEx plan and maintenance and expansion CapEx in details for the coming quarters and how that can be influenced by smelting margins and zinc prices and basically and metal prices? José del Valle Castro: Yes. Our capital allocation strategy has not changed despite the silver streaming step down. In terms of CapEx, we are reaffirming our guidance. So the fact that we are generating higher cash flow in this favorable price scenario is not going to change that. So that's something to keep in mind. And in terms of leverage, as we have mentioned before, what we want is to have the flexibility so that we can go through different cycles. So part of the strategy of reducing the debt on one hand is to reduce interest expense, which is high for a company of the size of Nexa. But we want to have this financial flexibility because prices can change, and we want to have that additional buffer. We don't know how fast we will be able to do this because we don't control prices, but we are certainly optimistic in this price scenario that we will be able to achieve this faster. I would say that reaching an overall net leverage of 1x would give us a lot of comfort so that we would have that buffer to go through the different cycles. So it will depend again on prices, but we are confident that we will be able to accelerate this with this stable production performance that we're having and with the supportive prices that we're seeing. Peter Varga: Okay. And also probably one question. We have seen some market rumors that your parent is looking to divest the company and then there are rumors that some European buyers are around. Can you comment on this, please? Ignacio Rosado: Yes. I mean we have rumors all the weeks -- every week. And actually, we don't comment on rumors. What I can emphasize is that we are very active on looking for opportunities to grow Nexa, and we have a very dedicated team to make sure that we grow the company, not only in reserves and resources that we are being very successful, but also on opportunities that are in the market, especially in copper. Peter Varga: So that means that you are looking for M&A, but I mean, you already mentioned your net leverage goal. I mean, this 1x to reach over time you mentioned, but how can fit that M&A goal into the deleveraging goal? I mean, you want to finance that probably issuing new shares or what kind of financing can we expect if there is an M&A? Ignacio Rosado: Yes. With this price environment, as Jose Carlos was saying and some internal action that are happening, which is the Cerro Lindo stream, we might expedite reducing the debt at the level that we are comfortable. And in the interim, the strategy is going to be looking for these accretive opportunities in the market. The timing depends on how much we reduce the debt and how fast and how -- what opportunities we find in the market. We keep track. We have in our radar, a lot of opportunities. It's a difficult market today because it's very expensive. So I would say it will be a combination of reducing the debt and making sure that we can use our balance sheet, mainly our balance sheet to start looking for these opportunities. And given that it could be an overlap, we are -- we have to be creative, and we have been doing that. So I believe that it could be done, and we'll see what happens in the coming months. Peter Varga: Okay. And probably the last question. What do you expect from the new Peruvian government? I mean we have heard some -- I mean, it depends which party or which President will be at the end. But how do you expect the licensing and especially the environmental licensing for the operations going forward? I mean, do you have any view how left being presidency can affect the operation? And then do you have any plans for that scenario? Ignacio Rosado: Yes. I guess, it's early days. We're not even in the second round today, and they're still debating who is going to go with the Fujimori party to the second round. But in any case, the way we see it is that we were already exposed to President Castillo. And I think they realize the 2 things. One is that the Central Bank is independent and changing that you will need to change the constitution. And to change the constitution, you will have to go to the Diputados Camara and Senadores Camara, and it's going to be very difficult for them to approve any change. So this is a lockup that we have. So the economy -- and if you see that the political noise is very difficult to affect the economy. That's one thing. The second one that is very important is that any president regardless of their views on how they manage the country start to know that most of the income that comes through taxes are from the mining sector. So if they really want to finance some, let's say, projects or activities or actions that are against the mining sector, they will start losing this income and they cannot afford to do that. This happened to Castillo. So the Ministry of Finance or the Ministry of Economy is very robust in that regard, and it's very clear that if income comes down, they won't have anything to do different actions that differ from making sure that the country is growing, okay? So that's the second one. And the last one is that we, mining companies are used to this sort of situations. And the most important part here is that you have good relations with your communities. So having good relations with them means that you have good agreements that benefit them, that benefit you, that are long term and that create an economic scenario for the 2 of us that is not affected by the political environment. So we don't see -- this has been the case for the last years. Many presidents have been impeached, which is a shame for Peruvians, for we Peruvians. But if you can see that -- and you can see that there is no link to the economic performance of the country. You can see that the mining sector managing communities effectively won't be affected that much by this noise in the political arena, okay? So that's more or less where we are. We'll see what happens. And we have to be prepared to any scenario, and this has been the case for many years. Operator: Now I would like to turn the call over to the company for the written questions. Rodrigo Cammarosano: Thank you, operator. We have one question from the audience. The question is, is there any estimated date for a construction decision for the Stage 2 or Phase 2 of the Cerro de Pasco integration project? And will this Phase 2 require additional permitting? Ignacio Rosado: Yes. Very important question. I think there was a question that was asked before. I apologize for not answering that. Very important question. The Phase 2 part of the project is integrating the 2 mines and making sure that we produce more ore. As we were saying in the presentation, we have a very dedicated team of -- in the exploration that started a strategy some years ago to start drilling heavily our mines. So we said many times that we are finding a lot of resources that have higher NSR and very important opportunities in the intersection and in Atacocha and El Porvenir in the underground parts. The reason why we decided to delay the Phase 2 is because we are trying to make sure that we build a mine -- a life of mine plan that is more effective and has -- is more profitable for these 2 mines. And this is going to take some time. So I would say, we might be able to tell the market, I would say, in the next -- in the second half of this year, how are we going to manage that. Our Board is also waiting for that, and this is a priority. And the good thing is that the permits that we will have for El Porvenir and Atacocha that will be approved in the first half of next year also apply for this integration. So we won't have bottlenecking problems in these approvals. So I think we are right on track. And we have a very good problem because the endowment that we use to approve the second phase has been increased significantly. That's why we are saying that we have more than 15 years. And today it's a matter of how are we going to build this new life of mine plans to make sure that profitability or NAV drives this evaluation, okay? So we'll keep you posted in what are we going to do in the following months. Operator: This concludes our question-and-answer session. I would now like to hand the call over to Mr. Ignacio Rosado for his closing remarks. Mr. Rosado, please go ahead. Ignacio Rosado: Thank you. I would like to emphasize that the closing of last year, we had a very strong results and we were exposed to prices -- to very good prices. This has been the case for the first quarter of this year. Unfortunately, we had some problems in our Peruvian operations that already have been resolved. But the message I would like to convey is that for the rest of the year, we are very committed to have very stable operations. We are very committed to offset some problems that we have in costs, regarding oil, regarding inflation in the market, regarding the FX in Brazil try to make sure that we sort of offset those with productivity measures. So we built a very robust operating profit from our mines and smelters in the rest of the year, not only because we have these very good prices, because we take care of the main variables of the mines and smelters. So we look forward to speaking to you towards the end of the second quarter, and we are confident that we're going to deliver on our commitments and our guidance. So thank you very much for attending the call. And again, we look forward to speak to you in a few months. Operator: Thank you. This concludes today's conference call. We appreciate your participation and interest in Nexa. You may now disconnect.
Operator: Welcome to the Curtiss-Wright First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations. James Ryan: Thank you, [ Leo ], and good morning, everyone. Welcome to Curtiss-Wright's First Quarter 2026 Earnings Conference Call. Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford; and Executive Vice President and Chief Financial Officer, Chris Farkas. A copy of today's financial presentation and the press release are available for download through the Investor Relations section of our website at curtisswright.com. A replay of this webcast will also be available on the website. Our discussion today includes certain projections and forward-looking statements that are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results and guidance include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance. GAAP to non-GAAP reconciliations are available in the earnings release and on our website. Now I'd like to turn the call over to Lynn to get things started. Lynn Bamford: Thank you, Jim, and good morning, everyone. We had a highly productive start to 2026. We delivered a strong first quarter performance that exceeded our expectations as we demonstrated exceptional operating results, reflecting higher growth in revenue and operating income across all 3 segments. As we continue to compound sustained profitable growth, I'm pleased with the team's steadfast focus on innovation where we are driving incremental investments in research and development to support a number of critical pursuits across our end markets. These investments, along with the continued growth in our order book, better position us to accelerate the pace of long-term organic growth. We also continue to have strong alignment with leading industry growth vectors, which has been further reinforced by improving underlying demand and industry fundamentals across our A&D, commercial nuclear and industrial markets. The momentum continues to build across Curtiss-Wright's portfolio. Based on the strong start, we raised our full year 2026 outlook, which provides us with confidence that we will exceed our overall Investor Day targets and continue to deliver strong results for our shareholders. With that, I'll turn to today's presentation. Starting with the highlights of our first quarter 2026 results. Sales of $914 million grew 13% year-over-year, while operating income once again exceeded our sales growth, resulting in 100 basis points of overall operating margin expansion. Of note, our results reflected higher year-over-year sales across all our major end markets. Diluted earnings per share grew 23% year-over-year, slightly ahead of our expectations and primarily driven by our strong growth in A&D sales. Regarding our order book, new orders increased 15%, reflecting a 1.3x book-to-bill ratio, driven by mid-teens growth in each of our 3 segments. I'll cover some of the key highlights. Starting in defense, where we're pleased to see the overall improved pace of order activity, which is a testament to Curtiss-Wright's long-standing alignment to U.S. and allied military priorities. Digging deeper and starting with Defense Electronics segment, the team delivered the best performance since the third quarter of 2024 and is making great strides to move past the delays caused by the prior continuing resolution and 2025 government shutdown. Notable wins during the quarter range from the mission computer upgrades supporting the C-17 cockpit modernization to various awards supporting next-generation helicopter platforms and programs, along with increased activity for some of our short-cycle businesses, including tactical communications. Overall, our pipeline of opportunities for these businesses remain strong. Our programs remain in good standing and the improved demand to begin the year provides us with increased confidence to deliver on our full year objectives. In the Naval and Power segment, which delivered a 1.5x book-to-bill ratio, we experienced continued strong demand for nuclear propulsion equipment supporting the U.S. Navy's current and next-generation submarine programs. We also continue to benefit from increased demand for our commercial nuclear aftermarket products. Lastly, within the A&I segment, I would like to highlight the improvement in our order book for industrial vehicles, which has now delivered 2 strong quarters in a row and is contributing to increased optimism in our general industrial market relative to our 2026 guide. Overall, based on the healthy growth in Curtiss-Wright's order book, we reached a new record of nearly $4.3 billion, which provides us with great visibility and continued confidence in our future top line growth. Regarding our full year 2026 guidance, we have raised our overall outlook for sales, operating margin, earnings per share and free cash flow and remain well positioned to deliver strong operational performance this year. Of note, we now expect overall sales to increase 7% to 8%, driven by improved outlook in our defense and commercial nuclear markets and further supported by the overall strength of our order book. We continue to expect that operating income growth will outpace sales growth and now anticipate an increase of 40 to 60 basis points in operating margin in pursuit of a record 19% to 19.2%. As a result, diluted EPS is now expected to grow 13% to 16%. In addition, we raised our free cash flow guide to reflect higher confidence in the full year outlook, and we continue to expect strong conversion in line with our long-term targets. Overall, we are pleased with the strong growth in revenues and profitability to begin the year, and we're strategically positioned to deliver another outstanding performance in 2026. Now I would like to turn the call over to Chris to provide a more in-depth review of our financials. K. Farkas: Thank you, Lynn. Turning to Slide 4. I'll begin by reviewing the key drivers of our first quarter 2026 performance by segment. Starting in Aerospace & Industrial, overall sales increased 12%, which exceeded our expectations. Beginning with the segment's defense markets, which drove the outperformance, our results reflected higher sales of actuation and sensors equipment supporting various U.S. and European fighter jet programs as well as increased demand for EM actuation equipment supporting ground-based mobile launcher systems. Within the segment's commercial aerospace market, we experienced solid OEM sales growth supporting increased production on both narrow-body and wide-body platforms. And in the general industrial market, the steady improvements in our order book, primarily attributed to increased demand for industrial vehicle products contributed to solid mid-single-digit growth in sales. Regarding the segment's first quarter operating performance, operating income and margin were ahead of expectations, growing 24% and 150 basis points, respectively, driven by favorable absorption on higher revenues, restructuring savings and favorable mix. Next, in the Defense Electronics segment, overall sales increased 5%, which was slightly ahead of our expectations. Within the segment's aerospace defense market, we experienced higher domestic sales of embedded computing equipment supporting various aircraft modernization programs as well as higher direct foreign military sales of embedded computing and flight data recorders serving NATO and allied countries. Ground defense market sales were flat as increased Turret Drive stabilization systems supporting international programs were offset by lower sales of tactical communications equipment. Regarding the segment's operating performance, we delivered a strong first quarter operating margin of 28.1%, up 60 basis points year-over-year, reflecting favorable absorption and mix on higher revenues. Moving to the Naval and Power segment. Sales growth of 21% exceeded our expectations. This was due to stronger-than-expected revenue growth in naval defense associated with the accelerated ramp-up in production on submarine programs. We also experienced a solid uplift in aftermarket revenue supporting naval shipyards through fleet services work and overhaul programs. Within the segment's aerospace defense market, our results reflected strong growth in revenues for arresting systems to international customers. In the power and process market, overall, we experienced high teens year-over-year growth in revenues. This was mainly driven by strong growth in the commercial nuclear market, supporting maintenance and life extensions at operating plants across North America in addition to increased revenue supporting advanced small modular reactors. Regarding the segment's operating performance, operating income grew 33%, generating 140 basis points in operating margin expansion, principally reflecting favorable absorption on the better-than-expected growth in sales as well as favorable mix. To sum up Curtiss-Wright's first quarter results, we generated a strong operating margin of 17.6%, driving 100 basis points in operating margin expansion on the better-than-expected top line performance. Turning to our full year 2026 guidance. I'll begin on Slide 5 with our end market sales outlook, where we now anticipate total sales to grow 7% to 8%. Starting in Aerospace Defense, we now expect full year sales growth of 11% to 13%, benefiting from increased sales of actuation and sensors equipment supporting domestic and international fighter jet programs as well as increased demand for defense electronics. Within ground defense, while we were pleased to see the overall improvement in Defense Electronics order book, we continue to take a conservative approach in tactical communications resulting from the FY '26 budget delays. And as a result, our outlook in this market remains unchanged. Aside from those timing delays, we continue to expect increased EM actuation sales supporting the U.S. Army's IFPC program and increased demand for Turret Drive stabilization systems supporting international ground vehicle programs through our relationship with Rheinmetall. In Naval Defense, following the strong first quarter results, we now expect full year sales growth of 6% to 8%, mainly due to expectations for higher production revenue on submarine programs, while we continue to project solid growth on the CVN-81 aircraft carrier program. In addition, we anticipate solid growth in aircraft handling equipment revenue supporting various international programs. Looking more broadly across all 3 defense markets, we expect direct foreign military sales to grow 10% this year and slightly ahead of our prior expectations, driven by the alignment of our technologies to global defense spending priorities. Moving to Commercial Aerospace. Our outlook for 10% to 12% sales growth remains unchanged and continues to reflect our strong backlog supporting the anticipated ramp-up in OEM production across the major narrow-body and wide-body platforms. Wrapping up our aerospace and defense outlook, we now expect total sales in these markets to increase 6% to 8%. Moving to our commercial markets. In Power & Process, we now expect full year sales to increase 13% to 15%, mainly due to the continued underlying strength of our order book within commercial nuclear, we now expect to deliver mid- to high teens growth in sales this year. Shifting to the process market. We continue to project strong growth in sales, which we anticipate will more prominently benefit our second half results based on the higher sales of MRO valves and instrumentation solutions. And lastly, in general industrial, we continue to take a cautious approach in this market and anticipate sales to be flat in 2026. However, we're encouraged by the more recent improvements in the order book and remain cautiously optimistic that we'll see a return to growth as we approach 2027. Wrapping up our total commercial markets, we now expect total sales in these markets to increase 8% to 10%. Moving on to our updated full year 2026 financial outlook by segment on Slide 6. I'll begin in Aerospace & Industrial, where we now expect sales to grow 6% to 8%, driven by the strong first quarter performance in the segment's defense markets, continued growth in the order book and the anticipated ramp-up in commercial aerospace OEM production. Regarding the segment's profitability, operating income is now projected to grow 13% to 15% and drive operating margin expansion of 100 to 120 basis points, ranging from 18.4% to 18.6%. In addition to the improved top line guide, this outlook reflects the ongoing benefits of our operational excellence and restructuring initiatives more than offsetting higher year-over-year investments in development programs. Shifting to Defense Electronics, where we continue to expect sales to grow 4% to 6%, principally driven by strong growth in aerospace defense and partially offset by the timing of our orders and revenues in ground defense. Regarding the segment's profitability, we continue to expect operating income growth of 4% to 6%, and we remain on track to deliver record levels of operating margin at 27.3% to 27.5%. In Naval and Power, based on the continued strength of our orders and backlog in both our naval defense and commercial nuclear markets, we now expect sales to grow 9% to 11%. Regarding the segment's profitability, we now expect operating income growth of 13% to 15% and operating margin expansion of 40 to 60 basis points with this uplift mainly driven by the stronger revenue outlook. Also, as a reminder, this outlook reflects the savings generated by our restructuring actions as well as continued investments in both internal and customer-funded development programs. To summarize our 2026 outlook, overall, we now anticipate total Curtiss-Wright operating income to grow 9% to 12% and expect operating margin to range from 19% to 19.2%, up 40 to 60 basis points as we lift at the bottom end of the range to reflect our increased confidence. Next, to aid in your quarterly modeling of sales and operating margin, we expect overall second quarter 2026 sales to grow by mid-single digits while also targeting high single digits plus growth in operating income, both relative to the second quarter of 2025. Of note, within our A&I and Naval and Power segments, we anticipate strong year-over-year growth in sales, resulting in improved second quarter profitability, while we expect both sales and profitability within the Defense Electronics segment to be in line with last year's Q2 results. In summary, at the overall Curtiss-Wright level, we expect modest year-over-year improvement in profitability to result in a high teens second quarter operating margin. We expect this to be followed by strong second half operating margin expansion, keeping us on track to deliver record results this year. Continuing with our financial outlook on Slide 7 and starting with our EPS guidance. Building upon our strong first quarter performance, we now expect full year 2026 diluted EPS to range from $14.90 to $15.30, up 13% to 16%, reflecting improved sales and profitability within our A&I and Naval and Power segments. To aid in your quarterly EPS modeling, we expect second quarter 2026 EPS to grow by low double digits relative to the second quarter of 2025. We then expect modest sequential EPS growth over the remainder of the year with the fourth quarter EPS being our strongest. And lastly, turning to free cash flow. Overall, we were pleased with the strong start to the year, and that provided us with increased confidence to raise our full year free cash flow projections to a new range and record of $580 million to $600 million, up 5% to 8% over 2025. This outlook continues to reflect our expectations for strong growth in earnings and a record level of working capital below 18%, while overcoming a nearly 30% year-over-year increase in growth investments through capital expenditures. We are confidently executing while continuing to deliver a free cash flow conversion rate of approximately 105% again this year. Now I'd like to turn the call back over to Lynn. Lynn Bamford: Thank you, Chris. And turning to Slide 8. I would like to conclude today's prepared remarks by highlighting how we are accelerating momentum across Curtiss-Wright's portfolio through our strategic initiatives and our alignment with industry growth drivers, positioning the company for long-term financial success. As we have discussed today, our strong execution to begin the year, combined with our growing order book and strength of our backlog reinforces our ability to deliver record financial results across our major metrics. This outlook is underpinned by increased sales in the majority of our end markets, while we're also targeting a record level of profitability with overall operating margin at or above 19%. The team is focused on driving margin expansion through an unwavering commitment to operational and commercial excellence while continuing to accelerate investments in R&D and infrastructure to support future organic growth. As a result, we continue to be successful under our operational growth platform as we sustain Curtiss-Wright's stature as a top quartile margin performer relative to our peers. We are also compounding earnings at a mid-teens pace over time by pairing that focused operational execution with our commitment to a balanced capital allocation strategy. In addition, Curtiss-Wright remains strategically aligned with many favorable secular growth trends across our markets. Starting in defense, Curtiss-Wright is firmly anchored across the most critical current and next-generation platforms of programs to be funded within the U.S. Department of War budgets. As a reminder, our technologies are trusted on over 400 platforms and 3,000 programs worldwide. Building off of a strong and funded base of approximately $1 trillion in the FY '26 NDAA, we're pleased to see the upsized levels to a historic level of $1.5 trillion issued in the President's budget request this past month. In naval defense, we remain aligned with a strong drive for accelerated production across the U.S. Navy's major platforms as well as investments in the next-generation SSN(X) submarine. Similarly, within our aerospace and ground defense businesses, we maintained strong alignment to the Dow's top strategic priorities, including tactical aircraft modernization, next-gen air superiority, radar and strategic missile defense and Golden Dome, just to name a few. All of these areas have received increased requests for funding in the FY '27 budget. Equally important, we're making focused investments in research and development to further advance our technology and ensure we maintain strong positions across our entire defense portfolio. On an international front, our NATO allies continue to strengthen their operational readiness by targeting record levels of defense spending, while we continue to solidify our positions with technologies such as Turret Drive stabilization systems, embedded and tactical computing and both ground and naval arresting systems. Turning to commercial nuclear. Curtiss-Wright's extensive portfolio of aftermarket technologies support the continued performance, safety and modernization of operating reactors worldwide, where we have content on every reactor across North America and South Korea. We remain aligned with plant operators and their incremental investments in plant extensions, power upgrades and modernization. In the U.S., we have seen an increased pace in number of plants receiving NRC approval for subsequent license renewals. Thus far, 23 reactors have been approved to extend their operating license, up from 9 reactors at the beginning of last year, with the most recent SLR completed in a record time and in less than 12 months. Similarly, in Canada, we continue to support the modernization of reactors progressing through major component replacement programs to extend the life of their plants. We are also committed to supporting the construction of new Westinghouse AP1000 reactors expected to be built in the U.S., Poland, Bulgaria, Canada and other locations globally. While not included in our current year guidance, we still anticipate an order for our reactor coolant pumps this year. In addition to large light water reactors, we continue to grow our relationships and secure content across leading 300-megawatt plus SMR designs. Our strategy ensures we will be engaged regardless of who is participating in the SMR race, which will ultimately support a number of winners. We expect SMRs to be a meaningful contributor to our revenue growth in 2026 and beyond. As we highlighted yesterday, one of those driving forces is our strong position on the X-energy Advanced Reactor where we have transitioned from design to prototype manufacturing of both the helium circulator and the reactivity control and shutdown systems as we continue to support the advancement of their next-generation reactor. Overall, we have a clear path to capturing tremendous growth in our commercial nuclear power business, and I'm confident in our ability to capitalize on the robust industry growth that lies ahead. Within commercial aerospace, we continue to build upon our strong core positions and alignment to the OEM production ramps across Boeing and Airbus platforms and support our customers' growing backlog. Over the next years, the elevated growth trajectory based on increased rates of narrow-body and wide-body production will provide us with durable opportunities for growth. At the same time, we expect that our continued investments in critical technologies and highly engineered components will bolster our ability to capture new positions and expand our portfolio across both current and next-generation platforms. Shifting to Industrial. Earlier, I spoke about the improved order momentum that continues to build in these businesses. This reflects our ability to grow our leadership positions while simultaneously investing in technologies that advance customer efficiency, performance and safety. This, in turn, together with the team's ability to successfully navigate global macroeconomic pressures, mitigate the impact of tariffs and identify opportunities to drive pricing and cost containment initiatives has enabled us to routinely overcome industry headwinds in this market. Overall, across all our end markets, we continue to take the necessary steps to ensure Curtiss-Wright remains aligned with the fastest growth vectors and that we are well positioned to capitalize on the needs of our customers, both today and well into the future. Turning to the bottom section of the slide. We are intensely focused on leveraging the full breadth of Curtiss-Wright's financial resources to maximize our returns across numerous investment opportunities. We are driving record levels of free cash flow, and we are doing so while investing in critical technologies at an accelerated pace across the portfolio. In 2026, we are ramping up our investments in people, systems and capacity to drive increased throughput across our naval businesses and also in anticipation of future commercial nuclear awards. Overall, we have and remain very focused on efficient capital deployment. Finally, Curtiss-Wright maintains a very healthy balance sheet, and we have remained extremely disciplined in our approach to capital allocation, continuing to strategically pursue acquisitions as our top priority in order to further accelerate top and bottom line growth. Beyond this, we look to further balance that allocation and sustain our strong track record and commitment to return capital to shareholders. In closing, I'm excited about Curtiss-Wright's numerous prospects for growth and we look forward to delivering another record financial performance this year as we continue to drive long-term value for our shareholders. Thank you. And at this time, I would like to open up today's conference call for questions. Operator: [Operator Instructions] Our first question is coming from Kristine Liwag with Morgan Stanley. Kristine Liwag: Your pivot to growth has been very successful, and you're seeing that with your strong book-to-bill of 1.3x in the quarter, and we're seeing very strong demand signals from customers. I guess when we look at the industry as a whole, U.S. defense primes have a record backlog of over $500 billion, but their ability has been gated by the supply chain. You guys have been executing fairly flawlessly the past few years. And Lynn, you highlighted that you're interested in also doing more deals. So are there specific areas when you look at that broader ecosystem where you see gating factors that are pretty high ROI? And is that an area that you would be interested in doing more M&A? And so any color you could provide here would be really helpful. Lynn Bamford: A great question, Kristine, and thank you for joining us today. We are positioned very broadly across both all 3 branches of the U.S. Department of War and have a great footprint in NATO. And so I feel like we're very well positioned. And from an ROI standpoint, obviously, our Defense Electronics team continues to really deliver very strong results for our shareholders. And so that's always when we talk about M&A and where we're interested in pursuing targets, they usually remain at the top of the list. We know how to buy businesses there, integrate them. And even if their profitability, which we were very open with PacStar as an example, our last acquisition there was well below the segment's margins. We've had outstanding performance with that team, and it continues to grow and expand its footprint, both here in the U.S. and really some early days traction internationally, which is exciting to see. So that is always a focus. We're we very much appreciate the tone out of the Department of War with wanting to have more commercial acquisition, be more willing to do second sources, dual sourcing equipment. And so first and foremost, that's a good reminder for us, we need to be a great supplier into our customers, and that is a big focus for us, and we don't take that for granted, and we're not perfect. So there's always areas we can improve. But that's also an area where we are making ourselves clear to the Navy. We're very open to being considered to become a second source in some of those areas. And I think when we think of our scaling in the naval business, when you look at our MIB funding going from $15 million 3 years ago to $60 million now, that's indicative of where the Navy wants us to go and our ability to be a vital part of their supply chain. So that is one. But we're also looking more broadly across our aerospace and defense areas where there's critical aerospace technologies, especially the things that we can take both to the commercial space and the military space. That's one of our strategies that drives our ROIC in the company is having technologies we invest in for one end market, but then leveraging the breadth of our end markets to be able to take the same core investments and spread them across. Aerospace is a great place to do that. And so definitely an area where we're interested. And our last 2 acquisitions were in commercial nuclear. We continue to look. There's less targets out there in that space, but we found 2 and who's not to say we won't find more. That's another area where we continue to look. But we're really looking -- we consider how we look at things -- we have KPIs that we're very focused on, and you have to look at that in balance. And I don't know, Chris, if you'd add anything for -- from a financial perspective and how we think about that. K. Farkas: Sure. Yes. I would just kind of note in the current environment, I mean, there's a good amount of competition for acquisition targets that are out there right now. There's a scarcity of high-quality strategic assets. And that, in turn, is driving some elevated multiples. But we are very stringently applying our strategic and financial filters as we're looking at books in the process. We're generating a significant amount of free cash flow. We're continuing to invest in our organic growth. But you can see from the health of our balance sheet, I mean we've deployed $2.5 billion towards acquisitions since we began the pivot to growth. Despite this, our leverage is approaching record lows. We've got a fully untapped revolver, $3 billion of borrowing capacity today. So as we look at financial -- acquisition targets from a financial lens, we're looking for businesses that can really be accretive to our core KPI growth rates over time, revenue, operating margin, EPS, free cash flow and ROIC. I think this in combination with the market environment, it's just -- it's important to note that not every asset is going to be immediately accretive to all KPIs, but we'll balance those strengths and opportunities in various ways against the full portfolio and generate improvement over time as we've done successfully for many years. Kristine Liwag: Great. Super helpful color. And if I could follow up on margins. The company, you guys have done a lot of restructuring, and we see that benefit with your record margins here. I guess as the Department of War wants to shift more towards more commercial terms, I mean, I presume, is that more margin accretive for you in the long run? And also, I guess, it's a broader margin question as we think about demand from international customers also coming in. I would also presume that would be higher margin. And it'd be great to get your views on those long-term drivers. But then also within the defense ecosystem, you're seeing more players like Anduril, like nontraditional player come into the industry. How does that shift the margin opportunity for a supplier like you where you've got pretty core capabilities that could be used by the incumbents and the new and you've got these new shifts in contracting approach. Is this good for margins in the long run? Lynn Bamford: So we feel confident about and comfortable with where we are. And this year, we're not going to speak beyond this year, but continue to expand margins this year. And you can see that's across our portfolio, including some uplift in our defense businesses. And I really -- as a team, we like to think of it with delivering value. We spend over half of our internal IR&D is spent in our defense electronics portfolio. We have brought some outstanding capabilities to the market that are really unique to a product offering in Curtiss-Wright around some of the capabilities with a variety of NVIDIA-based products from things that use the Blackwell 5000 down to products that leverage the 4 that are much more size-weight-power oriented. And so really having that our Fabric100 capability, which is unique to Curtiss-Wright, the Microsoft Azure offering that we have. But from our perspective, we're very targeted at delivering technology excellence to our customer base, and that goes hand-in-hand with the value you can ask for those products. And so we just keep our eye on solving the hardest, most critical problems that our customers have and believe we will be comfortable. We work with the nontraditional primes. We have active engagements with many of them. There's places our products fit and places our products don't fit. So we're not -- we don't have applicable products to all of them. But the things that we build are complicated and hard and take lots of investments in long periods of time, especially around the defense electronics, not setting aside all the submarine work and such like that. And they're in a foot race. And so for them to be able to acquire product from us is really -- fits hand-in-hand with their value proposition. So I think we're in a very solid place for where we are regarding margins and our ability to continue to grow. Operator: We'll move on now to Myles Walton with Wolfe Research. Gregory Dahlberg: This is Greg Dahlberg on for Myles. I was just hoping to follow up on the X-energy announcement, shifting from design to prototyping work. Can you just give us a context of how much of the announced chipset content this allows you to recognize or maybe frame how large SMR revenue is in 2026? Lynn Bamford: So it's not really our place to talk about what exactly the content is we're prototyping with X-energy. We've been very open and said our content is $120 million per reactor. We only mentioned 2 of the 3 major subsystems that have moved to prototyping. So it's obviously below that. And we're not -- and I will be open, we're not prototyping the full complement of what an end reactor would be, but it's still great and meaningful revenue for Curtiss-Wright. And we're underway with that. And there's also some things we need to do from an infrastructure and test fixtures and stuff to be able to prepare to be able to do that testing. So it's a good revenue driver for this year, but I'll let leave it to Chris to talk about maybe any specifics he'd be comfortable giving. K. Farkas: Sure. I would just say embedded within that mid- to high teens organic growth guide that we're giving for commercial nuclear, you've got aftermarket coming in at approximately low double digits. I mean we're seeing a lot of global strength related to that business. But also, there's a very strong ramp-up in SMR revenues for the development transition to the initial prototyping phase. And last year, we were roughly 10% -- it was roughly 10% of our commercial nuclear revenues. And this year, with the guidance, we're targeting 12% of our commercial nuclear revenue. So a pretty sizable and growing improvement for a smaller part of our overall commercial nuclear portfolio today. Gregory Dahlberg: Great. And then I just wanted to touch on Defense Electronics bookings real quick because it sounded like things were good in 1Q based on your commentary and the short-cycle tactical comms work was accelerating. So can you share your expectations for 2Q book-to-bill maybe just given the context of the ground defense end market reiterated for the full year? K. Farkas: Yes. I mean maybe I'll just kind of back up a little bit before I kind of dive into Q2. Lynn mentioned in her comments, some of the changing government structure and budget delays we faced this last year. And on the last call, we said once that was resolved, we expected we'd see a normal flow in approximately 60 to 90 days, which would put most of that at the time into the April and May timeframe. And I think broadly, across Defense Electronics, that held true. We had the best order quarter for that business dating back to Q3 of '24 and also in Q1, Lynn mentioned, we received several of those orders that we had expected in 2025, including the C-17 and tactical comms and strategic returns. But the Q1 order book was up 18% year-over-year. We had a book-to-bill that was near 1.1x. And then I'll also say that as we're looking at the April order update right now, we're seeing an improvement of 46% year-over-year for that month. So we're really off to a great start here in the second quarter, and we're expecting another good order quarter here in Q2. I will say that you heard in our prepared remarks that there will be some pressure on the second quarter revenue. I think we forecasted that and discussed that a little bit on the last call as well. But what's fortunate for us with some of these delays is many of the businesses here that are impacted are shorter cycle in nature and we've been taking steps to ensure that we can convert those orders into revenue as quickly as possible, and that gives us confidence in the full year guidance. Operator: We'll move on now to Nathan Jones with Stifel. Nathan Jones: I guess I'll start with a question on industrial vehicles. It's not one we talk about too much, and it's obviously been a tough market over the last few years for industrial vehicles. But it does seem like that market overall has kind of troughed out here and you're starting to see some growth. Some of the end customers there are starting to talk about increased production. I guess maybe a little bit more color on the order book, the growth in that. I know you kept the revenue outlook for general industrial flat for this year. Is that one of the areas that we might see some upside in the second half if things continue to progress on the same trajectory they are now? Lynn Bamford: Yes. We've had 2 good quarters of bookings, which is really nice to see. And I definitely always want to give a shout out to the team. It's been a couple -- 3 years that have had industry headwinds in them. I think we do feel optimistic that 2027, we will return to some growth in this end market and the trends continue to indicate that. You can see the reports out of our customer base of what's being built. But the team continues to do a good job with bringing new products to market and winning new content. So we're very well positioned as that growth does come back in this market segment that we will be there to position it. We focused on our content across the European markets where I think growth is predicted to be a little bit more accelerated. So we feel good about what we've done there. And it's still a watch item. So we're being cautious. We're not going to meet our 3-year Investor Day targets of low single digits in this market. But it's nice to think that we will -- we're feeling good that '27, '28 is going to be a better position. Nathan Jones: I guess just a follow-up on some of the delayed spending you've seen out of some of the stuff that's going on with budget approvals and continuing resolutions and stuff like that. The current administration has shown a real propensity to want to spend in these areas. How would you handicap the potential for that spending to get accelerated in the back half of the fiscal year, your 2Q, 3Q for the government and perhaps see some upside relative to some of the forecasts that you've put out there for continuing headwinds in those areas? Lynn Bamford: Thank you, Nathan. It's -- we're definitely -- you can see our book-to-bill across Naval and Power, 1.5x. I mean we're definitely seeing the aggression and the desire to spend and to get things moving. And if I gauge it, the chance for upside by our quote activity, our order activity, the analysis of the pipeline across our defense business, it's very strong. And you see what -- the shipbuilding is very visible. Our defense electronics is across so many platforms that it's not driven by any one target. But even taken within our A&I segment, Chris mentioned in his prepared remarks, the IFPC program. The number of IFPCs procured this year has more than doubled from last year, and it's expected to almost double in '27. And there's lots of examples like that around that are some really dramatic upticks that are going to drive revenue for Curtiss-Wright. It's too early to count on anything. The President's budget request at $1.5 trillion, there's a lot of hand wringing on that. And I was up on the hill just a couple of weeks ago, and lots of people have lots of opinions on it. But I would say universally, everybody thinks there's going to be a much larger than the $1 trillion defense budget this year or next year. And so between that and NATO countries ramping their spending, our prospects are very good. Operator: We'll move on now to John Godyn with Citi. Unknown Analyst: This is [ Bradley Eyster ] on for John Godyn. So I wanted to circle back on the defense aerospace side that you called out earlier in your prepared remarks. So you highlighted strong trends for the quarter that benefited both aerospace and industrial as well as defense electronics. And this has been a common theme we've heard across this earnings season. So I was hoping you could talk a little bit more about what demand signals you're seeing here in the military aviation side looking ahead for the year and how things are shaping up relative to your expectations even from a few months ago. Are there any platforms or platform types such as fixed-wing versus rotorcraft growing faster than the other? I appreciate any color that you can give here. Lynn Bamford: Yes. I mean it's definitely an area of great growth. And whether it's modernization programs, things like the C-17 that we were able to announce in Q1, but there's a lot of aircraft modernization programs going on, the F-15EX, the KC-46 to just name 2 others. And we're very active and are participating in those early days, but as some of the next-generation air dominance programs are being selected, whether that's the F-47, F/A-XX is supposed to be awarded finally, and we're well positioned, we think, with that. And the CCAs, there's just -- the demand is very heavy. And clearly, the current situation over in Iran, there is definitely driving a lot of sparing activity type of work that we're already beginning to see. So it's not any one platform per se, but good steady content and growth. And even another example is with the President's budget in '27, the number of F-35s from here in the U.S. alone is going to double. So we'll see where that takes us. Unknown Analyst: Got it. I appreciate the color. And then I want to circle up on the commercial nuclear side, specifically on the AP1000. I'm just trying to get a sense of like when a customer or country finalizes an order or a deal, what's the timeline for when you guys could complete the product for these RCPs and start recognizing revenue? I'm just trying to get a sense like how the timing flows through these deals. Lynn Bamford: It's really a changing landscape right now. If you go back to our '24 Investor Day, we kind of laid out kind of the traditional approach to how the contractual situation has moved and how EPC contracts were led and how that led to us getting orders. But in the current environment, specifically more maybe here in the U.S. than across the European customers, with some of the funding that's being made available out of the government, it's less clear whether we're going to follow this traditional trajectory. And we really take our cues from Westinghouse. I mean, regardless of who's buying the plants, our customer is Westinghouse. And so we take our cues and work with them to understand when we can expect an order. And as I said in the prepared remarks, we do still expect that order this calendar year and our scenario playing a variety of things with Westinghouse to make sure we're ready to ramp with them and meet their needs so they can be successful in the marketplace. That's the most important thing for us is making them successful. And so we've talked in the past, we recognize the revenue over a 4- or 5-year bell curve. And so it will start a little slow at first as we -- there's work to be done that will drive revenue, but they started securing long lead material and things along those lines. So that's why we felt it was just prudent not to put any AP1000 revenue in our guide for this year's revenue because the exact timing of the order, we don't know and I don't want to try and predict it. And then whether it will have -- be in time for us to have meaningful revenue is TBD. Operator: We'll now move on to Louie DiPalma with William Blair. Louie Dipalma: Lynn, you mentioned F-47 and CCA. How are you positioned to potentially be involved for those next-gen platforms? Or have you already secured a spot in terms of content supplier relationships for those platforms? Lynn Bamford: So it's a little bit of both. There is content we have secured across those platforms, but there's absolutely content that we're still pursuing that there are still opportunities for us. So I think they will both provide solid revenue streams for us going forward. We're on both the winners of the CCA. We have nice content with both. So we'll see how that goes, whether they both wind up producing planes or just one of them. And when Boeing won the F-47, we were very pleased with that. We had strong content that we secured with them and some things that are still under work. So... Louie Dipalma: Great. And for the Navy, has the strength been broad-based across the nuclear pumps and valves that you provide in addition to electronics and R&D and perhaps overhaul? Or has anything stood out in terms of how you've been able to maintain the double-digit growth for the Navy for so long? K. Farkas: Yes. I would say, Louie, the vast majority of the Navy order book and backlog is really focused within the Naval and Power segment where we are embedded across the key naval nuclear platforms. And that's a very steady stream of work that continues to come on in. It gives us a very long-term view of where that market is headed. It's very durable revenues, and it's great cash flow. You may have noticed here in the first quarter that while it was an outflow for us in cash, it was better than what we had seen in prior years and even beat our expectations a little bit. That was really based upon the very strong orders that we had received across the submarine programs in Q1 and the related advances that come on into that. So great cash businesses as well. But we are seeing some uplift in other areas of the business for technologies such as EM actuation and various things that we do there on the ships. And then I think as you look across the Defense Electronics group, while it's not as significant a portion of their overall portfolio as, say, defense aero or ground defense, there's a lot of work that goes into the subs and surface combat ships for that business. So -- but the vast majority of what's happening there in the order book is really just kind of accelerating through the core of naval defense across the key platforms. I will say just maybe one last thing about naval, you can't forget about what's happening on -- with FMS. We are seeing a lot of naval aircraft handling system growth looking outwards. And then also, we mentioned, I think, in the prepared remarks, we're seeing a lot of good work with fleet overhauls and repair work. So those last few categories can be accretive to the overall margin profile of the naval defense work. Louie Dipalma: How significant is the overhaul work for the broader Navy segment? K. Farkas: Yes. I think when you look at just the RCOH as an example, I'll maybe just throw that out. And we do approximately $50 million in work every time one of those carriers comes in. We'll recognize that revenue over kind of a 4- to 5-year timeframe as they're doing the work on the ships. But beyond that, I mean, we talked a little bit too about some of the growth that's been embedded across the Virginia-class submarine programs more recently, initial spares provisioning that's happening there. We haven't given exact values. But with some of that work and then also the service centers that we have on the East and West Coast, it's really kind of opening us up to other opportunities to help get the fleet repaired and back onto the water. So it's good business for Curtiss-Wright. Operator: [Operator Instructions] We'll move on to Jan Engelbrecht with Baird. Jan-Frans Engelbrecht: Congrats on another strong set of results. I think I'll start off with if you can give us sort of the puts and takes over the next couple of years for the commercial nuclear franchise, how you're thinking about margins as you're sort of progressing through this decade? And just how we should think about sort of operating leverage on double-digit growth in the aftermarket and then SMR development ramping up, the impact of large reactors, AP1000 and then just the South Korean design, which I think you have around $20 million of content today. But if they can sort of figure out a way that there could be a domestic build of that as well, I would assume that you'd be in a great position as having the domestic facilities. Lynn Bamford: So important question and one that I don't know if we're being comfortable giving a ton of color on. I will say starting in the SMR space, we've been doing paid design work for 4-ish years now. And that's always some of your lower-margin business. And so as we begin to move as we were really pleased to be able to announce into a prototyping phase with X-energy and then some of our other content is in the same vicinity, but the only one we're really talking about is X-energy, that will be better margin business than the design work. And then we're still working on how we will move into early production quantities later this decade. So I feel like there's natural margin uplift as we get volume and move through that work tied to the SMRs. Relative to the aftermarket work, we make healthy margins on that business. It's more growing our content. And I don't know if there's any major margin changes coming in the aftermarket market work. I mean, as they do larger -- take on maybe some more sophisticated improvements that are being afforded as they contemplate not just the 80 years, but the 100 years. There could be a little bit of something there, but I don't think it's dramatic. And really, with the AP1000, we just need to work to support Westinghouse and it's a very active situation right now. And I just -- I don't think it's appropriate for us to make any comment on that. K. Farkas: And I would just add maybe to answer your question on the revenue growth. When we started the -- we had our last Investor Day back in May of '24, we put a slide up that showed the art of the possible, and we said that we would double our organic commercial nuclear footprint by 2028, which was taking $300 million of revenue to $600 million and then you can layer on the acquisitions and stuff that we've done since then. But it was a pretty reasonable outline of how we would actually achieve that. And while the slide said possible, I mean, certainly, some of the things that have been happening here in the industry since we had that Investor Day have given us increased confidence that the possible is looking really good. So I think as you're looking outward, we feel much better today about what's possible than we did back then. Jan-Frans Engelbrecht: That's very helpful. And just a quick follow-up, if I may. If you guys can just give us an update on the cockpit voice recorders franchise, sort of updates on the Airbus certification timeline? And then just how is it tracking the North American fleet sort of upgrading from 2 hours to 25 hours? I know there is a 2030 deadline, but what are you seeing so far? Lynn Bamford: So the work continues with Airbus, and we think we will achieve certification in the back half of this year. So that's good. I mean we're getting pretty close to having that achieved. I will say our deliveries remain pretty steady with Honeywell for new market build for Boeing. The aftermarket uptick has maybe been a little slower than we would have anticipated for retrofitting the existing fleet. But the good thing is as much as that was announced back in '24, it was actually signed into law February of this year. So I think that final step of making a legal requirement, it's just taking a little bit of time for the airlines to figure out how they're going to execute to that. So overall, that business is relatively flat year-over-year for us, but there's absolutely -- it will be a good growth driver for the Defense Electronics segment through the back end of this decade. So no concerns. It's just -- it's going to really start healthy growth next year. Operator: We'll move on now to Scott Deuschle with Deutsche Bank. Scott Deuschle: Lynn, there's obviously a lot of talk in the semiconductor industry about supply constraints and things like printed circuit boards and memory. I think this is something you've been pretty active about getting in front of and managing, but just curious for an update as to how you're thinking about managing those potential constraints and whether you see any impact to the business there? Lynn Bamford: There is definitely demand, and I really give a shout out to the team for their ability to manage their way through it. And we've talked about this. One of the areas that's a big focus in that team is the memory and storage chips has been a real focus, and they've done a great job of really working with our suppliers to secure supply. We tackle through so many different approaches. We work with our customers to fund the supply base for us. And in some cases, they're willing to do that. In some cases, it's more forecasted business and things we have to do. We definitely leverage government high-priority ratings where we can, which is a reasonable amount of the business, but not all. I'm not going to say that. But also just really from the COVID time and how we work with our suppliers, it's really become much more sophisticated over the past couple of years. And whether that's the personal relationships we have or tools we have to be better monitoring lead times and doing advanced buys. I know I've talked directly with the team about how they feel about the needs for '26. I think we have that well in hand, and they're focused on 2027 and being able to have things in line. So we're prepared to continue the great growth trajectory in that area and not let that impact us. And the other supply area that we're -- if you say the 2 that are top of mind, rare earth minerals are an issue that we watch, and that's more across our surface tech and industrial businesses, and they're also doing a lot of creative things with qualifying alternative minerals and looking for second sources and just various approaches. There's never one silver bullet that it's worked, but the teams do a great job with it. Scott Deuschle: Got it. And maybe this is overreaching, but have you seen competitors have maybe greater issues with the semiconductor constraints such that your ability to secure these supplies actually creates a market share opportunity relative to competitors that maybe haven't managed these input constraints as well as you have? Lynn Bamford: Not anything that would be meaningful that I would make comment on. I mean we are always after market share, and we are doing things to take market share. I will assure you that. And there are things that we're doing product capabilities. We talk frequently about our Fabric100, that's 100 Gigabit Ethernet, and that's a unique offering to Curtiss-Wright. We're leveraging that to take market share. But we're -- if they stumble, so be it, but we will do it through technology leadership and creating great value for our customer base that nobody else can deliver. Operator: There are no further questions at this time. I'm happy to return the call to Lynn Bamford, Chair and Chief Executive Officer, for additional or closing remarks. Lynn Bamford: Simply, thank you all for joining us today, and we look forward to speaking with you again on the road or following the release of our second quarter results. Have a good day. Operator: Thank you. This concludes today's Curtiss-Wright earnings conference call. Please disconnect your line at this time, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to UGI Corporation Q2 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 first speaker today, Tameka Morris. Tameka Morris: Good morning, everyone. Thank you for joining our fiscal 2026 second quarter earnings call. With me today are Bob Flexon, President and CEO; and Sean O達rien, CFO. On today's call, we will review our second quarter financial results and key business highlights before concluding with a question-and-answer session. Before we begin, let me remind you that our comments today include certain forward-looking statements, which management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available within our presentation. And with that, I'll turn the call over to Bob. Robert Flexon: Thanks, Tameka, and good morning. Fiscal 2026 is shaping up to be a year of meaningful progress against the strategic priorities we laid out at the start of the year. Our natural gas businesses continue to anchor the portfolio, supported by strong customer demand and operational execution. We continue to have a robust pipeline of data center opportunities, much like the announcement of our partnership with Prime Data Centers. UGI International continues to demonstrate the strength of its business, generating strong free cash flow and effectively managing margins through a dynamic operating environment. Of note, we do not anticipate any full year impact to margins or supply availability issues from the ongoing conflict in the Middle East due to the nature of our sales contracts and our risk management hedging program. The operational transformation at AmeriGas is delivering substantial measurable results and on target to set the business up for a successful heating season at the start of fiscal year 2027. Our balance sheet ended the quarter with consolidated leverage below the targeted range of at or below 3.75x. Sean will cover in more detail the leverage milestones we expect to achieve this fiscal year. Our year-to-date reportable segment's EBIT is up $17 million over prior year, largely from higher gas base rates at our utilities and effective margin management at UGI International, which offset the impact of warmer weather in our global LPG service territories. At our utilities, we deployed approximately $280 million of capital year-to-date, advancing our commitment to pipeline safety, reliability and modernization while adding more than 6,000 new heating customers across our service territories. Through our weather normalization riders in Pennsylvania and West Virginia, customers were able to save $26 million on heating bills this past winter. At AmeriGas, we are excited that in select cities, our barbecue cylinders are now available online through Amazon. We are rolling this out in a phased approach across the markets where we currently operate AmeriGas' cylinder home delivery service called Cynch, leveraging our established direct-to-consumer delivery infrastructure. Turning to the next slide. I want to spend a few minutes on several strategic actions that together reflect the deliberate execution of our long-term value creation strategy, sharpening our focus on natural gas and deploying capital into the most attractive growth opportunities we see in our service territories. First, subsequent to the quarter, we entered into a definitive agreement to sell our electric division at UGI Utilities. The transaction valued at approximately $470 million with further potential earn-outs prior to working capital adjustments is expected to close in the first quarter of calendar 2027, subject to customary closing conditions and applicable regulatory approvals. The strategic rationale here is clear. The transaction sharpens UGI's focus in our area of greatest competitive advantage and the after-tax proceeds will be used to reduce UGI debt and for general corporate purposes, further strengthening the balance sheet and providing greater financial flexibility for natural gas capital investment. We're excited to announce the strategic partnership between UGI Energy Services and Prime Data Centers to develop major natural gas supply infrastructure in Pennsylvania's Northern tier. Under a purchase and sale agreement, UGI Energy Services will sell Prime property to build a proposed on-site gas fuel electric generation facility. UGI will retain the storage capacity and oil and gas rights associated with the property and is expected to supply the data center with reliable, large-scale gas supply. Prime's natural gas demand is expected to exceed 100,000 dekatherms per day within 3 to 5 years, a scale that underscores the importance of the project for the region's energy infrastructure. This partnership is a powerful example of how UGI's integrated natural gas platform is uniquely positioned to support the next wave of energy demand. The northern tier of Pennsylvania offers direct access to locally produced natural gas and multiple redundant interstate pipeline pathways, a combination of supply, security and infrastructure depth. And importantly, Prime is one of many opportunities we are actively pursuing. Our team is in active conversations with numerous parties across the data center and large load industrial space with over 75 nondisclosure agreements directly related to potential future projects signed to date. While we don't expect that every one of those will translate into contracted opportunity, the breadth of inbound interest continues to be a strong signal of the demand environment in our service territories and UGI's position to be a strategic partner for large-scale natural gas infrastructure. Lastly, during the quarter, we ran a successful oversubscribed open season for the projected Auburn pipeline expansion, which is pending FERC approval. The level of customer demand validates our expansion strategy. Taken together, these announcements provide additional avenues to creating long-term value, sharpening focus, strengthening the balance sheet and deploying capital where the demand exists. Now let me spend a few minutes on UGI International because this segment really embodies what disciplined execution looks like over the long term. When you look at the financial and operational profile of this business, there are several metrics worth highlighting. First, the return on capital employed of approximately 15% indicates that we're earning attractive returns on the capital invested in this business, reflecting the quality of our market positions, a thoughtful approach to capital allocation and an operating model that has been refined over many years to drive efficiency at every level. We've also continued to expand operating margin, drive cost productivity and improve on already strong safety and customer metrics, areas where this team has long set a high bar and continues to raise it. Free cash flow generation is equally important. And over the past 3 years, UGI International has generated more than $800 million in free cash flow. Free cash flow that has been used to fund dividends to shareholders, invest in growth initiatives in our natural gas line of business and maintain a strong balance sheet with net leverage consistently below 2x. This reflects disciplined CapEx, working capital rigor and the structural cost improvements this team has driven consistently over time. Together, these metrics describe a business that is efficient, generates strong returns on the capital it deploys and built to perform through changing economic cycles. Turning to Slide 7. The operational transformation is fully underway at AmeriGas and making a significant difference. We continue to advance many active improvement work streams across 6 focus areas with measurable improvements compared to fiscal 2024. Over the past 2 years, we have reduced the recordable incident and lost time injury rates by roughly 50%. In operations, the percentage of 0 fill stops and out-of-gas events are down considerably while we've become more efficient in the number of miles driven to serve customers. And when I think of customer satisfaction, our customer service call volumes are down 32%, while our Net Promoter Score is up 67%, significant progress when compared to fiscal year '24. A major milestone on our turnaround for AmeriGas is the full reshoring of our call center to the U.S. at the end of the second quarter. We now have over 250 agents dedicated to serving customers and regional teams that are closer to our customers and can better understand and respond to our customers' needs. This was a multi-quarter effort, and we executed on schedule, on budget and well ahead of the upcoming heating season. Our route optimization program is fully implemented and the productivity benefits are showing up in miles driven and on-time delivery metrics. Although we've seen strong improvements, our established PMO team remains focused on efforts to improve our cylinder exchange business, customer segmentation, pricing and billing, service operations improvement, supply chain optimization and inventory modernization. Taken together, the operational transformation at AmeriGas is delivering tangible results with volumes stabilized and a 9% improvement in EBIT over the 2-year period. And with that, I'll hand the call over to Sean to walk through our financial results for the quarter and year-to-date in more detail. Sean O’Brien: Thanks, Bob, and good morning. For the fiscal 2026 second quarter, UGI delivered total reported segment EBIT of $688 million in comparison to $692 million in the prior year period. This performance was largely driven by higher base rates at our Pennsylvania gas utility and effective margin management across our global LPG businesses in a quarter that was warmer than the prior year across their respective service territories. I want to highlight the strong operational execution by our natural gas teams who faced periods of colder weather in their service territories and delivered safe, reliable service for our customers. Turning to EPS. Adjusted diluted EPS was $2.09 compared to $2.21 in the prior year period. As we previously anticipated, the year-over-year decline in adjusted EPS was driven primarily by the absence of investment tax credits realized last year and higher interest expense. Turning to the drivers of each segment's results. First, the utilities delivered EBIT of $250 million, up $9 million over the prior year. Total margin increased $23 million, primarily due to the effect of higher gas base rates that went into effect in Pennsylvania at the end of October 2025. As designed, our weather normalization adjustment mechanism mitigated approximately $19 million of the weather impact this quarter, providing bill stability for our customers. Operating and administrative expenses increased $8 million, reflecting higher personnel costs and uncollectible account expenses. Depreciation and amortization rose $4 million on our continued distribution system capital investment. At Midstream & Marketing, EBIT was $150 million for the quarter in comparison to $154 million in the prior year. While heating degree days were 3% colder than the prior year, this winter, we saw longer durations of cold weather where the team was focused on reliably serving its peaking customers who pay a fixed demand charge regardless of usage, driving greater earnings stability in this business. Next, operating and administrative expenses were higher year-over-year, primarily due to new assets placed in service in the prior year. In the global LPG businesses, starting with UGI International, EBIT was $132 million in comparison to $143 million in the prior year. Retail volumes were 8% lower, largely due to divestitures of the LPG businesses in Italy and Austria and the impact of warmer weather. Total margin was down $4 million as the lower retail volumes were substantially offset by the translation effects of stronger foreign currencies, which contributed approximately $30 million. Operating and administrative expenses were comparable with the prior year period as the impact of the aforementioned divestitures as well as lower distribution expenses were largely offset by the translation effects of the stronger foreign currencies of approximately $15 million. Other income declined $11 million, and this included approximately $8 million of lower realized gains on foreign currency exchange contracts. Lastly, while we are closely monitoring the current geopolitical situation involving Iran, the structure of our LPG contracts with customers, combined with proactive actions taken by our team, gives us confidence that we do not anticipate any impact to margin or supply availability constraints. Importantly, the underlying business continues to perform well from a margin management and cash generation standpoint. Moving to AmeriGas. EBIT was $156 million, up $2 million versus the prior year. Retail gallons decreased 5%, primarily due to temperatures in the West that were warmer than prior year period as well as continuing customer attrition. For the quarter, while weather in the Eastern region of the U.S. was comparable on a year-over-year basis, temperatures in the West were 12% warmer than the prior year period, impacting total volumes sold. On aggregate, on a weather-adjusted basis and excluding the effect of the Hawaii divestiture, retail gallons were comparable to the prior year period. Total margin increased $2 million as higher average LPG unit margins and increased fee income were largely offset by the lower retail gallons. OpEx increased $2 million from the continued investment in customer-facing initiatives, which resulted in higher compensation and advertising expenses. Turning to our year-to-date results. Adjusted diluted EPS for the first half of fiscal 2026 was $3.35 in comparison to $3.58 in the prior year period. UGI delivered core EBIT growth, largely driven by higher gas base rates at our utilities, which more than offset the impact of warmer weather in our global LPG service territories and the previously announced LPG divestitures. This EBIT growth was offset by higher income tax expense, reflecting the absence of investment tax credits realized last year and higher interest expense. As we turn to the full year outlook, we are revising our fiscal 2026 adjusted diluted EPS guidance range to $2.75 to $2.90. This primarily reflects lower expected earnings contributions from our Midstream & Marketing segment, where there are delays in planned growth investments and lower production volume in the Appalachian region. Also, to a lesser extent, the pace at which operational improvements at AmeriGas are translating into earnings is slower than originally anticipated. The fundamentals of these businesses remain intact. And as Bob discussed earlier, the recent announcements and progress on the operational transformation underscore our confidence in the long-term growth trajectory of this business. Moving to the balance sheet update. We continue to make strong progress against our balance sheet objectives. Available liquidity at the end of the quarter was approximately $2.1 billion, an increase of approximately $200 million over the prior year quarter. Net leverage at UGI Corporation was 3.7x at the end of the quarter, which was the lowest in 5 years and below our targeted level of at or below 3.75x. At AmeriGas, we closed the quarter with net leverage of 4.7x, representing a meaningful decrease compared to recent years and the lowest in 5 years. On the credit front, we are pleased that [ Fitch ] revised the AmeriGas outlook from negative to stable during the quarter, further validating the operational and financial improvements that are underway, and this builds on the Moody's outlook that was revised to positive last quarter. Turning to the next slide. I want to walk through a key strategic action that we are taking to optimize the capital structure across our global LPG platform. We are executing a onetime rebalancing across UGI International and AmeriGas designed to optimize the consolidated cost of capital, improve credit profiles and further strengthen the balance sheet. Specifically, UGI International, which ended the quarter at 1.2x net leverage and with approximately $900 million in liquidity, will pay a special onetime dividend of $300 million to UGI Corporation using available liquidity. Those funds will be immediately contributed to AmeriGas as a capital contribution, which AmeriGas will use to retire outstanding indebtedness, including approximately $150 million of intercompany loans from UGI International. This rebalancing accomplishes 3 things: First, it leverages the interest rate arbitrage between UGI International and AmeriGas to materially reduce our consolidated borrowing costs. Second, it significantly accelerates deleveraging at AmeriGas, which is consistent with our objective of reducing the company's net leverage to sub-4x while enhancing free cash flow and consolidated credit profile. Our expectation is that AmeriGas will end fiscal 2026 with leverage below 4.0x. Third, it unlocks investment capacity for growth opportunities within our natural gas businesses while maintaining a conservative credit profile. Taken together, the strategic actions we recently announced reflect a deliberate disciplined approach to capital allocation that strengthens the foundation of the company and supports our long-term EPS compound annual growth rate target of 5% to 7% between fiscal year '24 and fiscal year '29. Now let me turn the call over to Bob for his closing remarks. Robert Flexon: Thanks, Sean. Before we open the line for questions, I want to leave you with several key takeaways. First, our year-to-date results reflect the continued execution of our strategic priorities with reportable segment EBIT ahead of the prior year. Our natural gas businesses are performing well, supported by robust customer demand and our weather normalization mechanisms are working as designed to provide bill stability for our customers. Second, the operational transformation at AmeriGas is delivering measurable, sustainable results in safety, in operations and in customer satisfaction. The onshoring of our call center, the implementation of route optimization and the launch of our cylinder sales on Amazon, all position the business for the upcoming heating season and for future earnings growth. Third, we are well positioned for attractive natural gas growth opportunities and the Prime Data Centers partnership, combined with the planned expansion of the Auburn pipeline supports the long-term outlook for our midstream business. In addition, the strategic actions we have announced, the agreement to sell our electric division and the global LPG capital structure rebalancing sharpen our focus on natural gas, strengthen our balance sheet and increase our financial flexibility to invest where the demand is greatest. While we have revised our fiscal 2026 guidance to reflect the timing of certain growth initiatives, the long-term trajectory of this business is, in my view, stronger than it has ever been. We are optimally situated to serve the growing demand for safe, reliable and affordable energy solutions and the foundation we are building positions UGI to deliver sustainable returns for our shareholders over the long term. And with that, I'll turn the call over to the operator for questions. Operator: [Operator Instructions] Our first call comes from -- question comes from Julien Dumoulin-Smith of Jefferies. Paul Zimbardo: It's actually Paul Zimbardo on for Julien. It's good musical chairs during earnings. The first question I had was just on the decision to kind of put equity into AmeriGas from International. I fully understand the cost of capital benefits, but I thought the message was more that AmeriGas needs to stand on its own 2 feet without support from corporate. So just curious what changed in the plans? Or was this always the plan? And just any details on the thought process there would be helpful. Robert Flexon: Paul, I'll go first and then let Sean tap in because I certainly have the viewpoint AmeriGas stands on its own. I think what's different in this situation, AmeriGas is in a position now where they can stand on their own. This is about optimizing cost of capital. And rather than paying interest rates, AmeriGas will be paying a dividend up to the parent starting next fiscal year. So rather than seeing that money go out as interest expense, we see that money flowing to the parent company as more valuable. This is not a situation where AmeriGas could not refinance its upcoming debt maturities. This is more a decision of Sean and team finding creative ways to lower that cost of capital to allow additional funds to flow to the parent. I mean, Sean, you can comment. Sean O’Brien: Yes. I think, Paul, what -- I just stick to the facts. let's stick to the facts. AmeriGas, this is very -- I was here when the previous -- the aforementioned infusion happened. That was from Holdco to AmeriGas. AmeriGas was in a much different position. So let me hit some of the facts. We set the best debt-to-EBITDA that AmeriGas has seen in over 5 years in this quarter at 4.7x. So massive progress. AmeriGas was sitting on well over $100 million of cash. The business is generating a lot of cash. So we're sitting on a lot of cash. And then one other fact, we will -- and you can see it in the slide, we're going to pay down back to International, the $150 million of intercompany debt in this transaction. So much, much different place. You've got volumes at AmeriGas, much more stable. You've got earnings stable, different position. Now let me get to the economics, why the team and myself really wanted to put this on the table. Bob alluded to it. This improves the cost of capital for the company. This benefits the company as a whole in terms of interest expense, in terms of cash flow in a meaningful way, and we'll get a full year of that starting in '27, but we'll get some benefit of that this year. The last thing I'll tell you is we know we have a maturity coming due. AmeriGas has a maturity coming due, and we want to put our best foot forward, not only arbitrage the cost -- the lower cost debt at international, but do the best we can to make sure that as we head out into the markets to take care of this AmeriGas maturity that we put our best foot forward. And I don't know if you saw it this morning, but Fitch upgraded AmeriGas from B1 positive from B positive to BB- stable. That's a big move. That puts us on par with the best propane companies in terms of the balance sheet that are out there and actually, in some cases, stronger than many of our peers. So there's a lot to this deal. I think it's all good. And we kept it between the LPG family, between international and between AmeriGas. So I'm very proud, and I think it really is going to be beneficial to the company. Paul Zimbardo: Facts. That is useful information. And I did not see that Fitch update. So thank you for that. One other one, if I can, just to shift gears. I want to see if you have any thoughts on the Pennsylvania Governor's letter related to utility affordability. Do you think this impacts the current rate case or anything in front of you? Robert Flexon: Well, we don't think it impacts the current rate case. It's going through its normal process and procedures. It's on schedule. We've had some of the intervenor commentary. It goes for into the next stage in June. So we don't see anything. But certainly, we want to be constructive with the governor. We want to be constructive for the state. We want Pennsylvania to continue to be one of the best states to invest in, and we're going to do everything we can to work and drive on affordability and support the governor and the governor's goals for the state. So I mean that's how I see it playing out. I mean we're going to do our part. Operator: Our next question comes from the line of Gabriel Moreen of Mizuho. Gabriel Moreen: Maybe I can just follow up on Paul's question on sort of the AmeriGas International capital transactions here. Sean, can you maybe just talk about how -- what else you need to do to address that upcoming maturity and maybe how you plan to address it? Is it just straight up debt issuance at this point? And then also, I think you had mentioned a comment on this allowing you to maybe invest a bit more on midstream. So I'm curious or in the natural gas businesses. So I'm curious about that. And last but not least, Bob, strategically, I'm curious with, I guess, AmeriGas cap structure kind of rightsized after this, do you think there are larger strategic implications as far as you evaluating AmeriGas' place within the UGI family of companies? Sean O’Brien: Okay. So I think I can go first, Gabe. I think a couple -- one thing I want to highlight, and I should have highlighted it on Paul's question, the absolute debt at AmeriGas Gabe, and you were kind of alluding to this, has moved from $2.8 billion to [ sub-$1.3 billion ] in this period. That's amazing. And it's in the slide, Gabe, but in terms of the overall leverage, we're going to be sub-4 after this transaction. That is -- that will be industry-leading leverage. In terms of the -- we know we have a maturity going current in the next month or so. This does a really good job of preparing us for that. But our goals in dealing with that maturity and any future maturity is to rightsize the cost of capital at AmeriGas. We believe this transaction does that and also continue to delever. So we've been very open. I can't speak about timing on when we go after the maturities, but I can tell you that our goal is to as quickly as we can deal with the current maturity and also go after the '28, which had a 9 handle and continue to set AmeriGas up, again, with leverage sub-4 with absolute debt lower than [ 1.3 ] when it was just at [ 2.8 ] and really set it up well as it goes to deal with future maturities to be an industry-leading balance sheet as we go out into these markets. So this helps us accelerate all those things I just mentioned to you. Robert Flexon: And Paul, sorry, Gabe, in addition to what Sean is speaking about with the great financial profile improvement of the balance sheet, we've done a lot of work over this past year to drive operating improvements, as you saw on one of the slides showing a lot of the more complex projects that we have underway and the significant improvement. We now feel with the call centers being back in the U.S. that we can be much more aggressive now in seeking new business. And by the time we start the winter for 2027, which really begins, call it, in November of this year, we expect to have a substantially better business than what we had when I joined the company November 1, 2024. So let's get through the upcoming winter season. I expect significantly improved execution. This year was better than last year, and next year is going to be better than this year, and we have all the operating metrics to back that up. Once we get through the winter of next year and kind of prove where we are, I think we will look at what are the longer-term strategic options for the company on how we are configured and the like. But right now, our focus is to make sure that in addition to this financial improvement, we have a strong operating base to show growth in AmeriGas. And then we'll get through the winter and we'll see what's next. Sean O’Brien: And Gabe, I want to -- I missed -- you asked about the midstream -- what it does for Midstream. In general, and it's not just the AmeriGas delevering, we talk about the transaction on the electric utility. Obviously, the portfolio optimization we've done in international, the sale of Hawaii. What we're alluding to there is we're setting the company up. All of that, as you know, our priority has been to improve the balance sheet, improve the financial standing. All of that -- those transactions have gone to debt reduction. So we're very focused on increasing the -- what I'll call the dry powder of the company. Corp, by the way, set a 5-year record as well at 3.7x this quarter. We set a goal to be sub [ 3.75 ], and we're at 3.7x this quarter. So it's really setting the company up well for midstream opportunities. We know that, obviously, the LDC side of the equation, we've seen opportunities. That's what we're alluding to there, really getting the balance sheet, delevering, getting AmeriGas' cost of capital down. So the company is well positioned if those opportunities come. Robert Flexon: And Gabe, I want to maybe stretch your question a little bit further when you talk about how do we position AmeriGas and maybe talk in general about portfolio management for the entire corporation. And as you can see, we've done a lot on recasting what our international business looks like. We are now in markets where we are the top 3, if not primarily top 1 in markets and really where we have a good competitive advantage. The electric utility sale that's underway, we've been able to execute that at a very strong multiple off a rate base of somewhere between $220 million and $230 million rate base and bringing in $470 million approximately of sale proceeds with the potential for some higher earn-outs on that as well. And then we can look at the overall configuration once we get through the winter. So portfolio management of the entire complex of the company will always be under review, looking what's going to create the most value and the most focus for our shareholders. Gabriel Moreen: Great. Maybe if I can kind of stay on midstream a little bit. I think you alluded to delay in some midstream investments as one of the factors behind the guidance revised. Can you maybe speak to that a little bit more, whether that was organic, inorganic? What are the factors there? Will they resolve? And then also just talking about the Auburn expansion, can you maybe talk about the capital and timing on that project potentially? Sean O’Brien: Yes, I can take the first part, Gabe, for sure. Since I've been here, it's been -- we've had consistent opportunities to do inorganic growth at the midstream business. A lot of that's just through buying out through JVs, looking at PE firms that are ready to exit the assets and so forth. And we've had that pretty consistently. So it would not be uncommon for us to assume those types of things as we move forward. I think what happened this year, if you want to be specific to that, we anticipated those inorganic opportunities around those similar to what we've seen in the past. And then the data center evolution hit. So you can think, Gabe, that the valuation on a lot of those inorganic opportunities were massively reassessed by their owners with potential growth in power, potential growth in gas needs in the region. So the region. So it's just a case where the company is being very disciplined. I mean, as we look at those transactions, they have to be at the right return levels for us. So I do think those transactions will continue to be there for the midstream business. But the ones that we were counting on, and we had specific ones we were looking at this year. But again, the valuations got a little bit beyond where we felt comfortable. So I think that could just be a timing. We do anticipate seeing those opportunities in the future. Robert Flexon: Yes. And the other part of your question, Gabe, around Auburn, the investment will be somewhere between $25 million, $30 million of capital investment. And through the open season that we just went through, the interest in subscribing to the Auburn pipeline was significantly higher than what we had in our economics. So it's a very strong return project for us. So we look forward to bringing that one online. Gabriel Moreen: Great. And then if I could just squeeze one more in on the data center announcement. Can you just talk about sort of next steps there as far as kind of when you'll figure out whether that's sort of a go on the gas supply. And then I'm also curious whether there's capital kind of being infused into this project? Or are you actually getting capital out because of the sale of the property here to the data center developer? Robert Flexon: Well, overall, there will be a net capital input, but certainly, there's the sale of the land, which provides the capital return to us at the beginning. And then there will be investment on our side to be able to deliver gas to the data center when developed, working with Prime and working with John, who -- John and I worked together at [ NRG ] for a number of years, they're good power developers. And so we look to be there to supply the gas to the demand that, that data center will create. So I think you'll see the benefits of that later in the decade in terms of the development, the investment and the bringing online. Operator: This now concludes the question-and-answer session. I would now like to turn it back to Bob Flexon for closing remarks. Robert Flexon: Yes. Thanks, Stephanie, and thank you for your interest, everyone, for participating today and listening in. Just to summarize, I think we've really been focusing on our operational performance. I think one of the things that we're most proud about is the dramatic increase in safety. AmeriGas has had its best safety performance in the history of us owning AmeriGas, which is #1 on our list to make sure everybody is safe. And we're seeing that across all of the business units. So safety is really paramount, and we're seeing just tremendous progress on doing our business in a very safe way and keeping not only us safe, but our customers and communities safe as well. Our performance over winter was good on all accounts. And we're looking at with customer service back in the U.S. for AmeriGas, we're looking for significantly improved customer service, making the business feel local again. We've executed on strategic transactions, the sale of the electric utility at a very strong multiple for us. We're now a retailer on Amazon for the AmeriGas business, which is exciting. We'll see how that translates into sales, but we're really optimistic on that. Obviously, the deal with Prime Data on bringing in a data center and being able to serve that as well. And finally, as Sean spoke about a lot, strengthening the balance sheet. So the combination of operational improvement and having a much stronger financial base opens up opportunities for us. And so we look forward to executing on all of that. So with that, I will conclude the call. And again, thanks, everybody, for participating. Operator: And thank you for your participation. This does conclude the program. You may now disconnect.
Vincent Clerc: Welcome, everyone, and thank you for joining us on this earnings call today as we present our first quarter results for 2026. My name is Vincent ClercKirk. I'm the CEO of A.P. Møller - Maersk. And I would like to introduce our new CFO, Robert Erni, who is joining me here in the room for the first time. Many of you will no doubt have the opportunity to meet Robert on the upcoming roadshows and conferences. Let me start with the overall highlights for the quarter. At the macro level, we continue to see strong demand growth across all of our segments and most regions. The big exceptions was North America which has remained weak since the start of the trade tensions about a year ago. This resilient level of demand is easily observable in our own number, but it wasn't enough to stabilize the ocean freight rates. The supply overhang there has worsened as the many new vessels delivered throughout 2025 and into 2026 have outpaced this strong demand. The Middle East conflict has required also operational adjustments, but it did not have a material financial impact in this quarter. This is mainly due to the delayed recognition of revenues and costs in Ocean. I will elaborate on this shortly on the following slides. Overall, we delivered an EBITDA of $1.8 billion and an EBIT of $340 million, impacted overwhelmingly by the lowest rates in Ocean year-on-year. Lower earnings led to free cash flow of negative $874 million for the quarter. Looking ahead for the full year, notwithstanding the disruptions that the Middle East conflicts have brought, we are maintaining our guidance given what we can see right now. On the basis of container volume markets of 2% to 4%, we guide for underlying EBIT of between negative $1.5 billion and positive $1 billion and a free cash flow of negative $3 billion or better. The Middle East conflict is not expected to have a material impact at this stage through the use of both operational and commercial levers. Our maintaining the guidance and the range reflects the fluid environment that we are in, but it also speaks to the agility and resilience of our business such that we can withstand such large disruptions without materially changing our financial outlook. And that is a good segue into the next slide, where I'll add a few more words on the Middle East conflict. It is important to highlight that the outbreak of this conflict is primarily impacting Ocean. Logistics & Services and Terminal have not been and we don't expect will materially be impacted. Thanks to our strategy put in place over the last decade, we have a much more diversified and resilient revenue and cash flow streams today that will cushion the impact on our results that the ocean market is faced with. Let me start by saying that we have of over 6,000 colleagues in the affected countries, and we currently have 6 vessels stuck in the Persian Gulf comprising owned and time charter vessels with crew on board. We also have our gateway terminal at APMT Bahrain, our hub in Salalah. We have warehouses and offices and all the colleagues are safe and accounted for. Safety of our people, vessels and assets is our #1 priority. This means right now that operations also in and out of the strait of Hormuz have been suspended based on our continuous security assessment. The Gulf region before the outbreak of the conflict represented about 2% to 3% of global containerized trade, so direct volume impact is limited on the global scale. The situation in the Strait of Hormuz has also impacted the situation in the Bab al-Mandab Strait, and we have reversed and halted the gradual return to the Red Sea transit for safety reasons since the beginning of the hostilities. We have seen rate spikes since the outbreak of the conflict, which averages on spot rates up to about 40% since the end of February. It is important to note that this rate increase has been roughly in line with the cost increase we have faced. Operationally, the modularity of our Gemini network has helped us pivot with volumes back to pre-war levels and limit the disruptions to our volume delivery and service quality. We have been able to isolate part of the network impacted by the conflict and carry on with our operation while maintaining the highest reliability and in delivery. While the oil prices have surged and bunker availability has become under pressure, we have been able to maintain bunker supply through available reserves on board vessels and in storage facilities on land. We have a coverage at this time of minimum for a quarter ahead, which is in line with normal coverage. We have responded to fuel shortages in certain parts of our network, most notably in Asia by redistributing available fuel from North America and Europe to ensure that our vessels can bunker before departing again for their head ho. The cost impact of this energy shock is unprecedented, both in terms of size, the speed at which it has unfolded and the dislocations it has created in the market. For us so far, it represents approximately $0.5 billion in extra cost per month that we must find a way to pass through. If these elevated bunker prices persist, which seems likely, we would expect to deploy more slow steaming to reduce the cost impact. We remain confident that the impact of the shock can effectively be contained between a combination of commercial and operational measures. In terms of the numbers, there is limited financial impact from the conflict in the first quarter given the accounting effects of delayed recognitions of both revenue and costs. The increased costs that will flow through the P&L in quarter 2 and beyond are being recovered through higher spot rates and a successful implementation of commercial levers with our contracted customers most notably surcharges and bunker formulas. As mentioned, this is about $500 million of extra cost per month, which we are recovering in full today even in an oversupplied market. Overall, despite heavy disruptions to energy markets, Maersk is well diversified and stand well positioned to weather these challenges and take advantage of the opportunities that will undoubtedly arise. You may recall the strategic priorities we set for Ocean as well as the other segments back in February. Looking at Ocean first. On Protect, our high asset turn, we have delivered a 6 percentage point overperformance on volume growth versus fleet growth, driven by Asian exports, which is comfortably above market. This has allowed us to increase our asset turn and bring down our unit cost. This follows similar outperformance we saw in the third and fourth quarter of 2025. It is the new baseline now that we have created through Gemini and the one that we must continue to improve on going forward. We also demonstrated strong operational performance by filling our vessels to reach a utilization of 96%, reflecting discipline in fleet deployment. On grow, with an above-market growth of 9%, we delivered a strong quarter and ensure that we leverage the agility created by Gemini to maximum impact. The strong volume performance was delivered against the backdrop of continued downward pressure on rates with rates down 14% year-on-year. This came from contracts rerating at the start of 2026, driven by this industry oversupply. Finally, on the focus on profitability, we have demonstrated a sustained decrease in unit costs, notwithstanding the Middle East conflict, owing to our strong operational performance. This, I'll return shortly to on the next slide. As mentioned, commercial levers are helping us to recover the cost increase from the Middle East conflict. The benefits of Gemini are on track and will incrementally benefit the P&L until the end of quarter 2. From quarter 3, it will become part of the baseline. As mentioned, our strong operational performance is also reflected in the sustained decrease in unit costs driven by our modular network, which I'm particularly pleased with and is due to the hard work of our teams. Since Gemini's inception, we have delivered 7% year-on-year decrease in unit cost at fixed energy. What makes this particularly impressive is that we have sustained this trend in this quarter, even in the wake of the Middle East conflict and the operational disruptions it has brought. Cost leadership remains central across all of our businesses, but especially in ocean with tougher times and more disruption. We will continue to roll out initiatives such as potentially slow steaming or restarting operation through the Red Sea in this regard to ensure that we protect our profit and margins going forward. In Logistics & Services, our priorities in 2026 are twofold: accelerate the margin improvement and improve on our growth performance. So I am very focused on margin expansion and productivity as this will drive better performance this year. On the first priority, we have demonstrated clear improvements in our challenged product, especially airfreight and MinMile with higher year-on-year margins in both. These improvements have come from productivity gains as well as more effective revenue management. Looking at margins more broadly, this quarter marks the eighth consecutive quarter with year-on-year EBIT margin improvement, reflecting the operational progress we have made across the portfolio. This quarter, we improved our EBIT margin by 0.5 percentage points to 4.6%. There is, of course, more to do, and our focus for the rest of the year remains on revenue management and productivity improvements to drive performance. On the second priority of improving growth, we have delivered a revenue growth of 9% overall across the portfolio. While further proof points need to be delivered in the coming quarters to confirm this good performance, we are satisfied with the current momentum. Our job is to grow, but to do so profitably, continuing to make investments where it makes good sense, like we did in Singapore, if we turn to the next slide. Back at mid-March, I had the pleasure of attending the opening of our new modern warehouse in Singapore. World Gateway 2 is a fully automated multi-client distribution centers spanning about 100,000 square meters and strategically located close to major transport infrastructure. The facility marks a major expansion of our contract logistics and e-commerce capabilities in Asia Pacific and represents a doubling of our footprint in Singapore. It is equipped with state-of-the-art robotics and automation technologies. For customers, this will mean faster order fulfillment to end to end customers and shorter lead times as well as improved accuracy generally. The modern technology and scalability will unlock opportunities in new verticals, including luxury to complement the others where we already cover such as lifestyle, FMCG, retail, wellness and technology. We are excited about World Gateway 2 and look forward to delivering value to our contract logistics customers. In terminals, looking at our strategic priorities for the year, in relation to the first one, growth through existing and new location, we demonstrated solid growth of 4% year-on-year. What is equally exciting is that we are the growth plan that we have either announced or executed during this quarter. These investments will allow the business to diversify and increase its portfolio of gateway terminals across the globe while ensuring continued strong value generation. First, we announced the strategic expansion plan to upgrade North Sea terminal in Bremerhaven together with our partners at Eurogate. I'll elaborate on this one shortly on the next slide. We also announced the acquisition of a 13.7% minority stake in Southern Container Terminal in Jeddah, Islamic Port alongside DP World. And further, we executed the incoming transfer of our 49% minority share in the Hateco Haiphong International Container Terminal which is located in an area of crucial importance for Vietnam's growth and for the Asia and transpacific trade. Finally, we completed Phase 2 of the expansion of Lázaro Cárdenas in Mexico with high level of automation, electrification and the use of clean energy sources. We are now proceeding with Phase 3 of the expansion of that terminal. On our other priority, maintain long-term profitability, the quarter generated a very strong return on invested capital of 16%. We do expect the effect of growth investment in greenfield projects to affect the ROIC figure in the coming quarters as invested capital increases ahead of activities during the buildup phase. These are great investments, though, that will secure future growth and deliver strong returns over many decades for our shareholders. The expansion plan of the upgrade to upgrade Bremerhaven is an example of what we do best and comes straight out of our playbook of operational excellence. The EUR 1 billion planned investment together with our partners, Eurogate will significantly upgrade North Sea terminal in Bremerhaven and promise a significant return. As we have recently done in Pier 400 in Los Angeles, we will implement automation to bring down our breakeven level. The learning from Los Angeles means that we expect the implementation and outcome to be even better this time at NTB. In parallel, we will expand NTB's capacity by around 1/3 to 4 million TEUs per annum, which in turn will strengthen the location as a key terminal in the Maersk Ocean network. And I will now hand over to Robert, who will walk you through the detailed financial and segment level performance. Thank you. Robert Erni: Thank you, Vincent. I'd like to take a brief moment to introduce myself as this is my first earnings call with Maersk. My name is Robert Erni, and I started as the Group CFO of Maersk in February of this year. I have 30 years of experience in finance across the global logistics sector, of which about plus 10 years as Group CFO in previous companies. Maersk is a company I've long admired and come to know well from the customer side. I'm very pleased to be part of the team. I look forward to meeting many of you in the days and the weeks ahead. Now let me turn to the results for the quarter. The first quarter was characterized by solid operational execution across the business with strong volume growth. However, this was against a more volatile environment and materially lower earnings in Ocean, driven by deteriorating rates as a result of industry oversupply. We delivered revenue of $13 billion, which was a 2.6% decrease year-on-year. Lower rates were only partly offset by the strong volume growth. The impact from lower freight rates can be seen in our profitability, which declined despite earnings growth in Terminals and Logistics & Services. We delivered EBITDA of $1.8 billion and EBIT of $340 million. This led to a decline in return on invested capital to 3.8%. Free cash flow was negative $874 million in the quarter, reflecting the lower earnings base. Our balance sheet remains strong, and we retain significant financial flexibility. Following the distribution of dividends for the financial year '25 and continuation of the share buyback program, we ended the quarter with $18.4 billion of cash and deposits and a net cash position of $1.3 billion. Let us look at our cash flow generation in Q1. Let me comment on a few of the key developments in the bridge, starting from the left. Our net working capital increased by $913 million in the first quarter as the higher price of bunker drove an increase in the value bunker inventory, while customer receivables also increased. As a result, operating cash flow was $1 billion. Relative to EBITDA, this implies a cash conversion of 59%, down from 102% in the first quarter of last year. This is mainly due to the increase in net working capital, as already explained. Our capital lease installments increased by roughly $400 million over last year to $1.2 billion. The increase is mainly related to installments towards the renewal of the Port Elizabeth Terminal in U.S.A. extension, which was signed in Q2 '25 as well as the exercise of purchase option on some formerly chartered vessels. Gross CapEx remained sequentially stable at $1 billion, but decreased around $400 million year-on-year, reflecting a lower investment level in Ocean. As usual, the majority of gross CapEx related to Ocean investments. After these items and the $231 million proceeds from sale of aircraft, which is included in the other bucket, free cash flow was negative $874 million for the quarter. In addition, we returned $1.3 billion to shareholders through the distribution of dividends for the financial year '25 and the ongoing share buyback. Taking this together with net borrowings and other items, net cash flow for the quarter was negative $874 million. So let us have a closer look at the financial performance of our segments, starting with Ocean. I will start by reiterating the point made by Vincent earlier. The financial impact of the Middle East conflict was immaterial in the first quarter, even as supply chain disruptions led to an increase in both rates and costs towards quarter end. The impact will be more visible in our P&L in the second quarter as we consume our bunker inventory and recognize revenue from containers shipped at higher freight rates from March onwards. Ocean reported revenue of $8.2 billion, down 8.2% from last year. This is driven by the impact from much lower freight rates, partly offset by the substantial volume growth driven by strong Asian exports. The commercial mix was more or less in line with our target with 44% of volumes on longer-term rate products. Operating costs remained broadly stable despite various disruption in the external environment. With the increase in volumes, this means that unit cost at fixed energy was down by 7.1% compared to last year. Profits were slightly lower sequentially with EBITDA of $903 million and net EBIT of negative $192 million. Ocean continues to reap the benefits of the Gemini network. We maintained industry-leading reliability for our customers, and we're seeing sustainable financial benefits from better asset turns and bunker savings. These are helping to cushion the full impact of declining rates. Finally, gross CapEx was $716 million, which is in line with our CapEx guidance. In the EBITDA bridge, you can see how all of these different factors have contributed to the year-on-year development in quarter profitability. The significant rate decline was a dominant factor, driven by lower rates from the supply overhang with a large negative impact of around $1.2 billion. This was only partially offset by stronger volumes. There was a positive impact from the lower price of bunker, which decreased 16% year-on-year to $486 per fuel oil equivalent tonne. Note that this does not reflect the increase in oil price that happened throughout March. Bunker consumption was also down by 5.3%, driven by network efficiencies. Net of the volume effect, we managed to keep both container handling and network costs, excluding bunker price, largely flat year-on-year. There's also a significant revenue recognition element as rates declined sharply between Q4 '24 and Q1 '25, but were stable between Q4 '25 and this past quarter, a pure timing effect. Continuing to our Logistics and Service business. The segment continued to track positively in the first quarter. We are growing and we are growing profitably. Revenue increased by 8.7% year-on-year to $3.8 billion. Growth came from all 3 service models. Revenue was down sequentially following peak season in the later half of '25. This quarter also marks the eighth consecutive quarter of year-on-year EBIT margin improvement with the business delivering EBIT of $173 billion, implying a margin of 4.6%. This represented a 0.5 percentage point increase in EBIT margin compared to the previous year. Let me remind you that from the next quarter, we will be reporting Logistics & Services under a new structure as already advised. And therefore, only briefly on the current service models, which you will be seeing for the last time. You can see the volume growth helped to drive increased revenue from all service models. Profitability-wise, most of the increase came from fulfilled by Maersk through Middle Mile and transported by Maersk through Air. Specifically, Air saw volume increase by 20% compared to last year. We continue to prioritize investments in profitable growth. And whilst CapEx was 30% lower year-on-year, this was only as a result of the phasing of investments. Stepping back, the picture shows that broad-based top line growth is translating into better profitability, particularly in the parts of the portfolio where we have been focusing on operational improvements. Revenue was up around 9%, while EBIT was up 22%, demonstrating good operating leverage and continued improvement. As Vincent says, we are focused on margin expansion and productivity to drive performance. That is our job for the coming quarters. So I round off my financial review of the segments with our terminal business. Through a quarter of geopolitical conflict and supply chain disruptions, our terminal business again demonstrated its resilience and delivered a solid performance. Revenue increased 6.7% year-on-year to $1.3 billion, driven by higher revenue per move and volumes across most regions. The volume growth of 4.3% was largely coming from North America, which experienced growth of 11%. This was due to Gemini, which consolidated its volumes at 2 North American terminals, representing a net gain relative to the former 2M alliance. Revenue per move increased around 3%, driven by improved rates, favorable mix and ForEx, but partly offset by lower storage revenue. Cost per move similarly increased about 4%, mainly reflecting higher depreciation from recent investments, adverse ForEx and investments to extend the life of our cranes and other equipment. This was partly offset by lower SG&A and the benefit from higher volumes. EBITDA reached $488 million with a margin of 37.1%, while EBIT increased by 11% to $436 million, corresponding to a margin of 33.2%. Gross CapEx increased to $171 million, driven by growth investments, including Zwappe in Brazil and Pipavav in India. It should be noted that while return on invested capital on a 12-month basis for the segment increased to 15.7%, capital employed will increase following the recent investments while incremental earnings ramp up. Moving on to the financial guidance. Following the first quarter performance and given what we can see now, our 2026 financial guidance remains unchanged. Assuming global demand remains robust, we continue to expect global container volume growth of 2% to 4% in '26 with Maersk to grow in line with the market. On this basis, we continue to guide for an underlying EBITDA of $4.5 billion to $7 billion, underlying EBIT of negative $1.5 billion to positive $1 billion and free cash flow of negative $3 billion or better. Whilst we maintain our cash flow guidance, we are experienced in higher working capital because of higher bunker costs, which is absorbing additional cash. Our cumulative CapEx guidance also remains unchanged at $10 billion to $11 billion for '25 to '26 and likewise for '26 to '27. The guidance range continues to reflect industry overcapacity from new vessel deliveries as well as different scenarios on the timing of the reopening of the Red Sea and Strait of Hormuz and their consequent impacts. With that, we remain focused on operational execution, cost discipline, capital allocation as we navigate what is still expected to be a volatile year. On that note, we finished the first quarter financial review, and we'll now proceed to the Q&A. Operator, please go $ahead's. Operator: The first question from the phone comes from Cristian Nedelcu with UBS. Cristian Nedelcu: Two, if you allow me. The first one is on the Ocean strategy. There have been some statements from the ZIM Board members a few weeks back noting that Maersk made an offer for the acquisition of ZIM. Having this in mind, could you tell us what is your strategy in Ocean going forward? Are you looking to grow capacity? Would you consider acquiring other Ocean assets going forward? And the second one is on the Ocean EBITDA. Historically, seasonality-wise, volumes are up in Ocean in Q2 versus Q1. You earlier alluded to the fact that you're fully passing through the higher fuel costs. Is there any reason why the Q2 Ocean EBITDA should be lower than what you generated in Q1? Any other moving parts that we should keep in mind? Any color would help. Vincent Clerc: Yes. Thank you for the questions. Our strategy in Ocean is quite simple. We want to deliver the best service to our customers in terms of reliability. We want to have the lowest possible cost, and we intend to grow our volumes in line with the market. Those are the 3 tenets that we have. If we make a deviation to this, such as what we did with ZIM is if we feel that there is something which opportunistically would serve to lower our cost or we can buy assets, which opportunistically would be at a much better price than average because of the current market circumstances, then we look into it. And if suddenly the prices would have to increase to a place where that doesn't make sense and doesn't support our cost leadership, then we get out of the process. So I don't expect us to be active on the M&A front in Ocean. This is not a core tenet of our strategy. But at the same time, we stay alert to what happens. And if there are some -- a few things that opportunistically would advance some of our fleet goals and lower our breakeven cost, then we will look at it because it's aligned with our strategy. On the EBITDA for Q2, I think the only thing that would change -- the 2 small things that to look at is from a volume perspective, you mentioned -- I mean, you're right, in general, volumes are stronger. This time, Chinese New Year was kind of late in March. So the rebound may be a bit less than when Chinese New Year is strong. And then you had some of the disruptions from the Gulf where it started by -- with a few weeks of booking acceptance being actually shut down and then gradually reopened as the situation there, we found ways to bring the cargo. So from a total volume perspective, volumes today are back to their pre-war levels, but there's been a few weeks at the beginning of the conflict where they were a bit lower. From a profitability perspective, I think the real question is exactly at what week the cost start to filter through and the revenue start to filter through. What we know is that we've been able to recover these cost increases. And you can see it, 40% increase on the shipping indexes out of China. It means that we're basically on all the shipments are recovering the full cost increase, and we have similar increases that we have secured in the contracts. Now in the very weeks where this phases in, where the one phases in a bit faster. So if revenue phases in a bit faster than cost, that's very good. If it phases in a bit slower than cost, it's not as good. What is good is that this will quickly be -- it's just a little timing issue at the beginning. So I don't expect major fluctuations in Q2, but I think we -- as Robert mentioned, we have a big range in the guidance, and that is because the situation is extremely volatile and the mood swings around whether we get to a conflict resolution fast or not, they are quite significant from tweet to tweet. Operator: The next question from the phone comes from Muneeba Kayani with Bank of America. Muneeba Kayani: So just following on from the earlier question on 2Q. You've done $1.75 billion in the first quarter of EBITDA. If the second quarter is somewhat similar, we're looking at EUR 3.5 billion, maybe EUR 4 billion of EBITDA in the first half. So can you explain how you've thought about that low end of the guide and kind of what scenario would be needed to reach EUR 4.5 billion for the full year? And then secondly, Vincent, if you could talk a little bit more about what you're seeing in the demand environment. I think you've mentioned that demand has been strong and you've continued to see that. What are your customers saying? And how are you thinking about that volume range turning out for the rest of the year? Vincent Clerc: Yes. Let me start with the second, Muneeba. Basically, I would say, as we stand here today, we see no impact on demand level from the conflict in the Middle East. As I mentioned, our volumes are back to pre-war levels. So we feel pretty good that the first quarter market will be at the upper end of what we have guided with respect to market, maybe even a hair above. And that -- these strong demand levels we see continuing into April and May. So that's the first thing. So for us, I think if you think about this, the range of 2% to 4% in order to get out of that range for the market for the year based on 5 months with that strength, you would need to see a pretty sharp deceleration coming out pretty soon for it to go out of range. So from that perspective, I think there is quite a lot of resilience in the market. Now -- the cost increase is significant and how this will -- how long this will take to get down into inflation or margin absorption for the different parties involved across the energy markets. I think that is very much an open question. So we have not yet seen impact on demand from the higher energy prices. We do foresee though a softer growth in the second half year in anticipation of that. But how much -- we still think it's going to be enough that we stay in the range, but we need also to see how the conflict evolves if the war starts again or if we really move towards peace, there is a lot of different dynamics there. So that's, I think, the best color I can give on the demand level. With respect to the EBITDA level. So I think we don't guide specifically on the quarter. So I don't want to be too -- get into the math of it. But what we see is continued strong demand, which means whether we are in terminal or in logistics, we should be able to continue the normal seasonality that we have there and in ocean as well. As I mentioned, the one thing that could impact a little bit is the phasing in of the revenue upsides and the phasing in of the cost downsides as a result of the hostilities and how they exactly net out in the quarter, which is too early to comment on. But I feel very proud of the speed at which we have been able to pass these cost increases to the customers. And therefore, I don't think it's going to be a huge impact, but I have yet to see the numbers exactly on how that goes and how this is taken through revenue recognition and cost recognition and so on because as Robert mentioned, our working capital has increased as the inventory -- the cost of holding the inventory of fuel has increased significantly. So we'll see how quickly that phases through on the P&L. Muneeba Kayani: So how do you get to the low end of your guide given you've been happy with the speed so far? I think what you need to remember is there is -- we have 44% of our business that is in contract where we have secured coverage for this cost increase. And we have 56% of our business, which is on spot or monthly rate for which we have secured it through the spot market, as you can see in the freight exchanges, but where this is a weekly battle to keep it there. So I think our concern would be a softening of the demand environment, insufficient capacity management across the industry, which leads to an erosion of the recovery of these costs on the short-term market, which could -- depending on how much you think it will erode, could quickly get you into a not so pleasant place from an EBITDA level in the second half year. Operator: The next question from the phone comes from James Hollins with BNP Paribas. James Hollins: So start off with the Logistics division. Clearly, you've shown 50 bps of margin growth year-on-year. Perhaps you run us through what more you're looking to do there on margin expansion, where you think maybe you can get to what projects you're working on? I think you noted margin growth was there in Middle Mile, where else we can see progress coming from there? And the second one was that the old favorite of the Red Sea. Clearly, we've all seen headlines around the data showing some of your competitors going back through the Red Sea. I was just wondering if you could update us on your thought process there? Is it potentially sooner rather than later? Do we absolutely need to see an end of the conflict on the uranium side? What do you need to see to start thinking about going back to clearly you had started? Vincent Clerc: Yes. The Red Sea, we have a review ongoing right now where we're assessing given the situation between the U.S. and Iran, whether we feel that we should also restart the return of some of our services through the Red Sea. There's no doubt that we have a bit of a different threshold than especially some of the competitors that are going through the Bab-el-Mandeb today because that's the same that have had issues in the Strait of Hormuz and have had either people being detained or people getting injured because they took some different chances than we did. So I think we make sure we have a very independent and very cautious approach because we clearly take the safety of our colleagues as our first priority. That being said, there has been no attack in the Red Sea for the entire year so far. And for us, the one limiting factor is the limitation of availability of either escorts or monitoring assets from different European U.S. or other navies to make sure that the crossing is safe. That's what we're working through right now. But it is clearly a topic for us as well to see, and that could free tonnage that we could reinvest into slow steaming opportunities for the services that cannot return immediately because at these bunker prices, that would be a good way for us to bring our cost picture down. On Logistics & Services, I think we're going to continue on the margin expansion. Our goal is still to generate a margin that is above 6% on the portfolio. And I think we'll be able to provide the next quarter as we get through the new breakout on products, a bit more color on what we expect the different areas to deliver. But I think for now, 8 quarters in a row of expansion, we don't expect the theory to end now. We certainly want to continue it. Airfreight, ground freight, contract logistics continue to be the main areas where we're working on. It's reduction of white space in contract logistics. It is continuing the margin expansion and productivity drives in air freight, and it is more revenue management and growth and productivity in ground freight. Those are the levers that we're working on. Operator: The next question comes from Alexia Dogani with JPMorgan. Alexia Dogani: Right. I have 3. If we start with the second quarter, I think kind of can you explain to us a little bit the bunker fuel adjustment lag for the 44% you said is on contract? Because if I understanding correctly, the bunker adjustment factor will really reprice in Q3 rather than Q2. And in relation to that, Vincent, you mentioned about EUR 1.5 billion extra costs per quarter. What do you include in there? Because it appears quite high if you take into account kind of even the peak of the bunker price. That's my first question. Then secondly, can you discuss a little bit about the order book to fleet ratio? I mean this keeps building and it's approaching almost 40%. And deliveries are accelerating in '27 and '28. So clearly, even without capacity management, we're looking at very steep increases even without the Red Sea return. How do you actually see the outlook when you say today, even in the second half, we could see a not so pleasant place for EBITDA? And then finally, do you have any thoughts on Amazon Supply Chain services? Clearly, the contract logistics part of Maersk has not been performing. I don't know if it's still losing money. But if there is an additional capacity entering the consumer space in the U.S. does make your turnaround even more challenging in that sector? Vincent Clerc: Okay. Thank you, Alexia. So the bunker fuel adjustment factor, you're right. market -- normal market practice is that it is adjusted quarterly. In this case, here, we have implemented surcharges and in some cases, changes in the bunker formula so that we can actually start recover immediately simply because of the size of the price hike, it was impossible for us to just shoulder it for a quarter. And that's what we'll be talking about more in 3 months when we meet for the second quarter, but we have been able to basically move forward the recovery of costs so that we match cost increase and revenue increase to the best of the abilities that we have. So that's also similar to some of the questions we had before. So that's the first one. The -- what is important to realize on the cost is we have actually 3 buckets of cost that we're faced with to get up to the EUR 1.5 billion. The first one is the fact that actually bunker cost has increased more than oil price. If you look at it, not all products, not all oil-derived products have increased by the same and actually, bunker has increased more than the average oil price. The second thing is that you have dislocations in the market where the premiums that we pay today over the WTI or the Rotterdam index are higher in many ports than what they are. So what you would normally accept to be your average given where you bunker in the world, that average has been further increased by these locations. And then the other thing is that we have had to take on more cost, we have had to move -- physically move bunker from North America and Europe into Africa, Middle East and Far East in order to secure supply where we need the supply. This comes at a cost. And as well, and it's very high cost because the tanker market has exploded. And we have also a time charter market that has increased significantly as a result of this. So we see significant cost increase out of all of these factors, the biggest one being obviously just the nominal cost increase on the price per ton. Now of course, it depends very much on the price of oil that day. So it has been swinging a lot between $90 and $110. If it's $90, it's going to be a bit less than the 1.5 -- it's going to be a bit less than the $1.5 billion, but still well in excess of $1 billion. If this was to go to $120 or something, then that price could even -- that price tag could even increase. I'll take the order book last, if that's okay, and I'll just go to Amazon SCS. I think the expansion of the Amazon offering is a logical continuation of efforts they have made to build delivery networks in the U.S. domestic market across both ground freight, airfreight and last mile. So Amazon is a great partner of ours. We do a lot of business together. For the most part, I think we're going -- we don't see that at all as being threatening to what we're doing for different reasons. We are active much more on the international scene where they are active much more on the U.S. domestic scene. We are not so active in the express and last-mile delivery compared to what they are. And we -- a lot of the customers that we have are actually customers that price data sovereignty and are extremely cautious in committing data to Amazon systems who would be able to both train their systems further and also learn a lot about how these customers' supply chain and demand and so on works out, which a lot of them have serious quants about. So we see certainly that this is going to be something that becomes a factor in the -- especially the U.S. domestic logistics market in the years to come, for sure. But that we feel that we have sufficient differentiation with Amazon that we don't really see this as being a threat for us at this stage. Finally, on the order book, the order book is in -- as far as I can see, I mean, I would wish that it was smaller, Alex. That's pretty clear. I think that we see that there is a capacity overhang today in May of about 1 million, 1.5 million TEUs. And there was about 2 million TEUs that are basically used to serve the longer routes around the coast of Africa for the service affected that cannot sell to the Red Sea. So it's about 3.5 million TEUs overall that is the capacity overhang, the total capacity overhang to a normalized trade routes today. And the deliveries are okay this year, but they are picking up significantly next year, and that's going to put further pressure on the overhang that we see. My theory is still that it is of a size where if people are disciplined, it's manageable. But we need to see that discipline come into effect. And so far, we're getting disruptions upon disruptions, and that delays actually the need for people to take this on. The higher energy costs are going to trigger a whole new wave of so steaming, I believe. I mean, I can -- we're looking at it ourselves and the cost benefit is quite compelling. So I think that will certainly demand -- high energy costs will demand more ships to cope with -- effectively with the demand. But if we don't pick up scrapping and actually retiring some of the ships that have not been retired over the last 7 years, this is going to be extremely bumpy. But I think that what you can see with this crisis in how quickly and rapidly costs are being recouped there is -- I still have -- there are reasons for optimism that the conduct in the industry is different despite the fact that the CapEx conduct is not very encouraging, conduct on the ground on the P&L is much better than what we have seen in the previous years, and we'll have to see this play out even more in '27 and '28 for sure. Alexia Dogani: And sorry, if I just ask a very quick follow-up. Obviously, we've now had the second quarter of EBIT losses in Ocean. And in the past, you have talked about this on-the-ground discipline that the industry won't allow too many quarters of losses. So we're now in the second quarter. What did you mean then by saying not so pleasant place on EBITDA for the second half? Because I think that's something that the market doesn't want to understand? Like why would the EBITDA not be less in the second half? Vincent Clerc: I think the risk that you have on EBITDA is actually temporary pressure on it from -- the worst that happened to us is if demand softens slowly because before people act on capacity, they first start to use the pricing lever for a while to see if it's -- if that's going to solve the problem for them. If demand was to soften rapidly, just like we can see here, when the cost increase rapidly to get them recovered is good, and we can do it. When cost increases slowly, then it's much more difficult because the you don't have the same urgency. So I think if we saw a gradual softening of demand, you would see a period where people -- or you could see a period where people use pricing levers for a while to try to shore up their utilization. And until you go to an EBITDA-neutral freight rates, that might be tempting until then they start to switch to more capacity-driven tools. That's the concern that -- I don't think it's necessarily likely. But we're trying to have a range that encompasses both the most concerning and the most optimistic scenarios with what we know today. Again, there's a lot of things that have happened since we talked 3 months ago that may also change that. But with what we know today, we feel that the range that we have covers some of the worst scenario we can think of and some of the better scenarios we can think of. Operator: The next question from the phone comes from Lars Heindorff with Nordea. Lars Heindorff: The first one is a follow-up on the slow steaming, Vincent, you mentioned that. I mean I don't know if you can quantify -- I think the average speed around is maybe slightly below 15 knots. I mean how much further down can it go? And what kind of impact will that have on supply? What -- how much can you actually tie up in terms of slowing down? And then the second part is on the savings from the slow steaming. And then a question regarding the costs. There is an other cost item of almost USD 250 million in the first quarter in Ocean. You said that you've been moving -- typically been moving bunker around. Is that related to that? And is that something that you expect to continue to do into the second quarter? Vincent Clerc: Yes. Thank you, Lars. On slow steaming, I think the global networks today, at least on the long haul, they are sailing probably in 16, 17 knots area. And it would be quite -- it would be economical to bring the vessel speed down to about 14, 14.5, 15 knots depending on the service and the route and how you can secure berth windows and so on in the ports. at the current price for bunker is actually it's quite a positive thing. The other thing that would be extremely positive from a fuel cost perspective is actually to reopen the Red Sea, as I think one of the questions previously I was alluding to because when you're sailing from India to the Mediterranean, it's a lot -- you're going to burn a lot less fuel by going through the Red Sea than you will -- if you have to go the long route as we do today. So those are the 2 things that we certainly are looking at. And it depends on the industry. It's pretty hard to assume exactly what people are going to do. I don't know. I only know what we're looking at. But if people were to do something similar to what we were to do, you could absorb between 1 million and 1.5 million TEUs in slow steaming effectively by reducing your cost in an economically positive way. So that's about the order of magnitude that there would be for me. And then on the other costs, let me -- let Robert give you an answer. Robert Erni: Yes. You might know that we obviously, like many others, we are trying to hedge some of the bunker costs. So this is, let's say, an unrealized loss on derivatives that we had to take according to the accounting standards. Again, it's unrealized. We'll need to see how this evolves, but that is the additional cost that we have seen. Lars Heindorff: And just, Robert, just on that one, which means that the physical movement of bunkers from North America to Asia, where the cost of that? It sounds terribly expensive. And as Vincent mentioned, DKK 1.5 billion on a quarterly basis. I mean, is that in network cost? Where is that showing up? Operator: We will move to the next question. The next question from the phone comes from Arthur Trans Citi. Arthur Truslove: The first question I had was just around the Red Sea reopening. So if you imagine a scenario in which the hostility is ended tomorrow, what would be the earliest point that you could realistically imagine a full industry reentry to the Red Sea? Second question, just following up on the previous one. Are you able to just articulate how much of the [indiscernible] that you use is hedged? And then final one, if I may. Obviously, consensus EBITDA for the full year is towards the upper end of the range. It sounds like you are talking to a few uncertainties in H2 and potentially around timing even in Q2. Are you comfortable with consensus near the top of the range? Or would you rather it was somewhere else within that range? Vincent Clerc: Yes. So I think first on the guidance, I mean, I don't guide on the guidance. We provide a guidance, and I think that's I'm not going to be able to voice an opinion about where in the guidance is we should be. On the bunker, we don't have -- we don't hedge bunker. So the only thing that we have is how much we have on hand. And -- but we do not do speculative hedging of bunker. And then finally, on the Red Sea, it's really hard for me to talk to when -- how fast this could happen. I mean, as I mentioned, we are looking at it ourselves. It would have to be gradual because at least today, we would not -- we would have to go with either escort or monitoring, and there is limited capacity for that. So there is only so many services that we could send through. And I would think that others would have the same. And for it to be a full return, you would need to feel comfortable with the safety and security assessment that you can sell without any monitoring. And I have no idea given the volatility of the situation between U.S. and Iran for when that is going to be. It could be very soon or it could take a while. Operator: Ladies and gentlemen, thank you. That was the last question. I would now like to turn the conference back over to Vincent Clerc for any closing remarks. Vincent Clerc: Thank you again for joining us today. To summarize, we have started 2026 with a quarter marked by strong volumes across all segments and equally important with is the strong cost containment that we have demonstrated, especially in Ocean, where we have seen a downward trend in unit cost since the inception of Gemini. Oversupply continues to affect container shipping, extend exerting downward pressure on rates that are visible in this quarter. While demand remains strong, this continued oversupply makes the ocean market environment very volatile. Nevertheless, as far as the Middle East conflict is concerned, its financial impact in the first quarter was limited, and we expect it to be managed without material financial impact in the coming quarters. Ultimately, notwithstanding the ongoing disruptions brought about by the conflict, the strength and the resilience of our business means that we are in a position to maintain full year guidance for 2026. Thank you for your attention, and we look forward to seeing many of you on the upcoming roadshows and at conferences. Thank you very much, and see you soon.
Operator: Welcome to Lesaka Technologies' results webcast for the third quarter of fiscal 2026. As a reminder, this webcast is being recorded. Management will address any questions you have at the end of the presentation. [Operator Instructions] Our press release and investor presentation are available on our Investor Relations website at ir.lesakatech.com. During this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our press release, presentation and Form 10-Q available on our website. As a domestic filer in the United States, we report results in U.S. dollars under U.S. GAAP. However, it is important to note that our operational currency is South African rand, and as such, we analyze our performance in South African rand, which is non-GAAP. This assists investors in understanding the underlying trends in our business. I will now turn the webcast over to Ali. Ali Zaynalabidin Mazanderani: Good morning and good afternoon. Thank you for joining us for Lesaka's Q3 results presentation. I'm pleased to report Lesaka has delivered a strong set of results for Q3 FY 2026. It's also worth noting that this is substantially on a like-for-like basis. Net revenue was up 16% to ZAR 1.58 billion, short of our guidance of ZAR 1.65 billion due to slightly softer-than-expected performance in Merchant, as the division focused on the integration of the business units and closures of noncore business lines. We remain confident in the profile and trajectory of the Merchant division, as Lincoln will talk you through in more detail shortly. From a profitability perspective, group adjusted EBITDA came in at ZAR 337 million, at the top end of our guidance and a 45% increase over last year. Adjusted earnings was up 246% from ZAR 43 million to ZAR 148 million. Similarly, adjusted earnings per share increased from ZAR 0.52 to ZAR 1.80 for the quarter. Net debt to group adjusted EBITDA of 2.1x is a significant improvement over last year and is close to our target of 2x. Dan will unpack the divisional numbers in more detail shortly. From the last quarter, we have simplified how we present our business, emphasizing its core structural revenue drivers. We present a single total view for active consumers and active merchants and aggregated ARPU for each. Consumer ARPU is a function of our transactional bank account and the penetration of our lending and insurance products within our account base, while Merchant ARPU is a function of our 5 products: acquiring, Alternative Digital Products (ADP), lending, software and cash. Over time, we may continue to further refine our definitions of ARPU to better reflect the business strategy. We have 750 Enterprise clients. So rather than representing the drivers in Enterprise on an ARPU basis, we do so on a take rate and total process volume for ADP and utilities. These 6 variables across the group together explain more than 90% of our net revenue. We will use this framework as the key drivers of the net revenue of our businesses each quarter to thread the operational performance of each division, along with the financial results. In full year results, we will provide more granular information on the underlying drivers of each of our core products by division. For now, I will hand you over to Dan to take you through our financial performance in more detail. Daniel Smith: Thank you, Ali. Good morning and good afternoon to everyone joining us today. Before turning to our operating and financial performance and the components of our business, I would like to focus on the excellent progress we've made this quarter in addressing some of our legacy and noncore activities, as well as creating One Lesaka. These initiatives have resulted in a few nonrecurring items that have had a mixed impact on our results this quarter. In our Merchant division, we made the decision to exit the ATM business, reflecting our disciplined focus on profitability and capital allocation. The business was structurally loss-making and immaterial in scale. Its wind down removes an ongoing group adjusted EBITDA drag and allows us to redeploy capital towards higher-return, digitally-led growth opportunities as part of our broader portfolio optimization. This resulted in a total impairment charge of approximately ZAR 27 million, split between our impairment entries and once-off items. Also within the Merchant division, Switchpay, a legacy buy now, pay later product, has been sunset, resulting in an impairment charge of ZAR 6.5 million recognized in the quarter. At a group level, we focused on the collection of monies owed to us from a legacy investment and reversed the receivables allowance of ZAR 25 million. Similarly, we also deregistered a legacy offshore entity, being Masterpayment, resulting in a gain of ZAR 14 million. As highlighted last quarter, we are progressing with our major rebrand to One Lesaka. The rebrand has been launched with an activation campaign, with the external customer rollout planned over the coming months. Rebrand-related costs of ZAR 16 million were incurred during the quarter, and we maintain our guided total rebrand costs in the range of ZAR 50 million to ZAR 75 million. Given our transformation as One Lesaka and our office consolidation, we also recognized an impairment charge of ZAR 26 million on lease premises due to lower utilization rates. Finally, the accelerated write-down of our intangible assets relating to our legacy brands has tapered off with the purchase price amortization of intangible assets now at ZAR 98 million, which reflects a more normalized run rate. Looking at our divisional performance, Lesaka delivered nearly ZAR 1.6 billion net revenue, a growth of 16% for the quarter. Merchant net revenue declined 4% to ZAR 751 million, as previously explained by Ali. We expect Merchant net revenue to be flat next quarter. However, as you will see on the next slide, segment adjusted EBITDA for Merchant increased this quarter. In contrast, the Consumer division delivered another record performance with net revenue increasing 41% to ZAR 627 million, an all-time quarterly high. The Enterprise division also performed strongly, delivering net revenue growth of 51% to ZAR 220 million. This growth includes 3 months of contribution from Recharger compared to 1 month in the prior period. However, it also reflects meaningful organic growth, as the division's refreshed strategy and operating structure continue to gain traction in the channels they serve. At a group level, adjusted EBITDA of ZAR 337 million was an all-time quarterly high for Lesaka and represents a 45% year-on-year increase. The Merchant division recorded a 3% increase to ZAR 151 million. We are pleased to see evidence of the efficiencies implemented over the past 6 months, translating to an increased margin to above 20%. Our medium-term expectations remain that the Merchant margin will continue to increase to above 30%. Consumer segment adjusted EBITDA increased by 81% to a record ZAR 213 million, reflecting strong operating leverage and disciplined execution. Last quarter, we saw over ZAR 1 billion of origination volume for our lending products, and we are starting to see the positive impact flow through to our financial performance. The Enterprise division delivered a segment adjusted EBITDA contribution of ZAR 35 million as the business scales. Group costs were ZAR 62 million, slightly elevated due to an investment made in improving finance, risk and compliance frameworks and strategic hires at a head office level. This is a more accurate reflection of our group costs run rate going forward. Adjusted earnings per share continued its strong upward trajectory, increasing 247% to ZAR 1.80 per share, underscoring our ability to effectively integrate and extract synergies from our inorganic growth activity and our ability to scale organically once the integration and transformation phases are complete. Our strong cash generation continued this quarter with cash generated from business operations of ZAR 365 million, closely tracking our group adjusted EBITDA. Given the short duration of our credit cycle and seasonality effects, we only required an additional ZAR 10 million of funding for our lending books, reflecting the efficiency and scale of our operations. We paid ZAR 98 million in cash interest. And while not presented on the slide but reflected in the annexes to this presentation is a release of ZAR 320 million of seasonal working capital compared to the prior quarter. In aggregate, the group generated a pleasing ZAR 608 million in operating cash flow. We continue to manage our CapEx carefully with ZAR 76 million of investment this quarter. Our CapEx was relatively evenly split between cash vaults, POS devices, and software and platform development. The strong earnings growth and cash generation, combined with prudent capital allocation, resulted in our net debt to group adjusted EBITDA improving to 2.1x this quarter and bringing us closer to our medium-term target of 2x. In recent quarters, the benefits of the platform we are building have become increasingly evident. Continued growth across our distribution footprint, combined with ongoing product innovation, has further improved operating leverage with operating margin rising from 17.2% a year ago to 21.4% this quarter. As the transformation of our Merchant division progresses and following the completion of the Bank Zero acquisition, we continue to expect operating margins to trend towards over 30% over the medium term at a group level. A similar positive trajectory is evident in our capital investment profile. Consistent with prior guidance, we expect CapEx to remain below ZAR 400 million per annum. On the last 12 months basis, CapEx as a percentage of EBITDA has reduced from approximately 46% a year ago to 29% this quarter. Together, these trends highlight the strengthening fundamentals of the business as we continue to evolve and scale our platform. Thank you. I will now hand over to Lincoln to take you through our divisional performance. Lincoln Mali: Thank you, Dan. Good morning and afternoon, everyone. As Dan has alluded to, we're in the middle of building an integrated merchant business from 5 historical components. We are modernizing our core systems into a unified backbone, enabling our servicing staff to provide a more efficient and effective customer service. We are centralizing data, creating a 360-degree view of each merchant, and implementing AI to strengthen our risk capabilities and reduce customer friction. This enables better credit decisions and reduce fraud. Furthermore, we are leveraging these assets to drive smarter customer engagement. For an example, AI-enabled WhatsApp support and targeted cross-sell engines will simultaneously enhance the client experience, and we believe will drive higher ARPU. At an overall level, active merchants increased by 6% year-on-year. Looking at the mix of our active merchants, our community merchants grew 8% year-on-year. Last year, we restructured our community merchant sales force to allow for a more targeted distribution strategy, and we are pleased to see our community merchant portfolio increase. The number of active corporate merchants fell 4% year-on-year, primarily due to increased competition in monoline products, for an example, merchant acquiring. At the aggregate, Merchant ARPU was 7% lower than last year and driven primarily by an increase in the number of community merchants as a percentage of the total. Community merchants are growing faster than corporate merchants, and this has a predictable impact on blended economics as they generate materially lower ARPU than corporate merchants, as shown in the slide. As the community segment becomes a larger proportion of the overall base, aggregate Merchant ARPU naturally decreases even while engagement levels, transaction volumes and profitability increase. Secondly, as mentioned last quarter, the community ARPU reduction was impacted by a network-driven reduction in airtime commission rates. Since that reset, ARPU has been relatively stable quarter-on-quarter. Within the corporate space, we saw flat performance in ARPU. Our current aggregation of ARPU includes network fees that is [ interchange ] and from our corporate segment, but excludes network fees from our community ARPU. We expect to review the definition of corporate ARPU in the new fiscal year to align the treatment of network fees to community ARPU. Product penetration in Merchant was flat at 46% for 2 or more products. The merchants with 3 or more products reduced to 7%. The primary driver for this decline is due to the increase in our community merchant base who typically engage with ADP and acquiring. The total number of merchants with 3 or more products declined as we refined our lending criteria to the community merchant base. While penetration rates for multiproduct accounts have shifted over the period, we are in the early stages of our ecosystem journey. Our current performance is intentionally driven by a land and expand strategy. As seen on the left-hand chart, we have a broad base of merchants through hero products and a set of highly valued ancillary products that tie merchants into the Lesaka ecosystem. The core of our thesis remains unchanged. As product density increases, so does the value of the merchant. Within our community merchants, we can see that moving from a stand-alone solution to a [ C+ ] product proposition drives a 94% uplift in ARPU. Increasing our product penetration in community relies on Merchant's strategy to expand lending and cash to our existing community base. In the corporate segment, Lesaka experienced a 60% uplift in ARPU when our customers shift from 1 product to 2 product. We currently have no corporate clients with 3 or more products. Our industry-specific strategy in Merchant is focused on increasing our product penetration in Merchant. For example, in the restaurant and hospitality segment, we're adapting our product and sales force to be able to serve our clients with a combination of software, acquiring, lending and cash. In the fuel industry, we're developing our acquiring and software capabilities to augment our current cash and lending offerings. We believe this ecosystem product approach, coupled by a single distribution and servicing capability, will grow percentage of corporate merchants with 3 or more products in the medium term. Looking at our Merchant volumes for the quarter. Card TPV increased by 7% to ZAR 10.6 billion, with active acquiring merchants up 9% to 74,000. On the cash side, volume grew 2% with a slight increase in wallet for the quarter of 4,900. Within the base, as with previous quarters, we have seen net reduction in the corporate merchant base and good growth in the community base. The growth of our cash offering in the community merchant space has supported the strong growth in the TPV of our Alternative Digital Products, or ADP for short. As community merchants immediately digitize their cash taking in their own wallets or in the nearby merchants, they have more value in their wallets to use for airtime, electricity and voucher purchases for resale and supplier payments. ADP TPV is up 30%, reflecting traction for our offering. Following the margin compression seen within our prepaid solutions in financial year 2025, particularly airtime, we are pleased to see a normalization and return to growth in these volumes with 11% increase in prepaid solution products and a 47% increase in supplier-enabled payments. Turning to Merchant lending. Originations in quarter 3 were 22% lower year-on-year at ZAR 227 million. The comparative period in quarter 3 of financial year 2025 included unusually high spike in originations from our corporate channel, driven by fuel-related lending push and the rollout of preapproved lending offers late in the year 2024, which then originated in the quarter 3 financial year 2025. While January and February were muted, we did experience a very strong March, much of which was driven by demand in the fuel sector ahead of anticipated price increases. Our lending portfolio closed 4% up at ZAR 427 million. We are comfortable with this lending activity, and it reflects a deliberate decision to be conservative in merchant credit, whilst we refine our Merchant lending offering as part of our broader Merchant ecosystem. This is not about a lack of opportunity. It's about exercising capital discipline and protecting the long-term quality of the book. Software, particularly through our Unity platform in the hospitality space, is central to our long-term Merchant strategy. Unity is not about site growth alone. It is a cloud-native platform that enables the Merchant ecosystem and sets the platform for multiproduct penetration at scale. Approximately 50% of all Unity clients are fully integrated into our acquiring proposition with 80% of all new software clients on board utilizing Unity. In conclusion, we are laying the foundation for a stronger, scalable business through platform consolidation, data and AI investment, and integrated product strategy. Consumer had another excellent quarter with an 81% increase in segment adjusted EBITDA. As expected, our KPIs have all shown impressive increases with active consumers up 19%, ARPU also up 19% and cross-sell success continuing its upward trend. Active consumers now stand at over 2 million with a permanent grant recipients of 1.7 million, representing a 14.6% market share. Looking forward, our medium- to long-term expectation is that we could reach a 25% market share, based on our current growth trajectory and distribution plan. Encouragingly, in quarter 3, only 3 players showed growth during the quarter, of which Lesaka grew the largest. Net additions in quarter 3 were almost 26,000, more than double our nearest competitor, demonstrating the strong brand and product fit we have developed in this segment. Importantly, growth is not dependent on competitor dislocation alone. There are approximately 150,000 new grant entrants every month, and our expanding distribution footprint positions us strongly to capture a disproportionate share of these new customers. By June, we expect to have increased our footprint to a further 30 community sites and a further 15 new branches. This expansion materially strengthens our access to both urban and rural grant recipients and support sustainable organic growth. Our ARPU has increased by 19% year-on-year to ZAR 99 per month, driven by continued engagement and cross-sell success. At the end of quarter 3, 20% of our active consumer base was utilizing our full product suite, up from 17% last year, with 50% of our base having 2 or more products. This consistent increase in our product penetration rate is a clear demonstration of the power of our value proposition and superior distribution capabilities within the segment and is a clear indication of our ability to continue to grow. Our lending product has been the key driver of our Consumer division's financial performance. In the third quarter, we originated approximately ZAR 856 million, representing a 33% year-on-year increase, with the outstanding book growing 73% to around ZAR 1.4 billion. This momentum reflects the successful rollout of our 9 months loan product, which now represents nearly 50% of all new lending originations. We expect this to continue increasing, supporting growth in both book size and average tenure. We are also evaluating a modest increase in maximum loan values and repayment terms to meet customer demand, while maintaining our disciplined risk framework. We have a deep understanding of our lending base with a high proportion of originations to repeat and long tenured customers. This supports effective credit scoring, provisioning and product development. The portfolio continues to perform within normal parameters, and our 6.5% provision level remains above the observed risk experience with any refinement to be communicated transparently at the end of the year. Turning to our funeral and pension plan insurance business. We delivered another very strong quarter. Gross premiums written grew by 38% to ZAR 146 million, while in-force policies increased by 34% to 704,000. We have recently started rolling out insurance policy sales to non-Lesaka consumers within Lesaka ecosystem. This represents a significant opportunity with an estimated 3 million grant recipients currently uninsured. We are leveraging our existing distribution network and sales force to access this market efficiently. While the initiative is not yet financially material, it is strategically important and directly aligned with our purpose of extending affordable financial protection to underserved communities. Our insurance product is a key driver for compounding our product penetration in the short to medium term. As we increase our attachment rates of insurance at the time of client onboarding and we increase our stand-alone insurance sales, we do expect the collection rate to moderate to circa 90% over time. Importantly, we believe this will still result in a net positive gross written premiums for Lesaka. We believe the overall quality of our insurance book will continue to remain high and compare favorably against the wider insurance market. The Consumer division continues to demonstrate strong momentum with resilient growth drivers, effective last-mile distribution and clear product relevance. By leveraging our technology and distribution network in tandem, we are confident that Consumer will remain a core engine of value creation for Lesaka, delivering both financial performance and meaningful impact for the communities we serve. I will now move on to the performance of our Enterprise division. The Enterprise division continued to make solid progress this quarter, contributing ZAR 35 million or about 10% to group adjusted EBITDA. Strategic progress is evident in ADP TPV for the quarter, which increased 19% year-on-year. Bill payments were up 12.5% to ZAR 9 billion. And prepaid solutions grew by more than 50% to ZAR 2.8 billion as we continue to expand our collector and receiver ecosystem. As highlighted in previous quarters, we've also partnered with several key players, increasing our distribution and collection footprint. We are now seeing the growth from our channel partners, driven by targeted marketing campaigns. Our ADP take rate improved by 22% to 1.3%. As a reminder, we earn a fixed fee per bill payment transaction. However, we earn a commission on TPV for facilitating buying and selling of prepaid solutions. As the business scales the prepaid solution offering, we will see a product blend leaning towards an ad valorem revenue model. In Utilities, TPV increased 18% to ZAR 477 million on a like-for-like basis with active meters rising to 368,000. Excitingly, in quarter 4, we will launch an electricity advance product to our utilities customers. This product will allow Lesaka utilities customers with active meters to load electricity when they are short of funds by an interest-free facility. The business model is simple as we will charge a flat fee for the service and recover the advance from future purchases. We look forward to sharing more information as the product rolls out through the base. Thank you. That concludes our operational review. I will hand back to Ali now for the outlook. Ali Zaynalabidin Mazanderani: Thank you, Lincoln. Innovation is at the heart of who we are. We don't just want to win the game. We want to change the game. So we thought to provide examples of 3 strategic initiatives that demonstrate that across our businesses and which set the foundation for our continued competitive advantage. Firstly, we believe payment rails globally will increasingly move to blockchain as a superior underpin from a resilience, availability and cost of settlement perspective. We also believe that in the South African context, a ZAR-denominated stablecoin will form the foundation of this. As a founding partner of ZARU, we intend to pioneer use cases across our ecosystem to allow consumers and merchants to settle securely and at low cost, eliminating the friction of traditional banking hours and fees. We will provide more updates on what we are doing and what this should mean at our end-of-year investor presentation. Secondly, the scarcity of credit, provided in a frictionless, fair and sustainable manner across the continent is a major opportunity for us. We choose to focus on making that credit available to underserviced consumers and merchants where traditional banks don't have the capability, competency or desire to compete. One focus for us in this respect is in short-term credit advances against utility products like airtime, data and electricity. You will see increased activity from us in this space, leveraging either touch points to our existing banking customers through an app or USSD channels or utility customers in homes where we provide the electricity meter. In both instances, we would expect to have an advantage in repayments vis-a-vis others. Thirdly, the explosion in AI tools offers a wonderful opportunity for a pioneering technology company with digital enablement and efficiency of operations at the heart of our values and competitive advantage to further this advantage relative to traditional incumbents with legacy platforms. We are actively embedding AI tools across our group from engineering teams' code development to new product launches, to fraud management and operational efficiencies that allow us to better provide services more securely and more sustainably, complementing our human engagements. Again, we will be providing in due course more details on some specific initiatives and the impact thereof. Turning to guidance. We are tightening our guidance forecasts for the rest of this financial year. We are updating our net revenue guidance to ZAR 6.2 billion to ZAR 6.5 billion for FY '26, the midpoint of which implies 20% year-on-year growth. We are on track to deliver our group adjusted EBITDA guidance for the year as we did for this quarter, but also tightening the guidance range to ZAR 1.25 billion to ZAR 1.35 billion, implying we expect to come in at the bottom end of the previous range. The midpoint of our updated group adjusted EBITDA guidance implies 43% year-on-year growth for FY '26. We are also updating our adjusted earnings per share guidance for the year. We previously provided guidance of at least ZAR 4.60 per share, and we are now raising this to a range of ZAR 5.50 to ZAR 6.00 per share, the midpoint of which implies a growth greater than 150% on a year-on-year basis. We will increasingly reference our adjusted EPS as the primary measure of our profitability. We are also reaffirming from a net income perspective, without exclusions, we expect to be profitable for FY '26, the first year this will be the case since the creation of Lesaka 4 years ago in May 2022. In our end-of-year presentation in September, we will be providing our guidance for FY '27 and also our medium-term outlook for the next 3 years. Given that we expect the Bank Zero acquisition to be completed in the coming months, that being so, we will be providing guidance for FY '27 and the medium-term outlook inclusive of Bank Zero. Thank you for attending our earnings presentation. We will now address any questions you have for the team. Operator: Chorus Call, please, can you open the line for Ross Krige from Investec? Ross Krige: Three questions for me. Just firstly, on the Consumer, just with regard to the very strong margin accretion that we're seeing consistently over time and the jump up in Q3, if I look ahead at some of the opportunities there, so you're talking about the volume growth prospects, the size of the market that you're addressing there, and you've talked about the cross-selling prospects and you've executed on that. And then, you've alluded to that comment on risk performance being better than what your provisioning suggests, which you'll give more detail on. But if I put all of that together and think about operating leverage ahead, am I correct in saying that, that points to significantly higher EBITDA margins even off this base? That's the first question. I can carry on, if you like. Ali Zaynalabidin Mazanderani: We can address that one, if it's helpful, Ross, first. I mean, the short answer is, we do see the ability to continue to expand those margins. I mean, year-on-year, those margins have gone from 26% to 34% in the Consumer business. And yes, we do believe there's more room for growth as we scale that platform. Ross Krige: Great. Okay. Moving on to Merchants. So just 2 parts to this question. One on the ARPU dynamics. So Lincoln explained a lot of this. But maybe just in terms of the outlook, if I look at active merchants by type, so across corporate and community, should we expect to see stable ARPU going forward or some pressure as the mix changes within each of those segments? Or -- yes, just any comment on the next 6 to 12 months? And then, on profitability, clearly, the margin improved there as well, as you talked about. I'm just trying to understand what the sort of runway if we look at the next, I guess, 6 months, 12 months, whether or not some of the, I guess, cost-saving activities that you've embarked on will still come through and how long that runway is. Ali Zaynalabidin Mazanderani: So the -- I mean, I think I'm not sure, Ross, it was you at the last call or somebody else who asked the question around how we see the evolution of the margin. And our perspective is that we see a continuation of the evolution in the next quarter. However, from FY '27, we do expect to see a different trajectory there. And giving you a little bit more granularity around that. Obviously, we have a smaller ARPU in the community space than in the corporate space, but the community space is growing faster. However, within community ARPU, we expect in the coming year to see an increase, both because of the scale and quality of customers that we onboard, as well as because we expect to have an increase in the product penetration within that base in a similar way as we experienced that in the Consumer business. What I would also say is that the ARPU, while the number of merchants and the ARPU is a good representation of the net revenue, and that's why we're focusing the net revenue drivers on that, it doesn't obviously speak to margin, and that margin is both the gross margin and the EBITDA margin. And we believe that we have room in both capacities. From an EBITDA margin perspective in the Merchant business, this quarter last year, we had an 18.7% margin. And obviously, in this quarter, it's north of 20%, and that's despite the fact that, obviously, the revenue performance was not where we expect it to be going forward. We do see that margin having substantive room for growth. I think we have previously communicated that we think the Merchant business should be targeting EBITDA margins of closer to 30% and execution will define how quickly we get there. But like the Consumer business is evolving EBITDA margin, the Merchant business should follow a similar trajectory. I just -- from a Lesaka perspective as a whole, I think it's probably also worth observing that we see operational leverage there as well. While we have made some investments in group costs, we don't expect that to be growing at the same rate as our EBITDA margin. So group EBITDA margins, which have gone from 17% to 21%, we expect to also be increasing substantively. The question on the sort of the margins within the businesses, you always have to look at a few different components on the ARPU -- from the ARPU perspective. So the first one is the mix between corporate and community, where there are differential components. The second one is the cross-sell, how effective we are in basically layering the product because obviously, you make much more ARPU around them. The third is, there is, because ARPU is just a revenue number, some aspects of seasonality associated with it. So if you were to have looked, say, for example, back to last quarter because it was during the festive season, you would expect that to be larger volumes or throughput. So you'd expect that to be larger ARPU as well. And the final thing to consider in that respect is, obviously, the margins per product. And you will get, going forward, better understanding of those underlying drivers because we will be providing, at the end-of-year presentation, some of the second derivatives of that. But in essence, the focus in the Merchant business over this year has been about trying to improve the quality, trying to improve the unit economics as we signposted because we want to be scaling into something that has an excellent return profile around it. And we are still in the process of doing that. I think that the strategic intent is ahead of the operational reality there, whereas in the Consumer business, I think we are fully in the slipstream of where we wanted to be. One thing I would just emphasize within that Consumer business is, there remains, within our core product offering for the SASSA grant recipients, material room, but that is not where we are circumscribing our aspiration. Clearly, we have an aspiration, obviously, to extend that as well. So there's sort of the existing market share within the existing segment. And then, there's the opportunity to move into adjacent segments. Ross Krige: On Enterprise and utilities, just wondering if -- on Enterprise and utilities, just wondering if you could guide on what the net financial impact could be from migrating the other [indiscernible] of ADP volumes to Merchant? Ali Zaynalabidin Mazanderani: Sorry, Ross, I don't think I heard that properly. Ross Krige: Sorry, I'll repeat. So, on Enterprise, specifically within utilities, I think there was a comment on migrating some of the subproducts of ADP volumes, the prepaid volume to Merchant, I think specifically. And then, on the -- I think there was a comment that they'll be migrating the rest of those products, the rest of the subproducts of ADP volume from [indiscernible] to Enterprise. Ali Zaynalabidin Mazanderani: I understand. I understand. So basically, think of the Enterprise division in addition to having external customers, 750 corporate clients, it's also servicing ourselves. And there is operational efficiencies that can be released as a consequence of that, which should speak again to margin improvement across the group, part of which would be represented in the segment that it services. Both consumer and merchant would ultimately be consumers of Enterprise services, but would also then be represented in the Enterprise business' margin. So it would be distributed. Exactly the quantity of it, it's, I'd say, probably less about the scale of the operational cost saving and more about the control and the quality that we can provide as a consequence of bringing it in-house and not having third-party dependencies on our ecosystem that affects our product delivery. And that ultimately will speak to our promise to our customers. There is also -- there is some economies of scale, however, in being able to aggregate our purchasing capacity, right? We will clearly be a very material player as a consequence of that aggregation. So we do expect to see margin improvement on what we can buy as a consequence. Operator: I'm going to move now to Frank Geng from Briarwood Capital. Unknown Analyst: Just had 2 quick ones on Consumer. One is, I guess, what's driving the greater ARPU numbers year-over-year and sequentially? Is that mostly kind of the loan and the insurance book or any other initiatives? And then, secondly, on the margin, yes, it seemed a bit higher versus the past and especially kind of on an incremental basis. So curious what's driving that. Is that mostly kind of lending, or there's a provisioning kind of step-down? Just any color on that? Ali Zaynalabidin Mazanderani: Lincoln, do you want to have a go? Lincoln Mali: Yes. So thanks, Frank. I think, as we've highlighted before, our ability to cross-sell is a key, key part of our success. The distribution model that we have enables us to be where the customer is and cross-sell the loan and cross-sell the insurance. And I think that you're starting to see that growth, and that momentum will continue. The other things that Ali is mentioning will be adding to that. But for now, there's still room within that consumer base to be able to cross-sell the loans and be able to cross-sell the insurance. Already when you look at some of the numbers, you're starting to see that over 50% of our clients have got 2 or more products with us and that more than 20% of our clients have got 2 products with us. So you're starting to see that we've got that ability to cross-sell even more into that base, and that will improve the business substantially. Yes. I think the overall outlook on our provision has been very conservative. We have tried to remain in line with the risk that we see, but we have signaled that there are opportunities to make some changes. And when we do make those changes, we'll be transparent about what those changes are looking like. But for now, even all the new changes that we've made in the loan product, both in terms of the duration of the loan and the size of the loan, has not seen any material change in the quality of the book. The quality of the book remains very, very good. Operator: We are going to move to questions from the webcast now. And we have a few questions from [ James Labbert from SBG Securities ]. Question one, since the start of the Middle East conflict, are there any particular developments you have observed in Consumer and Merchant? Talk about collectability of premiums and loan repayments, but also credit quality. Any commentary on the resilience of clients would be appreciated. Ali Zaynalabidin Mazanderani: I mean, I think the -- in substantial terms, the answer is, not really in terms of issues relating to credit quality or -- there's obviously a consequence of the Middle Eastern events in terms of the cost of fuel, and so disposable income from the market as a whole. But I would just emphasize that we are really not a proxy on the market. Our opportunity is in effectively growing substantively our share in the market by having a superior proposition. And so, our expected growth rates are more around our capacity to either take market share or alternatively by growing a market that is currently not digitized. I don't know, Lincoln, if you have anything specific you want to add to that? Lincoln Mali: Yes, I would say the same thing to -- that Ali said. In the actual core business, we have not seen any material changes that are there. Of course, there are long-term impacts that are there in the broader society. But in our business, there is no material impact that we see, either in our ability to collect or in the credit quality or in any of the performances of the underlying business. Ali Zaynalabidin Mazanderani: And then, Dan, if you have anything? Daniel Smith: The only thing I'd add to that is, when there's dislocation in the market, it creates an opportunity for us to respond to our customers' and our clients' needs as well. We successfully did that in our Merchant business in March, which was, let's call it, the starting point in the Middle East conflict with fuel prices increasing, gave us an opportunity to support our fuel merchants. And in our Consumer business, should this lead to elevated inflation, it might create an opportunity there for us to support our clients, of course, within appropriate credit measures. Ali Zaynalabidin Mazanderani: I think, in general, as a business, we do have pretty good resilience, but there will always be specific areas or specific things. I think what we're trying to message is, it's not anything that is very material in terms of the P&L performance. But I could also point out that clearly, as a business, we also roll out point of sales. Those point of sales, overwhelmingly they are -- they come from Asia. And so, you do have to be cognizant of not just the availability, but also the exchange rate. And if the exchange rate improves vis-a-vis, then we will have a benefit. And if it declines, it will have a cost. Operator: Question number two. The revenue increasing at a group level -- with revenue increasing at a group level, how do we square the decrease in cost of sales? Is there some favorable pricing from suppliers or any other dynamic at play that has allowed you to manage cost of sales as well? Ali Zaynalabidin Mazanderani: There is a lot of dynamics in that. So the first one is, we are consciously exiting business lines that are not core, that have lower margin, and so you have a mix effect around that. We are growing, in revenue terms, higher-margin businesses faster. And we are also benefiting from scale and operational efficiencies across the business. So it's not one single thing. It's a number of things coming together. And the rather pleasing thing is, I don't think we are nearly through that journey. We have quite a lot of operational efficiencies that we can extract in the business over time to continue to improve that. And there are tools that are also being made available to us increasingly as a consequence of AI innovation that will allow us to do more -- even more than we might have thought was possible before. Operator: Question number three. How should we think about our working capital cycle in terms of collecting receivables, extending debtors and selling inventory? Are there periods in the year that are typically more favorable than others? Ali Zaynalabidin Mazanderani: Dan? Daniel Smith: There is a cyclicality in our working capital cycle. So quarter 2, let's call it, the December period, is peak volumes for us. So therefore, our inventory naturally spikes in that period of time. Quarter 3 compared to quarter 2 is a -- results in a de-gearing in our inventory. And you would have seen in this period, inventory clawed back about ZAR 120 million quarter-on-quarter. So, that drove a large portion of the cash inflow, working capital cash inflow. Similarly, our receivables also has a similar cyclicality. Our payables are roughly flat, so that unwinds a little bit less. So comparing things quarter-on-quarter, quarter 3 sees an unwind, quarter 4 normalization and slight increase, and in quarter 1 of the next financial year similarly. Operator: And the last question from James. To what extent does Bank Zero integration enable you to up those 3-plus cross-sell metrics in Merchants, particularly in the corporate space? Ali Zaynalabidin Mazanderani: So I think that Bank Zero transaction has multiple benefits for the business. But specifically, in the merchant space, clearly, Bank Zero has had a historical focus on SMEs as being a digital bank provider for them. The consequence of the transaction should allow us to effectively be able to offer a banking product through our existing sales force, our existing relationships, which should be accretive -- augmentative in terms of the ARPU that we would be able to generate, especially because we should be able to also generate benefit from float, as well as from other sources. Operator: The next question is from Jamie Friedman from Susquehanna International Group. CapEx as a percentage of revenue seems to be declining and helping free cash flow, in Page 11. Is that a function of mix? How should we think about it? Ali Zaynalabidin Mazanderani: Dan, go ahead. Daniel Smith: On an aggregate basis, we have guided the market, on an annual basis, roughly ZAR 400 million of CapEx is the right quantum of CapEx to support the group, both from the maintenance and from our growth ambitions. There's a little bit of seasonality around that in terms of timing of delivery of POS devices, for example, similarly, timing of when we bring on board capitalized software development costs at the appropriate stage. So quarter-on-quarter, some variability. But I'd look at it in the whole, on an annual basis, our CapEx shouldn't exceed ZAR 400 million. So, of course, therefore, as our EBITDA is growing, we get the benefit of that capital efficiency in our group. Ali Zaynalabidin Mazanderani: There is -- I mean, just to augment, Dan, there is obviously an element of mix effect associated with that in that the product lines that are growing faster are typically ones that have lower CapEx requirements. And I think that, that general trend, as you move towards greater digitization, should continue because if you think about where, as Dan said, the CapEx is spent, a nontrivial part will be on cash vaults and on point of sale. And even in the context of that being on point of sale, there are -- there is evolution in customer uses of feature form that we would expect going forward. So I'm quite confident around the long-run resilience of the cash conversion of the business and expect to see a continued expansion of that capability, albeit there will be -- it's not necessarily going to be a straight line every quarter. There's going to be instances in which investments will be needed to be made, but substantively, expect a declining percentage. Operator: The next question is from Charles Boles from Titanium Capital. Buy now, pay later seems to very much be involved in SA. You have exited Switchpay. Does this suggest you have a negative view of the BNPL market? Or was the exit due to factors specific to Switchpay? Ali Zaynalabidin Mazanderani: I think it was more specific. I don't have a specifically negative view of the buy now, pay later market. I think that as a business in the merchant space, I think we are at a build moment within our credit proposition, as Lincoln was alluding to within the conversation. And it doesn't represent our lack of willingness to participate in that market. It was a legacy product that was not fit for purpose in terms of the scalability that we needed to achieve and the unit economics and [ hygiene ] we wanted. Operator: The next question is from Tim Olls from Laurium Capital. Within the Merchant segment, please, could you share some color on the competitive dynamics resulting in the decline in the corporate merchant numbers? And what more can be done to defend this? And are you able to share current 2 and 3 product penetration rates for community and corporate customers separately? Ali Zaynalabidin Mazanderani: On the product penetration rates, do we not -- I mean, I think we can share. I think that, as I said before, going forward, in the next investor presentation, we are going to provide greater granularity. So you can expect that clarity there. In terms of what's going on in that -- in the corporate space, so there are -- where we have a strong resilience of our offering is where we have multiple products and specifically 2 products in the corporate space. So if you have a point of sale software with attached acquiring like in the hospitality space with Unity, you will have lower churn. If you have stand-alone point of sale single product, you should expect there to be less defensibility. And I think the reduction in the customer base is a combination of some legacy that we inherited that we didn't feel was sort of core to where we were going. But I don't have an expectation that, that trajectory is going to continue. I do have an expectation that we will be -- in the coming year, be investing in growth in our merchant count, as well as -- in the corporate space as well as in the community space, albeit the growth within the corporate space, I expect to be lower than the community space. But it's not representative to us of the medium-term growth path. Operator: The next question is from Jarred from All Weather. Please provide more color on the level of provisions for the loan book and how that changes under the current macro environment. Ali Zaynalabidin Mazanderani: I don't know if you want to go at that, Dan. Daniel Smith: Jarred, I'd split it between different types of provisioning in the Merchant loan book and in the Consumer loan book. So in the Consumer loan book, we provided 6.5% at the moment. We run obviously a variety of different models. Our experience indicates something more favorable than 6.5%. And as I signaled in the previous quarter results, we are revisiting the appropriate levels of provisioning. We think that at year-end would be the right time to either confirm our current levels of provisioning or change them, based on obviously what the models and our experience is at that point in time. But they are well within our overall risk appetite. And as I said, our experience there is better than 6.5%. On our Merchant loan book, which is far smaller, but obviously, the average value of loans is significantly higher, there we provide according to the typical expected credit loss models. Our experience there, previous quarter, you would have noted, we did have some specific impairments, which affected our overall level of Merchant earnings, specifically on the lending side. That has normalized, those handful of specific instances, and there was nothing unusual or out of the ordinary course in terms of our credit experience in this quarter. Operator: The next question is from Christos from Avior. Will the ZARU settlement on the merchant side be in ZAR or ZARU? Ali Zaynalabidin Mazanderani: I'm not sure I understand the question, to be honest. So ultimately, there's a difference between whether the settlement is in fiat currency, ZAR or ZARU versus what is the infrastructure through which that is converted. So the question as to whether a merchant wishes to accept a stablecoin as opposed to ZAR would ultimately, I think, be the prerogative of that merchant. The thing that I think is more relevant is what rails is that settlement occurring through. And just to reiterate, the fundamental difference is blockchain is 24/7. You don't have to wait for banking hours. Speed of settlement is a core differentiator, and the cost associated with utilizing that blockchain ecosystem should be far favorable than legacy banking rails. So it's not a -- the utilization of blockchain as plumbing for merchant accounts is separate to whether the merchant has actually been settled in the fiat currency or in a stablecoin. Operator: We are going to move back into the Chorus Call now for our last call questions from Theodore O'Neill from Litchfield Hills Research. Theodore O'Neill: Congratulations for beating the estimates in the quarter. My first question is, are you seeing any impact from the conflict in the Middle East? Ali Zaynalabidin Mazanderani: So there, I mean, not really and not especially, as we mentioned earlier, some residual impact. There's a consequence in terms of, obviously, the cost of fuel, but that's not really translating into negative impact. In some ways, we've had a beneficial consequence in that it created an opportunity for us to do advances to [ fuel ] companies ahead of price changes. There is obviously some other consequences in terms of consumer disposable income and things. But fundamentally, we're not really an index on the economy, and we don't view it as being a critical factor in our performance, at least for the moment. Theodore O'Neill: Okay. And exiting the exiting the ATM network, was there a buyer for that? And by exiting it, was part of that -- thought behind that, that it would align better with Bank Zero? Ali Zaynalabidin Mazanderani: So, I mean, there wasn't -- we didn't feel that there would be a benefit in selling it. It was going to be more costly, I think, than potentially winding it down. Otherwise, that would have been what we would have done. In terms of strategically, it was purely based on the fact that we want to be a business that delivers exceptional results. It was not a core part of the offering. It was not a business line that is indexed to digitization or one that we consider to be necessary to support the ecosystem, and it was providing a negative drag on earnings. And we would rather spend our time on things like the digitization of the society and blockchain enablement and AI enablement than on a legacy piece of infrastructure. Theodore O'Neill: Right. Finally, can you give us an update on the status of the move-in to the new headquarters? Ali Zaynalabidin Mazanderani: Yes. I think the time that we are doing this investor presentation in the next quarter, we should be doing so from our new headquarters, and we are very excited. And it's not just about having a nice refreshed office environment. It's also -- I think it will have a profound impact on the way we work and then the efficiency of the business because currently, as we are trying to coordinate across different aspects, sitting in the same office with all the components, I think, will be hugely beneficial. So we are expecting to see good positive ways of work develop as a consequence of that. And it also will dovetail nicely with the more visible launch of our brand. So it's actually a very exciting season coming up for us in that respect. Lincoln Mali: Yes. I mean, if I could just add that what it also coincides with is us launching our values and bringing our teams together across all the different provinces, getting people to really fully understand what One Lesaka means because there's going to now be one brand, and both consumers and merchants and enterprise customers will relate to one brand, so getting our staff across the country to understand what this is about. So it's not only the new offices. It's also those offices that will start to build in the months to come in the different provinces, but also people starting to work across the divisions and across the functional areas in head office, as Ali was saying, is the way we want the new culture to emerge from this. And that, again, drives this thinking about cross-selling, doing more for our customers and giving them more solutions. The more people get to know about those solutions, the better it will be for them to be able to sell those solutions to customers, be they merchants or consumers or enterprise clients. Ali Zaynalabidin Mazanderani: [ Also Theo, just to add, it's not just Johannesburg. We're moving into one office in Cape Town as well in a few months. Subsequently, we expect to be doing the same in Durban. And across our footprint in the provinces, there is a rationalization process associated with that. So our office footprint will shrink across the country. And it is a very powerful thing for the business. Operator: Thank you, Ali, Dan and Lincoln, and thank you, everyone, for joining the Chorus Call and through the chat and for engaging today. We are going to wrap it up here. As a reminder, there will be a replay of the webcast on the Lesaka investor website. Thank you, everyone, for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Alaris Q1 2026 Earnings Release. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Amanda Frazer, Chief Financial Officer. Please go ahead. Amanda Frazer: Thank you, Antoine. Good morning, everyone, and apologies for the technical difficulties this morning. There was an issue with our link, but I think we've got -- it's somewhat sorted and this tape is being recorded, so the recording will be available to everyone after this call. I am joined on the call this morning with Steve King, President and CEO. Before we begin, I'd like to remind everyone that all financial figures discussed are in Canadian dollars unless otherwise indicated. Please note that some comments made during the call may include forward-looking statements. These statements are based on current assumptions and involve risks and uncertainties, so actual results may differ materially. For more detailed information on the factors, assumptions and risks involved, please refer to our press release issued last night and the management's discussion and analysis under the headings Forward-Looking Statements and Risk Factors available on SEDAR at sedarplus.com and on our website. We will also be referencing certain non-IFRS financial measures, which may be presented differently than similar measures by other companies. Additional information and reconciliations related to these measures can be found in the press release and MD&A. Overall, we had a strong start to 2026 with improved portfolio income and solid growth in distributable cash flow. There are 3 main takeaways this quarter. First, portfolio income continues to grow, reflecting the investments we made throughout 2025. Total revenue and operating income increased 2.7% in the quarter, while partner distribution revenue was up 11%. Within that, preferred distributions increased approximately 10%, supported by contributions from investments completed last year, along with distribution resets, while common distributions were also higher quarter-over-quarter, reflecting timing and variability. Second, distributable cash flow improved, increasing approximately 6% Q1 '26 over Q1 '25, supported by those higher distributions and lower transaction costs. And third, our payout ratio remains very conservative at 51.9% for the quarter compared to just over 51% in the prior year period and well below our target range of 65% to 70%. From a balance sheet perspective, net book value per unit increased to $25.31, up $0.52 in the quarter, driven by $0.55 per unit of earnings from operations and $0.44 per unit of foreign exchange gains, partially offset by distributions of financing costs. On the earnings side, earnings from operations were down modestly year-over-year, primarily due to higher compensation expense related to the new participation plan approved this quarter. However, earnings and comprehensive income increased significantly, driven by an unrealized foreign exchange gain this quarter as compared to a loss in the prior year. As we've noted before, these movements can create volatility in reported earnings and are not reflective of underlying operating performance. Overall, the quarter reflects the benefit of capital deployed in 2025 now contributing to earnings and cash flow along with continued strength in the core portfolio. From a portfolio perspective, the business continues to perform well and remains well diversified. Our portfolio continues to generate strong reoccurring cash flow and earnings coverage remains around 1.5x, which we view as a healthy level. During the quarter, we saw a positive fair value movement of approximately $8 million, driven largely by Fleet, which increased by over USD 10 million, partially offset by a decrease in Shipyard of approximately USD 6 million related to a softer forward outlook. We also had some capital recycling during the quarter, including a partial redemption from 3E, which generated a realized gain of approximately $3.8 million and returned capital for redeployment. Subsequent to the quarter end, we continued to deploy capital with a new investment of $75 million in Kubik, reflecting the strength of our pipeline and ongoing opportunity set. Looking ahead, we expect Q2 partner revenue to remain consistent at approximately $48 million and over -- sorry, and our run rate revenue for the next 12 months is now approximately $203 million. We've also increased our annual distribution to $1.52 per unit annually, reflecting confidence in the stability and growth of our cash flows. On a pro forma basis, the payout ratio for the quarter would have increased modestly to approximately 53% with the increased distribution. Overall, the quarter reflects solid underlying performance with growth in portfolio income, improving cash flow and a payout ratio that remains below our target range. And with that, I'll turn it over to Steve for his comments. Stephen King: Great. Thanks, Amanda. Our first quarter really highlights the consistent and predictable nature of our company. Our structured cash flow stream continues to grow, both through organic growth in our partners and also through the record levels of deployment we've shown in 2025 and already in '26. Investors will be hard-pressed to find a higher quality revenue stream than what Alaris exhibits with a broadly diversified 24 company portfolio of required service businesses that have little to no debt, have proven to withstand external economic volatility, have track records going back decades and probably most importantly, are owned and operated by the people that built them. Alaris' unique structure, which has failed to be replicated despite our 22-year track record of industry-leading returns, continues to allow us to deploy capital into the companies that others cannot. Our recently announced investment into Kubik is another great example. Kubik's management team was looking to buy out the original founder. Finding a capital partner like Alaris, who allowed the management team to move from minority ownership to majority was an incredible outcome for them. Being able to participate at a favorable valuation that was negotiated by the management team with the founder also allows Alaris to target returns on our common equity investments that others cannot. This unique alignment shows up in other ways as well. GWM is a partner that has experienced a few years of disruption in their industry and that has led to weaker results than what they had forecast because the management team is a majority shareholder of the company, the motivation to dig in and work their way out of the situation is very different than what a dropped-in management team would be, which is what traditional private equity model would entail. GWM has doubled their efforts, and I'm happy to report that distributions restarted this month, and they're operating well above their budget to this point of the year. The competitive environment in the private equity industry remains highly competitive with a particular focus on the kind of basic cash flowing industries that we've always specialized in. We expect deployment to remain strong for the year as entrepreneurs continue to select Alaris as the capital partner of choice despite processes that have drawn more than 50 bidders per process. The other big positive of having a competitive market will be in the potential sale processes where Aleris and our founding partner decide to go to the market to sell. We are hopeful that this will lead to favorable outcomes and provide capital gains over and above what we're carrying these investments at in our fair value. So Antoine, happy to open it up to any questions. Operator: [Operator Instructions] Our first question comes from Scott Fletcher from CIBC. Scott Fletcher: Steve, you noted in the press release and some of your comments that there's potential for partner exits in H2 and that the climate for transactions sounds constructive. Just hoping you could expand a little bit more on that. Are there partners that are exit candidates? And then what are you seeing in the market that is constructive, whether that's bid-ask tightening, any shift in sentiment? So some color on the environment would be helpful. Stephen King: Yes. We have targeted a couple of our partners that -- well, I shouldn't say that we've targeted them in every case. It's our partners that have targeted transactions along with our guidance, I would say. It is always up to our entrepreneur partners to make that decision at the end of the day. So yes, we do expect to be active in the second half of this year with potentially a couple of exits if the bids are strong enough. The nice thing about getting cash returns on a monthly basis from your investments is that there's no -- there's never a gun to your head. So if the bids aren't good enough, we certainly wouldn't sell. But if they are, then we will, along with the founder. And as I said, the competitive environment is very, very strong right now. I think people have gone away from some of the tech industries that have been adversely affected by AI or could be adversely affected by AI, companies that are reliant on imports and exports that have been disrupted by tariffs or the price of oil. All of those things are not in favor. So it's really pointed the whole market to exactly the kind of company that we've targeted for our full 22 years. So that's why I was mentioning processes that are getting 50 bids for kind of small to medium-sized businesses, which is very unusual. So what that means is, yes, it's a competitive environment to deploy capital, but we're still so unique that, that doesn't bother me. We're the only option for entrepreneurs that really believe in their business and want to stay in and keep a majority stake. But the biggest thing for us is it means that the probability of success on sales is probably higher than it's ever been just because people are chasing our kinds of companies. Scott Fletcher: Okay. That's great color. And then I did want to ask a second question about Sono Bello. You saw revenue and EBITDA decline year-on-year in the quarter and after declining in '25 as well. But your comments have generally been quite positive on the outlook there. So can you just help us square sort of the difference between the declining EBITDA and general confidence? Stephen King: Yes. Sono Bello is actually doing quite well. So they are actually ahead of budget for the year, and the budget is calling for about a 25% increase over last year. So obviously, kind of the end of 2025, when you look at kind of a TTM period, which is what our numbers reflect, the end of '25 was weak for them based on kind of consumer sentiment in the U.S. The first quarter and the first month of the second quarter have been quite strong. Operator: Our next question comes from Matthew Lee from Canaccord Genuity. Matthew Lee: I noticed a bit of a change in language in the MD&A this quarter, the answer with a new focus on raising and managing third-party capital. Is the long-term vision still predominantly a preferred equity income model? Or is there kind of an evolution towards a more traditional asset manager maybe with larger common equity and fee-based earnings streams? Stephen King: No. Yes, it is without a doubt, as a preferred structured equity investor investing as principal is our main focus. There will be situations where third-party capital can add to that as we did with Sono Bello and Ohana. There may be some situations where we have a sidecar fund. But as I look forward over the next 36 months, I think we are going to have a fairly significant amount of our companies that we have good common equity positions in. I think we're going to see them transact just on kind of our average hold periods over 22 years, a lot of the seeds that we planted 6, 7 years ago are going to start blooming here. So I think for us, we're going to have a significant amount of our own capital as principal coming back at us. And the vast majority of our deployment will be focused on redeploying that capital. If we have more deployment capabilities than that, I would prefer to raise that money myself. The economics of investing as principal are far superior to being an agent as you would be in managing other people's capital. So that is going to be our -- continue to be our focus is acting as principal. If we can add to it with specific types of third-party transactions, we'll do so, but we're definitely a principal investor. Matthew Lee: Yes. That's helpful. And then on the Kubik deal, a bit more debt than I think you've used in the most recent deals. Can you just maybe talk about why you chose debt on that deal? And how do you decide about the mix with regards to any given transaction? Stephen King: Yes. And I always have to be careful because the tax people -- they've structured this deal with a debt component for a reason. And so that, every aspect of this deal for us in terms of the economic and kind of conditions and remedies and rights and whatnot are identical to every other deal that uses straight prefs. This was done to get the best outcome for the selling party. So it's just a kind of a tax structural consideration, but everything is identical to a straight prep and common deal. Amanda Frazer: And you'll often see debt used where there's corporations in the structure. Stephen King: But yes, all the economics, all the rates and remedies are the same as the press. Matthew Lee: So, just an optimization thing? Operator: Our next question comes from Jeff Fenwick from ATB Cormark Capital Markets. Jeffrey Fenwick: I wanted to start my questioning off on Fleet. So it was nice to see continued markups on the equity -- on the common equity there you referenced in the quarter. Can you just speak to maybe some of the dynamics there that trigger that magnitude of the write-off? I see just a surge in activity to the beginning of the year, driving ROE higher? Or any color you can sort of offer there on that? Amanda Frazer: Sure. One of the primary drivers of that increase is just there has been some equity set aside for future issuance that sort of incremental plan has been wound down, and it drove an increase in the value of our equity. We also raised sort of left room in our valuation for some dilution from that program. And since that has been canceled, it's sort of elevated everybody's common equity share for the individual holding equity of Fleet. So that drove about $7 million of the USD 10 million increase. And then the remainder was really driven by the strengthening of their backlog and new customer wins being factored into those forward cash flows. I don't know, Steve, if you'd like to add? Stephen King: Yes. No, yes, Fleet has had a very successful first quarter. One of the keys to that company is diversifying their customer base. They added a really significant customer in the first quarter. They now have 5 of the top 10 fleet companies in the world as customers. So they've been doing extremely well. So that is reflected in the ongoing increases in Fleet. Jeffrey Fenwick: Great. And then maybe related to that, I mean, there was a significant equity-related compensation component there, the TRP program you referred to in the quarter. Can you just remind us, what's that, that is tied to? I think it is associated with common equity gains across the portfolio. But if you just clarify that for us? Stephen King: Yes. That was really reflective of kind of the evolution of Alaris over our 22 years. As you know, we were strictly a preferred share yield-based investor up until 6 years ago. And our compensation plan was completely dialed to distributable cash, then there was nothing in our comp system that compensated management for the capital gains on common equity, which has just started. So that was really trying to reflect all the facets of our business where we kind of had a blind spot before. And so, we've got a 10% carry, if you will, on common equity gains and with a 2-year lag on them. So you see the compensation that we got in '25 was based on gains that were made in '23, and that's basically making sure that those gains stayed and you didn't have something with a gain and then a write-down in the years subsequent to that. So that was what the Board and the compensation advisory group that they hired came out with. I think it's a positive move for us. We've been kind of in the bottom quartile of pay for our industry for really our whole 22 years, even though our returns have been top quartile. So I think this is an important move for employee retention. Jeffrey Fenwick: Okay. And that's completed annually and reflected in the first quarter? Or is it something that you do on a rolling basis over the year? Amanda Frazer: So because the plan was just approved formally at the Q1 -- or sorry, the year-end Board meeting in March, that expense hit in Q1 for this period. On an ongoing basis, it will be something that we won't report at year-end. So the program should -- is recorded once those performance -- that 2-year hold period and performance hurdles are achieved and once the value of the programs can be fully estimated and accrued. So each Q4 go forward provided that there has been maintained that growth above a 10% hurdle, we'll book that compensation expense there. Also, while it is sort of a bonus pool program, it's settled in units. So subject to our AGM later this afternoon, we do expect that, that shareholders will approve that this is a stock-based comp plan. So it won't be driving a cash expense through the financials, but it will be settled in units on a go-forward basis. Stephen King: That was the other thing that I really wanted, Jeff, is I wanted our employees to be tied to the company as much as possible with units and be aligned with our shareholders. So all of this is paid in units. Jeffrey Fenwick: Okay. Makes sense. And maybe one more sort of accounting-related one here is the timing on the cash tax payments, swings fairly significantly by quarter, obviously impacts your free cash flow. So can you give us any insights or thoughts, Amanda, how we should be thinking about that? Is there like a cadence over the year or things that trigger that payment? Amanda Frazer: It is a tricky one to forecast and the challenge is that we're not actually paying tax off of our own earnings, but we get allocated earnings as partners within all of these investments. So throughout the year, we are making our tax installments based on our best estimates of what that cash tax is going to be. When we get to the end of the year, so U.S. tax are filed in November, we true that a lot and compare to what we've installed. So the reason that Q1 cash tax payments are so low, and I think they're actually a recovery in the quarter is just we over installed last year. So we have credit on file for forward quarters. So I appreciate that it makes it incredibly difficult to forecast into cash flow, but it's just a bit of a lumpy process, and there's a lot of estimates that go into it. I expect that Q2 will also be pretty low on a cash tax basis, just as we have those over installments from the prior year drawing down. Jeffrey Fenwick: Okay. Great. And maybe one last one here. Could you just speak to financial capacity here? It sounds like you've got a busy pipeline. You obviously continue to have access to your revolver. But with the E3 redemption there, brought some cash in. So do you have an approximate value of available draw now to go out there and look for new deals? Amanda Frazer: Yes. So we have USD 115 million available on the line of credit. So we expect that, that will be able to fund 1 or 2 additional transactions. And then we do expect some further redemptions later in the year, which would also add to the available balance. There's also an ability to draw an incremental USD 50 million preapproved on that line. So we could extend the line from USD 450 million up to USD 500 million as well if an opportunity came up and there was any need to bridge between a redemption and closing a transaction. Operator: Our next question comes from Gary Ho from Desjardins Capital Markets. Gary Ho: Maybe just to start off, I want to get an update on 2 of your partners, FMP and GWM. They were deferring distribution at some point in time. Can we get an update on those? I think you mentioned restarting of distributions, FMP, if I'm correct, and outlook for continued distributions over the next 12 months or so? Stephen King: Yes. GWM, as I mentioned, is operating well above their budget, having some good customer wins and good success. So I feel very good for those people. They just to kind of hammer home my point about having owner operators instead of just operators, the 2 top people at GWM have not taken a salary in the last 12 months. That's something you just don't see from people that don't own their businesses and sort of talk about being tied in and aligned with us. So yes, they expect to restart distributions and then they don't expect to stop them again. Obviously, this is life. So you never know what happens in the future, but that's their expectation. And based on, on kind of the track that they're on, the run rate that they're on, they shouldn't have any problems continuing those distributions. FMP is and has been paying partial distributions. We expect that level to continue. As I mentioned in our Q4, they are seeing some renewed business activity with the customers. So they do expect to recover fully, but we're probably a year or so away from that, I would guess. Gary Ho: Okay. Great. And then my second one, I want to chat on Edgewater. We did see the 1.7 million comments. Nuclear has been quite topical. I believe they were in the bidding of other projects or have RFPs out. Can we get an update on that investment? Stephen King: Yes. No update there. Those are kind of long processes once they get an RFP from the Department of Defense. So yes, no updates on the other contracts. But obviously, Edgewater is sitting in a very hot sector and are incredibly well positioned within it. Gary Ho: Okay. Great. And then my last question. You mentioned deployment should remain strong for the balance of this year. Can you talk to the pipeline? Are those -- some of those maybe follow-ons? Are they new partners? And then maybe just related to Jeff's question, maybe talk about the sequencing versus some of your larger monetizations. Stephen King: Yes, always -- it's a 24 ring circuit. As you know, Gary. We've got a lot of -- with 24 partners, there's a lot of our partners that are looking at acquisitions. So those aren't done until they're done, but there are some in process that would require our capital. So I think we should have a pretty decent amount of follow-on deployment this year. And then we do expect more new partner activity as well. We have a good line of sight on that as well. So nothing imminent. These are, as you know, take several months to do these deals. But yes, we've got good line of sight on both new partners, plural and follow-on deals as well. Operator: Our next question comes from Nathan Po from National Bank Capital Markets. Nathan Po: My first question is, can you give us some color around the lost customer for the Shipyard, perhaps what happened there and what they're doing to backfill that? Stephen King: Yes. So the Shipyard is run by a real veteran of the industry, Rick [ Millenhall ], and he's kind of known in the industry. So he's done a remarkable job since we became partners of adding new customers. And you've seen over time, like we have written up that investment based on some really nice growth in the business organically and through acquisition as well. So this is -- I hate to say, but it is part of this industry. When you have a customer at a certain point, it's pretty natural for them to choose a different advertising agency just to get kind of a fresh look to their advertising campaign. So, there is some churn in the industry. And if this would have happened with this particular client when we first invested, it would have been a pretty material hit to the business. Now it is not because they've had so many customer wins. So yes, the backfill of that business is already underway. We don't expect this to cause any issues, but it just kind of hampers -- slows down the growth profile is really when it reflected in the fair value number. There's no -- there's not a big decline in the business. There's no cash flow issues. So it's just -- unfortunately, just a part of this business. Nathan Po: Okay. Great color. And could you also give some background on the 3E redemption? And any thoughts as to when or if the rest will be redeemed? Stephen King: Yes. It's a good news, bad news story. 3E has been a huge success. This company is several times the size it was when we first invested in it. The bad news is we don't own any common equity in 3E. And the reason for that is that 3E is a minority-owned business and issuing common equity to us would have jeopardized their ability to win contracts based on being a minority-owned business. And so that was -- that's unfortunate because it is -- it has been a big winner. They've grown so much where, quite frankly, they don't need our capital in their capital stack. But they really like having us as partners. And so they basically brought us down to the minimum level. In every deal we do, there's a minimum level you can take it down to until you have to take us all out because we don't want $5 million left in the business. So they took us down to that minimum level. They don't anticipate taking us out because they like having us as a partner. We show them deals to look at. They think at some point, maybe there's a big deal that they can't finance on their own that they would like more of our capital for down the road. But -- so it's flattering that they wanted to keep us in even though they had far lower costs of capital alternatives that they could have taken us out with. So yes, according to them, they have no plans on buying us fully out. Nathan Po: All right. And how much do you want to deploy or need to deploy in short order to get to your targeted payout ratio? Does the pipeline you described previously right now get you there? Stephen King: Well, we're already below our targeted payout ratio. So anything that we do would take us even further below and would probably lead to another dividend increase. So yes, we don't need to do anything to -- but we're already ahead of our target as it stands today. Maybe what we do in the quarter. Amanda Frazer: Yes, we're currently at 51.9% payout ratio. Our target is 65% to 70%. We -- even with the bump that we did after quarter end, that would take us up to 53% based on those numbers. If you look more to the outlook, we're sitting in that 60% to 65% range, so closer to our target. The thing that drives us down in actuals compared to the outlook target is when we receive more common distributions than we were expecting in Q1, it was the Edgewater distribution that really drove that down. Also, we're leaving -- given the potential for some redemptions and then redeployment, we are leaving a bit of cushion to being able to absorb those redemptions if they come through and give us time to redeploy that capital back out. But with the way that our pipeline is looking, we don't anticipate any issues getting any capital that comes back redeployed. Nathan Po: Got you. And what are your thoughts on the NCIB versus dividend raise allocation decision? Stephen King: Yes. I think the dividend raise is our priority today. Our stock is within 10% of our book value. So when you factor in the taxes on buybacks, it's not very accretive. So I think you get more value out of a consistent dividend growth profile and get a premium multiple on the stock as we had before COVID. So that's going to continue to be our focus is dividend increases. Nathan Po: All right. And just one last housekeeping one. Apologies if I missed this. How much of the common dividend stream is embedded within the $203 million run rate revenue figure? Amanda Frazer: I believe it's about $15 million at the moment. Stephen King: Which is, I would say, very conservative. That's why our actual payout ratio is always well below our outlook payout ratio. Amanda keeps a very conservative list of common dividends that we typically meet every quarter. Operator: Our next question comes from Bart Dziarski from RBC Capital Markets. Bart Dziarski: I wanted to start with just on AI software, obviously, a very topical theme these days. And as you look through the portfolio and you talk to the portfolio companies, like are you seeing this as a net positive? Are there opportunities to harvest this to surface value? Or are there any kind of names that are maybe more at risk of being disrupted? Just help us think through that exposure within the portfolio companies. Stephen King: Yes. So it's interesting. One of our newest partners, Optimus out of Toronto is a management consulting company. And part of what they do actually is do AI audits for companies. And so we are retaining them to do that for each of our partner companies. And for the most part, these are kind of older economy nuts and bolt required service type businesses that aren't going to be significantly impacted by AI one way or the other. There are -- we think there are some opportunities with some of our partners. We haven't seen anything yet in our portfolio that gives us great pause in terms of negative aspects of it. So -- but Optimus is going to do that kind of study for us. And I think it's going to be great value add for each of our 24 companies to have that done for them by us as their partner. So that's something that we've initiated. And -- but in our own review of our portfolio because we go through this with our Board each quarter, we definitely see it as more of a positive. But really, I wouldn't overemphasize that. I think it's really marginal with the kinds of companies that we have. Bart Dziarski: Okay. Great. Got it. That's very helpful. And then apologies if I missed this earlier, but the common equity holdings of $330 million, thereabouts, how should we think about the realization time frame of that? Like is that fairly, I don't know, a 1/3, a 1/3, a 1/3? Or is it more of a ramp call it, over the next few years? Stephen King: Yes. That's not something that we're really going to be able to put kind of a curve on in terms of expectations. It really is just individual company based. But as I said, when you look at when we started doing common equity investments, which is kind of 6, 7 years ago, you also have 2 of our larger ones in Sono Bello and Ohana that we have third-party partners with that do require an exit in a certain period of time. So those would -- both of those would be within the next 3 years. So I think the next 36 months, Bart, is going to be a fairly significant time for us for crystallizations with some of the common equity portfolio. So I think it's pretty heavily weighted towards kind of 2028 and 2029. Operator: Our next question comes from Trevor Reynolds from Acumen Capital. Trevor Reynolds: I think most of my questions have been answered. But just on GWM is, mentioned restarting payments there. Is that built into the guidance? Amanda Frazer: Yes. At the moment, we have 50% of GWM's distribution for the year within the outlook. So we are -- we do have sort of more than 50% for the go forward of the year factored into that outlook. Stephen King: Yes. So -- so we should beat that. But again, we wanted to be conservative with somebody that's coming out of some issues. Amanda Frazer: Yes. And they're still subject to their senior credit facility. So we wanted to make sure that there was room there if anything had to be adjusted because of that. Trevor Reynolds: Great. And then is there any update on Heritage, like that's just kind of one that's been dragging along, but any update there? Stephen King: Not really. Still just -- I'd be kinder than dragging along, but they're doing well, but it's -- yes, it's a slow rebuild. We've got advisers and airlifted management in there. So I wouldn't really expect much out of Heritage for the next year or two. Operator: This concludes the question-and-answer session. I will now turn it over to Steve King for closing remarks. Stephen King: Great. Thanks, Antoine, and thanks, everybody, for tuning in. Apologies again for the bad link on joining us today. We're not really sure what happened there, but I think that's our first time in what I'll say 18 years as a public company. So anyways, we'll get that double check for next quarter, but thanks again for tuning in, and please feel free to reach out if you have any further questions. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Papa John's First Quarter 2026 Earnings Conference Call and webcast. [Operator Instructions] Please be advised, today's conference is being recorded. I would now like to turn the conference over to your speaker today, Heather Hollander. Please go ahead. Heather Hollander: Good morning, and welcome to our first quarter 2026 earnings conference call. Earlier this morning, we issued our earnings release, which can be found on our Investor Relations website at ir.papajohns.com under the News and Events tab or by contacting our Investor Relations department. Joining me on the call this morning are Todd Penegor, President and Chief Executive Officer; and Ravi Thanawala, Chief Financial Officer and President, North America. Comments made during this call will include forward-looking statements within the meaning of the federal securities laws. These statements may involve risks and uncertainties that could cause actual results to differ materially from these statements. Forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our SEC filings. In addition, please refer to our earnings release and our Investor Relations website for the required reconciliation of non-GAAP financial measures discussed on today's call. Lastly, we ask that you please limit your questions to one question and one follow-up. And now I'll turn the call over to Todd. Todd Penegor: Thank you, Heather, and good morning, everyone. During the first quarter, we continued to execute our transformation plan to be the best pizza makers in the business. I am proud of the work our team is doing to navigate the current consumer backdrop and highly promotional QSR marketplace. Although certain competitors have outlined their strategy to compress restaurant margins in the sector, we are taking a disciplined approach, executing a balanced transformation that extends well beyond price, meeting customers where they are while improving 4-wall margins, elevating our fleet and supporting our franchisees to build this business for the long term. While transformation work is neither linear nor instant, we are confident that the progress we are making in Papa John's transformation, combined with the strength of our brand and quality of our pizza will fuel profitable growth and value creation over the long term for all our stakeholders. Now turning to our quarterly results. In our international business, results continue to be strong. We delivered 3.6% comparable sales growth, marking six consecutive quarters of positive comps, driven by the benefits of our transformation initiatives. We continue to see strong performance in our focus markets in the first quarter, including Europe, the Middle East and Asia Pacific. In the U.K., comparable sales growth accelerated to 11% compared with 7% in the fourth quarter, driven by strong operational execution and enhanced customer experience and increased media investment that is strengthening our brand awareness and foundation for growth in the market. Comparable sales in the Middle East increased 9%, driven by sustained transaction growth, while Asia Pacific increased 5%, reflecting continued strength in Korea, supported by product innovation, partnerships and holiday demand. As anticipated, North America comparable sales ended the first quarter down mid-single digits, primarily driven by declining orders, which were pressured by lower new customer acquisition. During the quarter, we continued to see resilience in core pizza and customers ordering multiple pizzas, with flat year-over-year pizza volumes, excluding 2 weeks that were impacted by severe weather and pies per order increasing 5% versus last year. Our loyalty customers continue to be a force for the company, and we added nearly 1 million new loyalty members in Q1. We also saw growth among our frequent and super frequent customers. And combined, these tiers make up approximately 30% of our customer base. Our loyalty customers are our most valuable customers, generating 5% higher ticket per order and ordering twice as often as non-loyalty members. This upside was offset by pizza mix shifting to smaller nonspecialty pizzas, resulting in low single-digit declines in overall pizza sales, excluding severe weather impacts. Outside of pizza, comparable sales were pressured by declines in size and desserts and lower new customer acquisition compared with last year. We are working with urgency to address areas of opportunity and capitalize on areas of strength through our transformation work. Our two largest opportunities to gain share are building on our improved value perception and leveraging our rebuilt innovation pipeline to win new customers, elevate our pizza order mix to more premium pizzas, drive add-ons and expand our total addressable market. Starting with our value proposition, we are meeting customers where they are with popular offers, including Buy One pizza, Get One free, $9.99 3-topping and our Papa Pairings. Leveraging our CRM platform, we meaningfully increased engagement with existing customers, which translated into higher subscriber order frequency in Q1. We are also leaning into innovation because newness is critical to winning new customers. We rebuilt our pipeline to deliver more frequent, compelling new product launches. And in the first 3 months of 2026 alone, we introduced 2 new menu platforms, Pan Pizza and oven-toasted sandwiches. These launches elevate our pizza mix and expand our total addressable market. Our first innovation of the year was Pan Pizza, which launched at the end of January and filled a critical menu gap developed through extensive consumer research and rigorous testing, our Pan Pizza is truly a best-in-category product. Since launch, it has delivered strong repurchase rates, and we plan to build on this momentum throughout the year in North America by driving trial and awareness. We also have plans to expand Pan Pizza into several priority international markets. Next, we introduced oven-toasted sandwiches at the end of March, opening an entirely new category for Papa John's. This platform features 3 chef-crafted handhelds, each available at an accessible price point. We integrated sandwiches into our Papa Pairings value offer, where they've mixed well since launch. We're encouraged by the early results we're seeing with sandwiches driving participation across both dayparts, contributing to sales expansion and already exceeding sales of Papadias without complicating our makeline. The feedback from our restaurant teams on the introduction of sandwiches and the removal of Papadias and Papa Bites has been overwhelmingly positive. Not only have we removed operational complexity, but we are seeing benefits to the brand as we introduce new menu items outside our core pizza. Great pizza deserves great pairings. Part of our 2026 innovation agenda is crafting compelling side items at accessible price points to encourage customers to look beyond the center of the plate and drive higher ticket, increase sales and improve 4-wall margins. We introduced Cheesy Garlic Bread in April, a new value side baked on the same tasty ciabatta bread as our sandwiches. This operationally friendly side item is designed to be a strong add-on, increase check and expand non-pizza sales. We're also unlocking new sales layers to expand our top line. I'm excited to share that this summer, our iconic Papa John's garlic sauce will be available for retail purchase across 7,500 distribution points at Walmart, Kroger, Albertsons, Safeway and other leading retailers across the country. This launch builds awareness by extending our brand beyond our restaurants and gives customers a convenient way to add Papa John's signature flavor to their everyday meals. Finally, we're partnering with iconic global brands to introduce Papa John's to new customers in powerful and highly relevant ways. I'm excited to share that Papa John's has announced a global collaboration for the theatrical release of Toy Story 5 on June 19, the first time Disney and Pixar have collaborated with a pizza brand for a Toy Story movie release. We're fully leaning into this activation with new product innovation, custom packaging and a special custom animated spot created by the team at Pixar Animation Studios. At participating international restaurants, customers will also be able to receive an exclusive Toy Story 5 collectible. Papa Rewards members can also join in on the fun and earn Papado through our new Toy Story 5-themed in-app game. As part of the collaboration, we're also launching a new lineup of Toy Story 5 personal pizzas. Looking ahead, we believe that our individual 8-inch pizza can become a new innovation platform with a compelling price point to drive customer acquisition. We're thinking big with our innovation strategy and all our newest offerings, Pan Pizza, oven-toasted sandwiches and our Toy Story 5 activation, including our single-serve pizza creations will also be available across select international markets. Our international innovation continues to raise the bar with the U.K. launching an on-trend Artisanal Salerno pizza last month. Backed by consumer-led insights, this lighter, thinner, more premium pizza is designed to attract new customers and further elevate the Papa John's brand. Our reimagined innovation pipeline is fully stocked and purpose-built to win new customers, elevate our pizza lineup, drive add-on sales and expand our total addressable market. In addition to our compelling product innovation, we're sharpening our marketing message to drive greater impact at the local level. As we discussed on our last earnings call, we reinstated advertising co-ops across the U.S. to improve local targeting and relevance. While still early, 50% of our U.S. restaurant system is now supported by local co-ops across more than 50 markets. With our reestablished co-ops and sharpened value proposition, our local operators are aligning around a unified market strategy, accelerating our ability to win at the local level and driving benefits that will build throughout the year. Investing in technology and our tech stack is essential to delivering a seamless customer experience across our digital assets and own channels, strengthening customer connections and driving operational efficiency. For example, we have now made to-the-door delivery tracking a brand standard across our U.S. restaurant system. Through our app, customers can see real-time updates on their order, including its progress through the bake process and when it is ready, creating greater transparency and confidence in their experience. We continue to build on our partnership with Google Cloud to transform our digital ordering experience with Google's Food AI. This partnership is highly customized to Papa John's and grounded in a customer-first approach, focused on solving real customer problems and removing friction from the ordering journey. Across our U.S. system, we rolled out advanced voice and group ordering, enabling customers to order using voice and text inputs, significantly reducing friction in the order process. Our agentic ordering technology further enhances the customer experience by applying the best deals and enabling high-speed and seamless reordering for Papa Rewards members. Together, these innovations underscore our commitment to leveraging technology to make the customer experience even more seamless. We are pleased with the early results, showing faster ordering and higher conversion rates. As part of our ongoing efforts to improve workflows across our U.S. restaurant operations, we began piloting our new POS solution in our first restaurant in April. Our new PAR POS is designed to simplify restaurant operations by bringing inventory management, makeline operations and labor inventory and restaurant management systems onto a single integrated platform. It will help us also innovate faster through improved SKU management and faster deployment of menu changes across our restaurant system. This modernized POS solution will equip our operators with more actionable insights, enabling them to run more efficiently while delivering a better experience for our customers. Designed to utilize existing hardware, it minimize implementation expense and accelerates deployment across our restaurant fleet. We continue to differentiate our customer experience across every demand channel to support top line growth. As of the end of the first quarter, we are approaching 42 million loyalty members and year-over-year loyalty redemption sales continue to grow. Leveraging our robust CRM platform, we are engaging customers more frequently and using targeted personalized communications across e-mail, push and SMS to drive incremental visits and deepen engagement. Our restaurant general managers and their teams are hard at work driving a more consistent experience in our restaurants. Ravi will share more about their progress in a moment. Finally, we continue to partner with and evolve our franchisee base. Our efforts to optimize our North American supply chain and reduce overall cost to serve are gaining momentum on a path to unlocking the full potential of our vertically integrated model. We captured $7 million of benefits in the first quarter and are now on track to realize at least $25 million of these savings this year. We are confident that we will achieve at least $60 million of North American system-wide supply chain productivity opportunities, equating to at least 160 basis points of 4-wall EBITDA improvement by 2028 for both company and franchise restaurants. In total, we expect to generate at least 200 basis points of 4-wall EBITDA improvement for both company and franchise restaurants over the medium term, driven by supply chain savings, operational efficiency and restaurant portfolio optimization. In summary, while the consumer environment has impacted the pace of our transformation, we are managing through these short-term headwinds and building for the future. We are confident that we are taking the right actions to transform the business and set Papa John's up for long-term success. We are making progress and are excited about the opportunities ahead. And with that, I'd like to turn the call over to Ravi. Ravi Thanawala: Thank you, Todd, and good morning, everyone. I will begin by sharing an update on the progress we've made in the first quarter to drive 4-wall profitability across our restaurants, elevate our service model and optimize our restaurant portfolio. I'll then provide a summary of our first quarter financial results and conclude with our outlook. Improving 4-wall profitability remains a core pillar of our transformation. We have clear line of sight to delivering at least 200 basis points of store level profitability through supply chain productivity, labor optimization, market optimization and dedicated coaching and financial incentives for our franchisees. As Todd shared, we are on track to achieve at least 160 basis points of 4-wall EBITDA improvement through our supply chain productivity work with 24 basis points of margin improvement captured to date through Q1. We're also encouraged by the early results of our labor optimization efforts, supported by new tools that more accurately forecast sales and help our restaurants align staffing with intraday demand. While it's still early, we're seeing meaningful labor productivity gains and improved operation scores in our test. We're also leveraging new AI capabilities, including our Google Cloud partnership to further reduce costs and enhance customer service. Optimizing our restaurant portfolio is also a key lever to improve profitability and overall fleet health. We are making progress on our previously announced efforts to address locations that are failing to meet brand standards, lack a clear path to sustainable improvement or represent an opportunity for strong sales transfer to nearby restaurants. These sites, primarily decade-old franchise units with AUVs below $600,000, predominantly generate negative EBITDA. During the first quarter, we closed 44 of the 300 identified locations. Early results are encouraging as we have observed a strong transfer of sales to neighboring restaurants. These results, along with the demonstrated success of our international transformation underpinned by a focus on priority markets and strategic closures give us confidence that our strategy will enhance our competitiveness and support our efforts to increase North America market share. We are also addressing low-volume restaurants where operational improvements can drive significant value. Currently, there is a 400 basis point gap in comparable sales performance between restaurants and the highest quintile of operation scores versus the lowest quintile. To close this gap, we are planning to provide certain franchisees with dedicated coaching and financial incentives to elevate operational execution, boost sales and enhance unit economics. Turning now to our first quarter results. Please note that all comparisons and growth rates referenced today are compared to the prior year period, unless otherwise noted. For the first quarter, global system-wide restaurant sales were $1.2 billion, down 3% in constant currency as higher international comparable sales were more than offset by lower comparable sales in North America. As Todd shared, our international teams delivered another exceptional quarter with comparable sales growing 4%. Our international focus markets continue to outperform as we build momentum through new menu offerings, aggregator expansion and improved brand and marketing performance. Total consolidated revenue for the first quarter was $479 million, down 8% as lower revenue at our domestic company-owned restaurants, North America commissary and all other business units was partially offset by higher international revenues. Domestic company-owned revenues decreased $31 million, primarily due to refranchising of 85 corporate restaurants in the fourth quarter of 2025 in addition to lower comparable sales. Revenues at our North America commissary segment decreased $18 million, primarily due to food cost deflation, partially offset by higher pricing and all other business unit revenues decreased $4 million, driven by lower digital fees and advertising funds revenue as a function of lower sales. Partially offsetting these declines was a $4 million increase in international revenue. Consolidated adjusted EBITDA decreased $2 million to approximately $48 million, impacted by pressure flow-through due to lower sales and QCC volumes in North America and increased food costs in the supply chain, which will be covered by pricing in subsequent quarters, partially offset by improved performance in our international markets, lower overall G&A spend due to our biannual franchisee conference, which did not repeat this year, as well as lower supplemental advertising and lower cost of sales due to commodities deflation and lower volumes to our restaurants. As Todd stated, we recognized approximately $7 million of benefits or approximately 20 basis points of 4-wall margin improvements related to our efforts to increase efficiency and reduce our overall cost to serve at our North America commissary during the first quarter. North America commissary segment adjusted EBITDA margins were 5%, a decline of 230 basis points, primarily reflecting franchisee food cost subsidies, increased food costs, which will be covered by pricing increases in subsequent quarters and lower volume during the quarter. Domestic company-owned restaurants delivered 4-wall EBITDA of $16.6 million and a 4-wall margin of 11.9%, an improvement of 140 basis points. Importantly, 4-wall margins have remained resilient, supported by our benefits of our transformation work and our disciplined approach to sharpening our value proposition. Turning to our balance sheet. At the end of the quarter, our total available liquidity was approximately $498 million, and our covenant leverage ratio was 3.3x as we continue to maintain a strong balance sheet. Turning now to cash flows. Net cash provided by operating activities in the first quarter was $7 million. Free cash flow was an outflow of $6 million compared with the last year's cash inflow of $19 million, primarily reflecting lower net income and a more normalized incentive payments, inclusive of the company's enterprise transformation plan. Now turning to our 2026 outlook. As discussed, we are making progress advancing the actions we're taking to transform the business. We have taken steps to accelerate the top line throughout the year through an enhanced value offering, our rebuilt innovation pipeline and improved mix of national and local media through our reestablished local co-ops. We're also driving efficiencies across our business with our supply chain optimization and cost savings initiatives and evaluating refranchising actions, which are progressing our business towards an asset-light model with higher free cash flow. With that in mind, we are reiterating our 2026 financial and operational metrics. For 2026, we expect global system-wide sales to range between flat and low single-digit declines. For North America, we still expect comparable sales to be down 2% to 4%. Our guidance reflects both the benefit of our innovation pipeline and enhanced marketing strategy and considerations around the current cautious consumer environment. April North American comparable sales are trending slightly worse than Q1 on a year-over-year basis, but consistent with Q1 on a 3-year stack. We expect to build top line momentum in the second half of the year with sequential improvements versus the first half as we benefit from our product innovation, marketing co-op activations and meaningful brand collaborations and strengthened aggregator marketing strategy. We expect the North America quarterly comps will be relatively consistent for the remainder of the year on a 3-year stack. Internationally, we continue to build on our transformation momentum and still expect comparable sales to increase between 2% and 4%. Our outlook reflects current geopolitical and consumer conditions, and we'll continue to monitor developments closely. We are currently in negotiations to refranchise 29 restaurants in the Southeast, and we expect to close the transaction in the third quarter of 2026. Consistent with our prior expectations, we expect that this transaction will reduce 2026 consolidated revenues by approximately $9 million, including the impact of eliminations and benefit adjusted EBITDA by approximately $1 million, all of which is factored into our 2026 financial guidance. We are on track to reduce our company-owned restaurant ownership to mid-single digits of the North America system, and we expect to unlock growth opportunity as we refranchise certain restaurants with well-capitalized growing franchisees. We will provide an update on future earnings calls as these transactions move forward. For 2026, we continue to expect consolidated adjusted EBITDA to be between $200 million and $210 million. We now plan to invest approximately $18 million in supplemental marketing and franchisee subsidies to support our promotional strategy and this year's reinvigorated innovation calendar. Our 2026 consolidated adjusted EBITDA outlook also includes $13 million of G&A savings outside of marketing. We now have line of sight to achieve at least $30 million of total cost savings by the end of 2027. We also expect that stock-based compensation will be approximately $5 million per quarter. Consistent with our prior guidance for nonoperating expense items, we expect net interest between $35 million and $40 million, adjusted D&A between $70 million and $75 million and capital expenditures between $70 million and $80 million. We expect our 2026 GAAP effective tax rate to be in the range of 30% to 34%. Finally, we expect diluted shares outstanding of approximately 33 million. Turning to restaurant development. We are on track to open between 40 and 50 gross new restaurants in North America in 2026, having opened 8 restaurants in the first quarter. We continue to expect 200 restaurant closures in North America. Internationally, we expect to open between 180 to 220 gross new restaurants in 2026 with closures representing 5% to 6% of our international system. Overall, we continue to execute on our transformation efforts to deliver a better customer experience, accelerate sales, improve restaurant level profitability and move to a more asset-light model and become a more nimble organization to deliver value creation for all of our stakeholders. With that, we'd like to open the call up for any questions you may have. Operator? Operator: [Operator Instructions] Our first question comes from Brian Bittner with Oppenheimer. Brian Bittner: Just a question on the same-store sales guidance. As we look to the rest of the year, your comparisons don't get much easier for the rest of the year until the fourth quarter, but you are baking in a big improvement from the first half of the year. And I'm just curious why maybe not derisk the guidance a bit. I know you have a lot of initiatives to bend the trend in the second half of the year, but why not derisk the guidance a bit? And why, Ravi, should the 3-year trend be the right way for us to model comps as the year unfolds? Just any other color you can provide on 3-year trends being the right metric? Todd Penegor: Yes, Brian, I'll start and see if Ravi has anything to add on. If you start to think about where our year-over-year comparisons starting to soften and lapping over some of the competitive pressure from a year ago, the back half, not all the way to the fourth quarter, starts to get a little bit easier. But what we really wanted to look at is how does the business normalize with all the choppiness over the last couple of years. So very clear that our business, our transactions, how we're actually forecasting the outlook, and we think we've derisked it with really providing guidance that it remains fairly consistent on a stack 3-year basis. If you think about where we stand with all the second half of the year initiatives, we've launched some compelling innovation. We've got Pan in the world. It's mixing really well with existing consumers. The opportunity is to continue to wear it in and recruit new with that great product. We've got sandwiches in play, again, mixing well with existing consumers, plays to refresh our Papa pairing offering, so great value with that in it. And we're really excited about our partnership with Toy Story 5 and driving 8-inch pizzas with some news as we work to compete in the back half of the year. We'll continue to work to make sure we got our mix well so we compete on third party as the year progresses. But we think it's a prudent and realistic outlook for the year with lots of initiatives to support it, and that's considering the competitive and the consumer landscape that we're faced with at the moment. Anything else you'd say, Ravi? Ravi Thanawala: Yes. And Brian, you asked the question of why the 3-year stack. One, like as we looked at month-over-month and where we saw a bit of the trend come through is we saw some consistency there. So one, the underpinning data from Q1 and quarter-to-date Q2 has reflected that. Second is middle of 2025, we saw a meaningful step-up in competitive pressure from a promotional standpoint. And if you go back one more year, that was really when we saw the competitive pressure step up from an aggregator standpoint. So we're trying to take into account the competitive landscape, both from what's happening in the respective channels as well as what's been happening from a pricing pressure standpoint. Operator: Our next question comes from Alex Slagle with Jefferies. Alexander Slagle: I just wanted to ask on some of the new menu categories with sandwiches and pan and then, I guess, the personal pies and ask about your confidence that all these changes don't drive too much complexity. I realize you're going to pull out the Papadias and Bites and that helps. But maybe you could kind of walk us through and help envision what changes happen that keep this simple to execute. Todd Penegor: Yes. No, it really starts with a focus on operational excellence and delivering great product with everything we do. And we really stepped back as we started to introduce all these new products to make sure that we set our restaurants up for success starts with great training and making sure that we're ready to deliver on the promise when the new customers show up. What we really wanted to do is ensure that pan was designed to be best-in-class in the industry, but be able to do it with a one pass through our oven. And that's different than what we've done in the past. We did all the oven calibration work. We're able to make a great Pan Pizza simply with one pass to the oven that takes the complexity out of how we've done it relative to the past. Sandwiches is a very easy build with the oven recalibration, a great one pass. The ciabatta bread cooks really well in the oven and a lot simpler than what we were doing with Papadias, really getting into that handheld occasion, taking Papa Bites out. Those 2 things, Papadias, Papa Bites were our biggest rhythm breakers in the restaurant and really distracted from making great food day in and day out. We do make small pizzas today. So as you start to think about the simplistic builds, the unique builds that we're going to have that go along with Toy Story 5 at the 8-inch, that is a very easy build and can be managed quite nicely within our restaurants. So I think we've really set our teams up with less operational complexity and operational focus to really deliver great products with the innovation pipeline we've had. We've taken some of the friction out of our restaurants today to be able to do that. Operator: Our next question comes from Todd Brooks with Benchmark StoneX. Todd Brooks: First, I was wondering, Ravi, can you decompose the same-store sales between check and traffic? I'm just trying to get a sense of this more competitive approach to value as innovation ramps, kind of what was the drag on check that was part of that down 6.4% North American comp? Ravi Thanawala: Yes. Check was effectively flat in Q1, and that's been the trend in Q2 quarter-to-date as well. So the check has been there. And as a reminder, there was slight food cost deflation in Q1, some labor productivity and supply chain benefit. So 4-wall margins hung in there fairly well in Q1 because of that. But where the sales comp drag has really come has been from a transaction standpoint. If I take -- go one more click down, it was really in small transaction size from a number of pizzas. The transaction loss was in orders that contain only one or no pizzas. We continue to see order growth in multi-pie orders. Todd Penegor: That's why we feel confident with the incoming of Toy Story 5 and that partnership that can address that one pie order. Our challenge really is people are managing their overall check, right? And we're still seeing some of the leakage in size. We've not got cheesy garlic bread as a compelling price point side. We're going to have to continue to make sure sides are relevant. That's the opportunity to allow us to drive some check and mix up, but haven't planned for that with the tough consumer environment. So our guidance reflects where we stand today. Todd Brooks: And I'm sure there was a weather reality that hit the same-store sales as well. Can you size that for us? And should we be normalizing for that when we're thinking about the 3-year stack trend or just build off of the trend that we saw with the weather impacts this quarter? Ravi Thanawala: Yes. The weather impact was about just under 40 basis points of impact for the quarter. But what I would say is build off of the 3-year stack, that probably best reflects how we're thinking about it. And as we talked about, like that applies to all the quarters for the year. And as a reminder, like this is about us like taking into account a more intense competitive pressure, also the competitive landscape in each of the channels, and that's been the underpinning driver of that. Operator: Our next question comes from Sara Senatore, Bank of America. Isiah Austin: Isiah Austin on for Sara. Just in the line of questioning about competition, where do you guys see the competition coming from? Just when you think of the 3 large major chains seem to be struggling. So is it national, regional, maybe there's a resurgence in local? Just curious on your thoughts on that. Todd Penegor: Yes. I think if you look at where overall competition, clearly, the pizza category has been very promotional, not just where we participated at times and tried to do it smartly to make sure that we are managing margin while meeting the consumer where they're at. But 2 of the larger competitors have been aggressive on price. But the total QSR industry has been very aggressive on price. You start to look at some of my past life, the burger players, others with scale. There's a lot of promotional pressure out there to really try to make sure they're meeting the consumer where they're at. And we're going to pick our spots where we need to do that. We're going to leverage innovation to balance it. We're going to take a long-term approach to make sure we set our business up for long-term success. But we are conscious of where the consumer dynamic is with some of the headwinds that we're seeing with gas prices and impacts on discretionary income. But we also know we're going to have to play a long-term game to really set this brand up for sustainable long-term success, and we're going to use the opportunity to continue to build a really strong foundation, whether that be operationally, whether that be upgrading our tech stack, whether that's continuing to rebuild our momentum on innovation and importantly, making sure that we've got a local co-op environment set up so we can compete as a unit at the local level. There is regional and local pressures out there, but we do think the co-ops getting reestablished will help us compete at that level quite nicely as the national calendar balances with our local calendar. Isiah Austin: Great. And just as a follow-up, thinking about third-party versus first-party delivery, is third-party still outperforming? And just if you guys can broadly speak about your performance on third party, do you feel like you're still taking share on platforms? Or are you more growing in line with aggregator demand? Ravi Thanawala: Yes. So third party is still outperforming first party from an order and from a comp sales standpoint. We have seen competitive intensity really ramp up over the last 9 months in the aggregators. And it's a fairly dynamic space. So checking and adjusting on pricing and promotion is a really important part of the cadence. So there are definitely some weeks where we're taking market share. There are other weeks where we're in line. And we just continue to adjust. But I would say that broadly speaking, the space has just gotten more competitive from a pricing standpoint. We're still really focused in on winning across all of our channels and also balancing at the same time, volume, customer count and 4-wall margins to make sure that we navigate this environment well. Operator: I see there are no more questions in the queue. I will now turn the call back to Todd Penegor for closing remarks. Todd Penegor: Well, thank you, everyone, for joining the call this morning and for your continued interest in Papa John's. I'd like to extend a special thanks to our team members and our franchisees for their continued commitment to serving our customers. We are focused on continuing our transformation work to be the best pizza makers in the business and generate profitable growth and value creation for all of our stakeholders. Have a great day, everyone. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.