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Operator: Good day, and thank you for standing by. Welcome to the Tele2 Q1 Interim Report 2026 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jean-Marc Harion, President and Group CEO. Please go ahead. Jean-Marc Harion: Thank you, and good morning, and welcome to Tele2's report call for the first quarter of 2026. With me here in Stockholm, I have Peter Landgren, our Group CFO; Nicholas Hogberg, our Chief B2C Officer and Deputy CEO; and Stefan Trampus, our Chief B2B. Please turn to Slide 2 for some highlights from the first quarter. In Q1, group end-user service revenue grew by 3%, whereas underlying EBITDA grew by 11%, marking the fourth consecutive quarter of double-digit growth. We also continue to generate strong equity free cash flow with SEK 2.2 billion in Q1, plus 7% versus last year. Our Baltic Tower transaction was completed by the end of February, generating cash proceeds of SEK 4.7 billion to Tele2. And we also opened 5 new stores in Sweden in Q1 and upgraded our fixed network to 2.5 gigabit per second, a record internet speed, which are already available across many of the largest cities, including in Stockholm. With our 5G already recognized as the fastest in Sweden, we now operate the fastest networks in the country. Please move to Page 3 for more details on our results. Our 3% growth in end-user service revenue was driven across all our operations and core services. Our 11% growth in underlying EBITDAaL was driven by both transformation and revenue growth. Our strong equity cash flow or free cash flow, which grew by 7% year-on-year was largely driven by the increase in our operating cash flow. Peter will go through the details. CapEx to sales declined seasonally, partly due to lower 5G rollout speed in Q1. Leverage fell to 1.5x due to the Baltic Tower transaction and organic cash generation. In Sweden Consumer, end-user service revenue grew by 1% with contribution from all main services. In Sweden Business, end-user service revenue grew by 5%, driven by mobile and IoT. Our Baltic operations grew end-user service revenue by 7% and underlying EBITDAaL by 15%. Let's move to Slide 5 for more details on Swedish Consumer. As commented in the CEO letter this quarter, we combined store expansion with rapid progress in AI and automation, improving customer experience, operational efficiency and our ability to anticipate customer needs. Mobile postpaid end-user service revenue grew by 3%. Total mobile revenue grew by 2%, partly offset by continued decline in prepaid and some temporary issues due to the move to our new logistics platform. Fixed broadband grew end-user service revenue by 1% due to ASPU growth. Digital TV once again improved sequentially, driven by healthy high single-digit growth in Tele2 TV end-user service revenue, more than offsetting the latest impact of Boxer TV switch off. Let's look at consumer KPI on Slide 6. Mobile postpaid RGUs remained unchanged in Q1 despite temporary negative impact related to 2G, 3G shutdowns. Mobile ASPU increased by 1% year-on-year, driven by price adjustments, while still negatively impacted by IFRS 15 fair value adjustments, which will gradually abate during the year. Fixed broadband RGU declined slightly in Q1, while ASPU grew by 1% due to price adjustments. As in previous quarter, we have remained selective in parts of the market due to continued aggressive competition, which hampered volume growth. TV RGUs increased by 4,000 in Q1 as the good growth momentum in Tele2 TV has continued. ASPU grew by 5% year-on-year, driven by pricing and cross-selling of sports content improving the success of our flexible offer. Please move to Slide 7 for Sweden business. Sweden business continued to deliver strong end-user service revenue growth, reaching 5% in Q1 despite strong competition. Mobile grew by 8%, largely driven by our IoT business, which is expanding in new industries such as the automotive sector and geographies, for example, in Latin America. Mobile RGUs increased by 3,000 in Q1, ASPU continued to be impacted by change in customer mix. B2B solutions grew by 3% in Q1, reflecting our decision to focus on a more targeted portfolio of services. Please move to Slide 8 for Sweden financials. In total, Sweden end-user service revenue grew by 2% in Q1, driven by both business and consumer. Underlying EBITDA grew by a solid 9%, driven by the end-user service revenue, workforce reduction, stricter prioritization and cost control. The cash conversion has improved to 73% over the last 12 months. Let's move to the Baltics financials on Slide 10. Baltics once again maintained strong top and bottom line growth in Q1. Total end-user service revenue grew by 7%, partly supported by previous price adjustments. Q1 was the fifth consecutive quarter in which all Baltic markets delivered double-digit organic growth in underlying EBITDAaL, delivering a total growth of 15% pro forma the Baltic Tower transaction. It is worth commenting that our Baltic operations started accounting the cost of Baltic Tower company in March 2026. Cash conversion based on the last 12 months stands at 80% despite the impact of the Tower transaction. As you know, a spectrum auction has already been announced and will take place in Lithuania in 2026. Let's move to Slide 11 for Baltic's operating KPIs. The total postpaid base in the Baltics increased by 17,000 RGUs in Q1, driven by all markets. Prepaid decline was due to regulation and migration to postpaid. Blended organic ASPU grew by a strong 10%, driven by price adjustments and continued prepaid to postpaid migration. With that, I hand over to Peter, who will go through the financial overview. Peter Landgren: Thank you, Jean-Marc, and good morning, everyone. Please turn to Page 13 and the group income statement for the quarter. Total revenue grew, thanks to organic service revenue growth of 3% with contribution from all operations. Underlying EBITDA grew by 10% organically or 11% after lease, thanks to the sharp cost control across the group and the contribution from service revenue. Items affecting comparability were mainly impacted by redundancy costs related to workforce reductions. Last year, the corresponding redundancy provisions were more significant as you might recall. The gain from sale of operations of SEK 5.1 billion refers to the capital gain from the Baltic Tower transaction completed at the end of February. Net financial items decreased year-on-year, mainly thanks to higher interest income and positive currency effects. In Q1, our average interest rate was 2.7% with a debt mix of 73% fixed rates and 27% floating rates. Income tax increased year-on-year due to higher taxable profits. Let's move to the cash flow on Slide 14. CapEx paid, excluding spectrum decreased compared to last year, mainly due to lower intensity in the Swedish 5G rollout and reduced workforce. The decline was also impacted by delayed hardware supply with an expected catch-up later in the year. Spectrum CapEx paid increased due to the first out of 2 payments for the Swedish spectrum secured in 2025. Changes in working capital contributed to the cash flow with around SEK 450 million, largely driven by seasonal decrease in equipment receivables. Taxes paid increased since last year included a tax refund of around SEK 280 million, while the corresponding tax refund this year was around SEK 50 million. In summary, Q1 equity free cash flow reached SEK 2.2 billion, which implies a 7% growth compared to last year, and this translates to around SEK 9 per share over the last 12 months. Please turn to Slide 15 for our capital structure. End of Q1, economic net debt was SEK 17.4 billion, a reduction of SEK 6.9 billion compared to end of 2025. This was driven by 2 things: the cash proceeds of SEK 4.7 billion from the Baltic Tower transaction as well as the SEK 2.2 billion generated in the business. And this brings down leverage to 1.5x underlying EBITDA after lease ahead of the proposed dividend distribution. And with that, I hand over to Jean-Marc for some comments on our 2026 guidance. Jean-Marc Harion: Thank you, Peter. Please turn to Slide 16 for 2026 guidance. As highlighted last quarter, we concluded 2025 by setting a high standard and establishing a new reference point for Tele2 profitability. Building on that momentum, we remain focused on consolidating the company's transformation further strengthening profitability and safeguarding revenue growth in the face of continued geopolitical uncertainty. We, therefore, maintain our full year guidance for 2026 with low single-digit organic growth of end-user service revenue, low to mid-single-digit organic growth of underlying EBITDAaL, CapEx to sales in the range of 10% to 11%. Note that the organic growth rates include the impact of the Baltic Tower transaction on a pro forma basis. And I hand back to Peter for some additional comments regarding 2026 before we open up for Q&A. Peter Landgren: Thank you. First, a reminder about the Baltic Tower transaction. As previously stated, the transaction is expected to have a negative impact on underlying EBITDAaL of around EUR 35 million on a 12-month basis. And in Q1, this only impacted March, while we'll see the full impact onwards. And then a few reminders on the cash flow for the full year 2026. On spectrum, we noticed that an auction has been announced in Lithuania expected to take place during 2026. On financial items, excluding leasing, we still estimate full year net payments of around SEK 650 million with a similar quarterly phasing to last year. And finally, on taxes, we still estimate full year payments of around SEK 1.4 billion. And with that, I hand over to the operator for Q&A. Operator: [Operator Instructions] And our first question comes from the line of Ondrej Cabejsek from UBS. Ondrej Cabejšek: I had a few questions on Sweden and specifically mobile, I guess, please. So I am looking at the mobile trends specifically in postpaid. And if you could please talk about -- I guess, you mentioned previously that you put through price rises this year about a month earlier than last year that the market has been kind of improving. So I think we would have maybe expected a bit more of an acceleration. You mentioned also that there has been some kind of legacy negative impacts on mobile. So if you can talk about the growth rates for postpaid Sweden specifically and how you see those throughout 2026. And second question, if I may, also related to this, but maybe from a different angle. You've obviously put with the new portfolio on mobile, you seem to have a very stable base in the quarter on postpaid against some price rises specifically on like family plans, which I think are very important. So how is the reception then and again, tied to how we should think about the service revenue kind of profile for the rest of the year? Jean-Marc Harion: Slight technical issue, but we continue the Q&A session. Just to answer your first question first, and then I will hand over to Nicholas to develop on the portfolio and the new pricing. But of course, the price adjustment that we implemented a little bit earlier this year, of course, has a progressive impact, and it's as always, mitigated by the BTL discount, the different segment that -- where these price adjustments are adjusted for. I believe that the second question is more relevant to be answered by Nicholas about the postpaid portfolio now and the positioning and how we see the competition, not only, I would say, with the other operators, but with the sales distributors as well. Nicholas Hogberg: So thank you, Jean-Marc. This is Nicholas. Yes, the new portfolio has been very well received. We have simplified the portfolio radically, which is good, and we have also continued to build Frank. And of course, as you know, we have started somewhat a repositioning of Comviq with Jattebra, very good, and it's actually working very good so far. So what we can see is that it's still a fierce competition and a challenging market. We have been restricted to engage in the price war, especially when it comes to the no-frills brands. They are pushing the market really hard. But we see that our new portfolio is working well and that we -- our position in the market becomes clearer and clearer. Then when it comes to our distribution, we have launched 5 new stores during the quarter, and they are working very well, and we think that, that's the way forward for us. And we also see that we are less dependent on third-party distribution. Ondrej Cabejšek: If I may maybe follow up on the last point. So is it a case of maybe you are -- as you kind of reposition the distribution channels, is it a case of maybe there will be slightly weaker volumes this year, but profitability will benefit as a result? Jean-Marc Harion: Yes. Let me -- Jean-Marc here again. To complete what Nicholas was commenting, of course, we are operating in a very competitive environment in Sweden on the consumer market. We like this kind of competition. We have 2 strong brands to compete with the others. One of the specifics, and this is a comment that I already made several times, one of the specifics of the Swedish market is that the competition is distorted by the behaviors of some sales channels, which are too important, overwhelming on the volumes, for instance, telemarketing. So that's probably what you were referring to. We made a very clear statement last week supporting stricter rules for telemarketing operators. But we believe that this stricter rules should apply as well to other channels, third-party retailers where we have as well received a lot of complaints from our customers. So this, in my view, is one of the focus -- one of the priorities for the industry in Sweden and, of course, for Tele2 in the coming few months. Operator: Our next question for today comes from the line of Fredrik Lithell from Handelsbanken. Fredrik Lithell: I would like to come back to your cost profile and the good cost control you are driving the company with. A little bit more on the sort of the software stacks. You alluded to that in the report that you're working your way through with automating the software stacks and all that stuff. How much of that upgrade, modernizing, automating your software environment will sort of trickle through in improved cost profile over time as well? Or is this that sort of you get into a modern state with your software and the cost will be pretty much the same to drive it. It would be interesting to hear a little bit more color on that. Jean-Marc Harion: Okay. Thank you for your question. It's a very complicated exercise to answer your question in a few minutes in this Q&A session because, of course, now, for one simple reason because it's an ongoing transformation process. We have a huge potential ahead. And I believe that Tele2 is leading the pack in the AI and automation initiatives. We received recently an international award for the automation of our processes. We have built -- in parallel, we were optimizing the organization in the company. We have created a dedicated data and AI team. Of course, one of the purpose is to help us better understand the customer behavior, anticipate their issues and make the support to these customers smoother and more faster and more transparent. But we have engaged into a huge transformation of all our processes. So we have a series of initiatives, internal initiatives that empower the managers and the employees to automate their own processes. So we have created a kind of library of tools and small internal academy to support automation and AI initiatives. And furthermore, and I believe that, that is more relevant with the content of your question. We started applying agentic coding in our development. And this, of course, is a huge opportunity because it accelerates the delivery and lower the cost of the development. We haven't seen all the potential of this initiative yet, but I'm personally very impressed by the first results that we are delivering. So far, we don't have any number to share with you. We are just trying to unleash the potential of agentic coding internally to accelerate our transformation. Fredrik Lithell: Very clear. Can I have a follow-up on that, Jean-Marc? Do you expect that you will see the biggest effect or maybe the earliest effects within your production. Or will you see it within your support systems or support functions, I should say. Where do you see the early signs? Jean-Marc Harion: No, we -- I believe that we already see it in the customer interaction because that's where, of course, we put our priorities. We want to improve our knowledge in order to better understand the needs and the issues faced by every single customer segment. But the automation and the development is evolving fast as well, including in the support of our B2B customers. And that's because, of course, I should have mentioned that the automation of our processes started in the B2B area last year when we started trying to automate the processes that we have in place in order to support our large accounts. And this is from there that we have developed this automation academy and so on. Operator: Our next question comes from the line of Andreas Joelsson from DNB Carnegie. Andreas Joelsson: Two questions from my side. First of all, Jean-Marc, your comment about the macro situation currently, how does that impact your growth plans and growth ambitions for the year. Has there been any changes to that given what you see around you? And does it also make you more eager to look further to the cost side and CapEx side? And secondly, just curious, given a quite strong start to the year with 11% EBITDA growth, how did you reason when you decided to keep the EBITDA outlook unchanged? Jean-Marc Harion: Okay. Thank you, Andreas. I believe that the 2 questions are linked. First, so far, the telecom industry has not been the one most impacted by the international situation. So that's good news. But in the meantime, we see a sharp increase in the price of the component of IT equipment. So this may impact our cost, CapEx and OpEx in the coming months. But so far, we can deal with the situation, but this price increase in the component is a concern for our industry, not only for the telecom industry. But of course, the major focus we have is about the consumer behavior. So far, the Swedish economy was recovering, but still lagging behind in terms of consumer consumption. The international situation will probably create some tension as well in the customer behavior and appetite to spend. We will see. We are just careful. And so far, so good. But if the situation lasts, then we will need to adjust. And this is why we are very happy to have transformed the company last year so that we are agile and reactive again. So we can react very fast. We have a much leaner cost structure that help us adjust if necessary. And that explains as well why for the time being, we are careful with our guidance. Operator: Our next question moment comes from the line of Derek Laliberte from ABG Sundal Collier. Derek Laliberte: Just a follow-up there on the guidance and given the strong Q1, what would you say needs to happen or not happen for you to reach the upper end of this EBITDAaL guidance or even beat it? Jean-Marc Harion: Just -- okay, Peter? Peter Landgren: Derek, thanks for the question. I think it will be a little bit of a repetition of what Jean-Marc is saying because I think we have elaborated on it. We have the geopolitical uncertainty, which is both on the component side, but also on things like energy costs and FX and things like that, but most of all, the customer sentiment. And to add to the customer sentiment, it's also about the competitive situation, which is, of course, we know where we stand now in April, but it's a long year and it's early days and how that evolves is, of course, critical for our top line evolvement. So that's something to add and that can bring things to upper or lower end, I would say. So that's what I would add. Derek Laliberte: Okay. Got it. And on competition there, has anything changed in terms of the Swedish competitive intensity in the consumer segment? Jean-Marc Harion: Nicholas? Nicholas Hogberg: Yes. We can see that it's a bit of an increased competition, and it has to do with all the product segments. So we can see it both on Voice, but also on broadband and entertainment TV. So we see that there is clearly higher competition in the market during Q1. Derek Laliberte: Got it. And finally, on TV in Sweden, how do you see the growth prospects from here on? Nicholas Hogberg: We have a positive view on the growth prospects for TV, and we feel that we have a strong offer, and we see a continuous growth in TV. Jean-Marc Harion: And the Swedish football team is qualified for the World Cup. So that's good for the business. Operator: Our next question for today comes from the line of Felix Henriksson from Nordea. Felix Henriksson: I have 2, both relating to capital allocation. Just want to hear your thoughts about why not distribute some proceeds from the Baltic Tower transaction given that your balance sheet is in an extremely healthy state at the moment? And secondly, in the report, you mentioned this proposal to regulate the Villafiber market by PTS. So I just wanted to pick your brain if that has changed your mind in either way about making M&A in fiber assets in the future in Sweden. Jean-Marc Harion: Peter will answer the first question. I will try to answer the second. Peter Landgren: On the capital allocation then, I would put it this way that there was a proposal then from the Board, as you know, along with the Q4 release of a quite appealing shareholder return of SEK 10.5 per share, which we assume will be approved by the AGM now in May. So it's sizable and it fits well into our updated financial policy stating that we want to secure appealing shareholder return while retaining our flexibility. On the Baltic Tower transaction, That's, of course, a sizable cash proceed we received now, SEK 4.7 billion. But as we have said before, that's not really turning the needle in terms of dividend capacity because it also affects which leverage we can allow based on our rating. But we, of course, fully agree. We have a strong balance sheet. We see that as something very positive and something that enables appealing shareholder return also in the future. And on top of that financial flexibility and, of course, good interest rates. So we see that we are in a quite good spot. And then, of course, it's up to the Board to conclude how to pay it going forward. Jean-Marc Harion: And as a reminder, the proposal from the Board to the general assembly consists in distributing 118% of 2025 equity free cash flow, which is partly an answer to your question. And regarding the -- your question about M&A and fiber infrastructure. I would say the comment we make is about the -- we made -- is about the progresses made by PTS, the Swedish regulator in the regulation of the SDUs. So this is, of course, a good news for the Swedish consumers. Let's remember that in Sweden, 1 out of 2 households is a villa, meaning that 1 of 2 villa owner today doesn't have access to competitive offer for the fixed Internet. So this will be a big opening and a big opportunity. And of course, we expect to play a key role in the opening of the market. We are waiting for the regulation to materialize, but at least the first publication by the PTS are a good sign, and we expect the regulation to materialize in the coming few months. Of course, the sooner the better. Regarding the M&A, we will see. I already commented that we don't exclude anything. But of course, the assets have to be available at a reasonable price. So far, we haven't any opportunity on the table. We are looking -- we are observing and scrutinizing the market, but nothing tangible, nothing concrete at this stage. Maybe it's interesting to comment that to remind ourselves that the Swedish market is very fragmented at this stage. Maybe some consolidation will happen in the coming few years. It's not the time yet. So let's wait and see. Operator: Our next question for today comes from the line of Keval Khiroya from Deutsche Bank. Keval Khiroya: I've got 2 questions, please. So last year, you made strong progress on renegotiated supply contracts and on the workforce reduction savings. Can you elaborate a bit more on how you think about the source and scope of additional OpEx cuts in 2026? I appreciate you did speak a bit about automation. And then secondly, in B2B, you've again shown strong revenue growth. Last year, you also talked about wanting to focus a bit more on profitability of some B2B contracts or segments. Are you now happy with the B2B profitability? And how do we think about the B2B revenue to EBITDA growth translation? Jean-Marc Harion: Peter will answer on the contract side. Peter Landgren: Yes. Thanks for the question, Keval. On the workforce and also the contracts, starting with the workforce, we had this big transformation last year, as you obviously recall with a reduction of 650 positions or 15% across the group. And that was completed, as you know, in last year. This year, we're moving rather from this transformation phase to more of an optimization where we will continue to stay disciplined in the workforce number and, of course, use the opportunities created by automation and AI, but it's a different phase than last year. And on the supplier contracts, the work continues. Of course, we had a strong start last year when a lot of contracts were reopened with a lot of potential. There is still a lot of potential, but it's not as obvious as last year. But the ambition is the same, the intensity in the supplier renegotiation is the same, and we reap benefit from it. But at the same time, we should, of course, also remind the inflationary pressure that we see in some pockets, especially around hardware, which Jean-Marc has called out. So we keep on working on this just like before, the discipline continues. Jean-Marc Harion: And maybe a short comment about the constant optimization of the organization. So once again, it's a never-ending exercise if we want to keep the company at the best of its efficiency. So we are moving pieces of the organization, [ permanent ] -- because of the -- we are close from the end of the rollout in Sweden. We reshuffled some team in the network organization. In the meantime, we are reinforcing our skills and capacities in AI and data analytics, but it's an investment in order to create more synergies, thanks to the automation. So that's why it's a permanent exercise. To answer your question about B2B, I will hand over to Stefan. But in a nutshell, yes, no, we are happy with the profitability of our B2B activities, Stefan? Stefan Trampus: Thank you, Keval, for the question and also Jean-Marc. Well, the efforts that we've taken in the B2B during last year, but also coming into this year is really broad-based in order to create a better profitability, which trickles down to bottom line, but we're not revealing in the numbers, but we see a significant improvement during last year, but also in this quarter. We have addressed vendor partner negotiations. We addressed organization where we changed the structure. We have done rightsizing of the organization, and it also continued into Q1. We've done some near-shoring of some resources as well during this quarter. We have outsourced some of our production of some of our platforms. We are working on IT modernization, automation, which Jean-Marc was alluding to earlier, which we kick started early last year. We're creating a center of excellence. And we are, as you know, working on the channel optimization in order to drive versus our internal challenge with one of the highlights during the autumn where we closed 60% of our external resellers. So it's really a broad-based approach on improving efficiency. Of course, one part of this is also addressing individual customers and customer profitability. That is something that we're scrutinizing and have a program in place to drive, and it has also yielded results. So hope that gives you some color, Keval, to what we're doing and it's paying off. Operator: [Operator Instructions] Our next question comes from the line of Andrew Lee from Goldman Sachs. Andrew Lee: I had just a couple of questions around some temporary drags on your customer numbers at the moment in Sweden. Just if you could give us a better sense of scale of those drags and what your service revenue growth might be anticipated to be excluding those. So first off, in Swedish mobile, I think you had a drag on postpaid customer numbers from the 2G, 3G switch off this quarter. What scale of drag is that? When should we anticipate that drag disappearing or dissipating? And where do you think your service revenue growth could be without that? And then similarly, you've talked a lot on the fixed broadband side about the drag from not competing in open networks areas at the moment. Your broadband net add number is negative at the moment. If you were competing in the open networks area with a viable wholesale price as you should achieve or at least hope to achieve post regulation, where would you expect your broadband net add number to be? Should it be still negative? Or would it be flat? And what kind of drag do you think that's placing on your Swedish service revenue growth? Those are the 2 questions, I mean, overarching is if you didn't have those temporary drags, where do you think your Swedish service revenue growth would be this quarter as an insight for how we should think about things going forward given that even with those drags, your Swedish service revenue growth was 2.4%. Jean-Marc Harion: Thank you, Andrew. I will try to answer the question together with Nicholas. But to make it clear, the 2G, 3G switch-off took place in December. It impacted some prepaid and low ASPU customers in January. So it was a temporary hiccup. We came with a number of solutions and proposals to support the customers who have the -- who were using noncompatible phone for VoLTE, 4G and so on. Unfortunately, we couldn't reach all the customers for obvious reasons, but it was a temporary hiccup. So it's behind us now. Maybe Nicholas want to complete and elaborate on FBB and competition in the open networks. Nicholas Hogberg: Yes, absolutely. Thank you, Jean-Marc. So what we see is that some of our competitors is actually quite aggressive now in the broadband space and in the open networks. We even see competitors are selling right now at below cost, which we are not participating in. So when the regulations come in place, we, of course, see an opportunity to expand more and hopefully take market shares. But we are waiting for the regulations to come in place, and then we can get back more on that matter. Andrew Lee: Okay. Can you give us a sense of how many customers you ended up losing from that 2G, 3G switch off? And I get your point on broadband that there's also intensified competition in the space that's also dragging on customers. But is there any sense of giving us -- is there any scope for you to give us a sense of the scale of drag from not being able to compete in the -- or not being able to compete in the open networks there at the moment? Jean-Marc Harion: No. But allow us not to answer the first question about the 2G, 3G drag because, of course, it's an information that we keep for ourselves. But once again, it's a temporary hiccup. It's behind us now. And regarding the FBB, we don't have any I would say, forecast or estimation to share either. Operator: Our next question comes from the line of Nick Lyall from Berenberg. Nicholas Lyall: Just coming back to the cost question, please, for 2026. I mean you mentioned about staff costs and procurement, I think in Keval's question there. But could you give us an idea of the scale of savings available to you? You've got roughly 3/4 of your staff savings done before the end of the first half in 2025. So it feels like the pull-through effect for 2026 is going to be minor. But also how far are you through the procurement process itself. Could you help us on that, please? Because some of the comments about inflation from maybe the geopolitical effects and others suggest there's not a lot to go. So could you help us with the absolute amount of savings you might see in '26 versus '25, please, so we can start to sort out the forecast. Jean-Marc Harion: Peter, can you take this one? Peter Landgren: Yes. Nick, we are not calling out specific numbers, but the flavor around 2025 and '26, of course, as we have said and the main impact or a larger impact was seen in 2025 when we kickstarted this exercise and had some quick wins as well. So we had sizable savings last year. We will see benefits from it this year as well. So it is a contributor, of course, partly flow-through effects, some of it from last year and additional efforts that are doing this year. But the magnitude is lower simply because it's getting tougher and tougher and because we have some cost avoidance to take care of as well. But we're not calling out specific numbers, but it's a high priority also in 2026. Nicholas Lyall: That's great. And the timing of any AI contributions. It sounds like maybe it's a benefit possibly to service revenue, predictability of consumers and things like that. There's nothing we need to think about sort of the AI contribution immediately is there? Peter Landgren: I think it's -- we have benefits from this in different places, obviously, on how we meet our customers and how we approach them. On the cost side, we have, of course, efficiencies to reap the benefits from on how we're working, and we will get savings from that. But it's gradual. We have seen some of it, and we keep working on extracting more savings there. Operator: Our next question comes from the line of Ajay Soni from JPMorgan. Ajay Soni: I've got 2. The first is around business growth, which was very strong, and you mentioned IoT. So I was just wondering, can this growth continue around this mid-single-digit level because obviously, B2B revenues can be somewhat lumpy. And if it is going to continue at that level, what is driving that growth? And then my second question is just back to the costs. So you still had pretty sizable redundancy costs in Q1. So could you tell us what your FTE reductions were in Q1? And I can understand maybe you don't want to give a number, but do you have a target for your FTE reductions for 2026? Jean-Marc Harion: Okay. So let's start with IoT. Stefan, do you want to answer it? Stefan Trampus: Yes. Ajay, thank you for the question. I think I'm going to answer it in a general perspective. And I mean, you're correct, and we talked about it before. We time to time have quarters with some swings due to larger wins, customer wins or larger rollout projects. So that can happen. Overall, I'm really happy that we have a well-diversified portfolio and that over time takes turns in driving the growth. We have a focused portfolio with some decisions that we did last year, but it's still a well-diversified portfolio, which gives us this ability to have growth from different sources. And this quarter, we basically have growth on all product lines and then the stabilization of the fixed part and the fixed connectivity that we saw some quarters ago has continued, driven by deals that we're doing in that domain. And also that we see that there's a need of modernization of networks, indoor networks, et cetera, for the customers. There's modernization in regards to cloud, more capacity that customer needs to bring to their businesses. So this is driving continuous, I would say, need of modernization for our customers, and that helps our growth overall. This quarter, IoT stands out. It's the highest growth driver, which we're happy to see. And it's driven by increased usage, which is a very positive sign. So not directly RGU. We have good RGU development as we've had before, but very much the usage part, which is good to see. And as I communicated before, I think we expect IoT to continue to grow on the basis of more deployments of IoT-enabled devices throughout the world. So that's overall what we see at the moment. Looking forward, I think I commented the profile for the year. I wouldn't say that you should take into account Q4 or Q1 as the level of growth for B2B. You should rather look at the full profile for 2024 when you look at the profile for the full year. You know that we had a really good ending of last year. It's going to be hard and the comps in end of this year will be high. So it's going to be hard to see the same growth rate that we've seen in the last couple of quarters. So look at it from a full perspective of 2025, I would say, going forward for this year. I hope that gives you some color, Ajay. Peter Landgren: And maybe I should -- Peter, I can continue with the second question around redundancies. Yes, you have probably noticed it in our notes that we have redundancy costs of around SEK 40 million in Q1. It corresponds -- to answer your question, that corresponds to roughly 45 people. We don't have any specific targets on downsizing this year. As we have said, last year, we had a big transformation with the 650 people reduction. This year, it's more about optimization. So it will be more of a gradual optimization never ending that will continue. And that's how you should probably look at the workforce side. Operator: Our next question comes from the line of Viktor Hogberg from Danske Bank. Viktor Högberg: Just a continuation on the Tower commitments and the rating agencies. Could you say anything if you got something new on the kind of leverage cap you're looking at following the Tower deal? Is it still 2.6, 2.7? And then another question on the cash flow. Just working capital, do you expect it to be neutral this year. And the CapEx, how much was the delayed hardware CapEx now in Q1 that is going to be caught up during the rest of the year? Jean-Marc Harion: Okay. Peter? Peter Landgren: Thanks for the questions. My favorite questions. Let's start with the leverage or the rating view on this. As you point out or as we've said before, we believe that the cap for our BBB rating is, as you said, around 2.6, 2.7, something like that based on the present context. On working capital, it's clear that this -- we have a clear seasonal effect. We have seen it before. We are, of course, in the holiday season in Q4 with Black Friday and Christmas, we -- and also sometimes also on Apple launch, we're selling a lot of equipment and then it's a bit of time lag before we can get it financed by our financing partner. And that's a very big piece of the working capital upside we see in Q1 and that one, all else equal, will, of course, normalize or bounce back for the remainder of the year. And yes, we see some delays on the CapEx side. I can debate exactly which number, let's call it around SEK 50 million that delay, but it's, of course, a matter of definition. Operator: Our next question comes from the line of Siyi He from Citi. Siyi He: I have 2 questions relating to your fixed business. The first question is really a follow-up on your answers to Andrew's question earlier that you mentioned the pricing competition is particularly intense in the SDU market. Could you just let us have a visibility who are the operators that you see being aggressive on pricing? Are they MNOs or they are more like the ISPs? And the second question is that I wonder if you can tell us if you have seen any changes on the cable trends after you have done the speed upgrades. I saw that landlord revenue are still declining by 4%. Just wondering why you are still seeing all these kind of rental revenues from MTU landlords are still coming down? Jean-Marc Harion: Okay. Thank you for the question. Nicholas is going to answer those. I'm not sure that we want to share information about competition, but Nicholas? Nicholas Hogberg: No, exactly. No. But we can see an overall competition in the market from all the players. So I won't comment that more. When it comes to our upgrade of the network, we see very positive reaction from our customers. And we see also that we have a strong offer in the market with the highest speed in Sweden in our network and with a very good footprint. So we, of course, are very optimistic about that going forward. So that's about it that I can comment right now. Operator: We will now take our final question. And this question comes from the line of Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: Maybe just one on the Baltics. We've seen you continue to deliver very strong organic end-user service revenue growth in these markets. I think there was a perception that maybe the sort of price increases led revenue growth might slow in the future. So maybe just -- it would be helpful to hear your latest thoughts on the potential to use -- continue using pricing as a source for growth in these markets? And then secondly, just any color there on your sort of thoughts heading into the spectrum auction that you mentioned in Lithuania. Just any thoughts around the potential size or any context that you can give us there would be very helpful. Jean-Marc Harion: Okay. Thank you for your question. I would say that the way price adjustments are applied in each Baltic country takes, of course, into account the positioning of Tele2 in this country, meaning that we are not doing anything crazy. We are just adjusting when we see an opportunity. We remain very well positioning in terms of price points. And of course, in these markets, the largest part of the sales are done in our own stores. So based on conversation and in discussion with the customers. So I would say it's a kind of very smooth and more and more sophisticated price adjustment that we apply in the Baltic countries. So no risk that Tele2 loses clear position as the best value for money in these countries. Regarding the auction, the spectrum auction in Lithuania, I believe that the message that we wanted to convey here is that please don't forget about this auction in your computations. But so far, we don't have any indication of the price, and we cannot, of course, comment on the details of the auction. Operator: That was our final question for today. This concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.
Juha Rouhiainen: Good afternoon, good morning, everyone. This is Juha from Metso's Investor Relations, and a warm welcome to our first quarter '26 results conference call where we have our President and CEO, Sami Takaluoma; and CFO, Pasi Kyckling, briefing you about the results. Sami will start with some of the highlights and then Pasi will walk you through our financials and cash flows in more detail. And after that, we are taking your questions. Before we start, a couple of reminders. First of all, we will have our forward-looking statements disclaimer in the presentation deck and today is our AGM. So it's a busy day, and that's why we are going to limit this call to 50 minutes. So please take that into account and ask as briefly as you can. We would appreciate that. With these words, Sami, over to you. Sami Takaluoma: Thank you, Juha, and good afternoon also from my behalf to everybody. Let's go through the Q1 performance. In a nutshell, strong orders and delivered solid margin during the first quarter of this year. Our orders received amounted EUR 1.555 billion. This is 6% growth year-on-year. And in organic constant currencies, it's 10%. Sales was EUR 1.252 billion, and this was also growth from last year, 3% or in organic constant currencies, 5%. Adjusted EBITDA EUR 203 million, growth 5% year-on-year and representing 16.2% margin relatively. Operating cash flow for the quarter was EUR 78 million. And in the rolling 12 months, it's representing EUR 856 million of operating cash flow. So as I said, the order intake for the year was strong and kicked off our year very well and nicely. Our book-to-bill for the period is 1.24, improvement from the last year when it was 1.21. Order growth was strongest in the Aggregates equipment and Minerals aftermarket. Our backlog went up by 6%, and this was heavily driven by the aftermarket in our backlog now. Sales growth that we delivered that was mainly led by the Minerals equipment where we continued to finish the projects and Minerals segment was the main contributor to adjusted EBITDA growth that we delivered in Q1. Our strategy, we go beyond that we launched Q4 last year and now under execution. It is focusing on the high-value growth elements. We are doing the investment in our rubber products plant in China. During the period, we also completed the acquisition of MRA Automation, Australian-based automation and software company. And one, I really want to highlight here is the partnership with Loesche, and we are introducing the vertical roller mill dry-grinding technology, ground breaking with a very efficient way of doing the grinding in the future. Completion of our divestments, both the Ferrous and our Loading and Hauling businesses, they were completed as planned during the period and creating further strength for our strategy execution, focusing on the right topics. We have also completed the ERP renewal project. Rollout is done. We have now a state-of-the-art software in use for the whole company the same way and the next phase is then to get the benefits of this investment in the coming quarters and years ahead of us. And also, I want to highlight that record-high engagement score and also noteworthy, the active co-creation that is strengthening the growth culture that we have. We are measuring the employee engagement 4 times a year, and it was a pleasure to see the all-time high scores now in the Q1 round. Regarding the outlook, we keep the outlook unchanged. We do see the market as a positive, meaning that it stays in the stable good activity level. Market activity in both Minerals and Aggregates are expected to remain at the current level. And I want to highlight also in the statement as well that the geopolitical turbulence could potentially affect the global economic growth and, therefore, also the market activity in our segments. And now if I give the microphone to Pasi to walk through the financials and the cash flow topics. Pasi Kyckling: Thank you, Sami, and good day, everyone, also on my behalf. Let's start by looking at our orders and revenue development. Order intake at EUR 1.555 billion, representing 6% year-on-year growth or 10% growth in constant currencies. The equipment side of the business grew 8% or 12% in constant currencies and aftermarket orders by 4% or 8% in constant currencies. And the order performance was especially good in Aggregate capital side and then Minerals aftermarket business. Aftermarket part of the overall orders was 66%. In this quarter, we also won the EUR 100 million greenfield copper project in Peru. And in the comparison period, we had EUR 60 million order from Almalyk project in Uzbekistan included. The order book at the end of Q1 totaled to EUR 3.6 billion, it's roughly 6% up year-on-year, and all that increase comes from Minerals aftermarket business. Then our revenue at EUR 1.252 billion was 3% up or 5% in constant currencies and it was driven by Equipment aftermarket was 1% down. And aftermarket represented 55% of our sales. Let's then look at our EBITDA development and earnings per share. Our EBITDA increased to EUR 203 million and then from a margin point of view, the increase was 0.3 margin points from 15.9% to 16.2%. The higher volumes contributed with EUR 13 million in a positive way and the gross margin increased by EUR 25 million or by 2 margin points. Then on the headwind side, we have increase in our SG&A by EUR 12 million. And then under other items, it's primarily currency where we had last year some tailwind and this year, some headwind and this relates primarily to hedges that we don't hedge, account and we need to mark to market at the end of each quarter. Overall, in Q1, both equipment businesses in Aggregates and in Minerals continued to deliver healthy margin levels. Then EPS is unchanged from a year ago at EUR 0.14. If we then move to our cash flow and cash flow from operations was lower than in comparison period at EUR 78 million. This was mainly due to inventory buildup and timing of the cash flows in our mineral capital project deliveries. In inventory, it's primarily work in progress inventory and it is in both Aggregate capital and then Minerals aftermarket. In Minerals aftermarket, it is especially upgrades and modernizations where we have had good order intake during last year and are now in the middle of delivering many of those activities. In Aggregates, it is Aggregates capital. It's more seasonal. We are preparing for the stronger equipment delivery season during the European or Northern Hemisphere summer period. Looking at the rolling 12-month cash flow from operations and then the cash conversion, we continue to be at a healthy level, and we expect to deliver also healthy cash flow throughout 2026. If we then move to our balance sheet and balance sheet continues to be strong and support fully our strategy execution. Net debt to EBITDA is unchanged at 1.2x. We continue to have Baa2, a long-term credit rating with positive outlook from Moody's and that continues to be a good support for us while we execute our strategy. Let's then look at our segments and start with Aggregates where we have all-time high order intake at EUR 440 million. And it's noteworthy that in this order intake, we see a clear pattern that some of the orders are placed not only for the second quarter, but also for the second half of the year. So sort of a pre-buying phenomenon visible in that regard. The equipment orders represent 20% growth and aftermarket is 14% down. Regarding the aftermarket development, I just want to highlight that we have done a minor adjustment in our presentation between capital and aftermarket when it comes to screens and that has a slight negative impact on the reported growth numbers in the aftermarket part, both in orders and revenue, and we have not adjusted the comparison periods. Then EBITDA in Aggregates was EUR 1 million down at EUR 48 million, with solid 16% margin and continued healthy margins in the equipment side of the business. If we then look at our Minerals, there, the orders increased by 5% or 8% in constant currencies to slightly above EUR 1.1 billion. Equipment orders were flat or 3% up in constant currencies. And again, I just want to highlight the major order that we won from Southern Peru Copper Corporation regarding their greenfield copper projects in Peru. Small- and medium-sized orders were at a good level and in average at the same level that we had during 2025. Then aftermarket orders increased 7% in reported currencies or reported numbers and 10% in constant currencies. And the upgrade and modernization part of the business from order point of view is up 14% year-on-year. So we continue to see a very healthy development there. And then spares and consumables are supported by the good high utilization in our existing customer mines. Aftermarket share of the total orders was 66%. Then sales increased 5% to EUR 953 million representing 6% organic growth. We had 3% currency impact and then also 2% positive impact from acquisitions that were concluded after the previous period. Equipment sales up 14% and aftermarket up 1%. And again, we continue to have a very strong order backlog when it comes to aftermarket and expect that to deliver also revenues during the coming quarters. Adjusted EBITDA at EUR 168 million with solid 17.6% margin, and this was supported by overall sales increase and then healthy profitability in our equipment part of the Minerals business. With that, I would like to hand back to Sami to summarize our quarter. Sami Takaluoma: Thank you, Pasi. As said already, a very solid start for the year and strong orders, creating a very good healthy backlog. We do see the heightened geopolitical uncertainty remaining as a risk and then our strategy execution is progressing very well at the moment. With that, to you, Juha. Juha Rouhiainen: Thank you, gentlemen. And operator, now it's time to open the Q&A lines. Operator: [Operator Instructions] The next question comes from Chitrita Sinha from JPMorgan. Chitrita Sinha: I have 3, please. Just firstly, to ask on the phasing of the aftermarket deliveries this year. I mean if I look at kind of the average orders over the last few quarters, it's been above 650, but then Q1 deliveries was weaker, it was below 600. So can we expect to pick up from Q2? How are you thinking about it? Sami Takaluoma: Yes. Thank you. Good question, and your logic is correct. So we do see that we have this good backlog that has been built up and the deliveries are starting from the Q2 onwards then. And that is something that you can expect to see from the Q2 sales point of view. Chitrita Sinha: Great. And then my second question is just if you could provide a bit more color on kind of the demand backdrop in Minerals. We've clearly seen a significant amount of volatility in commodity prices this year. Maybe by commodity would be really helpful. Sami Takaluoma: Yes. We have highlighted this also in the report that we do see this as a risk. We all remember what was the year '25 and how tariffs did impact partly for that demand. However, the indications of any major delays or postponing or even canceling the decision of the new capital projects are not really here. So we don't hear that from those customers that we discussed at the moment. But it's very clear that especially the energy price cost and how does the future look like is having an impact, and it needs to be calculated in for those projects. So that's why we do keep that as a potential risk at the moment. Pasi Kyckling: Just adding a little bit color from a commodity point of view. So like we have seen during the course of last year and early this year, we still continue to see high amount of activity in copper and gold driven projects. So don't see that those demand drivers have changed by any means. So it's the same market where we continue to operate. Chitrita Sinha: Okay. And then final question is just on the inventory buildup this quarter. I know you've provided a bit more color in terms of why that happened. But maybe if you could give a bit more detail in terms of what kind of range should we be thinking about? I mean, previously, we've spoken about maybe going towards the [ EUR 1,800 ] level. And now if I look at the Q1 inventory level, it's gone up back towards the [ EUR 2 billion ]. Is there maybe a range that we should be thinking about when looking at inventories? Pasi Kyckling: Yes. Thank you for that. And a fair question. At the same time, we're not -- we will not provide you sort of a range, but rather think that way that over time, the inventory efficiency. And as a matter of activity, working capital efficiency overall should not deteriorate. And while we don't have a formal target -- a financial target on working capital and inventory to be more specific, we see opportunities to improve the efficiency. And obviously, first quarter was not a proof point of that, but it's only one balance sheet point. And we are working with the underlying drivers there to improve the overall efficiency and then provide solid cash conversion. And when I talk about efficiencies, I'm referring to working capital over sales or then DIO, DSO, DPO type relative indicators. Operator: The next question comes from Klas Bergelind from Citi. Klas Bergelind: So my first one is on Section 232 and the changes to steel, aluminum and copper from April 6. I'm trying to understand the extent you're impacted. Will this increase your effective tariff rate and by how much? And can you remind us of the import share to the U.S. for the group and for the 2 divisions? And how much today of COGS is steel, aluminum and copper? I have a 50% input share for the group and about high single-digit share of COGS being raw mats, but any more sort of color here would be very, very helpful. Pasi Kyckling: Yes. Thanks, Klas, and good and current one. I'm not sure if I can provide all that detail to you. But if we start from the helicopter point of view, so Aggregate business continues to be excluded from 232 and we indeed recently saw the change in 232 when it comes to sort of the calculation basis for that earlier. It was the steel, aluminum content. And now it seems to be the total tariff value of the equipment in question. And then obviously, that's driving the tariff base up. From our point of view, we continue to work with the same approach as we have done during the course of last year. So we work with our customers with surcharges and the new surcharges based on this initial period seem to be higher, which makes sense from the calculation logic point of view, and that is what we are charging from our customers. So again, we are not making money out of those, but we are not suffering from those either. That's the approach we have taken and will continue to take on this. Klas Bergelind: You are -- you're basically seeing the reciprocal tariff, basically, you're not seeing anything on steel, aluminum and copper from Section 232 impacting the Aggregates business just to confirm if that's... Pasi Kyckling: That's correct. So to be more specific on Aggregates, and maybe I said it already, but screens and crushers are excluded from this tariff. And there was a speculation late last year that the exclusion would come to an end, but we haven't seen that happening, which is obviously positive. Klas Bergelind: Okay. No, that's good to hear. My second very quick one. I know we're only allowed to ask one question, but this is super quick. Just on aggregate, you're talking about pull forward of orders. Can we talk a little bit about like the reasons where there is some pull forward in? Because people were thinking that this could be a change for tariffs. Was this North America led? And also in Europe, are you seeing some hesitation? Obviously, Aggregates is -- and construction is quite sensitive to inflation rates and so forth, it's early days, but are we seeing any sort of customer discussions showing some hesitations in Europe? Just to get some more color on this pull forward and also European commentary. Sami Takaluoma: Yes. Thanks, Klas. So what we did see was this orders in U.S. for the Aggregates with the requested delivery date, not immediately, but later on the year. So we took that as a positive signal that the customers and our distributors do see the market as a very good and looking good also going forward. And these have been then reflecting these orders, the situation in the market. When it comes to the Europe, it still remains kind of like not one rule to apply for the whole continent, and it's more like a country-based approaches. We see activity in Southern and Eastern European side and then remain still quite slow from the perspective of so-called maybe even more traditional aggregate countries. And from that point of view, do we see elevated level of hesitation discussions? Not maybe really, Klas. So it's unchanged from the end of the year when it comes to the European side. Pasi Kyckling: Maybe then just from order book, Klas, still from order book point of view, I mean both Europe and North America had a healthy order growth. So this growth is coming from both of our main markets. Operator: The next question comes from Christian Hinderaker from Goldman Sachs. Christian Hinderaker: I want to start on the Middle East, if I may. Can you just confirm your percent sales exposure to the region maybe highlight any single country, context worth discussing? And then you mentioned in the release targeted measures to manage supply chain and operational risks. I appreciate it's fluid, but what's your current base case for the direct and indirect cost effects? Sami Takaluoma: Yes. To start from the region. So it represents something like 3% of the whole company sales. So that's the exposure. And of course, the situation has created certain activities also on our side, logistics is one clear one we have been quite good situation because many of our supply routes have already been going around Africa before the incident started. So from that perspective, the countries in question, obviously, Saudi is a big one for us. We got at the end of last year, the gold plant order, as an example. And then also, Oman has been a country that we have a lot of activity at the moment. As it is today, operations continue. Our work continues, but we, of course, need to very carefully all the time observe the situation and how it develops. But this is how we see the Middle East situation at the moment. Pasi Kyckling: Maybe still just to add a color. Obviously, logistics costs are up. We see some fossil fuel-related inflation. And the way we are approaching this is similar that we did during the COVID time. So playing inflation game in a way in both end of the supply chain in one hand with our suppliers and then in the other hand with customers to manage it -- manage it well. But just to confirm that we obviously see also some of those inflationary pressures that have surfaced after the crisis. Christian Hinderaker: Can I just come back to the Section 232 and also your comments on aggregates pre-buy. If a customer is ordering now, are they affected by the tariff, if it changes later, do you think the pre-buys are about that tariff's concern? Or do you think it's more about hopes for a demand improvement? Pasi Kyckling: Christian, it's a very good question. And when it comes to tariff speculation, obviously, should there be tariffs, we don't know how they are implemented, whether they are implemented on sort of new deliveries or everything that crosses the border after a certain point and so forth. So that's difficult to say. Our read is more that that's a sign of confidence to longer-term market development in the U.S. and sort of our partners, distributors, customers preparing for that, not only in imminent short term, but also looking towards the second half of the year. Operator: The next question comes from Antti Kansanen from SEB. Antti Kansanen: A few questions from me as well. I'll start with the demand on the Minerals aftermarket side. And I mean, good growth that you have had now 4 quarters of decent growth in the business. So could you maybe remind a little bit on kind of the growth potential going forward, the comparison, the timing of kind of when you started to see the modernization and retrofit business increasing. I mean, is it reasonable to now assume a bit of a normalization of the growth? Or do you think you can still accelerate on that one? Sami Takaluoma: Thanks, Antti. For the Minerals aftermarket side, it's one of those centerpieces of this growth strategy, and we do see potential to continue to deliver growth. And actually, the target as well is that we see the aftermarket products demand very, very good at the moment, market as well, and that makes us to see that strong single-digit growth numbers to be delivered also in the future. You know very well. And a reminder that we are having the widest portfolio of the technologies in the downstream of the minerals processing and that gives us a very good potential for the growth going forward as well. Modernization and upgrades, they are the one that have a certain cyclicity. And from that perspective, as Pasi was stating, we have seen good amount of these orders coming in the past few quarters already. How that looks going forward is that the funnel -- the pipeline for new orders is looking good. And then it's about the timing issue of the customers to make the actual decision to move forward with these opportunities. Antti Kansanen: Okay. Great. And then maybe a follow-up on the things that you said on what you expect from the decision-making and kind of the geopolitical uncertainties. So I just wanted to make sure because you've been quite optimistic on certain large orders and investment decisions. Have you seen any concrete evidence kind of in March or early April that some of your clients have been maybe slowing down some of the processes or are asking to recalculate some of the project items because of inflation? Or is this just a kind of a cautionary statement if the war lingers on and will have an additional impact? Sami Takaluoma: Yes, we have -- as I said already, many of the customers that we have discussions in a certain phase, they have not indicated any change of the time tables. But then on the other hand, yes, we do see also a recalculation need also coming to our direction to check certain project elements and the timing of them and also the price from our side of them. So it's an indication that the recalculation, it is happening. And for me, it makes sense also to do that, of course. But this is why we remain a little bit cautious of that, what will be the true impact of this for this greenfield and large brownfield projects going forward during this year. Antti Kansanen: Okay. And the very last for me is your exposure to LNG availability and prices through your foundry setup. Could you comment if there's any substantial risk that you see because of the... Sami Takaluoma: Yes, and that's coming mainly from the India side where the LNG was and is the main energy source. Yes, we did see the risks, especially in the beginning of the escalation of the situation and the incident in Qatar. So what we have seen is that the prices have increased, which is natural. But the biggest risk that we had in our hands was that do we have enough LNG to run the operations. That has not materialized. So we have been able to operate normally. But the cost level has increased and also our suppliers have been seeing the same and adjusting the prices. So as Pasi was saying, this is what we see logistics side and also then the component and supplier side. Antti Kansanen: And this will lead to price increases from your end going forward. Sami Takaluoma: This is the normal way to handle this. So as I said, we have taken this into account in our price increases that have been introduced in April and first of May, the next batch. Operator: The next question comes from Tore Fangmann from Bank of America. Tore Fangmann: Just 2 questions left for me, both on the aggregates side of the business. First one would be, so we do see now and for a while, a pickup in the equipment demand in aggregates. On the other side, the service part, the aftermarket side of things remains fairly low and weak. Could you just help me square this together? So there's need from customers for new equipment, but on the other side, the utilization still remains low. Sami Takaluoma: Yes. For the aftermarket question, so it is exactly, as you said, when the utilization of the machines is low. So then the demand and need for the aftermarket products is also low, and that's the reason for our aftermarket not yet in a growth mode in the aggregate side. And then our capital equipment business in aggregate is going through the distribution, especially in the U.S. And then the equipment is ordered and delivered and they don't always go directly for the end customers to use to generate the aftermarket either because during the '25, the distributor stock levels normalized, meaning that every month, they were in lower and lower levels. So now there is a need for restocking and having the machines available for the work for the end customers with the coming months and quarters. Tore Fangmann: Okay. I understand. Then maybe just a follow-up on this one. So when utilization is still low, it seems like the overall end market demand has still not really picked up. So the current growth in equipment and you also mentioned some prebuying already for the second half of the year. So is this all just distributor driven? Or is this actually end market demand driven the pickup that you see? Sami Takaluoma: I think the pickup is the end market driven, but you need to remember that this is very regional or let's say, even local business. So as an example, from the Europe, there might be good activity both in the new equipment orders and also utilization of the existing equipment in the country. And then the neighboring country might be on the quite opposite way. So this is what is highlighting also the dynamics of the aggregate industry in general. Tore Fangmann: Okay. Understood. And then just one last, just to understand the strength in Europe is largely driven by the Eastern European countries. Any sense around Germany or other Western European countries picking up again? Any impact from the infrastructure package from Germany? There's something you can share. Sami Takaluoma: Yes, there's a so-called traditional good market for us like Germany, France and so on. So they are not zero, but on a low-ish level and for the Germany-specific question. So our customers do not see yet any impact of that stimulus package that was announced. So that's why they have not been activating themselves either when it comes to the orders. Operator: The next question comes from William Mackie from Kepler Cheuvreux. William Mackie: My first maybe was to go back to the question about Minerals aftermarket and just dive into the discussion about the disconnect between the order intake and the revenue booking. Can you maybe provide a bit more color on what it is that has caused the lumpiness of orders and the disconnect for the revenue booking in aftermarket Minerals? And when we look into the Q2 to Q4 acceleration of revenue bookings, I mean, can you give a little flavor as to either the regions or the product segments which you expect to lead to that upturn in aftermarket, please? Pasi Kyckling: Yes, Will, thank you very much. A good question. I mean if we start from a lumpiness point of view, so especially the orders, we believe we have seen sort of a solid healthy, high single-digit growth from period to period like we saw also now. Maybe if you refer to with lumpiness to the revenue side. So indeed, the growth has not yet picked up in revenue. And that is simply a timing question for us. So the backlog is healthy. We discussed the upgrades, modernizations, retrofits, delivery times there are longer than in the transactional part of the business. Then you were also asking about regions. I don't know if we can point out a specific region. I mean, it's generally the mining regions. One area to highlight when it comes to upgrades and modernizations is, of course, Australia and the iron ore related modernization cycle that needs to happen and is happening there. But it's not only that. It's also in the other mining regions. Again, we believe we are in a very good position with the order book. Like I said, the full backlog growth is from Minerals aftermarket, order of magnitude, EUR 200 million year-on-year growth there, and that will realize the revenues during the coming quarters. William Mackie: Maybe the second or follow-up was that I wanted to go back to your medium-term goal of 20% margins in Minerals. I mean, if we look, you've made a great step forward to the 17.6%, but it's still 240 bps below your target and equipment seems to be rising as a share of mix, which is normally something of a headwind. So perhaps you could walk through, again, the levers to get us back to the -- or get to the 20% with regard to pricing or aftermarket efficiencies? And what sort of time frame to get there? Pasi Kyckling: If we start from the time frame, so our target is to deliver those margins, both in Minerals, Aggregates and as Metso by 2028. So that's the timing we are looking. Then when it comes to levers, it's about growth and specifically in aftermarket. We recognize that in capital side, it may be lumpier, especially orders to some extent, also revenue recognition, but even the big projects, the revenue spans over 6, 8, in some cases, even in 10 quarters. And then we'll -- to the point you are raising regarding the business mix between capital and aftermarket, not at all a major concern for us. And the reason is simply that the margins are good to start with. We have healthy capital business in Minerals. And if we see volumes going up, which we, by the way, don't currently see because the order book has been built with aftermarket focus, that will give us volume leverage. And then we are also working with the portfolio optimization to sort of grow the higher margin solutions or businesses that we have within Minerals and then improve profitability in the areas where we lack behind our targets. Finally, self-help is also something we are doing. And again, none of us will make miracles overnight. But the time horizon we have in mind is to deliver in line with these targets by 2028. Operator: The next question comes from Panu Laitinmaki from Danske Bank. Panu Laitinmaki: I wanted to ask about SG&A costs. What was behind the increase we saw in Q1? And how should we think about ERP costs? So are the kind ERP implementation costs over? And should you actually get the benefit from the new ERP system going forward? Pasi Kyckling: Thank you, Panu. And the costs are up, order of magnitude, 3% in line with the inflation. Obviously, something we are not happy with. Our ambition is to offset the inflation. And then when it comes to -- and inflation is the main driver in the cost increases that we saw Q1 year-on-year. And then ERP specifically, like Sami said, as part of his summary, the implementation is over. We have closed the implementation projects. So the specific costs related to implementation. We had some still in Q1 second quarter, we will not have those anymore. So going forward, we have a clean ride from that point of view. And now is the time to start harvesting benefits from the investment. And it has been a massive project. It's a big change to our teams but we see those efficiencies coming through. But again, will not happen overnight. It requires dedicated work. Provides also opportunities to apply more new technologies and everybody is talking about AI. We are also thinking and working with AI, it relates to ERP, but it relates to other things as well. So a big investment. And indeed, you are right, we need payback for that. Panu Laitinmaki: Can I just ask -- can you quantify what was the ERP implementation cost in Q1? Pasi Kyckling: Well, I mean, in Q1, we talked about single-digit millions like we have had throughout the implementation phase. Second quarter last year, you may remember, we had a bit accelerated or increased cost because that was the biggest sort of a go-live that we had. But other than that single-digit millions that we have had in P&L from that better quarter. Operator: The next question comes from David Farrell from Jefferies. David Richard Farrell: I just wanted to circle back to one of the highlights of the period, which was the partnership with Loesche and the VRM product that you are pursuing there. Can you just give us a bit of an extra detail around that, kind of what is it looking to replace kind of what kind of market share? Do you think that kind of gives you -- just any extra color around that would be great, please? Sami Takaluoma: Thank you for that question. It's a very new technology for the mining circuit, but we chose to partner with the market leader in other industry, mainly in cement, the Loesche. So what is this technology doing? First of all, it is dry grinding and we all know that the new greenfield locations, they are quite challenging locations, not only with the infrastructure, but also when it comes to the supply of water and in that sense, this is going to be helping a lot for those future flow sheets in terms of not needing to have that amount of water in the mining -- minerals processing processes. Second clear benefit is that this is energy-efficient way of doing the grinding. We talk about 40% less compared to the conventional grinding operations. And then as a cherry on the cake, you can also optimize the flow sheet. So actually less equipment is going to be needed when the dry grinding is fully implemented in the flow sheet. So we see a lot of positive elements here for making a difference in the mining operations. David Richard Farrell: And just as a follow-up. When do you think we could perhaps see the first one of these orders be received by Metso? Sami Takaluoma: It's an excellent question. This typically is a slow process from the perspective. Of course, we are more than happy to take the orders immediately. We are ready for that. But it's a slow process because it first needs to get into the flow sheet and then the process starts from the customer side to develop the project, get the financing, get the cost base and so forth. So typically, it is some time from this kind of launch that we start to see the first orders. But the teams are very engaged and there is a good interest towards this technology. So we are waiting eagerly to see when we start to get the benefit of orders. Operator: The next question comes from Mikael Doepel from Nordea. Mikael Doepel: Very briefly coming back to working capital. Just one question on that. So you talked about the reasons for the buildup there, but I'm just wondering if you have any comments on the full year? Do you expect that to reverse in the second half? Pasi Kyckling: Thank you, Mikael. And like I said, in relative terms, we have an ambition to be in par or improve our performance over time on sort of a rolling basis and not to repeat the working capital investment that we did in Q1. Then again, if the business continues to grow in a significant way, it may be that in absolute terms, we need to invest more. I guess that's really what we can say at this stage. Juha Rouhiainen: All right. Thank you, everybody. As a final question, I have received a question from Ed Hussey of UBS by e-mail, Ed is offline, but he wants to ask about operational leverage. So he says that Metso delivered strong drop-through margin in Q1 despite equipment being a bit higher in the mix. So what was the main driver of improvement in gross margins and what kind of drop-through should we think about going forward, specifically in Minerals? Pasi Kyckling: Okay. Thanks, Ed, for the question. I think we partly discussed this during one of the earlier questions, but the starting point is that we have healthy equipment margins. We had healthy equipment margins also in Q1. And even with this business mix, we're able to deliver a solid Minerals margin. The gross margin uplift there is, of course, a function of price work, cost work, and that continues. We don't guide on margins, so I can't give you an exact number there. But what we expect, like we have also discussed is the aftermarket order backlog to realize the revenues and aftermarket continues to have higher margin than the capital. So that will also support us going forward. Juha Rouhiainen: All right. Thank you, and we have spent exactly 50 minutes. So thanks for being efficient. Thanks for your questions. Thanks for participating. We conclude here. And just a reminder that half year review will be out on July 24, but we hope to see many of you in the meantime in various events. So thanks again, and goodbye. Pasi Kyckling: Thank you. Sami Takaluoma: Thank you.
William Berman: Good morning, everyone, and welcome to our FY '25 results presentation. I'm Bill Berman, CEO, and I'm joined today by our CFO, Ollie Mann. 2025 was our second year as a stand-alone AI embedded automotive technology company, and I'm really proud of the progress we've made in that time. The past 12 months have been particularly significant for us due to a number of key transactions and important operational milestones. Ollie will take you through the headline financials shortly. But before that, I'm going to take you through an overview of our strategic and operational progress delivered in the period. We have grown our revenue by 30%, driven by strong growth among new customers, successful upselling to our existing customers and the revenue added from our Seez acquisition in March 2025. In July 2025, there were 2 events that were key to Pinewood's future. Firstly, we bought Lithia out of the share of the North American joint venture. This removed the competitive overhang that existed and risked impeding our growth prospects in the key market. Secondly, we signed a long-term $60 million contract with Lithia to implement our system in all their U.S. dealerships across the U.S. and Canada. Meanwhile, we've been carrying out testing on the system in North America, which is progressing well. The largest piece of work that we have been focusing on is the North America OEM integrations and is progressing as planned. Almost all of our OEM partners have now been engaged with and integration work is on target. Another key milestone in the period was the acquisition of Seez, the automotive AI company in March of this year. Since then, we have made great progress bringing Seez into the Pinewood Group and integrated the 2 tech stacks to significantly enhance our AI capabilities. The contract we signed in March 2025 with Global Auto Holdings included Lookers, one of the largest auto dealerships in the U.K. The system rollout with Lookers started in July 2025 and is progressing well and on schedule. It is due to complete in Q4 of 2026. I'll now hand over to Ollie to take us through the financial review. Ollie Mann: Thanks, Bill. Good morning, everyone. We delivered strong revenue growth of approximately 30% to GBP 40.5 million. This increase was due to a number of factors, including the impact from new customers, upsell to our existing customer base and the revenue added from our AI acquisition, Seez. We also saw the impact of FY '25 being a 12-month period and FY '24 being an 11-month period. Gross profit of GBP 34.7 million was 23% up on last year. The gross margin rate of 85.7% fell as expected and reflects Seez gross margins being slightly lower than the legacy Pinewood business. The key profit metric that we use both internally and externally is underlying EBITDA. In 2025, this was GBP 16.4 million, up 17.1% on FY '24. Our recurring revenue of 83.2% is a key metric for us. The slight drop from last year reflects the mix with revenue from Seez now included. Our net customer churn of 2.5%, while higher than FY '24 is still at a very low level and highlights how much customers value the Pinewood platform. A new metric that we've introduced is total contract value. This is the amount of incremental annual recurring revenue from signed customers that have not yet started their Pinewood system implementation. If the customer is partway through their implementation, the revenue included in total contract value is just the element from dealerships not yet implemented. Our total contract value of GBP 64.5 million on top of our existing revenue will deliver us the majority of our FY '28 EBITDA target of GBP 58 million to GBP 62 million. On to Slide 7, where I'll take you through the key movements in our cash flow during the year. During FY '25, we generated GBP 6.5 million of cash from operations. There was a significant gain of GBP 60.8 million on the buyout of Lithia's share of the North American JV that was noncash. Other key movements in cash included GBP 1.1 million of bank interest received in the period and GBP 10 million received from Lithia for the settlement of a tax debtor. The capital expenditure figure of GBP 11.4 million in FY '25 includes GBP 10.5 million of capitalized development spend. During the year, there was a net spend on acquisitions and reseller buyouts of GBP 13.5 million. This was made up of GBP 26 million spent on the Seez acquisition, GBP 2.5 million spent on the South Africa reseller buyout, offset by GBP 15 million of cash received as part of the U.S. JV buyout. Alongside the Seez acquisition was the equity raise that we undertook in March 2025, where we raised GBP 34.1 million of cash. All of these movements led to an end of December 2025 cash position of GBP 34.1 million. On Slide 8 is the end of December 2025 balance sheet. There were closing shareholders' funds of GBP 204.2 million, with the main driver of the increase from the end of 2024 being the March 2025 equity raise and the July 2025 North American JV buyout. We now have goodwill of GBP 51.5 million on our balance sheet due to the buyout of Lithia's share of the North American JV, the Seez acquisition and the South Africa reseller buyout. The increase in our other intangible assets from GBP 16.3 million to GBP 168 million was driven by the North America JV buyout and the Seez transactions with GBP 125 million of the year-end balance relating to the North America customer contract. The majority of the tax liability we have relates to the U.S. JV buyout and will unwind as the intangible assets are amortized. Finally, we have GBP 34.1 million in cash. In addition to this cash, we also have a GBP 10 million RCF facility, which remains undrawn. On to Slide 9, where we show the non-underlying items for FY '25. There was GBP 4.6 million of costs related to FY '25 acquisitions. Most of this expense was legal fees related to the North America JV buyout and the Seez acquisition. Following the buyout of Lithia's share of the North American JV in July 2025, we have incurred GBP 4.2 million of costs in our U.S. subsidiary. As guided previously, these costs will be treated as non-underlying until the Pinewood system is installed in 20 North American dealerships. Our share-based payment charge was GBP 3.6 million in FY '25, and there was a GBP 4 million amortization charge relating to intangibles arising on acquisition. The final item to call out is that there was a one-off gain of GBP 60.8 million that we recognized on the North American JV buyout. On Slide 10, it's confirmation that our current FY '28 guidance is unchanged. This is underlying EBITDA of GBP 58 million to GBP 62 million in FY '28. Approximately GBP 50 million of this figure is covered by existing customers and signed contracts. In terms of FY '26, 2 of the 3 analysts that cover us released notes following our recent business update on the 25th of March 2026. The consensus of their FY '26 underlying EBITDA numbers was GBP 21.3 million. We expect underlying EBITDA for FY '26 to be in line with this. I'll now hand back to Bill to run through the operating highlights and strategy. William Berman: Thanks, Ollie. I thought it would be helpful to take the opportunity to remind everyone about the fundamental strength of Pinewood.AI and what sets us apart from our competitors. Firstly, being 100% cloud-based with one code base is extremely unusual in our industry. Our customers are working on the same version of the Pinewood system, whether they're in the U.K., U.S., Europe, Asia or anywhere in the world. This gives us a number of big advantages. From a security point of view, it's much more secure being in a cloud-based platform than being self-hosted or using on-prem servers. Additionally, we are able to release multiple software updates a week during customer working hours with no disruption at all, which is certainly not the case for the majority of our competitors. Our customer churn is incredibly low with customers generally only leaving due to M&A or network consolidation. The majority of our revenue is recurring and is generally around 85%. The main part of our revenue that is not reoccurring is implementation income. Another key differentiator from our competitors is having a fully embedded AI solution as part of our customer offering. Although having an AI offering is now standard, in most cases, it is a layered app on top of the system or basic API. What we have achieved with Seez is very different from this and is a fully embedded AI offering across our entire system, whether you're in vehicle sales, after sales or back office accounting. With margins being squeezed across the auto retail industry, what we can offer with our AI-powered solution is incredibly powerful. While we continue to innovate and recruit new talent, our experienced workforce underpins what we offer. We have 40 years of experience in the automotive industry, which has made a huge difference in us developing the system we have today. Finally, our deep integrations with our OEM partners remains key to us. We remain committed to being among the best partner for OEMs through our cutting-edge technology and our ability to adapt to the ever-changing auto retail landscape. I'll now take you through the progress we've made against our strategy during 2025. In the U.K. and Ireland, we started their Lookers implementation in July 2025, and we'll continue the rollout through 2026 when we expect to be completed. The combined Pinewood and Lookers teams have done an excellent job on the rollout. At the request of Marshalls, we have moved the start date of their implementation from Q1 2026 to the second half of 2026. This is so they can align their timing of the Pinewood rollout with a number of other projects they are working on. In our international markets, the Japan Porsche implementation started successfully in December 2025 with the first dealerships going live. We look forward to getting all the Porsche Japan dealers onto the Pinewood system and then starting the Japan Volkswagen implementation. We continue to be in discussions with a number of potential Central European groups. The buyout of our South African and Netherlands reseller is now completed, and we are delighted to welcome their teams into the Pinewood team. These acquisitions enable us to fully control our sales and customer service functions in these markets and put us in a stronger position to drive our continued growth in both regions. The acquisition of Seez in March 2025 has made a huge difference to our customer upsell offering as well as diversifying our revenue streams. The Seez team put a huge amount of focus into the rollout of Seez products into the U.S. and U.K. dealers as well as growing their wider customer base. The final pillar of our strategy, North America is comfortably the largest automotive retail market in the world. And I'll take you through our progress on this on the following slides. On Slide 14, we set out our expansion plans into the North American market and the progress we have been making. With 20,000 franchise dealers in North America, this is comfortably the largest market in the world with a total addressable market of over $9 billion. We think we are in a strong position to scale across the U.S. and Canadian markets. As a reminder, we now have a significant foothold in the key market following the $60 million contract signed with Lithia to implement the Pinewood system in all of their dealerships in the United States and Canada. Testing on a number of areas of the system in the U.S. is well underway with the full rollout expected to start no later than in 2026. The largest piece of the development work that we have for North America is integrating our system into all the U.S. and Canadian OEMs. We have now engaged with the majority of the OEMs that Lithia represent and integration work is well progressed with a number of these. We are targeting to have the majority of the North American OEMs integrations completed by the end of 2026. Having now bought Lithia out of their share of the North American JV, we are well placed to now sign further customers in the U.S. and Canada and have a number of leads on our official U.S. launch at the February 2026 NADA conference that we are now currently working through. Moving on to Slide 15 and an update to our recent U.K. system implementation. Our team have done a brilliant job so far on the Lookers implementations, working alongside the Lookers team to ensure the Pinewood platform rollout goes as smoothly as possible. It started in mid-2025 and will continue through 2026. We are pleased that the Lithia U.K. team are seeing the benefits of having Pinewood.AI in all the dealerships, and we continue to work with them to help drive their business forward. We are looking forward to starting the Marshalls implementation in the second half of 2026. The Marshall and Pinewood teams have worked together extremely well in the planning phase of this project. We continue to expand our range of products and offer all of these to our existing customers to help them drive their business forward by both increasing productivity as well as increasing efficiencies by using the Pinewood products. On Slide 16, we set out our progress in our priority growth markets outside the U.K. and the U.S. We set out some key geographies in our strategy at our Capital Markets Day in 2024. Japan and Southeast Asia, Central Europe and South Africa. The Porsche Japan rollout started well in December 2025, and we are working well with the Japanese Porsche dealers to work through the rest of the implementations during 2026. Once the Porsche dealers are completed, we will move to the Volkswagen dealers in Japan. We have ongoing discussions with a number of European customers, most of which are based in Central Europe. We have fully integrated our South African business into the group following the buyout of our South African reseller in mid-2025, and we are looking at different ways to grow our revenue streams in South Africa. We bought out our final reseller in the Netherlands in February 2026, and we're currently in the process of integrating the team into Pinewood. To wrap things up on the operating highlights, I just want to repeat some of the characteristics that make our market so compelling. All car dealerships need not only a DMS, but also layered apps associated with it. At Pinewood, we offer all of this, and we are in a position to offer car retailers all the software they need. Our average customer tenure is 15 to 20 years is a testament to how embedded our system is within our customers' work streams. Switching DMS is a long process and works in our favor for existing customers. But for potential new customers, we offer something no one else does. Being part of an auto retail group for over 25 years has given us a competitive advantage over everyone else, something that no amount of money or investment can replicate. In addition, our now fully embedded AI features differentiated us from everyone else. We are in a unique position to help our valued customers navigate a time of increasing demanding environment from a security and compliance viewpoint. Pinewood.AI offers something no one else is capable of providing. Finally, on to Slide 19. In the U.K., we will continue to work closely with the Lookers team to manage the rollout through completion in Q4. We are also looking forward to starting the Marshalls rollout later this year. As we've talked through, we have made significant progress in North America on both OEM integrations and on testing the system in the U.S. The opportunity in North America is considerably larger than any other part of the world. So scaling here as quickly as possible remains a top priority for us. Finally, our FY '28 guidance is unchanged at an underlying EBITDA of GBP 58 million to GBP 62 million, which is underpinned by our strong visibility from existing contracts, including the $6 million contract with Lithia North America as well as a number of other signed contracts. Thank you, all members of the Pinewood team for driving us forward as a group. Thank you for joining us today. We welcome any questions. Operator: [Operator Instructions] Our first question this morning is coming from Oliver Tipping calling from Peel Hunt. Oliver Tipping: Can you hear me? William Berman: Yes. Oliver Tipping: I've got sort of 3 different questions. The first one relates to -- I think you said Lithia is going to sort of go live in terms of revenue at some point in 2026. So I just wanted to understand exactly how far through the capital investment being made to make that product sort of fit for market in North America we are and how we expect sort of CapEx to move over the next 2 or 3 years? And are there any tools internally you're using that's improving your development efficiency? The second question is that broadly my understanding is the U.S. is built on a per rooftop basis. in the U.K., there's a larger per user element. So I was just wondering what the rough split was for the Lookers and Marshalls deal between per rooftop and per user. And then lastly, I noticed that there was a court case. It wasn't involving you guys, but Asbury and CDK went to court about their switch to Tekion, and they won that court case. Tekion and Asbury won that court case. Do you think that precedent will make it easier for you to win share in the U.S. in the future from the sort of incumbent North American suppliers? William Berman: So Ollie, I'll kind of go in reverse order. So we really can't comment on somebody else's lawsuits and stuff like that. What I can tell you about that is -- and obviously, if you would assume the ruling is -- they're going to go at it again. So they're going to appeal it. But at the end of the day, the dealer owns their data. We manage our dealerships that way as well. So in our case, dealerships data is their data to do what they want, and we allow them to facilitate whatever they need to do on that piece. As far as being able to open it up, just because you have open access to the data that doesn't necessarily mean it's in an easily digestible way to move over. We have created technology more specifically through our AI offerings to be able to facilitate that real time, whether we're pulling from a dealer group's data cloud on their own data stack or directly from a different core system DMS provider. But I do think going forward, you're going to see more and more open data stacks and as such. On the pricing models, obviously, it varies greatly by which part of the world you're in. Europe still goes primarily off of SaaS-based pricing. All of our pricing is going to be going to a rooftop and modular basis over time. And there's multiple positive reasons for that. Some things are just specific to a brand, and there's no way to actually charge it out on a per user basis, OEM integrations, certain updates, certain facets of it. A lot of AI functionality wouldn't be charged in a typical SaaS pricing. So it would have to be a rooftop charge. And one of the key metrics that are key attributes that we bring into the marketplace is being able to help dealers reduce their cost. And oftentimes, that is by automating certain non-revenue-generating noncustomer-facing processes, and it is such lowering a per user count. And it would be counterintuitive to sit here and continue with a per user basis when one of your key tenets is to try to reduce the number of users that exist that way. As far as -- we're not disclosing the exact amount that we spend in one market for development. But I'll just keep in mind that we are on a single code base. And oftentimes, things we do for one market transition and go into another market. and/or it can just improve the current functionality to the system that exists today. So we've got some great accounting platforms and different things that we've used -- that we found up in the Nordic countries and that we use in different places of the world, dynamic accounting and as such. There's lots of different tech solutions in North America and the ways of doing business that we could -- we would think would help other parts of the world, and we'd like to bring that over. Obviously, going into North America is a big endeavor. So while our CapEx has grown to us, we've just replatformed over the last 24 months. We've now put hyperscaling in. We've got all the certifications in progress with the U.S. OEMs. That would be something specifically that would represent North America. But say that piece, I think our CapEx is going to be pretty much where it is with the exception of being opportunities to go into new markets and/or investments into new and more dynamic products as we go forward. Operator: Next, we go to Damindu Jayaweera of Peel Hunt. Damindu Jayaweera: Sorry, Peel Hunt is asking too many questions probably. The thing I wanted to ask you, Bill, is that, obviously, I think you guys have done the right thing by making that Seez acquisition at the right time. It's interesting to see Keyloop loop also making or trying to make a similar acquisition or has done so in Motortech.ai. And so obviously, everybody is kind of trying to move towards AI, embed AI. I was listening to your Full Throttle podcast when you were over in the U.S. for the NADA conference. In there, obviously, you were kind of reiterating the fact that you don't want to do what everybody else is doing, which is just putting chatbots on top and the AI has to be embedded deeply. And when you look at your product page, I saw there's a nice video about how Seez DNA is going to permeate through the full product stack. The thing that slightly kind of confused me not listening to you, but listening to Jay at Tekion is in their NADA conference, it almost felt like he was playing down kind of Whizbang AI functionality, and he was trying to talk to the core of the single truth, the security layer, trying to move from -- trying to preserve the importance of system of record I kind of remembering, but I'm just trying to get to how you are trying to position Pinewood when you are talking to potential target opportunities when everybody is just talking AI, AI, AI all the time from Nextlane to even the constellation assets. William Berman: Yes. So listen, I can't really going to comment what any of our competitors would say out there. I can tell you this, the one thing in automotive, whether it's on the retail side, the tech side or the OEM side, of things -- the best of ideas are often replicated. I will say this with Jay, I completely agree on system of record and the core data stack that goes along with that and the importance of that. To -- the statement that you made maybe are different things here. I look at AI being able to utilize that core data stack and then being able to do new and exciting things with it. So the one thing with a platform like ours is without having to have a plethora of layered apps and disjointed data stacks and disjointed functionality and having 20 windows open simultaneously and to the best state possible having the fewest number of non-OEM integrations to be able to facilitate a smooth and easy transaction for both the customer and the dealer, I think, is a real differentiator. Where I see AI coming into it is AI is going to be able to do things like a system of record, a core enterprise-level accounting platform. Even as simple as ours is to operate, they still could be very complex. And we've already embedded our AI into that. And now the AI can answer questions for a user and be able to show you how to use the system. Where I see -- I'm starting to use AI is being able to do predictive indexing, being able to help a customer be able to schedule an appointment to maybe get the car service, but be able to do it in a way where not only do we -- does the shop have the availability on the side of individual writing up the service adviser and as such, but also being able to make sure that we have a technician that's available that has the appropriate skill set to work on that car. Oftentimes, appointments are made because there's an hour open in the day, but that technician might not have the qualifications to work on an electric vehicle, for example. I'm starting to do things like that. Do predictive indexing to engage with the customer when their car is going to need their next servicing or being able to directly when it comes to recalls and as such without having to use phone rooms and operators and humans to see here and try to facilitate things like that. I can see it being able to sit here and assist the customer journey. But at the end of the day, that core data stack, that system of record, that enterprise-level accounting platform with full integrations into the OEMs is the nucleus for everything. And any AI is only going to be as good as the data that it has access to. And to your earlier point, that's why I'm not quite as big of a fan of the layered apps approach and sitting on top like a chatbot because at the end of the day, they're pretty similar and they're accessing the same data streams when you have a data set like we have and the plethora of information that goes along with that, it really changes the operations and the value proposition that AI can bring. But AI is going to be additive. I do think it will be transformative. And I think you're going to be pretty wow by what's going to come out over the next 12 to 18 months when it represents to that with Pinewood and Seez. Damindu Jayaweera: I just have a follow-up question. So obviously, your biggest opportunity is the U.S., but I'm also really interested in the European opportunity you have. I think you've always talked about the fragmented nature of the European market. There are a bunch of products that are coming to end of life. But now as you described, AI is actually making use of these tools a little bit more easier. So the learning curve of adopting a new piece of software might be easier. Then on top in the last couple of months, obviously, people are seeing scary headlines about cybersecurity. So do you feel like the ability for you to probably run harder into the European market is now stronger than it was 12 months ago. I mean you obviously bought in Netherlands the Dutch distributor. And I know you have hiring plans in place from Germany. Just some commentary around kind of competitive landscape and if it's become easier in your head to crack the European opportunity? William Berman: Well, I don't know if I'd say easier, but the demand coming out of Europe, Asia, Africa and South America is growing exponentially day by day. OEMs are looking to go about things in a different way. Several franchises that -- sorry, several OEMs that we've engaged with have talked where they have upwards of 200 different OEM integrations, and it's just impossible to manage all those effectively. OEMs want fewer integrations into DMS systems, and they want more advanced systems that are out there. Cloud-based systems like ours are definitely appealing to them. So they want fewer. They want people that can sit here and operate on a worldwide basis. And to your point about -- and we call it assist that's built into our system where you can really just ask the system how to operate itself is a big differentiator. Our system is also language agnostic. So you can work multiple languages within a single dealer group even within a single store. So yes, I do think that. I think into the example that you bring, the European market is very fragmented. You have lots of local players in there that solutions are built specifically for a geography, and I just don't think those are going to stand the test of time. And I think you're going to need -- kind of like you've seen with consolidation within the retail network within dealers, I think you're going to continue to see consolidation within the tech stacks that the OEMs are going to be willing to integrate with. And ultimately, I think that will help drive opportunities for platforms like Pinewood.AI to be able to engage into there. And more specifically within Europe, you're right, there are several burning platforms, end-of-life, unsupported systems out there. And I think that gives us a huge opportunity. Now that said, North America, by far, is the biggest automotive retail market, especially on the technology side. So it's going to be a key focus, but we're never going to forget our roots and the geographies we already operate in. And in a perfect world, we want to continue to grow in our key markets close to our head office, the opportunities in North America, but then to be able to continue to grow in Africa and Europe, Asia and maybe even with the timing right, maybe even into South America. Damindu Jayaweera: Well done on what you've achieved over the last 2 years. It's great to see a vertical software actually company thrive in the age of AI. Cheers. William Berman: I appreciate you saying that. The team has done an absolutely wonderful job. So Ollie and I get to stand upfront, but there's 400 people that are doing the heavy lifting. So I appreciate the kind words. Operator: [Operator Instructions] We'll now go to Andrew Wade calling from Jefferies. Andrew Wade: A quick one from me. You talked about sort of competitive moat versus generic AIs in your RNS there. Just be interested if you could flesh that in particular, you sort of talked about the benefits of 20-plus years of experience and you talk about the challenges of integrating with the OEMs. So if you could just talk a bit more about why that is a challenge and perhaps reference some of the -- some of what you had to go through in the U.S. to get it done to the extent you have out there. William Berman: Yes. So Andy, so it's a good question. So the weird thing is you would think that if you integrate with a certain OEM that, that integration would work anywhere in the world. And what you find is that's the farthest thing from the truth. You can be in parts of Central Europe and have 4 countries touching each other and have 5 different integration levels with a single OEM. And so what you find is like going into North America, we're going to probably end up running nearly 1,000 different integrations to get all of the key OEMs fully integrated. Now lots of them have multiple integrations. So it's not 1,000 different OEMs, obviously, but it can be quite complex. And there is a huge differentiation even in some cases, between Canada and the U.S. So it's not the difficulty of doing it. It's just the sheer volume of work. Currently, we're pacing to have by the end of this year, 90-plus percent of the volumes that exist within North America have to be fully integrated on the OEM side and already have the certifications. And that really opens up the pathway for us to be able to expand outside of the Lithia deal and add additional U.S. dealers on in a relatively short period of time. You talked about the moats, and I'm glad you brought that up because obviously, everyone saw kind of the SaaSpocalypse on February 4 with Anthropic and Cloud coming out there and kind of disrupting some of the legal platforms that exist out there. A platform like ours puts us in a really unique position. You talked about the OEM integrations. That's one of those things where as big of an advocate I am in the company is for AI, I don't see how AI is going to be able to sit here and build OEM integrations. If it's 1,000 integrations for the U.S. to replicate that one worldwide. I also don't see the OEMs open sourcing or letting AI agents come in and start doing integration work. Having an enterprise-level accounting platform once again that has the integrations with the OEMs that is multi-jurisdictional in 40-plus countries to be able to do that way. These are things that at least in the near to midterm future, there are just things that an agent, an AI agent just isn't going to be able to do. And we have quite a few moats that kind of work around us and protect us on that piece of it. But there are also competitive advantages as we engage with new potential customers as we continue to work with our OEM partners, and we continue to expand our footprint worldwide. Operator: We do have another question just came in, and it will be coming from Alex Short calling from Berenberg. Alexander James Short: Two questions from me. First one, obviously, some really useful new disclosures to help us understand how much of that GBP 60 million target is already underpinned. I guess my question is around capacity and what -- how much Pinewood has around current and future implementations. So on one side, has the delay to Marshalls made things tighter in FY '27? Or conversely, has that allowed you to get ahead on Lookers and in North America? And on the other side, there's obviously a lot more potential market share out there currently held by legacy peers. Would the company have the implementation capacity in the event of a new contract win, say, in a new region where you need new OEM integrations? William Berman: So it's a good question. Not specifically within Marshalls or Lookers, our implementation team that's based in the U.K. for -- at least for the U.K., we're able to flex our capacity and the ability to sit here and put additional dealer groups on. So while the delay in Marshalls doesn't really change that much, might free up a little bit of resourcing to sit here and go a little bit quicker with the Lookers. But we have other contracts, obviously, besides Marshalls, Lookers going on. So it just opens up capacity on that end. Normally, the biggest thing that limits the speed that we can do an implementation is normally on the customer side and working around their time lines. In the U.K., for example, you normally don't do integrations in March and September because they're big retail months. So in that case, we might take some of that resourcing in the U.K., maybe move it into Central Europe to help with implementations on that site. I'd say the one thing as we go forward and we continue to grow our business and our capabilities and our tech stack is how we've started to use AI to help simplify the implementation. So the biggest piece of implementation is actually transferring the first is laying out the accounting stack that the current group is working on. There are certain nuances to every group in the way they operate. And while not every group has a bespoke platform that we help build for them, but then at the end of the day, there are nuances. But the biggest piece is extracting the data out of their current system or systems and then putting it in. We've just now started to utilize AI to do something that used to take a couple of weeks to do to get it down to taking a couple of minutes to do. I talked to you about on the call at least about using Assist, our AI agent that's embedded in the platform that's able to help you operate the system where you can be asking a question, how do I stock in this car, and it will give you a detailed pathway to be able to go do that. And in the relatively near future, that same capability, the system will be able to do it for you with a handful of prompts, be able to do it that way. So it really reduces the training time down significantly on new implementations as well as the way the system has been designed. It's very intuitive. It's all menu driven. And if you've used any Microsoft products in the past, and can read use a mouse and use a menu, you can operate our system in a pretty short period of time. So we're using our experience, our current tech stack, some of the innovative things we're able to do with the Seez tech stack and get it where implementations can move very, very quickly. Alexander James Short: Great. Maybe one more, if you don't mind, perhaps, Ollie. We obviously have clarity around the FY '28 EBITDA target, but maybe you could run through in a bit more detail your expectations for how cash margins trend through to '28 and the sort of CapEx and working capital dynamics around that. I appreciate you don't want to get too specific on the CapEx side. Ollie Mann: No, no, that's right, Alex. Good to hear from you. So yes, from a working capital point of view, I think we've touched on it before, as we grow our customer base, we do get an advantage from this because we invoice our customers quarterly in advance. This is for the recurring revenue and the majority of our revenue is recurring. So we will get a benefit from that. So as we get into FY '27 and FY '28, there will be a significant working capital benefit. So in FY '28, we're talking GBP 12 million, GBP 13 million of benefit there in that year. From a CapEx point of view, I think Bill touched on this. The underlying CapEx or standard CapEx is very much being one code based as is. There is -- exiting this year, we have been doing the OEM integration work with the U.S., which we're in a good place with. I think we've mentioned that we're anticipating having the majority of that done during 2026 or by the end of 2026, which is great, and it allows us to effectively sign any U.S. customers. So we're in a good place with that. So they will once we annualize the CapEx, there will be a slight tick up for '26 and '27. But the net impact of those movements is of the GBP 58 million to GBP 62 million underlying EBITDA, we expect sort of high 40s of that to drop through from a net cash position. So we're talking GBP 45 million to GBP 50 million of cash in FY '28. Operator: As we have no further audio questions, I'll turn the call over to Henry Wallers to take any questions submitted by the webcast. Henry Wallers: Thanks, George. Yes, we've got 2 questions from Investec with regards to total contract value. So Roger says, thanks for the total contract value metric disclosure. What's the assumption being made on average customer lifetime, please? Presumably, this can end up being many years, if not decades. So what is the cutoff being used? And then the second question on TCV is, broadly speaking, what's the subdivision of total contract value number between subscription maintenance type businesses and implementation/service business? Ollie Mann: Yes. Thanks, Roger, for those questions. Yes, just going in reverse order. So in terms of the split between recurring and implementation revenue, it's all recurring revenue. So we don't put any implementation revenue into that figure. So it's from the contracts, the customers that we signed and they are not implemented. It's just the recurring element of that revenue. And in terms of a cutoff or lifetime, the assumption is we haven't put a lifetime on it. And the reason being for that is the only time we really lose a customer is generally through M&A activity. So if we've got a customer with, say, 5 dealerships and they get bought out by someone else with 50 dealers who are on a different competitor system, that tends to be the only time that we lose a customer. So we're working on the assumption that most of these customers in the total contract value are big enterprise size level customers, the majority. So the assumption is that they're sort of lifetime customers and there isn't a cutoff. We haven't put a 10- or 15-year lifespan on. Hopefully, that makes sense and answers the questions. Henry Wallers: I think that's it, Bill. So good to... William Berman: Perfect. Listen, thanks, everybody. Kind of like I said earlier, when I was talking to Andy, I just want to give a reminder that even though Ollie and I could sit here and take the lead here, this is all a testament to the hard work of the 400-plus employees that we have worldwide. And this is probably the oldest start-up ever, and we look forward to even better performance in the half years and the years to come. Thanks, everybody.
Unknown Attendee: [Presentation] Ladies and gentlemen, please put your hands together for our CEO, Graham Lee. Graham Lee: Good morning, everyone. Thank you. It has been a strong year, 25 actually, 25 years of meaningful innovation, 25 years in which we have continued to earn and deepen the trust of what is now more than 26 million active clients. And that's because of you. So thank you. Thank you to you, all of our people, wherever you are. It is your energy, the energy that you bring and the ownership that you take and your client obsession, which brings these results, which makes our business strong. Thank you. We want to make a meaningful difference. We want to make a real difference in people's lives, and our role is enabling them to grow. All of the building that we do, the new solutions we bring to market, they unlock growth. They provide economic opportunity, and they are based on the same founding principles that we've always had. Our fundamentals, our fundamentals are clear, and they speak to how we treat our clients, to how we design for them. And of course, our CEO culture, 25 years in, our culture is still our most important competitive advantage. The CEO is how we show up, how we make decisions. And it starts with the client. It starts with putting the client first, obsessing for the client and understanding what they need. Our results come by putting our clients first. We put our clients first over and above short-term profits because we know that creating shareholder value comes from creating client value, not the other way around. It does feel a little bit like every year, as we're giving our annual results presentation, something significant has just happened in the world, whether it is a war, a special operation, a global pandemic. There always seems to be some curveball that has just about happened. And the truth is it will always be volatile. Our environment is always going to be uncertain around us, and there will be ambiguity out there in the world. But here at Capitec, we are not uncertain. Together, what we need to work on together, that's not ambiguous. We are a resilient company, and we are resilient by design. We build resilience each and every year, and we make our choices deliberately to build that resilience. We built our business model to be able to take on all shocks and still serve our clients well despite, and that continues from here. It feeds into how we look at our financial statements and the prudency with which we provide. It speaks to how we train our people to how we develop our systems because this environment will always be our reality. South Africa started the year really strongly from a global macro perspective. And of course, that -- we've seen that upended by the recent supply chain shocks, the recent oil price shocks. But that resilience that I talked about, that resilience that we built, that will bring us through and will bring us through strongly. Consumers and businesses in South Africa will remain under pressure, and we will support them through that pressure. Clients vote with their feet. And we've continued to grow our client base despite it already being so large. So 26 million clients now across all of our ecosystem, including Avafin. Even more pleasing than that total growth number is our growth in active app clients. That's up 19%. That's 15 million clients who are active on our app in the last 30 days. 15 million adults actually. And if you look at Stats SA, which shows that adults have a population around 45 million. That means roughly 1/3, more than 1 in 3 of all adult South Africans used our app to bank in the last 30 days. Fully banked clients continue to grow and business and entrepreneurs, that's up 71%. The big number, quite literally, the big number in the middle, is 23%. Our headline earnings is up 23% to ZAR 16.8 billion. And this comes from balanced growth. As you can see, that growth is balanced in both the net interest income as well as the noninterest income, what's coming from transactions and Connect and VAS and insurance. If you look at the balance between those, the proportions, just over 2/3 of all of our income from operations comes from the noninterest side. And the strong growth in credit is at good quality. The 8.1% credit loss ratio did tick up slightly, but that was within our plan, within our expectations, and it's a result of our book growth and the change in mix, particularly in business bank, in lending more on the scored unsecured side. It's been really pleasing growth across all of Capitec Connect, insurance and value-added services. All of this was done investing in the future with discipline, with cost control discipline, which meant that our operational expenditure grew by only 12%. And that positive jaws that, that creates means that our ROE grew to 31%. If you look at the detail of the income statement a little bit further, we're not going to go through everything. I just want to point out 3 things. So firstly, under the credit impairment charge, overall, the company had went up 21%, but that was lifted quite a lot by Avafin. And the reason for that is the nature of the business, the nature of the business model, which is short-term unsecured lending in which those loss ratios are expected planned for and priced for. If you exclude them, then the credit impairment charge for South Africa grew by 13%. Then there are 2 big numbers, total net insurance income up by 38% and the taxation up by 34%. This was the first full year in which we sold all of our new policies on our own license. And previously, in previous financial years, there was -- in the sale, there was a net out of the tax and the income. And so what you really see here is a grossing up of both, which is why both of those percentages are so high. And then overall 23% growth. That's true both with and without Avafin, if you see it across the board. The sources of our income are increasingly diversified. The Personal Bank remains our biggest contributor, both in terms of earnings contribution, but also because that's the launch pad. That is the launch pad from which all of our other businesses fly. Value-added services, connect and insurance, that now makes up more than 50%. But I want to make the really important point again, that only comes from the data, the brand, the distribution and the clients of the personal bank. And then business banking and Avafin are still early in their growth journeys. They are our big opportunities for the future. I'm going to let that big number sink in with you all for a second. Our business model is one that scales because of our clients. That scale creates economies, and we share those economies back with our clients. In the last financial year, the total amount that was given back to our clients is ZAR 1 billion in client savings. Now that breaks down like this. In the fees we dropped from last year to this year, we gave back ZAR 228 million in reduced fees. That left ZAR 228 million real rands in all of our real clients' real pockets. In addition to that, we reduced the prices of our card machines. We made our discount rates, not just transparent but lowered them significantly. And that gave back ZAR 213 million. We dropped our international card fees, and we charged 0 Forex margin. That contributed another ZAR 61 million. Then if you look to Connect, Capitec Connect and the data that it brings is one of the most valuable rewards our clients can receive. We lowered our Connect prices from the last financial year, and that saved our clients ZAR 330 million. And in the rewards that we gave, it summed to ZAR 108 million. Then finally, our 1% giveback on our credit card. That saved ZAR 107 million. All of that totals to really quite a significant number. The Personal Bank is our heart. And that also has diversified income. The earnings in Personal Bank are well diversified between both the net interest income and the net transaction income. Overall, both are up just over -- well, one's up 16%, one's up 17%. And you can see the steady growth over the course of the last couple of years, both great growth on top of a really, really large base. One of the reasons -- one of the drivers of that was the continued acceleration in digital payments, digital transactions. As you can see on the left-hand side, cash volumes are only up 10%, and a driver of that was cash send. I'll come back to that in a second, whereas card and digital volumes are up much more significantly. Digital alone, the lighter blue is up 25% in the year. There is steeper growth in send cash. And one of the reasons for that is that it's increasingly being used as a mechanism for the clients to do a cardless cash withdrawal. If you unpack the noncash payments, looking at the noncash payments in total, digital payments now make up more than half. The strongest growth you see in the pay wallets, that is Apple Pay. Google Pay, Samsung Pay. But you also see really pleasing growth in every single mechanism by which clients make payments. E-commerce is up 32% international and cross-border, our clients transacting outside of South Africa. That's up 29%. The lowest is in traditional plastic. Connectivity has become a utility. It's a basic human need really to live, to learn, to connect, obviously, but also to bank in this world. And with Capitec Connect, we've designed a mobile solution, a mobile connectivity solution that stays true to the Capitec fundamentals. If you look at our active 3 client base, that's up by 67% in the last year. That's incredible growth. And the usage is up even more. It's up 3x, 40.5 petabytes. I know in the past, we've played with how many songs and movies and that is, but I mean, the number bytes itself is just astounding. What's also really great to see is our voice calls are also going up significantly. And the reason why that's so important is that's an indicator. It's an indication of the client using that SIM as their primary SIM. We've also just launched right now free Connect to Connect calling. So one Connect client will be able to call another to Connect client completely free of charge. And then -- you guys can feel free to jump in with the applause at any time. It works for me. And then just looking at part of that giveback, the 78 million of free data, that was 3 petabytes that we gave to our clients. We couldn't just stop at bringing connectivity. You have to put the device itself into our clients' hands. And so we've launched Connect devices. A highly curated, carefully chosen set of devices, which we know have the highest quality, but which come entry, mid and upper end. And we've made that incredibly simple to use, incredibly simple to order and a great experience to receive. It's available in cash, but it's also available on credit, and our credit pricing is transparent. There isn't a deposit. There isn't that first payment due after 7 days, just very simple, easy to understand, ZAR 181 a month at its lowest. And we back that up, not just with the free calling. So all of your voice Capitec to Capitec is free, but also 5 gigabytes free a month. So pretty much it's your first year of connectivity taken care of with no network locking. Credit is at the heart of our business, and we manage the associated costs and risks prudently. If you look at our credit loss ratio, it's where we want it to be. We have good growth off a large base at good quality. The book growth this year was 9.4% in Personal Bank credit, but the real growth story is in the credit card, which was 32%. If you look at the disbursements, 27% to ZAR 68.7 billion. That's driven both by applications from new clients as well as annuity disbursements. And I think there's a really important point to make. What's most important is that this is driven by the quality of the data that we have. It's driven by the sophistication of our models. And we are saying yes to more clients, not because we've lowered the bar, but because we know them better. We've continued to diversify where clients get that credits and who those clients are. Purpose lending has been a real success in the last couple of years, and FY '26 was no exception. It's up 94%. And this speaks to the great experience clients get when they are able to fund what they need in the place that they are buying their car, or buying the materials that they're going to use to build their home and increasingly their education. More and more of it has done self-service on the app by making it more available, more accessible, that in itself leads to growth. And because of those -- because of those interventions, innovations and more, we also continue to increase the number of clients who choose to bank with us, including with credit. Clients earning more than ZAR 50,000 who took credit with us. That value went up by more than 50%. That robust growth came on the back of robust credit card growth. So new limit sales and annuity disbursements are pretty evenly matched from a percentage growth perspective. And we've created access to more than 120 -- sorry, 110,000 new credit clients through changing how we look at them, how we look at repayments and how we look at their exposure, which means that we've been able to bring in young adults, 147,000 of them to help them grow their credit score and grow credit disciplines. And that credit card really is the best one for travel. Why? Because there are no international fees, there are no Forex margins or commissions, and that means that when you travel with our card, it's the best rates in the market. We, of course, give the normal package of other rewards that goes along with that, but that 1% cash back on top of the 0 international fees or margin means that our clients save a great deal when they use our card to travel rather than another. We encourage and support savings. We have a deliberate pricing strategy to encourage clients to be more deliberate, more purposeful in how they save. And that deliberation has led to a growth in our market share. So we now have 13% market share across all fixed and notice deposits. And that really came because of our strategy, how we communicate it, how we communicate with our clients, why it's better for them to be -- to plan for their savings, to be deliberate in their savings. And that means that all of our savings plans grew by ZAR 15 billion. Mostly that was supported by the really strong growth in the notice deposit. This is new to us. And what you can see is really strong growth across both, but particularly in that 7-day product. When we first discussed launching this, there was a lot of questions about the value of that product. And clearly, clients are voting with their feet again. This creates a real ability for clients without a long-term commitment to save more, earn more interest and make their money safer. And because of that, we paid ZAR 858 million interest to our clients just for notice accounts in the year. Insurance is deeply embedded in our business now. This is the first full year in which all of our sales have been on our own licenses, and it has been an incredible effort, an incredible journey by probably most of the people in this auditorium right now. Lives assured in funeral cover is the best way, I think, to look at the organic growth. So we've had a great year, and we need to unpack that, but there are a lot of moving parts. Lives insured, there are now 16.6 million, and that's clear and easy to understand. The total sum assured is now more than ZAR 508 billion, and all of our policies sold now. All of the new policies are on our own license. And with the transition, 43% of everything is now on our own license. The net insurance result for funeral cover grew really significantly. 58%. But as I said, there are a lot of moving parts to that. So this is one of the more complex slides in the deck, but it's really important to understand that this waterfall helps us break down all of those moving parts. So in moving from the ZAR 1.8 billion that we had in FY '25 to the ZAR 2.9 billion that we have for FY '26, you can see the left-hand side together. That 33% growth is the business being better. That is in growing our book, growing the number of clients, growing their lives assured but it's also improvement. It's also improvement in our operations, in our claims and in our collections, which makes that business more profitable. If you look more to the right-hand side, those are the moving parts that are largely in the income statement itself. That reinsurance, a very significant number. That is the description of what -- of the additional earnings we've gained in taking over control of funeral cover, the whole book of funeral cover from Sanlam. That was largely canceled out by yield curve moves later in the year. And we've been looking carefully at what the impact of the yield curve is in the years looking forward. But just in the first month, we've seen a significant reverse of that as a result of changes in the interest rates. Moving on to Life cover. This is still young for us. But already, we are over ZAR 100 billion in sum assured. And if you look at how clients choose to use that, and remember, we give our clients choice. Our clients can choose when they set up their policy, how it's going to be paid out to their beneficiaries, whether it's going to be paid out in a lump sum, whether their children's education and needs is going to be taken care of through a trust or whether it's going to create a monthly income for their family to keep taking care of their family after they're gone. And as you can see from that pie chart, a little over half is in the lump sum with the rest spread between the children's needs and the monthly income. Moving on to Business Banking. The byline says it all. We were debating as we prepared these slides that, that appeared to be a little bit wordy, but I really like it. It says what we need to. We are empowering business. That's our goal. That's our purpose. And we're doing it with a very simple combination of more affordable, better service. faster credit. And the market has responded well to that offering. If you look back 2 years to February '24, we had 174,000 active clients, and that was when we rebranded. We rebranded from Mercantile to Capitec business. And we grew on the back of that to 266,000, 1 year ago. That's when we simplified our pricing, but we didn't just simplified it. We didn't just simplify it. We made it the same as personal banking. That's a dramatic change, a very significant cost in the fees we charge, in the fees that our clients pay and it is a first and only in the market. Every business pays just the same as what a personal bank client pays, and we saw the strong growth in that. Then in December, we launched our entrepreneur account. More on that in a second. And there you can see the tick up from there so that we ended the year with 456,000 active clients split between established businesses, entrepreneurs, merchants and Forex clients. All of those savings, focusing just on Business Bank, saved ZAR 217 million for our clients, and 172,000 of those 15 million app clients are now businesses. That entrepreneur account, so excited about this because what we have here is a bridge between our Personal Bank and our Business Bank. This is the account that we've launched for sole proprietors and people with a hustle, and people who want to do something meaningful with that hustle, maybe even more than one. So that's free. We charge a client fee. We don't charge an account fee. We charge a client fee, and this is part of what you get as a client in order to be able to manage your various different hustles, clearly, well with transparency, you can open up to 4. There's no paperwork. You can run your business off it, including acquiring, and our clients have taken to it with all of the passion that we knew that they would. If you look now at lending, that ZAR 30.4 billion book, that's a decent book now. Karl Kumbier, the CEO of our Business Bank, he was very deliberate in making sure that we highlighted that. And it is worth highlighting, up 30%. The most exciting part, so we've grown our intuitive and more traditional secured book very significantly in the year. But I'm not focusing on that. I'm focusing on what's more transformational, which is the score lending book. Our scored lending book. Scored lending is automated, quick, fast. It is more accessible through our scored overdraft on app. It's available to more people. Those everyday earners through our pay-as-you-trade, small amounts taken every day and that creates more accessibility. It creates more access to funding for small businesses who use that funding to grow their businesses. If you look back, ZAR 738 million in Feb '24, and then we launched in December, the pay-as-you-trade, and you can see the kick there so that we ended the year with a book of ZAR 3.1 billion, and we're not stopping there because this is one of the ways in which we grow the country around us. Our merchant acquiring business is also growing fast. In the last year, we've grown significantly so that we now have 112,000 active merchants because we have the best machines. They're the fastest, wherever you go and you ask a vendor, they will tell you. But it's also transparent pricing, easy to understand and the lowest. Across the whole year, merchants trading on our merchant acquiring devices, our POS devices did turnover of almost ZAR 100 billion. Moving on to Avafin. I really am excited by the work being done in Avafin and the work being done by the management at Avafin. Avafin gives us a solid foothold in all of the markets in which we're established. And I know that it has significant potential to create so much value for clients in all of those markets. If you look at the last year and focus on the profit, it will appear as if we had a year that went backwards, and you shouldn't see that because what you should see is that we are investing in the future. When we acquired Avafin, one aspect which was obvious immediately was that the rates were too high, and we needed to rethink our product from the perspective of our clients. We need to increase the tenor and reduce prices and that we have done in FY '26 across all markets. Now there have been mixed results to those experiments and to those new products, but we iterate, and we improve. And we start to see real benefit coming, particularly in Latvia, where the book has doubled. And I think we've created a blueprint for what we can do in the rest of the European markets. On the back of that, growth in the actual loan disbursements was very strong, EUR 629 million just in the year, and we continue to invest in the future. An additional key challenge that we identified is the overreliance on third-party online websites and API partners in order to bring us our distribution. It's a limiting factor. It's not good for the client, and it pushes up prices. So our focus in the year ahead, in addition to continuing to change the product for our clients and reduce prices is also increased distribution and to take control of direct distribution, direct distribution through digital, which you will see, for example, in Poland with the launch of the app that's coming. It's also physical distribution. Our engagement with Latvia Post in Latvia, our branches in Mexico, our cooperation with retailers in Mexico to give us the physical presence that we need to be able to serve our clients directly and break that overreliance on API partners and websites. And all of this we do, leveraging the platform and the infrastructure that Capitec has so that when Avafin does it, we are able to execute more effectively, more efficiently and more securely. Focusing now on group OpEx. We always reinvest in our future, and we also always remain disciplined as we do so. Our total expenses increased by 12% to ZAR 20.2 billion. If you split that out, what you can see is that ZAR 7 billion of that is salaries. That's up by 12%, growing and investing in people. If you look at all of our IT expenses, including salaries, that's up by 18% with all others up by 10%. Now all of these numbers are the whole group, including Avafin. If you take Avafin out and look just at South Africa, salaries, excluding Avafin are up 11%, and that other is up by only 7%. We are proud of the positive impact on communities and people. Through the Capitec Foundation, we are working inside 33 public high schools with our whole school approach. And that whole school approach is -- those are not one-off workshops or days away. They are sustained, deliberate multiyear efforts in which we have touched and improved the lives of nearly 23,000 learners and made a meaningful difference, a meaningful lift, particularly in maths, maths results. And those maths outcomes, they come at scale. All of you, our employees show up too, 3,400 people contributed to early childhood education in more than 1,000 interventions. And then MoneyUp. Since its launch, South Africans have taken more than 3.7 million MoneyUp courses and micro lessons. Free mobile practical financial education open and available everywhere, anytime. And this means something because the better you understand the money, the better you're going to be able to manage your life and for you to be as more resilient. What makes me personally most proud is when our people grow in their careers. If you look at all of the interventions we put in place in the last couple of years, particularly learning and development and training people to not just do the job that they're doing really well, but to be able to take the next step in their careers and the step after that and the step after that, if you look at what we've done on wellness and the opportunities we create through internal mobility, what that's led to, amongst other things, is a really significant drop in our attrition rate to 8.89%. That internal mobility program, the deliberate support and reaching out for people to be able to take the next step in their careers, even if that step is completely different to what they're doing today, has led to promotions. And that means an internal hire rate of more than 2/3. We continue to invest in hiring youth, 87% of all of our external are youth, and we invest in their training with more than 1,000 learnerships, bursaries, graduate development programs. Changing gear. I would like to share with you some of the creative solutions that are enabling us to serve our clients better and to protect them better. So fraud prevention, making sure that our clients are safe, their money is safe, their data safe is our top priority, and we've made significant strides. More than 650 of our best people, people in this room work on this. That's how important it is to us. We've made significant strides and our interventions saved our clients ZAR 673 million in fraud that was stopped before it happened in the last year. Looking at what we've either just launched or is coming soon. Additional simple solutions that create value in our clients' lives available on our app. We have Capitec Pay live in third-party apps, including Checkers Sixty60. You will soon in the next day or 2 or 3, see bus tickets, Intercape bus tickets live on our app for the first time, our next value-added service, bringing the affordability, simplicity to our clients when they travel. This is the first of our travel offerings. And you can now send money through our cross-border remittances to 26 countries. We recently have spent a lot of time talking about the Smart ID process that we've launched together in partnership with the Department of Home Affairs. And this application process in our branches, I think, is an excellent example of the public and private sectors working together brilliantly for the benefit of South Africans. We are live now in 86 branches, and we will soon be in 100. The plan we're working towards is to be in over 350 by the end of the year. We've had 71,000 successful applications to date. And that is going to grow and grow as we roll out more branches and word gets out. Looking at what we're doing with respect to AI. I think there are so many important points on this one. But firstly, the most important point to lead with is this is not a future aspiration. This is real in our lives now, and it is already at work, at work for us. We've invested significantly, and we have active and valuable implementations across the whole business that create value by personalizing service for our clients, by protecting them, protecting from fraud in all manner of financial crime and protecting them in the moments that need it. and empowering them, empowering all of us. Almost every single person working at Capitec, touches a Gen AI tool every day, whether it's in the branches or the BSC through Neo and Pulse, those abilities to understand our clients in context and serve them more quickly, more thoroughly more correctly. But also directly, almost 5,000 people are using these Gen AI tools split across Claude Copilot and Microsoft 365 Copilot and ChatGPT. All of those 5,000 people on average using it 4 times a day. And we're not stopping clearly now. More and more and more will happen. And there's a very important message. What we are not trying to do here is save costs. Our strategy is not to save or reduce headcount. Our strategy is to use these tools to make all of us so much more, to be able to serve all of our clients so much more and get to that big vision in the future without scaling costs. Looking at that big vision in the future. The next 25 years starts as always, every day. And we first protect and grow what has made us strong. We protect and grow our personal bank, and we do so by making sure that we prioritize those things which make our system stable and keep our clients secure and develop, deliver beautiful client experiences to them in the moments that really matter to them. Looking slightly further on, we are acting now significant action today, significant execution today to accelerate our key businesses that will create so much of our growth in the 1- to 3-year time horizon. Slightly further into our earning future, we are delivering and growing embedded finance and our enterprise payments businesses that will then kick up our growth significantly in 3 to 5 years. And then looking even further beyond that, we have already started to build and capacitate our new businesses. What Capitec means outside of South Africa in addition to Avafin as well as a data and media business and insights and media business really that can bring new value to all of our clients, especially our business clients. And all of it, of course, is built on that foundation that we started with, our culture, who we are, the platforms that we use and our business model, our approach to seeing and serving the whole person that is our client. And so I would like to end as I began with very sincere gratitude. Thank you to all of our teams, all of our people. Again, it is through you that we've delivered these results, and I'm very privileged to be able to stand here with you to deliver them. Thank you also to our Board members for your excellent guidance, to our shareholders for your support and to our clients, thank you for continuing to trust us. Thank you. So we have covered a lot in a short space of time. And so Grant has joined me up on stage, and we will together do our very best to answer any questions that you might have. Unknown Attendee: Can you hear me? Is it on? Grant Hardy: Sorry, you can just send the mic on, yes, for Lange, please. Unknown Attendee: The first question is from Harry Botha, Bank of America. Can you unpack the net interest income growth in the second half of '26? Were there any noteworthy headwinds, particularly in interest expense? And then the second question, do you want me to do it after. Second question is what percentage of your business bank relationships are likely primary relationships with consistent transactional account activity? Grant Hardy: Okay. So the first question, we did address partly at half year. What we did at the start of this year is on our main accounts, we had a tiered balance in the prior financial year. So we used to pay interest based on the amount that was in your account. And we moved that from, let's say, a tiered approach to a flat rate, which is currently 2%. What that then allowed us to do is to pay a higher interest on the various savings pockets. So anytime access accounts, notice deposits as well as fixed. So that drop in the interest expense has effectively been caused by moving the main account balance to a flat rate. We didn't see any further acceleration of people moving balances faster in the second half of the year than the first half of the year. Graham Lee: Then answering the second question. By client number, the significant majority of small businesses have their primary relationship with us. And that is something that we expect to continue to see growing as a proportion. Grant Hardy: Yes. Just to add to that, I mean the accounts that we highlight on the business bank side, those are active clients who are using those accounts. So there will be cases where they may or may not have credit elsewhere. And obviously, we then try to bring them across to be fully banked with Capitec from a business banking perspective. Unknown Attendee: And then the next set of questions are from Charles Russell at Standard Bank. First question, can you unpack the 9% higher deposits and funding versus the 8% lower interest expense? Grant Hardy: Okay. I think that touches back to Harry's first question. So it is moving that main accounts to a flat rate. Remember that 2% is 2% more than the majority of the market is paying on many accounts, where it's actually closer to 0. And then -- yes. Graham Lee: And then, of course, we also did have a declining interest rate trend in the year. Unknown Attendee: And then do you have a sense of the size of the addressable market for the simple life product, for the life? Graham Lee: It's a really interesting question that we consider really carefully ourselves all the time. When we're talking about simplified life, what we're not trying to do particularly is swap-outs with people who've already got existing life cover elsewhere. What we're looking to do is grow a brand-new market. And exactly what that market is, it is quite hard to get your hands around exactly the size of it. But what we do know is significant. It's significantly bigger than what we have today. Unknown Attendee: A few questions from Ross Krige at Investec. First question, are there any more major fee giveback plans in the pipeline for the coming year? Grant Hardy: I think Graham highlighted in his presentation, giving back to our clients in growth work hand in hand. So we're consistently asking ourselves, are we giving back enough? We want to make sure that the value we provide for our clients gets better and better. And the scale that we have, we continue to pass that benefit back. So I don't think that is something that never stops. Graham Lee: Yes. And then just to add to that, if you don't mind. We do have some plan, but even more importantly than that, the way that we're set up both in terms of how we run the business, but also how we think is we're going to continue to look for more opportunities, and we'll be agile in those opportunities to give back. Unknown Attendee: And then please comment on how you see the personal bank credit loss ratio evolving in the coming year in the face of rising macro uncertainty. Grant Hardy: Well, look, I mean, that's a very, very tough one to answer. The unsecured lending book is really based on how the economy performs. There's a lot of, let's say, fluidity in that and what's happening globally. We, as always, try to be prudent and very agile in our approach to unsecured credit. I spend over 40% of my time, specifically on let's say, the unsecured credit side. So we keep our ears to the ground and make changes as we can. At the moment, we think the book is well placed. But obviously, as the year plays out, we'll have to adjust to that and see how that plays out. Graham Lee: Absolutely. And if you look at the drivers of that credit loss ratio this year and think through how it's going to unfold in the year ahead, one of the drivers is strong book growth. We are still growing that book strongly, and you can expect it to tick up slightly as a result of that. One of the other drivers is the change in mix to more scored and unsecured lending in the business bank side, and that empowers small businesses. So we're going to grow that book even faster, and it will tick up slowly as a result of that in addition to, I think, the context of the question, which was the global uncertainty. That will also add some upside, I think, to that number, but we definitely see it growing within our appetite and as per our plan. Unknown Attendee: And then a few questions from James Starke. First question is on the expected credit loss coverage ratio, a decline from 25.5% -- declined to 25.5% from 27%, partly reflecting the release of the forward-looking overlays. Could you outline the macroeconomic assumptions embedded in the provisioning model? And what triggers could prompt a rebuild of overlays if the conditions deteriorate? Grant Hardy: Thanks, James. So I think firstly, it's also if you look at that Stage 3 book for the personal bank, you saw the percentage of the book in Stage 3 actually decrease. So you are seeing the book looking healthier, which is driving, let's say, a portion of that release. It was quite interesting because the U.S. Iran conflict broke out on the 28th of Feb, which was in the day of our year-end. So we have built in a fourth severe scenario, where we allocated probability to. That scenario specifically had oil being over $100 for an elongated period of time. So interest rates increasing as well as inflation and devaluation in the rand. We adjust that as we -- things move. I mean even in March, we've changed the weightings again and applied more to our severe scenario as well as our low scenario. So I think that situation is fluid, and we manage it as we have more information. Unknown Attendee: And then another question from James. Business banking, loan and deposit volume growth has been impressive. How should we think about the tempo of growth in this area going forward? Grant Hardy: Look, we haven't provided guidance specifically on it. If you see it's grown at 30%, I think that should continue into the foreseeable future. We really focus on the product, making sure that it's right, making sure that the client is getting the best product and the outcome then takes care of itself. But I think we should be able to continue the run rate that you're seeing come through at the moment. Unknown Attendee: Graham, I think this 1 is for you. On international expansion and acquisitions, please, can you expand on the nature and extent of this ambition, touching on market segments, geographies and lines of business? Graham Lee: Sure. So where we are right now is still properly planning for the future. What we knew is that in order to be able to take the second, third and fourth steps we had to take the first step. And that first step is creating and filling a team of the best to focus only on developing the strategy that we've started doing. And part of the initial work is really filtering the world, filtering the world for what the opportunities are that are available to us, looking for both territories that suit us in our future strategies as well as overlay what our strengths are compared to what are the gaps in the market. We're right at the beginning of that still. But what the step we've taken forward is a dedication of really excellent people to that strategy. Unknown Attendee: And then the last question from James. This is about Avafin and its trajectory. Avafin contributed ZAR 128 million to headline earnings with a credit loss ratio of 53.2%. Please discuss the expected profitability growth path forward. Grant Hardy: So the focus with Avafin is about building the foundations of which to take the business forward. The business is profitable, but we're not focused on profitability in the short term. It's about making sure we set the business up right in the long term. Graham mentioned some of the challenges we face in terms of API partners and how we currently acquire clients. So we are trialing things in some of the countries, for example, partnerships with retailers in Mexico, opening a few branches to see how those go in Mexico. So don't think about short-term profitability. For us, it's all about the long term and making sure we set the business up for success. Unknown Attendee: Perfect. And then a few questions, one from Muneer Ahmed. Can you comment on the recently announced partnership with Wise? What benefit does the partnership bring that you didn't bring before in international payments? Graham Lee: So really, what we're looking at is serving our clients better always, including being able to bring down prices, increased speed and so forth. In the international payment space, there is a lot of drag. There's a lot of drag in both time and in cost. And so one of the solutions is multiple rails and redundancy in those rails, making sure that we can select the best rail to bring that international payment to our clients' account the fastest, and at the lowest cost. And what you can expect is to continue to see an expansion in those choices available to us so that we can make the right decision for our clients. Unknown Attendee: And then the last question from Ross Krige, Investec. Please elaborate on the data and media solutions within future growth -- in the future growth slide in terms of what that offering might look like? Graham Lee: Sure. So this is really far out. And thinking about it in the context of income is really much too early. But what we do know is this. We do know there will be significant power, significant value created when we bring together the strengths of our personal bank and our business bank. To some -- to a very large extent, we are doing that together already with a single service model with serving entrepreneurs across both. One of the other ways that we bring additional momentum to the flywheel is bringing insights to our business clients, help -- giving them the insights to enable their businesses to grow. We see ability to lower friction in their processes, saving them time and cost through properly curated data services and in helping them grow their business through getting to the right media, getting their messages out to the right audience. Unknown Attendee: And that is the last of the questions. Graham Lee: Thank you. Grant Hardy: Thank you very much. Graham Lee: Thank you. So thank you very much, everybody. We are now going to cut the external feed, and we'll move across to a town hall just with Capitec people. Thanks a lot.
Benjamin Poh: Good morning, ladies and gentlemen. I'm Ben Poh, Head of Investor Relations. And today, I will be moderating the call. On behalf of ASMPT Limited, welcome to our First Quarter 2026 Investor Conference Call. Thank you all for your interest and continued support. [Operator Instructions] Before we start, let me go through our disclaimers. Please note that there may be forward-looking statements about the company's business and finances during this call. Such forward-looking statements could involve known and unknown uncertainties and risks that could cause actual results, performance and events to differ materially from those expressed or implied during this conference call. For your reference, the Investor Relations presentation on our recent results is available on our website. On today's call, we have the Group Chief Executive Officer, Mr. Robin Ng; and the Group Chief Financial Officer, Ms. Katie Xu. Robin will cover the group's key highlights for the first quarter 2026 and provide outlook and guidance for the following quarter. Katie will provide details on the financial performance for the quarter. Now I will hand the time over to our Group Chief Executive Officer, Robin. Cher Ng: Thank you, Ben. Good morning and good afternoon and good evening to all. Thank you for joining us today for our first quarter 2026 earnings conference call. Now let me start with the key business highlights for Q1. This quarter, I'm pleased to share that ASMPT achieved the highest quarterly bookings and billings in the last few years. We continue to see AI drive demand across multiple products as the rapid evolution of AI increases the value and complexity of back-end semiconductor manufacturing. New AI architectures demand heterogeneous integration, tighter interconnect pitch, higher bandwidth and power efficiency. And these requirements are driving higher precision, alignment and process control needs across packaging flows, benefiting a wide range of the group's product from TCB photonics, CPO, flip chip and mainstream volume and die bonding and pick-and-place solutions. Let me provide some color on these specific product areas. First, let's look at TCB. In Logic, we delivered sizable shipments for chip-to-substrate applications, reinforcing our leadership in chip-to-substrate TCB. We received bookings for 4 ultra-fine-pitch chip-to-wafer TCB tools, featuring our fluxless plasma-based AOR technology from a leading advanced logic customer. We are also actively engaging key logic players across multiple programs, and we are well positioned for more opportunities as the industry advances towards more complex logic chip architectures. In memory, our TCB tools remain at the forefront of technology development. A key memory player is using a flux-based TCB tool for assembly and this customer is also qualifying a Fluxless AOR solution for HBM4 16-high. Next, we'd like to share an update on Photonics. I'm pleased to report that our Photonics revenue grew nearly fivefold year-on-year, benefiting from strong demand for high-speed optical transceivers of 800G and above. In addition, our 1.6T transceiver solution received bulk orders from leading optics suppliers in the data center networking supply chain. This demonstrates strong traction for our optical transceiver solution as the market leader. I would like now to touch a bit on co-packaged optics or CPO before we move on to the next item. CPO represents a paradigm shift in AI system design, bringing optical engines closer to compute silicon to reduce electrical losses, lower power consumption and improved system efficiency. Our CPO solutions enable high precision bonding to integrate diverse components, including fiber array unit, microlens, electronic IC and photonic IC into a single high-performance optical engine. We have deepened our engagement with multiple leading global players and this positions the group well to gain market share as CPO adoption accelerates. Looking now at our flip-chip solutions. I'm pleased to update that they registered strong bookings growth, both Q-on-Q and year-on-year. This momentum is coming from two areas. First, there is an accelerated adoption of 2.5D packaging for larger AI package sizes that is driving a steady pipeline of opportunities for embedded bridge die-bonding solutions for both chip-on-wafer and chip-on-panel solutions. Second, we also gained traction in panel level fan-out for radio frequency and power devices. Both these areas are well solved by our flip chip solutions, which combine cost efficiency, scalability, high placement accuracy and strong throughput. And finally, in our mainstream business, we registered strong bookings for both SEMI and SMT. SEMI's mainstream business benefited from sustained utilization at leading global IDMs and OSATs alongside rising demand for AI data center power management solutions. In China, there was increased demand for wire and die bonding applications. For SMT, we achieved record booking gains in driven by strong customer demand across AI servers, optical transceivers and China EVs. In particular, SMT's high-flex high-force solutions for large format boards are a leading choice for AI server assembly. As we broaden our AI customer base, we are fully committed to delivering the highest quality of solutions and services. ASMPT was recently recognized with a prestigious Intel Epic Supplier Award for 2026, the highest supplier recognition award for excellence in business collaboration. This is a reflection of our strong technical capability and deep engagement with our customers. With these highlights, now let me hand over the time to Katie, who will walk you through our group and segment financial performance. Yifan Xu: Thank you, Robin. Good morning, and good evening, everyone. Before I start, I would like to say that unless otherwise specified, the numbers I'll be referring to today are for the group's continuing operations only, with adjustments made on the non-HKFRS measures. This slide covers our group financial results for Q1 2026. In Q1, the group delivered revenue of USD 507.9 million flat Q-on-Q, but up 32.0% year-on-year, driven by SMT and SEMI. Group revenue came in above market consensus and was the highest in the last 3 years. Group quarterly bookings exceeded expectations with SMT bookings at a record level. Group's booking reached USD 727.0 million, up 46.0% Q-on-Q and 71.6% year-on-year, the highest in the last 4 years. This strong growth came from multiple products, notably SMT products, wire bonders and die bonders and photonics. Group adjusted gross margin was 39.5% Q-on-Q, up 357 basis points due to higher gross margin and revenue contribution from SEMI. The year-on-year decline of 151 basis points was due to a higher revenue contribution from SMT. Group's adjusted OpEx declined 4.6% Q-on-Q but increased 12.4% year-on-year, largely due to unfavorable FX impact and from strategic infrastructure and R&D investments as we have guided for 2026 during our last earnings call. Both adjusted operating profit and adjusted net profit improved Q-on-Q and year-on-year due to higher revenue and operating leverage. Adjusted EPS was at HKD 0.81, up 118.9% Q-on-Q and 189.3% year-on-year, which was above market consensus. Moving on to the Semiconductor Solutions segment. In Q1, SEMI revenue delivered USD 274.5 million, up 12.2% Q-on-Q and 14.6% year-on-year. Q-on-Q, growth was driven by high-end die bonders and TCB, while year-on-year growth came in from multiple products, largely driven by AI-related applications. SEMI bookings were USD 309.6 million, up 22.6% Q-on-Q and 43.2% year-on-year due to higher demand for wire bonders and die bonders driven by China OSATs, high-end smartphone-related applications AI-related power management applications and optical transceivers. SEMI achieved a book-to-bill ratio of 1.13, which marks 3 consecutive quarters of improvement. SEMI adjusted gross margin reached 46.4%, achieving the guidance we set last quarter. Adjusted gross margin improved by 594 basis points Q-on-Q but declined slightly by 37 basis points year-on-year. The significant Q-on-Q improvement was mainly driven by high volume and favorable product mix. SEMI adjusted segment profit was HKD 309.4 million, up 165.9% Q-on-Q and 16.8% year-on-year. The strong Q-on-Q improvement was mainly driven by higher gross margins and operating leverage. Let me move to SMT. SMT Q1 revenue was USD 233.5 million, down 11.0% Q-on-Q but up 60.7% year-on-year. Q-on-Q decline was due to seasonality, while year-on-year increase was due to strong demand from AI servers and China EVs. As mentioned earlier, SMT achieved a record bookings of USD 417.4 million, up 70.0% Q-on-Q and 101.1% year-on-year. This was primarily driven by strong demand from AI servers, optical transceivers and China EVs together with robust China demand arising from global data center expansion. SMT adjusted segment profit was HKD 141.8 million, down 28.3% Q-on-Q due to lower volume, but it improved year-on-year. Now let me hand the time back to Robin for the outlook and the revenue guidance. Cher Ng: Let me present our Q2 2026 revenue guidance. The group expects Q2 2026 revenue to be in the range of USD 540 million and USD 600 million. At the midpoint of USD 570 million, this represents an increase of 12.2% Q-on-Q and 37.0% year-on-year. Notably, our midpoint revenue guidance exceeds current market consensus, and it will be mainly driven by SEMI. Group bookings in Q2 2026 are expected to remain elevated for both segments, though SMT will be down Q-on-Q due to the high base effect from Q1. The continued proliferation of AI expected to drive structural demand growth for both SEMI and SMT in 2026 across multiple products. This includes our flagship TCB and HP solutions, photonics and CPO to mainstream wire and die bonding and pick-and-place solutions that enable AI infrastructure deployment. Looking ahead, structural AI-driven demand is expected to support revenue growth across both SEMI and SMT in 2026. This concludes our first quarter 2026 presentation. Thank you, and we are now ready for Q&A. Let me pass the time back to Ben to facilitate. Benjamin Poh: [Operator Instructions] And I see a raised hand from Gokul of JPM. Gokul Hariharan: Great results, and also thanks, Robin, for your amazing leadership over the years. So first question is on memory TCB. What are we seeing in terms of bookings and potential for bulk orders for memory TCB given that we haven't really seen any big bulk orders in the last maybe couple of quarters now. And at the same time, the R&D progress seems to be quite good on both flux-based and fluxless. And in addition to that, could you also talk a little bit about your engagement with the bigger memory vendor that the market is talking about, which has largely been using internal TCB tools? Do you see that there is an opportunity opening up with this customer, which will definitely expand your addressable market? Cher Ng: Thank you, Gokul. I think there are a number of questions within your questions. Let me address I think the first one first. You're asking about memory TCB bookings and potential for bulk orders for TCB and in the last few quarters. The last bulk order that we received was in Q4 2025. We're still confident that we are well placed to -- well positioned to receive orders from memory makers as far as they are ready to dish out orders for equipment supply ourselves. Now I think your second question is on fluxless, R&D fluxless, how is it going. I think we are making good progress, especially on the logic side, as we have mentioned, we have won 4 tools in Q1 for CoW fluxless applications. We believe this is a start of this particularly exciting program. I think as the industry continue to migrate to more complicated GPU or even ASIC architecture, I think at some point, they may have to switch to a chiplet kind of configuration rather than using SoC, and that's where the opportunity to use our TCB fluxless tool for chip-on-wafer application will be there. So since now that we are already in that supply chain, I think, again, I think we are really well positioned to capture more opportunities for CoW fluxless application going forward. I believe your third question relates about the biggest memory player who is used to using internal TCB tools. Yes, I think we are unable to really name or confirm any specific collaboration with any customer, I hope you understand. What I can say that in the process of finalizing an evaluation program with a key memory player. We definitely see this as a positive step, possibly in the future, enabling our group's technology from memory as a process standard in the future. So we are excited about this potential collaboration going forward. Yifan Xu: Gokul, very quick. Just going back to the question on the memory TCB bulk order. I just want to -- probably to say that we want to reiterate, right? Our TAM forecast is actually of the $1.6 billion is intact. And you're probably reference into some of the recent adjustments for the next generation of GPU HBM4 road maps. They are leading to some -- maybe quarter-to-quarter, there might be some variability in the times of a customer's decision. But our activity level remains very healthy, but it could be uneven from quarter-to-quarter. Gokul Hariharan: Got it. That's very clear. Second question I have is on your photonics, obviously, very strong growth, 5x kind of growth. Could you help us size the like photonics business, I think you've said it long back that it was probably under $100 million annual run rate ballpark? Or is this still -- is now much bigger than that? Cher Ng: Yes. I think, Gokul, you... Gokul Hariharan: When we transitioned? Cher Ng: Yes. Maybe answer the photonics first, Gokul. Gokul Hariharan: Well, go ahead, Robin. I'll follow up later. Cher Ng: Yes. There's a little bit of feedback on this. Benjamin Poh: Yes. Your line is breaking up, actually, Gokul. Cher Ng: Okay. Anyway, I'll answer the Photonics question first Gokul. Yes, Indeed, when we look back in a deep dive into the photonics and the CPO market recently, actually, the TAM looks even more promising than before. right? So -- but we are not ready to disclose the TAM at this point in time. But I can tell you the TAM looks bigger than before. So when we combine the optical transceiver TAM and the CPO TAM, I must say that the TAM looks interesting. We are definitely paying a lot of attention in this area. And fortunately, I think for photonics, we are already a very strong player in the optical transceiver market. And I think for the CPO, you probably will follow up with your question on CPO as well. I think we're well positioned with some key players already. Our solutions, I would say, have been designed in with a number of key CPO players. So when the adoption takes place, I think we're in a good position to capitalize this opportunity for CPO. Maybe back to you for second question, please. Gokul Hariharan: Yes. So I think just to follow up on that CPO comment, Robin, the market understanding, obviously, is that hybrid bonding plays an important role in CPO for the EIC, PIC attach. And obviously, your hybrid bonder is still in qualification, especially the second generation. So could you talk a little bit about the progress there? And maybe also help clarify. I think there are multiple die attach steps, not just hybrid bonding, I think beyond that as well. So I just wanted to understand like what is the span of like SMT's involvement when it comes to CPO, just beyond the EIC, PIC attach? Cher Ng: That's right. I think we also said in the MD&A, we are participating in several key high-precision bonding areas for CPO, one of which is FAU attach on PIC. The other one is what you mentioned, stacking EIC on PIC. The third application we can think of is micro lens attached on PIC and also finally, the whole optical engine on the substrate. So we have solutions actually for all these key bonding solutions. That's why we feel particularly quite excited about the CPO market. And as I said earlier, I think the TAM looks interesting, maybe not in the initial years. But I think the CPO will accelerate probably from '28 onwards, and the TAM in fact, looks very interesting for CPO. So these are the areas we are participating. Now back to your question on EIC on PIC, hybrid bonding is one solution. I think CPO players are also exploring whether they can use TCB for the application as well. So if they use PCB, that will be also very an interesting market segment for us. Benjamin Poh: I'm seeing a next raised from Daisy. Daisy, could you please unmute yourself and raise question? Daisy Dai: Yes. And my first question is regarding the OSAT CapEx. So we saw that the OSAT CapEx is getting higher and higher for this year. So which area do you expect to record the highest growth for the year based on the current order visibility? And I mean the regions. And also, China is the largest revenue contributor last year around 41% of your total revenue. Within China, do you see that still advanced packaging, I mean your TCB and other hybrid bonding tools growth, outgrow the mainstream or mainstream for this year is also very strong. That's my first question. Cher Ng: Thank you, Daisy. In terms of -- I think your first question first in terms of OSAT CapEx yes, in fact, we are experiencing strong demand, I would say, on the OSAT front, mainly coming from wire bond die bond because of the AI demand for infrastructure. I think we have been talking about this for a few quarters already, but in Q1, the demand is particularly very strong. What is driving this is really power applications that go into data center. So this require new power devices and because of that new capacity is required. So that's driving a lot of our wire bond and die bond and also not forgetting SMT as well. We mentioned that SMT had a very fantastic booking in Q1 highest so far in history, largely also driven by AI server boards. And in there, there are a lot of power packages using tools from SiP, tools from SMT as well. So all this infrastructure deployment and spending are driving a lot of our mainstream tools, both in SEMI as well as in SMT. Now I think your second question is about China, whether China region, whether AP grow, is it faster than mainstream or mainstream is still very strong. I think typically, in China, say especially on the SEMI side, the mainstream side are definitely stronger than the AP side. However, on the SMT side, in the rest of the region, still stronger than the China side. So there's a mix in terms of China demand coming from SEMI and SMT segment. Daisy Dai: And my second question is also regarding the optics, photonics solution. So you mentioned that the revenue delivered fivefold increase year-on-year this quarter. And may I ask why we suddenly saw a very strong pickup in this segment. And I believe you mentioned that regarding the booking, the photonic solutions is both in your SEMI solutions segment and SMT segment. May I ask what tools for the SMT and what tools within the SEMI solution? Cher Ng: Yes. I think it's really all AI-driven, data center driven, as you can imagine, as the industry continued to increase the silicon compute, the transmission side has to match that capability as well. So that drives a lot of growth presently in terms of optical transceivers and the industry is moving from 400G to 800G to 1.6T, and we have a very, very good solution for optical transceivers. This segment has been seeing steady growth for a few quarters already. We have been reporting there. So it's nothing new to us. We have been saying that optical transceiver is a good market for us. We have been quite dominant in that space. We've been winning market share as well. So that's something that we are experiencing from many quarters already in terms of photonics. Now your second question is for -- both segments indeed are participating in this area. Now for SMT, mentioned in the optical transceiver there are many, many components, some require higher precision than others. So for those components that require higher precision bonding. They use our SEMI tools for that purpose. For those that do not require a lot of precision they use our SMT pick and place tool to bond those components. So both segment SMT and SEMI are actually benefiting from this surge in demand for optical transceivers. Benjamin Poh: Yes. Next, I will request Kevin from Citi to unmute. Kevin Chen: So I have two questions. Number one is that I would like to get some more detail on the booking guidance outlook. As you see right now, our booking is back to -- especially like SMT back to a record level. So can we get for the coming quarters, do we see -- have a rough sense of breakdown for booking into the, say, SEMI and SMT and specifically, which region are we seeing the most growth from. And also, last time we mentioned we're seeing some improving visibility. Is this still the case so that right now, approximately how many months of visibility do we have right now? . Cher Ng: Thanks, Kevin, for the question. Now I think you're referring to Q2 bookings. Now we -- as you know, we don't really guide but we can definitely give you some color we see bookings in Q2 this quarter to remain elevated. Booking may, however, moderate Q-on-Q but still expected to grow strongly on a year-on-year basis. We believe in large part, we continue to benefit from the secular demand for AI-related applications. And in the infrastructure spending, plus, of course, overall improving market condition as a whole. Giving a little bit of color as to the or the segment booking. Now for SEMI, Q2 SEMI bookings are expected to increase Q-on-Q and more significantly higher on a year-on-year basis. However, for SMT bookings are likely to decrease Q-on-Q due to high base effect as we have reported, Q1 booking for SMT was at a record high. So we don't expect the current level to continue on a Q-on-Q basis. However, having said that, SMT bookings are also expected to be higher on a year-on-year basis. Now you asked about visibility. Looking ahead, while we are definitely more optimistic about business compared to some quarters back, there is less visibility for the second half of 2026 for the whole group. I think this is pretty normal for a business that we can't really look too far away. So I hope I answered your question, Kevin. Yifan Xu: Yes. Maybe real quick, I think Kevin was asking about the booking by region. And Kevin, we actually sort of answered it already when we were talking about -- when Robin was addressing Daisy's question. Since overall, the regional mix will stay relatively stable. But like what Robin was mentioning about the strength of China OSATs. So there will be a little bit more booking from China. But overall, it's quite steady. Kevin Chen: Great. My second question is on the EMIB outlook. I think recently, there has been some demand pickup on this technology. I'm just wondering what type of or tools are addressing this kind of demand? And also our position to the share allocation in this type of technology. Do we need a special type of TCB and that require customization as well? Cher Ng: Yes. I think, Kevin, I can't hear you properly. I think you mentioned EMIB-T right? . Kevin Chen: Yes. Cher Ng: Okay. So A couple of layers we have to understand on the EMIB-T program. If you are talking about embedded die bonding, we believe this is on a large substrate, probably 510 x 500. Unfortunately, TCB, we are not ready for that yet in terms of that kind of panel size because it will take some time for us to deliver a tool of that size for TCB. But however, if this EMIB program takes off and we believe it will, we are already -- this particular customer is really using our tool for CoW application. So do you have to -- I mean, if this program proliferates, right? So they will probably need also more tools to place a lot more components on the EMIB-T substrate. So I think I think we will benefit from that particular area that means on the CoW tools, which we're already in. But if you're talking about embedded die bonding for the EMIB-T, we are not there yet. Benjamin Poh: Next, I will move to Sunny. Sunny, could you please unmute and raise your question? Sunny Lin: Hello. Could you hear me okay? Cher Ng: Yes. Very well. Sunny Lin: Congrats on the very good results and thank you, Robin, for all your leadership over the years. And so my first question is on your opportunity on the logic, especially on chip-on-wafer. And so Robin, earlier, you mentioned the chip-on-wafer migration for TCB could be somewhat related to chiplet. That was a bit surprising to me because I always think that the chip-on-wafer migration for TCB should be related to larger package. And so how should we think about from here? You just secured 4 tools from a leading-edge foundry customer. How aggressive are they in migrating to TCB for chip-on-wafer from here? How should we think about when you may get another bulk orders? Would that be in second half? Or will you need to wait until maybe 2027? Cher Ng: Okay. Thanks, Sunny, for your question. Now when we -- when I mentioned about chiplet, between chiplet and SoC, when the GPU architecture is using SoC, there is less need to use TCB to place the SOC onto the interposer because you don't need that kind of precision. But when you try to -- when you go into SOIC kind of packaging, you need more precision to put those chips onto an interposer. So that's why TCB will be needed going forward. So I think as the industry migrates from an SoC structure to an SOIC structure, we see increasing use of TCB for that application. So however, having said that, we have been telling you guys that for 2026, the number of tools for CoW will not be significant because it all depends on the migration to the next chip architecture. So we believe '26 will not be high for CoW. But going forward in the years to come, I think there's a meaningful TAM over there for CoW application for logic. Now how aggressive is this migrating to CoW? Yes, I think I already answered your second question as well. So '26 will not be high, but '27 would be meaningful. Sunny Lin: Also, if I may follow up on my first question. Also, these leading-edge logic customer, they are already working on the follow-up solution beyond CoWoS, meaning CoPoS. So yes, so from your perspective, for their CoPoS, they will start from smaller form factor, 310 x 310. And so from your perspective, are you seeing any signs of clients trying to pull forward the technology development. And for CoPoS, how should we think about your overall opportunity, especially around chip-on-panel. Cher Ng: Yes. I think we are -- as we speak, we are developing tools for CoP. So we deal to deliver demonstration tools sometime this year. So that part, we are already engaged with the key advanced logic customer. So that is another exciting area for TCB. So if you look at TCB in general, we have a wide customer base. We have a very diverse applications. We don't just depend on certain applications, but a very diverse application both on the logic side as well as on the HBM side. So certainly, panel packaging at CoP level is an interesting development for us as well. Sunny Lin: Also, if I may, I do want to ask a question on SMT. So any update on your strategic review for the division? And have you identified a specific option that you want to go for? And what would be the time line? Cher Ng: To answer your second question first, no. I think we are still in the progress of evaluating. But certainly, we have received some interest in the SMT business at this point in time. Benjamin Poh: Next, I would like to request Arthur. Arthur, please unmute. Yu Jang Lai: Robin, can you hear me? Cher Ng: Yes. Yu Jang Lai: Congrats on a strong result and guidance. So I will have two questions. Number one is on the CPO. You just mentioned that you have a deep dive into the process, right? And you mentioned the timing is '28. I want to confirm that that's the optical engine shipment or that's your equipment shipment timing? Cher Ng: Shipment TAM, we're referring to our equipment TAM for CPO, it wouldn't look interesting from '28 onwards. Yu Jang Lai: Okay. Interesting on '28. Because what we heard from the supply chains that actually some of the CPO equipment already kick off. So can you share more color on your target for example, is for the GPU side maker or is for the ASIC side maker? Cher Ng: I think the clientele that we have probably serving both Arthur. I think can really differentiate whether it's ASIC or GPU, yes. Yu Jang Lai: Okay. Okay. And my second question is about the HBM. So thanks for sharing this good progress. Do you think for the HBM4 and 4E and actually, you can continue to -- so my question is about HB progress, hybrid bonding progress and your tools, so do you think the visibility is getting longer and longer in the HBM side? Cher Ng: Not really. I think the road map from our customers are pretty clear, but like what Katie said, if there is adjustment to the road map, of course, the demand will vary from quarter-to-quarter. But however, in the long run, I think we are still sticking to a very significant TAM of $1.6 billion in 2028. And we intend and we have never wavered from our aim to target 35% to 40% market share for the whole TCB market. Yu Jang Lai: Got you. And finally, a question to Katie. On the modeling perspective, we know there is a strong booking, right? But how about your component supplier lead time? Is it getting longer? Or does that remain controllable? How should we think of the real billing seasonality of this year? Do we see any constraints? Yifan Xu: Yes. Arthur, thank you for the question. Maybe I'll answer it by segment. On the SMT front I'll do that first, though we have very, very strong bookings, as we've mentioned a few times now, the conversion -- the revenue conversion is somewhat impacted by the lead time of our suppliers. The team is actually actively addressing this, and we expect that in the second half, this kind of situation actually will get better. On the SEMI side, I mean, there's always the kind of tight supply chain, especially given all the uncertainties around the globe. But so far, we will say that we are managing the supply situation just fine. Benjamin Poh: Next, I would like to request Alex Chan to unmute. I think Alex have some technical problem. Maybe we'll go to the next one. Next, I would like to invite Donnie. Donnie, could you please unmute? Donnie Teng: Can you hear me? Cher Ng: Yes, Donnie. Go ahead. Donnie Teng: Robin, my first question is regarding to your NEXX business. So I'm wondering if that -- I mean, I remember in the past few years, the NEXX one of the NEXX major business was plating tool, and it can be sold to some PCB companies. And recently, I think PCB companies or substrate companies are expanding capacity due to their running out of the fab. So I think I just want to ask is like if NEXX can generate some revenue momentum recovery in the future? Are you still considering to sell this business? And also in terms of time line, when we expect that we can dispose SIPLACE and NEXX, these two businesses in the future? Would that be in second quarter? So this is the first question. Cher Ng: I think let me answer your second part of the question first. We don't have an exact timing for you. Whenever there is a deal we have we will announce it. But so far, we have nothing to mention here. Now you're talking about NEXX, yes, they are into deposition. When we make a decision to divest NEXX, we don't just look at financial alone. We look at strategic fit to our whole business, right? So we feel that we want to divest that because we're going to focus more on the SEMI back-end. NEXX is not exactly in the back end. NEXX is on the middle end. So that's the reason why we made the decision to divest NEXX, not purely on financial but because of strategy. Donnie Teng: Okay. Okay. Understood. Just one follow-up on this. So when you decide to divest NEXX, have you already seen the pickup of the orders from those PCB and substrate makers? Cher Ng: I would say, yes, as I said, but our decision is not based on financial alone. It's really more on strategy. Donnie Teng: Okay. And my second question is regarding to the CPO. So my understanding was that AMICRA for example, can be used for laser bonding or, as you s, maybe micro lens bonding on to IC. I guess that's the major business still today. But I'm also wondering if you can quantify a bit more on the 5x growth in the first quarter of this year. It's like what kind of base in the last year? And also in terms of the inspection, as you know, for CPO, the FAU alignment with optical engine is also very critical and it also requires inspection. So we have AOI tool. We have AOI tool. I'm wondering if we can explore some of the business opportunities there or we are mainly staying at the die bonding market? Cher Ng: Yes, very good question, Donnie. Actually, when we deep dive into the Photonics business, right? So we also think that may be we shouldn't just focus on just on the die bonding because there's indeed a lot of opportunities in the photonics in the CPO as well as the optical transceiver business. So too early. I don't have any concrete answer for you at this point in time. But coming back on the FAU, yes, I think AMICRA has a solution especially for FAU attached onto the PIC. So as I said earlier, I think as far as CPO is concerned, we feel good. We feel excited about this particular development. So we will probably have more of the share as we move throughout the quarters in the years to come. Donnie Teng: And in terms of 5x growth, can you elaborate a little more is like what kind of base we are growing from in capacity. Cher Ng: Yes. I would say Donnie, right now, it's still a small base. But again, in terms of growth, if it was a significant growth we thought it's worth to highlight to you guys as well that we are making good progress in terms of optical transceiver as well as CPO. Benjamin Poh: I'm afraid this is the time that we have. And now I'll pass the time back to Robin for his closing remarks. Cher Ng: Yes. So thank you for a very good discussion today. So let me take a step back and say that this quarter really marks an important point for ASMPT. We delivered one of the strongest quarters in recent years, not just in terms of revenue and bookings, but notably also how broadly AI is translating into more opportunity for ASMPT, from TCB and advanced packaging to photonics, CPO and mainstream platform, we are indeed seeing AI driving demand across multiple products and customer segments at the same time. Also this breadth matters because it reflects the increasing complexity of AI system architecture and the value of back-end manufacturing, an area where our range of solutions, our scale, our capabilities are allowing us to participate meaningfully across the technology space. We are indeed very encouraged by the operational leverage we have demonstrated this quarter. Our adjusted margins improved sequentially, supported by product mix and volume, and our results came in ahead of market expectations. So looking ahead, we continue to see AI as a multiyear structural driver of our business, with strong engagement across advanced logic and memory photonics and CPO and mainstream wire and die bonding and SMT pick-and-place solutions. We believe ASMPT is well positioned to support this next phase of industry growth across both SEMI and SMT. So once again, thank you for your interest and your continuous support. We look forward to updating you more in the next quarter. So this concludes our call. Thank you, and take care.
Hakon Volldal: Good morning from Oslo. Welcome to Nel's First Quarter 2026 Results Presentation. My name is Hakon Volldal, I am the CEO. With me today, I have our CFO, Kjell Christian Bjornsen; and our Head of IR, Marketing, Communications and Miscellaneous functions, Wilhelm Flinder. We have the following agenda. I'll skip the Nel in brief and jump straight to the highlights for Q1. We have a short commercial update covering the most important commercial events in the first quarter and one subsequent event, a short technology update and then we will, as usual, end with questions and answers. Quarterly highlights. Revenues came in at NOK 148 million. We had a negative EBITDA of NOK 100 million. Order intake at NOK 85 million. Order backlog ended at NOK 1.1 billion, and our cash balance ended at NOK 1.4 billion. A pretty quiet start to the year. First quarter is always a bit slow. What we are focusing on is the launch of the new pressurized alkaline platform that will happen at Heroya on May 6 this year. In connection with that, we have been busy in the first quarter testing out new pressurized alkaline production line technology that is progressing according to plan. We also opened Korea's first off-grid green hydrogen production facility. That was commissioned in late March. And in April, we received a $7 million purchase order for containerized PEM equipment. Looking at more detailed numbers. Revenue from contracts with customers down 5% year-on-year. Revenues from alkaline division increased by 6%, but we had a decline in the PEM division of 14%. The NOK 100 million negative EBITDA was a NOK 15 million improvement year-on-year, and it's, of course, driven by the fact that we continue to invest in next-generation technologies, and we need higher revenues in order to become profitable. Solid cash balance at the end of the quarter, and that does not include EUR 11 million in the EU grant linked to our pressurized alkaline industrialization, which we expect to receive in the next quarter or in this quarter, second quarter '26. Alkaline financials limited revenue recognition in the quarter. Despite that, revenue was up 6% year-on-year. EBITDA improved by NOK 35 million versus corresponding quarter last year due to positive impact of project deliveries. We have adjusted our cost base and capacity utilization to reflect lower market demand, but lower fixed costs will continue to negatively influence results until volumes pick up. As you can see from the chart, we do generate profits when we have good revenues. Turning to PEM. Revenue were down 14% year-on-year due to limited megawatt project deliveries in the quarter. We had mostly sales of industrial products. EBITDA was down NOK 16 million year-on-year, largely driven by delayed or canceled research grants in the U.S. We have historically received money from the Department of Energy to fund several research programs, and that has been under review and parts of the grants have not been paid out since late last year, and that reflects performance so far this year. We have a good hope that the grants will be reinstated and that money will continue to be paid out or resume -- we will resume paying money to Nel, but can't say exactly when that will happen again. We are also in the PEM division spending money on product development for next-generation PEM electrolyser with significantly lower levelized cost of hydrogen, and that development is progressing well. Order intake was NOK 85 million, was down year-on-year versus a strong quarter in '25. We expect the order intake to improve and have already booked the first order in the second quarter of roughly NOK 70 million. So the first quarter you see here did not reflect any big project wins, just, I would say, normal course of business related to aftersales and some industrial products. The order backlog at the end of the quarter ended at NOK 1.1 billion. Due to a declining order backlog and limited demand over the past few quarters, we have reduced our employee base. We will try to adjust our cost to change market expectations. We are down in terms of number of employees by 26% versus the peak and 19% versus the end of first quarter 2025. And we can see that this also then translates into a 21% reduction in personnel expenses in the first quarter of '26. We have done these adjustments to make sure that we spend our money responsibly, but it has largely affected our ability to manufacture at scale and deliver projects at scale. So that variable or that muscle has been reduced. We have kept more or less our R&D organization to make sure that we can progress and deliver the new technology needed to bring additional volumes back. And once we get new orders and we see that the market is coming back, we can add back the manufacturing and project execution capacity. But for now, we have reduced our staffing down to roughly 300 employees. On the commercial side, we do want to highlight this. Korea's first off-grid green hydrogen production facility has been commissioned, happened in late March. It's a 10-megawatt alkaline system from Nel supplied by a solar power plant, as you can see on the picture. There is no reliance on the power grid. And this project more or less validates large-scale off-grid hydrogen production as a model for future domestic and international projects. It's been a very interesting project together with Samsung C&T, where, of course, Samsung C&T acted as the EPC and Nel provided electrolysers and gas separation modules. In April, we received another order from -- for containerized PEM equipment from Measure Process. It's a second purchase order from this client. And we're quite proud to see that whenever we get an order now, very often, we can say that it's a repeat purchase. That means the quality we deliver is solid. Customers have good experience with the first products they have purchased and they come back for more when they need it. This equipment will supply hydrogen for refueling stations and industrial applications. And I think it's sort of confirms the story that the MC platform, the containerized PEM solutions, has strong momentum across a wide range of applications. It's a fully modular design and that enables rapid project execution. It's also a good way to build out capacity over time. You could add more modules if you need more capacity. That also fits nicely with the market perspective. We continue to see several of these promising smaller projects, 2.5 megawatt, 5 megawatt, 10 megawatt projects that are ideal for containerized PEM, but we also see some larger projects in the 50 megawatt to 150 megawatt range, and these are expected to take final investment decisions over the next quarters. Containerized PEM has strong momentum, as I said, and to elaborate a little bit on that. The reason is that projects have become smaller than we saw a couple of years ago than customers spoke about 100 megawatt, 200 megawatt, 300 megawatt, 400 megawatt. They now plan for something smaller, at least initially. They want a gradual approach to this where they build out capacity over time when an offtake materializes. If they start with the first step, that's usually in the 10 megawatt to 50-megawatt range, and that fits nicely with Nel's containerized PEM systems. Multiple containerized PEM systems offer a proven, efficient and standardized alternative to customized and tailored solutions. We have achieved significant CapEx reductions over the past few years, both on the stack itself and on the system design. And combined with the growing list of references that we have around the world, this has increased Nel's competitiveness in this market segment. Europe is currently the most active and promising region, but we also have projects and deliveries in North America and interesting prospects in the Middle East and Asia. Then I want to end the quarter with a comment on the energy resilience. We continue to see fossil energy shocks and we continue to see that we repeatedly subsidize fossil energy to manage these shocks, while investments into renewables face higher scepticism. Renewable energy can reduce exposure to certain price spikes and definitely help mitigate geopolitical dependency and vulnerabilities. The intermittency that we see from wind and solar, the wind doesn't blow all the time. The radiation from the sun is not constant, and that is a known challenge with the renewable energy systems. But electrolytic hydrogen enables long-term energy storage and system flexibility beyond what batteries can provide. As one example, a 200-megawatt plant in the United States has larger capacity than all the batteries currently linked to the electric grids in the United States, including the batteries from Tesla. So hydrogen is at another level when it comes to what kind of -- how the amounts of energy that we can store. Investing in renewable energy and green hydrogen is cheaper than repeat short-term subsidy programs for fossil energy. And it also, by the way, reduces emissions. So when we have debate about energy resilience and security of supply, I think hydrogen should increasingly be part of that. And we see an increasing interest among defense contractors and politicians to look at the role that hydrogen can play in distributed energy supply. To give you one example of how hydrogen can help basically flatten out the demand curve for electricity, we have a 20-megawatt Nel plant in Denmark. It's run and owned by Everfuel. They run this plant when there is excess energy in the system. So instead of then bringing prices down to a very low level, Everfuel will help prices stay more or less stable because they can also shut down the equipment when demand for electrodes is high. So this facility, the 20-megawatt facility helps balance out these peaks and low points that we see in electricity demand. Implementing this on a larger scale will, of course, help avoid periods where operators and generators get absolutely nothing for the electricity they produce, but also help consumers avoid periods when demand is high and electricity prices go through the roof. It basically helps flatten out the price curve for electricity. Shortly on the technology update. We have shown this slide before. And I just want to remind you that when we talk about pressurized alkaline in Nel, it's not that we haven't looked at that before. We used to have pressurized alkaline technology 20 years ago, but it did nothing that the atmospheric solution didn't do. We do, however, see benefits of having pressurized gas. And that's why we started back in 2018 to sort of reinvent our pressurized alkaline technology. In 2026, after years of testing this new technology, we are ready to commercialize it. It has taken 8 years. But now we're getting ready for the commercial launch. It will happen on May 6. We have invited customers, potential customers, partners, employees and a lot of people that might find this interesting to Heroya to take a look at a real physical installation, proving that this concept is more than a PowerPoint concept. It actually works. It's a physical thing and talk about the benefits that this solution brings to the world of hydrogen. We are truly excited to show the world what this technology can do. We will offer market perspectives by external speakers and of course, also dissect the solution and talk about the value proposition that we believe this solution has. Therefore, we will not go into a lot of details today on the technology. We will share our presentations with the public on May 6. Just want to give you a sneak peek of what is happening in parallel because we are truly proud of the solution that we have. And of course, we have to be able to deliver it at scale. And that's why we, in December, decided to invest in a production line for pressurized alkaline manufacturing capacity at Heroya. This is funded by the European Union. As I mentioned, the first milestone payment will happen shortly. CapEx per megawatt is significantly lower for this concept compared to the atmospheric alkaline or PEM. Ongoing tests confirm product quality and exceed prototype production results. We have clear improvements in yield and fewer critical defects and cycle times are coming down to support increased annual capacity and improved efficiency. We have a strong process understanding already, piggybacking on a century of experience producing alkaline systems, but there are new processes and new techniques that have to be mastered, and we're well into that. The goal is to have the first 500 megawatts of production capacity installed by the end of 2026. And that's why we commercially launched it now to have time to build the order backlog and for customers to understand the benefits of the concept and together with Nel start to work out the exact concrete and specific projects where we can apply this beautiful technology. And that brings me to the final page. This has been our value proposition for quite some time. I think Nel has an unrivaled track record. We have a century of experience. We have sold more than 7,000 electrolyzers globally, and we have a tonne of prestigious references. But to stay a leader in this industry, you have to demonstrate technology leadership. We do that by having multiple technology platforms. We have both PEM and alkaline. We have proven solutions for today, but we need new solutions for tomorrow. We need solutions that can bring the total cost of hydrogen down, and we don't develop that only here in Nel. We do it through a big network of world-class partners. What we will show in May is an example of cost and scale leadership. This concept will be an enabler for customers to realize projects that they could not previously realize because costs were too high. But Nel is a frontrunner in cost reductions. We take -- we make big leaps in terms of innovation and how we look at cost down opportunities and we combine that with market-leading production capabilities. So we will revert in May with more information about the new technology. And bear in mind, couple of years later, we will have the next-generation PEM platform also available. That concludes the presentation, and I will be joined by our CFO, Kjell Christian Bjornsen, to answer questions that you might have. Kjell Bjørnsen: Very good. Thank you, Hakon. Before we start the Q&A session, just a few practical points here. [Operator Instructions ]. If we don't get your questions, feel free to reach out to us at ir@nelhydrogen.com And as a reminder, we will not comment on outlook-specific targets, detailed terms and conditions for individual contracts, or questions about specific markets. Modeling questions are also best handled offline. And with that, I think we can get started. Kjell Bjørnsen: First question comes from [ Martin Klebert ]. Unknown Analyst: I'd just like you to give us some explanation of how long you can store the hydrogen for and what method you're using to store this? And then when it is released, do you turn it back into electricity through the use of fuel cells? Hakon Volldal: Yes. that's correct. There are different ways of storing hydrogen. You can store it in a buffer tank for large quantities of energy to be stored. You can even use a pipeline or you can use salt caverns. So there are different examples of how to do that. There are salt caverns used in Sweden for storage, there are pipelines being used with compressed hydrogen. You can liquefy it and store it in a tank. So there are different ways of storing the energy. And you're right, if you want to turn it back into electricity, you have to run the hydrogen through a fuel cell again to generate that electricity, which you can use on site or you can send it back to the grid. Unknown Analyst: And just before I let you go, how long can you store that hydrogen for? You have the normal storage at the moment of electricity, you can't store it for that long. Are you able to store it for a longer period? And what is the advantage of that? Hakon Volldal: Yes. So that's the big thing about hydrogen. You turn it into a molecule that you can store for a very long period of time, we're talking years, if necessary. There is always a little bit of a loss, what we call a boiloff, but that's a mickey mouse figure compared to the total amount of energy that you store. So whereas batteries can help you smoothen out short-term swings, it's very difficult with batteries to store large amounts of energy and use that to sort of, let's say, you need more energy during the winter, then it's difficult to store that in the summer and release it in the winter. Hydrogen, you can do that and you can even use it for long-term storage for multiple years. So that's where batteries and hydrogen serve different purposes, but I think both are needed to have an energy system that we can depend on. Unknown Analyst: And quickly, can you use existing infrastructure, existing tanks or do you have to get special new tanks? Hakon Volldal: So it depends on where you are. In some places, you have the infrastructure in place that you can leverage. In other places, you have to build that storage capacity. Kjell Bjørnsen: Next question comes from Elliott Geoffrey Peter Jones, [indiscernible]. Elliott Geoffrey Jones: Just -- I think just more on the macro side, just thinking about the -- obviously, the escalations in the Middle East and what's happened to like you mentioned, energy prices, we're seeing metals prices go through the roof as well. Are you seeing or hearing kind of any change in customer activity with regards to the potential for another bout of cost inflation when it comes to projects? Or have you not really seen any change in attitude from customers? Any color on that would be very helpful. Kjell Bjørnsen: So what we do see is that some of the projects that are in the Middle East are delayed or that further execution of those are somewhat hindered by the current circumstances. We do see some material price movements, but it's too early to see if that is a sustained movement or not. I would say with the beauty of what we are launching with the next-generation technology and also the next-generation PEM platform that we're working on is that we take down the labor cost on site, we take out down the engineering hours. So we take down a lot of these cost adders that would typically be influenced heavily by inflation. Hakon Volldal: And we reduce our dependence on platinum group metals significantly. Elliott Geoffrey Jones: That's a good point. That's helpful. And then just kind of follow up on that quickly. Just kind of putting it all together, looking at last year versus this year, obviously, we've talked about this year a lot of the pipeline being more kind of sensible and real. If you kind of add on the Middle East escalation, would you say the current market is more tricky than where you were last year? Or would you say given the maturity of the customers you're working with, actually, it's still -- you're still expecting more activity this year than last year? Hakon Volldal: I think we expect to see more FIDs this year than we saw in 2025. And then in a healthy market, there will be projects that are canceled and projects that are added. And I think that's what we see now. We don't see a big jump in our pipeline capacity. It's fairly constant, which I think is a good thing because then all the dreamers are gone and projects that don't make sense are stopped before we get too deep into the execution phase. So I would say we are slightly more optimistic about '26 than '25. And then we believe momentum will continue to build into '27 and '28. But we talk internally about a turning point that we've been down in the valley and slowly starting to climb back up the ladder. Kjell Bjørnsen: Next question comes from Arthur Sitbon. Arthur Sitbon: So I have two questions. The first one is we've seen some of your competitors announce large framework agreements with the defense sector. I was wondering -- I mean, you refer a bit more to energy security, the need of energy resilience in your presentation today. I was wondering if you're working on such type of framework agreements with that sector. And if we could see anything announced, anything meaningful announced on that in 2026? The second question, is just on the sequence of events for coming quarters and coming years. Your backlog is -- has been coming down. I was wondering how fast do you need order -- do you need to see orders come through in order to kind of bridge the gap between where your backlog is and maybe where consensus expectations are for revenues in 2027 and always with the idea that, well, I know you have that cash balance at the moment at a given level. I imagine that covers you for 2026. But for 2027, I suspect you need orders at a certain level for the cash to be enough. So any color on that would be helpful? Hakon Volldal: If I can take the first and maybe you will take the second question, Christian? We have a number of collaborations also with companies in the defense sector, but we don't announce these partnerships publicly because what we have been told is that the capital markets only appreciate hard purchase orders. And anything else, whether it's a FEED study or a frame agreement or this and that just creates noise. So I do see there's a lot of noise out in the market. A lot of agreements are presented as firm commitments, but they're not. So we are in the same type of discussions and with the same companies as you have seen announced recently, if that answers your question. Kjell Bjørnsen: Yes. And then just to add to that, we've been for years having grants from Department of Defense in the U.S. to work on hydrogen as part of an energy resilient infrastructure, and we're a defense subcontractor in the U.S. So yes, defense and resilience is definitely on the agenda. On the outlook, when Hakon talks about us seeing momentum in the market, it's obvious that with that, we see order intake coming near in time. And currently, we do not have enough to really fill meaningful utilization in 2027. But we have good reasons to believe that we will see order intake this year that will help us have meaningful activity levels in 2027. When it comes to cash balance, and we touched upon this in the presentation, we have taken quite some actions in addition to the personnel expenses that we talked about. We have worked a lot on other external spending. And I do believe that we can stretch that cash balance fairly long if it takes even longer to get orders. So we're not stressed with the size of our cash balance. Hakon Volldal: And I think we also said that the momentum for containerized PEM solutions is picking up. And the good thing about that solution is that we have a fairly short delivery time on that. We can deliver systems in less than 12 months. The order we booked in April will be delivered in '27. If we get orders now until year-end, I think we have an opportunity to deliver all of those or close to all of those in '27. So we are hopeful that we can book more containerized PEM solutions, and that will keep us float until we get the larger alkaline orders. Kjell Bjørnsen: I see we have a follow-up question from [ Martin ]. After that, I see no more questions in the queue. [Operator Instructions]. Unknown Analyst: My question is just when do you expect to launch the next-generation PEM? When is that likely? And what advantages will it bring? Hakon Volldal: If I could give you an exact date, I would. But if there's one thing we have learned is that technology development is uncertain. It takes time. I mean look at pressurized alkaline, we have worked on that for 8 years. The one -- you have a pretty good idea of what you want to do, and then there are always tricky things that you need to overcome. It could be pertaining to the concept design itself, could be pertaining to availability of materials or you end up with a cost that you don't like. So you have to reengineer it. With PEM, we have the ambition to build a full prototype stack this year. Then that has to be tested, and then we need to spend some time to get partners to help us industrialize it. So it will take, as I said, a couple of years. Whether that means we can launch it end of or mid-'28 or if we will launch it late '28 or in '29, I'm not able to say at the moment. When it comes to the benefits, the benefits of the new PEM platform is that our goal is to take the cost down by 70% on a stack level. And in the PEM system, the stack is the most expensive component. So that means we can significantly reduce CapEx. It will be a low CapEx, low OpEx solution. So that's the sort of the holy grail. You get the cake and you can eat it. It's compared to pressurized alkaline, it might have even better energy efficiency, and it has -- could have a smaller footprint at a lower cost. So it's -- and the response is, as always, with PEM, fantastic. So it's more dynamic than pressurized alkaline. Even though I have to say for larger pressurized alkaline systems, we also have a fantastic dynamic capabilities. But we believe that this is something that will be even more competitive than what we will launch now in May. And that's why we continue to work on it. If it's not, we will not launch it. Unknown Analyst: I'm from South Africa, I always promote platinum, platinum, platinum of platinum, but will it also contain platinum to read PEM equals PGM? Hakon Volldal: Yes, but it's the iridium loading and the platinum loading is very limited. So to all those who want to sell all of that platinum and iridium, I have to disappoint you because the reason we can get the prices or the cost down is because we will utilize much less iridium and platinum. It's on a very different level compared to what we see today. Unknown Analyst: I'm very happy with that, just go for volume. We don't worry about value, give us volume. Kjell Bjørnsen: Thank you, [ Martin]. It seems we're out of questions. So we'll end the Q&A session here. If anything comes up after the call, you're always welcome to reach us at ir@nelhydrogen.com and I'll hand the word back to management for any final remarks. Hakon Volldal: And no further comments. I think we look forward to the launch event on May 6. And as I said, we will release some material on May 6 that I think explains the new solution and the benefits that we see with that solution in more detail than what we have presented to the market so far. So I hope you take a good look at that material in just a couple of weeks. Thank you for voting.
Erkka Salonen: Good day, ladies and gentlemen. I'm Erkka Salonen from Finnair Investor Relations, and it's my pleasure to welcome you to this Q1 2026 earnings call. I'm joined by our CEO, Turkka Kuusisto; and our CFO, Pia Aaltonen-Forsell. [Operator Instructions] But with these words, I hand it over to you, Turkka. Turkka Kuusisto: Thank you, Erkka, and a very good afternoon also on my behalf. Earlier this morning, we published in my opinion, a strong Q1 report, especially given the fact that Q1 is typically a low season for our sector and also for Finnair. While, of course, at the same time when reporting stronger results, we do see that the risk related to the operating environment have increased. And we aim at also describing that how do we see the current situation, especially when it comes to the war in Middle East area. But if I very briefly summarize the Q1 results and Pia Aaltonen will get you through more of the details. But if I start with the operating results, we were almost at breakeven. And I think that this is a remarkable improvement from Q1 last year. Although we did face the industrial action already in Q1 2025, but the direct impact of the industrial action at the time was somewhat EUR 22 million. And the kind of the comparable operating result was minus EUR 40 million. So over the past 12 months' time, we've been capable of improving the operational platform, our commercial capabilities and executing the new strategy so that result actually improved by some EUR 40 million in Q1 to Q1 comparison. Revenue increased by double-digit number, especially driven or fueled by the strong demand that we especially did see towards the end of the quarter in Asian traffic given the situation in Middle East, the closing of aerospaces of Doha and Dubai Airports, of course, consequently increased the load factors of our Asian flights. But at the same time, January and February already performed very strong in terms of healthy Asian traffic. So this was kind of a final boost towards the end of the quarter. The number of passengers increased by some 7.3%, and that then resulted also in increased load factors basically in all of our traffic areas, except Middle East. Pia will discuss in greater detail when it comes to our hedging policy. But when we started this fiscal year or calendar year, our hedging profile was actually rather supportive for what we have now witnessed. 86% of the fuel purchases were hedged in the beginning of this fiscal year. And at the end of this quarter, 82% of the Q2 fuel price is already hedged and then 69% for the rest of the year. And then when we take the customer perspective, something that we are really now focusing on investing in when it comes to the new strategy that we launched mid-November last year. The customer satisfaction is on the rise. Across the total population, we did see in international comparison, in my opinion, a good result, 36. That was a 2-point improvement from a year ago. And then when we double click into the core customers of ours, those who flies us with the most Gold cardholders, Platinum and Lumo-tiered members, we are already scoring well above 40. So that's something that we can be rather satisfied with. And in my opinion, the strategy implementation has only started. And then I will revert back to this one, but the -- over the last running 12 months time frame, the number of Finnair Plus members -- active Finnair Plus members has increased significantly. Speaking of these traffic areas, if I start with Middle East, which is, of course, the most drastically changed area, we need to keep in mind that in the compared quarter of '25, we still had until mid-January also operation from Stockholm to Doha and from Copenhagen to Doha. But then, of course, the rather drastic change in terms of ASK in revenue is mainly explained by the fact that we did stop our operation from Helsinki to Doha and Dubai when this geopolitical situation escalated, late February. But we need to continuously keep in mind or put this into perspective that the Middle East traffic area has been some 3% of our capacity or annual revenue. And then taking the very positives starting from Asia. ASK grew by some 9%, but the revenue in RASK actually grew even more so. And also the load factors are up by some 7%. And which is a consequence of a strong investment capacity allocation to Asian traffic. And we have also -- we continue to see kind of the activation of Japanese travelers flying to Europe and also activation of the business travelers. But as I already mentioned, the last mile or the final push is pretty much because of the closed aerospaces or hubs in the Middle East, and we did get some spillover effect to our Asian flights. Domestic is pretty much stable, part of it last year, but also Europe did perform a bit better than we expected. ASK grew by some 4%, but revenue 8%, and again, load factors developing rather positively. So we are in a good position when it comes to starting the summer season during which we have more than 90 destinations in the Europe. North Atlantic traffic, something that we've discussed very frequently with you or even intensively, we did see an increase of capacity. But at the same time, now the revenue development follows the capacity and also, therefore, at least the decline has stopped and we start to see some positive signals when it comes to forward-looking bookings and also business travel when it comes to origination or the U.S.A. And then very briefly, just again, reconfirming that the capacity is growing steadily according to our plans, except the Middle East traffic area and then the market shares are pretty much stable. So we don't see anything drastic when it comes to our position at the Helsinki Airport or Helsinki Europe traffic. And also, we continue to be a very relevant player in the Europe, Asia, especially in Europe, Japan routes. And then maybe a few words related to the fuel supply chain issues. And of course, given what's taking place or happening in the Middle East and Strait of Hormuz that has influenced first and foremost, the price of jet fuel and crude oil. But if this situation prolongs, there might be also issues when it comes to fuel availability. If I start with our home market being the Helsinki Airport and Helsinki Hub, we do have a rather solid situation and based on the discussions of our main supplier here in Finland. We do see that the availability of fuel is extended until the end of our summer season and also some extra capacity. So therefore, if we need to tanker when it comes to short-haul flights in Europe, we do have enough fuel capacity in Helsinki to do so. Some 80% of our European destinations can be flown by utilizing the tankering option. In North America, we don't see a big risk when it comes to the supply. And then, of course, the Far East Asia is the question mark and something that we work very intensively with on a daily basis to understand what's the situation. But based on the information that we have today on the destinations and all these that are relevant for us, we don't see short-term issues or short-term shocks related to potential fuel availability. But maybe with these words, I would hand it over to Pia to continue on the financial figures. Pia Aaltonen-Forsell: Thank you, Turkka. And good afternoon, ladies and gentlemen. And if we haven't met, my name is Pia Aaltonen-Forsell, I'm the CFO of Finnair. And of course, looking at the Q1 performance, I completely agree with you, Turkka. I really see a seasonally weak quarter where our results have still been greatly improving. And in the graphs that you can see here, we have brought a bit of a quarterly perspective on some of the key figures over a longer period of time. And maybe if we look at the revenue just for a slight moment, I think, first of all, obviously, you do see that there's a big sort of uptick compared with the first quarter of last year. As Turkka said, there were some disruption impact there already at that point, the EUR 22 million on the result. So you could say, okay, what about the comparison period. But maybe you can, in this graph also have a look back at '24, which was a sort of more stable year. And also there, you can see that we do have a great improvement. I want to talk a little bit about the result in the same context. In the same way, obviously, a big improvement compared with last year. And if we look at sort of the how the year has started. I think particularly March was impacted by the war in the Middle East through both the fuel costs, obviously, as well through like the shocks that kind of went through the world, including then the supply-demand balance. So clearly, we have seen a very strong demand, for example, in Asia. But not only in March, so I do say that our year has started in a good way. And I think particularly, our cost controls have really been in place, and I'll still come back to that in my next slide. And finally, our cash flow was strong. I'll take the opportunity to come back to some of the details around that in one of my later slides. So first, I'll go next to look a bit at the unit revenue and the unit cost of the RASK and the CASK. And I think this is important because we have a strategy where we are foreseeing growth. We are foreseeing capacity growth, passenger growth and we are, of course, very keen to do that in a profitable way to ensure that we can reach our strategic target of a 6% to 8% EBIT margin in 2029. So looking at some of the elements, obviously, here first, if we look at the unit revenues, we can see that in this quarter, they were supported. So we had good load factors, yields, if you look historically, we're somewhat improving. And of course, we have as well sort of been able to navigate and manage the capacity growth that we saw in the quarter. So this is a good development and particularly if you kind of compare quarter-to-quarter, quarter 1 of last year to quarter 1 now, it's a really strong development. But please have a look at the cost as well. I guess the fuel costs have really been sort of top of mind for a good reason. I mean, the prices, the spot prices have, of course, really, really been spiking. But if you look at sort of the proportion of the fuel cost to the overall cost profile. Even normally, we would be sort of 25% to 30%. And so this is a very significant part. But you can see that thanks to our risk management, this sort of early part of this situation has been well managed. And actually, the cost development holistically has been under control, including the other costs. While we have been growing, of course, we have been adding some costs, but proportionately, we managed to keep this under control. So I think I'm happy with the development during the quarter there. Next, I'll turn to a few of the topics around our balance sheet. So first, I'll highlight the unfunded liability. And why I'm doing that is that I think it's, of course, it's a big balance sheet item, of course. You can see it's EUR 762 million. But what it also talks about is that we have seen bookings coming in. And sometimes, when someone is like asking that are people booking kind of what's happening? I think this is sort of the euro or the balance sheet way for a CFO to answer that. Yes, it's up 10% compared with a year ago. And you can see that if you go further back in history, it's up even more. So we do see those summer bookings coming in right now. And this is, of course, one reason contributing to the strong cash flow that you could see earlier, the EUR 274 million operating cash flow in the quarter. Another thing that, of course, has been greatly supporting our strategic journey is the strong cash flow. We have an investment program. You can see that the CapEx in this quarter was around EUR 100 million. That did include EUR 20 million of the new Embraers. So when positioning the order, we also have taken some early cost or early cash out relating to that. But I want to say that this is also a pretty good description of sort of the balance between the cash flow and the CapEx going forward. I mean, we had a particularly strong cash flow right now, but also in our CMD, we said we would expect at least sort of a EUR 500 million-ish operating cash flow per year. And obviously, with sort of the finalized plans for investment that we have made right now, it seems likely that we are somewhere north of EUR 400 million per year, but maybe only slightly north of that. So this EUR 100 million sort of per quarter is a fairly good proxy for that. I just wanted to say that because when you then look at our capital structure, I mean, our equity was strong in the quarter. Our net debt keeps going down. Our leverage was 1.2x. And and our cash ratio to sales is like 30%. So I think we are well positioned to operate sort of in a thoughtful way in this rather complex environment right now. And I think we are also well positioned to continue to execute on our strategic journey. And my final slide is really some details on the hedging. I wanted to bring this up. Turkka already did speak about the fact that we have a good hedging ratio for Q1, for Q2, 82% and we have 69% for the remaining part of the year. And you can also see here that we are still sort of having a cost level of less than $700 per ton on this, which sort of for our cost structure is sort of very close to, I would almost say normal. But obviously, we also know that the hedging ratio is going down over time. There are still some hedges in '27. Nonetheless, of course, the percentage is going down, but I think this is giving us sort of plenty of time to act and prepare for the situation. So with that, Turkka, I would hand back to you. Turkka Kuusisto: Yes. Thank you, Pia. A few remarks related to the execution of the strategy that we launched in connection with the CMU mid-November last year. And I'm actually rather happy when it comes to how the execution has started. And in my opinion, proceeds pretty much as planned. And as a big kind of strategic element or component, we did launch the resolution when it comes to the partial renewal of our narrow-body fleet a month ago. when we communicated that in order to support the growth, efficiency, profitability and customer experience objectives of ours, we did confirm an order of 18 E2 next-generation Embraers with some options and purchase rights. But parallel with that announcement, we also communicated that up to 12 [indiscernible] Airbuses 320s or 321ceos will be acquired from the market and that those aircraft are expected to join our fleet between 2027 and 2029. As I mentioned in connection with the analyst call around this subject I think that this is a perfect combination of new aircraft and then somewhat used second hand aircraft that provides us with the needed flexibility and optionality to develop our kind of big or total fleet plan towards the end of the decade. In the meantime, as already communicated, in conjunction with the capital markets update when we discussed the so-called midterm capacity or bridge solutions. Since then, we have agreed to add to current generation E190s, E1 Embraers into our fleet and also additional 2 ATR 72-600, that will be already operative in 2026 to further strengthen our regional capabilities and capacity. And thanks to this fleet plan, we have already communicated some new openings and also extended some of the summer season routes to be all year round. So, that we can meet the growth ambitions that we have communicated. In addition to network or the convenience part of our strategy flywheel, also the other elements or other areas in our updated strategy are proceeding according to the plans. Reliability and efficient operations in Q1. The flight regularity was at 98.3%, and it's actually increasing further more during the second quarter, so I'm very happy with the operational reliability and functionality of the Finnair platform as we speak. Also, the choice-based product offering and commercial strategy is also progressing with double-digit growth the ancillary revenue per passenger during Q1 grew by some 12.5%. And the total volume of ancillary revenue grew by 20% because in addition to per passenger growth, we had more passengers, so more than EUR 50 million of revenue were collected from ancillaries. And we continue to push for the growth of modern sales channels and even more efficient sales to enable this modern retailing and personalization. And then the fourth component being the engagement. Over the past 12 months' time frame, the number of active Finnair Plus members has increased by some 27%. Again, very concrete proof point to communicate that the strategy execution has started on front foot. And with these activities, as communicated by the end of 2029, we aim at improving our profitability by some EUR 100 million. And as today, when we are describing the situation, we have identified the initiatives and the euro values across some 110 projects so that we secure the, let's say, the delivery capability, and we will meet the number by the end of the strategy period. And then as a final slide, the outlook and guidance. The outlook section has been specified and the specified section is the capacity growth measured by ASKs. Earlier, we said 5%, but because of the capacity and the operational kind of a halt when it comes to Middle East traffic, today it say approximately 3% for 2026. And then the guidance, it is unchanged. We estimate the revenue range to be from EUR 3.3 million to EUR 3.4 billion and the comparable operating result to be within the range of EUR 120 million up to EUR 190 million. And this guidance is based on the assumption that there will be no significant disruptions in fuel availability. But maybe with these words, Erkka, I guess, we are ready for the Q&A section. Erkka Salonen: Yes. Thank you, Turkka. So indeed, I would be a convenient time for any questions you may have. Please follow the operator's instructions to present them or use the chat function. Operator: [Operator Instructions] The next question comes from Jaakko Tyrvainen from SEB. Jaakko Tyrväinen: It's Jaakko, from SEB. I'll start on the ticket liability, which you highlighted that was up 10% year-over-year. Could you elaborate a bit more on this? And how much of this growth reflects the continued good demand on Asian flights in Q2. Are you seeing -- basically asking, are you seeing the bookings very strong for April, May and especially on Asian flights? Or does this tell more about the overall demand growth across the geographies? Pia Aaltonen-Forsell: It's Pia here. I think sort of broadly what I can comment on this. I don't think that this is just April and May. I mean clearly, we see the booking curve sort of also through the summer period. And furthermore, when you ask about the different regions, I still think there's as well. There's a good spread. I mean, obviously, even in Europe, we have 90 destinations. There's a lot of new destinations they are getting some interest, et cetera. So I would not sort of highlight any area. And I think picking a little bit on some of the comments that Turkka made on the regions, I think even on the North Atlantic, there was a little bit of positive signs from the Q1 numbers. Jaakko Tyrväinen: Good. Then follow-up on Turkka's comment on the jet fuel availability. Could you talk a bit kind of scenarios, which kind of scenaries you are seeing the see availability being limited first in Europe, then in Asia and lastly in Helsinki? Turkka Kuusisto: So basically, based on the information that we have today and the dialogue that we have on a weekly basis with our suppliers, I need to start from the Helsinki perspective because that is also very related to the European perspective. We do see and we've been confirmed that there is some solid availability at Helsinki Airport until the end of the summer season and some capability and capacity to actually acquire a bit more because that then opens up the opportunity for tankering so that we can fuel the aircraft at Helsinki with the needed amount of fuel to fly back and forth if we face partial fuel shortages or limitations in some of the European destinations. Some 80% of our European destinations are feasible for tankering options so that we can fly back and forth with the fuel that we have loaded at Helsinki. Based on today's information or visibility, we don't recognize clear or significant issues at any of the destinations that we operate. And that same applies to our long-haul network. U.S. is maybe the most on the safe side, but also when it comes to the Far East Asian routes, plan -- our partners and suppliers haven't communicated that there would be severe challenges during the weeks or, let's say, 1 to 3 months to come. Jaakko Tyrväinen: Okay. And then the negative scenario that the jet fuel is being limited how would you react? And how would you assume the whole market being react? Is it just so that you and the other players would just cut the most unprofitable routes? Turkka Kuusisto: I guess that's how it goes, it's the game of optimization. And of course, this is speculation, but it would also dependent on that to which extent, let's say, destination x, y, z that do you get 80% of the fuel, if you previously get 100%? Or are there more drastic changes? So it's a rather complex environment. Should we face that, but I wouldn't like to speculate about it today. But that's something that I think Finnair is famous for that when it comes to contingency plans or running scenario planning and scenario management. So let's see if the day comes, I think that we are operational ready for it. Jaakko Tyrväinen: Okay. Then, are you already selling higher ticket prices for the second half of the year? And what about then the competition, especially the rivals who may have had a bit lower fuel hedges in place? Are you seeing them hiking prices faster than you are? Turkka Kuusisto: That's a complex question, Jaakko, as we've discussed earlier also. Prices are set by the market and then the pricing algorithms are pricing tickets as we speak here today. So, we need to have a bit more backward-looking statements once we have closed the next quarter and the third quarter. But what we can see from the Q1 results that the unit prices increased mainly in Asia, was at some 5% and a slight increase in the U.S. traffic. But if the situation or the supply chain issues when it comes to fuel availability, will prolong, of course, that will, at some stage, will be visible in the ticket prices as well. What is beneficial for us, as Pia described very well in my opinion, that the hedging policy and the risk management framework that we apply gives us a lot of time and oxygen to add up to the changing situation. And of course, we are following pretty closely how the competition has approached the same topic risk management and hedging and then let's see what happens. But I think that in relative terms, Finnair is well positioned for the Q2 and early Q3. Jaakko Tyrväinen: Exactly. Then one more, if I may. On the Travel Services, we saw a decline of 4% year-over-year in top line, a bit surprising to me. What was driving this? And how do you see the summer looking this year for you in terms of Aurinkomatkat-Suntours and tours? Turkka Kuusisto: Nothing drastic, that is mainly explained by the Canary Island supply issues or constraints. At Canary Islands, the hotel supply has been constrained. So we were, to some extent, we needed to limit or cap our capacity and sales to Canary Islands. But in a big scheme of things, our Aurinkomatkat-Suntours are doing well and also the same booking pattern or customer behavior pattern that Pia described in conjunction with the parent company applies also to Aurinkomatkat-Suntours. Operator: [Operator Instructions] Kurt Hofmann: This is Kurt from Aviation Week from Austria. Realized the closure of some of the Middle East traffic to help your long-haul routes. Can we see Well, the additional traffic is coming from. You have now a lot of connected passengers, let's say, from India to the U.S. or something like this? Maybe you can give me an update on that? That's my first part. Turkka Kuusisto: So basically, there can be up to 2,000 different [indiscernible] combinations on our flights. So I would say that our population of our transfer passengers is very, very wide and rich in my opinion. But as we've discussed also previously, Indian travelers connect via Helsinki to U.S., a lot of Japanese travelers connect by Helsinki, the 90 destinations in Europe. And then, of course, the various kind of nationalities that have now utilized the opportunity of traveling via Helsinki to Far East Asia, while the major hubs at the Middle East area have been closed or capacity constraint. Kurt Hofmann: Yes. As you find, very long routes now regarding the closed air space of Russia and now I have seen you very well hedged, that helps really a lot. Do you think that the fill issue will have an effect if you're looking ahead, the expensive fill on your very long-haul flights or so far so good as you had with the hedging terms, yes? Turkka Kuusisto: So basically, the hedging policy and the hedging position that we have, 82% for the second quarter and then 69% for the rest of the year gives us time to let's say, view or evaluate how the market and the demand will develop. So we don't have urgent need to adjust anything been announced to our traffic to -- for Helsinki to Japan, for instance, is 28 weekly frequencies. But of course, it's pure mathematics that the longer you fly the more fuel you burn. But at the same time, kind of same situation for the European carriers and the Japanese carriers as well. But -- so in a way, a long answer to your good question, but too early to speculate. Currently, we are well hedged and the demand for -- from Europe to Asia is doing well. Kurt Hofmann: Is doing well. Do you think that one day the hubs in the Middle East will return to kind of normal? Do you think they will -- Emirates and Doha and Qatar and so on, do you think it will start a kind of price dumping to regenerate their capacity to fill the aircraft up with life? Do you think there will be a kind of price dumping coming up? Turkka Kuusisto: I don't tend to like this competitors' activities and actions, but I would assume that if an airline company faces a situation that you need to ground the aircraft and and it's kind of a severe disruption. Today, the operation starts to ramp up. You need to fly the aircraft to keep them airworthy. You need to also get crew the opportunity to fly so that you avoid extensive simulator training and such so that the training pipeline doesn't become a bottleneck. So probably someone starts to price to the cash flow so that you can start to fly with the aircraft. Kurt Hofmann: Yes. Just 2 sub-points, if I may. Regarding the narrowbody order you have with the [indiscernible] A320s and 321s. Do you know already the share how many is 321s you will take and how many is 320s? Turkka Kuusisto: Too early to tell. It's, of course, always to some extent, an opportunistic approach when you go to the secondary market and the when the demand as supplies and there is a good deal to be signed off. So time will tell. Kurt Hofmann: I think there are a lot of good deals coming up now with many airlines probably to reduce the older fees, maybe -- what do you think? Turkka Kuusisto: Let's see. Let's see. So I don't see any big deal. Kurt Hofmann: Yes. And Australia, so the plants going on as planned for Melbourne, I think. No changes on this? Turkka Kuusisto: Yes, it is based on the information that we have today. So I guess, the maiden flight is the 26th of October, anyhow late October, and really looking forward to this opening and connecting Helsinki to down under. Operator: The next question comes from Joonas Ilvonen from Evli. Joonas Ilvonen: Joonas Ilvonen from Evil. If I may come back to this [indiscernible] ticket liability question, can you disclose to what extent this 10% year-on-year increase was driven by higher prices versus volumes? Pia Aaltonen-Forsell: It is a mix, Joonas. I mean, clearly, but if we just sort of look backward at the stats that we have shared from the third quarter, then you still see that, yes, indeed, on Asian routes the yields were improving a bit. But I mean we were not talking about sort of 2-digit numbers. So still assuming that, hey, we have increased capacity, you have seen the rather big increase in passenger volumes it is clear that volumes play a significant role here. And then there's a little bit of the yield as well. So I wouldn't say that this is driven by price. That would be an exaggeration. Joonas Ilvonen: Okay. And then another question. So you already kind of discussed this ticket pricing situation. I know it's a complex question, but if you can add just a little more for example, I just recently saw like an ad or also from in 2 ways to get to Boston starting from EUR 350, I guess you would have to add, I agree that's quite cheap. I'm not sure how representative studies of the like overall situation, but do you see like opportunities for more aggressive pricing in some places? I mean, I think basically all airlines are raising their prices. But let's say, if you were to expect that jet fuel prices are going to decline soon, which would you be in essence, be kind of ready to bet against these relatively high jet fuel prices, if you were like expect the decline by aggressively pricing tickets? Turkka Kuusisto: As mentioned earlier, the pricing is very complex, and the pricing algorithms and dynamic pricing optimizes the ticket prices in real time. And then, of course, there's -- especially in the European traffic, it's a rather tight competition. So time will tell how the price development and yield development will turn out. But then as I said earlier, if the situation prolongs and the fuel price stays at the elevated level, of course, that needs to be offset by let's say, profitable flying or sustainable flying. And then, of course, you shouldn't draw too much conclusions from a single campaign. What was it Helsinki has in Boston, that's only one example. And without knowing the data and the what we try to optimize. But it sounds like a nice deal. Maybe we should go to Boston. Pia Aaltonen-Forsell: It's a nice town, yes. Erkka Salonen: Then some questions online. So the first one comes from [indiscernible]. Will rising aviation fuel costs under low supply for Finnair to cancel flights in the next quarter, especially in the flights towards Asia and the European sector? Turkka Kuusisto: Short answer, no. We intend to cancel our flights. We have committed to the summer schedule that we have published. So you don't need to speculator be worried about our flight cancellations because there won't be such related to this situation in Middle East years. Erkka Salonen: And the next question is from Mateo Salcedo. You said that Finland and Europe have relatively good fuel supply for the time being. Could we translate this into months, since last weeks are some European destinations in which the risk of jet fuel supply disruption is more present than in others? Turkka Kuusisto: I cannot comment all of our European destinations. We have 9 of them. So based on the information that we update on a weekly basis or a daily basis, we haven't been flagged severe issues at any of the destinations as we speak. And the most confident I am -- when it comes to the situation at the Helsinki Airport, where we've been confirmed that the fuel availability won't become bottle-neck issue before the end of the summer season. Erkka Salonen: Yes. And the last question comes from [indiscernible]. So does Finland have better availability of Kerosene during 2026 than most of the European countries? Turkka Kuusisto: That's difficult to evaluate because we don't have transparency or visibility to the, let's say, reserves or national supply across the European countries. But what gives me a lot of confidence that in Finland at Helsinki, thanks to the Porvoo Refinery of Neste, we are well positioned also on this one. Erkka Salonen: So I guess we're out of questions, so we can conclude the call. Many thanks for joining and the call, and the excellent questions. We wish you a great day. Turkka Kuusisto: Thank you so much joining today, and see you again, Q2. Pia Aaltonen-Forsell: Thank you.
Benjamin Poh: Good morning, ladies and gentlemen. I'm Ben Poh, Head of Investor Relations. And today, I will be moderating the call. On behalf of ASMPT Limited, welcome to our First Quarter 2026 Investor Conference Call. Thank you all for your interest and continued support. [Operator Instructions] Before we start, let me go through our disclaimers. Please note that there may be forward-looking statements about the company's business and finances during this call. Such forward-looking statements could involve known and unknown uncertainties and risks that could cause actual results, performance and events to differ materially from those expressed or implied during this conference call. For your reference, the Investor Relations presentation on our recent results is available on our website. On today's call, we have the Group Chief Executive Officer, Mr. Robin Ng; and the Group Chief Financial Officer, Ms. Katie Xu. Robin will cover the group's key highlights for the first quarter 2026 and provide outlook and guidance for the following quarter. Katie will provide details on the financial performance for the quarter. Now I will hand the time over to our Group Chief Executive Officer, Robin. Cher Ng: Thank you, Ben. Good morning and good afternoon and good evening to all. Thank you for joining us today for our first quarter 2026 earnings conference call. Now let me start with the key business highlights for Q1. This quarter, I'm pleased to share that ASMPT achieved the highest quarterly bookings and billings in the last few years. We continue to see AI drive demand across multiple products as the rapid evolution of AI increases the value and complexity of back-end semiconductor manufacturing. New AI architectures demand heterogeneous integration, tighter interconnect pitch, higher bandwidth and power efficiency. And these requirements are driving higher precision, alignment and process control needs across packaging flows, benefiting a wide range of the group's product from TCB photonics, CPO, flip chip and mainstream volume and die bonding and pick-and-place solutions. Let me provide some color on these specific product areas. First, let's look at TCB. In Logic, we delivered sizable shipments for chip-to-substrate applications, reinforcing our leadership in chip-to-substrate TCB. We received bookings for 4 ultra-fine-pitch chip-to-wafer TCB tools, featuring our fluxless plasma-based AOR technology from a leading advanced logic customer. We are also actively engaging key logic players across multiple programs, and we are well positioned for more opportunities as the industry advances towards more complex logic chip architectures. In memory, our TCB tools remain at the forefront of technology development. A key memory player is using a flux-based TCB tool for assembly and this customer is also qualifying a Fluxless AOR solution for HBM4 16-high. Next, we'd like to share an update on Photonics. I'm pleased to report that our Photonics revenue grew nearly fivefold year-on-year, benefiting from strong demand for high-speed optical transceivers of 800G and above. In addition, our 1.6T transceiver solution received bulk orders from leading optics suppliers in the data center networking supply chain. This demonstrates strong traction for our optical transceiver solution as the market leader. I would like now to touch a bit on co-packaged optics or CPO before we move on to the next item. CPO represents a paradigm shift in AI system design, bringing optical engines closer to compute silicon to reduce electrical losses, lower power consumption and improved system efficiency. Our CPO solutions enable high precision bonding to integrate diverse components, including fiber array unit, microlens, electronic IC and photonic IC into a single high-performance optical engine. We have deepened our engagement with multiple leading global players and this positions the group well to gain market share as CPO adoption accelerates. Looking now at our flip-chip solutions. I'm pleased to update that they registered strong bookings growth, both Q-on-Q and year-on-year. This momentum is coming from two areas. First, there is an accelerated adoption of 2.5D packaging for larger AI package sizes that is driving a steady pipeline of opportunities for embedded bridge die-bonding solutions for both chip-on-wafer and chip-on-panel solutions. Second, we also gained traction in panel level fan-out for radio frequency and power devices. Both these areas are well solved by our flip chip solutions, which combine cost efficiency, scalability, high placement accuracy and strong throughput. And finally, in our mainstream business, we registered strong bookings for both SEMI and SMT. SEMI's mainstream business benefited from sustained utilization at leading global IDMs and OSATs alongside rising demand for AI data center power management solutions. In China, there was increased demand for wire and die bonding applications. For SMT, we achieved record booking gains in driven by strong customer demand across AI servers, optical transceivers and China EVs. In particular, SMT's high-flex high-force solutions for large format boards are a leading choice for AI server assembly. As we broaden our AI customer base, we are fully committed to delivering the highest quality of solutions and services. ASMPT was recently recognized with a prestigious Intel Epic Supplier Award for 2026, the highest supplier recognition award for excellence in business collaboration. This is a reflection of our strong technical capability and deep engagement with our customers. With these highlights, now let me hand over the time to Katie, who will walk you through our group and segment financial performance. Yifan Xu: Thank you, Robin. Good morning, and good evening, everyone. Before I start, I would like to say that unless otherwise specified, the numbers I'll be referring to today are for the group's continuing operations only, with adjustments made on the non-HKFRS measures. This slide covers our group financial results for Q1 2026. In Q1, the group delivered revenue of USD 507.9 million flat Q-on-Q, but up 32.0% year-on-year, driven by SMT and SEMI. Group revenue came in above market consensus and was the highest in the last 3 years. Group quarterly bookings exceeded expectations with SMT bookings at a record level. Group's booking reached USD 727.0 million, up 46.0% Q-on-Q and 71.6% year-on-year, the highest in the last 4 years. This strong growth came from multiple products, notably SMT products, wire bonders and die bonders and photonics. Group adjusted gross margin was 39.5% Q-on-Q, up 357 basis points due to higher gross margin and revenue contribution from SEMI. The year-on-year decline of 151 basis points was due to a higher revenue contribution from SMT. Group's adjusted OpEx declined 4.6% Q-on-Q but increased 12.4% year-on-year, largely due to unfavorable FX impact and from strategic infrastructure and R&D investments as we have guided for 2026 during our last earnings call. Both adjusted operating profit and adjusted net profit improved Q-on-Q and year-on-year due to higher revenue and operating leverage. Adjusted EPS was at HKD 0.81, up 118.9% Q-on-Q and 189.3% year-on-year, which was above market consensus. Moving on to the Semiconductor Solutions segment. In Q1, SEMI revenue delivered USD 274.5 million, up 12.2% Q-on-Q and 14.6% year-on-year. Q-on-Q, growth was driven by high-end die bonders and TCB, while year-on-year growth came in from multiple products, largely driven by AI-related applications. SEMI bookings were USD 309.6 million, up 22.6% Q-on-Q and 43.2% year-on-year due to higher demand for wire bonders and die bonders driven by China OSATs, high-end smartphone-related applications AI-related power management applications and optical transceivers. SEMI achieved a book-to-bill ratio of 1.13, which marks 3 consecutive quarters of improvement. SEMI adjusted gross margin reached 46.4%, achieving the guidance we set last quarter. Adjusted gross margin improved by 594 basis points Q-on-Q but declined slightly by 37 basis points year-on-year. The significant Q-on-Q improvement was mainly driven by high volume and favorable product mix. SEMI adjusted segment profit was HKD 309.4 million, up 165.9% Q-on-Q and 16.8% year-on-year. The strong Q-on-Q improvement was mainly driven by higher gross margins and operating leverage. Let me move to SMT. SMT Q1 revenue was USD 233.5 million, down 11.0% Q-on-Q but up 60.7% year-on-year. Q-on-Q decline was due to seasonality, while year-on-year increase was due to strong demand from AI servers and China EVs. As mentioned earlier, SMT achieved a record bookings of USD 417.4 million, up 70.0% Q-on-Q and 101.1% year-on-year. This was primarily driven by strong demand from AI servers, optical transceivers and China EVs together with robust China demand arising from global data center expansion. SMT adjusted segment profit was HKD 141.8 million, down 28.3% Q-on-Q due to lower volume, but it improved year-on-year. Now let me hand the time back to Robin for the outlook and the revenue guidance. Cher Ng: Let me present our Q2 2026 revenue guidance. The group expects Q2 2026 revenue to be in the range of USD 540 million and USD 600 million. At the midpoint of USD 570 million, this represents an increase of 12.2% Q-on-Q and 37.0% year-on-year. Notably, our midpoint revenue guidance exceeds current market consensus, and it will be mainly driven by SEMI. Group bookings in Q2 2026 are expected to remain elevated for both segments, though SMT will be down Q-on-Q due to the high base effect from Q1. The continued proliferation of AI expected to drive structural demand growth for both SEMI and SMT in 2026 across multiple products. This includes our flagship TCB and HP solutions, photonics and CPO to mainstream wire and die bonding and pick-and-place solutions that enable AI infrastructure deployment. Looking ahead, structural AI-driven demand is expected to support revenue growth across both SEMI and SMT in 2026. This concludes our first quarter 2026 presentation. Thank you, and we are now ready for Q&A. Let me pass the time back to Ben to facilitate. Benjamin Poh: [Operator Instructions] And I see a raised hand from Gokul of JPM. Gokul Hariharan: Great results, and also thanks, Robin, for your amazing leadership over the years. So first question is on memory TCB. What are we seeing in terms of bookings and potential for bulk orders for memory TCB given that we haven't really seen any big bulk orders in the last maybe couple of quarters now. And at the same time, the R&D progress seems to be quite good on both flux-based and fluxless. And in addition to that, could you also talk a little bit about your engagement with the bigger memory vendor that the market is talking about, which has largely been using internal TCB tools? Do you see that there is an opportunity opening up with this customer, which will definitely expand your addressable market? Cher Ng: Thank you, Gokul. I think there are a number of questions within your questions. Let me address I think the first one first. You're asking about memory TCB bookings and potential for bulk orders for TCB and in the last few quarters. The last bulk order that we received was in Q4 2025. We're still confident that we are well placed to -- well positioned to receive orders from memory makers as far as they are ready to dish out orders for equipment supply ourselves. Now I think your second question is on fluxless, R&D fluxless, how is it going. I think we are making good progress, especially on the logic side, as we have mentioned, we have won 4 tools in Q1 for CoW fluxless applications. We believe this is a start of this particularly exciting program. I think as the industry continue to migrate to more complicated GPU or even ASIC architecture, I think at some point, they may have to switch to a chiplet kind of configuration rather than using SoC, and that's where the opportunity to use our TCB fluxless tool for chip-on-wafer application will be there. So since now that we are already in that supply chain, I think, again, I think we are really well positioned to capture more opportunities for CoW fluxless application going forward. I believe your third question relates about the biggest memory player who is used to using internal TCB tools. Yes, I think we are unable to really name or confirm any specific collaboration with any customer, I hope you understand. What I can say that in the process of finalizing an evaluation program with a key memory player. We definitely see this as a positive step, possibly in the future, enabling our group's technology from memory as a process standard in the future. So we are excited about this potential collaboration going forward. Yifan Xu: Gokul, very quick. Just going back to the question on the memory TCB bulk order. I just want to -- probably to say that we want to reiterate, right? Our TAM forecast is actually of the $1.6 billion is intact. And you're probably reference into some of the recent adjustments for the next generation of GPU HBM4 road maps. They are leading to some -- maybe quarter-to-quarter, there might be some variability in the times of a customer's decision. But our activity level remains very healthy, but it could be uneven from quarter-to-quarter. Gokul Hariharan: Got it. That's very clear. Second question I have is on your photonics, obviously, very strong growth, 5x kind of growth. Could you help us size the like photonics business, I think you've said it long back that it was probably under $100 million annual run rate ballpark? Or is this still -- is now much bigger than that? Cher Ng: Yes. I think, Gokul, you... Gokul Hariharan: When we transitioned? Cher Ng: Yes. Maybe answer the photonics first, Gokul. Gokul Hariharan: Well, go ahead, Robin. I'll follow up later. Cher Ng: Yes. There's a little bit of feedback on this. Benjamin Poh: Yes. Your line is breaking up, actually, Gokul. Cher Ng: Okay. Anyway, I'll answer the Photonics question first Gokul. Yes, Indeed, when we look back in a deep dive into the photonics and the CPO market recently, actually, the TAM looks even more promising than before. right? So -- but we are not ready to disclose the TAM at this point in time. But I can tell you the TAM looks bigger than before. So when we combine the optical transceiver TAM and the CPO TAM, I must say that the TAM looks interesting. We are definitely paying a lot of attention in this area. And fortunately, I think for photonics, we are already a very strong player in the optical transceiver market. And I think for the CPO, you probably will follow up with your question on CPO as well. I think we're well positioned with some key players already. Our solutions, I would say, have been designed in with a number of key CPO players. So when the adoption takes place, I think we're in a good position to capitalize this opportunity for CPO. Maybe back to you for second question, please. Gokul Hariharan: Yes. So I think just to follow up on that CPO comment, Robin, the market understanding, obviously, is that hybrid bonding plays an important role in CPO for the EIC, PIC attach. And obviously, your hybrid bonder is still in qualification, especially the second generation. So could you talk a little bit about the progress there? And maybe also help clarify. I think there are multiple die attach steps, not just hybrid bonding, I think beyond that as well. So I just wanted to understand like what is the span of like SMT's involvement when it comes to CPO, just beyond the EIC, PIC attach? Cher Ng: That's right. I think we also said in the MD&A, we are participating in several key high-precision bonding areas for CPO, one of which is FAU attach on PIC. The other one is what you mentioned, stacking EIC on PIC. The third application we can think of is micro lens attached on PIC and also finally, the whole optical engine on the substrate. So we have solutions actually for all these key bonding solutions. That's why we feel particularly quite excited about the CPO market. And as I said earlier, I think the TAM looks interesting, maybe not in the initial years. But I think the CPO will accelerate probably from '28 onwards, and the TAM in fact, looks very interesting for CPO. So these are the areas we are participating. Now back to your question on EIC on PIC, hybrid bonding is one solution. I think CPO players are also exploring whether they can use TCB for the application as well. So if they use PCB, that will be also very an interesting market segment for us. Benjamin Poh: I'm seeing a next raised from Daisy. Daisy, could you please unmute yourself and raise question? Daisy Dai: Yes. And my first question is regarding the OSAT CapEx. So we saw that the OSAT CapEx is getting higher and higher for this year. So which area do you expect to record the highest growth for the year based on the current order visibility? And I mean the regions. And also, China is the largest revenue contributor last year around 41% of your total revenue. Within China, do you see that still advanced packaging, I mean your TCB and other hybrid bonding tools growth, outgrow the mainstream or mainstream for this year is also very strong. That's my first question. Cher Ng: Thank you, Daisy. In terms of -- I think your first question first in terms of OSAT CapEx yes, in fact, we are experiencing strong demand, I would say, on the OSAT front, mainly coming from wire bond die bond because of the AI demand for infrastructure. I think we have been talking about this for a few quarters already, but in Q1, the demand is particularly very strong. What is driving this is really power applications that go into data center. So this require new power devices and because of that new capacity is required. So that's driving a lot of our wire bond and die bond and also not forgetting SMT as well. We mentioned that SMT had a very fantastic booking in Q1 highest so far in history, largely also driven by AI server boards. And in there, there are a lot of power packages using tools from SiP, tools from SMT as well. So all this infrastructure deployment and spending are driving a lot of our mainstream tools, both in SEMI as well as in SMT. Now I think your second question is about China, whether China region, whether AP grow, is it faster than mainstream or mainstream is still very strong. I think typically, in China, say especially on the SEMI side, the mainstream side are definitely stronger than the AP side. However, on the SMT side, in the rest of the region, still stronger than the China side. So there's a mix in terms of China demand coming from SEMI and SMT segment. Daisy Dai: And my second question is also regarding the optics, photonics solution. So you mentioned that the revenue delivered fivefold increase year-on-year this quarter. And may I ask why we suddenly saw a very strong pickup in this segment. And I believe you mentioned that regarding the booking, the photonic solutions is both in your SEMI solutions segment and SMT segment. May I ask what tools for the SMT and what tools within the SEMI solution? Cher Ng: Yes. I think it's really all AI-driven, data center driven, as you can imagine, as the industry continued to increase the silicon compute, the transmission side has to match that capability as well. So that drives a lot of growth presently in terms of optical transceivers and the industry is moving from 400G to 800G to 1.6T, and we have a very, very good solution for optical transceivers. This segment has been seeing steady growth for a few quarters already. We have been reporting there. So it's nothing new to us. We have been saying that optical transceiver is a good market for us. We have been quite dominant in that space. We've been winning market share as well. So that's something that we are experiencing from many quarters already in terms of photonics. Now your second question is for -- both segments indeed are participating in this area. Now for SMT, mentioned in the optical transceiver there are many, many components, some require higher precision than others. So for those components that require higher precision bonding. They use our SEMI tools for that purpose. For those that do not require a lot of precision they use our SMT pick and place tool to bond those components. So both segment SMT and SEMI are actually benefiting from this surge in demand for optical transceivers. Benjamin Poh: Yes. Next, I will request Kevin from Citi to unmute. Kevin Chen: So I have two questions. Number one is that I would like to get some more detail on the booking guidance outlook. As you see right now, our booking is back to -- especially like SMT back to a record level. So can we get for the coming quarters, do we see -- have a rough sense of breakdown for booking into the, say, SEMI and SMT and specifically, which region are we seeing the most growth from. And also, last time we mentioned we're seeing some improving visibility. Is this still the case so that right now, approximately how many months of visibility do we have right now? . Cher Ng: Thanks, Kevin, for the question. Now I think you're referring to Q2 bookings. Now we -- as you know, we don't really guide but we can definitely give you some color we see bookings in Q2 this quarter to remain elevated. Booking may, however, moderate Q-on-Q but still expected to grow strongly on a year-on-year basis. We believe in large part, we continue to benefit from the secular demand for AI-related applications. And in the infrastructure spending, plus, of course, overall improving market condition as a whole. Giving a little bit of color as to the or the segment booking. Now for SEMI, Q2 SEMI bookings are expected to increase Q-on-Q and more significantly higher on a year-on-year basis. However, for SMT bookings are likely to decrease Q-on-Q due to high base effect as we have reported, Q1 booking for SMT was at a record high. So we don't expect the current level to continue on a Q-on-Q basis. However, having said that, SMT bookings are also expected to be higher on a year-on-year basis. Now you asked about visibility. Looking ahead, while we are definitely more optimistic about business compared to some quarters back, there is less visibility for the second half of 2026 for the whole group. I think this is pretty normal for a business that we can't really look too far away. So I hope I answered your question, Kevin. Yifan Xu: Yes. Maybe real quick, I think Kevin was asking about the booking by region. And Kevin, we actually sort of answered it already when we were talking about -- when Robin was addressing Daisy's question. Since overall, the regional mix will stay relatively stable. But like what Robin was mentioning about the strength of China OSATs. So there will be a little bit more booking from China. But overall, it's quite steady. Kevin Chen: Great. My second question is on the EMIB outlook. I think recently, there has been some demand pickup on this technology. I'm just wondering what type of or tools are addressing this kind of demand? And also our position to the share allocation in this type of technology. Do we need a special type of TCB and that require customization as well? Cher Ng: Yes. I think, Kevin, I can't hear you properly. I think you mentioned EMIB-T right? . Kevin Chen: Yes. Cher Ng: Okay. So A couple of layers we have to understand on the EMIB-T program. If you are talking about embedded die bonding, we believe this is on a large substrate, probably 510 x 500. Unfortunately, TCB, we are not ready for that yet in terms of that kind of panel size because it will take some time for us to deliver a tool of that size for TCB. But however, if this EMIB program takes off and we believe it will, we are already -- this particular customer is really using our tool for CoW application. So do you have to -- I mean, if this program proliferates, right? So they will probably need also more tools to place a lot more components on the EMIB-T substrate. So I think I think we will benefit from that particular area that means on the CoW tools, which we're already in. But if you're talking about embedded die bonding for the EMIB-T, we are not there yet. Benjamin Poh: Next, I will move to Sunny. Sunny, could you please unmute and raise your question? Sunny Lin: Hello. Could you hear me okay? Cher Ng: Yes. Very well. Sunny Lin: Congrats on the very good results and thank you, Robin, for all your leadership over the years. And so my first question is on your opportunity on the logic, especially on chip-on-wafer. And so Robin, earlier, you mentioned the chip-on-wafer migration for TCB could be somewhat related to chiplet. That was a bit surprising to me because I always think that the chip-on-wafer migration for TCB should be related to larger package. And so how should we think about from here? You just secured 4 tools from a leading-edge foundry customer. How aggressive are they in migrating to TCB for chip-on-wafer from here? How should we think about when you may get another bulk orders? Would that be in second half? Or will you need to wait until maybe 2027? Cher Ng: Okay. Thanks, Sunny, for your question. Now when we -- when I mentioned about chiplet, between chiplet and SoC, when the GPU architecture is using SoC, there is less need to use TCB to place the SOC onto the interposer because you don't need that kind of precision. But when you try to -- when you go into SOIC kind of packaging, you need more precision to put those chips onto an interposer. So that's why TCB will be needed going forward. So I think as the industry migrates from an SoC structure to an SOIC structure, we see increasing use of TCB for that application. So however, having said that, we have been telling you guys that for 2026, the number of tools for CoW will not be significant because it all depends on the migration to the next chip architecture. So we believe '26 will not be high for CoW. But going forward in the years to come, I think there's a meaningful TAM over there for CoW application for logic. Now how aggressive is this migrating to CoW? Yes, I think I already answered your second question as well. So '26 will not be high, but '27 would be meaningful. Sunny Lin: Also, if I may follow up on my first question. Also, these leading-edge logic customer, they are already working on the follow-up solution beyond CoWoS, meaning CoPoS. So yes, so from your perspective, for their CoPoS, they will start from smaller form factor, 310 x 310. And so from your perspective, are you seeing any signs of clients trying to pull forward the technology development. And for CoPoS, how should we think about your overall opportunity, especially around chip-on-panel. Cher Ng: Yes. I think we are -- as we speak, we are developing tools for CoP. So we deal to deliver demonstration tools sometime this year. So that part, we are already engaged with the key advanced logic customer. So that is another exciting area for TCB. So if you look at TCB in general, we have a wide customer base. We have a very diverse applications. We don't just depend on certain applications, but a very diverse application both on the logic side as well as on the HBM side. So certainly, panel packaging at CoP level is an interesting development for us as well. Sunny Lin: Also, if I may, I do want to ask a question on SMT. So any update on your strategic review for the division? And have you identified a specific option that you want to go for? And what would be the time line? Cher Ng: To answer your second question first, no. I think we are still in the progress of evaluating. But certainly, we have received some interest in the SMT business at this point in time. Benjamin Poh: Next, I would like to request Arthur. Arthur, please unmute. Yu Jang Lai: Robin, can you hear me? Cher Ng: Yes. Yu Jang Lai: Congrats on a strong result and guidance. So I will have two questions. Number one is on the CPO. You just mentioned that you have a deep dive into the process, right? And you mentioned the timing is '28. I want to confirm that that's the optical engine shipment or that's your equipment shipment timing? Cher Ng: Shipment TAM, we're referring to our equipment TAM for CPO, it wouldn't look interesting from '28 onwards. Yu Jang Lai: Okay. Interesting on '28. Because what we heard from the supply chains that actually some of the CPO equipment already kick off. So can you share more color on your target for example, is for the GPU side maker or is for the ASIC side maker? Cher Ng: I think the clientele that we have probably serving both Arthur. I think can really differentiate whether it's ASIC or GPU, yes. Yu Jang Lai: Okay. Okay. And my second question is about the HBM. So thanks for sharing this good progress. Do you think for the HBM4 and 4E and actually, you can continue to -- so my question is about HB progress, hybrid bonding progress and your tools, so do you think the visibility is getting longer and longer in the HBM side? Cher Ng: Not really. I think the road map from our customers are pretty clear, but like what Katie said, if there is adjustment to the road map, of course, the demand will vary from quarter-to-quarter. But however, in the long run, I think we are still sticking to a very significant TAM of $1.6 billion in 2028. And we intend and we have never wavered from our aim to target 35% to 40% market share for the whole TCB market. Yu Jang Lai: Got you. And finally, a question to Katie. On the modeling perspective, we know there is a strong booking, right? But how about your component supplier lead time? Is it getting longer? Or does that remain controllable? How should we think of the real billing seasonality of this year? Do we see any constraints? Yifan Xu: Yes. Arthur, thank you for the question. Maybe I'll answer it by segment. On the SMT front I'll do that first, though we have very, very strong bookings, as we've mentioned a few times now, the conversion -- the revenue conversion is somewhat impacted by the lead time of our suppliers. The team is actually actively addressing this, and we expect that in the second half, this kind of situation actually will get better. On the SEMI side, I mean, there's always the kind of tight supply chain, especially given all the uncertainties around the globe. But so far, we will say that we are managing the supply situation just fine. Benjamin Poh: Next, I would like to request Alex Chan to unmute. I think Alex have some technical problem. Maybe we'll go to the next one. Next, I would like to invite Donnie. Donnie, could you please unmute? Donnie Teng: Can you hear me? Cher Ng: Yes, Donnie. Go ahead. Donnie Teng: Robin, my first question is regarding to your NEXX business. So I'm wondering if that -- I mean, I remember in the past few years, the NEXX one of the NEXX major business was plating tool, and it can be sold to some PCB companies. And recently, I think PCB companies or substrate companies are expanding capacity due to their running out of the fab. So I think I just want to ask is like if NEXX can generate some revenue momentum recovery in the future? Are you still considering to sell this business? And also in terms of time line, when we expect that we can dispose SIPLACE and NEXX, these two businesses in the future? Would that be in second quarter? So this is the first question. Cher Ng: I think let me answer your second part of the question first. We don't have an exact timing for you. Whenever there is a deal we have we will announce it. But so far, we have nothing to mention here. Now you're talking about NEXX, yes, they are into deposition. When we make a decision to divest NEXX, we don't just look at financial alone. We look at strategic fit to our whole business, right? So we feel that we want to divest that because we're going to focus more on the SEMI back-end. NEXX is not exactly in the back end. NEXX is on the middle end. So that's the reason why we made the decision to divest NEXX, not purely on financial but because of strategy. Donnie Teng: Okay. Okay. Understood. Just one follow-up on this. So when you decide to divest NEXX, have you already seen the pickup of the orders from those PCB and substrate makers? Cher Ng: I would say, yes, as I said, but our decision is not based on financial alone. It's really more on strategy. Donnie Teng: Okay. And my second question is regarding to the CPO. So my understanding was that AMICRA for example, can be used for laser bonding or, as you s, maybe micro lens bonding on to IC. I guess that's the major business still today. But I'm also wondering if you can quantify a bit more on the 5x growth in the first quarter of this year. It's like what kind of base in the last year? And also in terms of the inspection, as you know, for CPO, the FAU alignment with optical engine is also very critical and it also requires inspection. So we have AOI tool. We have AOI tool. I'm wondering if we can explore some of the business opportunities there or we are mainly staying at the die bonding market? Cher Ng: Yes, very good question, Donnie. Actually, when we deep dive into the Photonics business, right? So we also think that may be we shouldn't just focus on just on the die bonding because there's indeed a lot of opportunities in the photonics in the CPO as well as the optical transceiver business. So too early. I don't have any concrete answer for you at this point in time. But coming back on the FAU, yes, I think AMICRA has a solution especially for FAU attached onto the PIC. So as I said earlier, I think as far as CPO is concerned, we feel good. We feel excited about this particular development. So we will probably have more of the share as we move throughout the quarters in the years to come. Donnie Teng: And in terms of 5x growth, can you elaborate a little more is like what kind of base we are growing from in capacity. Cher Ng: Yes. I would say Donnie, right now, it's still a small base. But again, in terms of growth, if it was a significant growth we thought it's worth to highlight to you guys as well that we are making good progress in terms of optical transceiver as well as CPO. Benjamin Poh: I'm afraid this is the time that we have. And now I'll pass the time back to Robin for his closing remarks. Cher Ng: Yes. So thank you for a very good discussion today. So let me take a step back and say that this quarter really marks an important point for ASMPT. We delivered one of the strongest quarters in recent years, not just in terms of revenue and bookings, but notably also how broadly AI is translating into more opportunity for ASMPT, from TCB and advanced packaging to photonics, CPO and mainstream platform, we are indeed seeing AI driving demand across multiple products and customer segments at the same time. Also this breadth matters because it reflects the increasing complexity of AI system architecture and the value of back-end manufacturing, an area where our range of solutions, our scale, our capabilities are allowing us to participate meaningfully across the technology space. We are indeed very encouraged by the operational leverage we have demonstrated this quarter. Our adjusted margins improved sequentially, supported by product mix and volume, and our results came in ahead of market expectations. So looking ahead, we continue to see AI as a multiyear structural driver of our business, with strong engagement across advanced logic and memory photonics and CPO and mainstream wire and die bonding and SMT pick-and-place solutions. We believe ASMPT is well positioned to support this next phase of industry growth across both SEMI and SMT. So once again, thank you for your interest and your continuous support. We look forward to updating you more in the next quarter. So this concludes our call. Thank you, and take care.
Ilkka Ottoila: Good morning, and welcome to Nordea's first quarter 2026 results. I'm Ilkka Ottoila, Head of Investor Relations. As usual, we'll start with the presentation by Group CEO, Frank Vang-Jensen, followed by a Q&A session with Frank and Group CFO, Ian Smith. Please remember to dial in to the teleconference to ask questions. With that, Frank, please go ahead. Frank Vang-Jensen: Good morning. Today, we have published our results for the first quarter of 2026. It has been an unsettled start to the year once again. The conflict in the Middle East that escalated in March has created further geopolitical uncertainty and is driving volatility in the financial markets. It also has implications for short-term energy supply and inflation. Sustained disruption to global energy markets may dampen economic activity, including in the Nordic countries. While the situation continues to evolve, it's something we are monitoring closely. Fortunately, the Nordic countries have a strong track record in navigating uncertainty. The stability, fiscal strength and global competitiveness of our home markets make them some of the world's best places to live and do business. This is something I have talked about a lot in recent quarters. It is, in addition, worth noting that our region is also structurally well positioned in terms of energy resilience. This is due to its substantial renewable capacity and Norway's role as a major energy exporter. We clearly saw the benefits of that stability during the last energy crisis in 2022. As for Nordea itself, we are uniquely diversified across these attractive Nordic markets. Years of relentless strategy execution have made us stronger and more resilient than ever and leave us very well placed to support customers. That strength showed again in our first quarter performance with solid growth in business volumes and high profitability. Return on equity for Q1 was 15.4%. The implementation of our 2030 strategy has started well. One of our key strategic priorities is growth. And here, our agenda is focused on 6 distinct growth areas. We are seeing -- we are seeing good early momentum in Private Bank, Life & Pension, small businesses and cross-sales. We're also encouraged by the steady progress we are making in Sweden and Norway. Our two other strategic priorities are to strengthen our customer offering and make more effective use of our Nordic scale. And execution on these is likewise off to a good start. During the quarter, we launched a unified Nordic corporate credit and lending platform. We also took further steps in our deployment of a more scalable and resilient payments platform, all part of our drive to enable outstanding customer experiences and superior efficiency. Let's now take a look at the first quarter and some of the financial highlights. Our return on equity was strong at 15.4%. Earnings per share were EUR 0.36, up from EUR 0.35. We were especially active in our corporate customers, with our corporate customers increasing lending by 11%. Corporate deposits went up 2%. Households were active too though to a lesser extent. Mortgage lending was up 2% and retail deposits were up 5%. Asset under management increased by 9% to EUR 464 billion. Net fee and commission income was strong, up 6%, driven by growth across fee types. Net fair value result was down due to lower market making income. That followed the sharp increase in interest rate expectations during March as the Middle East conflict intensified, which led to exceptional losses across certain desks. Total income was resilient with a 2% decrease primarily reflecting lower net interest income due to policy rate reductions and lower market making income. We continue to manage cost with discipline. First quarter operating expenses were flat before foreign exchange effects. Our credit quality remains very strong. This quarter, we fully deployed the remaining portion of the management judgment buffer we created during the COVID-19 pandemic. We reallocated EUR 116 million to further strengthen our modeled provisions, and we released the remaining balance of EUR 160 million, which was deemed surplus provisioning. Excluding the release, net loan losses and similar net result for the quarter totaled EUR 61 million or 6 basis points. Our strong capital generation continued and our CET1 ratio was 15.7% at the end of the quarter, which is 1.9 percentage points above the current regulatory requirements. With a solid start to the year and despite the increase in uncertainty in the latter part of the quarter, our full year 2026 outlook is unchanged. We expect a return on equity of greater than 15% and a cost-to-income ratio of around 45%. Our Q1 net interest income was lower, as expected, reflecting the policy rate reductions and lower lending margins. Importantly, we moved beyond the low point in daily NII and returned to growth during the first quarter. This was supported by both higher business volumes and our deposit hedge. Among corporates, we increased lending by 11% year-on-year, with all countries contributing. This was the first time we have had double-digit year-on-year growth in any quarter since 2022, and it underlines how Nordic businesses are very adaptable to the changing environment and are showing willingness to invest. Corporate deposits were up 2%. That's modest growth, which we likewise interpret as a sign of increased risk appetite. Household customers also increased their activity with mortgage volumes up 2% from still muted levels. The housing market is picking up, though only gradually. As in previous quarters, households have been more focused on strengthening their savings and investments. Retail deposits were up 5%. The deposit hedge meanwhile, continued to provide support to our income year-on-year, improving NII by EUR 55 million. Our net interest margin for the quarter was 1.57%, unchanged from Q4. Net fee and commission income was up 6% year-on-year driven by growth across different fee types. The higher savings fee income was driven by the higher average assets under management and the positive net flows in investment products of EUR 1 billion, even with nearly EUR 2 billion of outflow related to dividend payments. In our Nordic channels, we continued to see very good customer intake in private banking with solid net flows. In our international channels, we delivered positive net flows again despite increased investor caution. Brokerage and advisory fee income increased, supported by stronger debt capital markets activity, and strong income growth, 11% from our secondary equities business. Higher customer activity also drove growth in payment and lending fee income, and we were particularly pleased to have driven good performance in the strategically important cash management area. After a strong start to the quarter, March brought extremely volatile market conditions driven in particular by the developments in the Middle East, the resulting sharp increase in interest rate expectations resulted in losses in our market making operations in March, undoing the strong start to the year. Consequently, net fair value result was down 22% year-on-year, reflecting the impact from those March market making losses, which we consider to be an isolated one-off. Customer activity was strong through most of the quarter, particularly in FX and interest rate hedging as clients actively manage risk. Activity in equities and securities financing also held up well. Cost development in line with our plan and were flat year-on-year, excluding foreign exchange effects. Our strategic investment spend was stable and we are managing costs with our usual disciplined approach, taking the market environment into account. Including FX, costs were up 2% year-on-year. The first quarter cost-to-income ratio was 45.5%, which was slightly higher than planned due to the exceptional market making losses in March. The underlying cost-to-income ratio was below 45%, and there is no change in our guidance that we expect to be around 45% for the full year. During Q1, as part of our 2030 strategy, we announced restructuring initiatives to change the composition of our workforce. With our Nordic scale and with the impact of AI and process optimization, we expect to have fewer employees in the future than today. The restructuring initiatives are set to affect around 1,500 employees across the group during '26 and '27 and from 2028 should deliver annual cost reductions of at least EUR 150 million. This is a part of our 2030 strategy and is in line with the target we communicated at our Capital Markets Day to deliver structural gross cost reductions of EUR 600 million by 2030. In connection with these initiatives, we booked restructuring costs amounting to EUR 190 million this quarter. This has been reported as an item affecting comparability and is excluded from our 2026 financial outlook. Our credit quality continues to be very strong. This quarter, we fully deployed the remaining portion of the management judgment buffer we established 6 years ago during the COVID-19 pandemic. Over this period, the buffer has been continuously assessed in light of the macroeconomic conditions and in the knowledge that our loan portfolio performance has been consistently strong. Risk has been assessed to be largely reflected in our modeled provisions without the need for additional management overlays. As a result, the buffer has been gradually reduced and is now fully deployed. On the remaining balance, we reallocated EUR 160 million in the quarter to further strengthen our modeled provisions, while EUR 160 million was deemed surplus and was released. Consequently, net loan losses and similar net results amounted to a reversal of EUR 99 million. Excluding the release, net loan losses and similar net result for the quarter totaled EUR 61 million or 6 basis points. We continue to have a strong capital position. At the end of the quarter, our CET1 ratio was 15.7%, 1.9 percentage points above the current regulatory requirements. Our strong capital position and continued robust capital generation support lending growth and continued shareholder distribution. During the quarter, our AGM approved a dividend of EUR 0.96 per share for 2025, which was paid to shareholders in early April. Additionally, the AGM granted the Board authorization to decide on the distribution of a midyear dividend in 2026, which would correspond to approximately 50% of the net profit for the first half of 2026. Turning to our business areas and starting with Personal Banking, where we maintained solid business volume momentum and customer activity. Despite the market volatility, customer savings and investment activity remained at high levels and household prioritized, strengthened their financial positions. As a result, deposits increased by 5% during the quarter. Net flows were EUR 0.2 billion, still positive despite the market turbulence, though lower than in the previous quarters. Housing market activity continues to gradually pick up but remains slow. Even in this environment, we increased mortgage lending by 2% year-on-year. In Sweden, we further strengthened our position in the quarter, capturing mortgage market growth well above our own back book market share. Customer engagement with our digital services continued to increase supported by our expanded offering of self services features in our mobile app and online. App users and log-ins were up 4% and 6% year-on-year. And we are also seeing a growing share of savings and investment activity through digital channels. One of the areas we are targeting for growth is cross-sales. And we are seeing good traction, supported by successful product launches in savings and by more automated processes for account opening and onboarding. Net fee and commission income increased by 6% driven by higher payment cards and savings income and net insurance result increased by 46%. Total income decreased by 5% year-on-year, driven by lower net interest income and the lower policy rate environment. Return on allocated equity with amortized resolution fees was 16%, and the cost-to-income ratio was 53%. In Asset & Wealth Management, we maintained solid business momentum and delivered a resilient investment performance in difficult markets. Customer acquisition remains strong, reaching record highs in both Denmark and Finland and supporting net flows of EUR 1 billion in Private Banking. In our international channels, we recorded positive net flows again in the first quarter despite increased investor caution due to the Middle East conflict. The wholesale distribution business has shown resilience since the middle of 2025 and positive flows in the current environment testify to the attractiveness of our product offering. Net flows in Life & Pension were EUR 1.7 billion. We maintained good momentum across our 4 markets and further reinforced our position as the Nordics' second largest player. Gross written premiums in the quarter amount to EUR 4 billion, up from EUR 3.7 billion a year ago. Assets under management increased by 10% year-on-year to EUR 185 billion. This was driven by market performance and the positive flows despite the sharp decrease in investor confidence in March. We continue to progress with our strategic ambition to offer an outstanding savings and investment experience across the region. Among other enhancements made in Q1, we are now using AI to provide timely and relevant information to our customers about their investments they hold. Total income was up 1% year-on-year, with net fee and commission income rising in line with the higher asset under management. Return on allocated equity with amortized resolution fees was 38%. The cost-to-income ratio improved by 1 percentage points to 43%. In Business Banking, we maintained good business momentum and drove strong volume growth. Lending volumes increased by 8% in local currencies year-on-year, led by continued growth in Sweden and Norway and stronger activity in Denmark. Deposit volumes also grew by 8% with all markets contributing. We continue to strengthen our digital offering across the Nordics, a key enabler of our growth ambition in the small business segment. In Q1, we launched a digital onboarding platform in Denmark and Norway, making it faster and easier for customers to get started with Nordea. A wider Nordic expansion is planned for the coming quarters. We also kicked off the Nordic rollout of our new Business Insights service, which helps small businesses manage liquidity and cash flows more effectively. In Sweden, this was fully launched in Q1. The launch was well received, and the service will next be rolled out in Finland and eventually to all countries. Total income was unchanged year-on-year, as higher volumes and ancillary income were offset by lower deposit income. Return on allocated equity was 18%. The cost-to-income ratio was 45%. In large corporates and institutions, we drove strong business volumes as we supported our customers in the volatile market environment. It was a solid quarter on most income lines, but extreme market volatility in March negatively impacted our market making result, driven by the unexpected sharp increase in interest rate expectations. That impact, which we consider to be an isolated one-off, led to a lower net result from items at fair value year-on-year, even though customer activity in advisory and risk management was otherwise strong. Lending was up 14% year-on-year with all markets contributing. Strong demand from our secondary equities offering and higher lending fees and bond issuance activity supported 14% increase in net fee and commission income. Deposit volumes decreased by 5% year-on-year, but increased by 2% compared with the previous quarter. Debt capital markets activity remained high despite the market volatility and we maintained our #1 position for Nordic bonds and Nordic loans year-to-date. We have arranged more than 190 debt capital markets transaction so far this year, so off to a strong start. Primary equity market activity remains subdued, but our secondary equities business grew by 11% year-on-year. Total income was down 9% year-on-year, driven by lower net interest income and the decrease in net fair value result. Return on allocated equity was 15%. The cost-to-income ratio was 41%. In summary, this was a solid start to the year despite challenging financial markets later in the quarter. While there is uncertainty around global growth, confidence among Nordic businesses has not wavered, underlining the resilience of our region. Resilience is a critical asset and one that Nordea also demonstrates. As a large and well-established group, we are continually investing in capabilities that makes us even stronger, including in digital services, technology, security and risk management. We're also very well equipped to support customers and all stakeholders, thanks to our unique market position and presence, leading offering and strong balance sheet. The higher business volumes in both lending and deposits are likewise encouraging and will support our income. Our outlook for the full year 2026 is unchanged. We expect to deliver a return on equity of greater than 15% and expect our cost-to-income ratio to be around 45%. Our vision is to become the undisputed best performing financial services group in the Nordics. Thank you. Ilkka Ottoila: Operator, we are now ready to take questions. Operator: [Operator Instructions] The next question comes from Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: So on NII, if we assume that Q1 marks the trough for NII, could you walk us through how do you expect the trajectory to evolve from here, particularly in a scenario where the rate hikes materialize, and the key drivers between the hedge contribution pricing and the volume growth? That's the first question. Ian Smith: Gulnara, thank you for the question. So let's set aside potential rate hikes for the moment. What we -- what's driven the, I guess, the -- moving on from the trough in NII is that we've been able to add volumes. And how we proceed from here for the rest of the year is really a question of volume development and margins. And we're pretty confident that we'll continue to add volumes over the course of the year and that's going to help move NII forward. Margins are a bit more difficult. We continue to see pressure on the margin side, particularly on household, and as we've said consistently, a return to confidence that drives higher volumes is most likely the answer to that. So we're pretty constructive on NII continuing to improve. I think the outlook for the full year is kind of in line, maybe slightly better than 2025. Now rate hikes, first of all, they've got to happen. So we need to see policy rates actually move before we see that impact our NII. So let's see if that happens. our latest market expectations are that these are going to impact the second half of the year rather than anything in Q2. And then in terms of hedge, let's -- we'll work that through in terms of the timing and extent of rate hikes, not expected to see anything dramatic in terms of impact in 2026. So overall, provided we don't see something untoward on the margin side, you can expect to see a gradual improvement in our NII. Gulnara Saitkulova: And a related question on the volumes. As we move through Q1 into Q2, have you observed any meaningful changes in the customer sentiment, particularly in the light of the geopolitical tensions in the Middle East? And given the current backdrop, how are you thinking about the loan and deposit growth across your markets into 2026? Frank Vang-Jensen: This is Frank speaking. So I think our customers in the Nordics and across the countries has -- they have acted quite calmly, pushed through the deals. They have been active. There might have been a couple of weeks where it was a bit surrealistic what happened and how the rate changes and so how dramatic it went. But there has been no change in behavior. And I would say that now we're talking about the, of course, the first quarter, but the end of the quarter and the beginning of Q2 has showed good activity. I think we have -- and we have been speaking about it quite a long time that there comes a point of time where you just have to accept as a business leader that we are living in times where we will have to cope with a lot of volatility and uncertainty and unpredictability, but we cannot wait for -- continue waiting for the perfect moment. We have to push now for growth our investments in the different strategic parts and whatnot. So I think that's what you see now. We -- of course, we are not forecasting 11% growth year-on-year on corporates rest of the year. But there's no indications that it will slow down significantly right now. Operator: The next question comes from Magnus Andersson from ABG SC. Magnus Andersson: Just a follow-up there on the -- I think the corporate lending growth is what is striking all of us. I mean, in Business Banking, adjusted for currencies, you grow by more quarter-on-quarter than the market is growing year-on-year. And on the large corporate side, I guess, the numbers are not -- it's actually not adjusted for FX, but still, I mean, Sweden is super strong. So could you say anything about sustainability of these growth rates on a quarterly basis. And also, I mean, you mentioned the new onboarding platform. It is Norway and Sweden growing, which you talked about at the CMD, but just the quarterly trajectory looks quite stunning. And my second question is just on capital and share buybacks. You didn't launch a new program now. Is it because the previous program, which was just finalized, was expected to run until the 8th of May. And therefore, we will have to wait until mid-May before potentially you launch another program. Frank Vang-Jensen: Thank you, Magnus. Let me take the first one and then Ian, the second one. So yes, of course, the growth rates of 11% within corporates is a high number, and I don't want to commit to that number each quarter going forward. But let me say in the following way. So when growth is higher than expected and when we have larger credits, I get an overview on who they are and what is the purpose. And it looks very stable, honestly. It's super strong names. It's customers that we have been working with for a long time. And then it can be -- you're just waiting for the opportunity to enter or we have agreed about doing something more together and so there's not really any silver bullet or any single deal that has pushed it very high. So that's one. The second one, which is very positive, is that in a more broad based business banking. It's actually 3 out of 4 countries that are growing quite significantly. And it's a lot of different deals. I think what we do see now as well is that we start to see some of the proof points of our Nordic scale. So we have implemented, as you alluded to, the credit platform. We are making progress on our global payment platform as well. These initiatives help in the speed, for example, on onboarding, and onboarding for the customers, especially the smaller ones on the corporate side, is super important. That is helpful. So we actually also have a data point we have not talked much about, but we have a data point now on our small businesses. We have, for years, struggled with some outflow. Last year, we turned it and this year has actually increased quite nicely. And so I think the momentum is good. There is no silver bullet. 11% is a high number. So don't put 11% in year-on-year or quarter-on-quarter all the time, but I cannot see why we should not continue to show nice growth within the corporate side this year with the information we have right now. Ian? Magnus Andersson: Yes. And you're not feeling that you're sacrificing anything in terms of margins to achieve this growth? Frank Vang-Jensen: I think that we are well positioned to continue to delivering greater than 15% return, and that goes for the corporate business as well, and we are not accepting any deviation to our return targets. And of course, the business knows that. So I guess, I'm answering -- I'm happy with what I see right now. Ian Smith: Magnus, it's Ian here. So you're all familiar with how we think about buybacks, and there's absolutely no change. And as I look at the market expectations for 2026 in terms of buybacks, they look -- it looks like a pretty sensible estimate versus how we're thinking about it. So no interruption to the progress there. You're right, the EUR 500 million program we launched before Christmas, which is -- we hand over the control of that to the broker in terms of levels of execution and things finished a little earlier than planned. Q1 was an interesting quarter from a capital perspective. As you see from our disclosures, we generated capital as normal, as you'd expect Nordea to do. And quite a lot of that was deployed into growth. And we saw a little bit of elevated market risk capital requirements, as you can imagine, emerging from what happened in March. So it's one of the first times where we've seen those dynamics where we've deployed the capital generated into growth. We're still really comfortable with our plans for the rest of the year in terms of capital return to shareholders, and I say, I think the market's got that right. We still see opportunities for growth out there. And so we'll work through Q2 and make our decision on the right time to do another buyback. And that's really when we've got excess capital that we're prepared to trim. So things are proceeding as normal. I don't expect anything in the very short term but you can expect us to continue with our regular, consistent buybacks during the rest of '26. Operator: The next question comes from Andreas Hakansson from SEB. Andreas Hakansson: Well, I really want to talk about capital, but since Magnus covered that, we could move on. I think it's quite refreshing that we are talking about growth rather than just capital distribution. But Ian, you mentioned that retail is still a bit tough on the margin side. Could you quickly because we -- in Q4, we were a bit worried about the NII in Norway and then we were a bit worried about retail asset quality in Finland. Could you just briefly go through the 4 countries, what you see in terms of volumes, margins and asset quality in each of the countries, please? Ian Smith: So let me start with -- and Andreas, let me start with asset quality, take that one off the table. No issues or concerns there at all. And so we can set that aside. I think the growth picture in each of our markets is, as always, a little bit different. We still -- as you see from the publicly available information, we're still the market leader in Sweden in terms of capturing front book share. And in our other countries, things are a little bit slow. We do see underlying growth in Norway, particularly towards the end of the quarter. So -- and this is really a function of the market and its slowness. Frank referred earlier in the conversation to the still reticent consumer, I guess. We had -- our economist certainly had high hopes towards the end of last year that, that consumer confidence would increase and that would lead to higher investment and consumption. We've had an unsettling end to the first quarter that I think holds that back a little bit. And then in terms of what we're seeing on margins, still intense competition for those smaller volumes throughout. So we're having to be very much on our game in terms of managing our pricing. We've seen some positive price moves in Sweden, but we will have to see if that feeds through into margin improvements. And then very competitive in Norway, particularly among the savings banks. And so it's tough to increase margins in there. When it comes to the Danish market, you'll have seen some of our pricing moves, which is in response to the competition there. I think we see a good response from customers. And we're hopeful that feeds through into the numbers and the performance, and then Finland, as market leaders there, we really want to see the market move a bit more in order to see whether we can improve our NII. So that's on the lending side. Deposit is going well. Deposit margins are stronger than we had planned for and deposit volumes are good, and that's a really helpful contributor to NII. But there's no doubt that it's a tough market on the retail side and people are fighting for every, I was going to say, penny, but we don't have those in this market, every krona. Andreas Hakansson: And I mean... Frank Vang-Jensen: Sorry, but the sentiment in Q1 is better than it was in Q3 and Q4. So it's going slower than we would hope, but it is building somewhat and there's -- we sense there's more activity across the board. But it's different, as Ian mentioned, between the countries. Andreas Hakansson: And even if we don't see central banks hiking across the board until maybe late in the year and next year, we've seen that the IBOR rates in all markets have moved up quite sharply. To what degree is that helpful for your NII in the near term? Ian Smith: So it helps a little bit on the treasury side. And I can imagine that it might encourage all of us to look at pricing because essentially that's what drives a big chunk of the cost of funds for us. So I can see that it might encourage a slightly positive development, but we really have to see the policy rate changes come through for it to start to move NII meaningfully. Operator: The next question comes from Martin Ekstedt from Handelsbanken. Martin Ekstedt: So first question, the staff reduction program that you've announced in Q1. So once implemented, this will deliver around EUR 150 million of annual cost savings, right, which is about 25% of the EUR 600 million of gross cost takeout that you mentioned that you see in November. So as such, I was just wondering, should we expect 3 more cost reduction programs of roughly the same size in the years leading up to 2030, i.e., the end of your CMD plan? Or will other parts of the EUR 600 million of gross cost takeout be less lumpy, say, and less noticeable and come from other areas? That's my first question. Ian Smith: Yes. Martin, thanks for the question. No, we're pretty clear that we don't expect to launch another restructuring program. We tested ourselves pretty hard before launching this one about whether it was the right thing to do, both in terms of the way we manage our workforce and other factors. The reality is that we will need to reshape the workforce, particularly in technology. And that's where the focus of the restructuring has been. And everywhere else, our cost reductions are expected to come from sort of regular management of FTE because we will see FTE come down, but that's not going to come through large restructuring programs and other initiatives such as infrastructure simplification and AI. And of course, the restructuring is big. It's a very important contributor. And those EUR 150 million of cost savings, yes, they're 25% of the EUR 600 million gross, but we think of it as almost 40% of the EUR 350 million net that we're committed to. So that's a long way of saying what I said at the beginning. No further cost restructuring programs. Frank Vang-Jensen: And for the remaining part -- Martin, it's Frank. So for the remaining part, of course, there are firm plans owned by a DLT member for each stream that will lead to these cost reductions needed to deliver on our promise of EUR 600 million gross, EUR 350 million net. So of course, there is an execution risk, but we know what to do, when to do it, how to do it, and we'll follow that development very, very thoroughly. Martin Ekstedt: Okay. Very clear. And then my second question then around the release of the management overlay buffer in full. That surprised at least me a little bit that you released it in full already in Q1 against the backdrop of increased geopolitical uncertainty. So could you tell us a bit more about how your thoughts went around provisioning in front of Q1? And what scenarios, if any, could prompt you then to start building up that buffer again? And additionally, perhaps, if I may, in what sectors or segments was collected provisioning strengthened by that portion of the management overlay that was used now rather than released? Ian Smith: Yes, it's an important question, Martin. So first of all, we wouldn't be releasing if we thought we had any prospect of having to restore it at any point. The key thing is having looked at what remained of a provision that was established for COVID 6.5 years or 6 years ago, we concluded that there was a portion that was clearly surplus. And clearly surplus, not just in respect of its original purpose, both from a thorough review of the portfolio, looking at stress scenarios, looking at our estimate of the impact of the energy prices caused by the escalated conflict in the Middle East. So we've looked at this from every angle exactly as you'd expect. And each time we came up with of those EUR 276 million of provisions, we would keep EUR 116 million and deploying those into our IFRS 9 model. So no longer a sort of separately categorized provision and that EUR 160 million was clearly surplus. And then in those circumstances we released. Now releasing provisions, we've been pretty clear, I think, that in 2026, we would take action on the management judgment buffer. We think it's now the right time to move on and we maintain healthy provision levels, good coverage and have addressed any small areas of concern in the portfolio but these have been small in terms of how we deployed that EUR 116 million. Martin Ekstedt: Okay. So the EUR 116 million was not earmarked for any particular part of the portfolio? Ian Smith: It has a number of different components. My point is that it's not -- the bulk of it is not targeted at anything specific. It was really a granular EUR 10 million here, EUR 15 million here, that kind of thing. So... Operator: The next question comes from Markus Sandgren from Kepler Cheuvreux. Markus Sandgren: So we've been talking a bit about cost savings. I was just curious, now it seems like there is new AI tools for cyber criminals. Is that something that you have -- that is changing your view on cost development? Or is that already taken care of, so to speak, in your program for IT development? And secondly, I was thinking about also credit losses, as Martin was alluding to. Now with the strengthening of the provisions, the 10 basis points that you have in your business plan, is that just a conservative number? Or is that what you actually think you will have in the coming years? Frank Vang-Jensen: This is Frank. Thank you for the question, Markus. So the first one regarding cyber. I would say there's nothing new here. It would be wrong to say that we fully understood the Anthropic question and understood what it will create. But we have been all the time, very clear about that AI will grow and it will accelerate the growth when it comes to quality, and also what it would be able to do for us, for our customers, for our efficiency, for our shareholders. And so -- but of course, misused, it can also be used again against any company, any organization, any country you want. And I think that what we see here is an example of that. That tool was not built for criminals, but it can be misused by criminals. And in wrong hands, it appears to be quite strong. We have always planned for that. And the way we see it is that you have to continuously improve and strengthen your skills and your defense within cybersecurity, information security, you have to believe that the counterparts or the criminals will have the same capabilities or even better than yourselves, which means that you have to continuously invest significantly and that is what we have in our plan. So I think no big change. I think it's just not a proof point how fast AI is developing and you must embrace it, you must deploy it. Doing so, you will get a tool that can be helpful for different purposes, and it can be defense, of course, as well. That's the best I can say. Ian, over to you. Ian Smith: Yes. Markus, so the way we think about credit losses is we have guided as 10 basis points as the, I guess, long-term expectation. I'll come back to what expectation means in a moment, but of the portfolio loan loss levels. Of course, within that, you have our household loan losses, which are much, much lower than that. And the corporate loan losses that from time to time are double digit, so between sort of 10 and 15 basis points. The reality is, over the last 6 years, we've always been well within our 10 basis points, which says that the portfolio has been performing well and largely due to much lower levels than normal of corporate losses. So the corporate portfolio has been extremely robust. At the Capital Markets Day last year in November, I said that despite that experience, I don't think I can stand here and say that we would always expect to see such low levels of losses and so renewed our guidance for 10 basis points. But we'll always strive to keep it well within that. So 10 basis points is the guidance. It's a composite for the full portfolio performance but our track record is much better than that. Operator: The next question comes from Shrey Srivastava from Citi. Shrey Srivastava: My first is if we do see 1 or 2 rate hikes materialize this year, how would you expect pass-through behavior would be to deposit customers relative to the much larger hiking cycle that we had a few years ago. And my second one is, we obviously saw the news about Avanza's Danish expansion citing 5 years to be profitable. Is this something you factored in to your business plan? And if not, how does it affect your outlook? Ian Smith: Shrey, it's hard to prejudge what banks will do when faced with rate hikes, but I know you're asking for my opinion rather than a prediction. I can't see why -- I mean, particularly at these levels where we've looked at what we saw in the last rate hiking cycle, there was a reasonably high level of pass-through on rates at these levels. When they were getting much higher sort of north of 350, that kind of thing, a much different story because I think you end up creating an unsustainable position. So I think it's reasonable to assume a fairly high level of pass-through at these levels. But we'll have to see when they actually happen. Frank Vang-Jensen: And in regard to Avanza, fully as expected, no surprises. We have been planning for more of the platform players coming, and we are investing heavily in that area already and will continue to do so. So I'd say that, no, and it doesn't really make any difference to us. Operator: The next question comes from Namita Samtani from Barclays. Namita Samtani: The first one, just on net interest income. Can you help me think about it beyond 2026, please? Because the rate sensitivity for 2027 on Slide 19 looks flat based on the first quarter, and consensus has net interest income going up 5% in 2027. So do you think the volume growth can more than offset margin pressure and the negative impact from the hedge? And my second question, I read this article in Borsen about Nordea's own employees opting out of having a pension with Nordea in Denmark citing IT issues related to integrating the acquisition of Topdanmark a few years ago. I just wondered what's being done to fix this? And why is the pension side in Denmark not as slick as what we can see, for example, in Sweden? Frank Vang-Jensen: Let me take the first question about the paper that you read in -- apparently in Copenhagen. So our acquisition of Topdanmark's Life & Pension business is fully aligned with our plan. That business is an SME business, and we wanted to be an SME business. It has taken some time to get it separated from the seller, which we knew, but it has been difficult from the seller to separate it as it should be delivered on its own legs and not integrated as the seller's systems. That was delivered, as I remember, 12 months ago, and since has the job been about integrating it fully into our systems, and raising the quality and, of course, of the interface, so it meets the Nordea standards. And they are high, much higher than what this company came from on digital capabilities, which we knew. So no change. Then there are some that are, for example, brokers that would like to see that we were attacking and more and more active on large corporates in Denmark. But that's not our focus, and it has never been our focus with this -- our intention with this company right now. So we're actually very happy with the acquisition, and it progressed well. It has taken longer due to the seller's problems by separating the company, but we have full control now and are working with the plan to get it up to the standard that you should expect from Nordea. Then it might be that we one day will go to the large corporate sector as well, is very competitive, profitability is low. It might be we will go there. And when we will potentially go there, of course, we should offer our own employees to be -- to put the pension scheme, which is a group scheme for Danish employees to that company. But it has been fine with the current company for many, many years. So -- and we are not going to change anything for the sake of our own pension scheme as we are happy with that. So that's the facts around that acquisition. I think it was -- it came out a little bit different in this paper. Ian, over to you. Ian Smith: Yes. Namita, so on 2027 NII, we're not ready to actively plan for NII improvements and rate hikes at the moment. So I think it remains a scenario. And I think our Slide 19 is a good way to model the impact of that scenario. We've always been, I think, fairly consistent in showing those, the impact in both the first 12 months and then beyond of a 50 basis points movement. So our guidance has always been based on how we thought about things at Capital Markets Day last year, which is that the drivers of net interest income will be volumes and margins. We were planning for volume growth, both on the asset and liability side and margin stability. So we weren't baking in improvements in margin and a fairly neutral position on the hedge. I think that's still the right way to look at it. We do see, as I talked about earlier, some quite sort of tough margin pressure on the household side and we're absorbing that at the moment. But I think when we look out to 2027, growth in volumes on both sides of the balance sheet and margin stability is probably the right way to think about it. Ilkka Ottoila: And operator, we'll take the last question now. Operator: The next question comes from Nicolas McBeath from DNB Carnegie. Nicolas McBeath: So I was wondering, given the more positive view on productivity improvements that you mentioned through Q1 from AI, I guess, in particular, in software development, do you see potential to speed up the Nordic scale initiatives for these processes that you talked about in lending and payments, for instance, as we went through at the CMD last year? And do you see potential then to reach the cost-to-income target for 2030 before the time line given that you seem to become more bullish on this technology? Frank Vang-Jensen: So it's a good question, right? So -- and I cannot give you a firm answer. But what I can say is that the quality of AI is increasing fast. And what also increased very fast is, I think, most companies understanding of where they can apply AI -- deploy AI. And when you look at the use cases we have as a foundation for delivering on our Nordic scale benefits, they are on -- we are on plan and we will keep being on plan. But I do think that we can do even more. It's very difficult not to conclude with what we see when it comes to quality and also different use cases we continue to learn more about. It's very difficult to conclude that we don't have more optionality than we had previously. So then the question is how fast can you deploy it and how fast can you take out the cost. That's still up to be concluded, I would say. But it clearly looks even more positive when I look at it and we look at it right now compared to just half a year ago. So we are leaning in. We also have to ensure that we understand the risks, and we are not taking too much risks, but we're leaning in and we are pushing now. And I think when I get questions about it, how I see it, my advice is embrace it, understand the risk, cope with the risk, but embrace it because it is quite impressive what it actually can do for you nowadays. Nicolas McBeath: All right. I appreciate that. And then just a quick final question, if I may. Given the improved market conditions so far you've seen in Q2 and the decline in interest rates, would you expect much of the market making losses that you mentioned in March to be reversed in the second quarter? Frank Vang-Jensen: Ian? Ian Smith: Yes. So Nicolas, what happened in March was very much a sort of isolated performance matter on a couple of specific bits of our market business. So we talked about desks in the euro and SEK area. We sort of closed out positions where we needed to and moved on. So I think the real question is are we back to normal levels of performance in our markets business following that pretty disruptive market incident, and the short answer is yes. So we're back to performing normally. Ilkka Ottoila: All right. Thank you all for participating. As usual, just come back to us if there's anything that we can do for you. So thank you. Have a nice day.
Operator: Welcome to BONESUPPORT Q1 2026. [Operator Instructions] Now I will hand the conference over to CEO, Torbjorn Skold; and CFO, Hakan Johansson. Please go ahead. Torbjorn Skold: Thank you, operator. Welcome, everyone, to BONESUPPORT's Q1 2026 Results Call. My name is Torbjorn Skold, CEO of BONESUPPORT. With me here today is our CFO, Hakan Johansson. And together, we will use the next 25 minutes to guide you through the Q1 presentation and then open the line for questions. Before starting the presentation, I would like to draw your attention to the disclaimers covering any forward-looking statements we will make today. So let's look at the financial and operational highlights of the quarter. Q1 was another strong quarter with solid execution across the business. Net sales came in at SEK 324 million, corresponding to a growth at constant exchange rates of 31% versus Q1 2025. Reported growth was 14%, showing that there was a continued strong currency impact on our figures for the quarter. Our adjusted operating result, excluding incentive program effects, was SEK 85 million, corresponding to an adjusted operating margin of 26%. Reported operating result was SEK 72 million. We saw another quarter of solid cash generation with operating cash flows reaching SEK 75 million, resulting in a cash position of SEK 455 million at quarter end. We continue to see strong traction for CERAMENT G in the U.S. with sales reaching SEK 222 million for the quarter compared with SEK 178 million in Q1 2025. The sequential CERAMENT G growth quarter-over-quarter of USD 2.6 million was the strongest ever. In Europe and Rest of the World, we saw strong momentum across all markets with a growth of 16% at constant exchange rates compared to a very strong Q1 2025. Notable was also that our first CERAMENT sales in India were achieved during the quarter. During the quarter, the regulatory process for CERAMENT V progressed according to plan within the framework of the De Novo process. As communicated in early December, the FDA submission for CERAMENT V was transferred from a 510(k) pathway to the De Novo process in close dialogue with the FDA. If granted market authorization, CERAMENT V will constitute an entirely new product category like CERAMENT G did in 2022. Just as in the review of the De Novo application for CERAMENT G, both CDER, FDA's Center for Drug Evaluation and Research and CDRH, Center for Devices and Radiological Health are involved and the lead review team, which sorts under CDRH remains the same as during the 510(k) process. BONESUPPORT has received questions within the scope of the De Novo process and is working purposefully to address the requested details and clarifications. Responses are to be submitted no later than end of August. We are progressing with the early-stage launch of CERAMENT BVF for spine in the U.S. in line with plan. The introduction in spine is an important step as we continue expanding our portfolio of indications and applications. Now let's move on to the sales development. Next slide, please. The chart shows total last 12 months reported sales in Swedish krona by quarter since 2019 in stacked bars per region and product category. As you can see, the launch momentum for CERAMENT G in the U.S. is exceptionally strong. Given that we keep bringing new strong clinical studies and opening up new market segments and new indications, a product like CERAMENT G will remain in launch phase for many years to come. However, throughout 2025 and in the first quarter of 2026, we have seen strong influence from the U.S. dollar to Swedish Krona depreciation, which influences the optics of the graph, but not the end market performance, as you will see in Hakan's slides later in the presentation. Last 12 months growth in Q1 of 22% in the graph corresponds to an even stronger 35% at constant exchange rates. So the quarter-over-quarter slowdown in last 12-month sales is mostly due to strong currency impact. U.S. CERAMENT BVF last 12-month sale was flat year-over-year at constant exchange rates. In total, antibiotic eluting CERAMENT grew with 48% last 12 months in the quarter at constant exchange rates. Next slide, please. In U.S., sales amounted to SEK 267 million, representing growth of 35% at constant exchange rates. We continue to experience strong growth of CERAMENT G, driven by both increased access through new accounts and new surgeons as well as wider adoption among existing users. We see growth from all 3 prioritized platforms, foot and ankle, trauma and arthroplasty. At the American Academy of Orthopedic Surgeons Congress in March, presentations and discussions confirm the strong clinical interest in the CERAMENT platform and the commercial momentum in the U.S. Dialogues with surgeons and distributors show that CERAMENT G is perceived as a clinically relevant and practically useful solution in a broad range of procedures where there is a need for combined bone healing and effective infection control. During the quarter, clinical evidence was further strengthened through the publication of positive data for CERAMENT G. In February, the first U.S. clinical pilot study in trauma was published describing surgical technique and treatment results with CERAMENT G. The study conducted at the U.S. Level 1 Trauma Center and published in OTA International provides practical and real-world insights into how CERAMENT G is used in clinical practice in the U.S. Additional support was added in March through the first U.S. clinical case series focused on infection prevention in open fractures. By demonstrating how local antibiotic release can be combined with existing surgical techniques, the study highlights the clinical relevance CERAMENT G has within a segment with a high risk of infection. Despite the limited scope of the studies, they are of great practical importance as they provide concrete support regarding application techniques and expected outcomes for surgeons introducing CERAMENT G into their daily clinical practice. As part of our ambition to modernize an outdated standard of care in the U.S., we have successfully opened one market segment after another, starting with foot and ankle, followed by trauma and now moving into arthroplasty. Interest continues to grow for CERAMENT G in revision arthroplasty and periprosthetic joint infections, 2 areas where the clinical needs remain substantial and where the evidence supporting our antibiotic eluting technology has resonated strongly with surgeons. We have built a solid foundation for our spine strategy over the past quarters by establishing distributor coverage and preparing the market. In Q1, we continued the early-stage launch of CERAMENT BVF in spinal procedures with distributors now actively engaging spine surgeons across both existing and new partnerships. The surgeon access and early stages of adoption in spine follow plan and indicate the strength and potential of this segment. As this is a new clinical segment for us, more clinical data is needed to support broader market penetration. Importantly, the performance of CERAMENT BVF in spine will help confirm the value proposition for the CERAMENT platform, which will pave the way for the future antibiotic eluting CERAMENT launch. We've made strong progress in evaluating and preparing the regulatory pathway, and we'll share more on the path forward at our Capital Markets Day this spring. After Q1, U.S. CMS, Center for Medicare and Medicaid Services announced a proposed ruling, full year '27 IPPS in-patient prospective payment system, including changes that improve payments for the use of CERAMENT G in the treatment of complex orthopedic infections, such as periprosthetic joint infection, fracture-related infections and diabetes-related bone infection. In parallel, CMS proposes the introduction of more specific procedure and identification codes for CERAMENT G and CERAMENT V consistent with the company's submission. CMS also proposes new technology add-on payment, NTAP reimbursement for CERAMENT V effective October 1, 2026, provided that FDA grants the company's De Novo application by April 30, 2026. If FDA approval is obtained at a later point in time, we plan to submit a new NTAP application with a potential for additional payment from October 1, 2027. Although this is a proposed ruling, this is very positive for BONESUPPORT as it validates the uniqueness and value CERAMENT brings and reduces the potential financial barriers for using CERAMENT in daily clinical practice. The company intends to submit additional clarifications to the CMS during the ongoing 60-day public comment period. A final decision from CMS is expected in late summer 2026. Now let's turn to Europe. Next slide, please. Sales in EUROW came in at SEK 57 million, representing 16% growth at constant exchange rates. This is compared to Q1 2025, where we saw strong growth in EUROW, thus a very strong comparative quarter. We saw strong development across our 3 market structures, direct, hybrid and distributor markets. In our direct markets, the U.K. continued the recovery we saw during the fourth quarter of 2025. Our investments in hybrid markets developed well, underlining clear continued potential ahead. In our distributor markets, CERAMENT was launched as planned in India with a focus on the private market. We note some uncertainty in the Middle East, where geopolitical unrest is affecting market presence and logistics in the short term. Now I'll leave a deep dive into the numbers to Hakan. Håkan Johansson: Thank you, Torbjorn. Net sales improved from SEK 284 million to SEK 324 million, equaling a growth of 14% in reported sales growth or 31% in constant exchange rates. Torbjorn has already spoken about the solid performance in especially the U.S. and the major drivers behind the sales growth. But as the large movement in U.S. dollars compared with the first quarter last year somewhat hides a continued strong trajectory in the U.S., I would like to share the U.S. sales performance in U.S. dollars. CERAMENT V is the growth driver in the U.S. and this slide shows the quarterly CERAMENT V sales in the U.S. in U.S. dollars. And what we can note is an all-time high sequential growth resulted in accelerated growth in sales per workday. The contribution from the U.S. segment improved by SEK 25.5 million versus Q1 2025 and amounted to SEK 122.7 million. The improved contribution relates to increased sales after the effect of increased costs. Selling and marketing expenses during the quarter amounted to SEK 128.4 million compared with SEK 121.6 million previous year, of which sales commissions to distributors and fees amounted to SEK 85.1 million compared with SEK 78.8 million in the same quarter last year. From the graph at the bottom of the screen, showing net sales as bars and gross margin as the orange marker, it can be noted that the gross margin remains stable and strong at 94.5% with a minor decline in the period following a gradual impact from tariffs. In Europe and Rest of the World, a contribution of SEK 12.7 million was reported to be compared with SEK 15.4 million previous year. Selling and marketing expenses increased by SEK 6 million, mainly related to the previously communicated commercial investments in the so-called EUROW Booster program. From the lower graph and the orange marker, a minor improvement in gross margin can be noted, mainly impacted by market mix. Selling expenses, excluding sales commission and fees, increased by SEK 11.6 million, following commercial investments in both the U.S. and Europe, but also related to high intensity in terms of marketing activities. Research and development remained at a stable level and focused on the execution of strategic initiatives such as the application studies in spine procedures and the market authorization submissions for CERAMENT V in the U.S. And finally, administrative expenses, excluding the effects from the long-term incentive programs, remaining stable with an increase of SEK 1.4 million in the period. The adjusted operating result amounted to SEK 84.9 million with only minor currency effects impacting. I will come back to this on a later slide. The newly introduced tariffs in the United States had gradual impact on costs in the quarter. The full effect of a 15% tariff will equal an impact of 0.8 percentage points on U.S. gross margins, and this will come gradually with full effect later in '26. The difference between adjusted and reported operating results are costs regarding our long-term incentive programs amounting to an expense of SEK 12.8 million in the quarter compared with an expense of SEK 10 million previous year, as you could see on the previous slide. The increase in expense include SEK 1.6 million related to the long-term incentive program approved by the AGM in May '25, which was included in the accounts for the first time this quarter. Operating cash flow was strong in the period, partially supported by inflow of customer payments deferred from December to after the holiday season. During the period, the Swedish krona has experienced volatility against the U.S. dollar with a minor weakening towards the end of the period and with only minor exchange gains and losses reported as other operating income and expenses. The graph on this slide shows with gray bars how the relationship between the U.S. dollar closing rate and the Swedish krona has varied over time. This is read out on the right I axis. The blue dotted line read out on the left I axis shows adjusted operating result. The adjusted operating result, excluding translation exchange effects is the orange line and gives a more comparable view on the underlying trend in operating results. In the table below the graph, you can see that the FX adjusted operating margin of 25.5% in the period compared with 22.6% in the same quarter last year. In the shorter term, the operating margin is impacted by the commercial investments made in both EUROW and in the U.S. A gradual return to improvement in operating margin is expected as these investments are assumed to have positive impact on future sales growth potential. The relation between the U.S. dollar and Swedish krona has been stabilizing over the last 4 quarters, which becomes visible when comparing the adjusted operating result, including and excluding translation exchange effects on a rolling last 12-month basis. By the reported figures in Q1 this year, it is noticeable that the difference between including and excluding translation exchange effects is becoming narrower following a more stable relation to the U.S. dollar. The strengthening of the Swedish krona over time impacts both net sales and operating results as visible in the graph. A solid cash conversion has been reported continuously since third quarter 2024 with an average cash conversion of 81%, visible as the dotted line in this graph. Q1 this year reported ahead of the average, mainly due to the previously mentioned timing effects from customer payments. And with this, I hand back to you, Torbjorn. Torbjorn Skold: Thank you, Hakan. So to summarize Q1 2026, sales grew by 31% at constant exchange rates, reflecting steady and consistent progress. Highlights were sequential CERAMENT G growth in U.S. of USD 2.6 million, EUROW growth versus a strong prior year of 16% at constant exchange rates and record strong cash flow of SEK 75 million, underscoring the strength of the business and its scalability. I'm convinced that the most exciting part of our journey in BONESUPPORT still lies ahead of us. And as I said, to provide a clearer view of what that journey will look like, we will host a Capital Markets Day in Stockholm on the 26th of May this year, which you are, of course, all welcome to join. Now with that, we're opening the line for questions. Thank you. Operator: [Operator Instructions] The next question comes from Kristofer Liljeberg from DNB Carnegie. Kristofer Liljeberg-Svensson: Three questions. First, on the increased selling expenses here in the quarter. Would you say that you have reached a new level now? Or should we expect them to continue to increase sequentially? And related to that, how you think about the operational leverage here going forward? I noticed underlying EBIT has been more flat here sequentially. So would you expect it to pick up again here in coming quarters? My second question relates to the sales commission in the U.S. that seems to be down as a percent of sales. I noticed they are flat sequentially despite higher sales. If you could explain that? I know there's other variable costs included in that maybe as well. And then when it comes to the De Novo process for CERAMENT V in the U.S., if you could maybe explain a little bit what type of questions that FDA has and why you sound so confident that the product will eventually be approved and the risk of not receiving an approval? Håkan Johansson: Thank you, Kristofer. I will start answering the first 2 questions, and then I will hand over to Torbjorn to answer the question on the De Novo process. So let's start with the increased selling expenses. And again, as we have communicated also previously, we will continue to do gradual commercial investments if we believe that this is beneficial to sales growth. And on that theme, we have been both investing in the so-called EUROW Booster program, but we have also continued to strengthen our U.S. organization in terms of medical education activities, national accounts management and also more sales-related functions, et cetera, to continue supporting the growth and the aspirations in the 3 main segments in the U.S. So again, a gradual increase can be expected. But as we also mentioned in the call, we expect this to have beneficial impact also on sales and sales growth going forward, and we also expect that to come back with a gradual improvement in operating margins. When it comes to sales commission and fees, I'm glad that you noted that there is a reduction in the percentage to sales in Q1. And there is one main driver in this, and that is an activity that we've been running in the U.S. in the theme of balance sheet and process efficiency. And it's been a program to move customers from paying with credit cards to pay electronically over our bank systems. And this is an activity that has resulted in a lower cost for credit card fees and that is moving down sustainably, the fee is down with a percentage point. So that's the main driver by the reductions. There are some other reductions in the quarter, but they are more seasonality driven than anything else. But the main impact comes from reduced credit card charges. Kristofer Liljeberg-Svensson: And what did you say that impact as a percentage of sales? Håkan Johansson: It's 1% saving. Kristofer Liljeberg-Svensson: Okay. So this is a sustainable effect? Håkan Johansson: Yes. Torbjorn Skold: Okay. And then to the third question that you had around De Novo. So the way that we look at this and interpret this is, first of all, the De Novo process compared to a 510(k) process. It sets a higher bar. It sets a higher standard. That is not only a negative. It's actually also a positive, meaning that it strengthens the moat. What we also see is the pattern that we see from the FDA is very, very similar to the De Novo process that we had for CERAMENT G. What I said on the call, and I think it's also important to highlight is that as part of the 510(k) process, the department of the FDA that was involved was the CDRH, so the Center for Devices and Radiological Health. They were involved. They are still involved and they are still leading the audit. As we move to a De Novo process and as this product is a combination product, so it's a device with drug-eluting properties, then the CDER, so the Center for Drug Evaluation and Research is also involved. They're brought into the process. The questions that we have received are more of the nature of being explanatory, clarifying rather than anything else. The 3 areas, which is also fully expected and planned for are in the areas of preclinical, clinical and biocompatibility. Now we're working on these questions diligently, and we want to answer them in a disciplined and robust way to make sure that we properly inform, educate, if you will, the FDA to understand what this technology does with CERAMENT V, what it already does with CERAMENT G, which is FDA approved. And also this is a product. CERAMENT V is a product that has been approved outside of the U.S. for many, many years. It is used every day in patients. So with that, I feel comfortable that it's more of not so much if we get approval, it's more of when we get it. And having said that, we control what we can control, how FDA reacts and responds that is outside of our control. But I feel comfortable that we're on the right path, and we will get it to market. It's more a question of when. Kristofer Liljeberg-Svensson: Could I ask -- sorry, but just it's not that they're requesting more data similar to what happened with CERAMENT G. Torbjorn Skold: So far, it's more explaining and more details of the existing data that we have already provided. Operator: The next question comes from Mattias Vadsten from SEB. Mattias Vadsten: I have a few. So I think, as you pointed out, a solid quarter-over-quarter sales growth for CERAMENT G in the U.S. So if you could just tell me if there is something nonrecurring or extraordinary supportive in the quarter or if this is purely better penetration? And if so, what are the key contributors? You mentioned all of the areas, but anything to point out there? That's the first one. Torbjorn Skold: Okay. So boring answer. No, it's no one-timers. It's no nonrecurring. It is more of the same that we've seen in the past. And the growth comes from all the 3 segments: foot and ankle, trauma and arthroplasty. And in absolute numbers, all 3 contribute positively. Of course, there's a lot of excitement internally and externally in our 2 newer segments, so trauma and arthroplasty, but all 3 segments contribute in a meaningful way in the quarter. When we look at existing and new accounts, it's very much the same trend that we saw in 2025 throughout the year and also at the end of the year, meaning that we get meaningful growth from both existing accounts increasing their adoption as well as we see meaningful growth coming from shifting from awareness to access with access on many different layers. So yes, unfortunately, there's no -- there's nothing more exciting than that, Mattias, to your first question. Mattias Vadsten: That helps. My next one -- or can I just follow up in terms of working days, were they the same in Q1 vis-a-vis Q4? And what do you see here in the second quarter coming up? Håkan Johansson: So it's correct. So it's on the same level as Q4. So it's 61 days. And the number of work days is increasing in Q2, despite now starting with Easter holiday and with the risk of remembering wrong, but I believe it is 63 days in Q2. Mattias Vadsten: I have a few more. In terms of CMS proposing changes that improve the payment for using CERAMENT G, as you mentioned also in the presentation here, can we say anything on magnitude? And can you refresh us just how important the CMS exposure is for both [indiscernible] and so on? Torbjorn Skold: Yes. No. So first of all, it is a proposed ruling. So it is not -- it has not been approved. It's not been decided on yet. That's one piece. Number two, this full year '27 IPPS document, fully public, so all of you can go ahead and read it, knock yourself out. It's 1,600 pages of text of a very small portion of that, but still quite a bit of text related to CERAMENT. As it's complex, as it's many different codes impacted and several indications impacted. And when we look at it and when we also have advisers looking at it, it also -- there is a bit of interpretation in it. So we don't want to draw too many conclusions and too many specific conclusions yet. However, on a total level, on a high level, it is very, very positive. And pretty much everything that we requested in our submission pretty much went through. We have a couple of clarifications on how we should interpret it. But overall, it's very, very positive. And there are many layers in this proposed rule. And I think some of them you can sort of peel out or take out separately. One is the proposed NTAP for CERAMENT V. It's pretty standard. We would have been disappointed if we didn't get it. So that's one thing. The other thing is the extension of NTAP for CERAMENT G for open fractures. That is also sort of expected and you can strip out. What remains -- so if we strip those out, and those are very positive for us, what remains still is, in my mind, even more sort of strategically important for BONESUPPORT because it highlights a couple of things. Number one, it highlights that CMS continues on the path to pay more for outcomes rather than activities. Why that is important for BONESUPPORT is that, yes, we have a very expensive product. But the whole value proposition with CERAMENT is to avoid infections, avoid revision surgery, avoid readmissions. It is clear, not specifically only to CERAMENT, but in general, in this proposed rule that CMS is going in that direction. So that is very positive. And then you can see in diabetic foot infection, you can see it in also fracture-related infection and also periprosthetic joint infection. CMS proposes to incentivize technologies like CERAMENT and also, to a certain extent, almost use CERAMENT as a trigger point for a higher reimbursement because CERAMENT is very much linked to cases that have higher complication, higher comorbidities. So -- and I know you guys want a specific number, how much will sales go up? We cannot provide that. We don't know yet. It's complex material. We're analyzing it. But we're very, very pleased and satisfied with the proposed ruling and look forward both to the clarifications that we expect in the next couple of weeks and also the ruling to come into effect later this year with full effect next year. Mattias Vadsten: But that's helpful. Lastly, I have a follow-up to Kristofer's question regarding CERAMENT V in the U.S. So if I catch this correctly, the 150-day review period will pause and it will resume when you submit your answers or call it, clarifications. So with this in mind, what kind of delay do you think we're looking at here in the process? Is it a couple of months or and also August, is that sort of a formal last date, not necessarily means that BONESUPPORT will resubmit in August, I guess. Torbjorn Skold: So I'll answer it. Number one, Yes, you're correct in your first statement about the timing and the clock there. That's number one. Number two is knowing how and what -- how FDA and what CERAMENT -- what FDA will do is impossible for us to guess. So whether it's the delay or not, it depends on who you ask. Now what we want to do and want to make sure is that we answer the questions in a disciplined, robust way so that we get the approval in a way that we wanted to, not only as fast as possible, but in as a robust way as possible. So that's what we're doing. But again, you never know with the FDA. Now the end August time line that we communicate, that's the formal deadline. I mean, we will use that if we feel that it is necessary and we feel that it is good for the process. If we feel that we can submit it faster than end August without risking the quality of the material and the outcome of the process, we will, of course, do that. But end August is the latest formal deadline that we have. Mattias Vadsten: But it's still reasonable to expect it to be cleared in 2026 with all of this in mind. Torbjorn Skold: Well, it's always difficult to guess what FDA does. I feel comfortable that we're on a good path. It's not so much a question. If it could be in '26, that's my best guess. But if it needs to be extended to '27, it's worth waiting for, for sure, if we put it that way. Operator: The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: Just sorry for going back to this CERAMENT V. I'm not sure if I got it right here, but could you please confirm that you do not need to carry out any additional clinical studies in order to be able to answer the questions from FDA. Is that correct? Torbjorn Skold: That is our current hypothesis and current assumption. So yes, that's correct. Sten Gustafsson: Perfect. My second question is regarding sort of the -- if you look at the sales split of CERAMENT G and CERAMENT V in Europe, is it possible for you to see in how many cases you use both products at the same time, i.e., where there's a super broad infection, whether doctors use it in combination? Torbjorn Skold: So just so I understand the question, are you referring to OUS? Sten Gustafsson: Yes. I mean in Europe, for example, where both products are approved and being used CERAMENT G and CERAMENT V, do you have a feeling for how many procedures doctors use both products at the same time? Håkan Johansson: We know anecdotally that it happens, but we have no somehow data-driven substance that we can lean towards, et cetera. But we know anecdotally that it happens. By that, it is not extensive somehow in terms of using both. Sten Gustafsson: I get it. Excellent. And the sort of the split do you have a feeling for that in terms of procedural usage? Håkan Johansson: With some volatility, it's somewhere between 25%-75%, 20%-80%, where some of the largest use is on CERAMENT G. So roughly 25%-75%. Sten Gustafsson: Okay. Perfect. My last question is regarding Germany. I'm not sure if I missed it in the report, but are there any comments on how Germany is developing for you? Håkan Johansson: So Germany is, in a way, somehow positive because it's stable. And what do I mean with that is that somehow it feels like somehow it's trending on the same level as previous quarter, meaning that we don't see a decline. And I think that's a first good sign that again, as we have commented, we're still focusing on Germany. We still have strong relations to German hospitals and German surgeons, et cetera. And I think that for Q1, we're glad that we see that the development is stabilizing. Operator: The next question comes from Erik Cassel from Danske Bank. Erik Cassel: I wanted to focus a bit on the trauma centers in the U.S., which you gave figures for in last quarter. I mean, penetration rate was obviously quite high. But is it possible to now that -- I mean, they've done pilots potentially up to a year ago to talk a bit about the current, say, conversion rates from pilots to continued use? And then also if you can say anything on how high, say, the continued use is as of now and how many of those are still in sort of an evaluation phase? Torbjorn Skold: Okay. Thank you, Erik. I mean we don't provide -- we will not provide any numbers to answer your questions, but we can provide a bit more color on your question related to trauma in the U.S. So as I mentioned, we saw that all 3 segments contributed in a meaningful way for the quarter. That includes also trauma. So we see that the journey that we're on in trauma follows the plan and follows the expectations. I also said that there's a lot of excitement internally as well as externally around trauma and arthroplasty. That speaks to it. I think what creates internal and external excitement and helps us on this journey that you referred to are the 2 studies that we talked about earlier. I know that actually, you didn't really -- you quoted that those were not really meaningful studies. I would argue against that and say that they are very meaningful for us from a commercial perspective, and they get traction because it's a great way for us to talk about our product in a practical evidence-based way. So we're seeing in trauma, there's continued excitement. We continue to move from awareness to adoption -- sorry, from awareness to access to adoption. So now we're becoming more in the access and adoption phase with many, many more years to come in trauma, partly supported by the evidence that we provided. But we don't really give on a quarterly basis any data that you're asking for, Erik. Erik Cassel: Okay. That's fair enough. And then I also wanted to sort of repeat a question from Kristofer and see if we can get a bit more detail on it. I mean, you said in the report that the commercialization costs are going to peak this year sort of. But is it possible to maybe quantify or frame it in a bit more detail the implied cost ramp we're going to see this year and how that also transitions into '27? Because it makes it sound like the incremental margins this year might be a bit worse than what we normally see. So I just want to make sure that we get the expectations right on this. Håkan Johansson: It's a fair question, Erik. And again, I think that has been a repeated theme from our side is that we will -- and I promise you, we will continue to do commercial investments if we believe that this will be beneficial for continued sales growth. And on that team, we have the EUROW Booster as we've communicated, I think it's more than a year ago. And that the EUROW Booster is adding SEK 10 million in incremental cost, and it will take at least 18 months until that program is returning somehow sales that covers the cost. In the U.S., we have been gradually strengthening the organization. And if we just look at current plans, that means that from during second half of last year and going into this year, we are adding 10 heads into our U.S. organization because we believe that this will be beneficial for the U.S. sales growth. That will create in the shorter term, a reduced positive trend in terms of operating margin. But as we said on the call, we are strong in our view and believe that this will come back to continued gradual improvements in the operating margins. Torbjorn Skold: Absolutely. And on top of that, I mean, if we look at this case on a more of a couple of years basis, there's plenty of operational leverage in this business with what we're doing. We've taken quite substantial investments, both in EUROW as well as in the U.S. So if you take a more longer-term perspective, there's no change in the potential of the operational leverage of this business on the contrary, when we look at that internally and strategically in the more longer-term horizon. Erik Cassel: Okay. And then I wanted to touch upon the U.S. BVF sales. That was, I guess, a soft point in this report. Previously, you've more talked about the BVF products perhaps becoming an add-on to CERAMENT G, so that you get new accounts doing CERAMENT G and then they also start to use the BVF product. Now it more looks like that there's cannibalization on the BVF product. Have you changed the -- what you're seeing for BVF and sort of the, say, longer-term implication of that? Or are you actually seeing any CERAMENT G accounts also picking up BVF? Håkan Johansson: So I think that in the longer term, we stay firm with that view because again, we continue to see that surgeons that has been -- that we're bringing on somehow thanks to CERAMENT G are also using the BVF product for surgeries that -- where there is none to very low infection risks. I think that what we've seen in the first quarter is, in a way, not negative for the longer term because what we've seen that somewhat explains some of the softer sales of the BVF in the U.S. is surgeons that has been traditional and solid BVF users have converted and increased its use of CERAMENT G. We believe that is positive, even though it may have a short-term impact on the BVF sales. But again, statistics shows that somehow with CERAMENT G as a growth engine, bringing in new surgeons, we also see that those surgeons are using BVF. So over time, we believe the BVF first will stabilize, but then we will see low-digit annual growth coming back. Erik Cassel: Okay. But on the timing of that, it now looks like it's cannibalization. Do you think that will continue? Or is this sort of a stable rate do you think for that product? Håkan Johansson: I think it's too early to say because it was really visible this quarter in a stronger way than what we've seen, et cetera. So Erik, I'm sure let's come back to that question after Q2 and see somehow if that trend remains. Erik Cassel: Okay. Just the last one, if I may. On the gross margin headwind from tariffs, I understand that as you're, of course, manufacturing the products with contract manufacturers. Is it possible to say in the medium term, transfer production locally to the U.S. to sort of offset this? Or is the relative cost in the U.S. basically too high, so it wouldn't be enough of an offset to actually do that? Håkan Johansson: From a purely practical point of view, that could be a consideration. But from a regulatory point of view, to move production is a very timely and costly process. So we will continue to -- as the business in the U.S. grows to look at various options when it comes to manufacturing. But here and now and to offset tariffs, somehow, it's not a helpful strategy. Operator: The next question comes from Oscar Bergman from Redeye. Oscar Bergman: Thank you for very interesting report as always. I have a few questions left. I think maybe the first one, if you could just sort of clarify the constant exchange rate growth for CERAMENT G in the U.S., I think it would be helpful. Håkan Johansson: Yes. So explaining in terms of? Oscar Bergman: The constant currency exchange growth for U.S. CERAMENT G in Q1. Håkan Johansson: So again, as we showed in the graph, somehow, the sequential growth of CERAMENT G in the U.S. was USD 2.6 million. And that is somehow what's supporting the statement and the numbers reported and made. So sorry, maybe it's too early morning for me, but I think you have to clarify really what you're after, Oscar. Oscar Bergman: Yes, I was just thinking -- okay, maybe I have to check the report again, those numbers maybe was too early morning for me as well. I think we can just move on to the other question instead. Håkan Johansson: Yes. Oscar Bergman: I know CERAMENT BVF for spine is still very early stage, and you don't report this separately. But could you just give some sort of ballpark figure or anything that helped me sort of decipher the sales contribution so far? Torbjorn Skold: Yes. So the spine BVF launch follows plan. And the plan, just to remind everyone, but this is very important. It is that we take a very, very focused approach on spine BVF. And we've said that from a revenue perspective, it will not have any material impact on the overall numbers on the total or even on the BVF side. So we're really -- it's really small numbers for spine BVF. And the reason for that is simply we're not in spine. We're not going after spine to sell BVF. Our hypothesis on spine is that it's a very attractive segment for us offering a product that does the 2 things that CERAMENT does perfectly, meaning healing bone and in a very controlled, predictable way, elute antibiotics. So from a sales point of view, spine BVF, I wouldn't put any material numbers in that, if that's what you're going after. However, what is very positive to see in Spine is that our hypothesis and assumptions about that segment in terms of the strength of the value proposition is being confirmed in the quarter. So -- but also just to manage expectations, to come with a product, an antibiotic eluting product into spine is a couple of years out. We need the clinical evidence. We need the regulatory approval. So that still remains the same. So no change really. But Q1 in spine with BVF confirmed at least what we see that we're on the right track and our assumption and hypothesis so far remain valid. Oscar Bergman: But can you share any numbers on maybe a number of customers that have tried out the product or...yes. Torbjorn Skold: I mean, no, we don't provide any specifics on that. But these are -- we have wanted to keep it low. That's how we want it, and we're being very selective in which accounts we're going after. And to be fair, we could have gone for more accounts if we wanted to and actively promoted it more, but we want to keep it very strict, very disciplined, very controlled so that we do it in the right steps for the long-term case of CERAMENT in spine. Oscar Bergman: And I guess it's a fair assumption that you are targeting customers where you already have some experience with CERAMENT G for extremities? Or are you going for hospitals outside your sort of current customer base? Torbjorn Skold: We're doing both, to be honest, because, I mean, again, it comes back to that you want the right surgeon, you want the right hospital that believes in our hypothesis of CERAMENT in spine, that believes and acknowledges the fact that infection is an issue and that also believes and buys into the characteristics of CERAMENT. Sometimes they come in already existing partnerships with our independent sales reps in extremities. Sometimes they come outside. So we're not fundamentalistic that they have to come from the existing distributors. But -- so we see a combination of both. Oscar Bergman: And I know you have a CMD in about a month's time. And I guess we'll hear more about the Spine segment there. But do you still expect it to be registered as a medical device and not having to go through a drug registration process? Torbjorn Skold: Yes. I mean -- so our approach here is that we're a medical device company. We want to remain a medical device company, similar to what we have done with CERAMENT G and CERAMENT V. And that's also our plan and thinking on spine. Oscar Bergman: Okay. And just maybe a final question. The launch in India, I'm very happy to hear that you have first sales there already, but I suspect it's very small numbers still. Can you give some words on the progress here and maybe what we should expect for the full year? Torbjorn Skold: Yes. No, absolutely. I mean, I sit here next to our CFO. He's super excited because it's not like we've only launched and we've only also sold it. We've actually done cash collections. So for once, Hakan is on good mood when it comes to India. So that's great, which is positive. But you're absolutely right. It's just the start. And in Q1, it's small numbers. And it's going to be small numbers as it always is when we enter a new country. With India, it's very exciting for a couple of reasons, meaning that if you look at the size of the total population, it's massive. We're not going after that. We're going after a niche segment of that population. So private pay and closely sort of managed with private hospital chains where we have a good collaboration and good trust. But even in our smallest estimates, the segment that we're entering, it's a sizable country in -- or it corresponds to a sizable country in Europe with margins that are similar to distributor margins in Europe. So that's why we are excited. But it's early days. It takes time, but so far, very pleased with what the team has done there and the progress that we've seen. But again, small numbers in Q1. And hopefully, we'll work to make those numbers grow fast in the couple of years. Operator: There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments. Torbjorn Skold: Okay. We have a couple of minutes left, and we still -- we also have a couple of questions on the chat. And then we'll just quickly read through. One question is -- and I'll leave this to Hakan. So I will read Hakan and then you'll prepare. So Hakan, could you please help us on the R&D spend for 2026? Should we expect a similar ratio versus sales as seen in Q1 and 2025? Håkan Johansson: So again, I think that what we've seen is a very stable run rate the last 4 quarters. And I think that's a good baseline to start from. The uncertainty that we have is some pending the discussions with the FDA and the regulatory pathway to get an antibiotic eluting product approved for spine. And we believe that, that will include and involve clinical studies and the absolute cost levels and the timing of these costs remains to be clarified, and that will add to the run rate. Torbjorn Skold: Okay. Good. Another question we have is around dividends and capital allocation. And I'm going to read it and then Hakan, you will answer it. So why do you not consider a dividend appropriate at this time? What do you intend to do with the assets and the cash position of nearly SEK 500 million? Håkan Johansson: It's a good question. And again, some, it is good to have a solid underlying cash flow because that builds also confidence in the business for any future investments, et cetera. But also saying that, we understand and we see that we are generating more cash than the business needs in short to midterm. And there is also a good reason why the Board proposed to the AGM, the upcoming AGM in early May to get a mandate to buy back shares in the market as one way to allocate the funds that the business is generating. Torbjorn Skold: Okay. And then we have another question related to CERAMENT V on the chat, and it goes like this. Do you expect that you will reply to FDA's questions regarding CERAMENT V before summer? So what we've said is that we -- the deadline that we have end August, we will reply to the FDA questions before end August. So we confirm that what we already said. And then I believe there's one last question on the chat, and it relates to the SOLARIO study. And it says, when will the full report of the SOLARIO study be fully published? Or won't it be? So we -- I mean, again, we don't manage the submission to the scientific journal. This is done by the lead authors. But we have good reasons to believe that the SOLARIO study will be published in the near term, exactly when and exactly which journal remains to be seen, but we have good reasons to believe that it will be published as per plan, and we also have we believe that it will confirm this paradigm shift that we see and hear about related to using systemic antibiotics versus local antibiotics. So we feel we have a good and positive outlook on the SOLARIO study. So hope to see something there in the short to medium term. I believe that is it. That concludes. That concludes. So with that, right on time. Thank you all for dialing in. And again, a warm welcome to the Capital Markets Day in Stockholm on May 26. Thank you very much.
Operator: Good morning, and welcome to AT&T's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference call over to our host, Brett Feldman, Treasurer and Head of Investor Relations. Please go ahead. Brett Feldman: Thank you, and good morning. Welcome to our first quarter call. I'm Brett Feldman, Treasurer and Head of Investor Relations for AT&T. Joining me on the call today are John Stankey, our Chairman and CEO; and Pascal Desroches, our CFO. Before we begin, I need to call your attention to our safe harbor statement. It says that some of our comments today may be forward-looking. As such, they are subject to risks and uncertainties described in AT&T's SEC filings. Results may differ materially. Additional information, as well as our earnings materials are available on the Investor Relations website. I also want to note that the quiet period for FCC Spectrum Option 113 is in effect. During this period, applicants are required to avoid discussions of bids, bidding strategy and post-auction market structure with other auction applicants. And finally, I want to note that the discussion of our operating results and outlook during this call will be on a continuing operations basis. With that, I'll turn things over to John. John Stankey: Thanks, Brett, and good morning, everyone. I appreciate you joining us today. We executed well in the first quarter, delivering results that were consistent with the outlook we provided, while implementing several key strategic initiatives. Last quarter, we told you that we had positioned AT&T for improved growth with our investment-led strategy in fiber and 5G. There's clear evidence of this in our first quarter results. We reported 584,000 total fiber and fixed wireless advanced Internet customer net additions. This is our best ever first quarter result in the sixth consecutive quarter with over 0.5 million consumer and business net adds. We also continue to see accelerated pace of our customers' purchasing through wireless and Internet connectivity together. 42% of our advanced home Internet customers also choose AT&T Wireless. But when excluding the transaction with [ Lumin ], this convergence rate approached 45% on an organic basis during the first quarter. This is more than a 3 percentage point increase compared to last year, which is our fastest ever year-over-year convergence growth rate. These results are encouraging but not surprising. It is exactly what customers have told us they want. They're increasingly choosing what we believe to be the best combined fixed to mobile Internet service in the market. When our customers choose AT&T for their wireless and Internet connectivity, they consistently express stronger brand love, higher Net Promoter Scores and ultimately stay with us longer. During our Analyst and Investor Day in 2024, we shared a few data points highlighting the relative improvements that we see among our converged customers in key operating metrics such as customer lifetime values and churn. These benefits remain robust, and we expect [ that as ] a greater portion of our customers purchase their wireless and Internet connectivity from AT&T will demonstrate improved trends in churn and additional improvement in account growth. During the first quarter, we made further progress at positioning AT&T as the preferred provider for connecting consumers and businesses to the Internet. We closed our transaction with Lumin, ahead of schedule, adding 1.1 million fiber customers, and over 4 million fiber locations. We're pleased with the progress we're making as we integrate [ these ] assets in several major metro areas and position the business for faster growth. Early indicators are positive. We now offer fiber services throughout our distribution channels in these areas, which has driven sales activity well above pre-transaction trends. We're executing the steps to scale engineering, construction and service delivery in the acquired geographies, expected as we move into the back half of the year, will achieve steady improvement in fiber and wireless customer growth in these areas. When we focus on customers' needs and invest in the experience and products they want, we find success, and in the first quarter, we gave customers more reasons to choose AT&T. We expanded the AT&T guarantee to cover Internet Air and launched a new flagship app to deliver a simple digital-first experience to customers. We also launched AT&T [ OneConnect ], which enables customers to easily connect all their eligible devices at home and on the go, and eliminates the need to buy Internet access twice. We refreshed our Unlimited Your Way plans to deliver more value. All these moves are based on a consistent set of principles that drive our approach to serving customers the way they want to be served, with offers that deliver simplicity, value and choice and converged connectivity. After years of industry-leading investments in our fiber and wireless network, we believe that we have now established a structural advantage that others will not catch. We reached more than 90 million customer locations across the country with our advanced Internet services, over either fiber or 5G. We believe this provides us with more scalable reach and converged connectivity than any of our peers, including a meaningful scale and performance advantage in fiber. This is an advantage we're growing as we ramp our deployment at a faster pace than anyone else. Today, we reach over 37 million customer locations with fiber, and we're on track to reach 60 million plus locations by the end of the decade. As I discussed last quarter, when we complete our work at a fiber location, we believe we're able to offer that customer access to the Internet on a lower marginal cost structure than any competitor, with superior performance and an industry-leading experience on America's best and fastest home Internet. This positions AT&T to compete on performance and value by putting our service at the center of our converged offers and shifting the focus away from expensive device subsidies. You saw us lean into this advantage with the launch of AT&T OneConnect, the industry's first ever single subscription service for fiber and wireless with a flat monthly price. This is how you should expect us to go to market as we accelerate the expansion of our fiber availability, with offers and marketing strategies that yield attractive returns by driving deeper fiber penetration and growth in converged customer relationships. Running these plays has not only strengthened our performance in the consumer market, but they've begun to demonstrate that the same strategy can strengthen our business enterprise operations. During the first quarter, Advanced Connectivity business service revenues stabilized on a year-over-year basis for the first time ever. This reflects improved growth in fiber and 5G that is now offsetting declines in transitional services such as VPN, as we drive better sales execution [ across an ] expanding footprint of business locations that we can reach with fiber and fixed wireless. We're operating from a position of strength as we lean into the strategic foundation we've built. Our investments have positioned us to accelerate and scale the execution of our strategy in 2026. And through the course of the year, you can expect to see the momentum in our operating trends build. As we continue our journey forward, our strategies and capital allocation will remain focused on meeting the Advanced Connectivity needs of consumers, businesses, the public sector and first responders they adopt and rely on AI-enabled tools and applications. We expect AI to fundamentally transform network requirements beyond download speeds to the ability to support [indiscernible] capacity, ultra-low latency and session control across multiple access technologies under sustained load. And that's how we're architecting our converged network. We've committed to greater investment than any of our peers in the U.S. connectivity infrastructure. And by the end of this decade, we expect to operate the most advanced and open communications network in the U.S., built on a foundation of dense metro fiber and deep nationwide spectrum. With the opportunity to reach more end users than our competition, coupled with our historically scaled metro and long-haul core, AT&T is well positioned to lead our industry in AI-ready connectivity. Investment in high-performing networking is a critical component of a competitive American AI ecosystem. We continue to appreciate the leadership of SEC Chairman [indiscernible] in the commission's continued efforts to modernize America's networks. What we see transpiring on the federal policy front are the absolute right moves for the U.S. to sustain leadership in communications infrastructure at this [indiscernible] moment and the birth of the AI economy. I reflect on this moment within the context of AT&T's milestone celebration of the 150th anniversary of the first phone call. For a century and a half, we've adjusted this in markets, technology and the evolution of public policy. It's a story of many chapters over 150 years shared by proud and dedicated AT&T employees and retirees, consistently rising to our long-standing call of the spirit of service. While all the chapters are important, some turn out to be more consequential than others. And I believe we're entering one of those chapters that will be exactly that. I couldn't be more optimistic given how this company is positioned itself as we enter this defining moment, that our best days are ahead of us. With that, I'll turn it over to Pascal. Pascal Desroches: Thank you, John, and good morning, everyone. At a consolidated level, total revenues were up 2.9% year-over-year in the first quarter, and service revenues were up 1.4%. Our growth is increasingly driven by gains in fiber and fixed wireless Internet customers, as well as our success at growing customer accounts that choose AT&T for both Internet and wireless connectivity. We continue to expect we will grow consolidated service revenues in the low single-digit range for the full year, driven by growth in wireless service, fiber and fixed wireless revenues, partially offset by declines in transitional and legacy revenues. Adjusted EBITDA was up 2.3% year-over-year in the first quarter, and adjusted EBITDA margin decreased 30 basis points to 37.4%. As a reminder, our first quarter 2025 results included a benefit to adjusted EBITDA of approximately $100 million related to the resolution of vendor [indiscernible]. During the first quarter, we made good progress executing against our ongoing transformation initiatives as we work towards achieving our target of $4 billion in annual cost savings by the end of 2028. These include force optimization and federal rationalization, efficiency gains from further AI enablement, accelerated digitalization efforts and reductions to our legacy operations and support costs. We expect improved growth in adjusted EBITDA in the second quarter as comparisons normalize. Service revenue growth improves and as we implement further cost actions. And we continue to expect consolidated adjusted EBITDA growth in the 3% to 4% range for the full year. Free cash flow was $2.5 billion, which is at the high end of the $2 billion to $2.5 billion outlook we bought in January. Free cash flow declined by roughly $600 million compared to last year, which was driven primarily by higher capital investment of $5.1 billion as we accelerate the pace of our fiber deployment. For the second quarter, we expect free cash flow in the range of $4 billion to $4.5 billion, and we continue to expect $18 billion plus of free cash flows for the full year. Adjusted EPS of $0.57 in the first quarter was up nearly 12%, and we continue to expect full year adjusted EPS to be in the $2.25 to $2.35 range. Under our new segment reporting, over 90% of our consolidated revenue and nearly all of our adjusted EBITDA is generated by our Advanced Connectivity segment. We believe this new reporting format improves transparency into the growth we are achieving from our investments in fiber and 5G, as well as our progress at powering down our legacy copper network. Focusing first on Advanced Connectivity. Service revenues were up 3.6% compared to a year ago. Wireless service revenues grew 1.7% year-over-year which is consistent with our guidance [indiscernible] growth in the first quarter would be below the run rate we expect for the full year. Our wireless service revenue growth was primarily driven by growth in our customer base, including 294,000 postpaid phone net adds in the first quarter. Postpaid phone ARPU was flat versus a year ago. This is consistent with the outlook we provided for relatively stable ARPU as we gain customers in underpenetrated categories such as the value segment and grow our base of converged accounts that receive discounts, but typically stay with us longer. We expect second quarter year-over-year wireless service revenue growth to improve from growth reported in the first quarter and maintain our full year outlook for growth in the 2% to 3% range. This is driven by our outlook for customer gains from our new unlimited and converted subscription plans, and our expanding opportunity to sell wireless and home Internet services together. It also reflects our recent pricing actions that take effect during the second quarter. Advanced home Internet service revenues grew 27.3% year-over-year. This includes 2 months of revenues from fiber customers in geographies we acquired from [indiscernible], which added about 650 basis points to our reported growth rate in the quarter. Similar to wireless, our organic growth in Advanced home Internet service revenue was primarily driven by growth in our customer base. Advanced home Internet net adds were 512,000, which does not include the 1.1 million customers we acquired from [indiscernible] in early February. This was our best ever first quarter, and included 273,000 fiber net adds and 239,000 Internet Air net adds. We continue to expect that our fiber reach will grow by about 8 million locations in 2026, including over [indiscernible] new locations we acquired from [ Lumen ]. As we ramp our fiber reach, we expect to see improved trends in our fiber net adds over the course of the year while still considering typical seasonality. We are also seeing strong growth in our business fiber and advanced connectivity service revenues, which include business fixed wireless and value-added services. In the quarter, these revenues grew 7.2% year-over-year which is consistent with the trend last quarter and improved from mid-single-digit growth a year ago. As John noted, total Advanced Connectivity business service revenues were essentially flat year-over-year for the first time ever. Based on our improved sales execution and expanding fiber reach, we expect total business service revenues within Advanced Connectivity segment to remain stable in the near term and continue to grow at a low single-digit CAGR through 2028. Advanced Connectivity EBITDA grew 5.6% year-over-year, and we improved EBITDA margin by 30 basis points despite a few notable headwinds. These include high single-digit growth in low-margin equipment revenues, as well as the inclusion of revenues and geographies acquired from [ Lumen ], which did not make a material contribution to EBITDA in the quarter. In addition, about 40% of the adjusted EBITDA benefit from the vendor settlements we called out in the first quarter of 2025 was incurred in the Advanced Connectivity segment. So the improvement in Advanced Connectivity EBITDA margin was driven by service revenue growth, as well as the durable benefit of cost actions that I discussed earlier. Our outlook continues to anticipate immaterial EBITDA contribution this year from the operating regions acquired from Lumen. This reflects increased spending within these geographies to stand up a business that is positioned for faster growth in fiber and wireless customers, as fiber deployment accelerates and as we leverage our existing distribution in these regions. We're really pleased with how the business is positioned coming out of the first quarter and continue to expect Advanced Connectivity service revenues to grow 5% plus this year with EBITDA growth of 6% plus. Legacy service revenues declined about 25% year-over-year, which is consistent with our outlook for 20% plus decline in 2026. We stopped taking new orders for legacy services last year in most of our wireline footprint, and we now have approval to discontinue legacy services in more than 30% of our [indiscernible]. We're actively working with customers in these areas and helping them upgrade to more advanced services like Internet Air and [ Phone Advance ]. There is a lag between when customers migrate to more advanced services and when we are able to discontinue operations [indiscernible] infrastructure. This is the primary reason why the decline in legacy EBITDA of about 40% was greater than the decline in revenue. And we expect this dynamic will persist for the next several quarters. We ended the first quarter with net debt to adjusted EBITDA of 2.71x, which is up from 2.53x at the end of the fourth quarter last year. This was primarily due to the close of the transaction with [ Lumen ]. We continue to expect that our net leverage ratio will increase to approximately 3.2x following our transaction with EchoStar, then declined to approximately 3x by the end of 2026, and return to a level consistent with our target in the 2.5x range within approximately 3 years following the transaction. We ended the first quarter with $12 billion in cash and with $19 billion available to draw under term loans. So we are in a strong liquidity position as we prepare to close our transaction with EchoStar. We also continue to expect that we will close the transaction with an equity investor for the acquired Lumen fiber assets during the second half of the year. We returned $4.3 billion to shareholders in the first quarter through dividends and share repurchases. We continue to expect to repurchase approximately of stock this year and to maintain a consistent pace of buybacks through 2028 as we execute against our plans to return $45 billion plus to shareholders over this time period. I'm really proud of the team's ability to successfully balance our investment in fiber and 5G, while maintaining consistent return to shareholders. To wrap up, we continue to execute well, and I'm confident that we're positioned to drive improved growth and consistent capital returns through 2028 as we execute on our strategy. Brett, we're now ready for the Q&A. Brett Feldman: Thank you, Pascal. Operator, we are ready to take the first question. Operator: [Operator Instructions] The first question comes from John Hodulik from UBS. John Hodulik: Two if I could. First on OneConnect. Can you talk about sort of how widely it will be rolled out? What kind of support you have from an advertising standpoint, maybe the target market? And then, do you think it can drive subs in the near term? Just sort of your view on what the impact that could have? And then secondly, the phone churn trend definitely improved up 6 basis points. You have been seeing double-digit increases. Can that, kind of, improvement in [indiscernible] that we've seen continue despite the increases from the [indiscernible] pricing? John Stankey: On your first question. Look, if we didn't think it was going to have an impact, we wouldn't have started down this path. But to get to maybe the root of your question, and I think as we indicated, when we rolled it out, this is going to be kind of an iteration rollout. We've established a platform now with OneConnect that allows us to start looking at the segments and the customers differently. I think you can pretty well understand by how the plan is tailored, the kind of customers that it is targeted towards one of the things that we see is, first of all, the BYOD segment is increasing more broadly. That's one reason why we started with it. We see customers more willing to hang on their devices a bit longer, and they're certainly becoming more accustomed to porting them from one carrier to the next. And so we want to tailor this plan to make sure that we can receive those customers and then attach them to a network construct that drives churn down. And our belief is that by allowing them to have the simplicity of taking a number of devices and not thinking about how -- whether it's the WiFi in the car, or the watch or anything else that they carry around. We think that, that starts to provide the network as the basis for driving customer loyalty and relationships which plays into our strong suit. And that's also bolstered by the fact that as you notice, it requires [indiscernible] fiber broadband. And one of the best things we have to drive customer retention and customer lifetime value is by pairing fiber broadband with wireless. And so this is a plan to allow that to happen. It also tailors well into those account sizes that maybe are less than family plan sizes today that can grow over time. And I think you should expect that this platform that we've now laid out there can iterate over time, it can evolve. And over the course of this year, you'll see more variants of that plan come out that start to open the aperture more broadly in the market, for customers that can qualify under the construct and work into it. It will be one of several offers in our portfolio. We just redid all of our rate plans if you notice, and this is a particular plan that's targeted in a particular segment group of customers that we think will help with convergence and drive churn in a better direction over time. But we also have done some rework on our other base plans that will hit other portions of the market. And I think these are just natural evolution that you see, one, given the maturity of the wireless [indiscernible], given the shifts that are occurring in convergence in the market that allow us to play offense and go out with something that's pretty important. So I don't expect right now, sitting here today, I can tell you massive amounts of volume on it in the first couple of weeks. We didn't expect that to be the case. But we do expect the platform to evolve to become an important part of the portfolio as we move forward. An important part of the portfolio of putting the network first as a basis to attaching the customer and minimizing other constructs of how people have maybe chosen their service provider over time. And related to your second question on churn trend and can it continue? I mean, I don't mean to [ be flip ] about it, but I think this is -- over time, the churn dynamic is just math. And as we shared, and what I tried to articulate in my opening remarks, the best way for us to manage churn is to converge customers. And when we get through the repositioning and the shifting that's going on in the industry right now, which is aligning customers to asset basis, I believe you're naturally going to see that churn dynamic improve. And so we said we're at 45% converged on kind of our [ non-Lumen ] base you've been getting those numbers in the last several quarters that we've been sharing with you to show that acceleration. We've given you guidance out for several years where we've gone and done the math on where our fiber footprint is, where our [ AIA ] footprint is, the cohorts of customers we're going to target in those particular areas, the ones that we think we can hold over time, and we believe that, that's what builds a sustainable franchise, and leads us to service revenue growth in growth and leadership in the industry by the time we exit this decade. And that reordering of convergence along those asset bases that's going to make that happen. It's going to take a little bit of time for that reordering of customer base to asset base to occur. And I think there's going to be a little bit of the accelerated churn dynamic that you've been seeing in the last couple of quarters as that shakes itself out. But just like any math equation, you hit that tipping point where you start to get the benefits of the strategy. And I think you're going to see it ultimately come back in the line. And when we tell you that we've got fantastic converged lifetime values, for example, fiber and wireless, then we'll have a dominant part of our portfolio that represents that base, and that's when profitability looks good. And the franchise looks like a really strong franchise move forward. Operator: The next question comes from Michael Rollins with Citi. Michael Rollins: John, in your opening comments, you described that AT&T operates the most advanced and open communications network by the end of the decade. Can you unpack how AT&T is defining the term open, including how that impacts your go-to-market? And how you look at further partnerships, or acquisitions to maximize the TAM and your return on capital? And then just secondly, if I could, on the account growth sequentially in consumer and mobility. Can you share what's working for you and how you're balancing growth in accounts ARPA relative to what you were just describing in convergence, versus kind of the core mobility services that you offer? John Stankey: Michael, so when I think about open and what we're driving toward the thrust, I would articulate in that regard are one, you know what we're doing in our wireless network. And the purpose of us opening aspects of our wireless network is to manage supply chain costs and performance of equipment and the architecture over time. And I think we're leading the industry in that regard, and I would expect it shortly as we begin to get to a point where we start to deploy some new spectrum as we close the EchoStar transaction, you'll see the first instantiation of that as we move forward and work our process of deploying that spectrum, and how we build our network and what we're able to gain [indiscernible] associated with that. And so that's one aspect of it. The second aspect is the complete reengineering of the core of the network that we're doing that I think sometimes is overlooked a little bit. As I've shared with you before, we have multiple routing infrastructures that support different product lines in this business or different segments. What we use for routing infrastructure and consumer broadband fixed services is different than what we do, for example, for our business enterprise services, which is different than how we ship around our wireless packets and services, and we've been investing very aggressively to re-architect that network, flatten it, integrate it so that it's one solid routing network that handles all traffic. In doing that, it does a lot of things. One is it opens up the opportunity, given the software stack and how we build that to begin to offer a much broader set of APIs out into the public domain that allows people to manage and control their traffic differently. And that's going to allow for a tremendous amount of flexibility. And if you want to think about it in the context of just as hyperscalers opened up, the ability to spin up compute and storage through touching parts of the terminal. There's no reason why our routing infrastructure, and what we turn out to customers shouldn't have that same software-based capability that is digitally driven through API structures and allow not only our end users, but partner network customers to be able to control aspects of the network moving forward at a much lower internal operating cost that's all software-driven, and as that core becomes software-driven, it allows us to also use AI as a basis of us administering and managing that network. So instantiating those APIs out to the broader domain of our customer base is what makes the network flexible around it. And so I would say that those are the two most fundamental aspects of opening the network that allow for us to be effective moving forward. And if we have great preferred access technology, meaning we can get bandwidth in more places than anybody else, hence, a deeper fiber network, or a denser spectrum footprint and better wireless network, then that attracts traffic onto that network. It's the software control and programming of it and the dense access capillaries that allow people to say, I can get to more places with better bandwidth and better performance than anybody else and therefore, that's why I want to be on that network. When it matters, it must be AT&T, and that's how you drive returns over the long haul on that investment strategy and that aggregation of capabilities. In terms of account growth and what's working, it should be, I think, fairly apparent from what we shared. What's working is converging customers. And so when you look at the step-up in the convergence levels that you're getting, and I look at what's happening now, we're getting account growth. And if you looked at like average line sizes, for example, on our wireless account base, those accounts that are coming in tend to be below average for what we might have in the embedded base. And that's an indicator that we're picking up. One and two line accounts that are new to us. They're new, new. They're new fiber, they're new wireless. And that's really good because ultimately, those 1- and 2-line accounts become the 3 and 4 line accounts of the future. And as I said earlier during John's question, if we get them anchored in on a fiber base when they come in, the highest brand [indiscernible] any product in the market. It's the best performing product in the market. They have great positive brand perceptions. They're more likely to stay with us longer. They're more likely to buy more from us in the future. That's what all the data sets on the customer base that's out there. And so those new, new customers, those kind of accounts are the ones that I want to grow. And then secondly, we're getting some lift from Internet Air and the ability to converge both wireless and Internet Air with new customers on a combined basis, and we're being more specific in targeting that in places, for example, where we know we will have fiber in the future, so that we can grow that customer base today and ultimately meet them with a very, very good, robust, sustainable offering over time. And those two things, I would say, are probably the biggest impact on the consumer side. And then I would also tell you, look at the business revenues and look at the business performance and what we've been able to demonstrate to you that doesn't happen without some new business account growth that's occurring in order to stabilize the advanced connectivity service revenues that you've seen in the quarter, very proud of what the team has done, on that and obviously optimistic that we can carry that momentum forward and there's more that we can do there as we fine-tune our distribution even further. Operator: The next question comes from Sean Diffley with Morgan Stanley. Sean Diffley: I was curious how you assess and plan for the perceived threat from satellite more on the fiber and broadband side. But anything you would add on direct to sell. Clearly, you have an AST space mobile partnership? Would you ever consider doing [ MVNOs ] with emerging players? And how would you compare and contrast satellite versus the fixed wireless learnings? John Stankey: Sean, sure. Let me -- it's a long question, but let me start by reiterating kind of what I just said and what our direction is. Our direction is to build the best converged network offering in the United States. And that means in order to do that, you have to have great foundational assets that you own and operate to do that. I just shared with you, for example, why is it important to have a core switching architecture, routing architecture that allows you to see every packet on a network, because that's the way that you're able to manage service performance, security, offer the kinds of capabilities across heterogeneous access technologies like wireless, fixed fiber, Wi-Fi, other technologies that allow you to ensure the quality of service of delivering a packet over those heterogeneous architectures. And we start from a fantastic place with assets. We have great fiber. We've got a great wireless network. We have a great customer base that we know, that we know how to manage their accounts. We know how to manage the billing. We can build trust with them over time on the relationships that we have. And so when you start to think about more access technologies becoming available, such as right to sell, which we're going to see an opportunity to close out white spaces, I think we're naturally positioned to add those capabilities on to the great integration we've already done to be a converged access provider. And I don't mean to harp on fiber, but once you get that in place with the customer, it's a really good place, not only because it's the lowest marginal cost to carry a bit of any technology that's available out there, but its performance is superior. And when you get top end performance, the best performance coupled with low marginal costs in the networking business, that's typically a really good combination for the long haul. So we're going to continue to move to integrate partners. And I think when I think about [ LEO ] and satellites, you've heard me say it before. I think it's going to be great innovation for consumers. I think it's going to open up applications that none of us expected or knew about, and they're going to be new and different and they're going to help grow the market in total. I think that when you look at where we are right now, what's really on the horizon that maybe a couple of years ago, we all would have said, could this really happen, the 12 to maybe 18 to 24 months from now, we will have always on connectivity in the United States. And that's going to be really, really important. And I think our customers are going to want that. And I think it's natural that we work with LEO providers that have the capabilities to solve that problem to integrate those offerings into our services. We have a great position with those customers. And as you've heard me say, my ideal outcome for the satellite space is that there's more than one satellite constellation up there. And I've offered that at some point, I'd expect that there's probably at least 3 serving the United States with capable products and services. We're working with one closely right now to make sure that they get off the ground and they're viable. That's AST SpaceMobile mobile. We've been putting most of our R&D and our work on bringing product out with what they will be matching to the market, but I fully expect that SpaceX will ultimately have a robust direct-to-device capability I would expect that Amazon [indiscernible] will have a robust direct-to-device capability and who knows, maybe even a force shows up. My goal would be that I have a good strong wholesale relationship, and it may not just be one of them, it may be with more than one of them. And that we architect this in a way that we can continue to manage the traffic on our network and control packets, so that we are able to offer that end-to-end integrated service on a heterogeneous network, and that's the direction that we're taking. Now if you're thinking about the threat of a directed device approach. Look, there's a lot to be done in getting LEO constellations up and working on directed device. I think it will happen, but I don't think it's going to be a straight line from here to there. There's all kinds of challenges to work through these things. One is getting satellites up in the air. And two is getting them up and keeping them up. It's getting the right spectrum portfolio in place and working through all the issues of power levels and interference that are driven from it. It's getting the devices tuned so they work properly. Satellite works really good outdoors. It doesn't work very good indoors. It sometimes lost on people that we have spent literally decades investing in communications infrastructure in this country to raise service levels and performance for end-user customers that they become accustomed to. And the landscape is littered with those that have come in and tried to kind of get into the business on the cheap, or get into the business without understanding what the level of performance is necessary to have a minimally viable offering. Customers don't tolerate much interruption anymore. And there's decades of that infrastructure that's built. A lot of it is built on the interior buildings. I know in our company, we put about $1.5 billion a year into doing things to make sure hospitals and stadiums, and hotels and universities all work really well and you can't just flip a switch [indiscernible] done. When I think about an [ MVNO ] construct, my approach in terms of how AT&T looks at it is we like to think about [indiscernible] in a way where it gets to a part of the market that we can't get to. It's an extension in a segment that maybe we're not doing a good job of penetrating, and somebody can do it in a more creative way. And we also think about it in the context of we ensure that our network capabilities are used in a way that's consistent with our long-term goal to be the best converged operator in the U.S., which means that we don't just give traffic away without certain conditions and capabilities and requirements as to how they do business with us, and how that capability is instantiated in the market. So it's just not a wide open [indiscernible] connection to the network, do what you want with it. And within that context, do I think that I'm looking at satellite LEO right now and saying that, that's a place that an MVNO relationship would open up access to customers, I don't have today. No, I don't think that's the case. I think I've got a way to bring the right value to customers broadly and what I just articulated. And look, I don't know that I'm worried about taking on any comer in broadband right now when I've got fiber in a home. As I said, lowest marginal cost, best performance. That usually does pretty well in the market. And I like our investment strategy and where we're going to have 60-plus million fiber homes by the time we get to 2030, and living off that base and being very successful with it. Operator: The next question comes from David Barden with New Street Research. David Barden: So I guess two, if I could. The first would be, John, the EchoStar Spectrum acquisition, could you kind of elaborate how that's going to augment the business and how we generate a return off of that opportunity? And then second, could you update us on the copper retirement program and some of the advancements that you guys have been able to generate at the FCC along that front? And what that means from a cost savings and return standpoint? John Stankey: Sure, Dave. So on the EchoStar side, look, there's two fundamental things that come here. One, the improvement of performance in the network is noticeable, and there's markets where because of the deployment of the spectrum and I'm not speculating on this, as you know, we have a lease on a portion of the spectrum that we're acquiring, that we've shared with you that we've put a large percentage of that already in service. And when we do that, we are already testing network perception in those markets that we felt like it was [indiscernible] we are seeing that perception shift. And as a result of that perception shifting, it will help our wireless business just by nature, it will help in terms of customer growth and retention and all those things that drive value on that. As you know, when we can buy spectrum, there's economic value created that is capital efficiency. It avoids us from having to build growth and capacity in other ways that are more expensive than that has been since the start of time and that still plays into the factor. And then as you are seeing, it's also allowed us to expand and increase our [ AIA ], our Internet Air penetration and distribution. And I'm very happy with where we stand on that right now. As I said earlier, it's a fantastic tool for us to use, one, to get businesses that we haven't had before. And I think it's a very sustainable technology for certain types of businesses that are out there. Again, I'll go back to where you're seeing some improvement in our business performance. AIA is part of that. It's what's helping us get into customers, or maybe we didn't have fiber before that have a little different broadband portfolio, or profile that they need. And we can be relevant and we can go into large multi-location bids for customers and now we can do 100% of the bid in many instances rather than just 65% or 70% of the bid on fixed infrastructure for broadband. So that's an important way that it helps us. And I think in particular, with our strength in the Business market segment at AT&T. It's a natural pairing for us to be able to do that. And then in the consumer space, preceding in markets where we know we're going to have fiber and being aggressive about our deployment to hold converged customers. That growth is really good growth because the transition is from a broadband connection ultimately to a fiber connection, and that transition is a very profitable connection when you have a converged customer in that situation. And then in the markets where we know we're not going to be in fiber in the near term, finding the right segments to attack that we can hold for a long haul with fixed wireless and wireless together as a converged customer. That's not every customer in those markets. There are clearly what I would call the scaled broadband profiles [indiscernible] going to probably use terrestrial connections to ultimately sustain themselves, but there's good places we can hunt in those markets that I believe a fixed wireless with wireless combination is a good combination. We've been able to open up and expand that market and grow in that space to drive some return of the -- that spectrum as well. On your second question about copper retirement. Look, I -- probably 5 years ago, if I were letting you in on the inside baseball and started to kind of set the direction on where we're going to go on aggressively shutting down legacy infrastructure in this business. I would tell you I probably got some looks across the table from individuals within the business and said, never going to happen. We're going to be with it a long time. And a big complement to the team. It's like that's not an acceptable outcome. And went to work on what we needed to do to literally get to a path to shut down the infrastructure. And to sit here today, 5 years later and to have what we have in front of the FCC today is absolutely fantastic. It's the right moves to this country because the old copper infrastructure does nobody any favors. It sucks a ton of power. We've got buildings being cooled and switches and are running with a nominal number of customers on it. It's stuff that was built decades ago. It's not as secure as robust from a cybersecurity perspective as today's technology can be when built properly, it doesn't offer the same level of resiliency and services that we're building into networks today. Our capabilities putting resilience in the wireless network that is actually able to withstand other problems Copper is actually [indiscernible] copper can't withstand is clearly there and advanced features that are available on these networks are better. So this is a good thing for the customer. It's a good thing for U.S. competitiveness, and it's a good thing for AT&T, because we need to get those costs out. We need to get that infrastructure shut down, and we need to remove the distraction from the business. All the mainframes that go with it, and all the business processes that have built up over decades of regulation that have been layered on that. And as you heard Pascal mention, 30% of our wire centers are on a definitive schedule for shutdown right now. And we have a path to do more. And I think you're going to see in the next couple of months, even more activity moving forward. This FCC order that came out as a very strong order in my view. It gives a very good road map for how this should work out. We have a very receptive commission to getting this work done. We are mobilized at AT&T to take advantage of these things. We have a good organization built around it. The leadership of that organization has been doing a nice job getting the company in tune with everything we need to do. It's not what I would call really sexy work to shut this stuff down. But it's essential work and that includes what do you do with the copper when you're done with it? And how do you get it out and make sure that you monetize it, do all the things you need to do? And we are planning all the way through that and have every intention of being in a really great place by the time we get to 2030. And those cost improvements in that structure is all forecasted in our going-forward guidance that we've given you. Operator: The next question comes from Mike Ng with Goldman Sachs. Michael Ng: I have two, if I could as well. First for John, in prepared remarks, you talked about shifting away from device subsidy competing more on service. Will that be more gradual as OneConnect gains traction? Or do you expect a harder shift away from subsidies that we may see across 2.0 plans as well? And then for Pascal, it was encouraging to see the reiteration of the guidance. You talked about accelerating growth in 2Q. I was just wondering if you could provide some color on key drivers for the EBITDA acceleration throughout the year. How do you expect the [ Lumen ] opportunities, cost efficiencies and kind of new planned traction just impacting the curve of growth throughout the year? John Stankey: Mike, the short answer to your question is it's a balancing of the portfolio is the way I think about it. Our portfolio right now is over-indexed on device. And it's not the devices aren't important to customers into certain segments of [indiscernible], they'll continue and remain to be important, but I think we need a more balanced portfolio, that make sure that the customer understands the inherent value of the network underneath the relationship. And the true amount that they're paying for that fantastic service that they depend on every day. And that they're not clouded by the difference of what they're paying for device versus network. And I think we have an opportunity to really help people understand the inherent value of what's in the network and what's the difference between what they need to do to access the network. And there are other things besides devices that customers get value out of. And putting that at forefront to ensure that customers have choice about how they choose to allocate those products and those benefits and things that are important to their loyalty over time. I think we can do a job of balancing that portfolio, and I think we will gradually work our way through this over time. I don't think this is throwing the switch. But you've got to get a foundational capability out there in which to work from, and OneConnect is a foundational capability that we can iterate on and work from in the coming quarters to continue to work to balance that portfolio. I could probably answer your second question for you because everybody in the company is laser-focused on this particular issue, but my voice is tired, and I'm going to let Pascal do it for you. Pascal Desroches: Sure. Mike, pleasure to talk to you. Going into Q2 and improving for the rest of the year. We expect both service revenues and EBITDA to accelerate gradually. There are a few factors at play. One, for -- in our wireless business, we expect to continue to drive growth in converged relationships, including wireless. That should drive improvement plus we have pricing action that begins to take effect in April. For Q2, it's going to be not the entire quarter that benefits, but most of it. And it will [indiscernible] for the rest of the year, full quarter benefits of those pricing actions. Also, we're scaling [ Lumen ]. We said coming into the year that movement early on, we're going to have to invest significantly in order to stand up that organization in order to drive incremental fiber penetration into their footprint and to really set up ourselves. That process began in earnest in Q1, we'll continue. But I expect every month that passes the performance of the [indiscernible] will continue to get better. We're going to continue to see improvement in fiber net adds and converged relationships. Also, as you get through, in terms of free cash flow, Q1, as a reminder, is always seasonally low for a couple of reasons. One, you have our annual incentive comp payment in Q1. That's a meaningful cash flow in Q1. Two, the majority of the devices from the holiday season are paid in Q1. Those headwinds go away. And you also saw in this Q1 that we stepped up our -- we began to step up of our capital, and that was also a headwind. As we get through the balance of the year, I expect pretty much the same seasonal patterns that we've seen in free cash flow, and we remain confident. All in all, look, even at Q2, I think you should see meaningful improvement in our service revenue trajectory as well as our EBITDA trajectory. So I feel really good about where we are and the pacing for the rest of the year. Operator: Our last question today comes from Peter Supino with Wolfe Research. Peter Supino: Question about the broadband market. AT&T reported 2.5 million DSL subs, and that's been a really valuable feedstock for the fiber business over time. It's a great thing that you have a long-term declining business that is going to stop diluting your growth rate over the next couple of years. I'm wondering if the fade of the DSL business in general, including in beyond our own -- affects your view of the [indiscernible] market over the next couple of years. Whether that relates to fiber volume growth or fiber pricing or FWA pricing, all of the above? John Stankey: Peter, I don't know that the fate of the DSL base in and of itself causes me to think differently about things. I probably offer a couple of observations on the market. One is that pace is getting pretty tiny at this juncture. And I think one of the things that we should inherently understand is our fiber growth numbers have been relatively consistent over the last number of years. Our ability to find DSL customers that want to be fiber customers is much more difficult prospect these days because there really aren't many DSL customers left. And so when you look at our growth numbers on fiber, the question that was asked earlier about new accounts. They're new accounts. They're customers coming in, and that's that new new dynamic I talked about. And we're getting better at picking up those new new customers. And I think that the other observation I would give is in you've got certain parts of the DSL base that, in some cases, customers self-selected. They may be in a situation where it's the best that they can get in a not very good set of choices. Some of that's being taken care of today. That's what satellite serves well. That's what [indiscernible] addresses. But there's also a price-sensitive segment because in many cases, people can buy [ out that ] be at a little bit lower price than other broadband alternatives in the market. And so the place I think about where we naturally need mature at AT&T that I want to make sure we do well is we should be able to be a man for all seasons. We should be able to handle every customer, one that wants a premium high-powered, most capable service around and one that wants efficient, more cost-effective, more value-driven offering. And fiber, when we head in there certainly allows us to do that given the marginal cost structure, I'm profitable at any point, and that's maybe different than DSL. I mean, DSL is a high-cost infrastructure to manage. And I've shared with you that when we get fiber and our operating costs are dramatically reducing in these geographies now. And when we get the copper turn down, it's going to be even more. So we should be a little bit better on making sure we're hitting all segments of the market with our offerings. And hence, the question earlier about why OneConnect and why these things, we can drive value into some of these segments and make sure that we're monetizing it effectively on those price options for customers. And I think we can be a little bit better picking up some of that price sensitive segment, not only with a better portfolio of fiber pricing, as well as what we do with fixed wireless in places where that performance is adequate, given the nature of the household or the size of the household, the demands of the particular customers in those households. And you can maybe drive a little bit more of a value profile and what you're offering in that customer base to match that as well. And then -- and finally, I'll say this also lines up with the reality of where the broadband market is, in my view, which is getting from 0% to 40% penetration as we build fiber is really important. That's a really good return when we do that, and we're doing that incredibly well, and very effectively that hasn't changed as we've opened up new footprint, accelerated our build. We see our half to 40% as being really good, really strong. We continue to even refine it, get a little bit better. Although I'm pretty impressed, I've shared with you before that we're probably a year faster than what we expected we would be in the original business case, and that helps drive returns up higher. But getting from 40% to 50% is different. It's a different set of plays that are required than getting from 0% to 40%. And the reason I bring that up is because I think it's that value segment from 40% to 50% that's an important segment for us moving forward to add new accounts that we can do on an accretive basis. And so for those of you that are looking at new accounts, that's a driver of it. For those of you who are looking at ARPU temperament. Look, it's entirely economically rational and value creating and the right thing for AT&T to do to get from 40% to 50%, even if it means we take some ARPU to dilution to do that. And I think in the size of our base today and what's going on, you're going to see a little bit more of that. And some of that directs to that customer base that was that DSL holdout base that you're referring to, you need to get really good at figuring out how to pick up with the more value-sensitive price-sensitive parts of the base. Brett Feldman: Operator, that's it. You go ahead and close out the call. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for holding. Your conference will begin in five minutes. Thank you for your patience. Thank you for holding. Your conference is about to begin. Good day, ladies and gentlemen, and welcome to GE Vernova Inc.'s First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides refreshing or there appear to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today’s conference, Michael Jay Lapides, Vice President of Investor Relations. Please proceed. Michael Jay Lapides: Thank you. Welcome to GE Vernova Inc.'s first quarter 2026 earnings call. I am joined today by our CEO, Scott L. Strazik, and CFO, Kenneth S. Parks. Our conference call remarks will include both GAAP and non-GAAP financial results. Reconciliations between GAAP and non-GAAP measures can be found in today’s Form 10-Q, press release, and presentation slides, all of which are available on our website. Please note that unless otherwise specified, our year-over-year commentary or variances on orders, revenue, adjusted and segment EBITDA and margin discussed during our prepared remarks are on an organic basis, which includes the removal of the impact of our Prolec GE acquisition. In addition, we realigned the reporting of certain business units to reflect how we are managing the company. Notably in Power, we integrated the Steam business primarily into our Nuclear business. In Electrification, we realigned the segment into four distinct business units to provide investors with greater visibility. This included revising our former Grid Solutions and Electrification Software business units into three separate business units: Power Transmission, Grid Systems Integration, and Grid Automation and Software. A portion of our Electrification Software was also moved to Gas Power. Finally, in Wind, we simplified our reporting by integrating LM Wind into Onshore Wind. These changes are reflected in our first quarter 2026 10-Q and throughout our slide deck. We have posted a financial supplement on our IR website reflecting our realigned 2025 segment results, and please note, there were no changes to our 2025 total company results. We will make forward-looking statements about our performance. These statements are based on how we see things today. While we may elect to update these forward-looking statements at some point in the future, we do not undertake any obligation to do so. As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I will hand the call over to Scott. Scott L. Strazik: Thank you, Michael. Good morning, and welcome to GE Vernova Inc.'s Q1 2026 earnings call. We have had a solid start to 2026. As global electrification accelerates, the structural drivers underpinning demand for our solutions continue to strengthen. The growth is just starting, and there is no company better positioned to serve and transform the global electricity system than GE Vernova Inc. Since our spin, we launched with a $116 billion backlog. We have grown this backlog to $163 billion with an 80% increase in our equipment backlog at considerably better margins. In the last 90 days, we have added $13 billion to our total backlog and now expect to reach $200 billion in backlog in 2027, versus our previous expectation of 2028. In Power, we delivered strong results and further margin expansion in Q1, even with the continuing investments in capacity expansion and SMR. In Gas Power, we continue to see significant demand and favorable pricing trends for both equipment and services. This demand is global and spans a diverse set of customers. We saw continued strength in new gas turbine agreements in Q1, signing 21 gigawatts in countries like the U.S., Vietnam, Mexico, Brazil, and Canada to grow our total gigawatts under contract from 83 to 100 gigawatts sequentially. Backlog grew from 40 to 44 gigawatts, and slot reservation agreements increased from 43 to 56 gigawatts. Approximately 80% of our total gigawatts under contract are with traditional customers with the remaining 20% explicitly supporting data centers. Our momentum has continued into April. Quarter-to-date, we have booked more Power equipment orders in terms of value than we did in all of Q1 2026. On pricing, we expect our orders in 2026 to be priced 10 to 20 points higher than our Q4 2025 orders on a dollar per kW basis. We now expect to book 10 to 15 gigawatts of contracts in Q2 and to end 2026 with at least 110 gigawatts under contract. On production capacity, we now have installed over 280 new machines in our Gas Power factories and remain on track to reach 20 gigawatts of annualized output by March. Delivering on our growing backlog in the second half of this decade will lead to a larger, and even more profitable, service book that will benefit us in the 2030s and beyond. On the nuclear front, let us start with our operational progress in Canada on Unit 1 of the SMR project at OPG’s Darlington site. With the recent regulatory approvals received by our customer, installation will soon begin on the 2 million-pound basemat, a pedestal that will serve as the reactor’s foundation. This is a critical milestone and serves as a great illustration of the progress we are making on the first SMR in construction in North America. We also continue to make progress on our commercial pipeline in North America as well as Europe. We are inspired and appreciative of the U.S. and Japanese governments’ announcement of up to $40 billion for GE Vernova Hitachi to build SMRs in the U.S. This represents the best of government leadership to reindustrialize an industry that matters to the world’s future, and we continue to work hard to advance next steps with both governments. In parallel, we continue to work with TVA and the Nuclear Regulatory Commission, and we expect the NRC to issue the license to construct for Clinch River in Tennessee as soon as 2026. In Electrification, we achieved significant growth and margin expansion in Q1 as customers work to keep pace with increasing electricity demand, grid stability needs, and national security interests. This is a large and growing market where we continue to see strong demand for our portfolio of solutions. We will approach $14.5 billion in revenue this year and project an annual addressable market by the end of the decade of approximately $300 billion based on what we offer today. Point being, there remains substantial opportunity for us to grow. The first two months of running the Prolec business since closing the acquisition have only reinforced the substantial opportunity ahead. I will talk more about Electrification shortly. In Wind, the team is executing with discipline and is focused on the factors within our control. After successfully completing installation of the remaining wind turbines at Dogger Bank A and Vineyard Wind in Q1, we have now moved to the remaining commissioning activities for both projects. We are off to a very strong start on the installation of Dogger Bank B and continue to expect Dogger Bank B and C to take us through the better part of 2027 to complete. In Onshore, we continue to drive a more profitable service business with double-digit margin expansion versus the prior year for the second quarter in a row. While the U.S. market for new Onshore equipment remains soft, we are monitoring the outcome of Section 232 wind and solar tariffs, which could lead to more orders clarity in the second half of the year. As our total company backlog builds, we remain focused on driving even stronger execution. In Q1, we held a CEO Kaizen Week with almost 2,000 team members doing roughly 200 Kaizens with a focus on improving safety, quality, delivery, and cost. Coming out of the Kaizen Week, we see the opportunity for over $100 million in EBITDA improvement in future years driven from lower costs and better quality performance. For example, we held our first series of Kaizens at Prolec post-acquisition. In one Kaizen, we focused on improving our subassembly process for transformer tanks, decreasing our rework hours by nearly 70% and delivering a nearly 40% output improvement. In another, we used lean manufacturing methods to reduce cycle times in the winding process for transformer production. These advances are helping us meet the growing demand for transformers as we accelerate the ramp in capacity to grow this business. We are also deploying AI to enable our employees to improve how we run our businesses and accelerate innovation. We entered the year with 13 AI-based process transformations we were focused on executing, and the team is now working to double the transformations to 26 across GE Vernova Inc. Let me make this real with two examples. In our Gas Power business, where we have the largest installed base of gas turbines, steam turbines, and generators of any OEM in the world, one of our real challenges is to project demand and timing of needed investments in our customer fleets and ensure we have the right parts and resources available when a customer needs us. We utilize our decades’ worth of data and are building AI tools to automate our ability to match installed base demand with our planning to deliver better performance for customers as well as a higher scope per outage for GE Vernova Inc. We also see substantial opportunity with Sourcing, as we leverage AI to drive parts rationalization and more intelligent bidding while further automating manual processes like invoice matching. We expect to save tens of millions of dollars every year going forward with these new tools, while freeing up tens of thousands of hours of manual work. I give these two examples to reinforce that when you think about AI and GE Vernova Inc., do not just think about AI as a demand driver for our equipment and solutions. We are running this company with a very determined focus on meeting the demand for growing electricity for AI, while simultaneously incorporating the technology into how we work to transform our company. GE Vernova Inc. is operating from a position of financial strength and executing our capital allocation strategy with discipline. In Q1, we invested approximately $700 million in R&D and CapEx combined, with R&D growing by roughly 25%, including work to commercialize new technologies. We also further simplified the organization with business dispositions that generated approximately $900 million in pretax cash. We also returned approximately $1.4 billion to shareholders, including the dividend and $1.3 billion in share repurchases. Turning to first quarter financial results, we are executing well in the growing long-cycle electric power industry. We booked $18 billion of orders in Q1, up 71% year over year and a book-to-bill ratio of approximately 2. We also grew revenue by 7% year over year with growth in both equipment and services, while increasing our adjusted EBITDA margin by 390 basis points. We generated $4.8 billion in free cash flow in the first quarter, meaningfully above our full-year 2025 free cash flow of $3.7 billion. This robust performance was driven by strong orders and slot reservations at Power and Electrification as demand continues to accelerate. Regarding recent conflicts in the Middle East, the safety and well-being of our employees and partners in the region remains our top priority, and we continue operations in the region where it is safe to do so. We are monitoring the situation closely and have seen minimal impact to our business and financial performance to date. Given the strength of our first quarter performance and confidence in our full-year trajectory, we are raising our revenue, adjusted EBITDA, and free cash flow guidance for the full year of 2026, reflecting higher revenue growth in Electrification as well as further margin expansion at Power and Electrification. I want to spend some time on Electrification. This segment is the biggest beneficiary of how we are operating GE Vernova Inc. today as one focused and integrated company. Electrification’s growth trajectory has been significant. Since year-end 2022, its backlog has grown from $9 billion to $42 billion, and we expect substantially more growth moving forward. This is being driven not just by traditional customers, but also data centers, which accounted for approximately $2.4 billion in orders in Q1—more than the full year of 2025. Just to repeat that, our Q1 Electrification orders to data centers were more than full-year 2025 results. Additionally, Electrification’s backlog in North America is now nearly as large as its backlog in Europe, following a strong Q1 and the addition of Prolec. This growth is underpinned by our integrated, diverse product offerings and productivity-driven capacity expansions to fulfill rising demand for grid infrastructure. Let me expand on these business units for those less familiar with our Electrification segment. Grid Systems Integration, the largest part of Electrification’s backlog, delivers integrated solutions for large-scale electrification. This business sells HVDC systems and substations, including key data center solutions—all areas which have driven significant backlog and revenue growth as well as margin accretion. Today, our HVDC backlog represents approximately $10 billion to be delivered over the coming years and is located primarily in Europe, but we are seeing increasing momentum in other regions, including Asia, where we booked another large HVDC order this quarter. We expect to continue growing this portion of our backlog as we benefit from accelerating demand and investment in new products to expand our offerings for data centers. Power Transmission produces high- and medium-voltage transformers as well as switchgear and capacitors to modernize the grid and expand global electrification. We continue to drive productivity to increase volumes into this attractive market with healthy margins. With our acquisition of Prolec, this business now has increased offerings, scale, and strategic flexibility in transformers, a product category seeing robust demand and a backlog that is approaching the size of GSI. This includes $5 billion of backlog from Prolec, up $1 billion since we announced the transaction at Q3 2025 earnings. This 25% growth in the Prolec backlog since announcing the acquisition well illustrates the customer enthusiasm for this acquisition and the opportunity ahead. Power Conversion and Storage helps customers to improve grid resiliency and industrial power stability through advanced electrical solutions, including rotating machines, power electronics, and battery systems. Within PCS, synchronous condensers are a critical product needed for markets experiencing increased intermittency, representing a $5 billion-plus annual market opportunity. Overall, we see industry demand for grid resiliency products as growing low double digits through the end of the decade. Finally, we have combined our businesses to provide asset intelligence, monitoring, and grid software into Grid Automation and Software. Real synergies exist between our GridOS software and GridBeats that can help improve how the grid thinks, learns, and acts to enable utilities to move from reactive operations to predictive, autonomous grid management. We are also making investments in technologies that will define the next chapter of this segment’s growth. For example, our historical business with data centers has been the substation electrical equipment outside the data center, which remains the majority of our Q1 orders for this customer type. However, we also closed our first Energy Management System, or EMS, order in Q1. EMS incorporates solutions from Power Conversion and Storage with substation equipment and Grid Automation and Software to seamlessly integrate GE Vernova Inc. assets with load requirements in the data center. This first order is part of a larger project that also includes our Gas Power equipment and substation electrical equipment. In dollars, EMS is a small part of this large order, but it illustrates well the unique opportunity we have as GE Vernova Inc. to provide integrated solutions that span power generation, electrical equipment, and automation and software solutions. With that, I will turn the call over to Ken for more details on our Q1 performance as well as our financial outlook. Kenneth S. Parks: Thanks, Scott. Turning to slide six, we delivered a strong start to 2026 with robust orders, growing backlog and revenues, margin expansion, and significant free cash flow generation. In the first quarter, we booked orders of $18.3 billion, a 71% increase year over year and a book-to-bill ratio of approximately 2. Equipment orders more than doubled, while services orders increased 25%. All three segments delivered significant orders growth. As Scott mentioned, our backlog expanded to $163 billion, a significant year-over-year and sequential increase. Equipment backlog increased to $76 billion, up approximately $12 billion sequentially and 67% year over year, driven by both Electrification—which now incorporates Prolec backlog—and Power. Equipment backlog margin remains healthy, reflecting favorable price and our continued focus on disciplined underwriting. Our services backlog grew $9 billion, or 12% year over year, to $87 billion led by Power. Revenue increased 7%. Equipment revenue rose 10% year over year as 39% growth at Electrification and 25% growth at Power more than offset anticipated lower Wind revenues. Services revenue increased 4% year over year, led by Power and Onshore Wind. Price remained positive. Adjusted EBITDA grew 87% year over year to $896 million, led by Electrification and Power. Adjusted EBITDA margin expanded 390 basis points, with higher price, more profitable volume, and further productivity more than offsetting inflation, including the impact of tariffs which started in 2025. We remain on track to achieve our $600 million G&A reduction target by 2028. We are executing on our roadmap to drive simplification and reduction of data platforms through numerous Kaizens. For example, in Q1 2026, we launched a comprehensive company-wide data lake that enables us to retire 15 legacy data platforms, which we expect will reduce costs by approximately $15 million annually and significantly upgrade our technology to position us well for AI-enabled solutions. The strong adjusted EBITDA and working capital management drove $4.8 billion of free cash flow in the first quarter. Working capital was a $5.3 billion cash benefit driven primarily by higher down payments on increased orders and slot reservations at Power as well as higher orders at Electrification. Year-over-year free cash flow increased $3.8 billion driven by higher positive benefits from working capital and stronger adjusted EBITDA, partially offset by higher taxes and CapEx investments supporting capacity expansion. As Scott mentioned, we completed the acquisition of the remaining 50% ownership stake of Prolec for $5.3 billion. We also made further progress in simplifying our portfolio. We completed the sale of our manufacturing software business for approximately $600 million of pretax proceeds. We also sold an additional ownership stake in our China XD Grid business and our interest in a merchant transmission facility, which together resulted in approximately $300 million of pretax proceeds. Collectively, we recognized $4.5 billion of gains from M&A transactions, primarily resulting from the acquisition of Prolec, which were excluded from adjusted EBITDA. In addition, we issued $2.6 billion of debt in Q1 and remained below 1x gross debt to adjusted EBITDA. Importantly, we are committed to maintaining a strong investment-grade balance sheet. We ended Q1 with a healthy cash balance of approximately $10.2 billion after returning $1.4 billion of cash to shareholders through share repurchases and dividends in the quarter. We are encouraged by our strong financial performance to start off the year. Our growing backlog with healthy margin provides an excellent foundation for continued improvement in our financial performance moving forward. Turning to Power on slide seven, the segment delivered another strong quarter with robust demand, continued revenue growth, and significant EBITDA margin expansion. Power orders grew 59%, led by Gas Power equipment more than doubling year over year on higher pricing and units ordered. Power Services orders increased 29%, driven by Nuclear Power given orders for upgrades as well as continued growth at Gas Power. Revenue increased 10%. Equipment revenue increased from higher volume and price, driven by both heavy duty gas turbine and aeroderivative growth at Gas Power. We shipped a total of 25 gas turbines in the quarter, a 32% increase year over year. Services revenue also increased due to growth at Nuclear Power. EBITDA margins expanded 500 basis points to 16.3%, mainly driven by favorable price and higher volume more than offsetting inflation as well as additional expenses to support capacity investments at Gas and R&D at Nuclear. Looking to 2026 at Power, as Scott mentioned, we expect continued strong growth in Gas equipment orders. We also anticipate 15% to 17% revenue growth driven by both higher equipment and services, and EBITDA margin of approximately 17% to 18% as volume, price, and productivity should more than offset inflation as well as additional expenses to support capacity and R&D investments. Year-over-year EBITDA margin expansion should be less than Q1 2026 largely given the timing of planned outages relative to last year. Turning to Electrification on slide eight, we had another quarter of significant orders and revenue growth and EBITDA margin expansion. Orders remain strong at roughly 2.5 times revenue and increased 86% year over year to approximately $7.1 billion due to growing grid equipment demand, partially to support data center development. We saw significant growth in substations, HVDC, switchgear, and transformers. Equipment orders growth was particularly strong in North America and Asia, both roughly tripling year over year. Electrification equipment orders continued outpacing revenue, which, combined with Prolec, further increased our equipment backlog to $39 billion, up 75% or roughly $17 billion compared to 2025. Revenue increased 61% on a U.S. GAAP basis, inclusive of Prolec, and 29% organically with growth across all regions. We saw increased volume at Power Transmission, primarily from switchgear and transformers. Prolec also delivered solid performance with nearly $500 million of revenue at just over 20% EBITDA margin since the acquisition that was completed in early February. Grid Systems Integration revenue increased due to higher substation and HVDC equipment volumes. Electrification segment EBITDA more than doubled in the quarter, with margin expansion of 590 basis points to 17.8%. Margin expansion was led by strong volume, productivity, and favorable pricing. Looking to 2026, we anticipate continued solid equipment orders with healthy margins. Second-quarter Electrification revenues should be between $3.3 billion and $3.5 billion, a significant year-over-year increase. We also expect strong year-over-year EBITDA margin expansion from higher volume, productivity, and favorable price, with a margin rate modestly above Q1 2026 levels. Turning to slide nine on Wind, we continue to focus on what we can control. In the first quarter, the team delivered stronger performance in Onshore Wind services and successfully completed installation of both the Dogger Bank A and Vineyard Wind offshore projects. Wind orders increased 85%, mainly due to improved Onshore equipment orders, primarily in North America, off of a low year-over-year comparison. However, for now, it is still difficult to call an inflection point in U.S. orders as customers still face permitting delays and tariff uncertainty. Wind revenue decreased 25% in the quarter given lower Onshore equipment deliveries as a result of soft orders in 2025, partially offset by higher Onshore services and Offshore revenues. Wind EBITDA losses were $382 million in the quarter, in line with our expectations. The anticipated year-over-year increase in losses was primarily a result of lower equipment deliveries and the impact of tariffs at Onshore Wind, as well as higher contract losses at Offshore Wind, partially offset by improved Onshore services. For Q2 2026, we anticipate Wind revenue to decline at a mid-teens rate year over year due to lower Onshore equipment deliveries. We expect EBITDA losses to be between $200 million and $300 million. The year-over-year increase in losses is primarily the result of the lower Onshore equipment volume, partially offset by higher services profitability. We continue to expect significant improvement in Wind revenue in the second half of the year, given only 30% of our expected Onshore turbine shipments are in the first half, as almost 70% of our 2025 equipment orders came later in the year. Also, the volume we are shipping in the first half has fewer contractual protections for tariffs since we signed these orders before their implementation. As a result, we expect EBITDA losses in the first half to be partially offset by profitability in the second half. Moving now to slide 10 to discuss GE Vernova Inc. guidance. For 2026, based on our expectations for the segments as outlined, we expect continued year-over-year revenue growth and adjusted EBITDA margin expansion. We also expect to deliver positive free cash flow in Q2 2026 given our ongoing focus on aligning the timing of inflows and outflows along with the impact of down payments which correlate with the timing of orders. For the full year, we are raising our guidance based on the strong Q1 results and the continued momentum we see in our business. For revenue, we now expect to be in the range of $44.5 billion to $45.5 billion, up $500 million compared to our previous expectation due to additional growth at Electrification. We are raising adjusted EBITDA margin by one point at both ends of the range to 12% to 14% driven by Power and Electrification. Given the accelerating strength in orders and down payments, in addition to the higher adjusted EBITDA, we are increasing our 2026 free cash flow guidance to between $6.5 billion and $7.5 billion, up from $5.0 billion to $5.5 billion. We are generating significant margin expansion and cash flow this year while still investing in the business. Our 2026 guidance includes an approximately 30% year-over-year combined increase in R&D and CapEx to support innovation and growth. By segment for 2026, we continue to expect 16% to 18% organic revenue growth in Power driven by Gas Power. We now anticipate Power EBITDA margins to be between 17% and 19%, up from our previous range of 16% to 18%, as we continue to see the benefits of our productivity efforts. In Electrification, we are raising our revenue expectations from $13.5 billion to $14.0 billion to $14.0 billion to $14.5 billion as the team continues to deliver its growing, more profitable backlog. We continue to expect Prolec to contribute approximately $3.0 billion of revenue this year. Given higher top-line expectations, we are increasing Electrification EBITDA margin to 18% to 20%, up from 17% to 19%. In Wind, we continue to anticipate organic revenue to be down low double digits due to decreased Onshore equipment revenues given the softness in orders. We still expect EBIT losses to be approximately $400 million in 2026 as improvement in Onshore Wind services and Offshore Wind offset the lower Onshore equipment volume. We continue to expect 2026 GE Vernova Inc. adjusted EBITDA to be more second-half weighted than 2025, with the highest revenue and EBITDA in Q4 2026. We expect higher second-half Gas Power revenue as we ship more gas turbines in the second half of the year and as we increase annual production capacity to approximately 20 gigawatts starting in midyear 2026. We also anticipate typical Gas Services seasonality, with the highest outage volume in the fourth quarter. We continue to expect Electrification EBITDA to increase sequentially through the year, even while we invest in our ongoing capacity expansions and new potential products. As mentioned earlier, in Wind, we expect higher second-half Onshore turbine shipments given our recent orders profile and better services profitability. At Corporate, costs are typically uneven across quarters due to compensation timing and portfolio activity at our financial services business. We continue to expect full-year 2026 Corporate costs to be between $450 million and $500 million as we continue investing in AI, robotics, and automation to drive productivity over the medium and long term. Overall, the combination of rising demand, consistently stronger execution, investments into our business, and the completed acquisition of Prolec sets us up nicely going forward. With that, I will turn it back to Scott. Scott L. Strazik: Thanks, Ken. We have had a solid start to 2026. But it is just that—a start. We see significant opportunity to continue to improve how we serve our customers and expand our margins. I shared just a few examples of this earlier in the discussion with Lean and AI. With over $10 billion in cash and our updated 2026 guide, and a team just starting to get their feet under them with the significant opportunity ahead of us, we continue to make investments for the short, medium, and long term. We talked earlier about nuclear SMR and our Electrification EMS solutions for data centers as two examples with tangible Q1 progress. But there are many more. As the opportunity for us to serve this growing market expands, our humility and hunger to meet this moment only becomes a larger and more important part of who we are. This is just the beginning, and I look forward to our Q&A discussion. With that, I will hand it over to Michael. Michael Jay Lapides: Before we open the line, I would ask everyone in the queue to consider your fellow analysts and ask just one question, so we can get to as many people as possible. Please return to the queue if you have follow-ups. With that, operator, please open the line. Operator: Please press 11 on your telephone. If you wish to withdraw your question or your question has already been answered, please press 11. Our first question comes from Mark Wesley Strouse with JPMorgan. Please proceed. Mark Wesley Strouse: Yes, good morning, everybody. Scott, I wanted to start maybe with your latest thoughts on Gas Power capacity. You are talking more and more about AI, about automation. Just curious how we should think about that compared to the 24 gigawatts you are targeting over the next several years. Is AI and automation something we should think about measured maybe in hundreds of megawatts, or is that potentially in gigawatts? And then your latest thoughts on the lead times that you think might be needed before you would consider adding further physical capacity? Thank you. Scott L. Strazik: Sure, Mark. I think if I work backwards from the question on lead times, we are directionally at about three years’ lead time today. We are sitting in 2026, and we do still have capacity in both 2029 and 2030. If I compare where we were in our January earnings call in the fourth quarter, we talked then about having about 10 gigawatts of capacity remaining in 2029. What has happened in the first quarter is we sold a lot of 2030 slots, because the reality is we had a lot of customers that, looking at planning with EPC schedules and other dynamics, needed the 2030 slot more than 2029. So what has changed is we still have about 10 gigawatts remaining cumulatively in 2029 and 2030 together, whereas in January we had 10 gigawatts in total for 2029. We need to keep seeing where this market takes us. At the end of the day, in many of the cases with these projects, the gas turbines are really not the gating item when you are talking about a three-year cycle from when a project starts—the EPC buildout, the permitting, the fuel availability. We will keep working with our customers, and we are also going to learn a lot more on the first part of your question. We have installed 280 new machines in our gas factories over the last roughly 15 months. We will have added about 1,800 production workers in the U.S. between 2025 and 2026, with the largest portion of them being in our Gas Power factories. I do expect that we will drive more productivity as we start to execute with those new machines and those new production workers that we will start to see in the third quarter of this year. So quantifying that productivity opportunity—we need time. But as we continue to learn how much more we can get out of the investments we have already made, we will also learn more about where this market takes us as we sell out of 2029–2030 and the timing of when the incremental equipment gas turbines are really needed. Operator: Our next question comes from Julian C.H. Mitchell with Barclays. Julian C.H. Mitchell: Hi, good morning. My question is on the Electrification segment where you provided some additional, welcome color this morning. A couple of follow-ups. In the Power Transmission part that you call out on slide five, it does seem like you are very well placed and are taking a lot of market share. We met with a number of your competitors there at Data Center World yesterday, so maybe help us understand why you think you are so well placed to continue to take more share in that Power Transmission sleeve of the segment. Also wondered across the segment if you could flesh out the capacity expansion plans in any detail. And lastly, on Prolec, any issues or major tariff mitigation needed in light of the Section 232 changes? Thank you. Scott L. Strazik: Thanks, Julian. I would say at the start, we do not really internally talk a lot about taking share per se when we are thinking about where we are with the Power Transmission business. This is really about continuing to do good business. What is very clearly playing out is that where we are doing really good business is where we are attaching that equipment to the power generation solutions, and that integrated solution—this is why in the prepared remarks we talked about a project where we are getting the power generation, the electrical substation, and the EMS solution. We are clearly gaining momentum with integration of our products, and in that regard I expect a lot more to follow. On capacity, we are investing in our existing factories. We have the $5.3 billion we just spent to add three more factories in the U.S.—in Shreveport, North Carolina, and Wisconsin—through Prolec, in addition to factory capacity in Mexico and Brazil. That allows us to serve this market more effectively. A few months into the acquisition, we continue to see more operational opportunity to get more out of those factories just applying lean, and that is why I included in my prepared remarks a few of those examples that will bear fruit for us. On the tariffs, I am going to hand it to Ken to give a little bit of incremental context. Kenneth S. Parks: A great question. The tariff landscape has continued to move both with the changes in country tariffs as well as those in February. Our total number of tariffs last year, we said, was about a net $250 million impact on the company. We guided to $250 million to $350 million net impact on the company in 2026. The structure of those tariffs has moved around, but the absolute number is about exactly where we thought it would be. To your specific question on Prolec, certainly, how the Section 232s have been defined, there is a little bit more impact on the Prolec numbers, whereas we have seen lesser impact on some of the other businesses. But where we sit today, that outlook for $250 million to $350 million is fully built into our outlook. We will continue to work on mitigating plans through alternate sourcing and through contractual provisions where we have the ability to work with our customers to pass a piece of this along. We are managing through the landscape just like we did last year. Operator: Our next question comes from Nicole Sheree DeBlase with Deutsche Bank. Nicole Sheree DeBlase: Good morning. I would like to go back to Gas Power. Could we get a little bit more color on what you are hearing through customer conversations and pipeline growth—if the demand outlook remains as robust as ever? And then just an update on the pricing environment as well. It was really helpful, the pricing data point of 10 to 20 percentage points that you provided about 2026. What are the expectations for pricing to continue to move higher beyond that? Thank you. Scott L. Strazik: Nicole, I would say through the first four months of this year now on new bidding activity, which is probably a forward-looking indicator, we continue to be in that 10% to 20% growth in price on new bidding and winning activity today relative to where we were in the backlog in the fourth quarter of last year. You are going to start to see that cutting through in orders in the second quarter, and that is why we included that context on the 10% to 20% improvement in dollars per kilowatt through 2026 inclusive of Q1 and Q2, which is really telling you that the dollar-per-kilowatt growth is going to be very healthy in the second quarter of this year. From a pipeline perspective, we continue to be very actively iterating with a very diverse set of customers to meet this moment. It is important to contextualize that the 100 gigawatts we have under contract today is with almost 90 distinct customers in 24 different countries. There is a need for incremental electrons for many different applications and many different countries, which has us continuing to work hard to figure out how, in a very capital-efficient way, we meet this moment and serve this market. Kenneth S. Parks: Maybe I will just add one data point, because I know I did this last quarter to help you size the pricing on the Power orders. We disclose Power orders; we do not specifically disclose Gas Power orders. We show you the Power orders and we also give you gigawatts. The gigawatts obviously relate to Gas Power orders. It is important, as you are doing the math based upon the information we provide in the earnings release, to know how much there is to back out of those Power orders that are not Gas Power. Last quarter, it was about $500 million related to Hydro and Nuclear. This quarter, it is a couple of hundred million dollars to back out there. If you take those pieces of data, you will see exactly what Scott outlined, which is that our orders now—pricing in our orders—look relatively consistent to what we had in the fourth quarter, maybe up just a little bit. But we have the opportunity, as these SRAs continue to convert that are 10 to 20 full points above what we have in the orders book already, to see incremental pricing start to flow to our backlog. Operator: Our next question comes from Andrew Kaplowitz with Citigroup. Andrew Kaplowitz: Good morning, everyone. Scott, focusing on your comments that Electrification-focused orders on data centers in Q1 were larger than all of 2025, I know you said in the past you have a $200 million to $300 million per gigawatt entitlement in Electrification per data center. I think you are probably already higher than that now, but maybe you can talk about your progress on entitlement and what you see going forward. Scott L. Strazik: You bet. Philippe Perron, the business leader, and his management team are doing an excellent job systematically building a string of pearls here of incremental products from power generation right through to the data center. That is where the EMS solution is an example that we were able to cut in orders in the first quarter. We have already secured a second order with that product in April and expect more there, which is taking our entitlement per gigawatt up. But we are not stopping there. We are making progress with a stability block solution that complements what we are doing—that is an MV UPS solution, a combination of medium-voltage electrical equipment with storage and software that we are gaining real traction on within customers. We have talked in the past about the solid-state transformer investment that remains on track. We will deliver the first product to a hyperscaler in the fall of this year, after which they will have six months of testing of that product before it can play into a potential order really in 2027. Operationally, we are making progress there, and the SST would be the first example inside the data center of scope for us. When you take a step back—and it is why we have invested real money into the EMS solution—when you are doing the power generation, the substation equipment, and you are providing a lot of the software solutions to help the hyperscaler manage the load requirements they want with our equipment, it is giving you the enablement to then attach more Lego blocks, or that string of pearls I am referencing, to give them a more integrated solution. It does not come at once. EMS good wins are in the year. The stability block with MV UPS is something we could see incremental orders on in the second half of this year if things go our way. SST would be next year, and there is more stuff we are working on. When you see that 25% R&D growth in the company, the largest proportion of that R&D is in Electrification, because we see real opportunities to organically invest in this business and serve this customer need, and we are very determined to do that. There is a lot more to come in this business, but I continue to have more conviction—with humility—that we have a very unique shot to deliver integrated solutions over time that few companies in the world could do. Operator: Our next question comes from David Arcaro with Morgan Stanley. David Arcaro: Hi, thanks so much. Good morning. I was wondering if you could comment on your progress and the customer appetite for framework agreements around turbine orders, especially as you are getting booked farther and farther out. And is there any pricing trade-off that might come in those conversations? Scott L. Strazik: Thank you, David. Conversations have generally centered on securing long-term commitments at today’s pricing through generally a five-year period of time during the first half of the decade that would give us volume clarity in that period of time to continue to sustain our investments to meet this moment. We have not closed one of those transactions to date. Admittedly, we have been having these conversations for a period of time, and what continues to happen is incremental orders—let us call it by the drink—and that was the reference to a lot of 2030 contracts that were signed in the course of the first quarter, including with the hyperscalers. About 20% of our 100 gigawatts are direct to the data centers. The conversations continue on roughly 30 to 35 framework agreements, but we have not closed one to date and are continuing to iterate both strategically on the gas turbine content but also the attached potential with the electrical equipment and some of the other solutions we are talking about. In some fashion, that expanded scope, including Electrification in some of the discussions, is further elongating the iteration that is happening, but it is a productive iteration we are going to keep working hard on. Operator: Our next question comes from Joseph Alfred Ritchie with Goldman Sachs. Joseph Alfred Ritchie: Hey, guys. Good morning. Obviously, a big uptick in SRAs. One of your biggest competitors has talked about not taking orders beyond 2030 because they want to make sure that the supply chain can deliver on anything beyond 2030. What is your approach? Are you planning on limiting any type of order intake? Scott L. Strazik: We feel better and better, Joe, about our ability to meet this moment for the long term. We continue to invest in our suppliers and our partners that are making very good progress. I spend a substantial amount of time within that supply chain, and we do continue to expect to take on orders for 2031 and beyond. We referenced earlier we have about 10 gigawatts remaining of 2029 and 2030 capacity, and generally speaking, we do not find our heavy duty gas turbines to be the gating item on a directionally three-year cycle time right now. We will continue to invest to meet this moment, sustaining the demand. In our case, the dynamic will be different than our competitors because our base is so much larger. When you have an exponentially larger installed base than the other OEMs, we have to continue to partner with our supply chain to support a growing fleet. We have 231 units on order right now; over 100 of those have not been commissioned yet. That number is going to grow substantially through the rest of the year. That very large installed base relative to anyone else—whether we talk new units or total gas turbines—is a luxury because it provides a financial floor of demand we already have contracted in our service book that gives us a little bit more optionality to play to win and to serve this market, which is exactly what we are going to do. Kenneth S. Parks: The other thing that is really important as you think about GE Vernova Inc.—we talk about lean a lot. We do that not just for the words, but because it is a part of our culture. We told you last time that we were going to reach approximately 20 gigawatts of capacity in the middle of this year and then that would step up to 24 in 2028—a couple of gigawatts from lean, a couple of gigawatts from some incremental capacity. To your question about what we do past 2030, lean is not something that we do only in events; it is something that we do continually, and we will continue to add capacity at a very attractive value by continuing to grow our lean initiatives. There is opportunity there as well, Joe. Operator: We have time for one last question. This question comes from Alexander Virgo with Evercore ISI. Alexander Virgo: Thanks very much for squeezing me in. Good morning, gentlemen. I wondered if you could clarify your comments around April in terms of the Power turbines that you have already signed in April. And could you touch on the Vietnam order for us, Scott? I think you also referred in your comments about some questions over availability of fuel. There has been a little bit of debate over the complexion of that Vietnam order with one of the slugs of the 4.8 gigawatts being questioned over whether or not they change it to renewables. Any color would be appreciated. Thank you. Scott L. Strazik: You bet, Alexander. When I am iterating with our Asian customers right now—and you think about LNG opportunities in a place like Vietnam or Japan, I was with one of our largest Japanese customers last week—you are talking about gas turbine deliveries in 2030 and beyond right now and commissioning projects for 2032 and 2033. For those customers, the LNG dynamic in the moment with the crisis in the Middle East is not really changing their underwriting assumptions for LNG economics in 2032 today. We are not seeing a change in buying behavior, I would say, in LNG-oriented markets like that in Asia, at least to date. We have talked in the past about the fact that we have commissioned our first LNG-to-power project in Vietnam, 1.6 gigawatts. We have an incremental three projects on contract that are more in SRA category right now that will evolve into orders over time. I have seen—and we have been iterating with our customers on—some of what you could be citing in the press on one of the customers evaluating gas relative to a shift to renewables. I would just tell you there are more projects that our customers are talking about than what we have on contract today. Our 4.8 gigawatts that we have cited in the past are all continuing to progress. Frankly, there are more than those three projects that are being negotiated with the government in Vietnam. We will continue to work with our customers in Vietnam and throughout the world on the dynamics that they are facing to get projects done and are highly confident that we can do that. Kenneth S. Parks: A quick one just to answer your first question. The clarification on April orders was that in April we have booked Power equipment orders at a value equivalent to what we booked in the full first quarter. Michael Jay Lapides: Got it. Before we wrap up, let me turn it back to Scott for closing comments. Scott L. Strazik: Everybody, we appreciate you giving us the time this morning. Similar to our Capital Markets Day in New York City in December at the end of last year, we talk a lot about giving being an important part of the culture we are building at the company. In December, we had done the STEM toy drive that led to 80,000-some-odd toys ultimately contributed. We have a team at the New York Stock Exchange this morning announcing a $4.5 million commitment to the Engineering of Change program that is going to touch 6,000 students over the next four years in some important markets for us in the U.S. and the U.K., and I wanted to reinforce and share that that will be made today through our foundation. It is just an important part of who we are and the company and culture we are building. For our customers, we continue to appreciate their trust in us. For our employees, I personally thank each and every one of them for their work every day, and I am proud of the team that we are building. We need our partners and are appreciative of them. And for all of you, our investors, thank you for your continued commitment to GE Vernova Inc. and continued interest in the company. We are appreciative and proud of our start, but it is just that—a start. This is just the beginning, and we have substantial opportunity ahead. Thanks, everyone. Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
Operator: Good morning, and welcome to Taylor Morrison's First Quarter 2026 Earnings Webcast. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations. Mackenzie Aron: Thank you, and good morning, everyone. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. These statements are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call which are reconciled to GAAP figures in the release where applicable. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer. Sheryl Palmer: Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Eric Heuser, our Chief Corporate Operations Officer. I am pleased to share the results of our first quarter performance and look forward to providing an update on the progress we are making towards our strategic priorities for the remainder of the year. Our first quarter results reflected the effectiveness of our diversified strategy, the quality of our core locations and the disciplined execution of our teams. We delivered 2,268 homes at an average price of $578,000, generating home closings revenue of approximately $1.3 billion at an adjusted home closings gross margin of 20.6%. This drove adjusted earnings per diluted share of $1.12 and 11% year-over-year growth in our book value per share to $64. On the capital front, we invested $503 million in land and development and $150 million in share repurchases and ended the quarter with $1.6 billion in liquidity. As I shared on our last earnings call in February, early signs heading into the spring selling season were positive, and the quarter played out largely as we expected. With sales activity building through the quarter and March representing our strongest month. That momentum is consistent with normal seasonal patterns, albeit with slightly less acceleration than we have seen historically, reflecting continued consumer cautiousness. April started off somewhat slower as typical, coinciding with the holiday weekend, but momentum then picked back up, and we're looking forward to a strong end to the month, even with all the headline noise. Most importantly, as we prioritize the balance between price and pace, we achieved our first quarter sales with a significant increase in the share of to-be-built orders to 38% from 28% in the fourth quarter. As a result, we began to rebuild our backlog, which increased 23% from year-end to 3,465 homes. As we anticipated, this reacceleration in demand for to-be-built homes suggests that historic bio preferences are reemerging as excess spec inventory is cleared across the industry, and our new community openings support compelling value propositions for our shoppers to personalize their new home. One way in which we are helping drive this shift is through design center open houses, which enjoyed record attendance in the first quarter at over 140 events across the country and drove to-be-built sales activity with a strong average conversion rate of 23%. We are further supporting this shift with mortgage incentive programs that provide confidence to our build-to-order customers and enhance their buying power, generally at less cost than incentives required for spec sales. In addition to this favorable mix shift, we also realized more than a 100 basis point sequential reduction in incentives on new orders. And lastly, we made significant progress in selling through our finished inventory, which declined 30% from year-end to 863 homes as we reach targeted spec levels in most of our communities. We have positioned 2026 to be a year focused on setting the stage for reacceleration of growth in 2027 and beyond. This includes a plan to open more than 125 new communities this year, roughly 30% more than we opened in 2025, including about 40 that already opened in the first quarter. supported by an enhanced community opening framework that is helping our teams execute these openings successfully, another 45 or so communities are scheduled to open this quarter during the remainder of the selling season. These openings support our expectation that we will end the year with between 365 to 370 communities which would be up 8% at the midpoint compared to 341 communities at the end of 2025. These communities will generally begin contributing closing later in the second half and into 2027. I'm particularly excited that over 20 of these new openings are in Esplanade communities. This includes the anticipated grand opening of our first Esplanade in Nevada, providing unmatched views of the Las Vegas skyline. This community is already enjoying significant interest with a 1,400 plus lead list and is expected to command record lot and option premiums, with Esplanade consistently generating superior home prices mid- to high 20% gross margins and strong demand resiliency the growth in this unique segment of our portfolio is expected to be an important driver of our future performance. Since we last spoke, the market has been faced with another round of geopolitical turmoil intensified macro uncertainty and a shift higher in mortgage rates. As we would expect, consumer confidence has been impacted by these developments, exasperating affordability constraints and AI-related employment concerns. However, we believe the underlying desire for the homes and communities we build remain strong even as the broader macro environment has given consumers a reason to be more deliberate in their decision-making. On the policy front, we continue to have positive dialogue with the administration regarding how we and the industry can contribute to enhanced affordability and housing accessibility. While any solutions are likely to be incremental, we are encouraged by the ongoing focus on this issue and are pleased with the progress we are making in advancing constructive proposals. Erik will touch on read-throughs to our Yardley business in just a moment. Before I turn the call over to him, I want to touch on the progress we are making in technology. Our online reservation system continues to be a standout example. In the first quarter, we recorded over 1,000 reservations with a 58% conversion rate. Reservation buyers continue to transact at a higher average selling price with stronger option attachment than our nonreservation sales. Encouragingly, we achieved the lowest copra rate we have seen in years, reflecting the power of our reservation platform. On the AI front, we now have more than a dozen AI-powered applications in production across finance, sales, purchasing and customer experience and adoption has more than doubled year-over-year with over 2.4 million internal AI interactions recorded in the first quarter alone compared to approximately $3 million for all of last year. On the customer-facing side, our AI-powered contact center is delivering real-time agent coaching and dynamic scripting on every customer call with automated quality management applied consistently across all interactions driving improved customer satisfaction and sales outcomes. These investments are translating directly into results with an increase to more than 11,000 online sales appointments generated in the first quarter. We are achieving all of this through technology and automation, not incremental spend with more than half of these capabilities built in-house by our own teams. As a result, our overall technology costs are declining even as these capabilities continue to scale. There are many more initiatives advancing through our project management office that I look forward to sharing as they go live in the months ahead. In closing, our ability to reaffirm our full year 2026 guidance in the face of a more challenging macro environment speaks to the underlying strength of our business and the effectiveness of our diversified strategy. We are concentrating our resources where we have the greatest competitive advantage, managing costs and capital with discipline and positioning Taylor Morrison to establish an even stronger and more differentiated portfolio. I believe the actions we are taking today will seperate us in the years ahead as we look to continue creating value for our customers, our communities and our shareholders. With that, let me turn the call to Erik. Erik Heuser: Thanks, Sheryl, and good morning, everyone. At quarter end, we owned or controlled 75,626 homebuilding lots, of which 51% were controlled off balance sheet. While our controlled ratio has recently declined due to normal first takedowns and our active reevaluation of our deal pipeline against current market conditions, we still intend to manage toward our long-term target of at least 65% control. Based on trailing 12-month home closings, we owned 3 years of lots out of a total of 6.2 years of the controlled supply, which we believe is the right balance in today's environment. As Sheryl laid out, our land investment strategy is focused on core, well-located communities that serve our discerning customer base with approximately $2 billion of planned homebuilding acquisition and development spend in 2026. In the first quarter, we invested $503 million comprised of $279 million for lot acquisitions and $224 million for development. As we deploy this capital, we will remain prudent and balanced in our use of land financing tools. These include seller financing, joint ventures, traditional option agreements and land banking, and we selectively deploy each as we seek to optimize cost, risk and return at the individual asset level. Our preference is seller financing when available as it tends to be the lowest cost. When it is not, we evaluate JV structures, traditional options or land banking. The result is a diversified and flexible pool of structures that allow us to cost-effectively control lots off balance sheet or defer cash outflows to improve our returns and manage our portfolio risk. Given the increased investor focus on land banking, I wanted to share some perspective on this topic. As of quarter end, approximately 10,000 of our controlled lots were in a land bank representing approximately 13% of our total lot supply and about 25% of our controlled lots. Our remaining control lots were spread between 33% in JVs, 26% in single takedowns and 16% in traditional lot options. To further put our selective use of land banking in context, in the first quarter, only 6% of our lots approved by our investment committee were tagged to be financed via a land bank. We believe this balanced approach is a source of competitive advantage and one that is reflected in our relative gross margin performance with only about 25 to 30 basis points of capitalized interest in the first quarter attributable to land banking and seller financing related project financing. Turning to another area of focus, our build-to-rent platform Yardly develops purpose-built, single parcel horizontal apartment communities. We have been encouraged by our engagement with policymakers and their general recognition that Yardly's model is fundamentally distinct from the scattered single-family rental activity targeted by our recent legislative discussions, and we continue to believe we are well positioned as that policy dialogue evolves with flexibility around product and execution optionality. Operationally, we closed on the sale of 1 JV-owned Yardly community for approximately $41 million during the quarter. We now have 16 projects actively leasing and an additional 13 projects currently under development. Supported by our land bank, roughly 90% of Yardly's total units are controlled off balance sheet with a total investment of approximately $320 million at quarter end. While we await greater clarity on the regulatory front, we remain confident in the long-term demand dynamics for this unique rental offering that provides affordable housing solutions for those seeking an alternative to traditional multifamily apartments, often before being ready to commit to home ownership. Now I will turn the call to Curt. Curt VanHyfte: Thanks, Erik, and good morning, everyone. I will begin with the details of our first quarter financial performance and then review our guidance metrics. For the first quarter, reported net income was $99 million or $1.01 per diluted share, adjusted net income was $109 million or $1.12 per diluted share after excluding inventory impairment charges, of $8.2 million and pre-acquisition abandonment charges of $5.6 million. This compares to reported net income of $213 million or $2.07 per diluted share and adjusted net income of $226 million or $2.19 per diluted share in the first quarter of 2025. Both closings volume and average selling price came in roughly in line with our guidance, with 2,268 homes delivered at an average price of $578,000 generating home closings revenue of approximately $1.3 billion. This was down from $1.8 billion in the first quarter of 2025 driven primarily by lower closings volume. Our adjusted home closings gross margin of 20.6% came in stronger than our guidance of approximately 20%, driven by several factors, including favorable costs as well as product and geographic mix during the quarter. On a reported basis, home closings gross margin was 20%, inclusive of $8.2 million of inventory impairment charges. This compares to an adjusted gross margin of 24.8% and reported gross margin of 24% in the first quarter of 2025. As anticipated, the decline reflects a higher mix of spec home closings and elevated incentive levels. Looking ahead, we expect that our margin trajectory will be shaped by 2 offsetting dynamics. On one hand, the recent rise in mortgage rates in a more cautious demand environment are likely to sustain the incentive pressure. On the other hand, the progress we are making in rebuilding our to-be-built sales mix is a tailwind. To-be-built homes carry higher gross margins than spec closings. And as those sales convert to closings, we expect this mix improvement to be the primary driver of margin recovery. On balance, we continue to expect gradual margin improvement beginning in the second half of the year with the pace and magnitude dependent on how the sales and interest rate backdrop evolve through the remainder of the selling season. This also assumes relatively stable construction costs at mid-single-digit lot cost inflation. SG&A expense was $149 million in the first quarter or 11.4% of home closings revenue compared to 9.7% in the first quarter of 2025 due to the deleveraging impact of lower revenue. However, in dollar terms, SG&A expense was down $28 million or 16% year-over-year, driven primarily by lower commission expense and payroll costs as we have effectively managed our overhead structure. As closings ramp through the year, we expect the SG&A ratio to improve toward our full year target in the mid-10% range. Now to sales. Net orders in the first quarter totaled 2,914 homes, down 14% year-over-year at an average selling price of $603,000, up 2% versus the prior year. Our monthly absorption pace was 2.7 net orders per community, up from 2.4% in the fourth quarter of 2025, but below 3.3 in the first quarter of 2025. We ended the quarter with 356 active selling communities, up 4% both sequentially and year-over-year. Cancellation trends remained manageable with our cancellation rate at 10% of gross orders in the quarter, down from 12.5% in the prior quarter and from 11% a year ago. This was the lowest cancellation rate since the third quarter of 2024. Turning to starts. We started 2,371 homes in the first quarter. or approximately 2.2 homes per community per month. This compares to a monthly starts space of 2.1% in the prior quarter and 3.3% a year ago reflecting our management of spec production as we work through existing inventory. Going forward, we will continue to roughly align our starts pace with community-level sales activity. With cycle times down more than 1 month year-over-year, we have greater flexibility to start and close homes, including to-be-built orders within the year. We also made progress in working through our finished spec inventory during the quarter. Finished specs declined 30% sequentially to 863 homes while total specs declined 9% to 2,692, which is roughly in line with targeted levels. Net interest expense was $11.2 million in the first quarter compared to $8.5 million in the prior year, reflecting land banking activity. This is consistent with our prior guidance, the net interest expense would increase modestly year-over-year. Our financial services team achieved an 88% capture rate in the quarter, stable compared to a year ago, supported by competitive mortgage offerings and strong alignment with our homebuilding operations. Among customers using our mortgage company, the average credit score was 750. Average household income was approximately $181,000, average loan-to-value ratio of 80% and an average debt-to-income ratio of 39%, reflecting the financial quality and resilience of our buyer base. Turning to our balance sheet. We ended the quarter with total liquidity of approximately $1.6 billion, inclusive of $653 million of cash and no outstanding borrowings on our revolving credit facility. Our net homebuilding debt to capitalization ratio was 20.5%, unchanged from a year ago. Our next senior note maturity is not until 2028. We remain committed to disciplined and returns-driven capital allocation, including the return of excess capital to shareholders after investing in profitable growth opportunities. During the quarter, we repurchased approximately 2.5 million shares of our common stock for $150 million at an average price of $61 per share. We continue to target $400 million of share repurchases this year with $863 million remaining on our $1 billion authorization, which expires in December of 2027, Despite the evolving market backdrop, we are pleased to reaffirm our full year 2020 guidance across all key metrics, including approximately 11,000 home closings at an average closing price of $580,000 to $590,000. Our ending community count is expected to be between 365 and 370 by year-end. We expect our SG&A ratio to be in the mid-10% range of home closings revenue and our effective tax rate to be approximately 25%. In terms of capital allocation, we expect our homebuilding land investment to be approximately $2 billion. Lastly, we expect to repurchase approximately $400 million of our common stock leading to an average expected diluted share count of approximately $95 million for the full year. For the second quarter, we expect to deliver between 2,500 to 2,600 closings at an average closing price of approximately $575,000 and a home closing gross margin of at least 20%, excluding any inventory-related charges. We expect our ending community count to increase to around 370. Our second quarter effective tax rate is expected to be approximately 25.5% and our average diluted share count is expected to be approximately $95 million. Now I will turn the call back over to Sheryl. Sheryl Palmer: Thank you, Curt. As I reflect on the first quarter, I am proud of what this team delivered in a market facing elevated uncertainty and consumer caution, we exceeded our gross margin guidance, rebuilt our backlog, made meaningful progress on spec inventory and reaffirmed our full year outlook, all while continuing to advance the strategic priorities that will define Taylor Morrison's next chapter. None of this happens without the dedication and discipline of our team members who show up every day to serve our customers and execute our strategy. To our team, thank you. Your commitment is what makes this company exceptional. Looking ahead, I'm confident in the strategic direction we have chartered. The pivots we are making, concentrating our portfolio in the strongest markets and consumer segments, scaling our footprint and especially our Esplanade resort lifestyle brands, improving our sales mix and deploying technology to drive efficiency are already bearing fruit. As we continue to execute through 2026, we're laying the groundwork for a reacceleration in 2027 and beyond. I look forward to sharing our continued progress with you. Thank you to everyone who joined us today. Operator, please open the call to questions. Operator: [Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays. Elizabeth Langan: You have Elizabeth Langan on for Matt today. I was wondering if you could touch -- I was wondering if you could touch on the maybe your expectations around the cadence of margin [indiscernible] quarter with your 2Q guide is implying maybe a plan to step down and then you noted that things should improve through the back half as you increase your mix of tubibuilt homes. Is that going to look more like a onetime step up? Or is that going to be more of a sequential improvement throughout the year? Curt VanHyfte: Elizabeth great question. Maybe just to kind of start with kind of Q1. In Q1, as we alluded to in our prepared comments, we did have several factors that went into the margin, and I just want to touch on a couple of those relative to the mix. So on the mix front, we did close more homes than anticipated in our higher-margin divisions. So that was a key contributor. We also closed more to-be-built in the quarter than anticipated as we pulled some in from Q2 into Q1. And finally, what I would say is we closed fewer homes on lower-margin homes that we had anticipated and now have moved into Q2. So when we begin to think about the margin guide for Q2, all of those are then going to reverse and have that impact for Q2, which is kind of one of the main drivers as we looked at developing the guide for the quarter. And so we looked at cost mix, incentives, higher interest rates and where we kind of landed was when we look at maybe 3 key areas: the reverse of the mix dynamic in Q1; two, the continued kind of moving through and clearing our inventory; and three, just the higher interest rates that are in the market. And of course, we tend to work with all of our consumers on a one-on-one basis to make sure we're maximizing the efforts for each person's situation. And so that's kind of behind the backdrop from a Q2 perspective. And then when we begin to think about Q3 and beyond, we haven't necessarily guided to that. But based on the progress that we've done relative to clearing the inventory and increasing our to-be-built mix of sales in Q1 we do continue to expect to see that mark a gradual increase in our margins in the back half of the year. Now the tough thing about that is what is the magnitude of that? And that's going to be highly dependent on interest rate, the market backdrop, consumer sentiment, a bunch of different things. But if all things hold here today, we would expect a gradual increase in margin in the back half of the year. Elizabeth Langan: Okay. And kind of a follow-up to that. With the potential for the gradual margin increase throughout the year, is that -- can you maybe speak about incentives, like how much that could play into it? And are you assuming that, that 100 basis point step down. Is that something that should be consistent throughout the year? Or was that more a onetime step down in 1Q? Sheryl Palmer: Elizabeth, this is Sheryl. Thanks for the question. The 100 basis point sequential reduction, I believe, was a real positive. And reflects a number of different factors. The mix, as Curt mentioned, the mix of to-be-built versus inventory homes with that 100 1,000 basis point improvement. As you know, these incentives program tends to be less costly. So the mix is a tailwind. And I hope it continues to be with our focus on to be built. . Even with the progress we made in selling through finished spec inventory, which declined as Curt mentioned, 30%, we were able to be more disciplined in pricing even on the spec home. Some were correlated to competition probably getting off the year and aggressive incentives, but mostly a discipline in how we are how low we're willing to go. I think our sales teams did a great job holding the line. As I've said before, we aren't going to sell at any cost. We placed just too much value within our communities, and we'll continue to sell them from a position of strength. Some communities are going to be about volume, particularly as we sell out of these more remote locations, but others -- it's all about capturing value. We also replaced in many instances, our most expensive forward commitment programs with another version of our proprietary buy bill program, which is allowing our customers to get a lower monthly payment than some of our most aggressive forward commitment rates I do expect that to continue. And as we've said before, it's all about personalizing a program to meet each consumer's needs. So to your -- will it continue overall, the rate environment will clearly be a factor. And we should expect incentive pressures to persist as long as rates remain elevated. That said, we are very focused on community by community optimization using every tool available to balance that pace and price as we did in the first quarter. I'd say, in total, we're cautiously optimistic that incentive levels will stabilize, but we'll be prepared to adjust as the market dictates. Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Unknown Analyst: This is Chris on for Mike. I was hoping you guys could touch on your expectations for start cadence in the coming months and the delivery outlook for the second half of this year, the 2Q guide implies a sequential step down and certain increase in the back half as a result. I just want to get your thoughts on timing there, 3Q vs 4Q on deliveries? Curt VanHyfte: Yes. Chris, I can take that one. Thanks for the question. Relative to the starts cadence, as you saw in Q1, I think we started 2,371 homes, we sold 2,900. So in Q2, and that -- part of that was as we were clearing out some of the inventory. And now as we look to Q2, we would expect our starts to approximate our sales which is kind of what our consistent message has been as -- even though we had to work through some of the inventory on a go-forward basis. So that's kind of what we're aligning to on a go-forward basis for Q2 is aligning our starts with sales. And so you can imagine that we would be taking up our starts in Q2 relative to that. Sheryl Palmer: And the good news is, given what's happened to cycle times, Curt, we can actually start homes, Chris, much later in the year than you've seen over the past. So you'll see much more of an even cadence than this huge spurt to get to the year-end finish line. Unknown Analyst: Understood. Appreciate that. And just going back to the second half gross margin trajectory. I realize you are putting out guidance, but the modest improvement -- is there any way you could put some numbers around the mix of step up? It sounds like your new communities are slated towards the back half of the year and that is margin accretive. Is there any kind of colocation providers just the mix dynamic alone in terms of delivery timing? Sheryl Palmer: I think it will ultimately depend on the spec sales that we sell and close in the quarter. So it's hard to quantify exactly what that looks like. But as Curt mentioned, we still have a number of finished specs, but we've made great progress. We'll continue to make our way through those in the coming quarters. But as you noted correctly, you will see a heavier back end on the to-be-built based on the success we've had first quarter and our new openings with a high focus on to-be-builds. Operator: Your next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: Great. I'd love to there's been some encouraging trends, I guess, with yesterday's report by one of your large competitors in this morning around seasonality kind of holding in there -- you alluded to maybe the month starting out -- month of April starting out a little slower but starting to pick up again. And I'm curious, as you look at the trends in March and April, maybe better than peer just given all the macro noise, if you're seeing any relative strength within that across your footprint, either by buyer segment. And in particular, I'm thinking about move-up or active adult or even by region, that kind of stands out in your view is kind of anchored or led the results that you've seen? Sheryl Palmer: Yes. It's a fair question, Mike. As I mentioned in the prepared remarks, April started that first week, the holiday week, just a tad slower but once again, I think when I looked historically when Easter falls, that is pretty consistent. But then momentum immediately picked up, and we're looking forward, as I said, to a strong ended the month, even with all the headline noise we're seeing. But more broadly, I think what we saw through Q1 was pretty consistent with normal seasonal patterns. Sales built through the quarter, with March being the strongest month. In fact, I think we've seen an improvement in sales every month since late summer. As everyone's mentioned, consumer confidence was clearly has been impacted by the war and just overall macro uncertainty. But as we've said in the past for the most part for our customers, it's about, should I buy now not can I? And so what we're seeing is really the underlying desire for homeownership remains strong. I think last year, we felt a lot of folks were just hanging around the hoop and they've come off the sidelines. Traffic in our communities remain steady. In fact, we had our lowest cancellation rate since the third quarter of '24. So at 10%, I think that says a lot about the way the consumer is feeling. They're transacted. The ones that are transacting are committed and they're qualified. If I think about some of the regional differences, Mike, you'd expect performance was slightly varied across the market. The West was, I'd say, our most resilient area with orders just down about 8%, and they were led by the bay that was actually up year-over-year. And the rest of the markets in the West were just slightly down. Phoenix was also a pretty nice standout with year-over-year improvement in absorption. I also think as I look across the West markets, they were aided with low resale inventory across each of the markets. And once again, pretty consistent across each of the West divisions. When I move to the East Coast, it was down a bit more 17%. But I'd remind us that Florida had a very strong first quarter last year and some very difficult comps. But either the Florida markets held their own. We saw a nice resurgence in Naples for the season. The Orlando business was probably down the furthest, and that was -- we had a number of closeout and opened new community openings. We also saw a really good mix shift in communities with our average sales price in Orlando, up over $100,000 year-over-year. When I think about other markets in the East, Atlanta saw the greatest increase year-over-year in sales across our entire company, and that growth came in both community count and pace. And particularly nice to see the job growth in our Florida markets and the continued reduction in new supply pretty much across the entire East. Central was down somewhere in between the 2 on orders with a shopper -- probably what I describe as a sharper closings decline, partly a function of mix and timing of community life cycle transitions. A number of new openings in Houston and Austin. Austin actually finally saw what I would say, some stabilization in backlog, had the best sales month in quite some time and can seem to stabilize. So in total, Mike, I think as we continue to shift our strategic priority to core well-located communities, reduced exposure to noncore locations where we've seen just the greatest pricing sensitivity. I think you'll see continued pickup in our central markets. Across all the regions, we're executing on the same strategy, calibrating incentives, pricing community by community, really balancing that pace and price, doing it through differentiating our product. And I should also mention leveraging our online sales capabilities that really were helpful throughout the quarter. Michael Rehaut: Great. That's a great overview. I appreciate it, Sheryl. I guess, secondly, I'd love to kind of understand incentive trends across your markets as well and don't necessarily have to go through around the around the world per se. But just maybe even on a broader basis on a consolidated basis, how would you characterize incentives as they trended through the quarter? And if you expect, we're starting to hear about some level of stability potentially if you're seeing that and expecting that to persist into the second quarter? And if that has anything to do in your view with how inventory trends may have potentially also started to stabilize as well, both new and existing. Sheryl Palmer: Yes. It's a fair question. We talked already about the 100 basis points improvement in sales. But if I were to talk about it broadly, Mike, I would say similar to past quarters. The most expensive incentives tend to be with our first-time buyer group. Obviously, with the success we're having on the to-be-built, that was part of that was a good part of the 100 basis point improvement. But honestly, just as much of it came through a reduction in our spec incentives. So it was nice to see it in both areas. When I look at the cost of our forward commitments, the more expensive incentives, they were down quarter-over-quarter. When I look at our noncontract incentives, they were down. When I look at our contract incentives, they were down. So I'd say pretty much across the business, the exception would be where we had a higher penetration of specs and first-time buyer business, Mike, the last thing I'd probably mention on that just because I think it's an interesting stat as we looked at all the numbers is our incentives were down even though we offered the lowest average interest rate as we've seen in a number of quarters. So to think that our customers got the benefit of a lower rate and our incentives were down. It was a nice trajectory. Curt VanHyfte: Sheryl I think as Mike suggested, I think the supply factors are also helping a little bit. If you look at unsold finished inventory, it's really down in almost all markets across the U.S. and the starts per community have kind of rationalized. And so as we think about the general new home inventory, there seems to be some stabilization. And on the resale market, I would say, in a good way, it's somewhat boring. Our markets average about 4.5 months. We've seen real stabilization on listings, only up 1% month-on-month and pricing actually a little bit of pricing power in the markets in resale. So it seems like a general stabilization that's helping that backdrop for both new and resale. Sheryl Palmer: And we saw what about 1/3 of our communities, Curt, with some pricing. That was just base price adjustments. -- obviously, it'd be a much larger number if we considered a reduction in incentives. Operator: Your next question comes from the line of Jonathan Bettenhausen with Truist Securities. Unknown Analyst: So you made a comment in your prepared remarks about buyer preferences returning to kind of more historical norms. Can you give us some more specifics on what exactly you mean by that? Is that more of a preference towards build to order? Or are you also referring to specific feature of the home as well? Sheryl Palmer: Yes. No, fair question. I think honestly, it was more relating to the shift in the 38% to-be-built orders from the 28% in the fourth quarter. I think an important milestone and reflects what we think is a reemergence of for us, historic buyer preferences, obviously, clearing the spec inventory is helping that I mentioned on the call as well that we have hosted a number of design center open houses, and that's certainly been a key catalyst. We held over 140 events in the first quarter with a 23% conversion. But I think most importantly is that most of those sales were to-be-built sales. So we really saw customers coming in wanting to personalize their house. So I'd say it was more on the mix. But we also saw an overall increase in design center revenues. So I think it's also on the personalization of what they want in their homes. Erik Heuser: And also the share of the community, right, Sheryl as you think about 82% of our buyers say that the community is as important as the house. And I think it's beyond just the offering and hopefully, that long-term gravitation to the overall community as well. Sheryl Palmer: And you're saying it's a fair point, Erik, because we're also seeing it in lot premiums being generally slightly up in most divisions, flat overall. So I hope that helps. Unknown Analyst: Yes, that's helpful color for sure. And then also, it was a strong quarter for the Financial Services business on a year-over-year basis. What kind of went into that and should we expect that performance to continue through the balance of the year? Curt VanHyfte: Yes. Great question, Jonathan. A couple of things that I would say are the main drivers there. One is the high investor demand in the secondary market was very favorable in the quarter. And the second thing I would say is we're operating the business with just a lower cost structure overall. So those are kind of the 2 main contributors to that. As we look forward for the rest of the year, a lot of that will be dependent on, again, that investor demand in the secondary market, and we'll just kind of keep our fingers crossed, and we'll see how the rest of the year plays out. Operator: Your next question comes from the line of Rafe Jadrosich with Bank of America. . Rafe Jadrosich: Great. I really appreciate all of the color that you gave on the land banking exposure. Just a couple of follow-ups on it. Can you talk about the like accrued interest or the option maintenance fees relative to what's like flowing through your P&L today. And if it's sort of matched up and how we think about the potential like margin implications longer term? And then how do you think about seller financing like relative to land banking as you continue to sort of increase the option mix? Erik Heuser: Yes. Rafe, it's Erik. I'll start and then maybe when it gets to some of the accounting, ask Curt to jump in as well. When it comes to seller financing, it's always been a preferred tool of ours. When we have the ability to talk to a land seller, and really add value over time to their property. We found that cost of capital to be lighter than most other sources. So historically, it's kind of gravitated in that 6% to 7% range. So that is a preferred methodology. When it comes to land banking, yes, we did make mention of kind of the gross margin impact to the business. We do cost it in 2 different buckets, being capitalized interest and interest expense. And it does flow over time. So depending on what you have flowing through the portfolio, the timing of those communities, you're going to see a little bit of kind of picking the python as it moves through the financial statements. Curt VanHyfte: Yes, Rafe, generally speaking, when a site is under development, we capitalize the interest into inventory. And then when those houses close, they get -- they come through on the closing on the margin front relative to that home. -- when a site is done with its development, we then treat that interest expense as a period cost, and it gets run through the P&L down in interest expense. Rafe Jadrosich: Great. That's really helpful. And then on the margin outlook side, I think you're assuming sort of stable construction costs, have you seen any impact from inflation related to the geopolitical backdrop yet? And what's the expectation there? Like we've seen some price letters and obviously, diesel costs are up, do you have contracts that like lock you near term? And what's the potential just the overall impact. Curt VanHyfte: Yes. Great question, Rafe. What I would say, first and foremost, our costs quarter-over-quarter were down. So we're very proud of that. Our teams continue to do a lot of great work and working with our trade partners and our suppliers on trying to execute on our house cost reduction and mitigation strategies. Relative to what we're seeing relative to the Middle East conflict is today, nothing tangible has come through. To your point, there's been a lot of news out there relative to potential increases coming. But thus far, we have not seen any of those come through yet to us and hit us. Now if they were to happen to come through based on what I articulated a second ago is that we continue to work on our house cost reduction strategies overall. And so if there is some impact, I think we can overcome a lot of that and offset a lot of it based on some of those strategies. And if there is some flow-through for this year, it's going to be mainly a Q4 event if it does impact us. But I'm pretty optimistic about our team's ability to continue to work on our strategies to minimize overall cost increases. Operator: Your next question comes from the line of Jay McCanless with Citizens Bank. Jay McCanless: So a couple of questions. And Sheryl, thank you for all the color around the design center events. I guess, could you maybe give us some context of how many of those you ran last year and what type of conversion improvement you saw versus last year? Or was this a new initiative that you all did this year to try and see what kind of to-be-build demand was out there? Sheryl Palmer: No. We've been doing it design days for years. I would say we ramped it up pretty meaningfully. We've gotten better at it, and we really have focused it. It's not exclusively around to be built. But by giving folks the time with design experts in a very relaxed evening environment, we've just found it to be a remarkable tool. So I don't want to say it's double, but it's close to that. Jay McCanless: Okay. And then the second question, you guys talked about mid-single-digit land inflation. I guess kind of a 2-part question. One, has the resurgence of to be built demand come faster than you all expected? And I guess, two, is there an opportunity to maybe rebalance some of your land portfolio to walk away, sell, however you want to term it, some of the more entry-level dirt to focus on more of the A and B locations that you have sitting in the land portfolio now and maybe help offset some of that land cost inflation with higher gross margins, et cetera? Sheryl Palmer: It's a great question, Jay. And we continue to open up. If we look at community strategy. I think it really has set us up for a repositioning and a reacceleration into '27. When you look at the communities we opened in the first quarter and a number of what we've we have planned to open in the second and the back half, many of them are focused on the move up. Yes, we do have to continue to sell through on what I would call our first-time buyer position. But when I look at some of the success in those openings, specifically, I mentioned Atlanta. Our team there opened 2 new move-up communities in the quarter, booking nearly 60 sales. Only 3 of those 6 specs. They did just a great job in presales a lot about what I talked about with the new -- the enhanced framework on our community openings, really making sure that we're doing a nice job in the presales. And it's just continuing to yield dividends for us. Last quarter, I think I talked a great deal about, a new community that we opened in Phoenix with the success we had. In fact, that's a community that's mostly move up. And we're restricting sales in that community to ensure that we can align sales and construction cadence and have the ability to raise prices. So it's evolving through our investment committee approvals. But yes, you'll continue to see a greater pivot to the move-up and the Esplanade. Curt VanHyfte: And Jay, that kind of inflationary number is kind of the historic perspective of what's running through the P&L. So to Sheryl's point, and you know that we've spent some time and energy kind of pairing the portfolio fourth quarter and first quarter as you see some of those walkaway costs. And so to your point, as we look forward, that in step with what's coming through the investment committee, I think last quarter, we mentioned about 85% of what came through in 2025, we would deem core and 100% in the first quarter. So that will continue to kind of evolve and get us back to where we want to be. . Operator: Your next question comes from Ken Zener of Seaport Research. Kenneth Zener: Could you -- looking at order seasonality, which historically peaks in 1Q, then kind of moderates. Can you talk to the expectations given that orders and starts are going to kind of be reflective of each other? It sounds like in your commentary. And is that like driven by new communities? Sheryl Palmer: Yes. We've talked about a fairly significant opening cadence. So I think to Curt's point, that will align well with starts. We talked a little bit about April and the momentum we're seeing there. So given the increase in communities and just the robust reception that we're seeing from the consumer, I think you'll continue to see a balanced view on specs and to-be-builts. But overall, I don't see much difference in our overall absorption levels as we continue to work our way through the second quarter. Kenneth Zener: So you say absorption, are you referring to the pace kind of holding the same? Sheryl Palmer: Yes. I think pace generally holding the same and then obviously a ramp-up in communities. . Operator: Your next question comes from Alan Ratner of Zelman & Associates. Alan Ratner: So I appreciate all the color so far. I was hoping to dig in just real quickly on the pace and price kind of decision or strategy and really kind of trying to figure out the elasticity you're seeing in demand right now because when I look at your orders for the quarter, down 14% year-over-year, it seems like that was in line with your plan, given the fact that you reiterated the guide, but it does seem a little bit lighter than what we've seen from some of your competitors. And I'm curious, as you kind of drill into the local market data, do you feel like you lost a little bit of share in the quarter? And was that at all a function of dialing back those incentives and maybe prioritizing the price and margin over pace in the quarter? Or am I perhaps thinking about that the wrong way? Just curious if you've done any analysis on that front. Sheryl Palmer: Yes. No, I appreciate the question, Alan. Interestingly enough, and I understand that we missed consensus on orders. But when I look at our internal plan, we were actually spot on. So when we plan the year, guided to say 11,000 closings, our internal expectations on sales, pretty accurate. When I look at the pace market by market. As I said, we had a couple of markets that had larger misses. I pointed to Orlando with some of the repositioning. So with a reduction in community count a little bit in Denver. But across the rest of the business, I'd say exactly within expectations. As far as dialing back incentives, we've always talked about, Alan, that certain communities are intended to operate at a higher pace and some were going to extract all the value out of. And I really believe that. We have too much confidence in the communities we build that we're just not going to come to some of the aggressive discounting that we've seen. We don't need to. We think we can create more value this way. So in total, a little lighter, I know than what the market expected, but actually in line with our expectations. Alan Ratner: Got it. I appreciate that. And I guess I'll leave it there since the market is open. So I appreciate you squeezing me in. Thank you. . Operator: Your next question comes from Paul Przybylski with Wolfe Research. Paul Przybylski: I guess, Sheryl, you mentioned that geopolitical events the rate increase tied to that has been a headwind to consumer confidence in the first quarter. In prior shocks like this, how long has it taken the consumer to rebound, if you will. Would you expect maybe the spring selling season extends into the second half of the year? Or is the consumer more apt to wait until '27 for more certainty? Sheryl Palmer: No. I think we're already, it's an interesting question, Paul. And I'd say each market performing a little different on what the consumer is saying on the sales floor. I mean our web traffic is up considerably year-over-year, which I find a very encouraging sign. Foot traffic down a bit in most of our markets. But certain markets, I'll speak to Denver. It seems to be very, very tied to interest rate volatility. Other markets, I would say the macro just hasn't seemed to impact the way the consumers think in. So my instinct is, you're right, that we will see the spring selling season behave a little bit differently this year. It has been pretty consistent to what I'd say has been more historic norms if we know what normal looks like anymore and probably will go a little bit longer. Based on the level of activity that we're seeing and the engagement on the website and with our sales and online sales team members. Curt VanHyfte: And maybe just one encouraging thing, Sheryl, as you think about generations, millennials specifically, 88% when they show up, they say they're definitely or seriously considering a home purchase. And so -- it's just one data point, but it is encouraging to see when they are engaged, that they are serious. And so you always imagine that all to your point, there are some things that pull people off the fence. Some of it will be some of the things you mentioned. And for others, it will be something else. But it's encouraging to see some of the folks that are showing up very engaged. Sheryl Palmer: Well, and our conversions are at record highs. So the folks to your point here that are showing up have intent to buy. Paul Przybylski: And then you mentioned AI employment concerns. Is that still pretty much contained to IT sector? Or are you seeing that broaden out across your consumer segmentation. Sheryl Palmer: Yes. You mean as far as any resistance because of concerns around jobs. Yes. It's not something that our sales team hear a lot about. Certainly, there are some tech markets that may be a little bit. But I wouldn't say today that it's been a significant factor. When I look at the cancellations even though they're low, and I tried to get any trends there, Paul. There's some -- there's been some job concern, but it's actually a very small piece of the total cans. Operator: There are no further questions at this time. We reached the end of the Q&A session. I will now turn back the call to Sheryl Palmer for closing remarks. Sheryl Palmer: Well, thank you very much for joining us to discuss our first quarter. We wish everyone a good few months, and we'll look forward to seeking you at the end of Q2. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the First Quarter 2026 Annaly Capital Management Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sean Kensil, Director Investor Relations. Please go ahead. Sean Kensil: Good morning, and welcome to the First Quarter 2026 Earnings Call for Annaly Capital Management. Any forward-looking statements made during today's call are subject to certain risks and uncertainties, which are outlined in the Risk Factors section and our most recent annual and quarterly SEC filings. Actual events and results may differ materially from these forward-looking statements. We encourage you to read the disclaimer in our earnings release in addition to our quarterly and annual filings. Additionally, the content of this conference call may contain time-sensitive information that is accurate only as of the date hereof. We do not undertake and specifically disclaim any obligation to update or revise this information. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings release. Content referenced in today's call can be found in our first quarter 2026 Investor Presentation and First Quarter 2026 financial supplement, both found under the Presentations section of our website. Please also note this event is being recorded. Participants on this morning's call include David Finkelstein, Chief Executive Officer and Co-Chief Investment Officer; Serena Wolfe, Chief Financial Officer; Mike Fania, Co-Chief Investment Officer and Head of Residential Credit; V.S. Srinivasan, Head of Agency; and Ken Adler, Head of Mortgage Servicing Rights. And with that, I'll turn the call over to David. David Finkelstein: Thank you, Sean. Good morning, everyone, and thank you for joining us on our first quarter earnings call. I'll open with a brief review of the macro landscape for discussing our performance then I'll provide further detail on each of our three investment strategies and conclude with our outlook. Serena will then discuss our financials before opening up the call to Q&A. Now starting with the macro backdrop, January and February saw a continuation of many of the trends seen in the second half of 2025 highlighted by a resilient economy as well as modest stabilization in the labor market. Consequently, fixed income markets initially experienced continued strong investor demand and generally muted volatility, ultimately, however, the war in the Middle East, ruptured the calm as it introduced an energy price shock that may challenge the performance of the U.S. economy as the rest of the year unfolds. Although the U.S. is better insulated from higher commodity prices than most of Europe and Asia, rising oil and food prices risk further squeezing a consumer that is already facing slowing income growth and persistent affordability constraints. The bond market reacted sharply to the Middle East conflict and higher commodity prices as treasury yields sold off meaningfully in March. Short-term rates led to sell-off as investors priced higher near-term inflation, while long-term yields rose on increased term premium. Expectations for monetary policy shifted significantly with markets pricing limited probability of any rate cuts this year compared to roughly 2.5 cuts priced in at the end of February. For the time being, it appears that officials will be best served by waiting to evaluate incoming data for clear signs that inflation pressures are receding, where the labor market is more markedly weakening before further lowering rates. This past quarter also saw the release of the Federal Reserve's reproposed bank capital requirements, which were generally in line with market expectations. The newly proposed capital standards are more market friendly than both the original 2023 Basel Endgame proposal and current standards, providing the potential for deployment of excess capital from banks into fixed income and housing finance. The reproposal also specifically targets the mortgage market as residential mortgage loan RWAs are estimated to decline by 30%. This could accelerate Prime Bank loan growth and lower Agency MBS securitization rates of positive technical for prime loans and Agency MBS. Also the elimination of a provision that deducted mortgage servicing rights above a specific threshold from regulatory capital, may at the margin lead to slightly higher demand to hold MSRs on the part of banks. Now with respect to our portfolio performance in the first quarter, we delivered an economic return of 1.5%, reflecting the strength of our diversified housing finance platform across a volatile market backdrop. Leverage remained conservative at 5.7 turns, and we generated $0.76 of earnings available for distribution per share. Capital markets remained supportive in the first quarter, and we were able to raise approximately $510 million of common equity through our ATM in Q1. The majority of capital raise was deployed in our residential credit and MSR strategies given the tightening experienced in the Agency in January and as such, our aggregate capital allocation to resi and MSR increased from 38% to 44% at the end of the quarter. Now turning to our investment strategies and beginning with Agency. Spreads tightened sharply in early January, following the GSE purchase announcement before ultimately drifting wider, initially simply on tight valuations and later on increased rate volatility following the outbreak of the Iran war. Now despite the wide intra-quarter range, MBS widened only modestly quarter-over-quarter with lower coupons outperforming. For Agency strategies, the story for the first quarter was about our ability to allocate capital dynamically as relative value shifts. Following the January tightening, we redeployed capital away from Agency and into our credit businesses, which exhibited a more attractive return profile. However, the ultimate retracement of MBS spreads back to more reasonable levels later in the quarter left the center in Q2 with a more balanced view of the relative value landscape across our three businesses. The further support for Agency currently is the strong technical backdrop the sector is exhibiting as aside from GSE purchase mandate, weekly flows into fixed income funds are strong and CMO issuance continues to absorb over 30% of gross supply as banks have ramped up buying CMO floaters. Moreover, recent changes to bank capital rules encourage banks to retain more loans, which could lower securitization rates and decrease organic growth in Agency MBS. In our Agency portfolio, specifically, we ended the quarter at $92 billion in market value, a marginal decrease from year-end with Agency representing 56% of the firm's capital. We opportunistically repositioned the portfolio during the late quarter sell-off in rates, rotating down in coupon from 6s into 4.5 TBAs. And notably, 4.5s provide more durable cash flows and improve the portfolio convexity should rates retest recent lows. Also to note, we added modestly to our Agency CMBS portfolio in the quarter. We maintained conservative interest rate exposure throughout Q1 with continued focus on protecting book value and managing risk through disciplined measured hedging. Tightened rate macro volatility led to more active tactical hedge adjustments in the quarter as markets moved quickly in response to geopolitical developments. Despite this activity, the net impact by quarter end was modest with overall hedge levels changing only slightly. We remain comfortable maintaining exposure in swap spreads given the increased clarity around bank capital regulation and the growing presence of mortgage investors who actively hedge using swaps. That said, treasuries have proven to be a more effective hedge in sharp volatility episodes, such as March, which is why they continue to be an important part of our overall hedge composition. Now moving to Residential Credit. Our portfolio ended the first quarter at $10.3 billion in market value, increasing to 23% of the firm's capital, driven largely by continued growth in our whole loan correspondent channel. Residential Credit spreads tightened at the outset of the year as the strong movement in the Agency basis drove a rally across securitized products. However, similar to Agency, credit spreads gave back their tightening in late February and March with AAA non-QM spreads ending the quarter 10 to 15 basis points wider. We acquired $6.7 billion in whole loans on the quarter, approximately 80% sourced via our correspondent channel. Our lock volume was very strong at $7.4 billion, a 16% increase quarter-over-quarter and 41% increase year-over-year. Securitization markets remained healthy with Q1 Residential Credit gross issuance of $79 billion, a 63% increase year-over-year. Our OBX platform settled 8 securitizations for $4.7 billion on the quarter generating $570 million of high-quality proprietary assets for Annaly's balance sheet and our joint venture. And subsequent to quarter end, we priced an additional 4 securitizations and now brought 12 transactions to market totaling $6.6 billion year-to-date. Onslow Bay remains the largest non-bank securitizer of Residential Credit and is well positioned to continue to benefit from the growth of the private label market. And we maintained our tight credit standards as our quarter end locked pipeline is represented by a 764 weighted average FICO, a 67% combined LTV with less than 2% of the portfolio greater than 80 LTV. Now shifting to MSR, our portfolio ended the first quarter at $4.2 billion in market value, and our capital allocation MSR increased 21% of the firm's capital. During the quarter, we committed to purchase $24 billion in principal balance or roughly $388 million in market value of MSR with a weighted average note rate of 3.4%. And these purchases came across 4 bulk packages as well as our flow channels. We were the second largest buyer of conventional MSR in the first quarter, as measured by transfers, and we are now ranked as the fifth largest nonbank conventional servicer. Bulk supply in the first quarter, roughly $80 billion UPB was above Q1 '25, and we expect supply levels to remain ample throughout the balance of the year. And we continue to scale our flow MSR capabilities in order to acquire current coupon MSR when attractive and our active flow partners more than tripled quarter-over-quarter as we purchased $1.9 billion UPB via flow, though still a small share of our overall purchases. Underlying fundamentals within our MSR portfolio remained strong, with prepay speeds muted at 4.2 CPR in Q1, while our credit profile continues to be high quality with serious delinquencies just under 50 basis points. The portfolio's weighted average note rate of 3.3% continues to provide significant prepayment protection and is the lowest note rate among the top 20 largest agency MSR holders. Our MSR valuation multiple increased modestly to a 5.94 multiple primarily driven by the increase in interest rates. And lastly, to touch on our outlook, we believe each of our investment strategies is well positioned to deliver attractive risk-adjusted returns through the remainder of the year, supported by a constructive market and housing finance backdrop. Again, Agency spreads are at a more reasonable level today than earlier in the year, offering perspective new money returns in the mid-teens and as I noted earlier, market technicals are the most favorable they've been since the end of QE. We believe that our portfolio composition continues to be a meaningful differentiator for Annaly, minimizing prepayment risk, while also generating strong carry. Our Residential Credit business continues to see very strong growth, all while maintaining a diligent focus on asset selection and credit quality. While the non-QM and broader Residential Credit market is attracting new forms of institutional capital, our early investment in infrastructure and technology, the expansion of our correspondent partners and the depth of our OBX platform creates competitive advantages that are not easily replicated, and we intend to continue growing our allocated capital Residential Credit. Our MSR portfolio is distinguished from other scaled portfolios in the industry by our significantly out of the money note rate and the high credit quality of our underlying borrowers. This has allowed us to consistently outperform our model projections, providing ample and predictable cash flows. We expect to further add MSR this year with increasing usage of our flow acquisition channels and benefiting from our long-standing synergistic relationships with large originators and servicers. Now overall, Annaly's scaled, diversified housing model has demonstrated our ability to perform across different market environments. And over the last 3 years, Annaly has delivered a double-digit annualized economic return with a lower levered and more efficient platform than peers. The ability to dynamically allocate capital toward the most attractive relative value opportunities is critical in times such as this past quarter, and as we entered the second quarter with a reduced overweight in agency, we see a more balanced opportunity set with each strategy, providing compelling new money returns. And now with that, I'll hand the call over to Serena. Serena Wolfe: Thank you, David. Today, I will briefly review the financial highlights for the quarter ended March 31, 2026. As in prior quarters, our earnings release discloses GAAP and non-GAAP earnings metrics, and my comments will focus on our non-GAAP EAD and related key performance metrics, which exclude PAA. This quarter, our portfolio delivered sound performance even as market volatility and geopolitical challenges increased. Our diversified housing finance platform proved resilient, and our proactive hedging strategy protected us against interest rate volatility throughout the quarter. With that context in mind, as of March 31, 2026, our book value per share decreased by 1.9% from the prior quarter to $19.82. After accounting for our $0.70 dividend, we achieved an economic return of 1.5% in Q1. Earnings available for distribution per share increased by $0.02 to $0.76 per share and exceeded our quarterly dividend. We achieved this level of EAD primarily through a 30 basis point improvement in our average repo rate to 3.9% and higher TBA dollar roll income driven by increased specialness. Partly offsetting these benefits were lower levels of swap income due to lower average receive rate on declining SOFR. Net interest margin benefited from the reduction in cost of funds, improving 2 basis points to 1.71% while our net interest spread remains strong, declining modestly to 1.42%. The Residential Credit securitization business achieved another record quarter, issuing $4.7 billion across 8 securitizations, surpassing $50 billion in total issuance since inception. Our economic leverage ratio remained disciplined at 5.7x and our Q1 reported earning repo rate was 3.87%, down 15 basis points. The weighted average repo days to mature at the end of the quarter at 36%, up 1 day. Total warehouse capacity across our Residential Credit and the MSR businesses was $7.6 billion, including $2.8 billion of committed capacity. We have ample available capacity in both businesses with utilization rate at 65% for Residential Credit and 50% for MSR. We ended the first quarter with $7.4 billion in unencumbered assets. This includes $5 billion in cash and unencumbered Agency MBS. We also have roughly $1.6 billion of fair value of MSR pledged to committed warehouse facilities. This amount remains undrawn and can be quickly converted to cash, subject to market advance rates. In total, we have about $9 billion of total assets available for financing, down $300 million from the prior quarter. This represents about 55% of our total capital base and provide significant liquidity and flexibility. Finally, on our OpEx. Our efficiency ratio fell 2 basis points to 1.29% this quarter, continuing our trend of being 1 of the lowest in the mortgage REIT sector despite operating 3 fully scaled businesses on the balance sheet. That concludes our remarks. We will now take questions. Thank you, operator. Operator: [Operator Instructions] The first question comes from Crispin Love with Piper Sandler. Crispin Love: Dave, you mentioned the bank capital rules. Do you think these changes will drive significant changes in bank balance sheets with banks holding more mortgages, mortgages have definitely been moving towards nonbanks for an extended period of time. I think the bank crisis in 2023, you only increased that just given the asset liability mismatches. So I'm curious if you think that these changes could be meaningful could change just on the margin and what that could mean for the broader mortgage industry? David Finkelstein: Sure, Cris. And look, we'll have to see. I think when you look at the estimates in terms of balance sheet capacity for mortgages as a consequence of the rule and it gets a little over $600 billion in balance sheet capacity. And in terms of how we see it evolving, the tiering of LTVs, obviously, is quite favorable, and we think it will reduce agency issuance as banks will retain more loans. We don't know at this point the extent of it. But generally, it's good for the technicals associated with mortgages. And as far as origination, and I'm going to hand it over to Mike momentarily. But as far as the origination market, we don't see banks getting back into origination. That has largely moved outside of the banking system into nonbanks. And the nonbanks have made considerable investments and it will be hard to ultimately compete with them. Banks obviously still engage in origination, but that's typically on behalf of their customers as opposed to a real profit center. And Mike, feel free to add. Michael Fania: Yes. I would just add, Crispin, that in terms of what banks have been focused on, they have been focused on catering to their retail customer. They are not focused on pursuing origination through the correspondent channel. You could see that through Wells Fargo, but there's been a number of other companies that have deemphasized correspondent lending, as a way to acquire the customer. And we do not think that these rules will change that. A lot of it is what David is saying is that the secular trend of nonbanks, that's going to stay in place. They've invested in terms of technology resources, but also the profitability of the mortgage origination market as well is currently challenging. If you look at 2025, the net profit margin for independent mortgage bankers was 21 basis points. So that is historically a low number. So it's not really a conducive environment for banks to come back into the mortgage origination market with a large presence. Crispin Love: Okay. That makes a ton of sense. And then just a second question for me on capital allocation across the businesses. You did lean into Resi Credit and MSRs. Can you just remind us what your long-term goals are for allocation? I believe it was 50% Agency, 30% Resi Credit, 20% MSRs. First, does that still stand? Is that a place that you'd like to get to and just be able to dial up or dial down specific areas? David Finkelstein: Yes, that is correct, and you did identify those metrics accurately. And it is a long-term objective of ours. But as I've always said, we've always said we're very patient about getting there. And this past quarter is an example of our ability to pivot. In January, Agency MBS were very difficult to buy given the valuations and the ability of the other businesses to pick up the slack and add assets, I think, is a testament to the flexibility of the model, but long term, 50%, 30%, 20% is still the target. Operator: Next question comes from Bose George with KBW. Bose George: Actually, can we get an update on your book value quarter-to-date? David Finkelstein: Sure, Bose. As of Friday, we were up 4% in economic terms. Bose George: And that's 4% net of the accrued dividend? David Finkelstein: Inclusive, inclusive of the dividend accrued. Bose George: Okay. Okay. Great. And then on the -- going back to the Basel III question. I mean the MSR risk weighting has remained at 250%. Do you expect that to go down after the comment period? And if so, think that gets the banks a little more active on the MSR side? David Finkelstein: Well, the banks are already active on the MSR side. So we see them as we're bidding for MSR. And look, it's under common, the 250% risk weight, I would expect that the banks are going to be very active at lobbying around that 250% risk weight. And whether they'll be successful or not, we don't know, but they'll certainly be proactive about commenting on it. Operator: The next question comes from Marissa Lobo with UBS. Ameeta Lobo Nelson: On the increased capital allocation to non-agencies in Q1, the presentation states returns of about 12% to 15%. Can you expand on how that looks among the various non-agency subsectors you're active in? David Finkelstein: Sure. Mike, do you want to take it? Michael Fania: Sure, Marissa. So the net increase in the portfolio was $2.3 billion. I would say it's broken down within 3 components. One is third-party securities. So the portfolio was $2.1 billion at the end of the quarter. That was up $435 million. So within third-party securities, we bought $395 million of CRE CLOs. These are AAA assets, points of enhancement or like a 2-year spread duration, they're uncapped floaters, 7 turns of leverage, that gets you kind of to 12%. We also bought BB non-QM bonds. So these are the [indiscernible] ones. We bought those in the kind of the range of 3.35 to 3.40 over. I would say that those are in kind of the 12% to 13% levered ROEs. And then we also bought $55 million of NPL, RPL A2s. So these are unrated securities. We're buying the subordinate bond 15 to 20 points of enhancement and they're in the kind of like the 3.50. So there's kind of the 12% to 13% as well. So the lower end of that 12% to 15%, that is the identification of these third-party securities. The other 2 components of the portfolio is OBX. That was $3.5 billion. That is where you're getting those mid-teens returns. Whole loans were up $1.65 billion on the quarter. I will say when they're sitting on warehouse lines, you're earning kind of in that 11% to 12% range. but that when they're ultimately manufactured into OBX securities, you're earning that 15% on 1 turn of leverage. So that is kind of the breakdown over the quarter. Ameeta Lobo Nelson: I appreciate that detailed answer, Mike. And referencing recent reports from the rating agencies on non-QM delinquencies, particularly newer vintage collateral. And with the rising pressure you referenced on the consumer from inflation? And how is that impacting investor appetite down in credit. Has it impacted your credit enhancement and pricing in your deals in any meaningful way? Michael Fania: Yes. So I would say that what we are experiencing and what we are seeing is that the 2024 and the 2025 vintages up the seasoning curve of the credit card are showing lower delinquencies than what was experienced in 2023. And in 2025 is outperforming 2024. When you look at our portfolio, our serious delinquencies are D90 plus. It's 140 basis points. That has been pretty much in the range over the last year, call it, in the 130 to 145 basis points. So our performance has been very, very consistent. In terms of the deals themselves, what we're seeing broadly is when non-QM gets up the seasoning ramp, 2023 vintage, if you include other third-party non-QM shelves, you're maybe in that kind of 5% to 6% range as a percentage of current. What you are not seeing, however, is realized losses. Realized losses, cumulative losses within non-QM are still a handful of basis points across various vintages. So I would say we have not really had seen any impact from the investor side. I think we're very comfortable with the structures of the deals, the credit enhancement, the performance and ultimately, the fact that these borrowers have equity and they're not realizing losses on those delinquencies and then in terms of the rating agencies, I would say that they have been constructive. They initially were we thought very conservative evaluating these transactions. And CEs, I would say, have actually probably have declined a little bit given the actual performance that we've seen over the last number of years. Operator: The next question comes from Rick Shane with JPMorgan. Richard Shane: Look, you guys were aggressive in the first quarter, raising capital through the ATM. Stock continues to trade at a premium to book. I am curious in this environment with spreads tightening again how aggressive you might be at these levels and also given deployment into what I would describe as less liquid, more bespoke instruments, whether it's MSR or CRT, is the strategy to raise capital and then deploy it into the core agency book? And then as you see opportunities rotated into the other asset classes, how should we think about deployment and your ability, I guess, how aggressive you will be in raising capital and how you will mitigate the drag as you redeploy capital? David Finkelstein: Sure. Good question, Rick. So just to be clear, in the first quarter, the capital raise was specifically related to Resi Credit and MSR in real time. So in January, Agency obviously got quite tight, as I mentioned. However, we were seeing a lot of supply coming in both MSR and the loan pipeline was picking up. So we felt it was highly productive to raise capital, and we did so. We added nearly $400 million in market value in MSR and obviously, couple of billion in Resi Credit. And so that was the purpose. We weren't just raising capital, putting it in Agency and then redeploying it. It was specifically earmarked. On a go-forward basis, Agency looks better than it did obviously, in January after the GSE announcement. And when we look at that sector, the technicals are as supportive as they've been, as I mentioned in the prepared remarks, since QE. And so while spreads are not as cheap as they were in 2025, it's a very investable sector because we feel like it's safer given the breadth of demand across virtually all market participants. So we wouldn't hesitate to methodically raise capital and invest in Agency. But we don't feel like our footprint is going to be that heavy. We don't need to be that aggressive. It's got to work for us. And obviously, it was accretive last quarter and it still looks to be that way, but we're going to be delicate and we want to be very thoughtful about how we allocate it. And again, Q1 was not about just storing it in Agency and then redeploying it. We have done that from time to time. As I've mentioned, when Agency was cheaper but really, it's a very thoughtful process. We weren't in the market that frequently. In March, when the volatility certainly weren't actively in the market. It had to be right. The stock had to be liquid and with a strong bid associated with it and we didn't have a heavy footprint at all, and we'll maintain that approach. Richard Shane: I'm a little -- our team is a little short handed at the moment, and I'm bouncing around between calls. So the clarification on how opportunistic that issuance in Q1 was really helpful. Operator: The next question comes from Harsh Hemnani with Green Street. Harsh Hemnani: So there were a few securitizations this quarter that included Agency eligible loans. Could you maybe talk a little bit about the dynamic that's incentivizing originators to sell their loans to -- in the non-agency channel over the agencies? And then how you expect that to trend over the coming quarters? Michael Fania: Sure. Thanks, Harsh. This is Mike. So I would say that the Agency eligible investor loans and Agency-eligible second homes has been a continuing sector within the Residential Credit market over the last number of years when the FHFA and the GSEs made changes to their LLPAs. At the higher LTV levels, it is very onerous to deliver those products to the GSEs. So dependent upon where market execution is, a lot of these underlying originators would rather retain those loans, put them on gestation facilities for a period of time and deliver to nonagency aggregators like ourselves relative to delivering to correspondents or the cash window. So there's enough pay up for them to hold that loan, perform due diligence, pay incremental warehouse costs relative to just delivering it to another correspondent or cash window within a handful of days. So that's something that has existed within this market for a number of years, given those LLPAs. A new development, what the market is seeing is that Agency owner-occupied collateral, which does not have the so-called onerous LLPAs. You have seen more and more originators securitize that. So at this point, I think that there's been 3 originators that have come to the market. I think they all have differing objectives in terms of coming to the market. One of them, which is fairly large, I think that they've been very clear that the actual execution of owner-occupied in the PLS market versus the Agency market is breakeven, but they're utilizing it to create credit investments. We did a deal this quarter with the company. It was a partnership transaction. We didn't actually take principal risk, but we are charging for the use of our shelf. We take down [indiscernible] bonds. I think their incentive was they wanted additional capital markets distributions away from the GSE. So we've seen a handful of originators go down the route of owner occupied. At this point, though, we don't think that it's actually that profitable relative to the agency execution. It's more just broadening these originators capital markets distribution, so to speak. Operator: The next question comes from Merrill Ross with Compass Point Research and Trading. Unknown Analyst: You mentioned that there were slight changes in your hedging portfolio despite the shift in your equity allocation. And I'm wondering if the lower periodic income reduces your appetite for hedging with swaps over treasury futures and just how you expect to roll forward your hedge is in the second quarter? David Finkelstein: Sure, Merrill. So I'll just take a big picture approach to your question and talk about swap versus treasuries. Now we've had a couple of changes to the market in the past number of months beginning last fall and the first one being that the Fed ended QT and started reserve management purchases. And that to us, signaled that the Fed is going to stand behind balance sheet in the market. And the difference between swaps and treasuries in terms of the risk is treasuries have balance sheet risk, swaps don't. And so when you add potential for balance sheet on the part of the Fed, it makes swaps a safer hedge. And in addition to that, the second item is we got clarity on bank capital rules, which should free up a little bit of balance sheet. So from that standpoint, our disposition towards hedging with swaps is a little bit more optimistic. Now having said that, the correlation between mortgages and swaps is not as good as the correlation between mortgages and treasuries or hasn't historically been as good. It's a tighter fit to hedge with treasury. So it makes sense to maintain treasuries as a hedge even though the carry isn't as good. However, if you look at some of the evolution over the very recent past, REITs growing and they're hedging the GSEs hedged with swaps, a lot of bank purchases of CMO floaters, which are SOFR based. And so the market is evolving more towards benchmarking mortgages to swaps and as a consequence, you should get better correlations on a go-forward basis. So between both of those developments, I think we're a little bit more comfortable hedging with swaps, and you might see a slight increase in our usage of swaps. However, when you get shock environments like we saw in March and the selloff, treasuries tend to underperform swaps and they end up being a better hedge. So you want to have some element of your hedge portfolio in treasuries to kind of cushion those eventualities. But generally, we're pretty comfortable with around 2/3 hedge ratio between swaps and treasuries. You could see it go up because of the better or the increasingly better fit between mortgages and swaps.. Operator: The next question comes from Jason Weaver with Jones Trading. Jason Weaver: I was hoping to perhaps that maybe you could disaggregate the 190 basis points book value decline by what was driven by HD spread widening versus marks on the Resi Credit and MSR book and if that's materially reversed in April? David Finkelstein: Yes. So I'd say resi performed the best, followed by MSR and Agency obviously lagged. So Agency spreads as well as costs associated with dynamically hedging. We had a 50 basis point variation in 10-year swaps, and that can tend to cost a little bit. And so some of the book value deterioration was as a consequence of just managing the portfolio and hedging. But generally, Agency lagged the other 2 on a little bit of spread widening, maybe had a very slightly negative return and resi did the best, call it, low to mid-single digits and MSR low single digits in terms of economic return. Jason Weaver: Got it. That's helpful. And then given the geopolitical volatility that's been going on since March, has that shifted your outlook for the runway for the Onslow Bay business? Or have you changed your retention target with that strategy? David Finkelstein: You said Onslow Bay specifically? Jason Weaver: Correct. Michael Fania: Jason, this is Mike. I would say if anything, Q1 has actually given us more comfort in terms of ramping up -- residential whole loans ramping up the correspondent business. Similar to what we experienced during Liberation Day and the subsequent fall out there, there's been significant resiliency within the non-agency market. When we look at Q1, David mentioned in his script, over 60% growth year-over-year in Q1. And that is despite spreads at the top part of the capital stack experiencing a 50 basis point -- 50 basis point range. So the market was fully functioning. We obviously priced 8 deals, settled 8 deals, $4.7 billion. We priced 12 deals to date. And right as we sit here today, the cost of funds on a AAA security is probably in the 1.20 range all-in SOFR cost or SOFT plus 1.50 and you're in the low 5% cost of funds. So the market has shown increasing growth, sponsorship and liquidity and I would say we're comforted by despite this volatility, the market continued to operate at a high level. Jason Weaver: Congrats on the quarter. Operator: Next question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: With mortgage rates increasing a decent amount over the last several weeks, can you give us an update on your thinking as to the probability of further efforts from the government to potentially lower mortgage rates and what form do you think that could potentially come in? David Finkelstein: Sure. So look, the affordability issues kind of moved a little bit to the sidelines in light of the conflict in Iran, and just to summarize what's been done thus far. Obviously, the GSE announcement was meaningful for the mortgage basis. But there's been a couple of executive orders, which have been primarily focused on regulation, both building as well as mortgage lending. And those are just around the edges. The ROAD Act is stuck in the house and that has, again, some positive impact for affordability as pilot programs, convert vacant buildings into attainable housing, spur construction through regulatory relief as well. Grants for manufactured housing, et cetera. And also the other efforts within the government to just generally make housing more affordable. But these are not having an impact insofar as at the end of the day, mortgage rates are higher, folks are locked in and home prices are high. And ultimately, we need lower rates to be able to help that. We'll see what else the government can do. But one thing I can tell you that might be a little novel idea, if you want to get mortgage rates lower, is to take a bipartisan approach and focus on reducing spending and raising revenues and get overall level of interest rates down, if you can deal with deficits. And until you really deal with the bigger structural problems in the economy, it's going to be hard to get mortgage rates lower. So -- that's the short of it. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to David Finkelstein for any closing remarks. David Finkelstein: Thank you, operator, and thanks, everybody, for joining today, and we'll talk to you next quarter. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Bank OZK First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jay Staley, Managing Director of Investor Relations and Corporate Development. Please go ahead. Jay Staley: Good morning. I'm Jay Staley, Managing Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates and outlook for the future. Please refer to our earnings release, management comments, financial supplement and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO; Brandon Hamlin, President. Cindy Wolfe, Chief Operating Officer; Tim Hicks, Chief Financial Officer; and Jake Munn, President, Corporate and Institutional Banking. We will now open up the lines for your questions. Let me now ask our operator, Tanya, to remind our listeners how to queue in for questions. Operator: [Operator Instructions] And 1 moment for our first question, which will come from Manan Gosalia of Morgan Stanley. Manan Gosalia: Hi, good morning. The first 1 is just around the CIB, strong growth again this quarter. And I guess -- appreciate that you guys are growing in attractive markets. You're building teams. But at the same time, we continue to hear across the board that competition is growing. I guess the question is, how do you assess risk in that business? And I guess, what, if anything, would cause you to pull back there? George Gleason: All right. Jake, do you want to take that? Thank you for the question, Manan. Jake Munn: Great to catch up with you and hear you. Good question. We continue to grow at a steady clip, as you mentioned, within CIB. Across all of our major business lines this quarter, we had really some nice success in generating over or nearly 2 dozen new relationships, upsizing nearly a dozen legacy relationships. And so we continue to see some nice growth across all of those. . You have a good point there. What we're really building here, and you need to remember is it's a diversified C&I. And so it is not a CIB business that's focused in on niche These verticals encompass over 42 different industry niches in particular. And so it's allowing us, whether that's through ABLG,/CBSF, EFG, fund finance, LFG, NRG our franchise capital solutions that we mentioned, we launched this last quarter. We're creating a really diversified book within CIB that allows us to take advantage of opportunities within those specific industries and push into them. So if we see a slowdown or increased competition, or increase or decrease pricing, let's say, in ABLG, it affords us the opportunity to push more into our CBSF or NRG business lines. And so that diversification that we're building within CIB is allowing us to continue to grow at a nice clip. -- in a way where we're not taking on any undue credit risk. Manan Gosalia: And are you seeing any spread compression in certain businesses that has caused to pivot into others? George Gleason: We are exactly, yes. So in our ABL G are some of our large corporate opportunities there, we have seen some pricing compression. And so we've switched that and moved downstream a little bit more towards the middle market, single lender opportunities, in particular, -- if we look at our fund finance business line, we've had to pull back a little bit in our capital call subscription facilities just due to increased pressure there. specifically from nonbank lenders and then insurance companies who have really entered that market and pushed down a little bit on pricing. And then if we're looking at our lender finance group, too, in our lender finance group. We've seen some pricing and structure compression there, too. So again, there's been some competition in those business lines. But as a result, it's allowed us to push in a little bit more within our CBSF,ourEG in our NRG business lines. And so again, the diversification and the nature of which we're building, CIB is affording us the opportunity to continue to grow without giving up yield and without sacrificing credit quality. Manan Gosalia: And then just in terms of helping us model out NIM. We saw the material securities growth Q-on-Q. Any color you can provide there on what you're putting on -- and I guess, how should we be modeling yields in that portfolio beyond the $460 million to $470 million that you've guided to for next quarter? . George Gleason: Tim, do you want to jump in there? Jim, go ahead. . Tim Hicks: Yes, sure. Mannes, we -- early in the quarter, took the opportunity to use some of our excess liquidity and buy a decent amount of investments during the quarter and enhance our yield. About 40% of those are in muni housing bonds and 60% are in mortgage-backed securities. Those have both have favorable yields. The muni housing bonds or a tax equivalent yield of around 6% and the mortgage-backed securities are somewhere around the 460 range or better. So these are agency mortgage backed. Agency mortgage backed. So we saw good growth there. We gave you some guidance on where we thought the range would be for yields for that portfolio. We had a nice pickup in Q1, and we'll see another nice pickup in Q2 and then from there, we'll see what the market brings to us on opportunities. But the team did a great job of finding good yielding attractive high-quality investments, and that's going to certainly help us on NII during the quarter and will help continue to help us throughout the year. Operator: And our next question will be coming from the line of Stephen Scouten of Piper Sandler. . Stephen Scouten: I guess the first question would be around commentary within the management - the common document around 2027. You guys seem pretty upbeat about the potential for the bank in 2027, both in terms of growth and maybe even resolution progress within RESG and the resumption of growth within that book. So I'm wondering if you could give any additional color as to what kind of driving that confidence, whether anecdotal or more concrete that would kind of give us a view into that progression? George Gleason: Yes, Stephen, happy to address that. Obviously, Jake's already spoken about CIB and diversification, the new areas we're pushing into their CIB will be the predominant growth engine we would expect in 2027 as it has been last year and will be this year. So we expect that leadership to continue from the CIB group. We're continuing to add people. We're continuing to push into other verticals there. . RESG may not be a great source of growth in 2027, but we're looking for a slowing of the headwinds from RESG repayments in 2027. It may be 2028 before we actually see significant growth there. We would expect our indirect lending group to continue to grow nicely. It stayed steady at 12% and sort of pushed up to about 13% of our portfolio. That portfolio is a very high-end prime, high prime, super prime consumer portfolio, and it has continued to just perform very well and very consistently And we expect to get some more growth out of our commercial banking, community banking group next year. So we think the headwinds from RESG repayments ease quite a bit in '27. We expect these other business lines to actually accelerate a touch more in '27 contributing to that. better incremental growth we're seeing that year. The other thing that I think is important is we're building a number of other and investing to build a number of other fee-generating businesses. We're putting increased emphasis on trust and wealth. We've got a mortgage group that we've been building for a couple of years now that continues to gain scale. Although the mortgage business is not a hot business right now. We think it will improve, and that unit will gain more scale. We're continuing to grow our fee income through treasury management and improving what we're doing there a lot and probably the biggest source of fee income opportunity just as far as growth is in our CIB group, where there are a number of fee-based businesses and opportunities we're tapping into. And I think you'll begin to see that incrementally add some noninterest income in subsequent quarters this year and really hit a good pace in 2027. So we're fairly optimistic about 2027. Stephen Scouten: Got it. Really helpful color, George. And then I guess my other question would be maybe similar to Manan's question in a way, but thinking about CIB, I mean, with RESG, we've all known you guys to have a best-in-class platform for the last 20 years or so you've shown a differentiated model. How do you give investors confidence around the pace of growth within CIB and that there is a more differentiated model there as well that we should have the same level of confidence as you grow that this rapidly similar to the results you've delivered in RESG over the life of that business? George Gleason: Yes. Great question. Thank you for that. I'm going to let Jayse answer part of that question. But before he does, I'm going to tell you a couple of things. Number 1 is talent and leadership are critically important in our company. And Jake will talk a little bit about talent as he answers your question. And the other thing is we've really built CIB aligned with the way we have built and approached RESG, and that is you're going to look at a whole universe of opportunities all over the country. You're going to focus on a very narrow subset of that universe that meets your criteria for quality of credit, profitability and relationship building, and then you're going to close those transactions with very intentional bank protective documentation, you're going to service and manage those assets in a very engaged way so that you see early warning signs you're able to influence behaviors and move those transactions in a way that is conducive with bank standards and objectives. So Jake, I'm going to let you talk about your team and why, given the growth you're experiencing and projecting to experience you're comfortable with what we're doing. . Jake Munn: Yes. George, I appreciate that. And Steve, good question as usual. It's really about building an infrastructure that's scalable to George's point. So when we got over here and we started to develop CIB in a very similar form in fashion, RESG has started with building out a really strong portfolio management and operations team. And so our portfolio management our underwriting, our quarterly status reporting on every single credit we do within this book of business. Our 4 operations teams that sit within PMO that ensure from beginning to end. It's a clean and crisp process for our clients as they're onboarded and service through the life of their relationship with us. And then it's also building out something that's scalable from a cross-sell and a products and capability standpoint. George mentioned that answering your last question about fee income. But if you go back a couple of years ago, to where we are now. We've really developed some nice additional business lines that support the needs of our clients and our communities, but also will assist in generating some really nice noninterest income. So whether that's our syndications desk that's afforded us and blessed us with the opportunity to now lead more deals as admin agent. whether that's our interest rate hedging capabilities, our foreign exchange capabilities, whether that's our capital markets program that we have that allows companies to access the capital markets with our partnership that we have there for whether that's our great treasury management platform that Cindy and Chad continue to develop and build out, we really have the products and the capabilities now to grow with the company and scale with the company over the long-term horizon within the C&I space. And then to top it all off and really the most important part that George hit on, it's all about talent. At the end of the day, we're in the business of people. We're banking people, we're banking communities, we're banking businesses. And so attracting the right talent who has a like mind for credit who has the fire in their bellies to say, to get in here and roll up their sleeves and make a difference. That talent is really what's been differentiating us. And so put it all together, we've developed all the products and capabilities that are needed to scale this business. We have a great foundation with our portfolio management and operations team. And then we've sat here and developed and bolted on complementary business lines. So whether it's our asset-based lending or corporate banking and sponsor finance our equipment finance, our lender finance, our fund finance, our Natural Resources Group and now our franchise capital solutions. We're just getting started. There's a great market out there. We're being highly selective in what we're doing to George's point, our pull-through rate on our more mature businesses is still around 14%, 15%. And so we are passing on 80%, 85% of the deals we see in the market, whether it's a credit or a pricing-driven path but being highly selective in who we bring on, being highly selective in the products and services that we're launching into the market to ensure that they're best in class. It's all really working out well for us, and we're seeing nice continued growth and true franchise growth, really built 1 relationship at a time. Stephen Scouten: That's extremely helpful color. And positioning it like RSG was built is something I wasn't fully aware of. So thank you for going into that detail. I appreciate you. Thank you. . Operator: And our next question will be coming from the line of Brian Martin of Bain Capital. . Brian Martin: Sam, maybe just 1 on the margin. I know you gave a little commentary in the management comments, but just thinking about if we don't see a change any changes in rates here in the near term, just thinking about kind of the comments in the in the release about the pressure that you may be upward pressure you may be seeing on the deposit side? And then secondly, just trying to understand with the growth in CIB, how much of that is variable rate versus fixed rate? Just kind of how to think about the margin in the stable environment, given kind of the changes here on the loan mix and then just maybe what funding pressure you're seeing? George Gleason: Cindy, you want to talk about deposit pricing, and then we'll jump to Jake on his CIB pricing. . Cynthia Wolfe: Sure. Thanks, Brian. Well, we did see competition increase last quarter. We've seen that before. So I'm just really proud of Audi Curley, our Chief Banking Officer and his team for actually reducing rates by 18 basis points in spite of that and growing we have an incredibly talented machine that manages to synchronize our deposit growth right along with our loan growth, which you can see remains a good kind of challenge with CIB and their success. So we're poised to continue to do that. And we also have a veteran leader of government and institutional banking, Drew Harbor. So we have a great mix of very large depositors and yet we remain average balances of our depositors of $52,000, which really, when you do the math of just under $2 billion in growth over the last year, it just represents an incredible amount of hard work every day by our retail bankers and our commercial bankers in our 255 offices. So we're going to continue to do that. And we're cheering RESG and CIB and our other bankers on in their growth, and we'll continue to perform really well. . George Gleason: Jake, do you want to talk about CIB pricing? . Jake Munn: Yes, sir. So on the CIB side, it's predominantly a variable floating rate book. Very rarely do we balance fix outside of our equipment finance group. -- if a client has a desire to fix rate, we offer them through our interest rate hedging solutions desk, the opportunity to swap their loan. And then artificially fixed as a result, which would generate additional noninterest income for the bank. It continues to be a bit of hand-to-hand combat out there on these deals as it relates to pricing. I know Manan had a question earlier about pricing and any compression we're seeing in specific business lines. Again, the beauty of what we're building is the nature of the diversification though, so we can pull on the levers and push into the business lines where we can get a little bit better yield. If we look at our legacy book versus the new deals generated this last quarter, there was actually about, call it, a 12 bp uptick on the average spread and so we're actually leaning into the market and pushing on pricing. I know I'm actively challenging the teams. The business line heads are challenging the teams. For sure, George and Brandon are challenging the teams to go out there and try to really get the best yield possible for the bank. And then the final thing I'll say there, aside from the rough spread on these opportunities that we're looking at, if we go back to the comments earlier about our loan syndications and corporate services, in the various business lines and noninterest fee income that they can generate. If we go back to our treasury management platform and all the hard work and time that Cindy and Chad are putting into that. We talked about our trust and wealth it goes on and on the products and services that we're building to be best-in-class out there that will allow us to continue to drive and really ramp up that noninterest income over the long term, which makes us even more competitive in the market. And then lastly, I'll just say it's important to remember that this is true relationship lending that we're doing within CIB. If we look across the CIB book of business, over 97% of those relationships or either single under direct deals where we get 100% of the wallet. So everything from deposit accounts to treasury management to interest rate hedging, et cetera, or it's club deals, 2 bank club deals, where we're splitting that wallet or in the case of broad syndications, over 95% of all the syndications we're in, we're either in the driver seat or the passenger meaning we're an admin agent or a JLA or like title We really have no interest in going out there. We're not buying books of business within CIB. We're not going in as participants. We really want to be a thought partner for these relationships. We want an opportunity to provide additional products and services beyond just a loan. So as a result, we're starting to see some really nice movement there with fee income, but also the opportunity to augment and impact the structure and the actual pricing of these loans long term. George Gleason: Brian, I would close up with this thought. Our long history is to be very profitable and that profitability is driven by margin. And while it's a very competitive deposit environment now, a very competitive loan environment. if you look around our peers in the industry, that 420 net interest margin we have is really strong. And that focus as Jake described, and as Cindy described on both sides of the balance sheet on really, really trying to get every basis point of yield or reduce every basis point of cost is just inherent in our culture and that drives our profitability metrics well above the industry. . Brian Martin: No, that's helpful. So yes, I think I've got your message there. So thank you for the insight there. And then maybe just my follow-up just would be in terms of credit quality, just looking at the reserve maybe coming down a touch this quarter, but just your NPAs and criticized were up a touch in the quarter. But I guess, more importantly, the commentary seems to suggest that you're a bit more optimistic on just the environment. So just kind of trying to think about how you're thinking about credit here as you go over the next couple of quarters if we see a bit more resolutions and just given it seems the tender is a bit more positive. George Gleason: Brian, what I would tell you is that the economy in which we're operating has been surprisingly resilient in my view, given all the noise. I mean there's a lot going on in the world today. And yet the U.S. economy continues to chug along at a pretty decent rate. And I've already mentioned our indirect lending business, which is 13% of our business, but that's a consumer business now granted, it's at the higher end of the consumer space. But I mean we're seeing very, very stable and favorable credit results from that business. Jake in his business is -- and of course, he's very carefully selecting what we do, but we're seeing very favorable results on credit and looking through to the customers in that, the trends of those customers, by and large, very favorable trends on their net income, EBITDA, cash flow coverages and so forth. Our RESG book, if you look at multifamily, if you look at industrial, you look at condos, wherever you are in the country and those categories of business they are very solid, and we're experiencing some really good results on that. Where you run into some issues and where we've had some issues is in the land, the office and the life science parts of the portfolio. And that is very transaction-specific and region specific. If you go to the parts of the country, that are pro-business and low tax and having significant in-migration and we're in a lot of those markets, a lot of our franchise risk in those markets. Those assets, office, whatever land are doing very well in those markets. It's the markets where you've had increasing tax burden and developing less friendly business, pro-business environment and out-migration of population or churn in population that's kind of kept the population neutral and eliminated the prospects for growth. That's where those transactions are struggling. So the economy, generally, in our view, is pretty solid. And the challenges are basically limited to a couple of property types in more adversely affected regions of the country. And I think we're doing a good job working through those. We've got 5 RESG loans that we talked about in detail that the sponsors are working on 2 of them. Recapitalization opportunities. One of those is Rich's point, they've got a signed letter of intent to recap the deal. We've got 2 of those 5 that are actively engaged in a sale process. And the fifth 1 of those 5 is a transaction that has a lot of activity from multiple partial or full buyers of the land that secures that credit. So those 5 assets account for the vast majority of our past due loans and the vast majority of our nonaccrual loans and do all 5 of those deals that are working get closed, probably not, do 0 of them get closed, probably not, but some combination of those transactions probably get closed this quarter or next quarter. And if the transaction doesn't close, they're -- you're on to the next opportunity to get those closed. So at the basis we're in those assets, there seems to be a pretty good interest and ability for us to put together exits from those. So yes, I would tell you, we know there are going to be a few more of those bumps in the road on asset quality in that office life science space, and we'll work through those. But we're feeling like we're late in this stage of the cycle. We're working through what is going to have to be worked through, and we're doing it in a very constructive way. Jake Munn: Brandon, do you want to add anything on that or -- you might want to talk about what we're seeing on leasing and so forth? Paschall Hamblen: Yes. No, I would just throw in there the great summary of how we view the world, what we're seeing we are in the property types, George mentioned condo, multifamily, industrial. We've got a lot of industrial and boy, a lot of industrial leasing is coming through our projects. Really happy to see that. But I would I would even say on the office side, we're -- and again, a great summary there of how market-specific this activity is but we're really encouraged on the office leasing side as well. So we're starting to see some green shoots there. Life science, as you noted, is that is challenges, but even on a market-specific basis, and we've mentioned this before in the Bay Area, the AI with is generating opportunities for our life science product, which as we've noted, is flexible to go life science or go more traditional office and . We've got 2 projects that are in serious contention for more of your tech AI-type users just as examples of how that's playing out, not just generally, but in our portfolio. But yes, great summary, George. We're a lot of noise, a lot of headwinds in various shapes and forms, but we're seeing some good resilience in our portfolio. And and I would say, office in particular, I'm just glad to see it starting to pick up and move. We're getting some progress there. That's the detail I would add, George. Operator: Our next question will be coming from the line of Michael Rose of Raymond James. . Michael Rose: Maybe just a bigger picture question just on a lot of the efforts that you guys have ongoing, specifically in CIB. You noticed in the management comments that the head count is up from 18 to 97 new vertical this quarter, you're building out some of the fee income verticals. Certainly, I understand the expense guide. But George, I just wanted you to frame this kind of longer term. At some point, the significant buildout will probably begin to slow. It seems like that could be in 2028, which could be at the same time that RESG balances begin to inflect higher after heavy paydowns. So I guess my question is, when do you expect to see the higher levels of expense build decelerate? And then it seems like 2028 could be a pretty significant year for operating leverage from just thinking about it conceptually. So would just love some longer-reaching thoughts on all the efforts that you guys have done to date and as we look forward? George Gleason: I appreciate the question, Michael. I'm reluctant to give a lot of guidance on 2028. That seems like a long time into the future. But I think your premise is correct that we will reach a point with CIB where the percentage increase in their head count and the percentage increase in their expense base will decline. Now Jake mentioned, we've got right now access into 42 different business and industry groups with CIB. If you look at the broad breadth of CIB that number of business and industry groups could be 100 or 200. I mean there are a lot of places we're not in. And I think the expectation is that, that business is going to continue to grow, continue to grow and continue to grow. But if we had 3 verticals in a year, or 2 verticals in a year. And 3 years from now, we had the same 2 or 3 verticals every year. The percentage increase from that subsequent addition is going to be less. There are also a lot of geographies that we're not in that we would like to be in with the CIB platform in the markets that we already serve on our commercial community banking business. So there's a lot of room to build out. And CIB is designed so that the speed of that build-out is geared to their volume of business and the profit margins generated by that business. In the early conversations that Brandon and I had with Jake understood that we didn't want to go out and spend of expense and have a dead start on that, that we needed to take the teams that we had incorporate them into CIB and get them really lined up with the CIB vision, and we needed to add people incrementally as the business was growing, and we were paying for those and creating more profits in CIB. And that will continue to be the approach going forward. So if I overhead grows 20% per annum. That's going to mean that their revenue is growing more than 20% per annum. So there's going to be a positive operating leverage from the continued growth an expansion of CIB. I would hope and our goal is that is we're building out more infrastructure and treasury management, more infrastructure and trust and wealth, more infrastructure and mortgage that you're going to see the same things. Now we're earlier in the real build-out and expansion of those. But I would expect you would see those gain positive operating leverage as we go forward. And to the earlier question of where does our efficiency ratio go I hate to apologize for a 39% efficiency ratio, that's a pretty good number. But we would like to see that in future years. Begin to work back down to our more custom ratio over the last decade. But it will stay in that high 30s range this year and maybe into next year, while we're building out some of these businesses. But they are designed long term to achieve positive operating leverage. Now there's no way we're going to run a much expanded trust and wealth business that doesn't have a 50-something percent efficiency ratio or mortgage business that doesn't have a 60% or 70% efficiency ratio. But the operating leverage that we will get in other businesses, I think we'll even those things out and let us get to a longer-term slightly improving efficiency ratio. Jake Munn: And George, real quick, just to run off of your thought there on CIB. I think it's important to note, too, as we continue to grow and expand CIB, again, the beauty of what we've built. We've got a credit analyst training program as an example in there. So over the long term, you'll see us hiring less portfolio managers as we have analysts and associates coming out of our in-house training. And so when you kind of put all that together, we ran this analysis at the end of last year, the folks on average we're hiring in this year have a lower average base salary and expense carried than the year before, and we can make the assumption that next year, that will continue to reduce in theory, right, as we're building CIB will need less cheaps and more Indians for lack of a better term. And so we'll continue to staff in that way in a very thoughtful and strategic fashion where we hope to continue to improve the efficiency ratio within CIB itself. George Gleason: Good comment. Thank you. . Michael Rose: No, that's helpful color. I wasn't looking for specific guidance, just trying to frame the narrative, but it seems like based on the answer that you guys have many years to come of kind of continuing to build out the business. So maybe the best way to characterize it. I don't want to put words in your mouth, but are we -- would you characterize the build-out is still kind of in the earlier to mid-innings versus the later innings? It seems like based on the commentary that's where we'd be. George Gleason: Well, Jake made the comment in his earlier remarks that we were just beginning. I've written enough checks to our expensive people that I don't feel like we're at the beginning. But yes, we're in the early stages of achieving CIB's potential. And we've commented I think we commented in the management comments in me, Tim, that we expected in 2027 that CIB would pull up even with RESG as far as portfolio size. And given the momentum it has it's expected here that it's going to pull ahead of RESG, at least until RESG gets that next wave and wind of origination opportunities that come from a more stable commercial real estate, more balanced commercial real estate market. Jake Munn: In mind or 2, that head count in CIB includes services that are enterprise-wide. So the syndications desk, interest rate hedging, et cetera, we're adding people that don't just benefit the growth of CIB but are going to benefit the growth of the institution as a whole in our noninterest income in future periods. Operator: And our next question will be coming from the line of Matt Olney . Matt Olney: I want to go back to the discussion around credit trends at RESG. And I think investors are looking for this inflow of newly identified substandard loans that to slow? I counted 3 new loans identified in the first quarter from your management commentary. Thank the 2 in Seattle University, 1 in Boston Life As you look at the Regie portfolio and recent upcoming appraisals and considering the conversations with sponsors, what are your expectations for the incremental inflow of new RESG loans into that substandard bucket? . George Gleason: That's a great question. What I would tell you, Matt, and I want Brandon to weigh in on this is we as we've said multiple times, we will probably have a few more sponsors who just reach a point they cannot or will not continue to support their transaction. So I would expect there will be some further inflow we've done a real good job of liquidating. Last year, we had 4 properties in foreclosed assets at some point during the year from RESG, we sold 3 of those last year. . So we've done a good job of liquidating. We've had several substandard loans that we liquidated out with the collaboration of our sponsors. So I think you'll see assets come in and assets go out of that. The other thing I would tell you is, and you mentioned appraisals, we are at a low leverage point on these loans. And for us to take a loss on the loans, all of the common equity, all of the prep equity, all of the mess that you got to burn through all of that to get to a point that we take a loss on these loans. So a lot of the assets that we've had resolution on, we've had no loss and the losses have been fairly well contained given the size of credits on the ones that we have had losses on. So I think you'll see assets come in and assets go out of that group. We'll do a lot of very collaborative work with our sponsors to help them work through this environment. I think our guidance we've given on net charge-offs and so forth is good guidance, given the loss content in those loans that are likely to pop in and out of classified status. Brandon, you might want to add color on that. Unknown Executive: Again, great summary, George. I mean I would also point out that we've been very diligent in our reappraisal process within the portfolio. We pointed that out in our comments. We've kept those appraisals current. You may note that there were fewer appraisals that resulted in LTV increases that were most within that plus or minus 10%. So the market -- as we said in our comments, we feel like we're in the later stages of the cycle. There's always an interesting new element to consider as we go from quarter-to-quarter with our conflict in the Mid East being the most recent add to that and uncertainty. But as George noted, the underlying economy seems to be really resilient. We're seeing good leasing, as I noted before. We will have projects where ultimately the sponsor does gets to the point that they're not able or willing to continue to support the deal. But we're -- our team does a great job of being on top of where these projects are and making sure we're on top of a making sure we're on top of ratings. So George's comments are spot on with respect to how we see the future. George Gleason: Brenda, I'm glad you pointed out the appraisal and for those on the call that didn't focus on a figure 28 and the narrative around Figure 28 in our management comments, 50% of the total RESG commitments have been appraised within the last 4 quarters and 92% have been appraised in the last 8 quarters. So the only appraisal is a loan that has a $1,500 nominal balance on a project that is sort of stalled and we'll never fund beyond $1,500. So that's the only pre 2023 appraisal on the book. So we're very current on the appraisals and continue to recycle those and renew those, keep them up. So we feel pretty good about that. Matt Olney: I appreciate the commentary on that. And just as a follow-up, kind of a similar question, but more on the Oro foreclosed asset bucket. I think that balance is $150 million, mostly 3 Reggie properties. I get these properties are all unique, but it feels like there could be additional foreclosures this year. So trying to anticipate if we should see that balance move up throughout the year? Or do you expect those existing 3 properties to move off the balance sheet? . George Gleason: We're working on all of those and there are discussions going on regarding all of those particularly a lot of discussions around the oldest 1 of those and several discussions going around the Chicago property. So I would hope that we'll over the course of this year, move some or all of those assets off the books. I repeat what I said earlier last year, we had 4 in that category. We moved 3 of them off during the year. 1 we didn't move off is that Los Angeles land. We've got a lot of activity on that right now. I would point out that we did make $12 million in contract extension fees and for a earnest money off the last contract we had on that, that never closed. So we'll work those things actively. It's premature to try to project what the outcome will be on that. But I would be surprised if over the course of the year, we didn't move some of those assets. Operator: And our next question will be coming from the line of Catherine Mealor of KBW. Catherine Mealor: We've spent a lot of time talking about the Life Science book and the office book. I wanted to see if we could get specific picture update on your multifamily book, maybe in 2 pieces. First, on just level of prepayments you're expecting in that book. It feels like that was the sector that was leading a lot of your prepayments over the past few quarters. And so our view on that moving forward, especially given the new rate environment. and then also in just credit and appraisal activities. To your point, the appraisals feel like they're coming in better than we've seen in some past quarters. So just kind of an update on the to health of the multifamily book? George Gleason: Yes. I'm going to let Brendan take the multifamily. And yes, the degree the rate of change in the appraisals is less significant than some of the earlier appraisals were in the last couple of years. And that just reflects the fact that the market has moved over a number of years. a lot of these assets are getting reappraised on an annual basis. And as a result, the LTVs on those assets are moving less significantly with the newer appraisals than they might have moved as the market was adjusting 2 years ago or 3 years ago. . So Brandon, do you want to take the multifamily story and talk about that? Unknown Executive: Absolutely, Catherine, good to hear from you. You are correct. We a lot of the payoff story that we're seeing in our portfolio is a direct answer to your question, both the health of the multifamily product in terms of its lease-up to the point of being attractive, obviously, for refi or sale or other takeout. And so what we see there is that -- and part of it that -- that's our largest property type by concentration. So by definition, they're going to have a outsized ratio of the repayments. But that's absolutely been the case. And some of the headwinds that we've talked about and our RESG repayments are driven in large part by the multifamily projects. And you'll continue to see that as we go forward. That was the case in the quarter just ended. It's been the case, and you can look back 6, 12 months, that's going to be the case. They're the heaviest part of our payoff. It's a healthy portfolio. And as the valuations, those this cap rates, that product type probably started out lower and moved as much as anything. But again, going back to our tried-and-true rules of having a lot of equity in these deals and being on a low basis even with those cap rate moves that, again, talking about appraisals, they've sort of the changes have slowed and everything seems to be sort of landing where it's going to be. It's a healthy portfolio, but it will, as you noted, result in a number of payoffs as we move forward. Catherine Mealor: And then 1 other has this question last quarter, but just to get an update on the IQHQ San Diego life science credit. And then last quarter, you talked about new leadership that came in that you were excited about. I know there was a lawsuit that's too press recently. So just any update on that project that you can provide for us would be helpful? Unknown Executive: Yes. Yes, I appreciate the question. And litigation, Catherine, that's really can't provide any meaningful commentary there on that. I mean that's for IQHQ to address. But -- to your point, we were excited. We are excited. We continue to be engaged with the new leadership there, very very excited about the energy that they're bringing and the traffic they're driving, the strategy that they're taking with respect to the different sort of segments of tenants that they're pursuing. It's not just the life science end market life science and office use, but clinical research, big pharma, tech, AI, even defense. So there -- the demand that they're tracking for the projects is -- it was good. In December, it's better as we sit here today in terms of the tours they're giving, the RFPs, LOIs and lease negotiations that they're having I would tell you the office demand, office user, the non-life science user is the bigger part of that traffic and demand that they're tracking, but they're seeing material demand there. And then they continue to work on the retail with some large block retail opportunities that they started to really get the project activated at the street level, and they're working some exciting opportunities that will continue to add to that energy and activation around the project. So yes, we're where we continue to be pleased with their focus and the demand they're generating. And we've noted in the past the material financial commitments they've made and and that was in '24, early '25. Some of this new leadership came in after that, and we really take their engagement with this project at that point in time. as a clear sign of their belief in the opportunity there. So yes, we're continuing to track the project and excited they're in the driver's seat and working hard on it. Catherine Mealor: I know that credit matures in August of this year. Is there anything that you think you need to see in terms of leasing or equity payments or anything that would present this loan from negatively migrating at maturity if you don't see a meaningful improvement in the leasing trends? George Gleason: Let me comment on that, and then Brandon, you can add some additional color. Sponsor support for a transaction is a key element in the migration or not migration of these assets. So based on our dialogue with the sponsor, I think, at this point in time, we expect sponsor support to continue for that asset. We'll see August is in some respects, not too far away. But in the world we live in today, August is an alternate from now. So we will see if that realization and expectation of sponsors continued support contribution of reserves as needed for this project is there, and that's our current expectation that that's going to be the case. I will I agree with Brandon, we're not going to comment on their litigation with one of their investors. But it's well known and been widely publicized in the media that QHCs had multiple tranches of capitalization and recapitalization come into that project. And in regard to the litigation, I'll just note that a lot of times when you have 1, 2, 3 or 4 different capital raises in a transaction, and there are different rights and preferences between the investors that come in at different points in the transaction. there's room for disagreement and hurt feelings between earlier investors who may get diluted out in subsequent capital raises. So that's a matter fran their investor to deal with. I don't think that has any significant bearing on our project with IQHQ or any other project with IQHQ, -- that's an interfamily squabble between the different tiers of investors in this transaction. Brandon, do you want to add anything to that? Unknown Executive: No. You covered it well, George. Operator: Our next question will be coming from the line of Janet Lee of TD Co. . Sun Young Lee: Good morning I would expect that the prospect of rate cuts is incrementally benefit benefiting for your net interest margin, generally speaking, given your variable rate loan rate component. But if the rates were to be relatively stable from here, is there any reason why your net interest margin would decrease further from here, whether that's because of the asset mix shift or the deposit competition? Or could we do stable NIM or potentially increasing from here? George Gleason: Yes. Janet, our view on that at this point is we're relatively agnostic as to whether rates go up 25 basis points or 50 basis points, or rates go down 25 basis points or 50 basis points are stay the same. Obviously, if rates go up, given our highly variable rate loan portfolio, we will get a couple of quarters probably of improved margin, but increasing rates would adversely affect a few of our customers on the bubble. And that increased margin would probably be more or less offset with incremental provision expense and credit costs. Conversely, if rates go down 25 basis points or 50 basis points, we -- that's going to be a bit of relief to a handful of customers that are on the margin there and probably lower some credit cost, but cut into our margin for a couple of quarters as our loan book reprices faster than deposits. So we've sort of reached the point with our balance sheet that we're agnostic about which way rates go, which is probably a good place to be today since nobody can really develop a firm thesis about which way they are going to go. Our margin will move around a little bit. We've talked about the competition on the loan side. We talked about the competition on the deposit side. We've talked about the a little bit of lift we're going to get from the securities book. So we'll just see where that plays out on the net interest margin in coming quarters. Sun Young Lee: And really appreciate the new guidance around your net charge-off expectations for the full year, which looks like it's pointing to around 50 basis point-ish. You already gave us a lot of color on credit. And given your commentary around inflows on the classified and criticized assets earlier. Is it fair to say that does NCO expectation assumes bakes in an assumption that classified and criticized assets will increase further from here? Or is there any other color you could provide on what kind of underlying assumptions are being used in this NCO expectations whether that you're assuming more losses than others and certain 5 RESG credits that you called out at the management commentary, et cetera? George Gleason: Janet, I think we've probably touched on all that to put a little more definition around it again as we've said it a couple of times on this call in the management comments and in prior quarters, we expect that there will be a small number of our customers that in this economy with these interest rates will just become unable or unwilling to continue with their project. So I think there will be some inflows of assets, small numbers into that special asset, substandard asset, foreclosed asset category over the course of the year. . We've had a good history of resolution. We've got some pretty meaningful activity toward resolving 5 of those assets as we've discussed, not all 5 probably make, but some portion of those do. So our -- whether that number goes up or down I think our guidance is good guidance. It's the best we can give you right now. And I think we'll have things come in and things go out of classification categories as the year goes on, and we'll just have to see how that unfolds. Operator: And I would now like to turn the conference back to George Gleason for closing remarks. George Gleason: All right. Guys, I think we're out of questions. So thank you so much for your time and attention today. We appreciate that we've used all of our time. So have a great day. We look forward to talking with you in about 90 days. Thanks so much. . Operator: And this concludes today's program. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to Travel & Leisure First Quarter 2021 Earnings Call -- Conference Call and Webcast. [Operator Instructions] Question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, it is now my pleasure to turn the conference over to Andrew Burns, Vice President, Investor Relations. Thank you, Andrew. You may now begin. Andrew Burns: Thank you, Rob. Good morning, everyone. Before we begin, I'd like to remind you that our discussion today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and the forward-looking statements made today are effective only as of today. We undertake no obligation to publicly update or revise these statements. The factors that could cause actual results to differ are discussed in our SEC filings and our press release accompanying this earnings call. . You can find a reconciliation of the non-GAAP financial measures discussed in today's call in the earnings press release available on our Investor Relations website. Please note that all references to EBITDA, net income, diluted earnings per share and free cash flow made during the call are on an adjusted basis as disclosed in our earnings release. This morning, Michael Brown, our President and Chief Executive Officer, will provide an overview of our results in our longer-term growth strategy. And then Eric Coke, our Chief Financial Officer, will provide greater detail on our results, capital allocation strategy and outlook for 2026. Following our prepared remarks, we will open the call up for questions. Finally, all comparisons today are to the same period of the prior year, unless specifically stated. With that, I'll turn the call over to Mike. Michael Brown: Good morning, and thank you for joining us. Travel & Leisure delivered another great quarter. Thanks to the hard work of our team, we are carrying forward the positive momentum achieved in 2025. We First quarter EBITDA exceeded guidance, driven by strong execution in our Vacation Ownership business and resilient owner demand. In the quarter, we achieved gross VOI sales growth of 7% and EBITDA margin expansion of 180 basis points and EPS growth of 31%. Our strategy starts with delivering outstanding vacation experiences for our owners and members. . We convert that owner satisfaction into recurring demand, predictable cash flow and consistent capital returns. Our first quarter results are a clear validation of that strategy and a proof point of the durability of our model even as the macro environment remains uncertain. In the quarter, we generated revenue of $961 million, EBITDA of $225 million and EPS of $1.45, with compounding growth across the P&L. We are seeing continued strength in our Vacation Ownership business with 7% gross VOI sales growth and above plan VPG. We tour growth of 5% was above our 2025 tour growth rate of 3%. I'd like to emphasize that we achieved these results -- these impressive results while executing on our resort optimization initiative, which naturally pressures those metrics. During the quarter, we returned $128 million to shareholders through dividends and share repurchases. Our dividend increased 7% to $0.60 per share, and we repurchased 1.2 million shares in the quarter. At the same time, we are investing in the business to drive long-term profitable growth. We continue to make meaningful progress advancing our multi-brand strategy and digital road map, and this balanced approach, delivering near-term results and returning meaningful cash to investors while investing for the future is central to how we create long-term shareholder value. Since our last call, macroeconomic uncertainty and geopolitical risks have been prominent in the news. I'd like to start with recent trends we are seeing with our consumer and across the business. Overall, our owner base remains healthy. They are prioritized and travel, and we are not seeing any meaningful shifts in their behavior. First quarter gross bookings were up year-over-year. The booking window remains steady at approximately 100 days and average length of stay is unchanged year-over-year at just over 4 days. The distance travel to our resorts in Q1 was actually up slightly to last year, indicating consumers' willingness to travel to our resorts. The data suggests that in uncertain economic times, our value proposition becomes even more relevant. For the 80% of owners that have paid off their loan, their vacationing for the cost of annual maintenance fees. This value proposition is clear to our owners and is best reflected in our 97% retention rate for owners that are current on their loan or paid it off. As we enter our peak sales season, we are mindful of the macro backdrop and its potential to influence consumer behavior. That said, the trends we are seeing remain healthy, our value proposition continues to resonate, and the model is performing as designed, positioning us to outperform across cycles. During the quarter, we continued to make meaningful progress advancing our multi-brand strategy and saw clear proof points of its success. Margaritaville is rapidly approaching $150 million in annual VOI sales, reflecting the success of our revitalization efforts and new partnerships. In the Accor Vacation Club brand, we expect to nearly double our VOI sales in 2026. We also began selling Eddie Bauer Venture Club at select sales centers. In March, we welcome guests to our first Eddie Bauer Resort in Moab, Utah. We are seeing strong interest and early momentum has exceeded our expectations. Sports Illustrated Resorts, sales are now underway at our new Nashville sales center. We also announced our new Sports Illustrated resort location in Baton Rouge, home to Louisiana State University and Southern University. As the brand's fourth resort, Baton Rouge is a highly complementary sports-centric university market that fits well within the club's growing portfolio. Overall, combined VOI sales from these brands are expected to approach 10% of our sales mix this year, and we expect that to increase further in the years ahead. Scaling our multi-brand strategy remains a critical pillar of our long-term growth plan, enabling us to reach new customer segments and meaningfully expand our addressable market. The progress we are seeing across the portfolio gives us confidence that this strategy is gaining traction and developing as we envisioned. On the partnership front, we recently renewed and expanded a 5-year agreement with United Parks & Resorts, owner of SeaWorld and Busch Gardens, building on the highly successful strategic partnership that began in 2013. In addition to our current on-site kiosk and promotional activations, the new agreement expands our presence across additional parks. This meaningfully increases our ability to introduce new families to our Vacation Club offerings and provide current owners with exclusive events and experiences. Overall, the expanded partnership strengthens our top-of-funnel demand prospects and supports new owner growth. Turning to the resort optimization initiative we announced last quarter. This effort involves removing a small number of aging, lower demand resorts to strengthen our overall resort system for owners while also improving the financial health of Travel + Leisure and our club HOAs. I'm pleased to report that we are realizing all the expense savings outlined last quarter, and we've been able to sustain our historical sales growth rates despite the resort closures. In summary, we've started 2026 from a position of strength with clear visibility into the key drivers of our performance and momentum in our core Vacation Ownership business. We are reiterating our full year outlook, and I remain confident in our ability to drive growth, generate meaningful cash flow and continue creating long-term shareholder value. Now I'll turn the call over to Erik to further elaborate on our results, capital allocation framework and outlook. Erik? Erik Hoag: Thanks, Mike, and good morning, everyone. I'll frame my comments in 3 parts: how the business performed, how we ran it and how we're allocating capital. Starting with performance. First quarter results were ahead of our expectations, continuing the trajectory we discussed on our February call despite a more volatile macro backdrop. What stands out is not just the strength of our results, but how the business performs across different environments. The compounding in the first quarter is clear. Revenue grew 3% EBITDA grew 11%, net income grew 22% and earnings per share grew 31% with tour flow feeding the top line and operating leverage and capital allocation driving outsized growth in earnings per share. Looking at our Vacation Ownership business, this segment continues to operate at a high level with results in the quarter showing steady demand and strong execution. Gross VOI sales were $549 million, up 7% year-over-year, driven by tour flow growth of 5% and continued strength in volume per guest, which increased 3% to $3,321. Tour flow remained strong in the quarter, consistent with the momentum we saw exiting 2025. While our new owner mix was slightly below prior year levels, we remain confident that it will increase as the year progresses. Top of funnel demand remains strong, and we view mix in the quarter as more a function of conversion dynamics rather than a change in underlying demand. Segment EBITDA was $191 million, up 20% year-over-year, with margin expansion driven by operating leverage, improved inventory efficiency and the benefits of our resort optimization initiative. From a broader perspective, demand remains stable. While we're always mindful of the macro environment, it's important to remember that most of our VOI sales come from existing owners who have effectively prepaid for their vacations. As a result, their travel behavior is less sensitive to economic changes, and our performance is driven by the strength of those long-term relationships through repeat usage, retention and ongoing upgrade activity over time. Credit performance remains within our expectations with provision rates slightly down year-over-year in the first quarter. We are seeing some movement in early-stage delinquencies and particularly in more recent vintages, which we would expect to influence provision over time. With that said, we still expect our full year provision rate to be modestly below prior year levels. The underlying credit profile of new originations remains healthy with weighted average FICO scores remaining above 740 and average down payments trending above 20%. Turning to travel and membership. In the quarter, transactions were flat year-over-year, reflecting a continued mix shift within the business with declines in exchange activity, offset by growth in travel clubs. Exchange membership was approximately 3.3 million subscribers, down about 2% year-over-year. As expected, the mix shift continues to pressure revenue per transaction and segment revenue was $165 million, down 8% year-over-year. Segment EBITDA was $59 million, down 13%. This reflects the continued mix shift within the business. with declines in the higher-margin exchange business and growth in lower-margin travel clubs. Travel and membership remains a capital-light, high-margin business that generates significant free cash flow. Our focus is on managing the business for cash and flexibility as we reposition the platform to improve returns over time. Shifting to the balance sheet. We exited the quarter with in line with our expectations, just below 3.2x. As a reminder, leverage typically trends higher earlier in the year and declines as we generate free cash flow over the course of the year. Liquidity remains strong with over $1 billion of available capacity, including cash on hand and our revolver, supported by consistent free cash flow generation and the continued access to the securitization markets. In March, we executed our first ABS transaction of the year, raising $325 million at a 98% advance rate and 5.1% coupon. This transaction reflects our ability to access capital at rates well below the average interest rate on our portfolio, creating significant net interest income even in a more volatile macro environment. Overall, the balance sheet provides the liquidity and flexibility to allocate capital across growth opportunities and return meaningful cash to shareholders. Before I review our outlook, I want to take a moment to discuss capital allocation. Our framework remains unchanged. We focus on deploying capital where it generates the highest risk-adjusted return on a per share basis while maintaining a resilient balance sheet and returning excess capital to shareholders through a consistent dividend and share repurchases. When returns are compelling, we also pursue opportunistic M&A that is well aligned with our strategy and accretive to growth. When you step back, the business rate continues to generate returns well above our cost of capital, while returning a meaningful portion of that value to shareholders. Moving to the outlook. We are reaffirming our full year 2026 guidance, which reflects continued strength in the Vacation Ownership business, cost management and travel and membership and the impact of our resort optimization initiative. While still early in the year, performance in the first quarter was ahead of our plan and our full year outlook continues to appropriately reflect both the current environment and the trends we're seeing in the business. For the full year, we continue to expect gross VOI sales to be in the range of $2.5 billion to $2.6 billion. EBITDA in the range of $1.03 billion and $1.055 billion and volume per guest to be in the range of $3,175 and $3,275. Continue to expect to convert roughly half of our full year EBITDA into free cash flow. During the quarter, we took inventory drawdowns in our Chicago and Nashville Sports Illustrated resorts where sales are now underway. That investment did impact first quarter free cash flow, but does not change our full year free cash flow conversion expectation. We continue to expect our full year adjusted tax rate to be approximately 29% and year-over-year EPS growth to be in the teens, supported by EBITDA growth, lower interest expense and share repurchases. For the second quarter, we expect gross VOI sales to be in the range of $660 million and $690 million, EBITDA in the range of $260 million and $270 million, and volume per guest to be in the range of $3,200 and $3,250. This reflects a continuation of first quarter trends while recognizing that growth can vary across quarters based on mix and timing. Our outlook reflects a business that's performing as expected with downside appropriately managed given the current environment and upside driven by execution. To close, the business continues to perform as designed. We're seeing steady demand, strong execution across the platform and continued conversion of earnings into cash over time. As we move through 2026, we remain focused on executing against our plan, allocating capital to the highest return opportunities and compound value on a per share basis. Rob, we can now open the line for questions. Operator: Thank you. [Operator Instructions] And the first question comes from the line of Chris Woronka with Deutsche Bank. Chris Woronka: Congratulations on a nice start to the year. Michael, you guys have started off with a nice collection here of the Sports Illustrated Edipower and our Greenville resorts. So 3 distinct brands in addition to the core brands that you started with, the question is kind of to what extent do you think you can possibly grow those brands further? And are you seeing any attractive opportunities on the hotel conversion front that kind of enable those? . Michael Brown: We're very pleased with how each of the brands, the additional 1 that I'd add to that is a core Vacation Club, which is the newest one post post-COVID and would since our name change. And that, as we mentioned, we'll double the sales this year. When you look across all of those brands, our anticipation is we want to grow each of them to support the growth of our Battleship brand, the Wyndham brand. As we start to look at how each of them can grow, I think the total revenue potential varies by brand. However, as we've stated on a number of calls is we want to get each of these up to about $200 million plus. And if you start to think about those 4 brands and stack that level of growth, you can have a lot of visibility into that 6% to 8% total VOI run rate for the foreseeable future. Fundamental to our strategy is to do things pragmatically, do a brand, start executing to another one, start executing. And if you look at the cadence of what we've done in adding brands, adding a core growing that brand, then add the second one in the revitalization of Margaritaville, as you heard, highly successful. And then the last two, Eddie Bauer, we started lightly last year, and it's really picking up momentum in Q1, and then we'll start Sports Illustrated. So we believe the success of adding new brands is the execution of the ones we already have, starting with Wyndham, ending with our latest announcement -- our latest start-up sales, which is Sports Illustrated. So those are key to our strategy, and we think we're going to grow. And I think that validates and is providing more clarity and precision around our long-term growth rate on VOI. Chris Woronka: Okay. Very helpful. Just as a follow-up, I know you guys mentioned a little bit of uptick in early delinquency activity. I guess, I don't know, Eric, if there's any more detail you want to ask the question that comes out of it is do you think that ultimately opens up an opportunity to essentially reacquire some of that inventory at favorable pricing? Or are you not quite down that path yet. . Michael Brown: Thanks for the question, Chris. So maybe a couple of comments on the loan loss provision. Maybe I'll start with how we actually performed. So maybe even going back to the fourth quarter. Fourth quarter provision was roughly 19%. It was down year-over-year. Full year 2025 provision was 20.7%. The first quarter start to the year were down to 19%. And -- so we've had 2 quarters of year-over-year decline. Second, regarding the early-stage delinquency predominantly in newer cohorts of loans, loans originated over the last several quarters. I do think that these will ultimately manifest into the provision. But third, there are several components to the loan loss provision calculus that I think are worth noting. First, I just mentioned delinquencies. Second, down payment rates, which are up, which is a good guide for the provision for us. FICO scores remained stable and healthy at above 740, which is another good guide for the provision. And maybe the last thing I'd say associated with this is the percentage of sales financed is also down, which is another good guide for the provision. So it's really those elements that give us confidence in projecting that the full year provision should be down year-over-year. And Chris, to your question, yes, when defaults happen, that does give us the ability for us to take that inventory back and resell it at today's prices with a very low cost of sales. Operator: Our next question comes from the line of Patrick Scholes with Truist Securities. Charles Scholes: Mike and Eric. Mike, I wonder if you could just put to bed any concerns, and it sounds like you had already, but just to finalize it -- any changes or concerns for the remaining 3 quarters versus your guidance earlier in year, certainly, the Algebra says if you beat on 1Q versus your guide, but maintain implied the rest of the year down slightly. Is it simply just Iran has happened since you reported in mid-February that kind of keeps you cautious and there's nothing else in your business that has -- as your outlook has changed. Is that a fair assumption? . Michael Brown: You've nailed it, Patrick, but let me first say -- let me first say, let me first speak to our business. We reported in mid-February, it's 2 months later, nothing's changed in our confidence in the building for the remainder of this year, prospectively. You've seen the results in Q1, which I would characterize as an extremely strong quarter, we had a great Q1 last year. I view this quarter as better. We beat the high end of our range. If you remember last year, we had Liberation Day, April 1, I believe it was, and we expressed that, that uncertainty led through in the way we thought about the rest of the year. this year, there's a war going on, which creates macro and geopolitical uncertainty. And we don't want to be tone out to that reality. But if you just step back and look at our consumer, great first quarter, 3 weeks into Q2, continued momentum exactly as we saw in Q1 and if you look prospectively, yes, it's great to look in the rearview mirror. But looking forward, we look at our summer bookings. They're up year-on-year, a great sign given that Q2 and Q3 is our high season. We get a daily report card in the form of VPG, continues to perform extremely well. Erik just spoke that we're monitoring early-stage delinquencies, but that's more retrospective. And I think between the macro uncertainty not micro uncertainty, we think our business is performing extremely well. I think the last piece of this puzzle is that Q1 is about 21% of our full year number at the consensus point. If that number was 29% versus '21, we might be having a different conversation. But early in the year, business is performing well, macro economy, we just want to be cognizant of what's going on outside of our business. And given that it's very early in the year, be thoughtful about that. So that was a very extended way to agree with you. Charles Scholes: I just wanted to put that to rest. I'm sure you -- as the quarter progression you may get questions, so we have the answer and writing there. Erik, my question for you. You talked about the earlier-stage delinquencies, specifically in newer cohorts. Does that means the newer first-time buyers, and specifically, what is it about those? Is it maybe a little bit weaker -- relatively weaker financial demographic, a younger customer than, say, your less newer or your legacy cohorts. Could you explain a little bit more about that? . Erik Hoag: Yes. Sure, Patrick. So when I say newer cohorts, these are the more recent cohorts, I think the last 3 quarters. When you sort of double-click into the characteristics within the cohorts, there's not a single attribute that I would say is maybe worth calling out. It's not tied to FICO. It's not tied to product type. It's not tied to income band. It's -- we're seeing a little bit of wobble associated with the loans that have originated in the last several quarters. Operator: Our next question is from the line of Stephen Grambling with Morgan Stanley. . Stephen Grambling: I think I heard in the comments that you said that the new owner mix was a little bit lower than expected and you attribute that to conversion dynamics. So I'm wondering if you could just expand on, what is happening in terms of the conversion dynamics there that might be impacting it and how you expect that to evolve over the course of the year? Michael Brown: Stephen, this is Mike. I would say that's a result of a positive story we have, which is growth in our new owner tour growth. There was a lot of commentary last year around our ability to grow new owner tours in Q1. Although our total tour growth was 5%, our new owner tour growth was 7%, Which is extremely strong. That's always step 1 and driving new owner mix into your total business. When we talk about conversion dynamics, basically, our close rate was lower in Q1. That's natural. Anytime you scale the business and grow new owner tour flow or any tour flow, you're likely to suffer maybe a little bit of underperformance on close rates. We've got that, but we've got step one accomplished, which is a great new owner tour growth in Q1. We think that will continue to be strong as we head into the high season with both our new partnerships and just the way we've developed some of the smaller ones on a regional basis. And we believe as we tend to do quarter after quarter improve the execution when we get focused on something that we think is a little bit behind. That's what happened in Q1. But again, I'll just reiterate that, probably the big storyline for us in Q1 was the new order tour growth year-on-year, which was 7%. Stephen Grambling: That's helpful. And then 1 unrelated question, just on free cash flow. I think you made a couple of comments on the intra remarks, but can you just maybe elaborate on any kind of puts and takes to think about impacting the cash flow conversion over the course of this year? And then maybe if you can remind us how to think through free cash flow conversion differences between the segments even as we think about the vacation ownership versus T&M segment. Erik Hoag: Sure. So let's start maybe a little bit with free cash flow, and we can talk about the segments on the back side. Free cash flow for the full year, we're reiterating our roughly 50%, roughly half of adjusted EBITDA should convert to free cash flow. I will say that the pace of free cash flow in 2026 will be backloaded. We've got inventory investments that we're making, we made in the first quarter associated with Nashville and Chicago. We've got inventory investments in the second quarter as well. So you're going to see the concentration of our free cash flow more back loaded. And then from a conversion perspective, with the benefit of our ABS transactions and being able to generate cash off of those, the free cash flow conversion across segments is very similar. Operator: Our next question is from the line of David Katz with Jefferies. David Katz: Thanks so much. I think a lot of the commentary around the VOI business is very clear. What I'd love to get just a little more color on is what you're including as we go through the quarters for the remainder of the year in your guidance or, 1, travel and exchange. It is flat the high end of the bracket and down some number at the bottom end, that kind of help is what I'm looking for. And then with respect to the resort optimization, I'd love to get a clearer sense of what exactly you're baking in for the quarters and the remainder of the year and whether from that, or sort of flat challenge, et cetera. I think hopefully, that's a clear question. Erik Hoag: It is, David. So it's Erik. So let me give you a couple of components associated with what's driving the year for us. So we had mid-single-digit tour flow growth in the first quarter. Our second quarter and our full year expect similar trends, mid-single-digit tour flow growth. We expect gross VOI sales to also be mid-single digits in both the second quarter and in the full year. I think about the Travel and Membership business as a little bit of an extension from where we finished 2025. And some of those stats are the following. The Travel and Membership business was down 9% in 2025. They were down 10% in the fourth quarter. They're down 13% here in the first quarter. So I think an extrapolation of the travel and membership business in 2026 is a fair base case to pursue. And then the resort optimization initiative has been a bit of a tailwind for us to start the year, when the Q is filed later this morning. You're going to see that the developer obligation, our carry cost, that savings is manifesting itself right into the P&L. And the one thing that we are also seeing is that despite the fact that we've closed several sales centers with the resort optimization initiative, our gross VOI sales have continued to remain very strong. So as I think about the rest of the year, it's very much a continuation of the mid-single-digit guide that we've got for the second quarter. It's an extrapolation of travel and membership. It's the manifestation of the resort optimization savings, and all of that compounding through the P&L to teens EPS growth as we continue to repurchase shares. David Katz: Okay. Very helpful. Congrats on the quarter. . Operator: Our next question is from the line of Ben Taken with Mizuho Securities. Benjamin Chaiken: Maybe we could talk about Worldmark and Eddie Bauer. I think you said Eddie Bauer was exceeding your expectations. I mean my understanding is that you're effectively combining these 2 portfolios. I would imagine that would create a pretty powerful upgrade opportunity. So my question is, one, am I on the right track regarding this upgrade opportunity; two, if so, have those upgrades started? And with that contributing to some of the strength in 1Q? And then three, as you see it, is the bigger opportunity upgrading the 180,000 or so market customers? Or is it selling the new combined portfolio to new customers entirely the world market of Bauer. Michael Brown: Great question. What we're trying to do is basically put a booster to Worldmark. The Walmart owner base has a clear travel demand. And we've heard time and time again, they love that. outdoor experience, the chance for families to be together for a friendly resorts and in not urban centers. And the plan for Worldmark is to highly, highly align the Eddie Bauer Venture Club with it so that in effect, operates as a singular club. . The success in Q1 is right along the lines of what you laid out, Ben, is it's a new product offering with a slightly different experience. that owners are going to get to enjoy. What I would say is, though, even though it exceeded our expectation, I don't think we've really unleashed the full power of what that brand is going to be. And what I mean by that is that in our world, it takes time to get fully registered in all jurisdictions, and we're partially -- we're registered in a few, but not all. We've opened only 9 sales locations. And we've only announced one resort. You can expect more this year and can expect more nice destinations. And I think as the Worldmark base sees those new destinations, the upgrade opportunity, the ability to own world market by incremental opportunity or credits into the Eddie Bauer system will only get strengthened. So ultimately, we want to preserve and grow the Worldmark brand through this brand extension, which is the Eddie Bauer Venture Club. As you mentioned, it's off to a great start. It's on the back mostly of upgrades, but it is our full intention to start feathering into the Eddie Bauer mix, new owners and I think it really attracts a new opportunity and gives us a new chance to grab some partnerships that maybe otherwise wouldn't be available in some of our other brands. Benjamin Chaiken: Understood. That's helpful. And then switching gears a little bit. There's kind of this never-ending question regarding the exchange business. Maybe you can walk us through your feelings on both sides as it pertains to keeping our disposing of the asset and then what your current stance is? Michael Brown: Well, it's as we've always shared, we're -- we will make our decisions on what we think is best for shareholders and the optimization of return for shareholders. we're all clear on the landscape of the traveler membership business. Exchange is in natural industry secular decline for the reasons we've all spoken about in the past. Despite that and despite what's happened over the last 3 to 5 years in that business, we've been able to maintain our overall travel and leisure mid-single-digits growth enterprise-wide on an EBITDA basis. We believe that is very much in our grasp despite what's happening on the exchange side. We continue to focus first on organic growth and by adding new business lines and new focus. We think the outlook that we laid out in travel and membership is the realistic, but we're looking to outperform that and outperforming it is not easy, but we're constantly looking both inside the timeshare space and outside for new lines of business, and we're actively working on those business lines, and we're going to keep working until we can change in the curve to be additive to our story, not basically absorb it as part of our mid-single-digits growth. What I would add on top of that is if there is a strategic opportunity, we'll evaluate it. And if it makes sense, we would not hesitate to make that type of move. But at this point, we're super focused on trying to bend the curve from the current decline trajectory because we know with the strength of our VO business that provides an additive nature to our EBITDA growth. Operator: The next question from the line of Ian Zaffino with Oppenheimer. Ian Zaffino: As far as VPGs, how do we think about that? I know you gave guidance for the full year, but how do we think about that throughout the the year. I'm just thinking about you're talking about mix earlier. Does that kind of impact how you're thinking about the VPG? Because I guess we were to believe that the VPG would be coming down just given more new owner mix and now it seems like the mix is changing a little bit. So any kind of color you could give us on where you think things are going and why. Michael Brown: What you're thinking about -- you're thinking about it the right way, and VPG will take natural pressure on an enterprise basis when you get a higher new owner mix. we're heading into Q2 and Q3, which naturally has a higher new owner mix, which we expect to happen definitely in Q2 and again in Q3. So you would expect some natural pressure on VPG, but that's a mix issue, not a performance or an execution issue. So as you look at the cadence, you would expect those higher VPGs in Q1 with a higher owner mix, which is what we got. But Erik has laid out our range for the year, and I think that's accurately reflecting both the cadence and how we think we'll ultimately perform on VPG. Ian Zaffino: Okay. And then I guess as a follow-up, I know the question if I ran kind of came up. And any kind of potential softness you might see? Like how do you think that's actually going to play out? Is it a matter of fuel prices are high and that's what might soften demand? Is it just kind of like a sentiment thing where consumers don't want to either travel or spend money on a DO. How does it actually manifest, you think or kind of what's baked into what you're expecting? . Michael Brown: We'll give you our best thinking about how we think it would show early signs of showing up in our individual performance. And it's why we highlighted some of the travel trends we're watching. We would expect a little bit of conservatism in the consumer travel behavior. First and foremost, booking windows would shrink, they have not so far this year. I would expect people to transition away from air travel to drive 2 destinations. That has not inspired so far this year. I would also look at VPGs to modify. They haven't. They've continued to perform extremely well. We said we're monitoring early-stage delinquencies. There's nothing in the travel trends that's noticeably moved. In fact, it feels like it's actually moved the positive direction, that would cause us to say there's an early radar sign or a signal that says the consumer is weakening. I say all that, knowing that every week, we look at these because we're looking for early signs, they just -- all we can report is what we know on April 22nd and what we would know on April 22, is early warning signs have not shown up in our travel trends, but we'll continue to monitor them. Operator: Our next question is from the line of Lizzie Dove with Goldman Sachs. Elizabeth Dove: I guess on a similar theme, just thinking about that new owner mix that you mentioned and being a key focus for this year. I guess, like, I think, typically in precedent times where there's a macro slowdown like getting that new owner to make that big purchases typically been tougher. Can you maybe walk through how you're thinking about like levers that you have to drive that new owner growth this year as you push that more for the remainder of the year? Michael Brown: Well, it all starts with what happened in Q1 is you have to see the guest. And then secondly, you have to look at your conversion rates and the 7% growth in Q1, I can't emphasize it enough is a big one coming out of Q1. We have laid the groundwork with our partnerships. We've laid the groundwork with the execution to be able to grow top of funnel key metric. And now our focus will be and our teams already very focused on it is the next stage down the funnel, which is conversion. Unquestionably, as consumers confidence rises and falls just like every single metric that's in every single business, it fluctuates. And we will have fluctuation in almost all of our metrics on the owner and the new owner side, I think what we rest on is that as we monitor and get ahead of any metric that starts to adjust, our team is quick to react, whether it's in cost management, whether it's changing our strategies, either on the marketing side or the sales side, that we feel as we mentioned in our prepared remarks, we think we can outperform across all cycles because there's a ton of value in the business. We've got the key metrics in place, being top of funnel, both owner arrivals in the summer and new owner tours that we can execute further down the funnel and have a lot of levers to make sure that we ultimately deliver the results we've put out to the Street. Elizabeth Dove: Got it. That's super clear. And then going back to the strategic review that you're undergoing. I think last quarter, you mentioned the swing factor was somewhere in between $15 million and $25 million in terms of EBITDA benefit. I know we'll get the queue later, but just any sense of like how we're tracking and kind of range of outcomes in terms of like coming in at the low end versus the higher end of that as we get through the year. Michael Brown: So just to clarify, when you say strategic initiative, you're referring to the resort optimization initiative, correct? Elizabeth Dove: Yes, yes. Michael Brown: Yes. So as Erik mentioned, when you see the Q, you'll see great proof points is that we're realizing full, if not slightly above the cost savings. So we're super encouraged first and foremost that -- the cost savings are being fully realized. Our team is doing a great job combining very process-oriented of of extracting those. Again, as a reminder, the resorts we're taking out have an average tenure of, I believe, about 40 years. So we're looking at more aged resorts with lower demand. And our focus really now is around the consumer and helping them determine having all the facts of their options, whether they want to stay in their ownership or exit, and working through on a one-on-one basis, the population of owners who ultimately need to make a decision. But when it comes back to the economic side of the equation, we're realizing the savings we expected, if not slightly ahead, but it's sort of like our full year guidance. It's early in the process. We have 3 quarters to go, but super encouraged around the execution being at or slightly above plan through the first 90 days. Operator: Next question come from the line of Trey Bowers with Wells Fargo. Raymond Bowers: Just had a couple of modeling questions on the free cash flow side of things. As we think about inventory for the year, is there a chance that as we look to EBITDA to free cash flow conversion, if another city where you wanted to add inventory popped up, could that shift things or just kind of the pace and timing of VOI sales caused what would be some of this conversion to kind of get pushed into '27? And then second, just around nonrecourse debt. Is that expected to be kind of neutral this year or a bit of a draw or a bit of a positive? Erik Hoag: Yes, so free cash flow, the pace of free cash flow in 2026 is going to be back-end loaded. With the Chicago and Nashville spent the inventory investments that we made in the first quarter, we've got additional investment that we're making in the second quarter. So we've got some conviction around converting roughly half of EBITDA into free cash flow on the full year, but you're going to see it really manifest in the back half of the year. From a portfolio perspective, I would say it's generally neutral. Raymond Bowers: Okay. And then just from the brand perspective, are there other sports illustrators or any Bowers out there that you guys are talking to? Both of those brands are not brands that I think a lot of people are super resonate with consumers, but obviously, it's doing something really positive for you guys. Could you just maybe walk through why Eddie Bauer and SI or kind of brands that are bringing in new owners? Is it the brand itself? Or is it kind of just what you've done with the brand that is causing it to resonate. Michael Brown: Well, I would say that I believe the Sports Illustrated brand highly resonates and is an iconic brand that almost everyone associates with a sports experience. I'd like to equate it to Margaritaville, which is not your typical hospitality brand and yet everyone associates it with the lifestyle. So I think those retail brands that express a lifestyle, both Sports Illustrated and Eddie Bauer are highly reflective of how we think hospitality is changing to be lifestyle based. And we just simply have taken the opportunity to find new markets through those lifestyle brands. I would add to it is a core is a traditional hospitality brand. And in the grand scheme of things, we're trying to combine lifestyle and our core hospitality brands of Wyndham and a core and ultimately grow the top line. So -- yes, I think, first of all, they're great brands and that they strongly are identifiable with the lifestyle, and that is resonating with the consumers as they make decisions. Raymond Bowers: And 1 more, if I could sneak it in with the core. Will the license fees around that be similar to what you guys have with the guys at Wyndham or is that a different structure to that deal? . Michael Brown: It's roughly the same. Operator: Our final question is from the line of Brandt Montour with Barclays. Brandt Montour: So I'm having a little bit of trouble, for having my head around the delinquency stuff. I wanted to go back to that quickly because it's not really super clear to us what's driving it. If there's no obvious characteristic you'd call out or normally, it seems like that you want to blame the macro for this. So you've seen a lot of many delinquency cycles. You called it a wobble. How would you say it feels this one feels in terms of how it would play out, like is it worse than -- I'm assuming it's better than the one you saw at this time last year? And then what are you kind of assuming when you say that the provision should still get better and you called out a bunch of good guys. On the bad guy side, what are you kind of assuming in terms of like where it stabilizes, when it stabilizes or anything you can kind of give us there? Michael Brown: Brandt, the first thing I'd say is that it's early stage delinquencies. There -- it's early in the cycle. We've seen it, wanted to communicate it. And the reason I wanted to bring up some of the good guys that are also running against the loan loss provision is just that, that as we sit here in the middle of April, we still got conviction that the loan loss provision will be down year-over-year based on just the confluence of things that make up that calculation. So the delinquencies that we've seen in the early stage delinquencies that we've seen I would say just that there are more recent vintages. But beyond the more recent vintages, there isn't a characteristic that I would specifically call out. And we're monitoring it, and we're working it. We've got aspirations to bring it down. Brandt Montour: Okay. And the second question is actually on AI. You guys have showcased some great progress in terms of your guest experience and the technology stuff that you've done. But I wanted to more ask about how you're using or planning to use new AI tools on the distribution side, i.e., enhancing the top of funnel and sort of working with the bigger models out there that are disrupting some of the ways in which consumers find their travel options. And so is that something you're doing directly or planning to do directly with tech companies? Are you working through the brand companies that you partner with to speak to them and work with them? Or what can you tell us about progress on that initiative? . Erik Hoag: Let me start with AI and then I'll just move to some technology updates as well to show some, as you said, showcase some positive things we're doing. On the AI front, we view sort of 2 opportunities there is, first is on the customer experiences to start in the search and book window and then expand outward from there. So we really want to get our owner-based engage when they're looking at resorts, planning their resorts, creating as little friction as possible and getting their destination confirmed in their inbox as a confirmed reservation. That's the starting point. Secondly is, as we look at AI in the distribution side of the equation, I think the bigger opportunity for us on the stage 1, stage 2 basis is going to be on sort of non-full product type of vacations, whether its rental short-term product, low transaction prices that's where you're best to start as opposed to trying to transact on an average transaction price of $25,000-ish through AI. I think we want to start with lower transaction prices and move up the chain from there, and that's work going forward. On the digital side, a lot of exciting things happened. We talked about Club Wyndham app that we launched and was received very well. We spoke recently about the Worldmark app that we launched last year. We already have 20% of our bookings, which is pretty amazing how recent that app was launched in how quickly that was adopted by our Walmart owners, already 20% of our bookings are happening through the Worldmark app. And we launched the Margaritaville app in Q1. So when you think about the cadence of reducing our friction, some of it's AI, but a lot of it is just the quality of our IT team and the speed at which they've worked with the business to get usable tangible customer experience technology out into the market that we're getting affirmation that it's working through the actual level of bookings we're seeing from our owners. Operator: This now concludes our question-and-answer session. I'd like to turn the floor back over to Michael Brown for closing comments. Michael Brown: Thanks, Rob. Thanks for joining us today, everyone. To wrap up, we've had a great start to 2026, and our strategic priorities are clear. We remain focused on disciplined execution to deliver strong results in 2026, while continuing to scale our multi-brand strategy to drive long-term profitable growth. Erik and I look forward to continuing the conversation with many of you at upcoming conferences and again on our second quarter call. Thank you for your time and continued interest in travel and leisure. Operator: Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good morning, and welcome to Otis' First Quarter 2026 Earnings Conference Call. This call is being carried live over the Internet and recorded for replay. Presentation materials are available for download from Otis' website at www.otis.com. I'll now turn it over to Rob Quartaro, Vice President of Investor Relations. Please go ahead. Robert Quartaro: Thank you, Krista. Welcome to Otis' First Quarter 2026 Earnings Conference Call. On the call with me today are Judy Marks, Chair, CEO and President; and Christina Mendez, Executive Vice President and CFO. Please note, except where otherwise noted, the company will speak to results from continuing operations excluding restructuring and significant nonrecurring items. A reconciliation of these measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements, which are subject to risks and uncertainties. Otis' SEC filings, including our Form 10-K and quarterly reports on Form 10-Q provide details on important factors that could cause actual results to differ materially. Now I'd like to turn it over to Judy. Judith Marks: Thank you, Rob. Good morning, afternoon and evening, everyone. Thank you for joining us. We hope everyone listening is safe and well. Starting on Slide 3. Otis delivered a solid start to the year in orders and sales with continued demand momentum that provides visibility for future growth, especially in our Service segment. Total organic sales increased 1% in the quarter driven by organic service growth of 5%, with broad-based strength across all service lines of business. Maintenance and repair sales increased 4% driven by an acceleration of organic repair sales, which increased approximately 10%. In modernization, we continue to see strong demand with orders up 11% in the quarter and the backlog up 30% at constant currency. This backlog provides improved visibility into the future and supports our view of modernization as a durable multiyear opportunity as the global installed base continues to age. In new equipment, market conditions remain mixed, but we see encouraging signs of stabilization. Orders increased 1% at constant currency and 5% excluding China. Backlog increased 3% year-over-year at constant currency and was up 11%, excluding China, giving us good momentum for the remainder of 2026 and beyond. While China continues to weigh on results, demand across the rest of the world remains positive, especially in the Americas, where orders grew more than 20% in the quarter for the seventh straight quarter of orders growth. Otis delivered another quarter of strong cash flow performance with adjusted free cash flow of approximately $272 million, up 46% versus the prior year. This reflects a ramp-up in orders, improved working capital management and continued focus on cash conversion. Yesterday, we announced a 5% increase to our quarterly dividend. Since spin, our dividend has increased by approximately 120% consistent with our disciplined approach to capital allocation and our commitment to returning cash to shareholders. During the quarter, we opportunistically completed approximately $400 million of share repurchases reflecting our ongoing approach to capital deployment while maintaining flexibility to invest in the business and support long-term value creation. We recently announced the majority investment and we maintain a digital and AI-enabled elevator service provider. We anticipate this transaction to contribute incremental growth as we maintain offers a compelling connected solution with a complement to Otis ONE for a multi-branded portfolio base. We're excited to welcome and support the -- we maintain team and integrated ecosystem and look forward to the long-term value creation opportunity. We're continuing to build our services capability to drive growth and margin. We will continue to invest in field and sales resources to support the service business. Lastly, we recently announced 2 new innovation offerings. The first is Otis robust, a range of heavy-duty elevators designed for data centers and other mission-critical environments. I'll share more in a moment. Secondly, we also introduced Otis Veeva solutions which supports safer and more accessible mobility for aging populations. Otis Veeva solutions focused on improving everyday usability and accessibility and elevators across both existing buildings via modernization and new installations. Turning to our orders performance on Slide 4. Combined new equipment and modernization orders increased 4% in the quarter, reflecting continued strength in the modernization business and new equipment orders returning to growth. The combined new equipment and modernization backlog increased 9% year-over-year, and our total backlog remains at historically high levels, approaching $20 billion, setting a solid foundation for future earnings visibility. New equipment orders increased 1% at constant currency in the quarter. We saw a strong performance in North America with orders up more than 20% and low single-digit growth in EMEA driven by the U.K., Central Europe and Western Europe. These gains were largely offset by a greater than 20% decline in Asia Pacific due to a tough prior year comparison as well as continued softness in China where orders were down low teens. Modernization continued to perform well with orders up 11% at constant currency, driven by North America and China each up greater than 20%. This was partially offset by EMEA down high single digits and Asia Pacific down mid-teens as both regions faced difficult comparisons for major projects in the prior year. Before moving to financial results, I'd like to mention several highlights from the first quarter. In France, Otis has been selected by Marseille Metropolitan Transport Authority to fully replace and maintain 51 escalators across 10 metro stations. The scope includes the installation of 35 escalators designed for standard heavy-duty metro use and 16 additional escalators engineered for the most demanding environments, featuring greater vertical rise and very high passenger volumes across one of France's busiest metro networks. In the Americas, Otis has been selected to supply 46 units to the Austin Convention Center redevelopment in Texas, including SkyRise and Gen 3 elevators as well as public escalators. We view the expansion of the Austin Convention Center as part of a broader modernization opportunity across the U.S. Convention Center segment, where many facilities built 20 to 30 years ago are now being upgraded to meet today's capacity accessibility and performance requirements. In China, Otis will upgrade 46 elevators at the Run win community in Harbin City as part of a bond-funded residential renewal project replacing all units with Gen 3 comfort elevators. This represents the first nationwide implementation of the Gen 3 Comfort model since we launched it at the eighth China International Import Expo, aligning with the country's good housing standards. Built for residential modernization and elderly friendly living Gen 3 comfort elevators feature full-height mirrors to enhance spatial awareness, bright LED lighting to improve visibility and comfort, increased cab height for a more spacious and comfortable ride and smart recognition cameras to detect and prevent safety hazards. The elevators are also equipped with a regen energy regeneration system and Otis ONE IoT platform, delivering a safer, more comfortable, energy-efficient and connected travel experience for residents. And lastly, as I previously mentioned, we recently launched our Otis robust range of elevators to serve data centers and other mission-critical environments, including hospitals and industrial buildings. Otis Robust is built for high-capacity, high-traffic applications that require durable, reliable around-the-clock operation, reflecting growing demand across infrastructure-driven markets. Engineered for heavy-duty performance and accelerated project time lines, our robust solution demonstrates our commitment to product innovations that serve our customers' unique needs, including movement of high-value freight and passengers. Turning to our first quarter results on Slide 5. Otis delivered net sales of $3.6 billion with organic sales up 1%. Adjusted operating profit, excluding a $28 million foreign exchange tailwind decreased by $38 million in the quarter. Adjusted operating profit margin declined 130 basis points to 15.4%. Adjusted EPS declined 3% or $0.03 in the quarter driven by operational performance partially offset by favorable foreign exchange rates. With that, I'll turn it over to Kristina to walk through our results in more detail. Cristina Mendez: Thank you, Judy. Starting with service on Slide 6. Service organic sales grew 5% in the quarter, with growth across all lines of business. Maintenance and repair organic sales increased 4% with organic maintenance sales of 2% and driven by 3% portfolio growth and approximately 3% positive pricing, partially offset by mix and churn. Repair organic sales were in line with our expectations, up 10% and reflecting solid orders momentum and healthy customer demand across all regions. Modernization organic sales grew 6%, supported by a strong backlog conversion in the Americas China and Asia Pacific, partially offset by a decline in EMEA. We experienced modernization project delays in EMEA due to the conflict in the Middle East during the quarter. However, we remain convinced of the underlying demand for modernization as evidenced through the progress we continue to make on orders. As Judy mentioned earlier, our modernization backlog is up approximately 30% at constant currency, which give us confidence in our outlook for the remainder of the year. Service operating profit was $556 million in the quarter, down $10 million at constant currency. Higher volume and favorable pricing provided a benefit that these were more than offset by continued investments to support long-term growth, higher labor and material costs and unfavorable mix, particularly in our maintenance business. As a result, Service operating margin contracted 160 basis points to 23%, reflecting investments in service capacity and quality as well as ongoing cost inflation. As the growth in lower-value maintenance units has driven negative mix in our portfolio growth in recent quarters. As we are focusing on shifting these dynamics to capture higher value units, we are investing significant resources in service excellence. We are also continuing to hire to support our long-term growth ambitions. In a moment, Judy will provide some additional insights on these dynamics and the actions we are continuing to take to address these headwinds. Turning to new equipment on Slide 7. New Equipment organic sales declined 5% in the quarter. Growth in EMEA was more than offset by declines in Asia, particularly China and slightly lower volumes in the Americas. EMEA sales increased approximately 1% driven by growth in Southern Europe, partially offset by weaker performance in Western and Central Europe. Asia declined 13%, reflecting China's lower backlog with sales down more than 20%, alongside lower sales in Asia Pacific with a strong growth in India, more than offset by softness in other parts of the region. New equipment sales in the Americas declined approximately 1%, a sequential improvement from last quarter as we begin to execute on the strong order growth that began in the second half of 2024. Looking ahead, we expect the Americas to return to positive new equipment sales growth for the full year in 2026. New Equipment operating profit of $38 million declined $27 million at constant currency, with operating margin declining 240 basis points to 3.3%, in line with our expectations. The decline in profitability was primarily driven by lower volumes and favorable price and mix, partially offset by productivity. Looking ahead, we remain focused on disciplined execution, productivity and cost management as we navigate the current new equipment market environment. I will now hand it over to Judy to discuss our [indiscernible] margins and the actions we have taken to return them to past levels. Judy, back to you. Judith Marks: Thank you, Christina. Turning to Slide 8. We realize we have seen some volatility in our service results in recent quarters, which is unusual given the nature of our stable and predictable service flywheel. 2025 was a year of uplift implementation in our frontline operations, which caused some disruption in repair and modernization execution in the first half. At the same time, we redefined our service strategy with the goal to maximize lifetime value by investing in service excellence and driving growth in our highest value markets. We're pleased with the progress we've made in strong repair and modernization orders in the first quarter and we're also encouraged to see our retention rates excluding China stabilizing. However, we experienced short-term profit pressure in the first quarter in our service business, driven by 3 factors we're working to address. The first factor is our investments for growth. Since the second quarter of last year, we've been adding field colleagues to drive our service excellence initiatives as well as adding sales resources to support our growth. Overall, in Q1, we have $5 million of additional field costs in the baseline devoted to service quality. In addition, in Q1, we invested approximately $10 million in sales capabilities in high-value markets, including tools and our AI pricing algorithm, sales representatives and training of the sales force. For the full year, we expect $50 million of incremental investments in 2026, inclusive of what we've executed in the first quarter. The second item is portfolio mix. While we've grown our maintenance portfolio 4% for 4 consecutive years through 2025, in the first quarter, our portfolio grew 3%. Importantly, more of the recent growth has come from lower value markets. This negative mix has been a drag, causing maintenance organic revenue growth to decelerate to approximately 2%. While we recognize this headwind last year, we anticipated a faster recovery in higher-value markets. Third, we have seen revenue delays and timing of cost recovery driven by inflationary effects in our base, partly related to the Middle East conflict. As we look ahead, we're taking decisive actions to address the headwinds to service margin and drive sequential improvement in the coming quarters. As I mentioned, the portfolio mix headwinds have been higher than anticipated and we've decided to scale up investments encouraged by the positive results from the pilots in place. We're confident that the improvement in retention rate will pay off, and we will return to margin expansion by the end of the year. Additionally, we're investing in micro pricing capabilities. And as we roll out the pricing initiatives that started last year across multiple high-value markets, we anticipate accelerating maintenance organic sales growth back to 3% in 2026. In addition, we remain extremely bullish on the outlook for both modernization and repair demand due to the aging of the global installed base. Going forward, we expect repair organic sales to grow approximately 10%, while modernization orders are expected to grow in the low teens or above on a sustained basis. Within repair, we're replicating the industrialized and proactive approach that has delivered such strong results in modernization. By leveraging insights from Otis ONE connectivity together with our unique capabilities from factory to the front line, we are proactively driving repair volumes and reducing customer downtime. First quarter repair results were very solid. We expect this trend to continue throughout the year. Regarding cost management to address cost headwinds experienced in the first quarter, we are implementing fuel and logistics surcharges, though there is a time lag versus cost incurred as we implement these pricing actions, we expect to fully offset these higher costs as we pass them on via pricing throughout the year. Finally, we're executing a targeted cost reduction program in nonfrontline related activities. After finalizing uplift in 2025, we're refining our global functions to be business-centric and removing discretionary spending that's not business-critical. We expect this to result in up to $20 million of run rate savings and indirect expenses. Please note of the $20 million targeted run rate, we expect to achieve approximately $10 million in 2026. Overall, while recognizing a setback in our service profit in the first quarter, we are addressing the root causes while sustaining our investments to return to our post-spin margin levels. With the actions in place we expect service margins to sequentially improve in the coming quarters and return to year-over-year margin expansion towards the end of the year as we capture the benefits from retention, pricing, execution of our growing orders in repair and modernization and optimization of our costs. Moving to Slide 9 with the market outlook. Our 2026 market expectations have not changed. We continue to expect the global new equipment market to move towards stabilization in 2026 with industry units down 2% for the year. This expectation includes growth across all regions except China. In Americas, first quarter demand in North America was robust, and we continue to anticipate solid growth for the full year, driven by strength in residential, health care and data centers. Latin America market volume is expected to stabilize, supported by public investment in Brazil. Growth in EMEA is expected to accelerate this year, driven by broad-based strength in Europe, and continued expansion as the Middle East continues to build its future economically despite the current conflict. At this time, we have not adjusted our beginning of year forecast for the Middle East. However, should the conflict continue for a prolonged period, there is a risk that new equipment demand could be negatively impacted. In Asia Pacific, we're anticipating last year's expansion trend to continue driven by robust demand in India and Southeast Asia, while Korea is expected to stabilize this year after a challenging past several years. Lastly, in China, we believe the worst of the market decline is behind us. While units are expected to decline in 2026, demand is continuing to trend towards stabilization. Taken together, we expect Asia to decline in 2026, the global outlook for modernization remains robust with the market continue to grow double digits on a dollar basis, with growth across all regions. This is due to past construction cycles and the demographics of the aging installed base. We continue to believe we're in the early innings of a multiyear growth cycle for modernization that we're just beginning to capture in both phased and full modernizations. Turning to our financial outlook. We now expect net sales of $15.1 billion to $15.3 billion, with organic sales growth up low to mid-single digits. While we've experienced limited project execution delays due to the conflict in the Middle East, we believe these delays are recoverable through the remainder of the year. We now expect adjusted operating profit to be approximately $2.5 billion up $20 million to $60 million at constant currency and up $60 million to $100 million of actual currency. Given the new profit outlook, adjusted EPS is now expected to be $4.20 to $4.24, still in the original range of our guide, representing a mid-single-digit increase compared to 2025. Adjusted free cash flow is anticipated to be between $1.6 million to $1.65 billion. We opportunistically completed $400 million of share repurchases in the first quarter, and we continue to target $800 million for the full year front loaded in the first half of the year. I'll now pass it back to Christina to review the 2026 outlook in more detail. Cristina Mendez: Thank you, Judy. Turning to our organic sales outlook on Slide 10. We continue to expect low to mid-single-digit organic sales growth driven by accelerating growth in service and moderating declines in new equipment. Our outlook for service organic sales remains unchanged. We are anticipating mid- to high single-digit organic sales growth within service representing 1 to 2 points of acceleration compared to 2025. Repair should benefit from robust orders demand as well as flow-through from our pricing initiatives. And within modernization, our strong backlog should enable us to deliver another year with solid organic sales growth. Our expectations for new equipment organic sales growth is also unchanged. We continue to expect to be down low single digits to flat with growth across all regions except China. In the Americas, we should continue to see improvement through the year as strong orders growth that began in the second half of 2024 flows through revenue. We expect total net sales of $15.1 billion to $15.3 billion for the full year. Turning to our financial outlook on Slide 11. We now expect adjusted operating profit to grow $20 million to $60 million on a constant currency basis. This represents similar operating profit growth compared to 2025 despite $50 million of incremental investments as well as the cost and mix headwinds we are currently experiencing. Regarding the conflict in the Middle East, we expect neutral impact for the full year profit. As we anticipate, we will be able to pass on higher cost for fuel commodities, electronic components and logistics. Our guidance also assumes a modest year-over-year benefit from tariffs based on the current tariff regulation in place without assuming any tariff reforms in year. Lastly, adjusted free cash flow is expected to be between $1.6 billion to $1.65 billion. Moving to the 2026 EPS brief on Slide 12. We are reducing the high end and narrowing the range of our previous adjusted EPS guidance to $4.20 to $4.24, primarily reflecting our softer-than-anticipated first half due to operational headwinds and investments in surveys described earlier. Note that our current guidance assumes the Middle East conflict ends in the second quarter, However, studies continue, we expect it to have a negative impact to profit of $5 million to $10 million per quarter due to project delays, logistic interruptions and increased cost. Providing now some color on the second quarter. Our expectations are aligned with what we said on our webcast on March 18. Total organic sales are expected to accelerate mainly driven by repair and modernization that will grow sequentially on the back of the strong orders momentum. The decline in new equipment organic sales is expected to moderate sequentially. Total adjusted operating profit dollars on a constant currency basis are expected to decline in the second quarter at a similar level as the first quarter resulting in adjusted EPS decline of minus 3% to minus 5% compared to the prior year. Looking at full year, we believe that the results will accelerate in the second half as we execute the operational actions Judy described. We expect service profit to sequentially expand driven by the impact from pricing, repeated modernization execution retention improvement and cost takeout. Together with recovery in new equipment volumes, we expect to drive profit growth in the second half. The investments we are making today are creating a strong foundation for the second half of the year and beyond. We are well positioned to capture the significant service opportunities ahead with our industry-leading margins that we believe and resume expanding in the future. With that, I will kindly ask Krista to open the line for questions. Operator: [Operator Instructions] Your first question comes from Joe O'day with Wells Fargo. Joseph O'Dea: Can we just focus on the cadence of service margin expansion? I'm not sure if kind of thinking about this correctly, but is it something that goes from like 23% in the first quarter to maybe 24.5% in the second quarter and then the back half of the year, you're looking at year-over-year margin expansion -- and if that's reasonable, just any color on kind of those building blocks from 1Q to 2Q because it would be a decent margin step-up. Cristina Mendez: Joe, this is Christine, and thank you for your questions. So let me guide you through the sequential evolution of the service margins throughout 2026. So we started Q1 with 160 basis points decline, 23% [indiscernible], and we are expecting this to sequentially improve along the coming quarters. You rightly said, Q2 will be probably negative EPB margin will be around 24% to stabilize in Q3 and to come back to margin expansion in Q4. That means that full year, we should be in the high 4 which is a patch below 2025. The reason for this calendarization is because of all of the actions we are implementing in the first half of the year. In terms of pricing, we also are facing these temporary headwinds for the Middle East that will be full year neutral because we are pricing the inflation in our contracts, but it takes time to recover the price versus inflation that comes upfront. We are also very positive about the strong momentum in every sales expansion. We have a very strong backlog in modernization and repair and we expect execution to ramp up as early as in Q2. So with all of this in mind, together with the payback of the investments we are already placing -- also on the portfolio mix, we expect maintenance sales growing 3% at the end of the year. As Unit has said, we are very confident that service margins are going to be back to normal by the end of the year. Joseph O'Dea: That's helpful. And then on the maintenance growth trajectory, so something like 2% in Q1, just to be clear, is it 3% for the full year? Or you would be exiting the year at that pace? And then what you see in terms of that path from kind of Q1 to better growth as you go through the year? The degree to which that's price related or kind of strategy around what you're doing on retention at capture? Judith Marks: Thanks, Joe. It's Judy. So yes, it's 3% full year and the exit rate -- so let me just take care of that one head on. Listen, we have been very focused. While we were disappointed in the first quarter that we didn't see the acceleration from this strategy shift we made last year to higher value parts of our portfolio, that is where the focus is. That's why we're making the investments in our people, making sure we have service excellence. So we're adding maintainers where in the past few quarters, and now we haven't billed them, again, to drive that service excellence. So the key metric I look at for that is retention. And I am pleased to share without sharing numbers, which we only do once a year our retention rate at the end of the first quarter was at the same place it was for full year '25. So it has stabilized. But if you look first quarter '26 to first quarter '25, we're up about 50 basis points in retention, which is why we have this confidence is the investments paying off. Again, at that we ended last year with a 94.5% ex China retention rate. So as we continue to add units in the higher value, countries. It obviously drives a higher value of margin contribution and profit dollar contribution, and that's what we'll be seeing as we go. Secondly, we are very focused on what we've been doing with micro pricing -- we're encouraged by what we saw with the pilots in the fourth quarter of last year. We're rolling that out in our higher-value countries as we speak and that is in both maintenance and repair. So our maintenance contracts as we renew them, separate from the pricing action we're taking to handle the inflationary impacts of the Middle East with fuel and everything else, they're sticking. And so that will going through, and you'll see that coming through the revenue. Operator: Your next question comes from the line of Rob Wertheimer with Melius Research. Robert Wertheimer: And Jay, just a follow-up on what you just touched on retention getting better, but you were sort of disappointed in the high-value markets in 1Q. So maybe square that circle, just what didn't come through as you expected in 1Q on that service portfolio? Judith Marks: I'd say the biggest challenge we had geographically was in our Europe base full transparency. That's where we didn't see significant gain there in terms of portfolio gain, and that is half our portfolio. So the good news is under TiVo's leadership, that team is laser-focused on ensuring portfolio gain in countries where our revenue per unit is significant as well as our contribution per unit. He has his team together, I spoke to them earlier this week as well directly. Those top leaders. This is their top metric, and they understand that. And over 55% of our portfolio is in EMEA. So that's why this is just so important to us. Robert Wertheimer: And do you think the war and disruption had any impact on that particular metric? Or is decision-making or anything else? Or is that more just [indiscernible] Judith Marks: I would not put this one on the war in terms of portfolio retention. This is about us executing the commitments we've made with service excellence. Again, we're starting to see the improvements, Rob. I really -- I can tell you that based on the deep dives and retention that we're seeing at every one of our operating territories. And I believe you'll see that come through as the year goes on. Operator: Your next question comes from the line of Jeff Sprague with Vertical Research. Jeffrey Sprague: Judy, maybe a pivot to we maintain that sort of winds a little bit with kind of the nagging concern many of us have about ISPs being technically capable of competing effectively against the big OEMs. Maybe just sort of address that and what you see them bringing to the table specifically for Otis. Judith Marks: Yes. No, thanks, Jeff. Great question. So we're really excited to have Ben and Jade and we maintain team join us here at Otis. And we will be operating them independently. What sets we maintain off from a lot of the ISPs across the globe is they're not just a service provider. This is a digitally native ecosystem that was started in late 2017 that operates in at least 4 other countries right now that integrates a digitally native mechanic with an ecosystem that uses machine learning and AI to really drive more customer centricity and to learn with every repair they make, every maintenance visit they make. What I like about it is it -- it complements what we do on Otis ONE, which has significant depth for Otis units and in a 23 million unit installed base gives us even more access to non-Otis units, of which a little under 20 million units out there are non-Otis units. So we're excited. We're excited to be the majority investor Again, we're going to operate as separate entities because we think that gives us more access to the market. But there's a really strong alignment with the technology platform that we maintain, and we believe in the growth potential that's going to, we believe, drive long-term value for customers and the culture. Jeffrey Sprague: Is there something that they have done or are doing, though that would suggest it's not I guess easy or likely that someone else replicates us using AI tools. Judith Marks: Well, they've been doing it for almost 9 years now, 8 or 9 years, which is different than just putting a piece of a genic AI out for repair technicians and maintenance technicians. It's truly integrated in terms of the knowledge learning and the immediate sharing across their entire mechanic base. So this was born this way. if you join, we maintain as a mechanic, is -- these are the tools you use and you use them 24/7 and when we look at incredible retention rates that they have and their ability to continue to grow, we think this is very unique. Jeffrey Sprague: Great. And just a quick follow-up on margins. You had that 60 bps gain in the Q4 service margin. You're -- on an as-reported basis, you're comfortable with Q4 2026 exceeding Q4 2025 even with that gain? Judith Marks: Yes, we are -- and let me remind you that Q4 '25 was also driven by sale of assets. We have $50 million benefit from that. from a few transactions. But yes, we are confident based on what I have described before because we see the backlog is there we have the resources to execute. We are very positive about the first impact we see from the pricing initiatives we started last year, and this is going to compound over the year. We will put on top the additional price through -- that will cover the inflation we have seen in Q1 and we will see in Q2 coming from the Middle East. And in addition to that, maintenance sales will recover in the second half of the year. So with all of these components, we are positive about the service margin expansion in Q4. Operator: Your next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: I just wanted to follow up on that, Cristine. Maybe if you just give us a little bit more help on that bridge and 23% in 1Q. I think you're pointing to a 26% plus in 4Q. So just wondering if you could maybe decompose that between pricing surcharging some of the cost reductions, that would be helpful. Judith Marks: So thank you, Nigel, starting with Q1. In Q1, originally, we were assuming 30 basis points margin contraction initially in our guide that was essentially the result of the investments we initiated last year sometime in Q2, Q3. The reason for those investments is that we wanted to accelerate growth in high-value markets and was primarily via retention. And as you know, stickiness in our business is very high. If we do the right things, if customers are satisfied, there are digital reason for them to leave. So those investments in the first pilot are rendering good results. Having said that, as we started the year, we realized that the headwinds we see in the portfolio mix were higher than expected. And that's why we decided we are going to invest more because we are happy about the results, you mentioned the retention rate has stabilized, so we are going to scale up those investments. So the reason for the incremental margin deterioration in Q1, we have seen 160 basis points versus 30 basis points originally expected is essentially 50 basis points coming from these mix headwinds -- another 50 basis points coming from the incremental investments we placed in Q1 and approximately 30 basis points coming from a variety of topics, primarily the Middle East headwinds. We had shipment delays in modernization and additionally, the cost inflation that we start seeing in our base. Now when you go through the year, you will see that service sales will accelerate. We are expecting approximately 7% organic services in the second half of the year, this is thanks to repair and modernization ramping up, repair will be around 10% growth per quarter. And look, we see the orders, repair orders in Q1 were above 10%. So this is coming, in addition, modernization will be above 10%. Our organization backlog is growing 30% and then in addition, we see the pricing effects. Pricing, we said at the beginning of the year, we expect $50 million FIFO incremental to what we have done before. Last in addition to that, we are going to price the inflation we see from fuel and logistics. This comes on top. And last but not least, that this is not related to service, but you did also mention because this will contribute to operating profit improvement in the second half cost take out. We are conducting a very selective approach in order to remove all kinds of costs that are not related to the front line. Let me also highlight that. We are going to protect frontline sales and field execution. This is going to come from non-frontline activities. Nigel Coe: Okay. Christina, that's really helpful. And then just on the pricing, it sounds like you're quite bullish on some of the pricing you put through. I'm just curious, is there a risk with higher price and some surcharges that could derail the attrition improvement strategy to some degree. Judith Marks: Nigel, listen, we -- the reason we are doing micro pricing is to not have just across the board and across-the-board push, which obviously, with certain customers who might be right on that precipice -- we don't want them to attrit. We want to keep them. So we're looking at where we drive value. So when you're looking at a repair, as it's urgent and imminent, how much elasticity is there in that price. And we're looking at it real time in the markets it's part of, whether it's hospitality, hospitals. So we're really micro-segmenting the segments and micro segmenting what the value and the elasticity is. So I'm not worried about that. The the fuel, I think you're going to see that across the board you already have with so many logistics companies already doing that I think you're going to see that everywhere. We've got 22,000 vehicles. As you can imagine, we're moving parts across the globe to be able to respond to our customers real time. And so we will -- we've done this before. when fuel went up, we were successful with it, and we anticipate a similar success, and I'm not worried about any compounding there that would cause attrition. Operator: Your next question comes from the line of Lewis Merrick with BNP Paribas. Lewis Merrick: Just one from my side. Just coming back to the service margin, you pointed out the negative mix impacts you've been having from growth in Asia and China. It's understood that those are lower-margin regions or the negative mix impact you get from growing there. but have that underlying margins ex the investments you've made in the EMEA and the Americas also coming under pressure? Or is that not the case? Judith Marks: Yes, they are not coming under pressure. We have not seen that at all. Again, we've been balancing retention price and that ability to make sure that those margins drop through. We do that through cost controls, Louis and including not just the ones we talked about where we're going to handle discretionary costs and other other resources that are noncustomer facing nonfield nonsales. But even in our field organization, our cost of sales and where and how we buy parts, all of that is being carefully managed and controlled now. So that's, again, what gives us the confidence, especially in the Americas and EMEA. Operator: Your next question comes from the line of Alexander Virgo with Evercore ISI. Alexander Virgo: Judy and Christina. Sorry, sitting in London. I wonder if you could talk a little bit about the repair business. If you could just sort of size it for us in the broader context. And then maybe give us a sense on the the visibility and the sort of the lead times that are entailed in it because I'm guessing that the dynamics are going to be somewhat different from the broader service business. So just wondering how you can underpin that 10% for the rest of the year and then how we might think about that in the longer term? Judith Marks: Sure. Let me start, and then I'll hand it over to Christine, let me just set the stage. The repair business is not discretionary. As the modernization business tends to be. And with 9 million or 10 million units now over 20 years old, we are seeing the frequency of repair increasing that we call reactive repair. That's something Otis has always done. It is, as I've shared many times on this call, our highest margin product offering -- it's higher margin than maintenance, it's higher margin than modernization and new equipment. As units age, they break down more. So this reactive repair demand we're seeing is healthy and growing by itself. Now we're layering on what we call proactive repair, which deals with obsolescence of parts, which deals with our ability because we have 1.1 million -- over 1 million units connected via Otis ONE. The ability to predictively understand when an elevator is going to shut down or have an issue, and we have the ability to get to a customer before that and repair it so that they don't have a shutdown. They don't have time lost. So when you add the reactive and the proactive, we believe that's somewhere in the teens, that growth rate. Again, it compounds and grows as people defer modernization decisions, which is absolutely every customer is right, whether it's a phased or full modernization. Christine, I'll let you take us through some numbers. Cristina Mendez: Yes. And Alex, I can complement with the financial size of this segment as you were asking of this activity. Within the Service segment, this is probably the second biggest activity after maintenance in terms of revenue size. But let me also note that we don't separate maintenance from repair because depending on where you are in the world, the nature of the contract can be all included in which case, repair is included in the maintenance revenue or can be basic and then all activities in repair or charge on top. That's why we put them together because it depends on the typology of contracts. From a margin standpoint, you said it, it's the highest margin activity. So you can imagine that repair growing at an ongoing run rate of 10% is very accretive from a profit standpoint. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to circle back, apologies on service margins again. So just trying to understand kind of what's -- anything changing in the market versus sort of self-inflicted things. Judy, I wondered if there was any shift I mean our understanding is that maybe China service pricing very difficult U.S. service pricing, maybe a little bit more pressure in the industry. I just wondered if you sort of disagreed with that. And then secondly, the price sort of cost headwinds or price net of labor, materials, fuel and so on in service, is that a big lever sort of turning around as we move through the year or not really? I think, Christina, you didn't mention that as a big headwind in first quarter, but it sort of come up through the call. So I just wondered if that's something price net of material and other costs in service, does that also help the margins year-on-year through the rest of the year? Judith Marks: Well, let me take the first question, Julian, and really thanks for asking. You're the first person who's asked me about China so far this morning. So I almost had a clock on that. But listen, we -- our service business in China, just like everywhere else, consists of maintenance, repair and modernization. And this is the first quarter in China where since spin, and I would argue, you can go back a lot more years where our service revenue has outpaced our new equipment revenue. So it's now 52% of our revenue for the quarter, while China is down to 9% of the total revenue for Otis. So our service business has continued there in terms of being able to add more units to our portfolio, albeit at a lower revenue value and a lower margin than in the more higher value markets. the mod market in China, though, is what's really added some nice contribution in the first quarter. We've been talking to you now, this is now year 3, we've entered with the bond stimulus. It started earlier this year, and there's approximately 180,000 units this year for bond in mod in China versus 120,000 last year and our mid first quarter orders were up well over 50% in China. The revenue was up close to that and their mod backlog is up over -- well in the double digits. In the Americas, we're not seeing a different maintenance structure. Yes, there are a lot of ISPs who have been amalgamated and brought together by other private equity -- but they're the same ISPs we competed with before. They're just some different brands, some different names. So we're not seeing that pressure drive really anything on the price side in the Americas. There's always unique customers, some key accounts across the globe where we make special considerations as you can imagine, because of the long-term relationship we have with them. Cristina Mendez: And Julian, I can complement what Judy has said on pricing. So first, we don't see additional challenges in the marketplace from a competitive standpoint. But secondly, price for us is a tremendous tailwind this year. And there are 2 different initiatives. One is the micro pricing that we started last year and this is essentially thanks to our AI algorithm, thanks to a much more value-add approach to pricing, we are able to adapt our price to customer perception to customer SMAs. So we don't follow the same approach for all and this is the $50 million improvement sequentially that I mentioned before, 1 year versus the other because this comes on top of the regular inflationary clauses we have in our contracts. The second set of initiatives related to the particular situation of the geopolitical Middle East conflict. And you mentioned Q1 is true that the Q1 effect from inflation was not big. It was part of the 30 basis point margin deterioration. I mentioned before, together with the volume today. But then in Q2, it will get a little bit bigger. This is part of what we guided of EPS being 3% to 5% down in the second quarter. It includes the inflationary effects -- but for the full year, we are going to be able to recover because we are currently already pricing that is just the time lag from when we start the initiatives until we see the flow through. So in the second half of the year, in a nutshell, pricing is going to be a tremendous tailwind both from macro pricing and from the Middle East inflation pass-through. Julian Mitchell: That's very helpful. And just 1 follow-up question, not so much on this year, but a broader 1 maybe for Judy, around the service business, and you had that strategy sort of pivot over the last 12 months. So for service, generally, as we're thinking about the medium term, is the expectation now it's maybe kind of 2% or 3% maintenance portfolio growth, and then you're trying to kind of squeeze out more -- just a sort of higher ARPU from adding technicians and all the rest of it. How long do you think it takes for us to see that higher ARPU kind of flowing through on that lower maintenance volume growth? Judith Marks: Well, it's lower maintenance unit volumes growth, and that's why we're talking about value versus volume. And you will start seeing that next year beyond what we've already now guided and outlooked for the rest of '26. That's where it comes through at the revenue per unit. We don't report on revenue per unit, but you will see it in our maintenance revenues. And we were up 5% organically this year -- this quarter. As Christina said, you're going to see that continue to ramp. And that's due to the backlog we have. I mean we have line of sight on repair and modernization to be able to convert that this year and that's what's part of our EPS guide for the second half. Operator: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: If we could start with the service business. I also have a bit of a medium-term question. With the goals of improving attrition over time, which we understand will nice that attrition is bottoming, but it will take time for it to move in the other direction. How should we think about the need for service investments beyond 2026? And I guess your confidence in being able to return to year-on-year margin expansion within service in 2027. Judith Marks: Yes. Thanks, Nicole. That's an absolutely fair question to ask. I would say that certainly retention has stabilized ex China again, different structural thing system in China for every year, competition every year renewals, no auto renewals -- so we are -- the investment we've made, we see as very, very important. The most important part to that is it does drive the retention. And simultaneously, it gives us more skilled mechanics. So when I look at medium term, when I look beyond this year, it's not just about the retention rate in the maintenance portfolio because once we get that, we also get the additional repair that comes with that work and eventually the relationship for modernization downstream. So it really does have a knock-on effect again, of driving all parts of our business because some of the maintenance portfolio, we get through recapturing units. So they're not all just coming off warranty from new equipment. They're also entering our portfolio from recapture. So they enter at all different service life. And so we understand where they are in those service lives, what it takes to maintain them and what it takes to retain them in our portfolio. So I think the investment, certainly, we're not going to guide for medium term on that. But I think the investment slows down or more importantly, those people convert to billable. So there's actually could be a double benefit where they're now trained. They're now working. They have customer relationships. They can work on maintenance, they can work on repair. They can work on mode. We have a better skilled workforce and now we can do better resource allocation and make them billable. So we're actually kind of turning and reversing an investment into a revenue and profit-generating opportunity. Nicole DeBlase: That's very helpful. And then I just wanted to circle back on what you're seeing in the Middle East. It sounds like you're not assuming that the condensate continues. But what's happening on the ground right now with the ceasefire, are there still project delays? Have you seen kind of a return to business as usual, which means if the current status prevails, there shouldn't be a real impact in the second quarter? Judith Marks: Yes. So we have colleagues -- and first of all, I'm just -- I'm thrilled and we watch it every day. They're all safe. We have colleagues everywhere in the Middle East. As you can imagine, UAE, Qatar, Kuwait, Bahrain, Saudi Arabia, and they are performing. Our Middle East revenue is low single digit of Otis' revenue. So this -- that's not as much the impact in the region. Obviously, we're back on construction sites where our customers want us on the new equipment side. And the Middle East is more of a new equipment business, as you can imagine, than a service business. Just because of all the building that's going on and the investments that all of the governments are making and the commercial entities are making. So we see it as a delay in projects. It's recoverable -- our folks are at construction sites, they're modernizing buildings, and we never stopped our essential services just like during COVID. So we feel comfortable that we won't have a lot of impact. As Christina said, though, if if some of those new equipment projects or potentially demand disruption happens that's what we said. Think about that third quarter and fourth quarter, each of maybe $5 million to $10 million of EBIT impact. We don't expect that to happen, but we wanted to be clear as to what we saw. Operator: Your next question comes from the line of Patrick Baumann with JPMorgan. Patrick Baumann: A lot of questions on service. I'm going to go back to new equipment. Just wanted to get some more clarity on the margin you expect there in the second quarter and then for the year, what was the tariff benefit to the guidance versus prior expectations and then below the line, the corporate expenses for second quarter and the year, if you could give some more color on that. Judith Marks: Patrick, thanks for the question. So on the new equipment side, we are at 3% margins in Q1, and we expect the situation to continue at this level for the balance of the year. We will -- the reason for that is, as we see the recovery from volumes, which is going to be a tailwind, we have the mix and the price in the backlog, primarily from the price reduction we saw in China in 2025 Commodities are a small headwind. In a broader scheme of things, very small. We are talking about $10 million negative. But last year, they were $10 million positive. On the other side, you got it right. Tariffs are a tailwind for us. The new situation regarding IPA, Section 122 and the new tariffs are favorable by $10 million versus our original guide expectation that was to be flat versus prior year. So it's going to be better versus prior year. And in addition, we are getting some productivity on the field. So with all of this, we expect newcomer margins to stabilize. And as we start in positive new equipment sales, margins should go up in the future. On your second question regarding corporate, corporate is going to be around $50 million per quarter going forward. and it's going to be full year approximately $50 million down or worse BPY. Operator: Thank you, that's all the time we had for questions. Judy Marks. I'd like to turn it back to you for closing comments. Judith Marks: Thank you, Cristina. In 2026, we are investing in capabilities to accelerate our top line growth and our profitability, together with fundamental tailwinds of the aging installed base, Otis is well positioned to deliver attractive, sustainable long-term shareholder value through our service business. Thank you for joining us today, everyone. Stay safe and well. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining, and you may now disconnect.
Operator: Thank you for standing by for New Oriental Education & Technology Group Inc.'s FY 2026 Third Quarter Results Earnings Conference Call. At this time, participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect. I would now like to turn the meeting over to your host for today’s conference, Ms. Sisi Zhao. Thank you. Sisi Zhao: Hello, everyone, and welcome to New Oriental Education & Technology Group Inc.'s third fiscal quarter 2026 earnings conference call. Our financial results for the period were released earlier today and are available on the company’s website as well as on newswire services. Today, Stephen Yang, executive president and chief financial officer, and I will share New Oriental Education & Technology Group Inc.'s latest earnings results and business updates in detail with you. After that, Stephen and I will be available to answer your questions. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. New Oriental Education & Technology Group Inc. does not undertake any obligation to update any forward-looking statements except as required under applicable law. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on our investor relations website at investor.neworiental.org. I will now turn the call over to Mr. Yang. Stephen, please go ahead. Stephen Yang: Thank you, Sisi. Everyone, thank you for joining us on the call. I am glad to share with you that Q3 of this fiscal year marks another quarter of solid results and consistent growth. We are pleased to see that after several consecutive quarters of revenue growth exceeding expectations, this quarter has once again surpassed expectations. This reinforces our confidence in the correctness of our strategy and our optimism about future performance. We are even more delighted to see margin expansion in our core business along with the significant contribution from the outstanding performance of Easter byte. Our focus on operational efficiency and investment in strategic initiatives have again driven satisfactory performance and continue to lead our path to sustainable profitability. This quarter, total net revenue grew 19.8% year over year to $1.4173 billion. Non-GAAP operating income rose 42.8% to $202.9 million, while non-GAAP net income attributable to New Oriental Education & Technology Group Inc. increased 34.3% to $152.2 million. Both our core business and new initiatives are gaining meaningful traction this quarter. Breaking down, overseas test prep recorded a revenue increase of 7% year over year for this quarter. Overseas study consulting recorded a revenue decrease of about 4% year over year for this quarter. Our adults and university students business recorded a revenue increase of 15% year over year this quarter. As for our new education initiatives, including non-academic tutoring and our intelligent learning system devices, they delivered sustainable revenue that grew 23% year over year this quarter. Our non-academic tutoring business has been rolled out to around six existing cities. Market penetration has grown steadily, particularly across high-tier cities. The top 10 cities contribute over 60% of this business. Our intelligent learning system and device business that leverages our teaching expertise and data analytics to provide adaptive learning solutions has been launched in around 60 cities. We are encouraged by enhanced customer retention and scalability of this new business. The top 10 cities contribute over 50% of the business. Turning to our integrated tourism-related business, which includes study tours and research camps for K-12 and university students as well as new cultural tours for middle-aged and senior travelers, we are delighted that the culture travel China study tour, global study tour, and camp education product continue to be well received, providing customers with valuable knowledge, personal growth, and cultural enrichment. Our student programs now operate in approximately 55 cities nationwide, where the top 10 cities generate over 50% of the revenue. Our other top-notch adult tourism offerings span around 30 provinces domestically and select international destinations. We are also extending into senior health and wellness tourism through partnerships with over 40 wellness facilities in Hainan, Yunnan, and Guangxi, utilizing an asset-light model to pilot the emerging opportunity. We continue to invest in our online-merge-offline teaching platform, leveraging our educational infrastructure and technology capabilities to deliver advanced personalized learning experiences across all age groups. This quarter, we invested $30.6 million to enhance and maintain our OMO platform, which enables us to provide high-quality instruction to students while adapting to their individual learning needs. Turning to East Bay. Esterbuy remains committed to delivering premium products and services to Chinese families. It has advanced its multi-platform, multi-account strategy by launching specialized vertical live streaming channels on Douyin, including Easter by Home, Easter by Food and Vegetables, and Easter by Nutrition and Health. It also continuously optimizes live streaming content and introduced innovative engagement initiatives, including large-scale live campaigns for streamer recruitment and supplier conferences, as part of these efforts to strengthen team capabilities, supplier partnerships, and customer engagement. Looking ahead, Easterby will look to expand its private label portfolio, enhance product R&D and quality control, accelerate app membership ecosystem development, and grow its offline footprint steadily through vending machines and experience tours. Together, these initiatives will drive greater operational efficiency and advance supply chain excellence, supporting sustainable long-term growth. Besides upgrading our OMO system, increased by the positive feedback on our AI applications, we continue to integrate AI across our offerings to strengthen core capabilities. Simultaneously, we are expanding the use of AI to streamline internal operations, thereby boosting efficiency and elevating the support for our teachers and staff. Driving innovation in product capabilities and operational excellence continues to fuel our pursuit of sustainable revenue growth. We look forward to sharing measurable results from our AI investments in the quarters ahead. I would also like to take this opportunity to share a new strategic initiative with you. Historically, New Oriental Education & Technology Group Inc. has focused on serving our customers as each individual. Going forward, we are extending the perspective to serve the entire family unit. Given our diversified offering across different age groups and demographics, we are uniquely positioned to adopt a full life-cycle, full-spectrum approach that addresses the evolving needs of each family member, from children to parents to seniors. To support the shift, we launched New Oriental Home, a private domain platform that integrates our education services, each by used to buy offerings, and the cultural tourism product into one unified ecosystem. Through a single app, families can conveniently access, manage, and redeem services tailored to different members, enabling seamless cross-category engagement and deeper household-level relationships. This platform is already demonstrating strong user engagement and retention through scenario-based marketing and integrated service offerings, significantly enhancing customer lifetime value. At the same time, precision-driven operations improve conversion efficiency and optimize overall operating costs. We have now launched this pilot program in 12 cities as test beds, including Hangzhou, Suzhou, Xi’an, and Wuhan. With over 330 thousand registered families, the platform has achieved campaign activation rates of 10% to 15%, significantly outperforming many public domain e-commerce platforms. This performance demonstrates the high-reach and precision advantages of our education-focused private domain ecosystem. Now I will turn the call over to Sisi to share with you the key financials. Sisi, please go ahead. Sisi Zhao: Thank you, Stephen. Let me now walk you through the key financial highlights for the quarter. Operating costs and expenses for the quarter were $1.237 billion, representing a 16.9% increase year over year. Cost of revenue increased 23.4% year over year to $656.2 million. Selling and marketing expenses increased 9.1% year over year to $198.8 million. General and administrative expenses for the quarter increased 10.8% year over year to $382.1 million. Total share-based compensation, which was allocated to related operating costs and expenses, increased 30.9% to $21.1 million in the third quarter of fiscal year 2026. Operating income was $180.3 million, representing a 44.8% increase year over year. Non-GAAP income from operations for the quarter was $202.9 million, representing a 42.8% increase year over year. Net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $126.8 million, representing a 45.3% increase year over year. Basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were $0.80 and $0.79, respectively. Non-GAAP net income attributable to New Oriental Education & Technology Group Inc. for the quarter was $152.2 million, representing an increase of 34.3% year over year. Non-GAAP basic and diluted net income per ADS attributable to New Oriental Education & Technology Group Inc. were $0.97 and $0.85, respectively. Net cash outflow generated from operations for 2026 was approximately $7.5 million. Capital expenditure for the quarter was $68.8 million. Turning to the balance sheet, as of February 28, 2026, New Oriental Education & Technology Group Inc. had cash and cash equivalents of $1.7834 billion. In addition, the company had $1.4917 billion in term deposits and $1.9532 billion in short-term investments. New Oriental Education & Technology Group Inc.'s deferred revenue, which represents cash collected upfront from customers and related revenue that will be recognized as the services or goods are delivered at the end of the third fiscal quarter of 2026, was $1.8859 billion, an increase of 7.8% as compared to $1.7499 billion year over year. Now I will hand over to Stephen to go through our outlook and guidance. Stephen Yang: Thank you, Sisi. The healthy results we achieved this quarter reinforce confidence in our operational resilience and growth trajectory. Looking ahead, we remain focused on balanced growth, advancing both revenue and profitability in parallel. We will expand capacity and talent strategically, ensuring growth does not come at the expense of quality. We plan to deepen our presence in markets with proven top- and bottom-line performance while maintaining disciplined resource allocation. We will calibrate the pace and scale of new openings throughout the year, aligning expansion decisions with operational needs and financial results. Cost discipline and sustainable profitability across all business lines continue to be foundational to our strategy. In the coming quarter—what I mean is in Q4—we expect greater cost control to be realized as a result of restructuring and consolidation of our overseas business. A certain level of fixed expense will be reduced, enabling us to pave the way for higher operational efficiency and a better margin profile next year. There will be certain one-off expenses in the coming quarter related to these structural adjustments. Even so, we remain confident in our fourth-quarter profit margin. Looking ahead to next fiscal year, we have strong confidence in our core education business and Easter buy. We will continue to drive sustainable and healthy growth through product enhancement and quality improvement while further optimizing operating costs and enhancing efficiency and profitability. Considering the positive momentum and cost management measures across our business lines, we expect total net revenue for the group in 2026 to be in the range of $1.4296 billion to $140.6669 billion, representing a year-over-year increase in the range of 15% to 18%, driven by encouraging growth across various business lines. New Oriental Education & Technology Group Inc. raises the full-year guidance of total net revenue in fiscal year 2026, 06/01/2025 to 05/31/2026, to be in the range of $5.5614 billion to $5.5987 billion, representing a year-over-year increase in the range of 13% to 14%. These expectations reflect our current outlook based on recent levels of rate development and the prevailing market conditions. Both of the rates remain subject to change. I would also like to give you an update on our shareholder return plan for fiscal year 2026. In October 2025, we announced that, pursuant to its privileges, we adopted a three-year shareholder return plan. The board of directors has approved the ordinary dividend of $0.12 per common share, or $1.20 per ADS, to be distributed in two installments as part of the shareholder return for fiscal year 2026. As of today, the first installment has been fully paid to shareholders and ADS holders. The second installment, $0.06 per common share, or $0.60 per ADS, will be paid to holders of common shares and holders of ADS of record as of the close of business on 05/15/2026, Beijing, Hong Kong time, and New York time, respectively. We expect the payment date to be on or around 06/02/2126 or June 5, 2026, for holders of common shares and holders of ADS, respectively. Additionally, we announced a share repurchase program in which New Oriental Education & Technology Group Inc. is authorized to repurchase up to $300 million of its ADS or common shares over this recipient 12 months in the open market. As of 04/21/2026, we had repurchased a total of approximately 3.3 million ADS for an aggregate consideration of approximately $184.3 million from the open market under this share repurchase program. In closing, New Oriental Education & Technology Group Inc. remains firmly committed to sustainable growth, delivering exceptional value to our customers, and generating long-term returns to our shareholders. We continue to maintain close collaboration with the government authorities in China, ensuring full compliance with relevant policies and regulations and adapting our operations to evolving requirements. This is the end of our fiscal year Q3 summary. We will now open the call for questions. Operator, please open the call for questions. Thank you. Operator: Thank you. The question-and-answer session of this conference call will start in a moment. In order to be fair to all callers who wish to ask questions, we will take one question at a time from each caller. If you have more than one question, please request to join the queue on your telephone keypad and wait for your name to be announced. To withdraw your question, please press the key again. We will now take our first question from the line of Jenny Yuan from UBS. Please ask your question, Jenny. Your line is open. Jenny Yuan: Congratulations on a strong set of results this quarter. My question is about margin trends. We know that overall margins expanded meaningfully by 2.3 percentage points this quarter, which is very impressive. Could management please help us break down the key drivers behind this margin expansion? In addition, what is your outlook for margin trends in next quarter and for the next fiscal year? Thank you. Stephen Yang: Thank you, Jenny. It is a good question about margins. Let us start with the margin analysis this quarter. Even though we missed the margin drag from the overseas-related business, we still got group margin expansion by 130 basis points. I think the margin expansion was mainly due to better utilization, operating leverage, cost control, and more profit contribution from Easter buy. As you know, we started to do cost control since March 2025. In the last 11 months, we have seen very good results, which help drive margins up. Our focus on operational efficiency and disciplined resource management has been the key driver of margin expansion. For next quarter, Q4, we remain optimistic on margin expansion, even though there will be certain one-off expenses related to structural adjustments—the consolidation between the overseas test labs and consolidation. These are one-off expenses. Even so, we remain confident in fourth-quarter margin expansion for the whole group. As for the margin outlook for next year, the new fiscal year, we will focus on profitability across all business lines and drive to achieve margin expansion. We are quite optimistic about margin expansion for the core educational business, and we expect East Dubai will generate more profits in the coming year. Operator: Thank you. We will now take our next question from Alice Cai from Citi. Good evening, Sisi and Stephen, and congratulations on the strong results. Please go ahead. Alice Cai: Good evening, Sisi and Stephen, and congratulations on the strong results. May I ask about the capacity expansion plan for Q4 and also for FY 2027? Thanks. Stephen Yang: Regarding expansion, at the start of this fiscal year, we planned to open 10% to 15% new capacity. The net adds of new learning centers in the first three quarters was 8%. That means in the first three quarters, net adds were 8%, so for the whole year, net expansion is somewhere around 10% to 13% or 14%. We only allow the cities with good performance on the top line and bottom line last year to open more learning centers. We care more about better utilization and margins for the whole group. We put new student enrollments into existing learning centers, so the utilization rate will be up for the group. Next year, we will continue to open somewhere around 10% or even a little bit more in learning centers. On the other hand, we have a lot of online and OMO products and offerings. For some online business, we even do not need existing learning centers. I believe in the coming new year, the utilization rate will continue to go up. Operator: Thank you. We will now take our next question from Lucy Yu from Bank of America Securities. Please go ahead, Lucy. Your line is open. Lucy Yu: Hi, Stephen. I have a question on margin as well. You mentioned there will be a one-off restructuring expense in the coming quarter. Would you please quantify how much that would be, either in U.S. dollar terms or as a percentage of revenue? Also, you mentioned a new strategy that will possibly lower the selling and distribution expense or the marketing expense next year. What is your target on the sales and marketing expense for 2027? Thank you. Stephen Yang: The one-off expenses in the coming Q4 relate to structural adjustments of the overseas business. The negative impact on margin is roughly 50 bps to 100 bps, so roughly $10 million to $15 million. Even so, we still remain confident to get margin expansion for the whole group in Q4. We include the one-off expenses in the forecast and still get margin expansion. Regarding marketing expenses next year, we are doing cost control and we put more focus on product quality enhancements, so we do not need to spend crazy money on marketing going forward like what we did in the last three quarters. In the coming new year, we expect marketing expenses as a percentage of revenue will be down. It is another factor to drive the margin. Operator: Thank you so much. We will now take our next question from Yikun Zheng from Citi. Yikun Zheng: Hello, Stephen and Sisi. Thank you for taking my question, and congratulations on the strong results. My question is about the momentum of K-12 business. I remember last summer our K-12 business went through some deceleration. How do you think of the growth trend and the competition for this business in this summer? Thank you. Stephen Yang: On the K-12 business, we beat the guidance again in Q3. We actually beat guidance two to three quarters in a row. In Q4, we are very optimistic about K-12 revenue growth. This year, we changed strategy and put more focus and resources on product quality enhancement, which drives student retention rate up and drives utilization rate up. In Q4, our K-12 business still has revenue growth of about, let us say, 15% to 20%. Grade 9 has 20% content growth plus, 20% plus top-line growth, and high school business less than 15% to 20%. Going forward, even in next year and the year after, we still expect very healthy growth of K-12 because our quality is better than last year, student retention rate is up, and we do not need to spend crazy money on marketing to recruit new enrollments. We are quite optimistic about K-12 growth going forward. Thank you. Operator: Thank you. We will now take our next question from Elsie Sheng from CLSA. Elsie Sheng: Thank you, Stephen and Sisi. Congratulations on the strong results. My question is about the overseas business. I noticed that revenue growth of overseas test prep has been accelerating over the past two quarters. Could you give us more color on the reason behind this? Is it because demand is coming back, or because we gained more market share? What is the outlook for overseas growth in the fourth quarter and next year? Thank you. Stephen Yang: Due to the negative impacts of the economic environment and the international situation, our overseas business was negatively impacted by the outside environment. But our team for the overseas business has shown resilience in almost every city. In the coming Q4, overseas-related business will likely be flattish year over year or up low single digits on revenue increase. Thanks to the great team doing a great job in almost all cities. Next year, I believe we can do even better. Since last quarter, we started the consolidation of the overseas test lab and overseas consulting. Going forward, we will provide a better one-stop service and product to students. We will also do some cost control to save fixed expenses. In the coming new year, I believe the overseas-related business margin will be up. Operator: Thank you. We will now take our next question from DS Kim of JPMorgan. DS Kim: Hi, Stephen. Hi, Sisi. Congrats on the strong beat. Actually, all my questions have been answered already, so let me just ask a couple of follow-ups. First, you mentioned $10 million to $15 million one-off expense in Q4. Can I double check it would be purely contained in Q4, or can there be additional one-offs spilling over into next year? I think it is just one off, but, to provide some confidence and comfort to the market on margin expansion next year, just to clarify. Second, you mentioned the 10% to 13%–14% expansion. Can I double check if that is number of centers or the size of classroom—like area size expansion? And, more importantly, what does this group-level expansion mean specifically for K-9 class capacity this and next year? Stephen Yang: On the one-off expenses, the majority will happen in Q4—one off. Even considering the one-off expense drag, we still get group margin expansion in Q4. It is better for the future because we spend some one-off expenses in Q4, but as a result, we reduce fixed costs in the coming year. That will drive the margin up for the overseas business next year. On capacity, what I am saying is square meter size—net adds. Most of the new capacity we build is in the K-12 business. The top-line growth next year—this is not official guidance, but based on our current estimation—will be somewhere around 15% to 20%, close to 20% or even more. If we open 10% to 15% new capacity, we still have the leverage to drive the average utilization rate up going forward. As for cost and expansion discipline, the local teams will support the job. They have done a great job this year, and I believe they will do an even better job in the coming year on cost control and managing the expansion plan. DS Kim: I absolutely agree it is necessary to make the hard decision to optimize the cost structure into next year. Just to double check—broadly speaking, when we say the one-off, it is optimization of workforce and staff. That is one off, right? It is not like we are ongoing spending on restructuring; it is really that we had to make a hard decision and there was some related cost to it in Q4. Is that a fair understanding? Stephen Yang: Yes, correct. DS Kim: Thank you. That is very clear. Thank you. Stephen Yang: Thank you. Operator: Thank you. We will now take our next question from Jane Yuan of CICC. Please ask your question, Jane. Your line is open. Jane Yuan: Good evening, Stephen and Sisi. Congratulations on this quarter’s strong performance. I noticed that on the new education business side, revenue top-line growth remains strong, but I see a slight moderation in the number of paid users for the learning device. Could you help us understand what is behind the shift? Thanks. Stephen Yang: On paid users, this is because of disclosure differences. One paid user pays more money and enrolls in more subjects at the same time—better than before. Secondly, we do have some seasonal or timing differences. I suggest you look at enrollment, deferred revenue, and GAAP revenue over a longer term. That is why we gave the whole-year guidance this year. The trend for the K-12 business works, and in Q4 I believe revenue growth will be very healthy and we will continue to grow the business in Q4 and the new year. Operator: Thank you. We will now take our next question from Charlotte Wei of HSBC. Please go ahead, Charlotte. Your line is open. Charlotte Wei: Thank you, Stephen and Sisi, for taking my question, and congrats on a really strong quarter. My question is regarding AI impact. On one hand, we can see AI clearly improves operational efficiency and supports margin expansion. On the other hand, how do you expect AI can change the core tutoring format the company is currently offering? Over the next 12 to 24 months, what kind of opportunities and risks do you see from AI? Thank you. Stephen Yang: I will ask Sisi to answer your question. Sisi is an AI expert. Sisi Zhao: We are excited about the opportunity to implement AI technology into our business. It is a big opportunity for companies like us with capital advantages; we can hire top people and we have the best educational experience in this industry. We are well positioned to implement AI in our area. Three things we are doing and making progress on that I want to share. Firstly, we are implementing AI technology into all key business lines. Not only online products or hardware products like our intelligent learning device—we have AI functions embedded in it and keep monetizing it and enhancing students’ learning experience and improving learning efficiency—but even offline classes for young students and all ages can implement AI functions in class. We are collecting data and combining it with our teaching and learning experience to create more value and product opportunities in the future. Existing products are enhancing quality and competitive advantage using AI. Secondly, we use AI to enhance overall efficiency to bring healthy growth plus profitability enhancement. AI can help in each step of our daily work. For teachers, salespeople, teacher assistants, and functional department staff, the whole working process can implement AI technology to enhance efficiency. We have already seen in some businesses that labor costs or labor hours have been reduced. We are doing some restructuring for certain businesses, for example the overseas-related business and others as well. We want to implement more AI in the working process to benefit from efficiency improvement. This is ongoing; we will closely follow the trend of AI technology and keep using it across processes. Teachers are saving more time so that utilization can also improve. Third, we have several piloting teams working on new products implementing purely AI technology so we can depend very little on human resources, combining AI with our teaching and learning experience and certain content to create innovative educational products. These are different from current offline offerings but use AI to bring students a learning experience similar to offline face-to-face teaching. We are exploring opportunities here now, and hopefully in the coming several months we can see some new products. The company is devoting a lot of resources to AI. It is an ongoing process, but together with our strategy we will implement more AI, keep catching up with the trend, and benefit more going forward. Charlotte Wei: This is very helpful. Thank you, Sisi. Stephen Yang: Thank you. Operator: We will now take our next question from Timothy Zhao of Goldman Sachs. Please go ahead, Timothy. Your line is open. Timothy Zhao: Great. Hi, Stephen. Hi, Sisi. Thank you for taking my question, and congrats on the solid results. My question is regarding your longer-term margin profile. You have discussed a lot about new initiatives, the full life cycle of customers, and how AI can help improve operating efficiency, including the overseas test prep and integration. Could you share your view on the longer-term operating margin of the EDU business and the education business? Thank you. Stephen Yang: Thank you, Tim. On margin, as I said, in the coming new year we are optimistic about margin expansion because of higher utilization rates, better operating leverage, and cost control reducing fixed expenses. Next year, margin will be up. I believe we will get margin expansion in the next three years. We hope to get a better margin step by step in the next three years and even long term. Next quarter, I will give detailed margin guidance for next year. We are quite optimistic about long-term margin expansion going forward. Thank you, Tim. Operator: Thank you. We are now approaching the end of the conference call. I will now turn the call over to New Oriental Education & Technology Group Inc.'s executive president and CFO, Stephen Yang, for his closing remarks. Stephen Yang: Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact me or any of our investor relations representatives. Thank you. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the M/I Homes First Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Wednesday, April 22, 2026. I would now like to turn the conference over to Mr. Phil Creek. Please go ahead. Phillip Creek: Thank you for joining us today. On the call is Bob Schottenstein, our CEO and President; Derek Klutch, President of our mortgage company. To address regulation for our disclosure, we encourage you to ask any questions regarding issues that you consider material during this call because we are prohibited from discussing significant nonpublic items with you directly. And as to forward-looking statements, I want to remind everyone that the cautionary language about forward-looking statements contained in today's press release also applies to any comments made during this call. Also be advised that the company undertakes no obligation to update any forward-looking statements made during this call. I'll now turn the call over to Bob. Robert Schottenstein: Thanks, Phil. Good morning, everyone, and thank you for joining us today. We had a very solid first quarter, highlighted by revenues of $921 million, pretax income of $89 million and a strong pretax income return of 10%. Clearly, during the quarter, new home demand and homebuilding conditions continue to be challenged, challenging and impacted by affordability and even consumer confidence, the conflict in the Middle East and general uncertainty and volatility in the broader economy. Despite this, we were very pleased to increase our first quarter new contracts by 3%, generate gross margins of 22%, and produce a return on equity of 12%. Our sales momentum from late last year continued into January and February, even with the winter storms that had a pretty significant impact on a number of our markets at the beginning of the year. During this period, we saw improved traffic and heightened homebuyer activity as we begin the spring selling season. However, market conditions slightly shifted at the end of February and into March as events in the Middle East pushed mortgage rates up higher, impacted gas prices and contributed to further market uncertainty. In managing all of this, mortgage rate buydowns continue to be an important part of our sales strategy. We continue to successfully balance margins and sales pace at the community level and offer mortgage interest rate buydowns both on spec sales and to-be-built sales as a leading incentive to promote our sales activity. During the quarter, we closed 1,914 homes a 3% decrease compared to a year ago. Our first quarter total revenue decreased 6% to $921 million, and pretax income decreased 39% to $89.2 million. Still, we ended the quarter with a record $3.2 billion in shareholders' equity, and our book value per share is now at a record $125, up 11% from last year. As I mentioned, our sales improved 3% year-over-year. We sold 2,350 homes during the quarter. Our monthly sales pace averaged 3.4 homes per community, consistent with 2025. We continue to see high-quality buyers in terms of creditworthiness with average credit scores of 747 and an average down payment of 15%. Our Smart Series, which is our most affordable line of homes, continues to be an important contributor to our sales performance. During the first quarter, Smart Series sales were about 47% of total sales compared to 53% a year ago. Company-wide, about half of our buyers are first-time homebuyers, while the other half are first, second or third move up. The diversity of our product offering remains an important factor and contributing to our sales performance and overall profitability. We ended the first quarter with 230 communities and are on track to grow our community count in 2026 by an average of about 5% from 2025. Turning to our markets. Our division income contributions in the first quarter were led by Chicago, Columbus, Dallas, Orlando and Raleigh. New contracts for the first quarter in our Northern region decreased by 4%, while new contracts in our Southern region increased by 8% compared to a year ago. Our deliveries in the Northern region decreased 9% compared to last year and represented just under 40% of our company-wide total. Our Southern region deliveries increased by 1% over a year ago and represented the other 60% of our deliveries. We have an excellent land position. Our owned and controlled lot position in the Southern region decreased by 13% compared to last year, and increased by 21% compared to a year ago in our Northern region, 40% of our owned and controlled lots are in the Northern region, the other 60% in the South. Company-wide, we own approximately 24,200 lots, which is slightly less than a 3-year supply. In addition, we control approximately 25,800 lots via option contracts, which results in a total of roughly 50,000 owned and controlled lots equating to about a 5-year supply. Our balance sheet continues to be very strong. As I previously mentioned, we ended the first quarter with an all-time record $3.2 billion of equity, 0 borrowings under our $900 million unsecured revolving credit facility and over $750 million in cash. This resulted in a debt-to-capital ratio of 18%, and a net debt-to-capital ratio of negative 2%. As I conclude, I'll remind everyone that 2026 marks our 50th year in business. We're very proud of our record and look to build on our success in 2026. Given the strength of our balance sheet, the breadth of our geographic footprint and excellent land position and well-located communities along with a diverse product offering, we are well positioned to continue delivering very solid results in 2026. With that, I'll turn the call over to Phil. Phillip Creek: Thanks, Bob. Our new contracts were up 3% when compared to last year. They were up 11% in January, up 7% in February and down 6% in March. Our cancellation rate for the quarter was 8%. Our monthly new contracts increased sequentially throughout the quarter. Last year's March new contracts were the highest month of 2025. 50% of our first quarter sales were the first-time buyers and 70% were inventory homes. Our community count was 230 at the end of the first quarter compared to 226 a year ago. The breakdown by region is 91 in the Northern region and 139 in the Southern region. During the quarter, we opened 22 new communities while closing 24. We delivered 1,914 homes in the first quarter. About 50% of these deliveries came from inventory homes that were both sold and delivered within the quarter. And as of March 31, we had 4,600 homes in the field versus 4,800 homes in the field a year ago. Revenue decreased 6% in the first quarter. Our average closing price for the first quarter was $459,000, a 4% decrease when compared to last year's first quarter average closing price of $476,000. Our first quarter gross margin was 22%, down 390 basis points year-over-year due to higher home buyer incentives and higher lot costs versus the same period a year ago. Our first quarter SG&A expenses were 12.7% of revenue versus 11.5% a year ago, and our first quarter expenses increased 4% versus a year ago. Increased costs were primarily due to increased selling expenses, increased community count and additional headcount. Interest income, net of interest expense for the quarter was $3.1 million. Our interest incurred was $9 million. We had solid returns for the first quarter given the challenges facing our industry. Our pretax income was 10% and our return on equity was 12%. During the quarter, we generated $99 million of EBITDA compared to $154 million a year ago, and our effective tax rate was 24% in the first quarter, same as the prior year first quarter. Our earnings per diluted share for the quarter was $2.55 per share compared to $3.98 last year, and our book value per share is now $125 a share, a $12 per share increase from a year ago. Now Derek Klutch will address our mortgage company results. Derek Klutch: Thanks, Phil. Our mortgage and title operations achieved pretax income of $14.1 million, a decrease of 12% from $16.1 million in 2025's first quarter. Revenue decreased 1% from last year to $31.2 million due to slightly lower margins on loans sold and a lower average loan amount, but offset by an increase in loans originated. Average loan to value on our first mortgages for the quarter was 85% compared to 83% in 2025's first quarter, 66% of the loans closed in the quarter were conventional and 34% FHA/VA, compared to 57% and 43%, respectively, for 2025's first quarter. Our average mortgage amount decreased to $401,000 in 2026 this first quarter compared to $406,000 last year. Loans originated increased to 1,579 loans, which was up 3% from last year, while the volume of loans sold increased by 1%. Finally, our mortgage operation captured 96% of our business in the first quarter, up from 92% last year. Now I will turn the call back over to Phil. Phillip Creek: Thanks, Derek. Our financial position continues to be very strong. We ended the first quarter with no borrowings under our $900 million credit facility and had a cash balance of $767 million. We continue to have one of the lowest debt levels of the public homebuilders and are very well positioned. Our bank line matures in 2030 and our public debt matures in 2028 and 2030, and has interest rates below 5%. Our unsold land investment at the end of the quarter was $1.9 billion compared to $1.7 billion a year ago. At March 31, we had $844 million of raw land and land under development, and $1 billion of finished unsold lots. During 2026 first quarter, we spent $79 million on land purchases and $104 million on land development for a total of $183 million. At the end of the quarter, we had 740 completed inventory homes and 2,584 total inventory homes. And of the total inventory, 999 are in the Northern region and 1,585 in the Southern region. At March 31, 2025, we had 686 completed inventory homes and 2,385 total inventory homes. We spent $50 million in the first quarter repurchasing our stock and have $170 million remaining under our Board authorization. In the last 4 years, we have repurchased 18% of our outstanding shares. This completes our presentation. We'll now open the call for any questions or comments. Operator: Your first question comes from the line of Natalie Kulasekere from Zelman & Associates. Unknown Analyst: I'm just curious, have you received any form of communication regarding any cost increases from your vendors because of fuel prices, maybe it could be a fuel surcharge stacked on top of your existing contracts? And if you have, do you think it's something that you could negotiate with your trade partners? Robert Schottenstein: Thanks, Natalie. The short answer is yes. The issue of increased fuel has come up in several divisions. I don't know if it's come up everywhere. I'm aware of 2 or 3 or 4 instances where it has and it could well be more. So far, there hasn't been much impact. In fact, so far, I think there's been no impact. Having said that, if the conditions were to persist at worse, at some point, we've been in business for 50 years, and one of the things we're most proud about is not only the consistency of our strategy, but the long-standing relationships both at the national level and at the local level that we have with so many of our subcontractors and suppliers, many of whom we've been doing business with for a long, long time. And one of the reasons that we're able to do business with people for a long time is we try to deal very fairly with them both in good time and in bad. You didn't ask maybe this as part of your question. But during the last year, we've gone back to a number of those subcontractors from our point of view and sought to see cost reductions. We had a very, very aggressive, intense internal cost reduction effort that we launched, I think, a little over a year ago, maybe a little more than a year ago in anticipation of the current conditions with declining margins and so forth. And we had quite a bit of success doing that. We know that's a 2-way street, and there's times that they work with us. There's times that we're going to have to work with them. So far on the gasoline and oil situation, though, I'm not aware of any impact, unless you are, Phil. I hope that's helpful. Unknown Analyst: Yes. And I guess I just have one more follow-up. So your ASP within the $470,000 to $480,000 range, if not higher across most quarters since 2022. So is there anything specific that drove this lower this quarter? And if so, how should we look at it going forward? Should it kind of be lower than the $470,000, $480,000 range? Or do you think it's going to -- do you reckon it's going to climb back up to that? Robert Schottenstein: It surprised me that it was -- we knew it would be lower. I didn't think it would be maybe quite this much lower. It's not that much. When you really look at it, $470,000 versus $460,000. Having said that, affordability is the favorite buzzword in our industry today other than maybe rate buydowns as I think about it. But affordability is up there. And really, it began in our company about 5 years ago where we began a very concerted effort to produce more affordable product, particularly attached townhome product. Company-wide, it's probably maybe 20% or 25% of our business, somewhere in there. It moves a little quarter-to-quarter with new communities and so forth and timing of closeouts. And I think it's -- I actually think it's more mix than anything else. I'd expect our average sales price to be at this level, maybe slightly higher, so they bounce around in this -- in the upper 4s for the foreseeable future. Operator: [Operator Instructions] Your next question comes from the line of Kenneth Zener from Seaport Research Partners. Kenneth Zener: I wonder, given your Smart Series, very successful, 47, I'm just going to call it half. And how -- can you talk to that. Are most of your intra-quarter order closings coming from the Smart Series almost by definition because it's like prebuilt? Is that the correct assumption that I'm making? Robert Schottenstein: Not necessarily. We manage our spec levels or inventory home levels on a subdivision-by-subdivision basis. And it's less related to maybe the price point of the community at times than -- I think it's more -- it more relates to the location of the community where we think the buyers are coming from. Clearly, I think there's a few more specs with attached product because you build building by building. And some of that is Smart Series, some of it isn't. I don't think there's really any discernible difference between intra-quarter closings coming from Smart Series spec homes versus the other half of our business. And by the way, not every Smart Series buyer is a first-time homebuyer either. It's just a product line that we've tried to push really hard to take advantage of bringing our price points down. But Phil, do you want to add something? Phillip Creek: Yes. And overall, we feel really good about where our spec levels are. As Bob says, it really varies community to community. This has been a higher percentage, about 50% of the closings occurring within the quarter. Reduced cycle time has helped. It doesn't take us as long to get houses built as it did a year ago. We're also trying to continue to be focused on when we put specs out there, let's make sure we put the right specs out there on the right lots. We're like most builders, we would prefer to have more dirt sales, more to-be-built sales, because, in general, those houses have more upgrades, higher price point, higher margins. But you also have to balance off when you're offering interest rate buydowns when you start getting longer term, it's harder to get those effective rate buydown. So a lot of those things are being balanced off. But overall, we were pretty pleased with the quarter with our closings, but we feel good about our investment level in specs. Robert Schottenstein: The other thing I'll mention just because it gets a lot of attention. For years, the differential in margin between specs and to-be-builts has been an issue in our industry where anywhere from 100 or 200 points -- 100 or 200 basis points of margin erosion occurred between specs and to-be-built, in some cases, 300, 400, 500 points. It sort of moves around market-to-market and period to period. It's that issue has never been lost on us. We've always, always tried to generate more to-be-built than spec sales. Having said all that, we're also trying to successfully balance pace. And we've -- initially, when we first got into rate buy-downs, it was strictly for specs. But for some time now, we've been heavily focused on rate buy-downs for to-be-builts as well because they do generate higher margins. And it should go without saying, but I guess I'll say it anyway, all of that gets poured into the strategy, which we think has helped us generate very strong returns compared to our peers quarter-to-quarter. Kenneth Zener: Yes. And I see that. I wonder if homebuilding doesn't -- the companies in general, you're not unique in this, you don't report the segment data and you have 2 segments, right, with the South Texas and Florida being big inputs there. Given the margin swings that we had over [indiscernible] 18 months where the North is now doing better than the South yet as I look at your new contracts and closings, I see that North is declining in terms of the mix, right, as a percent of the total, just the year-over-year change was down in the North, for example, on deliveries. Can you talk to how much of that, the margin we're seeing is just that the higher-margin North isn't flowing through? And then maybe comment a little bit on the Southern mix. I think in the past, you've talked about, right, Texas being larger than Florida in that southern segment. If you could just give us a little sense of how those different regions are impacting the margins. Robert Schottenstein: Happy to do it. In general, over the last year or so, our margins have held up better in our Midwest markets than in our Florida markets. For a while, our Florida markets had some of the best margins in the company. That's not the case today. We have had very strong margins in Dallas for a long time. They are lower now than they were in that market, like many is off a little bit. But comparatively speaking, and to give good context, we still have very solid margins in Dallas. The percentage of our business, our Texas markets, which really you can't claim newness anymore, they were new for a while, but those markets are really growing a lot for us. And our margins in Charlotte are very strong. We have very solid margins in Raleigh as well. It's sort of market to market. I think I mentioned that our most profitable divisions in the first quarter were Chicago, Columbus, Dallas, Orlando, Raleigh, but I don't want to leave out Charlotte or as I think about Cincinnati, Minneapolis, very solid operations in these markets. Look, I wish all 17 of our markets were performing at a high level. But most are. And we're very encouraged by that. When I say high level, given the conditions holding up quite well, I think right now, if I had to identify any part of our business that is feeling the pinch more than others, it would be the West Coast of Florida, really from Tampa down through Sarasota. That appears to be the most challenging right now. It's not horrible, but it's just nowhere near what it once was, and we're working through it. Phillip Creek: We're really pleased with where we are having the 17 markets, having the diversification. Sure, we all remember a couple of years ago how hot Florida and Texas were, but those markets have come back down. The Midwest [ airline ] has never got quite that hot. And plus, we have a really good presence. We talk about meaningful presence all time. We have a good presence in most of our markets. We're a pretty big player. So having this diversity in markets and also in price points and products. So we do have 50% first-time buyers, but that tends to be the [ 400 or 450 ] type price point as opposed to that kind of down and dirty, which there's a whole lot of competition. So again, we try to react to every market based on what the competitive landscape is, land position and those type of things, we try to really focus on having better locations in better schools, near better shopping, better transportation, again, try to give people a reason to buy, not just price. So that's what we focus on. Operator: Your next question comes from the line of Jay McCanless from Citizens. Jay McCanless: So sticking on kind of the questions on the North. Could you talk about the increase year-on-year in the lots from the North? And is that something that potentially could help gross margins down the road? Robert Schottenstein: I think that the increase in the lot position, some of it's -- what's the right word, episodic. I don't know if that's the right word or not. Sometimes things come on at different times because they're delayed and it skews a quarter. We have a lot of opportunity to grow in Indianapolis, still Chicago, Minneapolis, Columbus, Cincinnati, maybe slightly less so in Detroit. But you take those others, we believe we can grow our operations there 5% to 10% a year for the foreseeable future. In some cases, maybe slightly more. We have a lot of growth opportunities. Having said that, though, in Charlotte and Raleigh, our Raleigh operation has underperformed from a volume standpoint, not profitability, in large part just because of the incredible delays we've experienced in bringing some new deals to market. We're super excited about where we -- as we look out over the next number of quarters, we're very excited about what we have coming on in Raleigh over the next several years. And we still have big plans to grow in Houston and Dallas, maybe slightly less so in Austin, but still -- we still intend to grow in Austin, and we're growing in San Antonio. Big plans for Fort Myers, Naples. We're really just getting started there. We expect that to be a very meaningful contributor to us down the road. Tampa and Orlando, we've had top 5 positions in both those markets for a long, long time and are not going to give up market share in either place. And then Nashville. Nashville has been a slower start for us. I thought we'd be a little further along than we are right now. The only encouraging thing is I don't think we're alone. You tend to see that with other builders as well. But having said that, we're clearly going to grow our operation there this year. It's well, well ahead of where it was a year ago. And all of this should contribute as the markets -- I mean we don't know what's going to happen with the economy. We'll adjust as necessary what will happen to margins down the road. I think that over time -- I mean, I don't know what will happen, but I think over time, we've always pushed very hard to be in the upper tier. And I believe we -- wherever homebuilding margins settle, I think you'll see M/I in the upper tier of margin performance relative to our peers. Our mortgage operation contributes to that as well. We had a 95% plus capture rate in the first quarter given all the activity with rate buy-downs, even though I'm very proud of our mortgage operation. If we weren't at least a 90% capture rate, I think that would require a discussion because it seems like everybody should be going through our mortgage company with all the rate buy-downs that we and our peers are doing. But having said that, M/I Homes capture rates the highest in the industry, and we're very proud of that. And that contributes to profitability as well. Phillip Creek: And also, Jay, this is Phil. Just to add as far as from a land position standpoint, I mean, you know what we try to do, we really focus on what do we own, and we own today about 24,000 lots. A year ago, we owned about 25,000. It's kind of changed a little bit inside. Today, we own almost -- we own 10,000 finished lots. We like to own about a year of supply. And with our run rate, a little less than 10 right now, we're really well positioned there. Our finished lot cost today is up about 5% versus a year ago. Land development costs have kind of settled down a little bit the last couple of quarters. So we feel like we're really in a good situation from a land position standpoint. Bob talked about growth. We do have a few more -- a few less houses in the field than a year ago. But again, when we're building houses faster, we don't need to put the investment out there as fast. So we're trying to be efficient. We're trying to have specs where we need it. So again, we are very focused on trying to continue our growth, but we want it to be profitable growth with solid returns, not just give a bunch of houses away. We think we do have a really good land position. So we are excited about where we are. Jay McCanless: That's great, guys. So the second question I had, if you think about Smart Series, are most of those communities located in the Southern region? Or I guess what's the mix between the Northern and the Southern for the Smart Series communities? Robert Schottenstein: I think it's pretty evenly balanced with a couple of exceptions. San Antonio is almost 90% Smart Series, our communities there. Houston approaching 90% Smart Series, maybe even a little higher. But if you take those out and look at the other 15 markets, it's pretty close to 30% to 50% of our business. They tend to have slightly higher absorptions. So it skews and distorts the actual sales number. But it's somewhere between 1/3 and 1/2. Jay McCanless: That's good to know, Bob. And then if you could, Phil, maybe talk about what the gross margin looks like in backlog at the end of the quarter. Phillip Creek: Sorry, the backlog? Jay McCanless: Yes. Gross margin and the backlog at the end of the quarter. Phillip Creek: It really hasn't changed much, Jay. And of course, the backlog is not that big. We are focused on trying to do more to-be-built houses with higher margins in general and so forth, really hasn't moved much. The thing that's hard is that like this quarter, when half of our closings got sold and closed in the quarter. So it's just really, really hard to predict average sale price, really hard to predict margins because so much stuff goes through. Robert Schottenstein: Yes. I mean I know that you all would love to see us give margin guidance. I think it's a bit of a -- I'll just say it, fools errand. There's just so much uncertainty. During our last conference call, we weren't talking about a war. We weren't talking about $4 gas prices. In 90 days, look how things like that have changed. It's very, very hard to predict what's going to happen. Conditions right now are marked with uncertainty. Having said that, I think housing is holding up pretty damn well. I've seen a whole lot worse, and so has anyone that's been in this business more than a couple of years. We've been in business 50 years, this is going to be 1 of our 5 or 6 best years in company history, and that's pretty damn good. Sign me up. So I think we're very well positioned to deal with the conditions as they are. I think we were encouraged that our first quarter gross margin sequentially were almost the same as they were in the fourth quarter. Does that mean they're leveling off? I guess we'll know when we know. I just know that we'll continue to do everything we can to push profitability. We're very proud in this environment to have a double-digit pretax income percentage of 10%, not easy to do. I know a couple of builders do, but most don't. And I think that it's one thing to say we're focused on profitability. It's another thing to deliver it, and I think we're delivering it. Phillip Creek: And we spend a lot of time, Jay, talking about flow, not just the flow of spec inventory. For instance, at the end of the quarter, as I said, we have about 740 completed specs. At the end of the first quarter of last year, it was 686. We also not only track those getting through, that doesn't mean we fire sell them to move them through. But again, we don't want to get too big on specs. We also keep track very closely at what specs are coming through the system, are they drywall or what's the stage of them. So again, not just throw specs out there, [ willy-nilly ] every subdivision. But what can we work through? What is the demand? What can we settle at a decent margin? And we do the same thing at land. We make sure that when we buy raw land, we get into development. We put the finished lots out there that we need that we can work through. But again, trying to do a better job on managing our investment levels. But again, we think we're in good shape, and we can react to whatever we need to. Robert Schottenstein: The last thing I'll say, and it sounds like we're patting ourselves on the back, maybe we are, never gotten the build-to-rent business, we were the only builder that didn't, don't land bank, we're one of the only builders that doesn't. Our strategy has been pretty damn consistent for as long as I've been here. Focus on our communities, we focus on quality, we strive to deliver the highest levels of customer service that we can. And we try to produce -- build our homes in excellently well-located A communities all the time. There's no issue that distracts us from pace and margin on a community-by-community basis. Nothing gets more attention than that in our company. And we have, within certain of our cities, special rate buy-down programs that are only applicable to certain lots in certain communities. We don't paint with a broad brush. We really try to manage this business on a subdivision-by-subdivision basis even within markets. And that's what we've always done. And that's what our management team is focused on, and it's worked for us. Jay McCanless: Right. That's great. And actually, could you -- any qualitative, not quantitative, but qualitative commentary you can give about traffic or web traffic for April, just again, given some of the uncertainty that's out there? And then also, if you don't mind, Phil, can you repeat what the monthly order cadence was? I missed that part. Robert Schottenstein: The only thing I'll say about traffic is given the market, I've been pleased with our traffic through the first quarter and through April so far. That's -- we'll just leave it at that because we don't -- the month is far from over, and we're optimistic, but we'll see. Phil, do you want to comment on this? Phillip Creek: We're really focused also, I mean, we're opening a lot of stores. Last year, we opened about 80. This year, we plan on opening more than 80. So we're trying to open them the right way. In general, they're at a higher price point where we see a little more steady demand these days. But again, just staying on top of it community by community. Jay McCanless: Right. And Phil, if you could, what was the monthly order cadence again, please? Phillip Creek: During the quarter? Jay McCanless: Yes. Phillip Creek: Yes, the first quarter, let's see, Jay, we were up 11% in January. We were up 7% in February. March was down 6%, but last year's March was the highest month of last year. And we did sell more houses in February than we did in January. We sold more houses than March than we did in February. So overall, we were pretty pleased with our sales. Operator: [Operator Instructions] Your next question comes from the line of Buck Horne from Raymond James. Buck Horne: I kind of want to ask you the questions in slightly different ways. I'm wondering thinking sort of the monthly cadence of -- or just how you responded to March's volatility in terms of incentives, did you have to -- or did you increase or lean into certain incentives more in March to try to offset the mortgage rate volatility or conversely, was there just enough natural seasonal demand where you kind of were able to keep the same strategy in place? I'm just kind of wondering if there's a potential carryforward to second quarter margins just due to the incentives that were provided. Robert Schottenstein: Normally, I wouldn't want to get too specific, even though it's all on our website for our competitors to see. But I'll just say what has worked for us on specs for the most part is even though we've got see people working with the [ 2/1 ] and the [ 3/2/1 ] buydowns, some buyers, some subdivisions, we see some ARM product. But the vast, vast majority of our buyers want one thing, and that's a 30-year fixed rate mortgage. And what we have led with for quite some time now and been pretty consistent with it on homes that can be delivered within roughly 60 days, so call it inventory homes is a [ 4/7/8 ] rate on both FHA/VA as well as conventional. And we've also offered on to-be-builts that has a long-term rate lock a rate in the very, very low 5s. And we have found those 2 things, there are some exceptions, it's probably more than 2 or 3 or 5 exceptions, but we have 200-plus communities. The vast majority of our communities, those programs are what is working for us now and resulted in our 3% year-over-year increase in sales. The cost went up, went down, then it went up during the quarter. It went down before we started bombing Iran. And then afterwards, it went up. And it's been bumping around quite a bit since. We live in a minute to minute news cycle where there's a constant overreaction to good news or not. So all that affects what's happening with rates, and there's been a fair amount of volatility with the 10-year, I mean, between 440 and the low 420s. So when it goes up, it costs us a little more if we're buying it on that day. We look at it, we look at it every day. Derek is sitting right here, his team at M/I Financial is pretty intensely focused on this every single day. Buck Horne: That's very helpful. I think that's pretty clear. I appreciate that extra color there. Secondly, I'm kind of curious thinking through your -- just the way the business is set up right now, you're throwing off quite a bit of positive cash flow. You've dialed back the land spend, your land position seems to be in a really good position already. So I'm just wondering if you think through the possibility of the -- you've been very programmatic about the share repurchase schedule, but you're still building up quite a bit of cash. I'm just wondering if you think that there's a possibility that you'd kind of increase the kind of the schedule of the buybacks that you're penciling in for the remainder of the year and just at some point in the future. Robert Schottenstein: We talk about it with our Board, maybe not every Board meeting, but at least every other. We have a meeting coming up in 2 weeks. We'll probably discuss it at that meeting. I don't really see any change, but it's possible, I guess. I don't know. I think we're going to stay sort of where we are. I don't know if you want to add to that. Phillip Creek: No, I agree. Also, we're not really anticipating the cash to build up that much more. We are a little lower now than we thought we would be internally. I would have a few more spec dollars out there than I have, do a little better job managing that. I did mention we're going to be opening quite a bit more as far as new stores and so forth. So I would still expect to have a pretty strong cash position, would not expect it to be up very much more. And again, spending at the rate of $200 million a year to buy stock back, which we've done for the last few quarters, $50 a quarter, we still think it's pretty good. We bought back almost 20% of the stock the last couple of years. But that's something we'll continue to look at. Buck Horne: Congrats. Appreciate the color. Operator: There are no further questions at this time. Turning over back to Mr. Creek. Phillip Creek: Thank you for joining us. Look forward to speaking to you next quarter. 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: Everyone, thank you for standing by, and welcome to the TE Connectivity Second Quarter Earnings Call for Fiscal Year 2026. [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, the Vice President of Investor Relations, Sujal Shah. Please go ahead. Sujal Shah: Good morning, and thank you for joining our conference call to discuss TE Connectivity's second quarter results and outlook for our third quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we will be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. . In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion of our website at te.com. Finally, during the Q&A portion of today's call due to the number of participants, we're asking everyone to limit themselves to 1 question, and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments. Terrence Curtin: Thank you, Sujal. And also, once again, thank you, everyone, for joining us today. And as I normally do, before I jump into the slides, I do want to frame today's call around a few key messages. And I want to go back to November when we did our Investor Day, where we outlined how our strategy and business model are driving a broadening of growth across our portfolio while positioning us to deliver sustained margin expansion and double-digit earnings growth. The strategy we laid out, we believe, will drive ongoing value creation for our owners. And it's based on the backbone is how we capitalize on the proliferation of data and power by providing leading interconnect products and technologies across our target markets to meet the evolving next-generation architectures of our customers. The results we're going to get into today and talk about our further evidence of our strategy is working. Last year, we delivered $1.4 billion of growth as a company. And this year, we expect to deliver well over $2 billion of growth, with the majority of our businesses growing double digits year-over-year. As we look at our second quarter results, we delivered strong financial performance with sales growth of 15% year-over-year and continued outperformance versus our key end markets. We also delivered earnings growth of 24% in the quarter. When you underpin this performance, we continue to see strong order trends. In the second quarter, we had record orders of over $5 billion, which was growth of over $1 billion versus the prior year, with growth across both segments and in every business. As we expand sales, we continue to invest and scale the business to deliver consistent margin performance and earnings growth. The performance of our teams, combined with our global manufacturing strategy, are providing resiliency within a backdrop of an ongoing dynamic global environment, and this is reflected in the performance of both segments. We expect our strong performance will continue and Heath will talk more about that when he gets into his section. So if you could, if you're looking at the slides, I'd ask you to turn to Slide 3, and I'll get into our second quarter results. as well as our outlook for the third quarter. Our second quarter sales were over $4.7 billion, with performance above guidance driven across our businesses. Sales grew 15% on a reported basis and 7% organically year-over-year. We saw orders increase to $5.3 billion and I'll provide more color on the order momentum on the next slide. We delivered record adjusted earnings per share of $2.73, which was above our guidance and increased 24% versus the prior year. Our operating margins on an adjusted basis were 22%, and this was an increase of 130 basis points over last year due to the execution of our teams. We also continue to demonstrate our strong cash generation model with free cash flow of $1.3 billion for the first half of this year, and year-to-date, we returned nearly 100% of our free cash flow to shareholders while continuing to support investments for future growth. Also driven off of this strong free cash flow, in the quarter we announced that our Board approved a 10% increase to our quarterly cash dividend. As we look to the third quarter, we are expecting third quarter sales to be $5 billion, which reflect an increase of 10% versus the prior year with year-over-year and sequential growth in both of our segments. We expect adjusted earnings per share to be up 17% year-over-year to around $2.83. So I'd ask if you could turn to Slide 4, and let me get into more details on the order trend momentum that we're seeing. As I mentioned, orders were $5.3 billion with a book-to-bill of 1.12. We saw orders growth in every business and in all regions on a year-over-year basis. and our order trends support the broadening of growth I've already talked about. For the second quarter, over 70% of the company's order growth was in Industrial segment. Versus the prior year, Industrial segment orders grew 40% and essentially every business in the segment posted double-digit orders growth. In addition to the ongoing momentum in digital data networks where our orders grew over 60% in the quarter, we also continue to see continued momentum in Energy, Aerospace and Defense, as well as Automated and Connected Living. Turning to our Transportation segment orders. Our orders increased 13% versus the prior year, with year-over-year and sequential growth in all 3 of our businesses. Our order trends are supporting our growth and content outlook for the automotive business in the second half of the year. And in commercial transportation, we're seeing continued recovery in the global market with organic orders that grew year-over-year in every region. So with that as an overview of orders, let me now discuss quarterly segment results, and I'll start with the Industrial segment on Slide 5. Our sales in the Industrial Solutions segment grew 27% in the quarter and 17% on an organic basis year-over-year. We are benefiting from the secular growth trends that we see in our digital data networks business as well as our energy business, where we continue to see significant demand tied to AI and energy grid investments along with continued growth in aerospace and defense and factory automation applications. In our digital data networks, we had another standing quarter where our business grew nearly 50% year-over-year and sales were as we expected. We continue to win new programs with customers and the orders that we have received are building backlog into 2027. We now expect our AI revenues in fiscal 2026 to be about $150 million higher than our view 90 days ago, and this entire increase will be in the second half of the year and reflects the increased momentum that I talked about in orders. As we look out to the longer term, we are well positioned to continue to generate strong growth from AI applications. With our broad portfolio of data and power connectivity solutions as well as our engagements with the key architects of this space. We expect the addressable market for our AI products to continue to grow, both near term and long term. We are innovating with our customers on their road maps and architectures and are making both organic and inorganic investments to strengthen our road map for both copper and the inflection point for optical solutions. During the quarter, we acquired a leading technology for passive optical connectivity solutions, strengthening our road map to offer customer solution for both copper and optical connectivity in the future. As you would expect, we will continue to support our customers' architectures as they evolve. Now let me turn to the other businesses in the segment. And turning to Automation and Connected Living. We grew 8% organically year-over-year with growth in each region, and we continue to expect the momentum in the general and industrial markets to improve as we move through the year. In Energy, our sales grew 60%, including the Richards acquisition, where we're capitalizing on growth opportunities in the U.S. utility market. Organically, sales increased 11%, driven by year-over-year growth across 3 key application areas; the first being energy grid hardening, second being data center and the third being clean energy applications. We continue to see increasing investment by our customers in grid hardening as utilities upgrade aging infrastructure and improve resiliency to support more distributed and reliable networks. In the data center, load growth is being driven by the significant build-out of power infrastructure to support AI where our connectivity solutions enable higher power density as well as reliability. And in clean energy applications, we continue to benefit from ongoing investment in utility scale solar, along with the supporting grid infrastructure required to integrate these energy sources. In our Aerospace and Defense business, our sales grew 5% organically driven by growth across both commercial aerospace and defense applications. In these markets, we continue to see favorable demand trends coupled with ongoing supply chain improvements. These trends are supported by increased global defense spending and ongoing modernization efforts that require increased data connectivity and greater power requirements, along with ongoing production ramps in the commercial aerospace field. And lastly, in our metal business, sales grew sequentially as we expected, driven by the continued investment in growth in key therapy applications such as structural heart and electrophysiology. So turning to margins for this segment. Industrial segment adjusted operating margins expanded 260 basis points to nearly 22% and driven by the strong operational performance by our teams and the benefits of higher volume. So if you could, let me move over to Slide 6, and I'll get into the Transportation segment. Our sales in the Transportation segment grew 5% in the quarter and were down slightly organically. We are delivering growth over market in both automotive and commercial transportation, reflecting our leading global position and customer co-creation model. And this is resulting in continued content growth across vehicle platforms. Our Auto sales grew 2% on a reported basis and declined 4% organically in the second quarter. Our market outperformance against declining Auto production was driven by content growth in Asia and Europe. Year-to-date, we're averaging growth over market at the low end of our 4 to 6-point range and continue to expect content growth to be in this range for fiscal 2026 driven by our strong position and content opportunities across data connectivity in the vehicle, the electrification of the powertrain as well as electronification of the vehicle. Turning to Commercial Transportation. We saw 21% growth on a reported basis and 17% organically. We are seeing continued improvement in demand trends across regions with growth in Europe and Asia and stabilization in North America. Against this backdrop, we are delivering growth at significantly above the market driven by continued share gains from new program wins and increasing content per vehicle. In our Sensors business, sales increased 2% on a reported basis and declined 3% organically, which was in line with our expectations. For the Transportation segment, the team delivered adjusted operating margins of nearly 22%, demonstrating our team's operational resiliency. So with that as an overview of our segment performance, let me hand it over to Heath will get into more financial details and expectations going forward. Heath Mitts: Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, we achieved adjusted operating income of over $1 billion and adjusted operating margins of 21.7%, driven by strong operational performance by our teams in both segments. GAAP operating income was $954 million and included $8 million of acquisition-related charges, $10 million of restructuring and other charges and $57 million of amortization expense. I continue to expect restructuring charges in fiscal '26 to be roughly $100 million. Adjusted EPS was $2.73, and GAAP EPS was $2.90 for the quarter and included a $0.39 tax benefit primarily related to a settlement of prior period tax matters as well as restructuring, acquisition and other charges of $0.06 and amortization expense of $0.15. The adjusted effective tax rate was approximately 21% in Q2. We expect Q3 to be around 23% and the full year tax rate to be approximately 22%. Importantly, as always, we anticipate our cash tax rate to be well below our adjusted ETR. Now if you turn to Slide 8. This slide shows the growth and broadening that Terrence discussed along with the strength of our operating model with strong margin performance and double-digit earnings growth. Sales of $4.7 billion were up 15% on a reported basis and up 7% on an organic basis year-over-year. Adjusted operating margins were 21.7% in the second quarter, expanding 130 basis points year-over-year. Adjusted earnings per share were $2.73, up 24% year-over-year, driven by sales growth and margin expansion. We continue to operate in a dynamic environment. Versus 90 days ago, we are seeing increased inflationary pressures across certain input costs such as oil-based resins and freight charges driven by higher energy costs and broader geopolitical tensions. We are managing these impacts through our proven playbook, including optimization of our factory footprint, targeted pricing actions and ongoing productivity initiatives. In addition, our localization strategy around supply chain enhances resiliency by positioning us to manufacture close to our customers and respond quickly to changing conditions. Turning to cash flow. Cash from operations was $947 million, and free cash flow was $680 million. Through the first half of the fiscal year, free cash flow was a record $1.3 billion. We continue to expect our free cash flow conversion to be 100% this year. Before I turn it over to questions, let me reinforce that performance reflects strong execution in both segments. The strength that we have in orders gives us confidence in the second half, and we expect to have over $2 billion of growth this year, which will be ahead of our through-cycle target. While we remain in a dynamic environment, we have established levers in place to expand operating margins and drive double-digit earnings growth per share. So with that, let's now open it up for questions. Sujal Shah: Thank you, Heath. Eli, can you please give the instructions for the Q&A session? Operator: [Operator Instructions] Your first question comes from Scott Davis from Melius Research. Scott Davis: Can you talk about the...There is allergy attack here, but the $150 million bump up, when does that get shipped out? Terrence Curtin: Yes, sure. Yes, sure. So let me talk about that, and I do hope you feel better from your allergies here, Scott. The $150 million, I think 1 thing -- and you're talking about the AI -- when we look at it, I think let's frame a little bit where our orders are in our DDM business, and we'll talk about that $150 million because year-to-date in our DDM business, we have $2 billion of orders. . And as we talked in the past few quarters, some of these orders are being scheduled out. And like you're always going to have -- when you have these programs, there'll be some lumpiness to them as programs ramp up and ramp down. So with the momentum that we've seen in order, Scott, the $150 million that I mentioned about on the statements are things that relate to the second half. Part of it is ramping of programs we have, part of it is new ramps that are coming along, and it continues to show the momentum that we have in the space. So we do think with this additional $150 million -- $150 million of AI revenue in the second half, that will put our DDN AI revenue, which runs about 70% of total DDN approaching $2.4 billion, just a little bit below that, and the momentum continues. And it will ramp in the second half -- and like we said, about all the businesses, we do expect all of our businesses to grow from the second quarter to third quarter. So just the story continues there, where we have good engagement, good program wins and continue to have strong growth in the AI space.. In the AI space. Sujal Shah: Thank you, Scott. We have the next question, please. Operator: Our next question comes from the line of Mark Delaney of Goldman Sachs. Mark Delaney: Orders were strong again this quarter, a record high. You said it's strength across all businesses, but I'm hoping you could speak more on whether you think the momentum can be sustained and also what TE saw with business trends so far in April, especially in light of the geopolitical and supply chain volatility? Terrence Curtin: No. Thanks, Mark, for the question. So a couple of things. Yes, you're right. I think when you look at this year, remember, we did $5 billion of orders in the first quarter, $5.3 billion in the second quarter. So we've stacked about $10 million of orders. So we built backlog, and in the first month since quarter end, the order momentum continues to be very strong. We have not seen any demand negative impacts due to orders at all since the conflict broke out. So we continue to see that strong momentum. And I think the broadening that I talked about in the script is it is really across the businesses. When you look at the growth that we put up, which is 25% in this quarter, DDN was very strong at 60% order growth year-on-year. But if you look at the rest of the Industrial segment, essentially every business unit put up double digits. So we're continuing to have the strong momentum that we've had in energy that I mentioned, aerospace and defense, continues to build backlog. And those -- the lead time on those products are typically further out. So that's another one that's building backlog similar to what I talked about with AI. And the one that in the Industrial segment probably a little bit later of an uptick is what we're seeing in factory automation in our automation control business. When you look at that business, and I mentioned it on the script, we had growth in every region. But when you're talking about growth in every region, you're really looking at both at high double digits across every region. So we continue to see momentum building up on that CapEx investment and certainly, what we see with ISM be constructive, I also think is a good supporting fact. And then the other thing, when you get to transportation, clearly, our view of production hasn't changed. We've told you since the beginning of the year, we expect auto production to be slightly down. We still have that same view but our Transportation segment orders being up double digit, being led by commercial transportation, which is up a very strong double digit. And in Automotive, our orders were up mid-single digit. So showing the confidence we have around the growth in what is a production environment that I would say still isn't a positive production environment, but one that feels like it's just moving sideways and we benefit from our global position. So the order trends are broad. They are across regions and some of the businesses that a year ago, so we would say might have been still cycling down. have come back in and really driving some of the growth that you see. And we do expect it to continue and the orders in quarter 3 to date through today, we're showing that. Sujal Shah: All right. Thank you, Mark. We have the next question please. Operator: Next question comes from Luke Junk of Baird. Luke Junk: Terrence, maybe clicking a little bigger picture. Just hoping you could provide some updated perspective from your point of view on the copper versus optical debate in especially interested is just where you're leaning in to any related investments. You made the comment in the script about evolving with customers and also noticed you did an optical acquisition in March of RampPhotonics, if you could speak to that as well. Terrence Curtin: Okay. Thanks, Luke, for the question. And we've had many discussions about this, but I do want to start just reiterating some things before I click down a little bit to where you asked to go. It's important to be where we play, we're very fortunate to have a bird's eye view that we work with our customers and what's happening in both the data chain and the powertrain when you look at what's going on, on the AI architecture. And we work closely with our customers, and we're aligned with their road maps. The other thing that we talked about at Investor Day each customer has different architectures, and they have different opinions about when things will be introduced, whether it's in the power chain or in the signal data chain. And let's face it, we work very closely to make sure we're going to hit the inflection points that they are telling us. And I think the other thing that you've all heard very consistently from the broad merchant chip companies, is that copper will continue to be the workhorse in the rack and as many applications as possible due to the cost benefit, the power benefit, the reliability as well as where it's scaled to today to be able to meet their needs. And let's face it, we agree with that, and we hear it all the time, and we have a view that it's not copper or optical, it's copper and optical how do they play together in different structures. So when you sit there and you think about optics coming in, it's going to come in more into the scale out first. let's face it, we are bigger in the scale up. What we do in rack is the bigger driver of what we do and where we focus. And so you're going to see more in scale-out, and we do think that you're going to continue to have a hybrid solution between copper and optical over time. As I said on the call, we do view the TAM where we play and the product technology we have are going to grow as this occurs both near term and long term. And that means what happens in data as well as some power connectivity, and I know we get into that with some of you. You are right, and I mentioned it there, we did make a technology acquisition around what leading-edge optical technology that will be used to strengthen our passive optical connectivity road map. What we acquired is complementary to what we do in our portfolio and it enables advancements in high-density fiber array connections, and this really would connect an optical fiber to a CPO. And it really helps round out our road map. And the key we have to do is make sure we productionize and scale these technologies to really make sure we support our road map as well as our customers' road map. And we really think with this technology, it's going to fit right in very nicely. And this is something we do all the time organically, via partnerships. Sometimes we make technology investments like this. So we really feel like the trends are only up to the right, like we've always told you with what we have. And clearly, I think this is all good news for us. What happens on that trade-off that our customers will make that will continue to drive TAM improvement. So hopefully, that gives you some Flavor Luke. Sujal Shah: Thank you Luke. May we have the next question. Operator: Next question comes from the line of Amit Daryanani from Evercore. Amit Daryanani: Thanks, good morning, everyone. Maybe I'll step away from the Banister a bit. You hope to see really less growth in energy and even the commercial transport segment. So I'm hoping, Terrence, if you could just talk a little bit about on energy, even ex Richard's organic growth is double digits, what are sort of the big segments you're involved in, and how durable do you think this growth can be longer term? And maybe you can have a comparable discussion on the commercial transport side because I think both those segments are growing much faster than most folks would expect. Terrence Curtin: Thanks, Amit. And I appreciate you calling out some of the other markets. So first off, on energy, the investments we've made and where we're positioned, it is very important. It is focused around the majority of it is in the U.S. energy market. So anything we're talking about benefiting from is things all of you are experiencing every day. Increased utility investment related to capacity as well as hardening due to the low demand that you're going to get, and probably about 60% or 2/3 of what we do is around utility and grid hardening. So It is around that infrastructure side of it. . And let's face it, where we plan undergrounding with our technology and the intelligence we bring, that market is growing high single digits, and we're growing faster than that due to the efforts of our team. Another important area that we do, what we call industrial is about 20% of the business, but this is where we're actually doing where energy is getting hooked up, could be a data center, could be into an industrial complex, from to be a semiconductor fab by you're bringing power in. And that's another area with what we're seeing around the CapEx that many of you write about is very key. We're seeing very strong growth there as well, and we're growing double digits there as well this year. And then the third area, the balance of it is really where we positioned ourselves around clean energy and renewables. Up until a couple of years ago, that's what we talked to you a lot about. And we're still growing high single digit and there Certainly, there's been some policy elements that have slowed down some of that market. But with all the levers we have, we get really excited about the growth we have there to grow above market. And it's an area that we continue to get excited about how do we continue to deepen our position there. Jumping over to commercial transportation. I do want to sort of say, this business is 1 that unlike what I just talked about, it is truly a global business. We're pretty even between North America, Europe and Asia. And what we've seen this quarter, last year, we were seeing strength that was coming out of Asia. It was coming out of Europe where you saw whether it was truck and bus, ag, construct and improving outside the United States, we're starting to see stabilization here, and we're seeing our orders pick up as people are reacting to the stabilization as well as looking forward to 2027 and the sales growth says it by itself. You see the growth that was very strong in the quarter. The market probably grew globally in the quarter, 4%. So that outperformance was very strong with us growing well into the double digits. And it really comes into our position on next-gen vehicles as well as the trends we talked to you about in automotive all the time. We talked to you about data in the vehicle. We talk to you about powertrain and emissions that electronification piece, and we're seeing that. And in places like Asia where electrification of the powertrain is getting deeper and deeper into the various types of vehicles, we get a content uplift. And in some cases, that content uplift and I know Aaron talked about this back at Investor Day, we could have on some vehicles up to $2,000 when you get to next-generation powertrains versus $400 today. So we see that strength. It's good to see the market stabilizing. And certainly, we saw it in the orders that were up very strong, as I mentioned. And we just think there are going to be things that are getting back to that broadening of growth that I talked about in the script. Sujal Shah: All right. Thank you Amit. can we have next question please. Operator: Next question comes from the line of Wamsi Mohan from Bank of America. . Wamsi Mohan: The content growth in the 4% to 6% range for the year, that indicates a meaningful acceleration from this past quarter. Maybe you can share some color on what you're seeing that's going to drive that acceleration? And if you could just clarify for us the quarter-on-quarter order trend in DDN, I think you noted 60% year-over-year increase in orders. Wondering if you can characterize the sequential change in orders there, too. Terrence Curtin: Sure. So let me get into Auto a little bit. So first off, on Auto, I do want to start with production, because it's not lost, there's headlines out there. And when we think about production, production how we saw it as we start the year hasn't changed. We expect there to be 88 million to 89 million units and when we started the year, we thought every market was going to be down slightly. Europe is up a little bit. Asia and China is exactly where we thought. North America is a little worse. So when you look at it, the production environment is playing out as we want, certainly, some of the regional pieces are a little bit different, mainly in North America, being a little worse, Europe being a little stronger. . And when you look quarter-to-date, I mean, year-to-date, and we asked you not to look at quarters, we're running at the 4-point outperformance above production. And really, when you look at that, we were very strong in China right off the bat, continue to show that strong presence that we have. You're a nice growth over market, where it isn't where we were with in North America due to some of the cancellations you saw. But overall, we're still in the range. And our results and orders continue to say we're going to be at the range. So as we look forward, those production assumptions and orders continue to be very strong, and it's around the drivers we talked about. In Asia, electric vehicle adoption continues, that's not changing as well as strong in the data connectivity side. And as you go into North America, we have some EV pressures that we've been dealing with. But net-net, we feel good about where we are in the 4% to 6% at the lower end, and we expect to be there for the year and do expect first half versus second half, while production is going to be fairly flattish, if you compare halves that our automotive business will be up. On DDN, I don't have all the quarters in front me. But $2 billion is the first half orders that I mentioned. I also want to say we will have bumpiness. These are programs. It goes back to where we talked about. We're very excited that they're across a broad customer base. We're growing across all the customers that are key and -- but we will have some lumpiness. And Wamsi, we can follow up later to your question. I just don't have it here in front of me. Sujal Shah: All right. Thank you, Wamsi. Can we have the next question, please? Operator: Next question comes from Christopher Glynn from Oppenheimer. Christopher Glynn: Been around the portfolio pretty thoroughly. So just wanted to talk about capital and portfolio did a little bolt-on. Hasn't been much on divestiture for quite a while. I'm not sure how you view sensors, but just that and the weighting of acquisition pipeline versus buyback acceleration potential? Terrence Curtin: Sure. Let me talk a little bit and then I'll also ask Heath to jump in. So first of all, similar, I think when you think about what we teed up in November at the Investor Day, nothing changed. We really like the portfolio I think what you're going to continue to see is the bolt-ons that we talked about, like I mentioned with Richards in the energy space, certainly, we did something in the DDN space around the technology acquisition, but it's more about playing offense than defense and pruning right now to really make sure we capitalize on the growth trends were we position ourselves. Heath, do you want to put on a little bit... Heath Mitts: Chris, I'd say the pipeline is actually for M&A, it's actually -- it's pretty active right now. I mean there's a lot of things that we see either real time or that we anticipate coming to market here in the next 3 quarters. Some of those we're taking a very hard look at in terms of how they fit with us and where we can create value for our owners. There's other things that might be interesting, but there might be other people who are better owners for. So there's a level of interest there from our side outside of some of just the technology investment that Terrence mentioned. And I guess I'd just say stay tuned because that strategy is never linear. We have to see when things come to market and when they make sense for us. But yes, it's a reasonable pipeline right now. Operator: Your next to comes from Joseph Spak of UBS. Joseph Spak: Just wanted to touch on -- just want to touch on margins for a second. I mean you mentioned some of the inflationary costs. And just given the velocity with how fast things moved, I wonder if that weighed it all in the quarter. But more importantly, for the next quarter outlook, you mentioned how in the past, you always do a good job internally and passing stuff on. But is that so I think that protects EBIT, but should we expect a little bit of margin pressure just on the math next quarter? And could you quantify that at all? Heath Mitts: Joe, I mean, we've been dealing with different types of inflationary pressures, whether those are tariff related or certainly the metals that we've seen some pretty significant inflation on here for a while. Within the quarter that we just reported here in the second quarter, certainly, we've seen the oil-based derivatives increase. For us, that means resins, and we do buy a lot of resin. So we've seen those go up. We've seen freight and logistics costs go up as we move things around to our customers. So we do have a playbook. The team is pretty well conditioned right now that we don't get caught flat-footed when we see these things happening. We're able to largely pass that through in terms of price or maybe some other things we can do with our customers logistically in terms of where they take receipt of things. But there is a little bit of noise in our absolute margins for sure on that. Now as we talked about at the Investor Day, we're still committed to our -- to getting at least 30% flow-through on the operating income side year-over-year. We were able to do that in both segments. And obviously, for the company, I think if you kind of think about what our guide implies, you'll still see that level of consistency as we work forward. So when you're getting 30% flow-through, it does have -- and you're sitting at 22% margins, it does have that ability to move margins up. But I'd say both segments are operating well in this environment. But in terms of the headwind towards margins, there's a little bit of noise in there. And some of that's just the timing of when we feel those costs come in versus when the price is realized. But again, in absolute terms, I think that we're managing through it. Operator: Question comes from the line of Joe Giordano of TD Cowen. Joseph Giordano: Just curious, like I guess this is somewhat data center, but it could be more broad, and I think you just touched on it a little bit. But when you see orders up as much as we're seeing and price cost still kind of lagging, like how do we think about like the price inherent in the orders versus the price that's coming through in P&L? Like is there a real lag there? Like are you kind of covered already in the kind of in the backlog? And Heath, just if there's any update on CapEx expectations for the year in light of the orders? Heath Mitts: Yes. Joe, let me hit -- I mean, I'm not -- we haven't seen -- from an order perspective, we haven't seen people in any real activity or motivation to get ahead or pull things in. So -- and we're pretty tied in with both where we sell direct as well as with our distributor base on that front. So we haven't really seen any noise there in terms of people trying to get in ahead of a price increase. The orders that we're seeing are really project-based and things that we've had in the pipeline that are coming and then where we see it come in from -- it's a little bit more hand to mouth from distribution, it's pretty consistent. So that has not been highlighted to us from our businesses as a major concern in terms of matching up when they're seeing the inflation versus when the price is going in. But there is always a little bit of natural timing there. On CapEx, we have taken our CapEx up this year. We talked a little bit about it in prior calls. You should expect CapEx this year to be to run about 6% of revenue. That increase that we've had over the past couple of years is almost entirely due to ramping the AI programs within our DDN business. And those are tied to very specific programs. When we make capital investments, we have been awarded programs at that pace -- at those spots. And so we have some protection on that. We're not just out speculating where we need to make those big CapEx investments. So in some ways, that's a good indicator if I'm sitting in your shoes of what's to come in that space. Operator: Your next question comes from the line of Guy Hardwick of Barclays. Guy Drummond Hardwick: I think you said the AI business will be running at $2.4 billion this year. I assume that includes the cloud business, which I think was running like a $500 million last year. But my question is actually on the 30%, which is AI or cloud related. enterprise telecom, which potentially could be squeezed for or competing for dollars from -- for AI because of AI investments. So maybe you could talk about the trends in enterprise telecom and other IT. Terrence Curtin: No. Actually, thanks, Scott, for the question. And what we've seen, and we talked a little bit last time, what we're seeing is we're actually not to the level of growth that we see in the AI side, but that spending is constructive. On the enterprise, telecom and wireless space as a collective, we are seeing nice growth there. It's not at the rates like I talked about 60%. But I would say how people are prioritizing that between those spends, I'm not sure I'm the best person to say for the broader market. But in our order trends, we are seeing nice growth, and it is growth in those other product categories or end market segments. Operator: Next question comes from the line of Asiya Merchant of Citigroup. Asiya Merchant: My question is around just tightness in components, whether it's memory or CPUs and even GPU and allocation. Maybe you could help us understand if hyperscalers, were they providing much better visibility as a result of the hyperscalers as well as your chip companies that you deal with, if they were just providing better visibility due to the supply chain issues? And if you're forecasting any more complexity as these programs ramp in the back half? Terrence Curtin: Sure. No, thanks for the question. So first off, when you look at the product categories you're talking about memory, GPUs, CPUs, we don't buy that. So from our procurement, we don't buy that. Certainly, it's well known that memory is tight. And when I think about our business, which is important, what we're seeing for our customers, they are -- and you've heard me talk about in the orders, they are going out their orders a little bit to make sure capacity is reserved and on the ramps that they have coming. So that's built more backlog for us, as we've highlighted in the orders in DDM. But net-net, we're not seeing availability issues on what we procure to make our products. Certainly, our customers continue to ask us to ramp and ramp quicker. So we're not seeing any slowdowns from our builds into our customer, our hyperscaler customers at all. If anything, as we've talked about with the $150 million, some of that is they're increasing their ramps. So clearly, memory is tight. You can go to the memory and see that. But net-net, we're not seeing any impact in any of our businesses yet. And some of our customers are trying to do planning and they build buffer stock to make sure their supply is secure on those components, but we're not the closest to it. Operator: Your next question comes from the line of Steven Fox of Fox Advisors. Steven Fox: I just had one on the energy market. So the organic growth has slowed, still double digits. But I was curious, Terrence, you've talked about how energy can sort of be hand-in-hand with the growth you see in some of the data center markets. Are you seeing conversations with customers that there's a lag effect that maybe we see an acceleration in growth? Or is 10% type of the number we should think about? Can you just give us a sense for how energy looks maybe going out the next few quarters? Terrence Curtin: Yes. No, Steve, I think what's important is please keep the framing of what I talked about, about, hey, 60-plus percent of this energy business is utility grid hardening, what is data center or industrial and then what is renewable. And I do think that the growth rate came down a little bit is due to the clean energy side where you have had some pauses. -- on what's happening in utility, grid hardening and the industrial/data center space, it's full steam ahead. Now there is elements that you come into regulatory elements of when things get built and staged, but feel very good about where we are and feel like we'll be staying around this double digit for a while now with this build that we're seeing with probably the biggest lumpiness being in the clean energy space. Operator: Your next question comes from the line of Samik Chatterjee of JPMorgan. Samik Chatterjee: Terrence, if I can ask you to go back to the discussion around your capabilities that you're adding related to optical and on copper in terms of scale up. At the Investor Day, you had given us this AI rack representation and copper content or your content could be as much as $870 per chip. When you're engaging with your customers now and as you think about optical and scale up, is that going to be additive to the content opportunity that you outlined at the Investor Day? Or is it going to be part of that overall content that you presented at the Investor Day? And maybe sort of how are you thinking about in 5 years' time, how does the mix between copper and optical look in that content opportunity in a scale-up domain? Terrence Curtin: Thank you, Sameer. So first off, when you think about the technology acquisition we did and even what I said, this will help us in the scale-out element where we're not as strong because this is really where you get to where the fiber attached to the CPO for the scale-out. So that would be increased content versus what happens in the rack. And over time, this is going to migrate and what that migration rate is, is going to be very iterative with our customers as they make design constraints between the power chain and the data chain. And we even see that as inferencing is coming in how the architecture continues to move. So when you sit there versus what we talked about, it's an increase of content that we have, and it's just the positioning that we're always going to be looking at to do in all of our businesses, not just EDN to say, how do we get deeper with our customers in their architecture. And this is a nice fill of a building block that we feel with what we can do with it and integrate it with what we do already. we'll be able to hit the inflection point that they're working on. Operator: Your next question comes from the line of Colin Langan of Wells Fargo. Colin Langan: A follow-up actually on the co-packaged optics. I mean if you don't sort of build out the fiber optics capability from where you are today, any way to frame the downside or the content loss if a customer switches from copper to a fiber optic solution? Terrence Curtin: So Colin, the one thing I'm going to say, I'm going to go back to what I said in the script. It's very clear with the work we do with our customers, it's not going to be an or, it's going to be an end between copper and fiber. And that word, while it's a simple word, copper and fiber sounds like more important words, the end is the most important. And even when we think about the copper TAM, even as optics gets introduced into scale out and how it could be a mix in the rack, our TAM and copper is going to continue to grow due to the power elements that you need, power connectivity goes up, where they will continue to keep copper within the rack as the workhorse. So those types of things, we still see TAM growth in copper. And then we're also going to benefit from the inflection points when it does occur of optical, we're really nicely positioned for it. Operator: Next question comes from the line of William Stein of Truist Securities. William Stein: In the industrial end market, I have sort of 2 related questions. The D&N piece, there's very clear growth in bookings, and I congratulate you on that. It's clear that you've got growth coming. But it was a bit surprising to have 2 sequential quarters of flattish revenue performance. I wonder if you can explain why the revenue hasn't been growing for the last couple of quarters meaningfully in that part of Industrial. And related -- perhaps related to that, this quarter, we saw segment revenue in Industrial grow, but op margin decline. And I wonder if it's related to orders maybe ramping later in the year instead of now or maybe it's the recent acquisition you did in energy -- any help there would be much appreciated. Terrence Curtin: First off, Will, on your first part of your question, the important thing is we're going to grow this year in DDN and AI by about $1 billion. Looking at things on quarters, and I know I say it in automotive a lot, and you're all probably rolling your eyes right now with me. You look at a quarter, there's different programs that ramp supply chain impacts. And I think the more important point is we've increased our revenue by another $150 million. We're going to be stepping up here in the second half. And even the number we shared at Investor Day of the $3 billion, it continues to shift towards the left due to the momentum that we have. Heath, do you want to cover the margin side? Heath Mitts: Yes. The year-over-year margins are up significantly. So I assume you're talking about the sequential margins. Listen, it's a similar answer to what Terrence just said. You're going to have -- always have a little bit of noise in any quarter. Sometimes that works in your favor, sometimes it sequentially evens out. We tend to look at margins on a year-to-date or rolling basis. I'd say if I think about anything that's specific to that, I mean, we have ramped no different than I talked about CapEx earlier with Joe's question. We have ramped some investments in our DDN business to support these programs. So there's different times over a 90-day period that you might feel some of that pinch point a little bit more. But when I think about the full year or even where we are year-to-date, I feel good about both the margin performance as well as the flow-through on that organic revenue growth. So there's nothing that I'm I'll say, dwelling on relative to some kind of sequential move there. Operator: Next question comes from the line of Shreyas Patil of Wolfe Research. Shreyas Patil: Maybe just coming back to the discussion on CPO and optical. I'm just curious how big your optical business for AI applications is today and where you feel the need to further bolster via M&A, maybe on the transceiver side or DCI modules or things like that? Terrence Curtin: Sure, A. I think that what's important is and in the pre remarks, we're going to stay in passives. So when you look at transceivers and things like that, I don't think that's where we add value in the supply chain. And really, when you look at what we're doing here, what TE does is how do you get the signal chain that's moving off the CPO would be the fiber attach, how do you get out to an optical backplane and really the technology we did helps our base around the fiber attach. Also, we are stronger within the rack. So that's more -- that's going to be further out, but we do think this will get us into some scale-out options versus just scale up, which is more limited. But we will continue to look at via partnerships versus our organic development as well as what we just did to say how do we build it out. We really like how we're positioned with this building block we got in. to really make sure we can help our customers as they evolve their architecture. So thanks for the question. Sujal Shah: All right. I want to thank everyone for joining us this morning. And if you have further questions, please contact Investor Relations at TE. Thank you, and have a nice day. Operator: Today's conference call will be available for replay beginning at 11:30 a.m. Eastern Time today on the Investor Relations portion of the TE Connectivity's website. That will conclude the conference today. Thank you, and goodbye.