加载中...
共找到 39,052 条相关资讯
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.
Operator: Greetings. Welcome to Northpointe Bancshares, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brad Howes, Executive Vice President and Chief Financial Officer. Thank you. You may begin. Bradley Howes: Good morning, and welcome to Northpointe's First Quarter 2026 Earnings Call. My name is Brad Howes, and I'm the Chief Financial Officer. With me today are Chuck Williams, our Chairman and CEO; and Kevin Comps, our President. Additional earnings materials, including the presentation slides that we will refer to on today's call, are available on Northpointe's Investor Relations website, ir.northpointe.com. As a reminder, during today's call, we may make forward-looking statements, which are subject to risks and uncertainties and are intended to be covered by the safe harbor provisions of federal securities law. For a list of factors that may cause actual results to differ materially from expectations, please refer to the disclosures contained within our SEC filings. We will also reference non-GAAP financial measures and encourage you to review the non-GAAP reconciliations provided in both our earnings release and presentation slides. The agenda for today's call will include prepared remarks, followed by a question-and-answer session. With that, I'll turn the call over to Chuck. Charles Williams: Thank you, Brad. Good morning, everyone, and thank you for joining. With 1 quarter completed, we're off to a very good start in 2026. Despite the macroeconomic uncertainty, our business model remains resilient and our exceptional team members continue to perform well. For the quarter, we earned $0.62 per diluted share and with a return on average assets of 1.28% and a return on average tangible common equity of 15.71%. Factoring in the impact of dividends paid, our tangible book value per share increased by over 16% annualized over the prior period. Our first quarter results were anchored by robust growth and continued market share gains in our mortgage purchase program or MPP business, strong performance in our residential lending channel, a modest reduction in our wholesale funding ratio and an improvement in overall asset quality. We've added a new slide, which is on Page 4 of our earnings call presentation, which I think really tells the story well. We're proud to be one of the only entirely mortgage-focused banks in the country. While certain aspects of our financial performance are naturally sensitive to mortgage rates, our diversification across the mortgage space has historically insulated us from dramatic income statement volatility typically associated with the mortgage industry. As outlined in the charts, we've continued to deliver consistent financial performance and grow tangible book value despite a challenging and volatile interest rate environment. One of the biggest drivers of our performance is the success we've achieved in our MPP business. Let me walk through a few highlights. MPP balances ended the quarter at $3.9 billion, an impressive growth rate of 51% annualized over the prior period. Total loans funded through the channel was $11.2 billion for the quarter, which is very strong considering the first quarter is typically slower due to normal seasonality in the mortgage business. By comparison, total loans funded was $6.7 billion for the first quarter of 2025. We have funded $4.6 billion in total loans during March, which is our highest volume month on record. I believe our first quarter results, combined with the momentum we have gained, set us up nicely to meet or exceed our 2026 growth plan. I'd like to now turn the call over to Kevin to provide more details on our business lines. Kevin Comps: Thanks, Chuck, and good morning, everyone. Let's start with our MPP business on Slide 6. Compared to the prior quarter, period ending MPP balances increased by $435.7 million and average balances increased by $59.3 million, with most of the balance growth occurring towards the end of the quarter. As I've discussed on prior calls, these are net of any MPP balances participated out. At March 31, 2026, we had participated $412.7 million to our partner banks, down slightly from the level at December 31, 2025. Let me break down our first quarter 2026 growth a bit further. First, we brought in 8 new clients, which totaled $205 million in additional capacity. Second, we increased facility size for 11 existing clients, which totaled $465 million in additional capacity. And third, the overall utilization of our existing clients remained strong during the quarter, averaging 57%. Average MPP yields were 6.59% and fee adjusted yields were 6.82% during the first quarter of 2026. Our average yield was down 39 basis points from the prior quarter, which is consistent with the decrease in SOFR over that same time period. Turning now to Retail Banking on Slide 7. I'd like to highlight the results of the 3 main businesses within that segment. Starting with residential lending, which includes both our traditional retail and our consumer direct channels, we closed $693.7 million in mortgages during the first quarter, which is down from $762.0 million in the prior quarter. During the first quarter of 2026, saleable volume was $626.6 million. Of that, 39% was in the consumer direct channel and 61% was in the traditional retail channel. This compares to $671.3 million in salable volume during the fourth quarter of 2025, with 35% of the volume in the consumer direct channel and 65% in traditional retail channel. Refinance activity made up 59% of the total salable volume in the first quarter of 2026, up from 51% in the fourth quarter of 2025. In both periods, we saw a drop in mortgage rates, which spurred additional refinance activity. As we've discussed previously, it only takes a 25 to 50 basis point decline in mortgage rates to drive additional refinance activity, and we were able to take advantage of that temporary drop in both of the last 2 quarters. The additional refinance activity helped maintain strong volumes and revenues in what is typically a slower buying season. Mortgage rate lock commitments increased by 12% over the prior quarter, driven by an increase in refinance activity with purchase activity down modestly from the prior quarter. We sold approximately 68% of the saleable mortgages service released in the first quarter of 2026, which is down from 79% in the prior quarter. We continue to look for opportunities to create additional efficiencies using technology and hire new talented lenders within the channel. During the first quarter, we hired 7 new mortgage professionals in 2 new markets to help us continue to grow the channel. In the middle of Slide 7, we highlight our digital deposit banking channel, where we feature our direct customer platform and competitive product suite. We ended the fourth quarter with $5.0 billion in total deposits, an increase from the prior quarter. The breakout of these deposits is detailed in the appendix on Slide 13. The majority of our deposit growth when compared to the prior quarter was driven by normal seasonality in our custodial deposit balances as well as higher levels of brokered network deposits, which had more attractive rates than brokered CDs. On the right side of Slide 7, we highlight our specialty mortgage servicing channel, where we focus on servicing first lien home equity lines tied seamlessly to demand deposit sweep accounts, including what we commonly refer to as AIO loans. Excluding the adjustment for the change in fair value of MSRs, we earned $2.2 million in loan servicing fees for Q1, which is flat from the prior quarter. Including loans we outsourced to a subservicer, we serviced 15,900 loans for others with a total UPB of $5.2 billion as of the first quarter of 2026. Turning lastly to Slide 8. We saw a nice improvement in our overall asset quality metrics during the quarter. Consistent with prior quarters, we are not seeing any systemic credit quality or borrower issues in any of our portfolios. We had net charge-offs of $266,000 in the first quarter of 2026, which is down from $1.2 million in the prior quarter. First quarter charge-offs represented an annualized net charge-off ratio to average loans of 2 basis points, which remains well below long-term historical averages. Let me provide some additional details on our asset quality metrics this quarter. First, total nonperforming assets decreased by $2.0 million from the prior quarter. Second, early-stage delinquent loans improved this quarter with past due loans 31 to 89 days, decreasing by $6.5 million from the fourth quarter of 2025 level. Third, at March 31, 2026, MPP represented 58% of all loans, and we've continued to experience pristine credit quality in that portfolio. Fourth, virtually all of our loan portfolio is backed by residential real estate, which typically carries much lower average loss rates than other asset classes. And fifth, our residential mortgage portfolio is high quality, seasoned and geographically diverse. At March 31, 2026, our average FICO was 752, and our average LTV when you factor in mortgage insurance was 72%. Additionally, our average debt-to-income ratio was 35%. Now I'd like to turn the call over to Brad to cover the financials. Bradley Howes: All right. Thanks, Kevin. As I go through today's slide presentation, I will be incorporating full year 2026 guidance into my commentary. Let's start on Slide 9. As a reminder, our non-GAAP reconciliation on Slide 15 provides details of the calculations and a reconciliation to the comparable GAAP measure for all non-GAAP metrics. For the first quarter of 2026, we had net income to common stockholders of $21.7 million or $0.62 per diluted share. Our performance and profitability metrics, which are laid out on Slide 5, remains strong. Net interest income decreased by $2.21 million from the prior quarter, reflecting a 9 basis point decrease in net interest margin, partially offset by growth in average interest-earning assets of $47.6 million. Our yield on average interest-earning assets was down 17 basis points from the prior quarter, driven primarily by a decrease in loan yields. A significant portion of our MPP facilities are tied to the SOFR index, which was down almost 40 basis points on average on a linked-quarter basis. Our cost of funds decreased by 13 basis points, reflecting a federal funds rate cut of 25 basis points in December of 2025. For full year 2026, I am lowering our expected NIM range slightly to 2.35% to 2.50%. My guidance assumes a continued improvement in the mix of loans within the held-for-investment portfolio and that SOFR and funding costs will remain at or near current levels. I'm also assuming that we do not have any additional Fed funds rate cuts in 2026. Turning to loan growth guidance. For 2026, I expect MPP balances to increase to between $4.1 billion and $4.3 billion by year-end. I'm also still expecting $300 million to $500 million on average will be participated out throughout 2026. As we've reiterated on prior calls, participations remain an important component of our overall MPP strategy, which allows us to manage the balance sheet and optimize capital ratios while driving higher fee income. We will continue to look for opportunities to add and expand participation partners to help drive further growth in the business. I'd also still expect period ending AIO balances to increase to between $900 million and $1.0 billion by year-end. Excluding MPP and AIO loans, I'd expect the rest of the loan portfolio to continue to decrease to between $1.9 billion and $2.1 billion by year-end 2026. This includes loans held for sale, which tends to vary based on the timing of loan sales. None of my loan growth guidance has changed from the prior quarter guidance that I provided. Kevin provided details on the improvement in asset quality trends this quarter with the lower level of charge-offs, the decrease in nonperforming and early-stage delinquent loans and continued runoff of non-AIO and MPP loans, we had a total benefit for credit losses of $445,000 in the first quarter of 2026. With the provision benefit this quarter, I now expect total provision expense of between $2 million and $3 million for 2026. which would be driven by the replenishment of net charge-offs and growth in our MPP and AIO loans. Any additional provision expense or benefit related to the credit migration trends, changes in the economic forecast or other changes to the credit models would not be part of my guidance. Noninterest income increased slightly from the prior quarter, reflecting higher gain on sale revenue, partially offset by larger adjustments to our fair value assets. On the top of Slide 14, we break out 3 of our fair value assets and their associated quarterly increases or decreases. These assets tend to move up or down with interest rates and are not part of my revenue guidance each quarter. On the bottom of Slide 14 and in our earnings release tables, we provide further details on the components of net gain on sale of loans. As you can see on that chart, first quarter net gain on sale of loans included a $1.2 million decrease in fair value of loans held for investment and lender risk account with the Federal Home Loan Bank. Excluding these items, net gain on the sale of loans would have been $17.8 million, which is up from $16.6 million on a comparable basis in the prior quarter. For 2026, I am forecasting total salable mortgage originations of $2.2 billion to $2.4 billion with all-in margins of 2.75% to 3.25% on those mortgage originations. My margin guidance is a blend of margins from our traditional retail and consumer direct channels. As a reminder, the consumer direct channel has lower margins with an offsetting lower mortgage variable comp expense. These estimates do not assume any significant decrease in mortgage rates nor do they assume any change to the current level of mortgage originators within the bank. I'd expect MPP fees to range between $9 million and $11 million for the full year 2026 based on the expected participation balances and continued growth in loans funded. Excluding fair value changes in the MSR, loan servicing fees were $2.2 million for the quarter, flat from the prior quarter. I'd expect that quarterly run rate to continue to increase in 2026 with full year revenue between $9 million and $11 million. Noninterest expense was up $658,000 from the prior quarter, driven primarily by salaries and benefits, mostly related to bonus and incentive compensation, which is tied to company performance. For the full year 2026, I'd expect total noninterest expense to be in the range of $138 million to $142 million, no change from my prior guidance. The expected increase in noninterest expense is more than offset by growth in total revenue based on the positive operating leverage we are able to generate. Turning to the balance sheet on Slide 10. Total assets increased to $7.4 billion at March 31, 2026, based on the strong growth in MPP balances during the quarter. Our wholesale funding ratio was 62.94% at March 31, 2026, which is down from 64.60% in the prior quarter based on the deposit growth Kevin highlighted. Looking forward, we'd expect to continue to fund MPP and AIO growth through a combination of brokered CDs, retail deposits and other sources of nonbrokered deposits where possible. Our effective tax rate was 24.72% for the first quarter of 2026, reflecting additional income tax expense related to nondeductible tax rules for publicly traded companies. I'd expect the 2026 run rate to be in line with that. Lastly, on Slide 11, we outline our regulatory capital ratios, which are estimates pending completion of regulatory reports. Looking forward, I'd expect we will continue to leverage additional capital generated through retained earnings to grow MPP and AIO balances. We previously announced the completion of a private placement of $20 million in aggregate principal amount of fixed to floating rate subordinated notes. We believe this additional capital provides us with flexibility should we see stronger growth throughout 2026 and with respect to our $25 million in Series B preferred stock that we anticipate calling prior to year-end. With that, we are now happy to take questions. Sherry, please open the line for Q&A. Operator: [Operator Instructions] Our first question is from Crispin Love with Piper Sandler. Crispin Love: First, just on the net interest margin trajectory. I heard your update on the guide, I think 2.35% to 2.5% for the year, to 2.42% in the most recent quarter. But can you just discuss the ramp you would expect throughout the remaining 3 quarters of the year to just fit within that range? And then just any puts and takes there? Bradley Howes: Sure. Crispin, this is Brad. What I'd say about the guidance is that if we think about rates, we don't have anything significant changing in our models today where we stand with interest rates. So SOFR funding rates and all that remain relatively flat, no Fed fund cuts. So really, the benefit that comes over the remaining quarters would come from the continued improvement in the mix of loans. If you look at MPP and AIO loans, which are driving the growth in the balance sheet today, as we grow those and as we run off legacy assets, which have lower average yields based on when they were generated, we will see a little bit of a continued improvement in the mix of loans, which drive up margin. That's really the only put and take, I'd say that's embedded in our guidance. We do have a small amount of borrowings that are coming due, $50 million this year. But for the most part, most of the funding costs should remain pretty flat absent any changes in rates. Crispin Love: Okay. Great. That makes sense. And then I have just 2 related questions on MPP. Just first on the loan balances for 2026, did you reaffirm that $4.1 billion to $4.3 billion guide? I just might have missed that. Bradley Howes: We did, Crispin. Yes, no change to prior guidance. Crispin Love: Okay. Perfect. Okay. That's what I thought. I just wanted to make sure. And then just broadly on MPP balances, they've continued to grow meaningfully. They did on the -- on a sequential basis in the first quarter. So can you just discuss some of the drivers of that growth and sustainability of that? And I assume with that guide, I would think that some of the sequential increase should decelerate a bit in the coming quarters. But just curious on that MPP balance growth that you continue to generate. Kevin Comps: This is Kevin. I can start with that, Crispin. So part of the growth was in the commentary was some of it is coming from existing clients expanding their facilities still. That is reasonably expected to continue as we get into the busier cycle of the year, which is typically the summer buying season. That could be a reasonable place also. And then as usual, we do have a pipeline of clients that could potentially come on board. Additionally, we had new ones added during Q1 also. We expect to add some new ones moving forward. The pace of growth of new clients, to your point, will probably not be the same as when we came out of the gate with the IPO a year ago and had a very long backlog of new clients coming on board. So both of those things will still represent growth within the channel going forward though. Operator: Our next question is from Damon DelMonte with KBW. Damon Del Monte: Appreciate all the commentary and detail in the prepared remarks. Just curious on the commentary around capital and the potential for the $25 million of preferred to be called. Is that something that you could do with kind of cash on hand? Or is that something that might require another sub debt issuance? Bradley Howes: No. We believe we can do that and looking at our models with what we have today. That was kind of part of the purpose of the sub debt offering that we did, twofold, one, to be able to generate higher growth throughout the year, should we see it? And then two, to sort of bring that money in now so that we have the funding towards the end of the year and don't need to raise any additional capital and take any variability in what could happen in the markets out of play and have that money. Damon Del Monte: Got it. And can you remind us kind of what your targets are for capital levels? I think total capital was 11.4%. What is your comfort zone in that ratio? Bradley Howes: Sure. Yes. So we look at -- there's 4 regulatory ratios. We look at each of those regulatory ratios at the bank and the holding company. We have a capital plan that has trigger levels that are with a buffer to well capitalized based on what we're comfortable with. Today, as we sit, our most binding capital ratio would be total risk-based at the bank. And we still have, call it, good room from there until we even get to the trigger level. So as we look out for our growth, we continue to lever additional retained earnings to grow our balances and grow our capital levels. And then I would expect those to continue to be consistent throughout the level of 2026. Damon Del Monte: Got it. Okay. Great. And then on the mortgage banking, I think you reaffirmed your expectation for origination activity for the year. What was the gain on sale this quarter? Bradley Howes: So the dollar or the margin? Damon Del Monte: The margin. I think you gave a range of what, 2.75% to 3.25%. So what was the -- did it shake out this year for this quarter? Bradley Howes: Yes. I'd say this quarter, the margin as a percentage was probably closer to the bottom end or a little off the bottom end or a little above the bottom end of that range. We talked about in prior quarters, we are seeing competitive pressures on the conforming business and more entrants into the non-QM space, which you have typically higher margins. So I'd expect our guidance is predicated on that. Depending on what happens throughout the year, we'll still continue to earn in that range that we outlined, but it's probably closer this quarter to the -- towards the bottom end of that range. Operator: [Operator Instructions] Our next question is from Christopher Marinac with Brean Capital Research. Christopher Marinac: I wanted to talk about the progress in the wholesale funding ratio and that reliance inching down. Is the all-in-one progress this year and the further growth itself going to contribute to that? And are there other kind of goals for that ratio going forward? Kevin Comps: Yes. This is Kevin. I'll start with the all-in-one piece of this. So the all-in-one product is tied to real-time sweep features from a checking account. Those checking accounts are 0-dollar balance checking accounts with real-time sweep features to pay down the loan. So that is not driving the decrease in the wholesale funding ratio. Normal swings in our custodial funds related to our servicing MSRs that we own and the other servicing relationships we have on the custodial front, the normal seasonality of those accounts is what the main driver of the reduction in the wholesale funding ratio. And then we're always looking for additional opportunities on the non-brokered side of the house. No material items to speak of for this quarter as we sit, but we always are looking to do something additional there. Christopher Marinac: Understood. Thank you for that background, I appreciate it. And as you are -- have been very productive in the digital channel for a while with the business plan, are those customers behaving any differently when you have a modest backup in rates like we've seen since the end of February? Or does that create any headwind for you in the upcoming quarters? Bradley Howes: You talking from like a beta perspective, [ Crispin ]? Christopher Marinac: Correct. Exactly. Bradley Howes: Yes. I'd say, no, if you look at our cost of interest-bearing -- sorry, our cost of deposits this quarter was down 22 basis points from the prior quarter. We had the Fed funds cut in December. So we behaved, I think, from a beta perspective, very well. 22 of the 25 would be in the deposit side. Where you see, obviously, the funding mix more stable is on the borrowing side, where we have match funded some of our longer-term assets with longer-term liabilities. So we've locked those in over time to maintain the same margin. But when you look at Fed funds rate cuts, obviously, those are -- those remain flat, but we do see a nice benefit from the rate cut, and we really were able to pass along most of that beta in this last rate hike. We haven't seen anything to the contrary so far this quarter. Christopher Marinac: Sounds good. And final question for me just as you continue to build the asset side and kind of pledgeable assets as the balance sheet grows, does that extra liquidity give you any difference in terms of whether it's managing capital like the preferred decision or just sort of how you pursue other initiatives? Bradley Howes: Could you repeat that? You cut out for a second there, Crispin -- Chris. Christopher Marinac: That's okay. I was asking about the growth of the balance sheet and how that impacts liquidity as you have more assets you can pledge for further borrowings in the future and how that impacts sort of the profit build-out for the firm. Bradley Howes: Yes. No, we have a pretty good amount of excess capacity as we stand today. That will slowly grow as we grow the balance sheet. You're absolutely right with MPP being pledgeable to Federal Home Loan Bank, that's one of our largest sources of liquidity. That will continue to grow over time. We haven't had to tap a lot of it because we have sort of a growth path in funding and a growth path in assets that matches each other, and we maintain that level of liquidity. We like to have it just in case. So -- but you're right, that will continue to grow nominally over the course of 2026. Christopher Marinac: So if the environment were to change and become more favorable or margins changed to what you wanted to take advantage of grow faster, you could, and that was really just channel check. Bradley Howes: Yes. From liquidity would not be the constraining factor. That would be more based on our capital ratios. Our growth path kind of has us leveraging all the capital we generate. What I mentioned in our comments, though, and what Chuck and Kevin have reiterated on prior calls is that we would use participations and continue to grow that program if we should see opportunities for further growth this year. That is a vehicle that we could utilize to manage our balance sheet and to grow faster or higher than we originally thought. Operator: There are no further questions at this time. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to Vertiv's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the program over to your host for today's conference call, Lynne Maxeiner, Vice President of Investor Relations. Lynne Maxeiner: Great. Thank you, [ Jeanie ]. Good morning, and welcome to Vertiv's First Quarter 2026 Earnings Conference Call. Joining me today are Vertiv's Executive Chairman, Dave Cote; Chief Executive Officer, Gio Albertazzi; and Chief Financial Officer, Craig Chamberlain. We have 1 hour for the call today. During the Q&A portion of the call, please be mindful of others in the queue and limit yourself to one question. And if you have a follow-up question, please rejoin the queue. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of Vertiv. These forward-looking statements are subject to material risks and uncertainties, that could cause actual results to differ materially from those in the forward-looking statements. We refer to the cautionary language included in today's earnings release, and you can learn more about these risks in our annual and quarterly reports, and other filings made with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we'll also present both GAAP and non-GAAP financial measures. Our GAAP results to non-GAAP reconciliations can be found in our earnings press release and in the investor slide deck found on our website at investors.vertiv.com. With that, I'll turn the call over to Executive Chairman, Dave Cote. David Cote: I'm very pleased with how we started the year. The momentum we're seeing across the business is strong. It's translating into the kind of performance that gives us confidence to [indiscernible] our outlook for the full year. What we're seeing in customer conversations is different than 6 months ago. The urgency has increased. The scale deployment is larger, and the technical complexity is creating opportunities for companies that can solve [indiscernible], which is exactly where we excel. We're seeing broad-based strength, and that tells you something about the depth of demand and our ability to capture it. I like what we're seeing in the industry and the continued evolution of Vertiv. We're still in the early stage of the infrastructure build out for AI. Our competitive advantages are compounding. If you can deliver product systems, integrated solutions and services that scale, you become even more important to your customers' technology road map. We're also managing the challenge as well. Tariffs, supply chain, complexity, labor constraints. These are real. But they're manageable. And additionally, they raised the bar in ways that favors established players like us. Gio and the team are executing very well in this rapid growth environment, balancing aggressive growth and share gain with operational discipline. We're expecting a strong year ahead and strong years in the future. So with that, let me turn it over to Gio to discuss it further. Gio? Giordano Albertazzi: Thank you very much, Dave. Let us go to Slide 3. Well, I'm quite pleased with how we started 2026. Q1 was very strong with organic sales up 23% year-on-year. We reported growth of 30% when we include M&A and FX. From a regional perspective, America was the primary engine with 44% organic growth. APAC was up 12% organically, while EMEA was down 29% organically. In the few slides, you will hear us elaborate on some of the [ encouraging ] dynamics we are seeing in EMEA. Adjusted operating margin came in at 20.8%, up 430 basis points year-on-year, and 180 basis points above our guidance. Margin performance and strong top line growth drove adjusted operating profit of $551 million, up 64% year-on-year. Adjusted diluted EPS of [ $1.17 ] were up 83% versus Q1, '25 and exceeded our guidance by $0.19. Adjusted free cash flow of $653 million was up $147 million versus the prior year, driven by higher operating profit and continued working capital improvement. We are raising our full year guidance, and we now expect adjusted diluted EPS of $6.35, up 51% from 2025. This is supported by raising our adjusted operating profit guidance to $3.2 billion, up 53% from 2025. Adjusted operating margin is now expected to be 23.3% to 190 basis points higher than 2025. And let's go to Slide 4. Let me start with the market environment. Our pipeline momentum continues to be strong. Our pipeline generation is robust and we're still expecting another year of strong orders performance in 2026. We anticipate orders to be up year-over-year, which reflects the sustained demand environment we are seeing across our markets. Americas continues to show remarkable strength. The market momentum is broad-based and robust. Our pipeline in the region continues to expand as we convert opportunities. In EMEA, the spring continues to uncoil. We're seeing improving market sentiment throughout the quarter with momentum building. I know we do not disclose orders but we are very pleased with EMEA's Q1 bookings. We feel good about EMEA returning to year-over-year sales growth in the second half, which you see embedded in our guidance. When it comes to APAC, we see positive market dynamics across the region. Rest of Asia and India are showing convincingly strong pipelines and dynamics with robust momentum building. China is also showing encouraging pipeline movement, and this positions us well as we move through the year. On pricing, we continue to see favorable dynamics. We expect positive price costs in '26, including the impact of tariffs and tariff countermeasures. From a manufacturing and supply chain perspective, we're expanding while continuing to strengthen our resilience. Our regionalized footprint and multi-sourcing strategies are maintaining stability despite evolving dynamic trade dynamics and tensions in the Middle East. We are accelerating our strategic capacity investments to meet the demand we are seeing. We're expanding our global manufacturing service footprint while unlocking latent capacity with VOS driven productivity gains. Our cost management remains disciplined. We expect these investments to position us very well for the current and future demand environment. We manage commodities and components proactively. This, combined with our multisource model and supplier diversification provides a critical buffer in what remains an inflationary environment. Through various countermeasures, we are actively working to mitigate tariff exposures, including recent changes under Section 122 and 232. In this very dynamic environment, growth-wise, geopolitically, et cetera, we stay focused on supply chain resilience, growth, capacity expansion and navigating the tariff environment. A lot going on. But we are focused on execution. And let's go now to Slide 5. We continue to see very robust growth in demand for data centers. And as a result, we are focusing investments on capacity expansion, supply chain and engineering capabilities. We are committed to continue to grow capacity, supporting our customer demand, and we continue to deliver above market growth. Our CapEx in Q1, sustainably higher than in the same quarter last year is a testament to that commitment. We are making significant investments in capacity expansion across both manufacturing and services. On the manufacturing side, we're expanding capacity organically across multiple sites globally and particularly across the Americas, on which you see some details here. These investments are strategic and positions us to meet the accelerating demand. We do this for growth but also to bolster our overall operational resiliency. This capacity expansion is broad-based, power management, thermal management, infrastructure solutions and IT systems across all technologies. We're doing the same with our services capability. Specifically, we are scaling our people and service capacity vigorously and [ convincingly ], across all service technologies and regions. In particular, the acquisition of [indiscernible] significantly strengthens our fluid management and liquid cooling capabilities, enhancing our system-level services offering. This is one of the most technically demanding and financially consequential aspects of modern data center operations. With respect to our supply chain, we have prioritized multi-sourcing strategies to mitigate supplier risk. Strategic acquisitions are further strengthening our supply chain capabilities. And finally, we continue to prioritize investment in our engineering capabilities in multiple directions. Clearly, one is engineering labs, central to development of our technology portfolio. Customer witness test capabilities are another important area of investment. The complexity of data center technologies requires extensive test capacity at the beginning of a delivery. Growing customer test capacity with volume is a growth enabler. We will have an opportunity to continue to elaborate on what capacity expansion means during our upcoming Investor Day. And with that, it's over to you, Craig. Craig Chamberlin: Thanks [indiscernible] Let's start with the first quarter results on Slide 6. As you can see, we had an excellent start to the year. Adjusted diluted EPS was $1.17, up 83% year-over-year and $0.19 above our prior guidance. On the top line, net sales were $2.65 billion, up 30% versus prior year, with organic net sales up 23%, with acquisitions contributing 4% and favorable FX adding 3%. This organic growth was driven by Americas, up 44% and APAC up 12%, partially offset by EMEA down 29% organically. Adjusted operating profit of $551 million increased 64% versus the prior year and came in $56 million higher than our guidance. Our adjusted operating margin of 20.8% expanded by 430 basis points versus last year, showing a great operating performance from the team. The main drivers were strong operational leverage on higher volumes, productivity gains and favorable price cost execution, which was partially offset by ongoing tariff headwinds. On the cash side, we delivered $653 million of adjusted free cash flow. That's up 147% from the prior year first quarter. This was supported by higher operating profit and working capital efficiency, partially offset by higher cash tax and increased net CapEx, as we continue investing in capacity and ER&D to support business growth. We exited the quarter with net leverage of 0.2x, providing us with significant strategic flexibility. Flipping to Slide 7. Let's look at segment performances by region. Americas delivered another outstanding quarter. Net sales were $1.81 billion, up 53%, with 44% organic growth. reflecting strong broad-based momentum across nearly all product lines. Adjusted operating profit was $490 million, with margins benefiting from operational leverage, disciplined execution and partial intensity. Looking at APAC, net sales were $514 million, up 15%, 12% organically. Organic growth came in below quarterly guidance, primarily due to timing. Adjusted operating profit of $67 million was up approximately 48% year-on-year, mainly driven by volume leverage and operating discipline. Turning to EMEA. Net sales were $321 million, down 29% organically. We believe this is a temporary reflection of softer orders that we saw in Q2 and Q3 of 2025. However, we are seeing opportunity generation accelerating, reflecting improved customer demand and supporting a return to sales growth in the back half of 2026. We saw a step down in margins here year-over-year due to operating deleverage. However, our conviction has gotten stronger for a second half recovery in EMEA, which you see embedded in our EMEA full year guidance. On Slide 8, let's discuss our second quarter guidance. We're projecting adjusted diluted EPS at the midpoint of $1.40, which is 47% higher than our second quarter 2025. Net sales at the midpoint are $3.35 billion, which reflects 27% net sales growth versus prior year. Adjusted operating profit at the midpoint of $710 million represents 45% growth versus second quarter 2025. This strong profit growth is supported by robust organic sales growth and continued operating leverage. Adjusted operating margins at the midpoint of 21.2% is up 270 basis points, supported by strong organic sales growth [indiscernible] cost leverage. Additionally, we expect to materially offset unfavorable margin impact from tariffs. This guide reflects our confidence in the strength of our market position and our ability to execute on the significant opportunities ahead of us. Now on to Slide 9. Let's talk about our full year 2026 guidance. We continue to expect another strong year of strong performance across all key metrics. We are raising adjusted diluted EPS guidance by $0.33 to a midpoint of $6.35, which represents 51% growth versus prior year. For net sales, we're updating our guide to $13.75 billion at the midpoint, reflecting 34% net sales growth versus prior year. By region, we expect organic growth rates of high 30s in Americas, mid-20s in APAC, and flat in EMEA. The updated adjusted operating profit is now at a midpoint of $3.2 billion, representing 53% growth versus prior year, and $160 million higher than our prior guidance. This strong profit growth is driven by a combination of robust organic sales growth and continued operational leverage. Finally, on margins, we're guiding to 23.3% adjusted operating margin at the midpoint, an expansion of 290 basis points from 2025, and 80 basis points [ tied ] in our prior guidance. This expansion is supported by 30% organic sales growth and continued operational leverage. We expect to be price/cost positive for the year, inclusive of tariff impact and the countermeasures. With fixed cost leverage, [indiscernible] in growth, ER&D and capacity. For adjusted free cash flow, we're maintaining our guidance $2.2 billion at the midpoint, up 17% versus prior year, primarily due to higher operating profit, partially offset by higher cash tax and net CapEx investments. With that, I'll hand it back to you, Gio. Giordano Albertazzi: Well, thank you, Craig, and let us go to Slide 10. And before I wrap up, I once again want to invite all of you to tune in to our 2026 investor conference that will be held on the 19th and 20th of May in Greenville, South Carolina. This will be an excellent opportunity to gain first-hand insight into Vertiv's visions and strategy from our leadership team. On the first day, the agenda includes a comprehensive market update, a detailed financial overview, and our updated multiyear outlook and Q&A sessions, of course, with the leadership team. The following day, we will have a technology session where you'll hear about how we continue to innovate and drive the industry. This will be followed by a tour of our Pelzer Infrastructure Solutions facility for those who will be joining us in person. It's going to be a great opportunity to see what we're building and where we are headed. And now let's go to Slide 11. Our first quarter results were strong testaments to Vertiv's execution capabilities and the momentum continuing to build in our markets. The demand environment is robust and we are very well positioned to carry that forward. We have received -- we have recently announced two strategic acquisitions that are expected to strengthen our competitive position. [ Thermal Key ], which is anticipated to close in a few months, we'll expand our thermal management portfolio with great heat exchange know-how and a leading range of dry coolers, a capability for the globe, starting in EMEA. Heat rejection is becoming more complex for AI data centers and a portfolio comprising chillers, dry coolers, trim coolers, offers great flexibility and efficiency opportunities for our customers. [ B, market ] structures, which brings custom engineers structural fabrication capabilities that accelerate our ability to deliver manufactured and converged infrastructure solutions at scale. Both are expected to provide capacity and capabilities to better serve our customers while expanding our technology base. We have raised our 2026 guidance, reflecting our confidence in the trajectory of the business and opportunities ahead. EMEA is absolutely part of the AI story. And we're seeing that play out with customer projects like [ Ecodata Center ] in Sweden designed to support the most demanding AI workloads with NVIDIA's latest generation [indiscernible]. [ Vertiv 1 ] core was selected to deliver the full data center solution here, encompassing power, thermal IT white space and services. We are excited about our collaboration with [ C Power Energy ]. Together, we are enabling U.S. data centers to turn their on-site energy assets into grid resources, accelerating speed to power, improving resilience and reducing cost for data centers and their communities. This is the kind of end-to-end thinking that sets Vertiv apart. Our long-standing customer relationships, combined with our partnerships create a significant competitive advantage that is very difficult to replicate. We continue to move further and the market is recognizing it. Achieving investment-grade credit ratings and inclusion in the S&P 500 are meaningful milestones. They reflect the strength of this business, the execution prowess of this team, and the confidence the market has placed in our trajectory. I do not take that lightly. Neither does the rest of the Vertiv team, we hold ourselves to a high standard and will continue to raise the bar. We had a strong quarter. We expect to build on it and we will. And with that, we can begin the Q&A. Operator: [Operator Instructions] And your first question comes from the line of Scott Davis with Melius Research. Scott Davis: Can you talk about the prefab market, like how important this market is? Or is there any way to think about a TAM? You seem to have a lot of content in prefab. I'm just trying to get a sense of how the customers view the importance of that content? Giordano Albertazzi: Thank you for the question, Scott. Multiple dimensions to this. One is we know that speed, or time to token is absolutely essential in the market. Clearly, prefabrication alleviate challenges on site -- the construction site is always a complex system to manage. There is a scarcity of talent trade resources we see, and we certainly are stimulating, if you will, an increasing adoption of prefabrication. But there is way more to it than that. For us, prefabrication is not just prefabrication. It's convergence of our solution into a system like [ one core ], not only [ one core ], but [ one core ] SmartRun. It's systems that are designed, converged and optimized already from the beginning on a given set of [ Lowe's ] and silicon. But -- and it is also a way to make the whole system more efficient and more dense in many respects. So there are multiple reasons why this is being adopted. And there are multiple reasons why we believe we are ahead of the pack here because we're not just an integrator. We provide technology. You were also asking about the TAM for us. Clearly, that is a concentrator of opportunity for us because the prefabrication is, for us, an old Vertiv technology solution. So that help us to capture more of the TAM. Scott Davis: That's helpful, Gio. Excuse my voice, the allergies are [ killing me since ] the last couple of days. You mentioned capacity adds with productivity and I'm kind of intrigued. What kind of productivity levels can you run when you try -- I mean, you're adding capacity, obviously, quickly, you're trying to get a lot of stuff out the door. What kind of levels of productivity can you actually run at just kind of leave it at that? Giordano Albertazzi: Well, my productivity comment was really kind of the manufacturing systems in a factory vis-a-vis having kind of a piece-by-piece assembly going on, on site, that is the traditional way in which the data center business is run. I wouldn't go down the path of exactly comparing. But when we prefabricate them, certainly, we will have an opportunity to have a direct conversation when we look the floor in Pelzer. But we definitely achieved manufacturing productivity levels when we manufacture the systems. Operator: Your next question comes from the line of Amit Daryanani with Evercore. Amit Daryanani: Perfect. I'll try to stick to Lynne's ask for one question. Maybe it's a multipart though. Gio, the calendar '26 guide that you folks have right now, sort of, implies 30% organic growth for the full year, versus I think we've done like 22%, 23% growth in the first half of the year. Can you just help us understand what are the levers that you're seeing? And maybe you can quantify some of these levers that you're seeing that enabled the step-up in growth in the back half versus the first half? Assume EMEA and maybe more capacity in [ Rubin ] are all parts of the story. But I would love to just understand what do you see that gives you confidence that growth can accelerate organically in H2 versus H1? Giordano Albertazzi: Okay. I will start. Certainly Craig will also complement here. But -- but I'd say that it's really 2 things, if you really think about it at a high level. One is capacity. We are adding capacity, we're constantly adding capacity. But you could see from our CapEx profile, and what we mentioned about Q1, we're very, very focused on adding capacity and a lot of that capacity start to hit us in the second half. But the other thing is if you think about our Q4 orders, there certainly is a good load of backlog in that part of the year. If you think about the customer requests lead times that we've been talking quite extensively. So there's more to it, but I would say those are two important element to the equation. Craig Chamberlin: Yes. And Amit, I'll just -- I'll double-click on that a little bit. You're right in terms of APAC and EMEA. When you think of them in terms of the first half versus the second half, there is an accelerated growth in the second half in both of those regions. And we've talked extensively about that in terms of what we look like from -- and what we expect the coil to the uncoiling of EMEA to happen. And how we're seeing that come through. And that's the way it is in the guide as well. Operator: Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Jeffrey Sprague: I want to come around to service. Obviously, a very clear acceleration in the last several quarters and actually service growth kind of couplings of product growth in the Americas. We've been waiting for this backlog growth to really come through strongly. It looks like it's happening at this point. But could you maybe just address kind of the field organization, the ability for service to grow at this pace. How the margin complexion of service may or may not be changing, and just how to think about that outlook over the balance of the year? Giordano Albertazzi: Yes. There's certainly multiple angles here, Jeff. And again, I'm sure we'll have an opportunity to further elaborate in May. But at a high level, [indiscernible] satisfied with the trajectory of services, and that's true for both the project services and the life cycle services. To your question about what is our structural organization. We're very, very present in the territory, very, very local. But at the same time, we understand that those -- the big projects that are out today are also sometimes concentrated. So we have developed the ability to move people and have teams of people that are dedicated to addressing the big data center deployment when it comes to project services. But we remain and we continue to nurture and strengthen and grow a very good on the territory type of services presence. We mentioned a couple of times that we are investing heavily. I mentioned it in my script, we are growing our services population, and we will have details in May. And of course, here our strength and tradition and experience in training, e-commerce is absolutely essential, combined with increasingly strong tools that are at the tip of the finger of our engineers. So absolutely multi-faceted. What we like when we talk in general about services is the fact that the installed base that is being created is very, very conducive to our life cycle capture and business over time. Craig Chamberlin: Yes. And Jeff, I'll just double click on that a little bit, too. In terms of on a reported basis, yes, products and services are equal. If you look at organic, you're seeing the feeling or you're feeling the impact to [indiscernible] right there as well. So I just wanted to get to be sure that you kind of understood that. [ Pelzer ] is a big impact for us, but so we like that. Jeffrey Sprague: Yes, I did see that. I wonder, though, if you could also just, maybe, a little bit more color on how to think about margins. I guess the nature of my question is right, labor-related services. We don't think about operating leverage, right? It's man hours or people hours, but there's kind of other more sophisticated services that come into play. So just how should we think about operating leverage in that business as it grows? Craig Chamberlin: No. I mean I think you would probably -- you point to the fact of what we're seeing from our own overall incremental margins when you think about that. So overall incremental margins were always in the neighborhood of 30% to 35%. I would say that would kind of be similar in terms of the way that we would expect services to pull through as well. Operator: Your next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: Just maybe we can talk about the evolution of behind the meter has become a lot more prominent over the past 4, 6 months. What technology avenues does it open to Vertiv? And I'm sort of thinking controls, best controls, sort of UPS transition as part of direct current architecture. But also maybe different chiller technology things like absorption chillers. I'm sure you've thought about the road map over the next 2, 3 years, and I know you'll talk about at the Analyst Day, but seems to be evolving fairly rapidly, how are you positioned? Giordano Albertazzi: Well, I think you've guided pretty much right, Andrew. In terms of -- certainly bring your own power is something that is here to stay, and we see it very, very clearly. We talked about partnerships today. Remember the partnership we have with [ Caterpillar ], with Oklo. So in various shapes and forms, bring your own power is a very important part of the data center equation, especially in the U.S. certainly, we play a role in everything micro-grids [indiscernible] storage systems interfacing and making sure that the entire powertrain be it direct or alternate are consistent and designed for a bring your own power solution. But -- as we -- multiple times -- and we keep saying the data center needs to be looked at as one system. So you're right when you say, hey, this is the implications might have implications also on the thermal side of things, so exactly absorption is one of -- one of the things. Then naturally, people and we think about. So we will have more details in May. But rest assured that we see bring your own power being an integral part of how we design and think a data center. So it is an opportunity for us ultimately because it makes the system more complex and with more -- possibly with more content for us. Operator: Your next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: Can we just double click a little bit on what you're seeing in EMEA. It seems like from the commentary at the beginning of the call that you're gaining conviction in the second half ramp. So could you just talk a little bit more about what you're seeing and hearing from customers there that's driving that higher confidence? Giordano Albertazzi: Well, we see -- well, you're right, exactly as I said, we're very pleased with our Q4 orders. We are very pleased with the Q1 orders and pleased by the -- what we see in the pipeline. So we see the market moving. We see a pipeline acceleration increasing. That is really a signal and to proof of a service [indiscernible] market and a demand that is there, which was natural. That's why we were talking about a coiled spring because there is a shortage of data center capacity, significant shortage of data center capacity, and even more profound shortage of AI-capable data centers in EMEA and in Europe, in particular. So hence, the dynamics that you see. And of course, we are very well positioned in Europe because of historically our strong presence but also because a lot of the players are players here and are players in Europe. So there is a very encouraging opportunity there. Operator: Your next question comes from the line of Patrick Baumann with JPMorgan. Patrick Baumann: Just had a quick one on margins. Just wanted to see if you could give some color on the sequential expectations. So from first quarter reported to the second quarter guidance, looks like the incremental margin is kind of in the low [ 20s ]. And I'm just wondering if you could unpack the moving parts on that, whether it's capacity investments, or tariffs or whatever. Just any color you can give on that. Craig Chamberlin: Yes. And Patrick, I would say, again, when we look at it sequentially or year-over-year, year-over-year, it's in the low 30s, which is what we are expecting in terms of our guide. Quarter-over-quarter, there is a little bit of a headwind as we bring on capacity. This is probably one of our bigger ramps in terms of capacity in the second quarter. So there would be a little bit of a, I'd say, a change in that when you look at it for the first quarter to second quarter. But if you look across the full year, we're still guiding to that between that 30% to 35% for the overall sequential margin. So I'd say it's a bit of a bump from 1Q to 2Q in terms of when we're bringing on capacity and working through all the different various actions that we have to do, offsetting all the tariffs and working through that, the [ 232s ] have now changed. So there's a little bit of a dip there, but I'd say, overall, still feel very strong about the year being in the 30% to 35% range that we've given. Patrick Baumann: Just a quick follow-up on that. The tariffs, I think you said to materially offset it, you thought that would be at the end of first quarter. Is that kind of slipped out to second quarter now because of the changes? Or are you kind of already there at the end of the first quarter? Craig Chamberlin: I'd say we're already there at the end of the first quarter. As 232s have changed, we're continuing to do, I'd say, actions and countermeasures around those. And if you look at it for the year, we feel confident that we'll continue to materially offset those. Operator: Your next question comes from the line of Andrew Kaplowitz Citi. Andrew Kaplowitz: Obviously, you've talked about the Americas continue to be strong, but maybe you could talk about how much of the business is still being driven by hyperscalers in colo versus enterprise. I assume it's still heavily weighted towards the forum. But enterprise markets seem to be picking up a bit given AI needs and usage. When could that impact Vertiv? Is it something you see accelerating in 2027 or not, sort of yet? Giordano Albertazzi: Clearly, we continue to see hyperscale colo, new cloud being the biggest driver of certainly is true in the Americas, but globally pretty much. Certainly, there is -- there is an element of enterprise here. A lot of enterprise will continue to happen through cloud. So not always easy to separate. But we see enterprise started to adopt AI when that will be visible in terms of growth above the levels that we shared with you in the past, that's something that we will certainly elaborate in May, but it's probably a little bit still far away as independent. There is a lot happening at colo level, if that helps. Operator: Your next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to ask about the transition to 800-volt architecture. There's a lot of moving parts, but just wondering what does this mean for Vertiv content? And when does the company expect to start shipping to these 800-volt design facilities. And just specifically interested in liquid cooling and wondering if there could be some TAM expansion with applications beyond just cooling the chips as they're [indiscernible] a higher level of heat presumably running through the facility? Giordano Albertazzi: Chris, thank you for your question. Clearly, we've seen early as a transition -- a wholesale transition to 800 volt. Clearly, 800 volts going to be an important portion of the total market as we go into 2027 and beyond. We are on our on time with our programs. We were talking about second half this year launches of portfolio. We are pleased with where we are in terms of the customer feedback with the prototypes and validation activities that we have ongoing. Shipping will be a little bit further away, but I think it's a little bit premature to elaborate too much where we see it as a 2027, I think this one. When it comes to liquid cooling the influence of 800 volt. I would say that there will be a correlation, [indiscernible] necessarily simply because 800 volt DC is applied for very high density compute. That very high-density compute will see not just liquid cooling for the chip, but for a much bigger array of electronics across the entire IT stack. And of course, that has then influenced the entire powertrain, thermal chain. So we see that as an opportunity for us. We're very excited very excited about -- very pleased with where we are with the 800-volt DC programs, and we're getting ready for it. Operator: Your next question comes from the line of Amit Mehrotra with UBS Financial. Amit Mehrotra: I just wanted to ask a question about the pipeline. I think what was so interesting last quarter is, obviously, you had a big, big order number, but I believe the pipeline also grew double digits sequentially. Maybe you can just talk about the pipeline as it kind of evolved in the first quarter, momentum and quoting activity funnel. Anything you can give within the confines of not talking about orders? Giordano Albertazzi: Yes. Well, thanks for -- thank you for the question. Clearly, we were very vocal about the strength of the pipeline before. And we are as vocal about the strength of the pipeline in -- at the end of Q1. And with that, the pipeline duration, that to us is exactly what you defined as the activity volume of commercial volume of commercial activity. And this growth and this dynamism is broad-based. It's broad-based across our technology range and it's broad-based across our regions. So very pleased and very encouraged, and hence our comment about our overall year orders. Amit Mehrotra: Anything to call out in duration? I know you said most of it is within 12 months, maybe some leading it to 18 months. Any change in complexion on the orders as you come into the first quarter or second quarter in terms of duration or not? Giordano Albertazzi: You're talking pipeline or you're talking orders, just to be clear? Amit Mehrotra: Talking about orders. I'm talking about what's in the backlog right now, the growth? Giordano Albertazzi: What's in the backlog? Could you think about a backlog shape that is, if anything, a little bit more elongated, but not something dramatic to the point that the shape of the backlog is totally different. So there is no distortion of backlog. If anything, it's a backlog, that is a little bit more elongated. That, of course, gives us visibility, good visibility in 2020 -- in 2027. As we said, a lot of the projects in the industry are large projects where customers asked for, call it, [indiscernible] sorry, 12 to 18 month delivery windows. We have seen some occasions the very requested delivery window shorten a little bit. We, of course -- maybe on that 9 to 12 months window. Our average delivery time of which we're capable are shorter than that. But again, you can't really say different product lines. Different dynamics, different dynamics, supply and demand. But in general, despite the fact that, of course, it's everything very dynamic, pretty too much I go back to what I was saying. A backlog that is not dramatically different, if anything, a little bit more elevated. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Maybe just to switch tack a little bit to the sort of cash flow and balance sheet. I suppose, just trying to understand the free cash flow dollar guide is unchanged, and I can see the sort of bigger working cap outflow dialed in, but I would think you'd get good customer advances from orders and your working cap was a nice tailwind in Q1. So maybe just talk us through sort of the thinking there and the balance sheet allied to that, extremely unlevered as a result of that good Q1 cash flow? Any highlights you'd give us on sort of capital deployment from here? Craig Chamberlin: And I'll start off and I can pass it to Gio. But I would say in terms of just looking at the working capital over the course of the year, kind of two points on that. One is, yes, we are investing in terms of the ramp. So you see a little bit of a drag from that from an inventory perspective. And when we look at our order book and forecast out the way that we look at customer down payments, or customer advancements, we are a little bit prudent in the way that we look at that in the way that we forecast that. So both of those come into consideration when we look at the guide, Julian. So again, you're feeling a little bit of that and we're we basically would say the same thing is, one, there's a little bit of a ramp in terms of inventory. And two, just some prudence in the way that we look at our order book and the down payments we expect. On number two, on the capital deployment when you think of the [ 0.2 ] leverage, I think we go back to what we've said all along is there's two spaces where we love to invest in on a regular basis, and that's R&D book and the capacity book. And you can see on the flow-through of our cash statement that we're following with that -- that drumbeat that's what we like to do, and that's where you see continue to invest heavily. The other portions of that are capital deployment in terms of M&A, or stock buyback, or increased dividends. I think the biggest area that we had used cash there and that we always look to have some dry powder would be the M&A space. We've done some this quarter, as you saw. I think we'd continue to keep that open and that optionality available for us. Giordano Albertazzi: Yes. No, absolutely. Maybe [indiscernible] comments on the M&A side, you see us having a very dynamic posture in that respect. When we say -- it said and continue to say that our pipeline is -- M&A pipeline is very active. You have seen us do acquisitions that are also on predominantly technologized. We love technology. And our pipeline is well structured and quite convincing. So we'll continue to be focused on this area of capital deployment. Operator: Your next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I wanted to ask about the standard modular liquid cooling products. Just very interested in the level of customer take on this? And what role will this product line play in the rollout to more of the colos and enterprise customers? Giordano Albertazzi: Can you help me a little bit, Deane, because we have a very robust portfolio. I'd say, probably -- without probably, we believe the most robust. Can you help me exactly when you say standard liquid cooling product? Deane Dray: Yes, these were the ones that were talked about and displayed at the last super compute. So you're seeing -- you've heard in references [ lid cooling ] in a box. And it's just for the customer, the colos and enterprise who may not need such a customized system that Vertiv is now has this line, and as are some of your competitors on more of a standard modular design. Giordano Albertazzi: Yes. Let me elaborate on that. And thank you, Deane, for your question. When it comes to the liquid cooling portfolio, we have certainly an ability to provide very optimized liquid cooling solutions on specific [ second ] types, so absolutely optimized. We have a total ability to customize to customer needs when that is required. So it is both an ability to talk to our customers and say, hey, this is what you really need for this type of silicon, but also it is an opportunity for our customers to have exactly their design, depending on very specific in some cases, requirements. But if we go to super compute, the center stage was our smart run solution, which is the entire white space infrastructure comprising everything, white space data hold, power distribution, liquid cooling. So I would say that the integration and the convergence of that solution across multiple technology areas that normally happens on site with great consumption of time and cost is something that we have changed dramatically with a SmartRun. So SmartRun is extremely successful, and I think we have done our part again to change the way the industry works. Deane Dray: Are you expecting more regulation in liquid cooling. There's been a lot of discussion about that and what would the implications be? Giordano Albertazzi: Not necessarily. I think there is a -- the -- this part of the industry is maturing. So there are some of the let's say, way things are done are maturing and stabilizing a little bit in terms of water temperature, et cetera. But that, too, evolves over time as we know. Operator: Your next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: So I want to go back to the strength in free cash flow in 1Q and obviously, you had another very strong quarter of deferred income customer deposit bookings. And I'm just thinking, is this a way to think about backlog growth in the quarter? And I guess my question is, do we typically book the cash from the deposits in the same core as the orders? Or is this a reflection of the strength we saw last quarter? What I'm just waiting to say, is that a way to think about the backlog growth? Craig Chamberlin: I mean I think it depends on the customer, Nigel, in terms of what we get from an advanced payment perspective, or will we get from a downs -- a down payment perspective. And their payment terms in terms of when the actual cash would come in. So again, some of that strength in the first quarter is going to come from payments that were from orders in the fourth quarter. Some of it's going to come from orders that were in the first quarter. And that will continue out through the year. And as I was just mentioning to Julian, as we look at our working capital across the year, we are a little bit prudent in terms of how those payments will come in and when they will actually execute. And how much we would get from a percentage perspective when we look at the order book as well. So it's a combination of all those things. But again, it is a way to look at backlog, but it's not entirely our read through. Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: I want to better understand what the mix shift over time towards solutions like SmartRun and [ One Core ] means for your margins? And if there's a meaningful difference in what investors expect for incremental margins as those become a bigger piece of your overall sales mix? Craig Chamberlin: Yes. I mean I don't think in terms of -- as you mix more towards those, you're going to see a margin dilution from a mix perspective. I would say we'd be able to hold relatively on a product basis, margins kind of in line with what we'd expect historically as you mix towards those product lines. So I don't expect a major mix headwind from that. As we look at it becoming a bigger portion of our sales and our outcomes. I would say, again, there's multiple products in there, and there's multiple mixes that we would go across all the different business units. So I wouldn't say it's a significant headwind that we're looking and we're adjusting for. Operator: Your next question comes from the line of Noah Kaye with Oppenheimer & Co. Noah Kaye: I guess just one related question to that. Because Gio, you talked at the start about the convergence, right, of different disciplines, power, cooling, IT. Historically, we saw a lot of procurement of the different components based off of best point solutions. If that's shifting, can you talk a little bit about how it's shifting the conversations? Who you're having conversations? With who's making the decisions among your customers and how that's impacting your sales cycle? Giordano Albertazzi: Well, certainly, convergence is very important. And as I was saying, it's not just prefabrication, but it's an optimized system. That's why having an optimized system with Vertiv technology is a winner. But we shouldn't think about this as replacing the point-to-point, let's say, the product point type of activity. It is a gradual and partial shift. And it really different players have different degrees of adoption. So if you think about power modules. Those are pretty much becoming a standard in the industry. So you'll see that people will start to buy power modules instead of necessarily going into each and every component inside. It's never black and white, but that's a direction. When it comes to the entire converged system, the entire manufacturing system, SmartRun, well, the interfaces might be slightly different. But again, it's not a totally different breed of players, or people you discussed the engineering, or the transaction. But there is also a [indiscernible] different category of people in the industry that might not have, historically, that type of procurement, or engineering -- or engineering staff and experience. Nor do they need it when someone is capable of providing an already fully optimize pre-engineered converged system and solution. So the market is taking multiple going in multiple direction. Some are partially overlapping. Some are different. So we are very happy about our point products and -- to point product, let's say, type of business. As well as we see integration and convergence becoming a bigger part of the market that we serve. Operator: Your next question comes from the line of Andrew Buscaglia with BNP Paribas. . Andrew Buscaglia: I wanted to touch on -- you made some -- a couple of deals in the quarter, [indiscernible] Any way of framing the size of those or what you paid? And then our deals going forward more like kind of like the smaller bolt-ons, or we see more along the lines of like a purge rate if you were to move forward this year with more acquisitions? Craig Chamberlin: Yes. First off, just to answer the question on side. We didn't disclose any of the size of the businesses. So again, we probably wouldn't refer back to that. I mean, in terms of materiality, we did do some press releases on them, but we didn't give any of the sizes, but if they were materially impactful to us, we would have had [indiscernible] Giordano Albertazzi: Can you repeat the question around [indiscernible] I'm not sure I heard you. Andrew Buscaglia: Just more so, you guys indicated interest in M&A deploying capital towards that this year. Will we see more deals along the lines of like a [indiscernible] right spending-wise or more of these like smaller bolt-on niche kind of acquisition? Giordano Albertazzi: Well, exactly. We -- as you saw us with [indiscernible], when -- it's really about what the value of the asset that we have in front of us. So we have now the reticence in cutting bigger checks when that's needed and what's opportune, let's say, as we have demonstrated. And our balance sheet is certainly very, very strong. And when we see value, we offer value. And value is not just per se, there's value in the context of our long-term strategy and our technology and market growth strategy. So rest assured that we have no -- how can I say, no fixed [indiscernible]. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Gio Albertazzi for any closing remarks. Giordano Albertazzi: Well, thank you, [ Jeannie ]. Thank you very much. And thank you all for your questions and the conversation today. I'm quite pleased with what we have accomplished in the first quarter and how we are positioned as we move through 2026. The entire Vertiv team has executed well, and I'm grateful for the strong partnership we have with our customers, suppliers and partners in general. We are making real progress. But as you've come to know, we have never content with where we are. I am pleased, but I'm certainly never satisfied. We'll continue investing ahead of the market, maintaining our leadership in technology and innovation, and executing with our speed and precision our customers expect from us. I'm confident ever about where Vertiv is headed. The trajectory is strong. The opportunities are significant, and we are well positioned to capture them. Thank you all, and I hope you have a wonderful rest of the day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, and thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to EQT Q1 2026 Quarterly Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Cameron Horwitz, Managing Director, Investor Relations and Strategy. You may begin. Cameron Horwitz: Good morning, and thank you for joining our first quarter 2026 Earnings Results Conference Call. With me today are Toby Rice, President and Chief Executive Officer; and Jeremy Knop, Chief Financial Officer. In a moment, Toby and Jeremy will present their prepared remarks with a question-and-answer session to follow. An updated investor presentation has been posted to the Investor Relations portion of our website, and we will reference certain slides during today's discussion. A replay of today's call will be available on our website beginning this evening. I'd like to remind you that today's call may contain forward-looking statements. Actual results and future events could materially differ from these forward-looking statements because of factors described in yesterday's earnings release, in our investor presentation, the Risk Factors section of our most recent Form 10-K and in subsequent filings we make with the SEC. We do not undertake any duty to update any forward-looking statements. Today's call also contains certain non-GAAP financial measures. Please refer to our most recent earnings release and investor presentation for important disclosures regarding such measures, including reconciliations to the most comparable GAAP financial measures. With that, I'll turn the call over to Toby. Toby Rice: Thanks, Cam, and good morning, everyone. Our historic first quarter results are tangible proof of the differentiated value of EQT's platform. We generated more than $1.8 billion of free cash flow in the first quarter, another record-high for EQT. To put this into perspective, in just 90 days, we generated roughly as much free cash flow as we did during the entirety of 2022, a year when gas prices were over $6. This is a powerful illustration of how we've strategically transformed EQT over the past several years. Our vertical integration through the Equitrans acquisition and our low-cost operating model have fundamentally enhanced the earnings power of this company. That transformation has enabled us to enter this high-price environment largely unhedged, capturing the full upside of market volatility and accelerating our deleveraging plans. With leverage now below 1x net debt to EBITDA and our long-term $5 billion net debt target within reach by year-end, EQT has entered a new chapter, one defined by financial strength, durable free cash flow generation and sustainable growth. Our operational performance remains the bedrock of our financial results. Despite the challenging weather conditions presented by Winter Storm Fern, our teams coordinated seamlessly to achieve production uptime that outperformed our peers by a factor of more than 2x. Given with some minor volume impacts from the storm, production for the quarter came in above the high end of our guidance range. This is a testament to the strong underlying productivity of our asset base, the durability of our infrastructure and the outstanding coordination across our upstream, midstream and marketing teams to ensure our customers had access to reliable energy when they need it at most. Shifting to the macro environment. Recent geopolitical developments once again highlight the strategic importance of U.S. natural gas and energy independence. Recent events in the Middle East have triggered the second global energy shock of this decade. Supply disruptions across the region have pushed global natural gas prices sharply higher. In fact, European natural gas prices nearly doubled following the disruption of Qatari LNG supply and the closure of the Strait of Hormuz. These developments underscore a clear reality. Global energy markets remain highly vulnerable to geopolitical risk. While these challenges are significant, they also reinforce the critical role of American energy and position producers like EQT to help meet the world's growing need for reliable supply. And yet, despite this global volatility, U.S. natural gas prices have remained stable, continuing to provide affordable energy for American consumers. This divergence highlights one of the most important advantages of U.S. natural gas: energy security and affordability. While global markets are experiencing sharp price increases, American citizens and businesses continue to benefit from low-cost domestic supply, thanks to the shale revolution. In fact, in energy equivalent terms, the price of U.S. natural gas today is equal to $16 per barrel of oil, even with record U.S. LNG exports and data center-driven domestic power demand growth. Recent events also reinforced another key takeaway: energy reliability matters. Global buyers are increasingly prioritizing secure and dependable sources of supply, and the United States has emerged as the most reliable LNG supplier in the world. This reliability is becoming increasingly valuable to global customers, and EQT is positioned to benefit from this dynamic. Our LNG contracts position us to be a supplier of choice internationally, providing secure supply to global buyers who increasingly value reliability and energy security, while at the same time providing attractive international market exposure for our investors. In fact, if our LNG portfolio was fully online today, with current TTF and JKM spreads to Henry Hub, our projected 2026 free cash flow would be approximately $6 billion. Positioning the company to materially enhance our free cash flow generation with only 15% of our volumes is a powerful illustration of the value our LNG portfolio could unlock. As global markets continue to prioritize dependable supply, we believe EQT is well positioned to capture demand growth, improve our price realizations and further enhance the durability of our free cash flow generation. This geopolitical landscape reinforces what we've believed for a long time: low-cost, reliable U.S. natural gas is essential for both American consumers and global energy security, and EQT is uniquely positioned at the center of that opportunity. I'll now turn the call over to Jeremy. Jeremy Knop: Thanks, Toby. As Toby mentioned, the company delivered a record first quarter with outperformance across the board. We delivered sales volumes above the high end of guidance into peak winter pricing, while our cash operating expenses and capital costs came in below the low end of guidance due to improved efficiencies. All told, we generated more than $1.8 billion of free cash flow before the effects of $475 million of working capital inflows. As promised, we allocated post-dividend free cash flow to strengthening our balance sheet and retired more than $1.7 billion of senior notes during the quarter. We exited the quarter with net debt of just under $5.7 billion. This accelerated deleveraging has already been recognized by the credit rating agencies, with Fitch upgrading EQT to BBB during the quarter. This milestone further strengthens our brand while mitigating financial risk as we expand our gas sales portfolio. This rapid deleveraging also enhances our capital allocation flexibility. We are well positioned to continue investing in high-return growth projects, build on our track record of base dividend growth, and accumulate cash to aggressively repurchase our shares during times of market weakness. Turning to hedging, the benefits of our opportunistic strategy were on display as we captured nearly 100% of the surge in natural gas prices in the first quarter due to the attractive ceilings on the collars we put in place during periods of price strength in December. As prices have moderated into the spring, we are realizing the benefits with our balance of year hedge book in the money by $180 million. Turning to fundamentals. The global market has tightened meaningfully due to the conflict in the Middle East. Lasting damage to key LNG infrastructure has reduced near-term supply and delayed the timing of Qatar's large-scale expansions. At the same time, Europe is exiting winter with natural gas storage levels at the lowest level since 2022. U.S. LNG exports should be a primary beneficiary in this environment. In the near term, we expect LNG operators will defer maintenance to capture favorable margins, boosting export demand. In the medium term, the risk of an LNG glut in volumes backing up into the U.S. market is effectively gone. This environment also serves as a good case study for our thesis of the asymmetric upside exposure to global natural gas prices that EQT will have through our LNG portfolio. While our LNG contracts are forecasted to generate $500 million in annual free cash flow uplift when they begin in 2030 at the current strip, a repeat of the 2026 level volatility could drive that figure to $2.5 billion. This underscores the significant upside optionality for producers that can access the global markets. Shifting to the U.S. Momentum in natural gas-fired power growth is accelerating beyond prior expectations. Recent announcements and our own discussions suggest upside to our base case power demand growth forecast of 6 Bcf per day, with our initial bull case of 10 Bcf per day looking more like the new base case. This view is informed by the swelling opportunity set in Appalachia with a notable pickup in large-scale power, midstream and data center projects where EQT is positioned as the preferred partner. This backdrop is increasing our confidence in the view that demand pull projects will further improve Appalachian fundamentals through the end of the decade and create substantial high-return upstream and midstream growth optionality for EQT. Turning to the second quarter guidance. After surging production volumes in the peak winter pricing in Q1, we began tactically curtailing volumes this month to optimize price realizations during shoulder season and have embedded 10 to 15 Bcf of curtailments into our second quarter production guidance. Our strategic curtailments act as a form of storage. Keeping gas in the ground brings seasonally low periods of demand and surging volumes above baseline when demand rebounds. This approach allows us to leverage the flexibility of our integrated asset base to maximize value in both peak and trough demand seasons. From a CapEx standpoint, the second quarter represents our peak capital investment period of the year, driven by the timing of growth investments. We expect to see meaningful declines in capital spending into the third and fourth quarters, which should further support free cash flow generation in the back half of the year. In closing, this quarter is a tangible demonstration of the value creation possible through EQT's platform. With an integrated operating model, a peer-leading cost structure and a fortress balance sheet, the transformation of EQT is now complete. Our teams are now busy positioning the business to capture robust and sustainable growth opportunities, which should lock in the next leg of differentiated value creation for shareholders. And with that, we will now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Doug Leggate with Wolfe Research. Douglas George Blyth Leggate: I got one macro and one EQT transformation question, just to pick up on Jeremy's comments there. Toby, I'm always interested in your macro view. Sadly, it seems that with LNG full, the U.S. is back to an incremental cost of supply market, a.k.a. the Permian. The punchline is it seems that gas really hasn't benefited from all the resets that we've seen in terms of domestic demand. So my question is, what can you do to improve your realizations? And more specifically, can you accelerate your access to LNG on international markets given your current plan is post 2030? That's my first one. My second one is specifically for Jeremy. The balance sheet you've talked about often, Jeremy, you've talked about the transformation is complete. So given your inventory depth, why are buybacks the right answer for opportunistic cash flow versus offering EQT as a competitive dividend stock? Toby Rice: Yes, Doug, appreciate the questions. I'll tackle the first set. So when it comes to getting better realized pricing, I think there's a couple of things we think about. One, attracting demand to our backyard I think is going to be really important that will have the impact of strengthening basis, which will benefit our business. We're really excited about the progress that we're seeing. I think if you look at the slide we put out on data center demand, there's a lot of activity happening in our backyard. As it relates to LNG, I think this quarter and what's happening right now around the world just really shows why the strategy that we took to position the company to get exposure to LNG, why it matters, because we see the same dynamic that you're seeing. We see prices around the world rising and there's -- we're not seeing that benefit in the U.S. The only way to solve that is to get exposure to international pricing. So for us, we're proud of the decisions we've made. We're excited to start trading with LNG in the 2030 time frame. As far as accelerating that today, we were actually talking about that this morning, but I think getting more exposure to that sooner, you're already taking into account the spreads and you're paying for that. So it's not much of an opportunity in the short term. But we're excited about how we've positioned the company in the long term. Jeremy Knop: Doug, on the second part of your question, look, our base dividend has been and will continue to be a key part of our capital allocation strategy. That is something we intend to grow annually for the foreseeable future. But when we step back and think about what creates the most value in the long term for shareholders and what compounds capital, it's not necessarily the dividend. We see the most value upside certainly on an after-tax basis for shareholders being more so in buybacks, but also bringing back top line growth to the business. And in a capital-intensive business, we need capital to be able to invest and do that. And so what you're seeing us do this year through our midstream growth projects, I think we continue to search for opportunities, and I think we're really finding some phenomenal ones right now. We plan to lean into those in the years ahead. And then I think at some point too there will be an element of upstream growth that I think we bring back as the low-cost producer, some sort of mid to low single-digit level of production growth. But we need to see that sustainable structural demand show up first. And that's what we are working through our midstream strategy to help enable and create and tie into. And I think when you have a growing top line in a business, both hopefully with price structurally over time, but also with production growth, that creates an ideal situation to be buying back the stock along the way and creating outsized returns over the long run. Operator: Your next question comes from the line of Kalei Akamine with Bank of America. Kaleinoheaokealaula Akamine: My first question is about data centers. So more and more projects are getting shovel-ready, they need gas. You were having supply conversations. How would you guys frame up the near-term opportunity set in terms of scale? And also curious if terms are evolving beyond the [indiscernible] deals that we've seen so far? Toby Rice: Yes. So a lot of opportunities in our backyard, as we mentioned on the call on the prepared remarks. When we look high level just what's happening in basin, there's been some big announcements in Pennsylvania, Ohio, West Virginia, Pennsylvania. NextEra has come out and said that they're going to look at putting 10 gigawatts. We've got that big facility in Ohio that just got announced at Portsmouth. That's over 9 gigawatts. And then West Virginia has come out recently with their 50x50 plans, installing 50 gigawatts by 2050 in West Virginia. So these are big plans that are being put out in this area. So we're really excited about how Appalachia is positioned to be the home for a lot of these projects. And then for us, what that translates to EQT specifically, we've got a robust pipeline of these opportunities that are currently being negotiated. I mean we're looking at multiple Bcf a day of supply opportunities. And other opportunities range from gathering to gas supply. The gas supply opportunity, I think it's important for people to know, we are focusing these opportunities around our asset base. So that should set the table for some pretty good returns, while also being able to offer low cost of service to these customers because we're leveraging our existing asset base. So I think all these -- a lot of opportunities in the air right now, I think that they're going to start landing in the second half of this year. And it's a really -- it's a really great setup and we're excited about how we're positioned. Jeremy Knop: Yes, Kalei, I think to put some more numbers to that too, if you look at the projects we've announced so far between our midstream projects and the other data center projects, you're, depending on utilization levels, call it, 2 to 3 Bcf per day of demand growth that we've already partnered with other parties to help underwrite. And then if we look at the other midstream projects that we are in discussions with people about that we think have a reasonable chance to come into fruition, I mean, that number could increase to 8, 10 Bcf a day potentially of additional egress and pull out of Appalachia for gas. Some of that goes more short haul into Ohio, as we talked about, but some of it also more down to the South and Southeast markets. So I think the opportunity for producers, specifically in Southwest Appalachia, what we think of as like the gateway to the basin, is really tremendous. And so going back to Doug's question, as we think about capital allocation, seeing that opportunity potentially coming around the corner and seeing that demand show up in the next 2 to 3 years is a phenomenal opportunity for us to reinvest and potentially grow structurally, sustainably and create a lot of value through that. Kaleinoheaokealaula Akamine: I appreciate that. My second question is on LNG. You guys have gone beyond pure financial exposure here. As you wrap your head around the physical business, are you seeing margin opportunities that maybe have been overlooked by others? And through your conversations, what kind of contract terms are you seeing being favored by buyers at this point? Jeremy Knop: Yes. I mean I think -- so we think of our LNG business and that book being built out similar to how we had the book on our just base domestic gas business where we have some deals under longer term and some under short-term tenors. And then a little bit in the spot market too. I would expect most of that to be index-based. And then there's potential for structure around that. But look, you can also financially hedge that with structure just like we do domestically in the financial market. So I think it will be a combination of all the above. But we really envision that portfolio, I think, geographically being split pretty equally between Asia and Europe. But it's something that we will build out over the coming years, just like we do with our domestic gas book. Toby Rice: Yes. And I'll just follow up with just one point here. I don't think these opportunities are being overlooked by our peers. I just think they're out of reach. And I think you need to have a large-scale, high-quality business like EQT to be able to play in this market and do it in a balanced way. I mean for us to be able to take -- to reach a level of scale to be effective in this market, but still not be betting the farm on LNG, this is still a nice part of a diversified gas portfolio, only companies of our scale, I think, can achieve that. Operator: Your next question comes from the line of Arun Jayaram. Arun Jayaram: Jeremy, maybe for you, I was wondering if you could update us on the progress on some of your large-scale supply deals. I'm thinking Homer City shipping port and the Duke Energy and Southern Company deals, I think it's 2.6 Bcf a day of supply in total. I think we're seeing early construction at Homer City, but would love to get an update on both of those key projects. Jeremy Knop: Yes. Actually, a lot of really great progress on both. I mean the guys at Homer City are putting a lot of steel up and really moving that project forward. So we're pretty optimistic about the timing there. There's been a lot of good progress lately on shipping ports too with the offtake. So we're very positive on that, both in terms of timing and also just the gas supply. But again, those aren't our projects, so we're going to hold off giving like specific updates. I would look towards the developers on both of those for more specifics. But look, we remain a committed partner to anyone trying to develop anything in the region, both to midstream companies, to data center developers or power developers. And I think that's why you're seeing us [ laying ] so many demand projects. As it relates to the in-market like power plants being built down in the Southeast, our understanding is a lot of that will probably come online in like between 2029 and 2031. So I think there will be a ramp post that Southeast supply enhancement project on Transco coming online. It won't immediately be consumed, but it will debottleneck the Appalachian markets and bring [ MVP ] up to full capacity. But like any of these projects, it takes multiple years to get it built. So it can't happen overnight. Unfortunately, some of this has to happen sequentially given the uncertainty of timing for completion of these projects. But everything is moving ahead, we remain opportunistic. And I think the opportunity set for more of these projects to get built is today as big as ever and I think continuing to accelerate. We're feeling that in our day-to-day conversations. And I'd say the other thing too that's really changing, it's less so I think developers and the sort of upstart outfits trying to put these projects together, but it's increasingly really well-capitalized names who you would recognize who are sort of playing catch-up but I think can put real dollars to work and give us a lot more confidence that a lot of this demand ends up showing up. So we're increasingly excited by it. Arun Jayaram: Yes. GEV had some really strong orders though. I know they raised their expectations on inbound 110 gigawatts from 100, so obviously, some good things happening in power. My follow-up, Jeremy and Toby, is just to talk a little bit about your discussions around LNG offtake. You have 6 million tonnes of capacity post 2030. How would you characterize the nature of those discussions post the war in Iran? And would it be your expectation that you could sign some offtake in this calendar year? Toby Rice: Yes. So the reaction with Iran, I think, reinforces the reliability of U.S. supply. And that's certainly going to -- it was valued before, I think it's even more valued now. So we think that the interest in U.S. LNG is only going to continue to grow. We do hope to see that the international community steps up and signs up for what we view as 6 Bcf a day of available offtake from these facilities out on the Gulf Coast area. So there still is opportunity for the market to give more exposure to U.S. LNG. And for us, with the international community, I mean, we're going to be building a portfolio. I think just you're going to see some of those agreements probably be timed closer to when that offtake will become available. So I expect those agreements to be more of a focus sort of in that '28, '29 time frame. Jeremy Knop: Yes. I'd just remind you too, Arun, and I think anyone who's just in the market looking for offtake, the international customers who have signed up for this capacity, whether it's out of Europe or out of Asia, while you see chaos in the global markets, uncertainty over security physical volumes, but also just price uncertainty, those offtakers are buying gas at Henry Hub plus 115% today. So they -- by buying U.S. gas, like they are effectively insulated from what's going on in the world. And so I think the relative attractiveness, both for existing offtakers but also those still looking for offtake, I think the attractiveness of shifting to the U.S. just because you do have that inherent price security, being able to buy effectively at the same price that U.S. consumers are able to buy at, is really unique. And you're not going to find that anywhere else in the world. Operator: Your next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta: We spent a lot of time on the last call just talking about Winter Storm Fern. But now with the clarity of the numbers and how robust the trading and marketing effort was, maybe, Toby and Jeremy, you could just talk about lessons learned and confidence about the ability to replicate this in another period of high volatility. Toby Rice: Yes. This is something that we do believe we are going to replicate because this was very well orchestrated. I'd also -- I mean this all starts with operations. The entire team across the board on the commercial team did a fantastic job. But it starts with operations. The playbooks that we put in place that really the planning on this started in the summertime are things that we're going to be able to put out there and repeat that. It's hard to see that performance is going to get even better, but just look at how our performance versus our peers, I mean, we had basically half the downtime than peers did, but there will be some opportunities. But the big part for us is really just continuing to keep the teams in great collaboration and coordinating across. And this is something where our technology platforms really bring that type of sustainability as we continue to scale this business. So we'll continue to look for ways to streamline communications, and that's a normal part of our business in this large-scale organization. Jeremy Knop: Yes. I think what's also unique this time and seeing the stress in the system is it now that we have the integration with midstream complete, and we have effectively controlling visibility of the molecule from the wellhead through our own systems for 90% of our volumes down to the end markets, it allows us to have a lot more accountability and visibility into like, if something goes down, we can figure out what's happening really quickly. Historically, a lot of our traders would find themselves in situations where all of a sudden volume is lost and volume maybe they presold and they're trying to figure out where the volume is balanced, they're not able to trade and capture arbitrage. They're trying to just minimize imbalances on the system, avoid OFO penalties. So the amount of collaboration this time, the ability to identify issues in the field and get them resolved within hours, and allow the traders to do what they're there to do, and that's trade and create value, I think it was on full display this time. But again, it's not just because the trader is doing well or just because ops are doing well. It's a collective effort of the whole team working really well together, and that's what's important. Neil Mehta: Very clear. Look, you guys got a ton of inventory at this point. And I know that the A&D market, it felt like the bid-ask was pretty wide and it got overheated there for a period of time. Are there opportunities to continue to opportunistically bolt-on stuff? Or is this really just an organic story given all the stuff you guys talked about earlier? Jeremy Knop: Yes. I mean, look, we were intentionally a first mover in M&A. We thought there would be a snowball effect to that and the best assets would go first. I think what's left is of much lower quality. So look, we're always opportunistic. But we see when we look at the opportunity set and where to invest capital right now, it's organically, and gets compared to where the A&D market is, I think our stock is a much better value candidly. And I think the organic reinvestment opportunity set is a significantly higher return on capital than putting cash into an acquisition of, I think, what would be an inferior asset. So again, we're going to remain opportunistic and look around as we always have. But I think the odds of something happening in the A&D space are significantly lower. Operator: Your next question comes from the line of James West with Melius Research. James West: Toby, I wanted to quickly ask about if you're looking at any opportunities outside of Appalachia at this point. There's certainly international shales where you have tons of expertise you could provide, I'm thinking [ Vaca Muerta ] which is probably 10 years on the Permian or so, maybe 7. But any expansion opportunities outside of your current market that you're at least considering at this point? I know you guys have a ton on plate and there's a ton of growth in the domestic market. But just curious how you're thinking about that. Toby Rice: Yes. Our view is pretty simple. We've got a massive asset base here in Appalachia that we believe will give us the ability to connect our gas to premium markets domestically around world. And the key for us to unlocking that asset base is going to be to capturing that demand. So I'm more focused on looking for demand capture opportunities as opposed to supply opportunities. So we're staying focused on what we have right now. And it's just -- it's all the great work we've done over the last 5 years, bolting on and beefing up this asset base, is where our focus is right now. James West: Okay. That's very clear. And then maybe a quick follow-up on the LNG strategy. I think you addressed some of this earlier, but we clearly have a tight end of the market and changing dynamics there. Pricing has moved. Anything you think you would move on earlier than that time period you've already committed to getting into LNG? Jeremy Knop: I mean I think, as Toby said earlier, I mean, if you're going to take out capacity sooner, you're effectively buying it at the current strip in spread. So it's not like you're able to buy it at the same terms. Look, if we have the opportunity, we'd obviously take advantage of it. It would be free money. But I think the odds of that are pretty low. Operator: Your next question comes from the line of Bob Brackett with Bernstein Research. Bob Brackett: I'm curious around your comments of attracting demand to your backyard. And one way to do that is simply commercially you're low-cost operator, you're well plumbed up there. And the other is with some judicious midstream capital. Can you talk about what might be inbounds and out of bounds for the source of capital projects you've put to work to attract that demand? Toby Rice: Yes. I would say what's inbounds right now is our goal is to make sure that we're giving customers the best energy. That's the lowest cost energy, most reliable. And the key for us doing that is leveraging our existing asset base, the over 3,000 miles of pipeline infrastructure we have, and building off of that and extending that to be able to service these new the demand hubs that we're talking about. So I'd say that's really our big focus. And I'd say we'd stay in that zone until we've exhausted all the opportunities and then we could look out more broadly. But right now, just given the opportunity set we have in front of us, the cup is full and now we're just looking to land some of these big opportunities. Operator: Your next question comes from the line of Sam Margolin with Wells Fargo. Sam Margolin: First one is on the shape of the CapEx that you referenced. We're at a peak in 2Q for the growth side. Are there going to be any immediate returns with the start-up of those projects, whether it's in sales mix and realizations or costs that we can expect? Jeremy Knop: No, I wouldn't say it necessarily correlates with that. I think it just depends -- it comes down to the lumpiness of large-scale operations and just the timing of some of our growth capital. Sam Margolin: Okay. Got it. So nothing in second half to point to. And then just on the operational side, within liquids, we got this inbound. There was a little bit of a mix shift from C3 to ethane away from guidance. Was that just market-driven, natural gas price contracts? Or was there anything else to call out that's worth noting? Jeremy Knop: Yes. I mean just slight tweaks based on GPM assumptions we're making. But I wouldn't say there's anything material to read into on that one. Operator: Your next question comes from the line of Lloyd Byrne with Jefferies. Francis Lloyd Byrne: Toby. I just wanted to know if you give me an update on the regulatory standpoint with U.S. infrastructure, whether electricity pricing is finally going to get us over the home there with respect to probably the Northeast? Toby Rice: I hope that perm reform happens, and I think it needs to happen in the near term, so in the next few months. I do think that there's a lot of focus on this. And I think the pressure is only ratcheting up on our leaders to take action and create a win for themselves going into midterms, that they're actually doing something the lower Americans' energy bills that have been up over 40% since 2020. So -- and I think that -- we saw just a couple of days ago, Trump put out the executive determinations that just continue to reinforce the critical need to get energy infrastructure built. So all the signals are there and I think the issues going on around the world, I mean, our energy independence, the value of that is on full display with international prices being up $10 and the natural gas price here in the U.S. not moving. We've insulated Americans, but we can't take that for granted. We need more infrastructure to make sure we can preserve this really valuable opportunity we create for Americans. The American energy advantage is sort of at the end of its rope unless we get more infrastructure built. So I think people are recognizing this, but I hope they act. Francis Lloyd Byrne: Yes. It feels like we're finally making some progress there. Operator: Your next question comes from the line of Phillip Jungwirth with BMO Capital Markets. Phillip Jungwirth: Last quarter, you guys talked about industry having limited Ohio Utica dry gas inventory left than the last month. We saw a 9-gigawatt gas plant announced to power data centers in Southern Ohio. So just as you see projects like this or others in the Midwest announced, how do you see these projects securing gas? And is there an appetite to either expand existing pipelines? Or how much momentum do you think there is around proposed new builds right now? Toby Rice: So we think we do see that as a big source of some of the gas supply opportunities we're looking at. And yes, while our view is the dry gas portion of the Utica play in Ohio may be light, all it takes to get back to deep, high-quality inventory in the Marcellus region in Pennsylvania and West Virginia is a 20-mile pipeline. So that is a very short bridge to build. And these are going to be some opportunities for us to be able to connect to those opportunities. Jeremy Knop: Yes. We see that Ohio market and that Clarington market as one of the greatest opportunities for us. I think there's a lot of low-risk pipe builds of significant size backfilling those Utica dry gas declines. But also I think a lot of the demand maybe that gets built in Ohio or some of the egress that gets built out of that market through both brownfield or also greenfield expansion. So again, I think if you're sitting in Southwest Appalachia with a lot of inventory like EQT is, you're kind of first-row, beachfront real estate, get ready for that theme to really pick up. But that's something, as we said last quarter, we're super excited about based on the conversations we're having. Phillip Jungwirth: Okay. Great. And then one of the things you haven't talked about in the past is distributed power. It's smaller scale than what you've announced to date, but just wondering how you view this demand opportunity. And is it something that EQT could look to partner with or is it just adding another tool to the toolkit? Jeremy Knop: Yes. Look, I think there are so many companies and there's so much capital chasing that right now. I'd say it kind of falls in the same vein as like LNG and some of the other things that are tangential to our business. We looked at it all, we've studied it. And it ultimately comes back to do we as EQT have an edge? Is the need capital? Is it expertise? Is it equipment? I think what we come back to is there's plenty of money to finance it, return is inferior, I think, to what we can generate just being a partner to those projects in our base business, and we can create a lot of value by doing what we do best. So look, we see our position in the market as a partner both to midstream companies to power companies to some of these developers of distributed power, the data center developers. I mean we're really an ally and partner on everybody. We're not really a competitor with anybody. We're just trying to help enable and to facilitate all that gas demand to get built. So I think that's really one of the key reasons we're seeing so much opportunity right now. Operator: Your next question comes from the line of Josh Silverstein with UBS Financial. Joshua Silverstein: For the 2Q guide, you said you have about 10 to 15 Bcf of strategic curtailments and it kind of acts like storage. I was curious what kind of price point drove this decision? Maybe how much more you could curtail? And then potentially if prices go back the other way, how much more could you potentially say bring it out of your synthetic storage? Jeremy Knop: Yes, good question. It changes depending on the season and the shape of the forward curve. We make those decisions really through the lens of a marketer and trader rather than necessarily operations in today's world. And so it's informed by a lot of different factors. We can curtail a lot, a whole lot more than what we are planning to curtail based on the guidance we gave. We just don't see the need for that, at least at this juncture. There's a chance that later this year in the fall, we could choose to shut in a lot more. Economically, it's a lot easier to shut in large quantities right ahead of winter because you have so much contango in the curve, and the value and effectively storing gas in September, October is a whole lot higher versus storing it going into summer where the forward curve for the next 6 to 9 months is flat. So look, we adapt and evolve with the market, but that's kind of the framework through which we think about it. Joshua Silverstein: Got it. Okay, and that kind of goes to the next question I had, because I was curious if you had strategic curtailments planned for the back half of this year. Because the number of TILs is kind of even in kind of the mid-30s number throughout the course of this year, but the production guide is much higher for the first half versus the back half of the year. So are you planning more of these curtailments? And this is kind of the game plan going forward where first half volumes might be higher than second half volumes? Jeremy Knop: I wouldn't say it really comes down to planning for curtailments. I mean our ops plan, we map that out regardless of things like curtailments. Curtailments are what we consider to be an optimization action. I mean even if we were in growth mode, from like a base ops standpoint, we would still choose to curtail based on the factors I mentioned previously. So they're related but also not dependent on each other. . Operator: Your next question comes from the line of Jacob Roberts with TPH. Jacob Roberts: Jeremy, we spent some time on data centers, but I'm just curious, when I look at Slide 16, can you talk about how internally you guys derisk some of those numbers as to what might actually happen? And then you spent quite a bit of time talking about the partner capability of EQT, I'm just you could remind us what the guardrails are on that in terms of the type of counterparty risk you're willing to take or size or scale on the potential project. Jeremy Knop: Yes. I mean, I guess, Slide 16 first, this is data that we bought recently as we're analyzing where these projects are and trying to understand what markets we're seeing the most pull. I mean, look, we don't really see it is our role to sort of derisk this. I think the best thing we can do to help enable these projects to go forward is be a reputable, highly creditworthy, reliable supplier of gas. And the best thing we can do is provide a simple, comprehensive solution, which we, from our platform, see as being one where we can provide midstream if it's needed, we can provide the gas supply, we can manage daily gas volumes and balancing. And we can participate in owning a midstream project. We can let someone else build the midstream and just manage the gas and capacity. It doesn't really matter that much to us. I think for us, it's really about helping enable creating that demand and then tying that back to our operational and production base so that it effectively stimulates growth for our base business in the years ahead. So again, I think taking that approach and being a flexible partner is really, like I said before, what's driving a lot of the inbounds we have right now. Jacob Roberts: I appreciate that. And Toby, I think you briefly mentioned you see the potential for long-haul egress needed out of the Northeast maybe down to the Gulf Coast. And I think we generally agree as we look across the other basins and their staying power in terms of volume growth. So I'm curious if those conversations are happening now. And potentially, if you could opine on whether or not you think the cost of those types could be borne by the end user? Or do we see something similar to in the past where you guys might have to pay for that? Toby Rice: There are conversations right now about some of those pipelines. And then as far as who will bear the shipping rate for those, I think you look at the open season we had with MVP Boost as an indication of the market that we're in. MVP Boost Utility signed up for 100% of that. And it did not require operators to sign up and take on those liabilities. We think that we're in a demand pull for these type of projects. And certainly, the demand that's being created in the Gulf Coast region, people are waking up and looking for where am I going to get the supply and how can we get the infrastructure built to make sure reliable supply is delivered? Operator: Your next question comes from the line of Gabe Daoud with Truist. Gabe Daoud: Maybe just a follow-up on that last question. Maybe from your perspective, what's the latest on the Borealis project? Is there still an open season? Or any kind of update you could share as far as incremental egress side of the basin? Jeremy Knop: Yes. I would just call that one of many projects that is in the works in counterparties who we are in discussions with. In any of these pipes, I think the answer is going to be just it depends on who the shippers are and what EQT's role is. On many of these pipes, I think it's probably reasonable to assume that we probably build back into basin from certain supply hubs and gather the production and deliver it there. And there is a host of other companies either that are looking at projects like the one you mentioned or other brownfield expansions of existing interstate pipes that would probably take care of things from there. But again, it's a lot easier to get those built when you have a business like EQT on the supplying end of those pipes. If you even just look at the Southeast supply enhancement project on Transco expansion that was needed there, that was effectively paired up. I mean the shippers -- the name shippers on that pipe effectively paired those agreements up with the gas supply deals we did with them to enable that to happen. And again, it goes back to what I've said a couple of times already, I mean, our goal is to be a partner of choice, whether that's with utilities, midstream companies, power companies or whoever it might be -- not really a competitor. We're helping trying to play our role in helping this market develop. And I think whether it's Borealis or any of these other pipes in discussion, we're going to continue playing that role the best we can. Gabe Daoud: Got it. That's helpful. And then just a quick follow-up, I think you alluded to this earlier, but just around growth expectations and maybe what governs that. You have some pretty big projects coming on '27 [ and '28] -- when we can get a little bit of that growth wedge materializing in those? Toby Rice: Yes. The midstream -- the growth for -- CapEx growth on midstream, I mean that's in progress right now. And I think we have visibility through '27, '28, where these projects will ultimately come online. The conversations we're having right now, the opportunities we have would allow us to extend that runway in that '28 through '30 time frame. And then that's been the big focus right now on the midstream side, and that will create optionality for us on the upstream side if and when we decide that makes sense. Operator: Your last question comes from the line of Leo Mariani with ROTH. Leo Mariani: I just wanted to follow up a little bit on your guidance here in 2026. So obviously, great start to the year, very, very strong volumes here in 1Q. Also your second quarter guide, while production is down a little bit, also looks very strong. Just relative to kind of your full year guide, certainly starting to make maybe the rest of the year look a bit conservative. You did talk about some more potential shut-ins during the fall to capture that winter premium, but certainly it seems like you guys are trending pretty well versus the guide at this point. So should people think that you might be a little towards the higher end of the range on production here for the year? Jeremy Knop: Yes. Look, I think 2 months after setting our initial guidance, in our view, it's a little early to update something like full year guidance without a material change otherwise. But look, I think the business is humming as evidenced by our Q1 results. I think if there's a reason to update, we'd probably look typically to do that by midyear. But all else equal, yes, I think we're at least at midpoint of guide so far through the year. And as we see how the market develops and the likelihood of curtailments this fall, we'll adjust accordingly if it's merited. Leo Mariani: Appreciate that. And then obviously, I would love a discussion on the macro here. Gas market has been a little bit weaker of late. Liquids markets have been robust. Does EQT see any optionality of trying to maybe shift activity to slightly more liquids-rich areas? Is that something you guys might consider here? Toby Rice: Yes. I mean just so you understand how our operations scheduling works, I mean, we developed the most economic projects first. So if there's opportunity for us to develop more liquids, that's already been taken into account. Just given the size of our asset base, it's going to be hard for us to see -- to materially change our liquids mix in our production portfolio. But it is something that is taken into account in our normal operations. Sorry, operator. Operator: That concludes our Q&A session. I thank you all for joining, and you may now disconnect. Everyone, have a great day.
Operator: Ladies and gentlemen, welcome to the Old National Bancorp First Quarter Earnings Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months. Management would like to remind everyone that certain statements on today's call may be forward-looking in nature and are subject to certain risks, uncertainties and other factors that could cause actual results or outcomes to differ from those discussed. The company refers you to its forward-looking statement legend in the earnings release and presentation slides. The company's risk factors are fully disclosed and discussed within its SEC filings. In addition, certain slides containing non-GAAP measures, which management believes provide more appropriate comparisons. These non-GAAP measures are intended to assist investors' understanding of performance trends. Reconciliations for these numbers are contained within the appendix of the presentation. I'd now like to turn the call over to Old National's Chairman and CEO, Jim Ryan for opening remarks. Mr. Ryan? James Ryan: Good morning. Earlier today, Old National reported first quarter 2026 earnings that exceeded our internal expectations and analyst estimates. We carried strong momentum into the year and our performance in the first quarter reinforces our confidence in the full year plan. This quarter demonstrates disciplined execution as we have reliably delivered quarter after quarter. We delivered robust loan growth, powered by continued strength in our core deposit franchise and disciplined funding management in a highly competitive market. We controlled expenses and generated strong fee income, which helped offset net interest income pressure from typical seasonality and the recent sub-debt issuance. Credit performance remains solid, supported by healthy liquidity and capital levels. We also acted decisively on capital returns, repurchasing shares during the quarter, including reducing auto Bremer's trust position in Old National, and we intend to deploy the remaining authorization over the course of the program. Bottom line, we are executing and we expect to keep building from here. Our priorities remain clear: drive organic growth and return capital to shareholders. Organic growth starts with talent, and we are investing accordingly. We recently announced a strengthened commercial leadership team, promoting proven internal leaders and adding experienced bankers from several super regional institutions. Our team is focused every day on winning new clients and deepening existing relationships and building the next generation of bankers. Our commercial pipelines are at record levels, and our talent pipeline is as strong as it has ever been. We are also accelerating efficiency and scalability through technology and AI investments supporting positive operating leverage. As a result, we delivered a record adjusted efficiency ratio that remains in the top decile of our industry. On the operating environment, the quarter brought higher for longer rate outlook and continued industry uncertainty. Old National is built for this backdrop. Our balance sheet remains neutral to the short end of the curve, our granular low-cost deposit base helps contain funding costs and our strong underwriting and straightforward community banking model positions us to perform through volatility. Importantly, nothing we are seeing changes our outlook. Loan pipelines are at record levels. Momentum is building, and we remain confident in our full year expectations. To close, we're off to a great start in 2026, and we're executing against our commitments. Our focus remains on organic growth and disciplined capital return. This is not a time where we need acquisitions to achieve our objectives. I want to thank our team for delivering a strong quarter and for staying relentlessly focused on our clients. With that, I'll turn the call over to John to walk through the quarter's financial results in more detail. John Moran: Thanks. As Jim mentioned and as summarized on Slide 4, we delivered another strong quarter and a solid start to the year, reflecting continued momentum in organic growth, disciplined expense management stable credit performance and increased capital return with robust capital levels. . Beginning on Slide 5, we reported GAAP 1Q earnings per share of $0.59. Excluding $0.02 of merger-related expenses and a noncash expense associated with the final distribution of a legacy First Midwest pension plan, adjusted earnings per share were $0.61. Results were driven by better-than-expected loan growth and fee income along with well-controlled expenses. Credit remained stable with less than 20 basis points of non-PCD charge-offs. Our profitability profile as measured by return on assets and on tangible common equity remain top decile versus our peers. Capital finished the quarter with CET1 over 11% and we grew tangible book value per share, 6% annualized and 11% year-over-year despite absorbing the majority of Bremer onetime charges, better-than-expected balance sheet growth and returning capital to shareholders in dividends and share repurchases. Specifically, during the first quarter, we returned $151 million to shareholders. On Slide 6, you can see our quarterly balance sheet trends, underscoring strength in our liquidity and capital positions. Our loan-to-deposit ratio remained 89% and the CET1 ratio is comfortably north of 11%. Again, we compounded tangible book value per share year-over-year despite the impact of the Bremer close merger charges over the past year and the increased pace of capital return. We repurchased 3.9 million shares during the current quarter and 6.1 million shares over the last year. With dividends and repurchases, our combined payout ratio was 64% of 1Q adjusted net income to common. As we've stated in the last several quarters, the best investment we can make today is ourselves. On Slide 7, we show trends in earning assets. Total loans grew 8% annualized from the last quarter, led by 16.9% annualized growth in C&I. Production was diversified across our commercial book and the next few quarters should be supported by record high pipelines of $5.5 billion, up nearly 14% from year-end levels. The investment portfolio was essentially unchanged from the prior quarter with portfolio purchases offset by changes in fair values. We expect approximately $2.4 billion in cash flow over the next 12 months. Today, new money yields are running about 83 basis points above back book yields on securities. Strong loan growth, ongoing repricing across both loans and securities and continued deposit pricing discipline supports stable to improving net interest income and net interest margin over the course of 2026. I would point out that the first quarter was impacted by 2 fewer days, our sub debt issuance in late January and the spread dynamics inherent in this quarter's loan production, which was skewed decidedly toward near investment-grade floating rate C&I. Moving to Slide 8, we show trends in deposits. Total deposits increased 4.2% annualized, primarily driven by commercial and retail growth and partially offset by seasonally lower public funds balances. As a reminder, 1Q is the low point for our public funds deposits with those balances typically rebuilding over the second and third quarters. Noninterest-bearing deposits declined slightly to 23% of total deposits from 24% in the prior quarter, partly reflecting the seasonal factors I just mentioned. Despite remaining on offense with respect to client acquisition in a competitive deposit environment, we were able to decrease total deposit costs by 8 basis points and lowered interest-bearing deposits and even better 14 basis points linked quarter. We achieved an approximate 93% beta in our exception priced book in conjunction with the Fed cuts in the fourth quarter. These actions resulted in a spot rate of 170 basis points on total deposits at March 31. Overall, our deposit strategy performed as we expected, and we successfully achieved the down rate beta that we had targeted for this rate cycle. Slide 9 shows our quarterly income statement trends. As I mentioned earlier, adjusted earnings per share were $0.61 for the quarter, and our profitability remains peer leading. Moving on to Slide 10, we present details of our net interest income and margin, both of which reflect my prior comments around day count, the nature of this quarter's loan production and the impact of our sub debt issuance. You'll note that we remain neutral to short-term interest rates, and we have a total of nearly $8 billion in fixed rate loans and securities expected to reprice over the next 12 months. Slide 11 shows trends in adjusted noninterest income, which was $122 million for the quarter, exceeding our guidance. While most of our fee businesses performed in line with our expectations, we again saw better-than-expected performance within mortgage despite typical seasonal patterns in that business and within capital markets. In both cases, this was driven by the mid-quarter dip in rates. Continuing to Slide 12. Adjusted noninterest expense was $354 million for the quarter. Run rate expenses remained well controlled, and we generated positive operating leverage, both quarter-over-quarter and year-over-year. We reported a record low 46% adjusted efficiency ratio, and we have now realized 100% of the $111 million of annual run rate cost saves that were anticipated with Bremer. On Slide 13, we present our credit trends. Total net charge-offs were 26 basis points or 19 basis points, excluding charge-offs on PCD loans. Criticized and classified loans increased $113 million this quarter as Bremer loans transitioned to Old National's asset quality framework consistent with our due diligence expectations. Legacy Old National upgrades partly offset this increase. Nonaccrual loans to total loans decreased modestly, the fourth consecutive quarter of improving performance trends due to active portfolio management. The first quarter allowance for credit losses to total loans, including the reserve for unfunded commitments was 122 basis points, down 2 basis points from the prior quarter, primarily driven by charge-offs on PCD loans and loan growth in lower risk portfolios. Consistent with the fourth quarter, our qualitative reserves incorporate a 100% weighting on the Moody's S2 scenario with additional qualitative factors to capture global economic uncertainty. Lastly, given the continued focus on loans to nondepository financial institutions, we'd again like to emphasize that our exposure is de minimis. All said, MDFIs are approximately 1% of total loans all are performing and like other businesses that we bank most are long-standing client relationships. Slide 14 presents key credit metrics relative to peers. As discussed in past calls, we've historically experienced a lower conversion rate of NPLs to NCOs as compared to our peers, driven by our approach to credit and client selection. That continues to be the case, and we remain comfortable around the credit outlook. On Slide 15, you can see our capital position at the end of the quarter. Regulatory ratios in TCE were stable linked quarter as strong retained earnings were offset by the robust quarterly loan growth, share repurchases and merger-related charges. Still, tangible book value per share was up 6% linked quarter annualized and 11% year-over-year. Our peer-leading profitability profile continues to generate significant capital, which opened the door for capital return late last year. As previously mentioned, we repurchased 3.9 million shares of common stock during the first quarter and have $383 million remaining under our program. Lastly, of note, while not yet finalized, we would clearly expect a capital benefit under the proposed capital rule changes. This would mainly come from reductions in RWA treatment within our mortgage book and changes to the treatment of unfunded commitments over 1 year. Obviously, these changes, if finalized, could present meaningful capital optionality. In any case, we feel confident in our plans to continue to execute on our buyback plan, which runs through the end of February. Slide 16 includes our outlook for the full year 2026, which is unchanged from our prior guidance. We believe our current pipeline supports full year loan growth of 4% to 6% and based on the results of the first quarter, we suspect we may trend to the higher end of this range. We anticipate continued success in the execution of our deposit strategy and expect to meet or exceed industry growth in 2026, generally in line with our asset growth. Our NII guidance remains unchanged, and our balance sheet remains neutrally positioned to short-term interest rates. Obviously, the exact path of NIM and NII in 2026 will depend on growth dynamics the shape of the yield curve, the absolute level of rates in the belly of the curve and the competitive landscape, but our base case outlook assumes the Fed has done for the balance of this year and that the 5-year, which has been volatile year-to-date, stabilizes at about current levels. We expect our fee businesses to perform well, supported by a robust loan pipeline that is driving capital markets activity, along with continued momentum in our wealth management and brokerage businesses. To that end, we believe we would trend towards the higher end of our full year fee income guide. Expense guidance is unchanged despite a lower-than-expected outcome in the first quarter. but this is due to a robust talent pipeline and our expectation of continued investment in operational excellence. As a reminder, second quarter includes normal seasonal factors such as merit increases. Our expectations for credit and income tax rates are unchanged. In aggregate, you'll note that we expect full year results that yield 15% plus growth in earnings per share and again, feature positive operating leverage with peer-leading profitability good growth in fees, controlled expenses and normalized credit. To close, the first quarter sets the tone for the rest of 2026, and we are on the front foot. We intend to stay there. Organic loan growth was strong and pipelines are healthy. we maintain a granular low-cost deposit franchise and our credit book remains stable. That gives us the flexibility to invest in ourselves in talent and in capabilities while continuing to return capital to shareholders. As Jim said at the top of the call, Old National enters the balance of 2026 with good momentum and added conviction in our ability to execute. With those comments, I'd like to open the call for your questions. Operator: [Operator Instructions] And our first question comes from the line of Scott Siefers with Piper Sandler. Robert Siefers: John, I was hoping you could please walk through sort of the major drivers of NII momentum going forward. I know you touched on the seasonality in the first quarter and the impact of the sub debt issuance. But just that because I think the year started a little weaker than at least the market had expected those idiosyncratic factors notwithstanding. But you kept the guide, I think the quarterly NII will need to average about 5% higher through the remainder of the year to get to the midpoint. So just sort of what gives you confidence in the guide and what are the major puts and takes you see. John Moran: Yes. So obviously, I think, first and foremost, we've got a more cooperative yield curve today than what we had on average for the first quarter. So that will be a helper -- and then we've got $5.5 billion sitting in the pipeline, up 14% year-over-year, and we feel really good about the growth outlook. And what's driving that is a little bit more balanced in terms of CRE versus C&I than what we saw in the first quarter. So I think the spread implications of that are favorable to us as we look forward into 2Q, 3Q. Robert Siefers: Okay. Perfect. And then -- so that sort of touches on the second one, which was sort of the margin specifically. So presumably, that beneficial mix shift in the loan portfolio should be helpful. But just when we think about the sort of launching point of the 355 margin, any other factors that would cause it to sort of jump up from here. I think in your prep remarks, you sort of suggested stable to improving for both NII and the margin. John Moran: Yes. I think stable to improving is the right way to think about it. Recall, we will get 4 basis points back on dates and so that will kind of the launch point there. And yes, I think stable to improve is the name of the game for this year. . Operator: And our next question comes from the line of Ben Gerlinger with Citi. Benjamin Gerlinger: I just want to double check to run through the numbers a little quick. You said a higher end of the range, the higher end of the range. You're building out a bigger team and hiring you guys say the higher end of the range on expenses? Or is it still within that despite the lower core on 1Q. John Moran: I'm just going to -- I'm going to walk it back on 1 thing that you said. So we said loans high end of range, NII guidance is unchanged, fees, high end of range and expenses is unchanged despite a better-than-expected outcome in the first quarter. And that piece of the guide, Ben, on the operating expense side is really not the talent pipeline that Tim and Jim are building I think we're having more conversations today than at any other time that I can remember since I've been at Old National, and we're really excited about that pipeline. Benjamin Gerlinger: Yes. I apologize. It was on higher -- but you retire still good. Just wanted to kind of push you a little bit here. So like things are looking good and you're hiring and you're setting up -- the hires today are obviously not impacting much for growth on '26, call it more of a '27 and the '28 story. Both looks good. Why not be more aggressive on the shareholder buyback or return? John Moran: Well, I think -- look, I think we feel really good about where capital is. We fully intend -- we've got $383 million left on this existing authorization. We would fully intend to use that through the end of that authorization in February. Look, a combined payout ratio that's close to 2/3 of what we generated in the first quarter and still being able to support loan growth, I think is a pretty good place to be. And so we feel comfortable with where we are. And obviously, we'll if those capital rules become final, we'll have some additional optionality and clearly, think about what we're going to do with that, and that would be... Unknown Executive: Incremental to everything we're doing today. John Moran: Exactly. . Operator: Our next question comes from the line of Brendan Nosal with Hovde Group. Brendan Nosal: Starting off on loan growth here. I know you've been kind of working towards these numbers for years and years in terms of the bank's growth capacity, but it really feels like something clicked this quarter and will continue to click for you through the balance of the year. Has anything changed environmentally in your favor? Or is this just kind of the culmination of a lot of effort. John Moran: Yes. Thanks for the question. It's certainly -- we're leaning into go-to-market strategies. We're really focusing on sales excellence and just being tighter in who we're targeting, how we're targeting and leveraging the full plethora of products and our platform that we have to offer. And we've seen that really come together nicely this quarter, and we like the trends that we see in the record pipelines that we have. We think that will continue to come to fruition. And as we add more bankers and more talent, we like the opportunity to continue to drive that growth going forward. Brendan Nosal: Okay. Okay. Great. Maybe pivoting to capital. I heard the commentary on the proposed capital rules and the benefits that would drive for you for others, and I think you mentioned that opens up the option set down the road. I mean can you walk through that? I think at the near-term buyback commentary and lack of interest in M&A at present. But like longer term, if you and others are sitting with more capital, what does that allow you to do longer term? James Ryan: Yes. Look, for us, I think you'd see a reduction in RWA roughly in line with what other sort of estimated for midsized banks. Again, on our balance sheet, the 2 biggest drivers of that are the LTVs in our wonderful family book and the line utilization is greater than 1 year. There were some banks that played a lot of games in the risk-weighted asset diet years kind of shrinking the commitments down to 1 year minus a day. Old National never did that. So the capital treatment on that piece of our book will be favorable. I think in total, it could be up to 100 basis points, give or take, on CET1, and that is not a level that we're going to run the bank at. And so I think it would be and foremost, supporting continued organic growth; and then secondly, return to capital. I think it's also just getting comfortable with where the industry settles at. Where is the right CET1 ratio, where the right TCE ratios to run the organization long term. I think the industry is still trying to find that target level. Clearly, we believe we have a lower risk model and should be at the peer average or lower, but there's a lot of work to kind of get there to define what those normalized levels should be. Operator: And our next question comes from the line of Chris McGratty with KBW. Christopher McGratty: On the Basel discussion, the 100 basis points that John referenced, ballpark. We've heard a lot of banks. Kind of in our follow-up calls talk about the importance of balancing CET1 and TCE. One going as far as saying 8% might be the right number for TCE. How do you -- I know the rating agencies care, how do you view the interplay between the two? John Moran: Yes. Look, I think those are the 2, and we have long been sensitive to those as you know, right? So I would say that we feel really good about where we are in TCE as evidenced by the fact that we're returning a pretty significant chunk of capital in the quarter and 64% combined payout ratio on the quarter's kind of core net income. . While still supporting organic growth. So as Jim said, I think we still got to kind of figure out what the right long-term numbers are as an industry and then what's appropriate for Old National Bank, but we feel really good about where we are. James Ryan: The challenge Chris becomes from a stress testing perspective, we feel really good about our capital levels and now we could push it harder. But there becomes a point in time when under periods of stress, our industry goes back to the higher capital levels are the ones that maybe feel a little less pain. So I think we're just trying to figure out what's the right long-term view and not get caught up in today's whatever short-term window might be. And how do we balance all the other stakeholders like you suggested. Christopher McGratty: Yes, you want to stay off the screens when things get a to get it. On deposit pricing, as we stay -- if the forward curve is right, there's no more cuts, or read that 170 spot are we flatlined basically until the Fed moves again? John Moran: Look, I think we still got some opportunity in the back book. We've definitely got some opportunity as brokered roles but I think the material decreases in spot rate are probably behind us if the Fed is done for the year, which is our base case expectation. And I would tell you, the deposit competition it's intense, but rational. And the environment around specials has stayed a little bit frothy longer than what we would have probably hoped for as an industry. Operator: And our next question comes from the line of Janet Lee with TD Cowen. Sun Young Lee: When I look at the Slide 10 on the impact of net interest margin that 19 basis point negative impact from rate and volume mix. Relative to 5.88% total loan yields for the quarter, should we expect that loan yields to increase in the second quarter as the -- obviously, the rate impact is decreasing or basically gone. And then maybe the first quarter had a overly high concentration of higher-quality C&I loans, which carry lower spreads. I guess that's not a bad thing at all, but I just want to get a sense of what a good loan yields is to start off as we head into the second quarter. James Ryan: Yes. I think you've got the moving parts of that, right, Janet. It's the on loan yields, like margin overall, 10 basis points of that was day count for us. The balance of it was sort of sober down and most of that was offset by funding costs. And then there was a de minimis amount, just on churn in the book, so sort of, call it, 5 basis points, 4 or 5 basis points on loan yields, just regular churn. And I think going forward, much like margin, I think it's kind of stable to improving and will depend a little bit on business mix of production. John Moran: Yes. When I look in the pipeline, just a couple of factors on the loan side. One, a greater portion of our pipeline is being driven in community markets, where we see a little less competition, and we see that segments and some of our strong community markets, where we have great market share and good brand picking up. . And then secondly, a larger part of our pipeline for the second quarter is in kind of core middle market, which third, fourth generational companies where you can tend to get a little more spread on that as well. also can get good core operating deposits with those loans as well. So as we look at the mix second quarter compared to first quarter from a timing standpoint, just had some of the higher quality loans that have slightly lower interest rates. In the second quarter, we see that mix shifting. Sun Young Lee: Got it. That's very helpful. And I would also love to hear a little bit more about what you're doing on the AI front that you mentioned earlier that's helping on the efficiency and expense enterprise-wise? James Ryan: Yes. So like others, we are investing in AI. We've got an AI center of excellence stood up within our technology and data teams. I would describe our progress to date is a lot of -- it's a lot of singles and doubles. And a really good example of that, that we shared with people is we had some like old Power BI legacy code that we lifted and shifted into a new data environment. It was kind of clunky. We threw AI at it and had what would have taken some of our best programmers month cleanup was done in a week. And so that would be a real life example of sort of -- I would describe that as a single and I think we've got some really interesting use cases that we're looking at. Probably the first 1 for us that we're going to dive deeper into is in risk management. If you think about everything that needs to be built to embed risk into the first line. Almost all of those jobs, which the big banks just through bodies at are checkers of checkers. And that is a perfect AI use case and I think something that, look, 100. That threshold is probably moving anyways, but it doesn't mean that we're not at work on thinking about things that we need to do as a bigger bank. And I think that the cost of that going to be a fraction of what it would have been even just 3 years ago because of some of the advancements in AI. So we're excited about it. And there's a lot of stuff watt the bank that we think help drive frees up dollars for us to go and invest in the more exciting stuff, which is the revenue-facing talent pipeline that Tim is building. Operator: And our next question comes from the line of Brian Foran with Truist Securities. Brian Foran: So the loan growth momentum, I mean, if we think about scenarios where it continues to be at the high end or above the guide, do you think earning assets will be growing at the same level? Or is there some point where if loan growth if we're start to pencil in 7% or 8% loan growth, we should moderate securities and cash a little bit. James Ryan: Yes. I think it's probably fair to think about everything sort of growing about lockstep. So I think as loan growth goes, the liquidity book would grow with it. Brian Foran: Got it. And then on the Basel discussion, I know it's very early, the proposals could change, so maybe it's too early for this question, but you referenced how some specific areas get much better treatment. Do you think this is big enough where from a strategic standpoint, you might do more hiring or focus in certain types of lending or you might deemphasize others. Is this a big enough move that you'll actually start remixing the business a little bit to optimize around it? James Ryan: It's probably a little early to say for sure on that. The one place where I think when you think about our WA treatment and 1-4 family. It seems clear that the regulators are trying to encourage banks to be back in that business in a somewhat more meaningful way. And so there's interesting implications to that, that we would think through, I think, if it became a permanent role. Operator: And our next question comes from the line of Brandon Rudd with Stephens. Brandon Rud: My first question, if I could drill in on loan yields a bit. I know it's primarily rate mark related now, but do you have the purchase accounting accretion for the quarter? John Moran: Not handy. It was roughly unchanged, though. I think the net-net of sort of purchase accounting accretion and interest collected on nonaccrual was a wash, like no impact on overall margin. Brandon Rud: Got you. Okay. And then for the other side of the balance sheet, I heard your earlier comments about deposit cost competition. Superregional Bank last week said the Midwest is a bit more competitive than other regions around the nation. Since your footprint kind of stretches across the Midwest, are there markets in particular that you're seeing more competition than less than others? John Moran: In the Midwest, no, not really. I would say that our most competitive market is probably Nashville. And that does -- we don't really have a back book in Nashville to worry about or certainly not the size back book that we have in other markets. But yes, I think most of our markets are competitive but rational. James Ryan: Yes. I think the other interesting thing is that some of the large national players are hanging some pretty steamy rates out there. So that's primarily competing with our wealth and private client businesses, which can be a little bit challenging at times. Operator: And our next question comes from the line of David Chiaverini with Jefferies. David Chiaverini: On expenses, can you talk about areas of investment and how we should think about positive operating leverage, the extent to which it should come through based on the guide we're modeling pretty decent operating leverage. But can you talk about those 2 things? James Ryan: We are likewise modeling pretty decent positive operating leverage on the year, David. I think, in fact, when we stack it up against our executive peers, we were either #1 or #2 on that metric for this year. And look, our expectation is that we'll continue to drive quarter-over-quarter and year-over-year positive operating leverage, and we walk into every single budget cycle. With that as a guiding sort of principle. So we know that, that's a metric that's important. It's something that we're focused on, and it's something that I think will deliver in 2016 for sure. David Chiaverini: Great. And then shifting over to your comment about pipelines on the loan side being up 14%, great to hear. Any particular industries that are driving that? John Moran: David, they're pretty balanced, no real industry concentration. And I would say we've seen a really nice pickup in CRE pipelines. So across the board, C&I remains strong. CRE is building -- and we've seen markets like Minnesota, where our momentum there is building pipelines there are higher than they've been in the last 18 months. So we feel very good overall about the pipelines, and it's a good mix of CRE and C&I, but with no concentration from an industry standpoint. Operator: And our next question comes from the line of Jared Shaw with Barclays. Jonathan Rau: This is Jon Rau on for Jared. Just looking at some of the components of deposit pricing, it seems like the exception book has been driving most of the downward pressure on deposit costs and the non exception book might be even going up a little bit in terms of average cost. Can you just talk about the dynamics there? And is if there's any emphasis being placed on moving to more weighting towards exception pricing? James Ryan: Yes. So the exception book is where we saw all of our uprate beta, and that's kind of how we've always managed deposit costs at Old National. So it is where we've experienced all of the down rate beta as well. we're really pleased with how that's performed. I would say if you're looking at quarterly sort of puts and takes on deposits, don't forget that there's some seasonal factors in our first quarter. Our public funds balances are at a low point in 1Q, those rebuild in 2Q and 3Q, and there's some seasonality in our noninterest-bearing on both the commercial and the public side of things as well in the first quarter. So that might explain what you're kind of scratching out there on the quarter's deposit costs. Jonathan Rau: Okay. Great. That's good color. And then maybe just a little more on the leadership changes in commercial banking bring in Chris. I guess, is there any specific areas of expertise in terms of lending verticals or anywhere else that he brings that would kind of alter the pace or areas that you're hiring in? John Moran: Yes. Chris' background is diverse, and we're very excited about what he can bring. But primarily on the C&I side, when you think about asset-based lending and core C&I middle market banking, the old school banking that we're very known for and very proud of. I think Chris will do an exceptional job of helping to drive that growth. At the same time, John Thurston on the -- on the corporate banking side, as our leader and President of that, we're looking at different ways to grow there, and we're excited about the depth he brings of a 30-plus year career across business banking, commercial banking and corporate banking. So excited about what each of them can bring to our growth going forward. Operator: And our next question comes from the line of John Arfstrom with RBC Capital Markets. James Ryan: We were just in Minneapolis yesterday. I didn't see you in the Skyway. Jon Arfstrom: No, I had a seatbelt on my office chair. Can't leave my desk. A few follow-ups. John, you said the yield curve maybe is a little bit more cooperative now. what changed, what makes it more cooperative and what's more ideal for you guys? . John Moran: Well, the 5-year came back to $390-ish , which is definitely helpful and there's some -- there's better -- there's a little bit better steepness finally. Now it may have gotten there for the wrong reasons, but we'll take it, right? So a little bit of steepness and a better belly is certainly helpful for us. Jon Arfstrom: Yes. Okay. And then just following up on the positive operating leverage question. You flagged a record adjusted efficiency ratio this quarter of 45.7%, which is great for your company. Are you saying that could go lower, John? Is that the message? John Moran: I think we're going to try to keep it where it is or maybe grind it lower... James Ryan: I think the tension, John, from my perspective, is that we don't want that to be an inhibitor to investing in our future, investing in growth, investing in talent. I think that's just the dynamics. We inherently know like if we're able to successfully convert this talent pipeline, that's an 18-month kind of breakeven scenario. And inevitably, the people that we're looking at hiring are kind of top decile performers, so they just come at a much higher cost on average. And so I don't want that number of 45% to be a number that stops us from investing in our future or the growth of the organization. So that will be the tension that we'll just have -- as I've said publicly a few times like, hey, nothing would make me happier if I have to come and apologize to you all that our expense guide is going up because we just had that much success in recruiting and attracting great talent to join the organization. Jon Arfstrom: Yes, fair. I don't want to say it's good enough. We want to keep pushing, but that's pretty good for you guys. James Ryan: I agree. I mean you know our history. That's remarkable if you go back and look at our history . Jon Arfstrom: Yes. Okay. And then the last one on the buyback. You flagged that you took a piece of the buyback from you bought from the Bremer Trust, how much is left there? Are those negotiated transactions? And kind of what's the plan? Is it more of a -- I guess it's maybe more of a bummer question, but what do you think the plan is and how much did you get from the trust? James Ryan: Let me just -- we actually flagged that transaction when we did it. It was around $50 million of stock. And so we just wanted to repoint that out. We did put a filing out on that. And the whole point is honestly, they see great value in long-term ownership. We expect them to have long-term ownership -- we're obviously sensitive to the concentration that they bring. So no material change to the current ownership other than the $50 million we reduced and I just don't see them wanting to do anything different in the near future. Obviously, they're in control. The lockup expires really quickly here. But after the lockup expires, I don't see them doing any changes based on our conversations but anything after that, they have to decide. The good news is we have the right of first refusal. So to the extent that they want to come to the market, we'll be there to support that. But I don't anticipate that based on our most recent conversations. Jon Arfstrom: Okay. Operator: And there are no further questions at this time. I'd like to turn the call back to Jim Ryan for closing remarks. James Ryan: We appreciate everybody's support. And as usual, we'll be here all day to answer any follow-up questions. Thanks so much. Operator: And ladies and gentlemen, this concludes Old National's call. Once again, a replay, along with the presentation slides, will be available for 12 months on the Investor Relations page of Old National's website, oldnational.com. A replay of the call will also be available by dialing (800) 770-2030 access code 9394540 and this replay will be available through May 6. If anyone has additional questions, please contact Lynell Durkol at (812) 464-1366. Thank you for your participation in today's conference call, and you may now disconnect.
Operator: Welcome to Teledyne's First Quarter Earnings Call. I would now like to introduce our first speaker, Mr. Jason VanWees. Jason, please go ahead. Jason VanWees: Thank you. Good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First Quarter 2026 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, George Bobb; EVP and CFO, Steve Blackwood, and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, George and Steve, we'll ask for your questions. But of course, before we get started, all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release under periodic SEC filings, and of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay via webcast and dial-in, will be available for approximately 1 month. Here is Robert. Robert Mehrabian: Thank you, Jason, and good morning, everyone, and welcome to our conference call. We started 2026 with record first quarter sales, earnings per share and operating margin. Specifically, sales and non-GAAP earnings increased 7.6% and 17.2%, respectively. In addition, despite a 30 basis point increase in R&D expense, non-GAAP operating margin increased 58 basis points year-over-year. And while we acquired DD-Scientific in January and increased our capital expenditures significantly from last year, our leverage ratio declined to the lowest level in 5 years since before the acquisition of FLIR in 2001. Excluding the impact of acquisitions, sales increased 5.3% due in part to the performance of our Digital Imaging segment, while organic growth was 6.9%. Sales of visible light sensors, infrared detectors and specialty semiconductors for space applications, each increased at double-digit rates as did FLIR infrared cameras for unmanned air vehicles as well as our own complete unmanned aerial systems. Also within the Digital Imaging segment, our industrial imaging and x-ray businesses is returned to year-over-year growth, which helped contribute to the strong margin performance in the first quarter. Given stronger sales in the first quarter, but also record orders and backlog with a book-to-bill of 1.16, which is our tenth consecutive quarter of book-to-bill of over 1, we're comfortable in increasing both our expected sales and earnings for 2026. We believe now sales will be in the range of $6.415 billion or 70 basis points higher than we communicated in January. We're also raising our earnings outlook at both the bottom and top of our prior range. to about $24 at midpoint or $0.35 overall in increase. George will now briefly comment on the performance of our 4 business segments. George? George Bobb: Thank you, Robert. In the Digital Imaging segment, first quarter sales increased 7.9% due to well balanced growth throughout the segment, including Teledyne imaging sensors, Delta e2v and Teledyne FLIR. As Robert mentioned, sales of visible and infrared detectors for space-based imaging increased nicely. Sales of infrared subsystems and cameras for our customers' unmanned air systems and unmanned maritime service vehicles also increased. . In addition, revenue from our own complete unmanned air systems increased due to continued growth of the highly differentiated Black Hornet nano drone as well as full rate production deliveries of our Rogue 1 loitering munition. Interest in counter drone activity also remains elevated. And in the first quarter and early Q2, we received orders for infrared cameras and subsystems, totaling in the tens of millions of dollars for counter drone applications. There were also bright spots outside of defense. For example, industrial machine vision cameras and sensors for semiconductor inspection and X-ray products for health care increased year-over-year and sales of micro-electromechanical systems or MEMS, grew over 20%, primarily due to demand for micromirrors used for optical switching and high-speed networking applications. Finally, non-GAAP operating margin in the segment increased 107 basis points to 23.2%, despite a 59 basis point increase in R&D expense within the segment. In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, first quarter sales increased 5.3% versus last year. Overall sales of marine instruments increased 8.3%, primarily due to strong defense-related sales, including unmanned subsea vehicles, which increased more than 20% for applications such as anti-submarine warfare and mine countermeasures as well as sales of interconnects for U.S. Virginia and Columbia class submarines. Interconnects for offshore energy production also continued to grow. However, these were partially offset by reduced sales of marine instruments for hydrography and oceanographic research. Sales of environmental instruments increased 6.7%. This primarily resulted from higher sales for gas safety and ambient air monitoring instrumentation, partially offset by lower sales of laboratory and life sciences instruments. Sales of electronic test and measurement systems decreased 3.7% year-over-year with greater sales of oscilloscopes, offset by lower sales of protocol analyzers. However, we continue to expect full year sales growth as semiconductor suppliers increase their shipments and data centers increasingly adopt devices, utilizing the newest, fastest data transfer protocol. Instrumentation non-GAAP operating margin in the first quarter decreased primarily due to product mix. That is a decline in higher-margin test and measurement, [ first growth ] in autonomous underwater vehicles in marine, which generally carry lower margins. In the Aerospace and Defense Electronics segment, first quarter sales increased 14.4% due to 1 additional month of results from the Qioptiq acquisition and with organic growth of 8.4% across defense electronics, partially offset by slightly lower sales from the commercial aerospace market due to a result of a tough comparison. Non-GAAP segment margin increased nearly 200 basis points year-over-year due to higher sales and corresponding operating leverage, improved margins at companies acquired in 2025 and in this case, a relatively easy comparison. For the Engineered Systems segment, first quarter revenue decreased 2.6%. However, segment operating margin increased 113 basis points. I will now pass the call back to Robert. Robert Mehrabian: Thank you, George. In conclusion, we are excited to begin 2026 with a strong first quarter with continued orders and sales momentum in our backlog-driven businesses, specifically defense where Teledyne has meaningful exposure to low-cost drone, counter drone technologies, space-based sensing, electronic counter measures and maritime surveillance. Furthermore, certain markets such as industrial inspection and health care, which have had headwinds in the past are now inflecting. Finally, with a leverage at a 5-year low, we are actively pursuing a number of acquisitions, but at the same time, we're investing more in R&D and capital expenditures to accelerate our own organic growth. I will now turn the call over to Steve. Stephen Blackwood: Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2026 outlook. In the first quarter, cash flow from operating activities was $234 million compared with $242.6 million in 2025. Free cash flow, that is cash flow from operating activities less capital expenditures was $204.3 million in the first quarter of 2026 compared with $224.6 million in 2025. . Cash flow decreased due to higher inventory purchases, partially offset by greater operating results in the first quarter of 2026 compared with 2025. Capital expenditures were $29.7 million in the first quarter of 2026 compared with $18 million in 2025. Depreciation and amortization expense was $87.2 million in the first quarter of 2026 compared with $80.7 million in 2025. Now turning to our outlook. Management currently believes that GAAP earnings per share in the second quarter of 2026 will be in the range of $4.75 to $4.90 per share with non-GAAP earnings per share in the range of $5.70 to $5.80. And for the full year 2026, we believe that GAAP earnings per share will be in the range of $20.08 to $20.44 and non-GAAP earnings per share in the range of $23.85 to $24.15. I will now pass the call back to Robert. . Robert Mehrabian: Thank you, Steve. Operator, we would like to start the questions. If you're ready to proceed, please go ahead. . Operator: [Operator Instructions] Our first question comes from the line of Greg Konrad with Jefferies. . Greg Konrad: Maybe just to start on the revised revenue guidance of $6.415 billion. Can you maybe just talk about organic versus inorganic? And then if you think about some of the derisking or things that have gotten better since the guidance you gave last quarter, where are you seeing the most outperformance just from a segment basis? Robert Mehrabian: Of course, Greg. First, fundamentally, we're seeing about a 4.9% total growth for the year right now, which is about 70 basis points higher than we had in January. About 4% of [ that solid 4% ] is organic and about 0.9% is from acquisitions, 1 early in 2025 and 1 small one early this year. From a segment perspective, we think the highest growth will probably be in our Digital Imaging and Aerospace and Defense with Aerospace and Defense probably over 6% and Digital Imaging overall about 5% led by really FLIR which we expect will grow about 6.5%. I hope that answers your question. . Greg Konrad: Yes, that's perfect. And you gave a little bit of color on the opening, but just following up on defense. How much was it up overall in the quarter? And then you mentioned FLIR. Can you just maybe give a little bit more color on FLIR defense growth? And then what's kind of driving the outperformance in A&D electronics just given that growth, thinking about that broader portfolio? Robert Mehrabian: Okay. Let me start with FLIR defense I think we're looking at about 9% growth in that area. Pretty much all of our products in the FLIR Defense are growing, specifically drones, nano drones, loitering drones, surveillance systems, you name it. And of course, we do supply both include visible and more importantly, infrared detectors, not only to our own drone manufacturers but also to everyone else across the world that's making drones. From from an A&D perspective, the growth has been again in a variety of our components. As you know, we make everything from lasers to detectors, readouts, semiconductors, switches. All of these are seeing various degrees of growth. And it's -- the business is very healthy, both supplying our own products, but more importantly, supplying products from -- that are required as the various conflicts are increasing both in Europe and the Middle East. Operator: The next question comes from the line of Amit Mehrotra with UBS. Zachary Walljasper: This is a Zach Walljasper on for Amit today. So just 2 questions from me. Can you just help give some color on the order trends between segments? And then the second question for me is just around the full year guide. So high level, the first quarter came in a little above and then raising a little above that. So there's not too much incremental pickup expected, but if you help flesh out the puts and takes for the balance of the year that you're seeing that will be helpful. And then like should the typical earnings seasonality still hold for 2026? Robert Mehrabian: Sure. Let me start with the overall, which I mentioned, the overall book-to-bill right now is 1.16. It is led by digital imaging and specifically, both FLIR as well as DALSA e2v that's where we have probably the highest book-to-bill higher than certainly we talked about in January. Digital Imaging right now is looking like about 1.38 in book-to-bill in instruments, a lot of short-cycle stuff, but it's still holding above 1, just slightly over 1. A&D, which it's a little lumpy because both A&D and Engineered systems are lumpy because we get big orders, then there's a period of quiescence and then we pick up orders. They're just below 1 right now. certainly A&D. But I think what's happened to us is for whatever products that we're able to put out an increased production, there's very strong demand, and that's why we think across our portfolio, we're going to do very well. We would think that we'll have a little more sales in the second half versus the first half. And in January, we were saying the first half would be a little much -- a little lower than we had. So we're kind of guiding our second half maybe at 51% versus first half at 49%. But as in January, we were thinking the first half would be more like 48% than the second half 52% in terms of our revenue. So we remain bullish but also cautious, not to over promise what we can deliver and stay within the framework that we've operated for the last 25 years. Operator: The next question comes from the line of Andrew Buscaglia with BNP Paribas. Andrew Buscaglia: Just wanted to touch on the Q2 guidance. Just that it reflects the point at the midpoint EPS declining sequentially, which is atypical, historically like it's seasonality. I'm wondering where is the biggest pain point. I think my guess is the instrumentation like the test and measurement area being a little weaker than expected in Q1. But wondering, yes, what are the dynamics affecting that Q2 guide? Robert Mehrabian: Let me just put it the big picture is the following. In Q1, we had some good tax benefits year-over-year. Our tax benefits increased because of stock option exercises increased about [ $0.10, $0.11 ] year-over-year. In Q2, where we sit right now, we're not projecting similar tax benefits. Now if our stock were to move up and our people start exercising more options, that would change. But right now, we're not projecting that. So we're taking that part out, we're projecting more like $0.03 rather than having the increase that we have. So primarily, that's it, just to cut through it, everything else I'm comfortable with. Andrew Buscaglia: . Maybe could you comment further then on that instrumentation comment I made earlier, just that was a weak start to the year. What do you think drove that? And how do you see that the cadence of that unleash over the next 9 months? Robert Mehrabian: Well, I'm going to just make 1 short comment and then I want to let George answer that. The different parts through instrumentation, strong marine performance for us, especially under water vehicles. These are vehicles that are used across the world, some of them for mine counter measures, very strong performance, but slightly lower margin than some of our high-margin like test and measurement. I'll let George kind of [indiscernible] a little bit, George? George Bobb: Yes. So I think I will focus on test and measurement, which is where we had the decline in Q1. And there are 2 parts of that business. Really, there's the oscilloscope side of the business, where we saw year-over-year growth and continue to see good demand in high-bandwidth applications power applications, for example, the people who are designing power supplies for data centers and from sales into the in-vehicle networks market. . Protocol sales were down year-over-year, and that was really due to the timing of PCI Express Gen 6 CPUs and GPUs. So we go through on the protocol side, kind of 2 phases. There's a silicon designer phase where we sell silicon designers, and then there's a phase of integration of chips when they come to the market. So what we expect this year is for those chips to come to market in the second half of the year, and we still expect full year growth in the low single digit in test and measurement. So overall, as Robert said, strong performance in marine, strong performance in environmental, test and measurement is a little weaker in Q1, but still expect full year growth in the low single digits. Robert Mehrabian: That's great. George mentioned the various aspects. We still expect instrumentation to grow over 4% for the year. . Operator: And the next question comes from the line of Jim Ricchiuti with Needham & Company. James Ricchiuti: I know it's probably early yet, but are you seeing signs of potential increases in your defense business just related to the conflict in Iran? Robert Mehrabian: Yes. [indiscernible] first, we are being approached by the government actually, the government is making some investments. We haven't announced it yet, but they're making some investments in getting our capacities increased in certain specific areas, which I can't go into until the releases are approved. Second, we're seeing obviously increased demand for anything that has to do with drones and counter drones. And we're also seeing some demand for underwater vehicles. There are a lot of inquiries right now, some orders, but we expect orders to really start picking up in the next 6 months. James Ricchiuti: Got it. That's helpful, Robert. And just on the M&A pipeline, just given valuation levels, are you still thinking the focus this year is going to be mainly tuck-ins? Or is there the potential for something larger? Robert Mehrabian: I think tuck-ins, first, maybe some midsized acquisitions like we did early in 2025. The larger ones they come not that frequently, and we're looking at some, obviously, but people are willing to pay some outrageous prices to get the revenue, and we'll have to see. But I would say the answer to your question specifically, tuck-ins first; midsized, second; larger, we'll have to wait and see what fits our portfolio. We don't want to go outside our portfolio too much in getting a very large acquisition and then have to do a whole new segment, et cetera. That's not us. So there we are. James Ricchiuti: And mainly in the instrumentation, digital imaging? Or are there still some potential opportunities in A&D? Robert Mehrabian: I would say in all of our segments, probably with the exception of Engineered Systems, where we're not looking at acquisitions because it's a business that's growing and the government is investing in that. So it means almost all of our segments depends on what we get. Operator: The next question comes from the line of Jordan Lyonnais with Bank of America. . Jordan Lyonnais: On the growth that you guys called out for space, can you give us a sense if that is related to Golden Dome? And then two, just for the FY '27 budget request, the $70 billion that they want for drone funding and the [ Dawn ] program. How are you guys thinking about that if that funding gets approved? And for that much funding to come through, can you support those volumes of own systems and as a supplier to everyone? Robert Mehrabian: Yes. Let me start by saying that right now, as Steve mentioned so the George, we're investing in our businesses both from CapEx with increased CapEx, about 35% over last year in the first quarter and expect to keep doing that throughout the year. So we've investing in capacity because we, frankly, our demand is larger than our capacity in certain areas. So we're investing in that. Second, we're also increasing some R&D expenditures. We increased our R&D by $10 million just in the first quarter. That's to us -- to me, that's about $0.14 a share that we added in our investments because we think those are going to be good investments, there's going to be good demand for you. Now having said that, I'll let George talk about Golden Dome. Right now, we're pretty well set on tranche programs, the SDA tranche programs, we've won just about everything with minor exceptions here and there. So I don't expect to get much more than that. But going to the Golden Dome, I'll have George answer that. George Bobb: Sure. So just as a follow-on to that, what I would say is, certainly, on the tranche programs, as Robert mentioned, we've done very well there, and that's what's driven a lot of the growth on the infrared imaging space side of the business. And we think we're very well positioned for Golden Dome as it evolves, given the fact that we've been on all of these [ space development agency ] tranche programs. Robert Mehrabian: We'll see how much budget goes in there in reality, right? Asking for increased budgets is one thing, getting it is another. But eventually, there will obviously be some monies either way, we're ready. But right now, with what we have and what we're seeing in terms of the book-to-bill, we feel we should invest in our own businesses, which is very unusual for us at this point in the year. . Operator: The next question comes from the line of Joe Giordano with TD Cowen. Joseph Giordano: you had previously last quarter talked about your unmanned business, $500 million, growing about 10%. I think the general view is that feels pretty conservative given recent events. Just curious for a bit of an update there. And then if you can maybe talk about the subsea stuff specifically, like where are you positioned on potential like Strait of Hormuz mine sweeping, what types of products would that be for you? Just any sort of color you can give there and how that might materialize over the next couple of quarters here? Robert Mehrabian: Sure. Sure. Okay. Let's start with the unmanned. As you know, we make unmanned systems air, ground and Subsea. I don't know if there are many companies that are able to do all of that, our unmanned air systems is growing very fast. Our Black Hornets, which are the nano drones. Over the last bunch of years, including this year. Just that one drone Black Hornet 3, now Black Hornet 4 will have revenues of about $500 million over that period. We expect -- and we have received already orders for Black Hornet, both in this country and some for Europe. And of course, Middle East conflict is demanding more. Second, we've introduced the our Rogue 1, which is armed drone. We have our first contracts. Those would increase substantially with time. We have other systems coming along the way. And then if we go to subsea, we have different kinds of underwater drones. They're not just any. We have, for example, gliders that can stay on very long periods of time and can go to large distances. And then we also have our [ Gavia ] vehicles, various ranges of it that go to different depths. And those are the ones that are used for detecting mines, and we have some nice orders for that in Europe. Overall, I'd say, I would remain with the $500 million for now for -- but it's -- some of the pockets are growing higher than 10%. So Broadly speaking, I think we're approaching almost $2 billion in revenue between defense, global defense, U.S. defense, drones EW, missiles, munitions, et cetera. That's a big chunk of our revenue for this year. It's about 30% to 35% of the whole company. So when you get a part of your portfolio growing that fast and you're actually investing dollars the way we are, we've always been kind of very cautious with our money that ought to tell you that we're kind of bullish about this area. Operator: Next question comes from the line of Guy Hardwick with Barclays. Guy Drummond Hardwick: I was wondering if you could maybe update us on your margin outlook, particularly in digital imaging, where it seems that you've had a positive mix effect with the industrial scientific cameras picking up? Robert Mehrabian: I think as George mentioned and [indiscernible] mentioned a little bit, for the quarter, our margin went up about 58 basis points. We're projecting that to continue throughout the year. So we think we'll end up the year about 60 basis points above last year, and it will be led by digital imaging at over 100 basis points, 105, 107 basis points, which is something that we've been striving for ever since the acquisition of FLIR. But now FLIR'S doing well and the legacy digital imaging with DALSA e2v is picking up. So the margins overall would grow about 60 basis points, led by Digital Imaging. Aerospace & Defense is not far behind at about 70 basis points. Guy Drummond Hardwick: And just generally talking about your, say, long cycle versus short cycle trends, it sounds like you don't think there's a bump to the order book in the defense side, yes, perhaps in the next 6 months. Does that suggest a pretty good outlook for defense for next year rather than kind of an acceleration this year in terms of revenues? Robert Mehrabian: No, I hope I didn't give the impression that we don't expect acceleration this year. We do because our orders are way up right now in our defense businesses. We expect it to pick up more. I don't mean to be greedy, but we expect it to pick up more in the next 6 months or so because of the use of munitions, the significant use of munitions in the Middle East. Having said that, we are already experiencing very strong defense orders across all of our portfolio from components to systems. Operator: The next question comes from the line of John Godyn with Citi. John Godyn: I wanted to just ask or kick off with a big picture question about M&A and the strategy. A couple of years ago, we saw new issues. IPOs business is being created that really focused on kind of roll-ups and industrial rollups with an aerospace and defense focus. More recently, they've been that plus broader industrials as well. And when you think about the amount of new kind of industrial compounders, industrial roll-ups, companies focused on finding niche highly engineered products, et cetera, it definitely feels a little more crowded today than maybe years ago. You guys started this theme, I mean, decades ago in the history books, you started it, but even just one decade ago, you were ahead of many of the others. I wanted to just sort of take the temperature on the market at large. Are you rubbing up against competitors more? Is it harder to get deals done? Are sellers reshaping the processes in the face of different and maybe more buyers seeking the same opportunities? I just feel like with all the IPO activity, it's worth kind of level setting, recalibrating and taking your temperature. Robert Mehrabian: Yes. I don't know. It's a very kind of difficult question to answer. We've always had competition. Some of the -- let me begin somewhere else. In the last 12 months, 13 months, we've already spent $900 million in acquisitions. In the last 25 years, we've spent $12.8 billion in acquisitions, only $4 billion of it with our stock. So $10.8 billion of it with cash, which we generate. And in the last 12, 13 months, $900 million. So I think our -- and we've made 75 acquisitions in the past 25 years. Yes, it's getting crowded. On the other hand, people that are conglomerates that are putting things together. They also have a tendency to put them together and then take them apart. If you look at various conglomerates, we've been the beneficiary of taking them apart. We've gotten a few businesses from conglomerates that suddenly decide, well, this thing doesn't fit or we want to concentrate. So we have been getting some really nice carve-outs in the recent past. We've always had competition. We always have going forward. That's not what worries me. What worries me is the crazy prices that people have been willing to pay. Fortunately, some of that is switching over to this AI and data center domain and bless them, let them spend their money in that area, and we will stick to the things we know. So I don't really see a lot of competition increases. John Godyn: Okay. That was great color. And if I could just sort of clarify some of the commentary on defense and maybe a little bit on aerospace. But it's very loud and clear that defense demand signals are strong. Bookings are strong. One of the challenges in the past at different times, with Teledyne is that the bookings are strong, but doesn't necessarily translate into the immediate quarters. And there could be some confusion about kind of short versus long cycle exposure. But when we see all these strong demand trends in defense, is that going to translate immediately? Like can you maybe just talk about the short-cycle elements of your portfolio a little bit more? You mentioned munitions. I just want to make sure that we're all kind of hearing that loud and clear, but also translating into the models the right way. Robert Mehrabian: That's a good question. That's a very good question. Let me just say it's mixed. Yes, some of our orders that we get are long 2, 3, 4 years in duration. Some of our orders are yet to come because of the conflicts in the Middle East. And of course, there's European growth in defense, where we're getting some healthy orders. By and large, when we think about part of our portfolio growing 9%, 10% organically, that's very healthy. We haven't had that for a while. On the other hand, I'm not going to be the one standing here and telling people that we're going to grow 20% a year, like I've heard others do. That's not us. It might happen if the munitions that are being used are replaced faster. But the government cycles are tedious even when there's urgent need. So I would balance it to say that we do have the great backlog. We have about $4.6 billion in our backlog right now, and those will translate into revenue. The good thing is that based on what we see, both in the Middle East, but also European defense increases as well as Ukraine conflict as well as what's happening in China and Taiwan, all of these directionally, all of these things favor the portfolio that we've developed both in legacy Teledyne and of course, with Flir acquisition. John Godyn: That's great. If I could slip in just 1 more related question on aerospace. I know your aerospace exposure is very small and your commercial aftermarket exposure is even smaller as a percentage of that. But is there any tea leaf reading there just on the back of what's going on in the Middle East, high oil prices, it's obviously much more topical with the companies that are more kind of aerospace, heavier aerospace pure plays. Robert Mehrabian: I'll let George address that one, please? George Bobb: Yes, you mentioned that it's a relatively smaller part of the business, which it is. It's about 4% of our revenue, give or take. The business actually is split about 1/3 OEM, 2/3 aftermarket. What we've seen in the aftermarket, the aftermarket was healthy in Q1. So I'm not seeing anything in the near term as a result of that conflict. . Operator: The next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: Robert, is it possible to state or quantify what short-cycle industrial revenue growth was in the quarter and what defense revenue growth was in the quarter and then what's in the full year 2026 revenue guidance for each of those? Robert Mehrabian: Right. Let me start with the government, we had a 9% growth in U.S. government. We had in non-U.S. government total, we had another 4% growth. This is organic. Where we grew most also was in international domain. We had a little shrinkage in the U.S. commercial, but we grew significantly internationally. What's happened to us now is our international businesses have become 48% of our portfolio now, 20 years ago, that was less than 15%. So the growth has been international and U.S. government, U.S. government being at 9% and international about 8.5%. I don't know whether I picked up everything you asked. Noah Poponak: And I guess what would -- are you able to quantify what growth was in short-cycle industrial, I guess, as you've defined it, during the downturn you experienced in machine vision, test and measurement, semiconductor. I guess I'm trying to get a sense for how much that recovered in the quarter in the 5% organic total company that you had? Robert Mehrabian: Yes. I think generally, the short cycle grew at about lower single digits, 3% to 4%; defense, high single digits. There's difference between machine vision and semiconductors, they're very healthy. We have good growth there. On the other hand, we have a little shrinkage in test and measurement. So the first quarter, that's where [indiscernible] Noah Poponak: That helps. And I think you've discussed this a little bit, but just the revenue number you're now providing for the full year, I think, would require the organic to slow a bit through the rest of the year. It sounds like defense orders would suggest it can hold or accelerate. Maybe [ 9 ] is just a tough large number starting point. And then it sounds like short-cycle industrial still has room to accelerate? Why would total company organic not accelerate? Robert Mehrabian: Well you got me there. I'm a little conservative. Noah as you know us to be, we expect revenue to keep growing throughout the year. Year-over-year, we had growth in the first quarter. We expect growth in the second quarter in the third and the fourth quarter. So when I look at the rest of the year, in January, we thought the first half of the year would be 48% of the total second half, 52% of the total. We switched that now. We think the second half would be a little less. And the reason for that is, frankly because a little conservatism. And we think we're going to have less benefit in the second half of the year from foreign exchange. We got some nice benefits in the first half of the year. In Q1, we had about 2%. We think that will drop down to maybe 0.6% in Q2 and then we're projecting 0 in the last 2 quarters. Now if that were to flip, so when we look at the year, we're thinking now our foreign exchange is going to be 0.6%, 0.5%. If that shifts, of course, our revenue would increase correspondingly. Some of the conservatism has to do with foreign exchange. Noah Poponak: I understand. Last one for me is just on the instrumentation margin. Maybe you can just maybe just talk about how you see that progressing through the rest of the year. And then I guess that segment had really nice margin expansion in the last 3 or 4 years. Now we have this quarter, what -- how should we think about the right kind of medium term a few years out instrumentation margin? Robert Mehrabian: Let me start by saying, historically, our instrumentation margins have been the healthiest in the company. We think with progression through the year this year, our margins will keep increasing. I think this was our lowest margin quarter and primarily because of test and measurement. We think the margins will go up every quarter, and we should end the year closer to 27.5%. To get there, we're projecting 29% margin in the fourth quarter for that segment. So as George said, our underwater vehicles don't have as great a margin as do our test and measurement. But we're anticipating a comeback in our protocol analyzers. Our oscilloscopes are already doing well. So I think margins will increase as the year goes on. Operator: the next question comes from the line of Rob Jamieson with Vertical Research Partners. Robert Jamieson: Just a couple just on Aerospace and Defense margins. Much better in the quarter than I expected. I was just curious on the better expansion outlook for that quarter or for [indiscernible] segment versus last quarter. Was there anything mix related that we saw in this quarter or that you're expecting through the rest of the year? Or is this more some of the cost efficiencies from the Qioptiq acquisition and integration? Robert Mehrabian: I think I'll let George answer this, but it has to do a lot to do with acquisitions. . George Bobb: Yes, that's right. So I'll answer it maybe a couple of ways. One, on the acquisition side, our playbook is pretty simple. We acquire companies at reasonable valuations and then we work to improve them. And we've really seen over the last year with the Qioptiq acquisition and the [ MicroPact acquisition ], in the Aerospace and Defense Electronics segment, a lot of good work there on margin improvement. Also did benefit a little bit from mix in Q1. We sell, for example, our avionics spares and high reliability semiconductors, things like that, that were somewhat better year-over-year. But fundamentally, I think cost discipline always improving the acquisitions and then, yes, a little bit of benefit from mix. Robert Jamieson: Perfect. And then just quick, can I get an update on just how you're thinking about free cash flow for the full year. And then just with the increase in CapEx investment that you called out as well. How should we think about that kind of in like the 2.5% of sales range for the year? Robert Mehrabian: Let me start with free cash flow. We've been fortunate in the last -- in '24, '25 to generate over $1 billion in free cash flow. We expect that to happen again this year. First half is a little slower than that, but I will pick it up the second half of the year because we're spending more on CapEx this year, we're projecting at about $150 million, which is an increase versus last year. And of course, we're spending a little more on inventory. We're spending a little more on where we have some cautions approach to some of the product or supply chain that comes out of China with the restrictions. So we're investing in some inventory. We're investing in some machining facilities for germanium, et cetera. Having said all of that, [ $115 million ] CapEx, over $1 billion in free cash flow, I hope we'll get to $1.1 billion. Operator: This concludes the question-and-answer session, and I'd like to turn the call back over to management for closing remarks. Robert Mehrabian: Thank you very much. I'll ask Jason to conclude the conference call. . Jason VanWees: Thanks, Robert, and again, thanks to everyone for joining us today. And of course, if you have follow-up questions, please feel free to call me or send me an e-mail. My number is on the earnings release. Thanks all. Bye. . Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good day, and welcome to the Community Health Systems First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Anton Hie Hi, Vice President of Investor Relations. Please go ahead. Anton Hie: Thank you, Bailey. Good morning, everyone, and thank you, and welcome to Community Health Systems' First Quarter 2026 Conference Call. Joining me on today's call are Kevin Hammons, Chief Executive Officer; and Jason Johnson, Executive Vice President and Chief Financial Officer. Before we begin, I'll remind everyone that this conference call may contain certain forward-looking statements including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation on our website. All calculations we discuss today will exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses and expense from business transformation costs. With that said, I will turn the call over to Kevin Hammons, Chief Executive Officer. Kevin Hammons: Thank you, Anton. Good morning, everyone, and thank you for joining our first quarter 2026 conference call and for your continued interest in CHS. Before we begin, I want to acknowledge our employees, physicians and all of our teammates who have embraced our vision to make the health care experience exceptional for our patients, our communities and each other. As people across our organization share in this commitment, I am confident we will see the benefits of making that health care experience exceptional. And as we do, more patients will choose our health systems and will create an even stronger company. Earlier this week, we announced some significant investments in ambulatory surgery centers in our core markets including the pending acquisition of a majority ownership interest in the Surgical Institute of Alabama, our largest acquisition since 2016. This surgery center performs more than 8,000 cases annually, and is the largest multi-specialty surgery center in Alabama. We expect to close this transaction during the second quarter. During the first quarter, we also purchased a majority interest in South Anchorage Surgery Center in Alaska and opened 2 de novo ASCs in Birmingham and Foley, Alabama. These targeted investments extend CHS' ability to provide outpatient surgical care in the most advantageous way for our patients while delivering excellent outcomes, optimizing the surgical experience for our physician partners and driving future growth for our health systems. Turning to our operating performance for the first quarter of 2026, adjusted EBITDA was on the low end of our internal expectations, declining 17.8% from the prior year period, reflecting our strategic transactions to reduce our debt, macroeconomic disruptions across the country, as well as the investment CHS is making in our future. The quarter's results include an approximate $50 million year-over-year EBITDA drag from recently completed divestitures that went from being positive contributors in the prior year period to negative in the first quarter of 2026. Closing these divestitures will remove the negative EBITDA drag from future quarters. Additionally, while we benefited from some out-of-period revenue related to the Georgia State Directed Payment Program, this tailwind was partially offset by out-of-period provider tax increases related to the Indiana program. Same-store net revenue increased 3.1% year-over-year, driven by 3.7% growth in net revenue per adjusted admission, partly offset by a 0.5% decline in same-store adjusted admissions. We believe volume and payer mix challenges in the first quarter reflect a temporary disruption in demand for health care services in our markets. Largely driven by consumer fears related to geopolitical instability and increased cost of living as well as ongoing aggressive practices used by the managed care companies that drive inefficiency, unnecessarily delayed payment and interfere with the delivery of medical care. I'd like to spend just a minute on our top priorities this year as we work to enhance quality, patient experience, physician experience and employee satisfaction. We are realizing operational improvements at an accelerating pace, and our ability to advance in each of these areas will also ultimately drive enhanced financial performance and long-term value creation for our organization and shareholders. For example, in the area of quality, when the spring 2026 leapfrog safety grades are released next month, we expect as many as 80% of CHS' hospitals to receive a Leapfrog A or B grade, up significantly from just 48% this time a year ago. We also expect 56% of our hospitals to receive a CMS rating of 3 or more stars when those metrics are published next month, up from 45% in the 2025 ratings. These achievements demonstrate our commitment to continuous improvement and our ability to drive stronger performance in this area. We are hyper-focused on improving the experiences of the people working in our organization. especially our physicians and employees. And we have numerous initiatives underway to increase patient satisfaction as well. On the physician experience front, we are currently deploying an ambient listening technology in our clinics and hospitals which will help reduce administrative burdens and optimize the time physicians and other providers spend face-to-face with their patients. Investment CHS has made to expand service lines, add new access points, recruit positions to our markets and improve our quality and experience have us better positioned and prepared to accommodate demand as soon as it returns to normal levels. Before I pass the call over to Jason, I'd also like to discuss the policy backdrop. Similar to our hospital peers and others in the health care industry, we continue to monitor developments related to Medicaid supplemental payment programs in the Rural Health Transformation Fund as well as ACA enhanced premium tax credit expiration and Medicaid work requirements and redeterminations among other changes. It is still very early to gauge the impact of these external factors, while there are a lot of moving pieces, unknown variables and potential consequences. Given CHS' historical and current presence in many rural and underserved markets, we remain actively engaged with policymakers across each of our states to help ensure that programs under the rural health fund are directed towards hospitals and other providers delivering care in these communities, which we believe was the original intent of the fund. We've set up a formal structure with dedicated internal and external resources working to evaluate each state's various programs as details emerge and to apply for any and all funding available to us in order to ensure continued access to quality care in our rural communities. At this point, I will turn the call over to our Chief Financial Officer, Jason Johnson, to review financial results and other information in greater detail. Jason? Jason Johnson: Thank you, Kevin, and good morning, everyone. For the first quarter, CHS delivered financial results toward the low end of expectations. The company continued to execute well on the controllable aspects of our business, demonstrate significant progress on our top priorities and further deleverage the balance sheet. However, volumes and payer mix were below expectations, including noteworthy softness in elective procedures such as hips and knees, which along with negative contribution from recently divested operations led to margin compression. Adjusted EBITDA for the first quarter was $309 million with margin of 10.4%. Recently divested hospitals produced approximately $25 million of negative adjusted EBITDA in the first quarter compared to positive $25 million in the prior year period. A portion of the negative results from the hospitals divested in the first quarter was attributable to impact from winter storm firm. Results included approximately $25 million in contribution from Georgia state directed payment program that was approved in mid-March, approximately 2/3 of which related to prior periods since the program was retroactive to July 1, 2025. As Kevin previously noted, half of this out-of-period benefit was offset by higher operating expense related to out-of-period Indiana provider taxes. Same-store net revenue for the first quarter increased 3.1% year-over-year, again, driven primarily by rate growth as net revenue per adjusted admission was up 3.7% year-over-year, including the benefit from new state-directed payment programs, partly offset by unfavorable payer mix shift. Same-store inpatient admissions declined 1.3% and adjusted admissions were down 0.5% year-over-year. Same-store surgeries declined 2.2% and ED visits were down 2.8%. Labor cost was well managed overall with approximately 2% year-over-year growth in average hourly rate and same-store contract labor spend down 11% from the prior year period. However, salaries and benefits expressed as a percentage of revenue increased 50 basis points year-over-year on a same-store basis due partly to increased physician employment consistent with the investments Kevin highlighted as well as continued in-sourcing, which we believe position the company well to capture share of patients in our markets return to the health care system. Supplies expense remained well controlled, declining 60 basis points year-over-year to 14.9% of net revenue, which largely reflected the decline in surgical volumes along with better procurement and inventory management under our ERP. Medical specialist fees were up approximately 11% year-over-year on a same-store basis. Slightly ahead of our forecast for 5% to 8% growth, but were generally consistent as a percentage of net revenue at 5.5%. Cash flows from operations were a use of $297 million for the first quarter versus positive $120 million in the prior year period. Approximately 1/4 of the year-over-year decline was due to core operating performance, but the remainder primarily attributed to timing of certain items such as Medicaid supplemental payments and provider tax payments that should reverse in future quarters. We also experienced a large buildup of AR related to Medicare Advantage accounts due to delayed payments, which we expect to collect throughout the remainder of the year. As expected, during the quarter, we completed the Clarksville, Tennessee, Pennsylvania and Huntsville, Alabama divestitures, generating more than $1.1 billion in gross proceeds and in early February, used a portion of the proceeds to redeem $223 million of the 2032 notes at 103 via a special call provision. As Kevin previously noted, the company's leverage was down slightly at quarter end to 6.5x versus 6.6x at year-end 2025 and down from 7.4x at year-end 2024. Our next significant maturity is in 2029, and at quarter end, we had no amounts drawn on our ABL. In early March, we announced a definitive agreement to divest four hospitals in Arkansas to Freeman Health Systems for $112 million in cash and the assumption by the buyer of certain real estate leases. The transaction is expected to close in the second quarter of 2026, further enhancing liquidity to continue to reduce net debt and leverage or to fund growth investments. Following the completion of the Arkansas divestiture, our net debt will be approximately $9.3 billion, down from $10.1 billion at year-end 2025 and $11.4 billion at year-end 2024. As Kevin previously noted, earlier this week, we announced several ASC investments in Alabama and Arkansas that are either pending or recently completed with a combined price tag of approximately $85 million. We will continue to evaluate opportunities for growth investments across each of our core markets. Our financial guidance for 2026 remains unchanged. While new developments have emerged relative to the outlook that we provided in February, including the approval of Georgia's State direct repayment program, the pending divestiture of our Arkansas operations and the ASC investment, we believe these are captured within the initial range for adjusted EBITDA of $1.34 billion to $1.49 billion. There are multiple items on the horizon that could affect guidance in the future, most notably the potential approval of new or enhanced state direct repayment programs and potential tailwinds from the rural health transformation program. We don't have sufficient data to adjust the outlook at this early stage in the year. This concludes our prepared remarks. So at this time, we'll turn the call back over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Brian Tanquilut from Jefferies. Meghan Holtz: This is Meghan Holtz on for Brian Tanquilut. I guess it would be helpful if we could start on the payer mix and volume pressures that you saw in the quarter. Is it due to the macro environment? Or are you seeing particular pressures in your markets, particularly as you start to see some green shoots in Q4 around your commercial book? And then how should we be just thinking about volume for the full year as you had been originally guiding to 1.5% to 2.5% of that 5% revenue growth? Should we still be thinking about that as comps get easier in the second half and you guys hopefully recover some volume. Kevin Hammons: Sure, I'll start off and then Jason, feel free to jump in. The volume pressures really saw were across the board. I wouldn't call out any specific markets that were worse than others. So we really do believe that it was a broad pressure on volume. It was also concentrated more so in individuals with commercial and health exchange coverage. So that leads us to believe a couple of things. One, it's macroeconomic issues because those are the individuals with high deductibles and the more aggressive behavior by the managed care companies is we understand, at least anecdotally, that there's kind of been -- they've turned the dial up on denying preauthorizations in more cases. So oftentimes, those patients are not even getting to us because of that. Jason Johnson: Yes. Maybe I would just add as it relates to our guidance, we're assuming low single-digit volume growth for the year. So we're at negative 0.5% adjusted admission for the first quarter. We do think that, that should recover. And I think payer mix was the other piece that came in less than our expectations for the full year. And similar, we think that comes back as the economy continues to improve. Meghan Holtz: Okay. And then as a quick follow-up, operating cash flow looked a little weak in the quarter. We assume it's working capital timing-related headwinds that you'll ultimately recapture. But can you just kind of give us the moving pieces on what was going on in the operating cash flow line in the quarter? Jason Johnson: Sure. I'll take that one. This is Jason. Yes, there are several items that are timing related that we expect to flip through the rest of the year. I'll name a few here. There's about $90 million of Medicaid supplemental payments and provider tax payments timing. In other words, we -- timing difference between when we either recognize the revenue or the expense of the provider taxes versus when we receive those payments or make the tax payments. $50 million to $60 million, I mentioned I referenced this in my comments, that there was a buildup of managed care -- Medicare Advantage accounts, and that's about $50 million to $60 million, which we do expect to collect at the rest of the remainder of the year. We make our bonus payments annually in the first quarter every year, that's about $50 million. So that will continue to flip back the other way as the accrual for this year builds up. There's $25 million to $50 million of AP timing that occurs and usually does kind of happen at year-end versus the first quarter. And then there's -- the final thing I'll mention is about a $15 million initial interest payment on the 2034 notes that were deferred from September 2025 and made this quarter. Those notes were issued in August of last year. And rather than make the initial payment a month or so later, it was deferred until the first quarter. Operator: Our next question comes from Ben Hendrix with RBC. Benjamin Hendrix: Great. I appreciate that it's early in the quarter, but just wanted to talk about kind of the HIX exchange headwind from the ETC expiry that we -- that you are assuming in your guidance. I think in the bridge that we have here, we had about $110 million of revenue, about $25 million of EBITDA assumed. I just wanted to see kind of based on some of the reports that have come out intra-quarter and your experience, just if there's any kind of change to that progression and if you're seeing any kind of regional variation. Jason Johnson: Yes. So we haven't made any changes to our assumptions yet. I don't -- we're still really don't have a lot more data than we had in February. I do know that our hits revenue and adjusted admissions remained between 4% and 5%, both the first quarter of this year and last year. Our revenue actually went up, but we did see about a 3.9% drop in adjusted admissions amongst the exchange plan patients. But that's, I think, similar to what we see with a lot of plans that have the high deductibles at the beginning of the year that we think are staying out of the system. Certainly, there's some portion of those people that may have lost dropped the coverage or moved to another plan or self-pay, we don't really have any new information yet. I think that's still going to be second or third quarter before we get a better feel for that. Benjamin Hendrix: And then just on the core growth that you're anticipating, obviously coming a little bit softer than expected in the first quarter, but -- but how do we think about that phasing through the rest of the year? And I know that you've kind of mentioned some consumer confidence and how do you see that developing as we get closer to the end of the year? Kevin Hammons: Sure. I think we indicated even at the fourth quarter earnings release, we expected this year to be more heavily weighted in the back half. We had anticipated starting off the year a little softer given the consumer confidence coming out of December was muted and low. And then kind of throughout the first quarter, we saw a jobs report come out that was much worse than expected. And then the conflict in the Middle East that transpired in March and the rise of price of oil and gas and price of the pump and so forth. We do believe that we'll see some economic recovery in the back half of the year. Second quarter will be a little bit of an easier comp for us as well. And we think that with the work that we're doing on improving, as I mentioned, improving quality, improving our patient experience as that gets more traction we'll really be positioned well that with this deferred business as people ultimately will come back and have these procedures done, we believe we'll be positioned well to capture that business and maybe uniquely positioned to capture that business in our markets, and that should serve us well. But that is likely not to happen until the back half of the year. Operator: Our next question comes from A.J. Rice with UBS. Albert Rice: Maybe first on these acquisitions, the Surgical Institute of Alabama and the Alaska one. I know traditionally, I've tended to think of you guys as doing when it's something like an ASC within your existing markets. I'm not sure whether you describe these as being adjacent to existing hospitals? Or are you pivoting to now maybe looking more at freestanding ASCs as an investment opportunity? And should we think that there'll be some capital devoted to that -- incremental capital devoted to that going forward? Kevin Hammons: Thanks, A.J. Great question. These acquisitions, we would still characterize as being part of our networks of care, extending the care area that we're treating patients from those hospitals but still connected within our markets and just an extension of those networks. So not going into what I would call new markets with just an ASC strategy. Albert Rice: Okay. All right. And just maybe some -- any update on what you're seeing with labor, hourly wages, contract labor and then professional fees as well? Jason Johnson: Yes. The average hourly rate increase was 2.3% during the first quarter versus the prior year. We did make an investment in physicians. We have 30 net physicians added in the first quarter. That's probably about $5 million of salaries, wage and benefits. And we in-sourced anesthesia program in November of 2025, and that's about $2 million, $2.5 million of additional expenses this quarter. Contract labor came down 11%. I think we're continuing to see a return to rate and usage that are more consistent with prior to the pandemic. Kevin Hammons: And maybe if I could just add a little more color. I think Jason absolutely got that right. But as I think about Jason's comments that we added some additional positions during the quarter, part of what we experienced and as we're being intentional about working on physician experience, our physician turnover decreased during the quarter. We were able to continue to hire new positions that the previous pace we have been hiring at, which has allowed us to add net new physicians. That positions -- it's another area that positions us well. It comes at a little bit of a cost right now without the volume, but -- and adding new physicians to the labor cost, but that will position us well in the future that as this business comes back, we'll have more capacity to take on additional patients with the additional physicians. So again, we look at that as a net positive for us, even though it's coming in a little bit of an extra cost this quarter. Operator: Our next question comes from Stephen Baxter with Wells Fargo. Unknown Analyst: This is [ Mitchell ] on for Steve. Can you give us a sense of the financial profile of the four Arkansas hospitals you announced are going to be divested as well as the large ASC investment. Just trying to better understand how that fits into the guidance. Jason Johnson: Yes, Stephen, thanks for the question. The $112 million proceeds, Arkansas, that's about, I think, a 10 to 12 multiple. And that was not reflected in our initial guidance in February. So that will come out for about half a year. But the ASC investments, which are going to -- are largely going to offset that, they're just about a wash. So no effect on our guidance between netting those... Operator: Our next question comes from Andrew Mok with Barclays. Thomas Walsh: This is Thomas Walsh on for Andrew. Can you help us better understand the uncompensated care and self-pay mix shifts in the quarter as ACA exchange disenrollment picked up? What's the most direct driver of higher uncompensated care higher uninsurance or worsening collections from the insured population? Jason Johnson: Yes. Over time, the collections experience does continue to drive a natural trend that we see. I don't think there was anything outsized this quarter. There was an increase in self-pay volumes this quarter. So relative to the overall net revenue, it increased as a percentage of total. I don't know that there's any one thing that we can point to, except for I don't know, part of this could be the behavior of those folks don't have insurance if they continue to come into the health systems regardless of what's happening in the broader macro environment. Kevin Hammons: I do think it's a fair point, and we've taken into consideration the additional risk of collectibility of co-pays and deductibles in that amount and have adjusted accordingly. Thomas Walsh: Great. And following up, there are a number of moving parts inside the pricing 3.7% in the quarter. Could you help us understand the contribution of normal course rate increases, incremental state directed payments and then the payer mix or acuity headwinds? Jason Johnson: Yes. The normal rate increases are, I think, consistent with our guide around 3% of the impact. And then the Medicaid supplemental payments, Georgia, which I mentioned was approved this quarter. That was about $30 million of revenue, $25 million of EBITDA. That's 9 months worth or 3 quarters. So that's worth about $10 million a quarter on revenue and $8 million or $9 million on EBITDA. And then the rest of the decline was volume and payer mix -- or I'm sorry, that netted against those benefits, probably evenly between slight drop in acuity as well, but it's more about payer mix and volume offsetting those total rate increases. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kevin Hammons, Chief Executive Officer, for any closing remarks. Kevin Hammons: Thank you, everyone, for joining the call today. If you have any additional questions, you can always reach us at (615) 465-7000. Have a good day, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to Grupo Aeroméxico, S.A.B. de C.V.'s First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a question-and-answer session at the end with instructions given at that time using the Ask a Question section on the webcast. As a reminder, today's conference call is being recorded. Now I would like to turn the call over to Ms. Lucero Medina, Head of Investor Relations. Ms. Medina, you may begin. Lucero Medina: Thank you, and good afternoon, everyone. Joining me today to discuss our results are Andrés Conesa Labastida, chief executive officer; Aaron Murray, chief commercial officer; and Ricardo Sánchez Baker, our chief financial officer. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we will present results that are based on our unaudited consolidated financials. Accordingly, financial results discussed today are based on information available to us as of the date of this call and not the comprehensive final statement of our financial results for any period presented. We may make forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act regarding future events and our company's future performance. We caution you that several important factors could cause actual results to differ materially from any plans and expectations expressed in this call, including the risk factors disclosed in our SEC filings. During this call, we will present certain non-IFRS financial measures. We have included a reconciliation and explanation of adjustments and other considerations of our non-IFRS measures to the most comparable IFRS measures. Our call and the earnings release are available on our website. Now it is my great pleasure to turn the call over to Andrés. Thank you, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2026 results. Andrés Conesa Labastida: As the situation in the Middle East continues to evolve, we remain hopeful for a prompt and peaceful resolution. Our results this quarter underscore the resilience of our business model. Despite several external headwinds, including temporary demand disruptions in certain regions of Mexico and a significant surge in fuel prices, we delivered results generally in line with our original guidance, reflecting the strength and adaptability of our platform. We are fully equipped to navigate these challenging times. Our brand is strong, and our ability to achieve higher premium revenue reflects our appeal to passengers who are less sensitive to price fluctuations. Above all, our team is widely regarded as one of the best in the industry. Thanks to this strong team, we have continued to lead the industry. We were once again recognized by Serium as the most on-time airline in the world in 2026, building on our number one global ranking in both 2024 and 2025. We have been acknowledged as a top employer in Mexico for four consecutive years, ranked twelfth on Forbes Mexico's best employer list, and achieved first place in the MERCO Palento ranking for passenger transport. The expertise and dedication of our team represent a distinctive strength that differentiates us from others in our industry. Aaron and Ricardo will give you a more detailed overview of revenue and financial performance. I want to point out several aspects that demonstrate the strength of our business model. Our unit revenues increased by 15% year-over-year, and we achieved an operating margin of 11%, which falls within the guidance range that we shared for the quarter. Also, we closed March with a robust financial position, liquidity exceeding $1.2 billion. Liquidity improved compared to the same period of 2025 and compared to the fourth quarter of last year, which is notable given that the first quarter of the year is typically weak on cash flow generation due to the seasonality of our business. With low leverage and a strong cash position, we have significant flexibility to respond confidently to current challenges. From a structural perspective, fuel accounted for approximately 21% of our total revenues in 2025, which is lower than the levels observed in other full-service carriers and ULCCs within the region. This positioning gives us meaningful advantage in managing periods of elevated fuel prices. Building on this position, we will continue to actively manage capacity and implement fuel recapture initiatives, including targeted fare adjustments. We are encouraged by the market's response, particularly in international markets where demand has remained strong and our fuel recapture strategies have proven to be materially effective. Approximately 70% of our revenues are generated in these markets. We plan to continue to take advantage of the adaptability of our network, enabling swift capacity adjustments as conditions evolve. As the environment stabilizes, we expect to capture meaningful operational leverage from the aircraft added over the past year, driving improved performance. We do not have any material additional fleet commitments this year, which limits incremental cost pressure and enhances our flexibility. This positions us favorably relative to other carriers with sizable committed deliveries in the following months. Simultaneously, we are strengthening our commitment to cost discipline across the organization to protect margins and sustain strong cash generation. This balanced approach on revenue and costs positions us well to navigate the current climate, just as we have proven in previous years. Looking ahead, we expect the second quarter to remain challenging and anticipate it will represent the weakest period of the year, reflecting the full impact of recent fuel price increases. For the second quarter, we expect to recover approximately 50% of the incremental fuel costs, with a clear path to higher levels of recapture as the year progresses, reaching around 70% in the third quarter and 100% in the fourth quarter, as our pricing and network initiatives are fully reflected in the market. In parallel, the benefits of our revenue initiatives, capacity adjustments, and cost measures will continue to build, supporting a sequential improvement in both margins and profitability. In this context, we expect low- to mid-double-digit revenue growth in the second quarter, translating into an operating margin in the range of 4% to 7%. Ricardo will provide additional detail on our second quarter guidance. Given recent market volatility, it is premature to revise our full-year outlook at this time. As conditions stabilize and visibility for the remainder of the year improves, we intend to provide updated full-year guidance. In the meantime, our structural advantages, strong market position, and disciplined execution are expected to reinforce our leadership in both financial performance and operational excellence. With that, I will turn it over to Aaron to discuss our commercial performance in more detail. Thank you very much. Aaron Murray: Thank you, Andrés, and good morning, everyone. I want to thank the entire Grupo Aeroméxico, S.A.B. de C.V. team for delivering industry-leading service and reliability to our customers in what has been a very challenging environment. We delivered revenue above our guidance for the first quarter, with total revenue of $1.34 billion, up 13.3% year-over-year. This record-setting first quarter performance was achieved despite the material impact from isolated disruptions in late February in Mexico. The impact of those disruptions, which affected both operations and transborder U.S. demand for a few weeks, has since recovered. Across our regions, we experienced strong revenue performance with particular strength in our international portfolio. International revenue increased 13.6% year-over-year, led by our long-haul markets in Europe, Asia, and South America. In domestic markets, revenue grew 12.7% year-over-year, supported by improvements with respect to last year's immigration-related impact on border markets and improved performance in beach markets. On the loyalty front, Aeromexico Rewards continues to build strong momentum, driving increased revenue and customer value. In the first quarter, we reached a new record with 38% of our passengers participating in the program, up 10 points year-over-year and 15 points since the program's reacquisition in 2023. Redemption revenue also grew 22% year-over-year, reflecting higher engagement and perceived program value. We continue to see significant runway for loyalty-driven revenue growth as participation expands. We are also seeing the benefits of the successful rollout of our new app, along with continued enhancements in retailing and merchandising which are strengthening our direct online channels. In the first quarter, direct online share reached a record 48%, up three points year-over-year and 23 points versus 2019. Our latest evolution of branded fares is also contributing to improved premium mix, with premium revenue mix reaching 42%, up one point year-over-year and 18 points versus 2019. These commercial efforts are delivering solid results, supporting revenue performance while strengthening the durability of our business. Turning to second quarter outlook, Ricardo will provide the details of our guidance, but overall demand has remained strong across the network despite continued volatility. March cash sales grew in the low teens year-over-year, with the week ending March 15 marking the highest first-quarter weekly revenue sales performance in the company's history, surpassing the previous record set in January. In response to higher fuel costs, we have been focused on implementing fuel recapture initiatives, which are showing encouraging results while also reducing noncore, lower-margin flying. These capacity actions resulted in the removal of approximately half a percentage point of capacity in the second quarter. Based on the success of the fuel recapture actions and continued demand strength, we expect to recover around 50% of fuel headwinds during the quarter. Beyond the second quarter, the impact of our fuel recapture initiatives will increase as a larger share of our bookings reflect these changes and additional initiatives are implemented. In closing, as we enter the second quarter in a more volatile environment, we are confident in our relative positioning in the industry. We have built a strong and durable airline with a robust commercial strategy that will allow us to navigate these conditions and emerge even stronger. I will now turn the call over to Ricardo. Ricardo Sánchez Baker: Thank you, Aaron, and good afternoon, everyone. I would like to echo Andrés and Aaron in acknowledging our team's dedication and significant contributions to the strong results achieved in the first quarter. We maintained best-in-class results in a complex operating environment, highlighting the robustness of our business model and our ability to achieve strong outcomes in challenging geopolitical circumstances. In the first quarter, total revenue reached $1.3 billion, marking a 13% increase from the previous year and aligning with the upper end of our guidance. This result demonstrates ongoing demand and healthy unit revenue trends. Our total unit revenue, or PRASM, grew 15% compared to 2025. From a cost perspective, total operating expenses increased 16% year-over-year, with higher fuel prices as the primary driver of the increase. Costs were also pressured by the impact of a stronger peso on our cost base, which appreciated 14%. Adjusted EBITDA for the first quarter reached €36 million with a 25% margin. This result represents a 5% increase compared to the first quarter EBITDA level of 2025, notwithstanding an estimated adverse effect of €36 million due to higher fuel prices and demand disruptions affecting revenue in specific regions in Mexico. First quarter operating income totaled $142 million with a margin of 11%, in line with the figures reported in the same period of 2025. These results correspond with the lower end of the guidance range issued in the previous quarter. Our cash position continued to improve. We closed the first quarter with over $1 billion in cash, complemented by a $200 million undrawn revolving credit facility, bringing total liquidity to €1.2 billion, or 23% of last twelve months' revenue. This represents an increase of $578 million compared to the same quarter last year, and is $21 million higher than year-end 2025, despite the quarter's typical seasonal weakness. During the quarter, we generated over $200 million in net operating cash flow and reduced financial debt by close to €10 million. At quarter end, our adjusted net debt to EBITDA ratio stood at 1.7 times, representing an improvement compared to the level reported at year end. Our leverage profile continues to strengthen, underpinned by consistent earnings generation and prudent capital allocation. With volatility continuing to shape the current environment, we remain focused on driving efficiency across the operation. As Aaron has highlighted, our emphasis on revenue management initiatives and network optimization is essential for maintaining consistent performance. At the same time, we are reinforcing cost discipline across the organization to protect margins and cash flow. Key actions include implementing a hiring freeze with backfill limited to critical operational roles, reducing discretionary spending including consulting and travel, prioritizing MAX fleet deployment to optimize fuel efficiency per ASM, leveraging operational flexibility to adjust engine maintenance programs and optimize capital expenditures, executing strategic capacity adjustments to avoid cash-negative flying, and reprioritizing investments and component management to reduce working capital requirements. Given the current level of fuel prices, our strategic investments in fleet modernization have become increasingly significant. Specifically, the enhanced efficiency of our 737 MAX aircraft has contributed to a reduction in fuel burn per ASM. During 2026, fuel consumption per ASM was 1.4% lower compared to the same period in 2025, resulting in estimated cash savings of approximately $5 million. In this context, the second quarter is expected to reflect peak pressure from elevated fuel prices, with the benefits of our mitigation actions not yet fully realized. As these measures are progressively implemented and reflected in our results, we expect a gradual normalization of margins and a stronger profitability profile into the second half of the year. For the second quarter, capacity is projected to increase by approximately 1.5% to 2.5% year-over-year. Total revenue is estimated to increase between 12.5% and 15.5% year-over-year. Adjusted EBITDA margin is expected to be between 17% and 20%, and operating margin is expected to be between 4% and 7%. We remain firmly committed to protecting margins, optimizing cash flow, and maintaining a strong balance sheet while preserving the flexibility to adapt quickly. Challenging environments like this often separate the leaders from the rest, and we are confident in our ability to capitalize on these conditions and strengthen our competitive position. We will now open the call for questions. Operator: Thank you. And as a reminder, to ask a question, press 11 on your telephone and wait for your name to be announced. To remove yourself, press 11 again, or use the Ask a Question section on the webcast. One moment while we compile the Q&A roster. Our first question comes from Pablo Monsivais with Barclays. Please proceed. Pablo Monsivais: Thank you. I would like to have more information on your recapture ability. You made some comments on the progress that you have done already, but I would love to know how much of the jet fuel increase can be offset by the prices that you have already reflected, how you are seeing clients, and when we are going to see this taking place, I guess more in the third and fourth quarter. Ideally, any color on the markets—how domestic is behaving to the fare increases versus international, which I guess is more on the long haul rather than the U.S.—would be great. Thank you very much. Andrés Conesa Labastida: Let me provide a brief comment, and then I will ask Aaron to go in detail. As you mentioned, Pablo, it has been much more efficient to translate these jet fuel price increases in international markets than in the domestic market, and I want to stress that 70% of our revenue is associated with the international market. That positions us in a great spot. Although we have not seen the same level of response in the domestic market in terms of yields, we have seen some capacity reductions, which is also positive going forward. Not necessarily affecting prices today, but in the future the domestic market, because of these capacity reductions, could be supportive of better yields. Aaron? Aaron Murray: Thanks, Andrés, and thanks for the question, Pablo. As it pertains to fuel recapture, in the international space we have great recapture across the board, particularly in our long-haul widebody network, and that is about 40% of our capacity. The fuel recapture initiatives were implemented swiftly and in large chunks and have been in place for the last few weeks. With the increase in fares for fuel recapture, we have been watching demand very closely. After a couple of weeks of sales at these new levels, we have not seen any cracks in demand in any of the international markets where we have sustained fuel increases. On the U.S. transborder, about 22% of our capacity, we did have some disruptions in the quarter that impacted U.S. point-of-sale demand. We have gotten through that, and from a recapture perspective we have had quite strong recapture, and demand is holding up. There is probably some long-term softness in U.S. point of sale, but we have made up for that in Mexico point of sale, so transborder U.S. is also holding strong. On the 50% fuel recapture target for the second quarter, with initiatives already in place, we probably need a little bit more to get all the way there, but the lion's share of increases that have stuck will get us to those targets, subject to fuel volatility. Two additional data points: when the conflict in the Middle East started in late February, early March, we had about 80% of the quarter's tickets already sold, given Easter fell in March 2026 versus April in 2025. That reduced our ability to pass through for the quarter. And our ATL on average is 35 days, so once you get to the new cycle, that is when you can translate higher jet fuel prices to ticket prices as you renew your air traffic liability. Operator: One moment for our next question, please. Our next question comes from Duane Pfennigwerth with Evercore ISI. Please proceed. Duane Pfennigwerth: Maybe just a follow-up: can you comment on the amount of 2Q that was already sold before the fuel spike? I assume as you move forward, you will have a better ability to raise yields. And then from a network planning perspective, as you are flexing down, what are the types of markets that are easiest to cut in this backdrop? And maybe you can speak a little bit about the likelihood and timing of slot waivers in Mexico City, if you even want them. Thank you. Aaron Murray: Yes, Duane. That is absolutely correct. We kind of picked around mid-March as when the fuel recapture initiatives really took hold. For the quarter, we were booked about 40%. At present, we are closer to 60% booked for the quarter. So you are right—about half the quarter was booked before the fuel recapture initiatives were in place. That is part of the staggered recovery of fuel recapture; into the third and fourth quarters, even with initiatives that have stuck and as long as demand continues to hold up, our recapture will grow as a larger percentage of bookings come at the new levels. On the network, Mexico City is the easiest place to target. We have some point-to-point flying not part of our hub, and that was the easiest to pare down, with a focus on driving a return on cash cost. In our hub at AICM, we also have some opportunity to cut, and we have, focusing on markets where we can get some recapture. If the markets are not covering cash and returning on cash, we can pull those back. Andrés Conesa Labastida: On slot waivers, let me stress that our top priority—and we will never put that at risk—is to keep our slot portfolio in AICM. We are in a great position to navigate uncertainty in the industry, so that will not be put at risk. If we are able to get some waivers and certain flights do not cover cash if the conflict continues, we will adjust, but we will never put at risk our slot portfolio in AICM. One example of what we have reduced that contributes to this half-point reduction in capacity is that we will not be flying Atlantas and Ixtapa-Zihuatanejo, which was not contributing to cash and is outside Mexico City. We continue to monitor those types of flights and we will not hesitate to cut and not fly them, with the top priority of keeping our slot portfolio in Mexico City. Operator: Thank you. Our next question comes from Michael Linenberg with Deutsche Bank. Please proceed. Michael Linenberg: As we start thinking about your supply plan for the year, you were down in March; you are up only slightly in June; we are already starting to see some cuts on routes in the third quarter—we can see them in the schedules. You have cut some from Guadalajara, etcetera, some non-AICM markets. How should we think about the capacity plan this year? Are we going to be closer to zero, or where are we with respect to planning? And then second, there was a proposal floated to potentially cap domestic fares in exchange for reduced airport costs. Is there any substance to that? Aaron Murray: For the full year, Michael, our original guide was 3% to 5%. What we are looking at right now is closer to probably 2% to 3%. The driver of our growth for the year is in our widebody network. We are taking deliveries this year, and widebodies for us are incredibly profitable. The capacity is coming in Barcelona, which is a new market for us, and other flying we are going to do in Europe. Even at current fuel levels, the profitability is extremely high for us. If market conditions prove that is not economical, we always have the ability to pull that back, but at this point, even at these fuel levels, canceling that flying would hurt our P&L. Andrés Conesa Labastida: To complement what Aaron was saying, as we have stressed in the past, we have huge operational leverage going forward. To fund the growth we originally planned between now and March, we are relying on the planes that we received, particularly in 2025. If we reduce our growth from 3%–5% to, say, 2%–4%, we are not bringing any additional shells to fund that, so we are in a better position. Given this was early in the year, obviously we needed to hire the crews for that growth in the second half. If we do not grow, we will not hire those crews. We are adjusting; we will not put pressure on the P&L. Regarding domestic fare caps, there is nothing that we see as a threat. As you know, in many countries, congress is always active and looking at potential legislation. We, like other airlines, are very active explaining how such measures, rather than helping the consumer, end up being worse for them. As we stressed in our initial remarks, the pass-through has been reflected more in the international than in the domestic market. You have not seen pressures on yields in Mexico’s domestic market because of oil prices, despite the fact that jet fuel is the only fuel that is not subsidized in Mexico—gasoline and diesel have ceilings—but in the case of jet fuel, it is a free market and we pay international prices. Operator: Thank you. Our next question comes from Filipe Ferreira Nielsen with Citi. Please proceed. Filipe Ferreira Nielsen: Hi everyone. On SEO—especially SEO availability—you discussed the strategy behind capacity and how you are seeing international long haul being very profitable. Are you seeing any constraints in terms of availability or shortage anywhere, especially in long haul? We have been hearing about constraints in Europe and Asia. Any high-level views on how this could impact your plans there? And a second question on the fleet plan: as you adjust capacity, are you primarily reducing aircraft utilization, and how should redeliveries and utilization play out as you adjust capacity? Andrés Conesa Labastida: We are monitoring the situation very closely. In the domestic market, Pemex has the ability to refine jet fuel, so we source a significant share of our domestic fuel consumption locally, and we do not see any risks there. In Europe and Asia, we are hearing about potential shortages. One advantage of working very closely with Delta, being a global airline flying everywhere, is that we are working together to make sure that we have the necessary fuel going forward. With the information we have today, for the airports that we fly to in Europe—which are the main airports in the region—we are not seeing potential fuel shortages in at least the next eight weeks, the remainder of the quarter. If the conflict continues, maybe it is another story, but in the short term we are fine. Ricardo Sánchez Baker: As Andrés mentioned, we source our fuel together with Delta in international stations, and suppliers have confirmed to us the availability of fuel for the next couple of months. If conditions continue to be complicated, then we will keep this space under our radar, but right now we think we have enough fuel to be operative in the next couple of months. On the fleet plan, we had a handful of deliveries coming this year. We are expecting another two 787s that will be delivered in the next few months, which will bring increased capacity in international long-haul markets, and we have three 737 MAXs that will be delivered during the year. We are planning to redeliver one NG this year, and we are evaluating if we will redeliver more aircraft next year. We would not have additional redeliveries this year, given the extensions that we executed last year. We plan to end the year with around 170 aircraft, from 165 at the start. As we have stressed, the bulk of our fleet expansion came in 2025 when we received close to 20 new shells. Operator: Thank you. Our next question is from Jens Spiess with Morgan Stanley. Please proceed. Jens Spiess: Thank you. Based on the 2Q guidance, what jet fuel price are you assuming to reach that guidance, so we can play around with different assumptions? Ricardo Sánchez Baker: Hi, Jens. We use a range, roughly around $4 per gallon, between $3.80 and $4.20. The midpoint would be around $4. Operator: Thank you so much. I will turn the call back to management to see if they have any questions online. Ricardo Sánchez Baker: We will take a couple of questions from the webcast. The first question is regarding free cash flow in the second quarter—what would be our expectation? We talked about the guidance in terms of profitability for the second quarter, but in terms of cash flow, we are coming from a first quarter that was very positive in terms of cash flow generation. Traditionally, the first quarter is the weakest of the year, and we were able to increase our cash balances in the first quarter. Going into the second quarter, we see a couple of forces at play. On one side, we expect peak pressure coming from the increase in fuel prices, and this pressure will have an impact on P&L and cash flow. On the other side, the second quarter is traditionally the strongest for us in terms of cash flow generation, as our passengers tend to purchase their summer travel in May and June. We are anticipating that these two forces will kind of cancel each other out, and we do not expect any material variation in our cash balances at the end of the second quarter—basically a flattish outcome. If conditions normalize in line with, for example, the forward curve that we are seeing, the third quarter should be closer to the normal seasonality that is basically flattish, and the fourth quarter would be a positive quarter in terms of cash flow generation. Operator: Thank you so much. I will now turn the call back to Andrés Conesa Labastida for closing comments. Andrés Conesa Labastida: Thanks again for joining the call. Rest assured that we will be working every day to improve the resilience and profitability of our business model. We are on the right track; we are going to do well. As soon as we have more clarity on the full year, we will not wait for the next earnings release—once we have clarity, we will release full-year guidance. For now, we will stay with the second quarter, but as we have it, we will let you know. Thank you again. I am looking forward to seeing you soon. Operator: And this concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Good day, everyone, and thank you all for joining us to discuss Equity Lifestyle Properties First Quarter 2026 results. Our featured speakers today are Marguerite Nader, our Vice Chairman and CEO; And Patrick Waite, our President and COO; and Paul Seavey, our Executive Vice President and CFO. In advance of today's call, management released earnings. Today's call will consist of opening remarks and a question-and-answer session with management relating to the company's earnings release. [Operator Instructions]. As a reminder, this call is being recorded. Certain matters discussed during this conference call may contain forward-looking statements in the meanings of the federal securities laws. Our forward-looking statements are subject to certain economic risks and uncertainty. The company assumes no obligation to update or supplement any statements that become untrue because of subsequent events. In addition, during today's call, we will discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release, our supplemental information and our historical SEC filings. At this time, I would like to turn the call over to Marguerite Nader, our Vice Chairman and CEO. Marguerite Nader: Good morning, and thank you for joining us today. I am pleased to report the results for the first quarter of 2026. We continued our long-term record of strong core operations and have maintained our full year normalized FFO guidance of $3.17 per share. Our manufactured housing portfolio represents approximately 60% of our total revenue, and these properties are currently 94% occupied. Our communities distinguish themselves by their ability to sustain high occupancy levels over extended periods. This resilience is driven by the composition of our resident base as homeowners represent 97% of our MH portfolio. Homeownership promotes long-term residency and supports our strong operating performance. The high concentration of homeowners is a key driver of our predictable recurring cash flow Residents are invested in their communities, which encourages stability, long tenure and strong neighborhood engagement. Within our RV portfolio, the increase in annual revenue reflects continued strength across our customer base. Our annual customers stay in park models, resort cottages, and RVs with many families viewing our properties as an integral part of their traditions and family history. This loyal -- this loyalty supports sustained long-term revenue. Turning to demand. Our offerings across our portfolio are unique. We offer great long-term experiences in sought-after locations at a fraction of the cost of alternatives. We are engaging with our customers through traditional e-mail campaigns, social media outreach and digital advertising. For the quarter, our websites attracted a combined 1.3 million unique visitors and generated 94,000 online leads, reflecting strong engagement. The drivers of the lead generation are from our RV annual lease campaign and trip planning lead generation. Our social media strategy seeks to engage both customers and prospects in a wide variety of platforms. We have over 2.4 million fans and followers across several social media networks. Over the past 10 years, we have grown our social media fans and followers by an average of 25% annually. During periods of uncertainty, it's important to recognize the stability of our business and the fundamentals that support continued growth. I will highlight 3 of the key components of our success. First, our unique business model drives sustained long-term outperformance. Over the past 25 years, ELS has outperformed the REIT industry NOI growth by 150 basis points. The stability through economic cycles is a hallmark of our success. Second, the demand drivers are the support for continued long-term outperformance. Our core customers are baby boomers and 10,000 people per day turn 65 through 2030. Thereafter, the Gen X generation maintains the demographic tailwind for the 15-year period following the baby boomers. The runway remains long supported by favorable migration patterns. And finally, our capital structure is an advantage for us. Our balance sheet is in terrific shape with an average term to maturity of more than 7 years. Our debt is fully amortizing and not subject to refinance risk, and our debt maturity schedule through 2028 shows only 14% of our debt coming due compared to the REIT average of 35%. We have delivered an 18% compounded annual dividend growth rate over a 20-year period. ELS offers a rare combination of strong income growth, stability and demographic tailwinds backed by a well-managed balance sheet. I want to thank our team for a great start of the year. They've done an excellent job supporting our snowbird guests and will soon welcome our customers for the upcoming summer season. I will now turn it over to Patrick to provide more details about property operations. Patrick Waite: Thanks, Margarite. We're in the middle of our seasonal shift with our snowbird customers heading back to Northern climates and our northern properties gearing up for the summer season. As we wrap up the busy season in the Sunbelt, I'd like to provide an update on our key Sunbelt MH markets and the value found in our communities. Florida is our largest market, accounting for about 50% of our core MH revenue. In our top markets of Tampa St. Pete and Fort Ladders. Pound Beach, the average single-family home price ranges from 350,000 to over $500,000. Our communities in these markets offer a compelling value with average new home prices of $100,000 and resale home prices averaging about $50,000. We continue our strategy to expand existing communities in areas of high demand and have added more than 1,100 MH sites in Florida since 2020. In our core Arizona market of Phoenix, Mesa, single-family homes averaged more than $400,000, while new homes in our communities averaged $100,000 and resale homes averaged $70,000. We are actively selling homes in our expansion projects in Arizona or new inventory is selling at prices typically ranging from 110,000 to $180,000. And we have 500 completed expansion sites to support further occupancy growth. In our Northern California markets around San Francisco and San Jose, homes averaged over $1.3 million. All the Southern California markets of Los Angeles and San Diego are about $900,000 to $1 million. Given high demand and the strong value proposition for our California properties, the portfolio is 99% occupied and home sales are typically resales of resident homes in the range of $100,000 and higher. In each of these markets, residents received an exceptional housing value along with desirable amenities, including swimming pools, clubhouses, pickleball courts and more. The active lifestyle and social engagement offered our communities as why homeowners stay with us for an average of 10 years. Leveraging feedback from our customers, our property operations team establishes comprehensive budget plans for each property. Our on-site team members prioritize occupancy and revenue growth while thoughtfully managing expenses such as seasonal staffing, overtime and discretionary spending. We're able to adjust to changes in the business to meet high customer expectations while managing expenses scaled to property operations. At the same time, we are investing in new technology across our business. customer touch points like online payments, customer surveys and follow-up and operational efficiencies like online check-in, staffing plans and expense management. This continued innovation allows us to increase operational capacity while improving the customer experience. Importantly, these efficiencies give our on-site team members more time to make connections with our customers and create memorable experiences. In our RV business, the long-term annual are the core stable occupancy -- core of our stable occupancy. Through April, we have seen improvements in attrition trends compared to last year, and we are looking forward to the summer sales season. Annual sites account for 75% of our core RV revenue, and most of our annual RV customers on a park model or our view of site improvements and sell their unit in place when they choose to leave the can grow. Annual Marina revenues experienced occupancy headwinds year-over-year from delays for permits and longer construction time lines for projects related to previous storms. We expect these construction projects to be completed late in 2016 and into 27, which will then contribute to occupancy gains as we build back that business. We're looking forward to launching the 12th annual 100 days of camping social media campaign this summer, which runs from Memorial Day weekend through Labor Day weekend. We see strong engagement with this campaign year after year, earning over 45 million views across social media last summer. Our teams will be following along as customers post photos online, helping each guest make memories and reinforcing the legacy of our brand. Now I'll turn it over to Paul. Paul Seavey: Thanks, Patrick, and good morning, everyone. I will review our first quarter 2026 results and provide an overview of our second quarter and full year 2026 guidance. First quarter normalized FFO was $0.84 per share, in line with our guidance. Core portfolio NOI growth of 4.9% compared to prior year was slightly ahead of our expectations for the quarter. Core community-based rental income increased 5.7% for the quarter compared to the first quarter of 2025. The increase in rental income is primarily the result of noticed increases to renewing residents and market rent paid by new residents. Occupied sites increased 54% during the first quarter, resulting in occupancy of 93.9%. During the first quarter, we sold 228 new and used homes. The occupancy comparison to first quarter 2025 is impacted by expansion sites added during the past 12 months. Adjusted for expansion sites, occupancy would be 94.4%, in line with first quarter 2025. First quarter core resort and marina based rental income outperformed our budget by 10 basis points in the quarter. Rent growth from RV and Marine annuals increased 4.2% for the quarter compared to prior year. slightly below expectations for the quarter. Marina performance was impacted by delays in slip restoration efforts. Seasonal and transient ramp was 70 basis points higher than guidance as a result of higher-than-expected seasonal rent in the quarter. For the first quarter, the net contribution from our total membership business, which consists of annual subscription and upgrade revenues, offset by sales and marketing expenses was $17.6 million. an increase of 13.7% compared to the prior year. Membership dues revenue growth is primarily rate driven. Approximately 1,200 upgrade subscriptions were originated in the quarter from new and existing members. Core utility and other income increased 5.4% compared to first quarter 2025. Our utility income recovery percentage was 50.4%, about 280 basis points higher than first quarter 2025. First quarter core operating expenses increased 1.8% compared to the same period in 2025. We renewed our property and casualty insurance programs, April 1 and the premium decrease year-over-year was approximately 18%. We are pleased with the results, which reflects no change in our property insurance program coverage. Core property operating revenues increased 3.7%, while core property operating expenses increased 1.8%, resulting in growth in core NOI before property management of 4.9%. Our noncore properties contributed $3 million in the quarter, slightly higher than our expectations. Property management and corporate expenses were $28.6 million in the first quarter of 2026, and 3.4% lower than 2025. The press release and supplemental package provide an overview of 20,262nd quarter and full year earnings guidance. The following remarks are intended to provide context for our current estimate of future results. All growth rate ranges and revenue and expense projections are qualified by the risk factors included in our press release and supplemental package. Our guidance for 2026 full year normalized FFO was $3.17 per share at the midpoint of our guidance range of $3.12 to $3.22. We project core property operating income growth of 5.7% at the midpoint of our range of 5.2% to 6.2%, we project the noncore properties will generate between $5.7 million and $9.7 million of NOI during 2026. Our property management and G&A expense guidance range is $119 million to $125 million. In the core portfolio, we project the following full year growth rate ranges, 4% to 5% for core revenues, 2.2% to 3.2% for core expenses and 5.2% to 6.2% for core NOI. Full year guidance assumes core MH rent growth in the range of 5.1% to 6.1% and Full year guidance for combined RV and Marina rent growth is 2% to 3%. Annual RV and Marina rent represents approximately 75% of the full year RV and Marina rent and we expect 4.8% growth in rental income from annuals at the midpoint of our guidance range. As I mentioned, the change in expectations for full year growth in annuals compared to our prior guidance is attributed to our Marina portfolio, which is experiencing longer-than-anticipated delays in restoration of slips. Our full year expense growth assumption includes the impact of our April 1 insurance renewal for the rest of 2026. Our second quarter guidance assumes normalized FFO per share in the range of $0.69 to $0.75. Core property operating income growth is projected to be in the range of 4.8% to 5.4% for the second quarter. Second quarter growth in MH rent is 5.6% at the midpoint of our guidance range. We project second quarter annual RV and Marina rent growth to be approximately 5.1% at the midpoint of our guidance range. Our guidance assumes second quarter seasonal and transient RV revenues performed in line with our current reservation pacing. We've made no changes to prior guidance for seasonal and transient rent in the third and fourth quarters. Second quarter growth in core property operating expenses is projected to be in the range of 3.9% to 4.5% and includes the impact of our April 1 insurance renewal. I'll now provide some comments on our balance sheet and the financing market. Our balance sheet is insulated from refinance and rate risk and is well positioned to execute on capital allocation opportunities. Our floating rate exposure is limited to balances on our line of credit. Our debt-to-EBITDAre is 4.5x and interest coverage is 5.6x. We have excess to approximately $1.2 billion of capital from our combined line of credit and ATM programs. We continue to place high importance on balance sheet flexibility, and we believe we have multiple sources of capital available to us. Current secured debt terms vary depending on many factors, including lender, borrower sponsor asset type and quality. The current 10-year loans are quoted between 5.25% and 6.25% 60% to 75% loan-to-value and 1.4 to 1.6x debt service coverage. We continue to see solid interest from life companies and GSEs to lend for 10-year terms. High-quality, age-qualified MH assets continue to command best financing terms. Now we would like to open it up for questions. Operator: [Operator Instructions]. And our first question comes from Jamie Feldman of Wells Fargo. James Feldman: Great. I wanted to dig a little deeper into the insurance renewal and then just the impact on the expense savings and the new guidance. Can you talk about what you had in the original guidance for the insurance renewal, how that compares to the down 18%? And then just maybe some of the moving pieces around the expense savings and the guidance going forward? Paul Seavey: Sure, Jamie. I think that we've guided to full year core expense growth. I think I mentioned this in the January call. It includes a premium to CPI. That is offset by some anticipated savings in a few line items. And just as a refresher for everybody, roughly 2/3 of our expenses are comprised of utilities, payroll and repairs and maintenance. And those three line items, we expect year-over-year growth for the remainder of 2026 to be approximately 4.7%. The CPI reported in April was almost 100 basis points higher than the prior month, and we've made some expense adjustments, including utility expenses and R&M both in anticipation of potential energy and supply cost increases. And with respect to the insurance we had an assumption in our budget, which was informed based on what we understood what's happening in the market at the time that we finalized our budget in January. And so we've made the adjustment to reflect the 18% reduction in premium and all of that is rolled into the guidance that we provided. James Feldman: But are you able to say like what was in the initial number for the insurer? I'm just trying to figure out how much better it was than what you thought. Paul Seavey: Yes. Generally, we don't go into that level of detail, Jamie. Operator: And our next question comes from Jana Galan of Bank of America Securities. Jana Galan: Following up on the revised seasonal and transient top line guide, can you just talk a little bit more about like booking visibility and kind of reservation pacing. And I don't know any impacts with kind of the weather. Paul Seavey: Sure. I mean, with respect to the seasonal business and just as we think about advanced reservation pacing, certainly, we talked a lot in the past about our transient business and not great visibility beyond the coming 90 days as our first point of kind of visibility. So as I mentioned, we've updated our guidance for transient to reflect what we're seeing in the system right now in terms of reservation pacing. But just a reminder, roughly 60% of the revenue comes from bookings that are within 7 to 10 days of arrival. Jana Galan: And also very much appreciate the update on the financing environment. I was just wondering if you can maybe comment on any changes in the transaction environment or any more product coming to market potentially on the RV side. Marguerite Nader: Sure. Thanks, Jana. Yes, as you know, our assets are really in demand from an investor standpoint. It's not a secret that the model that we have is compelling. But we find times in our history that we have limited amount of quality assets for sale, and we're in that time right now. As an industry, we're experiencing a low volume of activity. The ownership remains highly fragmented, but our team is very engaged with owners as they consider their next step in the future. I think that with your -- with respect to your question on whether on the RV side, I think there probably is more opportunities to buy transient RV parks than there were previously. But that's necessarily something we are interested in. Operator: And our next question comes from Eric Wolfe from Citi. Eric Wolfe: For the Northeast annual RV sites, can you just talk through the trends that you're seeing there? I think last year, around this time, you started to see some higher turnover like 20 properties or so. Does that seem to be normalizing? Is occupancy head behind? Maybe just talk through sort of for those Northeast properties, the annual trends you're seeing thus far? Patrick Waite: Yes. Sure, it's Patrick. We are seeing trends that are more consistent with our historical experience as opposed to the elevated attrition that we saw at the same time last year. And as we made our way through the quarter, sequentially month after month, we were able to achieve a higher level of sales. We feel like we have consistent demand in the RV annual space. And just as a reminder, in the back half, of 2025, we added 500 annual. So we kind of rolled out of that period into a period of steady demand, and we're past that elevated attrition that you referenced from last year. Eric Wolfe: Got it. That's helpful. And then maybe just going back to the marina restoration. I guess it sounds like based on your original guidance, you expected maybe some slips to come back, I guess, this quarter, but now it's sort of getting pushed to late 2026 or even early 2027. I guess, first, I just want to confirm, that was right. And then maybe just discuss, I guess, it sounds like maybe over the last 2 months, you've seen construction delays or permitting delays. Just sort of what happened and what the magnitude of it is. I guess I calculated like $1.5 million, but maybe just let us know if that's incorrect. Patrick Waite: Yes. So I'll -- let me speak to what's actually going on at the property. So it's 3 properties. They were impacted by the hurricane season in I think your time line is pretty close to our thinking. I would have expected that we would have been on coming into this year and starting to build occupancy as projects were completed through the current year. The reality is the delays are, call it, in the neighborhood of 9 to 12 months. And the expectation of progress being completed and building back occupancy late in 2026 and into 2027, I think is a good way to think about it. Operator: And our next question comes from John Kim of BMO Capital Markets. John Kim: Many teasing occupancy, it continued to trend down. It did end the quarter on a high note, but I'm wondering how you see that playing out for the rest of the year, excluding the impact of expansions. Paul Seavey: Yes. As I mentioned in the call, occupancy ended the quarter at 93.9%. That's up 10 basis points from year-end on the 54 sites that we filled during the quarter with no expansion sites added. We have a -- we essentially have an assumption in the budget for a modest uptick in occupancy for the rest of the year. not quite the volume of growth that we saw in the first quarter in the future 3 quarters, and so anticipate a slight increase during the rest of the year. John Kim: Okay. Can I ask a second question? Paul Seavey: Sure, you can. John Kim: The 1,000 trails, you talked about a new -- I think a new rate strategy. just given that it's gone up 12% year-over-year despite fewer members. Is this something that you're going to carry on through for the near future and potentially increase rates further at the expense of memberships? Marguerite Nader: Yes. I mean I think if you look at the supplemental, as you point out, you see that increase in revenue. I think all -- if you add all the line items together, you get to about an 8% growth. And that is primarily because we changed that product. And we have a higher annual dues rate. The term is, I think, 2 to 4 years and with costs ranging from $2,000 to $4,000 a and the members want to have that extra time at the properties, take advantage of discounts on cabins, et cetera. So right now, that price is, I think, is properly priced. And as we head into '27, we would look to what increases we would think that we should do in terms of that product. But the product as a whole has been very successful for our customers, our members wanting to get that upgrade and pay the additional does. Operator: And our next question comes from Haendel St. Juste of Mizuho Securities. Haendel St. Juste: I wanted to go back to the OpEx guide for a bit. Again, I guess I understand that you don't want to get into the specific pieces of how much things like insurance or causing an adjustment for the guide. But I guess I was more curious on the oil side. Obviously, the cost of oil has picked up quite a bit this year. And I'm curious how you can hedge the future volatility in the price of oil? Or how -- what's contemplated in the guide and potentially how that can be hedged. So any color on what's being contemplated, how it can be offset and how to think about that in the broader context of the prior guidance versus the new guide Paul Seavey: Sure. So our process to update guidance considered the impact of the roughly increase in oil price since December. We reviewed the pricing structure used by the utility providers in states where we operate. These include regulated, frankly, primarily regulated and some deregulated markets. utility providers in certain states like Florida do have pricing structures with variability clauses that allow them to recapture some portion of their costs if the regulated rates limit their ability to recapture price increases. So as we looked at all of that, we increased our utility expense assumptions for the remainder of 2026. Haendel St. Juste: Okay. Fair enough. I appreciate that, I suppose. And then if I could squeeze in one just on the revised guide for the noncore portfolio income, maybe some color on what's driving that and how to be thinking about modeling that? Is that fair just to perhaps ratably grow that through the model the rest of the year? Paul Seavey: Yes. I think it relates to just improved expectations, a couple of the properties in that portfolio. primarily RV locations. You may recall that there are a number of properties that are in the noncore portfolio that were previously impacted by storms that were not operational. And so as they're recovering, we noticed some upside in the performance and the expected contribution and that was the basis for the adjustment. Operator: And our next question comes from Brad Heffern of RBC. Brad Heffern: Historically, you've talked about weather being the primary swing factor on RV transient and there hasn't really been an obvious impact from gas price movements. Obviously, with the or we're seeing a much more dramatic and quick change in prices. Is there anything in your data that suggests that it might be having a negative impact on transient demand? Marguerite Nader: Yes. We've looked certainly over many years at gas prices and the effect on RV transient. And certainly, gas prices have made headline news over the past several weeks. Year-over-year, I think we've seen a $0.90 increase in the price of gas, not unlike what we saw during the pandemic during times in the pandemic. But we kind of think of it in terms of just what is it -- what's the incremental cost to our customer. And if you consider a 3-night trip. Our average customer is going about 90 miles to our locations. That higher gas price results in an increase of about $25, $30 for the trip -- and if that's three nights, you're talking about kind of $10 per night. So if you think about other vacation alternatives, the overall cost of our vein is really significantly lower and offers the flexibility of really being able to control your spend and also be able to control your environment. So I think at the current rates, net-net, I think it can be a positive certainly, if you're talking about rates that are significantly higher or you're talking about supply issues, then you get into kind of maybe different conversations. But I think where we're at right now, our customers are excited to get out there and use their RB. Haendel St. Juste: Okay. Got it. And then the Canadian tariffs kind of went into effect more than a year ago. So we should be starting to lap some of the comps on the boycotts. Are you seeing any evidence that those Canadian customers might be coming back or any other color that you can give around that? Patrick Waite: Yes. The we're just out of the summer season and the impact of the Canadians rolled through those results. I think it's early to call what we're going to see for the summer season. And certainly, we're in some unpredictable times. But we'll provide updates as we start to get greater visibility into the next couple of quarters. Operator: And our next question comes from Michael Goldsmith of UBS. Michael Goldsmith: Maybe just a follow-up on the seasonal and transient seems like the first quarter number was in line with the initial guidance. You're kind of guiding to second quarter of down 9%, but then it kind of -- it implied that the back half is up about 3%. So I was just wondering how you're thinking about that 3% growth in seasonal and transient in the back half? And if that split is that more fourth quarter weighted than third quarter? And then are you expecting in the guidance, are you baking in kind of an acceleration in the fourth quarter as you lap some of that disruption from the Canadian customer. Paul Seavey: Sure. Broadly, Michael, as you said, the base rental income growth rate, it does reflect a 50 basis point decline to prior guidance. half of that, as we talked about as the marina. The remainder is heavily weighted to our seasonal expectation for the second quarter. That's mainly in April. Just to provide that color. And then as we think about the remainder of the year, as I said during my opening remarks, we've left the assumptions for third and fourth quarters in place as they were budgeted as we don't have great visibility into that activity. Michael Goldsmith: So as they were originally budgeted, was that does that bake in an assumption that you'd get back some of the Canadian customers that didn't come in fourth quarter. Paul Seavey: We have an assumption in the fourth quarter of a recovery of some of that. I wouldn't qualify it to Canadian customers. I think that, as we've talked, the impact on the seasonal business, provides an opportunity for us to backfill occupancy from customers, whether they're Canadian or domestic customers. Michael Goldsmith: Got it. And then just as my follow-up question, on the home sale volumes on price, it looks like new sale volumes were down and the rate and the price per home was down and then similarly on the used homes. I think they were also -- at least the price was down. So presumably that's a mix shift, but can you provide a little bit more color in what's going on in the home film. Patrick Waite: Yes, sure. I mean we continue to see steady demand. The beginning of the quarter was -- it was impacted by weather, it was winter and that even bled down through many of the Southeast markets. And as we work our way through the quarter, we saw steady demand and feel good about the demand profile. Just with respect to the new and used sales the one, I wouldn't read too much into in any particular quarter, the home sale price because to your point, it has a lot to do with mix. I mean, directionally, the price per on the new was up and the price per on the used was down. But all of that is with the backdrop of -- we feel like we have steady demand in the MH portfolio. Operator: And our next question comes from Wesley Golladay of Bard. Wesley Golladay: Can you unpack the seasonal and domestic transient guests for the first quarter? Was that positive growth ex Canadian? Paul Seavey: Yes, it was primarily overall, it was growth. It did included the Canadian customer in the revenue, of course, but just to be clear, the marginal improvement was from customers that we saw booking seasonal stays during. Wesley Golladay: I guess the -- I mean, if you were -- could you unpack the domestic traveler? Was that positive? Is that customer segment bottomed? And do you have a positive outlook for that segment going forward. Paul Seavey: The domestic seasonal customer is what [indiscernible] sorry, sorry. Wesley Golladay: Domestic seasonal and transit segment. So I'm trying to figure out how much of that was weighed down or the outlook this year is maybe Canadian negative, but U.S. domestic and transit gas positive? Just trying to unpack if that is if that segment is bottoming out at the moment. Paul Seavey: Well, I guess. I'll say two things. One, as we -- as Patrick mentioned, we've ended our winter season and we're heading into our northern season. So that's a very different customer and different potential there. And maybe with respect to the seasonal as we just think about the future, the coming winter season next year, maybe it'd be helpful to walk through some historical context on the reservation patterns for the winter season revenue. I mean in the past, we would end our winter season with approximately 50% of the anticipated future winter season revenues booked those advanced reservations allowed customers to reserve the site that they wanted at the property and didn't carry penalties for cancellation. Then following a fair amount of booking and cancellation activity after the first quarter and into the summer months. By the end of any winter season, roughly 1/3 of the revenue that was generated during the winter season came from those advanced bookings. So start the season with 50% of the revenue booked to end with about 1/3 after all the cancellations -- and so as we think about it now, there's been a meaningful disruption to the seasonal business, we think that we've talked about as a result of the domestic and the Canadian relations, and so we look at it in terms of engagement. And as we sit here right now, 50% of the in-place guests have reserved space for next year, and that compares to 47% of the in-place guests last year. Wesley Golladay: And then one more, I guess, bigger picture question. With the rise of artificial intelligence and the way people are searching for product these days, are you noticing any change in the way you source your residents or a seasonal and transient guys? Marguerite Nader: Certainly, our marketing department is very focused on using artificial intelligence inside of our search options, understanding and appreciating customers are searching for our offerings. It is no longer kind of a simple camp grounds in Maine. It's a much more robust search and we're focused on making certain that once that search is put in place and once the person indicates what exactly they're looking for, we are able to have our communities and our resorts come up at the top of the list. And a lot of that is a function of our websites have been around for a really long time, and they have a really high number of reviews, which is very helpful for that algorithm. Operator: Our next question comes from Jason Lane of Barclays. Jason Wayne: Just on the RV and Marina. Looking at the RV and Marina. annual guidance cut, so that was driven primarily by transient and marinas. So can you just give any color on how rent growth and occupancy trended in RV annual specifically in the first quarter and what your assumptions are for the rest of the year, RV annual, specifically. Paul Seavey: The RV annual, when we reported in October, we provided our guide for rate growth that was 5.1%, and that's been consistent. And we anticipate that to be consistent for 2026. We're seeing no change from that. And in terms of occupancy, we had roughly 100 sites that we were down in the first quarter, and we anticipate, as Patrick was talking recovery of those sites and addition of annual sites throughout the year. Jason Wayne: it. And then it looks like there were some other sites added this quarter. Just curious where those new sites were added, if that was all in kind of the markets you mentioned earlier. And if there's any that are expected to come online this year in those markets and maybe outside the. Paul Seavey: We didn't add sites in the quarter. We did have some shifting in our reporting. So a couple of things in terms of just the presentation of sites in our earnings release, if that's what you're referring to provide greater visibility and clarity on the composition of sites in our JV portfolio. We reported those a bit differently and showed those in the categories with footnote disclosure that they relate to the JVs. And then we also annually at the end of the first quarter, we true up our seasonal site count for the number of seasonal customers that we had during the winter season. So that adjustment was made. And with that adjustment, the transient site count was offset or adjusted accordingly. Operator: And our next question comes from David SegaLoggerhead of Green Street. David Segall: Just a follow up on the site count changes. What do you think are the prospects for reclassifying those sites that were converted from or classified from seasonal transient back to seasonal later this year? Or is that more of a 2027 event? Paul Seavey: Yes. Our practice is to update that at the end of the first quarter based on what we saw during the winter season. So we would anticipate doing that a year from now. David Segall: Great. And I appreciate the color on local home prices that you gave earlier in the call. I'm curious what your thoughts are on the impact of stagnating or lowering prices and the local for sale market would be on the MH values and the ability to increase rents and just kind of implicitly what do you expect the spread between stick built homes in your markets to MH home values to remain stable? Or do you think it would narrow Patrick Waite: Yes. Let me -- I guess, first, I'd put in the context the value proposition that I addressed in my prepared remarks is very attractive and is a wide band to the next mark on single family. So we have a strong value proposition even if there was some moderation in single-family home pricing, and we've seen that historically that we've had consistent occupancy and consistent home sales, even in up cycles and more moderate cycles. So I think that's our reasonable expectation as we look forward to 2026. And I'd also highlight that those key markets that I highlighted have a very consistent demand profile, including in single family in the mid-tier across each one of those submarkets. Operator: And our next question comes from Peter Abramowitz of Deutsche Bank. Peter Abramowitz: Yes. Just wondering, could you give us kind of a refresher on general demographics of your transient customer base I think age average income levels would be helpful. And I know you talked about the impact of oil prices on decisions around train and travel. But just generally, kind of what are the democrats of that customer base? And then also maybe some of the broader macro factors like job growth, anything we should be watching for thinking about as it relates to results through the rest of the year? Marguerite Nader: I guess, the demographics of our transient customer really varies by region. So in the northern part of the country, the Northeast and the Midwest is really family camping. So you're talking about a couple. 40-, 50-year-old couple with a couple of children, and they come out on a weekend basis, and they're generally employed full-time workers and just have the time when they have time off from their jobs to be able to camp and then very differently in the South and Southwest in Florida, Arizona, et cetera. We have -- our transient camper tends to be a retired couple who tends to go and stay in a few different locations and has just more time on their hands to be able to work their way through our properties and through our system. Peter Abramowitz: Okay. That's helpful. I appreciate that. And then just one more on the scope of the work of the Marinas I think you mentioned it was three properties specifically. Can you share where they are? And then is there any sort of kind of offsetting revenue pickup in 2017? Or is this just work to kind of get the properties back online? And kind of back on the trajectory that you previously expected? Marguerite Nader: Yes. The properties are all in Florida, three properties are in Florida. And yes, certainly, there is a revenue pickup in 2017. There's upside in 2017 for these assets. because there is a high demand for these slips to be brought online, they'll be filled and then we'll be recognizing that revenue in 2017. Operator: And our next question comes from Adam Kramer of Morgan Stanley. Adam Kramer: Just want to ask about capital allocation priorities here. I think, in particular, right, development seems like a really interesting opportunity. Given I think what you talked about for yields historically versus what acquisition yields would be today. So just wondering, again, general capital allocation priorities sort of stack ranking them. And then I think with development in particular, is there an ability or an interest in sort of that beyond, I think, the sort of 700 to 1,000 sites you've talked about on an annual basis? Patrick Waite: Yes, sure. So on the development front, over the last 3 years, we've brought online a little over 2,000 sites, that's been a mix of MH and RV, highly focused on our core markets in the Sunbelt. This year, looks to be in the range of 200 to 400 sites that deceleration is not is not an indication of our desire to continue developing our expansion sites, but it's just the cadence of projects as they're working their way through an approval process and then getting a shovel in the ground. Those yields, we continue to expect to be in the high single digits. Those properties that we're focused on for the upcoming year in Florida, and then we have another 1 out on the West Coast. Adam Kramer: Great. And then maybe switching gears a little bit more of a bigger picture question. Just on the policy side of things. I think the -- so Roto Housing Act has a number of elements related to manufactured housing in it. I think the permanent chassis requirement getting removed sort of a big one, but also some financing elements pushed for factory-built housing a number of others. So I was just wondering, again, sort of open any question here. Sort of maybe the company's thoughts just on the act and what it might mean for the industry and the potential read-throughs to DLS specifically? Paul Seavey: I mean, overall, I would say that it would be helpful to the industry for the points that you just highlighted, specifically to ELS some variability in manufactured housing setup may provide an opportunity for us. I think there's broader opportunities for the manufacturers. We are close to tracking what is the progress on that legislation. And just given the current state of affairs in DC, that bill has stalled for all practical purposes. I think there's still a desire to move it forward, but we'll have to we'll continue to monitor. We can provide updates on future calls as we get some more insight. Operator: And our next question comes from Steve Sakwa of Evercore ISI. Steve Sakwa: A lot of questions have been asked and answered. I just wanted to kind of circle back on the MH occupancy point. I guess whether you kind of look at the data on Page 9 or the data on Page 7, slightly different numbers, but kind of paints the same sort of broad picture, which is the site count has gone up year-over-year. but the number of occupied sites is actually down when you kind of look at the ending March 31, '26 versus March 31, '25, and I think Patrick mentioned that you guys added about 500 expansion sites maybe over the course of the past year. So maybe just talk about that lease-up process? And are you still doing expansions at the same pace, given that the occupancy has kind of been trailing down? Or how do you sort of think about that development lease-up pace and future builds? Patrick Waite: Yes. Well, just high level on the occupancy front, just a reminder that as we made our way through '24 and '25 the hurricane impact from the '24 season was basically 300 occupied sites. So we're working through building that back. With respect to our expansions. We've completed some very solid recent expansions in particular, in Florida and Arizona. The lease-up rates there, I would expect to be anywhere in the range of 20 to 30 sites potentially as high as 40. And that's really going to depend on macro factors and then what's going on in the individual submarkets. But if you're leasing up in this space somewhere between the neighborhood of 20 and 40 sites on an annual basis. That's a good run rate. These properties are -- the expansions are part of very solid core properties and solid submarkets. So they'll continue to contribute to occupancy over the next couple of years to reach stabilization. And then as I mentioned a little earlier, we have a desire to continue those types of projects. We have others in the pipeline, and we can talk about those more as we approach 2027 and 2028. Steve Sakwa: So just as a quick follow-up, Patrick. Is it your expectation that occupancy, given the hurricanes and the expansions, would you expect occupancy, whether it's an average or a spot to be bottoming in '26 and then moving higher in '27 or '28? Or could you envision where occupancy is even down next year as you're kind of working through the pace of that and then it kind of starts to take off in '28? Patrick Waite: I would expect that we're going to increase occupancy in the MH portfolio on a consistent basis over time. That doesn't mean that we're not going to have an external catalyst that's a disruption to the business model temporarily, but we have a long history of continuing to increase the occupancy. And even backfilling the impacts of the hurricanes that I referenced show a very steady demand profile. Operator: And we have a follow-up from Eric Wolfe from Citi. Eric Wolfe: Another questions. If I look at your guidance changes, in the supplemental, it adds up to almost $0.02 positive benefit. I was just wondering what's offsetting that? Paul Seavey: Sure. Eric, we have maintained full year normalized FFO per share guidance though there are a lot of changes, as you mentioned. You can see the items that increased. The main offset in the updated guidance relates to assumptions for our income from home sales and ancillary operations. Eric Wolfe: Got it. That's helpful. And then you mentioned some adjustments to April seasonal. Was that just, I guess, the number of customers that typically extend their stays. So you just saw a little bit less extending their stays this year. And do you think that was perhaps due to sort of the greater shift towards domestic customers versus Canadian? Or is there some other factor around that? Marguerite Nader: A lot of what we see, Eric, in April, is really weather-related where people are saying, okay, it's nice enough up north, we can head up north. And No longer need to seek refuge in the cold or in Florida from the cold. So that's kind of what we saw. And you see that same effect in October, where -- some people stay longer, if you have a longer summer in September and October. And if you just saw people returning back north quicker than anticipated. Operator: And we have a follow-up from Brad Heffern of RBC. Brad Heffern: Yes. On the RV site count, what is the financial impact of a seasonal site moving to transient? I'm sure, obviously, it could just get booked again is the seasonal next winter. But if it stays a transient sight, is there a meaningful negative financial impact from that? Marguerite Nader: I mean it really depends on what -- how that site was performing. I guess just think -- if you just think about the annual conversions to transient our average annual is about $7,000 or $8,000 and your average transient customer is about $81 per night. So it depends how many nights and both the same with the seasonal, how many nights are occupied as to whether or not you have a financial impact to that conversion. Brad Heffern: Okay. But the like shift of those, whatever it was 12 1,400 sites, is that meaningful in some way? Or is it really just moving change from one back to the other? Paul Seavey: Well, it's -- I mean it's already embedded in our guidance because it's simply a reflection of what we experienced during the winter season in terms of the occupancy of those sites. Operator: And we have a follow-up from Jamie Feldman of Wells Fargo. James Feldman: I had a very strict instructions from Adam to ask one question. It's still hard. So I've had a couple of people ask me to clarify. So I apologize if you guys already answered this or provided it. But the 50 basis point cut to RV and Marina based rental income, was that all from the slips. And if it wasn't all the slips, how do you break it out between RV and Marina? Paul Seavey: Well, the -- it's interesting because there's a 50 basis point decline in RV and Marine in total. And there's a 50 basis point decline in RV and Marine annual. So to be clear, the RV and Marina annual 50 basis point decline is attributed to the Marina portfolio. It's not the RV portfolio. It's the Marina portfolio. And I think somebody earlier in the call said they calculated roughly $1.5 million, and that's correct. James Feldman: Okay. All right. And then last, the 300 sites lost in the hurricane, how many of those are back online. Because it seems like it comes up every quarter the occupancy change or fewer lease sites, fewer I should say. Patrick Waite: Yes, we're in the process of putting homes on those sites in I put it in the context of this. It's an additional 300 vacant sites in a portfolio of 70,000 sites where we have a run rate practice of purchasing new homes and these occupancy it's not like the 300 go down, then we fill them 1 through 300 and the move on. They're part of the ongoing investment in inventory in those -- in the broader market. Obviously, they were hurricane impacted, so they're in Florida. I don't have the exact number, but we've filled a substantial number with new homes, and we'll continue through that process to reach full occupancy. The properties that were impacted by those hurricanes are Pinnacle assets where the demand profile is very solid and I would expect the occupancy to rebuild consistently. James Feldman: Okay. And then finally, I think I know the answer, but you do have some portfolios out there for sale internationally. What are your latest thoughts on sticking to your knitting and keeping the type of assets you have? Or is there any yield IRR that would be compelling enough to go international at this point or into new property types or something outside of your core business? Marguerite Nader: I think you were right with how you started, which is you know what the answer is going to be. We are focused on growing our business inside the United States, and we will continue to do that. James Feldman: And in terms of new property types? Marguerite Nader: Well, certainly, more MH, more RBS to new property types, nothing that we're looking at right now. Operator: Since we have no further questions on the line, I'd like to turn it back over to Marguerite Nader for closing remarks. Marguerite Nader: Thanks for taking the time today to listen to our call. We look forward to updating you on our second quarter earnings. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, everyone. Welcome to Western Alliance Bancorporation’s First Quarter 2026 Earnings Call. You may also view the presentation today via webcast through the company's website at westernalliancebankcorporation.com. I would now like to turn the call over to Miles Pondelik, Director of Investor Relations and Corporate Development. Please go ahead. Miles Pondelik: Thank you, and welcome to Western Alliance Bancorporation’s First Quarter 2026 Conference Call. Before I hand the call over to Kenneth A. Vecchione, please note that today’s presentation includes forward-looking statements, which are subject to risks, uncertainties, and assumptions. Except as required by law, the company does not undertake any obligation to update any forward-looking statements. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to the company's SEC filings, including the Form 8-Ks filed yesterday, which are available on the company's website. Now for opening remarks, I would like to turn the call over to Kenneth A. Vecchione. Kenneth A. Vecchione: Good afternoon, everyone. I will make some brief comments about our first quarter 2026 performance before handing the call over to Vishal to discuss our financial results and drivers in more detail. After reviewing our revised 2026 outlook, Dale and Tim will join us for Q&A as usual. Western Alliance Bancorporation’s financial results in the first quarter reflect strong core business performance alongside decisive actions taken on two previously disclosed fraud-related credits. Adjusting for these actions, we generated earnings per share of $2.22, which is consistent with where we were tracking on a reported basis prior to the charge-off announced on March 6. Importantly, these matters are now largely behind us. By removing these lingering distractions, we can refocus attention on the trajectory of our underlying operating performance. I will briefly review these related charge-offs and mitigating actions before discussing our core results. As previously announced, we fully charged off the remaining $126.4 million balance of the loan to a fund of Lucadia Asset Management. We initiated legal action at the time of the announcement and are actively pursuing recovery through those proceedings. Given the nature of this process, the outcome may take time to resolve, and we will not provide further commentary while the matter is ongoing. As discussed last month, we executed security sales, which generated $50.5 million of pretax gains. These gains, together with identified expense savings and other revenue initiatives, substantially offset the impact of this charge. We are also providing an update on the Cantor Group 5 loan. We believe the $29.6 million specific reserve established in Q3 has been validated by current as-is appraisal values across all the collateral properties as well as our updated lien positions. We believe recoveries on this loan will be realized in the future from multiple sources, including springing guarantees from ultra-high-net-worth guarantors and a mortgage fraud policy. Due to the complexity and potential duration of the resolution process, we charged off $26 million of this loan during the quarter. Turning to Q1 results. Deposit growth was exceptional at $5.6 billion on a quarterly basis, putting us ahead of pace to reach our $8 billion deposit growth target for 2026. This outperformance positions us to accelerate deposit optimization programs, which should further reduce funding costs and support net interest margin, even absent interest rate cuts this year. In the first quarter, interest-bearing deposit costs declined 21 basis points, contributing to a 3 basis point quarterly increase in net interest margin to 3.54%. Total loans grew $903 million this quarter, split nearly evenly between the HFI and HFS portfolios. We grew HFI loans 3.2% on a linked-quarter annualized basis and 8% compared to the prior year. We deliberately grew the HFS portfolio with lower risk-adjusted weighting so we could repurchase shares and remain at our target CET1 ratio of 11%. This strategy afforded us the opportunity to delay loan growth into Q2 and reevaluate the credit, macroeconomic, and geopolitical environments. We have not backed away from our $6 billion target. Overall, core asset quality remained steady as net charge-offs for the quarter, excluding fraud-related credits, were marginally higher than the upper end of guidance. We believe the portfolio is past peak stress, particularly within office CRE, as we have seen classified loans increasingly migrate towards resolution instead of further deterioration. Classified assets to total assets declined 9 basis points from the prior quarter to 1.08%. We are positioning nonperforming loans to decline in the back half of the year, with several credits to be resolved by Q3. We continue to manage our capital dynamically in an evolving macro environment. During the quarter, we repurchased 700,000 shares at a weighted average price in the low seventies, reflecting our conviction in the intrinsic value of the franchise. Strong capital generation drove an adjusted return on average assets and return on average tangible common equity of 1.0% and 14.2%, respectively. This supported a stable CET1 ratio of 11% and ACL ratio of 87 basis points, while compounding tangible book value per share 13% year over year. Overall, we delivered strong balance sheet growth, net interest margin expansion, and sustained core earnings momentum underpinned by healthy risk-adjusted PPNR, while also opportunistically defending the stock through accelerated share repurchases. Western Alliance Bancorporation continues to benefit from a highly diversified franchise, differentiated market positioning, and deep integrated relationships with our clients that enable us to perform across a wide range of economic scenarios. At this time, Vishal will now walk you through our results in more detail. Vishal Idnani: Thanks, Ken. In the bottom right corner of slide three, we highlight two earnings adjustments this quarter. The execution of a series of security sales generated aggregate pretax gains of $50.5 million. These gains partially offset the impact of the LAM provision and together reduced net income by $62.1 million, or $0.57 per share on a net basis. As a result, my comments on our adjusted performance exclude these items, as we do not view them as reflective of the ongoing run-rate outlook of the business. Turning to the income statement on slide four, net interest income of $766 million was in line with the fourth quarter and increased approximately 18% year over year. Lower funding costs, driven by declines in interest-bearing deposit costs, helped offset pressure from lower loan yields, while higher average earning assets also supported NII stability. Noninterest income increased 18% quarter over quarter to approximately $253 million. Excluding securities gains realized in both Q1 and Q4, noninterest income would have declined modestly by $5 million, largely due to lower mortgage activity. Service charges and fees increased $15 million sequentially, primarily reflecting strong performance in our Juris banking business, with the corresponding but smaller offset flowing through other noninterest expense. Mortgage banking revenue was stable year over year but declined $18 million from the prior quarter. Importantly, fundamentals across the mortgage business continued to improve, with gain-on-sale margin expanding 18 basis points year over year to 37 basis points and loan production volume increasing 18%. Q1 mortgage earnings were impacted by the sharp backup in interest rates, highlighted by the 10-year Treasury yield rising 33 basis points in March. Elevated rate volatility during the month also created modest headwinds for hedging performance and servicing income. Early April results indicate mortgage banking is reverting to levels seen in January and February before rates backed up. Noninterest expense increased about $22 million from the prior quarter to $574 million. Excluding the FDIC special assessment rebate last quarter, noninterest expense only increased about $15 million. The increase reflects higher compensation expenses related to annual merit increases and other typical Q1 costs. Deposit costs declined from a full-quarter impact of two Fed funds rate cuts in Q4. As mentioned earlier, the increase in other noninterest expense was partly driven by higher Juris banking fee revenue and related expenses. Adjusted pre-provision net revenue was $394 million, up 42% from the same quarter a year ago. Provision expense was $87 million, excluding the LAM charge-off cited earlier. Adjusted net income available to common stockholders was $241 million, representing a meaningful increase from a year ago, and generated adjusted EPS of $2.22, up 24% compared to reported EPS in the prior-year period. Now turning to the balance sheet on slide five. Cash and securities rose meaningfully toward quarter-end, driven by strong deposit growth. As we execute our deposit optimization strategy, we expect the relative size of cash and securities to total assets to return to more normalized levels seen in Q4, while our loan-to-deposit ratio returns to the mid-70s. Total loans increased $903 million from the prior quarter. Diversified and meaningful contributions from mortgage warehouse, Juris, HOA, and regional banking drove $5.6 billion of quarterly deposit growth. We view this outsized growth as providing flexibility to further optimize deposit funding costs throughout the year. As deposit growth approaches our 2026 target of $8 billion, our balance sheet expanded in total by $6.1 billion from year-end to just shy of $99 billion in assets. The slight decline in total equity resulted from more active share repurchases and a rate-driven change in our AOCI position, mitigating the impact from continued organic earnings growth. We opportunistically repurchased $50 million of shares during the quarter, bringing program-to-date repurchases to 1.6 million shares, or $120.4 million at an average price of $76.55. Looking closer at loan growth trends on slide six, HFI loan growth continues to be powered by C&I loan categories. Nearly two thirds of quarterly HFI growth came from C&I, with the remainder concentrated in residential loans. From a business line perspective, regional banking was a primary driver of quarterly growth, led by homebuilder finance with solid contributions across businesses. Interest-bearing deposit costs declined 21 basis points from sustained cost reduction, despite growth in average balances. Overall, liability funding costs moved 12 basis points lower from Q4, mostly from lower deposit costs as well as reduced borrowing costs stemming from less reliance on short-term FHLB borrowings. On the asset side, the securities yield rose 5 basis points from the prior quarter to 4.59% due to a shorter day count. Despite the elevated level of security sales during the quarter, we were able to reinvest at slightly higher rates due to the recent backup in rates. The HFI loan yield compressed 16 basis points following a full-quarter impact of rate cuts made in late October and December. Looking at slide nine, net interest income was stable versus Q4 at $766 million, supported by $1.1 billion of average earning asset growth and lower funding costs. Earning asset growth was driven by C&I loan growth as well as higher held-for-sale balances. Net interest margin expanded 3 basis points sequentially to 3.54%, reflecting meaningful reductions in funding costs. The interest cost of earning assets declined 12 basis points while the earning asset yield compressed only 8 basis points, with rounding accounting for the net 3 basis point improvement in margin. Strong back-loaded deposit momentum increased liquidity toward quarter-end, as evidenced by the significantly higher period-end cash balance despite a slight decline in average balances during the quarter. Turning to slide 10, the efficiency ratio of 56% and adjusted efficiency ratio of 48% both improved by approximately 8 percentage points year over year. We continue to realize strong operating leverage as year-over-year revenue growth outpaced noninterest expense growth by approximately 3 times. As discussed earlier, noninterest expense increased $22 million in Q1, or approximately $15 million when adjusting for the FDIC special assessment rebate recorded in Q4. The increase was primarily driven by seasonally elevated compensation costs as well as incremental expenses incurred to support higher Juris banking fee revenue. Deposit costs declined $8 million due to lower rates, although higher balances driven by momentum in HOA and Juris partially offset the benefit from the rate reductions. On slide 11, you will see we remain asset sensitive on a net interest income basis. When factoring in the potential impact on earnings from mortgage banking revenue growth and also reduced deposit fees, our model now indicates we are slightly liability sensitive on an earnings-at-risk basis in a down 100 basis point ramp scenario. In this scenario, earnings are now expected to rise 1.7%, mostly from improved forecasts in mortgage banking. On slide 12, we highlight several metrics demonstrating core asset quality remains stable, excluding fraud-related charge-offs. Classified assets as a percentage of total assets continued to improve, declining 36 basis points year over year to 1.08%. Criticized assets were largely stable sequentially, increasing modestly by $60 million to approximately $1.47 billion, while special mention loans increased $78 million quarter over quarter. The change was not thematic, and the balance remains $57 million below first quarter 2025 levels. Nonperforming loans and OREO declined 7 basis points quarter over quarter as a percentage of total assets. Now let us move to slide 13 to review our allowance and coverage ratios. Provision expense was $87 million, excluding the LAM charge-off, and replenished other net charge-offs as well as supporting incremental loan growth, primarily in C&I. Our allowance for loan losses remained constant at $461 million, or 78 basis points of funded HFI loans. The total loan ACL to funded loans ratio also remained constant at 87 basis points. Over the medium term, we expect the allowance for loan losses to trend into the low-80 basis point range, reflecting a higher proportion of C&I loan growth within the portfolio. Our total ACL still fully covers nonperforming loans, shifting higher to 105% coverage at the end of Q1 compared to 102% a quarter ago. Looking at capital on slide 14, our tangible common equity to tangible assets ratio declined approximately 50 basis points from year-end to 6.8% due to approximately $6 billion in asset growth, increased share repurchases of $50 million, and a rate-driven change in our AOCI position. We believe our active buybacks in Q1 were prudent uses of capital, given the modest difference between where our stock was trading in early March and our tangible book value per share. Nevertheless, our CET1 ratio remained at our targeted level of 11%. Turning to slide 15, tangible book value per share increased 13% year over year and has grown at an 18% CAGR since 2015. The gap between historical tangible book value accumulation and peers stands at four times. Western Alliance Bancorporation has been a consistent leader in creating shareholder value over the medium and long term. On slide 16, we have provided 10 metrics that highlight how we stack up against our peers on earnings growth, profitability, and other critical factors that drive financial results and create durable franchise value. We view these metrics as important in compounding tangible book value and ultimately generating a long-term superior total shareholder return. For the last ten years, our EPS growth and tangible book value per share accumulation have ranked in the top quartile relative to peers. We are also the leader in tenure and adjusted efficiency. We continue to make strides towards top quartile returns on average assets, deposit and revenue growth, and average tangible common equity. I will now hand the call back to Ken. Kenneth A. Vecchione: Thanks, Vishal. Our updated 2026 outlook is as follows. We reiterate our expectation for $6 billion of HFI loan growth, as our business pipelines remain robust. We will continue to actively evaluate risk-adjusted returns across the pipeline. Vishal Idnani: Should spreads become less compelling, our appetite for some of these loans may change. Our $8 billion deposit growth target remains unchanged. As you heard during our prepared remarks, excellent year-to-date deposit growth provides ample liquidity and flexibility to remix deposit concentrations in order to lower interest-bearing deposit costs, improve the NIM, and better position the bank to achieve EPS targets, while still achieving 2026 deposit balance objectives. As a result, it is reasonable to assume deposit balances should be flat in Q2, with performance returning to more normalized levels beginning in the third quarter. Our CET1 target remains 11%. We continue to evaluate capital levels relative to peers and believe our current position remains appropriate. Accordingly, we do not expect capital ratios to meaningfully change from these levels over the near term. Net interest income growth continues to be projected in the range of 11% to 14%. While the range is unchanged, we now expect results to trend towards the upper end of the range. This reflects three key factors. First, our largely variable-rate loan portfolio benefits from an outlook which now assumes no rate cuts this year, compared to one cut previously assumed in Q2 and one in Q3. Second, our full-year loan growth outlook is unchanged. Third, optimizing deposit composition will provide opportunities to mitigate interest expense as interest income accelerates with loan growth. Taken together, we expect the net interest margin to experience modest expansion relative to full-year 2025 levels. Noninterest income, excluding the impact of security sales, is projected to grow between 13% and 17%. This reflects strong underlying momentum across the franchise, driven by higher expected growth in our Juris banking business and a return to the solid trajectory in mortgage banking activity experienced prior to the March rate volatility. Previewing April’s results, mortgage performance has begun to return to January and February levels. Improved growth in commercial banking fees is also expected to contribute to higher fee income growth. Total noninterest expense is now expected to increase between 7% and 11%. Our deposit cost range of $650 million to $700 million reflects higher average balances from stronger performance in select deposit businesses as well as the removal of projected rate cuts from our 2026 forecast. Operating expenses are now expected to be between $1.6 billion and $1.65 billion, driven by higher variable compensation, incremental costs associated with increased banking fee revenue, and continued investments in new business and technology. Importantly, these projections incorporate the $50 million of projected expense savings identified in early March, which will not impact LFI readiness or our key strategic growth initiatives. Our revenue and expense outlook continues to reflect solid operating leverage supported by continued improvement in our adjusted efficiency ratio. With respect to asset quality, we reaffirm our core net charge-off guidance of 25 to 35 basis points, excluding the two fraud-related charge-offs recognized in Q1. Based on current migration trends and the expected cadence of NPL resolution efforts, we anticipate full-year results will be at or slightly above the midpoint of this range, with charge-offs declining in the back half of the year. Our full-year 2026 effective tax rate outlook remains approximately 19%. And finally, we are excited to host our inaugural investor day in less than three weeks. We look forward to seeing many of you there in person on May 12. We will now open the call for questions. Operator: We kindly ask that you limit your questions to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matthew Timothy Clark with Piper Sandler. Please go ahead. Matthew Timothy Clark: Hey. Good morning. Vishal Idnani: Good morning. Matthew Timothy Clark: Just to touch on the five, you wrote off $26 million, I believe, of the just under $30 million that you had reserved. And I think that suggests you have just around $70 million left tied to that exposure. Can you just give us a little color on whether or not you are relying on personal guarantees to cover the remaining amount here? Because I believe they are suing one another and not sure how easy it is to get at that liquidity. Kenneth A. Vecchione: I think I got your question. On our last earnings call, we said that we were in the process of getting and receiving appraisal values. All the properties have been appraised and all the appraisal values held to what we originally had forecasted or originally had in the old appraiser. That was good news, point one. Second bit of good news was that the liens in front of us were less than what we thought. So what we have done is mapped out several different strategies to resolve this issue, trying to collect on the equity that sits behind these buildings. At this time, we feel taking the charge-off of $26.5 million is reflective of the strategies we are going to put forward to collect the remaining equity value that sits behind all the properties. We have not incorporated any of the ultra-high-net-worth individuals’ guarantees in coming up with the $26.5 million, nor have we captured the mortgage bond, which is up to $20 million after a $5 million deductible. So that is why we said we took the $26.5 million now. We have a number of resolution strategies. This will take some time. We are not going to talk about this every quarter, but as we go through the resolution strategies and finally get to the outcome, we will then turn our attention to the high-net-worth individuals and go after them, and then also whatever we do not collect from them, we will then put against the mortgage bond. So we think the $26.5 million is appropriate now. We do not see any other charge-offs or reserves coming from this point, and we believe recoveries will come later on in the process. I hope that answers your question. Matthew Timothy Clark: That is helpful. Thank you. And then just on the service charges up again, driven by Juris. How should we think about a normalized run rate there? I know it is difficult, I am sure, to guesstimate, but what do you view as a more normal run rate? And I assume we would see a reset in related expenses from that business. Vishal Idnani: It is Vishal here. Thanks for the question. We agree it is hard to do this. These fees tend to be a little bit lumpy. As we mentioned, we have a leading practice with the mass tort settlement here. We did talk about the Facebook Cambridge Analytica settlement that we had, and I think we got more of the revenue from that in the first quarter than we initially anticipated. So that is why you have the elevated number in Q4 and Q1. We do anticipate that number going down in Q2 and Q3, and then in Q4, you could see a higher spike as well. But it is hard to give you more clarity around that because it will just depend on how that comes through. What we will say is that the business continues to do well, and we have won the next large settlement. It is just a matter of timing around that. Operator: Your next question comes from the line of Jared David Shaw with Barclays Capital. Please go ahead. Jared David Shaw: Hey. Good morning. Thanks. Vishal Idnani: Good morning. Jared David Shaw: When we look at the deposit costs on the guide there, how should we think about the ECR beta in this environment with now no cuts? Where should we think that ultimately settles out? Vishal Idnani: Hey. It is Vishal here. Overall, when we think about the ECR deposit beta, I think it is in line with what we were thinking before, which is 65% to 70% when you think about the three businesses that have ECRs. Obviously, they are very specific to each one. In the mortgage warehouse, we tend to think of the beta as up to 100%, maybe in the 90% to 100% range. The other two businesses we have are Juris and HOA. The deposit beta on that tends to be around 35%. So when you blend those together, you get that 65% to 70%. The next piece of your question is our deposit costs went up because we did take the rate cuts out of the forecast. Where do we anticipate that going? We are continuing to push down on the cost. Given the big increase in deposits in the first quarter, we are going to make a concerted effort here to optimize the deposit cost across the company throughout the rest of the year. I would also tell you on the mix of the ECRs, we are planning to hold the mortgage warehouse deposits more flat and focus more growth in HOA and Juris. That should also help push the ECR cost down over the course of the year. Jared David Shaw: Okay. Thanks. And then as my follow-up, looking at asset quality, and maybe the criticized/classified, how are you looking at your exposure to software companies in the tech and innovation sector? Is that driving any credit migration here? Kenneth A. Vecchione: No. It is not driving any credit migration at this time. The conversation that is out in the marketplace is really around private credit. We have a very limited exposure inside of our private credit book to technology, and specifically software companies are under 5% of our total book. More importantly, we have such a granular approach in that book of business whereby all the credit that we have granted to the clients is roughly $4 million on average in commitment and $2 million drawn against the $4 million of commitments. So we are not seeing any problems in that book at this time, and it is not reflected in our criticized or classified asset viewpoint. Operator: Your next question comes from the line of Casey Haire with Autonomous. Please go ahead. Casey Haire: Yeah. Great. Thanks. Good morning, guys. Kenneth A. Vecchione: Good morning. Casey Haire: I have a million questions on NIM. I guess I will start with the loan-to-deposit ratio. Vishal, I heard you say you plan to get normalized cash and get back to a mid-70% loan-to-deposit ratio. Just in terms of timing, how quickly do you expect to get there? And a little more color on the deposit optimization plan if you can. Vishal Idnani: On the loan-to-deposit ratio, that is the target. When you think about our loan and deposit growth targets, $6 billion and $8 billion, that is 75% when you think about the target. I would say by the end of the year, that is the plan. It will also come down to the deposit optimization. We might actually see deposits in the second quarter not at the typical run rate you would see from us given this optimization. Plan for it at the end of the year. Hopefully, we will get there on the sooner side because we are trying to bring loan growth up to the earlier part of the year. On the deposit optimization, we are going to continue to work through that. As you can see from the first quarter, up $5.6 billion in deposits, close to our $8 billion target already, I think it just gives us a lot of flexibility to go to the highest-cost deposits in the bank and see where we can push those rates down. Casey Haire: Okay. Great. And then on the capital front, have you guys looked at the Basel III proposal and what that means for you guys in terms of capital ratio lift? Kenneth A. Vecchione: Yeah. Actually, it is very positive for us. All in, we expect it, based on the rules that we are reading, to increase CET1 by 81 basis points. Operator: Your next question comes from the line of David Charles Smith with Truist Securities. Please go ahead. David Charles Smith: Hey. Good morning. Vishal Idnani: Morning. David Charles Smith: If the operating expense guide is $20 million lower than January following the $50 million in mitigating actions, does that mean that you are expecting an extra $30 million of variable comp for production? Or is there anything else underpinning that as well? Vishal Idnani: You are right. We mentioned $50 million. We are only down $20 million. The answer there is twofold. One, our Juris banking fee income was higher than we anticipated, and therefore, what you are seeing are the expenses which find their way into operating expenses. And the second thing that we said in our prepared remarks is that we expect the mortgage business to do better than we initially planned, and the variable compensation relates to the fact that we will be hiring up people to support increases in mortgage income. So those two or three things taken together bring the operating expenses down by $20 million. David Charles Smith: Okay. And then you mentioned the plan to hold mortgage warehouse deposits flat over the course of the year. If the market is rebounding from a depressed level in March, does that mean that you are expecting to lose share somewhat in mortgage warehouse? Or can you expand on that? Vishal Idnani: So let us be very candid here. We are trying to finesse the deposit growth and deposit pricing in this bank. We are starting with warehouse lending where we have some of the higher-cost deposits. We are going to work with our clients to see if we can move some of those higher-priced deposits out of the bank. We expect that our overall deposit growth for Q2 will be flat because we will be accelerating some of these deposits outside of the bank. We then expect Q3 to have its seasonally high production, and we expect less runoff in Q4 since we moved a lot of the deposits out of the bank in Q2. This is a finesse operation. We will give you more update on this, a little more color, at the investor day as we work with our clients to do this as well. This is a little bit of a tougher one to forecast, but the direction is very clear, which is we are trying to lower deposit costs, lower interest expense, help support NIM going forward, and actually bring up our loan-to-deposit ratio so we do not have to carry this excess liquidity at either a flat or negative drag to the bank. Operator: Your next question comes from the line of Timur Felixovich Braziler with UBS. Please go ahead. Timur Felixovich Braziler: Hi. Good morning. Kenneth A. Vecchione: Good morning. Timur Felixovich Braziler: Ken, you had made a comment about reevaluating credits, the macroeconomic backdrop, and the geopolitical environment when talking about pushing out some of the loan growth into the second quarter. Can you maybe unpack that comment a little bit? And maybe what does that mean for loan composition going forward, if that changes at all? Kenneth A. Vecchione: I think we were just a touch conservative here, and we did not push to accelerate closings in this quarter. We had the time to negotiate. There was not an urgent press from the clients to close before the quarter end, and we just took a little bit of a wait-and-see approach. What we are seeing and what we are feeling and what we are reading—and this is your guess as good as ours—we feel there will be some type of ceasefire that will continue on. We are certainly seeing the robust pipelines that are in front of us, and we are still encouraged that we will achieve the $6 billion on a go-forward basis. Timothy R. Bruckner runs regional; he is sitting here. Tim, do you have anything you want to add to that? Timothy R. Bruckner: Yeah. I think when you really look at Q1 in particular, and it signals a view into our look-forward, we really saw the preponderance of the asset growth in those core commercial full-relationship segments that we have consistently talked about on this call. Where we pulled back a little bit or showed some hesitancy was in some of the asset-specific finance-oriented segments, predominantly the commercial real estate-related segment. So we are really committed to that full relationship. Growth in our pipelines in those segments is robust and, of course, with appropriate sensitivity to the market conditions. Timur Felixovich Braziler: Okay. And then one on credit for me. Just maybe reconcile your comment on being past peak credit with just the pickup in special mention and 30- to 89-day delinquencies. And I am wondering, with the allowance ratio here at 78 basis points, if there is anything incremental that would need to be done there as we get closer to or breach that $100 billion level. Kenneth A. Vecchione: I am going to team up here with Bruckner on this answer, but first part on the special mention: special mention increasing $75 million is really no big whoop, alright, and I would not get nervous about it. When we looked at fourth quarter results for our peer group, for example, which consists of 22 banks, our total criticized assets, which includes special mention, were 15.7% of criticized assets to Tier 1 capital plus ACL. That is well below the peer median of 25.5%. It actually puts us at the third best of the 22 peer group. So, at our size, having something move in and move out does not necessarily mean our asset quality is deteriorating or getting materially better. What we do here—you have heard this—is an early process of early identification, escalation, and then resolution. Timothy R. Bruckner: I would really say on special mention, that is a transitional rating. That is a rating that signals early warning and a potential problem loan, and we use it in a very directed way as transition. If something has the characteristics that, with the passage of time, would result in a problem, we mark that as a problem loan. Our credit process is conservative in that respect, and we push resolution. Early elevation, early resolution is our mantra there. Kenneth A. Vecchione: And on ACL reserves, I think what we said last quarter and still holds true this quarter: as we migrate and change the loan composition here, moving more into C&I, you will see the loan loss reserve move up from where it is today at 78 basis points into the low 80s. You will see that all throughout the year, and I would expect the provision will follow that. So you ought to plan accordingly, and that is very consistent with what we said last time. Operator: Your next question comes from the line of Christopher Edward McGratty with KBW. Please go ahead. Christopher Edward McGratty: Great. Good morning. Kenneth A. Vecchione: Good morning. Christopher Edward McGratty: Ken and Vishal, on the pace of buybacks, you mentioned, obviously, being there to step in when the stock was weak in the quarter. How do we think about balancing the benefit from Basel over time, the low valuation in your stock, and the strong capital position? Is there a scenario where you could perhaps slow or further optimize the balance sheet and just lean more on the buyback given the valuation? Kenneth A. Vecchione: Strategically, what is very important for us is to work to continue to lower deposit costs. We have several businesses—corporate trust, business escrow services, our digital asset group, and Juris Banking—that really depend on credit ratings from the rating agencies, and we are investment grade. It is very important to sustain that or improve those investment ratings. We think keeping our CET1 ratio at 11% is the appropriate thing to do and, slightly over time, continue to migrate that number upward. For long-term value, it is more important for us to maintain the ratings. Secondly, unlike many of our peers, we still see a very strong pipeline in front of us. Longer term, we think having the capital to support that long-term growth will help investors and will support investors’ trust in us as we continue to grow the bank. So, Chris, we are not expecting to go deep back into the market to do stock buybacks. They are not in our models right now. If there is a reason for the stock—if it gets disrupted in the market—then we will come back and look to support it as we did in Q1. Christopher Edward McGratty: Understood. Thanks for that. And then just digging into the mortgage a little bit, could you help us on a Q2 estimate for mortgage revenues? You mentioned trends in April reverted back to early Q1. I know there have been moving parts—servicing and production. Thanks. Vishal Idnani: I can jump in on this. I will make a couple of comments on mortgage banking. We were in line with the same quarter a year ago. Obviously, the business is seasonal. We were down $18 million from the fourth quarter of last year. As Ken mentioned, we are very constructive on the trajectory of mortgage banking in 2026, especially given the current administration’s focus on home affordability. January and February were good months. In March, there was a slowdown with the spike in interest rates. Fortunately, we are seeing that activity come back in April. For the full year, we are expecting revenue from mortgage banking to grow about 15% over last year’s level. Encouragingly, the gain-on-sale margin was up 7 basis points quarter over quarter and up 18 basis points from the same quarter a year ago. That margin improvement is being driven by increased retail recapture volume at AmeriHome, and we hope to see that continue. While volumes were down in Q1 compared to Q4, volumes were materially up 18% from Q1 last year, and the trajectory looks good for the rest of the year. Operator: Your next question comes from the line of Gary Tenner with D.A. Davidson. Please go ahead. Gary Tenner: Thanks. Good morning. I just wanted to check to make sure I understood the way you are parsing that lender finance data on slide 20, that private credit slide. Does that $2.3 billion basically represent the rightmost slide, the NDFI—slide 24—or make up the vast majority of it? Is that the right way to think about it? Vishal Idnani: I think if I got your question right, you are trying to figure out, on page 24 where we break out the NDFI bucket, where that lender finance sits. It is going to be in that business credit intermediary. The large proportion of that 5% of the loans—call it about $3-something billion—is going to be our lender finance book. Our lender finance book on page 20 is $2.3 billion within that category when you look at the NDFI loans. Gary Tenner: Okay. That makes sense, and that is what I was thinking. I am just curious—you point out that the average funded amount per obligor is quite light. I am just curious on the level, the average would be around $40 million I think. So I am wondering what the range is and what the top end of exposure is on the fund level. Kenneth A. Vecchione: The top end for any one credit inside of our private credit portfolio is about $60 million of commitment, of which we have about $30-odd million funded, and that is the largest credit that we have. As we said, it is very granular inside of our private credit book. Gary Tenner: Alright. That is very helpful. Thank you. Kenneth A. Vecchione: I will just add on that: I did a tour maybe three, four weeks ago, as soon as all the private credit noise hit the market, with our largest private credit clients—and you would all know them by brand names. What they were telling us was exactly what we were seeing inside of our book, which was credit was performing well. There were redemption requests mostly coming from the retail side of their LP base, and institutional LPs were remaining confident about performance. We are clearly seeing that as well inside of our book. Vishal Idnani: And, Ken, if I can add just a couple of things on the book. On page 20, you will see how granular it is. The other thing we would flag here in this bottom right bullet is we actually also serve as the trustee on about 60% of this, which helps us a lot in terms of oversight and monitoring the cash flows in and out on a bunch of these deals. Operator: Your next question comes from the line of Analyst with TD Cowen. Please go ahead. Analyst: Hello. So just to piggyback on the earlier question, can I interpret that as within the lender finance, there is no loan that is over $100 million in size? And if we broaden that outside of lender finance—just overall—are you able to share the number of exposures that are over $100 million in size as an example? Kenneth A. Vecchione: No, we are not going to share that, but loans to funds are much larger. Inside of the fund, the composition of the clients inside of that fund—or the borrowers that they are lending to—are the numbers that I just reported. But, yes, we have larger size. We have about 40 major funds that we are doing business with, and the size is larger. Analyst: Got it. And if I look at the lender finance portfolio, the $2.3 billion, when you were talking about the reserve ratio over time in the medium term coming down to low 80s—Is there any change in reserve methodologies that you would embed differently on the lender finance portfolio going forward? Or how should we think about— Kenneth A. Vecchione: Let me just change that statement for you. We are moving the loan loss reserve from 78 to the low 80s. We are not taking it down, okay? You are not going to be seeing releases here. We are looking to build our provision over time. In fact, looking at this last night, from about three or four quarters ago, our peer group has increased their reserve by 11 basis points on average, and over that same time, we have increased our reserve by 10 basis points. But we do not plan to release anything. Vishal Idnani: You may be looking at the total ACL to funded HFI loans, which sits at 87 basis points right now. You are going to see that trend into the low 90s. As Ken mentioned, the loan loss reserve to funded HFI loans is at 78 basis points. That was flat quarter over quarter. We are going to push that into the low 80s. You will see that with the natural movement in the loan balances, and the total ACL to funded loans is going to go from 87 to the low 90s. Analyst: Right. That is what I was referring to. Thank you for the clarification. Is the lender finance portfolio going to grow further from here along with the size of the rest of your loan book, or would you like to slow the growth in this segment for any reason? Kenneth A. Vecchione: I think it will grow as the rest of the portfolio grows. I do not think we are going to put any incremental acceleration to the private credit book at this time. Operator: Your next question comes from the line of Analyst with Wells Fargo. Please go ahead. Analyst: Hi. Thanks for taking the question. I just want to follow up on Timur’s question earlier. What would it take for the loan reserves—the all-in measure, if you will—to go to 1%? Kenneth A. Vecchione: If you want the numeric number, take the percentage and multiply it by ending loans. But if you are wondering what it would take, it would take a change in the economy. We are not seeing that. The economy is strong. We have a process here whereby the first line presents and develops the loan loss reserves. Second line comes in and reviews and comments on it. We have a third line that comes in to make sure that the first and the second lines are doing it correctly. Then we have the Federal Reserve, and our outside auditors come in and review the whole process. So I cannot walk in here and say, “Let us move it up 20 basis points.” I have to have a foundation for that. Everything is based on economic forecasts, and we base them off of Moody’s, and then we look at our overall portfolio. I will remind you, half of our portfolio really has never had a loss. Vishal Idnani: And when you look at the total ACL to funded loans—the 87 basis points—and we have about $8 billion of resi mortgages where we have sold credit, if you just move that out of the loan base, the ACL to funded loans is 1%. Analyst: Got it. Thank you. And then just for clarification, is there a run-rate number you can give for the service fees at all, or did you just give some directional commentary on where it is going over the next few quarters? Vishal Idnani: We are not going to provide a run rate here. We have given guidance for what the fee income is going to do over the course of the year, and you can back out the securities gains and see that growth of 15%. We have also given guidance around what we think mortgage banking will do within there. You can back into the number. We do see that number trending down in the second and third quarter on service charges and fees and then back up in the fourth quarter, but it will get you to the full run-rate guide that we are giving here in the deck. Operator: Your next question comes from the line of Bernard von-Gizycki with Deutsche Bank. Please go ahead. Bernard von-Gizycki: Hey, guys. Just on the resolution process that you previously mentioned during the quarter—the $126 million charge-off against the LAM loan—you identified the $50 million security gains and the $50 million of cost savings. The remaining $26 million, that may be already covered in the updated fee guide, but any updated color on this? Kenneth A. Vecchione: You are right. We took $50 million in revenue and $50 million in expenses. We have not articulated how we are going after the last $20 million or $26 million. We will see if we can work our way to resolving that during the course of the year. But we have enough in front of us to do. Quite frankly, you and many of your colleagues were suggesting that we should not fully resolve the $126 million charge-off, to ensure that we have enough money available for product development, enhanced services, and also to ensure that our loan growth and deposit growth continue on the trajectory that they are at. So we have been taking that advice to heart, and we only offset $100 million against the $126 million as a solve. Bernard von-Gizycki: Great. And then from here, the Investor Day is coming up. Any preview on what you intend to convey? Any big-picture messaging you can share with us today? Kenneth A. Vecchione: We are not like MGM where we give a preview, but one of the things that we are going to talk about is the question we get all the time: why can we grow when other banks cannot? We are going to spend time showing you how we grow and how we think about growth over several horizons, and how the growth that we have is not by accident, and it is not that we run forward to anything that is fashionable today. It has been well thought out for an extended period of time. I think it will be interesting to have you look under the hood and see how we position ourselves for growth inside the bank. Operator: Your next question comes from the line of Anthony Albert Elian with JPMorgan. Please go ahead. Anthony Albert Elian: Hi. Ken, your earlier comment on accelerating some deposits out of the company—I do not think I have heard that before, from a company that has grown as fast as you do. Is that entirely driven by taking a sharper focus on ECR costs now? Will the plan to move deposits out of the company be fully completed here in 2Q? And any other areas of focus as part of this deposit optimization plan? Kenneth A. Vecchione: Stepping back and taking a big-picture look, our bank grows every year about the size of a small regional bank. Most banks do not do that. That is point one. Point two, we had a phenomenal deposit growth quarter. It exceeded our wildest imagination. We thought we would maybe get to $3 billion; coming in at $5.6 billion was far greater than we thought. Third, where those deposits came from—they came in from some of our higher-priced customers, which led us to take a step back and ask, how do we optimize here? What we are trying to do—and as I said earlier, this is a finesse game—we have already started the process to remix, maybe reprice, and encourage some deposits to leave the bank. We are trying to be aggressive on it, and we are trying to get it done quickly by the end of the second quarter. That is why we have given the guidance that our deposits may be flat quarter to quarter. But a lot of this is also going to depend on our clients and what they want to do. That is the game plan, and we will be able to report on it in a little more detail on Investor Day. The goal is to work to bring deposit costs down by doing that. It is either interest expense or it is on the deposit cost side. Anthony Albert Elian: Thank you. And then is the outlook for higher ECR costs entirely coming from now assuming no cuts versus the two cuts previously? Or is this mix shift change—the deposit optimization plan—embedded in the deposit growth outlook of what you expect? Thank you. Vishal Idnani: Sure thing. I would say the large preponderance of it is removing the two rate cuts. More than half of that delta—you will see the deposit costs are going up $115 million at the midpoint—more than half of that is backing those two rate cuts out. The other driver has to do with volume. Volume was much higher in the first quarter. If you actually were to maintain those balances, you are going to just have higher deposit costs as well. The offset to this is what Ken talked about, which we are going to work through here over the next quarter: how do you adjust for that and optimize it? Basically, we are giving you the higher deposit guide here. It includes the base-case run rate we have right now. It is a mix of rate and volume, driven primarily by rate. Operator: That concludes our question and answer session. I will now turn the call back over to Kenneth A. Vecchione for closing remarks. Kenneth A. Vecchione: The only thing I will say is we look forward to seeing you all on May 12 in New York. I think the start time is 08:30 for our first investor day. We look forward to spending more time with you. Thanks again for your time and attention today. Operator: Ladies and gentlemen, this concludes today’s call. Thank you all for joining. You may now disconnect.
Operator: Good morning, everyone, and welcome to the National Bank Holdings Corporation 2026 First Quarter Earnings Call. My name is Anna, and I will be your conference operator for today. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations. Emily Gooden: Thank you, Anna, and good morning. We will begin today's call with prepared remarks followed by a question-and-answer session. I would like to remind you that this conference call will contain forward-looking statements, including, but not limited to, statements regarding the company's strategy, loans, deposits, capital, net interest income, noninterest income, margins, allowance, taxes and noninterest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties and other factors, which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman and CEO, Mr. Tim Laney Tim Laney: Well, thank you, Emily, and good morning, and thank you for joining us as we discuss National Bank Holdings' First Quarter 2026 Financial performance. I'm joined by our President, Aldis Berkonz; our Chief Financial Officer, Nicole Van Denville; and John Steines, our Executive Vice Chair and Executive Managing Director of Strategic Initiatives. The NBH team delivered an outstanding first quarter, and we believe we're well positioned to have a very strong year. In fact, momentum across the organization reinforces our belief in our ability to grow our earnings this year and surpass $1 of earnings per share in the fourth quarter. In the first quarter, we delivered record loan fundings and our net interest margin expanded to 4.06%. We experienced positive trends with all credit metrics, and we believe the NBH team is well positioned to deliver meaningful growth in earnings this year. I want to thank our bankers for their focus on taking market share as well as expanding relationships with existing clients. I also want to thank our teammates who worked diligently behind the scenes to efficiently deliver a great experience for our clients. And on that note, I'll turn the call over to Nicole for greater financial details on the quarter. Nicole? Nicole Van Denabeele: Thank you, Tim, and good morning. This morning, I'll review our first quarter financial results and provide guidance for the remainder of 2026. As a reminder, our guidance does not include any future interest rate policy changes by the Fed. For the first quarter, on an adjusted basis, we reported net income of $32.6 million or $0.72 of earnings per diluted share, 43% higher than the prior quarter. The first quarter's adjusted return on tangible assets was 1.2% and the adjusted return on tangible equity was 11.8%. During the first quarter, we closed the Vista acquisition, generated record quarterly loan originations of $805 million and delivered annualized loan growth of 12.4%. Fully taxable equivalent pre-provision net revenue increased $8.5 million or 21.7% compared to the prior quarter after adjusting for transaction-related expenses. Loan balances increased by $2.2 billion or 29% during the quarter. Our team generated $285 million of organic loan growth on top of $1.9 billion of loans acquired in the Vista acquisition. We entered the second quarter with robust loan pipelines, and we expect to achieve our full year loan growth guidance of approximately 10%. Fully taxable equivalent net interest income for the quarter totaled $111 million, an increase of 25.7% compared to the prior quarter. The linked quarter increase was primarily driven by $2.1 billion of higher average earning assets and the quarter's strong margin. Net interest margin expanded 17 basis points during the first quarter to 4.06%, driven by a 24 basis point increase in earning asset yields. For the remainder of 2026, we expect net interest margin to remain near 4%. Deposit balances increased by $2.2 billion during the quarter on a spot basis, inclusive of Vista balances added at acquisition close. Deposit costs remained low at 1.94% and our loan-to-deposit ratio ended the quarter at 91.9%. Turning to asset quality. Credit quality remains strong. We recorded $4 million of provision expense, primarily to support the quarter's strong loan growth. Net charge-offs were 8 basis points for the quarter or 34 basis points on an annualized basis, and the allowance coverage ratio remained consistent at 1.18%. As of March 31, we continue to hold $24 million of marks against our acquired loan portfolio, which would provide an additional 25 basis points of loan loss coverage if applied across the entire loan book. Noninterest income increased 16.9% year-over-year and totaled $18 million for the quarter. For the remainder of 2026, we project to achieve our full year fee income guidance of $75 million to $80 million. As a reminder, this outlook includes $2 million to $4 million of Unifi revenue, which we expect to be weighted towards the back half of the year. Net interest expense totaled $96.8 million for the quarter and included $15.3 million of acquisition and restructuring costs. Excluding these onetime items, noninterest expense was $81.5 million. We have begun realizing cost efficiencies from the Vista acquisition. We remain on track to achieve our targeted expense synergies, the majority of which are expected to be realized following the third quarter system integration. In addition, we continue to invest in future growth by adding new bankers across our footprint. We have recently added more than 10 new bankers, resulting in approximately $0.5 million of incremental expense during the first quarter and which will add approximately $4 million in annual run rate expense. As previously guided, we project total noninterest expense for the full year 2026 to be in the range of $320 million to $330 million. Our capital levels remain well in excess of well-capitalized regulatory thresholds, even after deploying capital for our most recent acquisition and for share repurchases during the quarter. Common equity Tier 1 ratio ended the quarter at 12.5%, and the total capital ratio was a strong 15.8%. Tangible book value per share was $26, and we expect to outperform our earn-back expectations for the Vista acquisition. Importantly, we are on track to deliver earnings in excess of $1 per share in the fourth quarter of 2026. With that, I will turn the call over to Aldis. Aldis Birkans: All right. Well, thank you, Nicole, and good morning. Our first quarter was highly productive, and I want to thank our team for getting us off to a great start in 2026. The first quarter's performance is consistent with our internal expectations. And as Tim shared, we remain confident in our trajectory towards achieving $1 EPS by the fourth quarter. In terms of the Vista acquisition, the onboarding of new associates and clients has gone well, and our integration efforts remain on track. Turning to our financial performance. The strength of our balance sheet was on full display this quarter. We generated record quarterly new loan fundings of $805 million, which drove an annualized 12% loan growth. I will note that this quarter's loan production was not just strong but also well diversified across asset classes and geographies, reflecting the breadth of our platform. Furthermore, as we move into the second quarter, we are encouraged by our robust pipelines. And as Nicole shared, we are on track to deliver our full year loan growth guidance. The portfolio credit trends are positive, and we are proud of our top quartile performance. We ended the quarter with the lowest levels of criticized loans in 4 years while further reducing both NPAs and NPLs this quarter. This quarter's new loan production came in at an average rate of 6.4%, which remains complementary to our overall loan portfolio yield and contributed to a strong net interest margin of 4.06%. Our ability to maintain margin at these high levels highlights the quality of our deposit franchise and our commitment to relationship-based banking. We offer the best-in-class treasury management capabilities that contribute meaningfully today and position us well to drive sustained deposit growth in the future. I'm also pleased to report that our Trust and Wealth Management business has grown to $1.4 billion in assets under management, more than doubling over the past 3 years since we entered the space. This momentum translates into double-digit fee growth in 2026, reinforcing our noninterest income outlook and highlighting the important role this business plays in our broader noninterest income diversification strategy. Finally, reflecting our confidence in the durability and quality of our earnings, we took steps earlier this year to enhance our shareholder returns. We increased our quarterly dividend by 3% to $0.32 per share and took advantage of the market volatility to restart our stock buyback program with $16 million purchased in Q1. With that, I'll turn it over to John. Unknown Executive: Thank you, Aldis, and good morning, everyone. We appreciate you making the time to be on the call. It's hard to believe it has only been 105 days since we closed our transaction. In that short window, we've already seen real momentum, retaining key talent, attracting new talent and driving meaningful growth across our markets. From the beginning, we believe Vista and NBH were a strong cultural fit, and that conviction has only strengthened as our teams work side by side. Both organizations share the same foundational values, a disciplined credit culture, and unwavering commitment to client service and a people-first philosophy that drives everything we do. That said, I want to thank our legacy Vista teammates for their continued trust, hard work and grit through the first quarter. I would like to thank our new NBH colleagues for the way that you've welcomed us to the team. Together, we are doing great things. We also have made meaningful progress on the operational side, integrating Vista into NBH's broader systems and platform. Successful combinations are built on shared values. They are executed through discipline, hard work and an unwavering commitment to win, and I could not be more proud of our team. As I mentioned last quarter, joining NBH means the opportunity to pair a strong market presence and client relationships with a broader platform, enhanced offerings and a bigger balance sheet. The momentum from this combination is already visible, both internally and externally across all existing markets and to our clients and teammates alike. Since closing, we've added over 10 exceptional bankers to the organization, 4 of whom were sitting presidents at their prior institutions, which is humbling the bank. I've always believed the best clients follow the best bankers and the best bankers follow the best culture. We are seeing that play out with time. Additionally, Texas remains 1 of the most attractive banking markets in the country, with its pro-business environment, diverse account for our company. To meet that demand, we are delivering a broad set of capabilities, such as enhanced treasury management services, wealth and trust services and an expanded mortgage offering. and is built to meet clients across the full life cycle of their needs from day-to-day operations to generational wealth planning. We are energized by the opportunities in front of us. NBH has the right platform, the right markets and most importantly, the right people. To our shareholders, thank you for your continued trust. We could not be more excited about the road ahead. And with that, Tim, I'll turn it back over to you. Tim Laney: Well, thanks, John. Well, as you now know, we have a lot to feel good about with our first quarter results. We also feel great about our momentum as we dive into the second quarter. We've covered the company's core performance, and I want to also provide you with an update on our Camber and 2 Unified businesses. With respect to Unify, the platform has generated over 1,300 user applications year-to-date with weekly application volume accelerating from about 40 per week to most recently, nearly 400 -- while top of the funnel growth and early engagement metrics are strong, we still have work to do to drive higher deposit account openings and loan fundings. Having said this, I believe the team is gaining traction and getting close to a meaningful breakthrough. So more to come. Now in the 3 years that we've operated Camber, we've grown the program over $700 million to greater than $2 billion. Further, the team has continued to increase and diversify its deposit distribution network giving Camber far more pricing power and funds movement flexibility. Our small but mighty Camber team is making an incredibly positive impact. Turning back to our core business. We continue to build market share in attractive U.S. markets and our demonstrated ability to rapidly grow capital translates into a broad set of opportunities for NBH. Our focus remains on supporting our teammates, serving our clients, our communities and, of course, creating greater shareholder value. And we stand on our track record of doing just that. On that note, let's open up the call for questions. Operator: [Operator Instructions] We'll now take a question from Jeff Rulis with D.A. Davidson. Jeff Rulis: Wanted to check in on that sort of that dollar expectation plus of earnings in the fourth quarter. You kind of made that initial expectation margin was at 3.89% and you were coming off a net loan runoff here kind of fast forward to 12% plus organic growth and a 406% margin. I guess, any potential for breach that figure earlier in the third quarter. It seems like certainly your confidence, you doubled down in the release, but I wanted to check on the possibility of what needs to take place potentially if that happens in the third quarter? Tim Laney: Jeff, we had a track record of underpromising and overdelivering. I've got to tell you, having said that, we feel very, very good about our momentum. I feel like we're running on all cylinders at this point, which is quite remarkable when -- just to remind everyone, we closed on the Vista acquisition in the first week of January. So if you think about the time required to assemble organized teams, get alignment and then get focused on clients and markets, it's pretty remarkable what we were able to see our teams do, generating that 12%, 12.4% loan growth. We think it's -- it may very well be the tip of the iceberg. And then beyond that, what we're seeing early on in terms of the opportunity to expand treasury management services, wealth management services, residential banking services in markets like Dallas, get us very excited. Jeff Rulis: And just maybe jump into Nicole or all this on the margin, do you have March average for -- where that was? Kelly Motta: Yes. March came in very much in line with the overall quarter's margin. Jeff Rulis: Okay. And Nicole, I guess as you talk about the outlook for near 4% for the rest of the year, is that suggestive of maybe accretion was a bit higher in the first quarter? It seems a little conservative. I know that Tim just said is under promise over the liver, but I wanted to see if anything 1 timing of 406% margin, why that might lean back towards 4 for the balance? Nicole Van Denabeele: Yes. Yes. Well, Jeff, I'll start by saying that we are very proud of our 4-plus percent margin. The first quarter had about 5 basis points of loan accretion addition from the Vista acquisition. So even without that loan accretion impact, very strong net interest margin and from a loan yield cost of funding perspective, as Aldis mentioned, Q1 loan origination rate 6.4%, very consistent with where our current loan book is and we expect to fund that loan growth with full relationship core deposits, so maintaining our strong cost of deposits under 2%. That gives you right at a 4% margin. Operator: We'll now take our next question from Kelly Motta with KBW. Kelly Motta: Thanks for the question. maybe building on that -- that under promise, over deliver concept of the 10% loan growth. Notably, I mean you came in stronger out of the gate with the noise acquisition with 12% organic loan growth. So 10% seems to imply a slowdown in the remainder of the year. I guess, it does sound like your pipeline and expectations remain quite strong. How are you thinking about the cadence of growth? And what would be the factors, I guess, that would get you to potentially come in over the top of that 10%? Tim Laney: Well, Kelly, as a reminder, we provided the guidance on 10% going into the year. And we don't typically make changes in year-end guidance. And having said that, I think the 12.4% growth in the first quarter, given everything that was going on speaks to the kind of opportunity we're seeing in the market. So I think it's noteworthy that we saw very strong diversified growth across our markets. I really -- I can't complement our banking teams enough for focusing on clients, taking market share, expanding relationships. And we feel very good about our growth prospects this year. Kelly Motta: Got it. Got it. That's really helpful. Turning to expenses. I appreciate the color that you added new bankers over time that helps to drive growth, and it's ahead, which is what we want to see. It does seem like there are some moving parts with the cadence of expenses with hires plus the conversion later in the year. And I'm wondering if there's any way to get kind of a Q4 exit expense run rate, given the noise or how much on a dollar basis, you're expecting the cost saves to be post conversion? Just so we can manage the cadence appropriately coming out of the year for -- as we think through next year. Tim Laney: Yes, it's a great question, Kelly. And first, we really been delighted with the quality of bankers that have been coming to us as we've looked at opportunities to expand in certain targeted markets. And a good example of that is what John has been doing in our resort markets, I mean it's -- we think we're going to get very attractive returns on those investments. I would tell you that we are also very diligent in tracking our expense reductions related to the synergies of the Vista acquisition. It's something we've got strong alignment with, with respect to our incentives and something our Board is very focused on. I am convinced we will not only meet but beat the expense synergies that we modeled in the acquisition and shared with -- the Street. And now I'll throw it to Nicole maybe for a little more detail and answer to your question. Unknown Analyst: Yes. Kelly, you're right. So as we all expected, 2026 is a noisy year on the expense front. I will reiterate that full year guide of $320 million to $330 million. Where possible, we're taking action to realize expense efficiencies ahead of the system conversion, but the bulk of those synergies will come after our systems conversion, which is at the end of July. That, coupled with, as I mentioned, we're continuing to invest in growth. And then a little bit of color, if I think about Q2 on the expense run rate perspective. Q2 does have a couple of additional payroll days. Our merit increases come online. So there wouldn't be surprised if there's an uptick in expense from Q1 to Q2, and then it will trend down throughout the year as those expense synergies come online. Kelly Motta: Got it. That's helpful. Last one, if I can sneak it in, just because we are on the topic of expenses, the expenses related to Unifi that's still about $22 million for the year here? Unknown Analyst: Yes, yes. That is correct. We recognized about 1/4 of that in the first quarter and very much on track to keep at that $22 million, which just as a reminder, is flat compared to where we were last year. The $22 million does have for this year, full year of depreciation expense, which means that we've brought down the cash burn rate meaningfully year-over-year. Tim Laney: To expand on that, if you look at it on a pure cash burn basis, it's about $10 million this year. So that's noteworthy. Operator: Our next question will come from Andrew Terrell with Stephens. Andrew Terrell: I appreciate all the color. I wanted to ask on the dollar per share in the fourth quarter, the guidance there. What kind of provision are you assuming in that dollar per share? And I ask just because it seems somewhat tough if we just take out of the midpoint of the guide for fees and expenses and if the margin stays near kind of a 4% level. I guess it kind of feels tough to get to $1 per share. So I'm trying to figure out where specifically the guide could be conservative on those few points? Or if it's just a difference in provision. Aldis Birkans: This is Aldis. I'll try to answer that one. In terms of -- if you look at kind of breaking down by pieces, right, if we deliver on our loan growth and our promise we deliver type of basis we should be sitting at $1 billion-ish, if not more, of earning assets in fourth quarter than where you sit -- what we did in Q1. If you look at the fee guidance that Nicole provided, that has some upside there as we discussed expenses, certainly a significant step down in expense run rate from Q1 to Q4, as Nicole indicated, due to synergies and while we don't provide specific provision expense, there is plenty of room to provide for new loan growth in Q4 as well in order to deliver $1 EPS. Tim Laney: To be very specific on provision, look, our models will drive provisioning. We use those models as we forecast. It's part of what we rely on as we get to that $1 plus of earnings in the fourth quarter. So there's no -- I would say, Andrew, maybe to answer your question this way, there's nothing unusual. There's no assumption around meaningful, in fact, any reduction in provision. That's not what this is about. This is on the strength of earning assets and fee income as well as realizing the expense synergies in the Vista acquisition. And it's, in our mind, pretty straightforward. Unknown Executive: Yes. Andrew, it's a good question. One thing to also keep in mind is we did invest in some really high-caliber bankers in this first quarter. And I think you're going to see strong results leading into the second half as they come over and execute on those expenses that we like to see as investments. Andrew Terrell: Yes, great point. Okay. I appreciate it. And then on the just 34 basis points of annualized charge-offs this quarter. This is a couple of quarters in a row of a little bit higher charge-offs. Just maybe could you speak to what drove the first quarter charge-offs. And I know some of the commentary in the prepared remarks, just around criticized, classified NPAs coming down a little bit this quarter. It seems like it would suggest that you'd expect kind of a normalization lower in charge-offs. So maybe just want to unpack kind of the credit piece a bit. Tim Laney: Yes. Look, you can't see it yet, but we've had a dramatic reduction in our criticized classified loan ratios this quarter. we are feeling very, very good about the credit quality. There -- as it relates to NPAs being flat, I would just tell you that we've had normal ins and outs. We do expect NPAs to trend down over the course of this year. but we're not apologizing for where we stand right now. Our goal is always to operate in that top quartile of performance. You couple that focus with the fact that we are very excited about what we're seeing in terms of the reductions in Cris and classified and we're feeling good about the year. Operator: We'll take our next question from Matthew Clark with Piper Sandler. Unknown Analyst: Just a follow up on the margin. Was there a special FHLB dividend this quarter? And if so, how much? Unknown Executive: There was no special FHLB dividend this quarter. Unknown Analyst: Okay. Great. And then do you happen to have the spot rate on deposit costs at the end of March 31? Aldis Birkans: Yes, that's right around where we did for the quarter, low 190s. Unknown Analyst: Okay. Great. And then on the the buyback, how many shares we repurchased or at what price either one? Aldis Birkans: I don't think we disclosed the price at which we purchase. But again, as we see markets pull back, we are opportunistic in the market. And I think that's how we operate it on -- we do have a specific price in mind, but if you see a meaningful pullback in our stock, it's -- we jump in opportunistically. Unknown Analyst: Okay. I didn't see the price per share, I just saw the dollars, sorry. Okay. And then just double checking the baseline you're using for the 10% growth guide for loans is $9.3 billion with Vista. Emily Gooden: Yes. Unknown Analyst: Okay. And then on the organic deposit front, excluding Vista this quarter, it looked flattish to down modestly. Just any color there on whether some of that might have been deliberate or chalking it up to seasonality? And what's the [indiscernible]. Aldis Birkans: It's a great question. It's actually a combination of all above. It was there's some seasonality as we pull the books together, there was some remixing of deposits and that's why you're seeing kind of flat. I'll say, Vista was operating at 2.5% cost deposits -- so us keeping deposit costs all on a linked quarter basis almost flat. You can imagine there is a bit of a shuffling around there. Unknown Analyst: Got it. Okay. And last 1 for me. Just -- any update on the progress you're making to execute to unifi partnership and whether or not that we should expect something still this year? Tim Laney: Look, it remains a focus, and there's not much more we can say about it at this point. Operator: We'll now take a follow-up from Jeff Rulis with D.A. Davidson. Jeff Rulis: A little more of a housekeeping question. I guess I'm just trying to map the merger, the costs. I would imagine a lot in other, but were there others sprinkled in the salaries or occupancy or professional fees, just trying to get to where we could remove those going forward. Emily Gooden: Yes, Jeff, I'll take that one. I can give you some color. So for Q1, the majority of those acquisition onetime fit in salary and benefits. So as you can expect, as we work through our expense synergies, a lot of those are people-related items. Jeff Rulis: Yes, I guess not -- I just want to make sure we're clear. The synergies, I get looking at the onetime merger costs of $15 million and the restructuring of $1 million by line item, you're saying a decent portion of the merger, onetime in [indiscernible]? Tim Laney: Yes. Think of severance, I think of other exit-related compensation. Operator: We'll now take a question from Kelly Motta with KBW. Kelly Motta: One of my follow-ups was just taken -- in terms -- I guess the last 1 for me is on the fee outlook here. at least Q1 is annualizing below that range. And I believe there's some to unify expectation in the second half of the year, mapping. Is there anything else that would load that's expected to build in order to get you to that range? I'm just trying to think through kind of the moving parts and how much is to unify versus other kind of core banking fee related uplift of this level? Aldis Birkans: Right. This is Aldis. That's a great question. So yes, you're right, the unified elite fee component really is going to start hitting in the second half. So that's an uplift relatively to what we delivered in the first quarter, you look at the interchange and service charges, those are expected to grow some. And the piece that is always light in first and fourth quarters of the year are mortgage-related gains on sale as we enter in the summer season, we do expect we'll at least plan for some pick up there as well. Tim Laney: Kelly, we very much like what we're seeing in terms of fee income opportunity for this year. We have no hesitation in standing behind our guidance on fee income for '26. Kelly Motta: Got it. Thank you so much for the color. It's all for me, I'll step back. Operator: And I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks. Tim Laney: Well, thank you, Anna. And really, thank you, everyone, for your participation. I'll thank the analysts for their great questions today, and wish everybody a great day and the rest of the week. Goodbye. Operator: And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available in approximately 24 hours, and the link will be on the company's website on the Investor Relations page. Thank you very much, and have a great day. You may now disconnect.
Operator: Good morning, and welcome to the Bridgewater Bancshares' 2026 First Quarter Earnings Call. My name is Danielle, and I will be your conference operator today. [Operator Instructions] Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations, to begin the conference call. Please go ahead. Justin Horstman: Thank you, Danielle, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman and Chief Executive Officer; Joe Chybowski, President and Chief Financial Officer; Nick Place, Chief Banking Officer; and Katie Morrell, Chief Credit Officer. In just a few moments, we will provide an overview of our 2026 first quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater's website, investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2026 first quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is as of and for the quarter ended March 31, 2026, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe certain non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the company's operating performance and trends and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2026 first quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater's Chairman and CEO, Jerry Baack. Gerald Baack: Thank you, Justin, and thank you for joining us this morning. Bridgewater is off to a strong start in 2026 with several positive developments during the quarter, positioning us well for the rest of the year. First and foremost, I would like to point out our net interest margin expansion. While we mentioned last quarter that we expected to reach a 3% margin by the end of 2026, we nearly got there in the first quarter as margin expanded to 2.99%. Deposit costs declined and loans repriced higher, helping us get there quicker than anticipated. We expect to see slow additional margin expansion over the coming quarters. Because of the strong net interest margin, we were able to continue growing net interest income. This happened even while our balance sheet shrunk during the quarter due to some strategic sales of securities. These securities sales were part of several opportunistic actions taken in the first quarter to enhance our balance sheet efficiency, resulting in both a substantial gain and positioning us for improved profitability moving forward. I want to be clear that this was not the standard balance sheet repositioning many other banks have done recently that involved selling securities at a large loss to increase future margin, but rather a calculated tactic Joe and our treasury team recognized as interest rates moved in our favor. In response to this shift, they executed on an opportunity to improve forward profitability while taking an immediate gain. Joe will provide more details on this in a minute. I'm pleased to report we continued to take market share in the first quarter as the loan portfolio grew 5.5% annualized, with much of the growth continuing to come from our commitment to our affordable housing vertical. Core deposit momentum also continued as balances increased 3.2% annualized, while the overall deposit mix continued to improve. Asset quality remained positive in the first quarter as net charge-offs and nonperforming assets both declined nicely. We continue to feel good about the overall asset quality of our loan portfolio resulting from the strong credit culture we pride ourselves on. In addition, we saw a nice uptick in our capital ratios as CET1 increased 36 basis points to 9.53%. Turning to Slide 4. Tangible book value growth continues to be a staple of the Bridgewater story. And that was no different in the first quarter as tangible book value increased 9.9% annualized to $15.93 per share. This is an important differentiator for Bridgewater. We are proud of our ability to create and sustain shareholder value through tangible book value growth and how consistent this trajectory has been over the past decade. Before I pass it over to Joe, I also wanted to share that we successfully expanded our footprint to the East. In February, we opened our de novo branch in Lake Elmo. This is a growing area in the Twin Cities, and we are thrilled with the opportunities it presents to Bridgewater Bank. With that, I'll turn it over to Joe. Joseph Chybowski: Thanks, Jerry. Before we take a deeper dive into the first quarter results, I wanted to walk through the balance sheet efficiency actions we took in late January and early February, which are laid out on Slide 5. As Jerry mentioned, this was really a win-win for us as our treasury team recognized how we could take advantage of the volatility in interest rates to not only improve future profitability, but also generate substantial near-term revenue. As part of this strategy, we sold a portion of our high-quality securities portfolio, which included the sale of $147 million of treasuries for a net gain of $1.2 million, and the sale of $62 million of municipal bonds for a net gain of $6.1 million. By selling these securities that were yielding in the 4% and 5% ranges, we were able to redeploy these dollars into higher-yielding loans going forward. In addition to these securities sales, we also prepaid $97.5 million of higher cost FHLB advances that were being used to fund the securities. While this resulted in a prepayment expense of $982,000, it helped to improve our funding mix and reduce our overall cost of funds. At the end of the day, we generated an additional $7.3 million of pretax net income in the first quarter, increased our permanent capital levels and supported future net interest margin expansion by reducing our cost of funds and creating an opportunity to redeploy capital into higher-yielding loans. This is another example of how we are actively and thoughtfully managing our balance sheet to drive shareholder value. Turning to Slide 6. We were able to grow net interest income by 3% quarter-over-quarter despite the average interest-earning assets declining $185 million as a result of the balance sheet actions I just mentioned. This is pretty impressive and was driven by 24 basis points of net interest margin expansion in the first quarter to 2.99%. Our expectation had been to get to a 3% net interest margin by the end of '26, but we were very pleased that several factors allowed us to nearly get there in the first quarter. First, we saw the full quarter impact of the fourth quarter rate cuts on both sides of the balance sheet as total deposit costs declined 18 basis points and loan yields were still able to reprice higher by 3 basis points given the fixed rate nature of the portfolio. Notably, deposit betas during this most recent rate cut cycle have outperformed the betas we saw during the prior cycle, primarily due to a larger portion of our deposit base being directly tied to short-term rates. Second, loan fees continued to increase as payoffs remained elevated. And third, there was a modest margin impact within the quarter from the balance sheet efficiency actions we took, which resulted in a decrease in higher cost borrowings and a smaller balance sheet. Given that we were able to pull forward much of our expected net interest margin expansion for the year into the first quarter, we expect the pace of margin expansion to slow meaningfully going forward. However, we still expect to see some mild margin expansion over the coming quarters, even with no additional rate cuts. With net interest margin resetting higher, some margin expansion expected to continue and earning asset growth set to return, we are well-positioned to continue driving net interest income moving forward. Slide 7 highlights some of the net interest margin drivers. The cost of total deposits declined by 18 basis points in the first quarter and is now down 40 basis points over the past 2 quarters. The decline in the first quarter reflects the full quarter impact of the rate cuts from the fourth quarter of 2025. Absent any additional rate cuts, we would expect to see deposit costs stabilize going forward, although we will continue to look for additional opportunities to lower the rates of deposit accounts where it makes sense. Our portfolio loan yield increased 3 basis points during the quarter to 5.81%. As we've said in the past, we expect our loan portfolio to continue to reprice higher in the current environment given the larger fixed rate component, which makes up 65% of the portfolio. We have been actively originating more variable rate loans to make the portfolio more rate neutral going forward. Variable rate loans now make up 23% of the loan portfolio, up from 17% a year ago. We would expect this loan repricing to continue to support future margin expansion as our loan portfolio includes $644 million of fixed rate loans scheduled to mature over the next 12 months at a weighted average yield of 5.73% and another $106 million of adjustable rate loans repricing or maturing at 3.86%. With these lower yields running off the books and new originations in the first quarter going on the books around 6%, we have further repricing upside ahead of us. Turning to Slide 8. We continue to see strong profitability and revenue growth trends as our adjusted return on average assets was just under 1% for the second consecutive quarter. We have also continued to consistently grow total revenue, driven by steady net interest income growth. In addition, noninterest income has topped $2 million every quarter since the fourth quarter of 2024, even excluding securities gains. This is a result of new fee income sources we have added recently, including swap fees and investment advisory fees, both of which we expect to continue to see throughout 2026. Turning to Slide 9. We have a strong track record of well-managed expense growth as evidenced by our consistently better than peer efficiency ratio. Excluding the $982,000 of FHLB prepayment expense, expenses still a bit elevated in the first quarter, which is typically the case due to some seasonality. First quarter expenses included our annual merit increases going into effect across the organization early in the quarter, several key strategic hires related to the disruption in the market and the pull forward of some charitable contributions. Occupancy expense also increased due to the opening of our new branch in Lake Elmo. As we've said before, we continue to expect adjusted noninterest expense to track closely with our general pace of asset growth over time. Keep in mind that this won't apply in the first quarter as assets decline due to securities sales. With that, I'll turn it over to Nick. Nicholas Place: Thanks, Joe. Turning to Slide 10. You can see our core deposit momentum continued with annualized growth of 3.2% in the first quarter. We were pleased with this level of growth as balances tend to remain seasonally lower earlier in the year. We have also seen an ongoing positive deposit mix shift given the more consistent core deposit growth and overall decline in higher cost brokered and time deposits, which have declined on a combined basis year-over-year. We continue to be very pleased with our core deposit growth and pipeline overall. This includes traction in our affordable housing vertical as well as opportunities from the ongoing M&A disruption in the Twin Cities. While our deposit growth tends to be a bit slower during the first half of the year, we feel really good about our ability to continue growing core deposits over time as these provides the fuel for our organic loan growth. Turning to Slide 11. Loan balances grew 5.5% annualized in the first quarter. We have seen an increase in competition in recent months, which has caused spreads to tighten a bit, but our pipeline remains strong and is near 3-year highs. As a result, we are in a good position to be selective on the types of deals we want to do and at yields that make sense. Overall, we feel we are right on track to hit our expectations of high single-digit loan growth for the year. Obviously, there will be various factors that impact our pace of growth, including competitive dynamics, levels of payoffs and of course, core deposit growth, which is really our governor on how quickly we can grow loans. Turning to Slide 12. You can see that our loan pipeline is continuing to translate into new originations, while loan advances continue to increase as well. The increase in loan advances was driven by new construction projects over the past year that are now funding. We would expect to see new originations and advances remain strong in 2026. Payoff activity also remained elevated, and we expect these to continue given the current interest rate environment. Turning to Slide 13. C&I was the largest loan growth category during the first quarter. This was largely due to activity in real estate-related C&I, including affordable housing. C&I is a strategic growth focus for us and an area in which we continue to invest. This includes adding additional talent with 3 new C&I bankers we've recently brought on board, stemming from the M&A disruption in the market. Overall, we are optimistic about our ability to continue expanding both talent and clients in this area. We continue to see meaningful opportunities for growth in affordable housing as balances in this vertical increased $57 million or 35% annualized during the first quarter. This growth was spread across both C&I and multifamily. With an ongoing focus on growing affordable housing and C&I as well as our strong expertise in multifamily and CRE, we feel good about the mix and growth outlook for our loan portfolio. With that, I'll turn it over to Katie. Katie Morrell: Thanks, Nick. Turning to Slide 14. Our overall credit profile remains strong. After a modest increase in nonperforming assets and net charge-offs in the fourth quarter, both came back down in the first quarter. We mentioned in January that the multifamily loan we moved to nonaccrual in the fourth quarter was under a purchase agreement. As planned, this transaction closed in the first quarter, dropping our NPAs back to 0.22%. Net charge-offs were also very minimal at just 0.05% annualized for the quarter. As we have said before, with a loan portfolio of our size, we do expect to have some modest net charge-offs and upticks in nonperforming assets from time to time. But we have also demonstrated our ability to effectively work through these credits. Overall, our loan portfolio continues to perform well, and we remain well reserved at 1.31% of total loans. Looking at Slide 15, our watch and special mention loans have remained relatively stable, sitting right around 1% of total loans, while substandard loans declined quarter-over-quarter, primarily due to the multifamily loan mentioned previously. We continue to monitor all watch list credits closely, but again, feel good about our overall asset quality and our ability to identify emerging risks within the portfolio. I'll now turn it back over to Joe. Joseph Chybowski: Thanks, Katie. Slide 16 highlights our enhanced capital position, which benefited from some of the balance sheet efficiency initiatives we mentioned earlier. Notably, our CET1 ratio increased from 9.17% to 9.53%. We did not repurchase any shares during the quarter given our strong organic growth pipeline and where the stock was trading. In fact, we actually announced the launch of an at-the-market offering for the sale of up to $50 million of common stock, which could add approximately 100 basis points to our CET1 ratio, if fully executed. However, we did not execute on the sale of any of these shares during the first quarter. While we feel comfortable with our current capital levels, we like the additional optionality and capital cushion the ATM offering can provide if we choose to use it. Given the strong recent performance of the stock, we want to have the optionality to execute on the ATM and support capital levels if market conditions are favorable. Turning to Slide 17. I'll recap our near-term expectations. As Nick mentioned, we feel we are on track to grow the loan portfolio at a high single-digit pace over the course of 2026. This will be dependent on a variety of factors, especially our ability to continue generating strong core deposit growth as we look to keep our loan-to-deposit ratio in the 95% to 105% range. From a net interest margin standpoint, we have basically already reached our 3% target that we had for the end of the year. As a result, we expect to see just some slow margin expansion from here, assuming no additional rate cuts in 2026. Our main focus remains on growing net interest income, which we believe we can do given expectations for margin expansion and continued loan growth. We also expect expense growth to align relatively well with asset growth over time. This may not be the case each quarter, but over the long run, we believe this alignment can continue as we have seen in the past. We feel we are well reserved at current levels and would expect provision to remain dependent on the pace of loan growth and the overall asset quality of the portfolio. We also feel that we can maintain stable capital levels after a solid increase in the first quarter. We also have some future optionality based on market conditions around share repurchases and the ATM we have in place. I'll now turn it back to Jerry. Gerald Baack: Thanks, Joe. Before we open it up for questions, I wanted to provide a quick progress report on our 2026 strategic priorities. We remain focused on taking market share in a profitable way. In the first quarter, I was pleased to see good loan and core deposit growth, but what was even more exciting was a substantial net interest margin expansion. Our credit culture also continues to show through with minimal net charge-offs. Our affordable housing vertical is another area that we are very focused on in 2026, and we have seen positive traction in this space as our brand and reputation continue to build. Lastly, on the technology front, we are working through several initiatives, which include bank-wide efforts to set the foundation for leveraging AI thoughtfully across the organization. I'm proud of the team and the efforts put forth in the first quarter and believe we are well positioned for the year ahead. With that, we will open it up for questions. Operator: [Operator Instructions] The first question comes from Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on capital. You created, what, 30 to 40 basis points of tangible capital this quarter with the securities sale. Do you think that lessens the need for you to tap the market with the ATM in your view? Joseph Chybowski: Brendan, this is Joe. Yes, I mean, I think it all depends like we said. I mean, we're going to be opportunistic with the ATM. We like the optionality that it provides. I think we're not going to bank on translating unrealized gains to realized gains. So I just think as we just generally think about capital, I think we're comfortable with where we're at. We're comfortable with the optionality we have on both sides. I want to be thoughtful about the organic growth prospects that we have. And so I don't think it changes the calculus by kind of the onetime gain that we took. Brendan Nosal: Okay. Okay. Maybe turning to the hires you made this quarter. I think FTE headcount was up like 15 for the quarter. I guess that there's a lot of M&A dislocation in your markets. But just wondering if there's any really notable hires in that number that you're particularly excited about? Nicholas Place: Brendan, this is Nick. Yes, I mean, we've been saying it for a while that we feel like we're well-positioned in the market to take advantage, both on the client front and the talent front, from the M&A disruption. I think sometimes those hires come early in that process, sometimes it takes some time, and we're starting to see the fruits of that labor pay off now. We're really excited about some C&I hires that we've had in the last handful of months. Those folks are really hitting the ground running now and are able to be bringing in some really phenomenal opportunities for us with great local C&I relationships. And around that, we're having to bolster and taking advantage of some of that disruption to bolster in other areas. Katie has done a great job hiring some senior credit folks to assist us in that C&I effort. So overall, we feel like our brand is well positioned to continue to take advantage of that M&A disruption on the hiring front. Brendan Nosal: Okay. Great. I'm going to sneak one more in here. Just on this quarter's actions with the securities portfolio, do you view that as additive to your prior outlook of the 3% NIM by the end of '26 or just kind of an acceleration of getting there? And I'm asking because if the NIM outlook is still around 3-ish, but the earning asset base is a couple of hundred million smaller, there's obviously like NII considerations to that dynamic. Joseph Chybowski: Yes. I mean I think that the securities sale certainly contributed to the margin outperformance, but it was a small amount. I mean it's 2 basis points in the quarter. So it's just -- there's no one silver bullet, certainly. This was part of it. So I think it's not like by not doing that, we are going to miss out on pulling forward margin going forward. So it had an impact. It was just part of the overall strategy itself. But the bigger thing, I think, is just the cost of deposit decline that we experienced and really outperformed in the quarter. I think that, coupled with loan payoffs, I mean, I think, as we said, there's -- we really wanted to not rely on rate cuts and additional rate cuts to really pull forward that margin. So it's definitely an all-hands-on-deck effort to achieve the margin expansion we did in the first quarter. Operator: The next question comes from Jeff Rulis from D.A. Davidson. Jeff Rulis: Just a question on the M&A side. A lot of discussion of benefiting from disruption. I guess taking the other side of that is just a check-in on your outward acquisitions, if talking about conversations and the interest. I see it's #2 on your capital priorities of chasing down M&A. Any updates to mention there? Gerald Baack: Jeff, it's Jerry. I'd say nothing different than the past. I mean, I certainly continue to stay in front of people. I would probably say things up here in the first quarter to have slowed down more than I expected, but I think that has a lot to do with just geopolitical reasons. So we'll see. But it certainly continues to be a priority. But at the end of the day, it's organic growth and continue to take market share in the Twin Cities is first and foremost what we're focusing on. Jeff Rulis: And maybe on the -- not to focus too much on the margin, but it didn't sound like the restructuring or kind of the moves you made with the balance sheet didn't have much impact in the quarter. I guess the timing of that, maybe for Joe, is there any tail benefit of those moves that it was 2 basis points this quarter. So that's, I guess, question one on the margin. Is there a tail that you expect to see in the second quarter? And then the other part is, I guess, as you hit the margin goal, maybe you got to set a new one, we get the language of moderate increases from here. But just trying to see about further out where you think a terminal margin could be where the balance sheet sits today. Joseph Chybowski: Yes, Jeff, I'll try to address the first part and then the second. I think there's definitely going to be a pull forward or a future impact by just selling those securities and redeploying those into higher-yielding loans. So the 2 basis points this quarter, you can certainly -- it was early on in the quarter, so you could somewhat annualize that as we redeploy those into loans earning in the 6s. So that's certainly definitely beneficial. I think as we talked about, in the past, the amount of deposits that we have linked to Fed funds, I mean, we're close to $2 billion now. I think to have 75 basis points of cuts in the fourth quarter really saw obviously a full quarter benefit of that here. And I think that certainly drove the majority of the margin expansion. I think even outperformed our expectation on really deposit betas as we compared it to prior cycles. So super pleased with that. And then obviously, on the loan repricing side, we've kind of laid out that's more spread pretty evenly throughout the year as loans reprice. So I think that's where we just talk about the more kind of mild expansion opportunities. It's pretty front-loaded, driven by deposits, and then it will be more gradual and backloaded based on assets. And the securities itself were -- I think, it's always been a source of strength for us. Our securities portfolio has been above market earnings certainly. And so -- but by selling the securities, by no means do we now have an underperforming securities portfolio that lags on performance. It's certainly additive as well. So I think we'll continue to look for opportunities to rationalize deposit costs lower throughout the year. I mean that will never stop, and we're certainly not going to bank on rate cuts. As I said, I think we're assuming no rate cuts the rest of the year. And we're just really pleased with the expansion we had. I mean, we get certainly to experience, and that margin uptick, ultimately, most focused on growing NII. And I think as the loan portfolio and the loan growth prospects translate, that certainly will happen. Operator: Next question comes from Nathan Race from Piper Sandler. Nathan Race: Just going back to the last line of question around kind of the yield pickup on the fixed and adjustable rate loans that are maturing over the next year. Joe, can you help us just with the yield pickup that we can expect on those 2 portfolios relative to what you laid out in terms of the runoff yield on Slide 21? Joseph Chybowski: Yes. I mean, I think, as I said, it's pretty balanced throughout the year. So it's not like it's concentrated in one quarter or the other. I think specifically the adjustable rate portfolio, just over $100 million, sub-4%. So as that comes up on reprice, and whether that -- either that pays off or it reprices and resets today at kind of new money yields in the 6s, I think they're certainly additive to margin going forward and accretive to the existing loan book. I think the fixed rate portfolio, as we've continued to churn through the reprice over the last couple of years, obviously, that yield and reprice, there's less of a benefit, but there's still certainly a benefit today that's still sub-6%. I just think the other piece that we talked about on the loan payoff front, as deals that have deferred fees associated with them on originations do pay off, that obviously accelerates the fee potential. We saw a pickup here in the first quarter. 12 basis points of the loan yield was loan fees. That's an uptick from prior quarters and gives us an opportunity to recycle dollars in the low 6s. So I think it's certainly not concentrated. It's spread throughout the year. Continue to see that benefit both from new originations and growing the portfolio and then just existing kind of repricing opportunities. Nathan Race: Got it. That's helpful. I appreciate the earlier commentary around kind of deposit costs under the current kind of forward rate outlook. But just curious kind of what you're seeing from a competitive perspective in terms of deposit pricing across the Twin Cities? And when it comes to deposit gathering, curious if maybe, Nick, you could touch on kind of what the latent deposit gathering opportunities look like with some of the team members you brought over recently from some competitors in terms of what the size of their kind of deposit portfolios look like at their prior institutions? Nicholas Place: Nate, this is Nick. Yes, I mean, on the deposit front overall, I mean, it continues to be a competitive market, but we are seeing new deposits come in at costs that are meaningfully lower than we saw last year. We feel really good about the team that we have and their ability to get in front of the right opportunities to bring in core deposits at cost that makes sense. The teams that we brought on board or the individuals we brought on board, they're actively prospecting and working through their portfolio. There's low-hanging fruit on the deposit front that can come over quickly. And those balances tend to come more in the savings and money market side of things, which tend to be a little bit more expensive with operating accounts to follow as our treasury management teams work with their clients to onboard the full relationship. So overall, we'll be able to blend the cost of those deposits down. But the prospects with these folks to bring in sticky core deposit relationships, both on the consumer -- the commercial and the business owner side, which our executive banking team does a phenomenal job of bringing on full deposit relationships with the owners and executives at these companies, we feel great about our prospects to continue to grow core deposits over time. The Lake Elmo market that we talked about, we feel like that's a really underserved market and that long term, we'll be able to grow well within that community. We've hired some great folks on that side of town as well that we feel will drive deposit growth long term. So we feel really good about our deposit pipeline and our ability to drive core deposit growth, especially when we think about the first half of the year being a seasonally low part of the year for us on the deposit front. We grew balances really well in Q4, which is pretty typical for us from a seasonality perspective. And we were not surprised to see some of those balances drift out as our customers did distributions, pay taxes, that sort of thing. So we feel good that we were able to grow deposits even in what is a seasonally more difficult quarter for us to do so. Nathan Race: Got it. That's great color. Really helpful. I apologize if you already touched on this, but if I could sneak one last one in on expenses. Just given the step-up in 1Q, I'm curious if there was any kind of front-loading of costs just given the branch opening and maybe some seasonality. And then maybe, Joe, if you could just help us with kind of the starting point for 2Q expenses just to kind of get to that high single-digit growth guide consistent with kind of the loan growth expectations? Joseph Chybowski: Yes, Nate, I think as we said, our annual merit cycle, there's always a step-up at the beginning of the year as promotions and merit increases take place. So it's historically and with prior years is a step-up in salaries and benefits. However, I would say, to Nick's point earlier, I mean, we continue to get in front of great people as part of the M&A disruption. And so I think the headcount up and just supporting the growth of the organization also contributes to that step-up in salaries. Certainly, Lake Elmo coming online, super excited about that and a little bit of step-up in occupancy, but that market is going to be fantastic for us. And then the other thing is just a real push on marketing and advertising throughout our market. Given the disruption, that's been a continued campaign. So not kind of a onetime item, but certainly just a continuation of really trying to continue to build the brand. So I think ultimately, as you said, I think we don't try to look at expenses in isolation on a quarter-over-quarter basis. We're more just thinking about continuing to invest in the business over the long haul. And just given the growth prospects, we feel really good about the investment we continue to make in people and technology. And I think over the long haul, as we've always said, that relationship of asset growth relative to expenses, we still feel like we maintain that. I get this first quarter, obviously, with the sale of the securities, that average assets, NIE to average assets ratio does somewhat break down. But I think over the long haul, we're confident that the asset growth and the expense growth will go in line and excited about the investments we continue to make in the business. Nathan Race: Understandable. Makes sense. I appreciate the color. Operator: [Operator Instructions]. The next question comes from Brandon Rud from Stephens. Brandon Rud: Thank you for all the color on the NIM. I think you just touched on it, but the difference in the period end and average deposits, when you look at a good starting point for the second quarter, would you see deposits kind of closer to the period end level of $4.3 billion or closer to that average level? Joseph Chybowski: Yes, I mean closer to the period end. And I think as Nick said, there are some seasonal outflows with the deposit base, but I do think as taxes get paid, distributions get made, I mean, those balances build back up. So I think that's a good way to think about it. Nicholas Place: Yes, Brandon, I think our low watermark on deposits is usually like early January, late January -- or mid- to late January, I should say, and it typically rebuilds from there. So we feel good about where we ended the quarter. Brandon Rud: Okay. Perfect. And just my last one. It seems like a bit of a slower start to the year for the multifamily portfolio. Is that more reflective of stronger growth in '25? Or is that a broader trend? Nicholas Place: Brandon, this is Nick. I don't think it's a broader trend. I mean, I think quarter-over-quarter, there's some quarters where we see large growth where we have some good originations and a small amount of payoffs, and then certain quarters where payoffs outpaces our new loan originations. So I'm not overly concerned around what we saw in Q1 within that portfolio. Our teams continue to be in front of the right clients and building deep relationships with folks. We mentioned our advances. We've seen an uptick in both multifamily and CRE construction in the last 12 months. So that's providing some tailwinds for us to build construction advances, and those loans, once complete and stabilized, do sort of roll into our multifamily and CRE buckets, creating some growth within those categories as well, as those construction projects convert. So no, I mean, our pipeline remains really strong. We feel really good about the opportunities we have in front of us. And I think we are continuing our trend over the last handful of years of really being disciplined in our growth approach, being laser-focused on trying to grow our loans in line with deposits and remaining in front of as many folks as we can to build a really strong pipeline and then be selective on the credits that we feel the best about and the ones in which we can add to the balance sheet in a profitable way. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jerry Baack for closing remarks. Gerald Baack: Thanks, everyone, for joining our call today. We're really excited about 2026 and the growth and profitability outlook that is in front of us and continuing to take advantage of the M&A disruption in the Twin Cities. I also just want to give a big shout out to our team members, our veterans and our new hires. We have a phenomenal team here, and I appreciate everything they do. Everybody, have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the First BanCorp Q1 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Ramon Rodriguez, Corporate Strategy and Investor Relations. Thank you. Please go ahead. Ramon Rodriguez: Thank you, Julian. Good morning, everyone, and thank you for joining First BanCorp's conference call and webcast to discuss the company's financial results for the first quarter of 2026. I'm here with Aurelio Aleman, President and Chief Executive Officer; and Orlando Berges, Chief Financial Officer. Before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from the forward-looking statements made due to the important factors described in the company's latest SEC filings. The company assumes no obligation to update any forward-looking statements made during the call. If anyone does not already have a copy of the webcast presentation or press release, you can access them at our website at fbpinvestor.com. At this time, I'd like to turn the call over to our CEO, Aurelio Aleman. Aurelio Alemán-Bermúdez: Thank you, Ramon. Good morning. Good morning, everyone, and thanks for joining our call today. We started 2026 with very strong momentum, generating $89 million in net income or $0.57 per share. That is actually up 21% when compared to same quarter last year. Core operating trends remain also very strong during the quarter with pretax pre-provision income reaching all-time high of $131 million. That is up 5% from a year ago. This performance resulted in a 1.9% return on average assets. This marks our 17th consecutive ROA above 1.5%, definitely demonstrating our commitment to sustain profitability. Moving to the balance sheet. Total loans declined slightly to $13.1 billion. That is actually consistent to prior year seasonality and accounts for the expected softening in credit demand within the consumer lending segment that we mentioned before. That said, still better than pre-pandemic levels when we look at consumer demand. On the other hand, core deposits for the quarter were strong other than brokered and public funds, which we don't call core, were up by 4.9% on a linked quarter annual basis, reinforcing the strength of the relationship-driven franchise while allowing us to actively manage funding costs. Driving core client deposit growth is a key priority for us, and we're very encouraged by the execution during the quarter in terms of new clients and accounts. Credit performance remained a key strength for the franchise during the quarter with charge-offs very stable, record low levels of nonperforming assets and very encouraging early stage delinquency trends, which actually declined 24% from the prior quarter. And finally, our consistent approach to capital deployment resulted in a net payout of 92% during the quarter achieved through buybacks and dividends. Even after this action, the quarter, we ended the quarter with a 16.9% CET1 ratio. Let's turn to Slide 5 to talk about the environment and highlight of the franchise. We're pleased to say that business activity and economic conditions across the markets continue stable and progressing in line with our expectation. The labor market continued to show resilience. Other economic indicators in the main markets such as economic activity index continue to be stabilized and recent credit delinquency indicates consumer stability. We are encouraged by what we see around in addition to the restructuring -- sorry, reconstruction activities, reshoring activity and expanded U.S. military presence in the island while the disaster recovery efforts remain in place. Expanding on a consumer first quarter industry auto sales declined 19% when compared to the third quarter last year. Definitely evidence in the expected reduction in consumer credit demand for auto. That said, it's important to note that retail auto sales continue to be 6.5% above the pre-pandemic 10-year average. So were still better than the prior cycle. We're definitely prepared to serve our customers in this environment, very, very many, many, many parts moving regarding potential impact of oil cost, which we are monitoring, which could be rising energy costs and other potential impact on inflation, which could impact consumer activity and commercial activity more broadly in the future, hopefully, that is soon. And while the macroeconomic environment continues to be dynamic, we remain focused on managing what we can control, enhancing the service delivery platform, technology investments to be more high and efficient and focusing on providing the best quality of service that we could. When we look at business highlights, total loan originations were up by 6% when compared to prior year seasonally adjusted. Commercial loan pilots actually remained healthy. Actually, if I compare pipelines today with the same time prior year, we are actually in a better position. So we sustains our loan growth guidance of 3% to 5% that we initiated that we mentioned in the last call. In terms of omnichannel strategy, active digital users continue to grow year-over-year. Digital transaction volumes continue to grow, self-service payment continued to increase. A sustaining -- demonstrating sustained engagement of clients in the platforms. We are spending time and effort on AI, understanding what we can do to improve internal processes and also improve the way we service our clients. We continue to also do franchise investment in our brand channels to continue to optimize how we service our clients. We believe that AI will definitely play a key role in the execution of this strategy, providing clients with faster, more personalized service offers and enabling our colleagues to spend more time in value-added customer interaction rather than dealing with routine transactions and processes. We're working very close to our key vendors to ensure that we adopt what's coming in all this new venture. Overall, capital allocation priority remain unchanged also include -- this includes supporting organic growth, which is a priority and paying a competitive common stock dividend and returning excess capital through share repurchase. As always, we thank you for your interest in First BanCorp and your support. And with that, I'll turn the call to Orlando and we'll come back for questions later. Thank you. Orlando Berges-González: Good morning, everyone. So Aurelio mentioned this quarter, we earned $88.8 million at $0.57 per share, which compares to $87.1 million or $0.55 a share last quarter. Adjusted pre-tax pre-provision income reached an all-time high of $131 million, which is almost 2% higher than last quarter and about 5% higher than the first quarter of last year. The return on average assets for the quarter was 1.89%. That compares to 1.81% last quarter. So we had an improvement there. The provision for the quarter was lower. We had some macroeconomic indicators, such as the unemployment rate and the CRE price index continue to show better trends and that leads to some of the reduction. Also, we had a reduction in delinquency, as Aurelio mentioned, and some of the consumer portfolios, the size of some of the consumer portfolios was down. On the other hand, we had an increase in qualitative reserves to account for the current geopolitical uncertainty in the Middle East. Income tax expense for the quarter was $25 million, which is $5 million higher than prior quarter, mostly related to the higher pretax income but also at the end of the last year, in the fourth quarter, we booked an adjustment to the effective tax rate for the final results for 2025. The estimated effective tax rate as of now, it's just slightly higher. It's 21.9% compares to 21.6% we had in 2025. In terms of net interest income, we had a reduction of $1.8 million in the quarter. Net interest income amounted to $221 million, that's $2.7 million related to 2 less days in the quarter, but net interest income compared to same quarter last year is 4% higher. Interest income on loans is $6.5 million lower than last quarter, which $3.8 million. It's due to 2 less days in the quarter and $2.8 million relates to the market interest rate reductions that affected the commercial portfolio pricing, specifically the floating rate components, yields on the commercial portfolio declined 18 basis points. On the other hand, interest income on investment securities increased $2.8 million, mostly due to a 22 basis points improvement in yields as we have continued to reinvest cash flows from maturing securities into higher-yielding instruments. On the expense side, overall funding cost was $3.5 million which is $1.3 million related -- $1.3 million of that reduction relates to the 2 less days in the quarter and $1.2 million related to rate reductions. The cost of interest-bearing checking and savings accounts came down 4 basis points for the quarter to 1.21%, which is mostly driven by government deposit cost reductions. But also the cost of time deposits came down 5 basis points, and the cost of broker deposits came down 7 basis points. broker the size of the broker deposit portfolio was also down in the quarter. Net interest margin expanded 7 basis points for the quarter to 4.75%, which is slightly higher than our original guidance of 2 to 3 basis points per quarter. Yes. Even though the interest rate environment remains uncertain, particularly in terms of the timing and magnitude of future rate adjustments. Our balance sheet continues to be well positioned for additional expansion in line with our original guidance. In terms of noninterest income, we reached $37.7 million, which is $3.3 million higher than last quarter. Most of the change was related to a $3.6 million collected on seasonal contingent commissions that we usually get in the first quarter of each year. Operating expenses for the quarter were $127.1 million, very much in line on only an increase of $200,000 from last quarter, if we exclude the gains from OREO operation expenses for the quarter were $128 million, which is about the same kind of adjustment of an increase of $300,000, which compared to the $127.7 million we had last quarter. Expenses were on the lower end of our guidance. Payroll expenses for this quarter were $1 million higher. That relates to the seasonal increase in payroll taxes. And also, we had an increase in share-based compensation expense for stock grants that were issued during the quarter. The portion of these grants that are attributable to retirement eligible employees is charged to expense in the quarter. This increase in payroll expenses was offset by a decrease in business promotion. Typically, business promotion efforts are lower during the first quarter and pick up on the second and fourth quarter of the year. The efficiency ratio for the quarter was 49.1%, which is slightly below the 49.3% we had in the fourth quarter. As we have mentioned before, based on our projected expense trends for ongoing technology projects and the pickup on business promotion efforts that happened later in the year, we reiterate our quarterly expense base for '26 will be in that range of $128 million to $130 million as we had previously mentioned. This is excluding OREO gains or losses. Our efficiency ratio, we estimate that we'll still be in that range of 50% to 52% considering the changes in expense and income components for the year. In terms of asset quality, credit quality continued to improve in the quarter. Nonperforming assets came down by $5.3 million, that includes $4.8 million reduction in nonaccrual loans, and that was across all business lines. OREO balances also decreased by $1.2 million but we did have a $700,000 increase in repossessed autos in the quarter. Inflows to nonaccrual were $34.3 million, which is $12 million lower than last quarter, and that's mostly related to a $10 million commercial loan inflow that was booked was recorded last quarter, fourth quarter of '25. Most importantly, loans in early delinquency decreased by $34.5 million or 24% during the quarter, which is mostly a $31 million decrease in consumer loans delinquency specifically auto loans, most of it. We have seen some stability in the consumer delinquencies, and we continue to monitor closely the behavior of the different vintages that were issued over the last few years. In terms of the allowance for credit losses, the allowance is $3.9 million lower. We reached $245 million, which represents 1.87% of loans. This is slightly down from the 1.9% of loans we had at the end of last quarter. Similarly to what I mentioned regarding the reduction in the provision for credit losses, the decrease in the allowance was mostly related to the improvements in some of the projected macroeconomic variables, specifically the unemployment rate and the CRE price index combined with a reduction in delinquencies and the size of the consumer loan portfolios. However, the ACL includes a higher qualitative loan loss reserve, as I mentioned, in order to account for this wider range of potential macroeconomic outcomes that could come out of the unrest in the Middle East. Net charge-offs for the quarter were $21.1 million or 65 basis points of average loans, slightly higher than its 63 basis points we had in the prior quarter. Mostly -- this is mostly related to reduced appraised value of the collateral of a commercial nonperforming loan that led to a $600,000 charge-off for the quarter on the commercial side. On the capital front, Aurelio mentioned, strong profitability has allowed us to repurchase $50 million in shares this quarter and declared the $31.5 million in dividends. Regulatory capital ratios continue to grow a little bit as the capital actions were offset by the earnings generated in the quarter. Tangible book value per share grew to $12.45 a and the tangible common equity ratio expanded to 10.11%. Again, we still have approximately $2.28 intangible book value per share and about 160 basis points in tangible common equity ratio, which is related to the other comprehensive loss adjustments that are related to the investment portfolio. Aurelio mentioned already, but we remain focused on supporting our clients and growing our business while delivering close to 100% of earnings to shareholders in the form of buybacks and dividends. With this, I would like to open the call for questions. Operator? Operator: [Operator Instructions] our first question comes from Brett Rabatin from StoneX. Brett Rabatin: Wanted to start on loan growth. And I know that auto sales are still strong, but they've obviously come back in a little bit. The guidance for the 3% to 5% loan growth is unchanged. What needs to happen for you guys to get to that 3% to 5% number? And then are you expecting consumer payoffs to slow from here? Just any thoughts on the pipeline relative to payoffs and how you see the balance sheet getting to that number? Aurelio Alemán-Bermúdez: Well, it's going to take til the end of the year to consumer payoff and originations to settle. So some of that additional contraction in the consumer portfolio is a reality. On the other hand, we expect additional commercial growth both in Puerto Rico and Florida based on what we have at hand in the pipelines today, and we do expect some additional growth in the mortgage portfolio, which demand continues strong. So that's how it's playing. Obviously, if we go back to how many years we grew the consumer book, mostly driven by auto sales and demand. We're still performing pretty well in terms of our market share in that sector, but it's just sales are lower, still better than pre pandemic. I believe, stabilizing compared to last year is a little bit of fair too because the first quarter of last year in auto, March was a very strong month. Because it was a pre-tariff people knowing that prices were going to increase. So that number is a little bit -- the 19% that we saw in the quarter on an adjusted basis, it should be about 10%. So that -- we're assuming about 95,000 new units which is still better than many years back. So again, it's just a price. We understand it's a price issue. I think there are still distributors considering lowering prices and adjusting and that could flow through the economy and change that number, but that is how what we're assuming right now. Brett Rabatin: Okay. That's helpful. And then your securities portfolio has been a source of strength in terms of improving yields as you've had cash flow to reinvest 2.69% yield in the first quarter. Can you just refresh me on what you guys have coming up and how big of an opportunity that is maybe relative to the margin? And then just any thoughts on the margin pace that's in the rest of the year? Orlando Berges-González: So the -- we still -- on the lower-yielding securities, we still have about $600 million in cash flows coming from maturities of securities yielding on average, 1.65%. That changes a little bit per quarter, but it's about $250 million, it's in the second quarter. And then we have the other $350 million, it's in the second half of the year. The average yield is fairly consistent. It's a little bit lower on the third quarter, a little bit higher in the fourth quarter, but overall, it's at 1.65%. that's what we're looking at. We had an additional about $236 million or so that mature during the first quarter. We did take advantage of a little bit of the second half of March where rates change behavior change a bit and increased. So we try to advance a little bit of cash flows into that. So that should help on the numbers going forward. But think about that $600 million plus a little bit of the $200 million that we had in the first quarter. that clearly is being replaced with things going from 250 to about 380 basis points higher. I'm sorry, 280 basis points higher, that's what I meant. Brett Rabatin: Okay. That's really helpful. And then just lastly, you guys commented some on the economic backdrop and oil prices being higher. Puerto Rico economy seems pretty stable. I was just curious here in the past, month or so how you're seeing the commercial pipeline in terms of people maybe making decisions or not, just given some uncertainty. And then just as you guys see it, the health of the consumer, if there's been any impact from the inflationary stuff. Aurelio Alemán-Bermúdez: Definitely, we're watchful on the impact on oil. Latest numbers that the government published energy in Puerto Rico now is -- it's below 20% dependent on oil. So that's good. They have been converting generation to LNG, and they still have a carbon facility and then some renewables. So less than 20% is less impact in terms of in terms of the final bill on the electricity side. On the other hand, the gas stations is immediately. So that impacts more the consumer, I will say, which is what we've been seeing, and we've been commenting about it. On the other hand, we've been proactively managing our risk in that segment. So we feel pretty good on the asset quality trends and how we have proactively managed that. Commercial activity remains strong. Tourism is strong. Puerto Rico is very attractive for U.S. visitors they're probably not going to Europe or Mexico at this time and coming more here, when we look at hotel occupancy airport, we feel pretty good about that. There's still a few projects on hotels that are moving through the pipeline. In terms of overall activity, construction continues very active and the supply chain that relates to that. So we haven't seen any softening on that piece. And distribution, expansion of distribution and other infrastructure projects are moving. So we feel pretty good about the commercial pipeline and obviously, looking forward to faster closing of what we have at hand, so we can deliver the growth that we promised. Operator: Our next question comes from Arren Cyganovich from Truist Securities. Arren Cyganovich: Credit quality, obviously, quite solid this quarter, and you commented on the early-stage delinquencies improving. What's the expectation credit for the rest of the year? Is it still more stability? Or do you think that the early stage delinquencies may help lower some of the credit losses in later part of the year? Orlando Berges-González: Well, yes, we're expecting stability. You always have a little bit of benefits on the first quarter from tax refunds. But when -- as we have mentioned in the past, we monitor vintages. And based on adjustments we did on credit policies way back in '23 and '24. And we have seen how the behavior of the vintages since are much better than what they used to be. We -- at this point, based on expectations on the market, we don't see any factors that could change dramatically always could be a little bit up a little bit down here and there. But overall, we expect stability on the delinquency side. Arren Cyganovich: Okay. Got it. And then on capital return, I appreciate the keeping a steady amount of capital return buybacks have definitely helped over the past several quarters. You're still operating with quite a high level of CET1. I know that, that's your intention. But are you giving any thought, particularly with seeing peers in the mainland, talk about lower capital and some of your competitors on the island also having a bit lower capital than you do in terms of increasing some of that capital return? Aurelio Alemán-Bermúdez: Well, that is a discussion that we constantly have as we move the pieces -- the moving parts are obviously the macro things that we don't control, obviously, other opportunities that we could we would like to have the power to execute if come to play, obviously, competitive dividend, and obviously, the component of the buyback. So it's a constant discussion that we will continue to have and we -- with the Board, with the management and we try to be opportunistic and consistent. That's what we try to achieve. So taking all those other pieces into consideration. Operator: Our next question comes from Kelly Motta from KBW. Kelly Motta: Maybe circling back to capital. I think a couple of quarters ago, you mentioned potentially looking in Florida for transactions that would make sense. Just wondering where that appetite stands today? And any kind of additional thoughts here on M&A given your high levels of capital and multiple? Aurelio Alemán-Bermúdez: Well, I think the answer is it's always part of the optionality that we keep to be something that makes sense. And so in that yield the returns that are -- that we -- our threshold of returns. So not necessarily easy to find something that qualifies for all of it, but we cannot discard if a good opportunity comes to the table, we will not discard. That's really the way we look at it. Not aggressive about it, balance and realistic, which obviously in mind, what is the bottom line from both a strategic perspective and financial perspective, both really go together. Kelly Motta: Got it. That's helpful. Maybe on expenses. I appreciate you reiterated the guide here with the expectation that there might be some increase later on in the year for, I believe, some marketing and technology initiatives and your commentary hit on some work you're doing on AI. I'm wondering if you could share additional color as to the use cases you see today and what you're looking at? Aurelio Alemán-Bermúdez: Well, I'd say we're working together, definitely, AI is here to stay. And I think the industry is in a learning stage of make sure that you have the size and the scale to make sure the use cases are financially justifiable. In the back of our size, obviously, you have internal processes related to education and other analytics that are the use cases that come to play fraud management and those. But also, we're working with our key vendors we don't have any developed applications. So it's all vendor-driven and they have a road map, and we are getting into the train in the early stages so we can benefit out of it. But I think there is a common understanding of scale. It's not only how you move, you have to move with the right governance and the right oversight as any other technology bring risk that you have to have commensurate policies and processes to cover. So I think at the end, we will all benefit of it. I think the larger the institution is the more the benefit and the more easy to justify the use cases because of the investment. On the other hand, very an important investment this year, which is the foundation is really data where the data resides, data analytics, everything. All the efforts are really moving to be fully cloud-based, which is halfway through already in our infrastructure and including the main applications already there. So it's a journey, and it will require investments that we are and obviously are an important component of the expense guidance that Orlando has been mentioning. Kelly Motta: Got it. That's really helpful. Last question for me, if I can sneak one last nitty-gritty one in, I appreciate -- I believe you reiterated your expectations around margin, which last quarter was about 2 to 3 basis points of expansion per quarter, but off this higher base. One thing, looking at your average balance sheet that stuck out was residential mortgage yields were a bit higher linked quarter. Wondering if you could provide any color around that, if there was any sort of onetime loan fees or anything that may have impacted that. Wondering if that's run ratable. Orlando Berges-González: Not any large ones. We typically get some movements on what's in and out of nonperforming. And so we collect some things that were there, but nothing major. I mean, remember that for quite a while, we -- when rates were low, we were originating almost all or substantially all of the originations were conforming paper. So we didn't have a lot of lower-yielding things on the portfolio, and we were not putting too much in the portfolio. We've been putting things into nonconforming kind of paper now for the last couple of years, 1.5 years, and those are higher yielding. So as you get repayments on some of the lower-yielding ones, you're going to get some pickup. This quarter was a bit higher. Also, it's a function of the 360 kind of component. But other than that, it's -- we expect that portfolio to -- as long as rates stay here, new originations will continue to come in a bit higher than what's going out of the portfolio with repayments. Operator: Our next question comes from Steve Moss from Raymond James. Stephen Moss: Maybe just starting Orlando on the 5% margin here. Curious on your funding cost expectations going forward. I noticed that your public funds have continued to head lower. Just kind of curious maybe if there's a little bit more give on your liability side for the margin here? Orlando Berges-González: I mean, you have to divide it by components. The clear ones are the like the time deposits new time deposits on the books are at lower rates than some of the older ones that are maturing. So that's where you saw the 5 basis point pickup on the time deposits. Broker deposits, even though it's not a large portfolio, it's also being repriced at lower rates. So we had that 7 basis points that we'll continue to see some small reductions. At the end, the deposits, you have to divide it the typical checking -- interest-bearing checking account or savings account with the limited movement in rates the same way it only went up 14% kind of beta when rates were going up, we won't see significant rate reductions on those accounts. Some of the reductions are seen on the government deposit accounts that are part of the interest-bearing component because some of them are indexed. And as some of the market rates have come down, they will come down. But it all depends on what happens with the market rates. I would say that with current expectations, we would see some reductions on time deposits, not so much in some of the other deposit accounts. Stephen Moss: Okay. Maybe we should phrase it this way. So in other words, just fair to assume like your public funds will be roughly stable around the $3 billion-ish or close to $3 billion level is your expectation? Orlando Berges-González: Yes. We don't expect major changes on those numbers. Stephen Moss: Okay. Appreciate that color. And then in terms of -- the one other thing that I was just wondering about here, the Puerto Rican -- originations in Puerto Rico were very strong year-over-year up almost 11%. Just curious, are you guys thinking that's market share gains or just overall economic activity that you're seeing on the market here? Aurelio Alemán-Bermúdez: Yes, I think it's a little bit of both, but I think overall economic activity and deal timing is really the primary. Some of these deals are being a couple of years in the making, especially related to infrastructure or construction or permits, things like that. So it's also the timing of economic activity. Stephen Moss: Okay. Got it. And then just in terms of Florida, I realize it tends to be seasonal, but just kind of any -- you've had some expansion there in the Florida market. Just any updated thoughts as to where. Aurelio Alemán-Bermúdez: We continue that Yes. Yes, it's an important piece of the franchise. It's an important strategy, a very healthy portfolio. We opened in the last quarter of last year, as we mentioned, new office in Boca. We just announced repositioning of a branch in Miami, Kendall we are looking to close and move to some other areas. It really we're really focused on repositioning to where commercial activity is more active. Definitely going north is showing additional opportunities. Meaning northeast, which is of the corridor of Broward County, and we're taking those. We already have the teams engaged in executing and producing. So it's an important piece of our franchise. Obviously, we all know that deposit gathering in Florida, it's somewhat more challenging than other markets. Operator: Our next question comes from Manuel Navas from Piper Sandler. Manuel Navas: I wanted to dive back into the NIM for a moment. I just want to confirm, you're feeling for that 2 to 3 basis points per quarter increase from here? Orlando Berges-González: Yes. That's what we're shooting based on expectation of rate movements and portfolio movements. Manuel Navas: Okay. Could funding costs improve if your core deposits continue to grow? Orlando Berges-González: Yes, assuming -- because if our core deposits grow on a typical mix, that would mean that those are more on the savings and interest-bearing checking accounts. And that assumes that as we mentioned -- you just mentioned that would be a stability on the government side. So that would mean that those deposits are lower cost deposits. And definitely, that mix could improve. Manuel Navas: And what initiatives are in that area that are helping kind of drive? Because there was some nice core deposit growth this quarter. Aurelio Alemán-Bermúdez: Well, I have to say, a lot of coordination, sales efforts, products, marketing across both retail, small business is an important piece of the puzzle, which we continue to penetrate. We also have in the year, as we announced before, a couple of branch expansions in the West Coast of the island, which are opening midyear. 4,000 new clients between retail and small business. So that -- it's really a sales focus and execution. It requires a lot of coordination and efforts. Manuel Navas: Okay. So that kind of means to summarize like loan yields are generally stable, securities could reprice higher as you laid out and deposit costs hard to decline them, but if there's good mix and growth in the right areas, that's where you get this steady increase in NIM that could have an upside if the deposit cost if deposit growth exceeds expectations. Orlando Berges-González: Yes. The only -- that's correct. The only thing I would add, keep in mind that one of the things we are considering we have included in our assumption is that the market -- the consumer market in Puerto Rico is still going to come down a bit in size, and those are higher yielding assets. So that's part of the assumption here that some higher-yielding assets might come down a bit. The commercial side, it's very good. But the average yield on our consumer portfolio is above 10%. Obviously, that's not the kind of yield on the commercial side. Manuel Navas: Perfect. I appreciate that. And how would rate cuts impact this kind of forward guidance, if there were any. There's none in forward curve at the moment, but if there was a rate cut, how would that shift your kind of expectations? Orlando Berges-González: We -- the 2, 3 basis points included some rate cut starts at the end of the year. The impact, depending on the size is obviously the investment portfolio reinvestment component, rate cuts are more. It's going to be a smaller rate. But on the other hand, we also get some repricing on some of the deposit side. So that assumption includes some expectation of reduction towards the latter part of 2026. Remember the floating rate component of the commercial side, it's about 50% just under that. And obviously, if rates are not cut, then we wouldn't have repricing on those. That's part of the assumption also that there is going to be some repricing if rates out cuts do happen. Manuel Navas: Broadening out for a moment, in the economic commentary, you discussed the potential -- and we've discussed about this that of military activity on the island and how it could impact the economy not that it increases activity, but could you kind of talk about how that makes Puerto Rico perhaps a increase of the floor of economic activity or reconstruction funds safety? Can you just speak to that military activity that you are seeing in the island? Aurelio Alemán-Bermúdez: What we're seeing is active use of some of the facilities with more people coming in more actually military personnel. There's also expansions in capacity to where they live in the facilities within actually hotels. This is outside the metro area primarily. This is in the east side of the island, the south part of the island and the airport in Aguadilla, which is the Northwest of the island. So it's outside the metro area. So hotels that are being fully occupied small hotels fully occupied by military personnel for long-term contracts. Obviously, they buy and consume merchandise and they go to places. And so we see more of that. There is some construction in the sale area. This is being kept fairly confidential. So we -- in terms of how much more is coming. But we're seeing it and we're getting commentary from our clients on this happening in our branch representatives in the areas that this is happening. Manuel Navas: And this strategic importance increase also makes the reconstruction funds a little bit safer to the deployment of them as well. This was my last question. Aurelio Alemán-Bermúdez: And definitely, and that's been also the contribution in the energy transformation of production because the Department of Energy has also been very involved working with the local authorities on this. Because it's part of safety. Operator: Our last question will come from Robert Rutschow from Wells Fargo. Robert Rutschow: I just wanted to follow up on the tech commentary. We can see relatively high growth rates in the outsourced tech spend and the professional expense. How much of the expense base would you consider to be tech spend? Is the growth rate of, say, the outsourced services indicative of the overall tech spend? And is it possible to segment your tech spend between like back office maintenance efficiency initiatives and anything that's geared towards revenue growth. Orlando Berges-González: At this point, there is a lot that has to do. As we have mentioned, we started a migration of our centers, our data centers from a managed facility structure we had within our facilities to a service provider structure, we use FIS as a service provider. We've also been migrating with we have in other cloud applications where they are managing -- they're going to -- they are managing and will fully manage some of those applications, some of those cloud applications for us. So we continue to see a lot of investments, which is part of the -- of that migration process, which is included in the professional service and both -- and the outsourcing cost. Aurelio Alemán-Bermúdez: Yes, I think just to add everything that is coming new is coming into cloud, it's coming as software and service, rather than in-house developed applications or more physical servers in our facility. So we don't have -- we cannot answer specifically the distribution of the expenses, something to look into. But we haven't made that data public. So we can -- we'll consider your questions for a much more detail we can provide in future presentations here. Robert Rutschow: Okay. Great. If I could just follow up on that. Do you think your tech spend growth rate is sort of at a peak level? Or is it possible it can decline? Or should we think about it sort of staying at these levels? Aurelio Alemán-Bermúdez: I think it will sustain for probably another 18 to 24 months and then should decline. Operator: We have no further questions. I would like to turn the call back over to Ramon Rodriguez for closing remarks. Ramon Rodriguez: Thanks to everyone for participating in today's call. We will be attending Wells Fargo Financial Services Conference in Chicago on May 13 and Truist Financial Services Conference in New York on May 19. We look forward to seeing a number of you at these events, and we greatly appreciate your continued support. Have a great day. Thank you. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect.
Per Brilioth: Okay. Hey, welcome, everybody. This is our -- as in we are VNV Global. This is our Q1 investor call. And I'll kick things off. We have like this usual summary page, which is the next one. Yes, NAV $462 million, which is down a bunch since the end of last year. And as we tried to sort of highlight in the narrative in the report, it's because of market and the peer group, the public sort of peer group from which we take multiples, they're down a lot. In some cases, there are names that we use that are down like 30%. And that's the main driver because the portfolio at large is doing really well. And as I wrote sort of -- if that sort of peer group multiple that we download and multiply with what we see at our companies, if that would have been flat this quarter, the NAV would have been up since the end of last year. So -- but this is how we value the portfolio. And it's no -- can sort of change that from quarter-to-quarter even if we don't think it sort of reflects the reality of the value here. And so we're subject to that volatility. And sort of if we -- if the second quarter were closed today, it would have been up. We'll see where it closes. But we're basically subject to that volatility. That volatility has taken the NAV down, but it's not reflective of what's going on in our portfolio. And I don't know if one sort of just has a go at trying to put the big sort of high-level reasons for why this peer group is down. I think it sort of falls into 2 main buckets. One is this fear, uncertainty, combination of those and what AI will do to a bunch of software companies. And as we've been on and on about before, we really don't see that as relevant even sort of -- it's the other way around for our portfolio companies is that we feel that these companies in our portfolio, they benefit from the emergence of AI platforms, models, that whole new toolbox in so many ways. I mean, the combination of hardware sort of proprietary data sets and sort of a customer base that sort of goes directly onto the platforms without any intermediaries. And just the ability sort of these sort of new ways of writing code and software, et cetera, is so beneficial basically for these companies. So -- and then the other one, of course, is I think you'll agree with me is this sort of are we heading to a recession, energy prices are up, inflation is up, interest rates are high because of inflation, that whole thing. And the point there is that we have sort of strong elements of countercyclicality in our portfolio. So in tough times, you use these products more. It's most intuitive around BlaBlaCar. We'll come back to that, but it's there basically. So yes, so with that sort of long-winding intro, I thought we'd sort of kick off this -- we'll take you through the numbers and touch a little bit upon the different names. So Bjorn, do you want to run us through the numbers? Björn von Sivers: Sure. So starting off sort of the overall portfolio. Here is a simplified sort of breakdown of the balance sheet. So as Per mentioned, NAV down to $462 million, down 15% over the quarter in dollars to $3.61 per share. In SEK, that's SEK 34.25 per share or down 12% over the quarter. Total investment portfolio amounted to $503 million, consisting of sort of $486 million of investments and $17 million worth of cash. Important to note that sort of we have an additional $30 million of cash and cash equivalents, but in liquidity management investments. So all in all, we're looking at sort of cash, cash equivalents and liquidity placings in the range of $47 million, borrowings down to $45.7 million as per quarter end. Continue to trade as a significant discount to NAV as of today, sort of 49% discount. And moving down to the sort of big drivers over this quarter is, of course, the larger constituents of the portfolio and just going through sort of the few largest ones here. So BlaBlaCar, obviously, the largest driver, down 27% or $44 million to $120 million for the holding, primarily driven by depreciating multiples over the quarter, both driven sort of from the overall rapid developments and uncertainty coming from the AI space, but then also, of course, from the geopolitical tension, whereas BlaBla sort of part of that peer group is in the OTA travel-related marketplaces that's been hit a lot. Same goes for Voi, that's also down over the quarter based on multiples. It's the order of sort of 16% or $20 million. HousingAnywhere here actually valued on a new transaction, we participated with EUR 1 million and then another sort of $1.5 million sort of converted from earlier convertible investments we held. Numan and Breadfast based value on transactions were relatively flat, a little bit of FX on Numan. And then Bokadirekt down roughly 10%, also driven by contracting multiples. All in all, these 6 names represent SEK 26 per share or sort of on an aggregate basis, 77% of the NAV. And again, sort of ended the quarter with $70 million of cash and cash equivalents and $30 million in liquidity management investments. Also sort of during the quarter, we bought back another close to 500,000 VNV shares and also a small amount of the outstanding bonds, which I'll come to now, which we also sort of announced today that we announced a partial buyback offer of the outstanding bond up to a transaction cap of SEK 275 million. This is to sort of effectively take down the gross debt and also lower the interest expense going forward. We launched this today and we'll hopefully have sort of the outcome sometime next week. With that, I thought I hand back to Per and we'll touch a little bit more deep in the larger portfolio holdings. Thanks. Per Brilioth: Yes. And yes, the structure of the portfolio looks very similar to what you've seen before. And so nothing really to comment here. But if we flip to the next page, this portfolio, as we've been on and on about, trades at sort of roughly half of the reported NAV. And as we -- as I think it's clear, we think it's -- we think that NAV is attractive, cheap. And hence, we've been buying back stock as we think that, that's the absolute best thing one can do with shareholder money. Our sort of aim is absolutely to continue doing that. And the reason being, as the next slide shows, as you've seen before, is that this is a portfolio that at large is positive, is earnings positive, is profitable. The slight downtick from a year ago is because of the absence of Gett, which is a profitable company. But at large, this company -- this portfolio is profitable and not sort of craving a lot of money to stay alive. And so that's not a reason for saving money to sort of put back into the portfolio names. We can use the money we have to buyback stock. And this profitability does not come at the expense of growth. We've made a new slide, which is the next one, just to -- which sort of you'll recognize it from earlier that this portfolio continues to grow over the past sort of is it 3 years, you've got a CAGR of nearly 30% across these 6 top names in terms of revenue growth, and it's turned from being slightly negative profitability to positive. So big change there. And as we try to highlight here also just as a reminder of how markets move around, these 6 names are -- those 6 names back in '23, this quarter, first quarter of '23, we had them in our NAV at $446 million and total NAV was like $800 million back then. And we now value them at $358 million. And so despite that sort of big shift in loss-making to profitable and very, very sort of steady growth. This last quarter, that portfolio grew by some 25%, still but marked lower. The overall NAV is, of course, lower also because we've sold some stuff to pay down debt. So I think that's a useful reminder of where we've come from and where we are today, both in terms of sort of quality of the portfolio, but also how we market. Yes. If we then go into the bulk of the portfolio, there's nothing really new around BlaBlaCar. This is a good summary, I think, around how they sort of closed 2025. EUR 2 billion of GMV is a sizable number. I know GMV is not revenue, but it's -- and as you remember, a bunch of their markets are unmonetized yet and some of them are really coming strong into monetization like Brazil now, but others remain unmonetized, waiting for liquidity to sort of further improve. But still GMV, that's a tool that many people use to sort of value these kind of sort of platforms, et cetera. And if you use that number and to where we're marking it today, it's 0.4x GMV, which I think is fair to sort of categorize as attractive. Certainly, in my mind, that is. And if you go to the next page, we also have a BlaBlaCar that's doing really well at the start of 2026. They have had a strong start. And -- and also of late, we've really seen this element of countercyclicality in the business model where oil prices go up, it's -- energy prices go up at large, driven by oil prices now. The activity of BlaBlaCar goes up because it's more expensive to drive a car and you're more prone to get other people into fill those seats. You do that through the BlaBla platform. So BlaBla gets more business and the graph on the right sort of highlights that. I think that's sort of all for BlaBlaCar. If we -- let's go and talk about Voi. Dennis, do you want to run us through Voi? Dennis Mohammad: So Voi closed a record 2025 with EUR 178 million of net revenue. This is up 34% year-over-year and adjusted EBITDA of EUR 29.3 million, which is up 70% year-over-year and adjusted EBIT of around EUR 3.2 million, up from essentially breakeven in 2024. So a very significant improvement across the board in the P&L. As we alluded to earlier, the company during the year also did a tap of EUR 40 million on the existing bond framework to fund the growth CapEx for 2026. And they also secured an RCF with Danske Bank and Swedbank here in the Nordics for EUR 25 million, which is still untapped, but provides additional financing flexibility should they need it. In Q1 of 2026, we've written down the value of our stake in Voi by 16%. This is primarily driven by peer multiples trading down as Per has already talked about earlier, but in part also driven by FX as the dollar has depreciated against the euro during the quarter. Operationally, Voi has had a strong start to the year. It continues to win tenders in Q1 alone. They won tenders in the Netherlands, in France, in Germany and in Norway. And they've started to roll out their new fleet of e-scooters, the V9 scooter and e-bikes, the E5 and EL2 across the streets of Europe. So putting to use the bond money that they raised at the end of last year. The company will issue their Q1 report on Monday next week, that's on April 27. So more information will be available then. I see we already jump to the next slide, which is good. As Per wrote about in the intro to the report, when Voi issued its bond in 2024, it pioneered the financing model that industry peers have since either replicated or attempted to replicate. We have now received the first public financials from one of those peers and the comparison truly reinforces our conviction in Voi's strategy and in their execution. As you can see in the numbers here on the graph, while Voi grew revenues by 34% year-over-year and generated reported EBITDA, different from adjusted EBITDA, but reported EBITDA of EUR 19 million and EUR 24 million of cash flow from operations, the European peer here saw a revenue decline of 16% year-over-year and on essentially the same revenue base generated negative EUR 13 million of EBITDA and negative EUR 20 million of cash flow from operations. We've excluded EBIT here as the peer change methodology on this metric during the year, so making a like-for-like comparison difficult, but that number was heavily negative as well for the peer. As I said, we are convinced that Voi strategy and execution is the best in the industry. And I think one additional data point that supports that is when looking at the revenue generation per vehicle end day on the right-hand side of this slide. So Voi generating EUR 3.94 per vehicle in a day in 2025 and the peer down at EUR 2.88 in revenue per vehicle per day. We can see here that, that's a 37% more revenue generation per vehicle at Voi. And I think this really shows how Voi's investments across the full platform, everything from hardware, where they have their own proprietary IT module, high-capacity swappable batteries to software where they use machine learning for fleet optimization. They have a very strong fleet and inventory tracking system. And lastly, operations where they have best-in-class fleet sourcing, fleet management, maintenance and eventually resell is truly paying off. With that, we go to the final slide, where there's really nothing new to report. They've seen continued growth on top line and improvements on profitability across the board, as I alluded to earlier. As also mentioned, their Q1 report is out on Monday. So we encourage you to keep an eye out on their IR website then. If we then jump to the next company being HousingAnywhere, HousingAnywhere has had a good first year under Antonio Intini, who joined as a CEO roughly a year ago after having senior roles at both Immobilare and before that, Amazon. Looking at their 2025 financials, the company closed the year with continued growth on top line and positive adjusted EBITDA, which is a big improvement on the year before. In Q1, as Bjorn mentioned, HousingAnywhere closed a financing round where VNV participated with EUR 1 million and where previously held convertible loan notes were converted to equity. With this new funding, we think that the conditions are in place to push growth harder from here, and we look forward to following that transaction, which was done around the VNV mark at year-end last year. If we then finally go to Numan. Numan closed a very strong 2025 with north of 125% growth on revenues and positive adjusted EBITDA. As we've spoken about in the past, their weight loss vertical has been a key driver of this growth over the past couple of years and 2025 was no exception. In Q1 2026, the company has continued to grow, albeit we have seen growth come down from the levels it's seen in past years, primarily driven by some price changes in the market for GLP-1 in the U.K. which initially led to some stockpiling behavior ahead of the increases and then some slightly lower activity following. But as I said, they're still growing year-over-year in Q1, and we value Numan on the back of a transaction that they closed last summer. However, should we have valued it on the back of a peer group model this quarter, it would have been roughly in line with the mark we currently carried at. Finally, this company continues to invest in its unified Numan 2.0 platform, which we believe is a key driver to long-term LTV growth and patient retention, and we look forward to seeing the results from those investments in the quarters to come. That's it on Numan. Handing it back to you, Bjorn. Björn von Sivers: Thank you. I'll finish off with sort of a short comment on Breadfast here, who continue to see strong growth in its core e-commerce business and also sort of initial promising dynamics in its fintech offering. During Q1, the company announced sort of the final tranche of their $50 million funding round, which they completed sort of majority of last year, but the final tranche sort of closed in Q1. So company is funded and continues to grow well, hence, sort of flat valuation still based on this transaction. And then finally, on the top 6 here, we have Bokadirekt, who is also sort of down during the quarter, primarily driven by multiples, but on sort of that side, continued strong performance, strong profitability. Bokadirekt also announced a small acquisition during the first quarter. They bought a company called Zoezi, which is sort of a niche SaaS player for gyms and personal trainers, which will add both sort of top line and profitability to the company. And with that, I think we're through the top 6 names, and we'll head to a Q&A. Björn von Sivers: And as a reminder here on the Zoom, please use the chat function or the Q&A function in Zoom and we'll try to address them. And I believe we have a few questions. We could start with this one for you, Per. Perhaps, once you do the partial bond redemption, what do you think is the remaining headroom to repurchase shares? Or put it differently, how do you weigh sort of the bond redemption versus share buybacks going forward? Per Brilioth: Yes. We -- our target is to sort of -- our goal for a long, long time, as you know, and which we sort of achieved now with the sale of Gett, this has sort of become debt-free and not to sort of be burdened by paying a coupon to -- because of the debt we have. So this is just a continuation of that. But at the same time, we absolutely aim to have liquidity to make use of this sort of gift that the market is giving us of valuing us where we are and put shareholder money to work at that. So -- and we've been active around that, and we do it in the way we do it, as I think you've all sort of seen, we try to -- or we do sort of highlight in press release what we bought the previous week. So I think it's fair to expect us to continue doing that and to sort of and also to fund that. Now this partial bond redemption sort of leaves a little bit of cash. We're still net cash, but -- or yes, barely, but we are -- but it leaves liquidity to continue to do that. So that's good. And when we get to the sort of the end of the duration of this bond, then we -- during that sort of period, we see that we will have completed several more exits. There's an ongoing sort of process, some driven by us, some driven by sort of things at large that will provide us with liquidity. So it's too early to talk about that because nothing is done until it's done. But I feel sort of assured that we will have sort of ample liquidity both to sort of retire this bond at full and then and to buy back stock. But nothing is done, unless it's done, but this redemption leaves us with, I think, a good balance of liquidity to sort of make use of what we want to do here in the market. Björn von Sivers: Another question here on BlaBlaCar. You mentioned profitability at BlaBla briefly. Could you give us some color on how this would scale if the higher activity levels from March were to persist during the year? Does the increased activity sort of translate into higher profitability as well? Per Brilioth: For sure, it does. And we're unfortunately not at liberty to share sort of any further details as much as we would like. We're not at liberty to do that. So -- but for sure, this drives sort of revenue -- business revenue and higher sort of earnings. So it is a positive for sure. Dennis Mohammad: Maybe I can add there, Per, without saying too much to your point, we're not at the liberty to do so. But the core carpooling business that they run operates at north of 90% gross margin. So any kind of revenue coming outside of what you have anticipated covers the fixed cost is already covered, so you get a pretty high contribution on the bottom line from that. So to Per's point, the answer is yes. Per Brilioth: Yes. No, well described, Dennis. So yes, I hope that answers that question. Björn von Sivers: And then sort of a follow-up question sort of on buybacks of shares and bonds sort of given the volatility in the markets and contracting multiples, aren't you sort of more eager to increase buyback levels of the share? And/or if not, are there other plans for sort of additional investments in the existing portfolio companies or new funding rounds? Per Brilioth: There's sort of just having a go at that question, the different parts of it. So there's nothing major. None of the large ones sort of have any large rounds going on. There's small bits and pieces that we have been -- where we've been active in the portfolio, but they're really sort of on the marginal side of things. So not a big sort of draw on liquidity. And yes, no, I mean, if we -- if we had liquidity to do more now, we -- I absolutely would be a strong advocate of doing more in terms of buybacks. I think it's very attractive. I really, really believe that our NAV will be able to deliver serious returns over these coming years. And so if we have sort of liquidity to do more, we'll do that. But sort of obviously need to balance that liquidity, but very eager to sort of participate in the way we're doing now. So it's that balance that you may feel is keeps us doing this at a frustratingly timid kind of level. But it's -- yes, it's necessary to do it that way. If we can accelerate some exits that are at NAV or around NAV, then of course, it makes a lot of sense to do those and then sell. But it's -- nothing is done unless it is done. I feel very strongly that we will be able to sort of complete some further exits and hence, we'll have liquidity to do more, but got to keep an eye on that balance. Björn von Sivers: Another question here, specifically sort of on the Voi valuation, maybe for you, Dennis, other than sort of contracting multiples, what has sort of -- what levers have been moving around on that in the model? Dennis Mohammad: So the multiples are the -- is the primary driver. As you know, we value in the next 12 months. So we've moved 1 quarter forward. So the NTM outlook is obviously higher than it was in the previous quarter since the company is growing. But you also have FX, as I alluded to earlier, the dollar has depreciated against euro. So that's one negative contributor. And also net debt. And in the case of Voi, we don't simply take cash minus debt. We look at what obligations the company has with the existing cash. In this case, it's CapEx investments for 2026, where they've improved the kind of -- they've improved payment terms significantly over the past couple of years. So cash outflows happen during the year to a larger degree than everything going out when you place orders. So it's a combination of FX, net debt, but primarily, as said, multiples. Björn von Sivers: Thank you. With that, I don't think we have any further questions at this point in time. But as always, feel free to reach out over e-mail, and we'll try to be helpful. And other than that, I'll leave it to you, Per, for any final words. Per Brilioth: Nothing more to add, frustrating quarter because of all the stuff that we've talked about, but we feel really positive about the portfolio and the opportunities that we have here. . So yes, when is our next report Bjorn, it's -- we're looking at July 14, the National Day in France. So that's when we will speak next. Thank you, everyone. Dennis Mohammad: Thank you. Björn von Sivers: Thank you.
Operator: Greetings. Welcome to the China Automotive Systems Fourth Quarter and Fiscal Year 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss, Investor Relations. You may begin. Kevin Theiss: Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2025 Fourth Quarter and 2025 Annual Results Conference Call. Joining us today are Mr. Jie Li, Chief Financial Officer of China Automotive Systems. He will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent the company's estimates and assumptions only as of the date of this call. As a result, the company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading of Risk Factors and Results of Operations in the company's Form 20-F annual report for the year ended December 31, 2025, as filed with the Securities and Exchange Commission and in other documents filed by the company from time to time with the Securities and Exchange Commission. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment and cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially adversely impact our business, financial condition and results of operations. A prolonged disruption or any unforeseen delay in our operations of the manufacturing, delivery and assembly processes with any of our production facilities could result in delay in the shipment of products to our customers, increased costs and reduce revenue. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call with a result of new information, future events or otherwise. On this call, I will provide a brief overview and summary of the fourth quarter 2025 unaudited results and the 2025 annual audited results for the period ended December 31, 2025. The 2025 fourth quarter results and the 2025 annual results are reported using U.S. GAAP accounting. Management will conduct a question-and-answer session. For the purposes of the call today, I'll review the financial results in U.S. dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy, automobile industry and our market position. China's automotive industry in 2025 set another new record with vehicle production reaching 34.5 million units and sales totaling 34.4 million units. These numbers reflect growth of 10.4% and 9.4% year-over-year according to data from the China Association of Automobile Manufacturers, CAAM. Commercial vehicle production and sales reached 4.3 million units and 4.3 vehicles sales, respectively. China's domestic auto market rose by approximately 6.7% with total vehicle sales reaching 27.3 million vehicles. Among the industry trends were greater sales of new energy vehicles and Chinese branded vehicle capturing a larger portion of the total vehicle sales. Auto-related exports were another strong sales growth avenue for Chinese vehicle manufacturers. In 2025, government incentives for the automobile industry included tax incentives, subsidies for scrapping older vehicles and lower interest financing. Additionally, local government and private incentives may also have aided buyers. Chinese branded vehicle OEMs introduced a significant number of new models to attract consumers. Our sales increased by 21.4% year-over-year to $229.2 million in the fourth quarter of 2025 compared to $188.7 million in the fourth quarter of 2024 and $193.2 million in the third quarter of 2025. Net sales increased due to higher demand for passenger and commercial vehicles in China as well as increased export sales in the quarter. Gross margin in the fourth quarter of 2025 rose to 23.1% compared to 15.6% in the fourth quarter of 2024. Research and development expenses, R&D expenses rose to $17.8 million compared with $7.8 million in the fourth quarter of 2024. Technology is playing an increasing role with steering performance and quality and customers are buying more advanced products. Operating income grew to $18.1 million in the fourth quarter of 2025, primarily due to higher gross profit. Net income attributable to parent company's common shareholders increased by 103.2% to $18.4 million with diluted income per share of $0.61 in the fourth quarter of 2025 compared to $0.30 in the fourth quarter of 2024. For the 2025 year, record net sales increased by 17.6% to $765.7 million. Total sales of the company's EPS systems increased by 25.5% year-over-year to sales of the traditional steering products increased by 12.6% year-over-year. EPS sales represented 41.5% of total revenue in 2025 compared to 38.9% in 2024. Our Henglong subsidiary sales of passenger vehicle steering systems rose by 12.1% year-over-year to $65.3 million in 2025. Jiulong sales of commercial vehicle steering systems increased by 28.9% year-over-year to $92.3 million. Brazil Henglong net sales grew by 34.7% year-over-year to $68.7 million, and net sales to North American customers rose by 15.3% year-over-year to $121.6 million in 2025. Sales to Stellantis worldwide network helped propel our steering product sales growth in North and South American markets as well as Europe. Gross profit in 2025 increased by 33.2% year-over-year to $145.5 million with the gross margin increasing to 19%. The gross margin increased mainly due to a change in the product mix and lower material costs compared with last year. Operating income increased by 33.2% year-over-year to $53.6 million in 2025. Net income attributable to parent company's common shareholders was a record $42.8 million in 2025 with diluted net income per share 43.4% higher to a record $1.42 per share. R&D expenses increased by 63% year-over-year to $45.1 million in 2025. We had a number of product and technology innovations in 2025. Our second-generation iRCB intelligent electro-hydraulic circulating ball power steering began production for use in heavy-duty vehicles that use both hydraulic power and electric controls. As China's first iRCB compatible with L2+ assisted driving, this system utilizes cutting-edge electro-hydraulic control technology to achieve remarkable steering accuracy and response. And through higher efficiency, operating costs will be significantly reduced. Our Jingzhou Henglong subsidiary launched its Active Rear-Wheel Steering in 2025. Once reserved only for luxury cars, CAAS' Active Rear-Wheel Steering provides superior steering characteristics and is now entering into the upper mass market for new energy vehicles in China. Our R-EPS steering product developed for Nanjing Iveco entered production in 2025, providing advancements in performing autonomous driving functions such as automatic parking, lane keep assist and lane follow assist. Our R-EPS uses our proprietary ball screw assembly, which has become an essential steering configuration for mid- to high-end vehicle models, demanding high reliability and efficiency and quick responsiveness. Another subsidiary, Hyoseong (Wuhan) began production of its new 115 platform steering motor production line at the end of 2025. This high torque 115 platform electric motor supports our ERCB commercial vehicle program. ERCB is advanced electronic recirculating ball steering systems. This new motor is a significant innovation in our advanced intelligence steering strategy. We also made strategic moves to expand our geographic expansion. Our Henglong subsidiary entered into a strategic cooperation agreement with [ KYB/UMW ] in Malaysia. Through this cooperation, a new regional manufacturing and supply system is being entered in Malaysia. This joint venture between KYB, a globally renowned automotive component company and UMW, a Malaysian industrial conglomerate with core businesses covering automobiles and other equipment. UMW holds a 38% stake in Perodua, Malaysia's largest car manufacturer and UMW also has a joint venture with Toyota in Malaysia. For our agreement with KYB/UMW, our products will be initially supplied to Perodua in Malaysia. In the future, additional opportunities in the OEM and aftermarkets will be explored in the broader Asian region. To support this strategic partnership, KYB/UMW's new advanced manufacturing plant became operational in 2026. Our Jingzhou Henglong subsidiary also won its first R-EPS product order from a large well-known European automobile producer. This order with annual sales expectations exceeding $100 million covers multiple vehicle models and mass production is expected to begin by 2027. Also, our affiliated company in Sweden, Sentient AB, achieved considerable sales to a major European OEM 2025 for its leading steering technology integrating hardware and software. As of December 31, 2025, total cash, cash equivalents, pledged cash and short-term investments and long-term time deposits were $256.7 million. Net cash flow from operating activities increased to $111.3 million in 2025 compared to $9.8 million in 2024. Free cash flow exceeded $74 million in 2025. Our net cash position reached $169.7 million at year-end. With our increasing global presence, the Board of Directors decided to change our corporate registration to the Cayman Islands. This change will save significant administrative costs and pave the way for us to become a true multinational supplier to global OEMs. Management is refocusing some of those resources to improve operations, sales and to increase penetration of our growing international markets. Beginning in 2026, we will report our financial results on a 6-month basis. So our next report will be for the 6 months ended June 30, 2026. Also in 2025, we changed our independent registered public accounting firm to Grant Thornton Zhitong Certified Public Accountants LLP with headquarters in Beijing. With the organizational changes and introduction of more advanced steering products, we are now better positioned to pursue steering sales opportunities on a global basis. We look forward to our R&D providing upgrades to further advance current product portfolio and introduce new technologies and products in the future. Now let me review the financial results in the fourth quarter of 2025. Our net sales increased by 21.4% to $229.2 million compared to $188.7 million in the same quarter of 2024. The net sales increase was mainly due to a change in the product mix and higher demand for passenger automobiles and commercial vehicles in the fourth quarter of 2025 compared to the fourth quarter of 2024. Additionally, export sales increased during the 2025 quarter. Our gross profit increased by 79.8% to $53 million from $29.5 million in the fourth quarter of 2024. Gross margin in the fourth quarter of 2025 was 23.1% compared to 15.6% in the fourth quarter of 2024, primarily due to a change in product mix. Selling expenses were $5 million in the fourth quarter of 2025 compared with $4.8 million in the fourth quarter of 2024. Selling expenses represented 2.2% of net sales in the fourth quarter of 2025 compared to 2.5% in the fourth quarter of 2024. General and administrative expenses were $12.2 million in the fourth quarter of 2025 compared to $9.7 million in the same period in 2024. G&A expenses represented 5.3% of net sales in the fourth quarter of 2025 compared to 5.1% of net sales in the fourth quarter of 2024. Research and development expenses were $17.8 million compared with $7.8 million in the fourth quarter of 2024. R&D expenses represented 7.8% of net sales in the fourth quarter of 2025 compared to 4.1% in the fourth quarter of 2024. Operating expenses was $18.1 million -- I'm sorry, operating income was $18.1 million in the fourth quarter of 2025 compared to $8.7 million in the fourth quarter of 2024. Higher gross profit compared with the same period last year was the main driver. Interest expense was $0.5 million in the fourth quarter of 2025 compared to $1.1 million in the fourth quarter of 2024. Financial expense was $1.1 million in the fourth quarter of 2025 compared with financial income of $0.8 million in the fourth quarter of 2024. Income before income tax expenses and equity and earnings of affiliated companies increased by 121% to $19.4 million in the fourth quarter of 2025 compared to $8.8 million in the fourth quarter of 2024. Income tax expense was $1.4 million in the fourth quarter of 2025 compared to income tax benefit of $2 million in the fourth quarter of 2024. Net income attributable to parent company's common shareholders increased by 103.2% to $18.4 million in the fourth quarter of 2025 compared to net income attributable to parent company's common shareholders of $9.1 million in the fourth quarter of 2024. Diluted income per share was $0.61 in the fourth quarter of 2025 compared to diluted income per share of $0.30 in the fourth quarter of 2024. The weighted average number of diluted shares outstanding was 30,170,702 compared to 30,180,947 in the fourth quarter of 2024. For the 2025 year, net sales increased by 17.6% to an annual record $765.7 million in 2025 compared to $650.9 million in 2024. This increase was mainly due to higher sales and production of passenger vehicles in China, increased vehicle export sales and commercial vehicle sales in China increasing by approximately 10.9% year-over-year in 2025. Total sales of the company's EPS systems increased by 25.5% year-over-year and sales of the traditional products increased by 12.6% year-over-year. Henglong sales of passenger vehicle systems steering systems rose by 12.1% year-over-year to $365.3 million in 2025. Jiulong sales of commercial vehicle steering systems increased by 28.9% year-over-year to $92.3 million. Brazil Henglong's net sales grew by 34.7% year-over-year to $68.7 million in 2025. Net sales of North American customers rose by 15.3% year-over-year in 2025 to $121.6 million. EPS sales represented 41.5% of total revenue in 2025 compared to 38.9% in 2024. Gross profit in 2025 increased by 33.2% year-over-year to $145.5 million compared to $109.2 million in 2024. The gross margin was 19% compared with 16.8% in 2024, mainly due to a change in product mix. Net sales on other sales in 2025 was $3.6 million compared to $4.3 million in 2024. Selling expenses rose by 15.9% year-over-year to $20.7 million in 2025 from $17.9 million in 2024, mainly due to an increase in marketing and office expenses, offsetting lower other expenses. Selling expenses continue to represent 2.7% of net sales in 2025 as well as 2024. G&A expenses increased by 7% year-over-year to $29.7 million in 2025 compared to $27.7 million in 2024. G&A expenses represented 3.9% of net sales in 2025 compared to 4.3% of net sales in 2024. This expense was mainly due to higher personnel and other expenses. R&D expenses increased by 63% year-over-year to $45.1 million in 2025 compared to $27.6 million in 2024. Higher R&D expenses reflected increased personnel expenses due to acceleration in R&D activities, including more investment in traditional product upgrades, advancing EPS technologies and miscellaneous research expenses. R&D expenses were 5.9% of net sales in 2025 compared to 4.2% of net sales in 2024. Operating income increased by 33.2% year-over-year to $53.6 million in 2025 compared to $40.3 million in 2024. The increase in operating income was mainly due to higher sales and gross profit. Interest expense was $1.7 million in 2025 compared to $1.8 million in 2024. Financial income was $2.4 million in 2025 compared to net financial expense of $0.09 million in 2024. This increase in financial income of $2.4 million was primarily due to an increase in foreign exchange gains due to the foreign exchange volatility. Income before income tax expenses and equity and earnings of affiliated companies increased by 39.1% year-over-year to $61.4 million in 2025 compared with $44.1 million in 2024. The change is primarily due to higher operating income in 2025. Income tax expense was $11.6 million in 2025 compared to $5.9 million in '24. This increase was primarily due to higher income before income tax expenses and equity and earnings of affiliated companies and the effective tax rate in 2025. Net income attributable to parent company common shareholders was a record $42.8 million in 2025 compared to $30 million in 2024. Diluted net income per share increased by 43.4% to $1.42 in 2025 compared to $0.99 in 2024. The weighted average number of diluted common shares outstanding was 30,170,702 in 2025 compared with $30,184,513 in 2024. Now we'll provide some balance sheet and other financial highlights. As of December 31, 2025, total cash, cash equivalents, pledged cash, short-term investments and long-term time deposits were $256.7 million. Total accounts receivable, including notes receivable, were $361.8 million. Accounts payable, including notes payable, were $350.3 million. Short-term bank loans were $81.3 million and long-term loans were $5.7 million. Total parent company stockholders' equity was $401.3 million as of December 31, 2025, compared to $349.6 million as of December 31, 2024. Net cash flow from operating activities was $111.3 million in 2025 compared to $9.8 million in 2024. Cash paid to acquire property, plant and equipment and land use rights was $37.2 million in 2025 compared to $43.7 million in 2024. The business outlook. Management expects revenue for the full fiscal year 2026 to be $108 -- I'm sorry, $810 million. This target is based on the company's current view on operating and market conditions, which are subject to change. With that, operator, we are about to begin the Q&A session. Operator: [Operator Instructions] Your first question for today is from [ Jim Fallon with Esousa Holdings. ] Unknown Analyst: [ Jim Fallon from Esousa ]. I was just wondering how will the U.S. Supreme Court tariff decision affect the company's exports into the United States? Jie Li: [Foreign Language] [Interpreted] Thank you for the question. So the short answer is the Supreme Court ruling does have a positive impact to our export-related business to the U.S. market. Specifically, the tariff the Section 301, Section 232 and Section 122, those 3 areas, the ruling by the Supreme Court enabled the total tariff reduced from 70% to now 60%. Operator: Your next question for today is from [ Gary Nash ] a private investor. Unknown Attendee: Mr. LI, why did Q4 gross margin spike? And is Q4 gross margin sustainable for 2026? Jie Li: [Foreign Language] [Interpreted] Yes, you are right. We did experience a significant improvement in the gross margin category in the Q4 2025. The gross margin reached 23% in Q4, mainly attributable to a couple of factors. One is our product mix has dramatically improved. We have -- we have increased our higher-margin products such as our EPS product and brushless powered electric power steering, we would call EPS product. And we also had some onetime event also took place in Q4. They are the tariff-related refunds as well as depreciation policy change. And so combining these 2 factors -- those 3 factors, we believe the gross margin in 2025 -- 2026 is we're going to be continued -- going to be at a very healthy level, but it's not going to be as high as Q4 2025. Operator: Your next question is from [ Jonathan Nieves, ] a private investor. Unknown Attendee: My question is on a dollar basis, how much does China Automotive expect to save on an annual basis by changing the company registration to the Cayman Islands? Jie Li: [Foreign Language] [Interpreted] So immediate impact [indiscernible] to Cayman Island. We immediately save about USD 500,000. That's the listing-related expenses. Then we are -- in terms of international business expansion, we will see more benefit coming even it's still a little bit early to give the detailed number. And also in terms of taxes, we're also seeing -- it will be a very notable saving as well. So combining all these, we believe it's going to be a very meaningful saving for our shareholders. Kevin Theiss: Okay. I have a question that's been e-mailed to me by one of the shareholders who could not be on. And the question is, with the current cash position, what's the outlook for either a stock buyback or cash dividends in 2026? Jie Li: [Foreign Language] [Interpreted] In terms of share buyback, we definitely are considering, previously, we do have a buyback plan in place due to the redomicile to the Cayman Island process, we have to meet a lot of compliance. So we put that buyback plan on hold. Now with that procedure completed, me and the CFO definitely will recommend to the Board and to reinitiate share buyback program. We'll make a -- do announcement when that's in progress. [Foreign Language] [Interpreted] As far as dividend, we don't have a plan at the moment, but we're going to make -- also make a suggestion to the Board of Directors. Operator: [Operator Instructions] we have reached the end of the question-and-answer session, and I will now turn the call over to Kevin Theiss for closing remarks. Kevin Theiss: We thank you all for joining us today in the conference call. We wish you to be safe, and we look forward to speaking with you in the future after we report the 6-month results. Thank you. Operator: This concludes today's conference. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Michael Green: Good morning, and welcome to this presentation of Handelsbanken's results for the first quarter of 2026. We can conclude that the bank reported yet another solid quarter. Operating profit increased by 9% compared to Q4 and the ROE amounted to 14%. The main income lines, NII and fee and commissions were stable. While the lending growth in Sweden was held back a bit by a general slow Swedish economic growth, it was again very encouraging to see that the lending growth trend in the U.K. and the Netherlands continued both on the household and on the corporate side. This has now been a consistent trend for more than a year. The savings business continued to perform well with market shares of net inflows into mutual funds far exceeding the market share in our books in both Sweden and in Norway. Cost efficiency is always a top priority in the bank. And again, we saw expenses declining. The net asset quality remained very strong with more or less insignificant credit losses once again. The capital remains robust. The anticipated dividends for the quarter earnings were increased a bit in order to calibrate the CET1 ratio to 17.2% or 250 basis points above the regulatory requirement compared to the 285 basis points in the previous quarter. The anticipated dividends amounted to SEK 2.93 per share or 91% of the earnings generated in the quarter. When we look at the longer-term value creation for our shareholders, this solid Q1 report fits well into the picture of the bank's resilient business model. As illustrated in this graph, the growth in equity per share plus dividends has not only been consistently stable over the past decade, but also growing with an average of 14% per year. And if zooming in on the past 5 years, the average growth rate has been even higher at 15%. And not to forget, this has been achieved in a decade, which includes everything from negative interest rates, Brexit, a pandemic, war then in the Ukraine, inflation and interest rate spikes, stresses in the real estate sectors, et cetera, et cetera. This is what we strive at always generating for our shareholders and also what the shareholders should expect from a bank like us. This stability is, of course, not achieved by coincidence and not just of our way of working. It's a result of the chosen markets and geographies. Our four home markets share the following common traits. They are all stable democracies with large economies, rule of law applies and the political and regulatory landscape are stable. It also helps if there are culture similarities and shares of values. Not only the assets, but also the cash flow from our customers are stemming from stable Western European economies. In such markets, the Handelsbanken model has a chance to stand out with a unique offering and a higher customer satisfaction than our peers. It is, of course, also essential that there are large bases of potential customers with the right risk profile and that we have a demand -- and have a demand for our offering, hence, offering material scope for long-term profitable growth at a suitable risk level in stable markets. And just to add a small remark, given the recent themes into the financial markets, we have no exposures to private credit. Before going into the financials for the first quarter, just some comments on the recent business development in these four home markets. Starting with Sweden, which accounts for 76% of the profits in our home markets. Handelsbanken is the largest lender in Sweden when summing up household and corporate lending. It's therefore fairly natural that the soft general economic growth in Sweden translates into fairly flat lending volumes in the past quarters. Deposits are growing somewhat, but the key growth is seen -- clearly seen in the savings business, where we consistently for the 1.5 decade, have seen market share of net inflows into our mutual funds far exceeding the market share of our outstanding volume by more than 2x. In the U.K., we had a long period after Brexit with declining lending volumes, mainly due to customer amortizations exceeding new lending. Since more than a year, the trend has clearly shifted to a consistent lending growth quarter-by-quarter on both the household and the corporate side. Also, deposits have increased over the past years as well as the savings business. The U.K. is a market where the customer satisfaction really stands out the most when comparing with our peers in the market. In Norway, we stated 2 years ago that we needed to see a better balance between lending, deposits and savings, and the situation has improved since. While lending volume have dropped over the past year, mainly due to intense competition, growth has been seen in deposits and in particular, in the savings business. Over the past 2 years, the market share of the net flows into mutual funds in Norway has been more than 2x the market share of the outstanding volumes. This means that we are deepening the relationships with existing customers and adding new customers, which bodes for improved profitability over time. And finally, the Netherlands. Just like in the U.K., the distance to peers in terms of customer satisfaction is particularly large. Lending growth has been very strong, as you can see in deposit -- and despite the drop in deposit last year, the longer trend has also been positive. And what is even more positive is that we now see also -- we now also register a sound growth in the savings business with steady growing assets under management. Now if we look closer at the financials of the fourth quarter compared to the previous quarter -- the first quarter, sorry. ROE amounted to 14% and the CE -- cost/income ratio was 39.5%. In Q1, a VAT refund of SEK 1.1 billion was booked. An adjusted basis, the ROE was 11.7% and the cost/income ratio 42.8%. Operating profit increased by 9%, but declined on an underlying basis by 3%. NII and fee and commission were marginally down, headwinds mainly related to day count effects and FX. Income increased by 3%, but declining by 3% on an underlying basis. Credit losses amounted to SEK 35 million or 1 basis point. Regulatory fees decreased as the previous quarter included a booking of a charge for the interest-free deposits at the Central Bank. Now if we switch over and look at the quarter compared to Q1 last year. NII declined by 13% and 10% adjusted for currency effects. The decline is related to lower margins in the wake of lower short-term market rates. Net fee and commission income, on the other hand, increased by 7% adjusted for FX effect. The key driver was again the savings business and strong inflows and positive market developments. All in all, total income dropped by 6% on an underlying basis. Underlying expenses dropped by 1% despite the annual salary revision that comes into force on January 1 each year and also the general cost inflation. Last year, we had a net credit loss reverses and the regulatory fees were flat year-on-year. All in all, the underlying operating profit was down by 12%. Now if we take a closer look at the NII development compared to the previous quarter, we see that NII dropped by 1%. Volume growth contributed with SEK 20 million in the quarter due to lagging effects on interest margins from lower short-term market rates in the previous quarter, the net of margins and funding contributed negatively by SEK 67 million. Deposit guarantee fees were lower this quarter, the decline being explained by fees being elevated last quarter as the final bill for that year was received and paid. The day count effect due to 2 less days in the quarter and the currency effects due to a stronger krona on average has created some headwind, as you can see. Net fee and commission income dropped slightly in the quarter. The bulk of fee and commissions related to the savings business, especially in the mutual funds business. The positive effect on fees from the strong net inflows were, however, offset in Q1 by a negative day count effect as well as negative mix effects with an increased share of the AUM asset under management in lower fee funds. Other fees were seasonally down. The high market share of net inflows into mutual funds have added significant customer asset under management under -- to the bank over time. As illustrated in this slide, the bank has now accumulated net inflows into Swedish mutual funds at almost 2x the run up over the past decade. This success comes not only from appreciated offering and strong performance in the funds over the years, but also the bank's distribution capacity where advisers are close to and have deep relationship with our customers parallel to an appreciated offering and distribution in our digital channels. Now over to the expenses. A trend of increased cost was broken in 2024. And since then, the expenses have trended down despite annual salary revisions and general cost inflation. The bank is now in a good position in regards to cost efficiency. As illustrated in Q1 when costs continued down on both quarter-on-quarter and year-on-year, it's deeply rooted in our culture and among our employees to always look at new ways of becoming even more efficient. Next slide show our asset quality and credit losses. Over the past decades, credit losses have been very low, which they should be in the bank with our risk appetite. Since the outbreak of the pandemic in 2020, the sum of all credit losses has been SEK 50 million or on an average, SEK 2 million per quarter. And that includes the period from the pandemic, sharp savings -- sharp swings in policy rates and inflation, the disruption of supply chains following years -- following the war in the Ukraine and Middle East, et cetera, et cetera. Still more or less no credit losses. If we compare the credit losses to our closest peers, the bank also stands out over the decade. In particular, in volatile times, difference in underlying asset quality has shown. In Q1, the credit loss ratio was 1 basis point. Perhaps needless to say, asset quality remains very strong. The bank is in a very solid financial position. Credit risks, funding risks, liquidity risks and market-related risks are prudently managed and the capital position is strong. The anticipated dividend in the quarter of SEK 2.93 per share equals to 91% of the earnings in Q1 and is yet another step to gradually adjust the capital position in the bank. The CET1 ratio now stands at 250 basis points above the regulatory minimum compared to the 285 basis points in the previous quarter. The bank should, however, always be considered one of the most trustworthy and stable counterparts in the industry. This is also the view by the lending rating agencies who rate the bank the highest among comparable rates globally. And this view was again confirmed and further enforced last evening by Moody's, who upgraded the bank's baseline credit assessment rating to A1 from A2. This put the bank in a very exclusive group of only a handful of privately owned banks globally with the highest BCA rating by Moody's. Finally, to wrap up, Q1 was a solid quarter with increased operating profit and ROE, although including a positive contribution from a one-off VAT refund. Q1 NII and fee and commissions were stable and costs declined. We see lending now growing consistently in the U.K. and the Netherlands and also in the savings business broadly over the markets. Our way of doing bank is appreciated by customers where they experience close relationship with us, and it's also seen in the external surveys in all of our well-chosen home -- stable home markets. Asset quality remains just as strong as it should for a bank with our risk appetite and the capital position is very strong, and we took another step down in the target range by anticipated dividend equaling to 91% of the earnings in the quarter. Finally, I'm also happy for our shareholders that has seen share price reached an all-time high during the quarter. And with those final remarks, we now take a short break before moving into the Q&A session. Thank you. [Break] Peter Grabe: Hello, everyone, and welcome back. This is Peter Grabe, Head of Investor Relations speaking. And with me, I have Michael Green, CEO; and Marten Bjurman, CFO. As always, we would like to emphasize that we appreciate that if you ask one question at a time in order to make sure that everyone gets a chance to ask their questions. With those words, operator, could we have the first question, please? Operator: [Operator Instructions] And your first question today comes from the line of Magnus Andersson from ABG Sundal Collier. Magnus Andersson: I was just wondering regarding the -- in total, SEK 6 billion in AT1 capital you issued late in Q1 '26, whether the main reason was to be able to go down further in your management buffer or if you expect the higher volume growth going forward or a combination of both? And related to that, also, if you could confirm that the coupon will be taken directly in other comprehensive income rather than in NII... Marten Bjurman: Magnus, this is Marten speaking. Yes, I had a little bit of a difficulty hearing your first part of your question, Magnus. But I assume that you talked about the AT1 that was issued late in the quarter and booked in Q2. And it's fair what you said, it's correct what you say that this is an equity instrument. It will be booked in the equity and the interest rate, if I may call it that, the coupon, that will be booked also in the equity, yes. Magnus Andersson: Okay. And also the reason for it that you have your next call in March 2027 of USD 500 million. What was the main reason for doing this now? Was it to be able to go down the management buffer volume growth? Or... Marten Bjurman: Well, there are various components into that equation, Magnus. But obviously, we didn't have a full box of the AT1, if I may call it that. This provides flexibility to the bank. And as you know, the 2 outstanding AT1s, they are in U.S. dollar. This one is in Swedish krona. So yes, it's -- and then we take it from there. We'll see. But the main reason is that it provides flexibility for the future. Operator: Your next question today comes from the line of Markus Sandgren from Kepler Cheuvreux. Markus Sandgren: I was thinking about you, Michael, you mentioned that you're going down gradually in terms of capital buffers. Can you give some guidance on -- I know that the Board is deciding what you will pay out. But since you have gradually reduced this buffer in your accrual of dividends, where are we heading within the range, please? Michael Green: Yes. This is Michael speaking. I don't think you should read that much into the adjustment this quarter. But it's -- the bank is in a position where we are running the bank very operationally strong and we have a cost -- the cost in place and all that. So we have gradually come down in our target range. And when we look at the world outside and we compare what's going on there with how our customers behave in terms of risk, we don't see anything that really sticks out. So our customers, they are in very good shape. And the risk we allocate for is taken care of in our internal risk models. So I don't see the need for having SEK 285 million now. So we will -- we just take it down to SEK 250 million. And then as you just said, we decide where to go when we come into the -- what we anticipate now for the year, and then we take the decision in the Board for how we recommend the -- for the shareholders to -- on the dividend side when we come into the Q4 report. Markus Sandgren: Yes, so I understand. But what do you mean by that, you shouldn't read too much into that you change it because you do change it because you think it looks good. So there must be some message in that. Michael Green: Because it looks good. Marten Bjurman: So but let me underline a little bit also. Again, I think bear in mind where we're coming from. We have -- we're coming from SREP plus 5% or 6% and then we took it gradually down, as you know. And we felt the need to guide a little bit to say that reinforce that the message that, yes, we have this interval, it is set, and we are slowly moving into that. Now as we are within the interval, we don't feel the need to guide that much further on a quarterly basis. So you shouldn't expect us to draw the line anywhere within the range. Now we are in the range, it feels great. Operator: Your next question today comes from the line of Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: On your cost outlook, please, could you walk us through the key moving parts in your cost base for the next 3 quarters that we should be aware of, specifically, where do you see flexibility for further cost reductions versus what could be the areas of additional cost pressure? You previously mentioned that you have completed the centralized cost-cutting program, but do you expect more efficiencies to come through from elsewhere, for example, from the local branches? And if you look at your headcount, it's down 1% quarter-on-quarter. Do you expect any further reductions in the number of employees to come through? And how should we think about your Oktogonen contributions going forward? Marten Bjurman: Okay. Well, maybe my answer will be a little bit disappointing to you because we will not guide on the costs going forward. But it's very true what you say. We have that initiative behind us now. We have no plans of broadcasting yet another of those initiatives. But rather, we are staying very true to our culture, our model where every employee within the bank is extremely cost cautious and very sensitive to increases in costs. And this quarter was extremely successful when it comes to cost as well. It was even to me, a little bit surprising actually. But again, I think that you shouldn't expect it to go further down. We are at a level now where we are extremely confident that we can run the bank the way we want. We have resources to spend and invest where we want to spend and invest. And -- but this model is extremely decentralized. We will not interfere with our home markets. We will not interfere with our branch office managers. So ultimately, they decide. So therefore, we cannot guide any further. Gulnara Saitkulova: And what about the headcount? Marten Bjurman: Headcount number is basically the same, maybe a little bit boring answer. But still, if a home country wants to expand in terms of number of employees, they are free to do so if they have good reasons to do it. So I don't foresee any big shifts either upwards or downwards in terms of full-time employees. Michael Green: And just to add on, when Marten says we -- the decision-making for resources, both in headcounts and other cost initiatives that they could happen throughout branch networks and product or whatever. It's not that we don't guide and we don't steer, but we follow them closely. So it's a very sharp following up in terms of cost efficiency and the returns on the investment we do. So it's not do as you like. It's do what you think is necessary, and we will keep a very close track on what's going on. Operator: Your next question today comes from the line of Andreas Hakansson from SEB. Andreas Hakansson: So a little bit of a follow-up here on costs. I mean you've been reducing cost continuously now for, it feels like 8 quarters roughly. And I mean, when we speak to quite a few banks, they see that there's a lot of IT investments relating to AI and whatnot. And when we speak locally and we hear people gossiping or talking, it doesn't sound like you are clearly ahead of the pack in terms of those investments. So is it a risk that you have underinvested now over the last years because a lot of the savings have come from IT, if nothing else? Marten Bjurman: The short answer is no, I don't think so. I think it's more of a matter of how you're running your development within the IT space. We were heavily dependent on consultants for a very long time. We have now -- we are now at another place in terms of that mix between employees and consultants. So that's one thing. But the other thing is that we are running our IT development in another way now. We have much more control, generally speaking. In terms of AI, are we lagging behind? Are we the first mover? I don't think it's in our nature to be the first mover in terms of trying out different AI solutions. That being said, though, I'm extremely confident that we have navigated through these challenges and opportunities the right way so far. It's a broad area. It opens up a lot of opportunities, not only for the bank, but also for our customers. We're following it closely. We have quite a number of initiatives that are all the way from ideas to fully implemented and up and running successfully. So it's a broad range of initiatives. So I'm not worried for that matter. Andreas Hakansson: So as a CFO, it's not that you want more resources, but Michael thinks you need to slow it down still? Or what's the balance between you? Michael Green: No, no. We don't -- the balance is very good between my CFO and myself. So -- but just for the record, I totally embrace the technology and the development of that, and that's a very wide area, and we invest largely in things that we need -- that we see could fit well into our customers and also for ourselves in terms of efficiency reporting, whatever. So I'm very interested in that, and we have a quite good pace actually. So I don't really have the feeling that you described in your first question that we lag. I don't think we lag. I think we do it in a very balanced way in the way we see it from my perspective. Operator: Your next question comes from the line of Shrey Srivastava from Citi. Shrey Srivastava: My first is actually on the positive side, you've got the second consecutive strong quarter for loan volumes in the U.K. What is the profile of the new customers you're attracting versus the U.K. incumbent? Has it materially changed versus your existing customer profile? Marten Bjurman: Thank you. No, no, it hasn't changed. It's basically the same. It's the corporate lending growth that you see in U.K. is very pleasing and the trend is continuing. So very pleased with that, generally speaking. In terms of our customers, it's no new mix of customers. We are very true to our model in terms of providing financing to businesses that we understand that have strong cash flows, a strong repayment capacity and all that. So no, the short answer is no. We don't have any new features into our model in providing financing to our customers. Shrey Srivastava: Right. And my second one is, can you explain this 50 basis points negative impact on the CET1 ratio from other factors, including claims on investment banking settlements and rounding on? I don't believe it's ever been called out before explicitly. So I'm wondering why it was so large this quarter? Marten Bjurman: Well, it is large this quarter due to natural reasons because I think that, that business where this derives from is typically slowing down in Q4. So when you compare the 2 quarters, this looks quite hefty. But it's not. I think if you take this level, it could be a natural level for the coming quarters. And I think you touched upon it in your question where it comes from. This is coming from the market making in the capital market side of the bank. So this is really short-term claims. These are coming from market making and deals that are between settlement date and trade date basically. So very short-term claims on our customers, majority in the fixed income space. Shrey Srivastava: Okay. So this was a bit larger than you'd expect given the seasonality if you look versus the past few years? Marten Bjurman: No. I mean, this portion that I just explained is maybe 1/3. The other 2/3 are so many items in so many parts. So it must be considered a regular quarterly volatility, many, many smaller items in that. So I'm not surprised where we are. But again, you have to compare with a regular quarter. And in this case, Q4 might not be that one. Operator: Your next question comes from the line of Namita Samtani from Barclays. Namita Samtani: I just wondered, it's just another quarter where Nordea is growing its Swedish corporate lending by 4% quarter-on-quarter and Handelsbanken volumes are flattish. So I just wondered why you're allowing another bank to take market share from you so much so that you're not even growing the Swedish lending book in the quarter? And just a follow-up to that. I just also wondered why there's appetite to grow in commercial real estate in the U.K. and Norway, but not in Sweden just based on how you grew this quarter. Are the competitive dynamics different in Sweden versus Norway and the U.K. Michael Green: Yes. So the -- first of all, we don't allow competitors to take business from us. We compete every day and you win and you lose some. In our -- from my perspective, the volumes that we've seen leaving the bank has mainly -- or absolutely the vast majority is -- it goes to the capital market side. So it's not that any other bank is competing with us, and we do not have the capacity to compete that. So that's how it is. And I'm not going to comment on Nordea's growth. That's -- I don't know what they do there. But I think growing the lending book, it comes -- when you have market shares like we do in Sweden, you tend to grow, as we've said before, in line with the real economy growth in this country. If you want to grow more over time, you need to be very aware of pricing and risk, and we are conservative in that sense. So we follow our customers. If they invest, we will grow with them. And we will gladly compete and take business from our competitors. But in general, we grow in Sweden with our very, very strong corporates and private individuals. And if you look at the market right now when it comes to corporates, what we see from our perspective when we talk to our customers is that they are a bit reluctant now to invest both when it comes to investing in factories and production, but also invest in real estate right now. So it's a bit on a standstill due to the uncertainty in the surroundings. And when it comes to the private individuals in Sweden, we see a small pickup when it comes to buying new houses, and we have quite a strong inflow when it comes to that market, when it comes to the transition market when they buy houses. So we don't see a problem with this. We -- in Sweden, we follow our customers when they grow and when they're not growing. When it comes to the -- as you probably noticed in the U.K. and the Netherlands, we have the opposite. We have a quite strong growth there because the market share we have is quite low. And that's what you should expect, and that's what I'm expecting with high ambition in these countries. Namita Samtani: Sorry, could you just comment a bit on the differences in the commercial real estate U.K. and Norway versus Sweden? Is it more competitive in Sweden? Michael Green: No, I think there are competition everywhere we are because we're very strong and transparent countries with strong competitors. So I don't think any -- there is any difference there. Operator: Your next question today comes from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: Here is Sofie from Goldman Sachs. I was just wondering how we should think about the net interest income in the other division, given that it was up 41%, I think, quarter-on-quarter. Could you just comment on kind of what's the normalized run rate? Are there any headwinds or tailwinds we should kind of be mindful of? And also, I know you don't guide on rate sensitivity, but if you could just help us kind of think about how we should model potentially higher rates in Sweden and also elsewhere in Europe, what the kind of moving parts are? Marten Bjurman: Yes. A number of questions there. And the sensitivity to policy rates, yes, obviously, when we have -- as we had in this quarter, policy rates turned down late in the previous quarter, we will have an effect. And generally speaking, as you know, we benefit from higher rates rather than lower. So -- but in the meantime, we have lag effects that you know of when these rates are cut. And it varies a little bit between countries. But yes, generally speaking, we should expect now that, okay, policy rates were expected to go down further in U.K. and in Norway. Now we don't -- we're not so sure anymore. Some say flat, some say even a little bit of a pickup. Obviously, we will have an impact of that. It will take a little bit of time to bleed through that effect through the books as with all banks, I guess. So that's where we are, and we don't guide any further than that. Sofie Caroline Peterzens: But in terms of the other division, like -- yes, do you have any guidance on how we should think about the contribution from there because it's very difficult to model on a quarterly basis, plus 40%. So is there any way we could kind of think about how to think about the kind of volatility in this division going forward? Peter Grabe: Yes. This is Peter speaking. You can say that there are mainly two reasons. One is within the treasury department where actually both of these two items are within the treasury department. And it goes up and down in between quarters and it's connected to what's allocated to the different segments. On a group basis, everything, of course, nets out. But occasionally, you allocate out more from Central Treasury and sometimes you allocate out slightly less. And then furthermore, it's also a result of the -- of what you generate in our liquidity portfolio, i.e., the returns on the assets we have in the liquidity portfolio, which means that it can go up and down somewhat in between quarters. But I think overall, you should see it as more of relating to components that generally are sort of intertwined with the allocations out to the respective segments. Operator: Your next question comes from the line of Riccardo Rovere from Mediobanca . Riccardo Rovere: Sweden loss cut rate in September, so say, around 6 months ago, would you say that now the balance sheet on the assets and liability side has absorbed the loss cut made by the Riksbank 6 months ago? Or should we expect a little bit more tail in the coming months? Marten Bjurman: Yes. Generally speaking, yes. I think we have seen most of the effect, not all, but most of the effect for sure. So that's the short answer. Riccardo Rovere: And let's assume for a second that short-term rates remain where they are. I mean, STIBOR goes up a little bit in the quarter. That I suppose nothing of that is eventually visible in these set of numbers, I would say so. Am I right in saying so? Marten Bjurman: I'm very sorry, I didn't catch your question fully. Would you be able to repeat... Riccardo Rovere: Yes, yes, sure. The STIBOR month was a little bit higher in the -- especially in the month of March. Let's assume for a second that, that remains. I think it was 9 or 10 basis points higher in the month of March. Let's assume that, that stays for a while. Is it fair to assume that in set of numbers, we have not seen anything from this 9 or 10 basis points higher level on STIBOR 3 months. Michael Green: I think it's what we usually say. I mean the reason for us being with silent here is that it's difficult to give you a straight answer on that question. I mean, obviously, as we always say that there are tons of factors that play in when we talk about the development of net interest of funding and margins. STIBOR is, of course, one component. But how a particular STIBOR movement in between months or quarters directly will affect the NII is very difficult to guide on. And as you know, we prefer to stay away from guidance -- sorry, Marten, please go ahead. Operator: Your next question today comes from the line of Emre Prinzell from Nordea. Emre Prinzell: I know you touched upon this, but just to double check here, what do you need to see for Swedish lending growth to meaningfully pick up in the next few quarters? I mean we're expecting Swedish GDP to grow maybe 2.5%. Should we therefore see a read to you that you ought to grow 2.5% in Sweden? Or what's a reasonable way of looking at this going forward? Marten Bjurman: Yes. Great question. Yes, I would love to grow 2.5%. That would be perfect for us. And as Michael alluded to earlier, we have seen 1 or 2 tickets leaving the book in this quarter, not to other banks, but to the bond market. That happens, it can happen. And what will it take for us to really set off the corporate lending? Well, I think -- and we've been talking about this quite a bit also during previous quarters that generally speaking, we will need the economy to pick up speed in terms of the recovery phase that we are in. And everything that is disturbing that picture is obviously not good for business. So if we have globally, even if it's not evident in our books, but the appetite or the demand for credit needs to pick up speed. That's where we are. We are not growing on our own. We are growing with our customers. So if they have a need, then we support them, obviously, it's not more fancy than that. Operator: Your next question today comes from the line of Johan Ekblom from UBS. Johan Ekblom: I just wanted to pick up on some of the earlier comments you made around costs and AI, right? So I think in response to one question, you said, look, the staffing decisions are made at the branch level. And at the same time, you feel like you're doing kind of enough in terms of technology and AI. But when we think about that, I mean, surely, technology and AI are investment decisions that had to be made at a central level and the benefits of AI are expected to largely come through in the -- in the form of lower staff needs. So does that create a tension in your decentralized model? Do you think you are as well equipped to reap the benefits of AI as maybe some of your peers that run more centralized business models? Michael Green: So Johan, thank you for the question. I appreciate that because this is actually a very good point. When it comes to decentralized way of working and resources, that refers mostly to the branch business. And when it comes to decision-making in terms of infrastructure program, AI investments, which is obviously a larger ticket. that's been taken care of within the management of the different areas, but also, of course, with the Head of IT, sorry. And we discuss that both me and Marten when it comes to these large investment programs that we run to make sure that we don't have any problem with holding back on time when it comes to develop new facilities, new prospects for doing business or creating efficiencies. So this is not a decentralized way of working. The -- what we should do comes from business and from IT. And then Marten and I and Head of -- Anton Keller, Head of IT, makes decision when it comes to the more heavy investments in this. So there's not a decentralized way of doing what you like when it comes to IT investments. Johan Ekblom: But do you not need full buy-in from the organization on adoption to make the investments work. Michael Green: Yes. But that's not a problem because if the reason is correct and right and logic and good for the bank, everybody will buy in. That's up to us to really make sure that the people understand why we do this. And I don't have any -- not once have I felt or heard that there is going to be difficulties in explaining the rationale when it comes to IT investment and spending because that puts the bank in a strong kind of competition position, which will be necessary all the time for a company to grow. So I don't think there is any problem with that, actually. Operator: Your next question today comes from the line of Max Jacob Kruse from Bernstein. Jacob Kruse: Just one question then. So this quarter, you hiked your mortgage rates very late in the quarter and STIBOR moved earlier. Could you just talk a bit about what you saw in the quarter in terms of timing effects? And maybe you could touch on as well any kind of balance sheet hedge offset you have there? Marten Bjurman: We saw none of those effects is the short answer. So yes, that's it. Jacob Kruse: And sorry, how is that -- I thought your list price would be determining the kind of role of the negotiated rates or the rates on mortgages. And obviously, your STIBOR, any kind of swaps into STIBOR would have moved. So why would you not see any impact? Marten Bjurman: We reset the interest rate for mortgages the 1st of April to start with. So it's first every month is the cycle, if you will, where we reset these interest rates. Michael Green: I'll just add that the price we get from the business when we do business with our private customers when it comes to mortgages is not -- it's -- the discussion stems from the list price, but it's not where we do business. So the cost for our branches when it comes to -- the funding costs for our branches, that it's volatile. It comes from where the market rates are. And they will then push and they do business where they find there is a profitability. So this -- the list price is just the way we start with the list price. We never do business on list price. So the volatility in short rating -- short interest rates are taken care of in the day-to-day business on the branches. Jacob Kruse: So just to clarify then, so the STIBOR moves are -- the STIBOR moved in the quarter, you say your pricing on the list price changed on the 1st of April because I guess your list price changed at the end of March. But I understand that your front book is a negotiated rate. But surely, as people roll towards -- if I have negotiated the rate, that will move with the list price. I think it will not move, but that plus the discount will be the role. So I don't quite understand how you can have STIBOR moving up and list prices staying stable without having any impact in terms of... Michael Green: So when you roll your 3 months interest rate period, we have another discussion with the customers. And then we set the new price for the next coming 3 months. So I don't really understand your concern there. Jacob Kruse: Maybe I'll catch up with you. Yes. Operator: We will now take our final question for today. And the final question comes from the line of Andreas Hakansson from SEB. Andreas Hakansson: And sorry, some follow-ups since we could only ask one question. So a follow-up and a real question. And it's back to, I think it was Namita asked about the commercial real estate exposure. I mean you're one of the most commercial real estate heavy banks around. And if we look in this quarter, the only growth is coming from commercial real estate, I think, in all markets, while other corporate banking is declining. Is that a strategy that you're happy with given that, I mean, the profitability of a CRE loan is normally lower than other types of corporate banking given what you can do around it and so on. So are you steering the bank in this way? Or is it just happened to work out like this? Michael Green: So Andreas, we don't steer the bank in which customer to pick and choose. That's for the branches to do. If they find it suitable or they find the risk suits us well. We have products that could solve problems for a corporate or real estate company, we do that. So it's the steering from my side. This is the way the bank is run. We make sure that our branches are in a position to compete and then they choose which counterpart they want to do business with. And this is how the balance sheet will ends up in that case. So it's not a -- it's not a choice from my perspective on where to do business. We try to compete on all segments. We compete on industrials or we compete on commercial real estate business. It's up to the branches to do that, to choose. Andreas Hakansson: Yes, that's fine, but the branches is quite significantly steered by a cost/income ratio and want to keep costs low, as you discussed earlier. But if they would then go after some other types of corporates where the margin could potentially be thinner and the cost-income ratio would be higher and then the benefits of doing some other type of business could be taken in the markets division in Stockholm. So is the branch really the ones that would drive a higher profitability type of lending since they are driven by costs? Michael Green: Yes, I say they are because what we do when we do business on the ancillary business, for example, within FX or other parts of the Investment Bank, that's been taken care of by refund, if you put that way to the branches. So everything comes down to the branches P&L anyway. So that's just good. So we do... Andreas Hakansson: But eventually... Michael Green: Sorry. Andreas Hakansson: But eventually, but you might have to live 2 years with a low margin until you do that business because you have to be committed to the company and so on. Michael Green: No, no, that's not how it works. So you get instantly repaid from the investment bank when they do their trades or their interest rates derivatives or whatever. That comes the month after. So that's not the way it works when we steer the bank. Andreas Hakansson: Okay. Then finally, on your loan-to-deposit ratio in Norway at around 300%. If rates now start to go up in Norway, which seems to be expected, is that a positive or negative for you guys? Marten Bjurman: It will eventually be a positive thing, Andreas, but it will take a little bit of time to adjust, obviously. So yes, but it's positive long term, yes. Michael Green: We will immediately benefit from the deposit side, of course. So that will give a boost. But then it's all about adjusting the lending book as well to the new market rate. Andreas Hakansson: Yes, I was thinking that some of a very deposit-rich bank could afford to compete on the margin on the lending side, given that it makes so much more on the deposit side, will you guys have flipped the other way around. Michael Green: Yes. But that's the way it has been for many decades now when it comes to the business and how we compete in Norway. So that's nothing new. Operator: That was our final question for today. I will now hand the call back for closing remarks. Peter Grabe: All right. Thank you, everyone, for all the questions and for those of you who listened in. And as always, you know you can always reach out to the Investor Relations department for any further questions and follow-ups. With those words, we wish you all a very good day. Thank you very much.
Operator: Welcome to Evolution Q1 Report 2026 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Martin Carlesund; and CFO, Joakim Andersson. Please go ahead. Martin Carlesund: Good morning, everyone. Welcome to the presentation of interim report for the first quarter of 2026. My name is Martin Carlesund, and I'm the CEO of Evolution. With me, I have our CFO, Joakim Andersson. As always, I will start with some comments on our performance and then hand over to Joakim for a closer look at our financials. After that, I will conclude an outlook, and then we will open up for your questions. Next slide, please. So let's start with the financial and operational highlights in the quarter. Net revenues were EUR 513 million, corresponding to a year-on-year decline of 1.5%. EBITDA came in at EUR 335.3 million, corresponding to a margin of 65.4%. The regional development was somewhat mixed in the quarter. Europe is not performing well at the moment, whereas LatAm is having a great momentum. North America continues its steady growth at a slightly higher pace than in Q4. In Asia, we made some further progress on combating cybercrime. Live revenue was hurt by the development in Europe and declined 3.1% on a year-on-year basis. RNG took a step forward with higher growth than what we have seen in the past quarters, up 8.1% year-on-year. During the quarter, we have continued to expand our studio network with new additions in Latvia, the U.S. and Argentina. We have also started to deliver on our amazing product road map for 2026. I will talk more about that later in the presentation. Next slide, please. If we then move to our operational KPIs, first, consisting of Headcount and then Game Rounds index. On Headcount, we are growing by 2.9% year-on-year and 1.7% on a quarter-on-quarter basis. We are on a good path with expansion, and we will continue to optimize the distribution and cost mix throughout 2026. The Game Rounds index can be seen as a general indicator of activity throughout our network over time. For an individual quarter, it can vary quite a lot and does not always correlate with revenue development. The long-term trend should be an increase in Game Rounds as game sessions in general gets faster and with smaller bets. I'm satisfied with the development in Q1, especially with the backdrop of the development in Europe. Next slide, please. In the last report, we introduced a real breakdown of revenues based on our customers location where Europe is dominant. Compared to the fourth quarter, North America and Latin America have grown their respective share of the total revenue, which reflects the overall development in the first quarter. As we require all our customers to carry a license in regulated jurisdictions, all our revenues are regulated. You also see a revenue split based on our customers and their players, our customers' customer, which is an estimation based on the IP number of players received from our customers and purchased by a third-party geo information. This is the breakdown of the revenues we have included for several years. See from that perspective that all our customers are regulated, our revenue is regulated to 100%. If instead looking at the estimation of the geo position and approximation of revenue based on our customers', customers' players' IP address, about 48% of the estimated revenue is regulated. Next slide, please. I will now give you a few comments on each of the major regions based on the estimation of revenue based on our customers' customers' IP number. As already mentioned, Europe did not do well and continued to decline quarter-on-quarter, largely due to regulatory volatility and subjectivity, which hurt our player activity. It has now also been almost a year since we introduced our extensive ring-fencing measures, which ensure that the players can only reach Evolution content from licensed operators within their respective markets. It was the right thing to do. And in the world of perfect regulation, it would not have caused any issues. However, due to that regulation in some markets fails to strike the right balance between player protection and entertainment, players continue to access unregulated operators and channelization is decreasing fast and significantly. This harms the total business and the most vulnerable players lose the player protection of playing of regulated operators and search by products from Evolution. Looking at the operational side, we have opened a second studio in Riga in the quarter. It is currently the home of our Always 6 Blackjack tables. But later this year, it will host both game shows, Game Night and Monopoly Filthy Rich. Looking at Asia, this is now the second quarter in a row with a quarter-on-quarter growth. This is, of course, a positive signal. We are in a better place right now than a year ago. However, as the challenge has been somewhat of a cat and mouse game, we remain cautious. Next slide, please. Both North America and LatAm reported yet another all-time high revenues. Growth rate in North America improved compared to the fourth quarter. It looks somewhat soft in our reporting currency, euro, but in U.S. dollars, year-on-year growth was roughly 21% compared to 19% in Q4. In the quarter, we launched several Monopoly theme titles, which have been off to a great start. Last week, we also launched Monopoly Live in Connecticut, which is an important milestone as we know that the Monopoly franchise is particularly strong in the U.S. market. It will be rolled out in additional states going forward. We have also completed the construction of the second studio in Michigan, located in Grand Rapids. It's a milestone as well. It's now going through inspections and regulatory approvals, and we are expecting to launch it in the next few months, hopefully earlier. Looking at the regulation, we note 2 positive developments. In the U.S., the main governor has now signed the iGaming bill into law. In Canada, Alberta will regulate its iGaming market in July. We have had presence in the program since 2021, serving the only available online gaming service run by the local government with live casino games. Now the market will open up for more operators. Last note on North America is the ongoing process to acquire Galaxy Gaming, where we are still working on the necessary approvals before the 17th of July deadline. We don't have any new information to share today more than that the process is ongoing. Latin America is doing really well at the moment. A highlight from the quarter is that we have completed the acquisition of a live studio in Argentina from a competitor who has decided to withdraw from the market. The studio will form the base for further growth in Argentina, and we are now adapting to evolution standard. In Brazil, we continue to perform well after regulation, which was about a year ago. We have launched a localized version of Crazy Time that is sure to attract a lot of new players in Brazil. LatAm truly is exciting. We're in full expansion mode. In addition to Argentina, we continue to expand our presence in Brazil and in Colombia to fully leverage the big market potential. With that, we don't have a specific chart for other markets, which mainly comprise of Africa. It continues to grow from a small base. Fresh games are widely popular in the region, and our recently launched Red Baron has so far exceeded expectations. Also, our RMG offering is starting to gain traction. To conclude this slide, the U.S. and LatAm are where we will invest the most in 2026. Both regions have high potential with life still being in early days. Next slide, please. As you are aware of, we have a spectacular road map for 2026, where we will take fun and entertainment to yet another level. Over the past month, we have made some initial releases like Always 6 Blackjack and Dragon Dragon, but the big splash is still ahead of us. Based on our exclusive partnership with Hasbro, we will continue to expand our portfolio of Monopoly games and closest in time for release of Monopoly Roulette and Monopoly Roll 'Em. Monopoly is an extremely strong franchise that is continuously gaining more popularity. And I think that it will be an important piece of the puzzle one -- continue to push the boundaries for entertainment. Another exciting development is the introduction of a new feature that we call SciPlay. It will allow players to enjoy slots alongside the live game attraction. With just a click, you will be able to activate selected slots from our RNG brands such as Nolimit City and NetEnt. Within the live interface, a mini lobby will make personalized recommendation to keep content relevant and engaging. I think this is a great feature as it brings together live casino and slots in one streamlined view, the best of 2 worlds and yet another feature and advantage of OSS, One Stop Shop. Since Evolution was founded 20 years ago, we've been obsessed with the end user satisfaction and the entertainment factor. And delivering the satisfaction is not just about innovation, it's about getting the fundaments right, every single day, top-notch gameplay, a flawless lobby, world-class studios, a game integrity that set the global benchmark. We often highlight what's new each quarter because innovation is exciting, but I want to be crystal clear. These basics are absolutely crystal -- critical for the experience because if the fundament slips, end user notice immediately. So with that said, 2026 is going to be another great year of innovation, while we also continue to enhance overall experience with playing our games. The combination of the two will ensure that we will bring the most entertaining experiences to the players and increase the gap to competition more than ever before. With that, I will hand over to Joakim for a closer look at our financials. Next slide, please. Joakim Andersson: Thank you, Martin. As usual, I have a few slides that will focus on the key highlights as we go through them. Starting with this slide, Slide 8, which shows our revenue and EBITDA development over time. If you look at the data on the far right, we can again see the Q1 revenue of EUR 513 million, represented by the blue bar, EBITDA of EUR 335.3 million in the gray bar and our EBITDA margin of 65.4% shown by the line above. Let's go to the next slide. And here we have a more detailed look of our profit and loss statement. As before, I have highlighted the key takeaways on this slide, and I will talk you through them one by one. First, the net revenues, of course, amounted to EUR 513 million, which is down 1.5% year-on-year, but practically flat quarter-on-quarter. Second, total operating expenses were EUR 220 million, which is 1.3% higher than Q1 last year and up 2.5% quarter-on-quarter. Personnel expenses increased by 4% quarter-on-quarter. However, on a rolling 12-month basis, we continue to see a deceleration in the growth rate each quarter. Third, profit for the period amounted to EUR 251.9 million. And as the fourth highlight, our earnings per share after dilution amounted to EUR 1.26. Let's move on to the next slide, where I show you the development of our cash flow. First, on the left-hand side, we show our operating cash flow after investments. This amounted to EUR 311 million for the quarter, representing a solid improvement compared with Q4, partly driven by a recovery in working capital. The last 12 months cash conversion remains strong and stays around the long-term trend with 81% in the quarter. Turning to the chart on the right, which shows our capital expenditures. Total CapEx related to tangible and intangible assets amounted to EUR 34.6 million for the quarter. This remains stable as a share of net revenues as illustrated by the black line. Next slide, please. Turning to our financial position. And as you can see on this slide, there are no major changes compared to recent quarters. We continue to be in a very strong position with total cash of EUR 1.2 billion, including our bond portfolio and total equity of EUR 4.3 billion. With that, I'll conclude my remarks for this quarter. And overall, it was a fairly uneventful quarter from a financial standpoint. I'll now hand it back to you, Martin, to wrap things up. Martin Carlesund: Thank you very much. So let's summarize and then move to the Q&A. If we look beyond Europe, 2026 has started really good. We grow across all regions. We maintain the margin, and we have started to deliver on the amazing product road map. I'm a little bit frustrated that the majority of our showcase games will be launched during the second half of the year, but they will be worth the wait. Europe is the main headache right now, but the long-term positive view is intact. I've talked about it many times before. Regulation changes over time. And right now, the balance is not where it should be. But as channelization continues to decrease, regulators will eventually have to adopt -- adapt to protect the players and not by force, but by some regulation, get them back into the regulated part of the market. We're doing what we can to mitigate the current development, working smarter and harder, releasing the best games, pulling the players back. As highlighted, we will continue to invest mostly in U.S.A. and LatAm alongside our internal focus on product innovation. Some further expansion in Europe will also be needed, but we are naturally more cautious in the short term. I don't want the U.S. litigation against a competitor to take focus from the results, but when a competitor sets aside all rules and deliberately try to hurt us, we must take action to protect our shareholder value. They have stated that they stand behind the defamatory report. But please remember that they paid enormous amounts of money during 4 years to not be exposed as the commissioner of that said report. Please also remember that the report was based on a success fee structure where the report producer was being paid based on how severely they could hurt our shareholder value. Evolution works hard. We are methodic. We are patient, and we are very disciplined. We believe in right and have strong and good culture based on morale and solid ethics. And as a last note in the quarter, the Board has proposed that no dividend will be distributed for 2025 as it has assessed that the cash dividend currently is not the best way to create long-term shareholder value. The Board has not made further decisions on the capital allocation for 2026 yet. It's not dramatic, rather refreshing. When further decisions are made, we will let you know about it. So with that, we thank you for listening so far, and now we open up for questions. Operator: [Operator Instructions] The next question comes from Pravin Gondhale from Barclays. Pravin Gondhale: Firstly, on capital allocation, I appreciate that Board of Directors have not decided to propose any dividends. Could you explain what are the reasons behind those decisions? And when can we expect any further communication in this regards? And secondly, on Europe, what are the key countries in Europe where you flagged that channelization is decreasing at faster pace? Has that materially accelerated in Q1? And when do you expect that to stabilize? Martin Carlesund: On the capital allocation, the Board is responsible for that, and they will take a decision that is creating the most shareholder value, and they are thoroughly and taking this question serious and looking at it. And as a result, they cancel the dividend for 2026. As soon as they have made their analyze, taking the decisions, they will get back and we will communicate what to do with our excess cash. I cannot, at the moment, give any more clarification on that. When it comes to channelization in Europe, and if we split this in two, channelization in Europe in a number of countries are not really known. The ones that make some of the investigations and estimations of that could be U.K. They have a low channelization. It's dropped significantly over the years. Netherlands, the same, but there are also others such as maybe even Sweden. It's quite hard to get those figures in total as the market -- the unregulated market is growing and not clear. So that's the comment on that. There are also other countries taking other regulatory measures or governmental measures that affect the situation in Europe as well. So that's the background or backdrop to Europe. Pravin Gondhale: And if I sort of follow up on that, could you just elaborate on what is the subjectivity part of the impact, which is impacting the player activity in Europe and in which countries? Martin Carlesund: I think that -- I will briefly comment on it, but I think that the regulation in many countries stays the same, but the subjective evaluation or the implementation of the regulations have changed. So even though the regulatory framework stays the same, suddenly, it's applied in a different way. That's what I mean with subjectivity. Operator: The next question comes from Georg Attling from Pareto Securities. Georg Attling: Martin and Joakim, I have a couple of questions, starting with Asia. So another quarter of sequential growth. And also when I look at the player data here in April, it looks very strong for Baccarat. So I'm just wondering what makes you reluctant to calling the trend shift here in Asia for the rest of the year. Martin Carlesund: I think that we need to be cautious. We need to be also prepared for that as I write in that it's a little bit of a cat and mouse game. And we methodically, systematically work on the situation, as you can see, and we're very happy with the 2 quarters in a row where we grow, but we're just a little bit cautious in our communication. Georg Attling: On Europe, another question. You alluded to it earlier, but just wondering, is this a broad-based decline across most countries or focused on a few countries where large declines? Martin Carlesund: I think you would say that it's a little bit of both. I mean there are war, oil price situation in the world, and it affects, I think, Europe quite a lot. You can also see that it affects the dollar and other. And there are specific countries taking measures and it's a little bit of mix. Georg Attling: Okay. Just a follow-up on that. What do you view is really in your hands when it comes to Europe because there's only so much you can do with the channelization and I assume you're quite keen to stop this negative trend in the region. Martin Carlesund: End user satisfaction, desire to play Evolution games, strengthen and higher entertainment value. That's the key for us. We are even looking at it like if we do even better games, higher entertainment, we will pull players back into the regulated environment, even though the hurdle has been created, which make them go away. So our core focus, as always, see to that we deliver the best games that the players desire, position them with the operator or the future operators, see to that we always are on top. That's the only thing that will matter in the long run. Georg Attling: That's clear. Just a final question on LatAm, where growth is accelerating quite nicely. Just wondering what do you view as the drivers to this acceleration? Is it market growth, studio expansion, larger game portfolio or something else? Martin Carlesund: Great games again, end user desire to play our games, studio expansion, market growth situation and so on. It's a good environment to be in. But if we didn't have the games to supply to the market, we would be nothing. So it's a combination. Operator: The next question comes from Nikola Kalanoski from ABG Sundal Collier. Nikola Kalanoski: I'm a bit curious on game shows. And so from an outside-in perspective, game shows seem to be growing quite nicely with respect to player count and the category seems to be becoming a larger and larger share of the player count. Are you generally seeing a less volatile revenue profile from game shows compared to some of the other game categories? Martin Carlesund: No. Nikola Kalanoski: Short and sweet. And then a short question on Ice Fishing. Are there any regions in which this game is particularly popular? Or would you say it's equally popular all over the world? Martin Carlesund: Ice Fishing is a super success, a great game, gaining traction all over the world. Actually, a loved game, one of the best we've made. Operator: The next question comes from Ben Shelley from UBS. Benjamin Shelley: I've got 3 questions. Question one, do you think margins can remain stable year-on-year given Europe and Asia are still declining and you are expanding capacity in Latin America? Martin Carlesund: I think that the incremental margin and the scalability of our business model is for sure proven this quarter. I think that in spite of the situation in Europe, we delivered good cash flow, fantastic margins, and it shows that the investments that we do are really, really well placed. So my view is yes. Benjamin Shelley: And given channelization issues in Europe, how do you see the outlook for the U.K. amid material iGaming tax hikes? And is there anything interesting you are seeing from operators in the market already? Martin Carlesund: I think that -- I will answer it in general terms. Everyone in the online gaming sector in one way or the other, if you're an operator or a supplier or even something else, you would know that if you have a tax level that is like somewhere around 25%, 20%, but even 15% is great and 20% works and 25%. But as soon as you hit like the 30% bracket, it starts to be really difficult and you open up for lowering channelization and unregulated play. When you put taxes on 40% level and a lot of other hurdles, you make it so difficult and not nice for the player experience that players in quite a large amount seeks play -- gameplay outside. I think that, that will slowly come into play. Right now, regulators talk only about what they do as repressive measures, but they don't talk about what happens to the players that are outside the regulated remit. And I think that, that needs to come into focus and you need to find that balance. I look forward to see that balance coming back. Benjamin Shelley: And then just lastly, on competitive intensity in the live casino industry. Are you experiencing any pricing pressures, any loss of share? Martin Carlesund: We have experienced that all along. I mean, I've been in the company for quite a long time. I think that the only difference is that there are different names related to the competitors. Some during one period it's one name and the second period is another name and so on. The pricing pressure from competition, not able to cover the gaps that we increase all along with the innovation and the game shows we do is always compact. It's always there. Operator: The next question comes from Martin Arnell from DNB Carnegie. Martin Arnell: My first question is on Europe and this discussion what's in your own hands and what you can do to improve. How important do you think the new game releases will be for Europe in order to come back to growth? Martin Carlesund: I have a positive view on Europe going forward. And I think the game releases that we are going to do and also even the games that we already have will have an impact and is super important. I think that some of the games that we do are the creator of gameplay and entertainment and people, persons and end users search those games. So the more of those games that we have, the more pull into the regulated environment we will have. Martin Arnell: And many of them are tilted to second half, but you have a few -- is it correct that you have 2 new Monopoly games scheduled for Q2? Correct. Martin Carlesund: Yes, that's correct. Yes. But the major ones are in the second half. And that's -- I always said it's a little bit frustrating for me, but it takes time. The big game, Game Night, it's a huge game, hundreds and hundreds of square meters of game show and different environment, studios, you go in and you follow the player in those, and it takes time to build. It's not -- it's a really, really complex world that we are creating. Martin Arnell: Interesting to look forward to that. And on the -- just also a question on like orders from your clients on new dedicated tables. Has that changed anything dramatically? Or is it stable? Or how do you... Martin Carlesund: We don't guide on that. I would say that we are continuously doing well. Martin Arnell: On dedicated tables orders, okay. And final question would be on this game show discussion, the product mix when it comes to game shows, are the new game shows more lucrative for you than the old ones in terms of like player activity, bet size, et cetera? Martin Carlesund: I don't -- I'm sorry, I don't guide on profitability per game or new game or old games. I think that the type of games that we do now with the type of Monopoly and Hasbro content is, of course, highly valuable for everyone, us and the operator and the player. Operator: The next question comes from Ed Young from Morgan Stanley. Edward Young: My first question on Europe, please. You've talked through the channelization angle and the subjectivity part of it. But if I look at your disclosure, the regulated mix is up despite the European decline and some Asia growth. So is it fair to say that this is primarily a decline in your European jurisdictions that are not locally regulated in the quarter rather than the channelization issue, which has obviously been ongoing. The second question... Joakim Andersson: Okay, let's take one question at a time... Edward Young: Sorry, let's -- sure. Martin Carlesund: Otherwise, I will -- due to my lack of memory, probably not answer. You have to look at -- we're growing nicely. everything more or less in LatAm is regulated. We're growing nicely in U.S., adding money there as well, adding a little bit of money in Asia. There is a percentage point here and there and there are decimals to that. So I wouldn't necessarily draw that conclusion to a point. There are other regulations in Europe that are not regulated that are suffering and there are regulated jurisdiction in Europe that are suffering. Edward Young: Second, you obviously added Playtech to your legal complaint. Can you just maybe give your reflection on where you are now in terms of what you're aiming for through the legal process and on what time line we should expect to get an idea of damages, including punitive damages that you're seeking? Martin Carlesund: We have had an opponent in this legal debacle that has been ongoing for 4 years, and we have systematically been progressing and winning in court. That's taken 4 years. It will take a very long time. And the opponent that we have is also taking a lot of measures to delay everything, which we have seen in the past, and we expect that in the future as well. So think about years, probably many years. Edward Young: And then finally, there's been some confusion in some of the questions we've had this morning. So perhaps you could help clear this up. In terms of the Argentina studio acquisition, just to be clear, you've acquired the studio, i.e., the building of a competitor's departed? Or have you acquired a competitor in some of their revenues in Argentina that have contributed to the quarter? Martin Carlesund: Studio. Operator: The next question comes from Karan Puri from JPMorgan. Karan Puri: Thank you for taking my questions, most of them. Martin Carlesund: Good morning. Karan Puri: Most of them have already been answered, but just quickly on the Argentina point, I just want to clarify, is there any inorganic revenue contribution coming from that acquisition for LatAm or not? That's... Martin Carlesund: No, no. Karan Puri: That's -- got it. And the second question, actually, I just wanted to check on the U.K., do you see any further discussions with the regulator on this front? Any idea when this might be resolved? Martin Carlesund: I have no idea when it will be resolved. Nothing -- no progress to report. Karan Puri: Just one quick one, if I can squeeze that one in. One on the RNG performance. It seems like it came in much stronger than anticipated, at least on a year-over-year basis. Maybe can you provide some incremental color on this, please? Martin Carlesund: I think we're doing great in RNG right now, fantastic games on Nolimit. We're gaining traction. We are on our way. We systematically methodically work with it, and I think that we're doing better and better. Operator: The next question comes from Andrew Tam from Rothschild & Co Redburn. Andrew Tam: Just one for me. We just heard from some of the operators out there about some of the headwinds in terms of the Turkish market. To what extent, just curious, did Turkish weakness contribute to the weak European result? Martin Carlesund: I won't quantify market specifics in Europe, but that also contributes to the decline in Europe, yes. Operator: The next question comes from Rasmus Engberg from Kepler Cheuvreux. Rasmus Engberg: Good morning. Joakim Andersson: Good morning. Martin Carlesund: I took a sleep of comfort, that's why I was a bit slow. That's why I was a bit slow. Rasmus Engberg: In the Americas, both North and LatAm, which business is growing faster? Is it RNG or is it live? Martin Carlesund: Live is growing faster. Rasmus Engberg: In both? Martin Carlesund: In LatAm in total, I don't want to go down to a specific number. We're doing a little bit better and better on RNG in total. And it's -- yes, but live is the main show. Rasmus Engberg: Okay. And second question, your rate of expansion with new studios this year compared to last year? Is it higher or lower or roughly the same? Martin Carlesund: Good question. The decisions we will take during 2026 will be a little bit more forward leaning and expansion will be maybe in actual terms about the same, but we are doing more for 2026, 2027, 2028 this year than we actually did 2025. I look forward to that. Rasmus Engberg: And I don't know if you can answer this, but are you -- is Evolution going to have a Board meeting after the AGM or in conjunction with the AGM? Martin Carlesund: I actually don't want to answer that to avoid any speculation. Joakim Andersson: So it's a constituent Board meeting in connection with the AGM. That's correct. Yes. Rasmus Engberg: Thank you. Martin Carlesund: Thank you, interesting question. Operator: The next question comes from Ben Shelley from UBS. Benjamin Shelley: I just wanted to ask on accounts receivables and compared to your quarterly revenues, they remain elevated year-on-year and broadly stable quarter-on-quarter. Are there any comments or any updates on your Q4 comments here? Joakim Andersson: Yes, I can pick that up. No, I mean, yes, you said any updates from Q4. Yes, Q4 was definitely on an elevated basis, and we are constantly looking into it, constantly reminding customers, constantly chasing overdues. When we review, there's nothing alarming in there. So we are now kind of more methodological -- whatever that word is, thoroughly doing this work and with a higher discipline than before. So we saw a roughly EUR 10 million reduction during this quarter, and I expect that to continue. Operator: The next question comes from Jamie Bass from Citi. James Bass: Just one question from me or 2 parts to one question, I guess. So firstly, are you feeling relatively confident that a solution will be found for Galaxy Gaming before the deadline? And if not, is the deadline you've got now, is that a hard deadline? Or can that be extended again? Martin Carlesund: I can't -- I don't want to guide on it. Of course, we are working hard to solve everything outstanding, and it's progressing. And right now, the deadline is hard. So then that comes down to, is there any possibility with some to postpone it. Right now, the deadline is hard. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Martin Carlesund: Thank you very much for participating, listening to us here today and looking forward to see you in a quarter again. Thank you. Bye-bye.
Annukka Angeria: Good afternoon, and welcome to Nokian Tyres First Quarter 2026 Results Audiocast. I am Annukka Angeria from Nokian Tyres Investor Relations. And together with me in this call, I have our President and CEO, Paolo Pompei and our new CFO, Timo Koponen. As usual, Paolo and Timo will run through the presentation. And after that, we will open the line for questions. But before we start, I would like to ask you Timo a couple of questions. You have been with us only a few days. And first of all, welcome to the company. Timo Koponen: Thank you. Annukka Angeria: It's great to have you here. With the short but intense experience with the company, what are your first impressions? Timo Koponen: Yes. Well, it has been very, very busy start as everybody can anticipate that. First of all, I'm very excited to be on board finally. It's been a long wait and kind of looking back when we started discussions with Paolo and the other people in the company, I got really intrigued by the momentum and drive the Nokian has. And obviously, that intriguement remains. And you only need to look at the just ended first quarter, and you see many product launches and so on, and you can really see that we have a second gear on. It's good to be here. Annukka Angeria: Good to hear. Maybe if you can also briefly say a few words about your background. Timo Koponen: Sure, sure. Yes, as I think it was already mentioned in the announcement, I have a long background in a Finnish industrial equipment companies, Konecranes, Hackman, Metos, Wartsila and last couple of years at Normet and have been working in finance as well as in the line management roles both in Finland and overall, France, China and U.K. and now in Finland. Annukka Angeria: Thank you. And with that, I will now hand over to you, Paolo, for the first quarter results. Paolo Pompei: Excellent. Thank you very much, Annukka and also from my side, welcome on board, Timo. Let's start immediately with the headlines, where you can see that sales increased across all regions and operating profit improved significantly, driven by disciplined strategy execution. But let's move to the agenda. We will start with the quarterly highlights, moving to the financial performance, then Timo will come in the business unit performance as well as our cash flow and financial position and then we will close this call with assumption and guidance. And of course, at the end, there will be question and answer. Moving directly to Slide #4. Operating profit improved significantly. This was really supported by volume, price mix improvement and lower manufacturing and material costs. Operating profit improved by more than 50% and we had really good also price and mix improvement during this quarter. effective working capital management, lower CapEx has contributed to improve our cash flow by over EUR 50 million in quarter 1 and this is also important, an important achievement in this quarter. We keep working on our continuous improvement initiative that are really supporting strongly our strategic plan and our EUR 220 million EBITDA improvement by 2029. And this was also an exciting quarter when we talk about product innovation. We were able -- actually we were releasing 2 important flagship in our product range for the Nordics and the Central European market and also a new tire for EBITDA division, a new line for truck tires. Moving to Slide #5. As I said, this was an exciting quarter and it's worth really to spend a few words about our achievements because we were able to release once again the new disruptive technology, the Hakkapeliitta 01 with -- start with -- that is actually delivering a tire that is able to operate and to adapt to the change of temperature with start on or start off depending on the driving condition with different temperatures. This is really a great achievement. It's a disruptive innovation. And we're really proud about the achievement of our R&D team and what our company has been able to develop through intense R&D work as well as intense testing in the last few years. We're also releasing the Nokian Tyre Snowproof 3P. This is also an extremely high-performing product dedicated to the Central and South Europe -- Southern European markets that is beating actually the key competitors in many parameters. And of course, we are extremely excited about our strong improvement in the product performance in a strategic market, a growing market for all of us. We have invited to test our tires solution more than 500 customers during the month of March in our test center here in White Hell in Ivalo. And this is obviously the best way to promote our product to make sure that our customers can really experience the good performance and the good capabilities of our own facilities as well of our own products. Now let's move to the financial performance. So moving directly to Slide #7. When we look at the market, we see actually market declining, both in Europe and North America. This is making us even more satisfied with our existing journey because, obviously, in passenger car tire, we've been able to outperform the market in quarter 1. So the market is estimated to be at this stage, minus 3% in Europe in passenger car tire and minus 8%, so significantly down in North America. Truck tire business has been positive actually in quarter 1. And we can say that the agriculture and forestry business was flat, both in the OE and the replacement market in the same period. Moving to Slide #8. We see that net sales increased by 4.9% in quarter 1. I would like to highlight the strong performance of passenger car tire that was plus 9% in comparable currency. We were growing in all the regions, and this is also very important in our existing journey. We improved segment EBITDA to EUR 30.2 million, so plus almost EUR 18 million compared to previous year, and this is representing finally 2-digit EBITDA, 10.8% of net sales compared to 4.6% in 2025. We improved our segment operating profit by more than EUR 14 million. This is a growth of 70% moving to minus EUR 4.3 million, so very close to the breakeven coming from EUR 18.5 million in 2025. And finally, we improved our operating profit by 50% to minus to minus EUR 17.8 million versus almost minus EUR 36 million in 2025. So the numbers are improving according to plan, and we are really pleased about these developments. Moving to Slide #9. You will see, as we have anticipated that sales are growing in any region. Obviously, this in comparable currency, we see a growth of 1.4% in the Nordics, strong growth in Central and Southern Europe with 9.1% and also very good growth in comparable currency in North America with plus 7.8%. I remind you in a market that is declining by 8% in quarter 1. So passenger car tire was outperforming the market. Heavy tire, the sales were down by 1.6% and but it were improving -- the profit was improving significantly above 15%, 15.7%. And Vianor was slightly positive with 1.7%. Moving to Slide #10. This is a new slide that we are presenting in this deck that is giving you a better understanding of the mix development of the company. You will see that in quarter 1 we were growing in terms of a percentage of sales in the all-season and summer tire business, while we were declining from 37% to 30% in the winter tire business. Just a reminder, obviously, quarter 1 is not a winter tire quarter in our industry. And also second reminder is that obviously, we are leveraging this year the product launches that we did last year in 2025 in Central Europe for the all-season and summer tire business as well also in North America for the all-weather. We are also happy about the progress we are doing on 18 inches plus larger tire diameters when we are reaching -- they are reaching today 51% in value of our total sales. So I would say, from the mix development point of view, we are developing the business in line with the plan and in line with the strategic targets that we released in February 2026. Moving to Slide #11. Of course, we see more or less the same numbers, but I would like to focus your attention on 3 main KPIs: One, obviously, the reduction of the debt by approximately EUR 45 million, and Timo will tell you more about that, the reduction of the capital expenditure to EUR 7.3 million from EUR 52 million last year, obviously, we say that we were ending a very heavy investment period, and now we'll get back to normal. And then, of course, the cash flow from operating activities has been also improving by more than EUR 50 million. Moving to Slide #12, you will see that we are targeting this year an investment level more or less in line with the depreciation of approximately EUR 130 million at this stage. So we get back really to a normal investment level which is obviously supporting our strategic plan journey moving forward to 2029. Then I leave the stage to Timo for the business or comments. Timo Koponen: Okay. Thank you, Paolo. So as it has already been mentioned a couple of times, we are very pleased about the performance we had in Passenger Car Tyres. Net sales increasing by 9.1% on comparable currencies. At the same time, the pricing continued improving. And very importantly, we operated with the lower manufacturing and as well as material costs and this logically all resulted -- results in significantly improved segment operating profit. And as we can see, we moved from losses a year ago, EUR 6.2 million, up to EUR 10.2 million or 5.5%. Moving on to Page 15, when looking at different components in the Passenger Car Tyres in net sales, volume contributed EUR 10 million of that increase, plus 5.7% and price/mix, EUR 6 million plus 3.4%. Headwind we had related to currencies, minus 2.1% and that comes from mainly from the North American sales. In the lower part, in segment operating profit level, lower material cost was the biggest lever we had by EUR 11 million. Sales volume and price mix having also a significant positive effect of EUR 5 million and EUR 6 million respectively. And as we already anticipated in the Capital Markets Day during the period may have made significant investments in our brand and marketing. And that shows as a higher SG&A. And it's needless to say the growth always takes some money. Moving on then and looking at the -- also the picture that we are very happy about sales volume turned to growth after 2 declining coming quarters, growing by 5.7% on quarter 1. And regarding the price/mix we can see the price increase continuing also on the quarter this time by 3.4% and currencies we already commented earlier. Then moving to Heavy Tyres. There, the net sales decreased by 1.6%, and that was due to lower demand in forestry segment. And this part of the segment that -- despite of that, the segment operating profit improved by EUR 8.6 million, and that is thanks to good [ pit ] pricing disabling. Percentage-wise, as Paolo already mentioned, we are back above 15% level at 15.77%. And as it has been our target already in this business is to fix the profitability, and we are very happy to see that happening. And then finally, on the business units, the Vianor, there, we had a disappointing first quarter, as already mentioned, and this part of the increased net sales, it went up by 1.7%. The segment operating profit declined and was minus EUR 17.1 million and the main cost there was the 2 factors, basically, the cost inflation and then one-off inventory revaluation, which both had a negative effect. And then as a reminder, as most of you already know, Q1 is seasonally low for Vianor so nothing new there. And then moving to cash flow and financial positions. positive cash flow development was already mentioned, 2 main contributors there. First of all, thanks to very effective working capital management we were able to improve. And there, the factors are, as we have previously communicated, we have several initiatives ongoing. Improve our position, inventories, payables and so on. Another big improvement compared to a year ago was the lower CapEx. There are some seasonalities on that, but we also have to remember that we have very high scrutiny on new investments, what we are taking in and focusing on improving cash flow. And then Finally, on a debt position, as already I mentioned, net debt went down by EUR 45 million on the quarter on the liquidity at the moment or end of the quarter, it was EUR 441 million. consisting of cash and then the EUR 304 million undrawn cash credit facilities. And regarding the debt maturities on the right-hand side, as we already commented in the report, during the period, we executed an extension of 1 year for EUR 100 million loan, and that was the only event that we had on the quarter. Paolo Pompei: Excellent. Thank you very much, Timo. And let's move now to the assumption and guidance. So if we can move to Slide #23, you will see that we are actually not changing the assumption for this year. We believe the market will remain plus and minus 2% pretty stable, impacting car tire as well as in agri and forestry tires where we see actually the demand pretty stable and low level in the OE market and slightly positive in the aftermarket for the rest of the year. So moving to Slide #24 and looking at the guidance, there are no changes to our previous guidance. We believe that in 2026, the Nokian Tyres sales will grow compared to previous year. And obviously, operating profit as a percentage of net sales will be between 8% to 10%. The tire demand is expected to remain flat. Obviously, we are continuously watching the evolution of the existing conflict in Middle East. This is an important part of the assumption. But at the moment, we are able looking at the outlook and considering our continuous improvement plan, we are able to confirm that our guidance is pretty strong and stable. The profitability, obviously, will improve, supported by new products, but also by price and mix, as you can see also in quarter 1 and continuous efficiency in Poland. So I would like to close the -- this quarterly presentation reminding that our long-term objective, we remain focused, and we want to remain fully focused in our leading position in winter -- keeping our leading position in winter time, we are targeting to grow above market level in the old season or weather segment as well as in the agri and forestry tire business. Three different journeys in -- by geography in Nordic is about strengthening our first position while in Central Europe as well as in North America it's about growing above market average. We will do that always supporting value premium value positioning and mix enhancement. We will do that, expanding our B&L network in Europe and focusing more and more on B2B and B2C, in particular, consumers. We have a strong product innovation in the pipeline. Actually, we are counting the 2029, I remind you in the Passenger Car Tyres to release a new product in all the segments where we operate, 90% of those new products will be dedicated to winter tire and all-season and all-weather consumer focus to add investments in marketing, in particular, and then we will keep working on operational excellence where we see great opportunities to improve significantly our cost structure. Our local to local business model will enable us to be less vulnerable in front of geopolitical tensions and of course, we can count more and more in an experienced and engaged team, we will be able to achieve our financial target. So our long-term financial targets remain the same. EUR 1.8 billion to EUR 2 billion within 2029, segment EBITDA above 24% and segment operating profit above 15% reducing the debt level to a ratio between net debt and segment EBITDA below 2. We can now move on to the question and answer, and thank you for your attention. Operator: [Operator Instructions] The next question comes from Artem Beletski from SEB. Artem Beletski: Paolo and Timo, I actually have 3 to be asked. So the first one is relating to raw materials and Paolo, you also mentioned conflict and Middle East. Could you maybe comment whether you have been doing already some price increases due to this topic or have seen competitors acting. And maybe just in terms of time lag, when you need -- when this type of higher oil-related raw material costs will start to increase for you? Maybe I'll start with that one. Paolo Pompei: Yes. Thank you for the question. This is an important one, really relevant, of course. So when we talk about raw material, there is time gap, as you know very well, I mean, we are estimating to see the impact of the raw material changes more through the end of the year, meaning quarter -- end of quarter 3, beginning of quarter 4. Clearly, we are not concerned about compensating this effect that will come up. As you can see, our pricing are moving up despite we have a favorable trend at the moment of the raw material trends. So clearly, prices is the tool to compensate the raw material trend long term. Obviously, we don't comment about competitors. But I can only say in 30 years in our industry, the market is very disciplined in transferring this cost, obviously, when they are coming. Artem Beletski: Yes. This is very clear. And maybe the second question, what I would like to ask is relating to Heavy Tyres and indeed, you delivered quite nice profitability improvement in Q1. Do you see that this level is now sustainable and maybe you can update us with your view what comes to market recovery. Do you still expect it potentially to happen in second half of this year? Paolo Pompei: Yes. This is also a very good question actually. The Heavy Tyres business is improving because, obviously, good price discipline. As we said, it's keeping and, of course, some internal operational efficiency actions that we have activated. I think the Heavy Tyres business is now at the end of a very long negative cycle. So we expect the market, obviously, to move up. It's difficult for anyone to say, particularly today with existing crisis in Middle East to say really when the market. The OE market in particular will pick up because the replacement market I think, is already moving in a better direction. It's more about understanding when the OE market for us, as you know, is very important, the forestry market as well. So my original estimation was the market will improve in the second half of the year. But of course, this, at the moment, is not yet visible. At least we don't have any visibility about this potential improvement already in the second half of the year, but we will keep you updated by step. Artem Beletski: Yes, great. And then the last one that I had was relating to SG&A expenses and those went up EUR 6 million in Q1 year-over-year. And I fully understand that it has to relate to this very interesting new products, what you introduced to the market. Is it fair to say that the increase during the remainder of the year will be much smaller given the fact that those product introductions and presumably, big events are behind us. Paolo Pompei: Yes, of course. Don't forget in quarter 1, 2025, we were coming out from a very, very difficult 2024, building a company, stretching everything at minimum, not really investing too much in our future. And then now we are investing on our future with growing sales force and growing marketing investments and of course, a big product launches that we did in March 2026. Clearly, we will keep investing in growth, but it has to be a profitable growth. So as I said, of course, you should not expect a 12% SG&A increase every quarter, but otherwise, this will not be sustainable, but you should expect that, obviously, we will keep investing on our brand for the future. Operator: [Operator Instructions] The next question comes from Thomas Besson from Kepler Chevreux. Thomas Besson: Thank you very much. Good afternoon. I hope you can hear me. The quality of the line was disastrous during the previous question. So I may ask a question for almost the second time, but I'd like to make sure I understood correctly. I think, Paolo, you said that the industry has basically been raising prices to offset higher energy and input cost historically. But my question was really to try to have a view on what you're assuming in terms of energy and raw materials headwind for the year or Nokian in 2026. And when these energy and raw materials are going to turn from a tailwind into a headwind? And what kind of price hike you need to be able to offset this assumed headwind. That's my first question. I have more questions that I'll ask later. Paolo Pompei: I'm sorry if the line was not -- I hope it's better now, but that is an important question. As we said, I mean, the raw material effect of the current situation will probably be visible end of quarter 3, beginning of quarter 4. And of course, this is changing every day, as you know very well. I mean it's depending on different announcements that are happening every day. But let's say, in our assumptions, we consider the existing raw material level, the one that we will see moving forward. Then the -- obviously, we are expecting to see some impact end of quarter to beginning of quarter 4. I think the pricing action we have in place are able to compensate this raw material effect. I will keep repeating that the problem is not about transferring the cost, it's always about evaluating the consumer behavior at the end. So tire industry, we were always very disciplined in managing price and raw material we tried in the last -- actually in the last couple of years now, 1.5 years to improve also our positioning through new products and through price increases. But in general, I would say that I will not be concerned about the balance between prices and raw material. We need to see how the demand will evolve. But at the same time, we need to say that our journey is a little bit in particular, outside of the Nordic, it's a little bit independent, meaning that we come from a niche position, a small position. So we still have plenty of opportunity to manage our growth. Thomas Besson: Second question, your Q1 volumes in passenger cars were up 5.7%, while your reference markets in Europe and the U.S. were both done. And it comes against Q1 25, where you already had a strong jump in volumes. Can you elaborate on what has been allowing this? Where have you gained share? And whether you do expect to be able to continue to largely outperform your end markets in Q2 and the rest of '26. Paolo Pompei: Sure. We are growing in terms of market share, as we said in the 2, I would say, new market, we could not even say new because obviously, we were before the crisis in Russia, we were already pretty present in Central Europe. But we are regaining obviously market share in Central Europe, we are growing market share in North America. And this is driven by a combination of elements, as we know very well. First of all, we have a completely new manufacturing footprint that is giving the possibility to have dedicated factories for dedicating markets, meaning that we can really focus on the development of specific market with dedicated manufacturing capabilities. Secondly, a lot of new products. We are releasing a lot of new products that are giving also the possibility to our team to promote our innovation capabilities. And of course, we are enforcing the team as well at the same time, also exploring new channels, reinforcing our B2B and B2C channels. So it's a combination. Clearly, for us, it's a continuous journey. And -- but it's very important that this journey is going to be profitable. So in Q1 2025, you saw an important growth 22%, but you didn't see an improvement of profitability. Now if you notice, you see a different journey in the last few quarters, we focus more on profitability improvement at this stage of our life. And then, of course, we are happy to see, like in quarter 1, when profitability and growth are moving together in the same direction because this is really what any healthy company should provide to investors every quarter. Thomas Besson: Clear. Can you just say a few words about what you expect in the coming quarters about your share gains, do you think it can continue? Or this was the best outperformance you're going to show during the year? Paolo Pompei: The guidance is about growth. So what I mean is that we keep guiding single-digit growth, and that is really important. So we are not guiding 2-digit growth, but we are guiding single-digit growth. Thomas Besson: Understood. Last question for me, please. You -- I mean, I think it's fantastic, that you barely spent any money in Q1 on CapEx, EUR 7 million. So obviously, driving an unusually big decline in debt over the quarter. Can you explain why this is the case? Are you facing something very slowly? Or do you still think you're going to need to spend EUR 120 million, EUR 130 million for the year? Or did you get some of the Romanian state aid that you wanted? Paolo Pompei: Timo has already anticipated very well that clearly, when you look at CapEx, you need to see also a sort of seasonality. Normally, for reasons, we do maintenance during factory closing. So obviously, the CapEx level in quarter -- end of quarter 1, beginning of quarter 2 will increase because it's the maintenance period for many of our own operations. As I said, I would consider EUR 130 million, the maximum roof. Actually, we are targeting less than this EUR 130 million. For us, it's very important to be capital efficient, meaning to be able really to invest whatever is needed in terms of maintenance, but also wherever we see a clear and faster return. So I will not take quarter 1 as a reference. But in general, of course, we have projects, we have maintenance projects. We have a small operational project to complete the Oradea plant that is not fully completed yet. But of course, we are guiding, as I said, at this stage, EUR 130 million and probably a bit less, but we will guide you better in the second quarter. Operator: There are no more questions at this time, so I hand the conference back to the speakers. Annukka Angeria: If there are no further questions, this concludes today's call. Thank you, Paolo and Timo and all for joining this call. And we wish you a great rest of the day. Thank you very much. Timo Koponen: Thank you..
Operator: Hello, and welcome to the Royal Vopak First Quarter 2026 Results Update. [Operator Instructions] This call is being recorded. I'm pleased to present, Fatjona Topciu, Head of Investor Relations. Please go ahead with your meeting. Fatjona Topciu: Good morning, everyone, and welcome to our Q1 2026 Results Analyst Call. My name is Fatjona Topciu, Head of IR. Our CEO, Dick Richelle; and CFO, Michiel Gilsing, will guide you through our latest results. We will refer to the Q1 2026 analyst presentation, which you can follow on screen and download from our website. After the presentation, we will have the opportunity for Q&A. A replay of the webcast will be made available on our website as well. Before we start, I would like to refer you to the disclaimer content of the forward-looking statements, which you are familiar with. I would like to remind you that we may make forward-looking statements during the presentation, which involve certain risks and uncertainties. Accordingly, this is applicable to the entire call, including the answers provided to questions during the Q&A. And with that, I would like to hand over the call to Dick. D.J.M. Richelle: Thank you very much, Fatjona, and good morning to all of you joining us in the call this morning. I would like to start with the key highlights of the year so far. We've had a strong start of the year, where we saw a healthy demand for our services, which is reflected by our continuously high occupancy rate of 91%. Our financial performance remains strong. Proportional EBITDA grew by 4.1% compared to Q1 2025, and that is the result adjusted for negative currency translation and divestment impact. Importantly, we were able to convert 76% of this EBITDA into operating free cash flow, resulting in an operating cash return of 16.6%. We also made good progress on executing our growth strategy. In West Canada, the construction of our REEF LPG project export terminal is progressing well. And in the Netherlands, approximately 90% of the 4th tank construction at Gate terminal has been completed. The project is on track to be commissioned within budget and on time at the end of Q3 2026. In addition, we took an investment decision in the Netherlands to repurpose capacity at our Europoort terminal for the storage of pyrolysis oil and another FID in Spain to expand the capacity in Tarragona. Finally, despite the increased volatility in the market related to the Middle East conflict, we are confirming our full year 2026 outlook, subject to ongoing market uncertainties and currency exchange movements. As per our current assessment, we anticipate the financial impact of the ongoing conflict will be absorbed by our strong underlying business performance and is within the range of our full year 2026 outlook. However, we do see that the uncertainty has increased, which is what I will talk about in more detail in the following slides. First, look at the market dynamics. Before diving into the results, I'd like to provide some context on the conflict in the Middle East. It has caused a historic supply side shock across global energy and manufacturing markets. This presents a major challenge for some of our customers. Broadly speaking, supply-side substitution has not been sufficient to offset the loss of physical products normally sourced from the Gulf countries. This has triggered significant commodity price volatility and forced a redirection of energy flows, domestic and -- towards domestic and transportation sectors, further impacting industrial demand. As a result, we see cautious customer sentiment and increased uncertainty. Let's take a closer look at how this impacts our business, starting off with our exposure to the region. We own and operate 4 storage terminals across the Middle East, with strategic locations in Saudi Arabia and the United Arab Emirates. In terms of financial exposure, around 5% of our proportional EBITDA is generated by these terminals, and they represent around 4% of our capital employed. Our terminals in Saudi Arabia are linked to industrial clusters, while our Fujairah terminal in the Emirates located outside the Strait of Hormuz, functions as an oil hub. The conflict has had severe impact on the industrial activity in the Gulf countries because of physical damage to the production facility and production halts. As a result of the closure of the Strait of Hormuz, Fujairah, despite its strategic location, faces reduced product flows. In terms of indirect exposure, to substitute for the loss of product volume from the Middle East, we see a rebalancing of trade routes emerging. While our infrastructure facilities facilitate the rebalancing of global trade flows, throughput levels are impacted by reduced products in the market. We do see that this presents a major challenge for some of our customers impacting their business continuity. While with our well-diversified portfolio of terminals, we've proven to be resilient against geopolitical tensions as well as energy market volatility and disruptions in the past. Our diversification is a structural strength, allowing our network to serve the evolving supply chain and energy security needs of our customers and partners. In addition, with the shift of our portfolio towards gas and industrial terminals, the duration of our contracts has increased significantly, reducing our exposure to short-term volatility. However, we are resilient, but we're not immune. The conflict in the Middle East introduces variables from shifts in global trade routes to heightened security risks and regional price shocks that we are not insulated from. We continue to monitor these developments to protect our operations and our customers' interest. Now let's take a closer look at our results for the different terminal types we operate. We see an overall strong performance with higher results compared to Q1 of last year when adjusting for the impact of currency translation and divestments. It's important to highlight that Q1 results had limited impact from the Middle East conflict. We saw a strong performance of our chemicals and oil terminals, which was primarily driven by increased throughput combined with strong contribution from growth projects. Our industrial terminals performed broadly stable year-on-year. However, due to the contribution of growth projects, we saw a slight increase compared to Q1 2025. For our gas terminals, we saw a slight decline year-over-year, which is primarily related to disruptive gas supply from the Middle East conflict. All in all, this has led to a proportional EBITDA of EUR 295 million and a strong operating cash return of 16.6%. Notwithstanding the volatility and uncertainty on the market during Q1, we continued to execute on our growth strategy. In the United States, at our Deer Park terminal, we commissioned repurposed capacity for biofuels. And in Spain, our Terquimsa joint venture with FID to expand its capacity to address market needs as well as further solidify its leadership position. Last but not least, we've taken a final investment decision to repurpose capacity at our Europoort terminal in the Netherlands for the storage of pyrolysis oil. This is an important step in our continued commitment to the energy transition and is strengthening and further integrating our industrial partnership at the Europoort. Since 2022, we've committed around EUR 1.9 billion to grow our base in gas and industrial terminals and to accelerate the energy transition. Around EUR 650 million of this is already commissioned and is contributing to the financial results. Around EUR 1.3 billion is still under construction. We expect to commission around EUR 775 million near year-end related to mainly Gate, the 4th tank and the LPG export terminal in Canada. In the period 2027, 2028, we expect to commission around EUR 325 million and around EUR 175 million in 2029 and beyond. This is based on the FIDs that we've taken so far. The already commissioned growth projects as well as the growth CapEx under construction will further reinforce our long-term stable return profile and diversify our revenues. Looking ahead, we remain well positioned to achieve our long-term ambitions. We've shown strong business performance in recent years and the market indicators for storage demand remain firm, supporting the delivery of growth projects and the resilient performance of our existing business. This is reflected in our long-term ambition. We have an operating cash return ambition for an annual range of between 13% to 17% and are well on track to invest EUR 4 billion growth CapEx through 2030. Also, as announced during our full year 2025 results, we are distributing around EUR 1.7 billion to our shareholders through year-end 2030 via a progressive dividend and a multiyear share buyback program. With that, I'd like to hand it over to Michiel to give more details on the Q1 2026 results. Michiel Gilsing: Thank you, Dick, and also from my side, good morning to all of you. As Dick mentioned already, we have had a very strong start of the year. We reported a healthy occupancy rate, increased our EBITDA and further improved our free cash flow generation. These results highlight the strength of our well-diversified portfolio, particularly in times of increased uncertainty and volatility. Simultaneously, we continue to invest in attractive and accretive growth projects while returning value to our shareholders. Let's take a closer look at the performance of the portfolio. Our operating cash return was broadly stable at 16.6%, compared to the 16.8% in Q1 2025, driven primarily by the negative effect of currency translation in our free cash flow. On an autonomous basis, excluding currency and divestments, our proportional operating free cash flow per share increased 7.1% versus Q1 2025. Demand for our services remained healthy, reflected in a proportional occupancy rate of 91%. Adjusted for currency movements and divestments, proportional EBITDA increased by 4.2% which we will detail further in the next slide. Moving on to our business unit performance overview. Excluding negative currency exchange effects of EUR 15 million and EUR 2 million divestment impact, our proportional EBITDA increased by 4.2% compared to Q1 2025. A large part of this growth can be explained by the strong EBITDA contribution of EUR 9 million from our growth projects, particularly in the U.S. and India. The performance across the network was relatively stable as regional headwinds are balanced by robust activities at our major oil hubs in the Netherlands and Singapore. We are continuously focused on generating predictable growing cash flows to create value for our shareholders. Compared to Q1 2025, we have seen our proportional operating free cash flow grow by 7.1%, adjusted for currency translation and divestment impact. This is primarily driven by the autonomous improvement of our proportional EBITDA and the reduced share count following our share buyback programs. Moving from the cash flows to our financial position. Our proportional leverage, which reflects the economic share of our joint venture debt remained stable at 2.6x. If we exclude the impact of assets under construction, which do not contribute yet to the EBITDA, the proportional leverage is at 1.99x, which is the lowest level in over 5 years. Our ambition for the proportional leverage range is between 2.5 and 3x. To facilitate the development of growth opportunities that enhance our operating cash return, Vopak's proportional leverage may temporarily fluctuate between 3 and 3.5 during the construction period, which can last 2 to 3 years. This is all in line with our disciplined capital allocation framework. Our capital allocation framework consists of 4 distinct pillars aiming to maintain a robust balance sheet, distribute value to shareholders, invest in attractive growth projects and yearly evaluate the share buyback program. As announced during our full year results, we are distributing around EUR 1.7 billion to our shareholders through year-end 2030 via a progressive dividend and a multiyear share buyback program. In addition, we have the ambition to invest EUR 4 billion on a proportional basis by 2030 to grow our base in gas and industrial terminals and to accelerate towards energy transition infrastructure. That brings me to the outlook for full year 2026. As mentioned by Dick, the market indicators for storage demand remain firm, supporting the delivery of growth projects and the resilient performance of our existing business. However, we do acknowledge that the market has become significantly more volatile following the conflict in the Middle East. For now, we expect that the financial impact of the ongoing situation is absorbed by our strong underlying business performance and growth project contribution. This gives us the confidence to reaffirm our full year 2026 outlook with the proportional operating free cash flow projected at around EUR 800 million and a proportional EBITDA expected to range between EUR 1.15 billion and EUR 1.2 billion. Bringing it all together in this slide, we are off to a strong start of the year with solid cash generation. Our portfolio remains well positioned to cater for increased volatility in the market. And last but not least, we continue investing in attractive growth opportunities while returning value to our shareholders. And with that, I hand over back to you, Dick. D.J.M. Richelle: Thank you, Michiel. And with that, I'd like to ask the operator to please open the line for questions and answers. Operator: [Operator Instructions] And now we're going to take our first question, and that question comes from the line of Kristof Samoy from KBC Securities. Kristof Samoy: First of all, congratulations with the results. I have 2 questions to start with. If we look at the ongoing conflict in the Middle East, there are, let's say, 2 factors at play there, which impact your business. First of all, positively, you have the rush for energy molecules, so energy security. On the other hand, you have uncertainty, which impacts the FID process that you are undergoing for certain projects. So my first question would be, how is the process looking for Australia right now? Has FID become less likely? Or although more likely given the fact that Australia can simply import oil from its own -- from another region in their country. And secondly, if you could comment on EemsEnergyTerminal and the potential extension there because we have seen the news that Exmar is progressing with the vessel conversion. And then the second question, we know that throughput rather than guaranteed offtake is more of a key driver for revenues in India. If we look at the drop in proportional occupancy rates in the Middle East and India, could we say that this drop is still mainly linked to the Middle East and that the drop linked to throughput in India has yet to be reflected in the numbers? D.J.M. Richelle: Kristof, thanks for the questions. Yes, maybe on your first question related to Australia and EET and then specifically on the timing of them, I think for Australia LNG project, the way we would look at it is and what we can see at this point in time, the need for that project is set by the local Victoria state for gas, and that's just for electricity generation. So that is a need that is almost independent of what happens in the rest of the world. They have a very strong need to find substitution for current gas supply offshore that is depleting. So there's no indication at this point in time that there is a fundamental change in -- that there is a fundamental change in the time line of that project. So we still expect to get back with more information towards the end of this year. I think that's around VVET. So that's the Australia energy project and maybe to EET. So EemsEnergy, the extension over there process is still ongoing. Yes, we've seen Exmar making the announcement. We are not there yet to make any announcement. As you know, we run an open season on the recontracting of the capacity post the end of the current contract by fourth quarter next year. And that is a moment that we are still working through or a process that we are still working through. And once we have news to share, we will come back to the market and share that. I think then maybe to the lower occupancy rate, it has more to do with the fact that the Fujairah capacity in the first quarter was lower in terms of also out-of-service capacity. Then had a direct impact of what's happening in India. I think still, if you look at Q1, it's a bit early to see the effect of any of the disruptions from the Middle East directly in our business in India. But indeed, the flows of LPG that flow to India have a lot to do with the source of origin, and that's the Middle East. Kristof Samoy: Okay. But for EemsEnergy, you do not experience a change of attitude with your partners in terms of the run-up to the FID being taken given everything that's going on in the Middle East. D.J.M. Richelle: No, I think many parties take for processing like this, a long-term approach. They know that the capacity is available in 2028. As you know, a lot of the flow that was coming from Qatar is taken out. That has a massive impact, but it is also expected to have a massive impact for, as they call it, a bit of extra supply that was expected to come in towards the end of this decade. So you could almost argue that with all the repair and restoration that is going on, it pushes out that supply -- extra supply a little bit further out in time, and it doesn't necessarily have an immediate impact on, for instance, product that needs to leave the U.S. and needs to find a home in Europe. So I think it's a bit of a long answer to say, for now, we do not see a material different approach of potential customers towards EemsEnergy. Operator: Now we're going to take our next question. And the question comes from the line of Thijs Berkelder from ODDO. Thijs Berkelder: Congrats with the strong Q1 performance, especially in chemicals. Can you maybe further explain why chemicals was so strong? And related to that, can you explain what you now see happening in your Deer Park and European chemical operations given recent Middle East events? Second question relates to the strong performance in Rest of World. Can you explain where that is coming from? D.J.M. Richelle: Thanks for that. I think on the Chemical side, I would say, overall, Deer Park has done quite well in the first quarter, and the same goes for Vlaardingen specifically that actually participated and contributed quite strongly to the results in the first quarter. When it gets to the conflict and the impact of chemicals as such for our network, I think Deer Park, although we do not see it yet fundamentally, but Deer Park or the U.S. in general, you would expect that they will benefit a bit from the fact that the U.S. as a chemical producer has quite a competitive -- a strong competitive position in the current global landscape. So we expect that, that will result in at least continued healthy demand for our services, especially Deer Park. I think that's one. So I would say strong performance there. I would say if you change that to Europe, particularly, I would say, Belgium, it's still hard to see, but quite a lot of the flows that are moving into Belgium are flows that come from the Middle East. It's a very strong market for Middle Eastern producers to sell product in Europe. That is subject to the disruptions as a result of the conflict. And what you see over there is, obviously, there's a lot of people that are trying to take positions, traders that try to take positions in that market to try to supply the demand for the end product that continues to be there. So it remains to be seen how that effect is going to balance out. Too early to tell in that sense for Belgium. If you look at it overall for the rest of the portfolio, I think what we said, it's still healthy demand on the main oil hubs, in the first quarter, Singapore Strait, strong, Rotterdam, high occupancy, high activity, so pretty strong over there and fuel distribution, quite healthy across the board in the first quarter. So I think we are pleased if we look back at the first quarter. And I think as we said, the outlook for the rest of the year given everything that's going on is within the range of what we said already in the first -- in February when we announced the 2025 results. Michiel Gilsing: We also had a few growth project contributions in the U.S. and India, which also helped on the Chemical side. So that has led to an increase versus Q4 2025 as well. Thijs Berkelder: Yes. And rest of the world primarily driven by Belgium then? D.J.M. Richelle: Not necessarily. No, not Belgium, I would say. I think if any, Belgium is a bit under pressure first quarter. I think rest of the world, just healthy across the board, not a particular region, I would say that jumps out. As I said, oil stable and relatively strong and just a positive good start of the year. China, quite well. So nothing particular that jumps out, Thijs, in a extreme way. Operator: Now, we're going to take our next question. And the question comes from the line of Philip Ngotho from Kepler Cheuvreux. Philip Ngotho: I have 3 questions, if I may. The first question is on China and North Asia. If I look at the consolidated numbers, I see the occupancy rates. It was already low last year, but it actually dropped further to 55%. So I assume it has to do with the Chinese terminals that are just generating or have low occupancy rate. I was wondering if you could share any -- because in the past, I think you also mentioned that the chemical market in China has been weak, and it seems that occupancy rate continues to drop further there. Do you have any -- what are the projections for those assets there? And could we be thinking of anything if it remains structurally weak to -- that you might take some portfolio actions there? The other thing that I'm wondering about is what portions of earnings is really dependent on throughput levels rather than really take-or-pay contracts? And the last question I have is if a client would declare force majeure and you have a take-or-pay contract with that client or client is impacted by force majeure and with the take-or-pay contract, what happens to that take-or-pay contract? Do you actually -- can you still incur revenues on that? Those are my 3 questions. Michiel Gilsing: Philip, maybe start on the China side. Yes, if you look at the consolidated occupancy, effectively, that's only one terminal. So we have a portfolio of 8 terminals in China. So that doesn't give you a very representative picture of China. Dick already mentioned, the China results were actually quite good and slightly above our own expectations. Indeed, that terminal is the Zhangjiagang terminal, which then has a relatively low occupancy because it's in a very competitive market, and it's one of the distribution terminals. Most of the terminals we have in China are industrial terminals. So basically backed by long-term take-or-pay type of contracts. So you see that the overall portfolio is quite healthy. We don't have any immediate portfolio actions, we're going to take in China. To the contrary, we commissioned last year a new terminal in China. So that is an add-on to our portfolio. We still see quite a few growth opportunities in industrial terminal locations. And overall, the returns in China, if you compare it to the rest of the portfolio is quite healthy, and we're quite capable of distributing our dividends from China back to the Netherlands. So that's maybe on the China side. On the earnings side, yes, there is always a component of throughput income. So even in contracts which -- where people buy, let's say, effectively the capacity, we still have an opportunity that if throughputs are at a higher level than expected that we will charge additionally for excess throughputs. So approximately 10% of the earnings are throughput related in some locations, more throughput related than in others. For example, location like Belgium is much more activity related than in another location. And some of the locations like I just mentioned, some of the industrial or some of the gas contracts are very low in terms of throughput dynamics. So that's maybe only a portion of the earnings, which is throughput related. And Dick, on the first, force majeure? D.J.M. Richelle: Yes. So force majeure, Philip, what we see happening is that some of our customers are declaring force majeure, but they are declaring it in all those cases towards their customers. So an inability sometimes to get product out of a region in order to deliver it to a customer that is further away that is not necessarily related to the type of services that they -- or obligations that they have towards us in the storage contract and arrangements that we have. So we obviously have to follow this case by case and understand very clearly what some of the situations of our customers are in this respect. And as was indicated, I think, in the presentation already before, we need to kind of like be prepared for those discussions because if that customers are under serious stress and under duress, we have to sit down and understand what we can do to support them. But legally speaking, the force majeure, there's very clear guidelines of what and how that applies in the contract obligations and responsibilities between the storage provider and our customers. Philip Ngotho: Okay. Very clear. Just one follow-up. So far, have you had any clients where you already had to sit down and renegotiate terms? Or given that they were just faced with difficulties or challenges? D.J.M. Richelle: It's no comment on that. And the reason for saying it, I don't want to go into individual discussions and official, it's -- I think it's a bit of a gray area where there is -- obviously, there are customers that say we're under a lot of stress, can we talk versus how official that is and how official those negotiations are. I think this is part and partial of what we've seen in previous crises. We are confident that we can manage through that. We're close to our customers and see where and when we can support them while at the same time, respecting and safeguarding the interest of Vopak, which is we made investment in certain infrastructure to support our customers in good times and in bad times. So no details. Operator: Now we'll go and take our next question. And the next question comes from the line of Quirijn Mulder from ING. Quirijn Mulder: On the whole situation in the Middle East. Can you give me an idea about, let me say, the first panic in the first week of March compared to what the situation is now? Are the customers still scrambling for products and has its impact on your throughput in, let me say, mainly in the Far East? So can you give me a view on what's in reality happening and what is -- you take a cautious stance on the second quarter. And it looks like that, okay, the March was not the issue, but maybe April is more an issue than March. Can you give any feeling on what's the current situation for many customers and also the impact on your business? D.J.M. Richelle: Yes. Quirijn, thank you for that question. I think first and foremost, as we already said, key priority for us is to make sure that people are safe and have been safe throughout the course of the conflict. The noncritical staff we leave away from the facility. We take noncritical staff not with a permanent resident in that region, take them out and move them back to their countries of origin. That has all been done. We monitor obviously the situation very closely, purely from a safety and security point of view and do whatever we can to support our partners and our people over there. I think that's in the first -- that's the first instance and first priority. If you look at it, what's happening at the moment, I think a few things to mention here. The amount of information that comes out of the region is limited. That's -- so what the exact damage is outside and far outside of the perimeter of the facilities that we operate is not publicly known, and it's also not always known to us. I think the second element is if you look at it physically what's going on, people would like to remove product in a safe manner, if that's possible as soon as possible in some instances, as we particularly have seen in Fujairah, while at the same time, making sure that now that the cease fire is in place, increased activities are happening to make sure that as much as possible, business continues as possible, as usual, with demand for fuel oil, demand for some of the products that need to be moved in and out, and that is, I wouldn't say all back to normal of how it was before because that would be too strong a statement simply because the product is not always available. The product that comes out of the region is hampered and is limited and restricted. But slowly but surely, as we speak now, things are -- people are trying to get back to normal and resume as much as possible, normal operations with a cautious view and a clear view on the uncertainty that's happening in the region, as you can imagine. Quirijn Mulder: Yes. And that's in the region, but there's a ripple effect, let me say, elsewhere in the Far East. So let me say, the situation in Australia and Sydney, et cetera. And let me say, for example, in South Africa, as you mentioned, in Pakistan. Is there anything you can update us on that -- on the development there? D.J.M. Richelle: Yes. So we continue -- what you see, Quirijn, is that things literally move quite volatile and hectically kind of like almost from week to week. So let's take South Africa, maybe as an example, dependent very much on imports from the Middle East. So in the first weeks of the conflict, you see product on the water still finding a home in South Africa. So first 2 weeks, it was almost business as usual. Then you have a period where there's no new supply coming simply because the supply was choked coming out of the Middle East. So then there's actually a bit of panic in the local market, what's happening and how can we supply new product. And then after a week, 2 weeks, you see that there's alternative supply coming into the market from different parts of the world. And for instance, West Africa is then becoming one of the suppliers of South Africa, which is then supporting. Over time, it obviously needs to work out what it does to total volumes once things start to settle down. But the challenge is it's never clear of when things really start to settle down. And I think that's what we are working through. So it's -- I think that's the best way to characterize it. And I realize you maybe want to have maybe sustainable longer-term view of where this is trending to. That's simply too hard to say at this point in time, and we continue to support where possible. And I think if I can take it one notch up, the general confidence that we have in the fact that we operate these critical assets at strategic locations that support the primary needs in local economies continues to give us a lot of confidence on the medium- to longer-term outlook for our network, but we have to navigate through the current circumstances. Quirijn Mulder: But I understand, let me say, if I look at the second quarter and especially in the month of April, then thus far -- okay, there's a lot of uncertainty, but it's not very concrete impact there, if I understand. There's not that you see, let me say, really impact from, let me say, the business happening on your -- the business happening on your business, in fact. Is that correct? D.J.M. Richelle: I think it's -- what we are saying is that with a lot of uncertainty and volatility in the market, we are certainly not immune for the supply shocks that are currently happening, Quirijn. This is not a relative easy exercise between brackets, easy exercise of rebalancing the remainder of the flows to the world. There's simply also a shortage of product in some regions, and that will have effect on the flows that are coming through some of our terminals, while at the same time, there's, in some instances, a rush for a particular storage position for a particular product because product is trapped and you need to find an intermediate source of storage. So I think it's too early still to tell. We haven't closed April yet. It's way too early to tell what the impact then will be. The assessment that we made is the assessment for the full year 2026, which is reflected in our outlook. And there, we think that we are capable of absorbing the negative impact of the conflict in the outlook that we've already presented. Michiel Gilsing: Yes. Because on outlook -- you may assume on the outlook that obviously -- well, the first quarter was relatively strong. So if you compare it to the outlook we have given, it's at the higher end of the outlook, if you would have 4 of these quarters, but then we still have some growth coming on stream and some positive currency exchange compared to Q1. So yes -- and that will compensate for the potential impact of the conflict, what we feel could be the potential impact of the conflict today because it's very hard to make an assessment. We don't know, let's say, how long this is going to last, how severe this is going to be. But we feel that where we are today and what we know today, that those compensating factors are sufficient to absorb, let's say, the impact of the Middle East. Operator: Now we're going to take our next question. And the question comes from the line of David Kerstens from Jefferies. David Kerstens: I have 2 questions also about the conflict in the Middle East. And maybe specifically on Fujairah, can you give an indication how occupancy trended in the month of March? And given that this is a hub location, do you see any impact from reduced product flows in Fujairah elsewhere, for example, going to Asia into Singapore, will there be a knock-on effect on occupancy levels there as well? And Dick, I heard you say you will see global trade flows rebalancing, I think in response to the former question, you talked about new supply coming out of West Africa. And also, you have a very well-balanced portfolio. Does that mean that you also see terminals that are seeing positive effects from the current conflict in the Middle East? D.J.M. Richelle: Yes. So I think individual occupancy level for particular months, let's refrain a little bit from that or we want to refrain from that. I think VHFL, as we said, total occupancy has gone down quite a bit in -- towards the end of the first quarter. And we see that around 8% of that capacity in Fujairah is out of service simply as a result of some of the damage that we've seen in Fujairah. So that is something that we have to repair and get back into service. The impact that, that has for the rest of the network, it's not necessarily that the immediate flows from Fujairah are moving to all other terminals throughout the network. So I think Singapore has its own dynamic, and it is impacted by the fact that there's products not flowing from the Middle East to Singapore, but that has different sources than to potentially repair that with. And we haven't seen up until now a big impact in, for instance, Singapore for the demand for oil storage. If there are positive elements in the outlook for some of our terminals, I think we mentioned already the effect in Deer Park. We see increased -- quite some increased activity in the Europoort as well. But I think you have to also understand this particular case, it's very relatively straightforward sometimes to assess what is not going well and what the direct impact is, it will take time for us to assess where we see some of the upsides coming from. I think it's simply also harder to predict that at this point in time. Operator: Now we'll go and take our next question. And the question comes from the line of Jeremy Kincaid from Van Lanschot Kempen. Jeremy Kincaid: I just have one question on your guidance. You obviously reconfirmed it today. But within that, there was -- it seems like there's some positives and negatives. On the negative side, clearly, there's the disruption from Strait of Hormuz. But on the positive side, you talked to FX. And I think the other key thing was some growth projects coming in. I assume this doesn't refer to the Europoort terminal or the Spanish development that you're working on because those seem to be -- will be operational in 2027. So can you just talk to what those growth projects are and what's changed from when you last gave the guidance? Michiel Gilsing: Well, definitely that, in the growth projects are not these projects you mentioned indeed. So the growth project, the major one, which will come on stream this year is tank #4 here of the LNG import facility, the Gate terminal here in Rotterdam. So that is still within budget, but also within its original schedule. So we would be able to commission it on time. That is the latest outlook we can give. So that's going to be the major positive contribution. There's a few other projects, but these are relatively smaller compared to the tank #4. Indeed, foreign exchange is a positive element. And then, effectively, what happened is the underlying business performed a bit better in Q1 than we expected. So as a result, if we wouldn't have had the Middle East impact, then obviously, there was -- there could have been a likelihood to basically adjust the outlook upward. But yes, the Middle East conflict basically brings the outlook to the level we have given to the market for both free cash flow as well as the EBITDA. Free cash flow is still healthy. So if you look at where we were last year and where we anticipate to be this year, we should still be able to report a strong cash flow, and that's obviously the main driver for value creation. So yes, basically, I hope that answers the question, Jeremy. Operator: Dear speakers, there are no further questions for today. Dear analysts, thank you very much for all your questions. And that does conclude our conference for today, and have a nice day. Fatjona Topciu: Thank you. D.J.M. Richelle: Thank you very much. Good day. Bye-bye.
Per Brilioth: Okay. Hey, welcome, everybody. This is our -- as in we are VNV Global. This is our Q1 investor call. And I'll kick things off. We have like this usual summary page, which is the next one. Yes, NAV $462 million, which is down a bunch since the end of last year. And as we tried to sort of highlight in the narrative in the report, it's because of market and the peer group, the public sort of peer group from which we take multiples, they're down a lot. In some cases, there are names that we use that are down like 30%. And that's the main driver because the portfolio at large is doing really well. And as I wrote sort of -- if that sort of peer group multiple that we download and multiply with what we see at our companies, if that would have been flat this quarter, the NAV would have been up since the end of last year. So -- but this is how we value the portfolio. And it's no -- can sort of change that from quarter-to-quarter even if we don't think it sort of reflects the reality of the value here. And so we're subject to that volatility. And sort of if we -- if the second quarter were closed today, it would have been up. We'll see where it closes. But we're basically subject to that volatility. That volatility has taken the NAV down, but it's not reflective of what's going on in our portfolio. And I don't know if one sort of just has a go at trying to put the big sort of high-level reasons for why this peer group is down. I think it sort of falls into 2 main buckets. One is this fear, uncertainty, combination of those and what AI will do to a bunch of software companies. And as we've been on and on about before, we really don't see that as relevant even sort of -- it's the other way around for our portfolio companies is that we feel that these companies in our portfolio, they benefit from the emergence of AI platforms, models, that whole new toolbox in so many ways. I mean, the combination of hardware sort of proprietary data sets and sort of a customer base that sort of goes directly onto the platforms without any intermediaries. And just the ability sort of these sort of new ways of writing code and software, et cetera, is so beneficial basically for these companies. So -- and then the other one, of course, is I think you'll agree with me is this sort of are we heading to a recession, energy prices are up, inflation is up, interest rates are high because of inflation, that whole thing. And the point there is that we have sort of strong elements of countercyclicality in our portfolio. So in tough times, you use these products more. It's most intuitive around BlaBlaCar. We'll come back to that, but it's there basically. So yes, so with that sort of long-winding intro, I thought we'd sort of kick off this -- we'll take you through the numbers and touch a little bit upon the different names. So Bjorn, do you want to run us through the numbers? Björn von Sivers: Sure. So starting off sort of the overall portfolio. Here is a simplified sort of breakdown of the balance sheet. So as Per mentioned, NAV down to $462 million, down 15% over the quarter in dollars to $3.61 per share. In SEK, that's SEK 34.25 per share or down 12% over the quarter. Total investment portfolio amounted to $503 million, consisting of sort of $486 million of investments and $17 million worth of cash. Important to note that sort of we have an additional $30 million of cash and cash equivalents, but in liquidity management investments. So all in all, we're looking at sort of cash, cash equivalents and liquidity placings in the range of $47 million, borrowings down to $45.7 million as per quarter end. Continue to trade as a significant discount to NAV as of today, sort of 49% discount. And moving down to the sort of big drivers over this quarter is, of course, the larger constituents of the portfolio and just going through sort of the few largest ones here. So BlaBlaCar, obviously, the largest driver, down 27% or $44 million to $120 million for the holding, primarily driven by depreciating multiples over the quarter, both driven sort of from the overall rapid developments and uncertainty coming from the AI space, but then also, of course, from the geopolitical tension, whereas BlaBla sort of part of that peer group is in the OTA travel-related marketplaces that's been hit a lot. Same goes for Voi, that's also down over the quarter based on multiples. It's the order of sort of 16% or $20 million. HousingAnywhere here actually valued on a new transaction, we participated with EUR 1 million and then another sort of $1.5 million sort of converted from earlier convertible investments we held. Numan and Breadfast based value on transactions were relatively flat, a little bit of FX on Numan. And then Bokadirekt down roughly 10%, also driven by contracting multiples. All in all, these 6 names represent SEK 26 per share or sort of on an aggregate basis, 77% of the NAV. And again, sort of ended the quarter with $70 million of cash and cash equivalents and $30 million in liquidity management investments. Also sort of during the quarter, we bought back another close to 500,000 VNV shares and also a small amount of the outstanding bonds, which I'll come to now, which we also sort of announced today that we announced a partial buyback offer of the outstanding bond up to a transaction cap of SEK 275 million. This is to sort of effectively take down the gross debt and also lower the interest expense going forward. We launched this today and we'll hopefully have sort of the outcome sometime next week. With that, I thought I hand back to Per and we'll touch a little bit more deep in the larger portfolio holdings. Thanks. Per Brilioth: Yes. And yes, the structure of the portfolio looks very similar to what you've seen before. And so nothing really to comment here. But if we flip to the next page, this portfolio, as we've been on and on about, trades at sort of roughly half of the reported NAV. And as we -- as I think it's clear, we think it's -- we think that NAV is attractive, cheap. And hence, we've been buying back stock as we think that, that's the absolute best thing one can do with shareholder money. Our sort of aim is absolutely to continue doing that. And the reason being, as the next slide shows, as you've seen before, is that this is a portfolio that at large is positive, is earnings positive, is profitable. The slight downtick from a year ago is because of the absence of Gett, which is a profitable company. But at large, this company -- this portfolio is profitable and not sort of craving a lot of money to stay alive. And so that's not a reason for saving money to sort of put back into the portfolio names. We can use the money we have to buyback stock. And this profitability does not come at the expense of growth. We've made a new slide, which is the next one, just to -- which sort of you'll recognize it from earlier that this portfolio continues to grow over the past sort of is it 3 years, you've got a CAGR of nearly 30% across these 6 top names in terms of revenue growth, and it's turned from being slightly negative profitability to positive. So big change there. And as we try to highlight here also just as a reminder of how markets move around, these 6 names are -- those 6 names back in '23, this quarter, first quarter of '23, we had them in our NAV at $446 million and total NAV was like $800 million back then. And we now value them at $358 million. And so despite that sort of big shift in loss-making to profitable and very, very sort of steady growth. This last quarter, that portfolio grew by some 25%, still but marked lower. The overall NAV is, of course, lower also because we've sold some stuff to pay down debt. So I think that's a useful reminder of where we've come from and where we are today, both in terms of sort of quality of the portfolio, but also how we market. Yes. If we then go into the bulk of the portfolio, there's nothing really new around BlaBlaCar. This is a good summary, I think, around how they sort of closed 2025. EUR 2 billion of GMV is a sizable number. I know GMV is not revenue, but it's -- and as you remember, a bunch of their markets are unmonetized yet and some of them are really coming strong into monetization like Brazil now, but others remain unmonetized, waiting for liquidity to sort of further improve. But still GMV, that's a tool that many people use to sort of value these kind of sort of platforms, et cetera. And if you use that number and to where we're marking it today, it's 0.4x GMV, which I think is fair to sort of categorize as attractive. Certainly, in my mind, that is. And if you go to the next page, we also have a BlaBlaCar that's doing really well at the start of 2026. They have had a strong start. And -- and also of late, we've really seen this element of countercyclicality in the business model where oil prices go up, it's -- energy prices go up at large, driven by oil prices now. The activity of BlaBlaCar goes up because it's more expensive to drive a car and you're more prone to get other people into fill those seats. You do that through the BlaBla platform. So BlaBla gets more business and the graph on the right sort of highlights that. I think that's sort of all for BlaBlaCar. If we -- let's go and talk about Voi. Dennis, do you want to run us through Voi? Dennis Mohammad: So Voi closed a record 2025 with EUR 178 million of net revenue. This is up 34% year-over-year and adjusted EBITDA of EUR 29.3 million, which is up 70% year-over-year and adjusted EBIT of around EUR 3.2 million, up from essentially breakeven in 2024. So a very significant improvement across the board in the P&L. As we alluded to earlier, the company during the year also did a tap of EUR 40 million on the existing bond framework to fund the growth CapEx for 2026. And they also secured an RCF with Danske Bank and Swedbank here in the Nordics for EUR 25 million, which is still untapped, but provides additional financing flexibility should they need it. In Q1 of 2026, we've written down the value of our stake in Voi by 16%. This is primarily driven by peer multiples trading down as Per has already talked about earlier, but in part also driven by FX as the dollar has depreciated against the euro during the quarter. Operationally, Voi has had a strong start to the year. It continues to win tenders in Q1 alone. They won tenders in the Netherlands, in France, in Germany and in Norway. And they've started to roll out their new fleet of e-scooters, the V9 scooter and e-bikes, the E5 and EL2 across the streets of Europe. So putting to use the bond money that they raised at the end of last year. The company will issue their Q1 report on Monday next week, that's on April 27. So more information will be available then. I see we already jump to the next slide, which is good. As Per wrote about in the intro to the report, when Voi issued its bond in 2024, it pioneered the financing model that industry peers have since either replicated or attempted to replicate. We have now received the first public financials from one of those peers and the comparison truly reinforces our conviction in Voi's strategy and in their execution. As you can see in the numbers here on the graph, while Voi grew revenues by 34% year-over-year and generated reported EBITDA, different from adjusted EBITDA, but reported EBITDA of EUR 19 million and EUR 24 million of cash flow from operations, the European peer here saw a revenue decline of 16% year-over-year and on essentially the same revenue base generated negative EUR 13 million of EBITDA and negative EUR 20 million of cash flow from operations. We've excluded EBIT here as the peer change methodology on this metric during the year, so making a like-for-like comparison difficult, but that number was heavily negative as well for the peer. As I said, we are convinced that Voi strategy and execution is the best in the industry. And I think one additional data point that supports that is when looking at the revenue generation per vehicle end day on the right-hand side of this slide. So Voi generating EUR 3.94 per vehicle in a day in 2025 and the peer down at EUR 2.88 in revenue per vehicle per day. We can see here that, that's a 37% more revenue generation per vehicle at Voi. And I think this really shows how Voi's investments across the full platform, everything from hardware, where they have their own proprietary IT module, high-capacity swappable batteries to software where they use machine learning for fleet optimization. They have a very strong fleet and inventory tracking system. And lastly, operations where they have best-in-class fleet sourcing, fleet management, maintenance and eventually resell is truly paying off. With that, we go to the final slide, where there's really nothing new to report. They've seen continued growth on top line and improvements on profitability across the board, as I alluded to earlier. As also mentioned, their Q1 report is out on Monday. So we encourage you to keep an eye out on their IR website then. If we then jump to the next company being HousingAnywhere, HousingAnywhere has had a good first year under Antonio Intini, who joined as a CEO roughly a year ago after having senior roles at both Immobilare and before that, Amazon. Looking at their 2025 financials, the company closed the year with continued growth on top line and positive adjusted EBITDA, which is a big improvement on the year before. In Q1, as Bjorn mentioned, HousingAnywhere closed a financing round where VNV participated with EUR 1 million and where previously held convertible loan notes were converted to equity. With this new funding, we think that the conditions are in place to push growth harder from here, and we look forward to following that transaction, which was done around the VNV mark at year-end last year. If we then finally go to Numan. Numan closed a very strong 2025 with north of 125% growth on revenues and positive adjusted EBITDA. As we've spoken about in the past, their weight loss vertical has been a key driver of this growth over the past couple of years and 2025 was no exception. In Q1 2026, the company has continued to grow, albeit we have seen growth come down from the levels it's seen in past years, primarily driven by some price changes in the market for GLP-1 in the U.K. which initially led to some stockpiling behavior ahead of the increases and then some slightly lower activity following. But as I said, they're still growing year-over-year in Q1, and we value Numan on the back of a transaction that they closed last summer. However, should we have valued it on the back of a peer group model this quarter, it would have been roughly in line with the mark we currently carried at. Finally, this company continues to invest in its unified Numan 2.0 platform, which we believe is a key driver to long-term LTV growth and patient retention, and we look forward to seeing the results from those investments in the quarters to come. That's it on Numan. Handing it back to you, Bjorn. Björn von Sivers: Thank you. I'll finish off with sort of a short comment on Breadfast here, who continue to see strong growth in its core e-commerce business and also sort of initial promising dynamics in its fintech offering. During Q1, the company announced sort of the final tranche of their $50 million funding round, which they completed sort of majority of last year, but the final tranche sort of closed in Q1. So company is funded and continues to grow well, hence, sort of flat valuation still based on this transaction. And then finally, on the top 6 here, we have Bokadirekt, who is also sort of down during the quarter, primarily driven by multiples, but on sort of that side, continued strong performance, strong profitability. Bokadirekt also announced a small acquisition during the first quarter. They bought a company called Zoezi, which is sort of a niche SaaS player for gyms and personal trainers, which will add both sort of top line and profitability to the company. And with that, I think we're through the top 6 names, and we'll head to a Q&A. Björn von Sivers: And as a reminder here on the Zoom, please use the chat function or the Q&A function in Zoom and we'll try to address them. And I believe we have a few questions. We could start with this one for you, Per. Perhaps, once you do the partial bond redemption, what do you think is the remaining headroom to repurchase shares? Or put it differently, how do you weigh sort of the bond redemption versus share buybacks going forward? Per Brilioth: Yes. We -- our target is to sort of -- our goal for a long, long time, as you know, and which we sort of achieved now with the sale of Gett, this has sort of become debt-free and not to sort of be burdened by paying a coupon to -- because of the debt we have. So this is just a continuation of that. But at the same time, we absolutely aim to have liquidity to make use of this sort of gift that the market is giving us of valuing us where we are and put shareholder money to work at that. So -- and we've been active around that, and we do it in the way we do it, as I think you've all sort of seen, we try to -- or we do sort of highlight in press release what we bought the previous week. So I think it's fair to expect us to continue doing that and to sort of and also to fund that. Now this partial bond redemption sort of leaves a little bit of cash. We're still net cash, but -- or yes, barely, but we are -- but it leaves liquidity to continue to do that. So that's good. And when we get to the sort of the end of the duration of this bond, then we -- during that sort of period, we see that we will have completed several more exits. There's an ongoing sort of process, some driven by us, some driven by sort of things at large that will provide us with liquidity. So it's too early to talk about that because nothing is done until it's done. But I feel sort of assured that we will have sort of ample liquidity both to sort of retire this bond at full and then and to buy back stock. But nothing is done, unless it's done, but this redemption leaves us with, I think, a good balance of liquidity to sort of make use of what we want to do here in the market. Björn von Sivers: Another question here on BlaBlaCar. You mentioned profitability at BlaBla briefly. Could you give us some color on how this would scale if the higher activity levels from March were to persist during the year? Does the increased activity sort of translate into higher profitability as well? Per Brilioth: For sure, it does. And we're unfortunately not at liberty to share sort of any further details as much as we would like. We're not at liberty to do that. So -- but for sure, this drives sort of revenue -- business revenue and higher sort of earnings. So it is a positive for sure. Dennis Mohammad: Maybe I can add there, Per, without saying too much to your point, we're not at the liberty to do so. But the core carpooling business that they run operates at north of 90% gross margin. So any kind of revenue coming outside of what you have anticipated covers the fixed cost is already covered, so you get a pretty high contribution on the bottom line from that. So to Per's point, the answer is yes. Per Brilioth: Yes. No, well described, Dennis. So yes, I hope that answers that question. Björn von Sivers: And then sort of a follow-up question sort of on buybacks of shares and bonds sort of given the volatility in the markets and contracting multiples, aren't you sort of more eager to increase buyback levels of the share? And/or if not, are there other plans for sort of additional investments in the existing portfolio companies or new funding rounds? Per Brilioth: There's sort of just having a go at that question, the different parts of it. So there's nothing major. None of the large ones sort of have any large rounds going on. There's small bits and pieces that we have been -- where we've been active in the portfolio, but they're really sort of on the marginal side of things. So not a big sort of draw on liquidity. And yes, no, I mean, if we -- if we had liquidity to do more now, we -- I absolutely would be a strong advocate of doing more in terms of buybacks. I think it's very attractive. I really, really believe that our NAV will be able to deliver serious returns over these coming years. And so if we have sort of liquidity to do more, we'll do that. But sort of obviously need to balance that liquidity, but very eager to sort of participate in the way we're doing now. So it's that balance that you may feel is keeps us doing this at a frustratingly timid kind of level. But it's -- yes, it's necessary to do it that way. If we can accelerate some exits that are at NAV or around NAV, then of course, it makes a lot of sense to do those and then sell. But it's -- nothing is done unless it is done. I feel very strongly that we will be able to sort of complete some further exits and hence, we'll have liquidity to do more, but got to keep an eye on that balance. Björn von Sivers: Another question here, specifically sort of on the Voi valuation, maybe for you, Dennis, other than sort of contracting multiples, what has sort of -- what levers have been moving around on that in the model? Dennis Mohammad: So the multiples are the -- is the primary driver. As you know, we value in the next 12 months. So we've moved 1 quarter forward. So the NTM outlook is obviously higher than it was in the previous quarter since the company is growing. But you also have FX, as I alluded to earlier, the dollar has depreciated against euro. So that's one negative contributor. And also net debt. And in the case of Voi, we don't simply take cash minus debt. We look at what obligations the company has with the existing cash. In this case, it's CapEx investments for 2026, where they've improved the kind of -- they've improved payment terms significantly over the past couple of years. So cash outflows happen during the year to a larger degree than everything going out when you place orders. So it's a combination of FX, net debt, but primarily, as said, multiples. Björn von Sivers: Thank you. With that, I don't think we have any further questions at this point in time. But as always, feel free to reach out over e-mail, and we'll try to be helpful. And other than that, I'll leave it to you, Per, for any final words. Per Brilioth: Nothing more to add, frustrating quarter because of all the stuff that we've talked about, but we feel really positive about the portfolio and the opportunities that we have here. . So yes, when is our next report Bjorn, it's -- we're looking at July 14, the National Day in France. So that's when we will speak next. Thank you, everyone. Dennis Mohammad: Thank you. Björn von Sivers: Thank you.