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Operator: Good morning, and welcome to the Boston Scientific First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lauren Tengler, Vice President, Investor Relations. Please go ahead. Lauren Tengler: Thank you, Bailey, and thanks to everyone for joining us. With me today are Mike Mahoney, Chairman and Chief Executive Officer; Jon Monson, Executive Vice President and Chief Financial Officer. During the Q&A session, Mike and John will be joined by our Chief Medical Officer, Dr. Ken Stein. We issued a press release earlier this morning announcing our Q1 2026 results, which included reconciliations of the non-GAAP measures used in this release. The release as well as reconciliations of non-GAAP measures used in today's call can be found on the Investor Relations section of the website. Please note that on the call, operational revenue excludes the impact of foreign currency fluctuations, and organic revenue further excludes certain acquisitions and divestitures for which there is less than a full period of comparable net sales. Guidance excludes the previously announced agreement to acquire Penumbra, which is expected to close in 2026, subject to customary closing conditions. For more information, please refer to the Q1 financial and operating highlights deck, which may be found in the Investor Relations section of our website. On this call, all references to sales and revenue are organic and relative growth is compared to the same quarter in prior year, unless otherwise specified. This call contains forward-looking statements regarding, among other things, our financial performance, business plans and product performance and development. These statements are based on our current beliefs using information available to us as of today's date. and are not intended to be guarantees of future events or performance. If our underlying assumptions turn out to be incorrect or certain risks or uncertainties materialize, actual results could vary materially from those projected by the forward-looking statements. Factors that may cause such differences are discussed in our periodic reports and other filings with the SEC, including the Risk Factors section of our most recent annual report on Form 10-K. Boston Scientific disclaims any intention or obligation to update these forward-looking statements, except as required by law. In addition, this call does not constitute an offer to sell or the solicitation of any offer to buy any securities or solicitation of any vote or approval in connection with the proposed transaction with Penumbra. Boston Scientific has filed with the SEC a registration statement on Form S-4 containing a proxy statement of Penumbra and a prospectus of Boston Scientific that contains important information about Penumbra, Boston Scientific, the proposed transaction and related matters. At this point, I'll turn it over to Mike. Michael Mahoney: Thanks, Lauren, and thank you to everyone for joining us today. The first quarter represented a solid quarter for Boston Scientific with total company organic sales growth of 9.4% versus our guidance range of 8.5% to 10%. First quarter adjusted EPS of $0.80 grew 6%, achieving the high end of our guidance range of $0.78 to $0.80 and Q1 adjusted operating margin was 28%. Turning to our outlook. 2026 has proven to be a more challenging year than we initially expected. And to that end, we are guiding to organic growth of 5% to 7% for the second quarter and reducing our full year guidance to 6.5% to 8%, reflecting unanticipated headwinds and changing business patterns that I'll cover in more detail on this call. Our second quarter '26 adjusted EPS guide is $0.82 to $0.84, and we now expect our full year adjusted EPS to be $3.34 to $3.41, representing growth of 9% to 11%. I and our company does not take this change lightly. As in Boston Scientific take great pride in ourselves and consistently executing against the guidance and goals we provide. Importantly, we remain convicted in the future of Boston Scientific. We have a strong global team committed to high performance, and we continue to invest in key new and existing markets which we believe will enable us to deliver on our fundamental goal of driving differentiated performance over the LRP. I'll now provide some additional highlights of our first quarter, along with some comments on our outlook. Regionally and on an operational basis, the U.S. grew 11% with double-digit growth in five out of our eight business units. Europe, Middle East, Africa grew 1% operationally. Growth in the quarter was driven by FARAPULSE, coronary and vascular therapies in Neuromod, offset by the discontinuation of ACURATE and POLARx, largely impacting the EMEA region. Last year, we did announce our intent to discontinue POLARx Cryo catheter but have accelerated that timing given some recent safety events and the availability of nonthermal ablation technologies. As we look forward, we expect that growth in demand will continue to improve with the annualization of the ACURATE discontinuation in 2Q and ongoing momentum from FARAPULSE, WATCHMAN and other key products. Asia Pac delivered a strong quarter and grew 12% operationally, led by double-digit growth in a number of countries, including Japan and China. First quarter growth in Japan was led by our differentiated PFA ecosystem with OPAL, FARAVIEW and FARAPULSE as well as strong reception of WATCHMAN FLX Pro. But within the quarter, we're pleased to have received PMDA approval for the de novo indication of our coronary drug-coated balled agent DCB can expanding the patient population eligible for this differentiated technology. China also delivered strong growth, inclusive of the impact of the VBP led by our Interventional Cardiology portfolio, particularly our imaging technologies. We are making consistent progress against our FARAPULSE goals in a competitive market in China and received NMPA approval within the quarter for OPAL HDx Mapping system with FARAVIEW, further building out the PFA platform. Now some commentary on our business units. I'll start with urology. Urology did have a difficult quarter in Q1 as sales grew 1% organically, falling short of our expectations, driven primarily by the stone management and single neuromodulation businesses. Within Stone, underperformance was driven by China VBP as well as some key product gaps in the core Stone portfolio. We expect the recent FDA approval for insurers to unlock value within our StoneSmart ecosystem alongside LithoVue Elite and we also anticipate launching additional new products in 2026 and including insulin [ urethoscope ] later this year. Our sacral neuromodulation business continue to see impact on commercial model disruption. And importantly, within first quarter, we have hired and trained a significant number of new sales and clinical reps we do anticipate improvement in the Pelvic Health franchise throughout the year as S&M commercial organization capability stabilized, along with the addition of Ecoin Tibial Nerve stem with the closure of Valencia Technologies in April. We expect our Urology performance to improve throughout the year. However, we now expect our full year uro growth to be low to mid-single digits in 2026. Endoscopy sales grew 7% organically, with strong results across the business and better-than-anticipated performance from AXIOS as we're able to ramp supply and available product sizes. As we look to the second quarter, we will continue to see some impact from AXIOS while also navigating other transient supply chain disruptions in endoscopy. Importantly, we expect improvement in the second half of 2026 as the underlying business is very strong, and we anticipate resolution of the supply chain issues. Neuromodulation had a strong quarter with organic sales growing 15% with our comprehensive portfolio growing low double digits, excluding the impact of the outlook. Our paint business grew mid-teens, inclusive of a strong quarter of outlook, as I mentioned, which closed at the end of January. Intercept continues to perform well, supported by compelling 5-year data demonstrating the long-term efficacy and cost effectiveness of this treatment for clinic low back pain. In DBS, we saw continued adoption of the Cartesia X leads an accelerating uptake of the Illumina 3D programming algorithm in the U.S. Cardiovascular delivered organic sales growth of 11%. Within those businesses, we'll start with ICVT, Interventional Cardiology Vascular Therapies grew organic sales of 8%. This business grew 9% organically, driven by double-digit growth in our ordinary therapies franchise, with strength in agent and ongoing momentum with our Imaging portfolio. And earlier this year, we completed enrollment in our fracture trial, studying the size of the IVL device in coronary arteries with data to be presented at EuroPCR on May 19 and we continue to expect launch in the U.S. in the first half of '27. Our Vascular Therapies business had a nice quarter, growing 7% organically driven by double-digit growth in TCAR and [ Bartina ] and this is offset by a large VBP impact on their arterial business in China, which is expected to annualize in second quarter. We expanded our launch with our seismic peripheral IVL for above the knee with positive physician feedback on performance. We expect to ramp our manufacturing supply chain over the course of the year and continue to anticipate launching our below-the-knee indication in the second half. In first quarter, positive data from [ Hipyto ] was presented at [ ACC ] evaluating eco clot anticoagulation versus anticoagulation alone, providing new clinical evidence that can help physicians make more informed decor patients with acute pulmonary embolism. We remain excited about the opportunity to ask the number team and highly differentiated portfolio of Boston Scientific. We anticipate that the deal will close in the second half of '26, subject to the Penumbra shareholder vote on May 6 and the receipt of the remaining regulatory clearances. Our Interventional Oncology business had a nice quarter with organic sales growing 15% driven by our broad offering of cancer therapy technologies. Within the quarter, we received FDA clearance of any day dosing and niche limited market release. Any day dosing is enabled by the TheraSphere 360 management platform line positions to schedule treatments on more days of the week and offering more streamlined ordering and operational efficiencies. Cardiac Rhythm Management sales declined 3% in the quarter. Our low-voltage business saw some impact in the quarter as we navigated our physician advisory and came up against a tough comp within our first quarter of 2025 change-outs. On the high-voltage side, we saw some impact from the Middle East complex impacting this particular business. In first quarter, our diagnostics franchise grew low double digits with continued strength across our broad diagnostic portfolio. And overall, we anticipate that our CRM business to return to growth in the second quarter and expect low single-digit growth in the year, supported by our full launch of the [ Lutroin ] second quarter within the U.S. Turning to WATCHMAN. WATCH grew 19% organically in the first quarter, which was below our expectations, with pressure on volumes in the U.S. as the quarter progressed, we believe this reflects the annualization of the initial concomitant adoption tailwind and a softening in stand-alone WATCHMAN cases driven by hospital capacity related procedure prioritization and evolving reimbursement dynamics. Importantly, we remain focused on expanding physician and patient education within the approximately 5 million patient indicated population today. And we expect data from CHAMPION to support a return to 20% market growth over the LRP. In late March, CHAMPION data was presented as a late breaker ACC with the trial achieving all primary and secondary endpoints, reinforcing the safety and efficacy of WATCHMAN and highlighting the high burden of clinically relevant bleeding on oral anticoagulation. As the next step, in addition to submitting for a label update, we are working with medical societies to support consideration of changes to LAAC guidelines using the totality of WATCHMAN clinical evidence ahead of any update to the National Coverage Determination. We also have additional data being presented at [ HRS ] this weekend, a champion post-ablation analysis which will provide further insights on this patient population. Across the globe, the results from CHAMPION provide important evidence to support the expansion of the patient population eligible for WATCHMAN over time in large markets including the U.S., Japan, China and Europe. For full year '26, we now expect global WATCHMAN growth to be mid-teens, with low to mid-teens in the U.S. In the U.S., while concomitant demand continues to strengthen, we anticipate overall WATCHMAN growth to decelerate with tougher comps and expect stand-alone WATCHMAN procedures to improve over the course of the year as it takes time for the totality of this clinical evidence to translate into [indiscernible] practice. We remain very confident in the long-term outlook of the business, supported by great clinical evidence, market development and new product innovation. Turning to EP. Organic sales grew 22%, 18% in the U.S. and 30% internationally. International growth was driven by our innovative portfolio, including our expanded OPAL Mapping footprint in catheter utilization with strong double-digit PFA growth in Europe in a highly competitive environment supported by the launch of FARAPOINT. U.S. growth was driven by continued expansion of the OPAL, strong catheter utilization in FARAPOINT, our PFA focal point catheter, which is performing ahead of our expectations and has moved into full launch. Looking ahead, we now expect our global EP business to grow approximately 10% in 2026. And within the U.S., we are updating our full year expected growth to be in the mid-single-digit range. with continued strength internationally at plus 20%, inclusive of full year impact of approximately $35 million from the discontinuation of POLARx. This outlook is the change from previous commentary but we feel is prudent and reflects ongoing competitive dynamics, offset by strength in our evolving FARAPULSE PFA catheter and mapping portfolio. We are highly confident in our ability to maintain our leadership position in PFA both in the U.S. and internationally through investment in commercial capabilities, ongoing clinical evidence, our expanding mapping footprint, in an impressive next-generation catheter watches included our FARAWAVE Ultra in the first half of '27. And this weekend, AVANT GUARD cited FARAPULSE new patient population of drug-naive persistent a patients will be presented as a late breaker at HRS. Additionally, we will see data from our first-in-human ELEVATE PFA study setting FANAFLEX, which is our large global map in a blade catheter for more complex arrhythmias. We anticipate initiating in our IDE later this year and continue to expect launching FANAFLEX in the U.S. in 2028. We've in closing, I'd like to share again my confidence in our team and the future of Boston Scientific. While this year has proven to be more challenging than we anticipated, we believe Boston Scientific is competing in the right markets, with a WAMGR growth of approximately 8%, we continue to be uniquely positioned to drive differentiated top line growth. We will continue to do this through strategic internal innovation, clinical evidence, external DC and M&A investments, along with our disciplined approach to expanding operating margins. All of which have resulted in our track record of delivering double-digit adjusted EPS growth. I'm very grateful to our talented team of global employees who work every day to advance financial life and I'm confident in the sustainability of our top-tier financial performance. With that, I'll hand it over to Jon. Jonathan Monson: Thanks, Mike. First quarter consolidated revenue of $5.203 billion represents 11.6% reported growth versus first quarter 2025 and includes a 220 basis point tailwind from foreign exchange, which was in line with our expectations. Excluding this $104 million foreign exchange tailwind, operational revenue growth was 9.4% in the quarter. Organic revenue growth was also 9.4%, in line with our first quarter guidance range of 8.5% to 10%. Q1 2026 adjusted earnings per share of $0.80 grew 6% versus 2025, achieving the high end of our guidance range of $0.78 to $0.80. And results include an approximate $0.01 headwind from FX. Adjusted gross margin for the first quarter was 70.5%, which represents a 100 basis point decline versus the first quarter of 2025 and primarily driven by tariffs as well as inventory charges related to the discontinuation of our POLARx Cryoablation system. We now expect full year 2026 adjusted gross margin to be slightly below full year 2025, largely driven by lower-than-expected product mix benefit and incremental investments in our global supply chain and quality systems. First quarter adjusted operating margin was [ 28.8% ]. We continue to expect full year 2026 adjusted operating margin expansion of 50 to 75 basis points, driven by OpEx leverage as we drive strong spend controls and continue to implement efficiency initiatives and optimize our organizational structure. On a GAAP basis, first quarter operating margin was 21.2%. Moving to below the line. First quarter adjusted interest and other expenses totaled $112 million, in line with expectations. And our adjusted tax rate for the first quarter was 11.7% and which was in line with expectations and includes a benefit from stock compensation accounting. Fully diluted weighted average shares outstanding ended at 1.495 billion shares in the first quarter. And free cash flow for the first quarter was $170 million with $348 million from operating activities, less $177 million in net capital expenditures. We now expect full year 2026 free cash flow to be approximately $4 billion. As of March 31, 2026, we had cash on hand of $1.453 billion and our gross debt leverage ratio was 1.8x. Our top capital allocation priority remains strategic tuck-in M&A, followed by share repurchase. In alignment with this strategy, we recently closed the acquisition of [ Valencia ] Technologies, which complements our Urology business, and we expect our announced acquisition of Penumbra to close in the second half of 2026. In addition, as previously disclosed, our Board of Directors recently approved an additional $4 billion under our existing share repurchase program bringing our total authorization to $5 billion. While we have been restricted from being in the market, we intend to repurchase approximately $2 billion of our shares during the second quarter subject to market conditions and applicable securities loss. I'll now walk through guidance for Q2 and full year 2026. We now expect full year 2026 reported revenue growth to be in a range of 7.0% and to 8.5% versus 2025, excluding an approximate 50 basis point tailwind from foreign exchange based on current rates, we expect full year 2026 operational and organic growth to be in the range of 6.5% to 8.0%. We expect second quarter 2026 reported revenue growth to be in a range of 5.5% to 7.5% versus second quarter 2025 excluding an approximate 50 basis point tailwind from foreign exchange based on current rates, we expect second quarter 2026 operational and organic growth to be in a range of 5.0% to 7.0%. We continue to expect full year 2026 adjusted be line expense to be approximately $440 million and under current legislation, including enacted laws and issued guidance we now expect a full year 2026 adjusted tax rate of approximately 12.0%. We now expect full year 2026 adjusted earnings per share to be in a range of $3.34 and to $3.41, representing growth of 9% to 11% versus 2025, including an approximate $0.04 headwind from foreign exchange. We expect second quarter adjusted earnings per share to be in the range of $0.82 to $0.84. In closing, we recognize that revising our guidance is a significant decision and not one that we made lightly. We believe our updated guidance appropriately reflects the unanticipated headwinds, and we remain highly focused on executing our full year 2026 guidance of 6.5% to 8% organic revenue growth 50 to 75 basis points of adjusted operating margin expansion and 9% to 11% adjusted earnings per share growth. For more information, please check our Investor Relations website for Q1 2026 and financial and operational highlights, which outlines more details on first quarter results and 2026 guidance. And with that, I'll turn it back to Lauren, who will moderate the Q&A. Lauren Tengler: Thanks, Jon. Bailey, let's open it up for questions for the next 35 minutes or so. In order for us to take as many questions as possible, please let yourselves to one question. Bailey, please go ahead. Operator: [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan. Robert Marcus: Great I wanted to ask whether Mike or Jon, came 3 months ago on the fourth quarter call and provided the guidance. And I think a lot of people were expecting a lowering today based on some of the third-party data we've seen, so it's not that surprising. But I guess the question is really what happened during first quarter that really prompted it? When did you realize it? And what gives you the confidence given there's going to be some deceleration throughout the year that the LRP is still valid and that growth can improve in 2027 here. Michael Mahoney: Yes. Thanks, Robbie. I would say first quarter, we're overall, we're pleased with that result. The 9.4% growth and on track for our margin and EPS. Essentially, what we saw, there's really three main contributors to the takedown of the guy, which is not in my happiest moment and very disappointed in that. as we're a company that consistently delivers on our commitments. So this is a guide down that we quite think are not proud of, but we think it's the right thing to do. And that reflects the current environment and the loss of the proper prudent guided deal. But we can talk about the future of the company, but speak and then at the time the takedown particularly, it's really focused on the three areas: primarily EP, WATCHMAN and Urology. And if we start with WATCHMAN, we saw a very, very excellent growth engine on 2025, we grew almost 30%. We saw a really strong consistent volume trends in January. So there is no signal to any WATCHMAN weakness until we leased out the early days of kind of early to mid-February, we started to see declining WATCHMAN volume for the first time. And as we did the analysis on that, we can talk more about it. Essentially, it is a strong increase in concomitant growth in a deceleration of stand-alone WATCHMAN. And we go through all those details now. That's the first primary one. So we see a declining WATCHMAN trend growth throughout fourth quarter, the first quarter and therefore, in our guide, we think it's prudent to assume that in that guidance range. We can talk more about the rationale and reasons for that. The second primary reason is EP, our EP business had a very nice first quarter. we are absolutely confident that we will remain the PFA market leaders in the U.S. and globally in '26. And we have a very rich cadence, just an R&D review last week with the team. The launch of the next 2.5 years, that's very impressive. But that being the case, even though the market is strong, we didn't lose a bit more share than we anticipated. So again, what we did in this guide anticipated greater share erosion than we're particularly seeing and still allows us to be the market share leader in PFA, but we're guiding globally to approximate 10% [ NEP ]. And the last reason making up is urology, which I mentioned that difficult first quarter, [ Neuro Mine ] had a real tough year a couple of years ago, and that business is growing double digit. I'm not saying euro is going to return to double digit right away. But right now, we're suffering in our core stone business and in the [indiscernible] neuromodulation area. We have very active execution plans in place to fix sickle neuromodulation, which we believe will be better as the years that the quarters go on. And then, of course, now we have some key product launches that will impact that business and help it quite in 2027. But it's essentially going to be a below market year in urology. So those are the three contributors overall to the guide down. Never all done very objectively. We think it's prudent. And we think it's the best guide to provide, to give shareholders confidence and to set up the business the right way. As you look forward in the LRP, we're not going to make a comment on the LRP top line growth at this point. We feel that will be under some slight pressure clearly given the 2026 guide. We will update that more in the future when we go through our strat plan process. We are comfortable with the 150 basis points of margin improvement in LRP, and we're comfortable with delivering double-digit EPS growth of the LRP. And I guess, lastly, that the long answer I'm giving you is we compete in a 8% WAMGR market. We almost always grow at or above this WAMGR. And this setup for '26 would show us at market at the high end of our guide or below that WAMGR. This is not Boston Scientific, it's not what we do. And in '27, we have a number of key product launches, we'll have far easier comps than we do this year. And we're very bullish about '27 and '28, we can detail that more. But start from long response, hopefully, that helped a little bit. Operator: Our next question will come from Joanne Wuensch with Citi. Joanne Wuensch: Mike, I think you just summarized what everybody needed to hear in that answer. Can you sort of walk us through a little bit how you're thinking about the quarters over the next couple of quarters, particularly for EP, WATCHMAN and Uro I'm sort of trying to think about the gist of Robbie's question. How do we get from first quarter to fourth quarter and then the jumping off point into 2027. And I just want to make sure those are somewhat set up appropriately. Michael Mahoney: I'll take a shot and Jon you can clean up the part of the math here. So we think second quarter is our toughest quarter of the year. We had a nice first quarter. Second quarter, we had very challenging dollar sequential quarterly growth comps on a dollar basis, in particular with EP and WATCHMAN. So that's our toughest quarter there. And so we also think with some of the impacts of some transient trends and [ EP and endo ] and some other areas that will be fixed for the second half of the year. So we think second quarter is our toughest quarter, that's the guide, [ 5% to 7% ] and the full year guide, as you know, is 6.5% to 8%. Jon, do you want to touch on any sequence and more. Jonathan Monson: Yes. Thanks, Joanne. So maybe stepping through WATCHMAN and EP. So you heard Mike mentioned in his prepared remarks, we expect global EP to grow mid-teens for the year. So that would imply Joanne low double-digit growth for the rest of the year for our global WATCHMAN business. So that's how you should think of WATCHMAN for the rest of the year. Global EP at 10% for the year implies mid- to high single-digit growth for the rest of the year. So if you then think of the rest of the business, as mid-single-digit growth. That's about where we landed in the first quarter. Expect to see some acceleration there within urology, CRM to pick up. So that's how you should expect the phasing as we go through the year, say, relatively consistent, slight uptick in the second half. They call it roughly 7%. And as we see Uro and CRM drive better growth as we move through the year. Operator: Our next question comes from Larry Biegelsen with Wells Fargo. Larry Biegelsen: I guess on EP, just maybe a little bit more color on the market and share assumptions, how they've changed. Where is the share pressure coming from Mike? And on U.S. EP, sales have been flattish for the past 3 or 4 quarters. Should we expect relatively flat U.S. EP sales for the rest of the year? And what does that mean for 2027, I think people are trying to understand when you can get back to market growth in EP? Michael Mahoney: Yes, I think John gave some of those numbers for the year, we expect Global to be approximately 10%. In the U.S. particularly, we expect mid-single-digit growth for the U.S. business, which implies a flat 2Q to 4Q. That's a low single digit -- in international about 20%. So call it flat to low single-digit U.S. mid-single digit for the year. . And then -- so that's the story there. What's different about it from our previous commentary where we've said we were a growth at market. We're disciplined and we're disappointed to bring that guide level down, but we think it's appropriate. The aim to be and we have high comments that will maintain PFA leadership in the U.S. internationally, globally in '26 and throughout the LRP. And we are very excited about the product launches that we have, in particular, the three big ones coming up, '27 are third generation FARAPULSE, differentiate [indiscernible] platform, and we think a very disruptive FANAFLEX platform all in the next 2.5 years. But today, we are seeing increased competition. There's three other large players in the marketplace. We've made commentary before Medtronic continues to be a solid competitor, J&J is enhancing their footprint in PFA and Abbott is early stages of launch in the U.S. In Europe, we really proud of our European performance for all three of those companies are performing, and we continue to grow that a 20%-plus clip where we quite frankly have a quite advanced mapping capability and platform and doing very well there. So we do expect a little bit more share [ erosion ] than we've anticipated in the past in previous guidance, but we think this is the appropriate guide to do and allows us to continue that PFA market leadership while we're bringing that platform forward. And importantly, our makers, which we've made a massive investment over the past 2.5 years continue to get stronger and stronger every quarter. We continue to install more and more OPAL mapping platforms. Our maps get more sophisticated, and we continue to add new catheters to the mix along with FARAPOINT, which we recently launched. So we'll continue to grow the Matthew platform, continue to invest in that commercial capabilities, you'll see more direct investments in WATCHMAN in particular. So we'll invest both commercially and marketing, and they're both our WATCHMAN and our EP businesses. But we're confident we'll maintain PFA leadership, but we are going to see a bit more share than we anticipated earlier in the year. Operator: Our next question comes from Rick Wise with Stifel. Frederick Wise: I was hoping you would might talk a little bit more about the WATCHMAN outlook in more detail. I mean, CHAMPION data, obviously, was excellent. But perhaps there was more controversy about the data, the reaction to the data than I expect didn't perhaps than you expected. How are you addressing some of the concerns that you were left how are you changing the narrative about the risk of WATCHMAN? And maybe how specifically are you going to tackle the growth rate factors that impacted this quarter? Michael Mahoney: Yes, I'll ask Ken to add comments here. First on some of the factors. And first of all, we're very proud that we essentially created this category, leading clinical science created a concomitant category. And this category grew 30% last year, and we expected mid-teens growth this year. And we're seeing the evolving practice patterns as this product continues to evolve with great clinical data and changing practice patterns. So with that extraordinary growth in [ AF ] ablations and WATCHMAN, we are seeing some practice pattern changes that I highlighted that we saw really become more acute in February. We're seeing terrific concomitant demand. Bottom line, we are seeing pressure in kind of the stand-alone WATCHMAN implant business, which historically has not been a challenge for us. Those challenges with a stand-alone WATCHMAN area a bit multifactorial. You've seen a bit more switch to the EP from the interventional cardiologist as the venture cardiologist is less exposed to the concomitant procedure. They've got more structural art procedures to do and there's been the reimbursement cut in that area. But you're seeing strengthening amongst the EP physician group. So those are some of the trends that have really moved it just recently more towards -- a bit more towards EP, a bit more towards concomitant and less than stand-alone. And that's also -- our customers are also adapting to operational workflow. They're adding new labs. They're moving to ASCs because they've experienced multiyear growth of, call it, 25% in WATCHMAN, multiyear growth of 20%, 25% in ablation. So there's significant demand and pull plus the approval of new structure of our procedures. So the hospitals themselves are investing in labs, particularly concomitant AFib are money winners for hospitals. So they're making the investments, but they're also moving through their own workflow challenges. You've seen a consistent backlog for WATCHMAN, which I guess which is good and high demand for super AFib. So on what are we doing to make it better? We're doing a lot right now to make it better. The most impactful thing quickly is commercial investments. We are putting more focused commercial investments directly at the WATCHMAN business. Today, we have a lot of strength because the same territory rep in many cases, is serving both the EP customer EP and WATCHMAN, where we're going to augment them with additional focus on WATCHMAN specifically, and put a little more emphasis and focus directly at that interventional cardiology call point. And we'll be making quite a bit of marketing investments to really highlight the outstanding data that we believe the first study of its kind that met its primary endpoints and champion that can get detail. So commercial investments, Medicare investments, marketing investments, position activation investments to all to leverage CHAMPION. It's also important to note that Ken can talk and sorry, too much coffee. Today, 25% of all watchword procedures are oncoming. We do expect that to grow to 50% over the LRP. So that view hasn't changed. What we've seen is an offset a bit in standalone watchman procedures. Ken, do you want to talk more about that? Ken Stein: Yes. I don't know too much to add,. Again, I think the first thing I'd say it, in terms of question, it just takes time to disseminate data and to educate physicians on the results of things like CHAMPION. And of course, we were not able to get out and pre-promote ahead of the data release and ahead of the publication in the New [ Northera ] Journal of Medicine. Having said that, the trial at all of its primary safety and efficacy and end points and all of the important secondary endpoints, we do still anticipate that we will get a big labeling, updated guidelines and eventually an updated national coverage determination. It just takes time for that to play through. I think the other thing just to reiterate what Mike said, in parallel with that, we see the opportunity to continue to improve some of the operational efficiencies that are required just to unlock more operational capacity for handling these procedures. We see hospitals building out more dedicated to these procedures, the move of simple relations to ASCs will further unlock capacity. And again, just a high level [ like stay ], not only see a very large opportunity for continued growth in concomitant procedures. And maybe the one statistic I'd add to what Mike said, just to remind everyone, roughly 50% of ablation for AFib in the U.S. today are done in patients who are at high risk for stroke, [ Chagas ] score of 3 or higher and who are potentially candidates for the common procedure. Operator: Our next question comes from David Roman with Goldman Sachs. David Roman: I wanted maybe just to toggle over to the other 70-plus percent of the business that's non-EP in WATCHMAN. And I appreciate some of the dynamics that you walked through on the call. But maybe you could unpack a little bit for us in more detail kind of where you see that cohort of the business going, some of the specific product launches that you expect to see in '26 and '27 in that we should be watching? And the extent to which that piece of the business can get back towards kind of an 8% growth level where it was, call it, before the accurate discontinuation. Michael Mahoney: Sure. Thank you for the question, David. The area that's not getting the spotlight on it is ICVT, [indiscernible] Cardiology Vascular Therapies Group, which again has a one-timer accurate, which will anniversary thankfully in May, which will help that business. But that business is extra very high level, driving the double-digit growth in China despite VBP, a very global business. Agent is continuing in our imaging businesses, in particular, continue to exceed our internal expectations, which is terrific. And we're excited about the seismic launch that it's really been in the small scale thus far within our [ Copal ] Vascular business has been very well received by physicians and that fracture trial will read out at PCR in a month or so. And we expect to have that coronary approval as we enter 2027. And we're focused right now on building up the manufacturing supply chain to enable a meaningful launch for seismic for both coronary and below the knee and above the knee applications in '27. So they also have a number of kind of singles than doubles key product launches in vascular to continue to widen that portfolio out. The Interventional Oncology business grew mid-teens and I talked about a key workflow launch that they additionally had along with some second M&A that they're executing on. And hopefully, the shareholder vote goes positive for us with Penumbra on May 7. And we're really excited about that team, which is extremely talented and brings a really differentiated portfolio and gaps that we have across Boston Scientific in that category. So particularly in combination, stand-alone, but [indiscernible] that business did extremely well in the future, ideally with Penumbra, that's a very unique, powerful growth driver for the company over this LRP period. And I think a lot of the discussion will still be on WATCHMAN EP, but much more will pivot to that area given the launches and momentum in that area. Lastly, I would just try to summarize the MedSurg overall. Some EP, we've had some challenges right now in Urology. We're not happy with the 1% growth in the quarter. We have clear line of sight to how we're going to adjust and to fix that as that business will improve in 2026, but not the level that we expect our business to perform at. And we'd be highly disappointed if we were closer to market growth for that business in 2027. Endoscopes doing well. They've got a nice set of product launches coming over the next 9 months. And our erode business is growing double digit. So overall, MedSurg is a tick lighter in '26 that we anticipate. And we see that business will improve as the kind of quarters move on and '26 we'll have a stronger '27. Operator: Our next question comes from Travis Steed with Bank of America. Travis Steed: On the WAMGR, I think there was a slight change to the WAMGR from 9% to 8%. I wanted to touch on that. And on the LRP, was the message more were not achieving at 10%? Or was it more we'll kind of wait and see how it all plays out because I'm thinking about '27, you sound pretty bullish on '27, no headwinds, you have product launches. So just kind of curious... Michael Mahoney: On the WAMGR drivers, I think we're pretty clear at the Investor Day that we were 8% moving to 9% over the LRP. So that's -- I believe that was the message in the WAMGR. So we call it 8% moving towards 9% because we're in the right high-growth markets. So I think that's consistent. LRP, I mentioned it in the previous commentary. So what we are confident in giving you now is we're confident in our ability to continue to have the discipline to improve margins up about 150 basis points. We're confident in our ability to execute double-digit EPS over this LRP period. And on the sales side, obviously, with the guide at 6.5% to 8%, that puts pressure on the 10% plus guide we gave in LRP. So that -- I would say that's likely an upside scenario at this point. But it's premature for us to give you an LRP organic revenue growth number at this point and let us work through our strategic plan. and launch cadence, and we'll update that over the course of this year. Operator: Our next question comes from Josh Jennings with TD COWEN. Joshua Jennings: I just wanted to touch on the EPS guidance revision. I think some may be concerned that with the deceleration in high-margin products, U.S. EP franchise and WATCHMAN franchise, there may be incremental pressure there. But any more details you can share just on any offsets or the impact on profitability with the revised outlook for U.S. EP and WATCHMAN? Michael Mahoney: Yes. Thanks, Josh. So we will see less mix benefit than what we expected at the start of the year. So that's why we expect our gross margins now will be slightly lower than 2025. But what we're doing is really driving leverage across OpEx. So most immediately, we put in much more restrictive spend controls across the company. So what we're doing is we're reducing spend that isn't correlated to revenue generation or that isn't pointed at our key product pipeline programs that we have in place. We also had more broadly a number of or structure optimization initiatives in place that includes scaling our centralized shared services. We've got a number of AI automation, other initiatives already in place, Josh, that drive cost efficiency and productivity. And so we're looking at those for what we can accelerate. And then as it relates to the R&D portfolio, we're looking across each of the businesses there, ensuring that we're appropriately fueling and appropriately focusing on the most impactful programs. But then those that are less impactful, we're looking at how we can trim those. So we've got a number of initiatives, Josh, focused on how do we drive our OpEx toward the most impactful areas of the business and revenue generation and then everything else we're squeezing. Operator: Our next question comes from Marie Thibault with BTIG. Marie Thibault: I wanted to double back to urology. I think you mentioned you have some active execution plans in place for improving the sacral neuromodulation business. Can you just dive a little deeper into that? I know that, that's something you've been focused on for a couple of quarters. Maybe it's going a little bit slower than hoped. So if you can just give us an update on how that is going. Michael Mahoney: Yes, it's definitely gone slower than we anticipated. We had we just had too much commercial turnover is the bottom line over the course -- take it over the course of the last 6 to 9 months. And we certainly learned from that. We made adjustments to it. But at this point in time, we feel we have the right leadership structure in place from region managers on out that are so key to driving a business like this. We have quite a bit of turnover at the manager level, clinical rep level and territory level. And so a lot of learnings from that as we look forward to Penumbra. But I would say on the management side, that's all been filled up on the region of managers, which is important. And we've had nearly 100 people that have been hired in our various stages of training, both clinical reps and territory reps to really strengthen that commercial team, which is really needed not only for case coverage, but also to drive the appropriate patient activation events and pull-through to appropriate procedures, which is really part of the business and an area that [ Axonics ] did really well. So we're also leveraging a lot of the internal capabilities from WATCHMAN and others. But it's primarily been a commercial disruption issue that has lingered farther than we wanted it to. But at this point in time, we have made the appropriate hires, the appropriate training, the appropriate investment, and we are confident that we'll see an improvement in that business as the quarters progress. Operator: Our next question comes from Vijay Kumar with Evercore. Vijay Kumar: Mike, I just -- I had one question on this buyback. Generally, when we see companies announced large deals like Penumbra, $15 billion deal, we generally see buybacks being suspended. So my question is, is the $2 billion buyback in 2Q, is that signaling anything on the deal in -- Jon, I think you mentioned you had $1.5 billion of cash on hand. How you're funding this $2 billion buyback? Are you going to raise any debt? Why now? Jonathan Monson: Thanks, Vijay. So we intend to -- the $2 billion, we've got $1.5 billion on the balance sheet now, and we project our cash over the second quarter. We'll fund that through cash on hand. We've been restricted from trading. We will be restricted at least through the Penumbra shareholder vote on May 6. But as soon as we're not restricted, we intend to repurchase are $2 billion worth of shares, as I've mentioned. And why now is we look at the stock price. We look forward at the outlook for the company that we have, our confidence in the company, the pipeline. We think that's a great use of our capital. Operator: Our next question comes from Matthew O'Brien with Piper Sandler. Matthew O'Brien: I was hoping to talk a little bit about the Penumbra. I know the vote is coming up here in just a few weeks. Just curious about Boston's comfort level in adding additional cash to that transaction, if required, just given the pullback in your stock and the degradation in the value of the overall transaction. If that were to be the case, would you still be committed to the deal at the current -- or the previous valuation if a higher cash component is required? Michael Mahoney: Yes, I would just comment on the numbers in general. We've gotten to know their leadership team extremely well. We really focused on the way spirit of the momentum of the ICT team we have and the potential addition to Penumbra, we think is a very, very powerful business in combination over time. We've said many, many times that we essentially plan to run a number of as a business unit consistent how we do Boston Scientific, global presidents, keeping their strong commercial team intact, keep an R&D pipeline. So we have a very solid way to maintain and enhance the Penumbra momentum post closing. We had the shareholder vote on May 7. We're hopeful and confident that, that will be approved as planned. Operator: Our last question will come from Matt Taylor with Jefferies. Matthew Taylor: I just wanted to follow up on some of the comments that you made about the outlook for WATCHMAN and PFA. Was wondering for more clarity on WATCHMAN in terms of how stand-alone was growing. You mentioned it was decelerating. Was it actually declining in Q1? And what's the outlook for stand-alone this year and next? Michael Mahoney: Yes. I'm not going to call out the specific number for outlook on concomitant specific and what stand-alone a little bit. I think we gave a pretty good guide as to what we see as the appropriate guidance for the full year on WATCHMAN, which is global mid-teens U.S. low to mid-single digits in cash. Low to mid teens, sorry. Low to mid-teens for U.S. WATCHMAN and international plus 20%, mid-teens growth globally. So that's our outlook, which is obviously a slower outlook than what we saw in first quarter, but it reflects what I mentioned earlier on a overcoming some very, very strong comps, overcoming some efficiency issues that we see that I highlighted before. and more of a trend towards stronger and stronger concomitant and a less strong weakening trend in stand-alone. Now over time, we aim to try to improve that based on the CHAMPION results, investments we're making. But as I mentioned, you have concomitant strengthening stand-alone currently less strong. Lauren Tengler: Thank you for joining us today. We appreciate your interest in Boston Scientific. If we were unable to get to your question or you have any follow-ups, please don't hesitate to reach out to the Investor Relations team. Before you disconnect, Bailey will give you all the pertinent details for the replay. Thank you, everyone. Operator: Please note, a recording will be available in 1 hour by dialing either 1 (877) 344-7529 or 1 (412) 317-0088 using the replay code 45-39-327 until April 29, 2026 at 11:59 p.m. Eastern Time. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Zurn Elkay Water Solutions Corporation First Quarter 2026 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bobby Belzer, Vice President and Corporate Controller for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company's Investor Relations website. At this time, for opening remarks and introduction, I'll turn the call over to Bobby Goldner. Unknown Executive: Good morning, everyone, thanks for joining call today. Before we begin, I'd like to remind everyone that this call contains certain forward-looking statements, which are subject to the safe harbor language outlined in our press release issued yesterday afternoon and in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them and why we believe they're helpful to investors and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we will speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results. These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and our SEC filings. With that, I'll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions. Todd Adams: Thanks, Bobby, and good morning, everyone. I'll start on Page 3. 2026 is off to a decent start as first quarter sales grew 11% organically. EBITDA grew 18% to $116 million, and our margins expanded 160 basis points to [ 26.8% ]. In the quarter, we generated $43 million of free cash flow and repurchased $50 million of Zurn Elkay at roughly $47 a share. We're very comfortable with our full year outlook for free cash flow of approximately $335 million and anticipate revisiting that along with the rest of our outlook after Q2. Just a couple of thoughts from me before I turn it over to Dave. From a market perspective, we generally see the same market conditions we outlined when we provided our outlook in February. The same is very much true for the pricing environment. Next, there's been a lot of announcements in moving parts related to tariffs over the course of the quarter. The Supreme Court ruling on the [indiscernible] tariffs and subsequent refunds, the implementation of 122 tariffs changes to the 232 tariff scheme and the opening of new studies on future Section 301 tariffs. We've also continued to advance our own supply chain footprint initiatives. And what I will say here is that we are very much on track to meet or beat the objectives we set out to achieve at the beginning of the year. As it relates to all these tariff changes and potential changes in our outlook, our view is that assuming some of the known changes to 232 tariffs, and projecting some likely net adverse changes stemming from the potential 122 and 301 changes, we are highly confident that without receiving any refunds or implementing any future price increases, the discrete impact of tariffs within 2026, which we said was to be price/cost positive remains unchanged. This leads me to my final point on our full year outlook. I think the way to describe the way we think about our outlook is to be both deliberate and conservative. As you can see with our first quarter results and second quarter outlook, we're running ahead of what was likely assumed for the first half of 2026. As I just discussed, we have high confidence that we will continue to manage through the tariff dynamics extraordinarily well. Second, as of now, there isn't anything I can point to that would make the second half worse than what we had anticipated. So I think it's safe to say our first half outperformance flows through to the year. That's where the deliberate methodology enters into our approach. The reality is that there's 8 months left in the year. And depending on today, there's simply a lot going on in the world. So rather than try to change a bunch of digital assumptions day by day that frankly will become more clear as the year goes on, we're simply going to update the second half after Q2. So with that, I'll turn it over to Dave. David Pauli: Thanks, Todd. Please turn to Slide #4. Our first quarter sales totaled $433 million, which represents 11% core and reported growth year-over-year. In the first quarter, we generally saw our end markets perform in line with the guidance we provided 90 days ago. Growth in our nonresidential end markets was partially offset by softness in residential. We've had solid execution on our growth initiatives and those initiatives helped drive our sales performance to the higher end of the outlook we provided 90 days ago. . In addition, during the first quarter, portions of the U.S. experienced some unusually cold weather. This resulted in some incremental break fix activity that we think plays out to about 1 point of growth over the first half. Turning to profitability. Our first quarter adjusted EBITDA was $116 million, and our adjusted EBITDA margin expanded 160 basis points year-over-year to 26.8% in the quarter. This continues a trend of year-over-year margin expansion that we have delivered since the Elkay merger. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives, leveraging our Zurn Elkay Business System and continuous improvement activities across the organization as well as mix as our higher profit margin products are growing the fastest. Please turn to Slide 5, and I'll touch on some balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with leverage at 0.5x. Our 0.5x leverage is inclusive of the $50 million we deployed to repurchase shares in the quarter. During the quarter, we also upsized and extended our revolver. We transitioned from a $200 million revolver to a $550 million revolver that extends 5 years. This gives us even more liquidity as we move forward. Balance sheet, leverage, liquidity and cash flow generation are in a great spot as we continue to evaluate our funnel of M&A opportunities. I'll turn the call back to Todd. Todd Adams: Thanks, Dave. And I guess I'll move to Page 6. I think the takeaway here could be [indiscernible] your work and work your plant, which when you boil it all the way down is the essence of the Zurn Elkay Business System. When you look at some of these attributes of our business, most of these have been cultivated through focus and intentional actions to build a business with a wide competitive moat that is flexible, repeatable and scalable and even when the external environment or circumstances aren't optimal. Stemming from our strategic planning process, all the way through to our strategy deployment process, being disciplined and intentional on playing the game, we can win consistently at a high level as our ultimate priority, whether it's our geographic focus, the product categories we're in, the end markets we prioritize are the actions we take on product or market exits or even more importantly, the new product development and adjacencies we're entering. It's all connected. If you followed us, one slight change that you may notice here is the slight change in our mix towards retrofit replace which 5 years ago was 45%. But as we deployed our strategic plan with an emphasis on growing drinking water and filtration, coupled with growth in our water and safety control products, and portions of our genetic and environmental business were now evenly split, which over time, only makes the business more resilient and in aggregate is margin mix positive for us. We're really excited about the trajectory and future of Zurn Elkay, and it stems from the culture we've established and the people we have. Throughout this year, we're going to expose everyone to more of our team on these calls, so investors gain a further appreciation of the management depth and passion that exists here and the appreciation for the people who really make all this happen each and every day. Now I'll turn it back to Dave. David Pauli: Thanks, Todd. I'm on Slide 7. Todd just talked about the focused and intentional decisions that led to the business we have today in Zurn Elkay. Slide 7 helps to illustrate the results in the form of profit. These decisions have produced over the last several years. On a trailing 12-month basis, our adjusted EBITDA margins have improved 630 basis points from Q1 of 2023 to Q1 of 2026 and on a point-to-point basis, our adjusted EBITDA margins are up 730 basis points over the last 13 quarters. That starts with 19.5% margins in Q1 of 2023 compared to this quarter's adjusted EBITDA margins of 26.8%. The foundation of our EBITDA margin improvements all center on our Zurn Elkay Business System, the belief in continuous improvement and the focus on getting just a little bit better each and every day. The margin improvement over the past 3 years is a combination of a number of drivers that I'll walk through. First, part of the Zurn Elkay Business System is sharing ideas and wins across the organization so that we can replicate successes. We've highlighted our #CI for continuous improvement process in the past. But as a reminder, these are associate-led and submitted ideas that save time, eliminate waste and improve day-to-day processes across the organization. While no single #CI on its own is material, they do become material when we have thousand submitted across the organization each year. The second item I'd point out is our unit volume growth in the most profitable areas of our business. Water Safety and Control, Flow Systems and Drinking Water have all seen growth over the last several years, while we've exited via 80/20, the lowest margin products within the portfolio. Third, after delivering on over $50 million of synergies associated with the Zurn Elkay, we continue to make positive structural changes beyond those identified in the synergy case. Consolidating our footprint to reduce overhead, introducing and sustaining the Zurn Business System lean tools into the Elkay manufacturing facilities and continuing to challenge our strategy around internal manufacturing versus sourcing. And lastly, our supply chain has been a clear competitive advantage that has allowed us to improve profitability while successfully navigating the tariff environment. Now to the guidance on Slide 8. For the second quarter of 2026, we are projecting core sales growth to increase 8% to 9% over the prior year, and we anticipate our adjusted EBITDA margin to be in the range of [ 27% to 27.5% ]. which is 50 to 100 basis point expansion year-over-year. Within Slide 8, we've included our second quarter outlook assumptions for interest expense, noncash stock comp expense, depreciation and amortization, adjusted tax rate and diluted shares outstanding. As Todd mentioned earlier, our first quarter actual results and second quarter guidance puts us ahead of our expected first half performance, and our plan is to revisit the second half of 2026 outlook when we announce our Q2 results. One other comment on guidance. Our full year outlook does not take into account any potential tariff refund benefits and assumes that the current tariff structure in place as of today remains in place throughout 2026. We will now open the call up for questions. Operator: [Operator Instructions] Our first question comes from the line of Bryan Blair with Oppenheimer. Bryan Blair: Great start so far to the year. I was hoping you could offer a little more color on drinking water trends. Pro filtration has obviously been in the market for another quarter. Any updates on adoption and the impact on overall platform growth or detachment rate would be very helpful. And with consolidated progress at 11%, I assume drinking water growth was quite robust in the quarter. Are you willing to share top line performance in Q1? Or how your team is thinking about . David Pauli: Sure, Brian. It's Dave. So Drinking Water in the quarter performed very well, in line with where we thought it would be going into the quarter. The installed base continues -- the installed base of filtered bottle fillers continues to grow at double digit. The filtration piece of the business continues to grow above double digit. You mentioned Pro Filtration. We've seen really nice adoption of Pro Filtration. That product was developed around feedback that we received from customers, end users, facility managers. And so seen really great adoption of that and the attachment rate associated with that is very high, just given some of the technology changes. So overall, drinking water had a really nice first quarter and we see that Pro Filtration continuing to accelerate as we go. As you know, we have a dominant share of specs, and our team is currently working just to update those specs. So legacy product to Pro Filtration. So in a good spot with Drinking Water. Bryan Blair: All good to hear. And I guess a level setting question as a follow-up. You just walked through the drivers of rather impressive EBITDA margin expansion over the last 3 years. And if we set aside Elkay synergies as kind of onetime structural lift. The rest of it is #CI in one form or another. Given the level of profitability that you now have and assuming that mix does not meaningfully shift or continues to positively transition. You've spoken to low 30s, maybe a step up to 35% as normalized incremental margins for the business. Are we at a point now where it would be reasonable to speak to a higher figure going forward? Todd Adams: Yes. Brian, look, I think Dave mentioned it in his comments, we while we had a nice quarter in drinking water, I think it's also important to recognize water safety and control in our Drains business is growing just as fast. And so when you think about those 3 categories, the margin profile in each of those is really good. And I think the combination of CI, obviously, the Elkay synergies, all the work we're doing on supply chain helps. But I think there's another thing to think through, which is a lot of the new products that we're introducing come at margins replacing the old products or the new products are even better. So it's a really nice dynamic where we've got an operational sort of lever that we're continuing to work at to all those things. But then as we introduce and launch new products, those are coming to market at attractive margins. And so I think in time, we may modify that. But for the time being, I think it's a good framework to think through as we invest in some of these new products to bring them to market. But I get your point, and we'll revisit it when we feel like we're ready to. Operator: Our next question comes from the line of Andrew Krill with Deutsche Bank. Andrew Krill: I wanted to dig in, I guess, more on the change of OE versus retrofit up to 50-50 split. Just -- is there any way you can quantify like a target over time where you think this can go? Many other industrials, they can be 2/3, 75% more aftermarket. Like is there any reason you can't get to that over time? Todd Adams: Yes. I think, Andrew, a good portion of our business is still new construction, an important part that actually ultimately feeds the retrofit replace. So I think I think it's unlikely that we'll get to a 75 retrofit replace sort of percentage. But I do see in the coming years that has the opportunity to drift higher. 55% I think is a reasonable next way point to think about for us. And as we point out, as Filtration grows, [indiscernible] our installed base for all of our products grows we see that opportunity to grow a little bit higher. . Andrew Krill: Great. And then on the weather comments of the Northeast, I believe Dave said it till about 1 point of a good guy from the first half. Can you just break down what this was in the first quarter, is there any chance it was flattish or down? Like any help on how that impacts 1Q for 2Q would be great? David Pauli: Yes. Even between the 2 quarters, Andrew, nothing oversized in Q1. Operator: Our next question comes from the line of Nathan Jones with Stifel. Good morning, everyone. Nathan Jones: I guess I'll ask some of the dumb tower questions. There's obviously been newly implemented tariffs and you guys are talking about contemplating some additional tariffs after that. Could you -- is there any color you can give us on what you think the incremental growth impact to the business in terms of increased cost is? I think everybody understands that you're very, very good at passing that through to customers. But just any color you can give us on what you think the gross impact is? Todd Adams: Yes, Nathan, there's obviously a lot of to be determined moving parts as 122 likely expires and then the studies from 301 come back and potentially get implemented. What I can say is we're not counting on passing any future price increases through a combination of all the work we've done on products substitution materials, obviously, some of our footprint things, we think hold that steady with some, I will say, conservative assumptions. And I also think it's important to point out that over the last 2 or 3 years as they function of the work we've done, our largest sourcing comes from the U.S. So out of all the countries that we source from, the U.S. is the largest by a decent margin at this point. So in many ways, we've insulated ourselves from it. But I think our working view is that Net-net, it's about the same as we started the year. The assumptions around 122 rolling off, 301 coming in. That's sort of where we see it today. That's what's embedded in our view. Nathan Jones: Okay. Fair enough. I'm going to ask a lot about capital allocation. It's been quite some time since Zurn acquired Elkay. The balance sheet is in great shape. Certainly has plenty of available capacity for M&A. Maybe talk about the maturity of the pipeline, the appetite for more M&A and priorities for capital deployment? Todd Adams: Yes, as we, I think, pointed out routinely on these calls, we run a proper funnel. So we're not -- we don't participate in auctions in a meaningful way. We continue to do some of that cultivation work, I think. Obviously, some of the work we're doing around new products is informing new targets as well. So I would say we're in late stage to mid-stage to early stage on a number of cultivations. We do have an appetite to do those only to the degree that they make sense strategically and then obviously meet the return hurdles that we set out for ourselves. In terms of capital allocation, we've obviously bought back shares routinely. We're going to continue to do that more when we feel like the intrinsic value relative to what we see is understated or less than what we think is fair value. And obviously, we pay a nice dividend. And so those are going to continue to be the priority. So no change. But certainly, optimistic that over the coming quarters, we're going to get some of these things over the finish line. Operator: Our next question comes from the line of Michael Halloran with Baird. Michael Halloran: So first question, just to clarify your comments familiar. So it doesn't sound like you're expecting incremental pricing. Just confirm that 1 way or another. And then the follow-up is when you talk to your customer base, what's the sense of fatigue on the pricing side of things? What concerns would you have if you had to go back to the market with price? Or do you still feel pretty good all else equal. Obviously, you have a value proposition you're pitching and people are pretty aware of the inflation that's out there. So just kind of curious on the puts and takes from the customer base at this point? Todd Adams: Well, Mike, I think when you take a giant step back, in aggregate this year, we're talking about 3 points of price, incremental. So it's not like we've gone out with egregious price increases above and beyond what our competitive set has done. We've got different competitors across all of our different product lines. So some people have been more aggressive than us. Some people have been less aggressive than us in certain spots. So taken as a whole, I think, stability would be a great thing. And I think that's sort of what we see in our outlook, which is the things that we're doing put us in a great spot to not sort of have to put these big digital price increases through that we're going through last year. But that being said, we've got to stay diligent because inflation of commodities and freight. And obviously, this conflict in the Middle East are all sort of bubbling. And so I think we're going to be smart about it. I don't see any meaningful fatigue. But I think it's something that we're just watching very carefully category by category, region by region. And I think we've done a really nice job of staying close to it and expect to continue to operate the same way. Michael Halloran: That makes sense. And then maybe the follow-up question is just any thoughts on the growth adjacencies you've been talking about and some of the growth initiatives that you're highlighting have an impact late this year and into next year. Just kind of any thoughts on some deeper color on what those might be or target areas or anything you might be going to share? Todd Adams: Yes. I mean nothing that we're going to share at this point. Obviously, these are going to be new entrants in the categories that competitors have or maybe even some new competitors. So I think we're making great progress there. I think it's really exciting. I suspect that by the time we get to Q3, we'll be in a spot to share some of those and obviously, as more roll out over Q4 and into the first part of next year, when we're ready, we'll talk about it, but I think very much on track with what we thought as we started the year. but great work by our teams. And I think it's going to be exciting for us moving forward, not just in '26 and not just in '27, but really starting to stack these year in, year out, which will be helpful to our long-term growth rate. . Operator: Our next question comes from the line of James Cole with Jefferies. Unknown Analyst: I guess I wanted to touch on this growth adjacencies a little bit more here. I just wanted to understand the rationale behind it. Like should we think about these initiatives as additive to your like current long-term mid-single-digit growth outlook or more as a way to kind of sustain that level if like other end markets slow or -- yes. Todd Adams: I think it could be both. Clearly, we're not going to predict what the market conditions are in '27 or point. So if they're weaker, this could clearly boost some of that maybe lower market growth. If the market is what it is, I think it would ultimately end up being additive. So I think it could serve both, James. And it really is something that we've done historically. I think given where we are from a balance sheet perspective, a strategic focus perspective, we see a dual-pronged approach here, right? We're going to enter new categories, develop new products, open up additional available market. And as a function of that, I think it's going to aid in some of our cultivation. So I think long term, it can be both. It can support what we have in the event of a weaker-than-expected market. And to the degree the market is okay, it should enhance is sort of the way to think about it. Unknown Analyst: Great color. And I guess as a follow-up, I just wanted to touch on 1Q outperformance like. Can you talk about the primary kind of drivers of the outperformance since growth came in stronger than expected even accounting for a favorable impact from weather. So can you kind of break that by core sales growth into like volume and pricing and potentially mix? David Pauli: Sure. So if you look at the 11%, 5% price in the rest volume, you mentioned the weather thing. That was about 1 point in the quarter. And then just in terms of the outgrowth we've talked about it a little bit just in terms of our Water Safety and Control business, our Drains business, our Drinking Water business, growing very nicely in the quarter. I think if you look at some of the initiatives that we set out and have talked about last year into this year, looking at areas of the U.S. where there is maybe a little bit more construction activity over resourcing those. So we've seen some nice wins from a regional growth perspective in terms of areas that we've intentionally deployed resources to and focused on. So I think that's helping to deliver some of the over performance we saw in Q1. . Operator: Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. . Jeffrey Hammond: Just had a couple kind of end market question. So in the Q, it looks like commercial bucket kind of accelerated. I didn't know if there's anything to parse out there if that captures more of the brake fix. And then I know it's small, like 8% Waterworks, but there's been some peer companies with some short-cycle noise. I didn't know if you could just comment on what you're seeing in that business and if you're seeing anything to that extent. Todd Adams: Yes. Again, I think when you look at commercial, it's a lot of different things. I'm staring at a pipeline chart here from our manufacturer's rep and just in New York, right? I mean, you've got the Core Weave data center. You've got the West Point football stadium. JFK Airport, the U.S. open stadium and parking garages on the come. You've got things like Major League Soccer Stadium in New York, the Brooklyn Borough jail. So I think there's a lot of activity out there, and I think it's representative of being hyper local and finding pockets of growth even in a geography where you may not assume that there's a lot of growth. In terms of Waterworks, nothing abnormal for us in Waterworks at all. So hopefully, that's the color you were looking for. . Operator: Our next question comes from the line of Brett Linzey with Mizuho. Unknown Analyst: Congrats on the quarter. This is Peter Kasson, for Brett. And maybe just 1 more about end markets. Can you kind of talk through your outlook by end markets? You're talking to flat to slightly positive market in total with institutional low singles, commercial flat and resi a little bit tougher. Do you have any updates to that given the 1Q outperformance? David Pauli: No. I'd say if you go back to the guidance framework we gave 90 days ago from a pure end market, we call institutional low single digits, Waterworks, low single-digit growth, the commercial market, we said would be flat and resi down low single digits. And I think we've generally seeing those end markets play out. In Q1, the commercial market might have a little bit better than flat. But I'd say from a long term, how we see 2026 play out, no change to that guidance framework we gave initially. . Unknown Analyst: Awesome. And then maybe just could you give us a sense of the margin differential between some of these lower-margin products you're walking away from and then some of the higher unit volume growth areas that you called out, like the safety and control the flow systems in the drinking water? David Pauli: So in terms of the stuff that we walked away from, intentionally, that would have been substantially lower margin. So think back to the Elkay merger when we exited some low-margin noncore residential sinks that were primarily sold through big box. We're largely out of those types of products at this point. The things that are growing faster that have some incremental margin would be think about filtration within drinking water. Think about some of our water safety and control and drains products that carry a really nice margin that would be ahead of the fleet average. . Operator: [Operator Instructions] Our next question comes from the line of Jeffrey with RBC. Jeffrey Reive: I appreciate all the color thus far. So if we think about the puts and takes around pausing the full year outlook, what are the key variables you're waiting to see it resolved by the time you report 2Q. Is it just tariffs? Is it something else? Todd Adams: Jeff, I honestly don't think it's that deep. I think we had a really nice Q1. We're projecting a nice Q2. I think that certainly, there's going to be more clarity on some of these tariff issues as we get through the summer. But quite honestly, we just are electing like we have in the past to sort of wait and see. I can't point to anything that would say at this point, the market is worse. We're concerned about the tariff issue. So it's really just, I think, being very deliberate about modifying the full year outlook. It's probably not going to foot across in your model. But I think we're sort of really trying to dial in a better view for the full year once we get through the second quarter. Michael Halloran: Got it. I only ask because I think when you see a company kind of paused guidance, it's usually a cause for concern, but obviously, you're doing it from a position of strong 1Q and a better 2Q outlook. Maybe just on visibility into the second half. Can you maybe talk to that the line of sight do you have your backlog? Just any comments there? Todd Adams: Yes. When you look at contractor backlogs as they sit today, as we talk to our third-party reps on activity that is likely to come to fruition in the second half. It's very much consistent with the kind of market growth that Dave talked about. And obviously, some of the outgrowth in terms of regional focus, new product launches, I don't see anything that would derail that at this point. So you're using the word pause. I think we're going to use the word deliberate. But needless to say, I think we're going to end up in a good spot for the year. And we're really just focused on the next 90 days and doing the work to make the second half as good as it can be. Operator: I will now turn the call back over to Bobby Belmar for closing remarks. Unknown Executive: Thanks, everyone, for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our second quarter results in late July. Have a good day. . Operator: This concludes today's conference call.
Operator: Welcome to the CME Group First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the call over to Adam Minick. Please go ahead. Adam Minick: Good morning, and I hope you're all doing well today. Earlier this morning, we released our earnings commentary, which provides extensive details on the first quarter 2026, which we will be discussing on this call. I'll start with the safe harbor language, then I'll turn it over to Terry. Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, in the earnings release, you will see a reconciliation between GAAP and non-GAAP measures following the financial statements. With that, I'll turn the call over to our Chairman and CEO, Terry Duffy. Terrence Duffy: Thanks, Adam, and thank you all for joining us this morning. I'll make a few brief comments about our record quarter before turning it over to Lynne to provide an overview of our financial results. In addition to Lynne, we have other members of our management team present to answer questions after the prepared remarks. I'm proud to announce that CME Group has achieved a record-breaking start to 2026. Our outstanding performance in the first quarter reflects the essential role we play in the global economy and the trust our clients place in our markets to manage risk during periods of significant economic transition. The first quarter average daily volume of 36.2 million contracts was the highest quarterly average daily volume in CME Group's history and represented an increase of 22% compared to the same period last year and 6 million contracts a day higher than any previous quarter. For the first time in our history, we achieved simultaneously record volume across every 1 of our 6 asset classes: rates, equities, energy, agricultural products, metals and foreign exchange. In aggregate, our commodity sector volume grew by 38% and our financial products volume grew by 18%. Building on the momentum of our record 2025, our global expansion continues to accelerate. International average daily volume reached a record 11.4 million contracts, a stunning 30% increase in 2025. The EMEA, APAC and Latin American regions all posted record highs. Remarkably, our international business also saw a record volume in all 6 asset classes simultaneously, proving that our value proposition is resonating globally. We aren't just growing volume, we're growing client value. We delivered record levels of capital efficiency, saving our customers an average of over $85 billion in margin per day. Additionally, open interest ended the quarter up 11% over the past year and up 19% since the beginning of 2026. During the quarter, U.S. treasury open interest reached an all-time high of 36.3 million contracts, driven by unprecedented demand for U.S. treasury futures and options. This growth reinforces CME Group's role as the deepest and most efficient liquidity pool in the world. We continue to innovate and provide the tools our clients need, and in an environment that is always risk on. These include last week's CME FICC, or Fixed Income Clearing Corporation, cross-margining agreements received approval from both the SEC and CFTC to expand to our end user clients beginning on April 30. 24/7 crypto trading scheduled to go live on May 29. Also, we're excited to announce that we will be filing to change our Micro Equity Index options to be financially settled to better serve the users of those products. Our new environment in Dallas is on track to open this summer, and we will provide a critical testing ground for our clients in advance of 2 of our agricultural products migrating to the cloud by the end of the year. As we look to the rest of 2026, we are confident in our ability to continue to deliver value to our clients and shareholders. Our strong performance, coupled with our ongoing investments in technology and product innovation, provides a solid foundation for future growth. With that, I'll now turn the call over to Lynne to review our financial results in more detail. Lynne Fitzpatrick: Thanks, Terry, and thank you all for joining us this morning. As Terry mentioned, the first quarter was record-breaking across the board. This included growth in our clearing and transaction fee revenue of 15% year-over-year. The average rate per contract for the quarter was $0.652. Our pricing strategy includes volume tiering, which results in decreasing rate for contracts at higher levels of volume. With volume records in every single asset class this quarter, this volume tiering encouraged incremental trading, providing risk management benefits to our customers and driving highly profitable incremental volume to the exchange. The combination of our volume growth and pricing structure resulted in an increase of $205 million in clearing and transaction fees for the quarter. Market data revenue also reached a record level, up 15% to $224 million, marking 32 consecutive quarters of year-over-year market data revenue growth. In aggregate, CME Group generated record revenue of $1.9 billion, up $238 million or 14% from the first quarter of 2025. Adjusted expenses were $512 million for the quarter and $405 million excluding license fees. Our adjusted operating income was $1.4 billion, or a 72.8% adjusted operating margin, the highest in our history. Adjusted net income and adjusted diluted earnings per share came in at a record-setting $1.2 billion and $3.36 per share, 20% higher than Q1 2025. This represents an adjusted net income margin for the quarter of 64.9%, with $200 million of the $238 million increase in revenue accruing to adjusted net income. We returned $3.2 billion to shareholders during the quarter, with $2.7 billion in variable and regular quarterly dividends and $536 million in shares repurchased. This quarter delivered the highest volume, revenue, operating income, adjusted net income and diluted earnings per share in the history of CME Group. These results are a reflection of our position as the world's premier risk management destination. As our clients continue to navigate uncertain times, we remain fully committed to meeting their evolving needs through continued innovation and deep liquidity. We'd now like to open up the call for your questions. Operator: [Operator Instructions] The first question in the queue is from Patrick Moley with Piper Sandler. Patrick Moley: Terry, you mentioned that you've received regulatory approval to expand the DTCC cross-margining agreement to end user clients. At the same time, the DTCC has been running a pilot program to tokenize U.S. treasuries as collateral. So as you think about the intersection of these 2 initiatives, I'm curious how you see enhanced collateral mobility impacting CME's clearing business. And then more specifically, with customers having the ability to move tokenized treasury collateral in real time, just what that could mean for the industry write large? Terrence Duffy: Thanks, Patrick. Suzanne Sprague is here, and she's been working very closely with both FICC and folks at DTCC and the regulator. So I'm going to ask her to opine on that question to start, and then I'll go. Suzanne Sprague: Yes. Thanks, Patrick. We are continuing to work with FICC as well as internally on various tokenization efforts. So we think that there is a benefit for the industry to be able to reduce friction moving collateral, especially for collateral that does not settle naturally same day. Treasuries is a good example of that. So we will continue to explore what we could do together with FICC as well as other initiatives that we're pursuing at CME, including the tokenization of cash and our partnership with Google, as well as looking at other assets that might be of interest in the ecosystem today to be able to reduce some of those frictions and free up liquidity by moving those assets on digital technology. Terrence Duffy: Patrick, just to add on to that, I have said and the team has said, we're looking at potentially our own stablecoin here. We're looking at multiple different ways to make that $85 billion a day of margin efficiencies continue to grow, and not only just the margin efficiencies, but the capital efficiencies about how we move money back and forth each and every day and what's the best interest of every single client. So whether it's through tokenization, stable, using cash and treasuries, other forms of margin that they use with us today, we want to make it as effectively for them and efficiently for them. So I think it's an exciting time for us, and we look forward to informing you more as we continue to roll out these proposals. Patrick Moley: Okay. That's great color. As a quick follow-up, we've seen some pretty interesting developments in the perpetual future space this year. The S&P Dow Jones JV recently granted an exclusive license for the S&P 500 perpetual futures to a relatively lesser-known company [indiscernible] blockchain. And on that platform, we've seen volumes explode in commodity perps. So just with your goal to try and attract more and more retail eyeballs to CME's product suite, I'm curious how you're thinking about perpetual futures as a product structure that could eventually become a more meaningful driver of [ retail ] engagement. And then just if you could maybe talk about some of the regulatory or market structure hurdles that I guess would need to be cleared before we get there. Terrence Duffy: So thanks, Patrick, and I'm glad you raised that. There's a couple of things I want to unpack there. First, we'll talk about the JV venture, then I want to talk about some of the commodities, and Derek can address that, and what the true volumes are associated with that. It looks very large in the way they're trading, but remember, those are in notional value, not in contract terms the way we calculate our business. So, and who's on those platforms, how those platforms work, what's the risk management associated with it and why would that institution potentially want to participate in something the way those are structured. First of all, perpetuals are against the law in the United States of America. That's first and foremost. That is where it's at today. They are not allowed under the Commodity Exchange Act of 2000. The centerpiece of that act was how do you define what a futures contract is. It wasn't a bunch of other things in the act. The centerpiece was what is a futures contract. And it was defined as a contract for future delivery. It was not designed as a contract that never ended. So I really believe that for perpetuals, I think convergence is massively important to the commercial producers and other participants that these contracts are designed for. Contracts are not designed, not, I repeat, not designed for speculators or hedgers or not to design for speculators or just a pure retail. They're designed for hedgers, commercials and producers. That's the way they -- you have to have a natural buyer, a natural seller. And they need to have convergence between cash and futures in order to run their business, which benefits the participants, not only in the United States, but globally. You need to have these markets. As the great Dr. Milton Friedman said to me in 2002, if we did not have futures contracts today, we would need to invent them in order to move forward and progress. But that -- the way the market works between cash and futures is critically important. So the decisions that people want on perpetuals, they seem to me more of they're trying to create a contract for the speculator. That's not the mission of the commodity exchange. That's not the definition of it. So I -- that's something that I'm very much involved with as it relates to perpetuals. Your other part about the volume going into some of these products, I assume you're referring to some on silver, some on oil, and so let's talk about that for a second. When they listed those on [ XYZ on hyper liquid], as you know, the way that market works, if in fact they were to have a tip-over in [ the auto ] liquidation, they've been very fortunate to have an orderly market for the most part, but if in fact, you had an auto liquidation, the money from the losers, it comes from the winners. It's a very difficult proposal for any institutional hedger to use a product such as that where if they're due $1 and they get $0.45 back because the other side of the trade just got beat up and so that's where they got the money from. So I am concerned about some of those rules, and those are done on a perpetual basis. I think the agricultural communities, the energy communities and others are not completely pleased with some of the pricing of those products. But I'll let Derek talk about that. But what's important, before he mentions it, we have to think about the timing of when those products were listed. You got to remember, silver went from $50 to $118, I believe, Derek, is that about right? High, and then back to $86. Oil went from $50 a barrel for almost 4 years to north of $100, and then back down $86. So that was where that activity kind of caught. Now the question will be, is that sustainable? So I'll let Derek comment on those particular products. Derek Sammann: Yes. I appreciate it, Terry. I think if you look at the results of this last Q1 and even continuing into Q2 of this year, you're seeing exactly what Terry talked about. The purpose of futures contracts are to enable hedgers to be able to know that they can identify the forward curve. These products then converge to physical delivery and physical markets, whether it's corn, whether it's livestock, whether it's oil, whether it's gold, all come to physical use. So we look at the end-user commercial need of these customers. When you look at the growth and record activity in our commodities portfolio as a whole, you'll see that every single portion of our client segments grew with double-digit growth in every single group led by commercial, corporate banks buy side and [ prop firm ]. So retail is a part of that, but financial customers will follow where the end user manages and hedges their underlying risk, and that's in our futures market. Terrence Duffy: And so on the first part of your question with the S&P listing on that, we were not made aware of that, even though we own 27% of the index business. We were not made aware of that decision. We got made aware once they listed it, literally several hours before their press release went out. Their press release went out, and which coincided with the opening of that market. We've been engaged with conversations, as you can imagine, with our partners. We both have a deep respect for intellectual property. We've made our points very aggressively on that, and I think they understand that now. And so we are continuing to work with our partners at S&P to make certain that, as we go forward, we're all on the same page. Operator: And the next question in the queue is from Dan Fannon with Jefferies. Daniel Fannon: So Terry, I wanted to follow up on your comments about the Micro Equity Index option to change. I think you finally are making to be more financially settled. So just wanted to talk about why now and what you see is the opportunity going forward with that. Terrence Duffy: I'll let Tim chime in, but I will tell you why now is -- maybe we should have done it a little bit sooner, but why now is because the client base continues to go across multiple different versions of the equity complex, whether it's the larger [ E-mini ], whether it's the micro or something smaller, and how they participate. This client base in the micros seem to be more of a retail focus. They really don't want to deliver their options into a future where the people that are trading the larger clients do want to deliver their options into the future. So we felt very strongly that the micro contract would make more sense for that constituency. But at the same breadth, we didn't think it made sense to change all of our equity contracts to deliver into cash settled. Basically we'll keep them as deliverable into a future. But Tim, you can add to that. Tim McCourt: Great. Thanks, Terry, and thanks, Dan. And I think part of it is, as Terry said, as CME Group is the comprehensive leader in risk transfer for the S&P 500 and the NASDAQ complexes. It's important for us to continue to evolve our products to meet the risk management and market access needs of our customers. And that's the feedback that we're receiving. When we look at the micro-size products and how those strategies are deployed, to hedge other parts of their either stock portfolios or ETF portfolios, or looking to access the market, that they prefer the financially settled mechanisms where they could have the options expire against the futures daily settlement price. And that is the change we're looking to file. It will then, as Terry said, be different than the institutional-grade E-mini offerings and options on those products, which serve a very specific and highly utilized function of the market of delivering the underlying futures, which is a benefit to the institutional community and the hedgers out there, particularly when they're looking to access the almost $40 billion per day of capital efficiencies in our equity complex at CME Group. We've actually seen continued adoption of our E-mini products by clients where several large buy-side clients are also switching some of their structured product strategies to utilize the efficiencies and the benefits of trading futures-based options at CME Group on the S&P 500. So we think this will further grow the complex as we remove some of the barriers to entry for clients and give them a better tool that serves the risk management needs of their portfolio. Terrence Duffy: And just so you not think I'm talking [indiscernible] my mouth, in this particular contract, we didn't design it as a financially settled in the micro because it's just for retail or speculation. It's not. You have to look at the value of the S&P 500 and who uses that contract today. For your historians that may or may not know this, we started with an S&P 500. And then we cut the multiplier of the 250. As the contract continues to go up and value, participants, even the large ones, need to trade a smaller contract or they need to trade a bigger contract, depending on what their needs are. So we are trying to take these pools of liquidity for the constituents to across the entire spectrum of CME's equity products. And it's basically the decisions are being made for the value of the index itself, not for just the constituents who are trading in. So I think that's a really important distinction. Operator: The next question in the queue is from Ken Worthington with JPMorgan. Kenneth Worthington: Can you talk a bit about the evolution of WTI and how you see the ongoing growth of U.S. Gulf oil playing into the dominance of the Cushing's settled product? And secondly, how do you see the changes in Venezuela and the conflict in Iran changing global supply chains? And how might this feedback into CME energy activity and CME oil market share? Terrence Duffy: Ken, that's a really good question. I think a lot of people like to have the answer to that one, especially in the industry for sure. I'll let Derek talk a little bit about the TI because I think it's important. But when we get into geopolitical, like what it means for Venezuela, I mean, we know what has been said publicly by the administration, but we don't ultimately know what's going to happen. So I think we'll stick with what we think on TI right now, Derek. Derek Sammann: Yes. I think that's a great question, Ken. It's certainly timely in light of what we've been seeing in terms of restrictions and constrictions of [indiscernible] supply. 20% of the crude oil market, as you know, comes from the Middle East, flows out in the global network. That has been disrupted. We've been talking for years about the ways in which we have continued to evolve WTI as a global benchmark. Ever since the export ban was lifted in 2014, U.S.-produced WTI, and nat gas, in fact, have been flowing out into global markets. So I think that to us, this is just another confirmation point of the absolute essential nature of U.S. produced energy products, both WTI and Henry Hub, that is now being produced and exported at record levels outside the U.S. And this is just another marker of adoption globally of the -- what these markets mean and what these products mean to risk management across the board. We have seen outsized growth for 4 years in a row now of global adoption of commercial end-user customers in Europe and Asia as both the Russian conflict with Ukraine disrupted supplies, this is another supply disruption, meaning a greater reliance on another provider of last resort. And that is the U.S. right now. As it relates to your specific question on the crude grades, we launched these contracts back in 2018, 2019, fully expecting a global adoption of WTI. When you have a physical contract that delivers in Cushing as we see record amounts flowing out into the U.S., we needed to provide a risk management tool to get physical in Cushing down to the Gulf Coast enter the export market. I think what you're seeing in the record volume in open interest and our crude grade contracts, it's really solidifying WTI as a dependable supplier of oil to the world. We think that continues to reinforce WTI's importance globally. And you look at the dependability of physical deliveries, we continue to dependently deliver those barrels month after month. In fact, our GME -- our state in the GME Global Mercantile Exchange in Dubai, which delivers the [indiscernible] crude contract, also physically delivered outside the Strait of Hormuz, has been uninterrupted in delivering 15 million to 20 million barrels a day as well. So the market needs to find dependability of supply. They found that in WTI. That's the reason why we're exporting not only record amounts of WTI and Henry Hub, but also [ RBOB ] gasoline and HLR diesel contract as well. So it confirms the importance of that in global products for global customers that we are the dependable provider, and we continue to ramp up exports, and that further solidifies U.S. energy products in the portfolios of global customers. Terrence Duffy: And Ken, I don't want to be dismissive, so I want to go back to the beginning of your question on Venezuela. Can you ask that question now separately so maybe I can address it? But I may not be able to. Kenneth Worthington: So it was just about how the changes in Venezuela impact global supply chains and what it means for CME activity and share? Terrence Duffy: So I think for -- not quite sure what that's ultimately going to mean with Venezuela. I think that the verdict is still out about how that country is going to run. As everybody knows, I think that their production got run way down. Their infrastructure in Venezuela was not doing what it was at peak. So those are all issues that they need to have addressed going forward. And then there's going to be a lot of politics and other people trying to deal with that particular issue. So as far as our share goes, I think what is important, and Derek touched on it, WTI is no different than Brent, another one, these are global markets. Whether it's produced in the United States or it's produced in Saudi Arabia or UAE or Qatar, these are global markets and people are going to sell to the highest bidder. And that's just how the oil market has worked. So I think sometimes people here in the United States think that we have this massive supply of WTI so our gas prices should be a lot lower. Our producers sell all over the world. And that's the way this market is, it's global. But the good news is, I think what Derek is saying, is the benchmark at WTI is getting a much higher visibility, and I think that will continue, which will bode well for CME's risk management [indiscernible]. Derek? Derek Sammann: I think one little last piece that's worth noting on the share piece here is that Venezuelan crude is extremely [ heavy ]. It's going to take a long time to rebuild the infrastructure in Venezuela, import that and then actually resource some of the refineries in the U.S. to adopt that. So we think that's a term impact. If you look at the forward curve of the oil market, you'll see a backwardation, lower prices [indiscernible] expecting more U.S. flow in. The last point I want to note is on the share piece of that. I think if you've seen record amounts of activity in global energy markets, we have seen share increases back in CME WTI north of 79%, 80%. And that's just confirmation that when markets are going through times of undue stress, market retrenches to core liquidity on the home exchange. We've seen that in WTI futures and options over this last 3 to 4 months. Operator: And the next question is from Ben Budish with Barclays. Benjamin Budish: I wanted to maybe start with market data. It looked like this quarter's recurring revenue growth was the fastest I think you've seen in several years. I'm just curious if there's anything you can share there. To what extent are these contracts volume based? To what extent are these from new FCMs kind of joining the platform? And how sustainable do you think this growth is over the near term? Terrence Duffy: Thanks, Ben. We'll turn it over to Julie Winkler, who heads up this area for CME. Julie? Julie Winkler: Thanks for the question, Ben. Yes, it was a great quarter. We had record $224 million in revenue. So we are up 15% from Q1 of 2025. And I'd say one of the biggest shifts that we've seen is really a surge in the simulated trading environment. So what's happening there is really strong growth, and I would say maturity among these platforms. And so these environments are really allowing new traders access to our market data. They're learning how futures products work. And they're taking advantage of the educational resources provided within these platforms. And really using it as part of the customer journey become successful new active retail traders. And so we've seen very strong year-over-year growth in these participants utilizing these sim environments to begin their trading journey in futures, that we believe is really going to be additive over the long term to the retail ecosystem. So sim participation was up significantly. And so that is really kind of driving that retail or nonprofessional participation in our market data business. We've also made -- we continue to make policy changes, right, in thinking about data feed licensing and how that all needs to work. That has contributed to some of that recurring revenue growth that you're seeing. And then lastly, subscriber growth has continued on the professional side as well. We were up about 1% from Q4 and up about 2.45% from the number of professional subscribers we had a year ago. So I'd say it's a number of fronts. A lot of this is relatively sticky revenue in that sense. And we continue to work with our customers to ensure that our benchmark data is provided and they're getting the data in the way that they want it. Lynne Fitzpatrick: If I could just reinforce a little bit of what Julie said, I mean I think what we're really pleased with is kind of broad-based growth. So we're seeing that subscriber growth. We're seeing the new product growth as well as some of the changes just with pricing. But this is a really healthy ecosystem that we're seeing across the market data business. Benjamin Budish: All very helpful. Maybe just a follow-up, maybe sticking with the retail team. You mentioned in the earnings commentary that on the prediction market side, you've now seen it looks like about 15% of volumes are kind of markets related. So curious if there's any further details you can share, what, if you have any visibility on, what types of customers are trading those contracts rather than sports? I would imagine all this is happening within your 2 current FCMs. But just curious what that customer base looks like. And maybe any color you can share in terms of the pipeline of potential additional FCMs would be helpful. Terrence Duffy: Thanks, Ben. Tim, do you want to address that? Tim McCourt: Yes. Thanks, Ben. So when we went live with our prediction markets and event contracts offering back in December, we've seen strong growth both in terms of adoption and volume where we recently surpassed the $220 million contract mark. And then when we look at the participation across those contracts, we started a marketing effort in the middle of March with our partners at FanDuel. And since then, the actual participation or the distribution of volume towards the market-based contracts across equity, crypto, energy and metals actually exceeded 30%. That's a shift that we're pleased with. And I think it speaks to the attractiveness of the offering where we're looking at attracting these next-generation traders to our markets. They're coming in through the apps through our FCM partners, and they're trading all types of the event contracts, both sports and the market space contracts. And that's something I think that reinforces the value prop of CME, that we have some of the world's leading benchmark products at CME Group and now we're making them more approachable and more accessible to the individual and next-generation trader through the fully funded or fully collateralized event contracts and prediction markets offering at CME. And the other thing that we're pleased to see is since December, we've had over 150,000 new accounts trade at CME Group in these products, which is off to a fantastic start. We're continuing to work with our partners that are currently trading, and we have a pipeline of FCMs we're still working to get on board and offer these products to their end users. So optimistic about the future, but a first few good months here out at CME Group in our prediction market offering. Terrence Duffy: So Ben, just to emphasize a little something, when we originally negotiated this deal with FanDuel, our goal and objective was it had nothing to do with sports. Our goal and objective was to do with markets and distribution. And that is exactly what we're starting to see happen. Even though it's very, very early innings, to say the least, for baseball season, Tim is absolutely right, what's going on here. And that's exactly what we were hoping to see. And if, in fact, both our partner, if FanDuel wanted to have [indiscernible] so we were accommodating to them, but that was never our goal and objective. Our goal and objective were markets, on events, on markets, for their participants and ours. And that's what we're starting to see. And for me, that's exactly what we wanted to see happen. Operator: The next question in the queue is from Alex Blostein with Goldman Sachs. Alexander Blostein: I had a follow-up on the energy markets. And just curious to get your thoughts on the health of the underlying customer. Obviously, we've seen extreme volatility, which feels like it might continue for some time. There's always a debate about good vol, bad vol. This doesn't feel like great vol. So if you think about what's happening with the underlying users and the durability perhaps of the customer base on the go-forward basis, I'd love to hear your comments on that. Terrence Duffy: Derek? Derek Sammann: Yes, it's a great question. I think that when you look at markets in times of stress, as I mentioned before, you're going to see liquidity retrench back to home markets. And we've absolutely seen that. When we think about healthy markets, we think about a couple of different markets. Number one, we want to see health across the entire breadth of the portfolio. So we saw record activity not just in WTI futures, but options. We saw record activity and open interest being held in the crude grade contract, as I mentioned before. We're seeing record uptake and actually fastest uptake in Europe and Asia. And we're seeing options set records, particularly in the short-dated part of the curve as well. So broad-based activity across all products. We're not seeing activity spikes in one. We're also seeing, despite the fact that we're seeing some pretty unprecedented volatility times and uncertainty, open interest in energy has been extremely resilient. If you look at open interest since the deck 31, our open interest in energy is up 14%. Even on a year-on-year basis, open interest is up 1%. So open interest is a marker of the sustainability and health of activity, and that is still holding in well. One of the other markers we look at is the breadth of activity across client segments, and every 1 of our client segments continues to perform up double digits across the board, led by our commercial customers, not surprisingly, in markets like this. Retail has returned over this last quarter as we saw in the metals markets as well, very much wanted to be actively involved in our micro contracts. But I would say the growth and the sustainability in the open interest holdings continue to be -- show positive trends. And we're seeing sustained activity. We are not seeing activity that we saw immediately following COVID, which was a spike in activity closing open interest and reduction in activity across client segments. So we are seeing a healthy amount of activity. I would attribute at least a portion of that strength in these markets to the growth in our options business, particularly with the short-dated options business that are giving customers the ability to discretely manage event risk like we're seeing right now. And that's why we're seeing records in weekly options that I think customers are using to manage short-dated risk around longer-term core exposure. So at this point, we're seeing into April a strong participation, open interest holding there, and good participation across clients. Terrence Duffy: And just to add to that, Alex, I think you got to look at the entire industry, and it's not just oil, it's the shipping industry. These are billion-dollar ships that are sitting out there that need to be insured. Insurance companies are very nervous about extending insurance to some of these billion-dollar ships that could be blown up in a heartbeat. So they are looking to offset some of their risk on the insurance side, whether they're creating a swap or trading futures against it. So I think the client base will continue to expand because this -- even though, whenever this gets resolved, people are still going to be very concerned. So I think we'll get a new constituency of participants, not too dissimilar from the mortgage industry and others, from insurers and reinsurers from the energy business using our products and others in order to manage that risk going forward. These are very expensive vessels that they cannot afford to have being sunk in the Strait of Hormuz or anywhere else. So I think it's a very interesting what's going on. You mentioned good vol and bad vol, Alex. I want to touch on that for a second. So good vol is the volatility that market kind of goes orderly in a direction and it maybe goes into a different direction. When you see pockets of volatility with not much [indiscernible] that to me is bad volatility. But that's headline volatility. And headline volatility can be very disruptive to the marketplace. And there's a lot to that, but that normally is short-lasting as well on the bad volatility. So we'll see how that continues to proceed going forward. Alexander Blostein: Got it. Yes. No, super helpful. One quick follow-up just on the numbers. Obviously, with a lot of volumes coming through, RPCs came down a bit. And I was hoping you could maybe frame how to think about near-term RPC across, particularly the energy markets where we're seeing the bigger decline. Terrence Duffy: Thank you, Alex. Lynne? Lynne Fitzpatrick: Yes. So I would keep in mind a few things when you look at the energy volume and the RPC in this quarter. First, as Derek touched on, we obviously had record volume there. But you also had some real spikes in short periods of time. So March, the level of activity we saw there is certainly impacting the numbers. So if you look at the total volume growth, you would expect additional usage of volume tiering. You also saw a mix shift towards crude, which tends to be lower priced than things like our nat gas. And Derek also touched on one other thing, the micro business really grew significantly. So we saw about 315,000 micro energy contracts a day this quarter. That was up from about 80,000 contracts a day in the same quarter last year. So that is going to have a dampening effect on the weighted average. Those are at about $0.52 a contract. So I think those 3 factors really are what weighed in on the energy RPC. The last one that's a little bit harder to see is just the shift towards more member trading. So that's really where we saw that impact. So going forward, I would look at that overall level of volume in terms of volume tiering. And then I would look at those mixes in terms of crude versus nat gas, and then the micro versus full-sized products. Operator: The next question is from Michael Cyprys with Morgan Stanley. Michael Cyprys: I was just hoping you could update us on your partnership with Google, including tokenizing cash, what the time frame and key milestones are there, how you see this playing out? And if you could also update us on the prospects for CME stablecoin as well. Terrence Duffy: Yes. Thanks, Michael. I'll have Suzanne and Lynne touch on both, because they're both working on those projects. So Suzanne, why don't you talk a little bit about the tokenized Google and timing and things of that nature? Suzanne Sprague: Yes, thanks for the question. So we are working with the settlement banks in our ecosystem as well as clearing members to be able to advance stages of tokenizing cash. You may have seen a press release from Bank of Montreal in the last few weeks, announcing publicly that they have been working with us and Google on the tokenization project. And so the goal there really is to be able to increase the testing capabilities within the settlement bank ecosystem as well as start integrating clearing members into that testing process this year, with the goal of being able to go live by the end of this year. And again, the tokenization of cash really for us enables movement of value outside of traditional banking hours, especially looking at 24/7 trading activity, as Terry mentioned in his opening remarks. It's a key component to being able to enable the movement of value in the off hours, as well as allow us to build upon other tokenized assets using the Google Cloud Universal Ledger. On stablecoin, we also continue progressing that effort with regulatory engagement. And as Terry mentioned there, we are looking to be able to seek a license to be able to issue stablecoin. And we're exploring technology partners that can help us do that as well. We plan to be able to advance that effort this year, although we can't opine on the regulatory engagement time line. Happy to have Lynne add anything else as well for stablecoin. Lynne Fitzpatrick: Yes. I'll actually add 2 things that are a little further afield related to Google. So first, you heard Terry mentioned that we are getting close to opening our Dallas facility for testing with our clients with the goal of ultimately operating markets in the cloud. So we're excited about that progress that we've made with Google. That was something that has been several years in the making. We're also -- that was a big part of the investment that Google originally made in CME. So I just want to make sure you all noted that the Google shares, which were preferred shares, the only difference between those shares and common was that they did not have voting rights. Those did convert into common during this quarter. So you will see that in the basic and diluted share count rather than seeing that separate class of preferred stock. So going forward, you will also see just that earnings that was allocated to the preferred stock, it will show up just in the basic and diluted. So you won't see that differentiation going forward. I just want to make sure you captured that. Terrence Duffy: Do you have anything on stablecoin, we'll get -- Michael, hopefully that addresses your question? Michael Cyprys: Yes. Just a quick follow-up, if I could, on the cloud. So with the contracts migrating to the cloud. I was hoping you could maybe elaborate on the benefits that you see the steps that you're taking to help facilitate that. How do you see the scope and path for migrating other contracts eventually to the cloud or what that might look like and how you sort of evaluate that and what the benefits could be? Terrence Duffy: Well, I'm a big believer that this is the future. And I think if you were to start an exchange or any other business today, you would be in the cloud. We are 175 years, 200 years old at this stage of our proceedings. I think this is the future of markets, having access to be in the cloud. I think the efficiencies that a hyperscaler like Google will be able to provide to CME and its clients will be second to none. And I think that is really exciting. You have to start somewhere. We wanted to start with our less latency-sensitive products, which are the agricultural complex and that commodity side. So I think this will be the catalyst that show people how the benefits of having markets in the cloud and the redundancy that they will have with 20 other centers just in the United States alone, if in fact we needed to go there. So it's pretty exciting from my standpoint. This was our vision going way back during the pandemic in '20 and '21 to do this with a big partner like Google. And I think the future, not only it was looked at, is starting to be realized. So I think it's exciting and I'm looking forward to this progressing forward, and I'm looking forward to every single product being in the cloud, as long as, and I'll say it again, as long as Google's technology and facilities are better than what we have right now. And I believe they will be. Operator: The next question in the queue is from Bill Katz with TD Cowen. William Katz: Maybe, Terry, one for you. if you can update us on your thinking on capital allocation at this point in time. Obviously, you have the dividend, but I'm sort of curious of what your thinking is on M&A. In particular, it seems like there's a lot of different vectors of growth in the industry, both de novo and inorganic, and how that might shape your views on priorities. Terrence Duffy: I missed the latter part. But on the capital allocation, Bill, I think is what your question was, the first one, and I'll let you take the second one. But on capital allocation, I think from the beginning, Bill, going back to '02, I was a big proponent of paying a dividend at CME when everybody else said you shouldn't do that. But I thought it served our interest really well. I still think it does, and I think returning capital to shareholders is really important. But at the same time, I don't want to be stuck in a situation where we're afraid to do something that we think can grow the business, whether it's through M&A or something else, if the opportunity presents itself. So I think instead of putting myself in a box or the company in a box about capital allocation, right now, we are in a really strong position with our dividend, we're in a strong position on repurchasing shares, as you heard Lynne talk about earlier. But again, if there's an opportunity that we see that makes sense for our shareholders, without going out too far outside of the scope of what we do, we will be evaluating those, and that might change our capital allocation at that time. But right now, we're pretty committed to where we're at on the allocation of dividend and share repurchase for now. And what was that the latter part of your question? William Katz: It was all the same question. And then maybe just a quick follow-up, one for Lynne. If I look at your adjusted expenses, excluding licensing fees, it looks like it was up about 7% year-on-year, if I did the math correctly. I think the -- I think you affirmed your guidance for $1.695 billion for the year. Can you sort of unpack what the growth was in Q1 and how we should think about maybe the -- just sort of the pacing as we look through the rest of the year? Lynne Fitzpatrick: Yes. So certainly, and your numbers are correct, so we saw about a 7% growth rate in Q1. Obviously, with a high level of activity, you saw some of the variable expenses come in a bit higher. So you'll see that in compensation, you will also see that in technology where we did see more activity going across the system. So we'll continue to monitor as we go forward. We sometimes see these spikes in activity. We're seeing a little bit of softer activity so far here in April, but it tends to be different periods of time over the course of the year. So we'll continue to look at that guidance as we move forward. But at this point, we're comfortable with where we're at. I would point out that we do expect the occupancy cost to continue to grow over the course of the year as we do things like opening the Dallas facility. You will expect technology to continue to grow as we move more into the cloud environment. The others don't have as many specific drivers that I'd call out. Operator: Next question is from Craig Siegenthaler with Bank of America. Craig Siegenthaler: We were looking for an update on your prediction markets FCM JV with FanDuel just given FanDuel's announcement earlier this month that they will launch a new FCM. So I assume they're going to favor the new venture where they can keep 100% of profit. So are there any major differences in the offering? Terrence Duffy: Yes. Thanks for the question, Craig. And I think there's a bit of confusion on what they can and cannot do with that potential application process. I'll let Lynne describe it to you so we're all on the same page. Lynne Fitzpatrick: Yes. So certainly, this is something that we were aware of, that they were going to make this application. I think it's important to note the difference between an application and a launch. So similar to the way we started an application process, and it took several years to get that approval, they want to be prepared for any future changes and registration requirements or the like. So this actually doesn't signify any change in our relationship or the partnership going forward. And as Terry mentioned, and as you would expect, there are some contractual restrictions in terms of operating alternative venues during our partnership. Terrence Duffy: And I think that's really important, Craig, they can't just get an FCM license, apply for one or buy one and compete with the JV that we put together with them. That is obviously contractually against what we originally stated with them. So I think it was a bit confusing to begin with at best. Craig Siegenthaler: That's helpful. And just one follow-up on prediction markets. Any update on the DCM side and volumes where there's multiple entities hooked up to, including DraftKings? Terrence Duffy: Is there any volume up there with DraftKings? Tim McCourt: No, I think, Craig, just sort of to my earlier comments when we were speaking about prediction markets, we just recently crossed the $220 million contract volume threshold since going live in -- back in December of 2025. I think the notable thing from volumes is, again, as we were covering, is that the percentage of volume in market-based contracts across the CME Group benchmark products in equities, cryptocurrencies, energy and metals is in excess of 30% since mid-March when we -- with our partner at FanDuel increased the marketing efforts, and we've had 150,000 accounts trade at CME Group. So those are the sort of numbers-based updates for prediction markets. And we would say off to a great start and optimistic about the continued growth from here. Terrence Duffy: Craig, what I think is also important is there's a lot of activity, for lack of a better term, going on around the sports prediction markets between the states and the providers. Where there's not a lot of noise, and nor should there be, is around the market event contracts or prediction markets on financial products. And I think that's why we're seeing them grow. And I think that's a very good sign for the future. And I think you're going to start to see other people probably leaning that direction more than just looking at the pure sports itself. So we'll have to wait and see, but I think that bodes very well for CME if in fact that goes there because potentially the offsets you can be looking at against our multiple asset classes that we have here at CME Group that others don't. So I'm pretty interested to see how this all plays out in the future investments going into prediction markets on the sports side of the equation. Operator: The next question is from Brian Bedell with Deutsche Bank. Brian Bedell: Maybe just staying with that very line of your answer on the prediction markets, good to see that market side rising as a mix of the percentage of volume. What is your view on potentially creating company KPI types of contracts, like financial KPI contracts? And I know -- I believe, maybe you can weigh in on this, but I believe they most likely would need to be SEC regulated. So maybe your view on any kind of time line of that, if that is something that is -- that you're interested in developing. And then also if you could just confirm, I think the rate capture on the contracts for you guys is about $0.01 a contract. I just wanted to confirm that. Terrence Duffy: Okay. Thanks, Brian. So do you want to address the first on that. Tim McCourt: Yes, sure. Brian, and thanks for the question, we're certainly seeing a lot of interest in other economic or market-based contracts where we've seen good growth in the economic indicators as well as the benchmark products at CME Group. I think with respect to anything that is financial or KPI or individual stock related, that is something that we continue to engage with customers on. But as you noted, there are some regulatory questions and clarity required about how those products would be brought to market and what the security versus commodities-based offering might be. So that's something we continue just to engage with the regulators. So I'd say stay tuned on that, but no imminent plans or a path forward for those just yet. Lynne Fitzpatrick: And in terms of pricing, we don't break out entirely, there's obviously different pieces depending on where the volume comes from either through the various channels. Obviously, the clearing and transaction fee is transparent. But again, for us, this is about getting the traction with the potential customer base and getting the eyeballs in that distribution and getting kind of that community exposure to our products, which we're seeing good uptake on that right now. Brian Bedell: Great. And then maybe if I can ask Lynne, if you could just talk about the April collateral balances that you're seeing so far and if that's -- if you're still managing about a 30 basis point spread in those balances. I said 30 basis points -- 10 basis points on the noncash, I think, and 30 on the other, on the cash. Lynne Fitzpatrick: Sure, Brian. So in Q1, we did show an average of balances for cash of about $149 billion. That is up a bit so far here in April at $153 billion. In Q1, we averaged about 33 basis points on the cash. I don't -- typically don't disclose for the partial period how we're doing so far in April, but that held steady at about 33% versus last quarter. Then on the noncash in Q1, we had $171 billion on average at that 10 basis points. So far in April, we're averaging $174 billion. So both up slightly in terms of the average balances. Operator: The next question in the queue is from Ashish Sabadra with RBC Capital Markets. William Qi: This is Will Qi on for Ashish Sabadra. I appreciate you guys squeezing us in. Just wanted to maybe follow up on some of the comments around market data and information services. I think last year you guys had some data license changes in regards to the introduction of the end-of-day data category versus real-time delayed and historical. It seems like clients are still kind of generally building out the infrastructure to kind of track that data and they've been back-billed for that charge. How much of a contributor is that license change to the market data and information services growth? And are there any other policies that we should be aware of that are notable as well? Terrence Duffy: Julie? Julie Winkler: Yes. Thank you for the question. Certainly, that was a change in policy. And part of it, right, is just to protect what we believe is a strong intellectual property of our data assets and just changing business practices within the space. So it has in the past and will continue to be of real-time professional subscribers being the core of that market data revenue line. And so while data licensing such a end of day is adding to the growth of the business. It is not a significant driver of that revenue that we talk about each quarter. That continues to be that real-time professional subscriber. I'd say policies in general though, I mean, this is where -- and Lynne mentioned it earlier, right, there's this blend of utilizing policies, introducing things like enterprise pricing with our core partners, simulated trading environments, things like that, that we are going to continue to do, [ Term SOFR ] is another great example of our build-out of our benchmark space. So these are all things that the team is actively working on as this space continues to evolve and change. And I think it's working given the 32 consecutive quarters of year-on-year growth. So we'll continue to update you on that. But I think, again, strategic and pricing-related initiatives as well as new product development is going to be a core of us continuing to drive this growth going forward. Operator: The next question in the queue is from Simon Clinch with Rothschild & Co. Redburn. Simon Alistair Clinch: I was wondering if I could just ask about [ BrokerTec ] and BrokerTec Chicago in particular. I was wondering if you give us an update on how that's progressing. Any benefits you're seeing also what kind of behavioral changes you're seeing across that treasury complex? And I guess, how we might think that could impact the overall treasury performance of BrokerTec in the future? Terrence Duffy: Thanks, Simon. Mike? Michael Dennis: Yes, Simon, thanks for the question. While still early innings, adoption of BrokerTec Chicago is expanding as clients leverage the platform's value proposition of smaller tick sizes, and co-location alongside our core futures and options markets in Aurora. What I like about BrokerTec Chicago is it gives our clients choice and execution venue, depending on their trading strategy and market conditions. We have over 35 clients connected to the platform already. And that includes several participants from the derivative space who exclusively trade U.S. cash treasuries on BrokerTec Chicago. ADV grew 93% month-over-month in March, and we saw a record day of $1.2 billion on April 8. So additionally, we view BrokerTec Chicago as an important foundation in a larger effort to deliver unique new trading efficiencies by bringing our cash and futures markets closer together. So we're pleased with BrokerTec Chicago so far, and we'll keep you updated on new features as it progresses. Simon Alistair Clinch: Great. And just a follow-up on prediction markets. Terry, could you expand a little bit more about on the -- I think you said 150,000 new contract -- new accounts that sort of started trading on CME's platform, having come through that predicting market funnel. I was wondering if you could talk about just what you're seeing, the early behaviors of those kinds of accounts, what -- how you think it might evolve as you sort of try and graduate those kind of customers across the actual traditional futures [indiscernible]? Terrence Duffy: So I'll let Tim comment, Simon. But I think when you look at those new accounts coming in to trade that particular product, it's really difficult to predict what the next 6 months or a year is going to look like with that constituency. It could be a whole new group of them. The market can get a little bit stale or could get exciting. You just don't know what's going to happen that would drive the growth of those new accounts or take it away from it. So I hate to try to make a prediction on that. I would rather try to create efficiencies for each and every client and build the business that way. But I'll let Tim talk more about it. As I said earlier, when we originally did this deal with FanDuel, it was about distribution and having people look at our products and then participating, and then hopefully they would be graduating into the other parts of our industry, which we think they are and they will. So to me, that's the long game here, and we are going to continue to stay focused on the new client acquisition, as we talked about for many, many years. And this is just an extension of the new client acquisition through our FanDuel partnership. Tim, do you want to expand? Tim McCourt: Yes. Thanks, Terry. I think the one thing I would expand on that is when we think about the original thesis of why we're trying to attract the next generation of trader to our markets, it's because we want to get our benchmark products and these benefits and the value prop of CME Group into the traders earlier in their life cycle as a market participant. So when we think about what is exciting about the prediction market is prior to the introduction of the full value margin of event contracts that make it easier to access some of these markets at CME Group. We were on the life cycle of perhaps a trader started in other markets, whether it was single stocks or ETFs or options and then eventually cross over to CME Group to open a futures account, work with our futures brokers and start trading either full size or micro-sized contracts at CME Group. What's exciting though we don't know the exact motivation of all those 150,000 traders at CME Group is with the smaller-sized, full value margin contract, we now have the opportunity to perhaps be their first trade in the financial markets. And that is something that is evolving and transformational for our opportunity here at CME Group, that we can meet these clients earlier in their journey. And then as you noted, Simon, once they are then in the ecosystem at the CME Group, we're optimistic they will look at other products. But hard to say exactly what that graduation or life cycle will look like. But capturing them earlier in that journey is one of the things that we find attractive about this opportunity. And it's great to see that bear fruit this early on in the endeavor. Operator: And the next question in the queue is from Chris Allen with KBW. Christopher Allen: Just a quick one following up on the capital discussion from earlier. I just want to ask about the buyback philosophy. So the buyback level doubled this quarter versus the prior quarter, even with the stock improving materially this quarter. So I'm just kind of curious how you're thinking about it from a -- you view it as opportunistic buyback or is it -- is there anything related to the preferred conversion to common shares? Any color there would be helpful. Terrence Duffy: Thanks, Chris. Lynne? Lynne Fitzpatrick: Yes, sure. So Chris, one thing that you are saying is we did comment that we will be using the OSTTRA proceeds and putting those to work in the repurchase. So we will continue to be opportunistic with repurchases, but we also will be using that $1.55 billion that we received from the OSTTRA sale and putting that towards repurchases. So between last quarter and this quarter, we've completed about half of that. So we had about $758 million remaining in cash from the OSTTRA proceeds at the end of Q1. Operator: And the last question in the queue is from Michael Cyprys with Morgan Stanley. Michael Cyprys: I was just hoping to circle back to the cross margining where you see the regulatory approval to launch the expanded treasury cross-margining to end clients in the coming weeks. So I was hoping you could help quantify the impact of that in terms of added margin and collateral efficiency for customers, how you see the scope for expanded client engagement, velocity and what that path might look like? Terrence Duffy: That's a good question, Mike. And I don't know if we're going to have complete visibility into what it's going to look like ultimately. But we are excited by the beginning of it. I'll let Suzanne talk about from her end, what she's seeing. Suzanne Sprague: Yes. Yes, thanks for the question. We are excited to be bringing those 2 big liquidity pools together in the interest rate space. We think that just as we've seen in the House program, we do have the ability to offer a pretty compelling savings the 2 clearing houses. We anticipate the savings can be upward of 80% for the client book just like we've seen on the House side of the program today. We are at about 22 clearing members today that have signed the agreements for the House program. And although we've just announced the approval, we do already have 1 clearing member that signed the agreement for the customer program scheduled to go live at the end of this month, and are engaging with a number of other clearing members to offer the client program as well. . So hard to speculate on the dollar savings, but we do anticipate the ramp-up will be similar to what we saw on the health side and that we'll be able to deliver significant savings for customers, just like we have so far on the House program. Lynne Fitzpatrick: And I would just add that this is a unique benefit that they're able to get those offsets between their activity at CME and at FICC. So it does help reinforce the value proposition of our offering. Michael Cyprys: And what were the savings on the House side? Suzanne Sprague: Max savings have been about $1.5 billion. Average daily is closer to just over $1 billion. Operator: And showing no further questions. I will now turn the call back over to management. Terrence Duffy: Well, thank you. Our record-breaking start to 2026 underscores the importance of our risk management ecosystem. I want to harp on one thing that Lynn talked about earlier. We have continued to grow this business, exponentially grow the client base globally and bring more participants in here to mitigate and manage risk. The rate per contract is always something that's difficult to figure out. And I think when you look at that, you need to focus on that just a little bit more as we continue to grow our business because we actually think this is a really good thing as we continue to grow. So this is not new. We're growing the business and we're really excited about that because it allows multiple participants to continue to grow their business here at CME and pay a price that makes sense for them and for us and for more importantly for you. And we're seeing unprecedented engagement across all of our global asset classes today. We remain focused on disciplined execution and delivering superior value to our shareholders. Once again, I want to thank you all for joining this call today. Operator: This concludes today's call. Thank you for your participation. You may disconnect at this time.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Weatherford First Quarter 2026 Results Conference Call. [Operator Instructions] As a reminder, today's event is being recorded. At this time, I'd like to turn the conference call over to Luke Lemoine, Senior of Corporate Development. Sir, you may begin. Luke Lemoine: Welcome everyone, to the Weatherford International First Quarter 2026 Earnings Conference Call. I'm joined today by Girish Saligram, President and CEO; and Anuj Dhruv, Executive Vice President and CFO. We'll start today with our prepared remarks and then open it up for questions. You may download a copy of the presentation slides corresponding to today's call from our website's Investor Relations section. I want to remind everyone that some of today's comments include forward-looking statements. These statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any expectation expressed herein. Please refer to our latest Securities and Exchange Commission filings for risk factors and cautions regarding forward-looking statements. Our comments today also include non-GAAP financial measures. The underlying details and a reconciliation of GAAP to non-GAAP financial measures are included in our earnings press release or accompanying slide deck, which can be found on our website. As a reminder, today's call is being webcast, and a recorded version will be available on our website's Investor Relations section following the conclusion of this call. With that, I'd like to turn the call over to Girish. Girish Saligram: Thanks, Luke, and thank you all for joining our call. I'll start with an overview of our financial and operational performance, followed by a short-term outlook on the markets. Anuj will then cover specifics on financial performance, balance sheet, detailed guidance. and I will wrap up with some thoughts on the current operating environment and structural market dynamics before opening for Q&A. To summarize our Q1 2026 performance, we delivered revenue of $1.152 billion, adjusted EBITDA of $233 million at a 20.2% margin and adjusted free cash flow of $85 million. I would like to thank all of our One Weatherford team and especially our Middle East-based employees for their focus on customers, safety in a complex and challenging environment. I would also like to highlight our announcement during the quarter of a proposal to redomesticate from Ireland to the United States, specifically Texas, which we believe will simplify our corporate structure, enhance capital management flexibility and support long-term shareholder value creation. As illustrated on Slide 3, revenue declined 3% on a year-on-year basis, but it is important to note that it was predominantly driven by the divestiture of the pressure pumping business in Argentina. On a sequential basis, revenues were down 11%, reflecting typical first quarter seasonality and the conflict in Iran, partly offset by continued strength in parts of our international portfolio and some second quarter opportunities that materialized earlier in the first. North America was modestly softer as operators maintain tight budgets and U.S. land activity remained under pressure. Latin America declined sequentially as expected, but this was partly offset by higher artificial lift in Argentina. In Mexico, we continued to make meaningful progress in the first quarter. Collections remained strong and consistent, reinforcing our confidence in the new payment mechanisms we discussed on our last call. This not only supported our Q1 cash flow performance but also contributed to a sequential improvement in working capital efficiency. The Middle East, North Africa and Asia region was impacted by the Iran conflict in the Middle East which drove delays, dropped drilling and workover activity and resulted in project suspensions in multiple countries. Since the start of the recent Iran conflict and over the course of the past few weeks, our priority has been the safety and security of our employees and ensuring business continuity to the extent it was feasible. Each country in the Middle East has been impacted in different ways, and we have taken actions in close coordination with customers and advice from local authorities. While the drop in revenue and result in high decremental margins, the most obvious manifestation financially, we are also working through additional complexities. Freight costs have risen dramatically and with logistical disruptions, there are both delays and higher costs in moving materials and people to the appropriate locations. With the strong manufacturing, supply chain base and local expertise in the region, we were able to navigate the first month of conflict well. There was a financial impact, but that has been offset through contributions from the rest of the international regions and other items in the first quarter. However, with the prolonged nature of the conflict, the impact of lead times, inventory drawdowns, logistical bottlenecks, the impact is expected to show more clear in the second quarter, both in the region and to shipments outside the region. With the assumption that the conflict is behind us and activity starts to normalize towards the latter part of the quarter, we believe the conflict would result in about $30 million to $50 million profit impact over the first half of the year. However, we are very encouraged about second half 2026, along with increasing confidence in activity levels in 2027. As the region rebounds in response to a growing need for energy security, we believe we will be well positioned to assist our customers in their efforts to normalize operations and provide that energy to the world. From a segment perspective, WCC revenue was largely flat year-over-year with higher Liner Hangers activity, partly offsetting lower cementation products and TRS activity in MENA. DRE revenue declined 8% year-over-year, primarily from lower activity in Latin America, MENA and North America, partly offset by higher wireline and drilling services activity in Europe. PRI revenue declined 11% year-over-year, mostly driven by the sale of our pressure pumping business in Argentina, partly offset by higher subsea intervention activity. Across all 3 segments, our product lines continue to benefit from differentiated technology, a strong installed base and the operational and manufacturing capability we have built over the past several years. Our first quarter adjusted EBITDA margin came in at 20.2%. Typical Q1 seasonality resulted in lower margins and that was further exacerbated starting in March by the Iran conflict. We remain focused on productivity and cost actions to support margin performance. And barring the Iran conflict persisting, we believe they will result in margin expansion in the second half 2026. We are also taking further actions to fine-tune our portfolio through a series of small not core divestitures. These will each be smaller than our Argentina Pressure Pumping divestiture by divesting these businesses should remove lower-margin revenue from our portfolio base, reduce capital intensity and align with our strategic priorities. Our adjusted free cash flow for the first quarter was $85 million, which was supported by very strong collections across most of our geographies, including continued progress on payments from our largest customer in Mexico. Importantly, our Q1 working capital efficiency improved by approximately 100 basis points sequentially, reflecting disciplined execution and the positive impact of continued strong collections. We believe free cash flow conversion will improve for the full year versus our prior expectations with continued progress towards a 50% through-cycle target. Turning to our segments. Slide 7 through 9 layout key highlights. During the quarter, we continued to build momentum with new contract wins across our portfolio and key regions. These wins are a testament to our operational and technical capabilities to deliver a range of differentiated technology and cost-effective solutions for our customers. I'm especially encouraged by key awards this quarter, including a multiyear integrated conditions contract with TotalEnergies in Denmark, a 5-year TRS contract with Phu Quoc POC in Vietnam and a multiyear contract with Shell to provide artificial lift in Argentina. On the operational side, in our PRI segment, we completed the AlphaV casing system deployment in the U.K. sector of Liverpool Bay. We also achieved important milestones in the Kingdom of Saudi Arabia, where we set a new global record for extended reach wireline worth logging over 29,000 feet measured depth with our compact well shuttle system, successfully executed the first rigless thru-tubing sand-control gravel-pack there, restoring a shut-in gas well without a workover rig. And we also successfully trialed our rod lift system at the Jafurah gas field. Now turning to our outlook. As we near the second half, we are encouraged by a number of contract awards and project start-ups that should lead to noticeable second half growth over the first half. However, it goes without saying that the conflict in the Middle East must conclude and operations must normalize to pre-conflict levels. These startups in the second half include Argentina, UAE, Brazil, Australia, Indonesia and Egypt. We are encouraged that second half 2026 international revenues could possibly be up year-on-year and are constructive on 2027 being a year of growth. Furthermore, we are seeing early signs of improvement in offshore deepwater activity, underpin a rising service-related demands in core basins such as Gulf of America, Brazil, the Caribbean and the Caspian Sea. With that, I'd like to turn the call over to Anuj. Anuj Dhruv: Thank you, Girish. Good morning, and thank you, everyone, for joining us on the call. Girish has already shared an overview of our first quarter performance. For a more detailed breakdown of the results, please refer to our press release and accompanying slide deck presentation. My comments today will center around our cash flow, working capital, balance sheet, liquidity, capital allocation and guidance. Turning to Slide 21 for cash flows and liquidity. In the first quarter, we generated $85 million of adjusted free cash flow, representing a 36.5% adjusted free cash flow conversion. This compares favorably to the 26.1% conversion we delivered in the first quarter of 2025 and was supported by very strong collections across most of our geographies, including continued progress on collections from our key customer in Mexico. While sizable collections remain outstanding, recent payment trends have remained consistent, reinforcing our confidence in the full year free cash flow outlook. Our adjusted net working capital as a percentage of revenues was 27.9% in the first quarter a sequential improvement of approximately 100 basis points, driven largely by improved collections relative to the revenue base, supported by continued collections from our key customer in Mexico. While the year-over-year comparison remains affected by the revenue base decline, we are encouraged by the direction of travel. All things considered, we remain fully committed to our internal initiatives aimed at achieving the goal of 25% or better. As we stay agile and adapt to evolving market conditions, we continue to execute on a series of cost improvement actions across the company during the first quarter. Our cost optimization efforts remain guided by 2 objectives. First, we are rightsizing elements of our cost structure, including headcount, real estate and supply chain footprint to better align with activity levels with a clear focus on ensuring each incremental dollar invested supports profitability. Second, we are maximizing the productivity of the current cost base by leveraging shared services, digital platforms, in artificial intelligence to enhance efficiency and margin performance. We have seen the impact of these cost actions in the first quarter, and they have helped partially offset the impact of revenue decrementals, pricing pressure, geopolitical conflict in the Middle East and the Argentina divestiture impact. During the first quarter, CapEx was $54 million or 4.7% of revenues, down approximately $23 million compared to the first quarter of 2025. As we align our budgets with the current market conditions, we continue to expect the midpoint of CapEx for the full year 2026 to decline relative to 2025. Given our investment in our infrastructure programs, the mix of our CapEx spend in 2026 will be noticeably different. Our CapEx on product and service line assets will decline commensurate with market activity and the completion of build-out on key projects, but we will see an increase in IT-related spend on our ERP systems. We continue to remain in the 3% to 5% range that we have laid out and will make the appropriate and prudent trade-offs through the cycle with cash returns guiding our decisions. In the first quarter of 2026, we returned $30 million to shareholders, comprising $20 million in dividends and $10 million in share repurchases, reflecting the 10% increase in quarterly dividend announced in January. Since the inception of the shareholder return program, we have now returned more than $330 million to shareholders via share repurchases and dividends. Our balance sheet remains very strong. At the end of the first quarter, we had approximately $1.05 billion of cash and restricted cash our net leverage ratio remained well below 0.5x. This outcome reflects our focus on strengthening the capital structure over time. Our stronger-than-ever balance sheet provides a solid foundation to not just navigate business operations in a challenging environment, but also pursue strategic opportunities. Turning to second quarter 2026 guidance on Slide 22. We expect revenues to be in the range of $1.017 billion to $1.110 billion and adjusted EBITDA to be between $195 million and $220 million. The sequential decline in the range is primarily a function of the Iran conflict and the operational disruptions in the Middle East. We expect adjusted free cash flow in the second quarter to be broadly in line with first quarter levels. For the full year 2026, we have greater confidence in the second half ramp, but our refining our guidance ranges to reflect the impact of the Iran conflict in the first half. Revenues are now expected to be in the range of $4.5 billion to $4.95 billion and adjusted EBITDA is expected to be in the range of $945 million to $1.075 billion. Adjusted free cash flow conversion is now expected to be in the mid-40% range, reflecting increased confidence on collections combined with our operational initiatives, and their effective tax rate is expected to be in the low to mid-20% range for 2026. Thank you for your time today. I will now pass the call back to Girish for his closing comments. Girish Saligram: Thanks, Anuj. Before we open it up to questions, I want to step back and address the macro backdrop as I know it's the lens every one of you is applying to our results and to our guidance. The first quarter unfolded against the most severe disruption to the physical oil market in the industry's history. I want to acknowledge and recognize the leadership efforts and resilience of our colleagues customers and partners across the Middle East region. Our people performed extraordinarily through this period. Operations continued in a lot of cases, and the attitude and focus of our team was, frankly, one of the proof points I'm proudest of this quarter. The conflict in Iran, the closure of the Strait of Hormuz in early March and the subsequent damage to infrastructure across the Gulf pulled roughly 20% of seaborne crude and significant LNG volumes out of the market almost overnight. Several well-respected sources have indicated this will take months to years to fully repair. The IEA has characterized this as the largest supply disruption in the history of the global oil market, and I don't think that framing is hyperlinked. The April 8 ceasefire was a welcome development, but OPEC+ March supply fell by more than 9 million barrels a day, month-on-month, and prompt physical cargoes are still trading at meaningful premiums to the strip. Even right now, it is clear with the daily announcements and volatility that the notion of the strait being completely open to passage is not being manifested in reality. Now what does all of this mean for our industry and specifically for Weatherford? I'd offer 3 observations. First, energy security has been fundamentally rewritten as a strategic priority, not as a slogan, but in capital plans. You're having conversations today with national oil companies, IOCs and independents that simply were not happening 6 months ago. And those conversations are about adding productive capacity adding redundancy and hardening infrastructure. Second, the demand destruction the IEA is flagging in its most recent monthly update, concentrated nation petrochemicals and aviation is in our view, cyclical while the supply response required on the other side is structural and multiyear, you cannot replace 9 million barrels a day of OPEC+ output with inventory releases indefinitely. And third, while it won't happen overnight, the pricing environment or services should eventually tighten because the same service intensity that funds reinvestment economics for our customers is the service intensity that flows through our P&L. Against that backdrop, our outlook for the second half of 2026 and into 2027 and beyond is splendidly, the most constructive it has been since late 2023. In the Middle East, we expect multiyear acceleration of capacity and resilience programs across Saudi Arabia, the UAE, Oman, Iraq and Kuwait, and are very well positioned to participate given our installed base and our integrated offerings across drilling, completions and production. There are structural multiyear tailwinds, and we should see a reacceleration of FID activity in North American East Africa and Eastern Mediterranean gas projects that had been previously deferred. In North America, higher sustained prices and a renewed policy emphasis on domestic production should translate into rising completion intensity, and our portfolio is leveraged directly to that activity. In international offshore and in mature field intervention, where our artificial lift and well services franchises are differentiated. We see a demand set that looks to us more like the front end of a durable up cycle than a late cycle peak. To be clear about what I'm telling you, while the immediate couple of months are a bit murky, we believe the industry is entering a period of multiyear visibility that is rare in the sector and Weatherford's portfolio, our geographic mix and the operating discipline we built over the last several years position us to convert that environment into earnings, free cash flow and capital returns at a rate that I believe the market has not yet fully appreciated. We will stay disciplined. We will continue to execute on the capital allocation framework we laid out, and we will keep doing what we have done every quarter, tell you exactly what we see, deliver against it and let our results speak. Thank you for your time this morning. Operator, we are ready for questions, and please open the floor. Operator: [Operator Instructions] Our first question today comes from Dave Anderson from Barclays. John Anderson: So you tend to be a bit more measured in your outlook, as we've seen over the years, but this is a pretty big shift in tone from you. Some inspiring closing remarks, and I agree this is -- seems to be a rare opportunity in terms of visibility. You were saying it's the most positive in 2023. I was wondering if you could talk a little bit more about the structural shift you're seeing, maybe a few of the areas where you think you're really going to excel. And also, if you could touch on some of the conversations you were mentioning, kind of how all the different customers are talking to these days and kind of what those conversations are about. I just kind of want to see if you could elaborate a little bit more on all this. Girish Saligram: Sure, Dave. Appreciate it. And look, you're right, we do tend to be a tad bit measured about it. But look, at the same time, we are always keen to point out that we are very clear about what we see and we deliver to that. And look, this time around our comments truly reflect that we feel that the mid- to long term is incredibly positive for the sector. Look, it's unfortunate the way it's come about, the backdrop is not great and especially from a humanitarian standpoint. But from a business standpoint, as this conflict comes to end, we think it's going to really result in structural dynamics that are very beneficial. So let me walk you through a couple of things. Look, first of all, as we pointed out and as everyone knows, there's been a lot of disruptions operationally on activity. So there is going to be a lot of work to go in and restart production. That's going to require service intensity. Again, we are very well positioned with our production portfolio. What tends to happen when you've also got production that shut in as some of our customers do, when you bring these wells back up, it's not a guarantee that you're going to get back at the exact same flow rates. And so you might have and likely will have in multiple circumstances, additional intervention work, et cetera, to go back in and make sure you're getting the same production rates. Again, very well positioned to participate in that. And then lastly, you will to offset that decline in production need more drilling. And again, that's where our existing contract base comes very handy. On the other side of the equation from a demand standpoint, what we think is, first of all, you're going to have to replace all the strategic reserves that have been depleted. That is going to take a fair amount of catching up to do. But this notion of energy security that I alluded to in our prepared remarks, we think it's really important, and you'll see a lot of customers do 2 things. First, customers who don't have any sources other than import will look to expand their strategic reserves, and I think that will create a demand stimulus. And the second is countries who have both oil and gas operations but still net importers will emphasize their own local operations a lot more heavily, and we are starting to see that today with multiple customers outside of the Middle East that we are talking to about expansion plans because they want to reduce their reliance on imports. So net-net, what we think is this will lead to structurally higher oil prices and LNG prices, et cetera, which flows back to structural demand for our business. And so we think, look, coupled with what we see in the offshore side of the world, we think for the next few years, this is going to result in significantly more opportunities for us. John Anderson: The world has certainly changed. Girish Saligram: As indeed. Operator: Our next question comes from Scott Gruber from Citigroup. Scott Gruber: I want understand the Middle East just given that the activity set has been very dynamic there. And your exposure differs a bit from larger peers. So just curious if you could walk us around the region, which countries and which product lines have been most impacted by activity disruptions, which have been more resilient, just some color on that complexion and that dynamic would be great. Girish Saligram: Sure, Scott. Look, I want to start off by truly acknowledging our gratitude to our customers. Their leadership has been phenomenal in the face of some very adverse circumstances. So Aramco ADNOC, KOC, PDO -- the list goes on and on. Every single customer has really, really taken a lot of effort to ensure safety, the security of all of our employees, making sure that everyone feels the same, facilitating logistics and that's helped a lot. Look, as we look at it, before I go country by country, one of the things that's important to note, for us, you're right, the Middle East has been our largest region. It's the region where we have the largest share. But as a result, we have a lot of local capability in the region as well. We have local capabilities in each country. It's also where we have our flagship manufacturing. And as a result, we were able to withstand the first half of the conflict reasonably. We had built in inventory levels, and we worked at alternative logistics routes within the region to make sure that everyone was well supplied and well stocked. . As we look at it sort of on a country-by-country basis, everything is -- every country is a bit different. In Oman, for the most part, operations have been fairly normal, and there's really been no disruption. In Kuwait, we have seen some disruptions and some slowdown of activity. In Iraq, there has been some suspension of projects, and that is where one of the countries where we had to evacuate some personnel as well early in March. In Saudi Arabia and the UAE, most of the operations have been normal with the biggest impact being on the offshore side. So I think what we have really seen over the course of March is on a day-by-day, week-by-week basis, things started to slow down a little bit more. And so that's why, as we pointed out, we did have an impact, but it was muted, and we were able to offset it with other things. And then going into April is kind of when everything was sort of at the level that we are currently seeing that run rate off and truly sort of at a disrupted level. Operator: Our next question comes from James West from Melius Research. James West: I wanted to kind of flip the Middle East question around and talk about or get your thoughts on countries that have restarted operations because we -- we're hearing about activity pickups in Iraq, in Kuwait, Saudi on land didn't really shut down. And so the disruption is not 100% everything in the Middle East is down. It's not that the countries aren't trying to get back to work either. We obviously have storage issues and transport issues. But -- but it seems to me like the -- your customer base is trying to get back to operations. And I wanted to clarify if that's the case and that's what you're seeing. Girish Saligram: Yes. Look, I think that process has certainly started. Again, it varies on a country-by-country basis, James. I'll start with Qatar, which was probably the most affected. I didn't talk about Qatar earlier. Again, Qatar Energy has done a wonderful job with their leadership of making sure that safety was truly the one priority for personnel, but they've started to sort of start drawing up plants, get back, et cetera. But look, I think rightfully so, every country, every customer is being careful about this, has been cautious, has been thoughtful and making sure that they're prioritizing safety and security above everything else, but also doing this in a fashion that is going to be sustainable over the long term versus just a let's rush back and do something that is half big. So we are starting to see a little bit of a normalization. But I think until the Strait fully opens and everyone can start loading up cargoes, it's going to be very difficult to get back to that full sense of normalcy just because storage capacity is essentially running out, and there's nowhere to go with the barrels. So -- so I think that's going to be a gating factor on really getting back. And then, of course, making sure that the ceasefire is truly permanent on the offshore side, especially, I think that's going to be another thing that everyone's going to look at. So we are starting to see plans getting drawn up. Everyone is starting to work towards that. There is a little bit of activity in a few places, but nothing yet that would suggest that we are back to immediate novelty. But I'm confident that, that will happen and hopeful that will happen over the course of the quarter. Operator: Our next question comes from Saurabh Pant from Bank of America. Saurabh Pant: Maybe I want to flip a little bit and talk a little about Mexico. It seems like things are steady, positive and steady is more important than positive alone, perhaps, right? But I saw in your press release, you were talking about the rebound in activity in Mexico in 1Q, I know that from a low base in 1Q of last year. So maybe you can talk to how things are moving on the ground in Mexico. And then any early commentary you can give, Girish, on 2027, how that might roll in Mexico? And then perhaps, Anuj, if you want to just talk a little bit about the new payment mechanism with your largest customer there? And then just what's baked into your free cash flow outlook for the year, just from a collection standpoint. Girish Saligram: Sure. So, look, on Mexico, I think suffice to say, we are very encouraged by what is happening. Look, we have said this multiple times. It's really about being steady right now. And thank you for noticing that. It's not about now all of a sudden a big growth inflection, but we are encouraged that there is stability we think that stability will continue on an activity level. And look, there's now additional customers as we diversify our revenue base in Mexico. So I think over the next few years, it will be a bright spot. Right now, we're just very pleased with the fact that activity levels have normalized, and we are starting to get paid, and I'll let Anuj talk a little bit more about that. Anuj Dhruv: Sure. So on the payments and collection standpoint, Saurabh, we are very constructive on collections. So if you recall last year in 2025, the government of Mexico announced a few structural reforms with the essential goal being to create an environment where the -- our largest customer in Mexico is structurally and financially sound. And that included pre-capitalization. It included other tax reforms and so real structural changes and not cyclical changes that were put in place. And since then, the collections or the payments, I should say, from our largest customer in Mexico have been like clockwork. They put in a $13 billion mechanism for payments from Banobras, and that mechanism has worked extremely well. So in Q4, we received a large payment from them. In Q1 of this year, we received a large payment, and we expect this trend to continue. And so we're expecting collections to come in Q2 as well as in the back half of this year. Taking a step back, on the total balance we have from our largest customer in Mexico, it's about $283 million as of March 31 in our Q, and we're constructive that we'll continue to get these collections here over time. And so if you add all that together, this is one of the backbones and pillars for why we are optimistic on our robust free cash flow generation for the year, and we've guided to the mid-40% on a full year basis. And on this topic, as we're here, I do want to take this opportunity to thank the local team in Mexico. They have done an excellent job working with our largest customer there in getting these collections through the door. Operator: Our next question comes from Doug Becker from Capital One. Doug Becker: Girish, you gave us some high-level comments about project start-ups that supports your confidence in the ramp. I was hoping you'd go into more detail about the moving pieces for the back half of this year and 2027. Girish Saligram: Yes. So Doug, I'm not going to call out specific contracts, of course. Look, we mentioned a few countries. Over the past 2, 3 quarters, you've seen us make several announcements on on new contract wins, I think that's really what feeds into that second half ramp that we expect. We also typically have a higher degree of seasonality from a product sales standpoint, both on completions as well as artificial lift that leads into the second half. So we see that pipeline. We've got the purchase orders. We've got the manufacturing teams cranking on that. So we feel very good about that. Look, the last piece of it is we've got several significant capital sales contracts, then this really leads into both '26 and '27 on the offshore side that we feel very good about. And some of it will come in this year, some of it will come in next year. And then typically, those get followed up with aftermarket pieces as well. On the offshore side, we've seen a lot of different announcements from operators. We've got [indiscernible] plants that are moving forward for operations to start up in the latter part of this year in early 2027. We've got expansion plans, whether it is in the Eastern Mediterranean, the Caspian. We've got the Caribbean. And look, we've got several contracts on there that we are in the process of mobilizing for our CapEx spend reflect some of that as well as well as our personnel moves. So all of that really sort of puts that together and brings it up. Operator: Our next question comes from Derek Podhaizer from Piper Sandler. Derek Podhaizer: I just want to maybe talk about quantification of the Middle East impact a little bit more. You pointed to the $30 million to $50 million of profit impact. How do you -- how should we think about the split between lost revenue versus elevated costs and logistics, the fuel? Can we maybe get a deeper dive into that from a country perspective and how we should think about the return in normalcy, the shape of second half of this year if we get a resolution by the end of the second quarter? Girish Saligram: Sure. So Derek, let me start with a couple of things. Look, first of all, that is truly a first half view. And some of that was already experienced in the first quarter. It wasn't huge, and we were able to offset it, which is what we didn't call it out explicitly exactly how much impose. But the totality of that first half is in that 30% to 50% range. Secondly, the range is important because the range really depends on not just the timing of operations returning to normalcy but also a function of where it comes in and what does the new normal actually mean, right? . Look, I think what we have seen so far is in the first quarter, the revenue hits were not very significant. It was really most of an elevated cost base as operations shut down. and we maintained all of our capacity on the ground. As we go into the second quarter, and you've seen that reflected in our guidance with the reduction in revenue levels. That is a pretty significant impact, especially as we have countries that have gotten significantly disrupted and operations have paused for several weeks. I alluded a little bit to Iraq [indiscernible] pieces of Kuwait, et cetera, offshore and Saudi. So that all has an impact. And look, that typically will have a very high detrimental impact simply because we are not having a knee-jerk reaction on personnel, et cetera. So we are very committed to our team as well as to our customers and making sure we are ready when operations resume as we hope they would reasonably quickly. The cost side of it is a different story, right? So we are seeing that very immediately on freight costs, for example, that have sold dramatically in addition to freight costs having gone up and they've gone up in multiple parts of the world. It's not just restricted to the region with the increase in pricing in jet fuel, et cetera, which also leads to sort of general expense increases. We also have logistical additions, right? So because we are not able to ship through our normal routes, we are shipping to alternative ports and then you have additional trucking costs et cetera. So I would say, right now, it's really sort of order of magnitude, 60-40 from a revenue cost standpoint. But that can fluctuate on a country-by-country basis. And it all depends on when things come back. What we've sort of assumed is really towards -- over the course of the quarter, things normalize. It's very, very difficult to pinpoint this and say this is the day everything goes back given that we really don't know what the geopolitical outcomes are going to be. And so that's why we've taken a little bit of liberty on having a broader range here. And I think once all of this is behind us, we'll be able to provide a heck of a lot more clarity on exactly what happened in terms of the various impacts and how the forward curve looks coming back. But either way, look, assuming that again, we are entering the third quarter, the second half essentially with all of this behind us, we think that activity profile ramps up significantly. And the good news for us is we've got the capacity on ground. We've got the fulfillment network on the ground and we have the ability to ramp up very, very quickly. Operator: Our next question comes from Jim Rollyson from Raymond James. James Rollyson: I just wanted to change topics a little bit and inquire a little around the redomestication back to the U.S. You mentioned I think is at the beginning that there are some financial benefits, but I'd like to see if you could elaborate on that a bit. Anuj Dhruv: Sure, James, I'm happy to take that question. So we are proposing to redomesticate from Ireland to the U.S. and specifically to Texas. This will go to a shareholder vote here soon. And as we alluded to in the prepared remarks, the reason for us to do this is simple. It increases shareholder value. And it does so by simplifying many of our administrative and compliance complexities that we have. It does also position us much better from an M&A perspective and also from a tax perspective. And so we've talked in length about our North dollars, one of those being free cash flow. And this initiative here is a step among many steps that we're taking to get to our target of achieving 50% free cash flow conversion. I do want to take this moment to note though that this is a corporate structural change only. This will not impact day-to-day operations. It doesn't impact how we interact with our customers, where our leadership team sits and our priorities will continue to stay the same. . Operator: Our next question comes from Phillip Jungwirth from BMO. Phillip Jungwirth: Can you come back to the portfolio pruning comment? Last year, you divested a higher capital-intensive business in Argentina, and we have seen free cash flow conversion improve. What's the nature of future divestitures and how maybe they don't align with the strategic priorities, whether it's technology advantage, scale or regional positioning? Girish Saligram: Yes. Look, Bill, we've gone through a few different phases in the company. But if I break it out very broadly, right? Our initial focus was we had to stop the bleeding several years ago. And so we stopped activity and divested businesses that were losing us money that we couldn't operate notable examples being drilling services in the United States, our wellhead business, for example, those kinds of things we got out of because we just were not making money on those. We had a lot of other businesses, though that we put a lot of effort in to make sure they were generating cash. And at that point in time, look, where the company was, we didn't have a whole lot of flexibility on what exactly we might have wanted to do with the portfolio. And you've all heard my comment before of if you can't have what you want, you want what you have. And as long as what you have is generating cash that was okay to a certain point. As we have sort of been working through the company and sort of really saying we want to be a company that is a technology differentiated, that's how we win business. Two, we want businesses that are truly capital-light. And third, we want things that we can add value into. A lot of things have now come up that are decent businesses, they're not bad businesses. They generate us margins for us that generate some degree of cash, but they're not really -- they don't fit that lens. And so we have tried to now then go after those. And those are really the intersection of our product line and country strategy and say, how do we move that out. So pressure pumping in Argentina was a great example. It wasn't really technology differentiation for us. It was very, very capital intensive and really didn't fit what we wanted to do. Things like rentals, things that have a high pass-through of third-party services, for example, tumor cancer business. Those are things that, look, we don't necessarily feel have the right place in Weatherford, but might another organization. So again, we want to be very thoughtful about this. This is not just about taking x amount of revenue out and saying we're just done with that. We actually think there is monetary value in these. So we are working through a very systematic process on these. They're all pretty small, which is why -- look, we think the effects will be on the edges. And to put it in perspective, and then to reiterate what we said on the comments, each of these is definitely much smaller than the Argentina divestiture. So we don't expect it to have a huge impact, any single one of these. But we are now in a position where we've got a great opportunity to continue to high-grade the portfolio and continue to look for opportunities where we can bring in things that are more differentiated, either organically or inorganically. Operator: And our next question comes from Keith MacKey from RBC Capital Markets. Keith MacKey: So just want to keep on the free cash flow thread. It looks like things are certainly improving, increasing the target from the low to the low to mid-40s or to the mid-40s rather. Just curious on that 50% through cycle targets, how aspirational of a target that is are the things that you've talked about, Girish, things that you have a very high degree of confidence we'll get you there? Or will there need to be additional things done to achieve that target over time? Girish Saligram: Yes. Let me just start, and I'll have Anuj give you the specifics on this. Keith, look, we don't put out randomly aspirational targets. Our philosophy has always been we put a target, we got a line of sight, so we absolutely intend to achieve this. So I'll let Anuj talk about the how. Anuj Dhruv: Yes. So I'll maybe take this opportunity to talk a bit about our margins, but also for cash. And so we haven't been shy, Keith, to really highlight 2 north stars that we have. One is margin and the second is free cash. And on the second, it's really maximizing the absolute amount of free cash, but then also maximizing our free cash flow conversion from EBITDA. And starting at the top, the key for us is to invest our money where we think there is line of sight to high ROIC. And so we're laser focused on how we deploy our CapEx dollars to ensure that we can drive cash returns from those dollars. From that, we then look at how do we optimize all of the levers we have to drive margin, our procurement, our supply chain. We then look at our cost structure. We have numerous initiatives underway that are driving the optimization of our cost structure. A few examples being do we insource, do we outsource? How do we use technology, how do we automate? How do we drive efficiencies? And it's not just saying what we're -- it's not just saying it's doing it. In 2025, if you recall, we had significant, significant reductions one, to rightsize activity to the head count that we have, but also, two, to really optimize based on all these initiatives that are underway. And so that then takes you EBITDA. You drive EBITDA and EBITDA margins. And thereafter, the focus is on how do you convert that EBITDA to free cash flow and hit the 50% target. And so that is a continuous relentless focus on AR, AP inventory. And a few of the tools I mentioned before with regards to automation using artificial intelligence, are key really for us to go and chase things on the AR, AP and inventory side. We do have inefficiencies like every company then. And on the AR side, there are situations where an invoice can cross the hands of many people before it goes to a customer. And so these are on-the-ground items that we are focused on. These aren't the high-level corporate items. These are on the ground, how do we structurally improve our processes so that we can continue to drive a better cash outcome. And on the inventory front, it's about optimizing, it's about reusing inventory. We've recently deployed an AI tool that allows us to look at inventory that might be sitting idle in a plant and allows us to use it in similar or other locations before a similar process. And so this allows us to reuse inventory that otherwise might have been potentially obsolete. And so these are all initiatives that are aimed at driving our working capital and optimizing that. Then you have on the interest expense side. And so last year, if you recall, we delevered our debt portfolio by $160 million. And we also refinanced $1.2 billion of our 2030 notes, and we extended them out to 2033. And by doing so, one, we derisk the balance sheet. But two, we also reduced our interest expense substantially we printed in September of last year, the lowest spread to treasury for an OFS high-yield company ever at that point in time. And so we're expecting to get $35-plus million on a run rate basis relative to 2025 on the benefits from lower interest. And then lastly, on the tax side, we've alluded to how we're going to optimize our tax structure and the redomestication from Ireland to the U.S. and to Texas specifically is a key, key milestone in this initiative. And so you'll likely see some of the accrued benefits this year from that change, but you'll really see some of the cash benefits start kicking in 2027. And as Girish alluded to, this is our initial target. It's not an aspirational target. This is our initial target. My aspirational target is well above 50%. And so this is our core is how do we continue to improve, not just based on the initial target, but also maximizing what we think the true potential of the company can be. And that is, in my view, over time, above the 50% level. Operator: Our next question comes from Josh Silverstein from UBS. Joshua Silverstein: Girish, you mentioned the potential growth in offshore and you have NPD is one of your strongest offerings. Can you talk about the growth potential here over the next few years? And are you already starting to see signs of an uptick? Girish Saligram: Yes, look, I think it's one of the most exciting parts of the portfolio right now as well as one of the most exciting times. we've Talked a lot and others have talked about the offshore cycle over the next several years that everyone sees happening. And as you look at what we've done, we've got several offerings, NPD being foremost amongst them. We've got a very, very healthy share of the NPD market on the offshore side. But what's interesting is, over the next order of magnitude a couple of years, we still think there is an opportunity for 30-odd drillships to get equipped with MPD systems. And if you take a conversion of even about 20% to 30% on that which is, I think, reasonable. That's a pretty significant opportunity. So we've got a rental fleet. We've got the ability to drive capital sales followed by aftermarket service agreements. Our technology differentiation on deepwater is very significant. We've got a lot of new advances on control systems as well that bring it together. On the shallow side of it, shallow market side of it, we've got the motors offering that is starting to get a lot of traction. Look, recently, we have put together -- we've built a new center of excellence in Houston, for managed pressure wells. We are actually hosting an event there during the OTC week in Houston with several of our customers. So I think this is something that over the next few years, has a lot of tailwind and something that I'm excited about seeing a lot of growth. Operator: Our next question comes from Ati Modak from Goldman Sachs. Ati Modak: Can you give us your thoughts on the North American markets a little bit? It sounds like there's some excitement around increase in activity, maybe less so on pricing just yet, but would love to get your thoughts on what you're seeing and expecting. Girish Saligram: Sure. Look, I think, first of all, it's a broad -- very broad market. I'll address sort of the two ends of it first and then come back to U.S. land. So I think look, Canada is pretty positive, especially with the current environment. We think there could be additional opportunities there. We've got portfolio in Canada that is a lot more like our international business versus U.S. land, much more of a full spectrum service provider. So I think there's some good opportunities that we got to go after and materialize. And then look, U.S. offshore in the Gulf of America very stable business but also has some very interesting growth prospects. So we think those 2 things are the things that will sort of propose up. U.S. land look, for us, we tend to be a much more product-driven business a little bit more production oriented on the product side where you're right, look, price competition is pretty high. We don't really participate in the true drilling and fracking completion activity. So for us, activity levels on that don't have a direct impact. They do on our cementing products business, et cetera, but it's not as extreme. Look, we think the U.S. market is going to continue to be a little bit more restrained. We have not really seen a significant uptick from our key customers on adding rigs or anything like that. There is a lot of, I think, talk but much more on the private and smaller player side. I think as the next few months develop, I think it will be really interesting to see where ultimately commodity prices stabilize and that activity profile that comes out of it. But we've got a portfolio, I think that's well positioned to benefit from the production side of growth there. Operator: Our next question comes from Josh Jayne from Daniel Energy Partners. Joshua Jayne: Just one for me on global supply chain in the state of it. You alluded to this a bit earlier, but maybe you could just talk about the numerous issues. So outside of the street. So we've had tariffs on top of mind for more than a year. And then we talk about the straight with oil. But that matters not just for oil, but also for aluminum and a number of other products. So I'm just curious how long after the conflict ends do those things take to normalize? And are costs structurally elevated for the balance of this year? And do you believe that these will easily be passed on to the operator community. Girish Saligram: Yes, Josh, look, I think it will take a little bit of time for it to fully normalize. I think there's different components of it. I think things like fuel costs that are being passed through as surcharges will just automatically come down as that abates, both from a commodity price level as well as refining flows and ultimately, fuel being available back to normal levels. I think the rest of it, everyone's going to always try to hang on to price to whatever extent. I mean we do that. Every industry, every company is going to try to do that and say it's now there. What has really benefited us over the past couple of years, our team has done a fabulous job in continuing to diversify our supply chain having multiple sources of supply moving to lower-cost countries for our sources of supply. And so we've been able to withstand that and I think we will continue to be able to drive towards that greater degree of efficiency. In terms of passing it on to customers, I think things that are just trade up surcharges, et cetera, are generally a little bit simpler because you can do that as a pass through though they have significant dilutive effects. Things that are more structural, especially in longer-term contracts become a lot more challenging, and they require very thoughtful discussions. But look, I'm always of the opinion of the -- our customers need a thriving service sector for them to be successful, and we don't just sort of pass it on and say, hey, it is what it is. So it's all about adding value. And as long as we can demonstrate that, I think we will have some degree of pricing flexibility. Operator: And ladies and gentlemen, that we'll be concluding our question-and-answer session for this morning. I would like to turn the floor back over to management for any closing remarks. Girish Saligram: Great. Thank you. Thank you all for joining our call today, and we look forward to updating you again in 90 days. Thanks so much. Operator: And with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
Operator: Good morning, ladies and gentlemen. Welcome to the Masco Corporation's First Quarter 2026 Conference Call. My name is Jenny, and I will be your operator for today's call. As a reminder, today's conference call is being recorded for replay purposes. [Operator Instructions] I will now turn the call over to Robin Zondervan, Vice President, Investor Relations and FP&A. You may begin. Robin Zondervan: Thank you, operator, and good morning, everyone. Welcome to Masco Corporation's 2026 First Quarter Conference Call. With me today are Jon Nudi, President and CEO of Masco; and Rick Westenberg, Masco's Vice President and Chief Financial Officer. . Our first quarter earnings release and the presentation slides are available on our website under Investor Relations. Following our remarks, we will open the call for analyst questions. Please limit yourself to one question with one follow-up. If we can't take your question now, please call me directly at (313) 792-5500. Our statements today will include our views about future performance, which constitute forward-looking statements. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We've described these risks and uncertainties in our risk factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission. Our statements will also include non-GAAP financial metrics. Our references to operating profit and earnings per share will be as adjusted, unless otherwise noted. We reconcile these adjusted metrics to GAAP in our earnings release and presentation slides, which are available on our website under Investor Relations. With that, I will now turn the call over to Jon. Jonathon Nudi: Thank you, Robin. Good morning, everyone, and thank you for joining us. Before I discuss our quarterly results, I want to spend a few minutes talking about the continued evolution of our Masco Executive Committee, which we established at the end of last year. Jay Shah, Group President Pulling and Wellness; and Rick Marshall, Vice President of Masco Operating System, recently announced their intent to retire from Masco later this summer. I'd like to thank both Jay and Rick for their leadership and their important contributions to both our business and our culture. With Jay's retirement, we've taken steps to further streamline our organization, the leaders of our 4 largest businesses: Delta, Hunts grow, Bar and Watkins Wellness will now all report directly to me. These 4 leaders have over 80 years of combined service at Masco, have extensive experience in our industry and are key contributors to Masco's performance and our culture. Furthermore, we are adding 2 new leaders to our executive committee with expertise in supply chain and procurement. The addition of these leaders and capabilities will enable us to drive additional efficiencies, leverage our scale and enhance our speed of execution across the enterprise. The structure and leadership composition of our executive committee will help enable greater agility and tighter alignment between corporate and business unit priorities all in the pursuit of delivering above-market top and bottom line growth. In addition, we have continued the implementation of other initiatives that were announced earlier this year. Our integration of Liberty Hardware into Delta Faucet Company is on track as we further leverage the brands, capabilities and scale of our Delta Faucet business. Restructuring actions to streamline our business, reduce head count and optimize operations are ongoing. We incurred approximately $8 million in restructuring charges in the first quarter, and we continue to expect approximately $50 million in total charges in 2026. The -- the savings generated from these actions will fund additional growth initiatives and contribute to our future margin expansion. We're already experiencing the positive impact of these actions in our results. With that, let's dive into our first quarter results. Please turn to Slide 5. Overall, we are pleased with our performance in an extremely dynamic environment. Net sales increased 6% or 4% in local currency, primarily driven by favorable pricing. Additionally, while still down slightly, this was our strongest year-over-year first quarter volume performance since the end of the pandemic. Operating profit was $324 million, an increase of 13%. Operating profit margin was 16.9%, an improvement of 90 basis points. Earnings per share grew 20% during the quarter to $1.04 per share. Now turning to our segments. Columbia product sales increased 7% in local currency, exceeding our expectations, largely due to more resilient than expected volume. North American sales increased 9% in local currency, driven by favorable pricing as well as slightly higher volumes. Delta Faucet delivered a strong quarter with sales growth across all 3 channels: trade, retail and e-commerce. Additionally, Delta Faucet was recognized by USA -- today as a most trusted brand and by Newsweek as 1 of America's most trustworthy companies, demonstrating the significant strength of Delta's brand and service capabilities, which are resonating with customers and consumers. Turning to International plumbing sales increased 1% in local currency, driven by growth across many European markets, particularly Germany, partially offset by the ongoing weak market in China. Operating profit for the Plumbing Products segment grew 10% to $250 million and operating margin expanded 10 basis points to 18.3%. Turning to our Decorative Architectural segment. Sales were in line with the prior year. DIY paint sales decreased low single digits, while Pro paint sales grew mid-single digits. Operating profit for the segment increased 19% to $105 million, and operating margin was 19%. Showcasing our commitment to innovative new products, BEHR PREMIUM PLUS Ecomix was recently named a 2026 Green Building Sustainable Product of the Year. BEHR continues its industry leadership in delivering both innovative and sustainable products. Turning to capital allocation. Our strong cash flow allowed us to return $267 million to shareholders this quarter through dividends and share repurchases. We are pleased with our first quarter performance and the team's strong execution and operational focus. Additionally, I'm proud of how our teams are working quickly to implement various restructuring actions to ensure we have the appropriate cost structure for our business in this rapidly changing environment. Turning to our expectations for the full year. We continue to face a highly dynamic macroeconomic and geopolitical environment. Therefore, we believe it is prudent to maintain our 2026 earnings per share guidance in the range of $4.10 to $4.30 per share. Our guidance includes our expectation that our sales will now be up low single digits for 2026, but that we will also incur higher than previously anticipated commodity costs. Rick will share additional details of our guidance in a few moments. While uncertainty remains in the near term, we are focused on positioning ourselves for ongoing sales and profit growth over the mid- to long term. The structural factors for repair and remodel activity are strong including record high home equity levels, the age of the housing stock and increasing pent-up demand for renovation projects. As consumer sentiment improves, interest rates decrease, and existing home turnover increases, we expect these favorable fundamentals to become a tailwind for our business. In addition, we are taking the right actions to optimize our business, leaving us well positioned to deliver above-market top and bottom line growth. We are committed to our consumer-driven strategy, which leverages our industry-leading brands, expanded commercial capabilities and enhanced operational excellence. We look forward to further sharing the strategy and our long-term goals with you, either in person or online at our upcoming Investor Day on Wednesday, May 13 in New York City. With that, I'll now turn the call over to Rick to go over our first quarter results and 2026 outlook in more detail. Rick? Richard Westenberg: Thank you, Jon, and good morning, everyone. Thank you for joining. As Robin mentioned, my comments today will focus on adjusted performance, excluding the impact of rationalization charges and other onetime items. Turning to Slide 7. We delivered strong first quarter results, with total sales increasing 6% or 4%, excluding the favorable impact of currency. In local currency, North American sales increased 5%, and international sales increased 1%. Gross margin expanded 10 basis points to 36% in the quarter. SG&A as a percent of sales was 19.1%, 80 basis points lower than the prior year. Operating profit grew 13% to $324 million in the quarter, and our margin expanded 90 basis points to 16.9%. Operating profit was driven by pricing actions and cost savings initiatives partially offset by higher tariff and commodity costs. Our EPS grew 20% to $1.04 per share in the quarter. Turning to Slide 8. Plumbing sales increased 9% in the first quarter or 7%, excluding the favorable impact of currency. While this growth was primarily driven by pricing actions, which increased sales by 6%, our performance was better than expected, driven by volume, which was up slightly in the quarter. In local currency, North American plumbing sales increased 9% in the quarter. This performance was primarily driven by strong growth in our Delta Faucet and Watkins Wellness businesses. In local currency, international plumbing sales increased 1% in the quarter. Hansgrohe grew in many of its European markets, including its key market of Germany. This growth was partially offset by softness in China and other smaller markets. Segment operating profit in the first quarter increased 10% to $250 million and operating margin expanded 10 basis points to 18.3%. Operating profit was driven by pricing actions and cost savings initiatives, partially offset by higher tariff and commodity costs. Turning to Slide 9. Decorative Architectural sales were in line with the prior year. This performance was driven by mid-single-digit growth in our pro paint sales, offset by a low single-digit decrease in our DIY paint sales. These results were largely in line with our expectations, and we continue to anticipate full year pro paint sales to increase mid-single digits and for DIY paint sales to decrease mid-single digits. Operating profit in the first quarter was $105 million. Growth versus the prior year was primarily driven by cost savings initiatives, which are inclusive of benefits from our recent restructuring actions as well as increased pricing. This was partially offset by higher commodity costs. Operating margin was 19% in the quarter and reflects the benefit of our Liberty Hardware business now being reported in our Plumbing segment. This was coupled with a more normalized first quarter for our paint business as we lap the inventory timing dynamic that unfavorably impacted the first quarter of last year. Turning to Slide 10. Our balance sheet remains strong with gross debt-to-EBITDA at 2.1x at quarter end. We finished the quarter with $1.3 billion of liquidity, including cash and availability under our revolving credit facility. Working capital was 19.5% of sales at quarter end. As expected, working capital balances in the first half of the year remained elevated versus the prior year due to the timing of when tariffs were implemented. However, we continue to anticipate working capital as a percent of sales will be approximately 16.5% at the end of the year. Our strong cash performance enabled us to return $267 million to shareholders through dividends and share repurchases, including the repurchase of $202 million of stock in the first quarter. Additionally, based on the strength of our balance sheet and confidence in our future performance, we recently entered into a 2-year delayed draw term loan of up to $500 million. We plan to utilize the available funds under this facility to opportunistically repurchase our shares. As a result, we now expect to deploy at least $800 million towards share repurchases or acquisitions in 2026, up from our previous expectation of approximately $600 million. Now let's turn to Slide 11 and review our outlook for 2026. While we are pleased with our strong results in the first quarter, there remains a high degree of uncertainty in the macroeconomic and geopolitical environment. As a result, we are largely maintaining our full year outlook. For Masco overall, we expect 2026 sales to be up low single digits versus our previous guide of flat to up low single digits, and we continue to expect our margins to expand to approximately 17% -- regarding cadence for the year, given the timing of tariff impacts, which largely impacted our results in the second half of last year, we anticipate total Masco margin to be relatively flat in the first half of the year versus our previous guide of margin contraction and to expand in the second half of the year as we lap the tariff impact and as our mitigation actions continue to take hold. As it relates to tariffs, on our prior earnings call, we estimated the total cost impact from incremental tariffs to be approximately $200 million before mitigation this year. Given the recent ruling on NEPA tariffs, the implementation of temporary Section 122 tariffs and changes to how Section 232 tariffs on steel, aluminum and copper are applied, we do anticipate the impact of these tariff changes before mitigation to be favorable. However, given the great deal of uncertainty as to where tariffs will ultimately land, it is challenging to quantify. In addition, we anticipate any tailwind from these tariff changes will be more than offset by anticipated increases in commodity and related input costs. Copper prices remain elevated and oil, which impacts a wide range of material as well as logistics costs also remains elevated and volatile. We continue to monitor these dynamics and we'll work diligently to mitigate the impact as we have demonstrated in the past. Turning to our segments. In our Plumbing segment, we continue to expect 2026 full year sales to be up low single digits and our operating margin to expand to approximately 18%, driven by pricing discipline, operational efficiencies and continued cost savings initiatives. In our Decorative Architectural segment, we continue to expect 2026 sales to be roughly flat with the prior year and our operating margin to be approximately 19% and with a continued focus on cost savings initiatives. Finally, as John mentioned earlier, we are maintaining our 2026 EPS estimate of $4.10 to $4.30 per share. This now assumes a $200 million average diluted share count for the year versus our previous guide of 202 million shares and a 24.5% effective tax rate. Additional financial assumptions for 2026 can be found on Slide 14 of our earnings deck. With that, I would like to open up the call for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of John Lovallo with UBS. John Lovallo: The first one is just on the Section 232. -- you said that this could be actually favorable, which seems right to us. But is this really driven by the fact that the product that you're importing whether it's faucets or shower heads, are not entirely copper and that some of the subassembly is done in the U.S. And how do you kind of wrap your arms around what this potential benefit could be? . Richard Westenberg: John, it's Rick. So with regards to our comments on the potential favorability on the tariff impact, it's really an impact -- it's really a composite impact. So it's not just the 232 tariffs, but it's the really on the EBA tariffs at the end of February, the imposition of Section [indiscernible] tariffs. And then, of course, the 232 tariffs, which -- so we look at it from a composite perspective. The 232 tariffs themselves are relatively nominal in terms of their net impact. But on composite, we expect a favorable impact. But in addition to the ones that we talked about in our opening comments, as you probably are aware, the administration is looking into a couple of investigations and Section 301 tariffs as well. The environment remains uncertain. We think net-net, it will be favorable for us for the year, but it's difficult to quantify just given the moving parts -- and as we also mentioned, we think any favorability will likely be offset by elevated commodity costs, as we talked about. John Lovallo: Okay. That's helpful. And then I think you guys said your prior estimate was for consolidated pricing to be up low single digits with mid-single-digit pricing and plumbing and sort of flattish and deck arc. I mean how are you guys kind of thinking about this now, particularly with the move in resins since the conflicts in the Middle East began? . Richard Westenberg: Yes. So with regards to our pricing expectations for the year, our plumbing expectation is mid-single digit. In terms of deck arc, it's really going to be dependent on where we end up commodity perspective, we are seeing significant headwinds given the elevated and volatile oil prices and the impact that it has really across the input spectrum and including freight costs as well, but certainly on the deck arc side with regards to resins, et cetera. And so we're seeing upward pressure in the neighborhood of mid- to high single digits. Obviously, it's still in discussion. And so that's something that we're tracking very closely. -- we -- I think from an overall company perspective, we would expect mid-single-digit inflation, and that's really commodities as well as 1 of the way inflation as well. So it's something that we're monitoring and managing very closely. We do have a track record of offsetting and managing through these challenges, and we believe we'll do so here as well. through a combination of levers. But that's really the landscape. And caveat, as we all recognize it's still uncertain, but there is upward pressure. Operator: Your next question comes from the line of Stephen Kim with Evercore ISI. Stephen Kim: I think you effectively have said that you -- well, you just reiterated that you think that the changes in the tariffs will largely be offset by the commodity. I was wondering if you could give us just an overall estimate of how much that piece, which will be transferred effectively will be for the year. And if there's a quarterly cadence to that, that we should be mindful of? . Jonathon Nudi: Steve, just to clarify your question. In terms of the transfer of costs. Could you just elaborate. Stephen Kim: Offset. Yes, the offset you are basically saying that the tariff changes could be beneficial to you, but the commodity costs will be higher and that those pieces would effectively be offsetting, if I heard you correctly. And so I'm just wondering how big is that piece effectively? . Jonathon Nudi: Yes. We're not going to quantify the actual magnitude of it. I think on a net basis, you can think of them as relatively flat to potentially a headwind for us for the year, just given the extent of commodity inflation that we've seen really across many input costs, particularly copper and zinc as well as oil-based inputs, particularly resins, et cetera. So we're basically tracking that. But I think at the end of the day, those commodity costs are going to offset the favorability or potentially more than that. In terms of your second question, quarterly cadence, this is largely a back half of 2026 phenomenon. As I think we've described in the past, particularly on the plumbing side of the business. commodity costs when they show up in the market really have to flow through our inventory and in our P&L, usually a couple of quarters later. And we saw elevated copper and zinc cost really as we entered into 2026. So that will be more of a back half 26 phenomenon. As it pertains to oil in resin costs. That's a little bit more near term because we've been seeing that as of late, and that's more of a quarter to 2 quarters out. So it's really kind of as we approach midyear and the second half of the year, that we would see that impact -- and that lines up pretty cleanly with regards to our tariff favorability because the tariff favorability is largely driven by the EPA tariff ruling. -- and that occurred as we all know, on February 20. And so that takes some time to flow through our P&L as well. So they tend to map pretty cleanly. But at the end of the day, there's still a lot of volatility out there, Stephen, as you recognize. Stephen Kim: Okay. Great. That's actually a good cleanup. I appreciate that. In the deck Ark segment, your margins were stronger than we expected. And I was curious if you could give us some sense for the relative importance of the cost savings initiatives from restructuring versus pricing? And give us a sense for what your expectation is about the quarterly cadence because we typically see the margins rise in 2Q and 3Q from 1Q. Is there anything that we should be mindful of that would be different this year than normal? Jonathon Nudi: Stephen, this is Jon. I'll jump in first, and then Rick can follow up with anything I missed here. We -- I guess, overall, feel good about this trajectory that our paint business is on. As you know, we exited with the challenging year behind us, and we feel better about our performance. Again, we saw our business overall flat with propane growing mid-single digits, DIY down low single digits. We feel great about the plans we have in place with our retail partner, and we'll continue to, again, grow share with the Pro painter HUTENSa, which is a big opportunity for us, and we've got a significant amount of headroom there and then make sure that we continue to grow with DIY as well where we have a significant share. In terms of margins, I would say, yes, they were up significantly versus last year. they are much more normalized versus a typical Q1 though, we had an easy comp this year versus Q1 of last year. and we feel good about our ability to continue to manage our margins as we move forward. I would say our restructuring actions are paying off and particularly in our bar business as we've taken significant steps to really streamline our cost structure and allow us to compete in the market that hasn't been drawn the way that we'd like overall. And I'll let Rick answer the question just on quarterly cadence, but hopefully, that gives you a perspective. Richard Westenberg: Yes, Stephen. So with regards to Jon's comments were spot on in terms of the implications on Q1. I would just reinforce that the performance in Q1 was driven really based off of of cost reduction actions that were in our control, including the restructuring actions that Jon alluded to. We did see some low single-digit inflation in the commodity input costs. So that's something that we are mindful of, and as I mentioned earlier, are expected to increase over time. So that's something that we're tracking. But I think in terms of our margin performance in Q1, it was largely in line with what we would have seen from a historical standpoint on a clean Q1. Operator: Your next question comes from the line of Sam Reid with Wells Fargo. Richard Reid: Coming back on the quarter here. In Plumbing, really nice beat versus expectations I just wanted to perhaps unpack the plumbing volumes that you put up during the quarter. I know they were modest, but I believe there was some volume benefit there. I just wanted to double confirm that there wasn't any being onetime or any pull forward in there around pricing that we should be mindful of? Jonathon Nudi: Sam, this is Jon. I would say the short answer is no. It was a pretty normalized quarter in terms of inventories. -- we feel really good about deploying business and the performance that, that team put up really around the world where we saw our business grow nicely. Our North American business, in particular, with Delta Faucet had a terrific first quarter. growing high single digits. I think 1 of the -- if you look at our beat versus our internal expectations for Q1, it was really a plumbing and then primarily North American Plumbing and the vast majority of that was really just volume versus expectations. As you're aware, we took a fairly significant amount of pricing as we exited last year. And the team has done a terrific job really putting that pricing in place and navigating with our customers to have really good plans. And we saw our volume perform better than we would have expected from an elasticity standpoint. So we feel like the fundamentals are incredibly strong. We grew share across our channels. In fact, we grew in every channel across plumbing, whether it be wholesale trade or e-commerce. We've got a great new product lineup. Our marketing plans are strong. We feel really good about our plumbing business, and we'll continue to focus on as we move through the rest of the year. Richard Reid: That's super helpful. And then maybe double-clicking on the plumbing price in a little bit more detail. I mean it sounds like the strength was widespread across all of your channels. But could you perhaps give us a little bit more color on whether there were any nuances between plumbing price, say, retail versus wholesale, wholesale versus e-com? We just lost maybe a view on how that plumbing price might have looked by channel. Jonathon Nudi: Yes, this is Jon again. We typically don't get into that level of detail from a pricing standpoint. I think it's suffice to say, though, if you look at our results, we executed our plans well from a pricing standpoint across all channels, given that we saw the price realization in the market that we had hoped for. and our elasticities were as severe as they could be. So again, we feel really good about how we navigated -- and the performance was pretty consistent through all channels. And again, in North America, it was high single digits, which is terrific. Operator: Your next question comes from the line of Matthew Bouley with Barclays. Matthew Bouley: Wanted to start on the growth guidance in plumbing. So you obviously started the year at this 9% growth and still guiding the full year up low single digits. And -- so presumably, those pricing comps will get a lot tougher in the second half. So I guess that part is understood, but you would still need a lot more deceleration in either as soon as Q2 or perhaps even a negative comp at some point just to kind of hit that guide. So I guess the question is, should we be expecting that, that deceleration in growth is sort of already happening here in Q2? Or are you just really building in a lot of conservatism on the volume side that you kind of think is prudent here to sort of get that type of deceleration? . Jonathon Nudi: You're welcome. This is Jon. So as I mentioned, really pleased with the performance in Q1. As we look to the remainder of the year, really, it's the uncertainty that we see in the road around is that, that cause us to keep our guidance where it is. Certainly, you had all of the uncertainty prior to the war and ramp with tariffs. And consumer sentiment and things like that. And then obviously, the war adds a whole another level of uncertainty. So we're looking at 2 things very closely. One, the demand environment and how our consumers purchasing across our markets. And today, we have not seen a meaningful change, but it's something that we're looking at very, very closely. And I think as the oil shock rubles for the economy, we have questions in terms of how the economy is going to perform. Again, nothing to date that gives us pause, but we're going to continue to watch that closely. As Rick mentioned earlier, what we have seen certainly is the impact of inflation from the oil shock, particularly in petrochemicals and particularly in our decorative architectural business. As Rick also mentioned and our team has really, I think, distinguished itself as being able to navigate through tough times in a dynamic environment, and we'll do everything that we can to offset that inflation by negotiating with their suppliers, looking at footprint -- but ultimately, if we have to take price, we'll work to do that in a very efficient and effective way. Matthew Bouley: Got it. Okay. That's very helpful. Secondly, shifting over to the Hansgrohe business. question is on basically both demand and energy costs, specifically in Europe. So as the conflict began, the question is, have you sort of seen any changes either from a consumer perspective? I mean, it sounded like Europe was still positive in the quarter. But anything changing on the margin around demand in Europe or just the energy costs related to natural gas in your business there. So any kind of color on how you expect that to play out? Jonathon Nudi: [indiscernible] I'd say similar to what we're seeing in North America. We haven't seen a dramatic change to date, something we're obviously watching closely. We see commodity pressure in Europe just like we do in North America, and that team is taking -- Hansgrohes taken the initiatives to offset it. And then from a demand standpoint, again, remember that [indiscernible] is really a global business. We like how Europe is holding up at this point. China is no secret. It remains challenging market from a new home construction standpoint and a building standpoint. So if anything, that's the market we continue to look at in terms of trends and looking to improve our trends in that market. But Europe is hanging in there pretty well to date. So we feel good about [indiscernible] as well. Operator: Your next question comes from the line of Ketan Mamtora with BMO Capital Markets. Ketan Mamtora: Congrats on a strong quarter. Maybe just coming back to the full year guidance Jon or Rick, what is the right way to think about sort of what you're betting as the base case? If volumes, the demand environment stay kind of where it is today, do you expect to be more sort of at the midpoint of that range? How should we think about that? Richard Westenberg: It's Rick. So with regards to our guidance, it's informed by all the information that we have to date with regards to what we're seeing in the marketplace. Obviously, the uncertainty in the macroeconomic and geopolitical environment as well as from an earnings perspective, the tariff implications and the commodity implications that we've spoken to already. I mean at the end of the day, we feel confident in terms of delivering our results within the range. And without further input on that, I think you can comfortably assume that we'll end in the mid part of the range. From a top line perspective, our guidance, we did increase our expectations for the year from flat to low single digits to up low single digits. So we do expect growth in our top line this year from a total company perspective, driven primarily in our plumbing space. And from a bottom line perspective, we do expect earnings growth and EPS expansion in lending in the $410 million to $430 million range for the year. Ketan Mamtora: Got it. That's helpful, Rick. And just as a follow-up on the capital allocation side, you moved the target higher to $800 million. Is it fair to say that you see bigger opportunity on sort of the share repurchase side? Or are you seeing kind of more M&A opportunity as well? Richard Westenberg: Yes. Fair question. As it pertains to the increase in our share repurchase expectations or availability for share purchases or acquisitions. Basically, we saw an opportunity with regards to the strength of our balance sheet. We've got a very healthy gross debt-to-EBITDA ratio or leverage ratio and our confidence in our performance, obviously demonstrated in Q1 and our confidence in our future performance and opportunity to look at increasing the cash available for share repurchases from $600 million to at least $800 million. To enable to do that we entered into, as I mentioned in my opening comments, delay draw term loan facility to enable that. So it's really going to be opportunistic. We like the flexibility that, that offers. And we like the opportunity in terms of the valuation that we're at today to be able to be opportunistic and leverage that. And so we'll keep providing updates as we progress on each quarter. But right now, we do expect an increase in share repurchases from $600 million to $800 million plus absent any M&A at this point. Jonathon Nudi: And just reiterating our capital allocation strategy hasn't changed. So we continue to look at M&A. And as we've said before, bolt-on M&A is our focus. We find the right deal, we'll do it. As Rick mentioned, we just felt like this was a great opportunity. we have the ability to go out and borrow a bit more. And we frankly believe that our shares are valued right now we believe that we're performing well, and we continue to as we move into the future as well. . Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Michael Dahl: I wanted to circle back to some of the cost and margin dynamics. I think the question is if you look at this being kind of net neutral to less favorable in terms of costs and tariffs and a lot of uncertainty around the second half. I understand that historically, had the ability to do things to offset this. When you have like broad increases in inputs and global tariffs, it's a little harder to get those savings from shifting footprint. I don't know if I'm wrong about that. So in your guide, if that is potentially a net negative versus your initial assumption is what is the primary lever that you're relying on to offset that and giving you the confidence to still guide margins up in the back half? Richard Westenberg: Yes, Mike, it's Rick. So your understanding of the playing field is accurate in terms of our read of the fact that commodity and input costs are likely to be a headwind that exceeds the favorability on tariffs. And as I mentioned earlier, it is more of a back half of the 2026 dynamic. In terms of the levers that we're looking at, it's really the same levers that we've been executing against already. So footprint in terms of sourcing footprint, is still a lever that we're pulling. And that is really on track in terms of helping to mitigate the tariff impact that we still are encountering but it's also a cost reduction. We've really executed well in terms of our cost savings initiative. And of course, the restructuring that we announced in our February call and John alluded to earlier in his opening comments, that is really taking hold. And so that is amplifying our cost savings initiatives, and we're streamlining the business, reducing head count and optimizing operations. And so that's a huge lever for us, and we're going to continue to do that. And then pricing, obviously, we've been really effective at our execution on pricing and although much of the pricing actions that we've been pursuing are implemented, there's still a lever that we're looking at selectively as we proceed during the course of the year. So I would say overall, Mike, the levers remain the same, and we're going to continue to execute like we've done in the past, and we believe that the mitigation actions that we are executing and we intend to execute through the course of the year. will be sufficient to allow us to mitigate the headwinds and allow us to deliver results complement within the guidance range that we provided. Michael Dahl: Okay. Great. That's helpful. Then shifting gears and back to the -- I guess, part of this might tie back to the capital allocation. I did note that in your [indiscernible], you have a little bit of commentary about the potential to seek relief or refunds from previously paid tariffs, but that nothing has currently been done or contemplated? What can you articulate about your strategy in terms of speaking refunds? And does that tie in at all to kind of the expanded buyback guide where if you do get some refunds, your inclination would be to to return that back to shareholders? Or how would you frame that? . Jonathon Nudi: Mike, this is Jon. I would say we think the refund process still has a lot of uncertainty in it until if and when we get refunds, we'll obviously report what they might be and how it might handle them. But we are not banking on refunds, and it didn't really play any kind of role in our decision to take on the incremental data that we talked about. So again, we're doing particular steps necessary to protect our shareholders. And at the same time, it's still highly uncertain. So we another report, we'll start to review that. Operator: Your next question comes from the line of Trevor Allinson with Wolfe Research. Trevor Allinson: I wanted to follow up on the restructuring actions. I think last quarter, you guys had talked about those being bigger impacts to '27 and '28, but it sounds like you're seeing those come through this year as well and providing nice tailwinds. So can you size for us what sort of benefit you're getting from the restructuring actions here in 2016? And then how much larger does that become as you move into '27 and '28. Richard Westenberg: Trevor. It's Rick. So with regards to the restructuring actions, we're really pleased with the execution, both the true execution and the timing of our restructuring actions as we disclosed we incurred about $8 million in Q1. We had incurred several million dollars in Q4 of last year, and we expect $50 million of restructuring costs for the calendar year and those are on track. And so we're starting to see those savings. We haven't quantified nor do we intend to quantify the savings per se because part of the savings are going to be redeployed in terms of growth initiatives as well as helping us to expand our margins. And that's a contributing factor to our margin expansion this year. You're absolutely right. The restructuring actions are going to be executed over the course of 2026. And -- and so we'll see more of a full year benefit as we move into '27 into '28. But we're going to be managing those cost savings and leveraging those, as I mentioned, to drive growth. as well as managing our margin expansion. Trevor Allinson: Okay. And then second question maybe is related to that then. I mean you guys have made some changes in your incentive comp structure recently. It looks like you've been more focused on growth than you have been in the past. Can you talk about that change? Why you made the adjustment? And does that imply some shifting priorities for you guys in terms of growth moving forward. Jonathon Nudi: Trevor, this is Jon. Maybe I'll jump in. So as I joined Masco last summer, it's clear to me Masco is a high-performing company. As I wanted to do the listening tour and talked to a lot of key constituents. The 1 thing I heard is that there is likely an opportunity for us to drive our top line a bit faster. Don't take the focus off margins. We don't take the focus off of cash flow. The company has done a great job on that. But if you can continue to deliver the bottom line and grow a little bit faster is probably a benefit to everyone. So we've been focused on doing just that. We're taking actions across the board, including the structuring of our executive committee to bring some external expertise in, in areas that we believe that we can benefit, see some additional savings. We're setting up centers of excellence around things like digital marketing and e-commerce, commercial excellence, all in the pursuit of helping to not only grow the bottom line, but also grow our top line a bit more quickly. And then certainly, incentive is important. So we did make a change to change the weight in terms of how we incent our teams. And I would say profit is still the largest percentage of the pie we have balanced it out a little bit to make sure that we have the appropriate focus on top line as well. So I'm really pleased with the progress we're making. I'm pleased that we were able to grow the way we did in Q1. And again, our goal over time is to be able to do that consistently. Operator: Your next question comes from the line of Adam Baumgarten with Vertical Research Partners. Adam Baumgarten: I guess just on the margin piece, you talked about first half margins now being flattish year-over-year, which would still imply some margin pressure in 2Q. Do you expect both segments to see margin pressure next quarter? Richard Westenberg: Adam, it's Rick. So in terms of our margin expectations, you're right in terms of our updated guide for the first half of the year is flat margins. And given the fact that we had expanded margins in Q1, it does imply a margin contraction in Q2. I would just remind you that Q2 of 2025 to last year's quarter, we really weren't impacted by tariffs quite quite significantly at that point in time. And we had a very strong quarter with regards to 20% margin. So it's a challenging quarter from a year-over-year perspective. We do expect a very solid quarter in Q2 from a margin traction perspective. I'm not going to comment on the segments per se, but overall, we do expect some margin contraction, but we do expect to deliver a very strong quarter in Q2. Adam Baumgarten: Okay. Got it. And then I think you guys alluded to maybe some incremental price actions. A couple of questions. Would that be in both segments? And would that happen if kind of commodity costs stay where they are today? Or would you need to see more commodity inflation to then think about raising prices further? Jonathon Nudi: Adam, it's Jon. I guess I would say we're not going to talk about prospective price advances. I just would probably tell you to look at history here, the recent history in terms of how we approach things. And pricing is the last resort for us. We start with negotiating with our suppliers, changing our footprint where possible, taking cost out of our own system. But if the need is there. I think our team has proven that they can take pricing very effectively and efficiently and do in a way that benefits not only the bottom line but doesn't harm the top line as well. So we'll continue to monitor things. Again, as we talked before, I'd say the one surprise for us so far this year has been the impacts on petrochemicals and particularly on our architectural business. So that's an area that we have a lot of focus. We're spending a lot of time with our suppliers to negotiate the best deals we can. And then ultimately, we'll work with our retail partner in terms of how we [indiscernible] forward. But -- just know that we've had good practice over the last few years given all the dynamic environment and feel really confident the team can navigate as we move forward. Operator: Your next question comes from the line of Phil Ng with Jefferies. Philip Ng: Congrats on a really impressive quarter. I guess to kind of kick things off, John. I mean, I think volumes for plumbing came in, as you've pointed out better than you expected. Is that a more resilient consumer, maybe better price elasticity? Can you tease out if there is any share gains of note that drove some of that? Help us kind of think through where, I guess, plumbing would have surprised and it sounds like it's been pretty resilient thus far. Jonathon Nudi: Yes, Phil. Yes, I mean, we're really pleased with plumbing, as I mentioned. It's globally we grew, which is great. I would say, again, versus expectations, it was really North America that we saw the beat. And as I mentioned, the vast majority of that will be versus our expectation was volume. And I would say our Delta team was firing on all cylinders right now. They've got great marketing plan for the year. They've got terrific new products that they've lost. Our vitality rate continues to increase year-over-year. Our commercial plans with our key customers are incredibly strong as well. So team continues to perform. And then when you break it down across channels, we grew high single digits in North America across each of the channels. So wholesale and e-commerce and retail. And that's tricky to do, and the team is hyper-focused on building strong plans at each each of our customers. So we do feel like you're taking some share. And at the same time, I think executed pricing in a really effective way that we didn't see the elasticity maybe that we would have modeled out beforehand. And I think it's to get a testament to strong execution. So -- the last thing I would add is we continue to see strength in our upper premium and luxury segment of the market where we have brands such as Brizo and Axor and Newport Brass. And the high-end consumer definitely seems to be hanging in there strong and we see really strong margins in that segment as well. So we feel great about the performance and feel good about the plans we have in place for the rest of the year as well. Philip Ng: Got you. And just kind of teasing off that, I guess, for Plumbing for perhaps Rick, you guys kept your guidance for up low single-digit top line growth. It sounds like there is nothing of note for 1Q and volumes were up -- it sounds like things are pretty resilient. Could that be a source of upside? Or are you kind of expecting volumes to kind of decline in the back half, perhaps just given some of the macro dynamics that is out there? Just want to kind of think through some of the puts and takes there on the demand side. Richard Westenberg: Yes. Sure, Phil. As it pertains to -- as Jon mentioned and we talked before, Q1 was a really strong quarter. We're very pleased with our results and the consumer in terms of our businesses is holding in there. The uncertainty is something that we're continuing to track both on the macro and geopolitical consumer confidence is a bit challenged. But as it pertains to the fundamentals of our business are strong. The only thing I would point to from a first half versus second half perspective is -- we started to take pricing from a tariff mitigation standpoint in the second half of 2025. And so we'll lap that as we get to the middle of the year. As evidenced by our Q1 pricing of 6% in Q1. We won't see that type of year-over-year comp in the second half of the year. So that's part of the dynamic, just mechanically, but we still feel pretty confident. And obviously, we're hopeful that there is upside relative to our expectations. But at this point, we're we're guiding at low single digit in terms of growth for the year. Operator: Your next question comes from the line of Michael Rehaut with JPMorgan. Michael Rehaut: Wanted to shift the focus to decorative and the sales were flat, still better than what we were looking for down low single digits. Was hoping to get a sense of DIY versus Pro and the different drivers there and where things might be if it's indeed the case maybe coming a little stronger if you're seeing any momentum similar to what you've seen in plumbing and how you might contrast the sales momentum that you've seen in plumbing versus what you're seeing in decorative across, again, DIY versus Pro on the paint side? Jonathon Nudi: Mike, good question. It's Jon. So our sales for the quarter were flat. Clearly, that was a better performance than what we saw in Q4 of 2025 and really most of 2025. When you break it down, we saw Pro continue to grow mid-single digits. DIY was down low single digits, and we feel good about the plans we have in place. I mean I do believe that DIY is going to remain pressured when you look at that business. It's highly correlated with existing home sales. And obviously, existing home sales remain pressured. So as a result, we're putting strong plans in place. We're going to focus on the great quality that we provide the best value in the industry, really make sure that, that's playing through and feel good about our plans with our retail partner. . The pro side is where we continue to see a tremendous amount of opportunity. I mean that's where the growth has been over the last longer time. We have a relatively small share in that space as well. We've grown our share by 200 basis points over the last few years. We're continuing to invest to take friction out of the experience for Pro. So whether that be order online, pick up the store or online, having delivered to the job site. We continue to hire both inside and outside sales reps to develop those pro relationships. And I can tell you that the home people have that same exact was our focus on the Pro as well. So I think we hope to see incremental progress as we move throughout the year. And we remain a tough DIY market, we believe, for the short term, I feel really good about the plans we have in place and the trajectory that we're heading on. Michael Rehaut: Great. No, that's helpful. And I know at the risk of of beating this one to [indiscernible] a little bit, but I think it's going to be a big topic over the next month or two around the strength in plumbing, particularly the volume side. And you just highlighted the fact that you've seen that strength across different channels in North America, a lot of success in your execution. Notwithstanding maybe being a little more conservative in the back half of various reasons. And I presume you also hit on this at our Analyst Day next month. But are we to think about let's say, the share gains that you've been able to achieve in the first quarter as sustainable? And are there parts of the market that maybe you see an opportunity where this share gain dynamic can persist throughout this year into 2028. Just trying to get a sense of the sustainability in the performance. And if there's anything that's shifted within the market, either on the customer side or some of your competitors out there, that lead you to believe that the share gain dynamic can persist on a, let's say, on a medium-term basis? Jonathon Nudi: Mike, good question. I mean, as I mentioned, we feel terrific about what our team has delivered in Q1, particularly in North America. We don't think anything for granted. Our competitors are strong. There's good brands out there and it's a dynamic environment. So we're going to keep playing our game, keep focused on building our brands, innovating and then executing at a high level. And if we do that, we believe it will continue to be as strong as we move forward. As I mentioned earlier, I mean the big question mark for us is just what happens with the end consumer. And a couple of months ago, we clearly talked about it being uncertain times and a lot of dynamic environment. And obviously, since the conflict in the Middle East, it's take it to a whole new level. So we believe that we're just being prudent in terms of, hey, let's wait and see what happens and how it plays out with consumers. And as we mentioned before, we are starting to see some inflation through. So if there's any caution, it's just that. And certainly, these are very uncertain times that we'll continue to monitor and to what we can control. I feel great about what our teams are doing. I feel we have a very clear line of sight into our plans for the rest of the year. and I expect our performance to be strong certainly versus the category. And ultimately, it's the category, how that performs with all these uncertainties and the things that we're watching. Operator: Your next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: Just following up on plumbing. Can you give any additional color on the growth you saw in Watkins and the opportunity or the TAM there? I think you flagged Delta and Watkins as your strongest growers is Watkins growing maybe similar to Delta? Or is it growing faster off a lower base? Is there any product set or brand within Watkins that's really driving the strength? . Jonathon Nudi: Anthony, it's Jon. We feel, as we've talked about, great about Watkins and the opportunity. Watkins did grow in Q1. And we're going to get into a lot more detail at our Investor Day next month in New York City. So we'll walk you through the TAM. We'll walk you through the opportunities that we see -- what I would tell you is that hot tubs is our biggest business, and we like the momentum. We're the share leader in that space across North America, where we're seeing outsized growth is really in [indiscernible], which is only 1% health penetration in the U.S. today. It's very much front and center of the wellness movement, and we're seeing just a lot of demand for that product. So we grew nicely from a walk-in standpoint in Q1. We'll give you a lot more details next month when we get together. Anthony Pettinari: Great. Great. And then, I guess, given the rise in diesel and gas prices, I'm wondering if you've historically seen real sensitivity between gasoline prices and consumer spending for your products? I guess I'm thinking specifically about DIY paint and maybe some of the smaller ticket items. It seems like you haven't seen that so far, but I'm just wondering if that's something historically that's moved the business. Richard Westenberg: Anthony, it's Rick. So -- it's tough to single out a particular driver. I think what we watch, generally speaking, is consumer sentiment as well as overall the health of the economy. And so higher oil prices, as we all recognize, is generally a headwind to consumer confidence is generally a headwind to disposable income. So -- and it's a headwind in terms of input costs. So those are things that we're monitoring closely, and that's one of the reasons that gives us caution and why we're prudent with regards to our expectations as we move out through the course of the year. Again, the fundamentals of the business, as Jon articulated, are really strong. We're pleased with the execution of what we've been doing here at Masco and across our business units. Oil prices is something that is a headwind, but it's more how it manifests itself in terms of consumer confidence, et cetera. For us, in terms of our products, they tend to be a lower ticket R&R items, so they tend to be more resilient in these types of environments. But nonetheless, we're not immune to it, but it's something that we'll continue to monitor and track progress through the course of the year. Operator: Your next question comes from the line of Susan Maklari with Goldman Sachs. Susan Maklari: I want to talk about the longer-term growth path. With the changes in leadership that you announced this week, do you now have the heads of those 4 key businesses reporting directly to you, Jon. Can you talk about what that means in terms of your ability to drive growth over time? And how the executive committee is focused on some of these items? And what that will mean for Masco? Jonathon Nudi: Yes. So great question. As I mentioned before, as I came into Masco, I heard that. top line growth as something that probably was an opportunity, something for us to focus on. And then as I took a deeper the of the feedback, the other thing I heard is just our ability to move with pace and be agile is probably the other area to focus on. So with the executive community returned to 2 things. One, make sure that we have the right experts in terms of our centers of excellence and deep functional knowledge where it matters. . We announced just earlier this week that we're bringing in a procurement -- Chief Procurement Officer who has 30 years of experience in the space and will be able to help us bring the most modern capabilities as which we feel great about. And also with the executive committee, really trying to streamline the organization to have more frequent communication, allow us to make decisions more quickly and move with pace. So with the new organization, essentially have removed a layer -- and with that, we think that our speed and agility will increase even more we talk as an executive committee, we meet once a week. I can tell you I talk to my direct reports many more times than that. And I think with the roll around us and the pace that we're seeing, it's really important that we have the organization that's set up to read and respond and deliver to consumers and customers what they expect from us. Susan Maklari: Okay. That's great color. And then despite the moving parts around inventories and costs, still targeting to get that working capital down to about 16.5% of sales this year. Can you just talk through some of the pieces in there and how we should think about that coming together? . Richard Westenberg: Sure, Sue. It's Rick. So part of the reason our working capital is higher than it typically is this time of the year or has been for the last several months is because of the implications of tariffs. So the payer tariff costs and commodity costs, quite frankly, that lead into our inventory and receivables have elevated our working capital in the shorter payment terms on the tariff bills or invoices also reduces are payable. So there's an overarching tariff dynamic that has been at play. We'll see that normalize as we get into the second half of the year. And we continue to be. The team is very focused on managing not only cost, but also working capital. And so that's something that we'll continue to execute on. And once we get through the normalization of the tariff implications in the second half of the year, we should be able to execute towards the working capital that's more in line with our historical average, and we've guided towards 16.5%. Operator: And your last question comes from Rafe Jadrosich with Bank of America. Rafe Jadrosich: The outperformance in plumbing volume in the first quarter in North America, how much would you attribute to just broader consumer resilience and the category holding up relative to your market share outperforming what you were expecting going into the quarter? Jonathon Nudi: So I'm not sure we'll quantify it to the level of detail you're looking for. I mean, I think the category performed fairly well. I am very confident we also took market share that mentioned I believe that we're firing on all cylinders right now and really strong plans in place across each of our channels, each of our customers. So just leave it out is probably a bit of both. But if I had to say which one was the bigger driver, I would think probably our market share gains. Rafe Jadrosich: Great. That's helpful. And then in terms of the input cost inflation, what you're expecting, can you talk about what the copper price is embedded in guidance for the second half of the year or should we be assuming that copper prices and like stay where they are today. So just what are you assuming to get to the full year guidance? . Richard Westenberg: Sure, Rafe. It's Rick. We're not going to disclose a specific assumption in our outlook. But suffice it to say, I would assume that where we have been recently relays we closed out 2025 is a pretty reasonable place to be. Obviously, it's volatile in that nature. I mean I think as we sit at $6 or above $6 per pound, that is something that represents a bit of a headwind to us, but it's a volatile environment. And at the end of the day, as I've mentioned before, we're not only monitoring the situation, but we're proactively taking actions from a cost reduction standpoint, from an efficiency standpoint and as necessary, a pricing standpoint to mitigate those impacts, whether they're copper, oil inputs, tariffs, et cetera, to be able to deliver the results that we've guided to for the year. Operator: This concludes the question-and-answer session. I will now turn the call back to Robin Zondervan for closing remarks. Robin Zondervan: We'd like to thank all of you for joining us on the call this morning and for your interest in Masco. That concludes today's call. Have a wonderful day. . Operator: This concludes today's conference call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Elevance Health First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead. Nathan Rich: Good morning, and welcome to Elevance Health's First Quarter 2026 Earnings Conference Call. My name is Nathan Rich, Vice President of Investor Relations. With us on the earnings call are Gail Boudreaux, President and CEO; Mark Kaye, our CFO; Felicia Norwood, our Chief Health Benefits Officer; Morgan Kendrick, President of our Commercial Health Benefits business; and Aimee Dailey, President of our Government Health Benefits business. Gail will open the call by highlighting our first quarter performance and the actions we are taking to advance our strategic priorities. Mark will then discuss our financial results and revised outlook in greater detail. After our prepared remarks, the team will be available for Q&A. During the call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website, elevancehealth.com. We will also be making forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Elevance Health. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to carefully review the risk factors discussed in today's press release and in our quarterly filings with the SEC. I will now turn the call over to Gail. Gail Boudreaux: Good morning, and thank you for joining us. Health care is undergoing significant transformation, and it requires us to operate with greater speed, precision and connectivity. Costs are rising, expectations are rising, and both member and care providers want a simpler, more integrated experience. At Elevance Health, our strategy remains clear: lower the cost of health care and simplify how people navigate the system. What is evolving is how we execute. We are operating with greater alignment, accountability and clarity across the enterprise, and that progress is showing up in our results. In the first quarter, our performance exceeded expectations, driven by underlying business strength, along with ACA seasonality and nonrecurring investment income. While it is still early in the year, the trends we are seeing give us increased confidence in the trajectory of the business. That is why we are raising our full year adjusted diluted earnings per share guidance to at least $26.75. Our outlook remains grounded in prudent, achievable assumptions with clear visibility into the key drivers of performance, supported by improving claims experience. We are advancing our strategy in several focused ways. First, we've realigned our leadership structure to strengthen coordination between health benefits and Carelon. We have streamlined accountability, aligned core functions more closely to the business and brought decision-making closer to where the work is done. Those changes are designed to sharpen execution and create greater alignment across the enterprise. Second, we are embedding and scaling AI across clinical, operational and administrative workflows where it can have direct measurable impact, and we are already seeing tangible results. These capabilities are improving how we engage members and how we manage costs. They are enabling earlier, more personalized interventions, strengthening decision-making through predictive analytics and reducing administrative expense through automation. Together, these are driving greater efficiency and supporting more consistent performance over time. Third, we are transforming how care is delivered through Carelon by advancing our integrated whole health approach. By combining CareBridge and our [ Care at Home ] capabilities into a single risk-based solution, we are driving higher engagement and stronger clinical outcomes. These programs have reduced hospital readmission by 20% and generated more than 10% savings on post-acute care, supported by integrated pharmacy, specialty care and behavioral health. We continue to see strong demand for Carelon's capabilities, reinforcing its role as a driver of current performance and long-term growth. Let me turn to our first quarter performance. In Medicaid, we are seeing early evidence that our actions are lowering costs, particularly in behavioral health and specialty pharmacy. That progress is being driven by more targeted, proactive interventions that allow us to engage earlier, coordinate care more effectively and support members in the most appropriate settings. We are addressing rapid growth in ABA therapy through rigorous clinical oversight, and we're using predictive analytics to identify members at risk of substance use disorder before adverse events occur. In Medicare Advantage, the steps we have taken to reposition the business are driving improved performance, and we remain on track to achieve an operating margin of at least 2% in 2026. We were also encouraged to see CMS address a portion of the funding challenges in the final rates for 2027. As we prepare for bid submissions, we will remain disciplined and continue to prioritize plans that deliver long-term value while supporting progress toward our financial objectives. Regarding the notice we received from CMS in February related to historical risk adjustment data, we are engaging constructively with the agency and making steady progress toward resolution. We stand firmly behind the integrity of our risk adjustment program, supported by rigorous oversight and governance. Importantly, this matter does not affect our outlook or how we serve our members, and it does not change how we are managing the business or our expectations for performance. In commercial, we maintained a disciplined pricing approach for 2026 to ensure appropriate returns and our first quarter performance reflects that focus. As we look ahead to 2027 selling season, we are seeing strong employer interest, supported by a robust pipeline and early wins. Our integrated medical and pharmacy capabilities continue to resonate in the market. In Individual ACA, we are seeing modestly stronger retention, particularly in bronze tier plans where affordability remains critical. First quarter results reflect pronounced seasonality given product mix and the business remains on track toward a more sustainable financial profile. In Carelon, our risk-based solutions are delivering measurable value. Using AI and advanced analytics, we are identifying high-risk members earlier and engaging them through coordinated whole-person care. That is driving higher medication adherence, fewer emergency room visits and lower hospital readmissions, and it continues to support strong demand for our capabilities. In summary, we are executing our strategy with discipline and clarity. Our actions are translating into measurable results, improving affordability, simplifying the health care experience and strengthening financial performance. We are building momentum, and we are seeing that translate into more consistent performance across our businesses with strong visibility into the drivers of our results. Elevance Health was recently named to Fortune's 100 Best Companies to Work For list for the sixth consecutive year. We view that as a reflection of the strength of our culture and our people and an important foundation as we improve execution and build greater consistency in our results. As we look ahead, we remain confident in our ability to deliver at least 12% adjusted EPS growth in 2027. Before I close, I want to recognize and thank our associates. Their commitment, resilience and sense of purpose drive our progress, supporting our members, partnering with care providers and advancing our mission every day. With that, I will turn the call over to Mark to review our first quarter financial results and updated outlook. Mark Kaye: Thank you, Gail, and good morning, everyone. Elevance Health reported first quarter adjusted diluted earnings per share of $12.58, which exceeded our expectations. The strength in our operating results reflected favorable claims experience and seasonality in our Individual ACA business. In addition, we recognized approximately $1 per share from nonrecurring valuation adjustments within net investment income. We are raising our full year 2026 adjusted diluted earnings per share guidance to at least $26.75 based on our first quarter results, and we view the assumptions embedded in our outlook as appropriate and supported by current operating trends. Our confidence reflects the actions we are taking to manage cost trend and maintain expense discipline. Further, we are investing to scale AI across our enterprise, which will enable earlier identification of a member's health needs, guide them to more effective and affordable care and reduce administrative complexity, strengthening both outcomes and long-term performance. In 2027, we expect to return to at least 12% adjusted EPS growth off of our revised 2026 earnings baseline of $25.75. Turning to our first quarter results. We ended March with 45.4 million members, an increase of nearly 200,000 from year-end, driven by growth in our commercial fee-based membership and higher enrollment in Individual ACA. This was partly offset by anticipated declines in Medicare Advantage, Employer Group Risk and Medicaid. Operating revenue totaled $49.5 billion, up 1.5% year-over-year as higher premium yields were largely offset by lower health plan membership compared with the prior year. Our consolidated benefit expense ratio was 86.8%. Medical costs were modestly better than we had assumed in our outlook, reflecting both favorable claims experience and the impact from actions we have taken to manage trend. These collectively contributed approximately 2/3 of our operating outperformance in the quarter. The remaining 1/3 reflected seasonality in our Individual ACA business associated with higher membership in our bronze plans, which have benefit designs that typically defer a greater portion of planned costs into the second half of the year. Our adjusted operating expense ratio was 10.5%, an improvement of 20 basis points year-over-year. While we continue to manage costs thoughtfully, the focused investments we're making in artificial intelligence and Carelon's clinical capabilities will improve how we operate, strengthen our earnings power and better position the enterprise for long-term growth. Before discussing our performance in greater detail, I want to briefly highlight 2 items recorded in the quarter that were excluded from adjusted earnings. First, we have initiated steps to submit risk adjustment data related to historical periods to CMS and are following the process established by the agency to bring this matter to resolution. We recorded an accrual of $935 million, representing our current best estimate of the identified potential exposure based on the information available today. While the final amount will be determined through the resolution process, we believe our accrual appropriately reflects this matter. Second, we recorded a $129 million charge related to business optimization. This reflects ongoing actions to simplify organizational structures and support accelerated decision-making. Turning now to our businesses. Medicaid performance was slightly favorable to our expectations, benefiting from progress on the initiatives we have implemented to manage costs. We remain confident in our full year operating margin outlook of approximately negative 1.75% as our guidance maintains a prudent stance towards rate adequacy and trend development over the remainder of the year. In Medicare, results were stronger than we anticipated, reflecting the impact of the portfolio actions we took for 2026. Those actions, including product repositioning and selective market exits, support improved performance, and we remain on track to achieve an operating margin of at least 2% this year. Commercial Group developed as planned, consistent with the pricing discipline we outlined last quarter. As employers focus on lowering health care costs, we are seeing stronger demand for our integrated whole health clinical programs and patient advocacy solutions. Individual ACA membership grew sequentially in the first quarter with a meaningful portion of the growth driven by our 2025 expansion states and more consumers selecting plan options at the bronze [ mental ] level. Our current view of membership effectuation indicates that we are on track to end the second quarter with approximately 1.2 million members ahead of our initial outlook. However, given the unique market dynamics this year and a significant shift in product mix, it is still early to revise our full year outlook to at least 900,000 members. Carelon's first quarter operating gain declined modestly from the prior year, reflecting lower health plan membership and continued investment in the expansion of our risk-based capabilities, partially offset by improvement in specialty pharmacy and CareBridge. These dynamics are consistent with how we are evolving the business, and we remain focused on advancing performance over time. Carelon is an important contributor to our enterprise performance and a key driver of our long-term growth strategy. Now moving to the balance sheet and operating cash flow. Days in claims payable were 46.6 days, an increase of 5.3 days sequentially. Operating cash flow was $4.3 billion in the quarter, and we continue to expect full year operating cash flow of at least $5.5 billion, inclusive of potential cash payments related to the CMS matter. In the quarter, we repurchased 3.7 million shares for $1.1 billion at an average price of just over $300 per share. Our capital deployment priorities reflect confidence in the durability of our business and its long-term earnings power, and we remain on track for at least $2.3 billion of share repurchases in 2026. We are pleased with the strong start to the year and are confident in our full year outlook. Beyond the update to our 2026 earnings per share guidance, the principal operating elements of the framework we provided last quarter remain appropriate. With respect to seasonality, our expectations for the second quarter are largely unchanged, and we anticipate our second quarter earnings per share to be approximately 23% of our revised full year guidance. With that, operator, please open the line for questions. Operator: [Operator Instructions] For our first question, we'll go to the line of A.J. Rice from UBS. Albert Rice: Maybe just we're well into the PBM selling season for 2027. And I guess we're gearing up for the commercial employer market selling season. Are you hearing anything different in terms of the amount of activity that you're seeing out there and the types of priorities that our employers are putting on engaging, anything they're emphasizing given AI, given a little uncertainty in the economy that you would call out that's different this year as we begin to move into the selling season? Gail Boudreaux: Thanks for the question, A.J. And I think it's a great one to start the call. Let me start with the commercial selling season, and then I'll ask Mark to comment on the PBM. But in terms of the national account season, in particular, where we see early, I think, early interest by employers, as I think I shared in my remarks, we're off to a really strong start. We've got some early wins. What we're hearing from our national account employers is they're very focused on affordability. AI is important in terms of the consumer experience. As you know, we've got 2 core goals: reduce the cost of health care for them and improve the experience, and we've been investing heavily in ensuring that those capabilities choke through. So from an employer perspective, we just hosted our national account group, and we had most of our clients in and they shared with us think a lot of satisfaction. We had a very strong '26 selling year. But also '27, we have a very strong pipeline, almost a record level for '27. We're pretty enthusiastic about how our assets are resonating. The other thing that we're starting to see is, again, continued consolidation from clients. We've had a record of taking clients who have multiple carriers and consolidating some single carrier under us. And that theme is continuing. So we're very optimistic. But overall, the season, I would say, very focused on affordability given what's going on in the economy, but also very focused on experience and wanting to ensure simplicity that there's real value pulling through for the commercial group. But let me ask Mark to comment on the PBM side as well. Mark Kaye: Yes. Thanks, A.J. Carelon Rx delivered a strong ASO selling season for 2026. So we had several national account wins. We also had improved win rates across both the middle market and large group. And that performance here really reflects growing demand for a more integrated medical pharmacy model and for some of the differentiated value that Carelon Rx is able to bring to employers and our health plan partners. I'd say sales momentum remains strong. We have seen total sales to date running ahead of plan including 2 marquee national wins. And that really does highlight our ability to compete upmarket successfully for large sophisticated clients. We've also seen good renewal activity, especially as we enter this active phase of some of the client strategy discussions. On the commercial side, good penetration across that book, good cross-selling of pharmacy into our existing fee-based relationships that obviously remains an important lever for us. And the reason this opportunity is real is that it is producing measurable results. And maybe just to give you 2 examples here. We have seen for clients that do have that aligned medical pharmacy benefit savings upwards of $100 per member per month as well as significantly fewer ER visits as well as a reduction in some of the high-cost specialty drug administration. So in short, as we look forward to 2027, our confidence is really grounded in that pipeline momentum and the demonstrated value that we bring. Gail Boudreaux: Yes. Thanks, Mark, and thanks, A.J. I think you heard from both of us, we feel really well positioned in -- for national accounts as well as for employer groups. So next question please. Operator: Next, we'll go to the line of Stephen Baxter from Wells Fargo. Stephen Baxter: I was hoping you could expand a little bit on the cost trend comments. Obviously, it seems like you're seeing some level of moderation in Medicare and are confident enough at this stage to identify that. And then on Medicaid, on the other hand, it seems to be much more consistent with what you've been talking about recently. Maybe help us try to understand the differentiation that you're seeing there and what's driving that at this stage. Gail Boudreaux: Thanks for the question, Stephen. Maybe it would be helpful to sort of take a step back in total because I think, as we said, we're really pleased with the strong start to this year. At a high level, cost trend is tracking in line with the expectations, and that's consistent with the stronger performance that we delivered in the quarter. But I think what's really important as you look through our results, it's not one driver or one single item. What we saw going into this year is solid execution across our entire enterprise, and that's what supports our full year adjusted EPS outlook guide of $26.75. And more importantly, I think it gives us much more confidence into the trajectory, not only this year but into '27. From a cost standpoint, I just want to point out some of the actions that we've taken are beginning to show through. So as you think about earlier using data to find out where the outliers are, utilization management, stronger payment integrity, for example, and an area that I think is really important is better site of care optimization, where we've been very focused on that. So overall, we see the businesses are performing in line. And in some cases, as Mark shared, they're ahead of assumptions. So we've embedded, we think, very prudent assumptions in our outlook, I think, and that speaks to the resilience of the portfolio. But I also want to, I guess, continue to say we're going to stay disciplined in how we view the balance of the year, and we're not relying on different trend environment to support the guide. So we're going to continue to scale what we're doing. But bottom line, I think it's important that our business, we feel, is performing well, and those actions are going to continue to gain traction throughout the year, and that reinforces our confidence. So thanks very much for the question. Next question, please. Operator: Next, we'll go to the line of Justin Lake from Wolfe Research. Justin Lake: Your guidance assumed a conservative view of Medicaid membership declines, I think, in the high single-digit range for the year. And I noticed for the quarter, Medicaid membership looks like it was down about 1.5% ex the growth in Indiana. So I'm curious what you're seeing here in terms of membership mix? Specifically, are you seeing membership declines heavier among lower-utilizing members, potentially pressuring the risk pool? And can you remind us what you've built in for acuity pressure within your Medicaid margin guidance? Gail Boudreaux: Mark? Mark Kaye: Thanks very much for the question, Justin. We remain quite comfortable with our Medicaid membership guidance range that we provided for 2026, which just as a reminder, reflects a high single-digit percentage decline driven by ongoing eligibility reverifications and disenrollment activity. At this point, we do expect to finish the year towards the higher end of that range, and that reflects both the prudence embedded in our original outlook and the way that the state reverification activity has unfolded so far this year. Overall, what we've seen to date has been broadly consistent with our expectations. I would say timing has been modestly more favorable than what we originally assumed. And then finally, I would say our full year guidance does assume that greater membership pressure from reverifications over the balance of the year versus what we saw in the first quarter. And that simply reflects that range of potential state actions, some of the uncertainty around the implementation of the timing of those 6-month eligibility periods and then overall enrollment-related pressures as the year progresses. Gail Boudreaux: Yes. Thanks, Mark. And also just to sort of bring it together for you, Justin, I mean, this is aligning similar to what we put in our guidance. And we do, as we've shared before, I think this is the trough year. And we continue to believe that given what we're seeing in the business. Next question, please. Operator: Next, we'll go to the line of Andrew Mok from Barclays. Andrew Mok: I wanted to follow up on the employer side and the affordability discussion. Can you help us understand what you're seeing in terms of consumer behavior in response to reset deductibles? And relatedly, have you observed any impact from higher gas prices or broader macro pressures on health care utilization? Gail Boudreaux: I'll ask Morgan to share his perspective. Morgan? Morgan Kendrick: Yes, Andrew, thanks for the question. I will tell you the market is completely aligned with our strategy of reducing the cost of health care and improving the experience of the consumer, making it simpler. I think that's the biggest thing that I hear that it's overly complex, burdensome for the consumers to actually seek care, go through treatments, things of that nature. That's where we're working together to solve those. That is exactly where -- and I think that's why, as Gail mentioned earlier, we had such a strong season upmarket, and that also permeates into our down level business as well. So if we think about our local geographies and national, all of this is focused around affordability and simplicity. Beyond that, it's just a little things around the edges are just about [ accentuating ] both of those. That said, we do see a shift in way of funding. So of course, as you go further up, it's all self-funded business. It's a fee-based business. If you look at the down market, it's about 50-50 between risk-based and fee-based. Nonetheless, people want to know that we're focused on the right things. And as Gail mentioned, we listen to the markets and the markets tell us quite carefully and honestly that it's all around affordability. How are we leveraging the unit cost position that we have and then how are we medically managing that to the point that is driving their trends down consistently. Gail Boudreaux: Yes. Thanks, Morgan. Maybe a little bit on the ACA, Mark, just in terms of what we're seeing in consumer behavior there. Mark Kaye: No, absolutely. So I'd say broadly, Andrew, consumer shopping behavior in the ACA market has been in line with our expectations. The biggest difference here versus our initial view is that shift towards bronze plans has been more pronounced and is a positive for us in certain markets. And that dynamic clearly makes sense in the current environment because obviously, subsidies are tied to that benchmark silver plan. And as benchmark premiums move higher in 2026, those bronze options became more affordable on that net of subsidy basis for consumers. So we feel pretty good about our positioning in ACA. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Lisa Gill from JPMorgan. Lisa Gill: I want to ask a question around Carelon and Carelon Rx. When I look at the margin in the quarter, it came in below our expectations. You reiterated the guidance for the year. Can you talk about the progression of getting that margin back when we think about Carelon specifically and then within that Carelon Rx? And then secondly, any comments around recent legislation, whether we think about what's passed on the federal level and any impact to your business on the PBM side or the potential of what's been proposed, for example, in the state of Tennessee, any impact on the PBM business? Mark Kaye: Lisa, thanks very much for the question. Let me start with the performance first in Rx. So I would say performance here was very much in line with our expectations in the quarter. Revenue growth was driven by strong revenue per script and continued momentum in the external business, particularly in the ASO space, and that was partially offset by lower strip volume from the affiliated health plan membership. On margin, to your question, the key point here is that the first quarter performance was very much in line with our expectations, and it's fully consistent with our full year guide for that mid-5% margin range. I'd say the quarter itself reflected very normal seasonality in the PBM business, along with expected mix of growth and the current earnings cadence across the platform. We did see some improvements in specialty and home dispensing. So that obviously helped overall performance in the quarter. But if you step back, I'd say, from an Rx perspective, revenue and margin, very much in line with what we expected. On your point on the regulatory for a minute, I think the direction of travel here is pretty clear. We have seen recent federal actions moving that PBM market towards greater transparency, stronger reporting and I think ultimately closer alignment between PBMs and their clients. And so for Carelon Rx, I would say that direction of travel is fully consistent with the model that we are building. We already offer clients flexibility in how they engage with us, and that includes rebate pass-throughs as well as transparent fee-based arrangements. And more importantly, I'd say our strategy here in Rx is not dependent upon any single economic mechanism. It really is built around that integrated medical and pharmacy management and a focus on total cost of care. Gail Boudreaux: Thank you, Mark. Next question, please. Operator: Next, we'll go to the line of Lance Wilkes from Bernstein. Lance Wilkes: Got a question on employer and in particular, the progress you're making on the second blue bid sort of opportunity out there. Maybe if you could just remind us of the '26 experience you had in sales there. But then if you could just talk a little about the value proposition you're selling, sort of the target clients who are going to be open to this and what pipeline looks like for '27? And as part of that, if there's any detail on the type of Carelon services that some of those people would be picking up more likely? Gail Boudreaux: Thanks, Lance. I'll have Morgan address your questions. Morgan Kendrick: Lance, thanks for the question. Regarding the -- what we're seeing in the national space, with second blue bid, it was quite -- last year, as you know, was the very first year we did it. It was very lucrative for the business. We had less -- we had probably 40 more additional opportunities that came through. And so it was there. We're still seeing that again in year 2, but nonetheless, not quite as high. We've got roughly 2 million members in queue. A couple of those are second blue bid, but the overwhelming majority is just business in the market coming from other places. So it's -- to me, it's -- the assets speak for themselves, and that's exactly what the markets are telling us. The renewal numbers that we've seen in our national business are nearly 100%. It's like 99.3%. So you think about -- these are organizations that don't move very often. They like what they're getting, they like and they keep it. To the point around Carelon, when I think about what they're looking for with Carelon, they're looking for various solutions around medical conditions, MSK, diabetes, things of that nature to work directly in their population where it may be skewed in those areas, and we can solve for it with them. And also, as Mark indicated, pharmacy. Last year was one of the largest years we've had around integrated Rx in the upper end of the market. We do expect that to play in, but it was really, really strong last year, and we expect it to be slightly dampened this year. Gail Boudreaux: Thank you, Morgan. Next question, please. Operator: Next, we'll go to the line of Ann Hynes from Mizuho Securities. Ann Hynes: I know you said Medicaid margins were tracking better than your expectations and what's embedded in guidance. Can you actually tell what Q -- tell us what Q1 results were? And can you also remind us what your rate increases are for 2026 as in guidance? And have there been any positive updates since the last report? Gail Boudreaux: Mark, I'll ask to start and then Felicia to give some more comments. Mark Kaye: Ann, thanks very much for the question. So from a trend perspective, I would say first quarter was slightly ahead of our expectations. That reflected the favorable claims development. That said, underlying cost trend does remain elevated. The first quarter trend is consistent with our full year outlook. And we do continue to contemplate Medicaid trend at the high end of that mid-single-digit guidance range that we provided. So as you think about margins, to your question for the first quarter, certainly, on a sequential basis, we did see an expected deterioration in the first quarter, meaning coming in exactly as we anticipated. And so for the full year, we're continuing to be very comfortable with our guide of minus 1.75% operating margin. Felicia Norwood: Yes, thank you for the question. Ann, thank you for the question. In terms of our Medicaid rates, our Medicaid rates for the first quarter, which means through April, are right in line with our expectations. The rates absolutely are coming in close to the mid-single-digit range. At the end of the day, however, that remains slightly below the trend that we continue to see in the business. So we are going to continue to work very constructively with our state partners around closing that rate to trend gap. Overall, I will tell you that those conversations continue to be very constructive. We provide regular information to our states in terms of our performance, and we look forward to continuing to make the improvements that we expect to see in the Medicaid rates over time. But through the first quarter, certainly right in line with the expectations, and we've already started to work with our states around July rates, although it's still early in terms of a view of July, but the continued progress that we're making is expected to really continue throughout the rest of the year. So thank you very much for the question. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Scott Fidel from Goldman Sachs. Scott Fidel: I was hoping if you could maybe expand on just giving us an update on the risk-based management programs that you've been deploying in Carelon services. Maybe just talk about the overall scope of how those programs have been expanding and basically sort of the actions within the operating model that you have to sort of protect against sort of upside risk on medical cost trend? And then also if you could just talk about the investments that you called out in the quarter also related to that line of business? Mark Kaye: Scott, thanks very much for the question this morning. I think let me start off by saying that we are taking a very disciplined approach to how we manage risk in Carelon services. And specifically, we're very intentional about where we take risk in the business, how we price for it and then ultimately, how we balance that exposure across our Medicare, Medicaid and commercial businesses with a mix of either subcapitated full risk or really fee-based offerings. One of the real advantages in Carelon here is that we can use our affiliated health plan membership as a proving ground to launch and scale capabilities quickly. For example, we started our risk-based oncology solution in commercial. We expanded it into Medicare. And then we plan to move it into Medicaid in the latter half of this year. And we followed a similar path for post-acute and more recently in BH as well. So a lot happening in that space. At the same time, obviously, as we continue to grow the risk-based side of Carelon services, the segment is going to reflect some of that normal mix and timing dynamics. And I think that's the heart of your question. And that really comes with our scaling of these capabilities. Just to point out, low affiliated health plan membership does remain a headwind across several of the offerings this year. And of course, some of the newer risk-based programs will have a different earnings cadence as they progress. And a couple of quick examples here before I leave at least this question. Risk-based oncology program, we started in 2024. We expanded in '25. Post-acute started in Medicare, we've deployed commercial. And then BH is the one that we've recently launched with some serious mental illness in the Medicaid population. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Ryan Langston from TD Cowen. Ryan Langston: I appreciate you sizing the settlement potential CMS. I guess can you give us a sense on how those conversations are progressing? And I'd be interested if you could help us frame sort of how you arrived at that $935 million figure? Gail Boudreaux: Sure. Let me like provide you sort of a comprehensive view of how this works. Let me start with the accrual. First, the $935 million accrual that we recorded in the first quarter reflects our current best estimate of the probable exposure that is associated with this historical matter. And that's based on the information that we have today as well as our engagement with CMS. I think it's important too, as you think about it, this relates to historical payment disputes that involves the interpretation of the risk adjustment policy during that period in question. And actually, really importantly, I think everyone -- to remind everyone, it's not about how we operate the business today, and it doesn't change the confidence, as I shared in my comments, about the integrity of our current risk adjustment practices, our compliance or our governance. But in terms of where we're going, since receiving the notice from CMS in February, we've moved very quickly to engage directly and quite constructively with the agency on this matter. And those discussions have given us much better clarity, both on process and on the path to resolution. So I want to be clear about that. We are working through the process that CMS has outlined to address those issues raised. And CMS has updated because of the compliance time frame, which you want to share and work through -- as we work through that process and under the current time line, we have through July 31 to meet all of those compliance requirements. Certainly, we appreciate the extension of that time frame because it reflects, I think, the complexity of the work required to complete this. That said, based on the steps that CMS has prescribed and the current time line, which I've shared, we believe and expect that if we complete those steps that the sanctions will not go into effect. So I also want to share that. But again, we're working very constructively with the agency and feel that we're moving towards resolution of the issue. So thank you for the question. Next question, please. Operator: Next, we'll go to the line of Elizabeth Anderson from Evercore ISI. Elizabeth Anderson: Just appreciate the comments about the 2/3 of the outperformance is favorable claims and sort of better management of those claims. Could you maybe help us parse out the breakdown of that? I know Mark was helpful in providing some comments about the flu and other 1Q utilization issues. But just anything else, if you could sort of clarify at this point, how you're viewing any weather or flu items in the first quarter? And then secondarily, in terms of some of those better management of claims, I appreciate you said that you're going to sort of flow those through for the rest of the year. Anything we should sort of think about in terms of that ramping up? Or should we think about that as relatively ratable across the rest of 2026? Mark Kaye: Elizabeth, thanks for the question. Let me start by framing the quarter because I think that's the cleanest way to answer your question as well as address sort of the guidance change that we put through. So in the first quarter, EPS did come in ahead of our initial outlook, and that included about $0.45 of core outperformance. About 2/3 of that or roughly $0.30 reflected underlying business favorability and the remaining $0.15 was really driven by seasonality-related timing dynamics. The underlying favorability was concentrated primarily in our health benefits business, and that did reflect better claims experience than we had assumed, including to the point you made, a less severe flu-like season that was embedded in our first quarter outlook, and that accounted for about $0.10-ish of that benefit. And so the remaining outperformance was really timing related. And as we noted in our prepared remarks this morning, primarily came from our ACA business, and that's simply driven by that higher mix of bronze plans, which we expect will defer a portion of planned costs into the back half of the year. So if I turn -- if I brought that all together and I turn to the guidance range, we did increase that full year EPS guide by $1.25 per -- relative to our prior outlook. And I would say of that increased $0.25 reflects that portion of the underlying nonseasonal business favorability we saw in the quarter. And of course, the remaining $1 was a nonrecurring item. And one last point, just from a modeling perspective, that dollar should clearly be excluded from the 2026 earnings baseline. So when you think about us returning to at least 12% EPS growth in 2027, that growth is off of an ending 2026 baseline at this point in time of at least $25.75. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Kevin Fischbeck from Bank of America. Kevin Fischbeck: Can we maybe go back to the exchange commentary. I guess we've been trained to look at better-than-expected enrollment sometimes as a red flag. So I just wanted to see if you could give any color about whether the high enrollment has come with any change in the underlying risk pool that you're seeing? And I guess last year, there was a change in the risk pool in part because there was a group of people coming -- losing Medicaid coverage coming on to the exchanges. Are you seeing any signs that, that's a potential pressure happening this year? Mark Kaye: Thanks for the question. Let me start off by saying we took a fairly prudent view when pricing 2026. And we did that really with the assumption that while much of the impact from the expiration of the enhanced premium subsidies would occur in the first year, it's going to take a little while for the risk pool stabilization to ultimately play out. I'd also note it's still early in the year and more time is going to be needed for those retention patterns or member retention patterns really to settle out and for claims to mature before we have a fully developed view of the morbidity profile of the risk pool this year. That said, one really early indicator that we have seen prior claims experience for renewing members in paid status running moderately higher than for the cancel or nonpayment cohorts. And that did support our view that [ relaxation ] here has increased the morbidity of the remaining pool. But importantly, that dynamic, that is tracking consistent with or even better than how we price the business in 2026. And so sort of to conclude here, I feel very good about our membership mix, and I feel very encouraged by that shift towards bronze, both in our book of business, but also broadly across the market itself. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Dave Windley from Jefferies. David Windley: I wanted to come back to Medicaid. Gail, you reiterated the comment that you think '26 is trough. I wanted to understand the assumptions embedded in that for '27 in terms of your expectations for member attrition from work requirement implementation and things of that sort? And then also ask where your thinking is around stay or leave state by state in situations where rate discussions are perhaps not moving in the direction that you'd like them to? Gail Boudreaux: So let me take the second part of the question first, and then I'll ask Mark to comment on the membership assumptions. We -- so as Felicia shared with you on Medicaid, we're having very constructive discussions with the states. While the rates are still lagging, we've seen, I think, positive movement in states trying to be constructive. And it's not only about the rates, it's also about the actions that we can take on benefits as well as the changes that we're making to our networks and other things. That being said, as I shared, I think, on the last call, where we don't see a sustainable path to profitability in a state, we will exit. I don't think we're at that stage with states. I just want to be clear. But again, we also are taking the view of, look, we need a sustainable path to this business. We do think it's an important business, both between our Medicare and Medicaid business in terms of how we serve our duals. But again, we will take a look to make sure that these rates are sustainable and that the capital we put into it can be returned. So with that, I'll ask Mark to comment just on how we're thinking about membership evolving over this year and next year. Mark Kaye: Thanks for the question here. I think modestly better Medicaid membership at year-end 2026 would not change our view that 2026 is the trough year for Medicaid margins. And if membership comes in somewhat better than we expected, the most likely explanation here is really timing, really that some eligibility-driven attrition would occur later than we had assumed. And that could, in theory, to your question, shift a portion of that membership and acuity pressure into 2027. But we would not expect any incremental pressure to be or we would expect any incremental pressure to be much more measured than what we would have experienced during the [ post-PHE ] period. And the key point here is because it's much more targeted, it's much more concentrated in that expansion population rather than being broad-based across the Medicaid book. And then just as importantly, and you heard this from Gail, that does not change our belief in the setup that we see for 2027. And we do believe 2027 is going to continue to benefit from better rate alignment as states incorporate more of that recent experience into their rate setting cycles. And certainly, while work requirements and community engagement requirements may create some additional pressure over time. I just want to emphasize the point, we do expect that impact to be much more phased and much more manageable than the redetermination cycle historically. Gail Boudreaux: Thank you, Mark. Next question, please. Operator: Next, we'll go to the line of Erin Wright from Morgan Stanley. Erin Wilson Wright: So AI and automation across just managed care in general has been a big question area for investors. I guess, can you talk about some of the proof points today or progress on that front, quantify any of those efficiency gains or maybe your long-term goals as it relates to that? And how are you tracking in terms of the associated incremental investments? How do you see that playing out as well as we head into '27, '28? Any context there would be great. Gail Boudreaux: Great. Well, thanks for the question, Erin. I think it's a great question in terms of how we're thinking about AI. And I think it's important as we talk about AI to step back because fundamentally, we see it and our technology strategy as supporting our overall strategy, which, as I said, is really very simple, make health care more affordable and make it simpler and more personalized for the people we serve. In terms of investments, we're investing more than $1 billion in digital and AI-enabled capabilities to support that strategy. And I think the key point that I really just want to start with is we're not approaching AI as a separate technology element or experimentation. We're looking at things that will scale and support those absolute core things of our business. So to give you some specifics, we're embedding it, I would say, in practical ways, first to help us reduce costs and again, to simplify experiences and then take administrative costs and complexity out for ourselves. So I'll walk in a couple of examples. One, for our members, that's really about making it easier to navigate. Health care is really complicated. When we look at where we've already invested, our AI-enabled virtual assistant, I think, is a really good example. We already have 22 million commercial members on that using it regularly, and it's helping people get answers fast with less friction. And we're seeing that dramatically improve, for example, our consumer effort scores. We're also being more personal. And I think that's another really important part of how we can deploy this technology through [ Sydney ], which is our personalized matching tool, where we help actually using over 500 data points, match people to the right care providers. More than 20% of our members have already connected and are finding the right providers. So not only is that simpler for them, but quite frankly, brings them to our providers that are high-performing providers. And again, that helps drive better medical costs. On the clinical and care operations side, we see AI helping improve things around speed, accuracy, decision-making, strengthening payment integrity. And what that's doing is giving us information much earlier to identify outliers. Again, that feeds into our ability to see trends faster and then take actions with our team around network, around clinical interventions. So over time, we see that as a real opportunity to manage costs. Right now, it's about getting information in our hands a lot faster. And I'll sort of close on a couple of final examples for care providers, it's really about reducing burden. We need to really reduce the friction and simplify workflows. That's a commitment that we've made. HealthOS is an area that we've been investing over. You've heard us talk about it the last several years. And that's really about data sharing, reducing paperwork and accelerating approvals. We're using it right now in our prior authorization commitments. And one of the areas that I know frustrates everyone is this lack of information and denials generally get caused because we don't get the right information. We see this technology and AI reducing those denials by more than almost 70% and it eliminates a lot of the need for follow-up and back and forth. So that's good for the system, and I think good for care providers. Then I'll just close, how else we're thinking about AI. We're leveraging it across our associates. More than 60,000 already have access to it. They're using it in their productivity tools. They're learning it. We have individuals signing up to understand how to use it. We have guardrails around that. We're obviously very cautious about making sure we use it the right way, but we think -- we see it as a productivity tool. So let me just step back. I know that was a lot, but we see it. We're encouraged by technology. It's not just pilots. It's embedded in our capabilities, and you're really going to see it come through in the results we have in the measures, not just in the dollars, but also in our [ admin ]. So thank you very much for the question. Next question, please. Operator: Next, we'll go to the line of Ben Hendrix from RBC Capital Markets. Benjamin Hendrix: I wanted to get a little bit more color on the site of care optimization actions you mentioned helping to control your cost trend. Yesterday, we heard your peer mentioned some notable reductions in hospital admissions and skilled nursing transfers through some heightened clinical review. And I'm wondering if you could share some anecdotes either within the Carelon risk-based programs or in the broader benefits business where you're seeing gains from those [ site ] of care efforts specifically? Mark Kaye: Thanks very much for the question this morning. So just as a reminder, CareBridge is our home-based care platform focused on Medicaid and dual-eligible members, especially those with complex needs. And strategically, this is important for us because it extends Carelon's whole health model into the home, where obviously, better coordination can improve outcomes, lower total cost of care and then support stronger health plan performance. We're also very pleased with how CareBridge is ultimately integrating into the broader Carelon ecosystem. I'd say first quarter results are very much in line with our expectations for CareBridge. But we are seeing continued signs of improvement as we scale that platform and drive operational efficiencies across the book. We are also expanding CareBridge in ways that deepen both its reach, [ R-E-A-C-H ], and its value. And intentionally, we have launched additional Medicaid home and community-based support programs in several states, which has deepened our market penetration. And as a result of that, we are seeing early indications of that improved cost of care performance, especially as those capabilities are ultimately embedded into our market. So to your question, when we talk about site of care optimization through CareBridge, it's really about keeping members aligned to the right level of care, reducing unnecessary facility-based utilization and using that home as a more effective and lower cost setting for managing those complex and chronic needs. Gail Boudreaux: Thank you, Mark. I might ask Aimee Dailey, who leads our government business, to also comment on how we're deploying that inside of the health benefits business. Aimee? Unknown Executive: Yes. No, thank you, Gail. Really, one of the greatest things about CareBridge is its ability to engage members in a place that they're comfortable being engaged. And that engagement rate allows better reach, better access for those members to their health care and actually has created a fair amount of ER avoidance and improvement in PCP visits, which allows us then to get quality gaps in care closed and really make sure that these members are getting better outcomes in the long term. And we're really -- very pleased with what we're seeing and the early adoption of our CareBridge model across our duals business. And that dual business is where we see really a high level of need in that engagement. And so very pleased with how we've been able to embrace that CareBridge model. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Sarah James from Cantor Fitzgerald. Sarah James: What's there any takeaways on where you sit versus the industry from the new March [ Wakely ] data? I think they may have provided some context around average premiums or metal tiers. And then on the bronze shift you mentioned, can you quantify how much your mix moved? And just give us an idea of the delta between peak and trough MLR between bronze and silver. Is that just like a couple of hundred basis points? Or is it larger than that? Mark Kaye: Thanks very much for the question here. The early [ Wakely ] report has been a helpful input because it provides additional visibility into market size, [ metal ] mix and enrollment patterns. And importantly, the report from our perspective supports our view that we are seeing a greater shift towards bronze and a greater share of new sales, both of which obviously have implications for our relative risk to the market. And therefore, to an earlier question that was asked around risk adjustment. I'd really caution it's still an early data set from [ Wakely ]. It does not fully capture the impact of retro cancellations, nonpayment behavior or even maturing cohorts. And so I'd say while the report is useful, visibility is going to continue to improve as we get more effectuation data and cohort-based information over the coming months. All in, I think the most important point here is we feel very comfortable with our pricing and how we positioned our products for sustainability in the ACA market this year. And then to your question on specific splits, we are seeing a much more balanced bronze silver mix this year it come through based on the new sales. Gail Boudreaux: Next question, please. Operator: Next, we'll go to the line of Jason Cassorla from Guggenheim. Jason Cassorla: I wanted to ask a little bit more on the return to at least 12% EPS growth in '27. You've got margin expansion opportunity across most of your end markets. You've talked about the early benefits of AI and investment spend. But I guess could you help frame how we should be thinking about the components of that 2027 growth, including how much of that is predicated on pricing and trend that you can control or impact? Or maybe said another way, to the degree that Medicaid margins remain pressured next year, how do you feel about the levers and growth opportunities across your other businesses that could offset to drive that at least 12% growth expectation? Gail Boudreaux: Well, thanks for the question. I think it's important to first start with '26. And I think the headline around '26 is this is all about execution. And as you saw, we upped our guide to at least [ $26.75 ], reflecting that early execution while remaining grounded again in prudent, achievable expectations. Specific to your question, as we think about '27, we're confident in at least 12% adjusted EPS growth off of that earnings baseline, which now stands at $25.75, as Mark shared. Over the past couple of years, and I want to reframe that, we've made targeted investments in portfolio, pricing and operating discipline. And those were all designed to protect our earnings base and position us for the durable growth that we're projecting. We're leveraging the capabilities of our diversified platform, and I think that's really important. And there's 3 things I just want to underscore to your '27 question. First, the key earnings levers are already in motion, and I think that's important. Those are the actions that we put in place in '25 and into '26, and those are across many of the things you said, pricing, care management and portfolio positioning. Second, we're making meaningful investments in 2026. So as those investments mature and we realize returns on those initiatives, we're going to see a clear step-up for 2027. And third, again, the path isn't predicated on any single assumption. And I think that's really important as you think about our portfolio. It's built on many and multiple independent levers, and it's disciplined execution across both health benefits and Carelon. So those are the factors as I think about it, that give us confidence in achieving the earnings growth consistent with the long-term growth algorithm that we talked about through '27. So thank you for the question. And next question, please. This will be our last question. Operator: And for our final question, we'll go to the line of George Hill from Deutsche Bank. George Hill: This one is probably for Mark. Mark, we saw a pretty big step-up in base claims payable, both sequentially and year-over-year. I was wondering 2 things. Number one, might you be able to unpack kind of what drove that for us? Was it membership mix? Was it the exiting of Part D? Was it like legacy claims? And kind of how should we think about how that number trends through the balance of the year? Mark Kaye: George, thanks very much for the question. So DCP ended the quarter at 46.6 days. That was up 5.3 days from year-end, and that was driven mainly by normal first quarter seasonality and higher medical claims inventory across the business. A little bit deeper here. Commercial was affected in part by individual mix dynamics that we've discussed. Medicaid and Medicare really reflect that typical earlier slowdown in claims payment cycle. And really, the main takeaway here is the DCP result was largely a seasonal and mix-related movement. I wouldn't say it reflects any change in our underlying reserve approach. On the prior year development, that was approximately $250 million in the first quarter. And it's really worth noting here around that number is that typically for prior year development, we reestablish that as margins and reserves through the normal process. And so it really doesn't have a material P&L impact. Thanks for the question. Gail Boudreaux: Well, thank you. Thank you for the questions. And thank you, operator, and thanks to everyone on the line. As we move through 2026, our focus remains on operational execution, strengthening our diversified platform and building momentum across the enterprise. We're encouraged by our strong start to the year and the progress we're seeing. Our strategy to improve affordability, simplify the experience for all of our consumers and care providers and deliver better outcomes for the people we serve is what's driving durable financial performance over the long term for us. Thank you for your continued interest in Elevance Health, and have a great rest of the week. Operator: Ladies and gentlemen, a recording of this conference will be available for replay after 11:00 a.m. today through May 22, 2026. You may access the replay system at any time by dialing (800) 391-9853 and international participants can dial (203) 369-3269. This concludes our conference for today. Thank you for your participation and for using Verizon conferencing. You may now disconnect.
Operator: Welcome to the Metropolitan Commercial Bank First Quarter 2026 Earnings Call. Hosting the call today from Metropolitan Commercial Bank are Mark DeFazio, President and Chief Executive Officer; and Daniel Dougherty, Executive Vice President and Chief Financial Officer. Today's call is being recorded. During today's presentation, reference will be made to the company's earnings release and investor presentation, copies of which are available at mcbankny.com. Today's presentation may include forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to the company's notices regarding forward-looking statements and non-GAAP measures that appear in the earnings release and investor presentation. It is now my pleasure to turn the floor over to Mark DeFazio, President and Chief Executive Officer. You may begin. Mark DeFazio: Thank you, Angela. Good morning, and thank you all for joining our call. We ended the year with momentum, meaningful visibility into our growth outlook. A substantial portion of our expected loan and deposit growth is already in the pipeline and expected to be realized in the first half of the year, with the balance building steadily into the back half. The visibility reflects signed client commitments, active onboarding activity and long-standing relationships rather than speculative assumptions. Our iGaming payments and HUD [Audio Gap] platforms are no longer conceptual. They are in integration stage. We have a line of sight into implementation time lines and client onboarding activity, which will allow us to provide increasingly specific guidance around when these initiatives will translate into meaningful balance sheet growth, fee income and a broader client engagement. With new investors joining us following the successful capital raise, this is an important moment to restate what defines the MCB business model. This is not a new strategy or a pivot. This is a continuation and acceleration of a long-standing plan that has been executed consistently over many years. MCB is led by an experienced management team with a demonstrated track record of delivering on growth initiatives. Our performance reflects disciplined execution, not opportunistic expansion, and our results speak to the depth and experience across the organization. Our growth profile is unmatched among peers, both within the New York City market and nationally. This outperformance is not limited to a single cycle or initiative. It is evident across multiple years of economic environments, underscoring the durability of our model. The initiatives driving our growth today were developed over many years and required extensive upfront investments, particularly in technology, infrastructure and risk management. Those investments are now largely complete. As a result, today's growth reflects execution on a well-planned strategy, not aggressive stretch targets or growth for the sake of growth. The magnitude of our growth opportunity is a direct result of the investment we've made in technology and talent, which are now fully embedded in the organization. MCB is positioned to comfortably support a substantially larger balance sheet while continuing to meet the evolving needs of a sophisticated commercial client. I would like to express my sincere appreciation to our employees, directors and clients for their continued dedication and contributions. Their commitment to excellence has been instrumental to MCB's sustained performance and will remain a key driver of our success in the years ahead. I will now turn our call over to our CFO, Daniel Dougherty. Daniel Dougherty: Thanks, Mark. Good morning, everyone, and thanks for joining the call. The press release does a good job summarizing the highlights of the quarter, but I would like to take a moment to emphasize the impressive ROATCE print of 15.6% and the successful follow-on equity raise, which was executed in March under challenging market conditions, thanks to everyone that participated. With that said, let's begin with a few comments on the evolution of the balance sheet during the first quarter. The loan book increased by about $235 million. The pace of loan growth is in line with our guidance of $1 billion in net growth for 2026. First quarter total originations and draws of approximately $524 million were printed at a weighted average coupon net of fees of about 7.24%. Payoffs and paydowns totaled approximately $287 million at a WAC of 7.37%. Our current loan spread guidance continues to drive new volume coupons well above 7%. Looking forward, our current loan pipelines remain very strong, with loan opportunities at various stages of underwriting totaling more than $1.2 billion. To add some additional context, the portion of the current pipeline represented by signed term sheets totals to more than $700 million. On the deposit side, our deposit growth continues to outpace our loan growth. In the first quarter, we grew deposits by about $363 million or approximately 5%. Over the course of the first quarter, our cost of deposits dropped by 15 basis points. The decline was primarily driven by the 2 late 2025 rate cuts made by the FOMC. The deposit verticals driving the bulk of the increase in deposits in the quarter were municipals, EB-5 and HOAs. The outlook for continued deposit growth in our existing verticals remain strong and our intent to continue funding all 2026 loan growth with deposits remains unchanged. As a normal course of business, we continuously seek new deposit opportunities. We currently have a couple of programs, namely our payments and HUD initiatives that are currently in the execution phase. Both of these initiatives are expected to become meaningful contributors to our deposit funding platform soon. Our net interest margin was 4.08% in the first quarter, down 2 basis points from the prior quarter. However, on a normalized basis, quarter-over-quarter, the NIM increased by about 10 basis points, a performance very much aligned with our recent guidance that each 25 basis point reduction in the Fed funds target rate should drive about 5 basis points of NIM expansion. Specifically, as discussed on the fourth quarter earnings call, the fourth quarter NIM of 4.10% was influenced higher by late year loan prepayments that drove above normal prepayment penalty and deferred fee income, resulting in a normalized NIM of about 4.02%. Looking at this quarter, we carried a cash balance well above normal. This was a result of deposit growth in excess of loan growth, the previously mentioned year-end 2025 loan prepayments and the capital raise. After conservatively adjusting for the outsized cash position, the first quarter normalized NIM print was about 4.12%. Now let's move on to some high-level comments on our income statement. Our first quarter interest income was down by about $2.5 million compared to the prior quarter. There were 3 primary drivers of this result. The first being the day count decline quarter-over-quarter, the elevated December loan payoffs, as previously mentioned, and to a lesser extent, the impact of rate resets that occurred late in the fourth quarter on floating rate loans. Importantly, on the other side of the ledger, interest expense was down by about $3 million, resulting in a flattish top line performance overall. Going forward, it is our expectation that top line growth will resume according to plan with at least 20% net interest income growth for the full year. We expect that the NIM will press higher over the course of the year toward 4.15% to 4.20% as the year progresses. Importantly, our expanding NIM forecast is not reliant on rate cuts. In fact, we have removed all rate cut assumptions from our current 2026 forecast model. On the allowance for credit losses, a confluence of events drove the reduction in the allowance in Q1. The primary drivers of the change were the charge-off of 3 loans totaling $12.3 million, a provision release of $2.6 million as we made enhancements to our ACL framework and improvements in the forecast for certain underlying macroeconomic variables. The 3 loans charged off this quarter included 2 unsecured personal lines and 1 out-of-market CRE loan. Using all channels available to us, we are actively seeking recoveries on each of these loans. We continue to work diligently toward the resolution of the credits that make up our NPL portfolio. Our core noninterest income continues to be relatively flat. However, we remain optimistic that our new initiatives related to payments and HUD activity will drive a meaningful uplift in fee income beginning in the back half of this year. Noninterest expense was $46.4 million, up $2 million versus the prior quarter. The major movements in operating expenses quarter-over-quarter were an increase of $3.8 million in comp and benefits, primarily related to an increase in the bonus accrual and restricted stock expense of about $3 million and seasonal increases in FICA and other payroll-related expenses of about $1.1 million. As well, we saw a $1.8 million decrease in technology costs. The primary driver of this decrease was related to a delay in the completion of the digital transformation project. In total, for the first quarter, digital project costs were about $1 million. With the Modern Banking in Motion conversion now expected to take place in May, we have penciled in about $2 million of related expenses to be recognized in the second quarter. I will now turn the call back to our operator for Q&A. Operator: [Operator Instructions] Our first question comes from Timur Braziler with UBS. Timur Braziler: Looking at the deposit growth, pretty impressive this quarter. Maybe just give us a little bit more color to the drivers there and the accelerating growth rates more recently. Is this the deposit engine kind of catching up to some of the lending activities? Is this something else? And just maybe give us a little bit of color on what's been driving that growth? And as you look through the rest of the year, kind of the projection on the deposit side? Mark DeFazio: Yes. So when you look at -- Timur, this is Mark DeFazio. When you look at the slide in our investor deck showing you all the different deposit verticals, we differentiate the deposits that are coming in from commercial clients or our retail platform versus specialty deposits. So this year, as Dan mentioned, HOAs, EB-5 and munis sit in our specialty deposit opportunities. So they're not driven by loan or commercial activity. They're driven by a very focused team of SMEs who are very experienced in these markets, and they continue to drive opportunity for the bank. And we continue to expand into different geographies, allowing us to better serve HOAs and municipalities as well. Timur Braziler: Great. And then maybe looking at the payment side, I know you had said that those are no longer conceptual lifts. Can you just maybe provide us an update on how some of those initial use cases are playing out? And then just remind us again of the type of cadence that we should expect from the increase in payment-related revenues as you go through this year and maybe next? Mark DeFazio: Yes. So this is Mark again. I'll work backwards on that. I'll be in a better position to give you some good financial guidance perhaps in the next quarter. But we are in integration, which means that our technology is being developed and being integrated into the bank's platform in order to service iGaming clients. So we expect to be in testing. We will be inviting 3 operators. We haven't decided what operators we're going to approach yet. Hopefully, in June through September time frame to come in and do testing, perform testing on transactions. We hope to be live in the end of the third, fourth quarter. But I'll be able to give you better guidance on its contribution toward the second half of the year. We believe it to be meaningful. The HUD, we have our HUD underwriter on staff. We are actively meeting with all of our nursing home operators. We expect to start to report this quarter the pipeline of HUD-related applications, and then we'll be able to give you some guidance on the fee income and the deposit opportunities that come along with that as well. Timur Braziler: Great. And then just last for me. The quarterly charge-offs, were those all driven by the loans identified last year? And maybe a similar line of questioning, just the linked quarter decline in the reserve, the specific reserves that were tied to the loans charged off? Mark DeFazio: Yes and no. There was a total of 3 loans. We have discussed 1 particular loan, which was roughly $4.5 million in the past. Well, actually 2 out of the 3 loans we talked about in the past. One, the out-of-state commercial real estate loan we have not talked about in the past. Out of the $12 million, I'm fairly confident that we'll recover $7 million to $8 million in this year. We are actively discussing a resolution with all 3 of these and I expect a good outcome, and I consider a $7 million to $8 million recovery a good outcome on these unsecured facilities. Operator: And our next question comes from Feddie Strickland with Hovde. Feddie Strickland: Just sticking with credit to start off here. Just to clarify, that loan from the third quarter of '25, you're still working through that one, right? These are separate loans from that particular relationship, correct? Mark DeFazio: That's correct. And we expect that relationship to get resolved as well very soon. We're getting through a legal proceeding in Mission, Kansas. We're highly engaged with a buyer for the property and the sponsor. We expect to have a full recovery not only with principal, but interest at the regular rate and all legal fees there. So we're optimistic there. We'll get that resolved hopefully in the third quarter -- second to third quarter. Feddie Strickland: Okay. Great. And just bigger picture then, I mean, it seems like you're on track for a pretty significant improvement in credit this year. Is there anything else on the horizon that's may be coming up for resolution that could push NPA to assets even lower? Mark DeFazio: No, no, no. We are going to go back to our normal trends of criticized and classified loans, which historically over 27 years have been extremely low. We had a little bit of a speed bump with, I would say, on the inside of 5 credits that we've been talking about for the last 1.5 years. The system workouts are inefficient, costly and timely, but I'm a patient person. I'm not looking and rushing to have an unsuccessful settlement. So they do linger a bit. But no, these are the same 5 credits that we've been working on, and we will get to the final resolution of them this year for sure. And Feddie, I just want to make another point, which I'm sure you know about. We feel that we are adequately reserved for those loans at this time as well. So going forward with the resolution, we'll either resolve these loans and get paid off or have a recovery. But we do not expect any further reserves associated with those legacy loans. I just thought that was important to mention. Feddie Strickland: Appreciate that, Mark. And just switching gears to the margin, it sounds like you guys still expect a pretty good lift in the margin this year even without rate cuts. Could you talk a little bit about the dynamics between maybe how much loan yields versus deposit costs are playing into that? It sounds like on the yield side, you got a little bit of a lift from cash going into loans. But I guess more specifically, what is the ability to lower deposit costs just as this mix shift over the course of the year? Daniel Dougherty: Feddie, this is Dan. The primary driver of the margin expansion is going to be repricing of the back book. This quarter, the maturing loan -- the paid-off loans had a pretty high coupon. We've got just a couple of tranches over the course of the next couple of quarters that are lower coupon paper. So as we replace that or renew that, we'll price it at higher coupons. Our ability to continue to reprice on the deposit side is going to be dependent on mix. So to the extent EB-5 continues its momentum, that will help drive down the cost of deposits. Of late, most of the -- 2 of the big contributors have been HOAs and governmental munis. Those tend to be at the higher end of the coupon stack, if you will. But again, if the mix kind of persists with EB-5 generating a noticeable contribution, that could help to drive down the cost of deposits as well. Mark DeFazio: And Feddie, I'd add as well, looking into '27, I think the deposits that we expect coming from HUD and iGaming will definitely bring down our cost of funds immediately. Daniel Dougherty: That's a significant opportunity. Feddie Strickland: Understood. That's helpful. And just one last one for me, just on expenses. It sounds like it's fair to assume the expense growth quarter-over-quarter probably slows here a bit just given your opening comments, Dan, and the $189 million and $191 million guide. Daniel Dougherty: Yes, we can stick to that guidance, Feddie. Operator: Our final question comes from David Konrad with KBW. David Konrad: A couple of quick questions, just to follow on from everyone else. On the funding side, as we move through and you've got the $1 billion loan growth guide, how should we think about the cash on the balance sheet largely from the capital raise working down throughout the year? So like how much of the $1 billion might be funded by the cash? Or is that kind of a 2-year outlook? But how should we work down the cash? Daniel Dougherty: We should see the cash working down in parallel with loan growth. So if you look at the average balance sheet, I think my average -- I carried about on average about $600 million of cash. It is my goal and my expectation that we'll work that down through loan growth towards a normal cash position, which is closer to $200 million for this bank. And when I made the NIM adjustment, I was really conservative. I only adjusted for $100 million. I'm well north of that in excess cash right now. So again, as loan growth continues, we'll work down that cash balance. As we sit here today, I've got second quarter growth fully funded with cash for sure. And I've got a good start on quarters 3 and 4 as well. David Konrad: And I guess, qualitatively, with that cash, your unique deposit channels, that should keep pressure off of other segments of deposits given that you have all this cash to fund loan growth? Daniel Dougherty: Well, we're not sitting on our laurels. We -- I am happy to carry an excess -- large cash position, and I've got no problem with that. So far this quarter, the trend continues. Deposits are coming in faster than loan growth. I expect that to normalize a little this quarter because my pipeline on the loan side is significant, signed term sheets totaling more than $700 million right now. So the pull-through on that is TBD, obviously, but again, the deposit growth continues a pace at a pace in excess of the loan growth. And I have no intention of slowing that down. I think the teams are -- intent to get out there and drive business. David Konrad: And then the last one for me might be a little bit trickier in a way. But in the Investor Day, we talked about maybe a target of 115 loan-to-reserve ratio. I think you're at 116 now, but you also made some methodology changes and economic changes. So maybe refresh the update of where we think, all else equal, obviously, credit quality could change, but all else, what you're thinking about a target reserve ratio? Daniel Dougherty: I think in the long run, the 115 is okay. It's going to take us a while to -- once we work our way through all the remaining NPLs are out there with reserves, that could come down a little bit. But through time, management's view on the reserve is that 100 to 115 basis points kind of makes sense for a commercial banking franchise such as ours that's growing at the pace we're growing. Operator: This concludes the allotted time for questions. I would now like to turn the call over to Mark DeFazio for any additional or closing remarks. Mark DeFazio: Thank you. I'd just like to say, once again, thank you to all of the investors that came in and invested in the more recent capital raise. And also, again, as I said many times, we don't take that commitment on your part lightly, and I'd like to thank all of our existing investors for their continued support, and look forward to meeting all of the investors as the years go on at different road shows. Thank you very much. Operator: This does conclude today's conference call and webcast. A webcast archive of this call can be found at www.mcbankny.com. Please disconnect your line at this time, and have a wonderful day.
Operator: [Audio Gap] a strong start to the year with outstanding growth from our international smoke-free business and very robust pricing driving impressive progress despite a particularly strong prior year comparison for both the U.S. and combustibles. Income growth exceeded our expectations driving plus 10% adjusted OI growth and plus 16% adjusted diluted earnings per share growth to reach $1.96 International smoke-free delivered a striking performance with double-digit volume growth, mid-teens organic top line progression and high teens organic gross profit growth or almost plus 30% in in dollar terms. This was led by IQOS with close to plus 11% adjusted in-market sales growth alongside further multi-category accretion from ZYN [indiscernible] which reached the estimated joint #1 [indiscernible] position in Europe based on Nielsen of [indiscernible]. The financial performance of our combustible business was robust, delivering results in line with our midterm model with low single-digit organic top line growth and low to mid-single-digit organic gross profit growth. This was especially remarkable considering cigarette volume declines were at the more negative end of our expectations following a prior year period of volume growth due to a number of temporary factors. This reflects the enduring pricing power of our portfolio led by Marlboro alongside efficient cost management. In the U.S., ZYN offtake volumes grew by plus 10% despite an even competitive landscape. As anticipated, segment financial performance was challenging due to the specific combination of impact this quarter, including increased investment and the comparison to Q1 2025 which had close to no price promotion and significant in inventory rebuild as we exited supply constraints. As we flagged last quarter, there was also a channel inventory overhang at the end of 2025, which largely normalized in Q1 and thus impacted shipments. We continue to invest for future growth and expect U.S. performance to progressively improve over the course of 2026 as we prepare to launch ZYN Innovations and comparison normalize, notably in the second half. Overall, while the global economic outlook is uncertain, our strong financial performance in Q1 underscores our momentum and gives us confidence in delivering another year of best-in-class growth. Let's discuss our Q1 results in more detail, starting with the headline financials. We delivered over $10 billion in net revenues, representing a plus 9% increase in reported terms and plus 2.7% organically surpassing our expectations for a broadly flat delivery. The strong performance in category portfolio more than offset the Q1 specific combination of U.S. and combustible headwinds I just mentioned. Adjusted gross profit grew by plus 10% to $6.9 billion, reflecting plus 3.8% organic growth and plus 70 basis points of organic gross margin expansion. We achieved this through strong pricing, operating leverage and the continued benefit of smoke-free mix, partly offset by the anticipated U.S. impact driven by the same factors and partly offset by increased growth reinvestment, adjusted operating income also exceeded our forecast, growing plus 10% to $4.2 billion with close to plus 1% organic growth. Adjusted diluted earnings per share grew by an impressive plus 16% to $1.96, including an $0.18 currency tailwind supported by positive Q1 transactional impact in addition to the generally weaker U.S. dollar. Our effective tax rate was also slightly better than expected and more favorable in this quarter compared to the forecast full year rate. Our international business delivered an outstanding quarter with both gross profit and OCI growing by around plus 10% organically and around plus 16% in dollar term. This was achieved even as we invested strongly behind our smoke-free portfolio. The excellent organic performance of smoke-free was the clear standout with plus 11.9% volume growth plus 15.8% net revenue growth and plus 19.4% gross profit growth, driving gross margin expansion of 210 basis points to 70%. This was primarily driven by the continued broadband momentum of IQOS in addition to increasing contribution from ZYN and VEEV. Looking at PMI as a whole, our global smoke-free business delivered very solid organic net revenue growth of plus 5.3% and organic gross profit growth of plus 3.9% and despite the dynamic in the U.S. We continue to expect strong global smoke free growth for the full year, supported by high single-digit volume progression and normalizing U.S. comparison. In international combustible, while volumes declined by 5.1%, organic net revenues grew by plus 1% and gross profit increased by plus 3.9% and with strong pricing and effective cost management outweighing volume mix headwinds. Gross margins expanded organically by 190 basis points, underscoring the resilience of this business. Turning now to volumes, where total shipments declined by 1.9% as compared to our broadly stable forecast for the full year. Smoke-free shipments increased by a very good plus 9.1% versus prior year, in line with our full year target of high single-digit growth. This was primarily driven by plus 11% growth in HTU to 41.3 billion units, including a modest net phasing benefit of around 0.5 billion units across several markets. In addition, the stellar plus 95% growth of e-vapor largely offset a decline in oral smoke-free volume of 16%, notably reflecting the U.S. shipment and inventory headwinds previously discussed and timing dynamic in the Nordics. Total smoke-free product in-market sales volume increased by plus 11%. Cigarette volumes declined at the high end of our expectation and above the international industry decline of 2.3%. This reflects a number of dynamics including the lapping of exceptional plus 1.1% volume growth in Q1 2025, which included inventory replacement in a few markets such as Indonesia, Russia, Italy and Spain. In addition, a challenging economic environment has contributed to higher level of illicit consumption in certain markets, while excise increases in country, most notably Mexico in January, drove a significant industry decline. Looking ahead, we expect volume declines to moderate over the coming quarters, and we continue to forecast a cigarette volume decline of around 3% for the full year. This includes a negative industry impact in India following the introduction of new excise rates in Q1. Looking at our Q1 top line drivers, strong pricing and the positive mix impact from intentional smoke-free more than offset the negative volume and mix dynamics from the U.S. and combustible. Pricing was the largest contributor, adding plus 5 points. This was driven by another strong quarter of combustible pricing at plus 8.5% and with international smoke repricing of plus 2.9%, led by IQOS offsetting the impact of more regular promotional activity in the U.S. compared to the very low level of Q1 2025. International smoke-free mix also made a substantial positive contribution of plus 2.7 points. This was partly offset by a 1.8 point impact from the U.S. reflecting the abnormal combination of factors outlined. Currency added a further plus 6.4 points, resulting in reported net revenue growth of plus 9.1% for the quarter. Overall, the composition of Q1 growth closely mirror the structural driver of pricing power and smoke-free mix delivered consistently over recent years. underscoring the sustainability and consistency of our growth model. Moving now to adjusted operating income margins, which expanded by plus 40 basis points to reach over 41%. This notably includes a positive currency impact, which enabled us to increase margin despite additional reinvestment in future growth as well as unfavorable timing and comparison effect. Gross margin expansion contributed plus 70 basis points, driven by the factors mentioned earlier, while only a small impact from disruption and cost increases related to the conflict in the Middle East. With regard to SG&A, as planned, we continue to invest in control program, scale and innovation, both internationally and in the U.S. While Q2 is likely to see further strong year-over-year investment, we expect this to moderate in H2 and for SG&A progression to be organically at or below the level of net revenue growth for the year. Currency provided a meaningful tailwind of plus 110 basis points, supported by a favorable comparison to transactional losses in the prior year. Overall, while this quarter had the slowest expected organic growth of the year, we continue to invest in our smoke-free portfolio supported by efficient back office and manufacturing cost management, including approximately $150 million of gross cost efficiency realized in Q1. We remain on track for full year organic margin expansion in 2026. Turning now to our worldwide smoke-free business, we delivered IMS volume growth of around plus 11% in Q1, approximately 3 percentage points above the industry smoke-free product growth rate in market and category where PMI is present. This reflects our ability to capture over 70% of industry growth in this market as compared to our share of around 60% and driven by the strength and scale of our multi-category portfolio. We remain focused on expanding the strengths with 3 geographies, adding another category to reach 55 multi-category markets and 2 new markets for smoke-free products in total to reach 108. This includes the launch of ZYN in Portugal and Kenya and VEEV in Egypt. Within smoke-free International, IQOS delivered another strong quarter with adjusted in-market sales growth of plus 10.9%. This reflects very good and broad-based momentum across markets and regions, including Europe and Japan. Adjusted IMS volumes outside these 2 geographies grew by plus 19%, including dynamic growth in Korea, Malaysia, Indonesia, GCC Mexico and remarkable early results in Taiwan. At this stage, following its launch in Q4 '25, Taiwan is the most successful major IQOS launch market to date with a national exit offtake share of almost 6% in March. This represents around 70% of industry [indiscernible] volume and a near doubling of our combined Taiwanese cigarette and HTU market share in the last 6 months. Global Travel Retail also continued to post double-digit HTU growth with only a limited impact from the Middle East. Q1 adjusted in-market sales included a consumer pantry loading benefit of approximately [ 0.5 billion ] in Japan, ahead of the April 1 excise-driven price increase. Even excluding this temporary effect, growth remained strong at plus 9.4%. Importantly, IQOS profitability continues to expand as we invest consistently behind the brand, driven by a growing contribution from pricing, continued scale benefits and productivity improvements across both consumables and device costs. Innovation remains a key enabler of legal edge nicotine consumer acceptance and retention broadening choice across test profile and price points. During the quarter, we continued to innovate on our flagship [indiscernible] consumables in addition to excellent traction from the expansion of mainstream price DELIA and tobacco-free variant, [indiscernible]. We also continue to make progress on the rollout of our alternative it not burn technology bonds by IQOS following promising results from initial key city launches in Italy, we commenced a national rollout during the quarter. A significant proportion of consumers are entrenched traditional cigarette consumers fully line with our mission to provide better alternative, which appeal to all courts of adult smokers. The strength of IQOS continues to be illustrated by sustained offtake share gains across key cities, which act as a lead indicator for national success. This includes impressive Q1 milestones such as Tokyo surpassing 40% share for the first time Global Travel Retail at over 20%, Munich exceeding 16% and Madrid over 10%. Coming back to Taiwan. A particular highlight was Taipei, where IQOS share reached over 7% in its second quarter post launch and exited in March at close to 8%. You will find additional market and SSP volume data in the appendix to these slides. While IQOS is a core engine of our international smoke-free business, ZYN and VEEV strengthen and complete our multi-category strategy with excellent momentum and significant global opportunities. ZYN continued to deliver rapid growth. Modern oral shipment volumes increased by plus 7% on a comparable basis or plus 42% excluding the more mature Nordic market. On this latter scope, where the greatest opportunity lies. We estimate offtake volumes grew by well over 50% and gaining share in a dynamic category. This notably includes strong results in markets such as the U.K., Pakistan, Poland and Mexico. Volumes declined in the Nordics, primarily due to timing dynamics. We continue to expand our portfolio to better meet the needs of legal aged smokers looking to switch by offering a broad spectrum of adult appropriate flavor and strength. This includes the rollout of our lower strength offering the XO 1.5 milligrams across a large majority of our 58 international ZYN markets, driving a significant improvement in first experienced nicotine acceptance among adult nicotine consumers. In e-vapor, VEEV continued its remarkable momentum in the quarter reinforcing its position as the fastest-growing international [indiscernible] brand among major players. I am pleased to share that VEEV became the joint #1 close pot brand in Europe in Q4 '25, as estimated by Nielsen [indiscernible] across 19 markets, surpassing long-established players. Quarterly shipments exceeded 1 billion equivalent unit for the first time and IMS volumes almost doubled, driven by impressive growth in Italy Romania, Germany, the U.K., France, Spain and Indonesia. With an expanding footprint across 49 markets, this rapid volume growth and improving positive margin profile demonstrate its growing value within our multi-category portfolio. This is especially clear in Europe where VEEV was an important contributor in delivering plus 12% shipment volume growth for IQOS, ZYN and VEEV in the quarter, more than offsetting the ZYN dynamic in the Nordics I covered earlier with plus 31% in growth elsewhere. IQOS adjusted IMS volume increased by plus 5.4% with a very good performance across the region, despite ongoing disruption in Ukraine and the initial impact from the implementation of the EU characterizing flavor ban in Poland. Excluding markets where the bank took CapEx in January 2025 such as Poland and Hungary. Adjusted IMS volumes grew by around plus 8% as the brand's powerful momentum continues. Double-digit growth continued in Italy after annualizing the flavor ban, which came into effect in mid-2024. Other notable markets delivering strong growth include Spain, Germany, Greece, Romania, Serbia, Bulgaria and the Netherlands. We expect further good growth from IQOS in Europe in the remainder of the year. In Japan, the heat-not-burn category continued to grow strongly, reaching around 53% of total industry offtake volume in Q1. IQOS adjusted IMS volumes grew plus 10.4% or around plus 6% excluding consumer pantry loading. This robust level of growth demonstrates the ongoing momentum behind the brand which delivered an impressive increase in adjusted market share to reach a record 34.9%. While competitive intensity in the category remains high, IQOS returned close to 70% of industry heat-not-burn volumes, reflecting the strength of the combined proposition of product, brand and commercial reach. In shipment terms, Japan HTUs increased only slightly compared to the prior year period, which included a timing benefit of around 1 billion units. As we mentioned last quarter, volatility between shipment and adjusted IMS is possible over the year due to the excise changes in April and October. Indeed, we expect Q2 adjusted IMS growth to reflect the reversal of consumer pantry loading and the price increases, which took effect on April 1. While too early to comment on the initial consumer reaction we remain confident in the growth of IQOS and the wider category in Japan over the coming years. Moving to the U.S. ZYN continues to lead the nicotine pouch category, delivering offtake growth of plus 10% in Q1, as estimated by Nielsen. This performance comes despite the competitive landscape where our portfolio does not yet address all of the most dynamic strength and flavor segments. While offtake volume increased, Q1 shipment declined to 155 million can, reflecting the inventory dynamic explained last quarter, which I will now briefly recap. With around 40 million cans of inventory rebuild in Q1 '25, the underlying shipment base linked to consumer offtake was around 160 million can. Therefore, the underlying volume for this quarter were around 10% higher at approximately 175 million cans. As flagged at our full year results in February, we estimated around 25 million cans of surplus inventory in the downstream supply chain at the end of 2025. As anticipated, this was largely normalized in the first quarter of 2026, resulting in lower shipment volumes compared to consumer offtake. While some quarterly shipment volatility is to be expected in any market, our base expectation is that ZYN shipments should broadly track offtake growth in future quarter against the estimated underlying 2025 basis provided in February of approximately 180 million can in Q2, 205 million cans and 200 million cans in Q4. More important than inventory movements, however, is the trajectory of offtake growth for both ZYN and the category. To that end, alongside brand building and commercial execution, we are sharply focused on innovating and we are preparing our manufacturing and commercial operation for new product launches in the coming months. This is further investment in our U.S. manufacturing footprint with our Aurora facility progressively increasing initial operations. This brings me to our key areas of focus to drive growth and value from the leadership of this promising category. First, we continue to invest in the ZYN brand and in the long-term growth of our U.S. business. This includes marketing, distribution and commercial activation as well as regular promotional activities which were unusually low in H1 '25. Second, we continue to navigate a complex and dynamic regulatory environment which impacts timely innovation and the switching of legal smoker to better alternative. It is clear from the science that nicotine pouches are a much better choice for those legal edge consumer we would otherwise smoke. We also note the recently published data from the National Youth Tobacco Survey showing that underage usage of the category remained stable or slightly declining at low levels below 2% despite the strong growth of the category. The authorization of [indiscernible] via the FDA's nicotine pouch pilot program remains a priority. Our application remains under active scientific review. And we have a continued dialogue with the FDA as part of this process. The FDA's intent for the pilot program is to increase efficiency and streamline the review process. And while it has taken longer than targeted. The science supporting our application is robust, and we are optimistic that we will be able to launch this product to consumers in the coming months. In addition, we have made a number of ZYN submission to the FDA that are at various stages of the regulatory process, and we are preparing to bring further innovation to market also in the coming months. With regards to IQOS, we are pleased that the FDA has now reauthorized the previous version as a modified risk tobacco product. We continue to engage with the FDA with respect to the authorization of IQOS ILUMA to enable American smokers to access the world's biggest and most successful smoke-free product in achieving full switching away from cigarettes. Overall, we look forward with confidence to the future growth of our U.S. business. Finally, moving to combustible, which once again demonstrated the resilience of our net revenue and gross profit growth model despite significant Q1 specific volume headwind which we expect to substantially ease in the balance of the year. Very strong pricing of plus 8.5% was the key driver with notable contribution from Turkey, Indonesia and Mexico. While we expect some moderation notably in the second half of the year due to timing and comparison effect, we now forecast a full year variance of more than 6%. International combustible gross profit grew by plus 3.9% organically and plus 9.8% in dollar terms, despite strong performance in the prior year, passing us nicely on track for another year of robust delivery. Our cigarette category share declined 0.6 points to 24.8%. A strong performance in Egypt was offset by market mix and declines in Indonesia and Russia, largely reflecting pricing dynamic as well as the ongoing share recovery in Turkey. Marlboro once again underscore the strength of its premium brand equity, reaching a record first quarter share of 10.7%, an increase of plus 0.4 points year-on-year. Our objective remains to maintain broadly stable category share over time with a clear focus on maximizing value through top and bottom line growth, while actively supporting the continued growth of smoke-free products. This brings me to our outlook for 2026. The Middle East conflict had a small impact on our business in the first quarter, which affected shipment to global travel retail and certain markets in the region for both combustible and HTUs. While we have observed increased energy prices and some disruption in energy supply in a number of markets, this has not, at this stage, translated into a discernible shift in consumer behavior. The situation remains uncertain in both duration and potential impact, and it is difficult to assess the broader implication for the consumer or the global cost environment. We have factored in some increases in transport, energy and other input costs. And we will continue to closely monitor development to assess the mid- to long-term impact across the main variables. Acknowledging this uncertainty and following a good start to the year in Q1, we are reconfirming the currency-neutral growth outlook we provided in February. We continue to expect broadly stable shipment volumes, organic net revenue growth of plus 5% to plus 7%. And organic operating income growth of plus 7% to plus 9% and currency-neutral adjusted diluted earnings per share growth of plus 7.5% to plus 9.5%. While exchange rates are volatile at present, we now forecast a currency tailwind of $0.25 at prevailing rates. This result in an updated adjusted diluted EPS forecast of $8.36 to $8.51 or plus 10.9% to 12.9% growth in dollar terms. For the second quarter, we expect continued strong performance from our international business and a sequential improvement in growth with HTU shipment volume of 40 billion to 42 billion slower HTU adjusted IMS growth due to the short-term impact of excise-driven pricing in Japan and a low single-digit cigarette shipment volume decline. We expect mid-single-digit organic net revenue growth and solid operating income progression despite another quarter of strong commercial investment. We forecast adjusted diluted EPS of $2.02 to $2.07, including a higher effective tax rate and a favorable currency variance of $0.02 at prevailing rates. This quarter also coincides with the publication of our value report 2025 which provides a comprehensive financial and nonfinancial overview of our strategy, governance and priorities for sustainable long-term value creation. Following the completion of our 2025 road map, we highlight the progress made over the past 5 years across our most material sustainability priorities. Key achievements include the continued expansion of our smoke-free business, further strengthening underage access prevention in indirect retail, carbon neutrality in our direct operation eliminating systemic child labor from our tobacco supply chain and advancing effective anti littering initiatives. We also introduced our value plan 2030 a focus, business-driven framework across 6 priorities: Consumer, circularity, our workforce, workers in our value chain, climate and nature. As outlined in the report, our approach to sustainable value is fully integrated with our business strategy, supporting the growth of our more transformation and reinforcing long-term resilience competitiveness and value creation. I would strongly encourage who's interested in how we are executing our transformation to review the report. I will conclude today's presentation with a few key takeaways. Our strong and resilient first quarter performance reflect the structural growth fundamentals of our business model. Our results continue to be underpinned by 3 powerful drivers: Strong pricing, favorable mix from the ongoing shift to smoke-free product and volume growth led by IQOS, ZYN and VEEV. While we continue to invest in future growth, these drivers are profit accretive and together with pricing power and cost management, reinforce our confidence in our midterm growth targets. While the operating environment remains complex marked by macroeconomic uncertainty, we believe we are well positioned to navigate external headwinds. Our smoke-free transformation continues to gain momentum, supported by remarkable cash generation and a strong balance sheet. Finally, we remain firmly committed to our progressive dividend policy and to returning value to shareholders as our transformation delivers sustainable long-term growth. We look ahead to the remainder of 2026 with confidence. Thank you, and we are now very happy to answer your questions. Operator: [Operator Instructions] Our first question will come from the line of Eric Serotta from Morgan Stanley. Eric Serotta: So starting with smoke-free or international smoke-free, your profit performance of gross margins over 70%, very impressive. You guys have spoken in the past that while you're still in the early innings of the optimizing the supply chain and really harvesting gross margins across international IQOS. As you look at [indiscernible], how much of a priority is that with your margins at very high levels and a lot of growth potential ahead and then the other question was on U.S. ZYN. Your price gaps have certainly widened back out not that far from where they were when [indiscernible] called them out last September as being wider than you'd like. Has there been any sort of strategic change in terms of how you're thinking about what your -- sort of the trade-off between pricing and market share that you're willing to win to balance in terms of U.S. Jacek Olczak: Thank you, Eric. So first of all, on smoke-free International margin, I mean, you're right, we continue to improve. And I would say it's a combination. First and foremost, you said it, IQOS that continued to do well. We've been increasing price in a number of markets. We're close to 3% on price increase on smoke-free and of course, IQOS is the biggest contributor to that. To be clear, that's not the top priority because we've been in many occasions, explaining the fact that on IQOS and on our smoke-free portfolio globally, we are benefiting from a higher margin than on combustible, which is very nice. But also in dollar terms, we are significantly above more than 2x in terms of dollar per unit for revenue but also for gross profit. So maximizing volume, of course, is a big objective. But as we are building the portfolio, we are building a very attractive brand with IQOS very differentiated, but look at what we're doing with VEEV. So they are coming more like these brands, if you want, Viva in international. They are much smaller than IQOS at this stage, but we are also working on the profitability of these 2 brands. But IQOS here is a big driver. We do, I would say, the best possible job to optimize the profit per unit, but we don't lose track from the fact that here, the name of the game is to maximize volume because that is very powerfully contributing to our overall profitability. Now your second question on ZYN in the U.S. I think, to a large extent, the premium versus competition remains the same as a few months. Let's not forget that it is a moving target because, of course, competition is also evolving their price, and we've seen globally in the market a lot of I would say, commercial aggressiveness on pricing. Fundamentally, ZYN is the leader of the market. If you look at the brand power instant really out versus any other brand in the market in terms of differentiation, in terms of brand strength. And this is as the leader of brand that will remain as the more premium brand in the market, and it's our intention that is going to be the case. Of course, we need to permanently monitor how with the right level of premium versus competition. And at the end of the day, while again, we're not going to lose our compass, which is to develop a leading brand with a very nice premium and profitable positioning we need to ensure that we have the best pricing for that and that we optimize all the parameter, including pricing to achieve this objective. Now of course, not able to elaborate more on pricing. This is a very sensitive matter. But at the end of the day, you should just have in mind that our objective is to keep in as the leading brand, premium brand, meeting a bit different versus competition, and then we'll navigate the parameters to achieve that. Operator: Next question will come from the line of Bonnie Herzog from Goldman Sachs. Bonnie Herzog: I maybe wanted to do a follow-up question on ZYN in the U.S. You did mention you expect performance to improve over the course of the year. So maybe I'd like to better understand what gives you the confidence in this. And curious to hear how much you're willing to, I guess, continue to sacrifice short-term profitability to drive volume growth? And then finally, we all know you've been at a disadvantage given the FDA's failure to fast-track reviews of the nic pouch applications. So curious if you consider just rolling out some of the innovation you have that you mentioned without approval. Jacek Olczak: Yes. Sure, Bonnie. So I'm happy to take this one. I'm going to repeat what I've just been saying on what is our objective on ZYN fundamentally in the U.S. But I'm certainly happy to elaborate on why we expect a much more positive dynamic in the second part of the year. First of all, allow me to spend a few seconds on Q2. So remember last year, we still have a little bit of market reloading in Q2, much more other than in Q1. But that means that we don't have a fully underlying performance as a basis of comparison for Q2. Second, you will remember that last year in Q2, there was, again, almost no promotional activity, which means that we had an abnormally high level of revenue per can. And therefore, in Q2, we will be facing what is the growth of ZYN in the market. And here, this year, I mean, every week, you can track the Nielsen and that giving some views. I'm not saying it's scientifically precise, but it's giving some view on the ZYN performance. And you will have this impact on invoicing and revenue [indiscernible] Then in the second priority of the year, that's when we get to normalization of the basis of comparison in terms of revenue per can. We should have as well in term of shipment, something that is more underlying in terms of reference. There will be, of course, in Q3, this one-off operation last year of the free can that will have to be taken into account. But as you know, it also impacted negatively our financial performance in Q3. So that's a negative element that is not going to to impact. And then as we said, we are expecting innovation to come in the coming months. I'm not going to be able to say exactly when it's going to come and when it's going to play. But of course, when we say we expect to be able to launch innovation in the coming months, that means that we expect innovation to positively impact our second part of the year. We'll say exactly when this is going to add. So if you take all these elements, the capacity that we expect to have to come with innovation to be benefiting from some of the dynamic category, the comparison that were difficult in H1 in terms of shipment and in terms of revenue per can, all that is going to be more favorable in the second part of the year. So that -- I think that explains why we expect this dynamic. I'm not going to elaborate on innovation globally and what we intend to launch, I'm sure you appreciate that this is extremely sensitive, and we're not going to share on that. But I think we're clear on our ambition to come with innovation, which is what a leader like in deserve. Bonnie Herzog: Fair enough. And I appreciate that color. And then if I may, just a question on IQOS. Your Q1 results came in better than your expectations. And a key driver of this really was the strength behind IQOS. And Emmanuel, you did touch on this, but I guess, hoping for some more color on the drivers behind the strength and maybe what exactly came in better than your expectations. Also I did want to just clarify if there were any timing benefits in Q1 on IQOS, I guess, just that might reverse. And then finally, as it relates to profitability on IQOS, your margins continue to expand. And as you mentioned, you continue to invest. So wanted to understand just the key drivers of profitability growth moving forward, whether it's between pricing and productivity improvements. Jacek Olczak: [Audio Gap] The biggest driver for our performance as combined is IQOS. I mean I don't think you have any equivalent in the smoke space in the world to IQOS, this multibillion-dollar brand, I mean, much north of $10 billion. This is a unique proposition. This is a brand that has been consistently owning around 75% of the category, which when we talk about novation is really unusual. There is a differentiation that is very clear for the consumer. And now, of course, as we talk about the $10 billion plus brand, this is coming with a unique brand franchise and the unique impact. So at the end of the day, the success is explained by the fact that IQOS is a great product that is meeting smokers requirement and expectation and that is making a clear differentiation on any other competing product. So that is what is behind the iQOS success. I mean if I was to take 1 market to illustrate that. And I think it's quite remarkable in this quarter. is Italy back to a strong double-digit growth. Okay, Italy has been clearly disrupted by the flavor ban and it took a few months to adjust. But we're back in -- to this [indiscernible] growth in Italy, we are reaching in some key city, very high share north of 20% and we're coming with innovation. So as I was talking about innovation for in a few minutes ago, a leading brand has to innovate. And I think no 1 is matching IQOS in terms of innovation. Terra, what we do with DELIA, what we do with [indiscernible]. We are launching bonds and bonds is having some very good step in Italy, very interesting to watch. I think this is the DNA of a leading powerful brand, and that is really what is behind the success of IQOS. On the margin improvement, it's price. So we are increasing price, not -- of course, it's a very different, as I explained, it's a very different story versus combustible, but we are increasing price on IQOS and on iQOS consumable in a number of markets. We keep, of course, working on the efficiency of the supply chain, the cost of electronics of the device. We are working on our supply chain on productivity to consistently and constantly improve the cost of the consumables. So that's another driver that is really what is behind IQOS success. I mean I could speak for many, many minutes about the reason for ICOS success. I could have been mentioning Taiwan. Of course, I mean, it's quite impressive in a few months, to reach 6% market share in Taiwan, March 8% in Taipei. And the brand was not present. So I think it just showed that even in markets where IQOS is not present, the brand does exist already with a strong image. I think it's a tribute to what IQOS is today. Operator: Our next question will come from the line of Pallav Mittal from Barclays. Unknown Analyst: Them of them, and I'll take it one by one. So firstly, on nicotine pouches in the U.S. Can you help us understand the excise tax environment. We have seen some proposals from a few states planning to increase excise taxes. And then earlier this month, in [indiscernible] data, I think the pricing for the entire category accelerated significantly. So is there something which is changing on the tax front? And how is the industry responding to those tax increases and discussions. Jacek Olczak: Happy to take this one. Look, of course, as all of us, we are hearing in a few states, not everywhere, but in a few states, discussion about putting some excise duty on nicotine pouch. Let's be cautious. I will be much more comfortable to comment things when they happen because it's difficult to comment on project speculation. We're not saying that nicotine part should have no taxation as a general rule. I'm not talking about -- only about the U.S., I think we believe there should be in the continuum of risk, some very differentiated taxation between small free product and combustible. And nicotine power being, of course, at a very well location in the continue risk should be particularly well treated in terms of low level of excise duty. So for us, that should be the general behavior of regulator worldwide and that should enable the smokers and the consumer towards the better product with more purchasing power. In the U.S., I would say this comment can be also valid because you have a regulator, the FDA that is clearly, I think, saying that this product are much better product than a combustible cigarette that is working to accelerate a number of PMTA because they believe that consumers should have the choice between product to maybe maximize the chance of switching away from compatible cigarettes. And I believe that putting high taxes in that context is going against the intention and the vision of the FDA. So that -- I think that would be a PT and that we're not going in the right direction very clearly. Pallav Mittal: Sure. And just again on nicotine pouches in the U.S., if I look at Zen volume trend, based on what Nielsen it as a dosing, it might soon become a flattish volume or maybe even a declining volume number, assuming there are still dealers in ZYN Ultra, if I extrapolate the current trend, and clearly, the PMDA timing is not in control. But what gives you the confidence that Zen Ultra once it comes into the market, it can accelerate the growth again, any particular market from where you get this confidence? And then just also on the innovations that you are highlighting. I'm not asking you to comment on what that exactly is. But is the timing of those innovations and getting those products in the market are again dependent on the FDA, PMDA process? Or is it something which is under your control? Jacek Olczak: Yes. First on this one, on innovation, of course, we follow the processes. So again, for obvious when this would come, but there is a process in the U.S., and we are following it extremely diligently I'm stating the obvious year. On the ZYN volume evolution, so yes, we are in the [indiscernible] around 5%, 6% growth. I'm talking about the last week. We'll see what is ever going to speculate. But obviously, our expectation is that ZYN Ultra is going to come with a proposal. We think it's a great product, and it's going to come with a proposal that will be matching areas of strong dynamism in the nicotine pouch market today in the U.S. And therefore, we expect ZYN Ultra to be able to bring some renewed momentum to the Zen brand in the coming months. That's our expectation. Pallav Mittal: Sure. And then just very quickly on IQOS. So looking at the growth in Europe, around 5.5%. Is it a bit lower than what you were expecting? Because historically, the growth in Europe has been high single digit, low double digits. How do you plan to accelerate that 5%, 6% growth back to the high single-digit number? Jacek Olczak: No. The growth actually is very good in Europe because if you exclude the market that has been growing recently through the flavor ban, you are at around 8% growth. So I would say, of course, in absolute level, it would be even higher because you have a higher base, but it's very much in line with what you've seen in the past quarter. So I would say if you put aside these 2 markets. And Poland is a significant one, plus a few disruption in Ukraine. I mean we have ongoing disruption in Ukraine, but there was a number of impact during the quarter. The rest of the market is staying extremely dynamic, and we expect Poland and Hungary, of course, to go through this disruption and put that behind them in the coming quarters as we did in other countries in Europe. Operator: [Operator Instructions] Our next question will come from the line of Andrei Andon from Jefferies. Andrei Andon-Ionita: Firstly, on in heated tobacco. Could you tell us a bit more about the early trends you're detecting in Japan after the excise tax increase on the 1st of April? And then secondly, incombustible, you mentioned in the release that in Germany, you have been seeing a discernible volume decline. Is that market share driven? Or is the industry itself seeing a slowdown in early 2026? And then finally, perhaps a bit more of a technical question. We noticed corporate expenses registered a significant year-on-year decline. Could you tell us what it's attributable to and whether you expect that to persist into Q2 and beyond? Jacek Olczak: [ Happy to ] take this one. So on Japan, look, if you heard the comment at that stage, of course, we're not making any comments. It was only a fortnight ago or a bit more than the the price increase was implemented in Japan. It's too early to say. The only thing I'm going to share is the fact that there is nothing in what we see in the first days that would, I would say, contradict what I mentioned about our confidence in the continuation of -- on the long term of a strong growth of the category and of the success of IQOS in Japan. But look, let's look at what's going to be the disruption in Q2. I think we explained the reversal we expect. And in a few weeks and in a couple of months, we'll be much more able to comment on the trend in Japan after this excise duty increase. In combustible in Germany, I think there was both -- there is a market that is a bit weak. But the industry as well is a bit weak, and you have some decline. So a combination of both, I would say, with the German consumer probably a bit under pressure. And on the corporate expense, it's largely technical. It's currency losses and transactional losses in the 125 because that's where we are putting transactional losses and it's by comparison effect, it looks better. So that's really what is behind. But it's a Q1 event, to be clear. It doesn't mean that for the rest of the year, we're not expecting things to be much more in line year-on-year on corporate expenses. Operator: And our next question will come from the line of Matt Smith from Stifel. Unknown Analyst: A follow-up on some of your commentary regarding IQOS by bonds and launching nationally in Italy. Can you talk about the incrementality you're seeing from that offering versus trade down and the profitability today for IQOS by bonds compared to IQOS and how you expect that to evolve? And what type of scale you need for that evolution and profitability? Jacek Olczak: Yes, happy to take this one. So bonds by IQOS is, as I mentioned, a very nice evolution in line with what the leaders should provide to the market. [Audio Gap] And the first step in Italy and a few other markets seem to be confirmed that there is something clearly of interest for this in [indiscernible] and that we could convince some of them that so far have not been switching to it not then to switch to a better [indiscernible] with bonds. And in terms of profitability, as you would expect, the name of the game is that it has to be at the level of combustible as a minimum. If we can do better, we'll look at. But certainly, it's not coming at a lower margin than our combustible business. Unknown Analyst: And a follow-up on the dynamics in Japan regarding IQOS inventories. I think you've laid out the 2Q expectation pretty clearly. But as we look ahead to a second excise tax-driven price increase later in the year, was the inventory dynamic in the first quarter entirely driven by consumer pantry are there mechanisms in place to keep the wholesalers from stocking up on inventory and just how you think about that potential impact between the third and the fourth quarter and the second half of the year. Jacek Olczak: Look, we'll see exactly it's too early to talk about October. You could have some similar features that will depend, of course, on what each player is going to do in terms of price increase. And I certainly won't comment at that stage. So we'll see, it's not impossible that there will be a similar impact, but it's too early to say. And allow me to come back on this question later this year when we'll have a better visibility. Operator: And our next question will come from the line of [indiscernible] from UBS. Unknown Analyst: I'll take 2 questions, please. Both of them on SI in the U.S. or the nicotine pouches category. I guess the first question I have is on the category. If we look at recent scanner data U.S. nicotine pouch volume growth, a bit have moderated over the past 3 to 6 months. From your perspective, what are the key factors, do you think that are driving this is the first one. The second one, coming back to ZYN Ultra, I'm not really asking for timings, but how are you thinking about potential regulatory concerns around higher nicotine strengths and a broad flavor range, particularly in relation to the category attracting non-nicotine users? Jacek Olczak: Yes. I guess on this one, and maybe I'm going to start with that. You are probably referring to this article, which were largely speculation. I think we stated very clearly that there is a very clear scientific fact that are supporting that this products are much better than smoking. You have this NYTS survey that is showing that there is no increase was even a slight decrease in the underage usage in the U.S. according to this study. So it's difficult to see anything that has changed from the FDA perspective. And they've been giving to another product. I think it was in December, so not that long ago, which is coming with a higher nicotine content higher than what ZYN has today. And I think if they had an issue with flavor and with higher nicotine content, I doubt they would have been giving this authorization only a few months ago. [Audio Gap] too much impacted by the percentage because when you are having with high percentage, you are having gross profit with high percentage of growth. Well, obviously, the percentage is declining, but it still means that in terms of absolute number of nicotine pouch level, it's still growing at the same time or even faster. So let's not lose track of the real underlying growth. And then maybe as we see some new consumer to the category. There could be a question mark on at least at the beginning. And very often, they are poly user when they start using nicotine pouch what is the average daily consumption of the new user. And maybe 1 of the reasons for some very slight softening of the trend in the past months. may have been the fact that some of the newcomers for the time being are coming with a lower ADC. But frankly, beyond that, I'm not sure I can highlight anything. Unknown Analyst: Can I squeeze in a sneaky 1 I guess, we have this high single-digit. Unknown Executive: Apologies, we're actually running out of time, and we just want to squeeze in 1 more analyst after you, but we'll follow up with you after. Operator: And our last question for today will come from the line of Gerald Pascarelli from Needham. Unknown Analyst: I just follow-up I just wanted to ask a follow-up on the last question just on on U.S. ZYN and nicotine pouch consumer dynamics, just as the category continues to grow, it's also matured. And I guess, are we at a point now where you are seeing evidence of I don't know, higher per capita consumers graduating from 3 to 6-milligram pouches into higher nicotine content pouches like 9 milligrams maybe at a faster rate. than we've seen in the past, and that's obviously asked in the context of ZYN Ultra and whether or not like just a simple nature of having a higher nicotine content patch on the market to compete with is enough to drive a reacceleration in volumes Operator: Gerald, I mean, as I explained, we see a number of ion nicotine content product and more flavor and notably fruit flavor being more dynamic part in the market today. And that's where you have the biggest dynamism. And 1 of the problem is that within, we don't have anything above 6 milligrams, and we have a limitation in terms of favors. So that could be -- again, I'm not going to say that I have any kind of [indiscernible] study to support that. But the higher nicotine strength development could be people who are trading up a little bit from a lower nicotine content. And as they evolve in their consumption well, they may explore new flavors and that could be behind the new flavors, fruit-type development, and they may also go for higher nicotine content. Again, I'm not saying I have anything that is clearly supporting that. but that could be an intrusion or a speculation we could make. And I would now like to turn it back over to management for closing remarks. Unknown Executive: Thank you for joining us today. That concludes our call. Please contact the Investor Relations team if you have any followup. Thank you again, and have a great day. Jacek Olczak: Thank you. Speak to you soon. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Hello. Welcome to the Range Resources First Quarter 2026 Earnings Conference Call. [Operator Instructions] Statements made during this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements. [Operator Instructions] At this time, I would like to turn the call over to Mr. Laith Sando, Senior Vice President, Investor Relations at Range Resources. Sir, please go ahead. Laith Sando: Thank you, operator. Good morning, everyone, and thank you for joining Range's First Quarter 2026 Earnings Call. The speakers on today's call are Dennis Degner, Chief Executive Officer; and Mark Scucchi, Chief Financial Officer. Hopefully, you've had a chance to review the press release and updated investor presentation that we posted on our website. We may reference certain slides on the call this morning. You will also find our 10-Q on Range's website under the Investors tab or you can access it using the SEC's at your system. Please note, we'll be referencing certain non-GAAP measures on today's call. Our press release provides reconciliations of these to the most comparable GAAP figures. We've also posted supplemental tables on our website that include hedging details by month, realized pricing by product along with calculations of EBITDAX, cash margins and other non-GAAP measures. With that, let me turn the call over to Dennis. Dennis Degner: Thanks, Laith, and thanks to all of you for joining the call today. Range is off to a great start in 2026. We continued steady operational progress in the first quarter towards our multiyear plan that was launched over a year ago. The first quarter also saw strong realized pricing for Range as winter weather drove natural gas prices higher, while international NGL prices spiked in March following supply disruptions in the Middle East. Range's strategic marketing portfolio paired with safe, steady operations, allowed Range to capture this opportunity, leading to free cash flow for the quarter of approximately $400 million. This free cash flow supported an increased dividend, additional share repurchases and the strongest balance sheet and company history. Looking at the operational results for the first quarter, Production came in at 2.2 Bcf equivalent per day. Range expects production to increase slightly in the second quarter before jumping meaningfully higher at the midpoint of the year as gas processing and related infrastructure is put into service. This will push production to 2.5 Bcf equivalent per day by year-end, all in line with our previous guidance. Capital for the quarter came in at $139 million as Range was running one rig and one completions crew. Completion spending will step up in the second quarter as we add a spot completion crew to begin working through the drilled uncompleted inventory we've built up over the past 24 months. As a result, second and third quarter are expected to be the high point for capital with this operational cadence placing us squarely within our previous stated capital guidance. During the first quarter, our single horizontal rig drilled approximately 143,000 lateral feet. Annualized, this is well over 0.5 million lateral feet by a single drilling rig. The team also had 8 days where they drilled over a mile in the horizontal, with two of those 24-hour periods exceeding 9,400 feet. This level of operational efficiency advancement continues to reflect the team's hard work and drive to deliver on peer-leading drilling and completion cost per foot. For completions, Range's electric fracturing fleet set a program record by completing a total of 874 stages during the quarter. Annualized, this is approaching over 700,000 lateral feet being completed in a year by a single crew. On multiple days, the team reached a record level of 17 stages per day. And despite challenging weather conditions, the team achieved a new record during winter operations averaging over 10 stages per day. Achieving this level of efficiency takes critical coordination between completions and water operations as we delivered up to 120,000 barrels of water per day for those wells. This is quite an accomplishment for our team, and it is a key contributor to Range's peer-leading capital efficiency. This combined level of efficiency and drilling and completions continues to support our operational plans through 2027 and beyond as we maintain a resilient DUC inventory for future optionality on capital and production. Range's Winter operations program also had a very successful first quarter and kept production volumes flowing through the harsh winter conditions ushered in by winter storm Fern. Production facility design enhancements, strategic staging of backup power and working in concert with our gathering partners are just a few aspects of the program that the team continue to focus on. All of this resulted in the team maintaining strong field run time and supported record free cash flow for the month of February. Hats off to the team for their dedication to safely keeping our production flowing. Before moving on to marketing, I'll briefly touch on service costs. We anticipate the cost of our electric hydraulic fracturing fleet to remain unchanged given the long-term contract that was signed earlier this year. Additionally, we have day rates locked in place for our horizontal activity for 2026. Steel market prices appear to be moving due to geopolitical events but Range is mostly insulated from these increases due to our prepurchase of production casing in late 2025. Fuel pricing will obviously be elevated due to diesel prices moving higher but we expect no changes to our capital plans given the efficiency gains and contractual certainty around the rest of our program. And as mentioned already, we believe Range's low capital [ intensity ] provides an additional level of stability versus our other producers. Shifting over to marketing. The current disruption of global energy supply has reshaped markets since the beginning of March. We believe America's ability to provide reliable, affordable supply to meet global demand has been highlighted now more than ever. The ongoing build-out of LNG and NGL export capacity positions the U.S. to meet an increasing percentage of the world's energy needs. At the same time, the industry is continuing to supply energy for Americans during critical periods of peak demand as demonstrated this past quarter. Given the clear call from the rest of the world for more U.S. energy, we expect exports for LNG, ethane, propane and butane to increase further throughout 2026, above already record levels. This should result in improved U.S. storage levels, particularly on a days of supply basis across all of these products, providing an expected tailwind to absolute pricing levels. For natural gas, LNG exports are now approaching 20 Bcf per day, up 20% versus last year, and further supported by the recent startup of the Golden Pass LNG terminal. For ethane, waterborne exports were estimated at 665,000 barrels per day for the first quarter up over 47% year-on-year, supported by new export terminal capacity that went into service during the second half of 2025. And lastly, for propane and butane, Exports are up 5% year-on-year and are expected to increase significantly throughout 2026 as additional U.S. export capacity comes online. We expect these growing exports [ will time ] storage balances and improved fundamentals across the various products, [ Range sales ]. Looking at the quarter results for marketing and starting with natural gas. Strong winter weather provided a window of improved natural gas pricing from a significant spike in demand to feed power plants and to heat homes in late January. Range's marketing team in coordination with operations and planning was able to sell nearly all of our natural gas during midweek in late January when Henry Hub and NYMEX settled over $7 per MMBtu supporting strong first quarter differentials. In addition, the marketing team further enhanced revenue and margins by optimizing ethane extraction timing with commodity price movements. Combined, this resulted in Range's best quarterly natural gas differential in over a decade at $0.18 premium to Henry Hub for the first quarter. Turning to liquids. Range's strategic access to international markets for ethane, propane and butane generated a significant uplift in NGL pricing in the month of March as international prices decoupled from U.S. markets. When combined with strong Northeast NGL pricing during January and February, along with the ethane optimization I just mentioned, Range realized an NGL premium for the first quarter of $4.41 per barrel above the Mont Belvieu index, the largest NGL premium in company history. As a result of this strong start to the year, we have improved our full year 2026 NGL differential guidance to a premium of $1.25 to $2.50 per barrel over Mont Belvieu. The low end reflects the potential for improved Mont Belvieu pricing due to strong U.S. exports. All the high end reflects current strip pricing in the various domestic and international markets that our contracts are tied to. In both cases, price realizations are expected to be substantially higher than our initial guidance communicated this past February. We are truly excited about how the company is positioned today with financial and operational flexibility that allows us to efficiently align production growth with known demand while generating free cash flow and returning capital to shareholders. We believe our robust inventory and relatively low capital intensity provides Range a differentiated foundation for generating through-cycle returns for our investors. I'll now turn it over to Mark to discuss the financials. Mark Scucchi: Thanks, Dennis. With the first quarter of 2026 successfully completed, Range continued steady progress along the multiyear disciplined growth plan we announced last year designed to capture market value enabled by the depth and quality of Range's portfolio. When we announced the 3-year plan at the beginning of 2025, we described the integrated approach from wellhead to customer that underpinned modest production growth to fulfill increasing natural gas demand. That plan is unfolding as expected with the infrastructure slated to come online midyear, enabling the completion and turn in line of lateral footage generated in recent quarters. We're using the power of Range's high-quality and long-duration inventory to underwrite targeted transportation and midstream contracts that enable Range to tie into premium markets with visible demand growth. This plan builds on Range's operational and financial strength and illustrates the positive outcome of an evaluation we continuously perform. This evaluation is really a simple question. How do we maximize long-term free cash flow netbacks on a per share basis. As a key metric, durable free cash flow per share drives how we evaluate sales contracts, drilling activity, infrastructure, share repurchases, essentially all major capital allocation decisions. The results of the first quarter highlight not only Range's operational strength but the quality marketing strategies implemented over many years to access premium markets. During the quarter, Range generated $545 million in cash flow from operations before working capital driven by realized natural gas price of $5.18 per Mcf before hedging and $26.62 per barrel of NGLs. Participating in rising prices requires thoughtful marketing, timely execution, an experienced nimble team and a transportation portfolio that reaches premium points. These elements of success apply to both natural gas and natural gas liquids. The Range marketing and operations teams executed superbly on our natural gas portfolio to capture strong January and February prices while delivering reliable supply to our customers. This was also true of NGLs where roughly 80% of our propane and butane are exported out of the East Coast and a significant portion is sold under medium-term contracts with floating links to European and Asian LPG indices, a linkage driven by our long-term positive view of those markets. With strong cash flow and a capital reinvestment rate of less than 30% in the first quarter, free cash flow was approximately $400 million. That free cash flow funded our growing dividend totaling $24 million in Q1 and modest share repurchases totaling $27 million. The end result was net debt of $834 million or half a turn of leverage, an investment-grade style balance sheet comparable to our strongest peers. Turning to unit cost for a moment. We have a permanent focus on driving down unit costs with the objective of maintaining and enhancing margins. Over the years, we've talked about the right way risk construct embedded within our gathering, processing and transportation expense line item. The cost of Range's infrastructure portfolio has linked to prices for natural gas via electricity and pipeline fuel costs and natural gas liquids via a percentage of proceeds processing cost. So the costs are aligned with sales, such that as we experienced some increase in electricity or processing costs, it's because we are realizing higher prices and expanded margins. Critically, in periods of commodity price weakness, we also experienced the proper linkage where we incur lower expenses when realized prices decrease, enhancing Range's resilience through cycles. So while the GP&T per unit increased for the quarter, it was on the back of strong pricing as Range realized its highest premium for natural gas in over a decade and the highest NGL premium in company history. Together, this translated to improved margin per unit of production of $2.77 per Mcfe, up 38% from the same quarter last year, reflecting the strategic right way risk embedded in our contracts. Looking ahead at the balance of 2026 and beyond, we will continue to critically evaluate investment opportunities in Range's business and shareholder returns. With an unwavering focus on sustaining and further enhancing Range's core objective, durable and growing free cash flow per share. To achieve that objective, we seek to enhance our low full cycle cost structure, low reinvestment rate and premier marketing portfolio, all with a focus on maximizing durable margins. Here's a key message we repeat today. We can thoughtfully grow Range's business alongside increasing demand, allowing us to grow the value of the business and deliver additional returns to shareholders. This is a consistent long-term strategy underpinned by quality long-duration assets and a strong balance sheet. We see lasting tailwinds in our business as the U.S. and global natural gas markets continue to integrate with commissioning of LNG facilities, while at the same time, domestic natural gas demand grows substantially, primarily from the need for additional electric generation and the world is again reminded of the critical importance of reliable energy supply. We believe Range's long-life inventory stands to provide enormous option value by serving an integral role as a dependable long-term energy provider, our durable free cash flow, evidenced through cycles, positions Range to consistently deliver value to shareholders. Dennis, back to you. Dennis Degner: Thanks, Mark. Today's results continue to demonstrate Range's strong operational performance against our multiyear plan, consistent free cash flow degeneration and prudent allocation of that cash flow, balancing returns of capital, balance sheet strength and the optimal development of our world-class asset base. As we sit here today, our multiyear plan is on track and years of disciplined planning have placed us in the strongest position in our company history, having derisked a high-quality inventory measured in decades and translated that into a business capable of generating significant free cash flow through cycles. With that, let's open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Jake Roberts of Tudor, Pickering, Holt & Company. Jacob Roberts: Mark, you mentioned the linked floating contracts for the European and Asian markets on the propane and butane, can you frame on a percentage or volume basis, which [indiscernible] market received in Q1? And how you see those amounts moving into Q2 and beyond? And maybe if I could ask if you could disclose those contract terms. Dennis Degner: For the last question first. No. There is some competition in this business, as you'd expect. So our marketing team has done an outstanding job over the years building relationships, managing exports out of the East Coast, cargo by cargo. So those relationships, the understanding of timing of the fact that what you're seeing on a screen may not be what is on the physical side of things, when these cargo loadings are planned a month, 2 months, 3 months in advance. So I guess to take a step back, as you know, roughly 80% of our propane is exported out of the East Coast. Of that, I would say the majority, well over half is linked to what I'll term as a medium-term contract that has tied to ARA and FEI. So we export out of the East Coast and therefore, with those molecules on the water can benefit from international demand and the need for those molecules, given the dependence on international chem, heating, consumer demand on U.S. molecules on the water. So in terms of those deals, no, we can't go into -- we don't wish to go into specifics of them but just that they are very strong netbacks as evidenced by the $4-plus corporate average premium to Mont Belvieu. Jacob Roberts: Yes, I appreciate that. You know I had to try. Dennis, I want to touch on Fort Cherry. Last call, you framed it as making reasonable progress towards finding an end user, I was hoping for an update there. And maybe for Mark, could you opine on how you're thinking about the marketing strategy given the -- I see kind of more clear line of sight to LNG type of opportunities, given the ongoing demand versus these power center or data center projects that seem to require a bit more negotiation to get across the [indiscernible] Dennis Degner: You bet, Jake. I'll go ahead and try and unpack this here. From the data center perspective, we're still seeing what I would say is regular and really, quite honestly, a good cadence of a dialogue around that particular Fort Cherry location and that opportunity. But in addition, if I were to put some context around it, there's probably a little over a dozen projects that were having a similar level of dialogue around and I think the announcement that we made just as a kind of a reminder for everyone, the announcement we made this past quarter earnings process for the $75 million a day of supply that's going to go into a power link type structure into the Midwest transport that we have. I think that's a sign of something that was a good indication of what was going on in the background while we were still working on this Fort Cherry-type opportunity. So we think there's a lot more to come. We also point to things like the NextEra announcement. Clearly, that power gen facility is going to go into the Southwest PA, Appalachia region. We think there's a real opportunity for Range to participate in a facility like that as details continue to get, I'll just say, sussed out on location and then who could, of course, have connective pipelines to get into that facility. So we think there's a lot of opportunity for us to continue to see this expand. And I would even say lastly, we've even seen some dialogue with the same counterparty that we made the announcement around this past quarter for some potential additional supply. So that's positive on two fronts for us. One, the ability to potentially, and I'll underline potentially, expand our volumes into that future infrastructure, but it also provides another confidence shot in the arm, if you will, that this is serious that these are moving forward, and it's not just a [ 75 million ] a day commitment, but you can actually see the serious commitment around putting shovels in the ground and getting this infrastructure built. So a lot of activity in this space by our marketing team to try and find good opportunities that will align with Range. We know that these are multi-decade financial commitments and decisions by these end users and counterparties, and we think it's perfect alignment with a company like Range that's got a long-term surety of supply and inventory like we do. So we'll certainly provide updates as we see more come forward and look forward to doing so. Operator: Our next question comes from the line of [indiscernible] with Truist. Unknown Analyst: If we could maybe start with the production trajectory on the back of Harmon Creek entering service. I guess you noted mid-year, is that June or July? And just trying to think through any commissioning or ramp-up period post that? And beyond this year and I guess, even '27, what are maybe some updated thoughts around that 2.6 Bcfe a day. What will ultimately govern the decision to either toggle that up or down or keep it flat? Dennis Degner: Yes. As we start to think about really the months ahead here in 2026, our production character should look really similar to what you've seen in others over the last few years under a maintenance-to-maintenance plus type program. So actually looking at Q1 production, it's almost an ideal overlay characterized to what we had a year ago. Several of the turn-in lines that occurred toward the back end of Q1, we'll now start to pack the system of available infrastructure that we have. And what you'll see is has been our ability to step into this commissioning of infrastructure that's going to occur toward the end of Q2 and in the beginning of Q1. So we have some gathering and compression that's going into service towards the end of Q2, and the processing will be right there at the midyear point, which, again, we think with this loop gathering system that we produce into, it's got a lot of optionality as we think about the efficiency around moving molecules around the field. Back half of the year is where we really start to see the increase in production take off. And so think about it being kind of fairly ratable across Q3 and Q4 as we start to end the year at 2.5 Bcf equivalent per day. The second completion crew that we mentioned in our prepared remarks that will start in Q2 or has started actually here in the second quarter, the activity of the DUC inventory that it will start to turn into sales through the next 6 months is really going to be -- I'll just say the tailwind that generates that production ramp in the back half of the year. It's going to utilize that processing and gathering infrastructure addition and then it's going to also provide some really significant momentum as we then work toward that 2.6 Bcf a day type number in 2027. And to kind of answer your -- and everything is on track from an infrastructure standpoint for this year. And when we think about what's beyond 2027, I think we have to go back to maybe how we started the first question here today, and that is what -- it's going to start with a conversation around what kind of demand and opportunity further materializes. If there is an opportunity for Range to participate in additional growth, we think there's a really strong opportunity for that to take shape, but it's got to take shape. And so once that occurs, we think there's a really capital efficient and thoughtful way for us to add another wedge of growth and doing so with a very similar capital investment that you've seen us commit to over the past 24 months. So we really think it will -- it has an opportunity to be very steady as she goes beyond 2027. If not, we have the ability to pull capital down and it could be somewhere in the $570 million to $600 million type range, where we can hold that 2.6 Bcfe equivalent type level flat until we see again that next step up with demand that materializes. So we're really optimistic about the future, especially as you get closer to the end of the decade, but we'll be able to have another thoughtful wage of growth as we see more demand take shape. Unknown Analyst: Got it. Okay. That's really clear. And then maybe just my second question back to the LPG side, and I appreciate all the prepared remarks and the answer to the earlier question, but curious if you could maybe put a little bit of a finer point or updated thoughts on the macro, given all the domestic and international moving pieces and even maybe elevated shipping costs. [indiscernible] comes on around midyear. So U.S. propane exports grow to 2 million barrels a day plus. Is that clear the inventory glut in your mind domestically? And then from an international standpoint, thoughts on China PDH run rates and maybe any other puts and takes that could ultimately impact the premium that you expect over Belvieu? Dennis Degner: You bet you. Thanks again, [ Gabe ]. So I'll kind of start here on the macro side by really saying, look, exports, and I think you pointed to it have really remained strong. If you look at the DUC capacity expansion that took place and went into service, last year. I mean, that was incredibly helpful when you think about starting to chip away at the current stock levels. Look, I think it's commonly known that the stock levels are elevated. We're talking somewhere roughly 70% above where we've seen historical averages. But we added 150,000 barrels a day in export capacity last year. That's been at a high end of utilization but I think one of the more, I'll just say, today's story is flex capacity that's gone into service out of the Gulf that adds in at the 360,000 barrels a day of export capacity. I think that was originally earmarked for more ethane service, but it's now been put into [ OPG ] service, and the first vessels have actually left the DUC. So we find that really encouraging when you start to think about pulling down stock levels over the balance of the year. And then, of course, there's another 300,000 barrels of additional capacity that's going to go into service on the export side by late 2026. So you're talking about meaningful impacts when you think about the ability to pull down stock levels. Of course, from a demand perspective, when we take a little bit more broader terms over the next 24 months, there's another 0.5 million barrels of demand that's going to go into service on, as you pointed out, the PDH type infrastructure. We think that all kind of goes hand in glove as you think about the ability for us to get more barrels on a waterborne export as an industry and then also meeting growing demand that's going into service over the next 24 months. Look, the dynamics of late have been very unique. And I think it's -- as we're all trying to navigate these particular moment, the reality is that the business has actually been as resilient as we've seen as has really demonstrated by the quarterly numbers that we just communicated. But as we think about the future, exports, we expect to remain strong. There's going to be a call and a need for future LPG barrels out of the U.S., which we think plays really well to our ability to get, as we heard Mark talk about, 80% of our LPG on a waterborne export out of Marcus Hook. And also I would be remiss not to point out the Repauno terminal that will go into service in January of 2027. That's going to allow us to have more access to waterborne exports. So all that to say, we've got demand growing, run rate show to be improving, and we would expect in the longer term stock levels to get re-equilibrated over the balance of the year. Operator: Our next question comes from the line of Neil Mehta with Goldman Sachs & Company. Neil Mehta: Yes. Great. Thanks, team. I want to stay on the NGL question. The $4.41 differential that you achieved in the first quarter, I think, was robust by any modeling standpoint. And just can you spend more time talking about what drove the magnitude of that beat? And then I saw you guys came out in the guide now talking about a $24 sort of mid-cycle view of NGLs. We've been realizing above that for the last couple of years. Do you think there's an upward bias relative to that number? Alan Engberg: Yes. Good question. This is Alan. I manage the marketing group. So I'll take a stab at answering your question there. When we look back at the realization during the first quarter on the NGL side, really 3 main drivers. So we'll go back to January, winters storm Fern. We had high gas prices. That allowed us to actually realize better gas returns. We actually pulled back on ethane recoveries, so that we can do better on gas. But flipping back to NGLs with your question. It also allowed us to realize better numbers on our ethane because we do have roughly 1/3 of our contracts on ethane that are priced off of natural gas. So that was one item that drove the premium. Second item, again, along with the weather and the cold, the demand for LPG in the Northeast domestically was strong, and we were able to realize good prices with sales within the U.S. during January and February. And then the third item, the one that I think most people are focusing on is the international export. That really came into play actually roughly a week or two before the events in Iran with a terminal that went down in Saudi Arabia, and that, despite the international prices, which then spike better returns at the DUC for us. So you add all those 3 things together, it was a good quarter. Things aligned very well. We are positioned with flexibility so that we could move from domestic markets to international markets and capture the best overall netback for Range. When we look forward, yes, we're going to be a little bit conservative in our view. But you have to remember, there's seasonality in that premium. And when you get into shoulder months and even summer months, sometimes just from a pure seasonal perspective, you don't do quite as well. Also, if you look at where prices went, let's say, mid-March compared to where they are today, on average, if you look at, let's say, international propane mid-March, it was up, call it, 80% relative to precrisis levels. That is now somewhere around, call it, plus 30% or plus 40% relative to precrisis levels, still very attractive but not quite what we were seeing in the middle of March. And we would expect that going forward, even if there is a solution, let's say, if the Street ever moves in the next couple of weeks, it's still going to take months to get flows back to normal, and there's millions of barrels of worth of inventory that have been consumed internationally. So with that, we are expecting good returns through the rest of the year on the export netbacks. Neil Mehta: That's great. Staying on the macro, just natural gas, we share your [ 375 ] mid-cycle view. But one of the pushbacks we get often is the weakness in Permian, specifically WAHA, now trading [ 6 under 0 ], right? So the question is, as those molecules move down to the Gulf Coast, what could that mean ultimately for the whole North American pricing system? So just how are you guys thinking about that the Permian gas risk, the associated gas supply risk and how that could put a depressing impact on price? Dennis Degner: Yes, Neil, I'll jump in here. I think when you start to think about the Permian gas dynamics, I don't think this is a place that we haven't seen, I'll just say the character of this play out over the past now several years. But when I think about what's going on, really rig count hasn't changed appreciably since the beginning of the year if you were to just kind of look at those dynamics. So stepping in with additional rig activity to create, I'll just say, a significant amount of growth really hasn't really shown up yet. Clearly, there's been an increase in completion crews. I think roughly -- that number is up across the board, probably around [ 12 to 15 ] in magnitude but that's also kind of similar in character to what you see when you look at the falloff at the end of a prior year and then to kind of start off at the beginning of this year. But it's still below pre year-over-year type levels from a standpoint of activity. And then, of course, I think what that means is you're seeing a bit of a DUC draw. DUC inventory is down across the lower [ 48 ] by about 20%. So when we think about the nat gas macro and you start to couple together all of those fun facts, I think our view is there will be some gas growth out of the Permian. But when you look at -- clearly, we're at 20 Bcf a day now from an LNG perspective, that's pretty encouraging. You're seeing meaningful commissioning gas go through Train 1 at Golden Pass. That's been a long awaited and now encouraging as well. And so we kind of look at it as where production levels are today and the dynamics, I don't think quite reflect where the front month pricing really should be. You get to the end of the injection season, we kind of view this as being more of a 3.8 to maybe 3.9 Tcf storage level. That's where we've been the last couple of years and then couple that with all of the demand that's taking shape right in front of us. You're talking about being on a days of supply basis at about 37 days. That's about 5 days below the 5-year average. So again, what we really think that sets up is more volatility, which we've now seen occur over the past couple of years. And when those moments happen, like we just saw over the past quarter, you can expect Range to really have an opportunity to capture the kind of cash flow that you heard Mark walk through this morning. Operator: Our next question comes from the line of Paul Diamond with Citi. Paul Diamond: Just wanted to touch on your OpEx and numbers you've touched. It's historically been that every dollar moved in NGL is about a cent in [ GP&T ] and then about $0.02 to $0.03 per dollar movement in the gas side. Does that hold in current market dislocations, I mean, is the right way to think about that as linear? Or should there be some, I don't know, parabolic effect given the volatility you were just talking about. Dennis Degner: I think as a rule of thumb, those are probably good estimates to use. Historically, as NGL prices have moved around and we've talked about fluctuations in [ GP&T ], we've really focused on the NGL side because that's where you've seen the greater volatility. As we've already talked about and as all of us are studying, greater volatility on the gas side, in particular with the winter weather in the first quarter when we saw [ 469 ] in January gas, [ 746 ] in February, back down to March at [ 297 ], you've got a situation that made it more apparent what cost the industry as a whole, carries as it relates to cost of electricity and fuel for transportation of gas or interstate pipelines. So if you want to say $0.02 to maybe $0.03 per dollar on the gas side, that's a reasonable ballpark estimate. It still holds for Range, specifically a dollar move per barrel of NGLs is about $0.01 in [ GP&T ]. I think the key point here is that, as I mentioned in the prepared remarks earlier, is that right way risk scenario where the margins are expanding. So if that line item goes up, it's because we are realizing higher prices and expanded margins. So I wouldn't say it's parabolic in terms of the cost line item. But if you're thinking about the two, you're going to get a wider spread because there's a fixed component in the cost structure as well. So the margins do expand. And of course, they shrunk in commodity price down cycles as well. So it's the right way risk. So hopefully, that answers your question, but we like the structure a great deal because it gives us flexibility that Alan spoke to in the portfolio. It builds that portfolio and participation and access to key markets with a structure that allows us to capture enhanced margins when we see these points of volatility and opportunity. Paul Diamond: Understood. Makes perfect sense. And just talking a bit more about the -- as you guys burn in the DUCs or bring down the DUCs part of the growth prospects, I guess how much -- is what level of reactivity in the production split do we expect to see the current conditions shift this? Any like kind of leading towards sort of more wet versus dry gas? Or is it all pretty much set for the coming quarters? Dennis Degner: Yes, Paul, good question. I think as you think about the DUC inventory that's been built over the last 24 months and what you would expect to see going forward, maybe two things I'll share this morning. One, really, the composition and makeup of the activity should look really similar to what you've seen from our program over the last few years where, again, approximately, you could expect to see some combination of 70%, it's maybe 65% on the liquids activity and then the remaining more on the dry gas side. And that's for varying reasons. But clearly, utilization of gathering systems that we have in place, keeping our costs at a low level, but also those are good returns in the dry side as well for -- when you look at the comparable across our asset base. But with the infrastructure that's going into service at the mid-year point, it's focused on the liquid side. So our activity of turn-in lines and completions will be more heavily focused on the liquids-rich activity thus feeding not only the processing capacity and gathering that's going into service, but also that Repauno terminal capacity that I mentioned a little bit earlier that we'll go into service roughly around the first of the year. So think along the lines of our DUC inventory being more weighted heavily toward the liquids-rich activity, much like you've seen over the last few years. And then the last piece that I'll share with you is, look, we've got around 500,000 lateral feet that we've built up over the last couple of years. And what you would expect to see with a consistent activity from our base electric hydraulic fracturing crew but also the spot activity that we'll have over like the next 6 months of this year, and the activity that we'll have next year will allow us to ratably utilize around 400,000 lateral feet over the balance of the next 18 to 24 months, and then we'll reevaluate what's the right plan for beyond 2027. Operator: Our next question comes from the line of Leo Mariani with ROTH. Leo Mariani: I wanted to see if you could be a little bit more specific on the kind of the change that you expect on production into 2Q as well as CapEx in the 2Q. I heard in your prepared comments, it sounds like production is only up slightly, then you get a big jump in 3Q. But anything you do to quantify. And it sounds like CapEx will also be up a decent amount here in 2Q. Dennis Degner: Yes, Leo. So I think from an activity standpoint, if you look back on Q1, we had one rig and one frac crew. Ultimately, that was $139 million in capital spending. So a way of thinking about it for maybe a little bit more color, roughly, the completion side is going to be -- it's a 2/3, 1/3 roughly split. So completions is roughly 2/3 of the equation. So when you ratio that and add a second completion crew, that's how I would think about a step-up for the second quarter. Efficiencies always play a part in that. So I would just say, think about what you've seen also from our efficiency standpoint, the ability to, of course, move water and efficient manner, all of those things returning to pad sites allow us to be, let's just say, on the lower end of sometimes what expectations could look like, and we're excited about that capture. So that's how I'd think about capital for the second and to some degree, the third quarter. Look, the completions team has really hit a home run with some of the stages per day that they've accomplished during some pretty tough winter weather and there very well may also be an opportunity for us to not need a second crew as much as you would expect, but the kind of 17 stages per day type efficiency levels that the team has been able to capture. So -- but yes, second quarter, third quarter, we'll have that second completion crew and still be the one drilling rig. From a production standpoint, I would expect to see us kind of take an uptick that basically will be more stronger towards the very tail end of the quarter. And so as you think about that back end of the year, so think about it kind of ranging somewhere from a ramp of roughly 2.3 Bcf equivalent per day towards the midyear point that gets us up to 2.5 Bcf by the time we get to the end of the year. Leo Mariani: Okay. Appreciate that. And then just on the financial side, do you guys expect any impact on cash taxes this year or next from kind of higher liquids pricing here? And your buyback program was a little bit more limited in 1Q. Should we expect that to maybe step up in subsequent quarters throughout the year given how good shape the balance sheet is in? Mark Scucchi: Yes, Leo, I'll take those. On the cash taxes, I think I would look towards and still anticipate 2028 is probably the first full cash tax paying type year as we work through new tax laws and Range's accumulated NOL that gains and profits over the next couple of years, we'll be able to utilize. So I would still think single-digit type, low single-digit type cash flow or cash taxes for '26 and '27. As we think about shareholder returns, our model, our goals, our objectives are still the same. We think there's tremendous value in buying back in Range's shares, modest growth as the market calls for it. It has compounded where single-digit growth becomes double-digit cash flow per share growth quite easily with the share repurchase program. And you can see that we're opportunistic and very targeted in how we buy back the shares with repurchases in the first quarter, averaging less than $34 per share repurchase price. Now in the first quarter, the reality is you're limited on the number of days we can be in the market because as you prepare the financial statements, you are blacked out. So there is that reality of exercising and running an opportunistic program. But where that leaves us today with $834 million in debt and a refreshed share repurchase program with a full $1.5 billion available is we have accumulated a tremendous amount of dry powder and have a great deal of flexibility to lean in and continue to be opportunistic. We are intentionally not formulaic on this. We think we have been able and we'll continue to be able to buy in shares at better pricing by being somewhat picky and when we lean in. But what that means is as we see a pullback or a disconnect in relative performance, we've got a significant capability to buy back shares. What I would say, if you just want to plumb line is a very basic expectation is that year-over-year, we would expect for share counts to go down, that is an objective. I can't say that's going to happen every single quarter, but year-over-year on any 12-month period, we would certainly hope and expect and plan for share count to go down. Operator: Our next question comes from the line of Kalei Akamine with Bank of America. Kaleinoheaokealaula Akamine: My first question is on NGLs. So really appreciate the macro commentary that stronger DUC utilization could life Mont Belvieu prices. The theory makes a lot of sense. I guess the concern is that the market is more like dry gas where hub and TTF remain decoupled. So curious how you guys explain why this market is different and why there could be better connectivity in global prices? Alan Engberg: This is Alan, Kalei, and good question there. I'm trying to -- I'm thinking -- so you're asking how this market is different from in the past. And I guess I'd say the biggest difference this time around is the closure of the Straight of Hormuz and the damage that's been done in the Middle East. LPG of the Middle East, roughly 1.5 million barrels a day in a global waterborne LPG market of about 5 million barrels a day. So roughly 30%. That has been roughly, I would say, 70% of that, so 1 million barrels per day has been absent from the market for the past 6 weeks. It will probably take a while if things get resolved at the end of April. We're still probably looking 2 to 3 months, depending on damage assessments, evaluations and repairs before that flow can come back. So you've really created a bit of a hole here that is unprecedented. Add to that, that during this period, we're consuming inventories throughout the chemical chain from widgets to polymers to olefins down to feedstocks such as LPG and ethane. So you're consuming that inventory, and it's going to need to get replenished. So those two items there extend, I think, the demand that we were seeing precrisis and really add to that demand significantly and we'll be feeling the impacts of that, I believe, through the rest of this year and into next year. So that's one of the big differences. Fortunately, from a U.S. perspective, we're in the mode of building out export capacity. And Dennis already referred to that. We've guided quite a bit in '25. We have new capacity that just came up last week. We have more capacity coming on into next year. And then we still have significant new capacity coming on in '27, '28 and early '29 that will be used really to supply the shortfall globally and we'll keep a strong pull on U.S. supplies. So the setup overall is it's really just improved for the long term as a result of all those changes. Hope answers your question? Dennis Degner: And I'll add in here, Kalei. I think you mentioned TTF is in the gas side of the equation as well. I think as we think about all of these markets, whether it's the NGL markets or the gas markets, the integration continues. You've gone from essentially no exports to currently running 20 Bcf. We see the potential to reach 30 Bcf exports LNG by 2028 and potentially 36 Bcf by 2030. Now layer that in with the complexities and the flows of limited storage capacity expansions in the U.S., some have been announced in the FID, but you're talking to the tune of 10% to 15% type expansions where you're talking 30% to 40% of the U.S. market is now exported. You're also not seeing expansions in Europe. In fact, you've seen storage facilities shut down. So the U.S. is now de facto storage and supply for Europe and for the rest of the market. So to your point, today, there is a disconnect between TTF and Henry Hub. The exports are running full out. So you don't have that margin or the ability to swing that marginal molecule to create that connectivity today. But as you continue to add in and commission the new facilities, whether it's Golden Pass and all these other facilities and continue to grow quite substantially, another 50% in LNG, you reconnect to those international markets. So as we look at that, and again, as I mentioned earlier in the prepared remarks, at the same time, you've got domestic power demand, you're effectively going to create once you have one spare molecule of export capacity you create a situation where the markets have to bid the molecule away. So does the U.S. power need it? Do we need it for heating domestically? Does Europe need it, does Asia need it for heating and manufacturing, you name it. So I think this while that sounds to be competitive tension, it is, but the U.S. market has the capacity, Appalachia specifically has the capacity to provide that gas. You do need the Permian molecules as well. So that's not a fear factor for us. We see this as a great tailwind for the industry to provide reliable capacity, reliable energy supply domestically and globally, a place where Range can grow as that demand pull occurs. And as a side note, a clear evidence of the fact that we do need some permitting reform both for power lines, pipeline and all forms of energy transportation. So today, you're right, there's a bit of a disconnect, but that's going to ebb and flow quarterly over the next couple of years as the rest of LNG under construction comes online. Kaleinoheaokealaula Akamine: That's excellent. That's a very thorough explanation. And thank you on the comments on the natural gas. My second question is on the growth program. You're now midway through your 400 million cubic feet gas equivalent target or 20,000 barrels of the NGLs will be sold from the new East Coast stock. Can you share anything about the split of those products, whether it's ethane or LPGs? And how -- and should we expect anything different from [indiscernible] of contracts versus what you currently have? Dennis Degner: Yes, good question. I think the way to think about our volumes, as you point out and what that looks like in the future, really from an NGL perspective, when we think about the C3+ side of the equation, you should expect to see character wise, very similar contractual and commercial terms like you've seen us communicate in the past. Alan and the team have really done a good job over the last few years of working through really what you saw where the results generated this past quarter, putting in both we'll just say medium-term type contract structures that have connections to ARA and FEI markets that we really feel like have some durability to them and indices that we like. But also the flip side is that we also have short-term type contract structures where it allows us to take also advantage of what's taking shape in more of a near-term type fashion. So as we think about the expansion at Repauno and our ability to put more barrels on a waterborne export, character-wise, think about it should look very similar to what you've seen in the past on the C3+ side. From an ethane perspective, as you would expect, there will be an uptick in ethane extraction just by nature of having more wet gas go through the system. But however, we tend to, obviously, extract down the middle of the fairway. What we don't do is try and get on the high end of extraction for a lot of reasons. It gives us some ability to be opportunistic when you see running ethane prices and the ability to basically take advantage of price signals during a given month or quarter. But we also have the ability to turn down that extraction, just like you saw the team do during Q1, when it made more sense financially to basically put those molecules back into the gas stream. So there will be a step-up as we have more growth over the balance of time in ethane extraction, but know that it's going to be characterized very similar to what you've seen us execute in the past. Operator: Thank you. Ladies and gentlemen, we are nearing the end of today's conference. We will go to Phillip Jungwirth with BMO for our final question. Phillip Jungwirth: I know you don't want to be formulaic on capital returns, but with net debt now below the historical target range, just wondering if there's a minimum you'd look to get to? Are you comfortable being net cash? Or do we kind of get to a point where we could see Range consistently returning about 100% of free cash flow? Mark Scucchi: Very good question. In terms of the art of the possible, could you see range go to a net cash position? The answer is yes. If you have strong commodity price window. If you have a run-up beyond mid-cycle pricing and cash flow is above what you would expect to be in the cycle business, you can and should likely expect us to likely tilt towards accumulating some dry powder because I would expect the stock to be significantly outperforming in that type of a window, whereas in a pullback and a return to a mid-cycle or even down cycle, you could see 100%. You could see far more than 100% of cash flow. I mean let's put that in perspective. I mean, to use just -- or if possible, $1 billion in debt is less than a turn of leverage. I'm not suggesting we're going to relever. I'm just pointing out the amount of dry powder available in a down cycle if the stock prices pulling back, and we have continued resilient free cash flow and the balance sheet strength to do it. There are periods of time, and this is just art of the possible where you could easily buy back 10%, 15%, 20% of the company in a relatively short period of time. So it's those disproportionate sized investments that generate long-term gains for the corporation. So we'll continue to execute, again, look for Range to seek to reduce share count year in and year out as a steady baseline, but to -- with greater balance sheet strength, look for larger, more impactful opportunities. Phillip Jungwirth: Okay. Great. And then on the NGL premium, I know we've hit on this a little bit. But when you say you're taking the strip at the high end for the annual guidance, just wondering how straightforward of the calculation this is given your marketing contracts are, are there a fair amount of complexities involved in just taking the strip like freight rates? Or just if you could kind of talk a little bit about the other variables that we should keep in mind as we think about the rest of the year, just considering how much you outperformed in 1Q here? Unknown Executive: Yes. There's a number of different contracts that go into that, but we've got a good line of sight as to the markets that we're going to be selling to. So it's simply taking the forward strip in those various markets, whether it's FEI or whether it's ARA or whether it's Belvieu-based. We've got a good feel for that. Naturally, those forward markets are going to be backward-dated. So I think we would view that as a conservative way to look at guidance. But just given the volatility that there's been and the market in the near term, we felt like that was the right approach to take. And then like Dennis mentioned, on the low end, we were plus $1.25. That's in a world where Mont Belvieu prices improve for all the reasons that we've talked about today. So even in that lower end, we're looking at absolute prices that are higher than where we've been. Operator: Thank you. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Degner for his concluding remarks. Dennis Degner: Yes. I'd like to thank everyone for joining us on the call this morning and all of the thoughtful questions around our great results from the quarter. If you have any follow-up questions, please follow up with our Investor Relations team. They'll be happy to address any follow-up calls you may have. And then, of course, lastly, we look forward to seeing many of you on the road in the weeks and months ahead to visit more about the Range story and on our next call. Thank you. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by, and welcome to the Sonoco First Quarter 2026 Earnings Conference Call. [Operator Instructions] I'd now like to turn the call over to Roger Schrum, Head of Investor Relations and Global Marketing Communications. You may begin. Roger Schrum: Thank you, Rob, and good morning to everyone. Last evening, we issued a news release and posted an investor presentation that reviews Sonoco's First Quarter 2026 financial results. Both are posted on the Investor Relations section of our website at sonoco.com. A replay of today's conference call will be available on our website later today and we'll post a transcript later this week. If you would turn to Slide 2, I would remind you that during today's call, we will discuss a number of forward-looking statements based on current expectations, estimates and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties. Therefore, actual results may differ materially. Additionally, today's presentation includes the use of non-GAAP financial measures, which management believes provides useful information to investors about the company's financial condition and results of operation. Further information about the company's use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures is available under the Investor Relations section of our website. Joining me today are Howard Coker, President and CEO; and Paul Joachimczyk, Chief Financial Officer. For today's call, we will provide prepared remarks, followed by your questions. If you'll turn to Slide 4 in our presentation. I'll now turn the call over to Howard. Robert Coker: Thanks, Roger, and good morning, everyone. During our February Investor Day, we set up a framework for our focused strategy over the next 3 years, which is linked to our 3 priorities of sustainable growth, margin improvement driven by our profitability performance plan and efficient capital allocation, which is focused on investing in our sales, debt reduction and returning value to our shareholders. We made strides in each of these priorities in the first quarter while achieving a solid start to the year despite some significant headwinds. Paul will go through the numbers in more detail, but as shown on Slide 5, our adjusted earnings for the first quarter of $1.20 net our and consensus estimates. This performance was primarily driven by strong productivity savings, favorable price/cost environment and a successful start to our profitability performance plan despite lower volume mix. I was really proud of our team's performance in the first quarter despite severe winter weather, which temporarily closed some of our customers and our operations to fire that destroyed our recycling facility in Greenville, South Carolina and the effects of rapidly changing macroeconomic conditions stemming from the Middle East conflict. Our Consumer Packaging segment exceeded our expectations during the quarter our Industrial Paper Packaging segment managed well through both operational and demand challenges. As I mentioned, severe winter weather disrupted several of our U.S. operations in late January as well as some of our large consumer customers who face for ologies, some lasting over a week. February was a much better month from a volume perspective. But with the onset of the Middle East conflict, we began experiencing rapid input cost inflation in March. And as I mentioned, an unfortunate fire in our Greenville facility on March 24. Thankfully, no one was hurt, but it did lead to a onetime cost of $2 million within the quarter. As you would expect, we're not standing still in the face of these macroeconomic challenges. If you turn to Slide 6, I'll talk further about the steps we're taking to mitigate rising costs and ensure supply for our customers in this challenging inflationary environment. Energy and freight and other petrochemical-related input calls such as resins, coatings and other chemicals represent approximately 10% of our annual sales. While the impact on the first quarter was under a few million dollars. Based on current estimates, we believe this inflation could add between $8 million to $10 million in additional costs in the second quarter. We are leveraging our global sourcing and supply assurance team to do all we can to help offset these rising costs. That said, we must recover this inflation and have implemented a number of necessary price increases, including a $70 per ton uncoated recycled paperboard increase in the U.S. and an EUR 80 per ton increase in Europe, along with other pricing actions. These actions are showing traction in the market. fast markets reported by Friday and an initial $60 per turn increase in U.S. URB prices. Given our current backlogs and solid mill utilization rates entering April, we feel confident about the sustainability of our actions. As shown on Slide 7, we have purposefully shifted our mix to more resilient consumer-focused businesses where today, 2/3 of our sales were generated by our leadership positions in paper and metal cans. We're focused on affordable center of the store safe food categories, which have historically remained resilient during periods of economic for us. I'm happy that our recent portfolio work has substantially reduced our exposure to resin based packaging. In 2023, we used approximately 240 million pounds of petroleum-based resins. While today, we used only about 75 million pounds primarily in our plastics industrial plastics business and our plastic cartridges for adhesives and sealants, where we do have recovery mechanisms in place. As it relates to our growth pillar, we recently opened a new paper can plant in Nong Yai, Thailand. As shown on Slide 8, Paul and I had the opportunity to participate in the grand opening with our team in Asia in March. This highly automated operation is expected to annually produce approximately 200 million units for the growing STACK chip markets in Asia and is one of the reasons we saw a 6% lift in paper can volume in the region in the first quarter. This plant was built to accommodate future capacity expansion, and we believe it could eventually become one of the largest global paper can operations over the next several years. In our industrial business, we are investing $20 million to add a new automated nailed wood, real production line at our Hartselle Alabama, facility. As shown on Slide 9, when this new line opens at the end of the second quarter, we expect it will increase our capacity by 15%, and able us to meet the needs of the fast-growing wire and cable industry. as it supplies the booming power infrastructure demand for AI center broad. I'll add that sales in our reels business were up 13% in the quarter. In addition to funding our growth, our disciplined capital allocation strategy remains focused on reducing debt and returning capital to shareholders. As shown on Slide 10, last week, our Board of Directors authorized the 43rd consecutive annual increase of dividends to shareholders, raising the payout to $2.16 per share which provides an annual yield of about 3.8%. Sonoco is one of only a few public companies that has paid dividends consecutively for more than 100 years. In summary, we had a good start to the year despite challenges, and we remain confident in our portfolio, our strategy and ability to execute through economic cycles. With that, I'll turn it over to Paul. Paul Joachimczyk: Thank you, Howard. I'll walk you through our first quarter financial performance, starting on Slide 11. With our portfolio transformation complete, we're entering the next phase defined by sustainable growth, margin improvement driven by our profitability performance plan and efficient capital allocation, which is focused on investing in ourselves, debt reduction and returning value to our shareholders. Today, I'll cover our first quarter results and our early progress against the profitability performance plan we laid out at Investor Day in February. Before I review the quarter, a quick note on comparability and some nuances related to the accounting treatment for our divestitures in 2025. TFP was divested on April 1, 2025, is reported as discontinued operations in last year's first quarter. ThermoSafe was divested on November 3, 2025, and was included in continuing operations in that same period. In 2026, neither TFP nor ThermoSafe as part of continuing operations. As a result, all year-over-year comparisons I discussed for continuing operations with ThermoSafe included in the 2025 figures, and I'll highlight the differences were applicable. Net sales from continuing operations were $1.7 billion, down 2% year-over-year. Results reflect lower-than-expected volumes, weather impacts as well as macroeconomic and geopolitical pressures win on both our supply chain and our customers. Those headwinds were partially offset by pricing actions and a foreign currency benefit primarily from the Euro. Also in the year-over-year comparison is ThermoSafe, which contributed $55 million of sales in the first quarter of 2025. Excluding ThermoSafe, our sales increased by approximately 1% versus the prior year. Adjusted EBITDA was $277 million, down 4% year-over-year and margin was down approximately 35 basis points. The decline was driven by lower volumes and the absence of operating profit from the divested ThermoSafe business. These impacts were partially offset by productivity initiatives strong pricing realizations, early savings from our multiyear profitability programs and favorable foreign exchange rates. Excluding ThermoSafe, adjusted EBITDA would have been flat reflecting strong cost containment from our profitability programs despite softer volumes. Overall, we're encouraged by how our continuing operations performed following last year's reorganization. On a consistent comparison basis, our key metrics are up year-over-year, reinforcing that we're building a more agile and resilient organization to navigate challenges as they arise. Now moving to Slide 12. Adjusted EBITDA for the quarter was $1.20, flat year-over-year after excluding the impact of discontinued operations. The year-over-year results reflect the balance of a softer volume and the impact of divestitures, offset by productivity gains, pricing, early profitability savings from our 3-year program, a lower effective tax rate and a favorable foreign currency. If we go a little deeper into the bridge here, I'd like to walk you through the components of each bar. We'll start with the discontinued operations adjustment, which is a net impact of $0.18 led by the TFP divestiture, partially offset by interest. The divestiture of ThermoSafe represents a $0.07 decrease. Operational changes are down $0.08 due to the pressures on the top line due to the macroeconomic and geopolitical factors within the quarter, partially offset by operational productivity. Nonoperational changes are up $0.09, led by FX, especially the euro, reduction of our debt and tax benefits which helped to offset several headwinds the business faced within the quarter. Profitability performance drove $0.06 of improvement. I want to underscore the importance of what we're doing to drive margins for the rest of the year, by controlling the controllables. We're maintaining pricing discipline, accelerating productivity, advancing our profitability performance plan and tightening -- tightly managing both our costs and our capital. While the macro environment remains uncertain, we remain committed to executing the long-term financial targets we shared at Investor Day. Turning to cash flow on Slide 13. Operating cash flow in the first quarter was a use of $368 million, consistent with normal seasonal patterns as we build inventories ahead of the canning season. Gross capital investment was $62 million below our expectations. Given the current macro environment, we are actively monitoring capital spending to stay disciplined and meet our targets. The year-over-year decline in cash flows was primarily driven by approximately $140 million of higher tax payments. That includes $103 million related to capital gains from prior period divestitures, which will not repeat. As discussed at Investor Day, we have a clear and disciplined approach to capital allocation. That includes prioritizing high-return projects, continuing to optimize working capital, especially inventory and payables and preserving balance sheet flexibility by paying down debt while still supporting long-term growth initiatives. Turning to Slide 14. Before I go deeper into the segment results, I want to share a brief disclosure related to our consumer segment and a footnote we've included for this discussion. In first quarter of 2025, Consumer segment adjusted EBITDA did not include $18 million of unallocated corporate costs. You can find these details in the earnings release table on Page 20 of our press release dated April 21, 2026. Now let's turn our attention to the 2 segments and overall results. Starting with Consumer. Sales increased 3% year-over-year to $1.1 billion, driven by pricing and favorable foreign currency exchange rates, partially offset by volume and mix softness related to the macroeconomic conditions. Adjusted EBITDA from continuing operations declined 7%, reflecting lower volumes, partially offset by productivity initiatives, pricing actions and early transformation savings. Adjusting for the 2025 unallocated corporate costs I just described, consumer adjusted EBITDA would have been up with margins flat. In Consumer, the team remains focused on price realization and mix discipline across key geographies while driving manufacturing and supply chain productivity. They are also leveraging accelerated transformation savings to improve their margins. Let's move on to our Industrial segment. Sales were $579 million, down year-over-year by 1%, driven by softer volumes, partially offset by favorable pricing and index-based resets with foreign currency benefits. Adjusted EBITDA declined by $7 million to $100 million, a 7% decrease as lower volumes were partially mitigated by pricing resets and productivity improvements. EBITDA margin was lower year-over-year due to unfavorable volume and mix, along with losses attributed to a fire at our recycling facility in Greenville, South Carolina. The Industrial segment is focused on fully on capturing index-based pricing resets as they flow through. Executing it against cost and productivity initiatives already underway, and preserving margin discipline while managing demand variability. We've seen good progress throughout the current one, which supports our confidence as we move into the second quarter. Turning to Slide 15. We are pleased with the early progress of our 3-year profitability performance plan outlined at Investor Day. In the first quarter, we delivered $8 million of savings progressing towards our $150 million to $200 million target. These savings were primarily driven by structural transformation initiatives, which contributed $6 million, along with $2 million from commercial excellence and operational improvement efforts. Importantly, these savings are already flowing through the P&L reinforcing our confidence in the program's execution and durability. And as they annualize, they represent approximately $32 million of recurring savings. Turning to guidance on Slide 16. We are maintaining our full year outlook while recognizing that continued macroeconomic and geopolitical uncertainty, particularly late in our quarter, rates a dynamic operating environment. We will continue to monitor inflation and demand trends closely. With that, let me walk you through our full year expectations. For the full year, we expect sales of $7.25 billion to $7.75 billion, adjusted EBITDA of $1.25 billion to $1.35 billion, adjusted EBITDA of $5.80 to $6.20 with results expected to trend towards the lower end of the range. While we are maintaining our adjusted EBITDA outlook, EPS will not track EBITDA 1 for 1 because of the tighter EPS range of only $0.40. In the current environment, inflationary cost pressures and macro volatility will create a larger impact on EPS rather than EBITDA. Operating cash flow of $700 million to $800 million, inclusive of the $103 million of tax payments related to 2025 divestitures, which were paid in the first quarter. For the remainder of 2026, our mandate is clear. deliver on our 3-year strategy of focus by executing the profitability performance plan, which is delivering $32 million of annualized savings in 2026. We have to offset volume pressures that we experienced in the early 2026, and we are protecting our margins through disciplined pricing and productivity, strengthening our cash flow through working capital and disciplined capital spending. We are more focused and have stronger execution levers than in recent years, building a higher quality earnings base and strengthening cash generation even in a challenging demand environment. Let me turn the call back over to Howard for some closing comments. Robert Coker: Thanks, Paul. Let me close by again thanking our global team for successfully guiding us through these uncertain times during the first part of the year. The year started out fairly strong, but were affected by winter weather in the Americas, losing 2 weeks of production from 2 of our major consumer customers in the Tennessee region. We also had mill and converting downtime by our and our customers throughout the region. We lost the facility to fire and other relatively one-off type issues and, of course, the impact of the Middle East complete. In spite of these, we stayed focused on controls and long-term productivity to deliver well within our expectations. I think it's also important to note -- while uncertainty remains, there is concern how the rest of the year will unfold. However, April has shown thus far some encouraging signs. As we enter the pack season, consumer EMEA has seen early positive signs in the South, the tuna pack has been strong, and while we have not built expectation for a rebound in [indiscernible] this market, too, is showing some promise for improvement and salted snack volumes are increasing, which is typical in a World Cup year. We see necessary index-based price in North America in our industrial business. which will drive full benefit during Q3 with incremental help in Q2 and early but reasonable expectations for URB and converted products and announced prices in Europe. Our focus on our drive for $150 million to $200 million over the next 3 years is on pace and will only build as we go deeper into the year. But the reality is we are in uncertain times. Things are changing on a daily basis. We do have some catch-up to deal with from the quick hit of inflation as we entered into Q2 and thus the cautionary tone in our EPS forecast. Let me close by saying how pleased I am we have made over the past several years, the changes you all have seen. If we had not made the portfolio shift, we'd be living in a vastly different world. Without our simplification efforts, we would not be driving the level of SG&A and other savings noted today. And we would be facing serious supply chain issues at a much larger degree of inflation impact and volume pressure. So again, thanks to our team as we continue to drive through this difficult operating environment and certainly looking forward to any questions that you may have. I'll turn it back over to the operator. Operator: [Operator Instructions] Your first question today comes from the line of George Staphos from Bank of America Securities. George Staphos: I guess I had 3 questions. I'll ask them in sequence and turn it over. Howard, first of all, Paul, could you discuss what the effect of the storms was in the first quarter a percentage of volume standpoint. In other words, if you did not have the storms, what would volumes have been? And what kind of early run rate are you seeing on volumes in consumer and in Industrial for the second quarter? Second point, we appreciate you calling out the inflation effect so far of $8 million to $10 million in 2Q. Is that a sequential impact from 1Q or year-on-year and if costs stay where they're at right now, would that be the effect in 3Q? Or would it be a lesser effect? And then the last question I had for you is, can you talk to us about how you feel on your metal supply chain, both aluminum and steel? Are there any flash points we need to watch out against relative to the Street? Or do you feel like you're pretty well situated as far as you can see for the rest of the year? Robert Coker: Thanks, George. I'm going to let Paul cover. I don't have the direct, Paul does either the full numbers in terms of the impact of the storm. What I would say on the metal side, which I will handle is -- we have no issues, no concerns, not only in terms of supply chain, but we have fixed pricing through the year. Obviously, we've seen tariffs and other things that an impact. But based off of where we sit today, we're in good shape. Paul Joachimczyk: And George, on the first question that you had around the storm effect, we did experience more declines in our consumer business in the Americas, primarily due to the weather that was out there with some of our CPGs being down, 2 of our largest customers being down for over a week, that did create a, I'll call it, a larger impact disproportionately than our international business that are out there. I'll say the early run rate, though, that we're seeing is we're seeing some recovery back in the business, more so on our industrial businesses. We're seeing strengthening in those markets as mills are getting closer back to the 90% effective rates, run rates that are there. We're seeing some lift back in our consumer businesses, but still more focused on the international side. The Americas are still lagging behind, but it did impact the volume pressures there for sure. Moving on to your second... George Staphos: Just -- so I know it's early, but what kind of volume are you seeing up down? Can you put a percentage on it in your key consumer or industrial categories? Paul Joachimczyk: Yes. I would say internationally, say, low single digits that were up there. Industrial in the same ballpark too is March was impacted primarily because of all the uncertainties that are out there, we're starting to see the recovery of those flows coming in early part of the month. And I'll say it's -- right now, if that trend continues, it will be a nice quarter for us in Q2. If I move on to your second question around the inflation impact, the $8 million to $10 million is what we have line of sight to for Q2. And with our recovery mechanisms that we have in place, there is a little bit of a lag. So I'd say right now, our exposure for Q2 is 8% to 10%. Obviously, if there's more macroeconomic effects, if there's something that happens with pricing pressures on our input costs, those could change to be greater in Q3 and Q4. But we do think our recovery mechanisms will help cover and offset this in those future quarters that are there. But we don't have full line of sight to what's going to happen in the macro world that's out there. But today, we feel confident in our exposure for what Q2 is going to bear, say, if everything holds steady, those would not recur and we could recover that by Q3 and Q4. Operator: Your next question comes from the line of John Dunigan from Jefferies. John Dunigan: Thank you, Howard. Thank you, Paul. I really appreciate all the details. I wanted to start back on the cost inflation with the $8 million to $10 million. Can you walk us through some of those key buckets and in particular, nat gas electricity across U.S. and Europe? And how much of that you have hedged across your businesses? And then if we're thinking about the freight surcharges that you called out, is there any kind of lag to putting those through contractually? And maybe you can help us quantify how much of your contracts currently have those surcharge mechanisms contained in them? Paul Joachimczyk: Yes, John, I'll take the first part of that. So the cost inflation, the breakdown of it you go through your freight as your primary driver of that. That was the one that we experienced almost immediately saw rising fuel prices primarily in the diesel aspect, come through. We do have recovery places and mechanisms out there. There is a lag related to those, call it, roughly 3 weeks, 4 weeks of a time period that's out there to get that recovery back. So you're exposed, let's just say, a month to be simplistic out there. As far as all the other inputs that are out there, whether it's the resins, the energy and things like that, I'd say we do have some coverage on our hedging. We haven't gone out with exactly what that coverage is from a hedging -- the $8 million to $9 million is inclusive. It's net of that. So that is an impact of us from already factoring into what we already have hedged and placed into programs. So that's the impact that we'll experience in our P&L. But freight is primarily the largest impact for us. John Dunigan: Great. That's very helpful. And then just on my follow-up, I just wanted to jump over to the cost savings. You called out the $8 million from the initiatives towards the $150 million to $200 million. But productivity in the quarter was pretty impressive. It was up $33 million year-over-year. Can you just walk us through the difference between those 2 figures and how we should think of the cadence through the rest of the year, that would be helpful. Paul Joachimczyk: Yes. And John, that's a great question. And really, what we're trying to do is we're trying to delineate productivity, which really is covering our inflationary impacts, things of that nature versus the profitability performance plan. The profitability performance plan, as we think about it, this is costs that are going to fall right to the bottom line, and they're going to be there every quarter on a go-forward basis. So that's why we did the delineation this quarter more so, and we'll continue that going forward. But we want to assure you that what we are delivering in those savings on that program of the $150 million to $200 million, that is something that you can bank on for us that's going to be there quarter after quarter after quarter, and it's going to be recurring. Operator: Your next question comes from the line of Michael Roxland from Truist Securities. Unknown Analyst: This is Niko [ Pacini ] on for Michael Roxland. Just to clarify on the inflationary impacts, does your current guide assume that $8 million to $10 million is the limit of the impact? Or do you assume current conditions basically persist through the rest of the year rather than kind of improve? And then secondly, what do you think to your customers and consumers' ability is to absorb price? How much in you can push before the manustructure might occur? Robert Coker: Yes. I would say the -- this is what we have visibility at this point in time. I went to extra effort to point out that with the new portfolio, particularly our key raw materials being still on the consumer side, is basically flat, contractually protected through the year. And so we do have the resin exposure I spoke to in my opening comments, that too has recovery mechanisms in it, and it varies from -- within the month within the quarter. But will we see more? It's hard to say. It depends on what happened while we were talking during this call virtually just seems to be changing on an immediate basis. But the point here is that from a key raw materials perspective, we feel really good in terms of the position that we're in at this point in time. And the customer impact, it's hard to say. We're being a staple food. All I can say is what we've seen historically when, obviously, the inflation being felt at retail is also showing up in QSR and other outlets as well, while it's get tight. We historically have seen in our consumer business that volumes are not affected and in fact, in some cases, have improved as people shop in the grocery store, cook at home as opposed to going out. So hard to predict how that's going to go. But certainly would think that while we're talking about the packaging side of things, that there's pressures on all raw materials associated with all food items, really on all items going forward, and it ultimately will we'll see how that fares through the consumer. Unknown Analyst: Got it. Understood. Just a quick follow-up. I think you mentioned a little softer EV volumes in 1Q, but a pickup more recently in April. What do you attribute that pickup to? And can you share where backlog stands right now? Robert Coker: Yes. We don't really track backlogs on URB. But what we're seeing is, as Paul had noted, roughly 90%, 91% operating rate here, which is our largest market and URB in North America. And frankly, there's a couple of things going on. The main is that we told at Investor Day about new products and new markets that we're entering with URB that traditionally have been served by other grades of paper that have been -- some of which has been taken out of the market the mill closures. We've been successful in converting saturated craft. So we've got our first customer and a line of customers in the funnel right now that is really helping us to as we look out into the quarter, go from the low 90s -- well still low 90s, but from 90 to 92, 93 type operating rates as that volume starts flowing through the mill now. Operator: Your next question comes from the line of Hillary Cacanando from Deutsche Bank. Unknown Analyst: Just regarding the softer volumes and inflationary pressures in the first quarter, could you just elaborate on what specific end markets or geographies underperformed expectations or outperformed expectations, most notably. I know you talked a little bit about tuna pack and sardines but if you could give more -- a little more detail on other end markets. Robert Coker: Yes. What I'd say, I'm really just talking to geography. It was -- if you go around the world, all already noted that Consumer EMEA was a very -- well, low single digits off from a volume year-over-year. It was a bigger impact here in North America. And I don't think I want to get into just from a confidentiality with customers. But our 2 largest customers on our paper can business loss 7, 8 days during the winter storm. Now we talked about that in February and what would typically happen is as we see the rush to make up that time and enough time would be held in the quarter. Then, of course, 5, 7 days after our Investor Day, you wake up and find out on February 27, we bombed Iran. So we think they took the opportunity to bring inventories down, and we're starting to see now a bit of a pickup and the expectation is the magnitude of what we saw in the first quarter will not repeat itself. In fact, they should be looking to make some of that up through the year. Unknown Analyst: Got it. Great. And then just a follow-up. As we're 3 weeks into the second quarter, I know you said April picked up, but are you seeing any real discernible change in customer ordering patterns or conversations? Like has anything like really changed? I know you're forecasting weaker volumes. But just wanted to see if any pattern -- like any discernible change in patterns? Paul Joachimczyk: Yes. Hilary, this is Paul. So really no discernible patterns that are out there. We're seeing a slight uptick in the volume that's given us a little bit more confidence in our guide that's out there. But really nothing that's -- I'd say you could lead anything to other than just a recovery from Q1. Operator: Your next question comes from the line of Anthony Pettinari from Citi. Unknown Analyst: Actually this is [ Bradbury ] on for Anthony. Maybe just focusing on consumer a little bit. Volumes were down against a pretty tough comp from last year. Do you think we start to see some improvement in year-on-year volume growth in 2Q and as we start to get into the back half, maybe from easy comps or ramping investments? Just any detail on maybe how that volume trend could develop '26 in consumer? Robert Coker: Yes. Pretty hard to really nail it with the amount of sorting that we have out there. What I would say is probably on our aerosol business here in North America, pretty tough comps coming up here in the summertime and somewhat of a discretionary spend you can do without. But on the other side of that, that would be reflective of a consumer that more of an economic downturn situation. So you could see that being a tougher comp. But at the same time, as I said earlier, you would expect that the food side of the business, on the center of the store, drive to the supermarket as conditions stuff and they would balance that, if not, actually exceed that. So tough to say. I mentioned earlier, in Europe, World Cup, that's kind of the normal thing for us to see that volume start to pick up around that particular event. But kind of a wait and see. I don't know if the consumer is fully, fully, fully felt it to the point, it does appear we're heading in that direction. That could be favorable, frankly, for the most part of the consumer side of the business. Unknown Analyst: Got it. And then maybe just on working capital. I'm not sure if there's any maybe sensitivity to raw material inputs that we should be mindful of, just as the year goes on, trying to be mindful of higher metal prices and then pet chems. I'm not sure if like an earnings sensitivity or just any detail you would want to put on maybe working capital or free cash flow as we think about higher metal? Paul Joachimczyk: Yes. So really, from a working capital perspective, no real concerns there. I'd say one thing to highlight that we are being very disciplined about our spend on capital for the remainder of the year. We want to make sure that we're hitting our guide and our targets that we've committed to the Street. So there will be some products that we'll postpone but we're not cutting back any of our growth or our value adding capital products that are out there, but feel really confident that with our supply chain team and our efforts that they've done to secure are really strong. Supply chain, both around Metalpack and all the other inputs that are there. So really no concerns from this perspective right now. That's what our current environment is, as we said. Operator: Your next question comes from the line of Ghansham Panjabi from Baird. Ghansham Panjabi: Just kind of picking up on some of the last few questions. So obviously, 1Q was impacted from a volume standpoint for all the reasons you kind of went through. 2Q, you gave some parameters as it relates to raw material cost inflation, et cetera, and we know what your full year guidance is. So specific to 2Q, do you expect earnings to grow year-over-year? Or will it be comparable to sort of 1Q just given what you called out as it relates to the price cost headwinds? Paul Joachimczyk: Yes, Ghansham, we do expect earnings to grow in Q2. I will say though, there is that inflationary impact for the raw materials that we talked about with freight and everything else that's there. So that will create a little bit of a margin drag for us. and some of the pressures that are there, but we definitely expect earnings to grow. Ghansham Panjabi: On a year-over-year basis, just to clarify. Paul Joachimczyk: Yes. Robert Coker: Yes. And Ghansham, I do want to reiterate that I know we talked about it over and over, but in the full volume environment, the team really did deliver on the bottom line expectations for the most part. And that is not changing as we see seasonal volumes increase in terms of the levels of productivity and savings, and the programs that we've got in place. So I just want to say, again, hats off to our team in the sole volume environment still being able to drop down within our expectations. Ghansham Panjabi: Yes. For sure. A lot going on. So as it relates to the volume impact of this particular inflation cycle and obviously, customers know that price increases are coming and so on and so forth. Have you seen any sort of preordering or just some sort of order pattern distortions that maybe amplifying some of the volume that you're seeing early part of 2Q in terms of the recovery you called out Robert Coker: No. In fact, it's, again, based off the portfolio. The type of inflation that we're seeing is not really about product inflation. It's how we deliver it's freight, obviously, some energy. But not to your typical, hey, you've got a 5% or 10% price increase coming in the next quarter I need to load off that. Ghansham Panjabi: Okay. And you haven't seen any change in the macro backdrop, just broadly speaking for your industrial business either right? Robert Coker: No. In fact, a little bit of concern about, yes, we had the weather impacts in the first quarter, but we've seen some green shoots here. A lot of it is self-help entering new markets that we've never participated in before. As I mentioned earlier, with saturated craft using I guess the furniture industry. So right now, things are -- you got to put that into the model to say, "Hey, we've got new business coming on that we never participated in before. So that our operating rates, as I said, we've said a couple of times, we're in pretty good shape. Paul Joachimczyk: And Ghansham, we have a realty business, too, that is doing really well in performance for us in Q1, and we expect that to continue into Q2 as well. Operator: Your next question comes from the line of Anojja Shah from UBS. Anojja Shah: So first, I just want to confirm that $8 million to $10 million of inflation that you pull out in 2Q, based on the lag in your pass-through, you're confident that, that should get recovered in the second half? Paul Joachimczyk: Yes. Anojja Shah: I would get, okay. Assuming and if there is additional inflation, then it's about 1/4 you said. Is that right? Paul Joachimczyk: Correct. Yes. Anojja Shah: And then also, you announced a new term loan at the end of March. And in the bridges you gave last quarter, you had a $0.20 to $0.40 nonoperational contribution on EPS. So is that -- is the interest on that new term loan sort of a headwind to that $20 million to $40 million? And is that part of why the EPS guidance is now on the lower end? How is that still filtering through your guidance? Paul Joachimczyk: So the term loan that we announced is really it's a delayed draw term loan to effectively retire our loan that would be due in September later this year. that really does not have -- it's a meaningful or call it, it's not a significant impact to our EPS strain that's out there. It's more of this inflationary impacts in the short term that is driving our EPS down more than anything else. Anojja Shah: Okay. And because of the tight range on EPS, that's why it's impacting EPS and not as much EBITDA, is that correct? Paul Joachimczyk: You got it. Yes, if you think about EBIT -- Anojja Shah: Go ahead. Paul Joachimczyk: I was going to say for the EBITDA range, if we think about it, it's really $100 million that's out there. If you take the taxes out of that, it really becomes a $133 million range and your EPS is only $0.40. So the 2 are disaggregated and disproportionate, almost a 3:1 ratio. So it's your EBIT impact, you can have a $10 million impact in your EBITDA, but it will drive a much larger impact on our EPS change that's out there. Anojja Shah: Right. Got it. And then finally, how are you feeling about your geographic footprint now with your current split between U.S. and Europe? I only ask because some of your peers are reconsidering the benefits that they thought they would get by adding on a European business and they're sort of saying that the large global customers tend to source more regionally. Do you believe that your global platform gives you significant economies of scale that maybe outweigh some of the complexity drawbacks? Robert Coker: Yes. We do -- certainly, economies of scale. We like the way we're situated right now. We're over half North America. I think it's about 40% in total company, both consumer and industrial. In Europe, -- and we've seen that flip back and forth over the last decade or so, more in favorable -- stronger in favor of North America. It just depends on the market, the opportunity -- it's not a conscious type situation, but we're happy with the portfolio. We're happy with the geographies that we participate in. Southeast Asia has on -- particularly on the consumer side, it's becoming even more material. And frankly, as we noted earlier, continues to grow at a nice pace. So we are where we are today, and we do not plan on any future portfolio or inorganic moves, but it wouldn't surprise me if we weren't talking years down the road and there's a different ratio there. Operator: Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Mark Weintraub: I got disconnected, so apologies if there's any repetition in the question here. But I was hoping to focus a little bit more on the volume side. And 2 things. One, maybe a little bit more color possible on some of the growth on some of the potential business wins and some of the expansions. If you could perhaps scale the size of opportunity and what you've seen so far. So for instance, with the new paper can facility in Thailand, how much revenue or opportunity might that provide? And then in Europe, you had been talking about at one point, the possibility of converting some customers who were doing their own accounting, if there's any update there, on progress there. You mentioned on the saturating kraft that was helpful. And then just on the flip side of that, where volume has been disappointing and certainly, there's the macroeconomic bears the weather, et cetera. But there's also the kind of a GLP-1 issue and hopefully, it's not as big a deal for you for some others, but maybe just update us on your thoughts relative to that. Robert Coker: Yes, Mark, good question. And as Paul has said, I do not have a total off of -- we're not going to give out specific plant level type details. But I can't really answer that question. What you did answer in your own question was where we're seeing opportunities, certainly, Thailand is reportedly going to be possibly even the third largest paper can plant that -- well, that we operate globally. So it's in its infancy in terms of -- and we're doing about somewhere around 200 million units right now during the start-up phase. Saturated kraft is really turning out to be quite an interesting market. And we're in with our first customer and I could keep going in terms of investments that we've made across the portfolio. But let's put that down as a homework assignment to aggregate that for you and the rest of the group. But no, we're not going to talk about individual opportunity, but I think it's a fair question from an aggregate perspective. You're right on the GLP side, we feel better about our situation today. If you go back just over a year ago, it just feels good not to be in the type of markets confectionery, cookies, crackers and things like that, that we were pretty heavy in. So the portfolio shift, I think, is more favorable this context. And I would say, but yes, we do participate with salted snacks that what we're seeing there, as we just spoke to in a bit, was that, that growth seems to be -- it is really materializing internationally, where GLPs are just not at the same level as they are here in the United States, particularly in Southeast Asia, that Eastern Europe and even South America, where we've got expansions going on. So feel much better about our situation today from a portfolio perspective to drive through where GLPs will finally settle on that. Paul Joachimczyk: Yes. And Mark, just to give you a little bit more context in the Thailand plant and referring back to a comment that Howard made in his opening statement to that plant will lead to 200 million units on an annual basis for us, and it did contribute a 6% lift in our paper can volume in that region. So it is going to be a significant asset for us and contribution to our overall growth and the strategy for that region. Robert Coker: With a reminder that that's the start-up of the plant. Paul Joachimczyk: You got it. Mark Weintraub: Right. And the point being to start up, a, there's more to come. B, are there also extra costs that you incur during the start-up phase that presumably fade away? Robert Coker: Yes. Always, when you're starting a new operation, yes, you've got a ramp-up curve. But I'll tell you though, we have a heck of a good team -- we do a lot of cans in Southeast Asia, and it's -- you never have a vertical, but you're right. We did see some cost including a grand opening that you saw the picture in the slide was well done by the team. Mark Weintraub: Great. And maybe this is getting a little too detailed. And if so, you either take it offline or whatever, but is it possible sort of to walk us up a little bit to the $8 million to $10 million, and if we annualize it, $32 million to $40 million, you've got $7.5 billion of sales. So we're talking about 4% or 5%, 40 to 50 basis points of increase, which seems kind of low if freight and those other variables are about -- I think you had said about 10% of revenue. So it would seem like not too big an increase? I don't know if you can quickly easily walk us up sort of the big drivers, basically, how much is freight up on a percentage basis if that's the biggest driver? Paul Joachimczyk: Yes. And Mark, we did -- probably when you were disconnected, we did cover this. But freight is the largest component of that. And really, we're the I'll call it as a recovery to go after that is going to be lagged and delayed. So the $8 million to $10 million is net of all of our recovery efforts set out there. So that's I would say -- so it does seem small. And the reason it is small is because we did put the net number out there, not a gross number. Operator: Your next question comes from the line of Gabe Hajde from Wells Fargo Securities. Gabe Hajde: I'm struggling a little bit with maybe just the commentary on the second quarter, and I appreciate there's a lot of uncertainty out there. But specifically, even to growing earnings in Q2, are we talking in EBITDA terms or ETFs because I think just the reduction in interest expense would get you something like $0.15 or so of EPS growth. So just a little bit of clarity there, please? Paul Joachimczyk: Yes. So Gabe, it will be both an EBITDA and EPS. EPS does receive the benefit of interest favorability year-over-year as well, too. So that is part of it. Gabe Hajde: Okay. And then maybe going -- looking backwards and thinking about even the second quarter, I know there's a lot of moving parts, and I apologize if I missed it. But if we think about North America Food, European food cans and then, I guess, maybe global composite cans. You talked about, I think, Europe food being up low single digits in Q1, which would imply maybe down by single digits, 8% or so in North America food or aerosol and then I guess, composite can. And then half of that was off because of weather? Just help us maybe on Q1 volume trends in the 3 different geographies or 3 different businesses as you think about it. Robert Coker: Yes. You're pretty close in your math in terms of low single digits in EMEA and your -- the correlation to how that would have impacted the Americas. I really don't have that full, what does it mean, available to us at this point, and maybe it can be a follow-up that we can give to you. Gabe Hajde: Okay. And then I guess, Paul, when I think about tax rate, you gave us 26% at the beginning of the year, maybe interest tracking around $150 million and D&A was a little light in Q1, $125 million. I think we were kind of thinking about $135 million or so. Is the $125 million a good run rate going forward? I'm just thinking about it again, what the translation between EBITDA and EPS, if I take the low end of EPS, call it $585 or so coming off to like $165 implied EBITDA. So anything that we should be mindful of there? Paul Joachimczyk: No. I'd say your depreciation will probably tick up a little bit as some of our products come online later this year, so you'll see a little bit of an increase. But your range is -- you're right in the same ballpark there. Gabe Hajde: Okay. And last one for me, and I apologize if it's repetitive. But getting to Mark's question, our math on transport as our paper businesses, about $20 a ton of inflation flowing through the system. I think you have 1 million for tonnes in North America, maybe 1 million tonnes in Europe. So that would imply I don't know, something $100 million just on inflation there, maybe I'm overestimating things. And then the 75 million pounds of polyethylene or resin buy that you were talking about, I think that was on a quarterly basis. It's up $0.30 give or take, just between April and March, but that would be implied just a lag on that would be maybe the $10 million? Again, I'm trying -- I'm having a hard time reconciling kind of and I believe you, right, $8 million to $10 million of inflation versus sort of the math that we have come up with independently. So maybe we're over, under estimating? Paul Joachimczyk: Yes, Gabe, I'd say I'm going to give hats off to our supply chain. They have done a phenomenal job negotiating things. We do have in our contracts, too, some delays in the way the pricing gets passed, those surcharges, the things that you're talking about for freight and hit quicker. Also, you think about how we optimize our transportation, we keep our plants close to our customer bases and things like that as well, too. So we -- they've done a phenomenal job, and we feel fairly confident in our numbers around the $8 million to $10 million as being in that number and exposure. So the gross number, you're probably absolutely spot on. It's definitely in that range. But the team has done a phenomenal job of mitigating it. So like I said, I'm very happy with the progress that they've done. Robert Coker: On the resin side of it, it's variable in terms of contracts, some of which are monthly extending out to quarterly. So that's the balance there. And you've got to look at the anticipation of what was coming and the inventories that we were able to build. And so all of the above points to exactly what Paul said, hats off to our procurement organization and how they manage through this. Operator: Your next question comes from the line of Matt Roberts from Raymond James. Matthew Roberts: A couple of questions. They're all on RPC. So I'll just fire them off one by one here. First, what was RPC volume performance in 1Q? I believe that used to be in the slide deck. On April... Robert Coker: Yes, I don't have visibility of that level. So Matt, when we did the reorganization to the 2 segments, we're really talking about consumer in total -- we're not going to break out RPC cans. We're not going to break out Metal pack cans. We'll talk to any major events that happen within the quarter, but we're going to keep that more at a consumer total level. Matthew Roberts: [Technical Difficulty] last couple of quarters. So about later a couple of more lines. I'm all good there. And then if I may, on the April promotional trends, I mean last year, we think because there is a customer on hold for working capital. [indiscernible] Promotional environment changes from that customer now that the deal has closed or has there been broader promotional environment given your customers are seeing cost inflation as well? Robert Coker: You're kind of breaking out, Matt. But I think I understand your question. We're seeing -- it's slowly happening. It's 1 quarter post new owner of that particular brand. and seeing probably more activity on an international perspective than we have seen here in North America, but things are improving. The relationship is rock solid and again, it does appear, if you look over in Europe and Asia, that's really the starting point of focus when the expectation is then we'll start seeing more activity here in North America over time. Matthew Roberts: And then last one, if I may, on RPC. In 2025, how big was frozen juice in that category? And any material headwinds in 2026 we can call out? Robert Coker: Concentrate, gosh, it's been a long time since anybody asked about that. was fill in production here, probably more -- it is more related to the Spirit side of things and mixtures. I guess I can say it is public minute made has discontinued relatively immaterial to us and that the volume had reached such a low level. So it's just really not material at this point or prior to. Operator: Your next question comes from the line of George Staphos from Bank of America Securities. George Staphos: So [indiscernible] just fishing up here. Can you talk about or give us some clarity on the size of the reals business within the portfolio? Or remind us how big that might be for you? Secondly, related to some of the activity that didn't necessarily happen last year on the consumer side with some of your customers. Are there any new products that are now being considered that you may actually get some business on for this year? And if you were in a position, could you size any of that for us in terms of the revenue opportunity later in the year? And then lastly, Howard, kind of longer term, looking at Slide 10, where you've got the dividend, and you do have a very good track record at Sonoco over the years. Certainly, that dividend has been growing more quickly than the organic volume growth rate for the company. You're obviously doing a very, very good job with productivity and mix and all the things that has made Sonoco successful over the years. But how long do you think you can keep growing the dividend at that rate if volume isn't growing at that rate? And when do you think that we will get to a positive on volume in the businesses, consumer and industrial? Is it third quarter, fourth quarter 2027? Any thoughts there would be great. Robert Coker: Sure. George, yes, there's more than a few new products that will be launched through the second half of the year. I can't tell you what the success rate is going to be and what type of volumes that's ultimately going to materialize in but pretty excited about some of what we see in the formula. It's here in North America. It's also on the consumer side. On the rail side of the business, it's doubled in the last couple of years, and it's probably about 10% of our industrial segment at this point in time. But again, continues to grow, and we certainly continue to support with capital. I guess that ties into your comment about dividend. Yes. I mean the good news is, if you look at the dividend payout ratio of where we are today, as we've continued to grow, it continues to go down as opposed to where we were not too many years ago, 6, 7 years ago. But you're right, productivity and other benefits to the P&L has certainly helped to support that dividend and the lowering of the payout ratio. When do we get back to growing? We've got some really exciting things in the funnel. But if you recall, in February, we said, look, we got a lot ahead of us over the next 2 to 3 years in terms of improving the bottom line for the company with the portfolio that we have today. There's incremental growth. We just talked to some of that. But I'm also very excited about some fairly large innovations from a capital perspective, from a market perspective that are in the funnel, that kind of overlap as we, over the next couple of years, continue to drive the SG&A and other savings within the simplified organization that we'll be starting to kick in with some new products that are indeed material in existing markets that we're excited about. So I can't give you timing, I can't give you amounts, but yes, we like the trajectory of the dividend. We also like the trajectory of the payout ratio, and we're going to continue to do what we need to do to improve the bottom line while we work on again, some pretty exciting things that are to come in the future. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Roger Schrum for closing remarks. Roger Schrum: Again, thank you for your time this morning. And as always, if you have any further questions, please don't hesitate to give us a call. Thank you, and you can disconnect. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orrstown Financial Services, Inc. First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Tom Quinn, President and Chief Executive Officer of Orrstown Financial Services, Inc. and Orrstown Bank, who will begin the conference. Mr. Quinn, please go ahead. Thomas Quinn: Thank you, operator, and good morning. I'd like to thank everyone for participating in Orrstown's First Quarter 2026 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued yesterday afternoon, you may access it along with the financial tables and schedules by going to our website, www.orrstown.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Also, before we start, I would like to mention that today's presentation may contain forward-looking information. Cautionary statements about this information are included in the earnings release, the investor presentation and our SEC filings. The earnings release and investor presentation also include non-GAAP financial measures. The appropriate reconciliations to GAAP are included in those documents. Joining me on the call this morning are Orrstown's Senior Executive Vice President and Chief Operating Officer, Adam Metz; as well as Chief Financial Officer, Neil Kalani; our Chief Revenue Officer, Zach Khuri; Chief Risk Officer, Bob Coradi; and Chief Credit Officer, Dave Chajkowski, will also participate on the call. For our financial highlights, Orrstown achieved another successful quarter, delivering strong results across the board. Net income increased to $21.8 million or $1.12 per diluted share. Return on average equity and return on average assets continued to exceed peer multiples. Fee income of $15.6 million contributed 24.1% of the total operating income. Noninterest expense declined, highlighting our continued commitment to creating efficiencies within the company. Our net interest margin remained near the top of all peers. We started off the year with another profitable quarter and created momentum leading into the rest of the year. I will now turn the call over to Adam Metz, who will speak about our balance sheet. Adam? Adam Metz: Thank you, Tom. Good morning, everyone. Loan growth was steady during the quarter, coming in at 4% on an annualized basis. Loan production was excellent, but overall growth was impacted by unexpected loan prepayments. Growth has occurred across our footprint and our product set, a mix of C&I and CRE. Our pipelines continue to be robust and support our growth targets. On the credit front, we recorded moderate provision expense aligning with the portfolio growth and experienced a reduction in classified loans. We remain prudent in our lending decisions, but we feel that the credit environment remains sound and without significant signs of stress. We are pleased with our meaningful deposit growth during the quarter. Deposits increased by $98.7 million, reflecting increases in interest-bearing demand deposits, noninterest demand deposits, time deposits and money market deposits. This deposit growth accelerated in the second half of the quarter, which enabled us to reduce borrowings at quarter end. This shift from borrowings to deposits reduced our go-forward funding costs, which we expect to become more apparent in the second quarter. Neil will discuss this in more detail during his presentation. Our capital ratios continue to build quickly with our earnings generation, which will create flexibility for us in the future. Capital levels continue to support our growth as well as providing the ability to facilitate other capital allocation opportunities. We maintain a long-term focus on generating earnings and growth to continually build shareholder value. In support of that, the Board declared a quarterly dividend of $0.30 per share payable in May. Neil Kalani, our CFO, will now discuss our quarterly results in more detail. Neil? Neelesh Kalani: Thanks, Adam. Good morning, everyone. We started 2026 off strong with net income of $21.8 million or $1.12 in earnings per diluted share. Return on average assets for the quarter was 1.59%, and return on average equity was 14.76%. As noted on Slide 4 of the earnings deck, the net interest margin was 3.90% in the first quarter, down from 4.00% in the fourth quarter of '25. This was driven by a combination of the impact of the December Fed rate cut on interest income, reduced purchase accounting accretion and temporarily elevated funding costs. We typically experience seasonal deposit outflows at the beginning of the year. This persisted for longer than in prior years, which drove borrowing balances higher for the first half of the quarter. In the second half of the quarter, deposit balances grew substantially, and we implemented some delayed deposit rate reductions. As a result of actions taken during the quarter, cost of funds was still down from the prior quarter but not by as much as previously projected. With a full quarter of impact, I expect funding costs will decline further in the second quarter of '26. The previous guidance for net interest margin in the range of 3.90% to 4.00% for '26 remains with an expectation of the margin increasing from here. Overall, in an extremely competitive environment, we feel good about the first quarter's deposit growth, reduced reliance on borrowings and where our funding costs are settling in. On Slide 5, fee income increased to $15.6 million in the first quarter from $14.4 million in the fourth quarter. In the first quarter, $2.4 million of life insurance proceeds were recognized. The quarter included wealth management income of $5.6 million, down only slightly from the prior quarter despite difficult stock market conditions. Swap fees were very strong at $1.3 million in the quarter. While there is expected volatility in some of the components, I expect normalized noninterest income to be in line with previously reported guidance. Now I'll cover noninterest expenses on Slide 6. Expenses declined by $700,000 this quarter to $36.7 million. Salaries and benefits declined with lower health care costs and some year-end incentive adjustments. Professional services came down substantially as we continue to reduce our reliance on third-party support. And I anticipate our expenses will fall into the lower end of the guidance range unless we choose to make some strategic investments in personnel to drive or support growth. Slide 7 discusses credit quality. Provision expense was $728,000 for the quarter, primarily due to loan growth. We had approximately $900,000 of net charge-offs, which was offset by the impact of favorable economic factors in the allowance calculation. Our allowance coverage ratio was 1.17% at March 31, '26, and we believe it remains adequately aligned with the risk profile of our loan portfolio. Classified loans declined again in the first quarter. Nonaccruals increased by $2 million from the prior quarter, primarily due to 2 relationships. While we experienced some movement into the nonperforming category, we also continue to see payoffs and upgrades out of that bucket, resulting from our focus on achieving the best solutions for the bank. Our earnings and performance metrics are on Slide 8. All metrics remain strong. TCE has increased to 9.2% despite an increase since December 31, '25, of $6.8 million in unrealized losses on investment securities due to changes in market rates. Slide 9 addresses our loan portfolio. Loans again grew by 4% in the quarter. Loan yields declined during the first quarter due to the impact of lower rates on the variable rate loan portfolio. We did have $211 million of loan production during the first quarter and still have a strong pipeline. As noted on Slide 10, deposits grew by $98.7 million or 9% annualized in the first quarter. The loan-to-deposit ratio declined slightly to 88%, leaving us plenty of room to support balance sheet growth. The cost of deposits declined to 1.96% for the first quarter with the timing of rate reductions in the middle of the first quarter and having 86% of the deposit growth being in demand deposits, we expect deposit costs to come down further. Another positive trend for the quarter was the increase in noninterest-bearing deposits of $14 million or 7% annualized. Our sales team remains focused on expanding existing relationships and creating new ones to continue building lower-cost deposit balances. The investment portfolio is covered on Slide 11. There is a little bit of purchase activity during the quarter in order to keep the portfolio flat. The overall portfolio yield declined during the quarter due to the impact of the December Fed rate cut on floating rate investments. We view the investment portfolio as a reliable source for income generation, and we'll continue to facilitate that by taking advantage of any market opportunities that correspond with our balance sheet strategy. As presented on Slide 12, our regulatory capital ratios continue to build at a rapid pace. Capital generation is expected to remain strong going forward based on projected earnings, and we continue to believe we're positioned to take advantage of various capital allocation options. So in summary, we believe the net interest margin has stabilized with the opportunity to grow from here with declining funding costs. Fee income remains a core strength and a differentiator, particularly with wealth management if the market can maintain or improve from current levels. And expense management remains a key focus for us in order to achieve our financial goals. Thank you for your time this morning, and I'll turn it back to Adam Metz for his closing remarks. Adam? Adam Metz: Thank you, Neil. As Tom and Neil has emphasized, it was another highly successful quarter. Having spent nearly a decade at Orrstown, I've seen firsthand the strength of our franchise, the power of our culture and the collective commitment to our clients and community. An incredibly talented team with common alignment to our core principles will continue to build upon the foundation already in place, driving prudent growth, deepening client relationships, thoughtfully expanding fee-based businesses and continuing our unwavering commitment to sound risk management and long-term shareholder value. We would now like to open the call to questions. Before we get started, the operator will briefly review the instructions with you. Operator: [Operator Instructions] Your first question comes from the line of Tim Switzer with KBW. Timothy Switzer: I appreciate the commentary on kind of the puts and takes on the NIM this quarter. And it sounds like the primary driver here was that seasonal deposit runoff at the beginning was maybe a little bit stronger, lasted longer than normal. Was there anything that surprised you on like the loan or security yield side as well? Or is it just primarily the NIM -- sorry, deposits? Neelesh Kalani: No, there's nothing surprising. It is primarily deposits. We -- as I've indicated in the past, since we are a little bit on the asset-sensitive side, we did expect the yields to drop on loans and investments. So it truly is driven by the deposit -- the timing of the deposits. So we are -- as I indicated, we do expect to see improvement in both the funding costs and translating into the reduction on the NIM side. On the asset side, the lending team continues to price well to help us maintain and improve the margin from here. Timothy Switzer: Okay. Got it. And are you able to help -- you said an upward trajectory from here. Are you help us -- can you help us quantify that at all? Like maybe what was the spot NIM at the end of Q1 once those deposits came back, and you're able to run off some of the higher cost borrowings? And any idea on maybe where we would end the year, say, if we get just a 0 rate cut? Neelesh Kalani: So we ended the quarter a few basis points higher than the average for the quarter -- for the reported NIM for the quarter and expect to be able to go up a few basis points from there over the course of the remainder of the year. Timothy Switzer: Okay. Great. That's very helpful. And then one last one, if I can get it on the deposit side. There's been some chatter about increasing deposit competition, but it's more extreme in some markets than others. Have you guys experienced that? I get you still have some room to move downward. But are you starting to see some deposit competition? Is it more competitive in certain markets or deposit categories than others for you? Adam Metz: Yes, Tim, I would say competition remains. It's prevalent, but I would tell you, we challenged the team to reach out to the relationships and drive deposit growth. And the team has absolutely responded to that initiative. And so we're very pleased with the results, and we think that we have a lot of momentum going forward. Operator: That concludes the Q&A portion of the presentation. Mr. Quinn, I turn the call back over to you for concluding remarks. Thomas Quinn: Thank you again, operator, and thank you all for participating today. As always, if we can clarify any of the items discussed on this call or in the earnings release, please contact us. Have a great day. Operator: This concludes the Orrstown Financial Services, Inc. First Quarter 2026 Earnings Conference Call. You may disconnect your lines at this time.
Operator: Good day, and welcome to the BankUnited, Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jackie Brova, Corporate Secretary. Please go ahead. Timur Braziler: Thank you, Clay. Good morning, and thank you, everyone, for joining us today for Bank Unit Inc.'s First Quarter 2026 Results Conference Call. On the call this morning are Raj Singh, Chairman, President and CEO; and Jim Mackey, Chief Financial Officer; and Tom Cornish, Chief Operating Officer. . Before we begin, please note that our remarks today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect current expectations and are subject to various risks and uncertainties that could cause actual results to differ materially. The company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. Additional information regarding these risks can be found in the company's annual report on Form 10-K for the year ended December 31, 2025, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website. With that, I'd like to turn the call over to Mr. Raj Singh. Raj Singh: Thank you, Jackie. Thanks, everyone, for joining us. I know this is a very busy morning. A lot of banks have these calls going on. So if you joined our call, we appreciate it very much. I know we had -- it was not an easy choice. But before we get into the numbers, I want to take a minute of your time and do my public service announcement which I usually do towards the end of the call, but I'm going to start this time with that. And you heard this announcement from me before at previous earnings releases that meetings I've had with investors and conferences we've done. We've been talking about this for some time, but I think it bears repeating. So our business is a fairly seasonal business. And that seasonality is well understood by us and has been demonstrated now over several cycles, several year cycles. And I'll talk about that in a little bit of just as a refresher of what that seasonality is. Deposits and loans, I'll talk about them separately because they behave separately. Our deposit balances, especially NIDDA, they start declining sometime in mid- to late December and the bottom out and deep in the first quarter they start to rebound back late in the first quarter, towards the end of the first quarter. And then they go straight up in second quarter, usually, second quarter is our strongest growth -- NIDDA growth quarter. They stabilized in the third quarter, and then in fourth quarter, the cycle again begins with declines in December. Now we've observed this for many, many years. Loan production and again, production, not balances. Loan production, especially C&I loan production start slow in the first quarter. That's our slowest quarter. It picks up steam in Q2 and Q3 and Q4 tends to be our biggest production quarter. We saw that last year, the year before, and we expect to have the same happen this year. There is some seasonality in expenses, but I think that's not just to us that everyone has that with FICA and stuff that happens in the first quarter. So I won't get into those details. Now when this happens, especially this big swings in NIDDA, it impacts our margin. It impacts our margin, margin impacts our revenue, that impacts our bottom line, EPS and ROE. So what happens when you look from Q4 to Q1, you see a pretty meaningful drop in earnings in ROA and EPS and so on. But then if you look to Q2, it kind of rebounds all the way back, if not generally more than all the way back. So in fact, yesterday, as I was writing down my notes on what I'm going to say on this call, I do this day before I sit down with a yellow pad and I hand write what I'm going to say. I had this data at moment, like I think I've done this before. And I went back and I looked at my notes, surprisingly actually still held on to my notes from my call a year ago. And it wasn't a dejavu moment. It was that I've been here before. This is exactly what happened a year ago. So I just quickly jotted down like what happened in Q4 last year to first quarter of last year, like so '24 going into '25, what happened to earnings, EPS, ROA and all that stuff. And I compare it to what happened this year, -- and our earnings quarter-over-quarter declined by $11 million this time last year. This year, they declined $10 million. EPS declined 13 basis points this year. It was a ROA declined 10 basis points last year, this year, it was 9%, slightly better, but kind of in the same ballpark. That's just the seasonality of the business. So the model of the story is, don't look at quarter-over-quarter, look at year-over-year or trailing 12 months. I know it's a fast-changing world, and we're all in the -- I believe in the here and now. But if you just look at the very short term, it will throw you off both in quarters in which seasonality works against us and in quarters in which seasonality works for us, which will be the next quarter. With that PSA out of the way, let me get into the numbers. So earnings for the first quarter came in at $62 million. EPS was $0.83. And I'll compare this to first quarter of last year, like I just said. Last year, earnings were $58 million, and EPS was $0.78. NIM was at 2.99%. Last year, this time, NIM was 2.81%. PPNR was $106 million. Last year, PPNR at this time was $95.2 million, about 11.5% growth. Despite seasonal pressure on NIDDA, like I just mentioned, in the quarter, deposits did grow. Non-broker deposits grew $277 million. We used most of them to pay down brokered. So net growth was about $7 million but again, like I mentioned, should be looking at annual numbers or trailing 12 months number. So over the last 12 months, non-broker deposits grew by $1.4 billion, NIDDA grew by $875 million. I would actually even go further and say, [indiscernible] end balances don't mean as much as average balances do. And average NIDDA grew by more than $1 billion. I think it was $1.5 billion. I'm looking at Jim to confirm, but I think it was $1.5 million. Talking of loans over the last year grew at $906 million. This quarter, it grew only $9 million. Non-core loans continue to shrink pretty consistently. That's been now going on for several quarters. So not much -- nothing new over there. Let's switch to credit. So we made a lot of progress on credit this quarter. NPLs were down $98 million, that's 26% and criticized and classifieds were down $146 million or 12%. Now that 26% and 12% is just the progress we've made in the last 3 months. That's not an annualized number. Our coverage ratio of ACL to NPLs improved from 59% to 76%. Switching to provision, with respect to provision, we continue to be cautious. The geopolitical landscape has changed in the 3 months since we last spoke to you. And we did use $8 million in qualitative factors in our provisioning to kind of account for that uncertainty. Tom can talk more about this, but I don't think we've seen any meaningful change from the way -- what our customers are telling us in terms of their plans and their capital investments and so on. But I will also say that they are very keenly aware of the situation in the Middle East and are watching it like as they should. -- smart money seems to be betting that the conflict in the Middle East will wrap up in a matter of days or weeks and not months but only time will tell how that will play out. So like I said, I'll go back and say we did use some qualitative factors to the tune of $8 million for that uncertainty. Switching to other aspects of the P&L, NIM, like I said, came down to 2.9%. And that number was within sort of the ranges of outcomes that we were expecting when we modeled this in our numbers back in December. All the other numbers are not that notable for me to get into. I'll leave for some of the stuff for Tom and Jim to talk about. Oh, yes, we did buy back 1.3 million shares as we had promised. So we're off to a good start on the buyback, and we still have just a hair under $200 million in dry powder left, and we'll continue to use that. Lastly, guidance, no change to guidance. So what we gave you stays. That's a full year guidance that we gave you, and we're still feeling pretty good about those numbers. I think not much has changed actually since we gave you guidance in our business or in the economy. I guess in the economy, you could say, the conflict in the Middle East is sort of the only new factor but it looks like it's moving towards some kind of resolution in the short term. So with that, I will turn it over to Tom. Thomas Cornish: Great. Thanks, Raj. So I have a little bit of my own public service announcement today as well [indiscernible] with Raj. So before I -- I want to talk about deposits first and sort of deposit strategy. before I dig into some of the numbers, some of which Raj has already covered, I want to back up a little bit and just talk about sort of what are we trying to do with the overall deposit and client book and over a longer period of time and how has that performed? . So when I look at it, I would say we have 3 major goals. One is to be a top-tier performer in NIDDA growth. And our NIDDA, as you know, is largely commercial and NIDDA. So when I look at that number, as Raj said, we're up period-to-period from first quarter last year, $875 million or 11%, which is a pretty impressive number. On an average basis, we're up $1.5 billion that Raj mentioned. So strategy kind of #1 of being a high-level NIDDA growth organization and that being a central part of our business focus, I think, has been well accomplished. The second major emphasis is being a payment processor and transactional bank for our clients and making sure that we maintain good pricing discipline around all the products and services that we sell that flow through commercial NIDDA and making sure that we are effectively cross-selling as many products as we can into the client base. So I kind of measure that by -- is our service charges on deposit growth greater than our NIDDA growth? And when it is, to me, that seems to be a multiplier effect on that. So if we look at service charges on deposits year-over-year, first quarter to first quarter, we're up 18.8% versus an 11% deposit growth. So to me, that means we're executing on the strategy of ensuring that, that book is well sold, well priced and client relationships are becoming very sticky. The last part, which is really the hardest work is managing deposit costs. And you'll see we had a decline in average deposit cost for the quarter, and I'll go through those numbers. But the process of managing deposit costs, especially in a period of time where we're not forecasting a Fed funds rate decrease that we can lean into is hard work. And we are consistently doing that. We just -- Raj and I were talking now, we have a series of rate cuts that are going in this week on the deposit front. So we are consistently analyzing the deposit book and looking to make it more cost effective. So I think kind of about -- those are the big 3 strategies that we try to execute around when we think about the client book and the deposit book as a whole. So with that, a little bit more detail, as Raj mentioned, non-broker deposits were up by $277 million from the previous quarter and $1.4 billion from a year ago. NIDDA represents 30% of total deposits. Our average cost of deposits declined by 6 basis points from the previous quarter from 2018 to $212 million. Wholesale funding declined by $70 million from the previous quarter and $749 million from the previous year. And as I said, service charge revenue was up 18.8% for the quarter. As we look into the second quarter, which is on the deposit side, traditionally, our best quarter. We have a high level of conviction around very strong deposit growth and NIDDA growth in the quarter. It's our best quarter typically, and all indications from pipeline and activity and business that's in closing documentation is that it will be a very strong quarter. On the loan side, as Raj noted, it was fairly typical first quarter for us, Cree and mortgage warehouse lending were up $76 million and $77 million, respectively. C&I declined by $144 million from the previous quarter. Part of that is declining off of higher utilization rates that we tend to see at the end of the quarter. First quarter, particularly in our larger corporate business tends to always be a bit softer because of the financial statements timing for new business that comes through. Resi continued to decline as part of our emphasis to focus on the commercial lending business. And so I think it was about what we expected to see for the quarter. A few comments on CRE that I typically make the CRE portfolio is now just under 30% of the overall booking within the CRE book, if you look at Page 9 in the detailed analysis, you'll continue to see that it's a well-balanced portfolio across all asset classes, virtually all asset classes are somewhere between 20% and 25%. And so maintaining a good quality balance in the CRE book is important. You'll note that the total weighted average debt service coverage for all property types is $1.84 and the average loan-to-value is 55.4%. So portfolio continues to perform well. It's probably the last quarter, I'll actually point this out, but we continue to see improvements in the office book. You'll note the office book on Page 9, the weighted average debt service coverage ratio is now up to 1.78. It's typically been running in the 1.54, 1.55 range. And what we're seeing is continued improvements in leasing. We've seen a reduction in the office book, which the traditional office book is now only about 16% of the book and about 4% is medical office building. And we're also each quarter, starting to see this narrowing that we've talked about in the past, which is the gap between physical occupancy and economic occupancy as lease rate abatements start to run off, we see a closing of that. So we saw a pretty significant increase in the weighted average debt service coverage over the last few quarters. And 1.78, it's a pretty strong performing portfolio right now. So that's my coverage on CRE. And I think with that, I'll turn it over to Jim. James Mackey: Great. Thanks, Tom. -- as Raj walked through, it's worth mentioning again, our first quarter is our seasonally light quarter for most of our businesses. So therefore, comparisons to the fourth quarter are always difficult to make. I don't want to repeat a bunch of the numbers that Raj took you through, but I do want to hit just a couple of other highlights. So if I just focus on the full year trends, you definitely see steady improvement in most of our key performance indicators that we look at. Net income was up 5%. PPNR was up 10%, ROA was up 6%. And was up 6% and NIM was up 18 basis points. So the trends year-over-year are really good and definitely in line with the guidance that we gave you at the last quarter. So we put in the press release just for full transparency, we do want to call out a couple of notable items this quarter. The impact was largely just due to the really strong performance last year and also the strong stock performance. And this was more than offset by the reversal of our previously accrued FDIC special assessments. So turning to NII and NIM. As Raj mentioned, relative to the prior quarter, we typically see a downward trend. We also added in the materials on Page 5, just a chart for the last few years, so you could easily see those trends, I thought it would be helpful. Now the dip from first quarter to fourth quarter this year was a few basis points larger than last year, certainly less than back in '23. But I just wanted to call out what was driving that. And it was a variety of small things. It was nothing large. It was all the things that we were sort of modeling going into it broadly. We saw the full quarter impact of the Fed rate cuts last year as it flows through the balance sheet. And notably, in the securities portfolio, some of the timing of those cuts were present more in the first quarter than in the fourth as certain coupons reset. We also had a higher reliance on brokered deposits due to the NIDDA seasonality that we've been talking about. We also did some activities in our investment portfolio. We had some opportunities to prefund some purchases and things like that because of actual situation in the marketplace. So we had a higher reliance on brokered deposits in the quarter and also the broker deposits were a little more expensive this year than historical. It's a little unclear exactly what was driving that. I don't know if it was from the war, the activities in Iran or what, but it was elevated costs that we don't typically see. NII was up $16 million or 7% from a year ago. And as I mentioned, NIM expanded 18 basis points. And this is driven by the common theme that we've been talking about that we've been reducing the cost of our deposits at a faster clip than the decline in our loan yields. Importantly, the NIDDA balances were up $875 million or from a year ago. Those are the spot, not the average. On the credit side, as Raj mentioned, credit trends are quite positive overall, which portends improvement going forward. Criticized and classified was down $333 million or 24% from a year ago. And just since last quarter, nonperforming loans were down $98 million or 26%. Now some of these improvements were resolved through charge-offs. That's why you did see some elevated charge-offs this quarter. It was $36 million. It was largely driven by just a few C&I loans. So this brings our trailing 12-month charge-off rate to 37 basis points, which as we've talked about before, we'd like to see that closer to 25%. So it is elevated from what we'd like to see. But again, the trends that -- things that we are seeing more recently in some of these books, the inflows are a lot slower than the outflows. So barring any economic shocks, we expect to see improvements in charge-offs later this year. And as we mentioned, especially related to the guidance, we definitely felt like more of the provision expense would be more front-end loaded versus evenly spread throughout the year. Our allowance for credit losses was $209 million, down $11 million from last quarter. Provision expense, as I mentioned, was elevated at $25 million. We did add some qualitative reserves, about $8 million. So our coverage ratio ended at 87 basis points, which is down a few bps from the prior quarter. If we purely followed our models, we would have told us to bring those reserves down a little bit more, but we felt prudent to add some into our qualitative, which brought it up to the 87 basis points. And I do want to mention, and we disclosed this on Page 11, most of our charge-offs are coming from the C&I portfolio of late. And if we look at the coverage of our C&I portfolio, it's around 160 basis points. So quite a solid coverage to cover the risk in that portfolio. On the noninterest income and expense side, just a few quick comments. Noninterest income was $25 million. It's up $2 million from a year ago. If I normalize for some of the securities gains. We always have securities gains. They bounce around from quarter-to-quarter. But if I normalize for that, noninterest income was basically flat. We felt good about the activity that we saw in our capital markets fee income, but they are dependent on activity in the quarter, when loans close, when syndication fees occur, size of the types of swaps that are booked and -- and so we're generally in line with where we expect to be at this point in the year and still feel good about the guidance that we provided. On the expense side, it is up from a year ago, $167 million. That's largely due to the investments that we made last year into our businesses to go into new markets, higher specialty talent, et cetera, and also just cost of living increases and basic things that are going on in that space. So it's in line with expectations. It's consistent with our full year guidance, and it's really driven by employee compensation and the benefits as we grow our businesses. And then just before I turn it back to Raj, I'll just reiterate a comment that he said that we are not changing our full year guidance. We always have volatility quarter-to-quarter. That's a theme that we talk about constantly just the nature of our commercial businesses but we're performing consistently with our seasonal patterns and in line with expectations, and all of that was modeled as we provided our guidance and so no changes. And with that, I'll turn it back to Raj. Raj Singh: Just one thing I forgot to mention on credit. So we took down NPAs pretty meaningfully this quarter. And I expect NPAs to go down into the rest of the year as well, probably not at the same clip. I mean if we did the same clip, we won't have any NPAs left in a couple of quarters. So -- there will be -- I expect NPAs to reduce at second quarter, third quarter into the fourth quarter. Another anecdote I'll give you. One of the things I do generally before this call a day or 2 before is I talked to my Chief Credit Officer -- Chief Risk officer Chief Credit Officer. And I generally ask him how he's feeling about this quarter. And this was, I think, the best call I've had in the last 3 quarters. And I measure the success of the call by the length of the call. the longer the call is the worst I feel because generally, he's walking me through names of things that he's worried about. This call, I have to actually ask them, "What about this loan? What about that London he was like, no, are going fine. So the call lasted maybe all of 3 minutes or 4 minutes versus last call 3 months ago, lasted a lot longer. So it's only 3 months -- 3 weeks into the quarter. but I'm feeling much better about credit and feeling much better about how much lower our NPAs are. And I also get updates like that on pipelines from Tom, deposit pipeline is better than I expected, honestly speaking. And we're feeling pretty good. With that, I will turn it over for Q&A. Operator: [Operator Instructions] The first question comes from Dave Rochester with Cantor. David Rochester: I wanted to ask you about the title business. I noticed the deposits were down this quarter. Normally, they get stronger as we head into 2Q. I would imagine that's still the expectation. And we're down like 3 quarters on that at this point. So if you could just talk about that outlook. And then are you still bringing in plus or minus new customers a quarter there? And if you can just update us on the competitive backdrop, that would be great. Raj Singh: Sure. Actually, we're bringing in more than 40 now. So our average over the last months -- 3 quarters has been more closer to 50. So the relationship intake has actually increased a little bit. . And I'm very, very positive on the outlook for the title business. It is the most seasonal of our businesses. right? HOA is also a little seasonal, not as much, but NTS is what drives a lot of that NIDDA volatility. But overall, in terms of gathering market share, we have not lost momentum. In fact, we picked it up. Thomas Cornish: I would add that's net. -- client relationship growth as well not just gross. Yes. . David Rochester: Yes. SP663696138 Great. And those relationships tend to be $2 million to $3 million on average in size, right? Raj Singh: On average, it's about 3 yes, around $3 million, give or take, yes. . David Rochester: Have you been adding more sales people to that business or any other technological enhancements, anything like that? Raj Singh: Yes, we have added more people in fulfillment in the back office. We've added more people in the front office. So clearly, yes, we are also, we have 2 large technology projects going on, which will impact much as that business, that will impact the entire bank but we're upgrading our treasury platform, and we're operating our payments platform. But again, like I said, those are infrastructural things that every business line will use, but NTS uses them as well. David Rochester: Yes. And just the -- what's that? -- sorry? . Thomas Cornish: I'd just say, average deposits are up year-over-year in the MTS business. So not meaningful. David Rochester: Yes, yes. And maybe just 1 last 1 just on the competitive landscape there. Occasionally, you see a larger bank come in and try to defend a relationship and it may not just be for the title piece, but something else. Can you just talk about what you're seeing from any of the larger banks that might be snooping around and what you're seeing out of banks more of your size, if you're seeing any interest in this type of business. Raj Singh: There is certainly more competition today than a year or 2 ago, both from -- we see from time to time, larger banks try to get into this but they've not been able to replicate what we have. So they've not been able to make much progress. We have seen banks much smaller than us and somewhat our size also compete. But honestly, I think it's a lot easier for them to just be taking market share away, like we're taking away from the 90% or 89% of the market that we don't bank than it is to take away from us. So there is more competition. There is -- I've seen like very small community banks trying to play around this space, but we have a 8-year head start, 9-year head start whatever it is. It's not like we have some kind of a trademark or intellectual property that is the moat. The moat is the fact that we have the largest market share. We've seen every issue that comes up with this. We have the largest sales force, and we've been doing it the longest in the way we are. We're most integrated with all the ERP providers. and that gives you the advantage to keep going forward. So there's more competition. I expect the competition to be even more going forward, but so far, we're doing just fine. Thomas Cornish: And we're not sitting still. We're continuing to focus on improving operations, getting better at everything we do. So we're letting that iron sharp and iron. Raj Singh: Yes. We made a pretty significant investment in the back office and fulfilling in customer service and what have you because the book has grown quite rapidly. And if you just -- when things are growing, it's easy to go hire salespeople because you can see salespeople will add more revenue, but you have to pay attention to the back office that actually keeps the lights on for our clients. It makes them happy in the long term so they don't lose you -- so we don't lose them. That was a pretty big investment we made last year. Thomas Cornish: And this is a heavy real business. . Raj Singh: Yes, it's a heavy operational business. . David Rochester: Well, it's a great business and certainly a nice advantage for you guys. So I appreciate all the color there. Operator: The next question comes from Jared Shaw with Barclays. Jared David Shaw: I guess just looking at the guidance and when you're saying reiterate the guidance, I'm just going back to last quarter's deck. With with that guidance you were assuming 2 cuts, if we don't get cuts, can you walk us through the ability to get to that 30% margin at the end of the year? Raj Singh: Yes. Our balance sheet is very, very neutrally hedged. So we're very, very slightly asset sensitive. So just mathematically speaking, it probably should give us a basis point advantage with the Fed doesn't cut, but it's really rounding. For the most part, it really does not do anything for us. Our risk to our guidance if it comes from market competitiveness, especially on the lending spread side, where we've been kind of calling that out for some time now. We're still seeing very tight spreads, CRE more tight than C&I, but everything has tightened up this year has been for several quarters now. That is actually a bigger risk than what the Fed does unless Fed does something sort of bizarre as it move several moves that nobody is expecting one way or another, it really will not impact our guidance. So we're not really worried about the Fed cutting once or twice or not cutting, it will not have an impact. If we miss our NIDDA guidance, if you're not able to grow, that will obviously be the single largest driver the largest risk we would have, and the second would be loan pricing and credit spreads. Jared David Shaw: Okay. All right. And then on the provision, you called out the $8 million qualitative overlay. Should we think about that as just maybe front-loading some of that provision and that the $68 million is still the good number? Or is it really 68% plus 8% for the full year? James Mackey: No. We're still sticking with the guidance that we provided for the full year. And like we said, I do think based on what we see more of that $68 million would be front-end loaded versus at the back end. So you can't just take the 68 divide it by 4 and project it out, but skew it more to first and second quarter. Jared David Shaw: Yes. Okay. And then if I could just sneak one more in. Just on the fee income. -- capital market is obviously very strong in fourth quarter. How should we think about sort of the components of growth in fee income as we move forward through the rest of the year? Raj Singh: Our capital markets income is probably closely aligned to production in both C&I and CRE. And then within production, I would say, slightly larger loans tend to drive that like syndication. They're not going to syndicate a $10 million loan, but we will syndicate a $60 million, $70 million, $80 million loan. So production is light in the first quarter. And then within the production if you're doing most of it in the lower end, then your capital markets income generally is impacted. So you saw lower capital markets income this quarter for both those reasons. Last quarter, it was the biggest production quarter and that's why you saw capital markets income as strong as it was. So it will vary quarter-over-quarter, plus it's a little bit of episodic also. It's not like $1 a day type of a business. It is a little bit lumpy. You can have a big deal you're working on, it slips over into the next quarter that could happen from time to time. But overall, the capital markets business should be a double-digit growth business for us. FX, which is still in the very early stages that is just beginning to gather momentum, and it's hard for me to predict what it will do but that's a very small number right now, but that can have a very big impact over the coming year or 2. Thomas Cornish: I would also add, if you look at the number of clients that we have added on to the FX platform, in the last 6 months, it's an impressive number. And I think even the raw number, well, Raj said, it's a small number, is up over 100% from the previous year. So we have really good hopes for the FX income, especially in the markets that we're in. They tend to be markets where people have international trade transactions, they have payroll transactions. They have other things that drive that business. We would expect the service charges on account business to be double digit in terms of fee income growth. I mentioned it was up 18.8% over last year. Our expectations are somewhere in the 15% to 20% range for that. And I think we feel we have a good bit of conviction that we'll be able to get that. The swap business is a bit interesting because there's kind of like a sweet spot as it relates to the profitability of the business at the very highest end as you would imagine, when you do swaps, you're sitting across the table from somebody like Jim who is extraordinarily knowledgeable about every basis point in the swap transaction. If you can go down far enough market where the transaction is still large, but there's more room in the pricing on swaps. That's really where kind of the sweet spot is for us. So the volume of transactions is important, and we think that will be good seasonally through the rest of the year. But also the mix point tends to be very, very important because you can -- that can vary by basis points, which over a lot of transactions over the course of the year can be meaningful. We do have a good bit of confidence in our syndications business, and it's been a strong point for us. We've funded these teams on the syndication side. We've added very good quality resources to them, and I have good confidence that syndication revenue would be good at the remainder of the year. Just 1 last thing to add to it. I mean commercial card revenue was up good strongly year-over-year. Again, it's small, but it's growing. And then 1 of the comments that Raj said, just with it being in the swaps business is very tied to the lending business, the activity we saw this quarter versus a year ago was very consistent -- just last quarter, we had a couple -- 1 or 2 larger transactions that drove a little more revenue a year ago versus this time. So it's -- the activity is there. It just really depends on the size of the transactions in any given quarter. Operator: The next question comes from David Chiaverini with Jefferies. David Chiaverini: Wanted to swing back to credit quality. -- kind of mixed in the quarter, criticized classified down, but you did mention in the release about 2 credits being charged off and we did see the elevated NCOs this quarter. Are you able to share which industries those were in? And then the second part of it, you mentioned about how we should see a decline in NCOs later this year. So it sounds like we should expect elevated NCOs in the second quarter as well. Is that a fair interpretation? Raj Singh: No, I think that as a general statement that the first half would be better -- will be higher net charge-offs because we already have first quarter, $35 million, $36 million. It's hard to predict exactly quarter-by-quarter. But generally speaking, I would say the charge-offs should be front-loaded. The 2 industries that you asked about, 1 is health care, and the other was transportation. So those 2 made up a large portion of the charge-offs and one was in Atlanta and one was in Florida. So geography also in case you asked that next question. Thomas Cornish: And our larger child drafts last quarter were in 2 completely different industries from the car was yes, yes. . David Chiaverini: Got it. And then back to the NIDA discussion. Nice trends year-over-year, 11%. Your guide is for 12% given this higher for longer rate environment. To what extent could that be a headwind to NIDDA growth? Because in the past few quarters, you've mentioned about the NIM expansion being driven by mix shift rather than the Fed, but curious about your thoughts there. Raj Singh: Yes. We were growing double digits. NIDDA was growing double digits when Fed funds was over 5%. So it is not about pricing. What is driving our NIDDA growth is our focus, our products, our specialty capability we've built. And it's not about just lazy money. This is not lazy money. This money we do a lot of payments, which is why this money sits in our pipes and people use us not because the price were because of the capability that we offer them and we continue to gather market share. So I'm not worried about rates could be 50 basis points higher, 50 basis points lower, that will not impact our NIDDA outlook. That will have an impact on interest-bearing deposits. And if the Fed moves down, it gives us an excuse to go back and reprice the deposits. And when the Fed is not moving and it's just harder to just do that, but we're still doing that, as Tom said, during -- this week, actually, we are pushing through certain portfolios, some pricing action on some of the portfolios. It's just as easier the Fed is moving. So I'm not -- the Fed being up or down or sideways, it doesn't really impact our NIDDA outlook. Thomas Cornish: The NIDDA growth is largely driven by net new client acquisition. Yes, that's across all business lines, specialty geography, whatever segment that it's in, it's driven by that. probably 75% to 80% of the growth was driven by that. . Operator: The next question comes from Michael Rose with Raymond James. Michael Rose: Just given the absence of rate cuts now that I think the market is expecting. Any updated thoughts around. Deposit beta expectations as we move forward. I think last quarter, you kind of talked about an 80% beta with cuts. . Raj Singh: Yes. With cuts is 80%, but the Fed is not going to move. If we get complacent, and don't look at interest-bearing deposits and just let that ride. It has a natural tendency that the rates -- the portfolio will price up. So that's the hard work you have to do is to make sure it doesn't price up and maybe even get it even to go down a few basis points. Not easy. That is really hand-to-hand combat client-by-client portfolio-by-portfolio but we are attempting to do that. New money competition is high. I think Jim mentioned, as an example, as a proxy, broker deposits are 15 basis points wider than they were like 6 weeks ago. Now I'm not smart enough to know why I'm guessing maybe it's the conflict in the Middle East and people just get a little nervous, they want to grab more liquidity or maybe it's something else. But we did see a pretty meaningful change maybe just rates have gone up 2 years now at 370, 380 and not closer to 350, maybe it's that, maybe it's a whole bunch of stuff. But we are leaning more and more towards NIDDA, I mean if I could have my way, and I have just no growth but NIDDA,all growth NIDDA. That's not possible, right? That's -- we will have interest-bearing growth as well. But it is our job is to make sure interest-bearing costs stay within reason, maybe come down just a little bit but it will be hard to make it come down a lot if the Fed is not moving. But if we don't do the hard work, they will naturally have a tendency to drift up, and we don't want to happen. Michael Rose: Okay. Helpful. And then maybe just the follow-up question on that, and I hate to ask for near-term guide, but I'm going to try here. . So obviously, given the margin guide for the year and the decline this quarter, it implies a pretty steep ramp from here. Can you just help us with the second quarter with the inflows coming back in and just some of what that margin within a run of expectations could look like for the second quarter? Because I think people are -- at least what I'm hearing is you're struggling to kind of get to that 320 full year guide. Raj Singh: What I'll do is, I'm actually looking at a sheet here from last year. So I'm not going to give you guidance quarter by quarter going forward. If we don't do that, right? If Leslie was here should be screaming at you. What I will do is I will just point to what happened last year, right? In fourth quarter of '24, we were at 2.84% we came down to 2.81% in the first quarter. And in the second quarter, we went up to 2.93% and then we went up to 3% in the third quarter and to 306 in the fourth quarter. . Now you can go and look at that pattern, right? We have a pattern of dipping down and then coming back very strongly in the second quarter and then maintaining some of that growth in the third and fourth quarter as well and then coming down again in the first quarter. So that's the best sort of guidance I can give you is go back and look at what has happened in the past because it tends to follow some pattern. Not every year is exactly the same. There is a lot of moving parts. But that's about as much guidance I can give you. I can't tell you what the quarter will be. But more than what we've already said, which is that it will be a very strong NIDDA growth quarter. Michael Rose: Totally get it, just trying to frame the conversation. Maybe just one last follow-up. Obviously, the repurchase is pretty strong this quarter. Any reason to think that the pace would be any different as we move forward? I know you said up to $250 million stock is obviously down a little bit today. But any reason to think that, that pace would change? Raj Singh: Not really. We're still being opportunistic where we can be. But at the same time, we're not trying to manage it on a day-to-day basis. Jim and I both have day jobs. So -- but there is still volatility in the market, and we try to use that volatility to our advantage the best we can. . Thomas Cornish: And we're working -- we're trying to steadily work towards the target of about 11.5% CET1. Better gravity that we're working towards. Operator: All right. The next question comes from Woody Lay with KBW. Wood Lay: One wanted to follow up on credit. And as you noted, NPA saw nice improvement even if you exclude the charge-off benefit -- so that incremental like $65 million of improvement. Could you just give some color on either the resolution or upgrades there? . Thomas Cornish: Yes. I would say if you look at that, you have a couple of fairly large loans that moved out of the bank. They were either refinanced in the longer-term capital markets that we were taken out by a lender in the group that was several of the large ones. You have a couple of upgrades in performance. That would be the mixture of the other items other than the charge-offs. Wood Lay: Yes. And then maybe just on the outlook that NPAs should continue to decline from here. Middle East represents some uncertainty and the kind of whipsaws back and forth on when that could potentially end. So what's driving that positivity that NPAs could continue to decline? Raj Singh: I think we're very familiar with every loan that is either in NPAs or criticized classified bucket. And we're looking at them very granularly to see where is performance getting worse or better or stable -- so my assessment on NPAs into the -- looking into the future is more based on that granular knowledge of the portfolio rather than what $100 oil might do. So that's not really what is driving that. It's -- I'll give you an example. Just 2 days ago, there's an NPA of about $17 million, $18 million in the CRE space that has been sitting there for almost a year, it looks like it's going to come to a resolution, and we might get a small recovery out of that. So I just know what's in the portfolio and where it is, this loan that I'm talking about as a close date of like third week of June. So I won't count the money until it actually the wire comes in, but it's it's a pretty good indicator that $7 million will get resolved, and it will be off our books before the end of second quarter. So it's things like that, right? There's another one in the C&I space, which has -- the performance has stabilized to kind of improve. But we're keeping it in the NPA category, we'll see how it works out. Three months ago, I was not as positive about how that business was doing. But now we've seen things they've done in the last 2 or 3 months that are looking better. It will probably still be an NPA, but it's maybe a couple of quarters down the road it gets resolved. So it's based on our granular knowledge of the loan portfolio rather than any big macroeconomic thing. Thomas Cornish: Yes. In some instances, we're aware of refinancings in the private credit market that are going on, in some instances, and individual credits. We're familiar with asset sales that are happening that will pay down the debt, you may have a division that's selling off within the company. I mean there -- as Raj said, there's specific kind of item by item that we can go through and identify events that we think are going to happen in the near term that give us that conviction. Wood Lay: Got it. That's really helpful color. And then last for me. I know it's pretty small in the grand scheme of things, but that little over $5 million of performance items and compensation this quarter. Was that included in the expense guide that was given last quarter? Or is that in addition? . Thomas Cornish: Yes. No, it's included. Operator: The next question comes from Jon Arfstrom with RBC Capital Markets. . Jon Arfstrom: Maybe for you, Tom, anything else to note on the C&I decline? You flagged the Q4 utilization, but anything else to note on commercial lending pipelines and what you're seeing there? Thomas Cornish: I would say, different parts of the business operate differently. When we say C&I, it really encompasses kind of larger middle market corporate lending and encompasses commercial lending for more midsized companies in the small business area. I think we're having probably higher levels of success in kind of the mid-level and down areas. That's a little less volatile as well. And also the credit sizes are a bit smaller. Pricing tends to be a bit better. We see less pricing pressure in that segment. The further you go upmarket, the more pricing competitiveness in terms and conditions competitiveness that you face. So a big part of kind of managing the growth of the business this year is managing that mix and managing the segments that we're in. We're fairly -- what is the right word I'm looking for, fanatical about kind of managing segments and keeping them within risk tolerance levels and kind of risk appetite as it relates to total exposure for industry segments, whether it's C&I side or the CRE side. So I expect that we'll see good quality C&I growth over the rest of the year. We're seeing good penetration in new markets that we're in particularly the southern markets, the Atlanta, the Charlotte. We just had a party yesterday for our new Charlotte office and had really good responses. We expect Texas to continue to grow well. So I think that there's -- it's broad, but I think there's going to be good market segments for us to grow in, but it's a very competitive business right now. We're trying very hard to manage this margin issue versus the volume issue and make sure that we're -- we've got a good pricing discipline. . Jon Arfstrom: Yes. Okay. Yes. And just that segues into the next one. How much more room do you guys think you have on deposit pricing from here? It sounds like you've got some rate cuts coming, but or some deposit pricing cuts coming, but how much more room do you guys think you have? Raj Singh: If the Fed doesn't move, then I think it's not like there is 30 basis points of room left here to cut. We will probably -- the existing book will probably cut 5, 10 basis points here or there but it's -- you can't really move too much unless the Fed moves. And the new money that comes in generally is at a higher price than the existing book. That's just the nature of the deposit business. So that will depend on where the market is. Like I said, broker market as a proxy was certainly very heated in March. We'll see where it kind of lands over the course of the next quarter, the remaining of the year. But it's we'll cut where we can, but it's not like there's some wholesale reduction that is still left if the Fed doesn't move. Thomas Cornish: But it is our commitment to focus on this. I can't even begin to tell you how much time we spend and how many painful meetings we have, we torture people over this, we torture our people, we torture ourselves . Raj Singh: Actually, the next meeting is on Friday . Thomas Cornish: Working through this. And it's like -- can we go down by 3 basis points on this account. And if it's a large account, 3 basis points makes a difference. It's an account by account relationship by relationship and pushing hard. It doesn't come by itself. I can assure you of that. . Jon Arfstrom: I know it's not easy. But you're still thinking 320 NIM by the end of the year and holding the provision guide? And if you can deliver that, I think that's really all that matters. Yes. I appreciate it. Correct. Operator: The next question comes from David Bishop with Hub D Group. David Bishop: Yes. Staying on the topic of maybe the NIM here. I think Tom or Jim, you mentioned securities took it on the chin a little bit from the Fed rate moves. From an earning asset yield perspective, do you think with an absence of rate cut here, -- in the near term, you might see average earning assets yields stabilize or start to turn here? I'm just curious how you're viewing yields within the market relative to roll-off. Thomas Cornish: Yes, except for competition related to credit spreads, right? If competition continues to ramp up and you start to see pressure there, that will be a little pressure on pricing. But we tried to factor that into our guidance. So really dependent if it's worse or better than what we projected. Yes, that will be also partially impacted by the asset yield mix changes. I mean, the continued rundown of resi and the continued emphasis on the commercial lending categories will help that. We also have some commercial real estate credits this year that are up for this year that were part of an older fixed rate book that we had of loans that were done 7 years ago or whatever they were done at lower rates. So we're looking at probably 7% to 8% of the portfolio that was at a fixed rate basis that we think we can reprice. So there's different elements to this that are levers that we think we can pull throughout the year in order to improve asset yields kind of across the board. David Bishop: Got it. And one f0inal question, as you look across the commercial portfolio. Any particular segments that are particularly impacted by rising energy or gas costs there? Just curious as you sort of analyze the portfolio, any segments that sort of jump out as being potentially at risk in the near term. Thomas Cornish: Yes. Everything is impacted a bit by it. I mean, we don't have we're not in sort of the energy lending business or businesses that you would say have a very front-end direct impact from it, but every consumer is impacted by rising energy prices and to some extent, any rise at that drives in food consumption type prices. So we do not have heavy consumer lending portfolios kind of B2C type lending portfolios. We don't have much of that. So we think we're reasonably insulated from that, but it's going to impact every consumer, and that drives 70% of the economy in terms of consumer expenditures and GDP. So it sort of depends on severity and duration in duration, duration -- we're watching it closely, and we'll react quickly if we start to see something that's concerned. It's one of those things we have a large food distribution company food distribution companies are going to have some level of impact from gas prices and what happens at the consumer if they start to downsize or trade down in quality of beef for things like that, but those are really difficult to try to assess other than watching it credit by credit. Operator: The next question comes from Stephen Scouten with Piper Sandler. Stephen Scouten: I'm just curious if you could remind what you guys are using for your economic scenarios as you calculate your loan loss reserve? And maybe what about your portfolio kind of gives you confidence that at what is a kind of below peer loan loss reserve to loan ratio? Thomas Cornish: Well, we look at Moody's primarily with the different booty scenarios and obviously, internal views as well overlays but again, really compare when you're comparing our aggregate coverage to others, you have to look at the mix within the portfolio. For example, if you just look at our C&I book, which I talked about, is where a lot of the charge-off activity has been. I think our coverage ratios are very comparable to peers. We've got a larger portion in our book of resi than some of our peers and the coverage on that tends to be a lot lighter. The performance there is very good. So you have to look at the sum of parts really to compare it to others. And I think we look much more comparable when you do that. Stephen Scouten: Fair enough. And then just my only other question would be, I think, Raj, like I like you reminding us to think about year-over-year, but I do look year-over-year profitability from an ROA perspective is basically flat around 66 basis points on what appears to be a core basis. So what's the biggest driver of improving that ROA on a year-over-year basis through the rest of this year. Raj Singh: NIDDA growth. If I was to pick 1 thing, that would be it. We deliver on ID improved in -- we deliver on that, everything else will take care of itself. Stephen Scouten: Got it. Sounds good. I appreciate the time. right. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Raj Singh for any closing remarks. Raj Singh: Thank you all for joining us. And like I said, I know this is a very busy day. If we missed anything, of course, you know how to reach me or Jim will be available. Thank you so much. Talk to you again in 90 days. Bye. . Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the TrustCo Bank Corp Earnings Call and Webcast. [Operator Instructions] Before proceeding, we would like to mention that this presentation may contain forward-looking information about the TrustCo Bank Corp New York that is intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Actual results, performance or achievements could differ materially from those expressed or implied by such statements due to various risks, uncertainties and other factors. More detailed information about these and other factors can be found in our press release that preceded this call and in the Risk Factors and Forward-Looking Statements section of our annual report on Form 10-K as updated by our quarterly reports on Form 10-Q. The forward-looking statements made on this call are valid only as date hereof, and the company disclaims any obligation to update this information to reflect events or developments after the date of this call, except as may be required by applicable law. During today's call, we will discuss certain financial measures derived from our financial statements that are not determined in accordance with U.S. GAAP. A reconciliation of such non-GAAP financial measures to the most comparable GAAP figures are included in our earnings press release, which is available under the Investor Relations tab of our website at trustcobank.com. Please also note that today's event is being recorded. A replay of this call will be available for 30 days, and an audio webcast will be available for 1 year as described in our earnings press release. At this time, I would like to turn the conference call over to Mr. Robert J. McCormick, Chairman, President, CEO. Please go ahead. Robert McCormick: Good morning, everyone, and thank you for joining the call. I'm Rob McCormick, the President of TrustCo Bank Corp. I'm joined today, as usual, by Mike Ozimek, our CFO, who will go through the numbers; and Kevin Curley, our Chief Banking Officer, who will talk about lending. We're pleased to report that 2026 is off to a great start with net income of over $16 million, improving margin, positive return metrics and building momentum in our share buyback program. Net income improved in part because of strategic pricing of our time deposit products, which had the effect of reducing our cost of funds. Also, contributing to this growth was noninterest income generated by our wealth management department, which increased 9% quarter-over-quarter. The most meaningful part of the story and a matter of significant shareholder interest is that the loan portfolio is, as expected, repricing as loans booked at lower rates over the past few years are replaced by higher earning loans. As the loan portfolio reaches another all-time high this quarter, the positive effect of repricing is becoming more pronounced and is having a meaningful impact on our financials. The great results announced yesterday are further bolstered by our stock buyback program. As investors will recall, we repurchased 1 million shares during 2025 and have received authorization to buy another 2 million shares this year. In the first quarter of 2026, we purchased over 500,000 shares, putting us on pace to fully execute. We continue to believe that the best acquisition we can make is TrustCo Bank, and we expect that share repurchase will remain the centerpiece of our capital deployment strategy. Each of these pieces of our company strategy over the quarter generated significant improvement in our return metrics, highlighting our profitability, efficiency and capital leverage. Year-over-year, we saw return on average assets increased 10% to 1.02%. Return on average equity grew 14% to 9.66%. Our efficiency ratio was lower by 6% to 54%. Now Mike will get into the details. Mike? Michael Ozimek: Thank you, Rob, and good morning, everyone. I'll now review TrustCo's financial results for the first quarter '26. As we noted in the press release, the company continued to see strong financial results for the first quarter of 2026, marked by increases in both net income and net interest income of the bank during the first quarter compared to the first quarter of 2025. This performance is underscored by rising net interest income, continued margin expansion and sustained loan and deposit growth across key portfolios. This resulted in first quarter net income of $16.3 million, an increase of 14.1% over the prior year quarter, which yielded a return on average assets and average equity of 1.02% and 9.66%, respectively. Capital remains strong. Consolidated equity to assets ratio was 10.31% for the first quarter of '26 compared to 10.85% in the first quarter of '25. Book value per share at March 31, '26 was $38.32, up 6% compared to $36.16 a year earlier. During the first quarter of 2026, TrustCo repurchased 522,000 shares of common stock or 2.9% of TrustCo's outstanding common stock under its previously announced repurchase program that allows the company to repurchase up to 2 million shares or 11.1% of TrustCo common stock in 2026. We remain committed to returning value to shareholders through a disciplined share repurchase program, which reflects our confidence in the long-term strength of the franchise and our focus on capital optimization. Credit quality continues to be consistent as we saw nonperforming loans modestly increased to $21.5 million in the first quarter of '26 from $18.8 million in the first quarter of '25. Nonperforming loans to total loans increased to 41 basis points in the first quarter of '26 from 37 basis points in the first quarter of '25. Nonperforming assets to total assets was 35 basis points, up from 33 basis points in the first quarter of '25. Our continued focus on solid underwriting within our loan portfolio and conservative lending standards positions us to manage credit risk effectively in the current environment. Average loans for the first quarter of '26 grew 3.1% or $158.9 million to $5.3 billion from the first quarter of '25, an all-time high. Consequently, overall loan growth has continued to increase and leading the charge was the home equity lines of credit portfolio, which increased $50.8 million or 12.3% in the first quarter of '26 over the same period in '25 and the residential real estate portfolio, which increased $93.2 million or 2.1%. Average commercial loans also increased $17.1 million or 5.8%. This uptick continues to reflect our local -- very strong local economy and increased demand for debt. For the first quarter of '26, the provision for credit losses was $950,000. Retaining deposits has also been a key focus as we begin '26. Total deposits ended the quarter at $5.7 billion and was up $156 million compared to the prior year quarter. We believe the increase in these deposits compared to the same period in '25 continues to indicate strong customer confidence in the bank's competitive deposit offerings. The bank's continued emphasis on relationship banking, combined with competitive product offerings and digital capabilities has contributed to a stable deposit base that supports ongoing loan growth and expansion. Net interest income was $44.7 million for the first quarter of '26, an increase of $4.3 million or 10.7% compared to the prior year quarter. The net interest margin for the first quarter of '25 was 2.84%, up 20 basis points from the prior year quarter. Yield on interest-earning assets increased to 4.23%, up 10 basis points from the prior year quarter, and the cost of interest-bearing liabilities decreased to 1.79% in the first quarter of '26 from 1.92% in the first quarter of '25. The bank is well positioned to continue delivering strong net interest income performance even as the Federal Reserve contemplates whether or not to make rate changes in the months ahead. The bank remains committed to maintaining competitive deposit offerings while ensuring financial stability and continued support for our community banking needs. Our Wealth Management division continues to be a significant recurring source of noninterest income. It had approximately about $1.26 billion of assets under management as of March 31, 2026. Noninterest income attributable to wealth management and financial services fees represent 44.1% of noninterest income. The majority of this fee income is recurring, supported by long-term advisory relationships and a growing base of managed assets. Now on to noninterest expense. Total noninterest expense net of ORE expense came in at $26.9 million, up $631,000 from the prior year quarter. ORE expense net came in at an expense of $50,000 for the quarter as compared to $28,000 in the prior year quarter. We're going to continue to hold the anticipated level of expense not to exceed $250,000 per quarter. All the other categories of noninterest expense were in line with our expectations for the first quarter. We would expect 2026 total recurring noninterest expense net of ORE expense to be in the range of $26.7 million to $27.3 million. Now Kevin will review the loan portfolio and nonperforming loans. Kevin Curley: Thanks, Mike, and good morning to everyone. Our average loans grew by $158.9 million or 3.1% year-over-year. This is an improvement over last quarter's report of year-over-year growth of $126.8 million. The growth was centered in our residential loan portfolio with our first mortgage segment growing by $93.2 million or 2.1% and our home equity loans growing $50.8 million or 12.3% over last year. In addition, our commercial loans grew by $17.1 million or 5.8% over last year. For the first quarter, actual loans increased by $37.7 million compared to the fourth quarter. Purchased mortgage loans, including refinances and home equity loans grew by $35.3 million and commercial loans were up by $3.3 million for the quarter. Our mortgage origination activity showed solid improvement during the quarter and year-over-year. Purchase loan volume was steady throughout the quarter. Refinance activity picked up earlier in the period with lower rates, then eased as market rates moved higher during the second half of the quarter. In all of our markets, rates were lower in the beginning of the quarter, decreased closer to 6.75% and have recently receded to 6% to 6.25% range. We continue to offer highly competitive mortgage rates with our 30-year fixed rate at 5.99%. In addition, our home equity products continue to offer customers lower cost alternatives to other forms of credit. Overall, we are positive about our loan growth in the quarter and remain focused on driving stronger results moving forward. Now on to asset quality. As a portfolio lender, we originate loans to hold for the full term, reinforcing our disciplined underwriting standards. Asset quality at the bank remains very strong. Our early-stage delinquencies for our portfolio continue to remain stable. Charge-offs for the quarter amounted to a net recovery of $39,000, which follows a net recovery of $14,000 in the fourth quarter and a total of $238,000 in recoveries over the past year. Nonperforming loans were $21.5 million at this quarter end, $20.7 million last quarter and $18.8 million a year ago. Nonperforming loans to total loans was 0.41% at this quarter end compared to 0.39% last quarter and 0.37% a year ago. Nonperforming assets were $22.8 million at quarter end versus $22.1 million last quarter and $20.9 million a year ago. At quarter end, our allowance for credit losses remained solid at $53 million with a coverage ratio of 247% compared to $52.2 million with a coverage ratio of 253% at year-end and $50.6 million with a coverage ratio of 270% a year ago. Rob, that's our story. We're happy to answer any questions you may have. Operator: [Operator Instructions] And our first question comes from the line of Ian Lapey with Gabelli Funds. John Lapey: Congratulations. Just a couple. So the provision more than tripled compared to a year ago despite really solid metrics in terms of your portfolio, and you mentioned stable early-stage delinquencies. So are you still -- you mentioned in the release a more cautious economic outlook. Are you still using the baseline Moody's forecast or are you doing something else? Michael Ozimek: Yes. So we are still using the baseline Moody's forecast. And I mean, what's really driving that increase in the provision, I mean, about half of it is loan growth and about half of it is that forward-looking component of the Moody's forecast that does have some of the economic factors looking slightly negative on the go forward. So that's what drives that calculation. John Lapey: Okay. And then the release mentions competitive pressure on deposit pricing. Can you just talk about is anything new, any new entrants or anything changing there? And what's your -- it seems like you're doing quite well in... Robert McCormick: I don't think there's anything new, Ian, but it's the same old, same old. A lot of the consumers are pushing for obviously higher CD rates. I think more than I've ever never seen before in my career anyway. Consumers have a magic number in their mind that they're pushing for. And you also have the natural competitors from the credit unions that we compete against. So they're tough competitors from a rate perspective. They don't have the same motivation and same issues that we have. So nothing really new, just those 2 popping up. John Lapey: Okay. And then lastly, on capital, what was the Tier 1 common equity ratio? And as you continue to repurchase shares, -- where -- what's your comfort level in terms of where you'd like to see -- where you'd be comfortable with that settling out? I know it was 18.4% at year-end. Robert McCormick: Yes. The share repurchase, we're taking it kind of one bite at a time and slower. Mike can comment on this if he wants. But we're taking it as we possibly can. We are fully committed and believe in the share repurchase, but we're certainly not going to jeopardize our capital position or our liquidity position to repurchase shares. We've always been known, you know, you've seen the way we run the place. We've always been known as well capitalized and very liquid by all measures, and we certainly wouldn't want to do anything to disrupt that. John Lapey: Okay. Good. And then do you have the CET1 ratio? I know it will be in the queue. Michael Ozimek: We haven't disclosed it yet, but I mean it's trending down the same way that the leverage ratio is trending. So we're putting that capital to work. John Lapey: Okay, great and congrats again. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Robert McCormick for any closing remarks. Robert McCormick: Thank you for your interest in our company, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the WesBanco 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 John Iannone, Senior Vice President of Investor Relations. Please go ahead. John H. Iannone: Thank you. Good morning, and welcome to WesBanco, Inc.'s First Quarter 2026 Earnings Conference Call. Leading the call today are Jeff Jackson, President and Chief Executive Officer; and Dan Weiss, Senior Executive Vice President and Chief Financial Officer. Today's call, an archive of which will be available on our website for 1 year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of April 22, 2026, and WesBanco undertakes no obligation to update them. I would now like to turn the call over to Jeff. Jeffrey Jackson: Thanks, John, and good morning, everyone. Today, we'll walk you through our first quarter performance and share our current outlook for the rest of 2026. There are 3 key takeaways from the quarter. We delivered solid year-over-year financial results. We exceeded our year 1 financial targets for the Premier acquisition. And we stay disciplined in executing our strategy to position WesBanco for long-term success. Overall, it was a solid start to the year. Turning to our financials. For the quarter ended March 31, 2026, we reported net income available to common shareholders of $87 million, excluding merger and restructuring charges. That translated to diluted earnings per share of $0.91, up 38% from a year ago. On a similar basis, we reported pretax pre-provision earnings of $114 [ million ] an increase of 44% year-over-year. The strength of our first quarter financial performance was reflected in our returns on average assets and tangible common equity of 1.3% and 17.4%, respectively. Our capital position also remained solid with a CET1 ratio of 10.7%. That gives us flexibility to support growth and navigate the operating environment ahead. As we mentioned last quarter, developers continue to seek permanent financing or the sale of properties. During the first quarter, that drove elevated commercial real estate project payoffs which totaled $340 million during the first quarter and created a 1.4% headwind to our year-over-year loan growth. In fact, we have incurred a significant CRE payoff headwind of $1 billion during the last 9 months. Despite that headwind, our teams continue to execute at a high level. Loan growth was largely funded by deposit growth and our commercial pipeline has reached all-time record levels. Adjusting for the payoff activity, total loans grew 3.6% year-over-year. The commercial pipeline has increased 35% since year-end to a record $1.6 billion. And in the few weeks since quarter end, the pipeline has grown another $200 million to $1.8 billion. About 45% of that pipeline is coming from existing loan production offices and the former Premier footprint. Impressively, this pipeline does not yet reflect the benefit of our recently announced South Florida expansion. That team has hit the ground running and built an initial $400 million pipeline just in a few weeks. They are on pace to grow that pipeline by a significant amount as the year progresses. Even with elevated CRE payoffs during the first half of the year, and the potential of influence of geopolitical events, we continue to expect mid-single-digit year-over-year loan growth for 2026. Supported by our record pipeline and early momentum from our South Florida markets. A little over a year ago, we completed our transformative acquisition of Premier Financial. An acquisition that placed WesBanco among the 50 largest publicly traded banks in the U.S. When we announced the Premier acquisition in July 2024, we laid out clear financial targets for the first year including 40% earnings per share growth, a 1.3% return on average assets and a CET1 ratio of 9.6%, along with a tangible book value earn back in under 3 years. I'm pleased to say we delivered and, in many cases, exceeded our targets. Over the last 12 months, core EPS growth reached 49%. And [ ROAA ] was 1.3%. We also exceeded the pro forma CET1 ratio by more than a percentage point and shave more than a year off the dilution [ earn ] back, as our first quarter tangible book value per share of $22.45 is well above the June 2024 figure and nearly at the year-end 2024 level. In addition, we have been making other strategic investments that demonstrate our commitment to long-term sustainable growth. We continuously invest in digital capabilities and products like WesBanco One account and treasury management services to ensure we serve our customers how, when and where they want. At the same time, we continue to optimize our physical branch network. Over the past 4 years, we've closed 64 locations with limited customer traffic, including 10 of them in Northern Ohio that will close next month. We're selectively opening new financial centers in key markets and consolidating others into more central and higher-demand locations. Our loan production office strategy continues to perform well. We've opened LPOs in high-growth markets, including Chattanooga, Indianapolis, Knoxville, Nashville and Northern Virginia. We're seeing strong results as these teams deepen relationships and bring on new commercial clients. As these offices achieve scale, we add product capabilities locally as well as financial centers to better serve our growing client base. Chattanooga is a great example. We opened that LPO less than 3 years ago, and it has generated strong relationship-driven growth. That momentum supports the opening of our first Tennessee Financial Center this week. We anticipate that several other of our LPOs will follow this pattern within the next couple of years. I'm very excited about our recent expansion into Florida, which is a thoughtful extension of our long stated southeastern expansion strategy. Last month, we announced the launch of our commercial banking business across key high-growth South Florida markets, starting with Palm Beach and [ Broward ] counties. We brought on a seasoned team of nearly 20 professionals, including market leaders, commercial makers, credit underwriting and a client relationship support as well as a treasury management leader. These are attractive high-growth markets and ones I have come to know well during my banking career. I've worked with many of these bankers before and they consistently delivered top performance while maintaining strong credit discipline. Just as importantly, their client focus aligns well with our relationship-led approach, our Florida expansion also provides meaningful organic growth opportunities for our strong health care banking vertical. As the regional business, which is primarily focused on C&I lending develops, we will evaluate additional services and solutions, including retail financial centers, treasury, wealth management and mortgage offerings to deliver even a greater value to our clients. I would now like to turn the call over to Dan to walk through the financials and outlook in more detail. Dan? Daniel Weiss: Thanks, Jeff, and good morning. For the first quarter, we reported GAAP net income [ available ] common shareholders of $84 million or $0.88 per share. And when excluding restructuring and merger-related expenses, first quarter net income was $87 million or $0.91 per share. To highlight a few of the first quarter's year-over-year accomplishments, we generated strong pretax pre-provision core earnings growth of 44% grew core earnings per share by 38% and improved the net interest margin by 22 basis points and reduced the efficiency ratio by nearly 4 percentage points to 52.5%. Total assets of $27.5 billion include total portfolio loans of $19.1 billion in securities of $4.4 billion, Total portfolio loans increased 2.2% year-over-year, driven by commercial real estate and home equity lending and declined slightly on a sequential quarter basis due to elevated payoffs. We expect CRE payoffs to remain slightly elevated during the second quarter, but at a lower level than the first quarter before returning to a more normal historical level during the back half of the year, totaling $700 million to $900 million for the year. While very small, we ended our indirect auto program, [ as ] it's not core to our organic growth strategy, and at quarter end, it represented about half of the $325 million of consumer loan portfolio and anticipate that, that portfolio will run off over the next 3 to 5 years. Deposits increased 2% year-over-year to $21.7 billion in organic growth. We continue to be successful in remixing higher-cost certificates deposits into interest-bearing demand and [ of our ] remaining $2.7 billion CD portfolio approximately [ 1 billion ] matures in each of the next 2 quarters with an average rate of 3.48% and 3.2%, respectively. Our current 7-month CD rollover rate is 3.25%. Further, we started the year with $100 million in broker deposits, $50 million paid off early in the quarter, while the last of our broker deposits paid off on April 1. Credit quality continues to remain stable as key metrics have remained low from a historical perspective and favorable to all banks with assets between $20 billion and $50 billion over the last 5 quarters. [ Criticized ] and classified loans as a percentage of total portfolio loans decreased $49 million or 24 basis points from the sequential quarter to 2.9%, and while nonperforming loans increased $53 million sequentially, primarily due to 3 CRE loans across different markets and property types, none of which were office. The allowance for credit losses, the total portfolio loans at the end of the first quarter was 1.1% of total loans or $210 million. The decrease from the fourth quarter was primarily due to lower loan balances faster prepayment speeds and macroeconomic factors. The first quarter margin of 3.57% improved 22 basis points year-over-year through a combination of lower funding costs and higher security yields but declined 4 basis points sequentially. This decrease resulted primarily from lower net loan growth as well as modestly higher seasonal deposit contraction in the first 2 months of the quarter, which fully recovered by the end of March. Total deposit funding costs, including noninterest-bearing deposits declined 11 basis points year-over-year and 7 basis points quarter-over-quarter to 177 basis points. The first quarter noninterest income of $41.8 million increased $7.2 million or 21% year-over-year due primarily to the acquisition of Premier combined with organic growth. Service charges on deposit and digital banking fees improved due to increased general spending and higher transaction volumes from our larger customer base as well as organic growth from treasury management, which generated revenue of $2.5 million in the first quarter, representing an 82% increase year-over-year, reflecting record asset levels, which totaled $10.4 billion combined trust fees and net securities brokerage revenue increased due to the addition of Premier Wealth clients market value appreciation and organic growth. Noninterest expense, excluding restructuring and merger-related costs for the first quarter of 2026 was $143 million, a 25% increase year-over-year due to the addition of the Premier expense base which was only in the WesBanco expense base for 1 month in the prior year period. Higher core deposit intangible asset amortization from the acquisition and higher FDIC insurance expense due to our larger asset size. On a similar basis, operating expenses were down slightly from the sequential quarter, reflecting our focus on managing discretionary expenses and some onetime credits approximating $2 million. Please note that the first quarter does not fully reflect our strategic expansion into South Florida as the hiring occurred late in the quarter. If we turn to capital, all of our key ratios improved quarter-over-quarter. Our CET1 ratio, as of March 31, was 10.7%, which increased more than anticipated due to lower risk-weighted assets during the quarter. Based on the strategic investment that we're making in the Southeast Florida and other markets, we anticipate CET1 to [ now ] build 5 to 10 basis points per quarter for the remainder of the year, putting us on pace for 11% and CET1 target by year-end. Turning to the outlook. Our current outlook for 2026 includes our Southeast Florida expansion, which currently totals nearly 20 individuals and is expected to achieve positive operating leverage within 12 to 15 months and be additive to our long-term financial outlook. We've removed our previous rate cuts from our modeling and currently do not anticipate any cuts or increases during the remainder of 2026. We anticipate our second quarter net interest margin to rebound into the low 360s and then continue to improve into the mid- to high 360s during the second half of the year. This assumes, among other things, that the competition for loans and deposits remain stable, loan growth is fully funded by deposits and an upward sloping yield curve. Generally speaking, there are no meaningful changes to our fee income outlook for the last -- from the last quarter. [ Trust fees ] and securities brokerage revenue should benefit modestly from organic growth and be influenced by equity and fixed income markets. And as a reminder, first quarter trust fees are seasonally higher due to tax preparation fees. Mortgage banking should grow modestly over 2025 beginning in the spring, driven by recent hiring initiatives Total treasury management revenue should see increases from 2025 as the compounding effect of our services continue to expand and gross commercial swap fee income, excluding market adjustments, should be in the $8 million to $10 million range. Overall, we currently anticipate our quarterly fee income to grow in the 3% to 5% range year-over-year during the remainder of 2026. While we remain focused on delivering disciplined expense management, we are making strategic investments to drive long-term value for our shareholders. We're closing 10 financial centers during May and anticipate the annual savings of approximately $2 million to begin to be realized midway through the second quarter. Salaries and wages will increase, reflecting the South Florida expansion and the annual midyear merit increases, which take effect midway through the second quarter. Occupancy expense should be flat to slightly down compared to 2025 due to our branch optimization efforts slightly offset by our branch expansion initiatives in our new and existing markets, while equipment and software expenses are expected to increase somewhat as compared to 2025 as we continue to invest in products services and technology to improve the customer experience and drive revenue growth. In support of our organic loan and deposit growth model and our commercial lending expansion efforts, marketing is expected to increase to approximately $4 million per quarter. And based on what we know today, we expect our expense run rate during the second quarter to approach $150 million and then to increase a couple of percentage points in the third quarter from a full quarter of midyear merit increases. The provision for credit losses will depend on changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies, changes in prepayment speeds and future loan growth. And finally, we anticipate our full year effective tax rate to be between 20% and 21%. This concludes my remarks. Operator, we're now [ ready ] to take questions. Operator: [Operator Instructions] And your first question today comes from Manuel Navas with Piper Sandler. Manuel Navas: I appreciate having us [ off for ] the comments. What are the funding expectations around the South Florida commercial lending team? And can you dive a little bit more into your ties to the area and the potential to add to that team? Jeffrey Jackson: Yes, sure. My -- I'll start with the [ tide ] in South Florida. As you may or may not know, I worked as a regional president in South Florida, when First Horizon bought Capital Bank, and really built out that team. And so work down there back in 2018 through essentially 2020, 2021. They're a very top-performing team, and so when the opportunity came around to bring them over to WesBanco, it just seemed like a perfect partnership. As I mentioned before, I kind of put together that team back at my previous employer. And so when you when you look at what they can do and where they're headed, I think it's going to be one of our big growth drivers for this year and future years. We are opening up 2 offices, as mentioned, Palm Beach and Broward. We would also follow up with 2 branches as well. So when you look at the funding piece, we are expecting them to provide a significant piece of funding their own loan growth and that will be followed up with 2 branch locations, which would -- we'd hopefully have opened by the end of the year. And -- but overall, we feel like it's a great growth market. And I think your other piece of that question was more expansion. We are looking at other markets there in Florida, as my previous history, I had the whole state of Florida. So we will be looking to add additional people when the right people come along, but I do believe, and as I mentioned in my prepared remarks, they have a current pipeline of about $400 million, and I feel like the loan growth and the revenue opportunities there will help propel us into the future. Manuel Navas: I appreciate that. Diving a little bit back into more deeply into the NIM outlook. Can you speak to more of the components there that should drive kind of the improvement across the -- from here? Can you have deposit declines beyond CDs what kind of current pricing levels on the loan book? Just kind of if you could walk through some of the wildcards there [ on the name ]. Daniel Weiss: Yes, sure, Manuel, I'll take that one. So we talked about kind of 3 to 5 basis points of NIM improvement here in the second quarter. A lot of that is really the repricing of the back book for both loans as well as securities and then kind of an assumption that we're going to fund the majority of the deposit or the loan growth with deposits in the second quarter. As you know and as you heard in my prepared remarks, we did see a little bit of outflow here in the first quarter in deposits, which is seasonally expected. It was just a little heavier than anticipated. And we also saw about $150 million of noninterest-bearing migrate into interest-bearing. So those 2 things kind of combined with the loan growth. You've kind of provided that headwind to first quarter margin. But if we think towards that 3 to 5 basis points when I talk to repricing, we do have about $400 million of fixed rate commercial loans, weighted average rate of about 4.25% that will mature in the next 12 months. Those will be repricing up almost 200 basis points into the low 6s, we've also got another $400 million of variable rate loans. These are those that would be repricing 48 to 60 months, roughly, that would be coming due in the next 12 months weighted average rate there is about 3.75. So that's going to provide some nice tailwind as well. And if we just think about other sources, securities cash flow that's beginning to tick up a little. We're kind of projecting around $275 million in security cash flows per quarter. And so that's going to reprice upward from kind of, call it, 3.3% up to about 4.75% to 5% depending on where rates are. So that's another nice pickup of about 150 basis points or so. And then, of course, as I mentioned in the prepared commentary, we do have a continued downward repricing of the CD book. So particularly that $1 billion of first quarter CDs that repriced down about 40 to 50 basis points, that's going to benefit the second quarter quite a bit. Similarly, the $1 billion in the second quarter of CDs that are maturing, those are going to reprice down about 25 basis points. That will begin to benefit second quarter and really kind of fully benefit third quarter. But I think those are probably the major items that I mentioned again in the prepared commentary that we did pay down the remainder of our broker deposits. So we had $100 million in brokered on the books at the beginning of the year, $50 million of those paid down kind of early in the first quarter, the other $50 million on April 1. So that also would provide I believe, some nice tailwind towards that 3 to 5 basis points of margin expansion here in the second quarter. Manuel Navas: I appreciate that commentary. If there is rate cuts, what would that impact this progression, if at all? Daniel Weiss: Yes. So we're pretty neutral. So I would say there's not a whole lot of movement one way or the other with rate cuts. Certainly, our commercial loan portfolio is 50% of that is variable rate, reprices within 3 months. But we'd also be able to reprice downward our deposits. Our FHLB borrowings are all mostly 1 month advances. And so we think that in a rate cut scenario or a rate hike scenario, which is now potentially on the table, we would be in a great spot. Operator: Your next question comes from Jake Civiello with D.A. Davidson. Jacob Civiello: Wanted to touch on the uptick in NPAs. So obviously, you mentioned that the 3 non-office credits were the driver? Can you provide a little bit more details in terms of what actually those credits were? Jeffrey Jackson: Yes, I can. They were -- as I mentioned, legacy Premier credits, they are all in 3 different markets, 2 are multifamily, and I would tell you that we feel like we're very well collateralized there and well reserved for those 3 and feel like that we will be working out of those. Once again, there were 3 credits. I think the other piece I would highlight is the [ C&C ] did tick down back to our kind of our normal range, sub-3%, which is top in our peer group. But we are looking at those NPAs. And do you still feel very good about working through those 3 credits. Daniel Weiss: It's also worth like kind of recognizing that those NPAs are nonaccrual loans are included in the [ C&C ] total. So that 24 basis point reduction in [ C&C ], that includes these as well. So continue to see positive momentum on the credit front. Operator: And your next question comes from Karl Shepard with RBC Capital Markets. Karl Shepard: Congrats on getting the Florida team in place. I wanted to start there. You highlighted the pipeline, I think, around $400 million. Can you help us understand maybe your expectations for how much of that you would think can close? And is that over the rest of the year? Or is there a little bit longer time line? Jeffrey Jackson: Yes. We -- I think that they will close their first deal this month. I would hope that by the end of the quarter, they would have anywhere from, this is a guess, but $100 million closed this quarter. And I would hope by the end of the year, anywhere from $300 million to $500 million closed could be more depending on the number of bankers we continue to add there. And that's just not loans. I mean, we're bringing -- we will be bringing over full relationships. Once again, we hope to have a couple of depository branches open soon. And this would also include fees and treasury management services and all those other things. I think it's going to be a heavy driver for us this year. And just while we're talking about it, just to bring up I think our overall pipeline, if I look back and compare it to last year this time, I think our pipeline last year was about $1.2 billion. Today, we said it nearly [ $2.3 billion, $2.4 billion ]. So if I look at that and then I also look at pay off is what we see today for the quarter. Today, we see about $100 million plus less payoffs than we saw in first quarter. So when I combined a much higher pipeline less payoffs that we see today, I feel very good about where we stand from a loan growth perspective for the rest of the year. Karl Shepard: Okay. That's helpful. And then I guess just on the payoff piece, I think you just said it, but I just want to clear it up too because I know the scenario is concerned. But I think last quarter, you thought [ $600 million to $800 million ] for the full year. I think you said $700 million to $900 million today. So the first quarter was maybe just a little bit of pull forward of stuff you thought was going to pay off. Is that a fair way to see it? There's really not much of a change in your expectation? And obviously, the pipelines are strong and the production looks solid as well. Jeffrey Jackson: Yes, 100%. Some of the payoffs moved to first quarter. As I mentioned, we see this current quarter less payoffs in the first quarter of over $100 million. And no, I think that's a perfect way to see it. The other thing I would add, just the first quarter is we had a couple of [ DFI ] loans that we decided we were not going to be in that business. And just to point out that we have a very, very, very small exposure, I think, less than $50 million to [ DFIs ]. And so we chose not to do a couple of those deals in the first quarter that could have given us some more loan growth. And then we did have a couple of deals really slide from first quarter to second quarter. So some of this is really just a timing issue with the loan growth. Operator: Next question comes from Russell Gunther with Stephens. Russell Elliott Gunther: Just following up on the pipeline discussion here. It would be helpful to get a sense of the mix and the yield, and then just in general, how you guys are thinking about pull-through rates relative to historical levels. Jeffrey Jackson: Yes, I think the mix, if I was to look at it, I would say it's probably 60-40 CRE to C&I would be my guess. And then the yields, I'm going to guess, the low to mid-6s from a loan yield perspective. Once again, I would also highlight that everything we do is a full relationship that has some level of deposits and treasury management services. As far as the pull-through, I don't see it being any different than what we've seen in the past from adding and closing business. Obviously, the new markets will have to measure that with Florida coming on. But once again, we feel very good about where we're at. And some of this loan growth is a timing thing, and I do believe we will see strong loan growth for the rest of the year. Russell Elliott Gunther: That's helpful, Jeff. And then switching gears from my second question here would be to capital. So CET1, roughly 10.7% today. You guys have a preliminary sense for the impact of the Basel III proposal on RWAs and CET1? And then would there be any shift in your appetite to consider repurchases? Daniel Weiss: Yes. Russell, I'll take that one. And great question. I think we're still obviously evaluating the impact there. But preliminary estimates kind of indicate that we would see a benefit to CET1 of about 5% to 6%. And so on a 10.7% ratio today, that's worth about 55 to 65 basis points. So that frees up about, call it, around $120 million or so in capital. And that certainly would provide opportunity to deploy whether that be through buyback or additional growth. But I think that certainly would accelerate the buyback view. So like I said in my prepared commentary, we are building -- we've built capital back very quickly here in the first quarter up to 10.7%. We were kind of projecting that to be closer to 10.5%. And of course, lower risk-weighted assets is what drove that extra kind of 20 basis points of CET1 here in the first quarter. But with the growth that we're anticipating from all of the things that Jeff has discussed, we expect that to slow down a little, the growth in CET1. But like I said, all of that being said, we do have today, 900,000 shares available for repurchase. I think that we're -- now that we're above 10.5%, that's kind of our target. I think that it offers us more flexibility to evaluate how we can deploy that capital. But as Jeff said, with the growth opportunity we have organically we're going to continue to evaluate there. Operator: [Operator Instructions] Your next question comes from Daniel Tamayo with Raymond James. Daniel Tamayo: Yes. Maybe just a clarification, Dan, for you on the expense guide. So I think you said approaching $150 million in the second quarter, and then a couple of percent growth, just so we were clear on that. So we should be looking for roughly $153 million or so or just below that in the third quarter. And then how -- is that kind of the normal run rate, including all the new hires at that point? I know it's an ongoing thing, but just trying to get a sense for maybe where we're going to end the year? Daniel Weiss: Yes. I'd say that $152 million to $153 million is probably a pretty good estimate for third quarter, as you said. But it is going to be dependent on the commercial hiring and the investments that we're making here throughout -- the market expansion. So today, that's where we're at. But if we end up taking any higher, that would be certainly very accretive to long-term earnings per share in that, we'd be hiring revenue producers to be putting on loans and fee income [ trader million service ], et cetera, into '26 through and begin to benefit us in '27. Daniel Tamayo: Okay. And I'm sorry if you guys talked about this, but are there any noncompetes that we need to be aware of for the new hires? Jeffrey Jackson: Yes. It's kind of they all have standard nonsolicitation agreements that we work through, that's pretty standard in our industry, and we are 100% behind working through that, making sure they comply with all those different nonsolicitation. There is no -- as far as the more noncompetes. Daniel Tamayo: Got it. Is there a time frame that we can think about that maybe starts to ramp after a certain period? Jeffrey Jackson: I would think that we would have significant progress from a ramping of business towards the end of the year for the Southeast Florida team. I would -- once again, we think that they would close anywhere from $300 million to $500 million in new loans between now and the end of the year, and it could be higher than that based on some deals we're looking at. So I think by third quarter, we'll have a very good feel in the third quarter where this team stands, but I have very, very high expectations of this team because I have worked with most of them in the past. And feel like they will be delivering a really great return for our bank. Daniel Tamayo: Great. And then maybe 1 more clarification for you, Dan. On the 3 loans that drove the increase in the NPLs. Were there reserve -- I guess overall reserves came down in the quarter or at least as a percentage of loans. Were there reserves -- incremental reserves taken on those 3 loans that were moved into NPL. And I know you said they're you're comfortable with where they stand now? I'm just trying to get a sense for coverage of those loans as we look forward. Daniel Weiss: Yes. No, there were not incremental reserves taken on them. As I said, they're as Jeff said, rather, they were generally well secured, well collateralized and certainly evaluated discussed, but nothing additional. Daniel Tamayo: Okay. Appreciate it. Jeffrey Jackson: Yes. Thanks, Dan. And the one other thing I'll mention is we have started hiring another team in Nashville, and they have just started as well. So there'll be more to come on that in future calls. Operator: And your next question comes from [ Hannah Wynn ] with KBW. Unknown Analyst: [ Hannah Wynn ] stepping in for Catherine Mealor. I just had a quick question on deposits. I know you mentioned your deposits were going to fund your loan growth. and deposits were flat for this quarter. So wondering where you see those trending for the rest of the year? Jeffrey Jackson: Yes. Typically, they're pretty seasonal in the first quarter where they drop and they come back to kind of flat in the second quarter, we start trying to build the deposit piece with most of our deposits historically been coming in the third and fourth quarters. So we do continue to see them. We are opening up a branch this week in Chattanooga, Tennessee, First Tennessee branch that goes along with our LPO strategy but that is really critical. We have also increased incentives on driving deposits and feel like we expect to fund our loan growth, the majority of it with deposit growth and as we have done in the last 2 years. Dan, I don't know if you want to comment any more on deposit growth. Daniel Weiss: No, I think you nailed it. I think one of the keys to is just you're getting those branches in the Southeast Florida market up and [ running ] take deposits. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Jackson for any closing remarks. Jeffrey Jackson: Thank you. And to wrap up, we remain focused on appropriate investments and disciplined execution of our long-term organic growth strategy. The successful integration of Premier, our continued expansion through loan production offices and targeted investments in high-growth markets have positioned the company well to continue delivering value for our customers and our stakeholders. Thank you for joining us today. We appreciate your continued interest in WesBanco and look forward to speaking with you at one of our upcoming investor events. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Agree Realty First Quarter 2026 Conference Call. [Operator Instructions] Note this event is being recorded. At this time, I would like to turn the conference over to Reuben Treatman, Senior Director of Corporate Finance. Please go ahead. Reuben Treatman: Thank you. Good morning, everyone, and thank you for joining us for Agree Realty's First Quarter 2026 Earnings Call. Before turning the call over to Joey and Peter to discuss our results for the quarter, let me first run through the cautionary language. Please note that during this call, we will make certain statements that may be considered forward-looking under federal securities laws, including statements related to our updated 2026 guidance. Our actual results may differ significantly from the matters discussed in any forward-looking statements for a number of reasons. Please see yesterday's earnings release and our SEC filings, including our latest annual report on Form 10-K for a discussion of various risks and uncertainties underlying our forward-looking statements. In addition, we discuss non-GAAP financial measures, including core funds from operations or core FFO, adjusted funds from operations or AFFO and pro forma net debt to recurring EBITDA. Reconciliations of our historical non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release, website and SEC filings. I'll now turn the call over to Joey. Joey Agree: Thank you, Reuben, and thank you all for joining us this morning. I'm extremely pleased with our performance to start the year as we have continued to execute on all fronts. During the quarter, we invested nearly $425 million across our 3 external growth platforms, while further strengthening our market-leading portfolio. The $403 million of acquisitions completed during the period represents our largest quarterly acquisition volume since 2022 as we continue to source superior risk-adjusted opportunities. While the macro backdrop remains highly unpredictable, we have never been better positioned. During the quarter, we raised approximately $660 million of forward equity through our ATM. We now enjoy $2.3 billion of total liquidity and more than $1.6 billion of hedged capital, including a company record $1.4 billion of outstanding forward equity. At quarter end, pro forma net debt to recurring EBITDA was just 3.2x, giving us meaningful flexibility to execute regardless of capital markets volatility. As a reminder, we have no material debt maturities until 2028. We have married this fortress balance sheet with the highest quality retail portfolio in the country that only continues to improve. In a K-shaped economy, our industry-leading tenants stay poised to leverage their scale and value propositions to drive further share gains. We are consistently seeing leading retailers with the balance sheet and operating discipline winning across cycles and expanding their brick-and-mortar footprints. Our pipeline across all 3 external growth platforms is robust, yet our approach remains unchanged. We will stay consistent within our established investment parameters without compromising our underwriting standards. While our investment in earnings guidance remain unchanged, I would note that we have increased our treasury stock method dilution in anticipation of an elevated stock price and as well as the additional forward equity raise during the quarter. We'll continue to provide updates as the year progresses, and Peter will provide additional details on our guidance and input shortly. Turning to our external growth activity. We had an active start to the year, leveraging our unique market positioning and deep relationships with retail partners to uncover opportunities across all 3 platforms. During the first quarter, we invested nearly $425 million in 100 properties across these 3 platforms. Of note, during the quarter, we executed a sale leaseback with Hobby Lobby on their corporately owned stores. As we've discussed on prior earnings calls, Hobby Lobby is privately owned, has a balance sheet and stands as a clear market leader in the craft and hobby space. They are a terrific operator and partner. As a reminder, we do not impute investment-grade or shadow investment-grade ratings in our IG percentage. Additional acquisitions during the quarter included a Home Depot, 5 bound leases in Pennsylvania and Maryland, a portfolio of 11 Sherwin-Williams stores, several Aldis and 3 Walmarts located in Georgia and South Carolina. The acquired properties at a weighted average cap rate of 7.1% and a weighted average lease term of 11.3 years. Nearly 60% of base rents acquired was derived from investment-grade retailers, and we continue to add to our portfolio during the quarter. As previously discussed, we continue to see increased activity across our development and developer funding platform. During the first quarter, we convinced 2 new development or DFP projects with total anticipated cost of approximately $18 million. Construction continued on 9 projects during the quarter with aggregate and anticipated cost of approximately $71 million. We completed 4 projects during the quarter, representing a total investment of approximately $23 million. Our development in DFP pipelines continue to grow significantly, and we expect development in DFP activity to meaningfully ramp in the second and third quarters, including several additional projects that commenced subsequent to quarter end. Moving on to dispositions. We sold 7 properties during the quarter for total gross proceeds of approximately $11 million at a weighted average cap rate of 6.8%. This activity included both the Jiffy Lube and Dutch Brothers that were loaded in the grocery portfolio acquisition last year. We sold these assets approximately 300 basis points inside of where we acquired them less than 1 year ago, highlighting our ability to opportunistically recycle capital and harvest value across our portfolio. Our asset management team continues to do an excellent job proactively addressing upcoming lease maturities. We executed new leases, extensions or options on over 876,000 square feet of gross leasable area during the first quarter with a recapture rate of over 104%. This included a Walmart Supercenter in Whitewater, Wisconsin and a Home Depot in Orange, Connecticut. We remain well positioned for the remainder of the year with just 29 leases or 90 basis points of annualized base rent maturing, which is down 60 basis points quarter-over-quarter and 260 basis points year-over-year. We ended the quarter with pharmacy exposure at 3.5% of annualized base rent, and it now falls outside of our top 10 sectors, a meaningful milestone given that pharmacy once exceeded 40% of our portfolio. Anchored by assets, which is our Walgreens on the corner of the Diag and the University of Michigan campus and our CVS on Granite avenue, we are confident in the real estate and performance of our remaining pharmacy assets. As of quarter end, our best-in-class portfolio comprised 2,756 properties spanning all 50 states. The portfolio included 261 ground leases, comprising over 10% of annualized base rent. Our investment-grade exposure stood at over 65% and occupancy is strong at 99.7%, up 50 basis points year-over-year. Before I hand the call over to Peter, I'd like to thank and complement the tremendous work he and his team did on the creation of our inaugural supplement. We have taken feedback from a number of constituents and created a first-class document that provides investors and analysts with a thorough picture of our portfolio and financials. Peter, thank you, and take it away. Peter Coughenour: Thank you, Joey. Starting with the balance sheet. We were very active in the capital markets during the first quarter, selling 8.7 million shares of forward equity via our ATM program for anticipated net proceeds of approximately $658 million. This represents yet another company record for equity raised in the quarter and underscores our ability to raise equity at scale via our ATM and in a cost-efficient manner. At quarter end, we had approximately 18.4 million shares of outstanding forward equity, which are anticipated to raise net proceeds of approximately $1.4 billion upon settlement. Additionally, during the period, we drew $250 million on our previously announced $350 million delayed draw term loan. As a reminder, we entered into forward starting swaps to fix SOFR through maturity in 2031 and inclusive of those swaps, the term loan bears interest at a fixed rate of 4.02%. We also took further steps to hedge against interest rate volatility, entering into $50 million of forward starting swaps during the quarter. In total, we now have $250 million of forward starting swaps, effectively fixing the base rate for a contemplated 10-year unsecured debt issuance at roughly 4.1%, combined with the approximately $1.4 billion of outstanding forward equity. We have over $1.6 billion of hedge capital, which provides critical visibility into our intermediate cost of capital, particularly amidst recent geopolitical and macro uncertainty. At quarter end, we had liquidity of approximately $2.3 billion, including the aforementioned forward equity availability on our revolving credit facility, term loan and cash on hand. Pro forma for the settlement of all outstanding forward equity, our net debt to recurring EBITDA was approximately 3.2x. Our total debt to enterprise value is under 29%, and our fixed charge coverage ratio, which includes the preferred dividend remains very healthy at 4.2x. Our sole short-term or floating rate exposure was comprised of outstanding commercial paper borrowings at quarter end. And as Joey mentioned, we continue to have no material debt maturities until 2028. Our balance sheet is extremely well positioned to execute on our robust investment activity across all 3 external growth platforms. Moving to earnings. Core FFO per share was $1.13 for the first quarter which represents an 8.1% increase compared to the first quarter of last year. AFFO per share was $1.14 for the quarter, representing a 7.9% year-over-year increase, which is the highest quarterly AFFO per share growth achieved since the second quarter of 2022. As Joey noted, we are reiterating our full year 2026 AFFO per share guidance of $4.54 to $4.58, which implies approximately 5.4% year-over-year growth at the midpoint. We provide parameters on several other inputs in our earnings release, including investment and disposition volume, general and administrative expenses, non-reimbursable real estate expenses as well as income tax and other tax expenses. Our current guidance also includes anticipated treasury stock method dilution related to our outstanding forward equity. Provided that our stock continues to trade around current levels, we anticipate that treasury stock method dilution will have an impact of $0.02 to $0.04 on full year 2026 AFFO per share. This is up from approximately $0.01 in our prior guidance due to both the higher share price and more forward equity outstanding. As always, the impact could be higher or lower if our stock price moved significantly above or below current levels. During the quarter, we recorded approximately $2.4 million of percentage rent, up from $1.6 million in the first quarter of last year. Roughly 1/3 of the increase was driven by strong same-store sales performance across this group of leases as we have actively targeted leases with potential percentage rent upside. The remainder reflects a timing shift as certain tenants that have historically paid percentage rent in Q2 contributed in Q1 of this year. Our growing and well-covered dividend continues to be supported by our consistent and durable earnings growth. During the first quarter, we declared monthly cash dividends of $0.262 per common share for January, February and March. The monthly dividend equates to an annualized dividend of over $3.14 per share and represents a 3.6% year-over-year increase. Our dividend is very well covered with a payout ratio of 69% of AFFO per share for the first quarter. We anticipate having over $140 million in free cash flow after the dividend this year, an increase of over 10% from last year. This provides us another source of cost-efficient capital while maintaining a healthy and growing dividend. Subsequent to quarter end, we announced an increased monthly cash dividend of $0.267 per common share for April. This represents a 4.3% year-over-year increase and equates to an annualized dividend of over $3.20 per share. Our inaugural financial supplement this quarter includes several non-GAAP financial metrics and key performance indicators, including our recapture rate, credit and occupancy loss and same-store rent growth. The enhanced disclosures are intended to provide better visibility into our operations and highlight the high-quality nature of our tenancy and portfolio, reflecting our best-in-class execution. We also hope the supplement serves as a one-stop resource that centralizes the key information needed to understand the performance and drivers of our business. With that, I'd like to turn the call back over to Joey. Joey Agree: Thank you, Peter. Operator, at this time, let's open it up for questions. Operator: [Operator Instructions] We'll take our first question from Jana Galan at Bank of America. Jana Galan: Joey, if you could just follow up on the investment guidance. I know it's already been raised once this year, but with $1.6 billion of hedged capital already raised, just curious if you could kind of expand on the pace or the size of the different pipelines for the platform? Joey Agree: Sure. So our pipeline, as I mentioned in the prepared remarks, across all 3 platforms is very strong. There are 2 things that will determine frankly, our pace into Q2. Number one is just the macro environment here. Obviously, we have a significant amount of uncertainty that seems to change by the hour. And then two, at our election, which transactions we decide to pursue. So we have a number of transactions across all 3 platforms that are under contract or under a letter of intent going through the diligence period but all 3 pipelines are extremely strong. Jana Galan: And maybe just following up on the kind of macro uncertainty, rates moving around, does this cause any kind of delay in your partner's decision-making or wanting to kind of pause on any type of big plans. Joey Agree: No. This is totally unilateral on our side here. We have pipelines that are extensive across all 3 platforms. I just didn't think it was appropriate to raise investment guidance at this time in the midst of a war with JD Vance sitting on the runway. Operator: We'll go next to Michael Goldsmith at UBS Financial. Michael Goldsmith: You now have a record $1.4 billion of forward equity outstanding. Can you walk us through a bit about the timing of physical settlement relative to acquisition funding and how you're thinking about using the forward versus term loans or other forces? Peter Coughenour: Sure. Michael, this is Peter. To your point, we still have $100 million of capacity on our delayed draw term loan. That's at a fixed rate of roughly 4% given the swaps that we entered into. So given the attractive rate there, I think that's likely the first option we look to when we decide to term out some of our short-term variable rate debt. Beyond that, to your point, we have roughly [ 4 million ] shares of outstanding forward equity. As disclosed in our new supplemental, the contract for about 8 million of those shares matures at some point this year. And while we can always extend the contract, if needed, I think there's a good chance that we settle those shares at or prior to maturity given our anticipated uses. So I would expect that those 8 million shares are likely settled at some point in 2026. And then lastly, we have the $250 million of forward starting swaps in place that have effectively fixed the base rate for us on a future 10-year issuance at 4.1%. And so with those swaps in place, we'll evaluate the appropriateness of an issuance later this year. But we're not in a rush to do anything given the term loan we have the capacity there, plus the forward equity. And I think, most importantly, with $2.3 billion of liquidity from multiple sources. We have plenty of flexibility, optionality here. Michael Goldsmith: And then Joey, you talked in the prepared remarks about Hobby Lobby and how you've been partnering with them. Can you just talk a little bit more about what makes this particular tenant attractive? And just how you view the outlook for the craft base going forward? Joey Agree: Sure. Hobby Lobby is clearly the far and away leader in the craft and hobby space out of respect for the Green family and our confidentiality, I won't go into their financials, but they are an extremely strong company here. The Green family as well as Hobby Lobby as an entity literally 0 or no debt -- net debt to EBITDA, net debt basis here. So we're talking about a leading operator here if they pursued a rating would be a high investment-grade operator. They effectively put Joanne out of business. They're a market leader here. They had limited stores on their balance sheet. Most of their assets are leased. They wanted to eliminate the real estate from the balance sheet and the management responsibilities that is entitled and had with owning those assets. And so this was a unique transaction for us. They're a tremendous operator, a tremendous partner. They're extremely methodical in their growth plans, and we are thrilled to complete this transaction with them. Operator: We'll take our next question from Smedes Rose at Citi. Bennett Rose: I guess I wanted to ask you a little bit more. I mean I think the answer is probably no here because you mentioned that you're meaningfully ramping up your development pipeline in the second and third quarters. But I just don't have the knowledge of construction enough, I guess, to know, but you're not seeing any increases in kind of pricing or due to what's going on in the Middle East or any kind of hesitancy on the part of tenants maybe to kind of pause interest at this point given sort of a more fluid macro backdrop? Or I mean it sounds like the answer is no, but I'm just curious as to maybe why. Joey Agree: Yes. No, it's a great question, Smedes. We're seeing absolutely no hesitancy on the part of tenants as world events unfold here. Could that be possible? Sure. But what we're seeing is the exact opposite in the middle of the conflict in the Middle East has not changed the perspective of brick-and-mortar retailers. And as we mentioned on prior calls, if you look at just the announced store openings for the biggest and best retailers in this country, they have all come to the recognition that the store is the hub of an omnichannel world. It is not a spoke and so they are all opening new stores, some at voracious paces here to reduce last mile delivery costs and be efficient. And so we have not seen any slowdown from any of the tenants that we're working with. In fact, we've seen some acceleration. As I mentioned in the prepared remarks, we have commenced several projects subsequent to quarter close, and we will be closing on additional projects later this week and next week. In terms of costs, the projects that we close on have guaranteed maximum price bids. They have GMP contracts in place from general contractors. I'll remind everybody, we're not speculating on land. We're mobilizing and commencing right after close. We aren't speculating on small tenant space here. These are build-to-suit projects or ground lease projects for the leading operators in the country that are signed, stealed and delivered at the time we close. And so we have not seen any material cost creep yet. The team here, the construction team, led by Jeff does a tremendous job budgeting these projects in advance, and then we work with general contractors to the bid process prior to close. Bennett Rose: Okay. And then I wanted to ask you, obviously, we all saw a 7-Eleven announcement to close a bunch of stores, I mean first of all, do you think any of your stores might be impacted? And given some of your leaning into convenience stores in a way, some of the reasons that they're closing some of those stores seems like it's going to support some of your white papers that you guys have written around this space. So just curious, any just near-term concerns around your portfolio specifically and anything it might tell you about kind of where convenience stores are going. Joey Agree: Absolutely 0 concerns. We have no stores closing in our portfolio, and I appreciate you referencing the white paper. I ask everyone to take a look at it on our home page. 7-Eleven is closing the stores that have roller hotdogs and Slurpees. That's the bottom line. The -- and they're constructing and we are developing on their behalf, large-format convenience stores that have food and beverage offerings that are extensive, aligned with where the convenience store space. And so 7-Eleven is just a proxy here for the broader gas station convenience store space. The days of the 1,800 square foot get cigarettes and gum and a couple of coolers and gas are gone. That was the gas station. If you think back 10, 15 years ago, they also had an auto bay. They probably blocked that up to add a little bit more square footage to sell in-store products. Today, the gas station is moving to the convenience store model, whether it's 7-Eleven or Sheets or Wawa, we acquired a number of assets this quarter and led their development entry into the state of Florida over a decade ago. These operators are taking meaningful share across sectors and the evolution of the business is happening before our eyes. And so again, the pump, while it produces significant revenue doesn't produce the EBITDA that the inside source sale does. That is F&B, food and beverage, primarily breakfast and lunch, liquid gold, coffee, and affordable meals and convenience items that also take from the front end of the pharmacy for consumers. And so this is going to be a multiyear evolution, and we're going to continue to see the 2,000 square foot -- 1,200 to 2,000 square foot "gas stations" go away. Michigan, we're at the heart of this right now with Sheets and Quick Trip and 7-Eleven Speedway and operators expanding across the state while the legacy gas stations are frankly put out of business. Now this takes time, like any transition of any retail sector. But effectively, it's sweeping the country. And so it's a tremendous opportunity for us. You see us our activity here through all 3 platforms. But it's truly the evolution of a business model into a highly successful operator that has significant margin in food, beverage and in-store components. Operator: We'll go next to John Kilichowski at Wells Fargo. William John Kilichowski: Joey, that was very helpful on the 7-Eleven breakdown. I guess, if you wouldn't mind, maybe just talking about the rest of the portfolio, what's in guide from a credit loss perspective. And if there's anything else in there that you're looking at that may be has forecasted that you have some expected closures or if all of that is just precautionary? Joey Agree: No, no anticipated closures, all precautionary. We give our guide. We try to narrow it down during the year. The supplement does a great job of bucketing what we call credit loss, whether it's expirations or actual or credit loss at tenant defaulting falling out of -- entering vacancy, rejecting a lease shows that historical trend. We don't anticipate anything material in the portfolio this year. We're watching 1 to 2 -- a couple of assets, but really, that's about it. Peter, anything to add? Peter Coughenour: No, I think you hit it, just to hit on the numbers quickly, John. In the supplement, we disclosed 14 basis points of both credit and occupancy loss during the first quarter. Our AFFO per share guidance for the year still assumes 25 to 50 basis points of credit and occupancy loss. So there is an implied acceleration in Q2 through Q4 there. At this point in the year, we thought it was prudent to leave that range as is. But as Joey said, the portfolio is continuing to perform well. William John Kilichowski: Got it. And then the second one for me is just yields and deployment time line on development DFP, Lider 1Q, I know in opening remarks, you mentioned some scale in 2Q and 3Q. I guess my question is, we've highlighted $250 million as sort of a medium-term target. Is that still a realistic target for this year? And then maybe above and beyond that. Is there the opportunity to scale above that? Like would it be surprising for us to see a number well north of $250 million a year or is there a reason from a risk perspective why your initial remarks sort of capped that target is like a 250 number? Joey Agree: So we said about -- I said about 18 months ago, our intermediate target that was approximately 3 years, was to put $250 million in commencements in the ground per year. There's a chance we hit it this year. Again, Q1 is generally light just because if you get into the northern half of the country, you get weather related, you're not going to commence a project with frost in the ground. Q1 is generally light will be significantly larger and Q3 is shaping up to be along the same lines of Q2. Now these projects are generally subject to entitlements and municipal the government authorities approving approvals there. But we are on track to hit that intermediate goal of $250 million in the ground. The team is doing a tremendous job working with the biggest retailers in the country and the best developers in the country on the DFP side. And we're very excited about our pipeline there. Operator: We'll move next to Upal Rana at KeyBanc Capital Markets. Upal Rana: On the competition and seller behavior side, you mentioned people are not pulling back due to the macro volatility, but are you seeing any change in behavior due to the volatility in the 10-year, just wondering if you're seeing any increased deal flow in the past month or so that could positively impact 2Q investment volumes. Joey Agree: Upal, nothing that I could say is causal. We've said with the 10-year between 4 and 5, it seems like the world has been accustomed to the base rate purportedly for the entire world, the 10-year UST vacillating by 10%, 15%, up and down. We haven't seen anything causal. I'll tell you, we see more and more opportunities. Our funnel is bigger than it's ever been across all 3 platforms. We don't see increased competition. I wouldn't tell you we haven't seen a notable decrease in competition. Really, nothing's changed since coming out of 2024 and our do-nothing scenario. And so the only thing that I can point to is the performance, the size, the scope, the depth and the experience of this team and then our relationships within the market, highlighted in the supplemental just the retailer relationship-driven transaction. Upal Rana: Okay. Great. That was helpful. And then acquisitions of investment-grade-rated tenants has come down again this quarter. I'm just curious, outside of IG credit ratings, is there something else in the lease economics that we should -- that you're acquiring that is a sign of higher quality that we should be considering? Joey Agree: No, let's clarify why investment grade came down this quarter. We don't impute a credit rating to Hobby Lobby, privately held company by the Green family. So that's the biggest piece of this year. We're talking about, again, the largest craft and hobbies retailers, a multibillion dollar revenue operator that is far and away the leader in the crafts and hobby space that is privately owned by one family. So that is the driver. And I'll reiterate, investment grade is an output for us. We have tremendous operators in our portfolio that we don't impute shadow investment-grade ratings, too, but publics Chick-fil-A, ALDI, Wegmans, Hobby Lobby, again, so that is an output. In order for us to call an operator, an investment-grade operator, they have to be rated by a major agency and therefore, have the outstanding debt. Alta is not an investment-grade company, but I believe they don't have any debt, correct, Peter? Peter Coughenour: Correct. Joey Agree: They don't have any outstanding debt. So we have debt free, multibillion-dollar public and private operators in our portfolio. If you want to impute shadow investment-grade ratings, to our portfolio, we'd be at 80%. Then add on the ground lease exposure, which doesn't have any sub-investment grade. And I would tell you the safety of those assets is even greater than investment-grade assets, and we'd probably be at 85%, 87%. So it's an output to what we do. Our focus is on the biggest and best operators, the best real estate opportunities across the country, leveraging all 3 platforms, whether or not they have an investment-grade rated balance sheet or carry any debt is really, again, just a secondary here. Operator: We'll take our next question from Rich Hightower at Barclays. Richard Hightower: Joey, I want to go back to a comment you made in the prepared comments, you sold some grocery store assets with a pretty quick turnaround versus where you bought the assets at a lower cap rate versus the purchase price, so is there any movement specifically in grocery assets versus nongrocery, any sort of bifurcation in cap rate trends? Because obviously, we all saw sort of the headline number didn't really change in terms of what you bought quarter-on-quarter. Just help us understand any movement there. Joey Agree: Yes. Just to clarify, Rich, we did not sell the grocery assets. The grocery portfolio that we bought had outlets that were leased to Jiffy Lube as well as Dutch Brothers that we disposed approximately 300 basis points inside of where we bought the grocery-anchored portfolio, inclusive of those assets. We have no interest in owning 1,000 square foot Dutch brothers that trades in the low 5s or a quick lube that the 1,200 square feet that has no residual value in the [indiscernible] either. So we quickly moved, we closed those in a TRS and then quickly move to recycle those assets, accretive to the overall transaction, and we'll redeploy those proceeds accretively into better real estate and we think better credit. Richard Hightower: Okay. Appreciate the clarification there. I guess, secondly, maybe there's nothing to read into this, but you did mention better percentage rents in the first quarter, part of which, not all of which, but part of which was due to obviously better sales at those particular properties. Is there anything to read into that in terms of strength of the consumer, a particular type of consumer relative to the aggregate just as we see sort of other indicators maybe softening given everything else going on in the world. Joey Agree: It's such a small handful of assets. It's the biggest retailers in the country. We're talking about 5 or 6 properties that contributed -- 2 that contributed the vast majority of that percent rent. I think it's aligned with our thesis and what we're seeing in terms of the K-shaped economy, but I would be hesitant to draw broader conclusions from it, just because of this year of limited number of properties. But we are seeing through non-percentage rent but through anecdotal conversations and also through other data here, and look, you're seeing it as well through the public reporters, the Walmarts and the TJXs of the world are thriving, right? The trade-down effect is real. In the middle-income consumer, the $125,000 median household income, plus/minus is trading down. And we're seeing that through multiple data points, both public and private. I think the percent rent falls in line with it. That's the only conclusion I would rather. Operator: Our next question comes from Linda Tsai at Jefferies. Linda Yu Tsai: Two questions. In your investor deck, you highlight avoiding private equity ownership, do you have a sense of what percentage of your tenants are owned by private equity and how it's trended over time in your portfolio? Peter Coughenour: So Linda, we added some new disclosure to our supplemental that highlights ownership type and I would just call out in that disclosure, 77% based on ABR of our portfolio today is publicly traded. There's -- the remainder of that is private companies, but that is broken down into a few buckets. Those could be privately held companies. We talked about Hobby Lobby owned by David Green, they could be nonprofit companies, ESOPs or some other form of private ownership. So there is a small component of private equity within that private bucket, but it isn't a significant component of the portfolio today for us. Linda Yu Tsai: And then just one for Joey, you always have a clear idea of the state of retail. I guess you said the consumer is trading down and that's been happening for quite some time. But are you seeing sectors where the consumer really is pulling back completely? And then any tenant sectors where you'd be more concerned, just broadly speaking, not necessarily in your portfolio? Joey Agree: Yes, not within our portfolio, but I think if we watch the casual dining space, we're seeing with the some of the quick service restaurants, all the guys that sell bowls for $18, $22, I don't know, I don't get to them very often. It's the discretionary options where people have the ability to trade out and that goes across really all sectors. So whether it's basic goods and services here, basic things like grocery. I mean, I drove by the Costco gas station 2 days ago and the line was about 25 cars deep for fuel. And so we are continuously seeing that trade-down effect now pinched by gasoline prices as well and exacerbated by gasoline prices and prices at the pump. So I think it's across all luxury experience discretionary sectors and then also trading down in the necessity-based stuff for things like groceries. Operator: Next, we'll go to Eric Borden at BMO Capital Markets. Eric Borden: Joey, just curious how cap rates are trending to start the year between investment grade and non-investment grade tenants. Are you seeing any meaningful changes in the spread between the 2, just given the macro uncertainty here? Joey Agree: We haven't seen any change in cap rates in, I would tell you, the past 18 to 20 months. Again, the volatility even with the 10-year treasury really hasn't driven it. We're still nowhere near peak transactional activity coming out of COVID or before COVID. There's still limited 1031 or private buyer competition out there on a relative basis. So we really haven't seen any real material moves in cap rates here. The low price point stuff, the Jiffy Lubes and the Dutch bothers, those trade extremely aggressively. Those are to the 1031 buyers. But if you look at just the inventory out there even for Starbucks and things like that, there's a significant amount of inventory that's stale out there because of the lack of a bid the buyer pool. But we really haven't seen any material change here almost to 2 years. Eric Borden: That's helpful. And then just on the forward equity, just given the increasing dilutive impact in the TSM as your share price rises, would you consider a more balanced approach to equity issuance between forward equity and traditional or do you believe it's more prudent to keep the forward equity book falls given the current macro side or some of that going off? Joey Agree: We'll continue to look at all alternatives. Obviously, our balance sheet is in a fortress position. But I think when we first issued forward equity and came up within the net new space, the goal was to get an intermediate perspective on our cost of capital. So volatility could give us the decision-making real-time basis, whether we do something or not because we liked it in relative to the environment, not because we had to fund it just in time, right? And so inherently, we think the forward equity construct, and I think has adopted now by all or the vast majority of our peers takes a just-in-time financing business and then gives you that intermediate cost of capital to truly operate looking forward months and quarters in advance. Now we'll look at all opportunities to raise and source capital that are efficient and fit within context of our balance sheet and so why wouldn't rule anything out on a go-forward basis. But sitting here with $1.4 billion of forward equity and $2.3 billion of liquidity, it's not something that's top of mind for us. Operator: And we'll move next to Ronald Kamdem at Morgan Stanley. Ronald Kamdem: Great. Two quick ones. Thanks for the disclosure on the supplemental. Just comparing the acquisitions versus the DFP -- developer in the DFP platform, just remind us what the spread on yields are that you're getting on the DFP side developer and the DFP side. And also, I think you mentioned earlier that competition is actually easing on the acquisition front. Maybe can you just talk a little bit more about like which of those platforms is more competitive and you're better positioned? Joey Agree: Ron, so we've always talked about development subject to the timing and scope of the project, whether it's a retrofit or a ground-up development, right, that's going to range anywhere from 9 to 18 months. Those projects being significantly wide 75 to 150 basis points where we can buy a like-kind asset. Developer funding platform is generally ranging from 6 to 12 months. That will be tighter just given the time horizon. Again, we're targeting the same tenant through all 3 external growth platforms. The only difference here is time. And so it is just time and pricing that duration risk. And so that's where we drive that spread from. But we're not targeting different types of assets or credits here. It's all within our sandbox. We're not doing anything on a speculative basis across all 3 platforms. So we're seeing significant activity across all 3 platforms at appropriate spreads, and we're going to continue to build that pipeline and we'll demonstrate it in Q2. Ronald Kamdem: Helpful. And then just a quick one on the -- so I'm looking at the recapture rates and same-store rent growth on the supplement. Is that -- is the $1.6 billion is some of that sort of volatility from quarter-to-quarter. Is that all the percentage rents? Or is there something else going on? There seems to be some seasonality to the same-store rent growth. Peter Coughenour: Yes. In terms of some of the seasonality you see in same-store rent growth, Ron, you're right, that percentage rent is included in Q1. And so that's driving a portion of the seasonality. But if you look at that over a longer time series as well, that seasonality is going to be driven by the underlying lease structure of our portfolio. And we disclosed in the supplemental about 91% of our leases have fixed rental escalators. Those are typically rental escalators taking place every 5 years, ranging from 5% to 10%. And so when those escalators hit, it's going to drive some variability in same-store rent growth. But what we've seen over the trailing 8 quarters, and it's consistent with what we've seen historically is same-store rent growth just north of 1%, with very little falling out, as you can see from our credit loss and occupancy loss disclosure. Operator: And that concludes our Q&A session. I will now turn the conference back over to Joey Agree for closing remarks. Joey Agree: Well, thank you all for joining us this morning, and we look forward to seeing everyone at the upcoming conferences and appreciate your time. Thanks, again. Spenser Allaway: And this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Thank you for standing by. My name is [ Gail ], and I will be your conference operator today. At this time, I would like to welcome everyone to the Chubb Limited First Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Susan Spivak, Senior Vice President, Investor Relations. You may begin. Susan Spivak Bernstein: Thank you, and let me add my welcome to our March 31, 2026 first quarter earnings conference call. Our report today will contain forward-looking statements, including statements relating to the company performance, pricing and business mix, growth opportunities and economic and market conditions, which are subject to risks and uncertainties, and actual results may differ materially. See our recent SEC filings, earnings release and financial supplement, which are all available on our website at investors.chubb.com for more information on factors that could affect these matters. We will also refer today to non-GAAP financial measures, reconciliations of which to the most direct comparable GAAP measures and related details are provided in our earnings release and financial supplement. Now I'd like to introduce our speakers. First, we have Evan Greenberg, Chairman and Chief Executive Officer; followed by Peter Enns, our Chief Financial Officer. Then we'll take your questions. Also with us to assist with your questions are several members of our management team. And now it's my pleasure to turn the call over to Evan. Evan G. Greenberg: Good morning. We had an excellent quarter and start to the year. Our results speak to the strength and resilience of our company in a period of elevated uncertainty. They also speak to our globally diversified business opportunities on the one hand and our disciplined approach underwriting on the other. I want to first start with a few words about the external environment. War in the Middle East raises the specter globally of higher inflation and potentially slower economic growth. To what degree, the timing and the pattern are all unknowable at this time. However, the impact of the war adds a degree of pressure to certain financial, fiscal and economic stresses, such as underlying inflation, fiscal deficits and sovereign debt, global supply chains and financial valuations, including equity and credit and a growing energy shortage to name a few. In times of stress, I like Chubb's position. Given the strength of our balance sheet, earning power and liquidity. Now turning to our results, strong growth in P&C underwriting, investment and life income led to core operating earnings of $2.7 billion or $6.82 per share, both up substantially over the prior year first quarter, which was, of course, impacted by the California wildfires. Adjusting for this, so excluding cat losses, core operating income was up 10.7% and EPS was up 13.5%. And most important, tangible book value per share grew 21.5%. Total company net premiums grew 10.7% for the quarter to more than $14 billion. P&C premiums grew 7.2% and Life grew more than 33%, both benefited from foreign exchange. Our underwriting performance in the quarter was excellent. P&C underwriting income was $1.8 billion with a combined ratio of 84%. And on a current accident year basis, excluding cats, underwriting income grew 9.8% and a combined ratio of 82.1%. On the investment side of our business, adjusted net investment income of $1.8 billion was up more than 10%. Our fixed income portfolio yield was 5.1%, and our current new money rate average was 5.5% as of March 31. Our invested asset now stands at $170 billion, up from $152 billion a year ago. Again, these results, top and bottom line, put a point on the broad-based, diversified nature of the company by geography and product by both commercial and consumer customer segments and by distribution channel. Our annualized core operating return on tangible equity was 20.6% and our core operating ROE was 14%. Peter is going to have more to say about financial items. Turning to growth, pricing and the rate environment. P&C premiums grew 7.2% with consumer up 14.2% and commercial up 4.6%. Overseas General grew 14.4% or 6.1% in constant dollar. Total North America was up 4.1% or 7.8%, excluding large account property both admitted and E&S, which we purposely shrank given what we judge to be inadequate pricing levels in a number of important markets, property and financial lines pricing conditions are soft, with property pricing in those markets softening in a pace that, frankly, I'll only describe as dumb. With that, as a baseline, I'll give you some more color on the quarter by division and region. I'm going to begin, as I did last quarter with our international P&C business. Premiums in our international retail business, which operates in 51 countries and is 90% of overseas general were up more than 15%. Consumer-related premiums, both Accident & Health and personal lines were up over 20% with commercial lines up over 11%. Europe grew 17.5% with consumer and commercial both up double digit. Asia grew more than 12% and Latin America grew almost 18%. In our international retail commercial business, P&C rates were down 2.5%, and financial lines rates were down 7.4%. Our selected loss cost trends and our international retail business was 3.7% or 130 basis points lower than '25%. In our London wholesale business, the market has become highly competitive, particularly but not only in property, and we purposely shrank our open market property business. Premiums in our London wholesale business, which is 10% of international P&C were up almost 8%. Turning to North America. Total premiums again grew 4.1%, including 8.3% growth in personal lines and 2.8% in commercial. excluding large account property, both admitted and E&S, and that's shared and layered property. Total North America commercial premiums rose 7.7%, a very good underlying result. Breaking it down further, premiums in major accounts and Specialty or E&S grew 1.5% or 10.9%, excluding Sheraton layered property, which again, we shrank. Growth was driven by a broad range of casualty, marine, surety and risk management businesses. Premiums in middle market and small grew 3.3% with P&C lines up almost 5.5% and financial lines down 5.7% or flat when adjusting for the impact of just additional reinsurance we chose to purchase. In North America, pricing for commercial property and casualty, excluding fin lines and comp was up 4.6%, with rates up 2.2% and exposure change of 2.3%. Property pricing was down 2.6%, with rates down 6.3% and exposure up 4%. However, going a step further, Property pricing was down 14.3% in shared and layered major and specialty for the business we wrote. Market pricing for the business we gave up or passed on was down between 30% and 40%. The larger the premium, the greater the price discount. On the other hand, in middle market and small commercial, property pricing was up 1.5%. Casualty pricing in North America was up 9.6% with rates up 8.4% and exposure of 1.1%. Work comp pricing was up 4.3%, and fin lines pricing was about flat. Our overall selected loss cost trend in North America commercial was little changed, with no change in casualty at other long-tail lines. On the consumer side of North America, our high net worth personal lines business had a very good quarter with premium growth of 8.3% and renewal retention on an account basis of 92%. Homeowners' pricing was up 7.7% in the quarter. And in our international life insurance business, premiums rose 37%. Premiums in North America Chubb Worksite Benefits business were up almost 16%. Our Life division produced $316 million of pretax income in the quarter, up 8.5%, and adjusted for a few onetime items that benefited last year's first quarter life was up 11.5%. In sum, we're off to a very good start in '26. And we had an excellent first quarter. From a macro perspective, over time, difficult environment, generally advantage, strong companies over weaker ones. Chubb's diversification, market-leading presence and capabilities and operating discipline provide us with resilience when the macro environment is uncertain. We are patient and have many sources of opportunity on both the liability and the asset side of the balance sheet. From what I can see, cats, et cetera, aside, I remain confident and our ability to continue generating strong growth in operating earnings and double-digit growth in EPS and most important tangible book value. I'll turn the call over to Peter, and then we're going to come back and take your questions. Peter Enns: Thank you, Evan. Our first quarter results were strong, and we concluded March in an excellent financial position. Supported by balance sheet strength and liquidity, including record cash and invested assets of nearly $173 billion and $3.8 billion of adjusted operating cash flow. During the quarter, we issued CHF 200 million or approximately $250 million of 6-year debt at a very attractive cost of 1%. We returned $1.5 billion of capital to shareholders, including $1.1 billion in share repurchases at an average price of $325.06 per share and $380 million in dividends. We ended the period with an all-time high in book value of nearly $74 billion or $189.93 per share Book and tangible book value per share, excluding AOCI, grew 12.1% and 16.5% from last year. Our core operating return on tangible equity and core operating ROE in the quarter were 20.6% and 14%. Pretax catastrophe losses were $500 million for the quarter, principally from weather-related events split 87% U.S. and 13% international. Pretax prior period development in the quarter in our active companies was favorable $301 million, comprising $322 million of favorable development in short-tail lines and $21 million of unfavorable development in long tail-lines. Our corporate run-off portfolio had adverse development of $15 million. Our paid-to-incurred ratio for the quarter was 87%, and our net loss reserves increased to nearly $69 billion, representing growth of 5% from first quarter last year. Turning to our investments. Our A-rated portfolio increased about $1.5 billion from strong operating cash flow and positive foreign exchange gains partially offset by $1.6 billion of net unrealized losses from an increase in interest rates and widening of credit spreads. Adjusted net investment income of $1.84 billion was at the top end of our previously guided range, primarily due to the increase in our invested asset base and stronger private equity returns. We expect adjusted net investment income in the second quarter to be between $1.825 billion to $1.85 billion. Our core operating effective tax rate of 19.3% for the quarter was slightly below our previously guided range, primarily due to compensation-related equity awards, which vested in the first quarter. We continue to expect core operating effective tax rate for the full year to be in the range of 19.5% to 20%. I'll now turn the call back over to Susan. Susan Spivak Bernstein: Thank you, Peter. At this point, we're happy to take your questions. Operator: [Operator Instructions] Your first question comes from the line of Bob Huang of Morgan Stanley. Jian Huang: My first question is on the geopolitical commentaries you had in your opening remarks. Can you maybe help us unpack this concept a little bit? Just -- we're hearing inflationary concerns out of Asia, out of parts of Europe due to the conflict in Iran. Do you see that at some point in time affect pricing expectations in the U.S. market if the conflict kind of drags on longer than expected? Just curious your thoughts on that. Evan G. Greenberg: As I said, the degree, the pattern, the timing is unknowable. However, global supply chains, depends substantially. You mentioned Asia. U.S., we depend on supply chain through Asia. We depend on supply chain through Mexico and other parts of the world. The impact of the Gulf on supply chain availability of commodities and other inputs and the impact to shipping, of course, is going to have an inflationary impact. How that passes through to inflation in the U.S., the degree of it and where it actually shows up is not really knowable at this time. But it isn't going to be 0. That's for sure. And how transient it is, is unknowable also. Longer it goes on, stickier it will be. That's sort of the mental model I have. How it will pass through on insurance, I don't know. I'm not -- it's not something that I'm really ringing my hands about. I'm concerned about. It will likely be short-term transient. We'll see what it is when it shows up, and we will respond to it accordingly. Jian Huang: Got it. Really appreciate the thoughts. My second question is on the small market E&S business and AI. So when we think about Trump's small market E&S business, that has grown fairly well over the past. And as we think about you deploying more AI capabilities either maybe through distribution or just internal capabilities on underwriting. Can you maybe help us to think about the growth trajectory over the next 5 years. Is it fair to say the E&S market for you, specifically the smaller end of that can grow multiple times bigger in 5 years' time? Is that the right way to think about it? Evan G. Greenberg: I think about it a little differently. I think about the small commercial market, retail and E&S I actually think the greater opportunity for growth is in the vast retail end of it versus the E&S. But it's both. And what we have done to transform that business and what we're continuing to do to transform it including with the use of AI and now with what's in front of us with agentics within AI, an evolving large language model capabilities and enterprise software that emerges from that as well. Yes, it is a real growth area for our company over the next 5 years. And by the way, not simply North America, we expect significant growth in various markets internationally that may ultimately -- really. Operator: Your next question comes from the line of Mike Zaremski of BMO Capital Markets. Michael Zaremski: Question regarding some of your commentary around the pricing cycle, specifically in the larger account marketplaces where you called out pricing power is declining, I think, more than you feel makes sense to Chubb. You also called out kind of the London specialty market is getting more competitive. Curious, you've been through lots of -- you and your team have been through lots of cycles. What's causing the competition this time? Is it just simply what you've seen before and folks are getting excited about increasing their top line growth in a softening marketplace? Or is there some other causes this time that you want to call out? Evan G. Greenberg: Yes. And let's step back and put a perspective on it too the market rates, so I gave you, Chubb, I gave you what we lost business for. If I sort of step back and look at overall market rate in Shared and Laird in North America and in London, Pricing overall is off 25% in the quarter, heading to 30%. It's -- you can actually see it's accelerating in that trend. It's -- and by the way, lost cost to put a point on it, loss cost, they're moving at about 4% to 5% in shared and layered property. So you can work out the math there. It's always supply demand. So it's -- the amount of supply, which is capital that is chasing a relatively finite amount of business. And by the way, in a concentrated way, if it's E&S and it's London or it's in the United States, it's boxed up and brought to underwriters. You can access it. It's not like retail business generally. You can -- and it's urban-based. It doesn't take a lot of capability. It takes some balance sheet capital and a couple of underwriters. And you're in the market. So it's a hunger that way, the difference -- and I wrote about it in the shareholder letter, so you can read that. I won't repeat at all. This destructural difference this time is simply how the capital is showing up. And it's showing up a lot of it in a volume-based incentive system. MGAs. The majority of them, it's just volume based. What do they bring? They bring a cheaper price and a higher commission. And it's the reinsurance market, and it's alternative capital. And the number of bites of the apple in the supply chain by taken by intermediation. That is what you are reflecting here. And by the way, the loser at the end of the day is the ultimate risk taker who puts up the capital. this is short-tail business. The report card comes home rather quickly, so stay tuned. Michael Zaremski: That's helpful. And my follow-up is just on Chubb's digital transformation. You gave us an update back in December, but you've been talking about digital transformation for many, many years, probably much longer than peers. Just curious, is there -- has your views changed in recent months given advances in technology on the kind of the pace of the cadence of the digital transformation, front-end loaded, back-end loaded or just pro rata over time? And also just do you feel that your digital transformation goals since they're longer term could change fairly materially over time given the pace of change in technology? Evan G. Greenberg: I haven't changed my view of our goals in the last 3 months, and it is steady, and we are executing and we are on track. The technology is evolving at a rapid pace. And the most interesting in the last number of months that will, frankly, is still emerging. There's a lot of talk about it, but how it actually operationalize is the notion of what agentics now really brings? And the notion of enterprise solutions that some of the developers of frontier large language models are working to actually monetize all that they've spent in development. And I think those trends as they emerge, we'll only accelerate, improve, lower cost, make it easier. So I'll stop right there. It's -- it's an exciting time. And you have to spend and I spend much more time on this subject than I did even 2 years ago or a year ago. You need to have knowledge. You can't just be listening to others. You got to have firsthand knowledge. And otherwise, you yourself start to become irrelevant. So as a leader, all that's on my mind. Operator: Your next question comes from the line of Gregory Peters of Raymond James. Charles Peters: So I'm going to ask a follow-up question to the -- some of your comments you just made. And some of your shareholders have reached out to me. And specifically, there's so much news in the marketplace about the rapid evolution of technology, specifically the new piece of information we're all processing is the Anthropic’s Mythos. And I'm just curious how you view this type of technology and its risks to like the cyber insurance market, how you think it might affect contingent business interruption. And then these tech companies are rolling out this technology. And if it causes problems, I'm sure they're going to face some liability costs. So just trying to come at it from a slightly different angle, but anyways, your views would be appreciated. Evan G. Greenberg: Sure, Greg. And that's not a slightly different angle. That's a different angle, and it's the right question. First, just on mythos and it's the notion of finding vulnerabilities and we've redefined vulnerabilities, the threshold for vulnerability has been lowered. What were minor vulnerabilities can now be aggregated in a much more insightful way. Anthropic is a code generator. So it can read code. So it's -- it shouldn't be shocking that since it can read code, look at another use that has emerged. And then there are others, think Gemini's models. And the company's business model, they go and they do searches for information. That means they know systems, computers. They know how to access the system does. So frankly, it can look at code. Finding vulnerabilities in your -- right now, it's not just -- and just on level setting. It's not just that you can use this to find your own vulnerabilities. But many companies, most companies also use open source in their estate and so third party. And to the degree it's open source that way in the estate, you can find vulnerabilities, maybe even before suppliers do. Doesn't mean the patch has been created. So in a word, the arms race is on. Now it is about hygiene and services to monitor and to support clients and identifying and fixing. And clearly, how diligent are you? Do you identify and patch? And imagine now the tools to patch are more automated and that automation is improving quickly. So you can patch faster. You can identify, you can patch if you choose to, see how faster speed. So that's the defense side of it, while we know the offense side is just around the corner. By the way, from what we can tell so far in AI in cyber attacks using AI. There really is only one instance we're aware of so far where it didn't involve a human. Other than that, humans are in the cockpit when they were using agentics so far. From an underwriter's point of view, obviously, policy conditions and pricing are on our minds. Large account will be much better at hygiene and have much stronger perimeters to get through to penetrate than small companies. Small companies, on the other hand, are less target individually, but create more systemic concern. And then finally, the biggest meat ball there is middle market companies. They're a target. They got more money, and they're less capable at hygiene and focus on it less and defense. And so all of that is on our -- and they have weaker perimeters. All that is on our minds as underwriters. And I give you all this, so you have a sense that we're thoughtful about this. Charles Peters: That's good detail. For my follow-up question, I'm going to -- I'm just going to focus on -- if you look at the PC consolidated operations, you're generating in the first quarter an 84 combined ratio. You're on track to have a heck of a year. How do you think, broadly speaking, about the new business penalty, the fact that writing new business could be dilutive to that 84% combined ratio versus retention. So just walk us through your mental model on some of the points in that. Evan G. Greenberg: Well, we run in our various businesses, call it, 85% and north of retention. large account E&S, the property I talked about is where we're -- well, we shed half the volume. And by the way, that half the volume we shed, most of it was because we walked away. We also purchased additional reinsurance that impacted our premium growth and reduced our exposure. But we always have the new business penalty. So I don't see -- I'm thinking about what you're saying, and I don't really see much of an impact. I don't see any impact, frankly. And when I'm maintaining underwriting discipline in property, if anything, what I'm doing is ameliorating impacts to combined ratio in our minds because we're only shedding business that is woefully inadequately priced if we were to write it. Operator: Your next question comes from the line of Meyer Shields of KBW. Meyer Shields: I guess one modeling question to start with. Obviously, you called out the savings-oriented single premiums in life insurance in terms of written premiums. And we saw a similar, I guess, uptick in policy benefits. Does that stay elevated in future quarters also if the sales of these products normalize or go back what it was before? Evan G. Greenberg: Do you want to take that offline? Do you want to answer? Peter Enns: Yes, I'll just do it real quick. So the savings-oriented products, as you know, are more spread-based than underwriting margin based, and that's how you have to think about it. And so if you will, if we're selling elevated amounts of premium, there'll be a policy benefit that would match it. But over time, the margin comes through the investment product. Evan G. Greenberg: I don't -- just to understand, it's Asia. And first quarter in Asia, classically an agency business, very fast start. I don't expect to see this kind of growth continue in single premium business. Return on capital for it is brilliant. I'm not in love with the margin of it. But I'll tell you what, it's like mutual fund business, you write a lot of it, and you make some money. But I expect more of growth in regular premium on risk-based product as we go forward in the year. Meyer Shields: Okay. Fantastic. That's very helpful. And if I can sort of switch gears back to AI. One of the debates out there right now is whether -- if the insurance brokers collectively use AI to lower their own expenses or expand their margins. Does that provide an opportunity for companies like Chubb to reduce acquisition expenses? Evan G. Greenberg: Pick your moment and at the right moment, it does. I mean, ultimately, I have to tell you, and I have been in this business a long time. And this industry has certain idiosyncrasies about it. And there is a belief that, therefore, these things will be durable like the cost of intermediation. The cost of intermediation in many parts of the industry, and this is not a slam against brokers. There are partners, but the intermediation costs overall in numerous parts of the business are excessive. And in an age of digitalization, in an age of AI and what technology does, one of the hallmarks of that is that it ought to ultimately, and it will, in so many areas, bring down cost. And if you look at the economics of the business and the cost of intermediation, I think in the longer term, it will -- it should decline. Operator: Your next question comes from the line of Tracy Benguigui of Wolfe Research. Tracy Benguigui: My question is for Tim Boroughs. There's been a noticeable change in tone by the market around private credit recently. From your perspective, how that influence how you're thinking about the role of private credit to play in your portfolio going forward? And if you could also touch on the health of the existing book, particularly any trends you may be seeing in underlying borrower performance or early signs of stress? Timothy Boroughs: Yes. Sure. On our private credit, our credit -- our exposure to private credit is less than 4% of total investments and just over 50% of that total is in direct lending consisting of first lien senior secured loans that are at the top of the capital structure. This portfolio is in separately managed accounts. And I think that, that's important, not BDCs, where we have control of deployment and enforce conservative guidelines to our managers. While the direct lending sector has grown rapidly, as you know, in the last few years, we've remained disciplined and have not grown our allocation. Our small group of experienced managers has consistently delivered strong conservative results with a loss experience we estimate to be only 1/3 of the broader direct lending universe. This discipline is further evident in our very modest exposure to software, which at less than $150 million or 4% of the direct lending portfolio is a fraction of the 20% average across the sector and less than 0.25% of our total investment portfolio. Tracy Benguigui: That's super helpful. I'm also love to get your thoughts on how you're thinking about the duration of this soft cycle. Does that steep pace of property pricing decline suggest something shorter-lived, maybe less sustainable? Or do the structural and capital factors you discussed with Mike point to a longer soft cycle? And if you could also touch on if you've seen any deterioration on terms and conditions that may play into the duration of this soft cycle. Timothy Boroughs: Yes. Terms and conditions just on the margin, not 0, but on the margin. And as to duration, well, look, I don't know. What I do know is you underprice business in property, and I haven't noticed that the attritional loss environment. Property premium, property pricing is made up of two things: attritional loss. So you got price to support attritional loss in premium and then you got cat. I haven't noticed a diminution in the attritional loss environment. That's pretty steady, and it has a little volatility to it because of the size of losses, but pretty darn steady. And on the cat side, well, unless you believe that the models are wrong or that somehow the climate environment is going to change or has changed and is going to become something other than what it has been, then -- then we have an adequate pricing and an adequate pricing in property tends to reveal itself pretty quickly. And the only way out for capital providers at that point is to adjust pricing and to ensure they got the right terms and conditions. And so generally, in my mind, you go to a dumb place pretty quick, then the reaction the other way ought to be quicker. But you know what, I don't know with certainty. But that's kind of my mental model. Operator: Your next question comes from the line of David Motemaden of Evercore. David Motemaden: I had another market question for North America Commercial. I noticed that the cash pricing has held in pretty well here and actually accelerated a little bit this quarter. I get that it's nuanced, but as property returns come under pressure, do you expect to see increased competitive behavior shifting into casualty. Are you seeing any early signs of that? Just sort of wondering your outlook there. Evan G. Greenberg: No. The -- so far, the pattern in pricing is about what I observed to you in prior quarters. In the cohorts that need price, you're getting price in excess of loss cost. And where the pricing is adequate, it is generally flat to or in some instances, below loss cost increases. But I see it at this point as I look through the stack as pretty rational, not everywhere, of course. It's a market. But overall, I do. And I even have been surprised in certain areas where the market response has been the correct response and it creates more opportunity where rate adequacy is required and the market is respective though. David Motemaden: Got it. That's encouraging there. Maybe just switching gears, the Chubb worksite benefits the 16% growth there, that's pretty solid, I think, especially after similar growth last year. Could you just talk a little bit about the strategic role of the worksite benefits business within the broader portfolio and how you're thinking about the key building blocks to scale it from here, whether that's distribution product expansion or maybe even potentially M&A? Evan G. Greenberg: Yes. There's no M&A in there on the horizon. As we see, we've built it organically, and we're continuing to -- it's fundamentally part of our Accident & Health strategy. We pursue it in two ways. We have the legacy agency force of combined that we have retooled to not sell individual insurance, but small group, worksite benefits business. And it is predominantly supplemental A&H business that you know us for dread disease, hospital cash, et cetera, to really lower middle income to middle income people and provides a supplemental product to them. It's the same but with a different distribution for merger account, middle market, upper middle market to large jumbo now where we're awarded business. And it works very closely with our P&C distribution and our P&C distribution on the brokers who represent us that way. They have expanded greatly over the years into employee benefits. And the notion that you couldn't cross sell one to the other is an old math. Because, in fact, the relationships on the accounts, we are benefiting from that in the growth of Chubb worksite benefits. And it, again, is a similar product mix, which may be a bit more of term life built into it as well. It's risk-based products. When I look at -- and it's on Life paper. So when you look at the broader story, of our life business and you look at our international Life business, which, as I've told you, is over 2/3 risk-based supplemental A&H type business growing through agency distribution, digital distribution, banks, et cetera, and has as well savings and other protection products within it. It's just part of a coherent story of what we are pursuing between accident and health and life, which both are growth areas for the company. Operator: Your next question comes from the line of Alex Scott of Barclays. Taylor Scott: First one I have is on the Middle East conflict. Can you talk about your involvement in some of the solutions that are being contemplated for marine and trade credit and so forth? And to what degree that could support some growth near term? Evan G. Greenberg: And to what degree, what? Taylor Scott: It could just help with, I guess, the growth opportunity. Evan G. Greenberg: I was approached by our government to put together the program that you have read about that we announced. The government wanted to support shipping through the Gulf and open when they think that the risk environment is such that they can support with military convoys ships that would transit the Gulf and that has yet to occur. The program is to ensure shipping under those conditions and the purchase of our insurance program is a condition to being part of a convoy that the U.S. would run. The U.S. military would run. The program is supported by U.S. insurers taking 50% of the risk and the other half of the risk is taken by an arm of the federal government. We have done it, number one to support our country and to support our military. Number two, to support the global commons and the economy, to the degree that we practicing our craft can provide that service. And it's in place and when conditions are such. If they are, then -- this will obviously generate would potentially generate premium revenue. And stay tuned. Taylor Scott: That's all helpful. Second one I had is on your partnership with KKR and some of the funds that you're putting together. And I just wanted to check in on the timing of it, when some of those newer things you've been working on are going to potentially contribute to NII or if they're already contributing to NII. I just wasn't clear. And I guess related to that, has some of the AI disruption changed anything about timing of all of that and the work you're doing? Evan G. Greenberg: Yes. I think you're missing something. We have disclosed quite clearly, particularly the last at the investor dinner and in quarters before, quite a bit of detail about our alternative assets and the investment activity there, what's our strategy? We -- half of it is in our partnership called Strategic Holdings. And we described what that is about. And by the way, we've been very clear about the income that it is producing and the income we expect it to produce over the next few years that we expect to achieve as we deploy. We've talked about the capital deployment. So that's all out there, but we're happy to separately take it offline and give you detail around it. I think Peter wanted to give you. Peter Enns: No, that's fine, Alex. I can talk to you offline, but it does show up in our adjusted NII, and you can see it on the income statement and income from private equity partnerships. That's a substantial part. Operator: Your next question comes from the line of Matthew Heimermann of Citi. Matthew Heimermann: Just one on reinsurance. I'm just curious, should we think about relative to any softening in pricing relative to how you're thinking about rate adequacy, just more opportunistic reinsurance purchases on a go-forward basis? Or is it just this was so acute, particularly on the property side, you felt compelled to do so? Evan G. Greenberg: Can you just repeat that, Matt? We have something changing. Can you hear me? Matthew Heimermann: I can hear you, and I'm on a headset. Evan G. Greenberg: We just gave ourselves a head fake. But go ahead. Can you repeat? Matthew Heimermann: Just how to think about how likely additional opportunistic reinsurance purchases are? And I don't want to react to what you did in property because the declines were pretty significant. But just how likely -- because I don't view as an arbitrage reinsurance buyer, but obviously it's available. So just trying to think about how your thinking around risk management evolves vis-a-vis the reinsurance pricing spread. And the follow-on really, which I'm really more curious about is like where does this allow you, if anywhere, to take more risk out outside, et cetera? Evan G. Greenberg: Yes. I'm not really going there, except to say to you that axiomatic in here, when pricing becomes marginal or inadequate, we have various tools to manage exposure and our appetite for exposure. It's not about premium. And so reinsurance is simply one of those. Could you hear that answer because we're having some audio problems right here.. Matthew Heimermann: You were clear to me. Willing to add anything with respect to if shrinking risk appetite in places in proper response to market conditions, does that create some flexibility to take more risk asset side? Or are there any things from a complex change in the portfolio that influence that? Evan G. Greenberg: No. No. The way we run a business doesn't think -- we don't think that. We've got plenty of capital, and we maximize the amount of risk we take based on how we judge risk reward, and there's no trade-off one to the other. Operator: Your next question comes from the line of Brian Meredith of UBS. Brian Meredith: Evan, we keep hearing a lot about price, what's happening in the property markets. I wonder if you could talk about terms and conditions. hearing a little bit more about some softening terms and conditions from people. Are you seeing that? And maybe you can maybe dive into that a little bit because that can be kind of scary. Evan G. Greenberg: Welcome to insurance, Brian. It's not scary. It just is what it always turns out to be. No, as I said earlier, we're seeing it only on the margin right now. Other than that, we're not, at this point, seeing changes to terms and conditions. And we're quite mindful and there you go. And by the way, when we look at pricing changes, we value term and condition changes. So we don't just sort of say price goes this. And by the way, change in BI waiting periods, deductibles, CPI, et cetera, that's just off to the side. No, we actually put value on it in pricing. -- we're seeing it very marginally at this point. Brian Meredith: Great. And then the second question is I've heard a little bit from some other companies about admitted markets getting call it, more competitive in taking business back from the E&S or wholesale non-admitted markets. Are you seeing that at this point? Evan G. Greenberg: I am on the margin of it so far. And frankly, it's what's so interesting to me. I look at middle market and small commercial E&S versus admitted. Admitted, much, much more discipline. E&S less so. And that is, again, back to the comments I made about distribution capital and the incentive system for volume. It's, to some degree, terribly illogical to me. I'm seeing some go back towards the admitted. It wouldn't surprise me to see more. It's a classic pattern in softening market. Where I'm seeing it is more on the margin in the property side. retail that will all of a sudden get so excited to write habitational wood frame business in Texas. Okay. Good luck to you. Operator: Thank you. We've run out of time for questions. This concludes today's Q&A session. I'll now pass the conference back over to Susan Spivak for closing remarks. Susan Spivak Bernstein: Thank you, everyone, for joining us today. If you have any follow-up questions, we will be around to take your call enjoy the day, and thanks again. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, everyone, and welcome to the Moody's Corporation First Quarter 2026 Earnings Call. At this time, I would like to inform you that this conference is being recorded [Operator Instructions] The call is scheduled to last approximately 1 hour. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead. Shivani Kak: Hello, and thank you for joining us today. I'm Shivani Kak, Head of Investor Relations at Moody's. This morning, we reported our first quarter 2026 results. The press release and today's presentation are posted at ir.moodys.com. We'll reference non-GAAP or adjusted measures, please see the tables in our earnings release for reconciliations to U.S. GAAP. Today's remarks may include forward-looking statements under the Private Securities Litigation Reform Act of 1995, please see the safe harbor language in our earnings release and the risk factors and the MD&A in our most recent Form 10-K and other SEC filings available on our website and the SEC's website. These factors could cause actual results to differ materially from those expressed or implied. Members of the media may be listening in a listen-only mode. With that, I'll turn it over to Rob. Robert Fauber: Hey everybody, and thanks for joining us. Q1 was a strong start to the year despite a volatile geopolitical backdrop. And Moody's again delivered sustained revenue growth across both businesses and powerful operating leverage as we continue to capitalize on the deep currents driving demand for our ratings and solutions. Now there are 3 takeaways for the first quarter. First, we delivered strong financial performance. Both MIS and MA grew revenues by 8% and disciplined cost management drove 150 basis points of adjusted operating margin to 53.2%. Together, this contributed to adjusted diluted EPS of $4.33 and that was up 13%. We returned $1.7 billion through buybacks and dividends in the quarter, and we increased full year buyback guidance by $500 million to approximately $2.5 billion. Second, demand remains healthy across both businesses. And ratings issuance continues to reflect long-term funding needs tied to infrastructure, technology, private credit and energy transition even as volatility may affect timing. In analytics, engagement is strongest and our largest, most strategic relationships, which continue to grow materially faster in a broader MA base, and we have a growing pipeline of some of the world's largest financial institutions to consume our agent ready intelligence, and that's supported by further expansion with our hyperscaler and AI partners. Third, we're executing on our strategic priorities. And when our intelligence is embedded directly into customer decision-making, we see tangible outcomes, higher retention, expanding relationships and more durable recurring revenue. And like last quarter, we'll share some specific examples of meaningful customer wins. So now let me turn to what's driving performance. In Ratings, as I said, issuance remains anchored in long-term funding needs tied to AI-driven infrastructure, private credit, energy transition in emerging markets. And these are multiyear funding needs. They're not short-term cycles. And as I said, volatility may affect timing, but the underlying demand is structural. And that showed up clearly in Q1. In fact, in the first quarter, rated issuance surpassed $2 trillion for the first time, and that was led by near record investment-grade volumes, including several jumbo AI-related financings totaling more than $100 billion. Private credit activity remained durable this quarter despite increasing credit concerns. As private market scale and come under greater scrutiny, demand for our independent credit assessment continues to increase, and that dynamic contributed to private credit related revenue in Ratings growing more than 80% year-over-year. In Moody's Analytics, we're embedding our intelligence into mission-critical workflows, particularly lending, underwriting and compliance where accuracy and auditability and trust are essential. And to support that shift or expand how and where our customers access Moody's Intelligence. In fact, over the last several weeks, we announced a set of partnerships that significantly extend our distribution without compromising governance or independence, and through model context protocol integrations, Moody's license intelligence can now be accessed directly within enterprise AI environments such as ChatGPT Enterprise and Claude. And this allows customers to bring trusted Moody's content into their own AI workflows rather than relying on generic or unverified data. With Anthropic for licensed users, our agentic credit and compliance workflows are now available natively inside the cloud interface through something called an MCT application. And that's the first of its kind as far as we're aware, and it enables users to access Moody's agents to perform analysis, generate outputs and trade sources without leaving the [ Claude ] environment. And by making our agentic solutions available through the AWS marketplace, we're meeting customers inside their existing cloud and procurement ecosystems, reducing friction by allowing customers to burn down their AWS commit when consuming Moody's agents and intelligence. And Moody's scaling workflow embedded distribution by launching a dedicated Moody's agent in Microsoft 365 CoPilot and making Moody's intelligence available as a grounding data source across CoPilot experiences. That's CoPilot Chat, Researcher, Copilot and Excel. And this brings trusted decision grade context directly into everyday Microsoft tools, extending access beyond specialist teams and enabling faster, more consistent, explainable and auditable decisions. And importantly, these are bring-your-own license models. They expand reach and usage but preserve our direct relationship with our customer. And all of this sets up what I'm going to turn to next, which is how customers are using these capabilities today and how that's translating into growth and differentiation across analytics and ratings. So I'll start with lending and credit decisioning. And our AI-enabled lending suite continues to gain traction as banks modernize end-to-end credit workflows. ARR for our lending suite grew 18% year-over-year, was driven by customers upgrading to an integrated platform that spans origination, decisioning and monitoring. And what's driving adoption is workflow integration and AI enablement. So the faster decisions, greater consistency, clear auditability. We're also seeing demand for credit assessment and workflow beyond banks with asset managers and even corporates. In the first quarter, we expanded relationships with 2 of the world's 5 largest asset managers, representing nearly $20 trillion of assets under management, the first signed an approximately $6 million multiyear deal to bring our decision grade intelligence to both public and private credit workflows, supporting risk investment decision-making at a global scale. And the second asset manager signed a multiyear contract of over $2.5 million and adopted multiple Moody's modules to support front, middle and back ops credit and compliance workflows. It also represented our first structured finance software win with a trustee, which provides a strong reference for future opportunities. And in the corporate space, a global athleisure brand tripled its relationship with us and signed a multiyear contract for an automated credit decisioning solution that accelerates decisions from days to minutes. And these are all ways that customers are accessing what we believe are the best set of commercial credit scoring capabilities in the world. In insurance, growth was sustained from continued demand for digitization via our intelligent risk platform. That included adoption by 1 of the top 3 reinsurers in the world in the first quarter as well adoption of our high-definition models. In fact, IRP cross-selling and upselling accounted for almost half of our insurance net growth in the first quarter. And that growth was also supported by our trailing 12-month retention rate of 97% which reflects how embedded we are in customers' workflows as what they call their primary view of risk. In KYC and compliance, growth continues to be driven by scale, complexity and regulatory expectations. And I've talked before how these needs go beyond regulated financial institutions. And a good example is our first Moody's for compliance customer. In the first quarter, a global real estate firm spanning approximately 275,000 sites operating in more than 80 countries selected our enterprise-wide solution for counterparty screening and monitoring covering millions of entities handily. And we replaced a fragmented region-specific approach, with a single governed platform integrating ownership, sanctions, politically exposed people and adverse media representing both a competitive displacement and a meaningful expansion of our relationship. And finally, let me turn to Ratings and digital finance. And as capital markets evolve, we're extending the same rigor and governance and independence that define our ratings franchise into new asset classes and new forms of market infrastructure. In fact, during the first quarter, we were the first rating agency to publish a methodology for stable coins, and that's an asset class that's expected to reach north of $2 trillion by 2030. And I'm excited to share that we already have a number of deals in the pipeline. We were also the first rating agency with blockchain agnostic capabilities to ingest data and publish ratings directly on chain. We're now live on The Canton Network, making Moody's the first rating agency operating a node in the privacy-enabled blockchain ecosystem. And during the quarter, we were the first rating agency to rate an innovative inaugural bitcoin backed bond where repayment is secured by bitcoin collateral. So these are not pilots or proof of concept, they represent and reflect real customer demand for trusted comparable risk assessment as finance evolves, whether assets are traditional or digital. And taken together, this is what differentiates Moody's across analytics and ratings. We're embedding decision grade intelligence directly into the workflows and decisions that matter most, driving durable growth today and reinforcing the long-term strength of the franchise. Now finally, before I close, I want to highlight an important leadership milestone, and I am absolutely thrilled that Christina Kosmowski will become Moody's Analytics CEO in June. And she brings a blue-chip Silicon Valley pedigree. She's been a pioneer in customer success and brings a track record of delivering high growth at scale, and her leadership materially strengthens our ability to accelerate execution in an increasingly AI-driven world, and I'm very excited about having her join us in June. I also want to thank Andy Frepp for stepping up to serve as the Interim President and for his steady and effective leadership. And Andy has had a fantastic career with us for almost 15 years. He is deeply respected across Moody's. And in a brief period of time, he provided some real focus and business direction and has ensured continuity and momentum during a critical period. And we are tremendously grateful for his leadership and continued support through the transition. And with that, I'll turn it over to Noemie to walk through the financials in more detail. Noemie Heuland: Thanks, Rob, and hello, everyone. Q1 represents a solid start to the year. And echoing Rob, our performance reflects disciplined execution across both of our businesses. Let me start with Moody's Analytics. Our Q1 results -- [ so we're ] delivering against the framework we've discussed over the last several quarters, durable recurring growth, strong retention and margin expansion, while we reshape the portfolio. MA revenue increased 8% in the first quarter as reported or 6% on an organic constant currency basis, reflecting healthy underlying demand across our core franchises. Recurring revenue grew 11% as reported or 7% on an organic constant currency basis and represented 98% of total MA revenue underscoring the shift towards renewable subscription-based solutions. As expected, transactional revenue declined materially, down 54% year-over-year, reflecting both the learning divestiture and our deliberate focus on scalable recurring revenue streams. This is fully consistent with the portfolio actions we've taken over the last several years to prioritize durable, high-quality revenue. ARR remains the clearest indicator of underlying demand and of the health of our future revenue base while reported revenue can move quarter-to-quarter due to timing effects and portfolio actions. ARR ended Q1 at $3.6 billion, up 8% year-over-year. Decision Solutions continues to be a key growth engine for MA, representing approximately 44% of total MA ARR and delivering 10% ARR growth. KYC grew 13%, driven by deeper penetration within existing banking customers and expansion beyond financial services. Our new Moody's for compliance offering officially launched in April, and we have already seen success in prelaunch activity, as Rob highlighted earlier. We are building pipeline, with April renewals as the first cohort of upgrades, and we expect this revenue to build progressively through the year. Banking ARR grew 10%, supported by strong adoption of our lending solutions, which grew in the high teens. We continue to see good customer uptake of our new package. Strength in lending was partially offset by more modest growth in the RAG product portfolio. Insurance ARR grew 7% reflecting sustained demand for higher definition models and cloud-based delivery via the intelligent risk platform, which is enabling the cross sell and upsell motion that is central to our strategy in this business. Research and Insights ARR grew 7% year-over-year, driven by our flagship CreditView suite, now Moody's View and EDF-X with broader adoption across banking customers and deeper integration into customer workflows. Data and Information ARR grew 6% year-over-year and we closed several high-value agreements that illustrate 2 distinct, but reinforcing demand patterns for Moody's decision grade intelligence. The first is mission-critical workflows where precision and auditability are nonnegotiable. 2 government tax authorities, one, supporting national scale fraud detection and tax compliance across thousands of users and the other powering AI-driven tax risk assessment and transfer pricing enforcement, selected Moody's as their long-term data partner. In these environments, the consequence of error is too high for good enough. Moody's curated, auditable data, we believe, is the best viable choice. The same dynamic plays out in financial services. A leading specialty insurer embedded our private company data and proprietary risk signals directly into its real-time surety underwriting workflows, replacing manual processes with automated point of decision analytics. The second pattern is front office and investment intelligence, where our data drives commercial advantage. First, as Rob shared, a major asset manager embedded our private and public credit risk data sets directly into its core portfolio platform to enhance credit modeling and surveillance across public and private markets. Second, a leading global professional services firm expanded access to our real-time information and research intelligence across thousands of consultants to sharpen customer advisory and business development workflows. Together, these wins reinforce that Moody's decision grade intelligence is becoming foundational infrastructure across both the risk and growth agenda of our customers. And across public institutions, financial services and global enterprises. Quarterly retention improved to 96%. That's up 200 basis points year-over-year as the outsized government and ESG-related churn we saw in Q1 2025 has no left. On a trailing 12-month basis, retention was 95%, improving 1 percentage point versus Q4 '25 and within our historical range, evidence that our solutions remain mission-critical as customers modernize their workflows, including with AI. Turning to profitability. MA adjusted operating margin was 32.5% and that's up 250 basis points year-over-year. We are well on track for full year margin of 34% to 35% and our mid- to high 30s target by the end of 2027. This expansion reflects the impact of prior restructuring actions, disciplined cost management as well as a thoughtful reallocation of resources, which enables us to fund priorities without increasing costs. As we look ahead, margins are expected to continue improving as efficiency initiatives scale, including usage of AI-enabled tools that lower unit costs in product development and tighter alignment of sales capacity to our highest growth opportunity with full benefit building into 2027. These structural changes underpin confidence in our medium-term margin trajectory. Turning to MIS. We delivered the strongest quarter on record. Rated issuance surpassed $2 trillion in Q1 for the first time, supported by strong primary market activity, relatively tight breads, increased M&A and solid investor demand. While investment grade and high yield spreads widened in March by roughly 15% and 30%, respectively, they remained well below the level seen around Liberation Day and the market stayed open and functional. Transactional revenue grew 8% year-over-year, outpacing the 6% increase in rated issuance. Recurring revenue grew 9%, supported by growth in our portfolio of monitored credit, new mandates and pricing. First-time mandates increased 20% year-over-year, an important leading indicator of future recurring revenue. Here is how transactional revenue performed across the major categories. Investment grade was the largest contributor with revenue up 33% year-over-year. Investment grade revenue within Corporate Finance was driven by a record first quarter and the second highest quarter ever for issuance, including several jumbo transactions from hyperscalers and other technology issuers. Issuance from the top 5 hyperscalers year-to-date has already exceeded full year 2025 levels. Specialty grade revenue grew 31%, with investor appetite holding up well for most of the quarter despite geopolitical volatility. Now we're watching this closely as sub-investment-grade issuers tend to be more sensitive to issuance windows. Bank loan revenue declined as activity moderated in March following a strong start to the year. M&A-related issuance in Q1 was the highest in a number of years, which we view as an encouraging indicator for the balance of 2026. Public, Project and Infrastructure finance grew 8% driven by infrastructure finance, which delivered its second strongest quarter of the past decade. Funding needs tied to the energy transition, transportation and AI-related infrastructure remain key demand drivers. Financial institutions revenue was modestly higher year-over-year. Funds and asset management remained strong, supported by private credit activity, partially offset by lower opportunistic issuance from infrequent issuers in banking and insurance. Structured Finance revenue was slightly lower year-over-year as large AMBS and RMBS reductions in EMEA were offset by softer CMBS and CLO activity in the U.S., especially refinancing. On profitability, MIS delivered an adjusted operating margin of 66.7%, reflecting strong operating leverage, disciplined cost management and technology investments that are improving analytical productivity. We're streamlining credit workflows, so analysts can spend more time on credit analysis and less time gathering and formatting information, while maintaining the controls and human judgment regulators and the market expects. Those investments supported our ability to handle record issuance volumes while expanding margins. Looking ahead, our full year guidance remains unchanged across revenue, adjusted operating margin and adjusted diluted EPS. Our base case assumes the current market turbulence is largely contained to April with issuance recovering through Q2 and Q3 on the back of ongoing refinancing needs, a healthy M&A pipeline and sustained demand for high-quality investment-grade issuance, including AI-related financing. For the second quarter, we expect MIS revenue growth in the low to mid-teens with adjusted diluted EPS of approximately $4.15 to $4.30. If volatility persists beyond April, we'd have less confidence in a full recovery in Q2 and Q3 and would expect full year MIS revenue growth to moderate to the mid-single-digit range with adjusted diluted EPS trending towards the low end of our guidance range. For MA, we expect to close the sale of our Regulatory Solutions business on April 30. We have, therefore, excluded its contribution from our reported revenue outlook, which moves us towards the lower end of our mid-single-digit MA revenue guidance range. Importantly, this does not change our expectations for ARR or organic constant currency recurring revenue growth, which both remain anchored in the high single-digit percent growth range. On MA margins, we expect a modest step up in Q2 and a more meaningful ramp in the second half, consistent with our typical revenue seasonality. Pulling this together, in terms of MCO revenue guidance, as I shared, we expect to be within the high single-digit percent growth range we previously provided. For modeling purposes, taking into account the impact from the MA divestiture, we anticipate growth to be towards the lower end of high single-digit percent range for MCO for the full year. Finally, a few housekeeping items to help with your modeling assumptions. Excluding restructuring and other charges, we anticipate Q2 expenses to be broadly in line with Q1 with increases in the second half, reflecting typical seasonality. This includes ongoing investments and annual salary increases, partially offset with our continued cost containment initiatives. We expect MCO adjusted operating margins to be above the midpoint of our full year guidance range for Q2 and Q3 before taking down in Q4, consistent with MIS revenue seasonality and historical patterns. There is no change to our tax rate guidance for the full year, and we expect Q2 to be in the high end of the full year range of 23% to 25%. And please note that our revised nonoperating income and GAAP EPS guidance reflects the expected gain on the sale of our Regulatory Solutions business in April, but it doesn't impact adjusted diluted EPS guidance. We again delivered strong cash flow this quarter with free cash flow of $844 million, up 26% year-over-year. And given price levels and market dynamics, we were active in the market repurchasing shares in Q1. We returned approximately $1.7 billion to shareholders through a combination of share repurchases and dividends. Given the nearly $1.5 billion of buybacks executed in Q1, we have increased our full year repurchase guidance by $500 million and now expect approximately $2.5 billion of share buybacks in 2026. We remain on track to return approximately 110% of free cash flow to shareholders by year-end. Importantly, our balance sheet remains strong, providing us with the flexibility to continue investing growth while maintaining a disciplined and consistent capital return framework. In summary, we delivered another quarter of strong growth and profitability expansion and remain confident in the trajectory of the business. We believe we are well positioned to deliver sustainable growth, margin expansion and long-term shareholder value. And with that, operator, we'd like to take questions. Operator: [Operator Instructions] Our first question will come from the line of George Tong with Goldman Sachs. Keen Fai Tong: You talked about your MCP strategy allowing Moody's data to be accessed through LLM. Can you discuss how many customers are accessing Moody's data through these channels and what your plans are to monetize MCP distribution? Robert Fauber: George, good to have you on the call. So yes, I talked a little bit about these different partnerships. And so that's enabling integration of our intelligence through MCPs through those surfaces. And then we have -- we have customers who are also looking to take the data directly into their own AI, internal AI workflow orchestration platforms at their institution. We have, I would say, a number of large financial institutions who are trialing, I'm going to call this our agent ready data through either the MCPs directly into the institution or through one of these channels. And what that does is it allows us the opportunity to up-level the commercial model that we have with these institutions, right? Because if they want to bring our intelligence into the corporate and investment bank, we need to make sure that there's an arrangement and a license that allows them to access that content across that entire division as opposed to in the past, we may have had been serving different use cases in different parts of the bank. So I would say it's in early days. Lots of really good engagement of number now of trials, and we'll be looking to convert those to obviously, the sales through the balance of the year. The one other thing I'd say is -- sometimes it will also depend on the kind of institution or what the use case is for some of this. So we may see some of this show up in different segments across MA. Operator: Our next question will come from the line of Scott Wurtzel with Wolfe Research. Scott Wurtzel: Wondering if you guys can help maybe contextualize how much of the operating leverage in MIS is being driven by the technology innovations and AI efficiencies, I think just in the context of maybe some softer-than-expected MIS revenue growth in the quarter, it was still encouraging to see the 70 basis points of margin expansion. So wondering if you can talk about how much of that is being driven by AI efficiencies? Noemie Heuland: Yes. So you're right to say that we've been able to deliver on $2 trillion of issuance this quarter and still expand our margins. We've talked a lot about the investments we've made over the past few years on technology and now so technology, workflow automation, for all the works and steps that precede the ratings committee, where the analysts actually gather and discuss and make decisions and the work that preceded that was automated over the past few years. We've enabled them to be more efficient, avoiding repetition in different tasks. As you can imagine, Moody's being a 120 years company. We had some technology infrastructure that needs to be updated. So we've done that over the past few years. And now we're adding AI to those workflows in large parts of our analyst groups to help allow them in areas like financial statement spreading, data gathering, all the information, again, that precedes the the Ratings Committee moment where it's a lot of human in loops discussing and talking about different industry sectors and what they're observing. So that's -- I would say that's what behind our margin expansion. I'm pretty pleased with that. Robert Fauber: Yes. And Scott, I would -- just to double click, I mean I think that the AI enablement really picked up in the back half of last year. As Noemie said, there was a lot of foundational work that we had done that put us in a very good position. We also had to work through our risk teams and make sure that we're going to deploy that in the appropriate way across ratings. And then it's not only about efficiency, and I appreciate you acknowledging that. But it's also going to be about inside as well. I mean, as Noemie said, we're capturing more and more structured and unstructured information across our entire ecosystem. And we're already seeing that that's going to give us new insights for our analysts that are going to support ratings quality as well as new research insights. Operator: Our next question will come from the line of Jeff Silber with BMO. Jeffrey Silber: I wanted to shift back to MIS. Rob, I think you had mentioned that volatility may impact timing and I was just curious, do you think there was any pull forward in the first quarter or conversely -- have we seen any recent delays? And if so, when do you think that debt might be issued? Robert Fauber: Jeff, good to hear from you. We were looking at the pull forward. And I would say there was no more pull forward than what we would consider to be within typical ranges. And we've talked about it on prior calls that -- and typically, there's less pull forward with investment-grade issuers because they typically have market access all the time, and spec grade issuers is a little bit more pull forward. But nothing out of the ordinary, I would say, first of all. And I would say, Jeff, that in general, yes, things have been choppier, but spreads have come back in from the highs in late March and so is the 10-year as well. So I would say from an investment grade perspective, markets open. And in fact, last week was a big week for financials. You had 4 of the 6 largest banks hitting the market, almost $40 billion in issuance. There is a backlog of Q1 deals that we have heard this from the bank. Some of these deals have been deferred into the second quarter. And I think there's some optimism that we're going to see some of that come back in May and June. But overall, the funding costs are pretty attractive. You think very tight spreads by historical standards, and looking at default rates, if anything, continuing to modestly decline based on depending on what plays out. It's that great, I'd say there's a little bit more selectivity as you'd expect with a preference towards credits at the higher end of the credit spectrum. But last week was pretty strong from a high-yield issuance perspective, pretty good from a loans perspective as well. So I'd say the market is open, constructive, and I think there are some risk windows, risk on and off windows that we're going to continue to see for some time as we've got some of the headlines playing out. Operator: Our next question comes from the line of Andrew Nicholas with William Blair. Andrew Nicholas: I wanted to follow up on the AI efficiency gains topic. And maybe asked a different way on the regulatory side. It seems like you guys have been first mover on a lot of these items, a lot of progress already to date. Is there any gating factor on adoption internally tied to regulatory pushback or what the regulators are comfortable with you kind of leveraging or ratings or even within MA. Just trying to get a sense for the puts and takes on that side. Robert Fauber: Yes, Andrew. Good question. So I'll take it in 2 parts here. One with ratings. As you'd expect, we have a very active dialogue with our regulators, and they want to understand how we are thinking about deploying and using AI and they want to make sure that they are a very strong control environment around all of that. There's I'd say, heightened sensitivity for sure around the use of AI to actually be making decisions. And I think you see that across a number of industries, actually. So a lot of what we're doing is around the rating process and tools to give our analysts more new insights like I talked about. But we have a very good engagement with our regulators, and I would say they understand and expect that we will be deploying these AI tools and providing them transparency and having a strong control environment. Now on the analytics side of the business, I would say that if you think about who we serve, these are -- we have several thousand bank customers, something like 1,000 insurance customers, they expect a strong control environment. They expect for us to have strong AI governance and other things as part of our products. And in fact, some of our customers come in and actually audit our products and solutions and what we're doing. And so when we talk about decision grade intelligence, we always say it's got to be decision grade and that means you have to have strong control environment and auditability and all of those things that are regulated customers expect of us. So that does I think that -- we've seen that it takes a little bit longer for adoption with these big regulated institutions because they've got to satisfy not only their internal environment, but make sure that the third parties that they're working with have the same kind of controls and governance that their regulators are going to expect of them. Operator: Our next question will come from the line of Peter Christiansen with Citi. Peter Christiansen: Congrats Rob. Best luck on next chapter here and also great to see first-mover strategy on digital assets. I had a question about private credit. It seems like sentiment here has been kind of going back and forth the last couple of months, and you called out 80% year-over-year growth, which is pretty impressive. Should we think that there's been a bit of a build and in the pipeline there? I mean you did talk about some deals that potentially are creeping in from 1Q to 2Q, but specifically on private credit, whether you're seeing that that dynamic occur and, if possible, is there any way you could size that portion of the growth for us? Robert Fauber: Peter, thanks. So there's a few kind of cross currents I'm going to try to address on private credit. I think fundamentally, though, when -- obviously, we've been reading about increased credit stress in private credit throughout the quarter. That -- we've been talking about this now for -- I mean, for a couple of years about the importance of transparency in the context of private markets and having benchmarks and data and other things that can support a consistent understanding of credit risk across that market. And that is very important for that market to be able to continue to grow and scale. And so I think one of the things that you're seeing as there's -- and this happens in the public markets as well. When there's more credit stress in the market, there is more interest and demand in our ratings and in our solutions. And that is exactly what we are seeing right now. It's exactly what you'd expect that we are seeing aspects of what I call investor demand pull or the investors in private credit are starting to say, we'd like to have a third-party independent credit assessment on these loans that are in the fund that I'm invested in. You're starting to see alternative asset managers make disclosures about how much of their portfolio is rated or the insurers are doing that and by whom. So -- and that's because the underlying investors are asking questions and wanting to have a third-party assessment of credit risk. Now I'll say this, though, that -- so we've seen a number of deals shift from private into public market this past quarter. That's not surprising. The public markets are typically a cheaper source of funding. We've seen a lot of that, but there are massive funding needs. We've talked about these deep currents, they're not going away. And we've talked about sovereign balance sheets being really stretched. And so that means you've got both the public and private markets are going to have to be very important sources of funding going forward. So all of that is playing into what you're seeing, I think, with our growth in private credit. And obviously, we've got very strong growth in ratings. But a couple of the things I mentioned in my prepared remarks, we're actually us supporting credit assessment out of our MA business with our credit scoring tools and other things. So I mentioned, we believe we have the world's best commercial credit franchise. So we're very well positioned to serve these needs across the entire company and across the entire ecosystem. Operator: Our next question will come from the line of Jason Haas with Wells Fargo. Jason Haas: I'm curious what caused ARR to come in a little better than expected since I think a few weeks ago, you're talking about it maybe coming in towards the lower end of high single digits. And then I think the expectation then was that we would see an improvement through the year, maybe just due to some timing of new products getting pushed out. So I'm curious if that timing cadence still holds. Robert Fauber: Jason, I'll start and see if Noemie has anything she wants to add. You're right, at that BofA conference, I did mention that there was a chance that we might have a little bit of a downdraft in ARR from the fourth quarter, just given that the way we had kind of sequenced our sales kickoffs and product launches and other things. We -- so I think the short answer is we had good sales execution through the balance of March coming out of those sales kickoffs and we ended up making up a little bit of that ground that I was kind of noting might be at that BofA conference. So change to how we're kind of thinking about the full year. I don't... Noemie Heuland: No, you're right, we had some pretty good execution in March. We had some swing deals that we were able to close, and we're pretty confident with the new product release that pipeline is building. We talked about what we're doing in KYC and we're confident about the high single-digit victory for ARR for the full year. Operator: Our next question will come from the line of Sean Kennedy with Mizuho. Sean Kennedy: So I wanted to see if you could discuss a bit more about KYC and some of the trends that you're seeing there and the longer-term opportunity? And if some of the slowdown was due to macro later in the quarter? Robert Fauber: Yes. Thanks, Sean. So for KYC, 13% ARR growth, we had a little bit of a tough comp for new business versus the first quarter last year. We had a couple of outsized deals last quarter. Retention improved pretty notably as we lapse those cancellations that we had last year, most of that was related to DOGE. I would say, Sean, that we think growth is going to pick back up into the mid-teens through the balance of the year. We've got some new use cases and new product launches. Probably the most important of those is the one that I just mentioned briefly in my prepared remarks, which is what we call Moody's for compliance. Think of that as a kind of a platform solution that serves nonregulated institutions, corporates and so on. So we've been building pipeline on that. We expect that to continue through the balance of the year. Most of our growth so far has been from cross-selling to existing banking customers, and we're starting to see that corporate growth pick up. So I think the key message here is that we expect ARR growth to pick up through the balance of the year into that kind of mid-teens number. Operator: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Toni Kaplan: Rob, I was hoping you could just give us an update on how you're thinking about the hyperscalers and if you've seen a number of them move to the frequent issuer program and whether the economics there are sort of similar to other IG issues? And I guess, has that created sort of a price dilution or a mix dilution between sort of when we look at the issuance numbers and ratings revenue, is that one of the factors that would drive sort of a delta there? And should we expect that to continue as we see this sort of massive hyperscaler issuance over the next few years? Robert Fauber: Toni, good question. I'm glad you asked it because I mentioned kind of $100 billion-ish hyperscaler issuance through the first quarter. That's a big number, and that's getting close to what we were thinking of for the full year for 2026. So it is possible there's some upside to that through the balance of the year. But I'm glad you asked the question because I would say hyperscalers are, in many ways, no different than any other what you would think of as frequent investment-grade issuer. And we always talk about some of our serial investment-grade issuers are on frequent issuer pricing programs, which is why there's a little bit different revenue mix on investment grade versus spec grade, and that's true here. So when you see these big numbers around hyperscaler issuance, just think of that as frequent investment-grade issuer kind of issuance. Operator: Our next question comes from the line of Andrew Steinerman with JPMorgan. Andrew Steinerman: Noemie, I just wanted to queue in on something you said in your prepared remarks about MA and you specifically said you're reshaping the portfolio. I was just wondering if that's sort of the past like the learning divestiture? Or is that also kind of a reminder something that's ongoing and MA portfolio changes ahead in terms of divestitures or product sunsetting? Noemie Heuland: Yes. We -- so you're rightly pointing to the couple of divestitures. We -- one we've closed last year and what we're about to close in April. So that's part of it, really focusing on high-growth areas product suites where we have cross-selling opportunities with the rest of our customer ecosystem. That was an important driver for the decision around regulatory solution divestiture, for example. And beyond that, we're looking at within Moody's Analytics, really reallocating our resources, both in the product development as well as sales and go-to-market to higher-growth areas. There's a product where the growth rate, and you see that, for example, in the Banking and Decision Solutions, some of them are very mature products, very much in demand from our customers, but at scale. And I would say we're investing less and putting them more in maintenance mode and making sure we continue to serve the customers who have those solutions before they migrate into the new package. So that's kind of the decisions we're making in terms of resource allocation. And that's what allows us to continue to fund investments in really strategic areas like lending, decision grade data, insurance underwriting, while at the same time not increasing the amount of developers resources new product and go-to-market. Operator: Our next question comes from the line of Alex Kramm with UBS. Alex Kramm: Yes. Staying on MA, and this is also Noemie, just a little bit more of a numbers question here, but obviously, the transactional side of that business, I think, is the lowest quarter on record, I think $17 million. So obviously, done a lot I know you deemphasizing. So just the question is, is this kind of it now? Is this kind of a good run rate to use for the rest of the year? And does that mean that as we think about 2027, you're finally getting to the point where like ARR and recurring revenue growth and overall growth kind of start converging? Or is there still more to go? And can there still be more lumpiness on the transactional side here. I'm just trying to understand like really what's happening on that side? Noemie Heuland: Yes. Recurring revenue on an organic basis is actually very trending really close to ARR. So I would continue. That's why we were disclosing those numbers separately. When it comes to transaction revenue, you have the effect of the learning solution divestiture in Q1 number. That's why you have the down dip in that number in Q1, which was expected. So you'll continue to see that carrying through the rest of the year. We had a double-digit decline in transaction revenue, which we continue to expect as we move services, integration work to our partners. We don't want those on our paper. We're obviously here to support our customers as they go through migration and implementation, but those revenues are now being recorded outside of our books. So you'll continue to see that carrying through '26 and '27. However, if you look at, again, organic constant currency growth for recurring revenue, that's really much aligned now with ARR, you can have a few lumpiness in a given quarter if we have on-premise revenue recognition for long-term software arrangement that could create a little bit of variation. But on a trailing 12-month basis, that's pretty close. Operator: Our next question will come from the line of Owen Lau with Clear Street. Owen Lau: I do want to go back to the organic revenue growth and ARR bridge because the organic growth was 6% in the first quarter, ARR was 8%, but you still guide to high single-digit percentage range for organic revenue growth. Can you please talk about the bridge to go there from 6% to high single digits? Because -- would that come from like Moody's for compliance, AI and some other stuff. More color would be helpful. Noemie Heuland: So the guidance for organic constant revenue in the high single-digit range is at the low end of that range. We have, as I said, about a percentage point of headwind from transaction revenue decline. It was down 56%, for example, in Q1. So that's one thing. In terms of the underlying organic recurring revenue growth, that typically accelerates throughout the year, consistent with our sales cadence. As you know, the second half is usually stronger when it comes to sales execution and pipeline build. So that's gradually building back up to high single digit. About organic recurring constant currency growth and ARR guidance is really consistent with what we've said before in the high single-digit range. So if you look at the organic revenue growth, that transaction revenue is really the delta here and the drag. Operator: Our next question comes from the line of Curtis Nagle with Bank of America. Curtis Nagle: Great. Just a quick asking question on ratings issuance just assuming we stay at that current guide of singles rate for revenue. Rob, last time you had spoken to at least the relative mix of the weighting to be about mid-50s for the first half of the year. Is that still roughly right or just anything we should think about or any changes that's baked into the current forecast? Robert Fauber: Yes, Curtis, good question, because obviously, we held the guidance but the issuance has been a little softer than we had expected. So I can give you kind of an update on how we're thinking about the calendarization of both issuance and then maybe I'm sure it will be helpful. I'll translate that quickly into ratings revenue. So we're expecting issuance to grow in the, call it, high single-digit percent range for the first half of '26 versus the first half of last year. And then we're expecting it to decline mid-single-digit percent in the second half of '26 versus '25. And remember, we have bank loan repricings in those numbers. So from a sequential standpoint, we think that issuance is going to decline from the first quarter to the second quarter in kind of call it the mid-teens range, flat issuance from the second quarter to the third quarter and then then kind of mid-20s decline from third quarter to the fourth quarter. From a revenue perspective, we're expecting first of all, year-over-year revenue growth in every quarter in 2026, stronger in the first half versus the second half. So in the first half, something like low double-digit percent revenue growth in the first half. And then for the second half, we're expecting something like mid-single-digit percent revenue growth. And again, the delta is just because of bank loan repricings being in there. So hopefully, that gives you a sense. Operator: Our next question comes from the line of Craig Huber with Huber Research Partners. Craig Huber: Rob, I thought one of the most important things you said earlier was a partial response to a question was concerning that the regulators were very apprehensive have an issue with AI making decisions out there talking about parts of your portfolio. Can you elaborate on that? It's obviously a major, major issue AI concerns and some hope with the AI tools can come in and duplicate some of the services that information service companies have in general. Just talk about a little bit further, please. It's a big point. Robert Fauber: Yes, Craig, and just take this for what it is from my seat. Obviously, I'm not an expert, for instance, in insurance and all of that. But I would say, just in general, you can imagine, and this is true with our regulators as well, thinking about the opportunity to accelerate your process and the time to get to a decision and all of those things, those are pretty straightforward conversations with regulators. When it comes to, hey, I've got an AI model that's actually going to make a decision about who's going to get a loan, who's going to get an insurance policy at what price, what a credit rating might be, there's a lot more sensitivity around that, as you'd expect, because there's questions about the model -- does the model have bias, how is the model being governed, what kind of data is going into the model? Is there a human in the loop? All of those things, right? And that's true with us, and that's true with a number of our customers. So obviously, there are decisions across financial services that do get made by models. I get that. There's quantitative trading platforms. There's credit score things that go on for consumers, all of that. But I would just say that, that's generally where there's more scrutiny from the regulators and wanting to understand it. If a decision being made by a model, well, there's a lot of questions about that. Hopefully, that gives you a sense. Operator: Our final question will come from the line of Shlomo Rosenbaum with Stifel. Shlomo Rosenbaum: A little bit more of a broader question in terms of the guidance. And I know it's a fluid situation geopolitically, but I'm just wondering how did you incorporate the war in Iran, what's going on and the potential impact to inflation and anything else in terms of spreads going up and down into the guidance? I know you mentioned the guidance talked a little bit about volatility. But like when you think about it through the year, and your decision to keep the guidance there. How are you thinking about it as it goes through both MIS and MA? Robert Fauber: Yes. I'll focus probably mostly on ratings just because I think that's where more -- there's more variability given the geopolitical backdrop. But obviously, the Iran war is the most important variable is interesting actually because we were thinking back at the first quarter call this time last year. And if you remember, there were the liberation day tariffs. And it was very -- it created a lot of volatility and uncertainty in the market. And what we saw through the balance of the year was that, that volatility resulted in considerably lower issuance levels in April last year. But then we saw that get made up for the back half of the year, right? And we ultimately ended up essentially right in line with our original full year guidance. So I think we're -- we feel like we're in a little bit of the same situation. It's April 22. There's still a long way to go in the year. There's actually an interesting stat, Shlomo, that in March, 80% of investment-grade issuance was in 6 days. That's pretty remarkable. And that tells you a couple of things. I mean one, it just shows you kind of the risk on, risk off windows that were going on in March. But two, it also shows you how much demand there is that was just waiting until there's a risk on window and that demand hits the market. So it goes back to all these things about the underlying funding drivers, the demand drivers for raising capital, those are still there. And so Noemie talked a little bit about in her prepared remarks that if we see heightened volatility that goes on into May, and we see real softness in the month of May, I think at that point, we're probably going to -- Noemie gave you a sense of what that would mean for our guidance. But right from where we sit right now, given the conditions that I talked about, given the underlying drivers and given the fact we're still in April, we think it's most prudent to hold to our current guidance. And when we talk to the banks, that's the same thing we hear from them as well. Operator: This concludes our question-and-answer session, and I will hand the call back over to Rob for any closing comments. Robert Fauber: Okay. With that, thank you very much for joining, and we look forward to taking -- talking with you on our next earnings call. Goodbye. . Operator: This concludes Moody's Corporation First Quarter 2026 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR homepage. Additionally, a replay will be made available after the call on the Moody's IR website. Thank you. You may now disconnect.
Operator: Thank you for standing by. Good day, everyone, and welcome to the Boeing Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. The management discussion and slide presentation, plus the analyst question and answer session are being broadcast live over the Internet. [Operator Instructions] At this time, I am turning the call over to Mr. Eric Hill, Vice President of Investor Relations, for opening remarks and introductions. Mr. Hill, please go ahead. Eric Hill: Thank you, and good morning. Welcome to Boeing's quarterly earnings call. With me today are Kelly Ortberg, Boeing's President and Chief Executive Officer; and Jay Malave, Boeing's Executive Vice President and Chief Financial Officer. This quarter's webcast, earnings release and presentation, which include relevant disclosures and non-GAAP reconciliations are available on our website. Today's discussion includes forward-looking statements that are subject to risks and uncertainties, including the ones described in our SEC filings. As always, we will leave time at the end of the call for analyst questions. With that, I will turn the call over to Kelly Ortberg. Robert Ortberg: Thank you, Eric, and good morning, everyone. Thanks for joining in today's call. As we reflect on our first quarter performance today, we're off to a really good start and headed in the right direction. We remain on plan and are building momentum from solid performance across all 3 of our businesses. Our Commercial Airplanes team continues to integrate our safety and quality plan into its operations, which has enabled us to increase production rates and deliver high-quality airplanes to customers around the world. Our Defense & Space team continues to stabilize operations and after 2 years of hard work and development, we're starting to achieve inspiring milestones like the recent Artemis II launch that carried NASA astronauts to space on the Boeing-built core stage rocket. The launch and landing were a truly profound moment as humans reached farther into space than ever before and serves as a great reminder of what Boeing, our industry partners and our country can do. In Boeing Global Services, our team is off to a strong start, adding further orders to its record backlog, meeting customer demand and continuing to deliver solid operating results. While we are seeing some regional instability as a function of the Iran war, we remain confident in the long-term future of our industry. Aviation has seen moments like this before, whether it be a recession, pandemic or conflict. The resilience of our industry has always led to a recovery and return to growth trends. Our market remains robust and the Boeing portfolio of versatile, fuel-efficient airplanes, defense platforms and services is built for the dynamic environment of our time. So far, we have not seen any impact on our airplane deliveries. As always, we stay close to our commercial customers if they make adjustments to their plans, in which case, I think the strength and diversity of our backlog gives us a lot of flexibility. And I should note, we're already seeing higher demand in our defense business given the increased operational tempo, which over time will be a good offset to any potential commercial MRO weakness that results from these higher fuel prices. We are confident in our business, customers and markets, and our team remains squarely focused on safety and quality, disciplined execution and elevating operational performance so we can profitably deliver on our record backlog of nearly $700 billion. As I mentioned last quarter, one of the biggest focus areas for our team in 2026 is completing the certification work on our development programs. This is where I'll spend a few moments before discussing our first quarter accomplishments. In BCA, we continue to move forward on certification work for the 737-7 and the 737-10. In the quarter, we began the final phases of the certification and flight test for the 737-10, which includes autothrottle, autopilot, enhanced Angle of Attack as well as engine anti-ice solution. We are pleased with the progress so far and remain on plan for the newest members of the 737 MAX family to be certified later this year with deliveries expected to start in 2027. On the 777-9, we continue to advance our certification testing. Last month, we received approval from the FAA for the next phase of testing called TIA 4a. While it's a smaller package focused on natural ice testing, it's an important step in moving this development program forward. You'll recall last quarter, we discussed a potential durability issue on the 777X engine that was discovered during an inspection. Since then, we worked closely with our supplier. As they've said yesterday, they believe they have identified root cause and they're working on finalizing their modification. We are working together with the supplier and the FAA to fold this into our certification plan, and we remain on track for schedule of first delivery in 2027. In the quarter, we also achieved an important milestone on the 787 program. We obtained FAA certification for an increased maximum takeoff weight for the 787-9 and the 787-10, enabling those models to fly further or carry more cargo, creating additional value and revenue-generating opportunities for our 787 operators. In BDS, work to reduce risk across our development programs using active management is leading to win-win outcomes for our customers and Boeing. This means we're proactively working challenging programs by looking more closely at risk, requirements, schedules and customer needs. Combined with stronger focus on program management rigor, we're seeing good progress here. For example, on KC-46 Tanker, we recently approached our best-ever factory performance going back to pre-pandemic levels of productivity, and we remain on track this year to deliver the most tanker aircraft since 2019. We also achieved an important milestone on MQ-25 with completion of high-speed taxi tests and the first flight is imminent. The Stingray is our first unmanned aerial refueler for the U.S. Navy. We are now one step closer to providing this first-of-its-kind capability to further enable the U.S. to project power worldwide. Overall, I'm pleased with the progress our BDS development programs are making, and there are no major EAC adjustments. Let's turn now to the first quarter accomplishments. As we start the year, we continue to drive stable operations across our factories, enabled by a focus on safety, quality and performance. Our team is more engaged in embracing our values and behaviors, which we first shared with our team around this time last year. That increased commitment is helping drive process improvement ideas. As an example, I just reviewed one from Renton where the team developed a new drill jig, resulting in more than 30% reduction in defects for 737 wing tip. In BCA, Stephanie and her team are methodically increasing production rates across our key commercial programs. The 737 program has stabilized at a rate of 42 airplanes per month. And in the quarter, we also delivered the final 737 MAX from storage. As previously discussed, some first quarter 737 deliveries slid into the second quarter due to a recent nonconformance finding on aircraft wiring. As part of our root cause corrective action process, we fully understand the issue, and we have reworked all of the 25 airplanes affected and most of these have already been delivered. Importantly, this is evidence of our safety management system working to identify issues early and drive continuous improvement and avoid these issues in the future. To be clear, the wiring issue will not affect our full year delivery goals or plans to increase production to 47 per month this summer. We believe our internal and external supply chains are well positioned for this next rate increase. To support further planned rate ramps above 47 per month, we are readying the new Everett North line. I recently walked the factory where I saw construction complete and tooling in place. Our team setting up the line are eager to get started, and we started hiring and training. Employees for the North line will complete structured on-the-job training, which will pair new mechanics with experienced teammates from our existing Renton line. On the 787 program, we did see some impact to deliveries in the quarter due to delays of premium seat certifications, but we still expect to meet our full year delivery range of 90 to 100 airplanes. We're staying close to our customers, suppliers and regulators to work through these seating issues, and Jay will talk a little bit more about actions we're taking to better manage these impacts going forward. On production, the program continues to stabilize at 8 per month as we work through selected supply chain delays, including the interiors and engines. Overall, the factory is performing well, and the program continues preparations to increase production to 10 airplanes per month later this year. Like the 737 program, the 787 team will use the same disciplined process guided by our safety and quality plan with data from the 6 key performance indicators to assess readiness ahead of planned rate increases. Turning now to BDS, where our defense platforms are providing unique value and capability to our customers, particularly in the current threat environment. Over the past 2 months, we've seen much of our defense portfolio support key missions in-theater. For example, the AH-64 Apache has proven its potent anti-drone capabilities and the Patriot Advanced Capability-3 interceptor with its Boeing-built seeker has intercepted ballistic missiles and drones threatening civilians and military forces. Boeing systems remain central to air superiority, precision strikes and electronic warfare, while long-range strike and airborne command and control extend reach and situational awareness. Our aerial refueling, reconnaissance and strategic airlift sustain high tempo operations, and we're proud that our Combat Survivor Evader Locator system and the Little Bird helicopter played a key part in the heroic mission that safely returned down pilots. We continue to make investments in our people and facilities to meet the evolving need of the United States and our allies. Those investments helped secure wins like the recently announced agreement to expand PAC-3 seeker production in our Huntsville factory. The framework agreement with the [ Department of War ] enables a massive increase in the supply of seekers needed to expand the protection provided by the world's most advanced air defense system. The current demand environment for defense extends into services as well, and BGS has had several notable wins, including Boeing Defense U.K.'s largest ever maintenance and support contract for the U.K.'s rotary wing enterprise, which was announced last week. Our global services team also signed the largest Landing Gear Exchange contract in Boeing's history with Singapore Airlines. That agreement will provide landing gear exchanges for more than 75 airplanes across Singapore's 737 MAX and 787 fleets. With these recent program wins and operational improvements in all of our segments, we're well on our way to fully putting the recovery behind us. So before I wrap up my prepared remarks, I want to thank all of our employees for delivering another quarter of improved performance as we continue to turn the corner. Their dedication to safety and quality, embracing our values and behaviors and continuous improvement have enabled a solid start to the year. While there's more to do in 2026, we're making measurable progress. We're restoring trust with our customers, we're increasing production rates, and we're on track to generate a full year of positive cash flow. And our commercial defense and service portfolios are well positioned to meet the market demands and restore Boeing to the iconic company we all know. So now I'll turn it over to Jay to discuss our operating results before we move on to questions. Jesus Malave: Thanks, Kelly, and good morning, everyone. As Kelly mentioned, a good start to the year and a clean quarter. Consolidated revenue was up 14% to $22.2 billion, driven by solid growth across all 3 segments. Of note, the revenue impacts from last year's Spirit acquisition and Digital Aviation Solutions divestiture largely offset each other in the quarter. Operating margin was 2%, down primarily from lower FAS/CAS pension adjustment as compared to last year, partially offset by higher segment earnings. The core loss per share of $0.20 improved from last year on segment growth and other nonoperating earnings improvements. Free cash flow was a usage of $1.5 billion in the quarter, driven by seasonal corporate expenditures in addition to planned CapEx increases as we continue to make progress on our growth investments in Saint Louis and Charleston. Free cash flow was notably better than expectations I shared last month largely driven by the solid recovery from the 737 wiring issue and favorable collection timing late in the quarter. Turning to BCA on the next page. BCA delivered 143 airplanes in the quarter. Revenue of $9.2 billion was up 13% as Stephanie and her team continuously drive quality improvements while increasing delivery volume. Operating margin of negative 6.1% improved compared to last year, primarily driven by higher delivery volume and a favorable accounting adjustment, partially offset by the dilutive impact of the Spirit AeroSystems acquisition that we highlighted last quarter. Regarding our customers in the Middle East, as Kelly noted, at this time, we have not seen any request for delivery deferrals nor have we encountered material supply chain disruptions that would impact our delivery or production rate plans. In fact, we delivered 4 airplanes as planned to customers in that region since the conflict began. That said, we will continue to monitor the situation. Importantly, backlog continued to grow and remains at an all-time high of $576 billion, including over 6,100 airplanes. Now clicking down to the commercial programs. Starting with the 737 program, where we delivered 114 airplanes in the quarter, which included the final shadow factory airplane built prior to 2023. As Kelly mentioned, we completed the rework on all 25 airplanes impacted by the wiring NOE, and we remain on track to deliver 500 airplanes this year. In the quarter, production stabilized at a rate of 42 per month, and the team drove a nearly 20% reduction in final assembly rework hours as compared to the first quarter of 2025. We continue to expect a production increase to 47 per month in Renton this summer and will benefit from buffer inventory during the transition. As we discussed previously, production rate increases above 47 per month will be enabled by activating the 737 North Line in Everett. The North Line is expected to begin operations later this year at a low rate of initial production to demonstrate conformity to the FAA that will allow operations under our current production certificate. Following completion of these initial units, we will be led by our safety and quality plan to increase rate to 52 per month when the entire production system is ready. On the 787, we delivered 15 airplanes in the quarter, in line with expectations shared last month and remain on track to deliver 90 to 100 airplanes in the year. Although seat certifications impacted deliveries in the quarter, we are working with the FAA and our customers to address these risks by partnering earlier in the development process and creating contractual off-ramps to avoid delivery delays in the future. In Charleston, the factory is performing well and continuing to make progress at stabilizing the production rate at 8 per month. In the quarter, our rework hours improved by more than 25% as compared to the first quarter of 2025. These gains in the factory come even as our stability is being paced by the supply chain, where we don't enjoy the same buffer we have on 737. We are closely working with our suppliers, including forward deploying resources to support their recovery plans. We continue to expect an increase to 10 per month later this year. Finally, on 777X, Kelly highlighted TIA 4a approval as well as progress made with GE on a solution for the engine durability issue we highlighted last quarter. During the quarter, we successfully completed flight testing associated with handling qualities, lighting and stability and control. We remain on track for first delivery in 2027 and continue to focus on managing the production system for increased rates. We also have a dedicated team performing the change incorporation statement of work for built airplanes, which will be completed over a number of years. All right. Let's shift over to BDS on the next page. BDS delivered 29 aircraft and 1 satellite in the quarter. Revenue grew 21% to $7.6 billion, primarily driven by higher volume on KC-46 Tanker, missiles and weapons and classified programs. Spirit contributed approximately $150 million of sales in the quarter. Operating margin increased 60 basis points in the quarter to 3.1% on improving operational performance. BDS booked $9 billion in orders during the quarter, including notable awards to continue E-7A Wedgetail development and additional international demand for KC-46 aircraft. Backlog grew to a record $86 billion. As I mentioned last month, I have continued my reviews of BDS and have come away impressed with the teams leading these programs. I've also generally found reasonable assumptions in our EACs. They're not without risk and many assume improvements in front of us, but the estimates have a solid basis. On many of these legacy-challenged programs, the teams have made excellent progress in retiring risk and moving these programs forward. Steve Parker and the team are building on this progress, utilizing active management and increased program management rigor to drive continued gains and improved financial stability. As Kelly has previously said, you're never done until you are done, but the team has made great progress here. As I also mentioned, a key part of our ongoing reviews of the BDS portfolio is focused on strategy and growth. It's clear to me that our defense portfolio is well positioned to capture upside from increased operational tempo and rising defense budgets among the U.S. and our allies. We see incremental growth opportunities from our missiles and weapon systems, including PAC-3, small diameter bomb and JDAMs as well as exquisite capability offered by platforms such as P-8, F-15EX and other proven solutions where we are investing to ramp up production. While we pursue additional growth, new opportunities are now subject to tighter underwriting to account for risk and our ability to deliver on our commitments. This approach, combined with continued operational improvements, support steady progress towards high single-digit operating margins as we execute against a record $86 billion backlog. Moving to Global Services on the next page. BGS continued to perform well and again delivered strong financial results in the quarter. Revenue was up 6% to $5.4 billion, primarily reflecting increased government volume. Excluding the impact of the Digital Aviation Solutions divestiture, revenue was up 13%. Operating margin of 18.1% was down from prior year, primarily related to the impact of the Digital Aviation Solutions divestiture and less favorable mix. Both commercial and government businesses delivered double-digit margins in the quarter. Also in the quarter, BGS received FAA and EASA qualification for 777-9 training devices, an important step forward in support of the airplane's entry into service next year. Chris Raymond and the BGS team remain focused on continuous improvement. For example, the business has implemented automation and AI to reduce proposal cycle time by approximately 25% year-to-date, enabling faster response times to our customers. BGS received $8 billion of orders for a book-to-bill of 1.6 in the quarter, led by a strong intake from its government business. BGS ended the quarter with record backlog now at $33 billion and remains a high-performing business focused on profitable, capital-efficient service offerings and continues to execute very well. Okay. Let's shift over to cash and debt. Cash and marketable securities ended at $20.9 billion, primarily reflecting debt repayments and free cash flow usage in the quarter. Debt balance ended at $47.2 billion, down $6.9 billion in the quarter on the paydown of maturing debt, consistent with our debt reduction plans. There are $1.4 billion of maturities left in the year. We also maintained access to credit facilities of $10 billion, all of which remain undrawn, and we remain committed to strengthening the balance sheet and supporting our investment-grade rating. Regarding our cash flow outlook, we continue to expect positive free cash flow of $1 billion to $3 billion this year, aligned with the expectations I shared last quarter. As I said previously, we benefited from order timing in the first quarter. We expect second quarter free cash flow to improve with the second half of the year turning positive. Of note, we assume the expected DOJ payment to occur in the second half of the year. Beyond 2026 and consistent with what we've discussed previously, cash flow is expected to grow primarily driven by higher commercial deliveries, steady performance improvements at BDS and continued growth at BGS. We continue to view the $10 billion free cash flow figure as very attainable with significant growth beyond that into the next decade as we execute on our record backlog and benefit from continued strong market demand. Okay. Let's sum it all up. A good start to the year as we continue to build on the momentum from 2025, and we're focused on steadily elevating our performance in 2026 to deliver on the long-term potential of this business. With that, let's open up the call for questions. Operator: [Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila Kahyaoglu: Congratulations on getting rates stable and looking up. I wanted to ask your thoughts on the conflict in the Middle East and potential impacts to deliveries, your commercial services and weapons businesses and free cash flow and just how we think about scenario planning if the conflict drags another 3 months, 6 months or 9 months? Robert Ortberg: Yes, Sheila, as we said in the prepared remarks, we have seen no impact so far. No customers are requesting changes in their deliveries. And as Jay said, we made deliveries in the first quarter into important customers there in the Middle East. I think the broader thing for us to watch is the overall impact of fuel prices and jet fuel price impact and whether that hits the aftermarket. As you know, we're less susceptible to aftermarket. It's a less -- a smaller part of our overall portfolio going forward. But let me come back and give you a feel for how we're exposed on OE. So 14% of our unit backlog is in the Middle East for customers. But 2/3 of that backlog delivers out in 2030 and beyond. And we have pretty good ability to resequence airplanes in the 12- to 18-month time frame. So I think we'll be okay. We'll manage through that. If someone has some issues, we'll be able to resequence their airplanes. I have received calls from airline customers letting me know that they're willing to pull forward if there's any opportunity. So I think the overall market dynamic will be okay for us in terms of OE deliveries. It's going to be very dynamic. I think we just need to watch, particularly the flight hour and the services business that's flight hour dependent. That will be the first indicator of any impact in our aftermarket. I'm encouraged with the near-term performance in our defense aftermarket. So hopefully, as I said in my remarks, we'll see some upside there, probably offset some of the downside if we see it in commercial. And we'll see the relative timing of those ups and downs. I'm not too worried about it right now. Obviously, the big question is how long does the war last. And I can't answer that. We'll just have to watch it and manage as things happen. Operator: Your next question comes from the line of Ron Epstein from Bank of America. Ronald Epstein: You both spent a fair amount of time on the call talking about the defense business. I was wondering if we could maybe dig down deeper on the defense portfolio, both in terms of new product sales and in the services business, what you're seeing there? And where are other potential areas of growth that you didn't highlight in your prepared remarks? Robert Ortberg: Yes, Ron. So I'd put it in 2 categories. One is our product lines and portfolio are very much being utilized in the current war environment. So any time you see that kind of op-tempo, we're going to see service uptick associated with servicing those platforms. And by the way, we're very proud of our platforms. We've got teams of people in the Middle East supporting our customers in very dynamic situations. So we're really proud of those folks as well. And then you look at the overall, just I'll say, the defense budget increase, and I look at our portfolio, and we're really well positioned for that. Let me give you a couple of examples of areas where I think this new defense budget is going to benefit as well. F-47, we see $5 billion in the budget for F-47. KC-46, increasing KC-46 production, $4 billion; F-15EX, $3 billion, enhanced -- the enhanced SATCOM, strategic SATCOM of $2 billion. So massive increases in weapon systems as well. And if you look at the backdrop of this, while it is funding new capability, it's really funding additional production of existing systems, which should be low risk for us. So our focus is really making sure we underwrite this growth properly with the right contract structures. We have our supply chain costs under control so that we get an opportunity here as we see increased production to actually make money on these opportunities. So that's our focus. I feel like the portfolio is well positioned. And there's no doubt that as we look at our 5-year outlook for defense, we're going to see upside from what we had planned last year. Jesus Malave: Yes, Ron, maybe just a couple of. If you look at the first quarter results, the tanker program, the classified programs as well as missiles and weapons, we expect that to continue to drive growth this year. As a reminder, we're expecting to increase our deliveries on the tanker from around 14 last year to about 19 this year. And then as you know, on the classified programs, we've got some pretty significant content there. And going back to Kelly's comments, the beauty of our portfolio is that we participate and have exposure on shorter cycle defense platforms as well as longer term. And the missiles and weapons would be what I would categorize as more shorter cycle, and we certainly see some upside over the next few years in that area. Operator: Your next question comes from the line of Myles Walton from Wolfe Research. Myles Walton: Jay, could you speak to the free cash flow profile for the rest of the year, particularly if the second quarter can get close to breakeven? And then is there any free cash flow downside risk on requests for progress payment deferrals, either from Middle East or other carriers? And is there upside free cash flow risk from the Chinese orders if those were to come to pass? Jesus Malave: Sure. Let me just take you through the profile first part of your question there, Myles. Just to reiterate the guide in terms of $1 billion to $3 billion for the year. As I mentioned during the prepared remarks, we benefited from some timing as well as the good recovery at BCA. So it's just timing in the year. We are a little bit back-end loaded, as you would expect, in the back half of the year, we'll expect to see some advances on the KC-46 program like we have seen in previous years. We'll see a little bit higher weighting towards aircraft BCA deliveries, which will come in with higher delivery payments in the back half of the year. In the second quarter specifically, somewhat similar to last year, an outflow, but in the range of, say, low hundreds of millions of dollars. So as I mentioned in my prepared remarks, an improvement from where we landed here in the first quarter, continued ramp throughout the year, and we still feel very confident in that guide. As far as variability on the upside, we had a really good start at BDS and BGS. You look at the revenue growth there, to the extent that we can continue to have strong growth, have that convert into net income and we can keep a lid on working capital, there could be some upside in those businesses. As you know, we're highly dependent on the BCA delivery profile. So that's -- those are things that we're keeping an eye on. And those -- as Kelly mentioned in his prepared remarks, that we're pretty much right on track on those. As far as experiencing any specific requests, nothing meaningful. To get back to Kelly's comments as far as Middle East customers, nothing meaningful in terms of request that would cause right now any variability to our cash flow outlook. So it's pretty much on track, and we'll monitor, obviously, throughout the rest of the year, but a very good start to the year. Operator: Your next question comes from the line of Doug Harned from Bernstein. Douglas Harned: Kelly, I wanted to go to the 737 and you stabilized production at 42 a month. But I'd like to see what you can say about the process and time line to get to 47 and 52. And I'm highlighting 52 because that had been a challenge in 2018 for Spirit. And now that you're integrating Spirit, what are your thoughts on the timing of these next 2 rate breaks? And where beyond Spirit do you see some potential supply chain challenges? Robert Ortberg: Yes. Thanks, Doug. So first of all, let me reiterate, we've done a really nice job of stabilizing at 42. That was our plan, and we've done a nice job of that. So the rate increase from 42 will be done by this summer. That's our current plan. And I feel pretty good about that. We still benefit, as you know, from high levels of inventory. So I kind of look at the rate 38 to 42 and then 42 to 47 kind of a similar rate increases. We'll go through the same process that we've gone through in the prior rate increases. When we go from 47 to 52, there's a couple of important dynamics that are a little bit different. That's where we bring in the North Line our fourth line of 737 production. We call it the North Line because it's in Everett as opposed to in Renton. We're in the process now, as we talked about in the prepared remarks, of bringing that online, the capital is all in place, the facility is ready to go, we're hiring people, we're going to bring those people through the Renton production system so that they get experience in a stable environment. And then we're going to be moving some folks from -- experienced folks from Renton up to Everett. So we've got to get that and all stabilized and also get the FAA authorization on that line. So that will be happening while we're producing here at 47 a month. And as I've also said, once we burn down inventory and we'll be burning that down at 52 and further rate increases beyond 52, that's where the supply chain needs to be more in line with our production rate. We won't have the levels of inventory that we had. And so continuing to watch the supply chain there, and we have areas that we continue to work will be a focus when we move to that next rate. So hey, let's get to from 42 to 47 here in front of us. And as we've done on this previous rate increases, just continue to work the constraints where we see them to allow us to move to the next rate. Douglas Harned: Can you say anything about Spirit on this as you integrate? Robert Ortberg: So Spirit has done fine. We're very pleased with the performance and the rate increases. We do still need to see some improvements in Spirit, but everything is tracking to our plan. And I would say the integration has gone well so far. So things are looking up with our Spirit integration. Jesus Malave: Yes, Doug, just some of the quality improvements that I mentioned on my prepared remarks have been enabled by the better quality performance that we've seen coming out of Spirit. From an integration standpoint, we have biweekly meetings with the functional teams and go through the status of those teams and everything is progressing well. Operator: Your next question comes from the line of Seth Seifman from JPMorgan. Seth Seifman: I heard the comments earlier on 787. And I'm wondering if we could dig in a little bit deeper there. First on what gives you the confidence in kind of overcoming the supply chain challenges there. It seems like the line in Charleston is doing quite well, but waiting on some suppliers, particularly with seats. And then on the financial profile of the program and bringing in Spirit, and we can see some increase in the deferred during the quarter, but how that moves from here and gets to the kind of healthy financial profile that we're looking for? And then lastly, maybe the long-term opportunity there with the new capacity that you're adding? Robert Ortberg: Okay. Seth, let me talk about production and I'll have Jay talk about the financial performance. So as you commented, we've done a good job of stabilizing as we've moved from 5 to 7 to 8 per month. A good example is, in this case, rework has improved significantly in the final assembly line, 25% improvement year-on-year. We have, as we've talked about throughout the past year, we've been struggling with getting the seat certifications complete for the new cabin configuration. So if it's a new seating configuration, typically with doors, this has been an area that we've struggled. It has less impact on our factory production because we can essentially build the airplanes, it's that we can't deliver them. And so we've got a fair number of 787s that are held up -- that are actually built that are held up now to get seat certification. So this is something we're just kind of getting the pig through the python. We've got to work to get this done. I don't see any showstoppers in these certifications, but it's just taking longer than we anticipated. In terms of the supply chain -- other supply chain performance, it's been a tough quarter in terms of engine deliveries for us. They've fallen behind a little bit. We do have a recovery plan on engines. So we've got to stay on that recovery plan to allow us to get to the next increase of 10 -- to 10 later on in the year. So it is a little bit different scenario than on 737 because we don't have the inventory levels. So we have resources forward deployed in our supply chain where we have constraints. And that's not unusual. We'll continue to do that to help the suppliers where they have issues, resolve those issues to support our rate increases. So a lot of work yet ahead. I think getting these -- some of these near-term seat certs behind us will unlock our delivery. And as Jay said in his prepared remarks, we're still -- there's no change in our forecast in terms of number of aircraft delivery in the full year. It's going to be -- I wish it was a little more linear than what it is, but we're working through those issues. Jesus Malave: As far as the financial profile and deferred production, Seth, we had a cost base extension. So we added to the block, which is a good thing at higher margin additions to the block. It will take us maybe a year or so to stabilize that and start working it back down, but all good news in terms of improving financial profile in that program. Operator: Your next question comes from the line of Peter Arment from Baird. Peter Arment: Nice way to start the year. Kelly, on the 777X, you mentioned the FAA last month cleared Boeing to continue to kind of advance the program in this fourth phase out of the total of five. Can you maybe update us on your thinking on how this current certification phase and what milestones any investors should be kind of tracking? And then just related, long term, just given the complications that you've seen on seating and everything else, any reason to think the production system here couldn't deliver at a much higher rate than what it's averaged in the last 8 years of 2.5 aircraft a month? Just trying to get a better handle on the long term, just given the program delays and kind of the wide-body replenishment cycle you guys kind of see out there. Robert Ortberg: Okay. Well, let's talk about the certification first, important. So we continue to make progress on the certification. I guess a couple of milestones. We got the TIA 4a authorization, which was not a super large package, but it was a really important package because it had deicing and we want to get that deicing done while there's still ice available in Alaska. So that was a really good important one for us to get so that we don't have to search for weather. The next one will be TIA 4b. We're expecting that very soon, and that's a pretty large package. So I think watch for that milestone, achieving 4b will be important for us to continue the flight test. As I've talked about, we had the engine issue that we identified. GE has got a fix that they're working for that. And so that's not impacting our flight test program now. We're having to do periodic inspection, but we're able to incorporate that and keep the airplanes flying. So we just have a lot of work yet to do here with this program. This is going to be a big focus area for us in the balance of the year. GE is also working the -- with this mid-seal issue that we've identified, it will require an update to the engines before delivery. So to your production point, we're still working through the industrial plan to get those -- to get all the engines upgraded to support delivery. So no real change in our forecast. And then the second part of this question was around capacity. Peter Arment: Just long term on the production system, just the ability to deliver at a higher cadence than you currently have been running. That's all. Robert Ortberg: Look, we're targeting 5 a month. And I think that's a reasonable -- with the overall market demand and our capacity, I think that's a reasonable goal and where we expect to be. Operator: Your next question comes from the line of Noah Poponak from Goldman Sachs. Noah Poponak: Jay, you made an interesting comment on longer-term free cash flow that you think you could have significant growth beyond the 10. I wondered if you would just talk about that a little more. I mean, I think we hear skeptics say, can they get to the 10 and then the 10 is peak because there has to be a downturn at some point or there has to be new aircraft investment at some point. I think people who are more bullish would say the production rates are still below demand, and there's some pieces in there that are moneymaking eventually that are still breakeven in the 10. The 787 math is interesting. I'd just be curious to hear you talk about what gives you the confidence to make that statement and what some of the key pieces are? Jesus Malave: Sure. Again, Noah, first things first, let's get to 10. That's a bogey that's been out there for quite some time. And so we got to first get to that before we can go beyond it. But again, the building blocks, whether it's 10 or even beyond that, are pretty much the same. A lot of it depends on the BCA recovery. And first things first, as Kelly mentioned during his prepared remarks, is achieving certifications on the 737 variants as well as the 777X program. And so we're on track to do that. That helps us enable the higher production rates. And Kelly just talked about what our path is for rate, just as an example, on the MAX from 47 into 52. And so we have -- that is a significant enabler to these types of cash flows we're talking about. When you think about that for a second, these delivery profiles, in the first -- or in January, on the fourth quarter call, I talked about these drags that we're bringing our cash flow down and weighing it down. What the increased production rates enable us to do is burn that off. At the same time, you get the compounding benefit of stepping into the higher-priced backlog. And a third compounding element to that is with the higher volumes, you're also going to see cost reduction through absorption and productivity. So all those elements together are really driven by our ability and the timing of which we drive to these higher production rates. Beyond BCA, you've got BDS recovery, and they've done a good job. You see here in the quarter, they delivered 3.1% on the margin. So we're on the right track in our march towards high single digit. The way I look at that business, I spent a fair amount of time talking about what I've seen thus far. And to me, I kind of simplify it into 3 elements, which I refer to as the 3 Ps: performance, process and price discipline. And I think Steve Parker and his team are employing that exactly right now as they march up to this high single digit. And then the last piece of it is BGS and their continued march up. They're performing exceptionally well through any environment and continue to drive growth there. So those are the 3. It's a question of timing, whether it's 10 and beyond that. But this is all underpinned by a nearly $700 billion backlog that Kelly mentioned. We talked about kind of perturbations that can occur, but it's such a strong backlog that we have the flexibility to manage these rates and still deliver on them. So it's up to us as a management team, obviously, to execute, but it's all sitting there in front of us, and we're confident that we can deliver that. Noah Poponak: Do you see 1Q as the low watermark for the BDS margin for the year? Jesus Malave: It's in that ballpark. I think for the year, it could -- yes, I mean, it could be a little bit better, kind of think about 3.5% for the year. So I would slight better from here on out. Operator: Your next question comes from the line of John Godyn from Citi. John Godyn: I wanted to maybe just ask about BCA margins, the trajectory from here. We've gotten a lot of interesting commentary on the call on 787, 737, delivery production outlook, certification trends. But intra-quarter, it felt like there was a couple of chances where you guys wanted to just level set people on BCA margins. So I wanted to just ask a question where perhaps we could kind of get it in one place, BCA margins this year, next year, kind of how do you see the play-by-play evolution with so much going on with the 737 and the 787. Jesus Malave: Yes. Thanks, John. Let me just baseline you, again, in the quarter, BCA had 6.1% margins, a little bit better than what I talked about in March, and that was largely due to this onetime benefit that we received. Having said that, we still expect progressive improvement sequentially throughout the rest of the year. And that will, again, go carry over into next year where we expect the margins to turn positive mid next year. So I think they're on the right track. That is basically dependent on the delivery volumes and us continue to increase deliveries. It's also dependent on cost base extensions. And again, we have such a strong backlog that's well priced, high confidence there. And so we've got, I think, over this time period, over this next 18 months or less, a solid path to get back to positive booking margins on that program. Operator: Your next question comes from the line of David Strauss from Wells Fargo. David Strauss: Kelly, 2 quick questions. First, I guess, on Spirit, I think, Jay, you've talked about $1 billion kind of cash drag from Spirit this year. How do you see that progressing into '27? That's the first one. And then 777X change incorporation, I hear change incorporation. It sounds a bit scary based on past history when we hear change incorporation. What exactly is involved in terms of change incorporation? And how many aircraft kind of built aircraft are we potentially looking at where there -- where change incorporation is going to be necessary? Robert Ortberg: Let me start with the change incorp. So we've -- what change incorp is, is basically for the airplanes that we have built to incorporate all the changes that have happened since they've been built. So things that result from the certification program, things that happen as a result of productivity improvements or process improvements. So we go back in and we incorporate all those changes before we make the delivery. So it is a pretty massive activity that we have underway. We've got a dedicated team within BCA focused specifically on the change incorporation of the airplane. So we've got roughly 30 777s that will go through this change incorp process over several years. Jesus Malave: On your question on Spirit, this year, we talked about $1 billion of negative cash from Spirit, partly due to just operating performance and the other part being related to CapEx. As we head into next year, probably similar types. And then beyond next year, we'll start to see that improve with the benefit of performance and productivity as well as synergy capture. So that's the way to think about it, David. David Strauss: Okay. And Kelly, are there any major -- in terms of that change incorp, is it structural software? Kind of any color on kind of the big things that need to be done? Robert Ortberg: Yes. The answer to that is yes. And actually, it depends on when the airplane was built. The older the airplane, the more change incorporation and the more structural related changes that are needed, and they'll take longer. The newer the airplane, the more it's likely more minor upgrades. And each -- actually, each airplane has a different change of corp work scope. So that's what the team is doing right now is going through defining the statement of work. We're actually going to bring all those airplanes down to a common configuration level and then incorporate the changes. We think that's going to be the most efficient way. Now this isn't new, David. This is something we've always planned. It's a part of the production process. Unfortunately, when you build the airplanes early to get all the learning, but then in order to make the final delivery, we do have to bring them all up to the latest configuration. So it's in our EAC, it's in our operating plan, and we're in the early stages of that change of corp effort. Eric Hill: Rob, we have time for one more analyst question. Operator: Your final question comes from the line of Gautam Khanna from TD Cowen. Gautam Khanna: I wanted to just -- you touched a little bit about demand and no erosion in demand yet. I'm curious if you could just talk about the big order campaigns you're pursuing on the BCA side. I know we talked a little bit about the China order, but how big could that be? When could it happen? And what are your expectations for kind of airplane orders this year? Robert Ortberg: Well, let me specifically address the China order. I think that's 100% dependent on the U.S.-China negotiations and relations. As you know, there's a big summit coming up between Trump and Xi. I'm highly confident that, that will result if there's an agreement at the country level, as I said in my comments, I'm highly confident that, that will include some aircraft orders. President Trump has been very focused on supporting us in international campaigns, and he's been very successful in doing that. So I think that's a meaningful opportunity for us. I'm not going to give you the number of airplanes, but it's a big number. Operator: And that completes the Boeing Company's First Quarter 2026 Earnings Conference Call. Thank you for joining.
Operator: Good morning, and welcome to United Airlines Holdings Earnings Conference Call for the First Quarter 2026. My name is Regina, and I will be your conference facilitator today. [Operator Instructions] This call is being recorded and is copyrighted. Please note that no portion of the call may be recorded, transcribed or rebroadcast without the company's permission. Your participation implies your consent to our recording of this call. If you do not agree with these terms, simply drop off the line. I will now turn the presentation over to your host for today's call, Kristina Edwards, Managing Director of Investor Relations. Please go ahead. Kristina Munoz: Thanks, Regina. Good morning, everyone, and welcome to United's First Quarter 2026 Earnings Conference Call. Yesterday, we issued our earnings release, which is available on our website at ir.united.com. Information in yesterday's release and the remarks made during this conference call may contain forward-looking statements, which represent the company's current expectations and are based upon information currently available to the company. A number of factors could cause actual results to differ materially from our current expectations. Please refer to our earnings release, Form 10-K and 10-Q and other reports filed with the SEC by United Airlines Holdings and United Airlines for a more thorough description of these factors. Unless otherwise noted, we will be discussing our financial metrics on a non-GAAP basis on this call, and historical operational metrics will exclude pandemic years. Please refer to the related definitions and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures at the end of our earnings release. Joining us today to discuss our results and outlook are Chief Executive Officer, Scott Kirby; President, Brett Hart; Executive Vice President and Chief Commercial Officer, Andrew Nocella; and Executive Vice President and Chief Financial Officer, Mike Leskinen. We also have other members of the executive team on the line available for Q&A. And now I'd like to flip the call over to Scott. Scott Kirby: Thanks, Kristina, and good morning, everyone. I'd like to congratulate the United team on a strong first quarter. We're building the #1 brand loyal airline in the world, and our financial results are indicative of the structural, permanent and irreversible changes that have happened at United and across the industry. Our first quarter results are just the latest proof point in our strategy to build a decommoditized brand loyal airline that's setting a new standard for what is possible for customers in air travel. We've proven that the winning strategy is to make travel easier and better for all customers, and while all of us at United are deservedly proud of the brand we've built, we aspire to go farther, and we want to set a new higher standard by revolutionizing air travel for our customers. More immediately, of course, we're managing through the impact of jet fuel prices that have doubled. Industry stress events seem to happen every 5 to 6 years. While we didn't know exactly what or when it would be, we knew something would happen. The best thing we could do was to prepare United in advance. To that end, we have, one, tripled our cash balance; two, moved to the top of the industry and profit margins; and three, strengthened our balance sheet. In fact, we ended 2025 with our highest credit rating in almost three decades. Advanced preparation allows us to stay focused on the long term while making near-term tactical adjustments to account for elevated fuel prices. At the moment, our goal is to do whatever it takes to recover 100% of the increase in jet fuel prices as quickly as possible and to achieve double-digit pretax margins next year. Oil is incredibly volatile right now, but because we think we're moving towards 100% pass-through, it allows us to have confidence in both our near- and medium-term earnings trajectory enough so that we can still provide guidance. For United, here's how we're thinking about our goals to get to 100% pass-through and achieve double-digit margins in 2027. One, to recover 100% of fuel costs, yields need to increase by about 15% to 20%, and we are assuming that fuel may remain higher for longer. Two, as yields increase, there will be an elasticity effect on demand that we're estimating will lead to less overall demand. While we haven't actually seen that decline yet, [ ECON 101 ] makes us believe it's coming. Three, less demand means that we should be supplying fewer seats to the market. For United, that means we're targeting capacity to be flat to up 2% for 3Q and 4Q on a year-over-year basis. It simply doesn't make sense to fly marginal flights that will lose cash in a higher fuel price environment. Mike will provide more details behind our 2026 outlook, but our view for 2027 is that we're targeting a pretax margin of at least 10%. We obviously have some time to see what happens, but if jet fuel remains elevated compared to our pre-war levels as we think it might, we'd once again expect to require less capacity growth in 2027 than we were planning just two months ago. Realistically, there probably isn't enough time to make up 100% of the fuel price increase this year. But I feel very good about 100% recovery and getting to double-digit margins in 2027. And because we've positioned United for success, we can make tactical adjustments to manage what we need to in the short term while also staying focused on our long-term plan. I'm also more convinced than ever that our decade-long strategy to build a great brand loyal airline that is obsessively focused on making travel easier and better for all customers is the winning strategy. Finally, there's been a lot of press coverage regarding consolidation rumors. We've not commented specifically on those reports and aren't going to start today. So you can ask me about it if you'd like, but you won't be getting anything new from me on it today. And with that, I'll hand it over to Brett. Brett Hart: Thank you, Scott, and good morning. During the first quarter of 2026, United carried a record number of passengers while also navigating a challenging operating environment. The quarter experienced elevated weather events and geopolitical disruptions, but our teams remain laser-focused on recovering from these events swiftly and delivering top-tier reliability for our customers. In the first quarter, we continued our streak of ranking first in on-time departures among the 8 largest U.S. carriers. During the quarter, United's per seat cancellation rate averaged 44% lower than the next two largest U.S. carriers. Solid operational performance is the backbone of the airline and helped drive our highest first quarter on-time Net Promoter Score since the pandemic. During the quarter, customers increasingly engaged with our self-service tools, allowing us to drive more personalization throughout their journey. Day of app usage reached a record 86%, supported by continued mobile enhancements such as improved bag tracking and live TSA wait times. Additionally, I would also like to take a moment to thank the TSA employees, who showed up to keep us safe during the government shutdown. We have also improved our disruption communications by embedding live maps directly within customer messages. These tools and redesign help us recover faster and make it easier for customers to navigate disruptions. Another reason United remains differentiated and why we continue to build brand loyalty. Late last week, the FAA issued an order regarding the summer 2026 schedule at Chicago O'Hare. We are currently reviewing the FAA order and we'll share additional information, including any next steps as soon as our review is complete. We are pleased to reach a tentative agreement during the quarter with our flight attendants represented by the Association of Flight Attendants. This agreement includes well-deserved industry-leading wages and other meaningful improvements for our flight attendants who play an essential role in caring for our customers and representing United every day. Voting concludes on May 12. On April 6, United celebrated its 100th birthday, a meaningful milestone for our airline, the generations of employees who have built it and our loyal customers who continue to choose to fly the friendly skies on United. I want to thank all of our employees for the care and commitment they bring each day to our customers and to one another. As we recognize this milestone, we remain firmly focused on the future and on building an even better airline through continued investment in our product, our people, our network and our operation. With that, I will hand it over to Andrew to discuss the revenue environment and our other industry-leading commercial initiatives. Andrew Nocella: Thanks, Brett. Consolidated total operating revenue in Q1 increased 10.6% year-over-year to a record first quarter of $14.6 billion. TRASM increased by 6.9% year-over-year. All regions had positive PRASM in the quarter. I'd like to -- I'd describe the start of the year as strong for all customer types and all regions. For January and February, prior to any impact from the war, we saw ticketing for business revenues up approximately 12%, while leisure was up a healthy 6%. Looking back at Q4, business ticketed revenues were up 6% and leisure was up only 2% year-over-year, creating a nice sequential increase in the first 2/3 of the quarter. Premium demand remains strong with Q1 premium revenues up 13.6% on 4.4% increase in capacity. Premium RASMs were up 8.9% year-over-year, leading main cabin by 4 points. It is clear that consumers continue to seek elevated experiences. Business demand was strong in Q1 with revenues up 14% year-over-year and strength across all verticals. Headlines about TSA wait times did suppress demand between March 23 and April 1, but they have fully recovered since. Our loyalty business continued to outperform and total loyalty revenue was up 13% in the quarter. Acquisitions and spend were both very healthy and supported by updates we made to the MileagePlus program. Late in the first quarter, we implemented 5 broadly successful price increases, along with an increase in baggage fees that began to offset the increase in the price of jet fuel. Price increases in response to the increase in jet fuel have been significant and across the board. However, global long-haul increases have been a bit stronger than domestic. In January and February, United's selling ticket yields were up 4% year-over-year. In the first half of March, that increased to 12% and further increased to 18% for the second half of March. So far in April, this trend has continued in the last week, sell-in yields for all future travel are now up 20% year-over-year. As you would expect, we sold 23% of our Q2 and 8% of our Q3 capacity at lower price points prior to the rise in jet fuel costs. We remain confident in our ability to fully recapture the fuel cost increases over time. And in 2Q, we expect to recover between 40% and 50% of the current increase. In response to higher fuel cost environment, we've begun to adjust capacity downward by approximately 5 points throughout the rest of the year. We now expect Q3 and Q4 capacity to be flat to up approximately 2%. Our adjustments removed marginal capacity on off-peak days and flight times such as red eyes, which we believe will fuel our recovery of fuel price increases in the second half of 2026. Our current sell-in schedule is up just over 4% in the summer, but those capacity adjustments will be loaded in the next week or so to get the capacity out there selling appropriately. On our January call, I hinted about new commercial initiatives that we believe will drive brand loyalty, choice and increase revenue for United over the medium and long term. We have now formally announced these initiatives, and I will summarize them today for you. To be clear, these changes have been in the works for years and they were made across all aircraft, all cabins and in many different areas of the commercial business. First and maybe of greatest importance, we've made the largest change in a decade to how we display and sell products on united.com and in our app. Internally, we described this change as nested selling. Nested selling took years to research, program and test and is now active in our digital channels. We can now properly merchandise our grown product lineup. We have already seen large increases in upselling because of these website changes. We simply were unable to show all of the products we had for sale easily on the old website display. Second, as part of the website evolution, we've introduced base fares in our premium cabins, Base fares come with less checked luggage, no early seat assignments and different club access features. To be clear, everyone on a base fare will be able to secure a seat assignment at any point via an ancillary purchase or for free during the check-in window. These base fares allow consumers more control over their experience by choosing what services they want to include on their journey and were a tremendous success in the economy cabin with basic economy. Third, we announced that 50 A321 Coastliners are planned to join our fleet. With the Coastliner, we can extend our award-winning Polaris brand for the first time on all United flights from New York to Los Angeles and San Francisco. Fourth, we unveiled United's new Airbus A321 XLR onboard products. These products on each XLR are consistent with the Coastliner. However, we've modified certain aspects of each XLR for the unique needs of an 8-hour Atlantic Crossing versus a transcontinental flight, including the larger snack bar, more lavatories, more galley space and less main cabin seating density. Combined between the Coastliner and the XLR, we expect to have a fleet of 100 A321s equipped with 20 lay flat beds and 12 premium plus seats, a commitment to this unique narrow-body platform unmatched by others. Premium plus seats will be for the first time deployed on domestic routes at scale. Fifth, to be a premium brand, we needed to have a consistent product no matter what plane you fly on or where you're going. United redefined service to smaller communities a few years back with the CRJ550, and we've now extended that idea into what we're calling the CRJ450. Sixth, we announced Relax Row, our latest product innovation for young families on global routes a few weeks ago. Relax Row is a main cabin product that transforms three seats into a flat surface and includes bedding and pillows. And seventh, we said we would change MileagePlus to accelerate United's earn-in, and we have. Members will now be awarded more miles when they fly if they hold our co-branded credit card versus members who do not hold the card. We also announced discounts for redemption only available to credit card holders. All these actions will increase the value of being a MileagePlus member and holding our credit card. While we continue to work under a long-term co-brand contract with our partners from Chase, we're making changes to what we can control today. In due course, we expect to have a new contract optimized for all stakeholders to the current market dynamics. Turning to our fleet. We have taken delivery of four high premium Boeing 787-9s with up to 16 more expected to be added in 2026 and a total of 33 planned over the next two years. The interior of our new 787-9 has something for everyone, and we believe further strengthens our premium brand. All of our commercial initiatives announced over the last few weeks have been years in the making, tested with countless customers and employee focus groups and are ready for prime time. Our launch plan is bold, quick and designed to increase customer choice, revenues and brand loyal customers. These new initiatives plus previous initiatives like Signature Interiors and Starlink are additions expected to be largely rolled out in two years. The future is now. United is now on final approach towards our product and premium vision that it completely transformed United versus pre-pandemic for all customers. I could not be more proud of the United team that has spent countless years and hours planning these product changes. These are the type of changes and product improvements across all cabins and for all customers that we believe genuinely differentiate United. We will continue to watch the demand and pricing environment very carefully in the coming weeks and quarter to refine as necessary our approach to this rapidly changing environment. With that, I'll hand it over to Mike to discuss our results and our outlook. Mike? Michael Leskinen: Thanks, Andrew. The first quarter has been a reminder that successfully managing the airline for the long term requires being prepared for short-term shocks. We've accomplished that at United by earning brand loyal customers. That strategy has led to margins at the top end of our industry and the best balance sheet we've had in almost 30 years. The financial strength that's created reinforces our ability to make the right long-term decisions. The latest challenge in our industry is the massive run-up in fuel prices created by the conflict in Iran. Fuel prices remain volatile, and we're monitoring the situation closely. We delivered resilient results with first quarter earnings per share of $1.19 within our initial guidance range of $1 to $1.50 and up 31% year-over-year, even with a $340 million higher fuel bill in the quarter. Our pretax margin was 3.4%, a 40 basis point expansion versus the first quarter of last year. Demand for the United product was already robust going into this heightened fuel environment. We believe we have the ability to pass on the increase in fuel due in large part to our brand loyal customers, continued demand strength and preference to fly United even at higher fares. In this elevated fuel environment, we began to swiftly adjust capacity in addition to pulling our Tel Aviv and Dubai flights, which together were 1.5 points of our capacity. These close-in cancellations from low CASM markets, along with significant storm-related capacity reductions throughout the quarter, pressured our unit costs. And as a result, our CASM-ex for the first quarter was up 5.9% year-over-year. As discussed, we are also proactively removing about 5 points of capacity for the rest of the year that we don't believe can cover the elevated cost of fuel. We expect capacity in the back half of the year to be flat to up 2%, several points lower than our original plan. That will continue to pressure our CASM-ex, but we expect it will improve profitability and cash flow for the remainder of the year. This is precisely why we don't manage to CASM-ex but to long-term profits and cash flow. Looking ahead, we expect second quarter EPS to be between $1 and $2, anchored by an all-in fuel average price of approximately $4.30 per gallon. For the full year, we are providing an updated and widened guidance range to encompass multiple scenarios. As we've experienced over the last two months, the world can change quickly, but in both higher and lower fuel price scenarios, we expect to recapture 40% to 50% of the increased fuel cost in the second quarter, 70% to 80% in the third quarter and 85% to 100% by the fourth quarter. We expect to deliver full year 2026 EPS in the $7 to $11 range. The demand environment to date remains strong, and we expect will support a double-digit increase in RASM in the second quarter and for the full year. If fuel prices remain on a downward trend, we expect to be in the upper half of the guidance ranges. And if fuel reescalates, we would expect to be in the lower half of the guidance ranges. With that said, United remains in a strong financial position. Our resilience in a high fuel price environment as well as our relative position in the industry provides further confidence in our long-term target of achieving double-digit pretax margins as soon as next year. Our proactive approach to managing the network in this environment is helping us achieve this outcome. Turning to the balance sheet. We continue to march towards our goal of being investment grade. In the quarter, we took actions to make further progress towards this goal and paid down more than $3.1 billion in debt, unencumbering more assets by accelerating our repayment of $2 billion of our notes that were secured by our slots, gates and routes while also prepaying $400 million of near-term maturity or higher cost aircraft debt. Additionally, the first quarter marked United's return to the unsecured market as we raised $2 billion across two unsecured bonds, our first unsecured issuance since 2019. The 5-year bonds priced at [indiscernible], while the 3-year bonds came in under 5% at [indiscernible]. We successfully reset the credit curve for United, compressing the gap in our credit spreads with investment-grade peers to historically low levels. This was the first high-yield bond issued with a coupon below 5% since Ford did it 4 years ago. Our execution exceeded our initial expectations as the market responded with incredible demand. This is the strongest evidence yet that the buy side appreciates that we're knocking on the door of investment grade. In the first quarter, we generated $2.9 billion in free cash flow. And while our free cash conversion in the near term will be pressured as fuel prices remain elevated, we remain committed to generating durable and growing free cash flow. To wrap up, our first quarter performance remained resilient. We are managing the business with the expectation that jet fuel remains elevated in the medium term. We're nimbly adjusting the network and cutting capacity that doesn't cover fuel costs, all while continuing to invest in our people and our hard product. As we look to the future, United is positioned to deliver stable double-digit pretax margins, strong free cash conversion and strong EPS growth on the other side of it. I'll now turn it to Kristina to kick off the Q&A. Kristina Munoz: Thanks, Mike. We will now take questions from the analyst community. [Operator Instructions] Regina, please describe the procedure to ask a question. Operator: [Operator Instructions] Our first question will come from the line of Jamie Baker with JPMorgan. Jamie Baker: So Scott, the CNBC interview where you articulated the idea of a larger brand that would capture passenger flows that are currently flying foreign competitors. It sounds like this is an idea that's still under development at United. But I'm curious, could you envision a world where United might operate its own hub in Europe the way that Pan Am once did? And second, do your existing partnerships with Star Alliance members, do those relationships factor in at all to your thinking in this regard? I mean, I think the idea of capturing foreign flows is fascinating. I'm just trying to think through how you might get there and maybe consolidation is the only way. Scott Kirby: Well, thanks, Jamie. I thought you were going to get through that without saying the C word. You almost. But first, I think it's extremely unlikely that we'll open a foreign hub anywhere in the [ foreign. ] Our Star Alliance partnerships are great. They enable global reach and breadth. They enable us to fly to lot -- give our customers the ability to fly to lots of cities around the globe that are never going to be big enough for United Airlines on our own to fly to and use frequent flyer miles to go to those kinds of places. And so those are all great. And really, everything that I've said today are -- I said on CNBC and Bloomberg this morning are all things that I've said in the past, I know people are now viewing it in a different light because of the rumors that came out last week. But everything that I said are things that I have said in the past. And it really comes from -- we've had this vision to build a great brand loyal airline, and it just worked incredibly well. Like you look at our first quarter results like with this kind of increase in fuel prices to deliver those kind of results to be able to look through to the full year with fuel prices doubling and still have reasonable confidence in $7 to $11 of earnings and stay focused on the long term. It's just -- it is dramatically different here at United than it was in the past. In the past, this would have been furloughing and deferring aircraft orders and cost-cutting exercises and just all kinds of stuff to try to manage through the near-term noise. And it's dramatically different. And we've won by winning customers in all classes of service, by the way. We invest nose to tail. Like most of our investments apply to all customers, Starlink, seatback entertainment and every seat, WiFi, the best app in the world. They apply to every single customer on the airplane. And because that strategy has worked, I thought it would work, but it's worked even better than I thought. And you can see in our financial results, you can see it in the market share data and in all of our hubs where we had big competitors, same things happened everywhere. It's not unique to competing with any one airline. It's happened everywhere. You can see it in the data. And it's worked even better than I thought, which -- because it's worked even better than I thought it would, it allows us to raise the bar on ourselves and aspire to something even bigger. And I think there is this big global trade deficit in the U.S. We compete with some really good airlines in the Middle East and Asia, and they have some advantages that we don't have. And like I actually haven't said what it takes to do it, and I don't even know the answer. Anything that it might be an answer comes with complications, and there's no certainty that any of them get there on their own. But it's an aspiration that we have at United. I've sort of talked about it and hinted at it at least in the past. It is an aspiration that I think United uniquely is in a position to take a run at. Dream big. That's the way you accomplish big things. Jamie Baker: Okay. And for my quasi-related follow-up, it's on the tape that the administration is readying a $500 million rescue package for Spirit. I've been with you for the last couple of years in terms of permanent and irreversible structural change. But how does the industry continue to evolve if the government chooses to prop up failing businesses whose failures have nothing to do with fuel? Scott Kirby: Yes. Well, first, I don't know what's going to happen there. And I think that we're proving right now that well-run airlines like United Airlines can even be profitable and certainly don't need bailouts in a time like this. And to your point, Spirit was -- I feel bad for the people of Spirit, but it's been pretty obvious that Spirit's business model was fundamentally flawed and the airline was not going to be able to make it or ever cover their cash operating costs. So I hope that doesn't happen. But if it does, we're going to keep focused on winning brand loyal airlines like -- this is brand loyal customers. For us, I don't think that this is nearly as big a deal as for others that are in the more commoditized space. If I was working at one of the airlines that depended on more commoditized travel, I'd be irate probably about this. But for us, like I think we've so distanced ourselves from the rest of the industry that I [indiscernible] policy. But I don't think it's going to have -- whether Spirit fails or keeps flying, I don't think it has much effect on United one way or another, to be honest. Operator: Our next question will come from the line of Conor Cunningham with Melius Research. Conor Cunningham: I'm pretty happy that I don't need to ask the Spirit question. In a world where fuel remains elevated for a long period of time, just curious on how that changes your management style of a hub or just like your general view on profitability to the overall system. I assume you're refreshing that analysis for yourself all the time. Are you doing that for your competitors as well as you look for opportunities more broadly? Andrew Nocella: Yes. I think the answer is affirmative on all the above. We look at this daily, weekly, quarterly, monthly, you name it. As fuel prices go higher, the question is how will demand react. And at this point, we can tell you that the price increases are going well and demand is hanging in there really strong. What we've done is proactively canceled flights, particularly on off-peak days and off-peak times, expecting that there could be some demand weakness in those channels. We'll see. So we think we're ahead of the curve here, and we'll continue to watch it and monitor it. But so far, so good, and demand is hanging in. Conor Cunningham: Perfect. And then maybe just on the demand destruction commentary a little bit. I'm trying to unpack it a little bit because in the past, you've talked about demand being somewhat inelastic to price. And I realize you're not seeing it fall off now, but there's a lot of speculation that may happen. So as you run your scenarios, like can you just talk a little bit about like how you expect premium, maybe the business traveler to change? Or I assume that the demand destruction really comes from the leisure side of the equation. So if you could just talk about how you -- how the scenarios kind of play out within your 2026 guidance. Andrew Nocella: I think we're a bit in uncharted territory. I think we can tell you right now that all types of customers remain particularly strong. Like just in the last week or so, our yields are now up 20% year-over-year. But even more importantly, the business part of our business, business traffic is over the last two weeks, up 25%, business revenue up 25%. And that's accelerated from up 16% in quarter one and 9% late last year. So these price points are being absorbed and passed through and volumes are increasing. And for United, you'll recall, we had the unique headwind last year related to [ Newark, ] which we're going to lap in about 10 days, I believe. So it will create easier comps for at least United and maybe harder comps for others. But the numbers look really fantastic over the last few weeks. Now we'll have to keep watching it, particularly as summer ends. And like in order to maintain these type yields at United, I felt like we needed less capacity on Tuesdays, Wednesdays and Saturdays and off-peak times, and we've done that. But look, business traffic is strong. Leisure traffic is bouncing in the mid-single digits right now, which I think I'm happy with. And so we'll continue to watch it. It is uncharted territory given the massive amount of changes we've done, but we've had 5 broadly successful price increases. And right now, we are passing on yields that are up 20% year-over-year. Michael Leskinen: Conor, this is Mike. I just want to pile on because you asked about the guidance policy. We've long had a guidance policy of building in an act of God into the guidance. And so we -- what you're hearing from Andrew, what you're hearing from Scott, there's nothing in our bookings that suggests there's demand destruction. But I believe it's prudent to be prepared for that. But we are not seeing it. We're hopeful that we won't see it. The economy seems robust. The stock market is indicating the economy is robust. And it may be that, that is an act of God we did not need to be prepared for. But that is our policy, and we need to be prepared for lots of scenarios. Operator: Our next question will come from the line of Ravi Shanker with Morgan Stanley. Ravi Shanker: Just on fuel, it appears -- the debate appears to be moving from fuel inflation to fuel availability. Just trying to get a sense of what kind of visibility you guys might have, especially out in Asia or Europe regarding potential fuel shortages and what the plan B might be in that case? Michael Leskinen: Ravi, it's a great question. We've got really good visibility for 4 or 5 weeks. And you are right to say that this issue is centered on Europe and Asia. It's much less of an issue in the U.S. We don't see a lack of availability being an issue at all in the U.S. It's a price issue. However, even in Europe and Asia, as we sit here today, we think it is a price issue, not an availability issue. We think that as prices rise, and you're seeing the price of jet rise much more than the price of Brent as crack spreads widen out. And so we think that price is going to be a rationing function. That means there will not be spot outages, but we're watching it closely. The longer the strait remains closed, the more that is a risk, and it is of risk in the regions you noted, Asia and Europe, not so much the U.S. Ravi Shanker: Great. That's very helpful color, Mike. And maybe as a quick follow-up, Scott, your first response, you said that you compete with some really good airlines in the Middle East. Obviously, they're having a little bit of an issue right now. Do you see any structural share gain opportunities in transatlantic or even longer haul from some of those challenges? Or vice versa, do you expect them to be aggressive when the situation settles down? Scott Kirby: I think it's temporary. And I think you look at like what Dubai, not just Emirates, but Dubai, City State of Dubai have accomplished is remarkable and impressive. And if I had to make a bet, I'd bet on Dubai. I think it's going to come back fully. It won't come back immediately. It's temporary, but we'll come back fully. Operator: Our next question comes from the line of Scott Group with Wolfe Research. Scott Group: So Scott, maybe this is a naive question, but why does the industry need a crisis to start pushing through such higher yields? Why can't we do it more sustainably? And then maybe just I'll lump it on to like one question. When I take your 10% pretax margin for next year, it sort of gets you to roughly $18 of earnings. I know you don't want to get into specifics, but just at a high level, as fuel hopefully starts to normalize lower, do you assume you hold on to this higher yield? Or do we have to give some of that back? Scott Kirby: So I will actually answer that first question. Maybe I'll try the second one. I've watched this for at least 25 years now and have come to the conclusion that -- I guess I'll start with the conclusion. Every airline CEO should have to have spent two years at a reasonably senior position in revenue management, understand it. And it's core, most of them haven't. That's the reason it's harder to get fares up. And I think what happens at airlines is the math geeks that are really smart that run revenue management. I'm looking at one of them in the room, sorry to call you geek, Dave, he's awesome. But I'm one of them, too, know that air travel demand is inelastic and that there's room to price more appropriately for our cost of capital and to return our cost of capital. But the people in marketing and government affairs are better at telling the CEO, like that's a bad message. And so they're much better communicators to CEOs. And so the pressure internally in the organization is really hard to raise fares. I mean it's even crazy right now. A couple of airlines that are raising fares like crazy and then they run a fare sale every week. Like just the marketing team disconnected from the revenue management team and the marketing team are better marketers. And so they tend to win is really what happens. And so you see it in a crisis. And by the way, like another like sure bet -- almost sure bet is in late October, November every year, there's going to be fare increases. And I eventually figured this out 20, 25 years ago that in October, the teams finished the budget and they rolled up to the CEO and the CFO who pound the table and say that's an unacceptable result. And they say, go raise fares, which they do. But it takes -- that's not exactly a crisis, but it takes something like that. And it's goofy to me that that's the way it happens. It's nonsensical. But I actually think that's the reason that it happens, and I thought that for a long time, and a crisis caused it to go up more. Now as to the question of does this hold next year? I think actually that this -- a situation like this at least has the potential to be different and for pricing to hold more. First, like as I said earlier, I think -- or I said somewhere today, I forget where I've talked, that airfares in real terms are down 27%, 2025 versus pre-pandemic. And that had put a bunch of airlines either losing a lot of money or sort of breakeven is really kind of only a couple of airlines returning their cost of capital. And everyone has to eventually return your cost of capital. And so I think it is more likely than not this time. And certainly, the longer this lasts, the higher the probability goes that the pricing increases hold. And we probably won't hold 100% if we normalize as I told the team earlier today, and it's just my guess that if things went back to mid-February normal, I think we get -- keep 20% of the price increase next year. And I think that's going to move towards 80%. And every day, it's ticking up longer as this goes on. So we're not going to give guidance for next year, but I do think that we'll be double-digit margins next year. And your analysis is not unreasonable. Operator: Our next question will come from the line of Brandon Oglenski with Barclays. Brandon Oglenski: Scott, I'm wondering if you could elaborate on winning brand loyal share and specifically as it equates to your Chicago O'Hare hub, especially now that there's a proposed FAA summer cap on operations there. I guess, A, how are you faring versus your competitor? And then, B, how do you anticipate complying with that? Scott Kirby: So I'm answering more questions today than I like, but I'll do it. In Chicago, we're still reviewing the order, but it does appear that we're not going to get to grow as much as we and our customers would like. But the real point is one you make, like we've won brand loyal share here in Chicago, and it's never been about the number of flights or the number of gates. Number of gates and flights were the output of what was happening with brand loyal customers. And we have by far the best technology. We have by far the best service, the best reliability, by far the best product. And customers have overwhelmingly voted -- not -- this isn't unique to Chicago, by the way. This has happened in all of our hubs. Customers in all of our hubs have voted overwhelmingly for United. We got three big hubs where we have three different big competitors. Each of which we've won about 20 points of market share. And here in Chicago, we've actually won 38 points of market share with business travelers. So customers care about quality. Quality really matters. And we give great value to all customers and so the brand loyal customers have switched. And absolutely nothing about that changes here in Chicago. But it does look like the FAA is going to not let us grow as much as we and our customers would have liked. And I wish we could grow more, but we can't. We've got other places we can grow, and I look forward to someday being able to grow more here. But nothing changes about the sort of structure here in Chicago and the decade that we've spent winning brand loyal customers by creating a great airline for them. Operator: Our next question will come from the line of Andrew Didora with Bank of America. Andrew Didora: Maybe changing gears a little bit, throw this one out for Mike. Just diving into cost a little bit more on the maintenance side. Just trying to think about how this kind of trends. I know it can be lumpy throughout the year, but particularly as it trends as you cut 5 points of capacity throughout the rest of the year. I would think you get some leverage on the maintenance side? Or am I not thinking about that the right way? And just from a long-term kind of maintenance cost perspective, is this something we should think about growing maybe a couple of points more than your capacity growth? Just curious on that line item. Michael Leskinen: Thanks, Andrew, for the question. And I'll make a few points. Firstly, you should broadly expect our CASM-ex trends to move inversely with the amount of capacity that we take out. I think that's maybe obvious, but that's what happened in Q1. That's what you should expect for the remainder of the year. Number two, the sooner you take out flights, the further out those flights are, the more you can variabilize the cost. There's no doubt about that. But at United, we're winning brand loyal customers by investing in this business. And nothing about this crisis is long term, and so you can expect us to continue to invest in the business. The final point I'll make, you made around maintenance. I think at United, we have some unique opportunities to fight that trend where maintenance cost is expanding as a percentage of our costs. Part of that is gauge, but part of that is what we're doing in global procurement and how we are working with the great tech ops team that we have. So I'm very optimistic we will not face that same trend that much of the industry faces. Andrew Didora: Got it. And then just my second question, certainly it seems like you were busy at the start of the year on the balance sheet. But just on the buyback, you had stepped it up this time last year in all the market volatility, but 1Q this year, very similar to the last few quarters. Just curious your thoughts on how you thought about the buyback. Michael Leskinen: Look, I think it's a great question, and it's valid. But we have two objectives with our buyback and our capital management. Number one, we are committed, absolutely committed to getting to investment grade. And so we need to balance our buyback and our opportunism around buying shares when they're below intrinsic value with our commitment to getting investment grade. And so what you saw in the first quarter was another example of how we're balancing that. I'm really proud of the team for what we did with the two unsecured offerings. And I just want to reiterate that we are going to get to investment grade in all scenarios. Operator: Our next question will come from the line of Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe another question for the revenue management geeks out there. You're removing 5 points of planned capacity through the end of the year. How do you think about what range fuel would need to settle in for United to return to that mid-single-digit capacity growth in the second half? And how do you think about irrational capacity coming back online? And how do you manage costs in that environment as well as you continue to invest? Andrew Nocella: That's a lot of questions. Sheila Kahyaoglu: Sorry. Just take one, if it's okay. Andrew Nocella: Look, I think we're going to watch demand really carefully. We know how price is created in the business, and we've cut this off-peak capacity because we want to make sure that we can sustain these type of yield increases that we see right now. And we'll continue to watch demand, and we're going to manage the business to hit the financial targets and margins that we have out there. And so if we can do that with more capacity, we'll gladly bring it back online. But where we are today would just -- and the economic lesson that Scott gave you at the opening would say that there should be some level of demand reduction related to a 20% fare increase. We haven't seen it yet. And if we don't, it's a really great outcome, but we're planning for that. If it doesn't turn out to be the case, we'll appropriately adjust our plans. Operator: Our next question will come from the line of Tom Fitzgerald with TD Cowen. Thomas Fitzgerald: I just want to ask a multipart question of Andrew about the commercial initiatives. If we bucket them into maybe merchandising, fleet and MileagePlus, would you mind just walking us through the margin uplift you're kind of contemplating over the longer term from some of these initiatives that they pan out? Like just in terms of thinking of putting some of those Airbus aircraft on those routes, like how they compare to the aircraft they're replacing, things like that? Andrew Nocella: Yes. I'll keep it really high level, but -- and I'm glad you asked the question because the current conditions are super interesting. But we've been working literally years on the 7 initiatives that I had in my script earlier, and we are really proud of all of them. We think all of them are material. But properly merchandising our products and being able to sell them, like we were unable to sell certain products is valued in hundreds of millions of dollars per year. And the new aircraft we bring on that are optimally configured for the premium demand that we're seeing is also a gigantic number. I'm going to avoid assigning values to each of them individually. Maybe we'll do an Investor Day someday where we can talk about it in more detail. But all of those initiatives, and there are 7 of them, and they're really all 7 of them were very, very significant, are about setting our future up to reach not only double-digit margins, but ultimately mid-teen margins as we've talked about. And we are well on our way. We've got it dialed in. We've, I think, figured this recipe out. We've segmented really effectively, and we're not done is also what I would tell you. We have other ideas in the works and plan another media day next year to talk about. Because we're really proud of all this. And the RM stuff, the segmentation stuff, the willingness to pay, all of it giving customers in all cabins more choices is incredibly effective, and we're winning share all the time. So hopefully, that answers your question appropriately, but I'm going to say it's just really materially significant to lay the proper foundation for the future. Operator: Our next question will come from the line of Michael Linenberg with Deutsche Bank. Michael Linenberg: Just one question here. Just on revenue recapture. I mean, thanks for outlining the progressions for the year. What gives you confidence that you're going to get to 100%? And do you actually need maybe outside help, whether it's other carriers cutting capacity? And maybe just give us a sense of how you recovered Russia, Ukraine, how quickly you were able to recover it back in 2022 when we had the last major fuel spike. Andrew Nocella: I'm not going to count on other airlines for anything, that's for sure. But from our perspective, the fact that we've already gotten to a 20% yield increase. And what we've done is we've cut off the capacity to make sure that we can sustain these higher yields. I feel really confident. And I would -- look, before this fuel situation happened, I would tell you, fuel is a pass-through. And so I feel really confident we're passing it through. Demand is hanging in there. We've made the appropriate capacity adjustments for United to make sure that we can get to full recovery by the end of the year, and we're well on our way already between 40% and 50%. And -- but the most optimistic thing is the fact that within a matter of 7 or 8 weeks, we went from yields being up 2% to 3% to yields being up 18% to 20%. It's pretty darn remarkable. Michael Leskinen: Mike, the underlying point is that for a growing portion of our customer base, this is a decommoditized business. The brand loyalty at United. You get a better experience, you get better value. And I think the results speak for themselves. Operator: Our next question will come from the line of John Godyn with Citigroup. John Godyn: I wanted to just follow up on the fuel pass-through. I think that commentary and that guidance was great. If we could maybe get a little bit of geographic color kind of how pass-throughs are evolving in your opinion, internationally versus in the domestic market. The capacity trends are very different. The fuel surcharge activity is very different. The hedging of the competitors is different. Maybe a little bit of color there would be helpful. Andrew Nocella: Look, I think the color I would add is I thought that the domestic would be quicker to move than international, and I was wrong. The international environment pricing -- well, both are strong. I want to be really clear. But the international environment is actually better than domestic that the price increases have been more substantial and are covering more of the fuel burden than they are domestically. And I think that's really remarkable. I think there's been changes in the overseas pricing behavior that have actually surprised me, quite frankly, given that -- I don't want to go into every detail, but given what I know about the industry. So I'm really pleased with that. And I do think these fares are going to be up. And as Scott said, depending on how long this lasts, the longer it lasts, the higher they'll be up and the longer it will stick, in my opinion. But the international environment is better than the domestic environment at this point. Michael Leskinen: John, I can't help myself, but you mentioned hedging by foreign carriers. If they hedge Brent, they're not hedging jet fuel. The biggest portion of the move in jet fuel has been crack spreads. So I think this experience has proven once again that hedging is a poor policy. John Godyn: That's great color, guys. And if I could just follow up with one more on the pass-through through the end of the year. It sounds like the assumptions embedded in that are status quo. Like you're not expecting all the other carriers to slash capacity or something like that driving your pass-through. Is it safe to say that? Or are there other kind of industry dynamics that you're looking for to kind of drive 100% pass-through by the end of the year? Andrew Nocella: Look, I can't speak for other airlines. We've engaged in self-help. We know what it takes to pass on these price increases by what we're going to fly. And we're out here to hit our financial targets and hit a double-digit margin next year, as Scott said. So I don't know what the goals and motivations and missions of the other airlines are. I won't speak for them, but that's ours, and we're going to manage our capacity to achieve our goals independent of what the industry does. Operator: Our next question will come from the line of Chris Wetherbee with Wells Fargo. Christian Wetherbee: Maybe just sort of sticking on the theme of the fuel pass-through and ultimately, retention rates. You talked about holding on to 20% and maybe that going to 80% over time. I just want to understand the mechanism behind that. Is it just simply duration? Is it the sort of competitive actions around capacity that others take? Is it other price actions you could use like bag fees or other ancillaries that kind of stick even when fuel prices come down? I just want to understand that dynamic of how you can hold on for longer. Andrew Nocella: Well, I think the longer the price of fuel remains in this range and the longer consumers pay these prices and airlines get used to this revenue stream, the more likely it is to stick. That's the simple perspective on it. I do think that international is running really well above domestic, as I said a few minutes ago. So it will be interesting to see if that normalizes. But the environment right now, I think airlines want to return their cost of capital and particularly here in the United States, most don't and that is unsustainable in the long run. So something had to change. It's unfortunate it had to be an oil crisis, but here we are. Operator: Our next question will come from the line of Duane Pfennigwerth with Evercore ISI. Duane Pfennigwerth: Just on the mileage plan changes, which seem like they were motivated to get more people to sign up. Can you speak to the changes you're seeing in credit card uptake since you've made those? And I wonder if you could give us your current thinking about the time line for a new comprehensive agreement. Andrew Nocella: Look, we've been working on the MileagePlus changes for well over a year. We thought we would engage in whatever activities we could control outside of a new contract. And the numbers, the uplift, the spend has been incredible. We're really, really happy with that. Let's -- it's really new. So hopefully, in a few quarters, I can still describe it as incredible. I expect I will be able to do so. But these are changes that I think are really motivating for our frequent flyers, and we're at a record penetration rate of cardholders that are premier members at United. So I'm really happy with it. I think the details regarding our deal with Chase are largely confidential, but I think you can Google the expiration date and know that it's not tomorrow, but it's not that far off. And we're working with Chase. They're a great partner and run a really sophisticated program, which is required by United given the size and magnitude of our co-brand portfolio. We look forward to what the future brings. Operator: Our next question will come from the line of Michael Goldie with BMO Capital Markets. Michael Goldie: By the end of the year, your aircraft count will be up some 8%. How do you think about the operating leverage of these assets in a recovery versus the decremental drag if flight activity remains constrained? And then related, how are you thinking about managing labor requirements as you take on this new equipment while managing capacity? Michael Leskinen: Michael, I'll take the fleet question, and I'll try to answer the labor question. In an elevated fuel environment, it only exacerbates the advantage of new fuel-efficient equipment versus older equipment. And so you can see in our fleet plan, we expect to continue to take delivery. We're really pleased with Boeing increasing production rates on the narrowbody. They've been a great partner to us. It is financially advantageous to take the new aircraft, both from a margin and a return on invested capital standpoint. So you will see that. Now at the other end of the spectrum, our older aircraft. There's an opportunity to fly those aircraft in a capital-efficient way by managing the maintenance at the end of the life to maximize the value we get out of those aircraft. You can bring the utilization down, have extra spares and have additional flexibility to fly the golden hour and to manage peaks. So I think we're in an enviable position from a fleet standpoint. You shouldn't see us change anything. When it comes to managing labor and labor efficiency around that fleet, we've got a very sophisticated team, and we make sure we are hired across all work groups at the appropriate level to make sure that we're managing -- while we invest in the customer, we're investing in the hard product, we're investing in our people. We need to make sure that we manage the workforce very efficiently. And I think we do that very, very well here at United. Operator: And we will now switch to the media portion of the call. [Operator Instructions] Our first question will come from the line of Leslie Josephs with CNBC. Leslie Josephs: Just on the Spirit potential bailout, I guess, at this point, it looks like the administration is moving towards that. One, what's your comment on that? And two, does that change any of your assumptions for capacity? Or do you think there's going to be more capacity than you expected out in the market just because there was a liquidation risk earlier this year or in recent weeks? And then second, just had a demand question, if there's any geography where you are seeing a pullback. I think you mentioned that international was a bit stronger than domestic, at least on yield. So curious if there's been any softness in any area. Scott Kirby: Leslie, I'll briefly -- I just said earlier in the call, you may not have been on, but it's a more fulsome answer, I suppose. But in brief on Spirit, well-run airlines are still solidly profitable even in this environment. As you can see from United, I don't think this crisis is anywhere near big enough to cause the need for an airline bail out. And my record, you got lots of quotes from me over the past several years going back into the last administration that the Spirit business model is fundamentally flawed and it's going to fail. And I feel bad for the people. A lot of them will land jobs of the airlines every time that we have a new hire flight class and I go talk to them, I ask where people are from, and there's a lot of Spirit hands that get raised in the room. But I don't think it's necessary -- I also don't think it's terribly relevant to a brand loyal airline one way or another like United. Andrew Nocella: On demand, look, putting the Middle East aside, we're seeing strength everywhere. But what I'll point out is we're really seeing strength in premium cabins going forward into Q2, particularly across the Pacific and across the Atlantic. We're teeing up to, I think, a really strong performance. And United had already gone into the summer season with a pretty conservative global long-haul capacity number, I think, actually down year-over-year. So I think we're actually really set up to produce some very good numbers, and we have very good business demand going into the Polaris cabins is my answer. Operator: And I will now turn the call back over to Kristina Edwards for closing comments. Kristina Munoz: Thanks, Regina. As always, we don't control the environment, but we do control how we perform in it. I appreciate your interest today, and we will see you next quarter. Operator: Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.
Operator: Good morning, and welcome to today's Amneal Pharmaceuticals Investor Call. I will now turn the call over to Amneal's Head of Investor Relations, Tony DiMeo. Anthony DiMeo: Good morning, and thank you for joining Amneal Pharmaceuticals investor call. This morning, we issued a press release announcing Amneal agrees to acquire Kashiv BioSciences and reporting preliminary Q1 results. The press release and presentation are available at amneal.com. Certain statements made on this call regarding matters that are not historical facts, including, but not limited to, management's outlook or predictions are forward-looking statements that are based solely on information that is now available to us. Please see the section entitled Cautionary Statements on Forward-Looking Statements for factors that may impact future performance. We also discuss non-GAAP measures. Information on use of these measures and reconciliations to GAAP are in the press release and presentation. On the call today are Chirag and Chintu Patel, Co-Founders and Co-CEOs; Tasos Konidaris, CFO; and Jason Daly, Chief Legal Officer. I will now hand the call over to Chirag. Chirag Patel: Thank you, Tony. Today is a defining moment for Amneal. This morning, we announced that Amneal agrees to acquire Kashiv BioSciences, creating a fully integrated global biosimilars leader and positioning Amneal to become the #1 affordable medicines company in the United States. We have long said this was our goal. And today, we're showing exactly how to get there. Turning to Slide 3. I'll begin the call by discussing the strategic fit of the acquisition and the remarkable biosimilar opportunity ahead. Chintu will share more about Kashiv, our combined capabilities and the robust biosimilar portfolio we will have. Tasos will discuss the transaction, our financial outlook and Amneal's very strong first quarter results, which we preannounced this morning. At a high level, Q1 marked another consecutive quarter of strong top and bottom line growth with revenue up 4%, adjusted EBITDA up 19% and EPS up 29%. Our strong start of the year, combined with growth of existing and new products, gives us confidence to raise our stand-alone guidance for 2026. This consistent performance is something investors have come to expect from Amneal and something we take great pride in. On Slide 4, we provide an executive summary of this combination. First, this is a highly strategic transaction that creates fully integrated global biosimilars leader. This unlocks direct access to more than $300 million of worldwide biologic loss of exclusivity over the next decade by bringing together Kashiv's deep R&D and manufacturing capabilities with our proven commercial scale. This combination builds on a longstanding partnership that significantly reduces execution risk. Second, this combination creates immediate scale in biosimilars. We expect multiple launches each year going forward, supported by a robust pipeline of more than 20 biosimilars programs. Third, this adds biosimilars as a key growth pillar within affordable medicines. The transaction further diversifies our business and extends our growth profile well into 2030s, while also creating a footprint to expand internationally over time. And fourth, the deal is structured to create value from day 1. With a balanced mix of upfront consideration, performance-based milestones, we expect significant financial synergies and we maintain a disciplined financial profile with a clear path to deleverage to below 3x by 2028. Let me turn it over to Chintu to share more about Kashiv. Chintu Patel: Thank you, Chirag. Good morning, everyone. Going to Slide 5. Today's acquisition announcement reflects our long-stated goal to be vertically integrated in biosimilars. I want to acknowledge the Amneal and Kashiv teams whose hard work made this possible. Kashiv is a biologics platform built over 12 years with more than $900 million invested, 600-plus employees and 4 R&D and manufacturing sites. It brings proven capabilities, a differentiated portfolio and a global operational footprint in U.S. and India, which provides reliable supply chain and cost efficiencies. Turning to Slide 6. Kashiv adds deep biosimilar development expertise and scaled U.S. and India manufacturing, enabling multiple programs to run in parallel with speed and cost efficiency. The platform can support 3 to 5 biosimilars developments annually and offers end-to-end biologics capabilities from clone development and protein characterization through clinical and regulatory execution. These expertise spans key modalities and the vast majority of biologics, including microbials, monoclonal antibodies, fusion proteins, bispecifics and cytokines. From a manufacturing perspective, drug substance capacity is expected to scale from 26,000 liter in 2026 to 75,000 liter by 2028. Combined with Amneal, this creates a fully integrated global biosimilar platform. I will hand it over to Tasos to share more on the transaction. Anastasios Konidaris: Good morning, and thank you, Chintu. Turning to the transaction overview on Slide 7. As you can see, we have purposely structured this deal to balance upfront value and success-based consideration to ensure alignment of interest. The upfront value of $750 million is a 50-50 mix of cash and equity. The equity portion translates to approximately $29 million of Amneal shares, representing 8% equity dilution. In addition to the upfront value, the deal terms include potential milestones of up to $350 million, contingent upon attaining certain regulatory approval milestones as well as potential royalties over 12 years contingent on achieving certain gross profit levels. Finally, Amneal will fund operations between signing and closing of the deal. We spent a lot of time structuring this transaction to ensure it aligns incentives with the large commercial opportunities ahead of us and doing it in the most balance sheet-friendly way. The transaction will be funded by cash on hand as well as some additional debt, and we expect the combined company's net debt leverage ratio at the end of 2026 to be 3.7x adjusted EBITDA, only a slight increase to the 3.5x adjusted EBITDA at the end of 2025. It is important to note that we expect to resume our deleveraging in 2027 and expect our net leverage ratio to be 3x below adjusted EBITDA -- net debt adjusted EBITDA by 2028. Finally, we expect this highly strategic transaction to close in a few months as we work through annual shareholder approval and customary closing conditions and regulatory approvals. Let me now share our expected combined financial growth profile on Slide 8. First, we're embarking on this acquisition from a position of strength. As you may have seen from our press release this morning, we announced record first quarter preliminary financial results, and we also raised our full year stand-alone guidance. Amneal's ability to deliver solid top line growth and double-digit adjusted EPS growth in a tumultuous macroeconomic environment is a testament to our strategic choices, strong execution and relevancy of our products. Consequently, on a combined basis, including Kashiv, our 2026 view remains largely unchanged aside from a small impact to cash flow related to near-term transaction and integration costs. Importantly, we're maintaining the higher adjusted EBITDA and EPS outlook, which we believe is a clear signal of the underlying momentum and confidence in the trajectory of our business. For 2027 and beyond, we expect the combined company to continue to grow both in terms of top and bottom line performance. And by 2030, we expect revenues to have grown by approximately $1.2 billion or 40% over 2026 and EPS up by approximately $0.70 or 70% over 2026. Finally, we expect substantial operating cash flow growth, which supports our continued deleveraging. While increased financial performance is important, I cannot emphasize enough the impact this acquisition is having in enhancing our diversification, providing us with access to large markets into 2030 and beyond, just like our GLP-1 deal with Pfizer. Let me now hand it back to Chirag. Chirag Patel: Thank you, Tasos. On Slide 9, this transaction fits squarely in our long-term strategy. It adds biosimilars as a key growth pillar and positions us higher on the value curve with greater scale and higher growth. So why now? In looking at Slide 10, it's because we are entering the golden era for biosimilars. The global market is expected to grow from about $40 billion today towards $200 billion by 2035, driven by the largest biologic loss of exclusivity in history over next decade. Advancing to Slide 11. Biosimilars represent the next major wave of affordable medicines, and we are at an inflection point. Physician adoption is accelerating, patient access is expanding and the U.S. regulatory advancements are lowering development time and cost. Today, about half of U.S. drug spend is concentrated in high-cost biologics. Furthermore, biopharma pipelines continue to shift towards biologics with most therapies in development being large molecules. Each biologic is a future biosimilar opportunity. With biosimilars, access expands and cost lowers, delivering meaningful value for patients and the health care system. In 2024, biosimilars were estimated to have saved the U.S. health care system $20 billion. There's a powerful opportunity to improve affordability and expand access because what is the point of innovation if it is not accessible. Turning to Slide 12. Despite this opportunity, there are only a handful of integrated global players. And today, there is no clear U.S. biosimilar leader. Most players have relied on partnerships to date. With Kashiv, we bring together development, manufacturing and commercialization, enabling faster execution, smarter and bigger portfolio choices and ability to capture full economics. We believe this level of vertical integration is a true competitive advantage. I'll pass it back to Chintu to share more on the combined capabilities and portfolio. Chintu Patel: Thank you. Chirag shared with you the strategy on why biosimilars. Let me share with you the clear reason why Amneal. Looking at Slide 13, since our founding, we have built a leading affordable medicine business. We are now #3 in U.S. retail generics with over 280 products across dosage forms with one of the most complex portfolio in the industry. This is a natural extension of our strategy, and we will execute with the same rigor and discipline in biosimilars. On Slide 14, we show how this combination brings together end-to-end biosimilar capabilities. Kashiv adds scientific expertise and in-house development from cell line through approval, along with scaled biologics manufacturing across a global footprint. Amneal brings a proven commercial engine, leveraging our leading affordable medicines business, long-standing customer relationships and the specialty branded infrastructure to drive market access and uptake. Built on a 10-year plus partnership with Kashiv, our capabilities are highly complementary and positions us to execute well. Next, let's look at Slide 15 and the combined portfolio. Together, we have a combined portfolio of 20-plus biosimilars that targets over $100 billion in U.S. opportunity and more globally. First, we expect to have 6 commercial biosimilars by 2027, including biosimilars for Avastin and Denosumab and a biosimilar for XOLAIR, which is pending approval. Second, we expect 6 or more additional approvals from our advanced pipeline by 2030. And third, in 2030 and beyond, we have a deep pipeline of future programs that extend our growth well into the next decade. Strategically, this is a balanced and durable portfolio mix. Many opportunities are biologics with less than 1 or 2 competitors expected and others are widely used products with large markets, creating a durable and scalable growth engine. On Slide 16, we have a clear line of sight to steady cadence of near-term catalysts from Kashiv. First, lanreotide is a high-value partner asset expected to be approved in quarter 3. Second, biosimilar XOLAIR follows with anticipated approval at year-end, which is another Kashiv partnered asset that we now capture full value for. After that, we see a pipeline of additional approvals in 2028 and 2029, including biosimilars for ORENCIA and CIMZIA, each representing meaningful future growth drivers. Let me now pass it back to Tasos. Anastasios Konidaris: Thank you, Chintu. I'm very pleased to share with you our exceptional first quarter preliminary results, our confidence in the strength of our business, which translates to increasing our full year guidance on a stand-alone basis. And finally, our proposed acquisition of Kashiv BioSciences, which positions Amneal as a leader in the large global biosimilars market. Let me first start with our first quarter preliminary financial results, which were characterized by robust top line growth, exceptional bottom line growth and continuing deleveraging. Moving to Slide 22 in the appendix. Total net revenues in the first quarter of $723 million grew 4%. Q1 Affordable Medicines revenue of $423 million grew 2%, driven by strong performance of key women's health and ADHD products due to high market demand and increased Amneal supply. These high-margin products drove Q1 segment gross margin to 47.3%, up 320 basis points versus Q1 of 2025. We continue to expect Affordable Medicines revenue growth of 7% to 8% this year, driven by the strength of new product launches and strong execution by our teams. Q1 Specialty revenue of $133 million grew 23%. First quarter CREXONT revenue of $21 million reflects continued strong market uptake. Earlier this week, we shared with you our additional Phase IV data, which showed CREXONT as having more than 3 hours good downtime versus RYTARY, reflecting the CREXONT's compelling clinical profile. In addition, we're also delighted with the strong launch trajectory of Brekiya for cluster headaches. Revenue in Q1 2026 was $4.6 million compared to $1.6 million in Q4 2025. This rapid adoption as well as feedback from patients and prescribers confirms the substantial market need and long-term revenue potential for Brekiya. Turning over to AvKARE, where Q1 revenues of $166 million declined by $6 million or 4% as strong growth in our government channel was offset by expected decline in the low-margin distribution channel. As you recall, this is part of our strategy to enhance profitability, and we're happy to report that AvKARE's gross margin in the quarter grew by 690 basis points versus first quarter last year. Moving to Slide 21. From a bottom line perspective, the strong growth of adjusted gross margins by approximately 500 basis points and thoughtful expense management translated to Q1 2026 adjusted EBITDA of $202 million, up 19% and Q1 adjusted EPS of $0.27, up 29%. Finally, our strong financial performance and discipline continue to reduce leverage and our net leverage ratio in March of 2026 declined to 3.5x adjusted EBITDA compared to 3.9x adjusted EBITDA in March of 2025. So in summary, and before I turn to our acquisition of Kashiv BioSciences, our business fundamentals, financial outlook and balance sheet have never been stronger, which positions us well to consider such a strategic deal. Turning back to the acquisition for a moment, as we outlined on Slide 17, this is a highly synergistic transaction, adding significant value to our commercial and operating business model and providing substantial financial benefits over the course of time. From an integration perspective, we're combining Kashiv's R&D and manufacturing expertise with Amneal's commercial engine. We're strengthening market access, expanding in hospitals and accelerating international growth. With our shared global platform, we accelerate time to market at lower cost. From a financial standpoint, we expect $400 million to $500 million in cumulative financial synergies over time. There are 2 key elements to this. First, we're now capturing full economics from partnered assets by eliminating milestones and profit-sharing obligations that existed as part of prior licensing deals. Second, we also expect to realize substantial tax benefits as well as incentives from the local Indian authorities. Importantly, this deal goes beyond traditional cost synergies. It creates strategic scale and durable value while also avoiding the significant time and capital needed to build a biosimilars platform organically. Let me now hand it back over to Chirag. Chirag Patel: Thank you, Tasos. On Slide 18, since 2019, we have built a stronger and more diversified Amneal, and delivered consistent top and bottom line growth each year. We have done this by executing well across our business. We launched 20 to 30 products annually, expanded especially with CREXONT and Brekiya, entered biosimilars with our first products, established a novel GLP-1 collaboration with Pfizer, expanded internationally and acquired and more than doubled the AvKARE business. That said, the opportunity ahead remains significantly greater than what we have achieved to date. We envision Amneal 2030 as a much larger, more diversified biopharmaceutical company with more than 400 retail and injectable medicines, mostly complex and differentiated, a large pipeline of 20-plus biosimilars and multiple specialty branded products advancing the standard of care, while Amneal fills hundreds of millions of U.S. prescriptions each year. In summary, the key takeaway from today's call are on Slide 19. Today marks a pivotal moment for Amneal, establishing a fully integrated global biosimilars leader, strengthening our diversified portfolio and extending our durable growth profile into 2030s. Our strategy remains clear to become America's #1 affordable medicines company and a leading global provider of essential medicines because innovation only matters when it reaches the patients. With that, thank you, and we will open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Matt Dellatorre with Goldman Sachs. Matthew Dellatorre: Congrats on the deal. I know this was a long time coming, so very exciting. Maybe 2 questions, if I may. First, just on the commercial strategy for the new expanded portfolio. I see you have both the mega blockbusters like OPDIVO and KEYTRUDA and also many sub-$5 billion assets in there. And then also, it's a healthy mix of pharmacy benefit and medical benefit drugs. So could you maybe just speak a bit on how you approach portfolio construction and what type of assets we should expect over time as you all disclose more and the pipeline expands? And then I realize you're primarily focused on the U.S. market, but can you just remind us how you are thinking about the international biosimilars business as well? And then maybe stepping back, a question for Chirag. When you look at this new kind of combined company you all have now, what would you highlight as maybe the 2 to 3 specific things that you're most excited about and which you think could drive upside to this long-term guidance that you're giving today? Chirag Patel: Thank you, Matt. So let me address the portfolio mix first, the Kashiv pipeline. So markets are shifting more towards PBM, as we know. We predict 70%, 75% market to be driven by private label, PBMs, specialty pharmacies and 25% or so percentages will be driven by buy and build. So it's a well-thought-out portfolio. If you look at the disclosed product, there are certain undisclosed product that just like what we did with small molecule, we want to be the big player, relevant player and mostly focused on niche products. So how do we achieve that? That is why we have some of the big products like KEYTRUDA, OPDIVO, DUPIXENT, but each has its own reason why we have selected. Just to give you an example, DUPIXENT requires such a large biologics capacity, we're building it. And at the right time, it will be ready to deliver. Then we have niche products, which we expect 2 to 3 competitors. So if you look at overall in the next 10 years, our portfolio would be probably 70% would be niche, about 30% would be the large molecule that we must have to offer a complete package to the customers. So that is how the portfolio makes very well and obviously, the IP driven, a lot of strategy work goes behind it for the last 10 years, what Kashiv has done, and we love the portfolio. And execution is going to be the key, which Kashiv has executed over the last 25 years. We will bring the same rigor to execute this big platform on the biologics. Your second question on how do I think about U.S. commercialize, I answered most of the products. We will be marketing Amneal directly. We already have a long-standing relationship with big buyers such as CVS, Express Scripts, Cigna, Optum, UnitedHealth. These three are about 80% of the market. We also enjoy a great relationship with smaller customers. So we're well set to commercialize products in the United States with a broad portfolio of small molecule. Don't forget that plays a role as well. It's the same people, same relationship, same trust that we have established. If you ask the Red Oak of the world or Walgreens of the world, they would rank Amneal as the most strategic, the best platform, best values, the most complicated products that we come up with and create a massive patient access at affordable prices. We intend to do the same with biosimilars. International, our strategy has been clear. India, we have started marketing on our own, mostly the unmet need on the branded side and biosimilars. Rest of the world, we enjoy great partnership, as Amneal, Kashiv has also built great partnership with companies as well, which will be disclosed in the near future. So I'm a big believer in a partnership model. So you can -- there is a biosimilar void. There's 118 biosimilars. How do we deliver as an industry on all of that. So partnership will make great sense, and we don't intend to have boots on grounds in Europe or South America or Canada, that's not where we are focused on. We are solely focused on delivering biosimilars at scale, staying in the molecule for a long time, be a champion in America as we have a stated, goal is America's #1 affordable medicines company, and we are on our way to get there, maybe 2030, '32, we have multi-decade strategy. So we are completely focused and internationally, great partners. We look forward to work with them. New -- the last one, I'm sorry, is a long answer, but I'm so excited. The new combined company, what is the most exciting thing. So let's go back. I mean, our core business is performing at a full throttle, it -- the women's health, the hormonal patches demand has gone up, the inhalation products demand, ophthalmic products demand, they're all at a high level. And also the small molecules LOEs are going to double in the next 5 years than it had for the last 5 years. So tremendous growth opportunity in core business by itself. Second, our specialty brands, very exciting. You saw the CREXONT data, amazing. I mean we're getting words from our partners in Europe and India that this would become a first-line therapy because they've been using 40 years old technology platform. The product was made 40 years ago, IR product, Sinemet, which gives you off time every 2 hours, 3 hours, you think of a life of a Parkinson's patient. CREXONT is the best therapy out there for maintaining the daily lives. So very excited about CREXONT and seeing a great outcome on Brekiya. It's a much needed product, useful product for cluster headache patients and severe migraine patients. The third, GLP-1 partnership with Pfizer. As we all know, GLP market is going to keep growing. It's going to become life setting. So tremendous capacity would be -- and capability would be required. This is what we are building with Metsera, then it's with Pfizer. We enjoy a great relationship with Pfizer, a win-win situation, global markets, global demand. We have 18 countries, emerging countries, including India, we've been given the rights to market. Pfizer's branded products, which came from Metsera portfolio. That's a completely unique strategy than fighting over the generics at such a low prices that's been out there in -- just started in India and rest of the world. And we believe this is consumer products, everybody would want less side effect, longer duration, which potentially Pfizer products delivers. And the last one, as we've been talking on this call, is all about biosimilars, huge growth. We've been saying that this is the inflection point. The providers are excited. The 80% now turns into biosimilars. The insurance company, the coverage is becoming better and better. CMS has keep pushing for it. FDA has reduced the regulatory requirements. So this is the perfect time that we integrate this platform and deliver 3 to 5 biosimilars develop and file and commercialize for many years to come. And it also opens up the opportunity for bispecifics, right, the fusion proteins and in the future, ADC as well. So if you -- this is why it's so important for Amneal to now have a complete platform, small molecule platform and large molecule platform. Long answer, but I hope it was helpful, Matt. Operator: Your next question comes from the line of Les Sulewski with Truist Securities. Leszek Sulewski: Congrats on the transaction. So you noted the capacity scaling from 26,000 liters to 75,000 liters. How does this compare to some of your peers? And what's the magnitude of dollar spend to get there? And separately, would you say this is rightsized for that business moving forward? And do you see a further need for capacity expansion beyond the 75,000 liters? And then second, on the gross margin profile, maybe just walk us through the puts and takes around 1Q and how does the remainder of this year look? And then over the long run, how should we think about the margin profile now that the biosimilars business will be integrated? Chirag Patel: Great. Chintu and I will take the first one and pass it to Tasos for the second one. So Kashiv has built the platform manufacturing sites over the last several years, which is -- which coincides with the product approvals timing. So XOLAIR being first, we will be in manufacturing Piscataway, New Jersey and also the backup site is India as well for global supply. So all key molecules will have 2 sites, U.S., which, as you know, we are a U.S. champion. We always believe in U.S. manufacturing. So we keep expanding U.S. manufacturing, and we only have a site in Chicago with Kashiv acquisition, which is for E. coli. So the current capacity is sufficient for first few launches. And then over '27, '28, '29, we're expanding to 75,000 liter, which is, again, matches with the pipeline execution and pipeline approval and launch timing. That is how we see the capacity expansion. And it will be a good problem to have from 2030, '31 to keep expanding. Once we have the infrastructure in the same site, we can expand another -- keep expanding 25,000 liter -- another 25,000 liters as we need, we are always smart about this. We'll keep expanding the capacity. So we never would have issue with capacity. I'll pass it to Chintu to give more lights to this. Chintu Patel: So we have perfectly sized the capacity, and it's not only about how many thousands of liters, it's also about how you design and the number of bioreactors because you need flexibility in your manufacturing and for the execution of the filing products. So I think that's a key differentiator that how we have thought through that on a long-term basis to cater to our goals of filing a few biosimilars every year and the same time also commercially to make sure that we have the excess capacity. And we are -- we have diversified our supply chain from U.S. and India perspective also. So if it's a cost sensitive product, we will have enough capacity in India and also in U.S. So I think we are positioned well to cater to all the 20 products that we have and we have also considered this as a global capacity. So it's not only U.S. specially, we are playing globally in this market. So we are pretty comfortable with the 20 products having 75,000 liters. It's all about the design and how we have thought through that. And we have taken under consideration good market share. So that's also there. About the spend, it's about $30 million, $50 million a year, we'll be spending for next 2, 3 years on the CapEx to get to the 75,000 liter. Anastasios Konidaris: And Les, this is Tasos. Around gross margin. So I'll just speak in annual terms. So if you think about our gross margin in 2025 full year total company, we were at 42.9%. So let's call it 43%, and my gut feel is I think we will finish 2026 at about 45%. So at least at 200 -- we're aiming at a 200 basis points expansion. And that's going to come -- that's going to be driven, a, by all the business units. So our affordable medicines margins will continue to expand as we have continued to evolve the pipeline to more and more complex products with higher price points, right? You've been hearing this from us for the last 6 years now, number one. Number two is we talked about our conscious decision to increase the gross margins in our AvKARE business, which has been -- that acquisition has been a spectacular success and by focusing more on the government, at the expense of the low-margin distribution business. So that continues to pay dividends. And then finally, in our specialty business, which already has low 80s, 81%, 82% gross margins kind of continue to drive that adoption. So those have been the drivers why our gross margin this year should be at about 45% compared to about 43% last year. As you think over the course of time, margins have more room to grow, more room to grow beyond the 45%. If you were here about 5, 6 years ago, you will have heard Chirag and Chintu talking about having gross margins in the old days, almost 50%. So this is where we are driving directionally over the next 10 years. So it takes some time to get there, but we see another -- over the next 3 to 4 years, we're looking at the 45% gross margin to be closer to, call it, 47% gross margin as the portfolio continues to be driven by biosimilars, which have a higher price point than the rest of the business. Operator: Your next question comes from the line of David Amsellem with Piper Sandler. David Amsellem: So I have a few. First, can you just comment and elaborate on the insider ownership of Kashiv? That's number one. Number two is why provide long-term revenue EBITDA targets, not just '27, but also out to 2030? What was the rationale there? And just remind us is the EBITDA margin expansion that you're factoring in between 2027 and 2030, is that -- how much of that is a function of just the elimination of the shared economics on biosims? And then the last question is how much of your revenue base by 2030 do you expect will be from biosims? Anastasios Konidaris: David, I'll take question #2 and #3. If you can just -- can you just repeat question number one for a second, if you don't mind? David Amsellem: Yes, the insider ownership of Kashiv. Anastasios Konidaris: Insider ownership of Kashiv. Okay. Got it. Okay. So well, I'll take the first one. I'll start with the first one. So insider ownership of Kashiv, you can see it essentially in our proxy, which has been owned by the Amneal Group, which has been also a big shareholders at Amneal since the beginning of time. So ownership includes of the Amneal Group, includes both our CEOs who've always been transparent of that as well as people who have been investors in Kashiv and -- investors of Kashiv and also at Amneal for a very long time, and key contributors to what we have built now, which is a great company. So that kind of thing addresses question #1, hopefully. Number two is no CFO that I know likes to provide long-term guidance because it's a Catch-22 as lot of things can happen over the course of time. Having said that, and you got to -- I think you know us long enough to know, we take our long-term guide and financial commitments incredibly, incredibly seriously. So for us to provide long-term guidance, we had to feel pretty confident on our ability to deliver on those commitments, number one. Number two, I think it speaks to the tremendous amount of diligence we have done in this acquisition, which probably expand at least a year's worth of work by tens of people in our R&D group, in our legal group, in our business development group, in our financial group and the commercial group to convince me and convince us as a management team to lay those numbers out for our investors. The final thing is, I would say, why provide long-term guide, to us, it provides a focal point by which we focus 8,000 employees at Amneal and now our brand-new colleagues at Kashiv. So everyone, all of our 8,000-plus employees are singularly focused to a set of financial metrics, so it eliminates ambiguity. So this is what's behind why provide those targets. And also you got to assume we're being prudently conservative, right? No management team, at least that I know, wants to put out numbers which they are at risk of missing. So that's kind of how we thought about and why we provide those long-term targets. Now in terms of revenue and EBITDA expansion, it's a combination. It's a combination of both. I don't have the exact percentages, right? A lot of how much of that is a new acquisition versus how much of that is the existing business. As I mentioned before, we have an existing business. You look at our affordable medicines, every part of our business is growing. So we are doing this deal, not because we need to, because we think this is the right deal to do at the right time with the right risk parameters to drive growth for this business in 2030 and beyond. So you look at our affordable business, and that business is growing this year. We expect it to grow 7% to 8%. That growth will continue, and you can model this and biosimilars will add to that, right? And then in terms of an EBITDA basis, Q1 EBITDA was up 19%, right? Last year's EBITDA growth was 10%, this year. So the base business that is growing at least adjusted EBITDA 10%. We expect this to continue and add on -- the additional add-on we expect to come on biosimilars. So that's how we think of it. It is a highly derisked long-term forecast that is based on the growth of the existing business plus the acquisition and it's conservative in nature. So hopefully, that addressed some of your questions. David Amsellem: Yes. How much of your business do you think is going to be biosimilars? Like what's the revenue base going to be in 2030... Anastasios Konidaris: So... David Amsellem: Footprint now, yes. Anastasios Konidaris: Yes. So if you think about 2030, for example, the guidance we're providing is between $4.3 billion and $4.5 billion, probably about $1 billion -- a little over $1 billion, $1 billion to $1.3 billion, that's going to be biosimilars. Operator: Your next question comes from the line of Chris Schott with JPMorgan. Christopher Schott: Just 2 for me. Maybe just first, a bigger picture question on biosimilars. Can you just talk a little bit more about how you see the competitive landscape evolving as we approach this very large cycle of biologic patent expirations? I know you mentioned there's no clear leader in the space, but do you anticipate there's going to be a more meaningful consolidation of share and there's going to just be a handful of players? Or will this remain a more fragmented market as a whole? And the second one for me is just on a specific product on lanreotide, the Somatuline Depot. Can you just talk a little bit about that opportunity as we think about 2026 in terms of market dynamics and competitive landscape and just how meaningful of a product that could represent for Amneal? Chirag Patel: Yes. Thank you, Chris. Competitive landscape on biosimilars, as we know, the vertically integrated players are taking more market share. Amgen, obviously, one brand company that is still investing in biosimilars. Rest of the brand companies have moved out of favor for biosimilars, as you know, they are more obviously back to the innovative medicines. So that leaves Sandoz obviously clear global leader at this point and a great company. Celltrion is coming in, is a -- from -- a South Korean company, which is expanding in the United States and globally and building a large vertically integrated platform. Samsung is doing both out-licensing mainly and concentrating also different division on biosimilars. India's Biocon has been in the biologics for over 40 years. So they're already in the United States market. And then Kabi with mAbxience ownership and their own, we see them as a vertically integrated player. So the way it would expand is -- this is why it's an inflection point that we, as Amneal got the platform or getting a platform with the manufacturing capacity, with the pipeline that we execute over the next 5 to 7 years. It requires a lot of manufacturing infrastructure, a lot of R&D infrastructure, number of years, even with FDA's Phase III gone, still will be 5-plus years from the timing of starting the clone development all the way to the filing and approval and then the IP negotiation settlement. All those things would take 5, 7 years. So -- and you can't see like in a small molecule, you have 50 companies jumping in from India and China. We don't see that. We see a few companies will come from India, a few maybe from China, but they all have to build these U.S.-oriented infrastructure or regulated markets, which is a different ball game than you've been producing biologics for the emerging markets, because the requirements of FDAs are much at higher standards than those other countries. And Amneal builds everything first with U.S. in mind. So yes, there will be more competitors. The large molecules like KEYTRUDA, OPDIVO, you will see 5 to 10 competitors. Some would be partnered, and niche, this is why we, Kashiv and Amneal will be focused on is in niche molecules where we will see 2 to 3 competitors. So that's how we see the competitive landscape, maybe 8 to 10 players. There are 118 molecules to go after. Big biosimilar void is there. So that is a large, large number of products to work on and not everybody can do every product. As we said, our capacity capability is 3 to 5 per year. Chintu, do you want to add anything? Chintu Patel: I mean there's a lot of high barriers of entry, and science, it's much more complicated than the small molecules. It will cost close to $50 million to $75 million per product. So there are lots of barriers. So I think it still will remain not that competitive plus as Chirag stated, it takes 5, 7 years for a new player to build this platform and have the manufacturing and development expertise and capacity. At Kashiv, we have a fantastic group of 600-plus people. And that experience, I think, gives us the confidence of this 3 to 5 biosimilar. So competition, as Chirag stated, would be these 4, 5 players might be vertically integrated, but still is largely a space for somebody to be a leader and the Amneal will be a leader by 2030. Chirag Patel: And lanreotide, Chris, is -- the market dynamics changed. There was -- Cipla was in the market, had some contract manufacturing issues, so they are no longer in the market. It leaves it only with brand and the product is in high demand. We're getting calls from everybody. So we have requested FDA to expedite the approval and they're working on it, and we could be the first, again, the -- I'm sorry, it's a small molecule, generic lanreotide in the market, and we will supply and create another access for the hospitals and clinics as soon as possible. Chintu Patel: And this is also a global. So we have a pending approval in Europe also, and it's a highly complex product. It's a drug device combination peptide. So we are looking forward to this product and its opportunity. Operator: Your next question comes from the line of Glen Santangelo with Barclays. Glen Santangelo: Just a couple for me. Chirag, I mean, I think everyone would generally agree strategically that a deal like this kind of makes sense. But I'm kind of curious to get your perspective on the operational complexities of sort of what's involved here. Because if you look at the -- we were just talking to Chris' question about the evolution of the competitive landscape. A number of the other players have decided to go more in the partnership licensing route versus the vertical integration route. And maybe that's a function of how complicated or operationally complex it is. And so I'm kind of curious if you worry at all about increasing the risk profile of the company in that way. And then maybe secondarily, I wanted to talk about the 2027 EBITDA guidance that you put out today. And I'm guessing you kind of realize that, that number is a decent amount below what the Street was already forecasting for fiscal '27 and kind of implies some deceleration in the EBITDA growth rate in '27 versus '26. And just sort of given the $400 million to $500 million in synergies we sort of talked about, you had a couple of partnership deals that seem like they're on track and maybe you'll have full ownership of them by the time they come to fruition. I'm just trying to reconcile all the pieces that you've laid out here as it relates to how soon we may see those synergistic benefits in '27 and beyond. Chirag Patel: Thank you, Glen. So let me take the first one. I'll pass it to Tasos for the second question. So the first one, partnering versus full economics or vertically means vertically integrated. Yes, it is complex. This is why it took 10 years for Kashiv to build this platform with significant investment. So this is why we believe it be competitive light compared to obviously the small molecule. And why you can take the large few molecules, right, who could stay in the market, who could take the leadership position and stay all the way until the molecule needs to be delivered and produced. So if we have -- first of all, it gives you full economics. So your margin expands, you have full freedom of selecting products and it's not easy to in-license 20 products. We have 20 products biosimilar basket, and we're going to add more in coming years. So that freedom, the full economics in the United States market, it makes sense to be completely vertically integrated. As I stated before, Glen, that it would -- the partnering would -- is great. And in international market, we look to partner and Kashiv already has partnership with the key players globally who are well set globally. So I see the combined model, but mostly the companies that would be successful if you look back in 2030 or '35 are going to be all vertically integrated. They will not be -- just like in small molecule, there are not any companies that have survived being just the marketing companies. We got to do a lot more than that because the real, real complications is the R&D, is the IP, is manufacturing. I think the PBMs and private labels are making the marketing and sales easier, which is how it should be. I hope that answers the first question. You can -- may have a follow-up, but let me pass it to Tasos. Anastasios Konidaris: Glen, I love financial modeling questions. So let's kind of put things in perspective. So the first point is guidance for 2027 on EBITDA of $820 million is kind of substantially below where the Street is. I'm not sure where the Street is, number one, I think that they are about $835 million. So us providing guidance of $820 million plus compared to $835 million, I don't think it's substantially less than that, kind of point number one. But also, obviously, we don't run our business to kind of satisfy anybody else other than us and our shareholders, kind of point number one. Point number two, this kind of notion of kind of deceleration. This year EBITDA, right, the midpoint is at $755 million is about 10% growth versus prior year. Even if you take the low end of what we gave you for next year of $820 million, that's about 9%. So 9% versus 10%, I don't think it's a big deceleration, number two. And number three, we feel great about growing EBITDA 9%, 10%, even absorbing a strategic deal, which is going to have some dilution next year until it becomes accretive in 2028. So we feel great about being able to give our shareholders a view about next year of adjusted EBITDA up of about at least 9%, number one. And at the same time, fund incremental R&D, right, to maximize the opportunity here of $300 billion plus of branded products going generic over the course of time. That's kind of how we thought of it, and try to give you guidance for 2027, that's a long time away. So I think it speaks to our confidence about telling you what we think we can -- the minimum we can deliver next year. So hopefully, that gives you some perspective. Operator: Your next question comes from the line of Ash Verma with UBS. Unknown Analyst: This is [indiscernible] from UBS. I'm just asking questions on behalf of Ash. So I have 2. The first one, and I apologize, this has been discussed before. So the first one, how do you think about the lanreotide market opportunity? It seems like there's just limited competition in this molecule. So I just wonder like how confident are you about the approval time line in 3Q? And what will be the gating items for the launch? And then my second question on gross margin. So I think like it was discussed before the annual -- like in annual term, it's about like 45%, but in 1Q, I think this quarter it is about 48%. Does that mean we're going to see some gross margin normalization later this year? If you can give some clarification on that, that would be helpful. Chirag Patel: Thank you, [indiscernible] The lanreotide, the gating item is only the FDA approval. We're ready to supply, and it's a great opportunity for Amneal. I'll pass it to Tasos on the gross margin. Anastasios Konidaris: Yes. Our Q1 gross margin follows for a while. It was just a record quarter, which was overall up 510 basis points versus Q1 of last year. So it's just to kind of be able the sustainability of 510 basis points is kind of hard to keep repeating quarter after quarter. So this is why I think we're being -- we have a little bit more modest gross margin expansion for the rest of the year. And this is why, though -- even though with a little, call it, a little bit more modest growth the rest of the year, we still feel confident that overall company gross margins this year in 2026 should be closer to 45%, 45%, maybe a little better compared to about 43% last year. Hopefully, that's helpful. Operator: There are no further questions at this time. I will now turn the call back to Chirag Patel for closing remarks. Chirag Patel: Well, thank you, everyone, and have a great day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.