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Operator: Good day, ladies and gentlemen, and welcome to the GE Aerospace First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. My name is Liz, and I will be your conference coordinator today. If you experience issues with the webcast slides refreshing or there appears to be delays in the slide advancement, please hit F5 on your keyboard to refresh. As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed. Blaire Shoor: Thanks, Liz. Welcome to GE Aerospace’s first quarter 2026 earnings call. I am joined by Chairman and CEO, H. Lawrence Culp and CFO, Rahul Ghai. Many of the statements we are making are forward-looking and based on our best view of the world and our business as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul will speak to total company and corporate financial results and guidance today on a non-GAAP basis. Now over to Larry. H. Lawrence Culp: Thanks, Blaire. Good morning, everyone. I want to start by addressing the conflict in the Middle East and the dynamic geopolitical environment our industry is navigating. We are hopeful for a peaceful resolution, and we are also embracing today’s reality. With safety our top priority, we are focused every day on supporting our teams in the region and our customers globally. At GE Aerospace, we remain committed to our purpose. We invent the future of flight, lift people up, and bring them home safely. Right now, nearly 1 million people are in flight with our technology under wing, a responsibility our 57,000 employees take seriously. Turning to our first quarter results, 2026 is off to a strong start. Orders were up 87%, with CES nearly doubling and DPT up 67%, including record defense orders for this decade. Revenue increased 29% driven by CES services and double-digit growth in DPT. Operating profit grew 18% with both segments up double digits. And EPS increased 25% to $1.86, with free cash flow up 14%. Flight Deck enabled us to improve output again, with commercial services revenue up 39% and total engine deliveries up 43%. All the while, we are continuously investing to improve time on wing and lower cost of ownership for our customers across our current fleet and for next-generation technologies. I want to express a big thank you to both the GE Aerospace team and our supplier partners for their unwavering commitment to deliver for our customers. Turning to slide four and what we are currently seeing in today’s operating environment: In the first quarter, global departures were up low single digits, including a high single-digit decline in the Middle East, which represents roughly 5% of our departures. For the balance of the year, we have assessed multiple scenarios to develop a range of outcomes, with our current assumption that the conflict and its effects continue through the summer. As a result, we are reducing our full-year departures outlook from mid-single-digit growth to flat to low single-digit growth. This includes a low double-digit decline in the Middle East for the year with modest reductions to other regions. Based on our experience during the global financial crisis, the impact on services will likely lag changes in air traffic demand by several quarters, to be followed by a period of above-average growth. We are well positioned to navigate cycles, with our backlog providing resilience through changes in air traffic. And we have a young and diverse fleet with leading programs in both narrowbody and widebody. For our largest program, the CFM56, about two thirds of the fleet has yet to undergo a second shop visit, and utilization remains stable, supporting continued demand. Additionally, our defense business is supporting U.S. and allied warfighters—our engines powering the Black Hawk, the Apache, the B-1, the B-2, the F-15EX, the F-16, and the Eurofighter. We are seeing increased utilization since March, creating future aftermarket demand. Diving deeper into services orders and backlog: Our commercial services business is supported by a robust backlog of over $170 billion, up nearly $30 million since 2024, providing visibility into multiyear demand and supporting our continued growth. Over the last twelve months, commercial services orders increased over 30%, including 49% growth in the first quarter. Within services, demand remains strong for spare parts, which represent roughly 40% of services revenue. Since March, spare parts orders are up over 30% year over year, and sequentially flat to the first two months of the first quarter. Even with over 25% revenue growth over the last five quarters, demand continues to exceed supply. As a result, spare parts delinquency—shipments that have been delayed due to material availability constraints—is up roughly 70% since 2024. Given the sustained demand environment and our existing delinquency, we are entering the second quarter with more than 95% of spare parts revenue already in backlog. Turning to internal shop visits, which represent roughly 60% of our services revenue, approximately two thirds of the engines due for our projected shop visits for all of 2026 are currently off wing, either in our shops or waiting to be inducted. Additionally, we have high visibility into the engines which will come off wing over the next couple of quarters based on utilization trends and required removal thresholds in concert with the airlines. Our pipeline of planned engine removals in the second and third quarters combined with engines that are currently off wing exceeds our shop visit guide, providing ample demand to fulfill our outlook and de-risking our 2026 guide. Overall, we expect a limited impact on services revenue and profit in 2026, holding our full-year guidance across the board. Given the macro uncertainty though, with our strong start to the year, we are trending toward the high end of that range. Shifting to slide six: Flight Deck is fundamentally changing the way we operate, and in times like these, it matters even more. Collaborative problem solving with suppliers, airframers, airlines, and lessors is key to this effort. For example, we recently hosted a key supplier at our Terre Haute, Indiana site. Leveraging Flight Deck, we worked together to improve flow and reduce waste on their lead production line, and they have since increased output by over 40%. Actions like these contributed to priority supplier material input increasing double digits both sequentially and year over year again in the first quarter, resulting in the increased outputs I mentioned, including engines up 43%. Across our MRO network, we are using Flight Deck to increase output, reduce turnaround times, and lower the cost of shop visits. Take our McAllen, Texas site, where we reduced LEAP high pressure turbine repair time by over 50% by redesigning the cell for better flow. And we know AI will be an accelerator for Flight Deck. At our Lafayette, Indiana facility, we expanded the deployment of an AI-based material assistant to predict shop visit work scopes for LEAP engines nine months in advance, building on the turnaround time reductions we have recognized in both our Selangor and Malaysia sites. Collectively, our efforts improved shop visit turnaround times for both narrowbody and widebody platforms year over year. With our growing installed base, we are focused on expanding capacity to fulfill customer demand. Within the LEAP external network, Delta TechOps is now the first North American airline MRO provider licensed for both the LEAP-1A and LEAP-1B. And we just announced Iberia as our seventh Premier MRO, supporting growth in Europe. More broadly, maintaining U.S. aerospace leadership requires sustained investment to meet customer demand. We recently announced plans to invest $1 billion in our U.S. manufacturing sites and supply base for the second consecutive year to help accelerate engine deliveries, ramp part production that extends time on wing, and strengthen our defense industrial base. Additionally, $100 million will be invested in our external supplier base to provide equipment and tooling to increase capacity. These actions and investments are driving meaningful progress to services and equipment output, and while there is more to do, we are off to a strong start and positioned to ramp even further. Shifting to slide seven: Our growing backlog reflects our commitment to deliver customer value, investing to improve time on wing and cost of ownership. Nearly $200 million of our $1 billion investment in U.S. manufacturing supports expanding capacity for LEAP durability upgrades. We are making progress upgrading the fleet, with the durability kit now on over 30% of the LEAP-1A installed base. Growing our repair capability is critical to improve turnaround times and lower cost of ownership, as a repaired part can cost 50% less than a new part. At our Singapore repair facility, we are investing $300 million to support new technologies and repair processes. Our customer-driven approach is driving backlog growth, with more than 650 commercial engine—or over $1 billion—in wins in the first quarter alone. This included extending our fifty-plus-year partnership with American, as they celebrate their one hundredth anniversary this month. American recently committed to more than 300 LEAP-1A engines with options for 200 more to power future A321neo and A321XLR deliveries. United, also celebrating one hundred years this month, selected 300 GE9X engines for its 787 fleet, making it the largest GE9X operator globally. Additionally, Delta committed to 60 GE9X engines with options for 60 more for its new 787 fleet, marking its first GE9X selection. In services, we signed an agreement with Ryanair covering approximately 2,000 CFM56 and LEAP engines, providing material support and MRO services to scale their in-house capabilities, consistent with our open MRO strategy. And in defense, in support of the CH-53K and the critical missions it performs for the U.S. Marine Corps, we were awarded a $1.4 billion contract for additional T408 turboshaft engines. With continued momentum, we are looking forward to what should be an exciting Farnborough Air Show in July. Our experience with our current fleet is also informing next-generation technology. RISE is central to that strategy and will enable improved efficiency without sacrificing durability. This quarter, together with the Civil Aviation Authority of Singapore and Airbus, we established the world’s first airport test bed for open-fan technology as part of the RISE program. This testing will validate how next-gen engine architectures operate in real-world airline environments and marks another step forward toward ground and flight tests later this decade. In Defense and Systems, we also continue to execute with speed against high-priority military needs in support of U.S. and allied warfighters. This quarter, deliveries were up 24%, and we continue to receive awards across our family of small engines, a key growth area as programs progress. This included an award from the U.S. Air Force to complete an initial design concept of the GEK 1,500 in partnership with Kratos, with potential applications across unmanned aerial systems, collaborative combat aircraft or CCAs, and missiles. This work is being informed by the maturity of the GEK 800, which completed successful altitude testing last fall. The team designed, built, and tested the first GEK 800 in less than twelve months, testing the fifth iteration of the engine last summer. We are making progress with high-end CCAs through our partnership with Shield AI for the X-PAT Vehicle program, pairing our propulsion development, testing, and certification expertise with their autonomous aircraft capabilities to accelerate delivery of mission-ready capabilities. We also recently completed a preliminary design review on a hybrid-electric turbogenerator engine system for Beta Technologies’ MB250 VTOL autonomous aircraft. This confirms the engine concept and demonstrates the power of combining our technical expertise to accelerate key programs. Stepping back, we are driving measurable progress on what matters most to our customers: ramping output and improving durability while reducing the cost of ownership, which supports their growth and ours. Rahul, over to you. Rahul Ghai: Alright. Thank you, and good morning, everyone. We started the year with over 20% top-line and earnings growth. Orders were up 87%, with CES up 93% and DPT up 67%. Revenue increased 29%, with CES up 34% while DPT was up 19%. Operating profit was $2.5 billion, up approximately $380 million, driven by services volume and price. Margins, as expected, decreased 200 basis points to 21.8% from the impact of installed engine growth, investments, and inflation. EPS was $1.86, up 25% from increased operating profit, a lower tax rate, and a reduced share count. Free cash flow was $1.7 billion, up 14%, largely driven by higher earnings. Working capital and AD&A combined was nearly a $500 million source with strong utilization billings, partially offset by the expected timing of compensation payments. Going deeper on our 25% EPS growth this quarter: Growth in operating profit drove $0.29, or nearly 80% of the improvement in EPS, with increased profit in CES and DPT. This was partially offset by higher corporate cost and eliminations, which were up around $120 million—roughly half from an increase in eliminations and half from an increase in environmental, health, and safety expenses off a low base. A lower tax rate and reduction in share count drove an additional $0.10 of EPS growth. The tax rate decreased three points to 14.7% from earnings mix and benefit from recent tax legislation. Share count was down 24 million from our previously announced capital allocation actions. Turning to CES: In the first quarter, orders grew 93%, with services up 49% and equipment more than tripling to nearly $8 billion. Revenue increased 34%. Services grew 39% with internal shop visit revenue up 35% from higher volume, including LEAP internal shop visit growth of over 50%, and increased work scopes. Spare parts sales were also up over 25% from improved material availability and growth of external LEAP shop visits. Equipment revenue grew 20%, with engine deliveries up 50% including LEAP up 63%. Widebody deliveries were also up over 25% driven by GE9X, which was up even more. Profit was $2.4 billion, up nearly $450 million from higher services volume, price, and the absence of charges related to estimated profitability on long-term service agreements taken in 2025. As expected, margins were down 230 basis points to 26.4% driven by installed engine growth, including 9X shipments, and investments. Both installed engine and spare engine volume increased year over year, but growth in installs outpaced spare engine growth. Overall, CES continues to deliver meaningful growth largely driven by services as OE ramps. In DPT, orders increased 67%, including T408 engines for the U.S. Marine Corps CH-53K. Defense book-to-bill was above 2 for the second consecutive quarter. Revenue grew 19%. Defense and Systems revenue was up 14% as June grew 24% driven by an increase in F110 and rotorcraft engines. Propulsion and Additive Technologies grew 29% with growth across the portfolio led by Avio Aero. Profit grew 17% from increased volume and price. Margins were down 20 basis points to 11.8% driven by mix, investments, and inflation. DPT delivered a solid first quarter with continued demand strength and improved output. Moving to guidance on slide 12: Our first quarter exceeded expectations, given stronger spare parts sales growth and shop visits increase. We have a robust backlog supporting our growth for several years, and we are taking actions to navigate the current environment. Due to the dynamic macroeconomic backdrop, we are maintaining our guidance across the board, and as Larry mentioned, given our strong start to the year, we are trending towards the high end of the range of low double-digit revenue growth; profit of $9.85 billion to $10.25 billion; EPS of $7.10 to $7.40; and free cash flow of $8 billion to $8.4 billion for total company. We are also maintaining segment guidance for both CES and DPT, with a similar trend towards the higher end. Our guidance is based on full-year departures growth of flat to low single digits and is underpinned by the following assumptions: fuel prices remain elevated above current levels through the third quarter and decrease to current levels by year-end; a near-term impact from fuel availability in certain geographical regions; a global reduction in GDP growth impacting air travel demand. This guidance does not contemplate a global recession unfolding. Near term, orders continue to be strong, and we expect the strength in the first quarter to continue into the second quarter, with 95% of spare parts in backlog and all shop visits for the quarter already off wing. As a result, we are expecting second-quarter services growth of high teens, above our full-year guide, and supporting total company year-over-year and sequential profit growth in the quarter. For the full year, we are now expecting services revenue up roughly $4 billion year over year, from approximately $3.5 billion expected previously, supporting our increase of profit and cash to the high end of the range. However, as we get into the second half, we are taking a more measured view given the evolving environment and have included the potential impact from deceleration in spare parts growth, lighter work scopes, delayed spare engine shipments, and reduced billings within our guidance. While the external environment remains uncertain, we are taking proactive actions, including managing discretionary spending and conducting reviews to assess risks and opportunities to support our customers. Overall, balancing the various factors, we are confident in our ability to deliver the high end of our guidance given our strong first quarter, outlook for the second quarter, and a substantial backlog. With that, Larry, back to you. H. Lawrence Culp: Rahul, thanks. Our momentum is further supported by our sustained competitive advantages. With the industry’s largest fleet—80,000 engines and growing—and more than 2.3 billion flight hours, we operate at scale with unmatched proximity to our customers across decades-long life cycles, which makes us the partner of choice. Our field experience combined with nearly $3 billion in annual R&D enables continuous improvement in time on wing and cost of ownership, directly aligned with what our customers value most. Across narrowbody, widebody, regional, and defense platforms, we offer leading performance under wing, supported by deep technology expertise and a growing services network. Our world-class engineering teams develop next-gen technology to improve durability, efficiency, and turnaround times, along with advanced defense capabilities. Through Flight Deck, we are turning strategy into results, with a focus on safety, quality, delivery, and cost—always in that order, every day. With Flight Deck, our over $210 billion backlog, and the actions underway, we are well positioned to manage near-term uncertainty and deliver value. With that, let us go to the questions. Blaire Shoor: We will now open the call for questions. Before we open the line, I would ask everyone in the queue to consider your fellow analysts and ask one question so we can get to as many people as possible. Liz, can you please open the line? Operator: Ladies and gentlemen, if you wish to ask a question, please press 11. Our first question comes from David Strauss with Wells Fargo. David Strauss: Thanks. Good morning. Thanks for taking my question. Thanks for all the detail on how you are thinking about the aftermarket. But I just wanted to clarify. So, Larry, it sounds like you ultimately do expect an impact on services growth from your lower departures growth forecast, but maybe it sounds like you are thinking more so in 2027, or carrying into 2027, than 2026 given your strong Q1 and the backlog that you have on the services side? And I guess in terms of how you are thinking this might play out, are you thinking at this point that there could be a pickup in CFM56 or GE90 retirements? Or are you just expecting lower utilization to come through at this point? Thanks. H. Lawrence Culp: Good morning, David. David, I think what you see in the lean toward the high end of the guide is the expectation that we are going to have a strong second quarter given the visibility that we have both with spare parts and shop visits—we touched on that earlier—and I think that is very meaningful. I think what we are acknowledging is it is very hard for any of us to call the duration of what is happening in the Middle East at this point. By holding the guide, I think what we have suggested is that the backlog that we have, the visibility that we do have for the second half, should allow us to be within that guide that we offered up ninety days ago. We are acknowledging that if there is sustained softness in departures, there is an effect typically in commercial services, but with a lag. Let us hope we are not staring at something akin to the GFC—we mentioned that in our prepared remarks—but there will be a lag effect. At this point, I think given what we know, we feel strongly about our ability to deliver the high end of the guide here in 2026. Rahul Ghai: Yeah, David, just to add to that, when we think about 2027, like you said, we feel good about 2026. Having leading positions in both narrowbody and widebody—75% share of the narrowbody cycle, 55% share of the widebody cycles—is helpful in times like this when air traffic growth is uneven, as it dampens the volatility that we see in the market. Also, the fleet is young. You touched on the CFM56 and GE90. A third of the CFM56s have not seen their first shop visits, two thirds have not seen a second shop visit, and there are similar trends for GE90—70% of the GE90s have not seen the second shop visit. It is early days, but as we sit here in April, both the number of parked aircraft and the retirements are really low. In fact, the retirements in the first quarter for CFM56 were lower than what we experienced in the fourth quarter. So we have not seen any increase in either of those two trends. As Larry mentioned in his prepared remarks, as we have seen in prior cycles, the air traffic has a strong recovery after every downturn. So if you see any impact here in the second half of the year, it is going to be a push-out of demand versus a disruption. It is hard to call 2027 just yet. It all depends on how the situation evolves over the next few months. It is early to call, but overall, we feel good about the trajectory that the business is on through this cycle. Operator: Our next question comes from Sheila Kahyaoglu with Jefferies. Sheila Kahyaoglu: Maybe just a follow-up on David’s comments. Larry and Rahul, services up 39% in Q1—great quarter both on shop visits and spare parts—and Q2 expected to be up high teens, implying only mid- to high-single digits in the second half. So maybe delve a little bit more into the visibility you have through the summer. And, Rahul, you mentioned push-out of demand, not demand destruction. How do we think about where you are seeing most potential risk post-Q4, whether it is narrowbodies or widebodies? And how do we think about retirement rates staying low today and potential assumptions for 2026 and 2027? Rahul Ghai: Yeah. So, Sheila, I think we touched on a couple of things here. As you said, we see good visibility into the second quarter. We have said—Larry and I both said—95% of the spare parts for the second quarter are in backlog, and all the engines that we need to work on for the second quarter are in the shop. Larry also provided a full-year shop visit view that we are about a third oversubscribed right now from what is already off wing and what will come off wing in the second and the third quarter. So that gives us confidence around 2026. Now as we go to 2027 and where the risks may come, you touched on retirement rates. Keep in mind that the retirement rates that we have assumed for 2026 with CFM56 are in the 2% range, and what we saw in the first quarter is sub-1%. As we get into 2027, we have already assumed in our prior outlook that retirements increase to 3% to 4%. So we have factored in a certain increase in retirements. We have not seen that. We are not seeing anything concerning just yet. Our order trends are holding. But it is more about what is unknown, and that is a little bit of caution, prudence—whatever words you want to use—for the second half of the year. Time will play out and give us more visibility into 2027. Overall, the business is strong, the franchise is strong, and I think we should be able to navigate anything that evolves over the next few months. Operator: Our next question comes from Kenneth George Herbert with RBC Capital Markets. Kenneth George Herbert: Yeah. Hi. Good morning, Larry and Rahul. Really strong spare parts orders in the first quarter. I am just curious—especially your comment on March strengthening from the first two months—do you get a sense that there was any prebuying by your customers on the aftermarket ahead of potential disruptions or concerns down the road? I am just curious as to what was underlying the real strength in orders in the quarter and if there could have been any pull-forward in the order demand. Thank you. H. Lawrence Culp: Ken, I do not think we have seen any evidence of a pull-forward here. To Rahul’s comments just a moment ago, when you think about the breadth of the portfolio—narrowbody, widebody, on a global basis—we just have not seen that sort of behavior. We also noted in the prepared remarks that, as proud as we are of the operational progress that we have made, we still saw delinquency increase, which means we are past due on the spare parts orders that we do have. I think customers are busy. There is still perhaps some pent-up demand from the pandemic that is working its way through the system. But to your specific question, we have not seen that behavior. Operator: Our next question comes from Christine Liwet with Morgan Stanley. Christine Liwet: Hey, good morning, everyone. Larry, Rahul, you talked a lot about demand, and I just want to dive a little bit deeper here. You talked about 2Q and 3Q engine removal pipeline above your shop visit guide. So, holding the macro environment you called out, is this higher removal pipeline contemplated in your upper-reach 2026 outlook, or could we see revisions higher in the year if oil resolves in 3Q? H. Lawrence Culp: Christine, good morning. I think if it were not for current events, we would be talking about an increase in the guide this morning, not color and body language toward the high end of the existing range. In many respects, given the backlog that we have highlighted a couple of times already, both in terms of spare parts and shop visits, absent a change in customer behavior and continued progress on our part relative to internal operational execution, that potential does exist. But, again, given current events, we thought it most prudent to stay with the range that we issued ninety days ago and provide a little bit more color, particularly with respect to the quarter and the first half. I will not repeat what we have already said. In terms of our ability to control the controllable, we feel very good about that. The progress that we have made with the supply base has been considerable already this year and builds on the progress over the last couple of years. You see that not only in the input numbers we have cited, but in turn the output numbers as well, both in terms of units and dollars. That should continue. Rahul Ghai: And, Christine, to get to a higher shop visit number—that is not factored into our guidance. What we will need to see is better material flow through than what we have currently factored in, to burn some of that delinquency that exists on both spare parts and the shop visit side. Back to your point, that is when we would take our services guidance above where we have it, around $4 billion of growth this year. Operator: Our next question comes from Scott Deuschle with Deutsche Bank. Scott Deuschle: Hi, good morning. Rahul, I was wondering if you might share with us an update on LEAP aftermarket profitability, and particularly how LEAP aftermarket margins are trending in 2026 relative to 2025. And then I would love to get your latest thinking on the path to margin expansion on the program beyond 2026 and over the long term. Thank you. Rahul Ghai: Yeah, Scott, on LEAP, the services business is trending really nicely. We are expecting a further improvement this year on margins. Trends have been good for the first half of the year, and it is coming from a few things: increased volume that we are driving in our shops; the repairs that we are developing in our aftermarket business—this year, we expect the number of repairs that we develop on LEAP to double over what we developed last year, which helps reduce the cost of the shop visit; and the external channel is coming up nicely as well. We are now at about 15% of our shop visits for LEAP performed by third parties. That number was close to 10% just eighteen to twenty months back. So that part of the business is developing nicely. If you put all that together and think longer term to your second part, we do expect the LEAP service margins to approach overall CES service margins by the time we get into the 2028 time frame. Really pleased with the progress—for a business that was just kind of breakeven a few years ago, we have made a lot of progress in the last eighteen months. Operator: Our next question comes from Robert Stallard with Vertical Research. Robert Stallard: Thanks so much. Good morning. Just want to follow up on slide five and that spare parts delinquency chart you have in there. Is that continued march higher in delinquencies just due to continued demand exceeding supply—the supply chain strain? And how long do you think it will take to get that back down to a more reasonable number? H. Lawrence Culp: It is—despite the progress we have talked about a few times now this morning, not only with inputs but outputs—just a function of demand outstripping supply. We highlight delinquency simply to make sure investors understand that dynamic is in play. Operationally, it is a number we are not proud of, because we are failing to meet customer expectations in that regard. I think it is going to take us a while yet to get to zero delinquency. That clearly is the goal. On-time delivery is one of our critical operational KPIs as part of Flight Deck. We are not going to be able to circle that, but given the continued momentum we see with our suppliers and our own operations, that is something that we should deliver on in time, regardless of the demand environment. Operator: Our next question comes from Douglas Stuart Harned with Bernstein. Douglas Stuart Harned: Good morning. Thank you. I wanted to continue on a look at the current environment because when you look forward and see some of the challenges out there—if we see jet fuel above $200 in Asia and in Europe—there are quite a few airlines that could be under some real financial pressure. When you look at the steps you need to take over the next year or so, how do you compare the concerns around, say, an airline that is in difficult financial straits and cannot do an overhaul versus simply reductions in flying hours that could take some dollars out of LTSAs? How do you think about these different hazards over the next year? H. Lawrence Culp: Well, Doug, the scenarios that we talked about earlier have us contemplating a range of possibilities, given that none of us know how things are going to play out here, particularly with respect to duration in the Middle East. I do not think we have tried to tether ourselves to one scenario or another. We have considerable backlog—we have talked about that a number of times this morning. We are mindful of the risks that we may have in the customer base. Rahul and the team have increased the work we do in that regard. But first and foremost, we are trying to support our customers as best we can to weather these storms as we have in past situations—be it the pandemic, be it the GFC, and even situations that were of lesser impact. We are also putting our spending under greater scrutiny—continuing to invest in the future of flight, of course, and continuing to invest in improved durability and lowering the cost of ownership. But given the situation, we are making sure that as a senior leadership team, we are spending in a more cautious fashion today given what we know and given what we do not. Operator: Our next question comes from Scott Stephen Mikus with Melius Research. Scott Stephen Mikus: Good morning, Larry and Rahul. Figured there would be a lot of questions about the conflict in the Middle East, so I wanted to check in on the GE9X. Boeing flagged a fatigue issue with the engine, so just curious if you could provide an update on that. Is there any change to the expectations you had for losses on the program this year? H. Lawrence Culp: No change on schedule, no change on losses. I would just start, Scott, by reiterating that we are thrilled to be the sole-source partner on the 777X. We have over a thousand engines on order, and customers want the engines, they want the airplanes. What we shared with folks is that we saw back in January a durability issue with the mid-seal. Remind everybody, this is on an engine that was certified back in September 2020. The crack that we uncovered during a shop visit—which is part of a flight test engine—is something we have seen before. We think we are at root cause. We are finalizing the modification as we speak, and we have been fully transparent with Boeing and the FAA every step of the way. So, I think as Boeing has said, we believe we are on track with the certification plan that has been communicated to customers. No change to the schedule. Of note, the 777X flight test program continues—it is ongoing. With respect to deliveries, we had deliveries in the first quarter. Currently, we are continuing to build up in assembly to the point of the mid-seal, modifying the tooling, and ramping some suppliers for the modified part. We will end up having deliveries that will be more second-half weighted, but at this juncture, there is no reason to believe the full year will be any different than what we have communicated. Operator: Our next question comes from Myles Alexander Walton with Wolfe Research. Myles Alexander Walton: Thanks. Good morning. I was hoping to switch gears a little bit on aeroderivatives—I know off-topic question—but you had a disclosure that had a restatement and moved derivatives equipment from your CES segment to your DPT segment. You had 94 deliveries of aeroderivatives last year to your customers, but the pricing on those looks fairly benign relative to the potential for where pricing could be, given the backdrop for power. So can you talk about what the strategy is for aeroderivatives and what the upside opportunity could be there for repricing and volume? Thanks. Rahul Ghai: Yeah. So, Myles, on aeroderivatives, as you know, we provide the engine and then our partners in the JV take the product to market. They do the system integration and add some controls—there is work done by both parties. What you saw in our disclosure is basically the fact that we are burning the pre-spin backlog. That was backlog that we had sold when we were part of one company that had different agreements. Post-spin, the pricing to the JV has been revised substantially, and we are working our way through the old backlog. We should transition to the orders that we have won post-spin over the next, I would say, eighteen to twenty-four months. You will see a gradual increase in pricing over the next few months to quarters. Overall, it is a great business. We are sold out through the early 2030s, so that is one leg of the stool. And then, obviously, everything that you are seeing with now CFM56 getting added potentially to the power generation capacity—that gives another level of growth toward the CFM56 platform, be it through spare parts sales to third parties who are developing that product, or some other form of collaboration. We are exploring all those things. Overall, the aeroderivative business is in a really good spot in the market, both with the existing product that we have and potential new entrants to that market. H. Lawrence Culp: And, Myles, we moved it over from CES into DPT really to give the commercial team the opportunity to focus exclusively on the airliners, the airlines, the airframers. At the same time, there are some similarities to part of our defense engines and services business, especially in and around marine applications. So there is a better operational home for this business in the other segment. That is the sole reason for the move earlier this year. Operator: Our next question comes from John Godden with Citi. John Godden: Hey, guys. Thanks for taking my question. If I could just come back to CES margins specifically. There is a concern out there that if this fuel shock continues, retirements spike and, in particular, your CES margins would be at risk. You have been very thoughtful about your guidance and embedded a pretty conservative outlook for global aviation, and it does not seem like you think that risk is particularly likely. I would love to get your reaction to the concern on margin risk and what positive offsets to this mix effect might exist if global aviation continues to deteriorate. Rahul Ghai: I think there are two parts to the question. For the current year, as you think about the margins, we baked in kind of flattish margins for the year. If you think about the growth for the year—the $4 billion of growth that we are now expecting—keep in mind, the first quarter grew by about $2 billion, and we are expecting high-teens growth in the second quarter. That gets us closer to two thirds to three fourths of the growth being in the first half of the year. We feel good about the growth rates that we have for the year, and that should support the flat margin expectations that we have for the business. What is happening in the year, as we have discussed previously, is that we are getting good support from our services growth—that is dropping through at a healthy clip. In the first quarter, service margins were actually up year over year. That was a positive trend. We are not baking that in for the full year—full year, we are expecting service margins to be flat—but it is a good start to the year. That positive drop-through from services is getting offset by the OE growth that we saw. For the full year, we expect deliveries to be up 15%. While both spare engines and installed engines are going to be up for the year, the growth is primarily going to be driven by installed engines, and then we have 9X shipments. Put all that together, and we expect flattish margins for the year for CES. As you go outside the year, we spoke about the LEAP margin trajectory earlier to Scott’s question. We expect LEAP margins to approach overall CES levels of service profitability in the next couple of years. 9X losses should also peak by the time we get to 2028, given that we are driving a 50% production cost reduction in 9X. So LEAP margins improving and 9X headwinds peaking in 2028—beyond that is when we expect both accelerated profit and margin expansion in the business. Operator: Our next question comes from Gavin Eric Parsons with UBS. Gavin Eric Parsons: Good morning. Thanks, guys. This is Joel Santos filling in for Gavin Parsons. Thanks for taking my question. Moving to defense—strong results in 1Q, solid margins, stronger order environment. As we look through the rest of 2026, how should we think about the sustainability of growth and margins in the segment? Rahul Ghai: For DPT, you saw our revenue growth in the first quarter. We are expecting high-teens revenue growth for the full year. Overall, if you look at the results for the first quarter, they keep us on pace for what we have guided for the full year, both on year-over-year profit growth and the absolute dollar of profit that we delivered in the first quarter. Margins were a little bit light in the first quarter largely because equipment grew more than the aftermarket, but that mix should improve as we go through the year. Overall, we are on track as we think about the year. We are going to drive strong output, productivity is going to get better, and the mix should also improve. Given the growth rates that we had in the first quarter, we feel good about the year, and as we said in our prepared remarks, we do expect DPT to be at the higher end of the guidance we previously committed, given the growth rates we are seeing and the expected drop-through. Operator: Our next question comes from Seth Michael Seifman with JPMorgan. Seth Michael Seifman: Hey, thanks very much and good morning. In the outlook where you talk about Brent prices remaining fairly elevated through Q3, in addition to Brent prices we have seen a significant increase in the spread for jet fuel. Are there special things we should be thinking about there, and reasons why from a jet fuel perspective this could carry on longer and/or be more disruptive than simply what is happening with oil prices? H. Lawrence Culp: Seth, I do not think we are trying to be too granular in the underlying assumptions. The economic realities you have pointed out are there, and I hope what we are taking is a conservative set of assumptions on board here between now and, let us say, Labor Day. Time will tell. By and large, we know that between inflation and potential scarcity in other parts of the world, we could see some near-term airline behavior shift. By near term, I mean late summer and early fall—call it the second half. We are also assuming that by the end of the summer, we are on our way back to more normal conditions. Given what we have seen before, we may have a lag in the aftermarket on the commercial side of the business from what is happening currently, but then we tend to have a spring back, which is why we have alluded to some of our historic reference points. Demand tends to get pushed out as opposed to going missing indefinitely. Blaire Shoor: Liz, we have time for one more question. Operator: This question comes from Gautam J. Khanna with TD Securities. Gautam J. Khanna: Hey. Thank you. I had actually two questions, but the first one just on supply chain—you mentioned delinquencies and the like. If you could just characterize how material improved sequentially and where, and maybe just an update you have given in the past on how many suppliers and where the pinch points are strongest. And then secondly, I was wondering on the company’s aftermarket exposure to low-cost carriers or business models in the airline industry that might be more affected by a high oil environment. Maybe if you could elaborate on that. H. Lawrence Culp: I will take the supply chain question and let Rahul speak to certain customer segment risk. From an input perspective, we mentioned earlier that we have seen double-digit increases again sequentially and year over year from some of the critical suppliers. We have said all along we are going to be the problem solvers, not the finger pointers, and I am really pleased with the way we have had suppliers across the board engage with us. It has been a journey at every point, but we are simply getting better. We are more transparent, we are more trustworthy with each other, and in turn we have allowed our best people to go to gemba—to go to where the constraints and bottlenecks exist—and solve them. There is no way we take engine output up 43% without that sort of support from the supply base. Likewise, commercial services up 39%—there is no way we are able to get that volume out the door to serve our airline customers without really good progress using Flight Deck with the supply base. That is not to suggest that we are all clear between now and 2030—there is still a lot of work we are going to have to do, more every year. But what a wonderful challenge to have. Kudos to our team and to the supply base for engaging and supporting us with our ultimate customers in mind, particularly here in the first part of 2026. Rahul Ghai: And, Gautam, to your second question—if I step back and look at the environment we have seen since the start of the conflict, there is nothing giving us pause. Customers are eager to get back in the air. Yes, they are experiencing temporary disruptions given everything that is going on—directly in the Middle East, and a little bit from lack of fuel availability and higher fuel prices—but everybody is eager to get back and support the flying public. We spoke to the trends we are expecting in the second quarter, and as we think about the full year—had it not been for the environment that we are in, and I am repeating something Larry said earlier—we would have raised our guidance. The first quarter was about $300 million better than what we had expected at the beginning of the year, and we are carrying that strength into the second quarter. The momentum is clearly carrying through, and we spoke to both sequential and year-over-year profit growth in the second quarter with high-teens services growth expected. The second half is just about what we do not know. Hopefully, as Larry said earlier, we are being conservative and cautious—prudent, whatever words you want to use. Time will tell, but we feel good about the year as we sit here today. We are not seeing any disruptive behavior on the part of the customer. We are not seeing risks that we did not have just a couple of months back. We are monitoring the situation very closely, as you would expect us to, and we will provide updates throughout the quarter as we learn more. Blaire Shoor: Larry, any final comments? H. Lawrence Culp: Just in closing, Flight Deck will help us deliver what our customers value most—higher outputs, improved durability, and lower cost of ownership—even as we navigate the current environment. We are confident in our trajectory and our ability to deliver value for customers and shareholders. We appreciate your time today and your interest in GE Aerospace. Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Please standby. Your program is about to begin. Good morning, and welcome to the Synchrony Financial First Quarter 2026 Earnings Conference Call. Please refer to the company's Investor Relations site for access to the earnings materials. Please be advised that today's conference call is being recorded. Currently, all callers have been placed in a listen-only mode. The call will open for your questions following the conclusion of management's prepared remarks. I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. You may begin. Kathryn Miller: Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. On the call this morning are Brian Doubles, Synchrony's President and Chief Executive Officer, and Brian Wenzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles. Brian Doubles: Thanks, Kathryn, and good morning, everyone. Synchrony started the year with strong momentum and delivered first quarter financial results that included record first quarter purchase volume of $43 billion, reflecting the enduring appeal of Synchrony's multiproduct suite. Customers engaged across our diversified portfolio, contributing to continued sequential improvement in average active account trends, higher spend per account across all five platforms, and 6% growth in total portfolio purchase volume compared to last year. At the platform level, Diversified & Value purchase volume grew 9%, primarily reflecting the impact of partner expansion. Digital platform purchase volume increased 8%, driven by strong customer response to enhanced product offerings and refreshed value propositions. Purchase volume in Lifestyle increased 7%, primarily driven by other apparel and goods and luxury, partially offset by lower average active accounts. Health and Wellness purchase volume was 3% higher, primarily reflecting growth in Pet and Audiology. And purchase volume in Home and Auto was flat, generally reflecting partner expansion in Furniture and Electronics, offset by selective spend in home improvement and lower average active accounts. Synchrony's co-branded credit cards, including our dual cards, accounted for 51% of our total purchase volume in the first quarter and increased 20% versus last year, driven by product upgrades, higher broad-based spend, and enhanced utility across these card programs. The mix of discretionary spend within our out-of-partner portfolio increased during the first quarter, marking the third consecutive quarter of year-on-year improvement. Additionally, the rate of discretionary spend growth continued to accelerate, outpacing nondiscretionary spend growth also for the third consecutive quarter, and even during the month of March when fuel prices began to rise. This discretionary spend strength came particularly from categories like retail, entertainment, and electronics. And while spending on fuel was up significantly during March in our nondiscretionary spend, total portfolio spend-per-account growth remained strong as consumers navigated the higher costs. Meanwhile, payment rate increased approximately 50 basis points compared to last year. Collectively, we believe these spend and payment trends are a testament to the efficacy of our prior credit actions and consistent credit discipline, as well as resilient consumer health supported by some early benefit from increased tax refunds and lower tax withholdings. Synchrony continued to execute across our key strategic priorities during the first quarter, adding or renewing more than 15 partners, including Indian Motorcycle, Harbor Freight, and Miracle-Ear. We renewed our partnership with Indian Motorcycle, America's first motorcycle company founded in 1901, to offer flexible financing solutions through their nationwide dealer network. We also extended our relationship with Harbor Freight, America's number one tool store with nearly 50 years in business and more than 1,600 locations nationwide, to provide private label credit card financing with the option of 5% back or zero-interest equal payment installment loans. And our program with Miracle-Ear enables patients to pay for hearing devices and related services over time, leveraging practice management software that optimizes the financing experience for both consumers and staff. Synchrony also continued to broaden distribution of CareCredit financing during the first quarter through our expanded strategic partnerships with Planet DDS. As the preferred patient financing solution across all Planet DDS practice management platforms, CareCredit will be integrated across more than 2,500 Cloud9 orthodontic practices and more than 15,000 Denticon dental practices to improve patient access to treatment, also supporting practice growth, operational efficiency, and better patient outcomes. We are also delivering streamlined CareCredit experiences for pet families through our new partnerships with both FIGO and Embrace Pet Insurance. Today, consumers can use CareCredit at approximately 85% of U.S. vet locations, and now approved pet insurance claims can be reimbursed directly as a credit to the consumer's CareCredit account after they pay for their pet care using their CareCredit card. These partnerships extend CareCredit's pet insurance reimbursement ecosystem to more than 1.7 million insured pets and underscore the larger opportunity we have through our strategic partnership with Independence Pet Holdings. Together, we are making it easier for consumers to pay for and manage the cost of pet care. Lastly, we continued to enhance the utility of CareCredit by broadening its acceptance for eligible health and wellness purchases on walmart.com, complementing CareCredit's longstanding acceptance in-store across Walmart and Sam's Club locations nationwide. In addition to currently eligible health and wellness purchases, CareCredit cardholders can now use their card to make purchases across a wider selection of in-store and online product categories, including medical supplies and equipment, fitness products, and sleep essentials. This expanded collaboration with Walmart will enable us to empower more consumers with financial flexibility to purchase health and wellness products and services whenever and however the need arises. As we look to the remainder of the year ahead, Synchrony is positioned to drive our momentum further as we grow our existing partner programs and win new ones, diversify our programs, products, and markets to reach and serve more consumers and more businesses across the country, and power best-in-class experiences for all those we serve. I am proud to say that we are doing all of this while also earning the privilege of being ranked the number one Best Company to Work For in the U.S. by Fortune Magazine and Great Place to Work in 2026. Together, all of our incredible people at Synchrony have built a high-trust culture that makes us faster, bolder, and better for the customers and partners who count on us every single day. With that, I will turn the call over to Brian to discuss our financial performance in greater detail. Brian Wenzel: Thanks, Brian, and good morning, everyone. Synchrony's first quarter financial performance delivered record first quarter purchase volume, a positive inflection in loan receivables growth, strong credit performance, and higher return on average assets and tangible common equity compared to last year. These results reflected Synchrony's disciplined execution as we focus on delivering consistent risk-adjusted returns amid evolving market conditions. Turning to our performance in more detail, Synchrony generated $43 billion of purchase volume, a first quarter record and a 6% increase compared to last year. Ending loan receivables were flat at $100 billion, though we did achieve a positive inflection in ending loan receivables with an increase of approximately $477 million at the end of the first quarter. This reflected the impact of higher purchase volume, generally offset by the effects of elevated payment rates. The payment rate of 16.3% was approximately 50 basis points higher than last year and approximately 110 basis points above the pre-pandemic first quarter average, primarily reflecting shifts in portfolio and product mix as well as the impacts of new portfolio seasoning, our previous credit actions, and higher average tax refunds. Net interest income increased 4% to $4.6 billion, primarily driven by the combination of higher interest and fees and lower interest expense. Interest and fees increased 2%, primarily driven by the impact of our PPPCs, partially offset by lower benchmark rates. Interest expense decreased 11%, primarily due to lower benchmark rates. Our first quarter net interest margin increased 76 basis points versus last year to 15.5%, reflecting three key drivers: (1) a 47 basis point increase in our loan receivables yield, partially driven by the impact of our PPPCs, contributed approximately 39 basis points to our net interest margin; (2) a 44 basis point decline in our total interest-bearing liabilities cost, which reflected the impact of lower benchmark rates, contributed approximately 35 basis points to our net interest margin; and (3) a 76 basis point increase in the mix of loan receivables as a percent of interest-earning assets versus last year, which contributed approximately 14 basis points to our net interest margin. These improvements were partially offset by a 69 basis point reduction in our liquidity portfolio yield, which reduced our net interest margin by 12 basis points. Turning to the remainder of our P&L, RSAs of $1.1 billion, or 4.31% of average loan receivables in the first quarter, increased $175 million versus the prior year, primarily reflecting program performance, which included lower net charge-offs and the impact of our PPPCs. Provision for credit losses decreased $156 million to $1.3 billion, primarily driven by a $242 million decrease in net charge-offs, partially offset by a $97 million reserve release in the prior year. Other expense increased 6% to $1.3 billion, primarily driven by costs related to technology investments and higher operational losses. The first quarter efficiency ratio was 35.6%, approximately 220 basis points higher than last year, resulting from higher overall expenses and the impact of higher RSA as program performance improved. To summarize Synchrony's first quarter results, we generated net earnings of $805 million, or $2.27 per diluted share, a return on average assets of 2.7%, a return on tangible common equity of 24.5%, and an 8% increase in tangible book value per share. Shifting focus to our key credit trends, our portfolio's mix of below-min payers remained well below pre-pandemic levels across all credit cohorts during the first quarter, with the non-prime population outperforming relative to other credit cohorts since 2023. We believe this continued trend in non-prime is reflective of our previous credit actions. We also continue to see normalization in the prime and super-prime cohorts, with some gradual shifting in the mix from above-minimum to minimum payments. At quarter end, both our 30+ and 90+ delinquency rates were generally in line with the prior year, and our net charge-off rate was 5.42% in the first quarter, a decrease of 96 basis points from 6.38% in the prior year. Collectively, these payment and credit trends underscore the efficacy of our previous credit actions and ongoing credit management strategies, as well as the resilience of our customers and portfolio amid an uncertain environment. Finally, our allowance for credit losses as a percent of loan receivables was 10.42%, which increased approximately 36 basis points from 10.06% in the fourth quarter, in line with our seasonal trends, and decreased 45 basis points from 10.87% in the first quarter of 2025. Turning to funding, capital, and liquidity, Synchrony grew our direct deposits by $3.1 billion and reduced brokered deposits by $3.7 billion compared to last year. During the first quarter, we issued $750 million of senior unsecured debt at our tightest five-year credit spread to date and a final coupon of 4.95%, and a $500 million three-year secured public bond from the Synchrony Card Issuance Trust with a final coupon of 4.22%. As of March 31, deposits represented 83% of our total funding, with secured debt representing 9% and unsecured debt representing 8%. Total liquid assets decreased 4% to $22.8 billion and represented 18.8% of total assets, 72 basis points lower than last year. Now focusing on our capital ratios, Synchrony ended the quarter with a CET1 ratio of 12.7%, a Tier 1 capital ratio of 13.9%, and a total capital ratio of 16%, each of which declined by approximately 50 basis points versus the prior year. Our Tier 1 capital plus reserve ratio decreased to 24.1% compared to 25.1% last year. Synchrony returned $1 billion to shareholders during the first quarter, including $900 million in share repurchases and $104 million in common stock dividends. In addition, our Board of Directors approved a new share repurchase program of up to $6.5 billion of the company's common stock, which commenced in the second quarter of 2026 and, unchanged from our prior share repurchase programs, does not have an expiration date. The new share repurchase program replaces the company's prior program, which was scheduled to expire on 06/30/2026 and had approximately $300 million remaining. The pace and amount of share repurchases are flexible and will be executed from time to time, subject to various factors, including capital levels, financial performance, market conditions, and legal and regulatory requirements, in accordance with our capital plans. Finally, our outlook: we continue to expect accelerated growth in purchase volume and average active accounts, without any further broad-based credit refinements as we move through the year. Those outcomes should more than offset the impact of elevated payment rates to drive mid-single-digit growth in ending loan receivables by year-end. The rate of receivables growth should follow seasonality and accelerate as we move into the back half of the year. This will be driven by growth in our core portfolio as well as a combination of both recently launched and similar OnePay, Bob's Discount Furniture, RH, and approximately $725 million of Lowe's commercial co-brand loan receivables, which was added in early April. Net interest income is expected to grow in 2026 as a result of higher loan receivables, the impact of PPPCs continuing to build, and a reduction in our funding liabilities cost; these trends will partially offset the lower late fee incidence. We expect delinquency and losses to follow normal seasonality through the year, with net charge-offs peaking in the second quarter. We expect our net charge-offs to be less than 5.5% for the full year, and we remain focused on our disciplined approach to underwriting our business. As program performance strengthens due to higher net interest income and lower losses compared to last year, we continue to expect RSAs to increase but remain within our long-term range of 4% to 4.5% of average receivables. Lastly, we remain focused on operating expense discipline while also investing in the long-term potential of our business. As a result, we continue to expect other expense growth to trend in line with loan receivables. Putting all these elements together, Synchrony remains on track to deliver between $9.10 and $9.50 in diluted earnings per share, while also executing across key strategic priorities to deliver consistent risk-adjusted growth and strong capital generation. We are well positioned to return excess capital in an aggressive but prudent way. With that, I will turn the call back over to Brian. Brian Doubles: Thanks, Brian. Before I turn the call over to Q&A, I would like to leave you with three key takeaways from today's discussion. First, the consumer remains resilient and the foundation of our portfolio is strong. Our consistent underwriting discipline, credit management strategies, and portfolio performance have positioned us well for both the near and long term. Second, Synchrony's investments are driving impact across our business and for the millions of consumers and hundreds of thousands of small and midsized businesses we serve across the country. Third, because of the results we deliver, Synchrony is generating growth at strong risk-adjusted returns and robust capital, positioning us well to drive considerable long-term value for our stakeholders. With that, I will turn the call back to Kathryn to open the Q&A. Kathryn Miller: That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I would like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session. Operator: Thank you. We will take our first question from Terry Ma with Barclays. Please go ahead. Terry Ma: Hi, thank you. Good morning. I just wanted to start off with the loan growth guide of mid-single digits. Can you give a little bit more color on what you are seeing in account acquisitions and borrower behavior to give you confidence in that second-half acceleration? And as a follow-up, on the payment rate of 16.3% this quarter and it being over 100 basis points above your pre-pandemic average, has your product mix shift driven a permanent resetting of that payment rate higher? If that is the case, what does that mean for your long-term loss expectations and loan growth? Brian Wenzel: Yes. Thanks for the question, Terry. As we look at the first quarter and how we exited, you saw a clear acceleration of our purchase volume to a record high for the first quarter, up 6% year over year. Payment rates were up from a credit perspective by 50 basis points. Some of that in the first quarter was a result of higher income tax refunds, which impacted the quarter by 14 basis points. We feel good about the purchase line coming through, and we feel good about some of the discretionary purchases that we see as we go through. As you step out into the quarters, we will start to see acquisition—whether it is Walmart, OnePay, Lowe's commercial—begin to build into the portfolio as we move into the back half of the year. We saw strong new account originations of 15% in the first quarter. For the first couple of weeks in April, trends have been consistent with how we exited, maybe slightly stronger, from a purchase volume standpoint. So we feel good that the consumer is engaging with our products and wanting our products as we move forward. On payment rate, I do not think it is permanently resetting. Two fundamental elements have happened over the last couple of years, driven by our credit actions. First, we have higher credit quality in the portfolio, particularly in the higher super-prime versus what we normally have. Non-prime has gone down, which has a higher revolve rate. Second, you see a mix in the portfolio as people pulled back in discretionary purchases the last couple of years, particularly in the Home and Auto space and Lifestyle. Larger promotional purchases generally have payment rates around 8%–9%. When the percent of promotional financings is down, that artificially brings the payment rate up. Additionally, the acceleration of new accounts in the last year tend to pay off at a slightly higher level. So it is more a phenomenon of a shift inside the portfolio as it relates to credit actions and the return to growth. Operator: Thank you. We will take our next question from Ryan Nash with Goldman Sachs. Ryan Nash: Good morning, everyone. Brian, maybe to start on the EPS guide of $9.10 to $9.50. Can you help us with how some of the moving pieces have shifted? It is clear credit is better with the guide below 5.50% for net charge-offs, but what else has shifted, given we have seen rates moving? Where do you think we are tracking within the range after a quarter? And then on the buyback, how should we think about pacing of the $6.5 billion, which is open-ended? Will it be done differently than under the prior process? And what are your expectations for capital relief under the Basel proposal, and how do you think about standardized versus ERBA? Brian Wenzel: Yes, thanks, Ryan. Starting with net charge-offs, as we guided at the start of the year, our loss rate would be in line with our long-term target range, and now it is slightly below, so there is a little bit of favorability. You do have some payment rate pressure that we saw in the first quarter. Thinking about the range and moving toward the higher end, there are a couple of things that can play into that equation: (1) a slowing in the payment rate, which would increase revolve, particularly on existing accounts, driving more revenue; and (2) delinquency formation and performance—if that continues to improve or stay steady—could lead to potential reserve release and net charge-off benefits. Both of those have an RSA offset. We are not guiding inside the range, but there are cases where you can get to the higher end even if payment rates stay higher and charge-offs stay where they are from our first-quarter exit; in that case, you are toward the middle or lower end of the range. The key question is the macro environment. The consumer has been incredibly resilient, both from a purchasing behavior and a payment behavior pattern, but we will have to watch uncertainty as it relates to geopolitical risks. On the $6.5 billion authorization, being open-ended, we do not give quarterly cadence. If you look back at recent history and that cadence, that is probably what we will end up doing, dependent upon business performance, macroeconomic environment, legal and regulatory considerations, and our capital plans. The plan was designed to align us, now that we have a 250 basis point stress capital buffer, with our Category IV peers. Regarding the Basel III proposal, under the standardized approach it is favorable to Synchrony. We appreciate the Fed’s thoughtfulness in re-proposing the rules and their willingness to listen. Under standardized, we get a benefit on retail exposures around risk weighting of assets, and only a small negative from AOCI inclusion. If adopted exactly as proposed, our RWAs would go down and our capital would get relief of 125 to 150 basis points. Under the enhanced risk-based approach, it is more mixed: you get more risk weighting benefit with trading assets, but you introduce a capital charge for open-to-buy in the portfolio (treating all open-to-buys the same), introduce operational risk, and have an impact on the DTA. Combined, that is a net negative if adopted exactly as is. We continue to study the rule and will provide comments, including ways to eliminate double counts in operational risk and to be more thoughtful on open-to-buy conversion to RWA. Operator: Thank you. We will go next to Sanjay Sakhrani with KBW. Sanjay Sakhrani: Maybe, Brian Wenzel, if we could follow up on the earnings guide. With credit doing better and loan growth remaining the same, and EPS remaining stable, has your expectation on yield changed lower? It would seem like you are moving toward the higher end of the range with credit coming in better. And then more broadly on consumer health: can you list how geopolitical events and fuel prices are impacting the consumer? You mentioned early benefits of tax refunds—are there more to come in the second quarter? Brian Wenzel: Yes, thanks for the question, Sanjay. If you go back to what I said in January, our guidance was around being in line with 5.5% to 6% for net charge-offs. We were trying to give a position of stability, and now we see less than 5.5%. I do not think there is a material difference in how we thought about credit in January versus today, so you may be overweighting that change relative to our guide. Brian Doubles: On consumer health, the consumer is still in pretty good shape and has been very consistent over the past few quarters. We are seeing strength in spending patterns, and credit continues to outperform our expectations. The macro environment is constructive—strong labor market and, yes, higher tax refunds. There are watch items like inflation and higher gas prices that create uncertainty, but we do not see it impacting spend. Spend for us accelerated nicely this quarter. Across platforms, Diversified & Value was up 9%, Digital up 8%, and Lifestyle up 7%. That speaks to our product suite and a healthy, resilient consumer. There is noise we are watching closely, but whether you are looking at spend patterns or credit performance—early stage and late stage—everything points to a resilient consumer. Brian Wenzel: Adding color on taxes and gas: tax refunds are slightly lower than our expectations. Our low end of range was around $500; they are coming in around $350. While it has not had a material effect on our book, higher refunds added about 14 basis points to payment rate in the quarter. In the next couple of weeks, you tend to see higher refunds for people who file closer to the April 15 deadline, so the amount could creep up a little. We did not see any real change in purchasing behavior week-on-week. On the depository side, we saw lower inflows and outflows, mirroring the trend of the last three years. For gas, average transaction value in March is up 17% sequentially from February and 10% year over year, but frequency is up slightly year over year, and we have not seen pullback related to gas. Consumers are probably annoyed, but have not changed behavioral patterns today. Operator: Thank you. We will go next to Darrin Peller with Wolfe Research. Darrin Peller: Could we start on expenses? Expenses grew 8% on an adjusted basis in the first quarter, and your guidance implies expense growth decelerates throughout the year even as receivables growth improves. How much of that is due to upfront investment in new program adds rolling off? Any other color on expenses would be great. And as a follow-up, on AI and AgenTek: what incremental investments are you making, any early evidence of efficiencies, and on AgenTek, investments to ensure placement and choice at the point of sale stays high? Brian Wenzel: Thanks, Darrin. There are two items to point to in the quarter. First, slightly higher information technology expense. Two components there: association fees we pay to Mastercard and Visa—on a volume basis, with volume up, particularly in co-brand, we see slightly higher expense and that should continue for the year; and information technology investments we are making, including cloud, which will also continue. Second, in "other," operational losses were higher; that is more idiosyncratic in the first quarter and should reduce as we move forward. The run-rate of expense dollars is probably about the same, and as assets come through we get leverage in the back half of the year. Brian Doubles: On AgenTek Commerce, this is a big focus for us and we are moving quickly with a first-mover advantage. Agentic experiences will change how consumers discover, research, and purchase. It is still early, and we are working with top companies to ensure as purchasing paths change, our financing offers are embedded. One prevalent scenario is the consumer researches in the AI platform but completes the purchase on the merchant site—we are already embedded there. The second scenario is purchase completion inside the AI platform. There, it is imperative our financing options are present at checkout. Our partners have a huge incentive to make sure that happens, so they are pulling us in as they work with AI companies. On Gen AI for productivity and efficiency, we have been at this for well over a year. The near-term benefit is speed to market. Our coders are using it, and roughly 90% of the professional workforce is using it across functions. We are seeing real economies of scale—faster, more efficient work, and the ability to redeploy resources to more strategic work. Operator: Thank you. We will take our next question from Rick Shane with JPMorgan. Rick Shane: You mentioned strength in luxury and discretionary, and a 17% increase at the pump on a ticket basis. Can you help us understand spending and credit performance based on income level and score? Are you seeing divergence based on borrower category? Brian Wenzel: Thanks, Rick. Looking at payment rate by credit cohort, you see the strongest increase at 780+; that is up the most. Next is non-prime, which is also up. The middle—650 to 720 and 720 to 780—is performing about equally. So the top end continues to pull up, consistent with the mix shift discussed earlier. Behaviorally, you do see some shift between minimum pay and statement pay. By cohort, where you see more minimum pay is in the prime segment, roughly 650 to 780, while the bottom end is holding firm on min pay. Generationally, the higher-end cohorts are pulling spend with slightly higher payment rates, particularly at the high end. Operator: Thank you. We will go next to Mihir Bhatia with UBS. Mihir Bhatia: Thanks. On average accounts, they have been declining for six quarters. Some of that is a deliberate byproduct of previous credit restrictions. Are you seeing any shifts in consumer engagement with programs? Relatedly, we have seen an increase in loyalty costs—is that due to readjusting programs to drive more volume, or is it co-brand programs like Walmart picking up speed? Brian Wenzel: Thanks, Mihir. On average active accounts, that generally lags loan receivables. You should see that invert as we have accelerated new accounts and they begin to engage; that likely happens in the middle part of this year. On loyalty costs, we enhanced certain value propositions last year on some cards, which drives slightly higher loyalty costs. When you launch new programs, you typically see higher loyalty costs as the most engaged customers take up the product and tend to spend in-store, which has a higher value proposition for our partners than in the "world" category. That is a natural byproduct of portfolio seasoning as you add new accounts. With 15% new account growth, you will drive more in-store value proposition versus world as you launch. With co-branded volume up 20%, you are going to drive more loyalty costs—which is a good thing. Transactions and frequency are up; customers are engaging more year over year. Mihir Bhatia: As a follow-up on buybacks, what factors impact the level of buyback? Is CET1 the binding constraint, or are there other considerations like rating agencies? Brian Wenzel: CET1 is not the binding constraint for us. The only thing left to fully develop is Tier 1, so there is a little bit more preferred to do, but that is not a binding constraint today—we still have plenty of room relative to our targets. Multiple factors determine pacing: business performance and visibility, expected RWA growth, regulatory environment, and rating agency considerations. We set cadence along with our capital plan and the Board. We will be aggressive but prudent. We would not drop immediately to target levels—regulators and rating agencies would not be comfortable—but we have shown measured discipline. Our earnings power generates roughly 350 basis points of CET1 year over year, so we will use an appropriate cadence to get to our targets. Operator: Thank you. We will go next to Erika Najarian from UBS. Erika Najarian: First, based on the RSA math under Basel III Endgame that you gave, it would take your CET1 from 12.7% closer to 14%, if I am hearing you right on the 125–150 basis points. As you think about a higher CET1 relative to the 11% minimum, is that biased toward buybacks or more aggressive portfolio acquisition? And on pacing—over the past three quarters your buyback average has been about $900 million per quarter, which would suggest you would go through this authorization in under two years. What drove that pacing, and as receivables growth improves, is that an immediate offset to buyback pacing? Also, is there reserve release in the EPS guide, or only at the mid to high point? Brian Wenzel: On Basel III, we do not know what the final rule will look like. If the rule is implemented as proposed and we get the capital relief, we would discuss with the Board what to do with incremental capital. We have shown we will invest in acquisitions—as with Ally Lending and Allegro—or return capital to shareholders. We are studying the proposal and evaluating positives and negatives, and where adjustments may be warranted for comment. On cadence and pacing, we look at a longer horizon and lean in where we see opportunities and earnings power. If that shifts or if we allocate more to RWAs, we adjust. We will be aggressive but prudent; history is a better guide than any quarter or two. On reserves, we have not provided guidance on releases. I was outlining potential pathways to the higher end of the EPS range. Credit has been a strength for us. We have qualitative overlays in case the macro worsens. If the environment plays out as we think, there could be some downward bias to reserves, but I would not plan on that today. We evaluate quarter by quarter. Operator: Thank you. We will take our next question from Mark DeVries with Deutsche Bank. Mark DeVries: Could you comment on how the pipeline for new program acquisitions or signings looks relative to recent history and how meaningful those opportunities could be for growth over the next year? And how big of an opportunity do you think the new RH program could be? Brian Doubles: We continue to have a very active pipeline, a combination of new startup de novo programs and existing programs. Existing programs coming to market in the next year or two are in the mid-sized range—nothing really significant in terms of portfolios we would acquire—but we have a great track record of buying portfolios, winning programs, and then driving penetration and strong growth. Across all five platforms, we have a robust pipeline of traditional programs and a nice pipeline of nontraditional opportunities, whether ISVs inside Health and Wellness or Home and Auto in more fragmented spaces. We are also seeing good price discipline in the market, consistent over the last two to three years. There are occasional pockets of irrational behavior, but generally the industry is pricing appropriately for this environment, and we are winning the programs we want. We are very excited about RH—it is a great franchise—and we believe we can drive more penetration and grow that program. Operator: Thank you. We will go next to Moshe Orenbuch from TD Cowen. Moshe Orenbuch: Four out of your five verticals had growth in purchase volumes, some with strong growth. Home and Auto was flat, although with down 6% accounts you had okay growth per account. Can you drill into that from an account perspective? Are there things you are doing to restart account growth in those programs? And as a follow-up, you mentioned benefits of lower withholdings—has that been a driver in your credit and spend outlook? Brian Wenzel: For Home and Auto, this is a large portion of our promotional financing business. Average active accounts tend to stick when consumers are engaging in discretionary purchases. The home specialty space has been more challenged on bigger-ticket items, impacting average account growth. You have seen a positive trajectory in Home receivables, but it is a broad mix—from do-it-yourself at Lowe’s to home furnishings and furniture, and then Auto, which has different dynamics on average ticket and frequency. It is more about the mix and the named-deliver strategy on that platform. We are moving into an important part of the year for that vertical—home projects in specialty and do-it-yourself tend to drive more volume acceleration. With the launch of new programs like Bob’s and RH, that should create a tailwind. On withholdings, it is harder to isolate. You can see flow of dollars from refunds because they are lumpy, but withholdings flow throughout the year. Purchase volumes were relatively consistent through the quarter, aside from storms in January and early February. That consistency is a combination of withholdings, refunds, and the discretionary rotation Brian mentioned. The first three weeks of April continued to show strength; the last three weekends were the three strongest of the year, ahead of last year’s pace. We are encouraged by consumer resilience and engagement with our products. Operator: Thank you. We have time for one final question. We will take our final question from Saul Martinez with HSBC. Saul Martinez: Thank you. On expenses, for 2026 you expect expenses to track loan growth. Beyond 2026, can you comment on your ability to deliver operating leverage as you exit 2026 and into 2027 as top-line growth accelerates? How do you weigh investment needs like AI and AgenTek versus letting revenue flow to the bottom line? And as a follow-up on the consumer, you mentioned high payment rates persisting but also minimum payments having gone up in super-prime and higher end of prime. Is that just normalization from historically low levels? Brian Wenzel: Our intent is to run the company without adding headcount right now, driving productivity through tools Brian discussed—AI and simpler engineering efficiencies—across all aspects of the business, keeping headcount flat and getting leverage, with NII growth outpacing OpEx growth. We will increase OpEx in technology that differentiates us and gives first-mover advantage, particularly in AI and cloud, while being disciplined on core costs to bring core operating costs down and continue medium- to long-term investment in technology. On payments behavior, I do not see a divergence. It is more about how customers engage with auto-pay—some set it to minimum payment versus statement-in-full, and then make incremental payments. At a higher level, we see strength in consumer spending and payment behavior, which has a little drag on NII but clear strength in maintaining credit. Sitting here in April with a good portion of the year covered, that is a good base for us to deliver through an evolving macro environment. We are pleased with the consumer’s performance inside our products. Operator: This concludes Synchrony Financial's earnings conference call. You may disconnect your line at this time. Have a wonderful day. Thank you.
Operator: Good day, and welcome to the RTX First Quarter 2026 Earnings Conference Call. My name is Latif, and I will be your operator for today. As a reminder, this conference is being recorded for replay purposes. On the call today are Chris Calio, Chairman and Chief Executive Officer; Neil Mitchill, Chief Financial Officer; and Nathan Ware, Vice President of Investor Relations. This call is being webcast live on the Internet, and there is a presentation available for download from RTX website at www.rtx.com. Please note, except where otherwise noted, the company will speak to results from continuing operations, excluding acquisition accounting adjustments and net nonrecurring and/or significant items, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. RTX SEC filings, including its forms 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. [Operator Instructions] With that, I will turn the call over to Mr. Calio. Christopher Calio: Thank you, and good morning, everyone. Before I get into our results, I want to acknowledge the ongoing situation in the Middle East and express our hope for a sustained resolution. Let me now shift to the quarter. We delivered very strong performance to start the year, driven by continued execution enabled by our core operating system and a consistent focus on productivity across RTX. Starting with the top line, adjusted sales were $22.1 billion, up 10% organically, with growth across all 3 channels. Adjusted EPS of $1.78 was up 21% year-over-year, driven by 14% growth in segment operating profit. And free cash flow of $1.3 billion was a solid start to the year and up $500 million from Q1 last year. On the orders front, demand for our commercial and defense products and services remains robust. Our book-to-bill in the quarter was 1.14, and our backlog is a record $271 billion, up 25% year-over-year with strong commercial and defense awards in the quarter. On commercial, our backlog is up 30% year-over-year with strength across both OE and aftermarket. This includes some notable GTF wins, including Vietjet Air, which selected the GTF engine to power an additional 44 aircraft. And recently, Finnair announced their intention to purchase up to 46 GTF-powered Embraer [ E2 ] aircraft. On the defense side of the business, we saw significant awards across all 3 segments, highlighting the strength of our product offerings. At Pratt, the military business was awarded over $3 billion for F135 Lot 19 production. Collins booked close to $3 billion of awards, including $1.7 billion for mission systems capabilities and $400 million for avionics equipment supporting multiple platforms. And Raytheon booked $6.6 billion of awards in the quarter, including over $600 million to supply the Netherlands with Patriot equipment and over $400 million from the U.S. Army for our lower-tier air and missile defense sensors. In addition, we're working closely with the Department of War to accelerate munitions production and are pleased with the progress to date. As we previously announced, Raytheon signed 5 landmark framework agreements with the Department for critical munitions, including Tomahawk, AMRAAM and the Standard Missile family. These agreements are a significant step forward in the department's transformation initiative and they are vitally important for national security. Once finalized, these agreements would provide firm demand signals for RTX and our suppliers to invest in ramp production well above existing rates over the next decade. This increased production will primarily occur at sites in Tucson, Arizona; Huntsville, Alabama; and Andover, Massachusetts, where we've already invested nearly $900 million in CapEx over the last 3 years to expand capacity at these locations. We will continue to make significant additional investments going forward to advance production capabilities and add new manufacturing lines to support these agreements. And as we said, the agreements incorporate a collaborative funding approach to preserve upfront free cash flow and they represent good long-term business for us. So a very strong start to the year. I know everyone is looking to understand how we're thinking about the end markets as we look ahead. So let me provide an update on the operating environment as we see it today. I'll start with commercial aerospace. Like all of you, we're closely monitoring global events. While the environment is dynamic right now, the underlying demand for our OE products and aftermarket services remains durable. Commercial OE in the first quarter was in line with our expectations. We expect continued production ramps across multiple platforms throughout the remainder of the year. In Q1, we saw solid RPK growth despite the disruption in the Middle East. And aircraft retirement rates also remain below historical levels, with V2500 retirements in line with our expectations. Of course, regardless of any near-term volatility, this is a long-cycle business. We assume RPK growth will continue and the demand for new aircraft to remain strong. So based on what we see today, we're not making any changes to our commercial outlook for the year. We'll, of course, be actively monitoring the situation. On the defense side, the current landscape clearly underscores the need for munitions depth, integrated air and missile defense technology, and more advanced capabilities to counter evolving threats, such as our Coyote counter-UAS system. As seen in the President's budget request, we expect these priority areas to see significant funding increases in the 2027 U.S. defense budget and other supplemental funding packages. Our products across RTX are well positioned to support these needs with our battle-tested systems and munitions serving as the backbone of many U.S. and allied defense architectures, including franchise programs like Patriot, GEM-T, NASAMS, AMRAAM, Tomahawk and the F135. So given our first quarter results and the strength we're seeing in our defense business, we're raising our full year outlook for adjusted sales and EPS and maintaining our free cash flow outlook. Neil will take you through the details in a few minutes. Operationally, our focus will remain on executing our backlog, driving increased output and innovating to bring new capabilities to market. Let me highlight on Slide 4 some of the progress we're making across RTX on these fronts, starting with our focus on operational execution. On the GTF program, the fleet management plan, including our financial and technical outlook, remains on track. PW1100 AOGs were down around 15% compared to the end of last year. We expect this downward trend to continue. As we've said before, the key enabler of this reduction is MRO output, which was 23% year-over-year on the PW1100 on top of the 35% growth we saw in Q1 of last year. Consistent with our prior comments, we will continue to optimize the allocation of material between OE and aftermarket to ensure the health of the overall fleet and balance all of our customers' needs. On the OE front, GTF shipments were in line with our expectations for Q1, and we continue to expect mid to high single-digit delivery growth for the year. During the quarter, GTF-powered aircraft surpassed 2,700 deliveries, with Pratt powering about 45% of the A320 deliveries to date, ahead of our roughly 40% sold program share. Also of note, the GTF program achieved 10 years in service in the quarter. The engine now has over 50 million flight hours with a backlog of about 8,000 engines, and we recently received aircraft certification of the GTF Advantage, keeping us on track for entry into service later this year. The Advantage incorporates a decade of learning that will deliver a step change in performance and time on wing for our customers. We also continue to leverage our core operating system, digital solutions and investments in automation to drive productivity and deliver on our commitments. For example, we saw further progress on munitions output at Raytheon in Q1 with total deliveries up over 40% year-over-year, building on the increased production we drove in 2025. With respect to our automation efforts, Pratt's MRO facility in Singapore has developed industry-leading robotics that assemble high-pressure compressor rotors, delivering 100% first-pass yield and reducing assembly time by 50%. And the team is implementing further automation of assembly and engine core stacking for the low-pressure compressor. This type of investment has supported an 80% increase in output at the facility over the last 2 years, and we're actively deploying these capabilities across our MRO sites. We also remain on track to connect 60% of our annual manufacturing hours to our proprietary data and analytics platform by the end of this year. We're harnessing this data from our connected products and factories to improve the speed of decision-making and operations. We've integrated our commercial installed base into this platform to enhance predictive fleet maintenance. For example, the wheels and brakes team at Collins is using real-time data to better understand service life and improve inventory management, resulting in cost reduction across its large portfolio of long-term pay-by-the-landing service agreements. Moving now to innovation and future growth. We're making focused investments to meet the growing end market demand. Specific to capacity, we made progress on expansion efforts across all 3 segments in the quarter. Pratt announced a $200 million investment to expand capabilities at our Columbus, Georgia facility that supports both commercial and military engine programs, including the GTF and F135. This investment will increase output of critical parts including rotating compressor and turbine discs to support growing OE and MRO demand. Raytheon completed $115 million expansion of our Redstone Missile integration facility in Huntsville. This investment will increase the facility's munitions capacity by over 50% and support multiple systems, including the standard missile family and associated framework agreements. And Collins launched a capacity expansion effort that will support the recently awarded FAA contract for radar systems and other air traffic modernization opportunities. We also achieved significant milestones within our cross-company technology road maps in the quarter. Raytheon successfully demonstrated a non-kinetic variant of the Coyote effector during a U.S. Army test event. This is a lower-cost counter unmanned aircraft system that can be recalled after completing its mission and redeployed for additional engagements. This innovation addresses a growing need for our customers and builds upon the battle-tested kinetic variant of Coyote in use today to defeat drone threats. In AI and autonomy, Collins completed a successful flight test of its mission autonomy software for the U.S. Air Force's Collaborative Combat Aircraft Program. This demonstration highlights the strength of Collins' open architecture autonomous software to deliver enhanced capability across various platforms. And in propulsion, our cross-company team consisting of Pratt, Collins, the RTX Research Center and RTX Ventures is making significant progress in Hybrid Electric Solutions. In the quarter, the team successfully operated the propulsion system and battery pack for a Turboprop demonstrator at full power. This technology is expected to drive a 30% improvement in fuel efficiency for regional aircraft and combines a thermal engine from Pratt, a 1-megawatt electric motor from Collins and a 200-kilowatt battery system supported by RTX Ventures. So overall, I'm pleased with the progress we're making on the innovation front. With that, let me turn it over to Neil to walk you through the first quarter results and the outlook in some more detail. Neil? Neil Mitchill: All right. Thanks, Chris. I'm on Slide 5. As Chris already mentioned, we had strong financial performance to start the year. In the first quarter, adjusted sales of $22.1 billion were up 9% on an adjusted basis and up 10% organically. This top line organic growth was driven by strength across all 3 channels, with commercial OE up 6%, commercial aftermarket up 14% and defense up 9%. Adjusted segment operating profit of $2.9 billion was up 14% year-over-year, driven by drop-through on higher volume, favorable defense mix and improved productivity. Specifically on productivity in the quarter, we saw continued progress across the company on cost reduction and efficiency improvement, growing organic sales and segment profit double digits with only a 1% increase in headcount. We also drove 70 basis points of consolidated segment margin expansion in the quarter with contributions from all 3 segments, more than offsetting the year-over-year headwind from tariffs. Adjusted earnings per share of $1.78 was up 21% from prior year, driven by strong segment operating profit growth and lower interest expense. Adjusted earnings per share also benefited by about $0.08 year-over-year from a lower effective tax rate, which was principally driven by higher stock-based compensation deductions. On a GAAP basis, earnings per share from continuing operations was $1.51 and included $0.27 of acquisition accounting adjustments. And free cash flow of $1.3 billion was a solid start to the year and included approximately $170 million of powder metal related compensation. Lastly, we paid down $500 million of debt in the quarter and are tracking to our full year deleveraging expectations as we further strengthen our balance sheet. Okay. Let's turn to Slide 6 and I'll provide a few details on our updated outlook for the full year. As Chris mentioned, based on our strong first quarter performance and expectations around continued defense strength, we are updating our full year outlook. On the top line, we're raising our full year adjusted sales outlook by $500 million to a new range of $92.5 billion to $93.5 billion, up from our prior range of $92 billion to $93 billion, driven by the performance we saw at Raytheon in the first quarter as well as slightly lower sales eliminations for the year. We continue to expect this to translate to between 5% and 6% organic sales growth for the full year at the RTX level. Breaking this down further, we continue to expect commercial OE sales to grow mid-single digits and commercial aftermarket sales to grow high single digits for the full year. And given the increase at Raytheon, we now expect defense sales to grow mid to high single digits for the full year, up from our prior expectation of mid-single digits. On the bottom line, we are increasing our adjusted earnings per share outlook $0.10 on both the low and high end of the range. This increase is driven by approximately $0.05 of drop-through on the higher sales at Raytheon, with the rest coming from a couple of below-the-line items, including lower interest expense. We now see adjusted EPS of between $6.70 and $6.90 for the full year, up from our prior range of $6.60 to $6.80. On free cash flow, we remain on track to our outlook of between $8.25 billion and $8.75 billion for the full year. Okay. With that, let me hand it over to Nathan to take you through the segment results for the quarter. Nathan? Nathan Ware: Thanks, Neil. Starting with Collins on Slide 7. Sales were $7.6 billion in the quarter, up 5% on an adjusted basis and 10% organically, driven by strength across all channels. Adjusting for divestitures, by channel, commercial OE sales were up 15% driven by higher volume on narrow-body and wide-body platforms. Commercial aftermarket sales were up 7% driven by a 15% increase in provisioning and an 8% increase in parts and repair, partially offset by a 3% decline in mods and upgrades. Recall, mods and upgrades were up 18% in Q1 2025. Defense sales were up 9% versus the prior year driven by higher volume across multiple programs. Adjusted operating profit of $1.3 billion was up $71 million versus the prior year, driven by drop-through on higher commercial and defense volume and lower R&D expense. This was partially offset by unfavorable commercial OE mix, the impact of divestitures completed in 2025 and higher tariffs across the business. In the quarter, Collins expanded margins by 10 basis points year-over-year despite a 130 basis point headwind from tariffs. Turning to Collins' full year outlook. We continue to expect sales to grow mid-single digits on an adjusted basis and high single digits organically, with operating profit growth between $425 million and $525 million versus 2025. Shifting to Pratt & Whitney on Slide 8. Sales of $8.2 billion were up 11% on an adjusted basis and 10% organically, driven by strength in commercial aftermarket and military. Commercial OE sales were in line with expectations and down 1%, driven by lower engine deliveries. As Chris said, we continue to expect mid to high single-digit large commercial engine delivery growth for the full year. Commercial aftermarket sales were up 19%, driven by higher volume, including heavier content in both large commercial engines and Pratt Canada. In military engines, sales were up 7%, driven by higher F135 production volume. Adjusted operating profit of $711 million was up $121 million versus the prior year, driven by drop-through on higher commercial aftermarket and military volume, partially offset by higher operational costs, including tariffs and higher SG&A expense. In the quarter, Pratt expanded margins by 70 basis points year-over-year despite a 50 basis point headwind from tariffs. Turning to Pratt's full year outlook. We continue to expect sales to grow mid-single digits on an adjusted and organic basis, with operating profit growth between $225 million and $325 million versus 2025. Turning to Raytheon on Slide 9. Sales of $6.9 billion in the quarter were up 10% on an adjusted basis and 9% organically, driven by higher volume on land and air defense systems, including Patriot and GEM-T, and higher volume on naval munitions programs. Adjusted operating profit of $845 million was up $167 million versus the prior year, driven by favorable program mix and higher volume in land and air defense systems, higher volume in naval programs and improved net productivity. In the quarter, Raytheon expanded margins by 150 basis points year-over-year driven by favorable mix and increased productivity. Bookings in the quarter were $6.6 billion, resulting in a book-to-bill of 0.96 and a backlog of $74 billion. And on a rolling 12-month basis, Raytheon's book-to-bill is 1.48. In addition to the awards Chris mentioned earlier, other key awards in the quarter included over $900 million for Standard Missile and Tomahawk. Turning to Raytheon's full year outlook. We expect sales to grow high single digits on an adjusted and organic basis, up from our prior range of mid to high single digits due to the strength Neil mentioned earlier. We now expect operating profit growth between $275 million and $375 million versus 2025, up from our prior expectation of between $200 million and $300 million, driven by the drop-through on higher sales and favorable program mix. With that, let me hand it back over to Chris for some closing remarks. Christopher Calio: Okay. Thanks, Nathan. As we set up front, our execution and operational performance drove strong top and bottom line results in Q1, and I want to thank the entire RTX team for their continued dedication and commitment to our mission. The underlying demand for our commercial and defense products is durable, and we remain focused on executing on our commitments, investing in capacity and innovating for future growth to drive long-term shareholder value. With that, let's open it up for questions. Operator: [Operator Instructions] The first question comes from the line of Robert Stallard of Vertical Research. Robert Stallard: Chris, you highlighted the very strong demand you continue to see for Missile Systems in the Raytheon portfolio. I was wondering, how concerned are you about the ability of your supply chain to keep up with the demand pace you're setting? And also in relation to that, the risk with regard to rare earth? Christopher Calio: Thanks for the question, Rob. I'll start by just saying we're really pleased with how we started the year in terms of production. As we said upfront, [ munitions ] was up over 40% year-over-year. So a very good start to the year. Now the continued ramp of production is going to require growth in supply chain output and performance, as you've noted here. Now Raytheon has had 12 consecutive quarters of material growth, which is great, and material receipts were up 13% year-over-year here in Q1. And we're going to obviously going to keep a very close eye on a number of the things that we talk about on a consistent basis: Rocket Motors given the concentrated supply base; microelectronics, given the non-A&D demand that's out there. But if you just think longer term and the potential impact of the framework agreements, it's going to require a step change, to your point, in the supply chain. Now the framework agreements do provide some potential long-term firm demand. And that's going to provide the visibility the supply chain needs to invest in people, tooling, test equipment and capacity, which is great. But I think longer term, the defense industrial base is going to need additional suppliers to improve the overall resiliency, and the firm demand is likely going to incentivize quality suppliers from other industries to enter the supply base, which is great, and I think we need it. And the Department of War has been partnering with a lot of those folks to provide strategic capital to give them the balance sheet strength they need to make these investments. But we're going to need all of that in order to not only meet the production ramp-up that we have in front of us now, but also the potential ramp-up that comes with the framework agreements. On critical minerals, I would just say that we've been working on this for a while having seen this coming. And so we're covered in what I would call the near and medium term. And we're still seeking to lock up longer-term partnerships and contracts on a handful of those. And the department has actually been a really strong partner in that effort as well. Operator: Our next question comes from the line of Peter Arment of Baird. Peter Arment: Chris, if we could just stick on your framework comments. Just wanted to kind of double-click on sort of how you're thinking about -- I know pricing is always sensitive, but how we're thinking about the impact when you're thinking about CapEx that you've had to put in place, and then how should we think about potentially margins long term? Is there an opportunity here where the mix changes dramatically where you have more in production versus development mix? Just how you're thinking about Raytheon just given investments that you need to do [ shoring up ] supply chain, et cetera, and then pricing around some of these agreements? Christopher Calio: Yes. Thanks, Peter. Look, given the demand coming out of the Ukraine conflict, we've been investing for a while and increasing capacity. We mentioned a number of those in our upfront comments. Think Huntsville, think Andover, think McKinney, Texas. All those investments that you need to not only expand your footprint, but tooling, test equipment and labor. So we've been on that path to meet the demand. On the framework agreements, and again, I don't want to get to too far into the details on this, Peter, only because we're still in the process of negotiations and discussions with the department on that. But again, as I said before, when they are ultimately finalized, it will give the kind of long-term visibility that the supply chain will need to invest, which is critically important. I think the episodic nature previously of the ordering patterns made it very difficult for the supply chain to make those kinds of long-term investments and things like the framework agreements are here to sort of address that. But here's what I will say, if you just think about the overall economics of the framework agreements, they give us an opportunity to bundle materials, they give us an opportunity to leverage economy of scale, and they give us an opportunity to really drive production efficiencies, especially given some of these are mature programs, things that are right in our wheelhouse. So we ultimately think that these are going to be very good business for us, but we're still going through the process to convert those into final agreements. Operator: Our next question comes from the line of Myles Walton of Wolfe Research. Myles Walton: Maybe a question again on Raytheon, maybe a little bit bigger into the -- digging into the details on the sensors and effectors. On the effector side, as a surrogate, LHX laid out this almost 20% CAGR through 2030 for the missiles business. Would that be reflective of the kind of growth you're expecting within that portfolio? And we don't hear as much on the sensor side, but you mentioned the Andover expansion. So I'm curious on the sensor side, what kind of growth you're looking for as it relates to your business at Raytheon? Neil Mitchill: Myles, I'll start on that one for you. Let me start by giving you a little bit of perspective on the Raytheon portfolio. If we were to look at '25, '26, if you will, as a proxy for how large is the effector business within Raytheon. Think about that as accounting for a little bit over 40% of the sales of Raytheon. So to just give you some context. And sensors obviously makes up a little less than that, but a large portion of the Raytheon business as well. And I would tell you that the growth we saw in the first quarter was significantly driven by the munitions and effectors, also the sensors, Patriot in particular. And we're seeing double-digit growth rates on those businesses in the quarter, and I expect that to continue as we go forward. Keep in mind, everything that Chris just spent a couple of questions talking about is not even in our backlog yet. So we're just talking about delivering today's backlog to both our U.S. and our international customers. On the sensor side, we see a lot of runway ahead of us there as well. We're continuing to build and deliver Patriot systems, NASAMS systems, the Coyote system. And obviously, we're ramping up our production on LTAMDS as we look forward. So that helps give a little bit of context on the size of the business and where we see it going. Again, as we finalize those agreements, we'll be sharing more details on the specifics as they come to finality. Chris? Christopher Calio: No. The only thing I was going to add there, Myles, is I think the underlying premise of your question is a good one, which is I think the sensors potential has been something that has perhaps been under-discussed given, obviously, the framework agreements and all the replenishment that you're going to need on the effector side. And Neil rattled off a whole bunch of pieces of that portfolio, which I think are going to be really critical priorities. But again, just think Golden Dome, think integrated air and missile defense, the sensor portfolio is going to continue to grow in importance. And I think we're going to see the output there have to grow over the long term as well. Operator: Our next question comes from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: When we look at what's happening in Iran, so there's a clear increasing need to solve for some of the cost mismatch issues for the lower-cost drones. I guess the demand signal for your existing products is very clear and the replenish of the arsenal makes sense. But can you talk about how you're thinking about the solutions you provide in these higher-volume but cheap drones, especially when we think about the future of warfare and how that could be integrated into the Golden Dome? Christopher Calio: Yes. Thanks, Kristine. Appreciate the question. I think just to provide some high-level context here, I think we're going to continue to need the right mix of capabilities. And you're absolutely right, the Department of War has put priorities around munitions depth and replenishment, integrated air missile defense, Golden Dome, all the things that are in the Raytheon wheelhouse and very mature products and products that are in production today. Your point about counter-UAS is a good one. We talked upfront about our Coyote system, and the Coyote system has been in great demand. It's performed exceptionally well in the field. And we've just actually started to introduce a non-kinetic version of the Coyote. So it can go up. It can perform its mission. It can address drone swarms. It can then come back and redeployed, recharged and, again, go out and prosecute another mission. So that goes to the low-cost, reusable nature of that particular platform. And we're seeing really, really strong demand both domestically and internationally. In fact, we just had an FMS case approved for Coyote for the UAE, just to show the level of international demand there. I think more broadly, you're right, there are a number of lower cost sort of platforms that are out there. I'm not sure that's where we're going to compete on a platform level. But I do think there are going to be opportunities for us to be a platform-agnostic supplier of systems on some of these solutions, whether that be mission systems, whether that be autonomy, whether that be propulsion. So that's kind of how we see this landscape playing out. Clear demand for the high-end capabilities that are in our backlog today and that are part of the framework agreement, clear strengths in our counter-UAS capabilities, again, Coyote, and then opportunities for us to play on some of those other platforms as a supplier. Operator: Our next question comes from the line of Mariana Perez Mora of BofA. Mariana Perez Mora: I wanted to follow up about the tariff impact. How are we seeing the impact so far after these new metal tariffs that were recently announced, and also the Supreme Court ruling on IEEPA? Neil Mitchill: Sure. I'll start with that one. Thanks for the question on the tariffs. Really no change today to our outlook for tariffs for the P&L for the full year. We talked about, back in January, seeing about a $75 million year-over-year tailwind as we continue to implement mitigations there. Obviously, the IEEPA tariffs court ruling have been overturned. They've been replaced with Section 122 and some other tariffs that's called Section 232. And so right now, we're sort of saying on balance, the tariff impact is about the same. That said, since the tariffs for IEEPA were put in place, we paid about $500 million associated with that kind of tariff. Obviously, the government is in the process of starting the refund process. And as we gain more clarity into that, we too will submit requests for our refunds there. We have not recorded income associated with reversing any of the expenses that we took. We have not included that in our guidance for this year either. So more to come there, but no change to our outlook today based on any of those changes. And if it improves, you'll see it in the bottom line. But right now, we're continuing to monitor it like everyone. Operator: Our next question comes from the line of Scott Deuschle of Deutsche Bank. Scott Deuschle: Chris, can you walk us through how you're thinking about the pricing strategy for [ Hot Section Plus ], which I believe is off warranty? And then do you require any additional regulatory approvals to begin providing Hot Section Plus on upcoming shop visits? Christopher Calio: Yes. Scott, thanks for the question. Well, first and foremost, we're really pleased here to have the aircraft certification on the GTF advantage, which, as you know, is where the Hot Section Plus comes from. So that paves the way for Advantage [ entry into ] service later this year. And those GTF Advantage engines are already moving through our production lines, and so I know our customers are looking forward to the increased time on wing and fuel efficiency. And to your point, the Hot Section Plus is the -- effectively the vintage retrofit package. Those 30 to 35 parts are going to provide almost 95% of the durability benefits of the Advantage, and they're going to get introduced into MRO a little bit later this year. So they will be introduced in MRO before likely the actual engine goes into service later this year. In terms of the pricing strategy, I mean, look, we've invested significantly in the Advantage, in all of the design and the testing and the like, and we plan to get value for that investment. Are there certain contracts that we have where it might make sense to incorporate versus others depending on where they're operating and what the environment looks like? Yes. And we're continuing to look at where it might be the most beneficial. But our intent is to get value for the investment that we've made and the value that it's going to continue to bring customers in terms of the time on wing and the fuel efficiency, which is again becoming a more important part of the overall equation. Scott Deuschle: Really helpful. Then Neil, can you explain how the transition to GTF Advantage will influence negative engine margin on the program? I assume there's some better pricing there, but it's not clear how that nets against presumably higher costs. If you could clarify that balance, that would be really helpful. Neil Mitchill: Sure. Thanks, Scott. I appreciate the question here. As we look forward, I think the GTF Advantage will have a little bit more cost associated with the engine as it brings greater capability and durability. But that said, you named it, there'll be some more pricing there as well. So on balance, I don't see a lot of headwind on a per engine basis as we begin to ramp up on the GTF Advantage engine over the next several years. So as we talked about for this year, we do think there's going to be a couple of hundred million dollars of headwind on OE margins throughout the course of the year. I'll tell you, for the first quarter, it was pretty much flat, not a major driver of the year-over-year performance at Pratt. They're doing a really nice job managing the cost of the engine. We're going to continue to see negative margins on deliveries of new engines, but obviously, the aftermarket is continuing to ramp there. Considerably, you heard Chris talk about the 22% GTF MRO output increase in the first quarter, that's driving aftermarket. The mix of those shop visits is getting heavier as well. And the margins on the aftermarket are low double digits. So we're starting to see the sequential improvement in the profile of the aftermarket at Pratt as well. So on balance, it's good business. It's great to see the certification occur here in the first quarter, and we're looking forward to making a very disciplined cutover over the next 1.5 years or so. Operator: Our next question comes from the line John Godyn of Citi. John Godyn: I was hoping to revisit Raytheon and the defense trends. Clearly, a lot of opportunities there, and the guidance was raised. That said, it was a very strong start to the year. So it feels like perhaps guidance is even a bit conservative. Maybe you could just revisit the outlook a bit and the shape of the year and how you see it playing out. Neil Mitchill: Thanks, John. I'll take that one. Yes, really pleased with the start of the year for Raytheon, seeing 9% growth on the top line. Chris talked about the material receipts, 12 consecutive quarters, 13% growth there. So we've been working, the team has been working very hard to make sure that we are prepared to deliver the backlog we have and then get ready for the future as well. With that strength, we dropped it through to our guide. We took up the top line at RTX by $500 million on the low and the high end of the range. I'd say about $350 million of that is all attributable to the Raytheon performance largely in the first quarter and what we can see as we enter here into the second quarter. The rest of the sales increase, we see some lower eliminations at the RTX level. So together, that's about $500 million. And we're seeing good drop-through. As you can see, the margins for Raytheon were 12.2% in the first quarter. We had $32 million of year-over-year productivity improvement at Raytheon. So a really nice start to the year. We're putting that into our guidance as well, and so that's a big driver of the $75 million increase in the range on both end of the high and low end of the range for Raytheon. So again, it's 1 quarter. We think that the business is performing quite well. We're seeing really good mix in the business. And as we continue to see that supply chain keep pace with our delivery plans, then we'll revisit that again here in July. But really pleased with the start and looking forward to continuing to see the ramp. Operator: Our next question comes from the line of Seth Seifman of JPMorgan. Seth Seifman: I wanted to ask about the impact of lower expected air travel growth on the aftermarket businesses at both Collins and Pratt, particularly maybe the short-cycle stuff at Collins, but if you could address it overall. We heard elsewhere this morning about the potential for a lag effect. And so thinking about is it some impact coming later this year and into '27, but it's a pretty significant hit to air travel growth this year. So maybe you could address that. Christopher Calio: Yes. Thanks, Seth. Well, the first thing I'll say is that we're really pleased with the way we started the year in our aftermarket business with 14% growth and the demand that we saw. And you're right, we're watching all the things that you're watching and the environment and the implications around higher fuel prices, jet fuel shortages, the moves that airlines are making on capacity adjustments. If you just think about our business, I think you've got to look at it by business unit and by channel to really understand sort of some of the implications. Now some of the initial moves that the airlines are making where they're retiring much older sort of platforms, again, a lot of our aftermarket isn't reliant on those. We don't see a lot of maintenance opportunities on some of those platforms. So those near-term moves don't see a lot of impact. If you look at Pratt, the 2 largest portions of our aftermarket are the V2500 and the GTF. As we've said before, the V2500 is still a very, very young fleet. 50% of it hasn't had a first or second shop visit. Shop visits were very strong here in the first quarter, and again, look to continue to be strong throughout the year. And on the GTF, well, number one, it's the most fuel efficient, which right now, of course, is, I think, what people are focused on. But beyond that, you obviously know that we've got the fleet health issues that we're contending with. We've got to continue to move engines out of the parking lot into our MRO shops, and we've seen good output there, as Neil talked about. So the demand for GTF MRO is going to continue to be pretty robust. At Collins, again, you've got sort of the 3 channels: the parts and repair, the provisioning, and the mods and upgrades. And I think where you'll start to see any potential issue would perhaps be in provisioning and mods and upgrades. Provisioning if airlines decide that they want to sort of live with lower stocking levels; and mods and upgrades if the airlines decide they want to maybe defer some of those things. Now we just haven't seen any of the impact on the demand yet, but that's kind of how we're thinking about it, and that's kind of how we're tracking it. Neil Mitchill: Thanks, Chris. I don't have much to add there, but I'll add a couple of data points, maybe just to help people do some sensitivities as we think longer term about this. On the Pratt business, about half of their segment is aftermarket. And as Chris said, the predominance of that is coming from the GTF, the V2500, and I would throw in there Pratt Canada. So if you put those 3 together, you're over 85% of the aftermarket sales. And Pratt Canada is a very diverse business, lots of customers, 70,000 units in service, so -- and great strength really across a number of their different business channels. So just to provide a little context there. On Collins, aftermarket there is about 40% of the total segment. And provisioning makes up -- I'm sorry, the parts and repair makes up about 2/3 of the aftermarket. So just a little bit of context to help people think about it. Again, very diverse business operating on a lot of what we would call the right platforms, a lot of newer platforms. And keep in mind, out-of-warranty flight hours continue to grow. When you think about all of the deliveries over the last 5 years, with the growth that we've seen year-over-year, we have more and more hours coming out of warranty every single year. And so those are the aircraft that will continue to fly even in a slightly depressed environment. So as we sit here and look at '26, there's no changes to our by-channel outlooks at this point for commercial OE or aftermarket. We're watching it, but I think we're feeling like, as we look at our portfolio, pretty good line of sight to the demand. Operator: Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: I wanted to ask about [ aerospace ] profitability, both Collins and Pratt. So first, on Collins, margins were quite healthy despite the tariff impact and OE growth mix. How would we think about 2026 guidance which suggests the rest of the year margins are flat to down slightly versus Q1, which would sort of buck the seasonal trend? So I guess how do we think about Collins puts and takes on margins? And then on Pratt, Neil, you provided a sensitivity layup for us right here. So when we think about the V2500, the PW2000 and the 4000, and if you could give us a breakout of what percentage that consists of and the retirement rates that you're assuming? Neil Mitchill: Let me start with the Collins margins. I think you said it, Sheila, it was a really strong start to the year despite our last quarter of having to deal with the year-over-year headwind from tariffs. Collins has done a nice job. They're focused on cost. We're taking on more and more OE. And some of that mix is a headwind, frankly. So with all of that, we continue to see margin expansion. You're right, as you look at the rest of the year, the margins remain relatively steady. I think as we continue to see OE mix trend towards more wide-bodies on the growth side, we'll have a little bit of a headwind there. It's a little bit early, as you know, to be adjusting the full year. We just talked about some of the uncertainty in the market. I think we're going to hold off for another quarter to see what second quarter looks like. But we're feeling like the Collins business is certainly on the right trajectory. If we get into the Pratt business, what I would say is the PW2000 is really not a major driver of the aftermarket. Obviously, we have a bit of a bigger portfolio on the 4000s, but we've been planning for that, I'll call it, structured decline for a number of years. And so that's not changing in our outlook here. On the V2500 specifically, we also are well connected with our customers. It's a young fleet. As Chris said, 50% of the fleet hasn't seen a second shop visit. 15% hasn't even seen its first shop visit. So we expect those airplanes to fly. They're also very durable and perform well. So despite the higher fuel prices, I think that they're great aircraft powered by the V2500. So as we look out, we're planning, call it, 1% to 2% kind of retirements for [ the V ]. The shop visits for the first quarter were on the run rate we expect for the full year, which is about 800. So continuing to see the strength there. Have a lot of visibility into the shop visit pipeline. Keep in mind, we're operating in a material-constrained environment, and so there's significant demand for spare parts and overhauls there. So that's what I would say as it relates to Pratt. Operator: Our next question comes from the line of Gautam Khanna of TD Cowen. Gautam Khanna: I was wondering if you could give us some help on how to think about AOGs on the GTF, because it's very hard from the outside to track those which were powdered metal impacted and not. So just kind of thinking about at year-end, is there some natural number we should be expecting AOGs that you can point to that would be consistent with your assumptions on MRO output and the charge provision you took a couple of years back? Just so we know that we're tracking to the -- to what you've already guided to. Christopher Calio: I'll start. And maybe just to address kind of your final point there, like the financial and technical outlook for the powdered metal situation remains on track. And as I said upfront, Gautam, we were really pleased that AOGs came down 15% in Q1 from the end of last year. That was on the back of some very solid MRO performance in Q1. The 1100 output was up 23% year-over-year, as I said. And that was with heavier shop visits up 9 points year-over-year. And so that was enabled by heavy shop visit turnaround time improving by about 20%. So very, very good performance in the shop helping enable the reduction in those AOGs. A couple other of good indicators as well as we think forward, 1100 inductions were up 7% sequentially from Q4 to Q1. And so we're improving that WIP in our shops to support the future growth in MRO output. And we also saw continued progress in material growth across some of the key value streams that are going to be important to MRO output. Structural castings were up 10% year-over-year, isothermal forgings were up 18% year-over-year. So again, those are all the elements that go into continuing to drive MRO output for the year, which in turn is going to continue to drive that downward trend that we talked about here that we saw in the first quarter. I won't give sort of a point estimate as to where we're supposed to be, but I will just say, as you just look at sort of the public data around AOGs, there are some in there that have absolutely nothing to do with engines. There are a number of other factors. Maybe they're going through a mod and upgrade. Maybe they're being returned from [ use ] and they need some modifications. And so not all of those are engine related. I'll also tell you that we continue to have removals for other reasons other than powdered metal. But those are the things that were in existence previously. And we've continued to provide upgrades to improve the durability and reliability. And so we also believe those will continue to have a positive effect as we look forward. So again, pleased with the Q1 performance. Our customers obviously want their assets back. It was a real positive shift this quarter in terms of the reduction. And given all the elements that I just talked about within MRO and those indicators, we continue to believe that that downward trajectory is going to continue. Operator: Our next question comes from the line of Scott Mikus of Melius Research. Scott Mikus: Chris and Neil, very good results. SpaceX is going public at a very lofty valuation and its IPO will probably create generational wealth for a lot of its employees. We've also seen Shield AI raise capital to $12 billion valuation. Anduril is looking to raise capital at a $60 billion valuation. Just how are you thinking about that in the context of retaining your best employees and engineers, so they don't join a defense tech company where they get significant upside from the equity valuation? Christopher Calio: Yes. Thanks, Scott. I thought where you were going there is that we were undervalued. I was hoping the point you were making there. Yes, good, good. All kidding aside, again, this is something we think about a lot in terms of the defense ramp-up. With unemployment at 4.3%, how do we make sure that we can attract and retain the labor that we need, in some cases, it's classified labor, which can be even more difficult because you got to get it cleared and the like at many of our facilities. So our labor strategy is something that we are laser-focused on. Now you mentioned our engineering population. If you look at RTX-wide, we've got roughly 180,000 people, about 1/3 of those are engineers. And they are clearly the lifeblood of the company, when you think about innovation being the bedrock of everything that we do. And so I think there's a couple of things that come into play there. Number one, we've got to continue to be competitive just from a compensation perspective, and that's something we're always looking at. And then number two, I will tell you that you walk the floors within RTX, you will see an uncommon dedication to the mission. And I think people get really excited about the work that we do and the mission that we play to connect and protect the world, in particular, on the national security side, given how critical our products are to national security and to allies. So it's not easy, to your point, Scott, there are people that will go, take a leap to go somewhere where they see that there might be some runway with an early-stage company. But by and large, we've been pretty successful at retaining our top folks. And again, I think that comes down to the core mission that we serve. Operator: Our next question comes from the line of Ken Herbert of RBC CM. Kenneth Herbert: I just wanted to follow up on the March commercial engine deliveries. With the first quarter in line with plan, and obviously, still the mid to high single for the full year growth, how do we think about the cadence into the second quarter and second half of the year? And I guess within that, as a result of just the supply chain incremental risk from higher input costs and everything else, are you seeing any incremental risk on your, I guess, Pratt supply chain from suppliers around the world just as a result of the war in Iran? Neil Mitchill: Thanks, Ken. Let me start with the supply chain piece. Right now, and as you know, we've been talking about this for a long time, Pratt has been laser-focused on ramping up critical supply chain elements: Structural castings, turbine airfoils and many other parts that go into the engine. And I think we've done a nice job there. So continue to see growth in those key elements, materials that are going to the engine. And so we're not seeing anything new crop up. Obviously, with the kind of growth rates we're talking about, because you've got to keep in mind, we're not only feeding the OEM growth rates, we're feeding the aftermarket as well, it's pretty substantial. But nothing new to report there. As it relates to the delivery profile, as planned, we were allocating materials between MRO and original equipment in the first quarter. You saw that in the sales number and in the delivery numbers for the quarter. And as you look at the implied performance for Pratt through the rest of the year, we still expect OE to be low single-digit sales. And as you said, up mid- to high single-digit unit delivery. So we'll continue to grow the number of new engines we delivered this year, and that will kind of happen pretty ratably as we think about the rest of the year. Now keep in mind, we had the strike last year in the second quarter. And so this year, second quarter will have an easier compare. But as we think about it, the negative engine margin will ramp up over the next several quarters as we kind of balance the mix of material between MRO and OE and drive the OE -- the AOG is down, and then continue to deliver to our end customer, Airbus. Operator: Our last question comes from the line of David Strauss of Wells Fargo. David Strauss: Following up there on Ken's question. Maybe could you specifically address the state of negotiations with Airbus and what they're desiring to get in terms of engines from you? And then secondly, if you can maybe just talk about the interior side of the business at Collins, where that is now in terms of being able to handle the -- what looks like a coming widebody ramp? Christopher Calio: Yes. Thanks, David. On your first question, as Neil said, we're going to continue to see OE deliveries step up throughout the year. And when we get to the end and execute on that plan, it's going to be a record number of GTF engines that we've delivered and that delivery share is going to remain above the program share. So continue to be pleased about that. In terms of the discussions with Airbus, those are always ongoing. And we're always talking with them about what's going on industrially, what's going on from a supply chain perspective and balancing, of course, the needs of the GTF fleet health and our mutual customers. And so those conversations will continue to go on. I will tell you that our focus is on making sure that we are investing for the growth we see both on the OE and the MRO side. On the MRO side, you heard us talk about some of those investments that we've made in Singapore that we're going to then translate into other parts of our network. We're going to be adding a forging press in our Columbus, Georgia facility. We're going to be adding a new tower for powder production at our HMI facility in New York. You heard Neil talk about the turbine airfoil ramp-up at Asheville. These are all investments that we're making because we continue to see the demand both on the OE and MRO side. And again, the relationship with Airbus is an important one for us. It's one that we, of course, greatly value. And it's one that has spanned decades. And it will continue to span decades. And we will continue to work through our issues, as we always do, in a constructive and transparent manner. And I have no doubt that we'll ultimately get there to where we need to be on volumes going forward. Neil Mitchill: And maybe just a comment on interiors. Had a good quarter. Sales were up double digits, so call it, low teens, if you will, in the first quarter. We're continuing to work through a couple of certification requirements on a handful of bespoke programs. But business has a good trajectory. We're expecting solid growth for the full year, and pretty good line of sight to mods and upgrades for the remainder of the year. So feeling good about that today. Thank you for the question. Operator: Thank you. With that, I will now turn the call back over to Nathan Ware. Nathan Ware: All right. Thanks, Latif. That concludes today's call. As always, the Investor Relations team will be available for follow-up questions. So thank you all for joining us, and have a good day. Operator: This now concludes today's conference. You may now disconnect.
Operator: Good morning, and welcome to the Second Quarter 2026 Earnings Conference Call for D.R. Horton, America's Builder. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Jessica Hansen, Senior Vice President of Communications for D.R. Horton. Jessica Hansen: Thank you, Paul, and good morning. Welcome to our call to discuss our financial results for the second quarter of fiscal 2026. Before we get started, today's call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although D.R. Horton believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to D.R. Horton on the date of this conference call, and D.R. Horton does not undertake any obligation to publicly update or revise any forward-looking statements. Additional information about factors that could lead to material changes in performance is contained in D.R. Horton's annual report on Form 10-K and its most recent quarterly report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. This morning's earnings release and our supplemental data presentation can be found on our website at investor.drhorton.com, and we plan to file our 10-Q later this week. After this call, we will also post our updated investor presentation to our Investor Relations site on the Presentations section under News & Events, for your reference. Now I will turn the call over to Paul Romanowski, our President and CEO. Paul Romanowski: Thank you, Jessica, and good morning. I am pleased to also be joined on this call by Mike Murray, our Chief Operating Officer; and Bill Wheat, our Chief Financial Officer. The D.R. Horton team delivered solid second quarter results with consolidated pretax income of $867 million on $7.6 billion of revenues and a pretax profit margin of 11.5%. New home demand remains impacted by affordability constraints and cautious consumer sentiment. However, our tenured teams continue to respond to current market conditions with discipline. During the quarter, we delivered a consolidated pretax profit margin above the high end of our guidance range, generated revenues within our expected range and increased net sales orders by 11% compared to the prior year quarter. At the same time, we reduced our unsold completed homes by 35% from a year ago, reflecting our focus on balancing sales pace, pricing and incentives to drive incremental sales while maximizing returns. We continue to focus on capital efficiency to generate strong operating cash flows and deliver compelling returns to our shareholders. Over the past 12 months, we generated $3.7 billion of cash from operations and returned $4 billion to shareholders through repurchases and dividends. For the trailing 12 months ended March 31, our homebuilding pretax return on inventory was 17.6%, while our consolidated returns on equity and assets were 13.2% and 8.9%. Our return on assets ranked in the top 20% of all S&P 500 companies for the past 3-, 5- and 10-year periods, demonstrating that our disciplined, returns-focused operating model delivers sustainable results and positions us well for continued value creation. Our sales incentives increased during the second quarter, and we expect incentives to remain elevated for the rest of the year with a level dependent on demand, mortgage interest rates and other market conditions. We work every day to leverage our industry-leading platform, unmatched scale, efficient operations and experienced teams to bring homeownership opportunities at affordable price points to more Americans. 65% of our mortgage company's closings this quarter were to first-time homebuyers. We will continue to tailor our product offerings, sales incentives and inventory levels based on demand in each of our markets to maximize returns. Mike? Michael Murray: Earnings for the second quarter of fiscal 2026 were $2.24 per diluted share compared to $2.58 per share in the prior year quarter. Net income for the quarter was $648 million on consolidated revenues of $7.6 billion. Home sales revenues in the second quarter totaled $7 billion on 19,486 homes closed compared to $7.2 billion on 19,276 homes closed in the prior year quarter. Our average closing price was $361,600, down 1% sequentially and down 3% year-over-year. Our average sales price on homes closed is below the average price of new homes in the United States by approximately $160,000 or about 30%, reflecting our focus on affordability. In addition, the median sales price of our homes is approximately $70,000 lower than the median price of an existing home. Bill? Bill Wheat: Net sales orders increased 11% year-over-year in the second quarter to 24,992 homes, while total order value increased 10% to $9.2 billion, in line with our business plan and expectations. Our cancellation rate for the quarter was 16%, consistent with the prior year period and down from 18% sequentially. The average number of active selling communities increased 4% sequentially and 11% year-over-year. The average price of net sales orders was $366,300, up 1% sequentially and down 2% compared to the prior year quarter. Jessica? Jessica Hansen: Our gross profit margin on home sales revenue in the second quarter was 20.1%, which included a 40 basis point benefit from a favorable litigation outcome and lower-than-normal warranty costs. Assuming normalized warranty and litigation costs, our home sales gross margin would have been 19.7% in the second quarter, slightly higher than our guidance range. On a per square foot basis, sequentially, home sales revenues and stick and brick costs were both down 2% while lot costs were essentially flat. Year-over-year, home sales revenue and stick and brick costs were both down 4% per square foot, while lot costs were up 4%. We currently expect our home sales gross margin to be 19.7% or slightly higher in the third quarter as we expect to realize additional construction cost savings on homes closed. Incentive levels and gross margin for the remainder of the year will continue to be dependent on demand, mortgage rates and broader market conditions. Bill? Bill Wheat: Our homebuilding SG&A expenses in the second quarter increased 2% compared to last year, and SG&A as a percentage of revenues was 9.2%, up from 8.9% in the prior year quarter. The year-over-year increase in our SG&A expense ratio was primarily driven by lower home closings revenue, reflecting the decline in our average sales price. We continue to manage our platform with discipline and remain focused on gaining market share efficiently while driving operating leverage over time. Paul? Paul Romanowski: We started 27,500 homes in the second quarter and we ended the quarter with 38,200 homes in inventory, of which, 22,900 were unsold and 5,500 were completed and unsold. Our completed unsold homes are down 25% from December and 35% from a year ago, with both unsold homes as a percentage of total inventory and completed unsold inventory at their lowest levels since fiscal 2023. For homes closed in the second quarter, our median cycle time from home start to home close improved by almost a month year-over-year. Our improved cycle times enable us to hold less inventory and turn homes more efficiently. We expect starts in the third quarter to be lower than the second quarter, and we will continue to manage our inventory levels and start pace based on market conditions. Mike? Michael Murray: Our homebuilding lot position at March 31 consisted of approximately 575,000 lots, of which, 23% were owned and 77% were controlled through purchase contracts. We are actively managing our investments in lots, land and development based on current market conditions. We remain focused on our relationships with land developers across the country to allow us to build more homes on lots developed by others. This approach enhances our capital efficiency, returns and operational flexibility. In the second quarter, 67% of the homes we closed were on lots developed by either Forestar or third parties, up from 64% in the prior year quarter. During the second quarter, our homebuilding investments in lots, land and development totaled $2.1 billion, including $1.5 billion for finished lots, $500 million for land development and $120 million for land acquisition. Paul? Paul Romanowski: In the second quarter, our rental operations generated $12 million of pretax income on $212 million of revenues from the sale of 566 single-family rental homes and 216 multifamily rental units. At March 31, our rental property inventory totaled $3 billion, including $2.7 billion of multifamily rental properties and $347 million of single-family rental properties. We remain focused on improving the capital efficiency and returns of our rental operations, and we currently expect our rental inventory to remain around $3 billion. Turning to our financial services operations. Pretax income for the second quarter was $52 million on $193 million of revenues, resulting in a pretax profit margin of 26.8%. Mike? Michael Murray: Forestar, our majority-owned residential lot development company, reported second quarter revenues of $374 million on 2,938 lots sold, with pretax income of $44 million. At March 31, Forestar's owned and controlled lock position totaled 94,000 lots. 65% of Forestar's owned lots are under contract with or subject to a right of first offer to D.R. Horton. During the second quarter, we purchased $280 million of finished lots from Forestar. Forestar's strong, separately capitalized balance sheet, national operating platform and lot supply position them well to provide essential finished lots to the homebuilding industry and to aggregate significant market share over the next several years. Bill? Bill Wheat: Our capital allocation strategy remains disciplined and balanced, supporting an operating platform that delivers attractive returns and substantial operating cash flows. We maintain a strong balance sheet with low leverage and healthy liquidity, providing significant financial flexibility to adapt to changing market conditions and opportunities. During the first 6 months of the year, homebuilding cash provided by operations totaled $619 million and consolidated cash provided by operations was $442 million. During the second quarter, we repurchased 6 million shares of common stock for $904 million, reducing our outstanding share count by 8% compared to a year ago. We also paid cash dividends of $0.45 per share, totaling $130 million, and our Board has declared a quarterly dividend at the same level to be paid in May. At quarter end, our stockholders' equity was $23.6 billion, down 3% from a year ago, while book value per share increased 5% from a year ago to $82.91. At March 31, we had $6 billion of consolidated liquidity, including $1.9 billion of cash and $4.1 billion of available capacity on our credit facilities. Total debt at quarter end was $6.6 billion, with $600 million of homebuilding senior notes maturing over the next 12 months. Our consolidated leverage at March 31 was 21.7%, and we continue to target leverage of around 20% over the long term. Jessica? Jessica Hansen: Looking ahead to the third quarter, we currently expect consolidated revenues to be in the range of $8.8 billion to $9.3 billion, with homes closed by our homebuilding operations to be in the range of 23,500 to 24,000 homes. We expect our home sales gross margin for the third quarter to be in the range of 19.7% to 20.2%, and our consolidated pretax margin to be between 12.2% and 12.7%. For the full year of fiscal 2026, we now expect consolidated revenues of approximately $33.5 billion to $34.5 billion and homes closed by our homebuilding operations of 86,000 to 87,500 homes. We continue to forecast an income tax rate for fiscal 2026 of approximately 24.5%, operating cash flow of at least $3 billion, common stock repurchases of approximately $2.5 billion and dividend payments of around $500 million. Paul? Paul Romanowski: In closing, our results and positioning reflect the strength of our experienced teams, industry-leading market share, broad geographic footprint, and focus on delivering quality homes at affordable price points. These are key components of our operating platform that support our ability to aggregate market share, generate substantial operating cash flows and consistently return capital to our shareholders. We recognize the current volatility and uncertainty in the broader economy, and we will continue to adjust to market conditions with discipline as we focus on enhancing the long-term value of D.R. Horton. Finally, I want to thank the entire D.R. Horton family, our employees, land developers, trade partners, vendors and real estate agents for your continued hard work and commitment. We look forward to continuing to improve our operations and expand homeownership opportunities for more individuals and families throughout fiscal 2026. This concludes our prepared remarks. We will now host questions. Operator: [Operator Instructions] And the first question today is coming from Alan Ratner from Zelman. Alan Ratner: Really nice job in a tricky environment. So congratulations. First question, I would love to drill in a little bit more on the gross margin outlook. It sounds like adjusting for the various warranty and litigation charges, it sounds like you're expecting pretty stable margins sequentially, which is very encouraging given what's going on. I know you mentioned you have some tailwinds there from lower construction costs. I was just curious if you can kind of give a little more detail on what you're seeing on that front lately, especially with the higher oil prices of late. We're starting to pick up some chatter about fuel surcharges from suppliers and trades. And I'm curious, if you're experiencing that in general, what your outlook there is maybe beyond the third quarter if oil remains near current levels? Bill Wheat: Sure. As we've discussed in prior quarters, we focused to do out our operations on sitting down with our trades and working our costs down as we held our starts back in Q4 and Q1. I feel good about what has been accomplished there. It's an ongoing effort, will continue to be ongoing. But we can now see in our construction cycle and our construction -- our homes under construction, lower costs coming through. And so we've started to see the front end of that in the current quarter that we're reporting, and we can see a bit more of that coming through next quarter. And so we expect to see some incremental benefits in Q3 and Q4. With respect to recent inflation, potential inflation from oil prices, that's something we'll be monitoring closely. Right now, we have nothing tangible to report in terms of anticipating inflation from that. But if we were to see an extended period where oil prices stayed elevated for an extended period, then there could be some pressure. If it remains a relatively temporary period, we wouldn't expect too much impact. Alan Ratner: Great. I appreciate that. Second question on the rental segment. I know it's not necessarily an area of growth for you guys, but obviously, a lot of noise with the outstanding extended bill related to BFR. I see you did sell 500-plus homes in single-family rental this quarter. Just curious if you could talk about the demand you're seeing kind of -- for going forward on BFR and whether you think this is going to kind of cause a bit of a pullback in activity in your rental segment beyond '26 if it does come to fruition? Paul Romanowski: We still see interest out there, but there is uncertainty around the legislation, and I think a little bit of a pause in terms of people waiting to see how that plays out specifically as it relates to the 7-year potential sale requirements. Generally speaking, we have underwritten our build for rent communities as for sale. So if need be, as we go forward, we can move those if needed. We also have focused the majority of our forward business on forward sales. In other words, we aren't starting those unless we have a contract and firm commitments. And so I feel good about our positioning there, not overly relying at all on having that business continue to be able to hit certainly our guide, and feel good about our positioning in the space. Operator: The next question will be from John Lovallo from UBS. John Lovallo: The first one is, how would you sort of characterize demand in March relative to normal seasonality? And the reason I ask is we've had certain checks that indicate normal seasonality sort of occurred each week through the first week of March and then sort of leveled off as the war started. Other checks have indicated they saw normal seasonality all the way through March, notwithstanding the war. And then I'm curious also what you're seeing year-to-date in April from a seasonality standpoint? Michael Murray: I would say the demand was good. We saw sales in line with normal seasonality, kind of as we expected and hoped throughout the month, and we're pleased with our sales results through mid-April at this point. But it's only the middle of the month at this point. Jessica Hansen: And our cancellation rate was stable throughout the entire quarter. Michael Murray: Yes. No change in that. John Lovallo: Yes. No, that was encouraging. Okay. And then on the order ASP of $366,000, it seemed to stabilize a bit here in the second quarter. It was actually up, I think, quarter-over-quarter for the first time since maybe the second quarter of '24. I mean was there any notable mix impact to call out there? And do you think we sort of found the floor on order ASP or close to it at this point? Paul Romanowski: I don't know that there was a notable mix for that impact. Our incentives do remain elevated as we had called out. And we're not going to call a floor relative to the market, and demand will depend on what we see through the remainder of the spring and into the summer selling season. Operator: The next question will be from Stephen Kim from Evercore ISI. Stephen Kim: Yes, strong results here in a tough market. I wanted to ask you about the incentive environment. You called for incentives remaining elevated through the remainder of the year. And I'm curious if you've seen any changes in trends worth calling out in terms of perhaps maybe an increase in the use of arms or temp buydowns. If you could just give us a sense for what you're seeing in terms of recent trends or recent activity in terms of how your incentives are tracking? Jessica Hansen: Sure. On the ARM front, we ran about 10% of our closings, at least through a mortgage company this quarter, more an ARM product. That's down from 13% sequentially, but it is up from essentially 0 a year ago. We are incentivizing. We've got products out there that are ARM incentives. So we are not surprised by that tick up. It's been somewhat strategic. I don't know that we expect it to grow materially from here. It could bounce around in that 10% to 15% range would be my guess today. And then in terms of just the buy down overall, we did have 90% of the buyers that utilized our mortgage company get some version of a permanent and/or a temporary buydown this quarter, which is up on our overall closings. That's roughly 73% of our closings had some form of a buydown. Stephen Kim: And could you give us a sense for overall, what incentives may, in aggregate, represent as a percentage of the, maybe the MSRP, the initial home price? And whether this has been -- it's been -- whatever it is, I'm sure it's obviously elevated, as you indicated. It sounds like there's no expectation to sort of bring that down, at least as far as you can see this year. And I'm wondering how would you respond to folks who are worried that this is becoming a new normal, that the buyer has become conditioned to expect very elevated level of incentives. And do you still have the same confidence that you had, let's say, 3 years ago when we started getting into this mess that you're going to be able to bring those incentives all the way back down to the level they historically were. Paul Romanowski: Steve, the incentives as a percent of revs is roughly 10%. And as it speaks to that level of incentives relative to market, rates have remained relatively stable. They've been somewhat range-bound, and we've stayed pretty consistent in the rates that we're offering. Therefore, that cost of those rates has stayed relatively stable in terms of the total incentive package. That being the most significant incentive that we are giving. I think we're going to need to see rates moderate some before we see that break up, and/or an increase in consumer confidence and more buyers in the market that allow for a reduction in incentive and over time, eventually, some increase in base house pricing. But we incentivize and look at that on a community by community level. We do have communities that we see a reduced incentive level. We haven't seen that come in aggregate when you look at our overall revenues. And as we focus on selling earlier in the process, we see the opportunity to hold back on some of those incentives as well. Operator: The next question will be from Ryan Gilbert from BTIG. Ryan Gilbert: Just first question on selling -- what you just said on selling homes. Earlier in the process, it does look like based on the backlog data, you've been able to sell more homes before they've been completed. Is that just a function of the drop in standing inventory? Or are you able to offer more incentives on homes under construction than you have been able to previously or have consumer preferences shifted away from completed spec? Jessica Hansen: With our cycle times where they are today, we're able to sell earlier and still put them into the BFC if that's the incentive that we're needing to get them across the finish line, whereas before construction cycle times were elongated and we weren't able to do that. But usually, when we sell a home earlier, we actually see a gross margin lift versus selling a home later. Ryan Gilbert: Okay. Got it. And then second question on starts, pretty big year-over-year pickup. Did you increase starts throughout the quarter? Do you need to make any adjustments as a result of the Iran conflict? It sounds like potentially not based on the third quarter guidance. But yes, any color on the starts gains throughout the quarter? And then if you think 3Q will also be down on a year-over-year basis in addition to sequentially? Michael Murray: On the starts for the quarter, we maintained our plan for the quarter, throughout the quarter, and we felt really good with the sales demand we saw. So the starts plan was in line and continued. I think we'd be -- expect to be seeing starts down sequentially in Q3, but likely roughly flat with what we had last year, somewhere in that range. Obviously, dependent upon the sales environment at a community level. Operator: The next question will be from Sam Reid from Wells Fargo. Richard Reid: Just wanted to talk through the cycle time benefit you got in the quarter relative to last year. I know this came up a little bit on the prior question. But how much of the 1-month improvement was explicitly from lower construction cycle times versus shorter complete to close? And then can you talk to any sequential benefits you might have gotten from that lower complete to close in Q2 versus Q1? Jessica Hansen: Our complete to close was down about a week sequentially, which is good. We still have room that we can improve that further. But a week quarter-over-quarter is a good start. Richard Reid: No, that's awesome. Helpful to hear. And then I know your red tag sale, I believe that's ongoing right now. Can you just remind us whether there are any timing differences between the sales this year versus last year? And maybe any tweaks to incentives we should be mindful of on the red tag sale? I mean I know you run it fairly regularly, but always trying to get a sense for any changes at the margins. Michael Murray: We've been consistently doing a red tag sale normally around the start of our fiscal quarters, and the incentive levels vary by community, by submarket. No, I won't say there's anything different in timing this year or anything really different in the incentive levels we're looking at in the aggregate. We have a little less completed inventory today in today's -- the current red tag sale than we did in the prior red tag sale. Operator: And the next question is coming from Matthew Bouley from Barclays. Matthew Bouley: So I wanted to first get a sense of what led the margins to be above your guidance and presumably with that continuing to how you're thinking about Q3 here. So was it kind of a reflection of the 6% mortgage rate environment we had from earlier this year? I mean it sounded like lot costs at 4%, probably a little bit lower than what we've seen recently, maybe more success on stick and brick than you had thought. Just sort of how do you bucket all that out? Paul Romanowski: I think it's a combination of all those things. We've seen some reduction in stick and brick come through that Bill spoke to less reduction of the increase of lot price. So those somewhat offsetting. And then we saw a fairly strong quarter from a demand perspective. And just under 25,000 homes sold in the quarter allowed us to hold incentives, maybe a little more than we had anticipated, and that's the result of our margin being at the high end or above our guidance. Matthew Bouley: Got it. Okay. No, that's perfect. And then secondly, I wanted to dig in back to that ARM's question. So I guess, number one, was there any more sort of temporary buydowns on top of the ARMs? Or is that 10% you mentioned kind of the whole thing. But then more specifically, I guess, going from 0 to 10% or if it's more with the temporary buydowns, like is there a rule of thumb? Or how would that impact your homebuilding gross margins relative to your financial services margins as well? Michael Murray: I don't think the -- it had a really significant material impact on the company. I think the ARM product has been pretty slow on the uptake this time versus prior cycles and people definitely prefer a 30-year fixed rate mortgage. And it is up 10% from 0 last year, but it's down 3% from Q1. So it's not having a significant impact truly on margins at the homebuilder with the financial services team at this point. Operator: The next question will be from Anthony Pettinari from Citi. Anthony Pettinari: On stick and brick, you talked about trends in building products costs. I'm just wondering if you could talk a little bit more about the labor piece, what that is year-over-year? And is there kind of an opportunity to keep driving that down on a year-over-year basis? And sort of what you're doing there? Paul Romanowski: We are seeing consistent labor and plenty of labor in the market. Hence, our reduced cycle times, and we continue to see those. The construction cycle times have slowed in terms of reduction just because we're below our historical average pace of home construction. So with more labor means more competition. And so we've seen certainly a portion of those total stick and brick savings come through labor as well as some mix of materials. That specific amount or percentage or split, we don't have, but expect to see, with what we're seeing in the market, that we continue to see some stick and brick savings show up, especially into our third and our fourth quarter in our homes that we closed. Anthony Pettinari: Okay. That's helpful. And I'm wondering if you could give any more kind of regional color on market strength and particularly what you're seeing in Texas and Florida, the spring season? Michael Murray: I think we're seeing good demand in Texas consistent as well in Florida. The markets feel pretty good to us. Generally, across the country, I would say that most of our markets are performing well in line with expectations, perhaps a little bit of softness in a few of our markets of kind of traditionally heavy exposure to the software industry, that buyer sentiment may be off a bit. Other than that, just kind of a good start to spring, pretty encouraged. Operator: The next question will be from Trevor Allinson from Wolfe Research. Apologies, it looks like we just last Trevor. We'll come back to him if he comes back in. The next question will be from Michael Rehaut from JPMorgan. Michael Rehaut: I wanted to circle back to comments you made earlier about demand trends in March and April, and you kind of indicated that, I believe, March, in line with seasonality, and you're pleased so far with April. I was kind of curious if you could kind of go a little bit more into detail on that? Obviously, the consumer sentiment data has come out a little shaky since the start of Iran war, a lot of volatility, a lot of headlines. And just kind of curious what you're seeing more on a bottoms-up basis from your home buyers and week-to-week, if perhaps month as a whole might have been kind of consistent with seasonality, but if you saw any more volatility on a week-to-week basis? Jessica Hansen: We don't generally comment on intra-quarter in terms of monthly trends, but to reiterate what Mike said, demand was good throughout the quarter and in line with our expectations and normal seasonality. Normal seasonality would be that February into March and into April are really getting into the heart of the spring selling season. And we didn't see any meaningful impact or disruption to the business that we would tie to any global or gas-related price increases. And I've said earlier, but also our can rate was stable throughout the quarter, which is another positive. Michael Rehaut: Okay. I appreciate it. I guess, secondly, you highlighted gross margins being stable going to the third quarter, if you exclude the 40 bp benefit, also expecting to benefit from lower costs into the third quarter. Perhaps if I heard it right, more than the second quarter as some of those benefits compound, let's say, or you feel the full impact. With flat gross margin sequentially, you have better continued gains on the lower cost. Are there anything that's offsetting that, that otherwise, you wouldn't see a potentially slight sequential improvement? And I'm thinking, in particular, if perhaps there's still kind of some movement around incentives or higher land costs or any factors that might offset the otherwise benefit from lower construction costs? Bill Wheat: We do continue to expect our lot cost to incrementally be a bit higher. It was relatively flat this quarter sequentially, but year-over-year, still up 4%. So that is a continuing headwind that -- our base case for this year was that we would see enough improvement in our stick and brick labor costs to offset that. And that's what we've seen thus far. That's kind of what we see as we look into Q3 right now. Obviously, incentive levels will depend on demand and mortgage rates and all the other factors that will impact our selling process. But -- so that remains to be seen what will happen on the incentive front. Operator: And the next question will be from Trevor Allinson from Wolfe Research. Trevor Allinson: You mentioned earlier that your completed specs are down about 35% year-over-year. So made some real progress on working down inventory. In past quarters, you've talked about industry inventory levels kind of still being extended here. Have you seen the industry overall also start to make some progress on working down inventory? And then was that a factor either industry-wide or for you guys, specifically in your 2Q gross margin coming in better than you anticipated? Paul Romanowski: I think we have seen inventory levels reduce across the competitive environment and I think similar to what we have done, a little more control on starts and that being dependent on the sales pace and demand. And we have absolutely watched that closely week-to-week and managing our starts in line with our housing demand that we see and our expectations as we move from quarter-to-quarter. So we feel good -- very good about our inventory position and good about the starch level that we had as it related to our sales throughout the quarter. Trevor Allinson: Okay. Very helpful. And then second question on your lot count, it's down about 10% year-over-year. You've got land prices, which remain sticky demand, still challenged. Is it your expectation that lot count kind of still continues to move lower sequentially here as maybe fewer deals just meet your underwriting standards in the current environment? Or were you able to find enough deals here where you expect that lot count to kind of flatten out from where it's at now? Michael Murray: I think we feel really good about the current lot position we have, and we're probably as good as we've ever been in the company's history of positioned with our land pipeline, such that we're able to kind of pass on deals that don't make sense in today's current incentive environment and being disciplined in our approach to the underwriting. Jessica Hansen: I think our development partners continue to work with us as well to adjust lot takedown schedules. And so that's probably a big driver of the sequential decline in our owned lot count as we still have an immense need for finished lots and appreciate those relationships and the ability to flow our takes in the projects where we need to. Operator: The next question will be from Rafe Jadrosich from Bank of America. Rafe Jadrosich: Just following up on the last comment. Can you talk about your exposure to land banking, maybe as a percentage of the option mix and then your ability to actually slow down the pace of the lot takedowns? Michael Murray: We have a mid-single-digit exposure to land lot bankers within our lot portfolio. So it's not a significant part of our land strategy at this point. Most of our lot position is held by third-party developers that are putting lots on the ground for us or Forestar. And we've been able to work with those folks in terms of adjusting, as Jessica said, take down schedules, timing of development phases to meet the market in line that makes sense for the market. We believe our strategy of working with third-party developers provides us a lot of operational flexibility, in addition to capital efficiency and utilizing the benefit of some very knowledgeable and seasoned experts in the development world. Rafe Jadrosich: Great. That's really helpful. And then I know it can be difficult to predict at times, but just can you help us at all with how we should think about the community count growth in the second half of the year? And if there's any sort of cadence that we should be considering? Jessica Hansen: We don't -- I always start with this. So we don't guide to community cap for a reason. It's a really hard one because it is so dependent on what's happening with our sales-based community by community. But it had stayed on a year-over-year basis, up a double-digit -- low double-digit percentage. We were up 11% year-over-year and 4% sequentially. We do continue to expect that to moderate at some point. I think the biggest positive this quarter, irrespective of community count, is that our sales were up 11%, in line with our community count increase. So we didn't see any decline on a year-over-year basis in terms of absorption. So another really positive sign about the second quarter and the demand environment. Bill Wheat: We expect it will moderate for that mid-single digit. Exactly what that timing will be, whether it's in the next few quarters or it's next year, sometime, that's the part that's a little more difficult to predict. Operator: The next question will be from Buck Horne from Raymond James. Buck Horne: Apologies if I missed this earlier, but I was just wondering if you could clarify for me, the changes to the top end of the revenue guidance for the year, given the -- I mean, the pretty resilient strength in net orders and the faster cycle times you're seeing, I just wanted to be clear on what the messaging was on kind of taking down the top end of revenue guidance for the year? Jessica Hansen: We lowered our closings guide by 500. And then we also saw a lighter ASP than we would have originally anticipated, and we're not really assuming our ASP to increase in the back half of the year. And so it's a combination of slightly lower closings at the high end and slightly lower average sales price. Buck Horne: And those lower closings would be driven by what factor? Jessica Hansen: We were light on our closing guide in both Q1 and Q2. We didn't achieve what we said we were going to do. We're still very well positioned to deliver in the heart of our original guide. We just felt like it was prudent to bring down the top end, since the first half of the year, we didn't deliver exactly what we were expecting. Buck Horne: Got it. Got it. Appreciate it. And just secondly, I was just curious if you're making any thoughts or changes around your land pipeline just due to what's changing around gas prices and just as consumers are having to drive longer distances for new home communities and the elevated cost of commuting, does that -- if we see an elevated energy price outlook longer term, do you start to reevaluate some of the locations where your communities are at in the pipeline? Paul Romanowski: We would have to see a very extended period of elevated gas prices to want to be responsive to that. The time that it takes to bring these communities online and our positioning of those communities are where we'd like to see them. So we feel good and comfortable about our community and our future community counts and locations. That said, we adjust as the market moves. And if we see an adjustment in market based on distances, then we'll adjust in kind, but nothing that we feel we need to be proactive about at this point in time. Operator: The next question will be from Susan Maklari from Goldman Sachs. Susan Maklari: My first question is on the SG&A. Can you just talk a bit more on how we should think about the path from here and your ability to get some leverage in the second half as those closings continue to come through? Bill Wheat: So we do expect to see some leverage in Q3 and Q4 as our guide for closings is a step up. So we'll see a higher revenue volume in Q3, Q4. Obviously, we want to be as efficient as we can there. The decline in our ASP over the last few quarters and then specifically this quarter, obviously, is a little bit of a drag on the SG&A ratio as well. But we -- as we look forward, we do expect to see SG&A as a percentage of revenue coming down from where we've been in the last few quarters. Susan Maklari: Okay. All right. That's helpful. And then how should we think about your ability or your willingness to continue on the shareholder return? Any thoughts there on potential upside or changes to the guide? And how you're thinking about balancing investments in growth relative to the dividend and the buyback in this environment? Bill Wheat: Our approach will remain consistent there. We're focused on generating strong cash flows from operations. And then you're basically utilizing 90% to 100% of that cash flow for distributions to shareholders. We've been consistent with our dividend and inching that up each year, and then the remainder goes to share repurchases. We're still guiding to approximately $2.5 billion of share repurchases this year. We're ahead of pace through Q2, when we saw the pullback in the stock in the latter part of the March quarter. Obviously, we continue to purchase and leaned into it a bit. So we've really essentially accelerated a bit of our repurchases into Q2, but still right on track towards our $2.5 billion guide for the year. Operator: The next question will be from Jade Rahmani from ABWK. Jade Rahmani: Could you talk about what's driving these warranty and litigation benefits, which you've experienced for more than this quarter and if you expect further benefits going forward? Bill Wheat: Yes, Jade. The last 3 quarters, we've had various kind of one-off events that occurred. This quarter, we had a favorable outcome from a specific litigation case that had been previously reserved, and the results was better than what we had anticipated when we booked the reserve. And so that was a positive benefit this quarter. As well as we did see our warranty costs step down a bit, and we're seeing the benefits of that. We set our reserves based on really where our costs have been. So there was some benefit from that. So this quarter, we would attribute 40 basis points of benefit from those items that we do truly believe are one-off. And so really, our forward anticipation is that the net impact of litigation and warranty would continue to be around 40 to 50 basis points negative impact on margin each quarter. This quarter, that impact was 0. We would expect normally it would be a negative impact of 40 bps. Jessica Hansen: And as a reminder, our supplemental presentation out on our Investor Relations site does give that line item detail on the home sales gross margin slide. And so you can see quarter-to-quarter what that is. And if you go further back than the last 3 quarters, you will see we're right in the heart of that 40 to 50 basis point typical impact. Jade Rahmani: And in terms of the share buybacks, is there a multiple at which above book value, you don't think it makes sense and where you would look to rather lean on the dividend as a way to efficiently return capital? Bill Wheat: We look at all aspects of our distribution strategy, and valuation of where the stock is, is a component of that. However, we're committed to continuing to distribute the substantial majority of our cash flow to our shareholders. We've typically kept the dividend at a more consistent level because any payment of dividends, you prefer that to continue to increase over the long term, and we are very reluctant to reduce dividend levels. And so the share repurchase would be the element that would be more likely to either toggle up or toggle down over time. Operator: The next question will be from Mike Dahl from RBC Capital Markets. Michael Dahl: Nice results. I just wanted to ask a clarifying question on the incentives. I believe in the opening remarks, you made a comment about incentives continued to increase in the quarter. But then a lot of your subsequent commentary, it sounded like it was actually a little more stable. So I just wanted to kind of confirm, was that a comment that was sequential or year-on-year? And then I understand that on a forward basis, the market conditions will dictate where you go with that. But in terms of what's embedded in the 3Q guide, is that for stable sequential incentives or different level, good or bad? Michael Murray: I think you heard that properly as stable incentive levels from Q2 to Q3. In Q2, about 61% of our homes closed were sold within the quarter, so they're very reflective, the results were reflective of the market conditions we experienced, and that's what we're kind of projecting forward from an incentive level. Michael Dahl: Okay. So the 10%, in the 10% you experienced in 2Q, was that also stable relative to -- so 1Q... Jessica Hansen: It ticked up slightly, but it was essentially rounded to the same number. Michael Dahl: Got it. Yes, yes. Okay. That makes sense. I wanted to also follow up on the material cost dynamic. I appreciate that you guys have some forward visibility given the way you negotiate with your trades and labor. If we've now seen a slew of price increase announcements across a large basket of construction materials and building products and understanding that it may take time for those to go through, it may fluctuate based on ultimately what's happening on the ground today. But from a timing standpoint, if we start seeing price increases go into the market, this later this spring, when does that flow through to? Is that a fiscal '27 closings dynamic for you at this point in the year? Are you pretty locked for '26 starts and closings? Paul Romanowski: If we started to see those price increases truly come through, then yes, that would be more of an impact on fiscal '27. Certainly, we'd see some, but I think probably offset in balance, and we really haven't seen that to date. So we'll just see how that goes based on what occurs in the world. Jessica Hansen: Increases get announced a lot. That doesn't mean we actually take them. Operator: The next question will be from Ken Zener from Seaport Research. Kenneth Zener: Given your normal order seasonality, do you feel -- did your teams tell you that you guys gained share? Or is that kind of just the demand environment? Michael Murray: Hard for us to gauge what we're doing on share versus the overall environment. It felt pretty good. Anecdotally, I'd say maybe it's a little bit of share, but I don't know. We'll find out when everybody else reports. Jessica Hansen: Over the next 1.5 weeks, I think you'll have a pretty good idea. Unknown Executive: Yes. I mean our cash flow each other [indiscernible]. Kenneth Zener: Right. No, it's very impressive. And then your lower land cost, I think you said it was up 4% year-over-year. Could you give us some context to that? I think it was more in the mid- to high single digits. And then can you talk to the benefit you believe you're realizing from when you slowed down starts to renegotiate? Just trying to understand how those 2 factors are -- might play out going forward. Paul Romanowski: When you talk about the benefit of slowing starts, are you talking on the land side or on the labor side? Labor? Yes, I think that... Kenneth Zener: It could be both. I mean really just to illuminate us, if you would. Paul Romanowski: Yes. I think that what we have seen and expect to see as we go into the third and fourth quarter, that the stick and brick savings between both materials and labor will offset any increase that we see on the land side. We have -- as we've gone through community by community, just like we do on the sales and our incentive level, this is a regular discussion with our development partners and/or landowners relative to the terms of any particular deal. And we've seen some savings on land deals, not widespread, but some land and lot reductions based on the reality of the environment and the pace at which we're buying lots and/or starting up. Jessica Hansen: And Ken, so the first part of your question, we did see moderation in terms of that increase on a year-over-year basis. We were up 6% last quarter, 4% this quarter. Too early for us to say it's going to continue to decline or stay right in that 4% range. But we have expected, as we continue to move through our earlier -- or our more recently purchased land that, that will moderate in terms of the year-over-year increase. Operator: The next question will be from Jay McCanless from Citizens. Jay McCanless: Jessica, I wanted to go back to a comment you made about a gross margin tailwind on homes that you guys sell earlier in the construction process. Is that some extra upgrades going in? Or is that just some cost attribution flowing through? Paul Romanowski: Some of that comes from choice selling earlier in the process compared to a completed home or one that we may be more motivated to move off balance sheet and get a buyer in there. So when we sell early in the process and there's a little more choice, whether that's lot selection or some of the things that go in the homes, I think those all attribute to a slight advantage on gross margin at the time of sale. Michael Murray: Yes. Just to clarify that we would expect a slightly higher margin on homes sold earlier in the construction process than those that are sold when they're complete, just to make sure we got the headwind tailwind on margin and cost of sales. Jessica Hansen: And we typically always talk to the point that once the home is completed and unsold for a period of time, we do start to see the margin degrade, which is why we have such a focus on not letting our completed specs age and how pleased we are with our completed spec reduction today. Jay McCanless: Okay. That's great. The second question I had, I guess, along those lines, if you are able to sell a little bit earlier, I guess, how much were you able to raise prices in certain markets this quarter? Or is it still kind of tricky to pull that off? Paul Romanowski: It's certainly tricky to measure with any consistency because that is a community-by-community balance. In some cases, it's a reduction of incentives compared to a price increase, and trying to nail that down and put a number to it is just not something that we have. Operator: The next question will come from Jonathan Bettenhausen from Truist Securities. Jonathan Bettenhausen: I know it's a smaller mix of sales, but another good quarter for the North. It's a fairly large region from a geographic perspective. So are there any metros specifically to call out that you're seeing outsized growth? Or is it more just kind of broad across the region there? Michael Murray: Pretty consistent across the regions. It's also reflective of investments we've made in that geography over the past several years that are now coming in and bearing fruit. So we're really pleased with the teams, how they're performing across the North region, and the contribution they're making to the overall sales results as Texas and Florida are not quite the powerhouses they once were. Jonathan Bettenhausen: Yes. Okay. And just to follow up on that. Can you talk about the kind of investment thesis in the North? Michael Murray: The investment thesis? It was markets we had not heavily penetrated. We saw opportunity to take national market share by expanding our presence in those markets, and we did it through a combination of greenfield organic growth as well as a few acquisitions. Operator: The next question will be from Alex Rygiel from Texas Capital. Alexander Rygiel: Cancellation rates have remained fairly stable, but have the reasons for the cancellations changed at all? Jessica Hansen: No. We continue to see that the vast majority of our cancellations are due to the buyer ultimately not being able to qualify for the mortgage once they get into the full documentation process. Operator: And the next question will be from Alex Barron from Housing Research Center. Alex Barrón: I was recently in San Antonio and saw you guys had several communities priced in the high 100s, low 200s. And I was wondering if that's just something you're only doing in that market? Or it's a new push you guys are doing across more markets to build more lower-priced affordable communities? Paul Romanowski: Alex, we have focused on finding a more affordable product and doing it where we can in the markets that especially allow the smaller lot prices and allow for those smaller square footages. Not something we can do across all municipalities in the country. We still face a lot of minimum lot size requirements that put the cost a lot out of range to achieve that and/or minimum square footages. But where we can achieve, we have seen good success with that. And certainly in Texas, allowing to get some of the lowest prices we can provide around the country where you're seeing in San Antonio, and we're seeing those across the Texas markets and feel good about the positioning. Alex Barrón: Okay. And are you finding above average sales pace for that price point? Paul Romanowski: We are. It certainly opens up homeownership to places where there is no other option in a lot of the markets and certainly not for a new home with a warranty and stability of neighborhood and community that we're delivering. So it's absolutely opening up home ownership across the markets, and we see a higher pace because of that. Operator: And that does conclude today's Q&A session. I will now hand the call back to Paul Romanowski for closing remarks. Paul Romanowski: Thank you, Paul. We appreciate everyone's time on the call today, and look forward to speaking with you again to share our third quarter results on Tuesday, July 21. And congratulations to the entire D.R. Horton team on a solid second quarter. We appreciate everything that you do. Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Flexsteel Industries Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mike Ressler, Chief Financial Officer for Flexsteel Industries. Please go ahead. Michael Ressler: Thank you, and welcome to today's call to discuss Flexsteel Industries third quarter fiscal year 2026 financial results. Our earnings release, which we issued after market close yesterday, Monday, April 20, and is available on the Investor Relations section of our website at www.flexsteel.com under News and Events. I'm here today with Derek Schmidt, President and Chief Executive Officer. On today's call, we will provide prepared remarks, and then we will open the call to your questions. Before we begin, I would like to remind you that the comments on today's call will include forward-looking statements which can be identified using words such as estimate, anticipate, expect and similar phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q and other SEC filings as applicable. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Additionally, we may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today. And with that, I'll turn the call over to Derek Schmidt, Derek? Derek Schmidt: Good morning, and thank you for joining us today. As we reflect on our third quarter performance, we are operating in an environment that continues to be increasingly uncertain and dynamics. Over the course of the quarter, we saw a meaningful shift in demand patterns driven by a combination of factors, including severe weather early in the quarter and more recently, heightened macroeconomic uncertainty stemming from the conflict in the Middle East. These conditions have impacted consumer confidence, increased volatility in financial markets and contributed to rising energy costs, all of which are influencing both demand and our cost structure. Against this backdrop and a strong prior year comparison, we delivered relatively stable year-over-year sales performance in the quarter and maintained solid operating margins of approximately 7%. While our year-over-year growth moderated this quarter, I'm encouraged by how our teams continue to execute and manage the business with discipline. Our results reflect the progress we've made building a more resilient operating model, 1 that allows us to respond quickly to changing conditions while maintaining focus on long-term value creation. Importantly, our underlying growth drivers remain intact. Our strategic accounts, new product introductions and health and wellness category all continued to perform well during the quarter. although at more moderate growth levels than we've experienced in recent periods. This gives us confidence that while near-term demand is under pressure, the foundational elements of our growth strategy are working. Demand trends were uneven throughout the quarter. January and February were impacted by unusually severe weather across several regions. In March, we saw a more noticeable slowdown in orders as macroeconomic uncertainty increased. Overall, orders were down approximately 2.4% in the quarter and we continue to see variability in consumer traffic and purchasing behavior. Retail partners are responding cautiously managing inventory levels closely and taking a more measured approach to replenishment. From a profitability standpoint, we continue to benefit from the operating discipline and productivity improvements we've implemented over the past several years. However, we are beginning to see cost pressures increase, particularly related to higher fuel and energy costs stemming from the developments in the Middle East. These pressures are impacting domestic transportation costs immediately and are expected to expand the ocean freight and product cost later in the fourth quarter and into the first quarter of fiscal year 2027. As we consider potential actions to mitigate these impacts, including pricing and cost initiatives, we are being thoughtful given the current sensitivity of the consumer and the broader demand environment. Compounding near-term supply pressures is a fire last month at a large chemical factory in Texas that is hindering production of polyol, a key chemical used in the production of phone for upholstered furniture. Not only is this further elevating prices on this key furniture input, but most North American phone manufacturers are now on allocation from chemical suppliers for polyol which could lead to product shortages and extended manufacturing lead times for furniture as soon as May. In addition to these supply chain and macroeconomic pressures, the tariff environment remains highly fluid and uncertain. We are closely monitoring potential new tariffs being pursued by the administration and how they may interact with existing Section 232 tariffs on upholstery furniture. There is also uncertainty around future trade negotiations, including USMCA, which could impact our operations and sourcing in Mexico. These factors represent additional variables that could influence both demand and our cost structure in future periods. As we look ahead, we do expect near-term conditions remain challenging. Demand is likely to remain uneven, and we currently anticipate fourth quarter sales to be relatively flat with prior year levels and operating margins similar to third quarter performance. The duration and severity of these challenges will depend on how macroeconomic conditions, geopolitical events and trade policy evolves. That said, our strategy and focus remains unchanged. We are operating with agility, maintaining disciplined cost control and continuing to invest in the capabilities that support our long-term growth strategy. These include investments in consumer insights, innovation, product development, marketing and customer experience, areas that we believe are critical to sustaining share gains over time. We believe our strong balance sheet and improved operating model positions us well to navigate this period of uncertainty, while continuing to strengthen our competitive position and drive long-term shareholder value. And with that, I'll turn the call over to Mike, who will give you some additional details on the financial performance for the third quarter and our financial outlook. Michael Ressler: Thanks, Derek. For the third quarter, net sales were $115.1 million or growth of 1% compared to net sales of $114 million in the prior year quarter. The increase was primarily driven by pricing from tariff surcharges, offset by lower unit volume, particularly in our made-to-order ready to assemble in case goods categories. Sales order backlog at the end of the period was $79.5 million. The backlog is up approximately 1.5% compared to the same period in the prior year. On a sequential basis, backlog is down approximately 3.5% from second quarter. From a profit perspective, the company delivered GAAP operating income of $8.2 million or 7.1% of sales in the third quarter compared to an operating loss of $5.1 million in the prior year quarter. The prior year quarter GAAP operating loss included a $14.1 million impairment charge on the right-of-use assets associated with our Mexicali lease, offset by a $0.8 million gain on the sale of a building in Honeyberg, Indiana. Current quarter operating margin decreased 20 basis points compared to adjusted operating margin of 7.3% of sales in the prior year quarter. The decrease is primarily driven by higher SG&A investments and consumer insights, innovation, demand generation and customer experience, which we believe will be catalysts for future growth. The impact of tariffs on operating margin in the quarter was mitigated through a combination of cost savings initiatives, operational efficiencies and pricing actions. Moving to the balance sheet and statement of cash flows. The company ended the quarter with a cash balance of $57.3 million, working capital of $142.2 million and no bank debt. Cash flow from operations in the quarter was $22.1 million, primarily due to a $14.5 million reduction in inventory. As mentioned last quarter, we brought in elevated levels of inventory prior to the anticipated tariff increase on January 1. During the quarter, we normalized our inventory stocking position while maintaining high service levels. With that, I'll turn the call back over to Derek to share his closing perspectives. Derek Schmidt: Thanks, Mike. As we look ahead, we recognize that the operating environment has become more complex and uncertain over the past several months. The combination of geopolitical and macroeconomic volatility, rising energy costs and supply chain disruptions is creating near-term pressure on both demand and cost with limited visibility into how conditions may develop in the near term. Despite this, our strategy remains clear and our focus remains unchanged. Our teams are operating with discipline and urgency, adapting to evolving conditions, managing costs responsibly and staying focused on the initiatives that we believe will drive long-term growth. I'm proud of how our organization continues to perform in the face of heightened uncertainty. Additionally, we are navigating this period from a position of strength with a solid balance sheet, an improved operating model and a clear strategic road map, which gives me confidence in our ability to manage through these near-term challenges while continuing to build a stronger, more competitive business over time and deliver long-term shareholder value. With that, we'll open the call to your questions. Operator? Operator: Operator Instructions] The first question comes from Anthony Lebiedzinski with Sidoti. Anthony Lebiedzinski: Thank you, and good morning, everyone. Certainly nice to see the better-than-expected profitability in the quarter. Just wondering if you guys maybe could -- maybe try to put a number as far as the impact of the severe weather on your sales, any way to kind of put that into context as to what you think that that was? Michael Ressler: Anthony, it's really hard to put a specific number on it. But what I would tell you is we got direct feedback from several of our large retailers that were impacted in it had a meaningful impact on their business, which translates to lower replenishment orders for stock to Flex deal. So hard to put a number on it, but we certainly heard a lot from retailers on the impact of their business. What I would tell you is January, February, we've seen just really choppy demand on a week-over-week basis. So that was probably 1 of the things that stood out to us in terms of how the weather played a role in that. And then we talked about it in the call. But March orders, we've seen kind of more of just -- I would say, more of a broader pullback as we're starting to, I think, field effects of consumer confidence and all the things going on in the Middle East and the economic uncertainty. Derek Schmidt: And the only thing I'd add to that, Anthony. I mean in terms of March, difficult to really determine whether it's something more structural longer term or temporary. Clearly, they'll given what Mike cited around conflict in the Middle East, rising energy costs, I mean we're seeing more cautious consumer behavior and more conservative inventory management from our retail partners. So difficult at this point to determine whether there's a structural change in demand, but more of a period of, I think, heightened uncertainty, where visibility is pretty limited and conditions, I think, can shift quickly here depending on how things unfold on the geopolitical stage. Anthony Lebiedzinski: Got you. Okay. And then just in terms of the pricing versus unit volumes, can you give some additional color as to what the impact of those 2 things were in the quarter? Michael Ressler: Yes, Anthony. So the tariff pricing we took, it was meaningful in the quarter. So somewhere around 11% of our sales composition is from pricing we took to partially offset tariff surcharges. And obviously, that was largely offset by unit volume declines. Encouragingly, there were categories where we actually did have unit volume increases in some of our key growth areas like strategic accounts and health and wellness. So that gives us confidence that our structural growth strategies are intact and working albeit with a more challenging external environment. Anthony Lebiedzinski: Understood. You also did a nice job with your gross margins, which were -- you cited favorable impact or favorable mix of higher-margin products. Can you share more color on this? And do you expect this to continue? Michael Ressler: Yes, Anthony. I mean, we've talked about product portfolio, life cycle management being a significant driver in terms of our operating margin improvement over the last several years as well as a catalyst for cost mitigation and maintaining margins going forward. I would say the mix of new product sales is probably somewhere in that 40% to 45% range. kind of at a company level. And I would say you dive deeper down into the categories, and that looks a little bit different. But I'd say, overall, I feel good about what we're doing in terms of focusing on bringing new product to market with better cost and profit profiles, and we're going to continue to focus on that as we move forward. Derek Schmidt: And to add to that, Anthony, not surprising, we're -- certainly, we see higher margins in the portfolios where we have differentiated innovation that clearly meets an underserved or unmet consumer need. And that's a huge focus for us in terms of continuing that investment. So I believe that if we can continue to execute well on that front around innovation, around the consumer insights, we'll continue to see certainly favorable margins from our new product portfolio. Anthony Lebiedzinski: Got you. And then can you just give a comment as far as the competitive landscape, I mean do you think that given all the disruptions that you're seeing, could this perhaps be an instance where the silver lining here is that you are able to gain market share? Derek Schmidt: Yes. I think, Anthony, you're absolutely right. Even though we're certainly in a challenging period, a very dynamic period that in the event that the Middle East conflict were to drag out or disruption in the energy markets would continue, I think that's going to be a huge drag certainly on the industry. As we've stated, I believe we're in a position of strength that we're well capitalized. We've got a strong balance sheet. We have the luxury of being profitable and being able to continue our growth investments. And I believe that is a competitive advantage that should enable us to continue to gain share in this environment where some competitors who are not in the strongest financial position, we'll inevitably have to pull back on investments. And again, I think that will further highlight our advantages. So that's the way we're thinking about it, Anthony. It's we say every market is a growth market, and we've got an opportunity here, I think, to continue to gain share. And we can't control what's happening in the external environment, but we'll continue to focus on executing what we can, which is delivering value to consumers through innovation, putting powerful marketing and customer experience for our retailers. And I think we just continue to do that and execute that well, we'll continue to gain share. Anthony Lebiedzinski: Absolutely. Okay. And then so as you mentioned, you have a strong balance sheet. You had a really strong cash flow quarter. Your inventory was down 15% on a sequential basis. I know you touched on this in your prepared remarks. But just maybe can you give us a sense as to where you think inventories might end at the end of the fiscal year? And what do you plan to do with the cash which you have more than what you've historically had? Michael Ressler: Yes, Anthony, inventory came down. We talked about -- there was a -- we bought ahead in some of our best sellers ahead of anticipated tariff increases. And this quarter was largely about kind of bringing those stocking levels back in line kind of with what our targets are based on the needs of the business while maintaining really high service levels, would expect inventory to probably grow here in the quarter modestly. We've got several new product collections that performed really well at market that are starting to flow, and we hope to get those things in stock, so we can start fulfilling orders. As far as cash flow, our capital allocation strategy remains intact. Number one, we want to maintain a strong balance sheet and gives us flexibility to navigate near-term kind of market challenges, but also optionality to reinvest back into the business and those growth initiatives that we believe will create long-term value. And honestly, lastly, we've talked about returning excess cash to shareholders through dividends and buybacks kind of based on the needs of the capital needs of the business. Anthony Lebiedzinski: All right. Well, it sounds good. Thank you very much, and best of luck. Derek Schmidt: All right. Thank you, Anthony. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Derek Schmidt for any closing remarks. Derek Schmidt: In closing, I want to thank all of our Flexi employees for their hard work and dedication in driving the company's solid performance during the third quarter. I'm also thankful to all of you for participating in today's call. Please contact us if you have any additional questions, and we look forward to updating you on the next call. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2026 Halliburton Company Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question, simply press star 11 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to David Coleman, Senior Director of Investor Relations. Please begin. David Coleman: Hello, and thank you for joining the Halliburton Company First Quarter 2026 Conference Call. We will make the recording of today’s webcast available for seven days on Halliburton’s website after this call. Joining me today are Jeffrey Miller, chairman, president, and CEO; Unknown Speaker, executive vice president and COO; and Eric Carre, executive vice president and CFO. Some of today’s comments may include forward-looking statements that reflect Halliburton Company’s views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Halliburton Company’s Form 10-K for the year ended 12/31/2025, current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, except as required by law. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our first quarter earnings release and in the Quarterly Results and Presentations section of our website. I will now turn the call over to Jeffrey Miller. Jeffrey Miller: Thank you, David, and good morning, everyone. Before I get into my thoughts on the current market and Halliburton Company’s outlook, let me begin with a few highlights from the first quarter. We delivered total company revenue of $5.4 billion and operating margin of 13%. International revenue was $3.3 billion, an increase of 3% year-over-year. North America revenue was $2.1 billion, a decrease of 4% year-over-year. During the first quarter, we generated $273 million of cash flow from operations, $123 million of free cash flow, and repurchased $100 million of our common stock. Now let us turn to our market outlook. I believe the situation in the Middle East will have meaningful and long-lasting implications for the global energy sector. Here is what I expect. First, energy security is no longer simply a talking point. It demands action by every nation to ensure a reliable supply of oil and gas. I expect we will see increased investment in localized oil and gas developments and urgency to diversify sources of oil and gas for those countries without their own resources. Second, recovery of oil and gas production and inventories will not be a quick or simple process. Cumulative production deficits are in the several hundreds of millions of barrels and trending towards a billion. This represents several years of meaningful incremental demand to replace strategic reserves on top of what I believe will be continued structural demand growth. Big picture, this means the world is fundamentally tighter in oil and gas than it was sixty days ago. In my view, that supports a durably stronger commodity environment and a far more constructive backdrop for upstream investment and oilfield services activity. I believe Halliburton Company will thrive in this market. We are active in all the major markets that matter, with the right service lines, strategy, and technology. In addition, we are the services leader in North America which, in my thirty years of experience, has always been the first market to respond to price signals. With that, I will turn the call over to our COO. Unknown Speaker: Thanks, Jeff. Before I get into our operational results, I want to recognize our employees around the world, but especially in the Middle East. They are executing under challenging circumstances, staying focused on our customers, and are keeping each other safe. Their fortitude and resilience represent the best of Halliburton Company. I want to personally thank them. Now let us turn to our international business, where our first quarter revenue was $3.3 billion. I will start with the Middle East, where we have remained closely engaged with our clients through disruptions. Activity has been most impacted in the region’s offshore markets in Qatar, UAE, and Saudi Arabia, and the land markets in Iraq and Kuwait. Halliburton Company continues to support our customers in these areas with the service capability they require to navigate current conditions and resume activity as markets recover. In the broader region, the closure of the Strait has resulted in our use of alternative supply chain routes, which has increased logistics cost. We have also seen price increases in purchased materials and supplies related to the conflict. In my view, these are manageable disruptions as we work closely with our customers to mitigate these additional costs within the terms of our contracts and agreements. Outside the Middle East, we saw better-than-expected results for the quarter, and we expect year-over-year revenue growth in the mid- to high-single digits for the full year, led by Latin America. I recently returned from the region, and I came away even more confident in our outlook. Activity is strong, customer engagement is high, and our growth engines are performing in several important markets. In unconventionals, YPF recently awarded Halliburton Company a multibillion-dollar award for integrated completion services in Argentina. This award expands our position in Argentina and represents an important milestone for Halliburton Company. Under this contract, we will deploy a full completions portfolio including Zeus electric fracturing services for the first time outside of North America. The award also includes Octiv AutoFrac, which brings electrification, automation, and digital workflows to unconventional fracturing in Argentina. In drilling, we continue to build momentum with our automated offerings. We recently closed our acquisition of Sekal, a global leader in rig automation. With this acquisition, our portfolio now combines Halliburton LOGIX drilling automation with Sekal’s Drilltronics platform and services. This means Halliburton Company has the technology in-house to fully close the loop for automated geosteering. This includes the bottom hole assembly, the hydraulics, and now the rig itself. We have worked with Sekal for several years and recently delivered this technology offshore Guyana. Our closed-loop automation technologies delivered better-than-expected drilling times and, most importantly, better reservoir contact. I am confident in the power of these technologies working together to maximize asset value for our customers. As our drilling technology continues to advance, so does my confidence in our offshore business. Our drilling capabilities and collaborative model were key drivers of a recent win in Suriname with PETRONAS. They selected Halliburton Company and Valaris for a strategic collaboration agreement to support the development of its offshore assets. The agreement brings the teams together early in the development cycle and reflects exactly the kind of close alignment that creates value for customers and for Halliburton Company. More broadly, I am increasingly confident in our offshore outlook. Across markets, customers are choosing Halliburton Company for offshore projects because of our technology, our execution, and our ability to collaborate earlier and more effectively throughout the well life cycle. We see that in Guyana, we see it in Suriname, and we see it increasingly in other offshore markets around the world. To conclude on international, I am confident in our business outlook based upon the strength of our growth engines, the value of our collaborative model, and the differentiation of our technology. While the Middle East remains the key near-term variable, we see real momentum across the rest of our international portfolio, and I believe Halliburton Company will continue to win and deliver profitable growth. Turning now to North America, where Halliburton Company delivered first quarter revenue of $2.1 billion. Early in the quarter, winter weather delayed services activity in the Permian and Northeast, but those impacts were more than offset by stronger-than-anticipated activity for the remainder of the quarter. In a recovery in North America, there are several signposts I expect to see. Today, we are already seeing a couple of important ones. First, the frac calendar white space in the first half of the year is now gone. As we entered this year, there was a risk that completion work might slip to the right and that gaps in the calendar could widen. That is no longer a concern. Second, we have seen an uptick in inbound calls for spot work. While these calls are not for committed crews, they do suggest incremental demand is building in spot markets with smaller operators. This is the leading edge of capacity tightening. While we are in the early innings, in my view, the setup for North America is constructive. Premium equipment is already tightening, the commodity price is supportive, and we see signs of incremental demand. As we look to the rest of the cycle, our strategy to maximize value in North America will not change. Here is how we will approach this market. First, we are going to focus on returns, not market share, which means our priority is to improve the returns of our existing fleets before we add capacity. Clearly, restoring price to acceptable levels is a key component of this. Second, we will deploy differentiated technology at scale that solves for customers’ greatest opportunities, improving recovery with Zeus IQ and drilling efficiency with iCruise. In summary, I am excited about North America. We see a recovery in progress. As activity grows, we believe customers will place high value on technology, efficiency, and execution, which plays to Halliburton Company’s strengths. With that, I will turn the call over to Eric to provide more details on our financial results. Eric Carre: Thank you, and good morning. Our Q1 reported net income per diluted share was $0.55. Total company revenue for Q1 2026 was $5.4 billion, flat when compared to Q1 2025. Operating income was $679 million and operating margin was 13%. Our Q1 cash flow from operations was $273 million and free cash flow was $123 million. During Q1, we repurchased $100 million of our common stock. Now turning to the segment results. In Q1, both of our divisions were impacted by the conflict in the Middle East, which resulted in an impact of approximately $0.02 to $0.03 per share. Beginning with our Completion and Production division, revenue in Q1 was $3.0 billion, a decrease of 3% when compared to Q1 2025. Operating income was $439 million, a decrease of 17% when compared to Q1 2025, and operating margin was 15%. These results were primarily driven by lower stimulation activity in North America, and lower completion tool sales and decreased pressure pumping services in the Middle East. Partially offsetting these decreases were higher completion tool sales in the Western Hemisphere and improved pressure pumping services in Africa. In our Drilling and Evaluation division, revenue in Q1 was $2.4 billion, an increase of 4% when compared to Q1 2025. Operating income was $351 million, flat when compared to Q1 2025, and operating margin was 15%. These results were primarily driven by higher project management activity in Latin America and increased drilling-related services in Europe and in the Western Hemisphere. Partially offsetting these increases were lower activity across multiple product service lines in the Middle East, lower wireline activity in the Eastern Hemisphere, and decreased fluid services in the Gulf of America. Now let us move on to geographic results. Our Q1 international revenue increased 3% when compared to Q1 2025. Europe/Africa revenue in Q1 was $858 million, an increase of 11% year-over-year. This increase was primarily driven by increased drilling-related services and higher completion tool sales in Norway, and improved pressure pumping services in Angola. Middle East/Asia revenue in Q1 was $1.3 billion, a decrease of 13% year-over-year. This decrease was primarily driven by conflict-related disruptions that resulted in lower activity across multiple product lines. Latin America revenue in Q1 was $1.1 billion, a 22% increase year-over-year. This increase was primarily driven by higher activity across multiple product service lines in Ecuador, the Caribbean, and Brazil, and improved stimulation activity in Mexico and Argentina. North America Q1 revenue was $2.1 billion, a 4% decrease year-over-year. This decline was primarily driven by lower stimulation activity and decreased artificial lift activity in U.S. land, and lower stimulation activity and decreased fluid services in the Gulf of America. Moving on to other items. In Q1, our corporate and other expense was $69 million. We expect our Q2 corporate expenses to increase about $5 million. In Q1, we spent $42 million on SAP S/4 migration, which is included in our results. For Q2, we expect SAP expenses to be about $45 million. Net interest expense for the quarter was $82 million, lower than expected due to favorable interest income. For Q2, we expect net interest expense to increase about $5 million. Other net expense in Q1 was $28 million. We expect Q2 expense to be about $35 million. Our effective tax rate for Q1 was 18.5%. Based on our anticipated geographic earnings mix, we expect our Q2 and full-year effective tax rate to be approximately 20%. Capital expenditures for Q1 were $192 million. For the full year 2026, we expect capital expenditures to be about $1.1 billion. Now let me provide you with comments on our expectations for Q2 2026. In the Middle East, the timing and path of a recovery to pre-conflict activity levels is unclear. In addition to lost revenue, we also expect higher costs related to supply chain logistics and fuel. We estimate the impact in the second quarter will be approximately $0.07 to $0.09 per share, which is embedded in our divisional guidance. In our Completion and Production division, we anticipate sequential revenue to increase 4% to 6% and margins to improve 50 to 100 basis points. In our Drilling and Evaluation division, we expect seasonal software sales to roll off in the second quarter. As a result, we expect sequential revenue to be flat to down 2% and margins to decline 75 to 125 basis points. I will now turn the call back to Jeffrey Miller. Jeffrey Miller: Thanks, Eric. Here is what you should remember from today’s call. The macro environment has changed in the last sixty days. I believe Halliburton Company will thrive in the market that we see. In North America, we already see the early signs of recovery. Outside of the Middle East, we expect our international business to grow. Our growth engines delivered significant milestones during the quarter, and our collaborative value proposition is winning in the offshore market. We will now open the call for questions. Operator: Ladies and gentlemen, if you have a question or comment at this time, please press 11 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press 11 again. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of David Anderson from Barclays. Your line is now open. David Anderson: Thank you very much. Good morning, Jeff. Jeffrey Miller: Morning. David Anderson: Obviously, the Iran conflict is not resolved, so it is really hard to guide for the next several quarters. I think everybody is just trying to figure out what the other side of this looks like. I realize it is early, but with global supply now a priority, how does this shape your views over the next few years? And how has that really changed over the last sixty days? Jeffrey Miller: Look, I think the most important change is that the supply overhang is no longer a concern. That is swept away, and structural demand remains intact. That combination moves the rebalancing up closer. When I look out, equally important is the view that energy security is no longer a talking point. That is going to drive activity, and I think that change is not temporal, but a solid few years. That is what has changed in the last sixty days in my view. David Anderson: And then you touched on North America. North America is always the first one to see a reaction. It sounds like you are saying early innings here. Could you talk about some of this white space shrinking? Are you starting to see E&P customers showing signs of picking up activity? How much is everybody waiting on the back part of the curve to lift up? Just a little bit more color on what you are seeing on the ground and in U.S. onshore? Unknown Speaker: Yes. Thanks, Dave. The short answer is yes. We have seen a couple of really good signposts. As I said, white space for Q2 is all but gone. We have seen a lot of pull-forwards. We have seen inbounds. We are also seeing H2 firming up as well. I think the next flip of the coin would be rig adds and some longer-term discussions on frac activity. As far as investments of the smaller and the bigger operators, the bigger operators tend to invest throughout the cycle. The smaller and medium-sized ones usually move a little quicker. They are looking at the front end of the curve and the back end of the curve. We like this market. We believe being the only fully integrated service company in North America is a fantastic position for us, along with our e-fleets, Zeus IQ, and the demand for iCruise in this market. So, short answer is yes. Early innings, but we like where we are. David Anderson: Thank you very much. Thank you. Operator: Our next question or comment comes from the line of Arun Jayaram from JPMorgan. Your line is open, sir. Arun Jayaram: Good morning, team. Maybe I could start with you. I was wondering if you could walk us around your core international and offshore markets outside of the Middle East and perhaps elaborate on the strength in LATAM and Europe/Africa. I believe you mentioned that outside of the Middle East, you expect international revenues to grow mid- to high-single digits. How does that compare to your thought process before the conflict? Unknown Speaker: Thanks, Arun. A lot to be excited about and a lot of bright spots, with Latin America leading the way. We are really excited about the work we are doing in the Caribbean, in particular Guyana and Suriname, working in a very collaborative way. Argentina is really exciting. We just announced a multiyear, multibillion-dollar, first-ever deployment of frac spreads in Argentina with YPF. That is going to be a really great business for us moving forward. The deepwater work as well in Brazil. If you move east outside of the Middle East, the Norway market is one where we have had a large, strong position. We are working very collaboratively with a number of customers. We are starting to see rig adds coming towards the back half of this year and early next year. Regarding West Africa, we are seeing some light at the end of the tunnel—real sizable programs both in Namibia and Nigeria. We have a sizable footprint in both of those countries, with contracts we like. I would add Asia Pac as a really resilient market for us throughout the cycle. It stayed busy. We expect that to continue. We expect full-year mid- to high-single-digit growth outside of the Middle East. There are certainly a lot of unknowns in the Middle East, but we still feel pretty good about where we are with that guide. Arun Jayaram: And my follow-up is in North America. We have a bit of an unusual dynamic where we have relatively modest natural gas prices, including in markets like West Texas, which are significantly below diesel prices. One of the things about Halliburton Company’s frac fleet is you have a lot of exposure to natural-gas-burning equipment—e-fleets that use natural gas as an input. Could you talk about opportunities to arbitrage this delta to the benefit of shareholders in terms of pricing power? Unknown Speaker: That just reinforces the value in our e-fleet. Yes, clearly an opportunity. We work that all the time in terms of pricing and where that is going. I would describe that as an opportunity. It is certainly a benefit for operators that are consuming natural gas. To add to that, the Zeus platform is proving itself a unique solution, particularly with respect to Zeus IQ and the ability to move on recovery. While the ability to be more economic with gas consumption due to arbitrage is valuable, the real power in the Zeus IQ and the Zeus platform has been what it is able to do subsurface. Arun Jayaram: Great. Thanks a lot. Operator: Our next question or comment comes from the line of Saurabh Pant from Bank of America. Your line is now open. Saurabh Pant: Hi. Good morning, Jeff, Eric, and welcome to the call. Unknown Speaker: Thank you. Saurabh Pant: Jeff, you gave us a lot of good color in your prepared remarks. Last quarter, we were talking about how the supply side of the equation—mostly a frac comment—is tighter than people think, and it would take just a little bit of demand coming back for pricing power to come back. How are you thinking about that right now? And how do we move through the remainder of 2026 based on what we know right now on the demand side and the pricing power side of things? Unknown Speaker: We are seeing some really good signposts. That is driving constructive conversations with our operators. There are a handful of fleets that can go to work. The way we think about it is, first, we have to address the pricing of our existing fleets. Those conversations are happening. The next step is longer-term programs and more rigs being added—that creates another level of constructive conversations for us. First things first is focus on the fleets we have now. It does not take much attrition for things to get tight. Early innings, but we are starting to see signs of that. Jeffrey Miller: To follow that up, what is even clearer than it was is the availability of equipment in the market, and that is what those early signposts are calling out. Equipment is tighter. We are getting calls. We are within a handful of premium fleets—dual fuel–type fleets—of being absolutely sold out as an industry. Saurabh Pant: That is helpful color. My second question is on the international side of things. If we just focus on the international side, which markets or operators do you think would be the first to change their behavior? Which regions should we expect to benefit first? And how would Halliburton Company seek to benefit from that? Unknown Speaker: I just finished a tour around international locations. Conversations with customers and energy ministers are focused on the dependency of being down to a Strait—it is on their mind. Anyone who is a net importer of oil is thinking about bringing forward programs and reevaluating their capital budgets. Our growth engines are well positioned to apply to improved drilling programs in some of these locations. Asia Pac and West Africa are markets that we see potentially picking up with what is going on in the Strait. You are right—the collaborative model we work under has been big for us. In a lot of the areas I mentioned earlier, we work very collaboratively and are invited in earlier, and that has supported us in winning work in a number of those markets. Saurabh Pant: Thank you. Operator: Our next question or comment comes from the line of James West from Melius Research. Your line is now open. James West: Thanks. Good morning, Jeff, and Eric. Jeff, three months ago we talked about 2026 as the year of rebalancing. It is a much different environment now, as you have noted. You have talked about the NAM recovery and announced a number of major contract awards internationally. Are customer conversations showing a sense of urgency, or is it still a little bit too early? Unknown Speaker: While it is still early innings, it was encouraging to see the white space in Q2 get taken out in a very short period of time. It was not just a short-term blip to take advantage of the current curve. We are seeing H2 firming up as well. I would not use the word urgency—I would say constructive conversations about getting back to work and capturing value they see not only now, but for the future. James West: That is very helpful. On exploration, it seems a lot of the supermajors have added a few incremental dollars to their exploration budgets. Is exploration going through a bit of a reverse cycle after a ten-year lull? Unknown Speaker: We are seeing a little bit of exploration, but a lot of the muscle is around development—producing more barrels. That is what we are seeing in Namibia and West Africa, and largely in Suriname. We participated in a fair amount of exploration in the Caribbean, but more importantly, we are getting into the heavy lifting of development there and elsewhere. In Brazil, we have been quite successful as well. So while there is some exploration, what we see ahead of us is a lot more development in a lot of places. James West: Got it. Operator: Our next question or comment comes from the line of Neil Mehta from Goldman Sachs. Your line is now open. Neil Mehta: Yes. Morning. Great quarter here, Jeff. First, on capital returns. The buyback at $100 million was a little lighter than the run rate we have seen at $250 million a quarter. Was that just a timing thing, and how are you thinking about share return over the course of the year? Eric Carre: Neil, overall there has been no change in our focus on shareholder returns or our overall approach around buybacks. We started the year lower than our run rate in 2025. We mentioned on the Q4 call that this was our intent considering the macro situation we were facing at the time and concerns around the speed of activity increase in the Middle East. You can expect Q2 to be higher than Q1, and H2 to be higher than H1 in terms of overall buyback. Our long-term objective remains per-share value creation. Neil Mehta: Very clear. Follow-up on the technology side. You have had success with VoltaGrid and your investment there. You are looking to deploy that over time, including internationally. Any perspective on the power side of the business and VoltaGrid in particular, and driving value from that side? Jeffrey Miller: We really like our position in VoltaGrid, and we like what the company is doing. Separate from that, but along with it, is the international pursuit we have underway and the venture we have with VoltaGrid. I am very excited about that and it is very much on track. I do not constrain that to the Middle East. We have lots of inbounds and back-and-forth with potential customers in Australia, Japan, Canada—all around the world. We have 400 megawatts in the queue ready to get placed, and have a lot of line of sight around how that might happen. Very excited about that. Neil Mehta: Thanks, Jeff. Operator: Our next question or comment comes from the line of Stephen Gengaro from Stifel. Your line is now open. Stephen Gengaro: Thanks. Good morning, everybody. Two for me. First, going back to the U.S. frac business and pricing potential. Are your customers willing to take diesel if you have any diesel available? How much are they thinking about the price arbitrage, which should lead to higher prices for gas-burning fleets? How are customers thinking about that right now? Jeffrey Miller: Our customers are always looking for the most effective solution. I do not know that fuel choice is what would motivate tightness in the market. That is more of a decision between equipment, and less of a decision about adding equipment. The more important point is the value of the commodity and the demand for the commodity. That is more of the driver than arbitrage in terms of pick up a fleet or not. Arbitrage makes it more economic and should create more willingness to pay more, but I do not know that it is what is driving tightness. Two separate ideas in my view. Stephen Gengaro: Thank you. The other question: for years we have heard about E&P capital discipline and being unwilling to add a lot of rigs and frac fleets back. Are you seeing any shift in that? How should we think about this over the next several quarters, especially in what is probably a tighter oil market for the next couple of years? Jeffrey Miller: We are in the early innings. Big public companies typically come later in the cycle. Early movers are smaller companies, and that early move is what takes capacity out of the market and creates tightness. Timing of big operators is less clear today. However, commodity prices are structurally higher than they were, there is going to be more demand growth, and fewer barrels in the market. That creates an opportunity for operators of all sizes to make more money. The tightness we are seeing created by smaller operators should not be overlooked. A lot of inbounds are from smaller operators taking capacity out of the market, and that is good for Halliburton Company. Operator: Our next question or comment comes from the line of Scott Gruber from Citigroup. Your line is now open. Scott Gruber: Good morning. I want to come back to the shale developments abroad, which were picking up even before the Middle East conflict. Now that those could accelerate, do you see international shale opportunities outside of Argentina utilizing more Zeus fleets given the efficiency advantage, or do most of those plays—because they are less mature—lack the supply chains required for Zeus and end up pulling more legacy diesel fleets from the U.S.? How do you see equipment demand evolving internationally? Unknown Speaker: Zeus is a unique solution. It is time to go to work in Argentina because there is scale, runway, and a focus on improving recovery. That combination makes it so valuable there. Others are at different places in maturity. They are not at a place where they can take advantage of Zeus. I will describe it in technology terms because that is where it creates the most value and commands a premium—its ability to measure where the sand is going, move the sand around, and create a closed-loop fracturing environment. That is very different than simply the arbitrage on gas to oil. Markets in the earlier stages do not demand that level of capacity. We have taken the same approach to Zeus internationally that we did in the U.S.—we deploy Zeus to contracts that have the duration to return the cost of capital and the capital during the term of the first contract. We do not see those conditions in a lot of other markets today. That does not mean we will not get there; we feel certain we will, but that may not be today. Scott Gruber: The YPF contract sounds meaningful to your business in-country. Can you dimension that at all for us—how much bigger it will grow your business in the country, the timing of that growth, and given the integrated nature and efficiency gains you will deliver, how you think about the margin profile of the contract relative to your 15%? Unknown Speaker: It is a huge win for Halliburton Company. We had a good footprint before the award; we have an even better footprint now. This is already being rolled out. We have fleets coming in now, then toward the end of the year and into next year. We will send equipment to the best places as far as returns and pricing. We are moving that equipment out of North America where we believe we have good pricing and a sustainable program. It also demonstrates the importance of our technology and improved recovery. YPF sees that. It is long-term work and we are really pleased with that win. Operator: Our next question or comment comes from the line of Marc Bianchi from TD Cowen. Your line is now open. Marc Bianchi: Hello. Can you hear me? Unknown Speaker: Yes. Loud and clear. Marc Bianchi: If the Strait were to open tomorrow and it were a green light to get back to normal operations in the Middle East, how quickly could that happen? Maybe walk us through some of the industrial challenges and opportunities that exist there. Unknown Speaker: It is unclear how quickly that comes back. We are ready. Halliburton Company’s operational footprint is intact. Most of our business is working today. Our biggest hit areas were in Iraq and Qatar. We are in constant contact with our customers and will support them when they are ready and able to go back to work. The first things you will see are likely wells turning back on, and that will be a well-by-well situation of how they produce and flow. The longer they get shut in, the more complex that gets. That likely comes first, and it puts Halliburton Company in a fantastic position. We are the market leaders for intervention work in the Middle East with our HWO and coiled tubing work. Then you would start seeing customers offshore drilling more in the deeper reservoir sections. Work offshore right now is mostly on top holes. Unclear timing, but we are ready. Jeffrey Miller: At a high level, turning back on is not immediate by any means. There is a gap in the supply chain in terms of oil to market. It is not an overnight matter. Equally important to the timing is the change in perception with respect to energy security. That is a bigger, overriding impact on supply, demand, and price. Marc Bianchi: One for Eric on CapEx. You reiterated the $1.1 billion, which would imply an uptick in spending for the balance of the year. Is there a shot that we end up doing better than the $1.1 billion, or is that just timing? And does your proportional spend for the 400 megawatts with VoltaGrid happen within that guidance? Eric Carre: The target for CapEx in 2026 is $1.1 billion. It is a bit higher than the $1.0 billion we had initially guided to. That is not related to the market situation; it is due to delayed delivery of capital equipment. We intend to stay within our range of 5% to 6% of revenue for CapEx spend. We guided 2026 on the low side of that range. Depending on how things shape up and our opportunities, we might move slightly within that range, particularly with the macro picture we see today. CapEx is overweight toward the growth engines we keep discussing. Regarding the 400 megawatts, it does not happen in 2026, so we kept it separate. Operator: Our next question or comment comes from the line of Keith MacKey from RBC Capital Markets. Your line is now open. Keith MacKey: Morning. Can you expand a little more on your offshore comments? You mentioned a few markets where you are seeing incremental demand, but how is the market shaping up versus what you might have thought three months ago? Jeffrey Miller: We really like our position in offshore. I view the offshore business from our perspective of what we are winning and the kind of work we have in the queue. We won a lot of work last year, and that is very strong for us. We continue to be quite successful in the offshore market. That is led by our value proposition—to collaborate in engineered solutions to maximize asset value for our customers—which meets an unmet market need in how we work and perform with our customers. Equally important is the progress we have made with technology, particularly closed-loop automated geosteering. It is a significant step forward in terms of reservoir contact. We feel good about the offshore business, really like our position, and we see solid growth in 2026, 2027, and 2028 in the offshore market from what we are going to be doing. Keith MacKey: And on the Middle East, what will it actually require to restart production when it is safe and feasible to do so? Walk us through what will be required, whether workovers or other items, and how that translates into service line potential for Halliburton Company. Jeffrey Miller: We are focused on drilling and the upstream. There is clearly storage and facility work that has to happen before us. As far as bringing wells back on that might be shut in, as described earlier, that will span the spectrum of how quickly they come on. It would be irresponsible to project timing—it would be a guess. The longer things are shut in, typically the more complex they are to bring back on. There is a lot of capacity with Halliburton Company in the Middle East to participate in bringing those wells back on, whatever might be required. Operator: This concludes the Q&A portion of our call. I would now like to turn the conference back over to Jeffrey Miller for any closing comments. Jeffrey Miller: Thank you. Before we wrap up today’s call, let me close with this. I believe the oil and gas markets are structurally tighter, and I am convinced that Halliburton Company has the right service lines, strategy, and technologies across the key oil and gas basins around the world. I believe this is a market where Halliburton Company will thrive. I look forward to speaking with you again next quarter. Thank you. Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speakers, stand by.
Operator: Good day, ladies and gentlemen, and welcome to the Genuine Parts Company First Quarter 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Tim Walsh, Vice President of Investor Relations. Please go ahead, sir. Timothy Walsh: Thank you, and good morning, everyone. Welcome to Genuine Parts Company's First Quarter 2026 Earnings Call. Joining us on the call today are Will Stengel, Chair-Elect and Chief Executive Officer; and Bert Nappier, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, a supplemental slide presentation can be found on the Investors page of the Genuine Parts Company website. Today's call is being webcast, and a replay will also be made available on the company's website after the call. Following our prepared remarks, the call will be open for questions. The responses to which will reflect management's views as of today, April 21, 2026. If we're unable to get to your questions, please contact our Investor Relations department. Please be advised this call may include certain non-GAAP financial measures, which may be referred to during today's discussion of our results as reported under generally accepted accounting principles. A reconciliation of these measures is provided in the earnings press release. Today's call may also involve forward-looking statements regarding the company and its businesses as defined in the Private Securities Litigation Reform Act of 1995. The company's actual results could differ materially from any forward-looking statements due to several important factors described in the company's latest SEC filings, including this morning's press release. The company assumes no obligation to update any forward-looking statements made during this call. With that, I'll turn it over to Will. William Stengel: Thank you, Tim. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. I want to start this morning by recognizing and thanking our 65,000 teammates around the world for their continued dedication and hard work. Their commitment, expertise and focus are the foundation of our success as they work every day to deliver parts and solutions to our customers. This morning, I'll review our first quarter financial results by business segment, followed by an update on our announced plan to separate our Global Automotive and Global Industrial businesses into 2 publicly traded companies. In short, the separation work is on track and progressing well. As we execute our separation plan, our top priorities remain the same: stay focused on key strategic initiatives, operate the business with discipline and deliver excellent service to our customers. During the first quarter, our teams did this well and delivered financial results ahead of our expectations. The war in the Middle East will require us to remain agile and disciplined in a dynamic global environment. The war is impacting the flow of certain goods across the global supply chain, adding inflationary pressure to certain product and logistics costs and adding incremental uncertainty for customers. Despite the environment, we did not experience a material impact to our financial results during the first quarter. Our teams have demonstrated the ability to manage through temporary economic and geopolitical disruptions in the past. We have global scale, playbooks and capabilities to deploy as needed. Moments of disruption create opportunities to gain market share and strengthen customer loyalty, especially when we respond with speed, discipline and focus. Bert will share more about how we're thinking about the conflict and the implications for our outlook. Turning to our financial results. A few highlights for the quarter include: total GPC sales of $6.3 billion, an increase of approximately $400 million, approximately 7% compared to 2025, with sequential improvement in all 3 business segments; continued overall gross margin expansion despite tough year-over-year comparisons driven by strategic pricing and sourcing initiatives; and Global Industrial segment EBITDA margin expansion of 90 basis points or 13.6% of sales. Now looking at our business segments. Total sales for Industrial were $2.3 billion, an increase of over $100 million or up approximately 5% versus the same period in the prior year, with comparable sales up approximately 4%. During the quarter, the benefit from price inflation was approximately 3%. From a cadence perspective, all 3 months of the quarter saw mid-single-digit average daily sales growth. Motion delivered a strong first quarter with balanced growth across our large corporate account customers as well as with our small- to medium-sized local accounts. We remain cautiously optimistic about the outlook for industrial market conditions. While we're encouraged by 3 consecutive PMI readings over 50 in the first quarter and solid performance fundamentals, we balance that optimism with geopolitical realities and potential near-term uncertainty. That said, we're confident in Motion's ability to execute in every market environment and leverage its size and scale diverse end markets, extensive product offering and strong customer-centric execution to differentiate it from the market. Looking at the performance across our end markets in the first quarter, we saw growth in 10 of our 14 end markets we track, which is up from 9 in the fourth quarter of 2025 and 3 in the same period of the prior year. During the quarter, we saw notable growth in food products, automotive, iron and steel, mining and fabricated metals. This growth was slightly offset by softer demand in pulp and paper, lumber and wood and rubber and plastic. Our core MRO business, which accounts for approximately 80% of Motion sales was up over 5% during the quarter. We continue to see an increase in planned outage projects to start the year where customers stop operations to do maintenance and repair work as deferred maintenance needs are being addressed. Looking at the remaining 20% of Motion sales, which originates from more capital-intensive projects, we saw encouraging sequential improvement in customer activity with sales up approximately 4% during the quarter. Industrial segment EBITDA in the first quarter was $314 million, up approximately 13% and 13.6% of sales which represents a 90 basis point increase from the same period last year. Turning to our automotive segments. Starting with North America Automotive, we saw sequential improvement with total sales for the first quarter, increasing approximately 4.5% and comparable sales growth increasing approximately 2%. During the quarter, North America Automotive segment EBITDA was $156 million, up 6% and 6.6% of sales. This represents a 10 basis point increase from the same period last year and a 110 basis point increase from the fourth quarter. The increase year-over-year reflects ongoing strategic initiatives, partially offset from pressure from cost inflation in salary and wages, health care, rent and freight. Within North America, total sales in the U.S. were up approximately 4% for the quarter, with comparable sales up approximately 3% and price contribution of approximately 3%. Average daily sales were positive in all 3 months, with 2-year stack consistent across the quarter. We continue to see strong sales performance at our company-owned stores. In the first quarter, comparable sales at our company-owned stores increased approximately 5.5%. Independent same-store purchases during the quarter increased approximately 1%. We remain pleased with our company-owned store initiatives as well as the work we're doing to partner closely and grow with our independent owners. Looking at the comparable sales performance to the end customer, which includes our company-owned sales as well as the sales out to the end customer from our independent stores, the NAPA system delivered sales growth of 4% in the first quarter, up from 2% in the fourth quarter. By customer type, comparable sales to our commercial customers for the quarter were up approximately 5%, while comparable sales to our retail customers increased approximately 1%. Within commercial, we saw mid-single-digit growth in all 4 customer segments. Across our product categories during the quarter, we saw continued relative strength in our nondiscretionary repair and maintenance and service categories, which were both up mid-single digits. As a reminder, combined, these categories account for approximately 85% of our U.S. business. Discretionary categories sequentially improved in the first quarter and were up low single digits. Looking at our performance in Canada, our team is executing well despite soft market conditions. Total sales increased approximately 4% in local currency versus the same period last year, with comparable sales down approximately 2%. Trade disputes, tariffs and low consumer confidence over the past few quarters have cumulatively impacted the market environment. However, the Benson acquisition provided a nice tailwind this quarter and we're ahead of our financial and operational target plans. Moving to our international automotive business. Total sales during the quarter increased approximately 13%, with comparable sales slightly positive. International Automotive segment EBITDA for the quarter was $145 million, up 5% and 9.1% of sales, which represents an 80 basis point decrease from the same period last year. The decrease in EBITDA margin was predominantly driven by ongoing inflationary cost pressures from higher salaries and wages, rent and freight, which was partially offset by our restructuring initiatives and cost actions. By geography, in Europe, total sales for the quarter increased approximately 1% in local currency, with comparable sales down approximately 0.5%. Overall results for the first quarter sequentially improved from the fourth quarter with improvement across each geography. Despite challenging market conditions, we believe we continue to perform in line or better than the market, driven by strength with key account customers, the NAPA brand offering and accretive bolt-on acquisitions. The investments in supply chain and technology across the region, combined with productivity initiatives position the business well as the market recovers. Finally, our team in Asia Pac had another solid quarter, with both total sales and comparable sales increasing approximately 4%. Both trade and retail businesses posted solid results during the quarter with retail performance continuing to stand out. Australia and New Zealand are reliant on oil from the Middle East and have recently been impacted by reduced fuel availability, elevated fuel prices and corresponding negative consumer sentiment. Australia has also raised interest rates twice in 2026. Despite a challenging market environment, our in-flight initiatives are working as designed and have translated into impressive relative share gains. The local team remains energized and action-oriented. Before I turn to an update on the business separation, I'd like to take a moment to recognize and thank Paul Donahue, who will retire from our Board of Directors at our Annual Meeting next week. Paul's retirement from the Board will conclude an exceptional career with GPC, which includes his impactful service as CEO and Chairman. For more than 20 years, Paul played a pivotal role in transforming the company and enhancing our long-term strategic foundation. While his legacy includes transformational leadership and performance, his most enduring impact is on our culture, which he helped cultivate, evolve and position for the future. He represents the best of who we are at Genuine Parts Company, leading with respect, fostering teamwork and maintaining a deep sense of service to each other and our customers. On behalf of the Board and the entire global organization, I want to deeply thank Paul for his many contributions and years of dedicated service. We wish Paul all the best in retirement and hope he enjoys the well-deserved time with his family and friends. Before I close, I can provide an update on our announced plan to separate our Global Automotive and Global Industrial businesses into 2 independent public companies. Overall, the announcement has been well received by investors, customers, suppliers and employees. All stakeholders are looking forward to additional details as we advance our planning. To ensure the organization can focus on daily priorities, we've been mindful to create a disciplined, centralized process and operating cadence with our advisers, business units and functional project leaders. We increased our internal communication rhythm to provide global updates to ensure teams are informed and managing through change. Our leaders are doing an exceptional job leading and partnering as a global team. As mentioned on our call in February, our automotive and industrial businesses maintain independent operations. Since our work stream has been to refine our initial estimates developed during our strategic review of potential dissynergies and incremental stand-alone costs that will be needed for 2 public companies. We expect the cost to be manageable and in the range of $100 million to $150 million, essentially in line with our initial estimates. Bert will share additional [indiscernible] his remarks. In addition, there is ongoing work to evaluate and identify leadership, prepare financial matters and organize stand-alone operational plans. We're progressing well and on track with our time line to complete the separation in the first quarter of 2027. In closing, thank you to our customers, owners, suppliers and shareholders for your continued trust and support. As we look to the second quarter, we're focused to build on the positive momentum as we manage the current market environment. We're prioritizing serving our customers reliably and timely and have a proven and resilient team that positions us well. I want to offer again my sincere thanks to our global GPC teammates for their continued effort and teamwork. I'll now turn the call over to Bert. Herbert Nappier: Thanks, Will, and good morning, everyone. Our teams delivered in the first quarter with sales in line and profit ahead of expectations. Our results reflect disciplined execution across the organization against evolving market conditions, particularly with the added uncertainties surrounding the conflict in Iran. During the first quarter, adjusted EBITDA was up 5% and adjusted EPS of $1.77 was slightly above prior year. Our results were driven by higher sales and the benefits from our global restructuring initiatives, partially offset by cost inflation and operating expenses. Our previously communicated headwinds from depreciation and interest expense negatively impacted our earnings by $0.09. This morning, I will review the details of our first quarter results and then share a few comments around our 2026 outlook, which we reaffirm this morning. Then I'll close with additional details on our estimated range of dis-synergies and stand-alone costs of our separation. Before I take you through the details of the quarter, my comments this morning will focus on adjusted results which include nonrecurring costs related to our global restructuring program and costs related to the planned separation of our automotive and industrial businesses. Collectively, these items totaled $75 million of pretax costs or $56 million after tax. Now let's turn to the details of the first quarter. Total GPC sales increased 6.8%, which included a 240 basis point improvement in comparable sales, a 130 basis point benefit from acquisitions and a 320 basis point benefit from foreign currency. Of note, each of our 3 segments delivered comparable sales growth that sequentially improved from the prior quarter. Price inflation was up low single digits in each segment, with North American Auto at approximately 3%, international auto at approximately 2%, and industrial at approximately 3%. Our gross margin was 37.3%, an increase of 20 basis points from last year and relatively in line with our expectations. The improvement in our gross margin was primarily driven by the ongoing execution of our strategic pricing and sourcing initiatives, partially offset by the impact of inflation and tariffs on product costs. Our adjusted SG&A as a percentage of sales in the first quarter was 29.4%, an increase of 50 basis points from the prior year. On an adjusted basis, SG&A grew year-over-year in absolute dollars by approximately $145 million. Foreign currency and acquisitions represented approximately $95 million of the growth year-over-year with foreign currency being the large majority of the increase. The remaining $50 million of core SG&A growth was up 2.9% from the prior year. Within our core SG&A, we experienced higher costs year-over-year in 2 main categories. Approximately half of the increase was driven by people-related costs associated with our merit increases a year ago and mandatory minimum wage increases outside the U.S. The remaining increase was largely driven by cost inflation in health care, rent and freight. We continue to take actions to adjust our cost structure through our restructuring initiatives. During the quarter, we incurred restructuring costs of $59 million and realized $26 million of cost savings or a benefit of $0.14 per share. For the quarter, total adjusted EBITDA increased approximately 5% with an adjusted EBITDA margin of 7.9%, down 20 basis points year-over-year. Our EBITDA performance within the 3 business segments includes the following highlights. For the North American Auto segment, EBITDA increased approximately $10 million or 6.3% and with EBITDA margin of 6.6%, up 10 basis points from last year. The primary driver of the increase was higher gross profit, partially offset by approximately $30 million of higher operating costs from cost inflation in people, health care and freight expenses as well as the impact of acquired businesses. International Auto segment EBITDA increased $6 million or 4.6% with EBITDA margin of 9.1%, down 80 basis points from the prior year. The decrease in EBITDA margin was primarily driven by a 100 basis point headwind from inflation in salaries and wages, rent and freight. This was partially offset by a 50 basis point tailwind from the benefits of our restructuring and cost actions. Industrial segment EBITDA increased approximately 13%, representing a margin of 13.6%, up 90 basis points year-over-year. The increase was driven by both gross margin expansion and leverage and operating costs, driven by our global restructuring initiatives, and disciplined cost control. Turning to our cash flows. For the quarter, we generated approximately $64 million in cash from operations. Our cash flow from operations benefited from an improvement in working capital of approximately $200 million, partially offset by payments related to tax planning initiatives. In the first quarter, we invested approximately $100 million back into the business in the form of capital expenditures as we continue to modernize our supply chain infrastructure and IT systems. We also returned approximately $142 million back to our shareholders in the form of dividends. Now turning to our outlook. As we detailed in our press release this morning, we are reaffirming our outlook for 2026. For the full year, we continue to expect diluted earnings per share, which includes the expenses related to our restructuring efforts to be in the range of $6.10 to $6.60 and adjusted diluted earnings per share to be in the range of $7.50 to $8, up 5% at the midpoint of the range versus 2025. With respect to our outlook, our expectations take into account our performance in the first quarter, which was ahead of our expectations. However, we have balanced our performance to date against a more prudent view of the second and third quarters, given uncertainty of the conflict in Iran, leaving our expected range of performance for 2026 unchanged. As we consider the shape and timing of our performance in 2026, key themes remain, the market conditions in Europe, the performance of our independent owners in our U.S. NAPA business and the impact from the conflict in Iran, including their duration of any disruptions. We expect near-term cost pressure from the impact of the conflict as we turn into the second quarter and have incorporated those views into our outlook. As we've previously noted, we continue to expect depreciation and interest expense to be a headwind of approximately $0.30 in 2026 as we continue to invest in the business for growth. With respect to the conflict in Iran, our outlook incorporates updated views across the various elements of our P&L as follows: first, our revenue outlook considers the impact of demand from higher oil and energy prices, which has the potential to drive lower consumer sentiment, miles driven and industrial and manufacturing output. Broadly speaking, during March, when the conflict was in its early stages, consumer behavior across our segments remained fairly resilient. It's difficult to predict how the conflict will play out but the duration of higher oil and energy costs will be something for us to watch. Our outlook for gross margin reflects anticipated cost increases from our suppliers as they face higher input and shipping costs. We have also considered the cost of adjustments to our own supply chain to mitigate any disruption to inventory availability. Our global teams are working with our supplier and vendor partners to manage any potential increases in a strategic and thoughtful manner. Broadly, we expect to pass through many of these cost increases. On a consolidated basis, our exposure to products sourced from the Middle East is less than 0.5% of our total purchases. Finally, we have incorporated revised assumptions on operating expenses, including freight and fuel costs. Our freight expense, which represents the cost of moving product to our stores and branches is approximately 3% of our revenue. While we maintained our guidance, I will reemphasize a few points within our fiscal 2026 outlook, starting with sales. We continue to expect total GPC sales growth in the range of 3% to 5.5%. Our outlook assumes that the market growth will be roughly flat and that the benefit from pricing, including inflation and tariffs will be approximately 2%. Our sales outlook also assumes the benefit from M&A carryover and about 1 point of growth from our strategic initiatives and about 1 point of benefit from foreign exchange. We continue to expect expenses associated with the transformation activities and cost actions to be in a range of $225 million to $250 million with an anticipated benefit in 2026 of $100 million to $125 million. These expenses do not include any costs associated with the separation of the businesses. Beyond these aspects, the remaining elements of our guidance remain unchanged, including the individual segment sales growth projections as well as gross margin, SG&A, corporate costs, EBITDA, cash flow and capital allocation expectations. The details of these assumptions are included in our earnings presentation on our website. Before I close, I'd like to add some additional details on the dis-synergies and stand-alone costs of our planned separation. We've done extensive work with our internal team as well as our external advisers, validating our estimates around the incremental run rate dis-synergy costs and stand-alone costs for the new public company. As we have outlined on Slide 11 of our earnings presentation, our estimated range of cost is $100 million to $150 million. This range of cost includes 2 components: first, dis-synergy costs from activities associated with indirect sourcing due to loss of scale and back office and technology functions that will have to be replicated. We estimate this category to be in a range of $50 million to $75 million, and it would be evenly split between Global Automotive and Global Industrial. The second category is incremental stand-alone costs associated with the design of the new public company and would include: new facilities, personnel, public company functions and costs. We estimate this category to also be in a range of $50 million to $75 million, the vast majority of which would be at Global Industrial. This range of cost does not include onetime costs associated with the separation, such as legal, banking and other professional fees. Further, it is important to note that this does not include the allocation of current corporate expense at Genuine Parts Company. We will share additional details on our views on the allocation of the existing corporate costs as that work progresses over the coming months. In closing, we are pleased with our first quarter performance and the disciplined execution demonstrated across the organization. As we move forward, we remain focused on running the business effectively while continuing to make steady progress toward our intended separation. At the same time, we will stay agile and attentive to all market dynamics, including the ongoing conflict in Iran. Above all, we are confident in our teams and their ability to navigate uncertainty while delivering for our customers and our shareholders. Thank you, and we will now turn it back to the operator for your questions. Operator: [Operator Instructions] First, we will hear from Greg Melich at Evercore ISI. Gregory Melich: Thanks for all the additional detail. I want to follow up on, I think, Bert, some of your comments about the conflict in Iran and some of the spillover and how it inflects the outlook. I think you mentioned pricing was up low single digits. I think it was [ 3% ] in North American auto and then similar in Industrial and International. How do you think the increased cost, as you mentioned on freight, you said it would pass through? So do you expect pricing to now for the year be running at that 3%? Or do you think it decelerates equally across the businesses? Herbert Nappier: Greg, thanks for the question. Look, I think I'll start -- I'll pull it up just a little bit and then come back to the pricing point and maybe give everybody a little bit more color on Q2 when we think about the next 100 days or so. And again, start with pointing back to my prepared remarks on those various elements of the P&L that I outlined where we think the impact comes from, when we think about the conflict, whether it's revenue, cost of goods sold or operating expenses. When we look across the balance of the year, I think we've been pretty prudent and pragmatic. That balancing, we finished ahead of expectations for Q1 against all these new dynamics we're dealing with the conflict. And so when you think about the forecasting, obviously, we're thinking about your pricing question within that. But I think the biggest variable, which gets to the question you've asked about the duration of pricing for the year is the duration of the disruption itself and the conflict. And obviously, there's a wide range of outcomes and scenarios when we think about this and we've really tried to refine our perspective to the next 100 days because I think that's what we have the best insight to, which is obviously a bit arguable when you think about the strait opening and closing from morning to afternoon or just the point around oil prices, I think in the last 45 days, we've had 6 days of double-digit moves in oil prices with some of those swings at nearly 20%. So with that backdrop, I think I'll give you just a little bit more precise color on Q2. We expect the impact to the forecast for us to be most pronounced in Q2. And when we've taken all the variables into consideration pricing, cost of goods sold and operating expenses, we see some downside risk that we've incorporated into our guidance of about $10 million to $20 million of EBITDA as the net negative impact of the conflict to the business. And so I'll give you a little bit more color there. The headwind that we see is really the product of both increased cost of goods sold and operating expenses, which will be freight-in, freight-out and fuel, balanced against what we think our assumptions are for pricing benefits that will be likely offset by muted expectations on demand from the environment itself. So I would say that we think the pricing environment stays more in line with what we see for the full year that I shared in my prepared remarks, split evenly between tariff and just overall inflation. But obviously, this conflict will have a lot to say about how long that lasts. And I think it gets back to the duration of the environment that we face. As I mentioned, we've incorporated all of this, including a very solid first quarter into our reaffirmed guidance for the year. And as we look beyond updating the guidance this morning. I would just say that April has started steady and helped inform our views. When we look about the rest of the year, I would remind everybody that we do have interest and depreciation headwinds. Those abate in the second half but we also expect the Q2 impact of those 2 items to be roughly in line with the first quarter. And then finally, I would just say, look, our teams have been here before. We've problem solved. We had the problem solved. And that gives us confidence as we look to our full year guide about our strategic initiatives, the transformation activities we're running, our restructuring actions, which will also build sequentially across the year. Gregory Melich: That's great. And for a follow-up, I would love to ask Will, as you're going through this big separation process and -- how do you think it could impact the culture and how do you think about working that through the thinking just bolt-on M&A along the way or even thinking of selling some of the businesses, if that's what makes sense along the way? William Stengel: Yes, Greg, I think this is a moment where our culture really shines. It's based in team. It's based in hard work. It's based in collaboration. I referred to the way in which we've set up the project team, it's cross-functional, it's cross-business unit, it's global. We meet every week. So I think the operating rhythm and the way in which we're all working is a perfect reflection of how this company works as a team and has built its culture over 100 years. As I've talked about before, we have a very consistent culture, both geographically and across business units. So that's part of our special sauce, and I wouldn't expect anything about the work that we're doing in 2026 or our strategy going forward. to change that. And in fact, I would argue that it amplifies the depth and the way in which we work together. So we feel really good about where we are. Operator: Next question will be from Bret Jordan at Jefferies. Bret Jordan: Could you give us a little more color on the European backdrop, I guess, or regional performance, competitive landscape, are there stronger and weaker markets over there that should be [indiscernible]? William Stengel: Yes, happy to, Bret. As I said in the prepared remarks, we were really encouraged -- we saw sequential meaningful sequential improvement versus the fourth quarter in all of our geographies. So we're seeing continued good execution and arguably improving market fundamentals across each of the geographies. We had some nice progress in our Germany business this past quarter. They're doing a nice job relative to competition, and we continue to show really nice progress in our Iberia platform that has done a lot of work to build its national supply chain, work closely with its vendors. It's accelerating its NAPA brand offering in the market that's new and different in the marketplace. So those are 2 highlights. And as I said, the other markets improved, and we're cautiously optimistic that as we go through 2026, we'll continue to build that momentum. Bret Jordan: Great. And then I guess sort of early thoughts on the dividend policy for the [ spincos ]. Obviously, it will be a sort of a different business profile, but how do you think about that capital allocation? Herbert Nappier: Yes, Bret, look, I think we've got more work to do on capital allocation. We're obviously mindful of the dividend and the importance of that to the various customer base -- or the various shareholder bases. One thing that I would say is that we have -- we've increased the dividend again for 2026. It's an important part of the current GPC capital allocation structure, and it will be going forward as well. I think as we shared a few weeks ago at the conference with Michael, this is a moment in which we'll ensure that the capital allocation strategy of the 2 businesses follows its growth strategy. And those will be different. And that's a backdrop for why the separation of the businesses make sense. Each business has a different trajectory going forward, both super positive, and we're both -- and we're excited about both. But when we think about it, I think you'll see an automotive business that has a focus on shareholder returns, first and -- first and foremost, and secondarily, probably an indexing towards capital CapEx investments and a little bit of bolt-on M&A. And when you think about industrial, I think you'll be thinking about a profile of more M&A. It's a little less capital-intensive business, so CapEx as well, but also shareholder returns. So early innings, we're doing that work right now, and we'll continue to progress that work and share thoughts later. But the most important thing will be to continue to focus on shareholder returns and make sure the capital allocation strategies follow the business strategies and in the end, make sure that we stay faithful to our intention to have both companies investment-grade ratings. Operator: Next question will be from Christopher Horvers at JPMorgan. Christopher Horvers: So I had a couple pricing follow-ups. So first on Section 232, the new steel tariffs, to what extent do you expect that to be inflationary? And I guess, to what degree and is that baked into your guidance as you look to the balance of the year? And then you mentioned potentially pricing through some of the freight costs. Just wanted to understand is like freight costs that get capitalized into inventory. You passed -- it sounds like you're willing to pass those through, but the periodic costs of domestic freight, is that something that you would anticipate passing through over time? Or is that something more of a TBD, we're going to have to eat that now, figure out the need to pass that into price later? Herbert Nappier: Yes, Chris, maybe I'll start with -- that's a long question. I'll start with the second part on the current environment with respect to the conflict and how we're thinking about that, and then I'll come back to the Section 232 tariffs. Look, I think this is going to be a steady as it goes kind of environment. We're dealing with something that's incredibly dynamic. As I mentioned a few minutes ago, just oil prices alone and the volatility changing from day to day. On the freight end, which does get capitalized into inventory, that would be part of our pricing strategy. We'll be thinking about how do we pass that through balanced against our regular playbook on pricing and where we're considering the moves of pricing across markets, geographies, SKUs and what elasticity is out there. I think the consumer has a lot to consider right now. Customers and consumers have a lot to consider on the pricing front. And we'll have to be thoughtful about this environment on top of overall inflation and then tariffs. When we think about the freight out and so that's the cost that we're incurring to move product inside the U.S. or inside a certain geography from DC to the branch or store. Again, we're having to absorb increases in cost, and that's why I shared the thoughts I shared on the second quarter about those additional downside risks to the business in the near term. That also will factor in how do we think about pricing on that front as well. I mean all of these things factor into our operating costs and the cost to serve our customers, and we put them first. And so we're being super thoughtful about how do we balance the additional costs we have in the business with what we can push through to price and then how can we be more efficient, which is an important part of our model as well and that we have to control costs. So it's a lot of algebra, it's a lot of 3D chest, when we think about it, but we're also trying to make sure that we put customer first and make sure that we balance all of that across those considerations. So there are good thoughts. I think we've thoughtfully incorporated them into our views. And that's why we see the conflict as a near-term net negative. When I think about Section 232, we're managing this just like we manage the overall tariff situation. Our command center is still up and running. Our teams are still focused on it. At this point, we have not seen any additional requests from customers on Section 232. Same thesis here to the extent we started to see those increases from suppliers or request for increases from suppliers, we factor in that into our models for pricing and how we pass that through. Again, our intent would be to pass through where we can. I would say that the overall tariff environment, I think, has finally found it's at risk of jeopardizing my views. I think it's found its normalized point. We're in a normalized rhythm and cadence. We're heading into the full anniversary of the tariff landscape. I think the noise has died down largely, and the request that we're seeing coming in from suppliers have become more normal conversations around annual price increases and negotiations versus specific to tariffs. So we'll continue to deal with whatever dynamic comes up tomorrow, but at the same time with respect to Section 232, we haven't seen any material increases. And anything we would see we'd be sure to think about how we pass that through and how we manage the overall cost. Christopher Horvers: And then staying on the pricing topic, you talked about 3% inflation roughly. You also talked about a gross margin headwind with respect to tariffs. So is it that you're not passing -- and that number lags -- that 3% lags what Zone and O'Reilly have talked about, albeit in line with Advance. So is that gross margin headwind essentially indicative that you're holding back on some of the tariff costs and as a mean to maybe narrow price gaps? Or are you trying to adjust for prices that are perhaps too high in certain markets and just trying to get back down to normal? Herbert Nappier: No, I don't think there's anything to see there other than we had a really strong Q1 a year ago, a 120 basis point expansion in gross margin. So we had a tough comp to begin with. The second element would just be that don't forget that the first quarter of last year had no tariff impact. And so for Q1 this year, we're actually carrying all the increases in cost of goods sold with the top line benefit and all of those things are hunting in the low single-digit range. So when we think about how we've expanded gross margin over the past several quarters, we've had the benefit at moments in time of lags and where we sit in terms of the delta between price and cost. And in this particular quarter, I think they're pretty lined up. And so that created a little bit of attention on expansion to gross margin for the quarter. But nothing concerning from our perspective, in line with our expectations. And as I -- as we mentioned in my prepared remarks, we've reaffirmed our outlook for the full year, 40 to 60 basis points of gross margin expansion. And that's going to come on this great work we're doing across the business, which is going to build benefits across the course of the year. Operator: Next question will be from Scot Ciccarelli at Truist. Scot Ciccarelli: Scot Ciccarelli, two auto-related questions. First, I don't know if you guys are willing to provide anything at this stage, but any more detail around the profitability of your North American company-owned stores versus the independent biz? And then secondly, kind of on a related basis, where do you think company-owned profit -- company-owned store profitability can go over time, just given what we can see from some of your biggest competitors? William Stengel: Yes, Scot, on the first one, I hope you can appreciate, I'm not sure we prefer to disclose that level of detail on the profitability. On the second question, maybe we won't talk with specific numbers, but I can tell you with a lot of empirical data behind it as you think about our 2025 strategic review, obviously, we spent a lot of time looking at what we call our entitlement in all of our businesses, but in particular, in our automotive business, and it's really compelling. And it's a material improvement in the business. The exciting part about it is, we've got best-in-class examples that are already at the level of entitlement. And so it's not pie in the sky in the sense that we've got to go out and do something unnatural. We have to get all of our opportunities up to best-in-class. And I think we'll bring that to life in the Investor Day to put some numbers around it. But we're excited about the work we're doing and the sequential improvement in company-owned stores is the early days work of executing that road map and that playbook to get the best of breed to teach the others and work with the others to get to that level. So more to come on it. It's a good question. It's a fair question. I would note, we are a B2B business. So we are different than your traditional retailers. So we'll have our own benchmark for what we view as entitlement and best of breed that might potentially look different than a traditional retailer. Scot Ciccarelli: Can I just ask a follow-up, given the lack of information on the first question there. What are you hearing just in terms of your conversations with your independents, given their appetite for inventory and given some of the cost pressures that they've been under with the interest expense related to inventory? William Stengel: We had a -- I should mention, we had 20 of our largest owners here in the U.S. in the Atlanta headquarters 2, 3 weeks ago and the tone and the discussions are very positive and optimistic, honestly, sequentially improved, as you saw in our results, which I think reflects the cautious optimism as we go through 2026. Alain Masse and the NAPA team here in the States, part of his expertise and his experience working with independent owners is playing out as we thought. There's really good alignment in terms of the priorities of the business and the investments we're making in the business on behalf of the independent owners. And we're also spending time thinking creatively about different ways to support their inventory investments, and there's more to come on that topic as well. So we're working as well as we've ever worked with our independent owners over the recent years. Obviously, it's been a tough market backdrop for them in all small businesses and part of our strategy today and going forward is to make sure that they're in a position to win in the local markets. And their sales outperformance is encouraging. And as long as we're all selling out in the markets there, I think the independent owners have a real opportunity to be successful and we're here to support them to be successful in the same. So more to come on it, but a fair question and a good question. Operator: Next question will be from Michael Lasser at UBS. Michael Lasser: It's essentially a follow-up on that last topic, which is, is there a trade-off for GPC corporate in the Auto segment where you have to balance the free cash flow generation of the North American auto business versus the top line growth for your independents, meaning you have an opportunity potentially to sacrifice some of the free cash flow generation. If you were to extend more capital or longer terms to your independents? And if that's the case, how is that going to impact the free cash flow generation of a stand-alone auto business? Herbert Nappier: Michael, it's Bert. I think the short answer to that is it doesn't impact the medium or long-term outlook for cash flow generation for the business. The bottom line is that we've been using our very strong balance sheet for many, many years to support our independent owners whether that's capital programs that we guarantee, that we disclose to support their growth and loans that they need to grow, which gives them access to capital at a more favorable -- at a little bit more favorable rate than they could on their own to payment terms, to deeper investments in inventory to make sure they have the availability. We've been using the GPC balance sheet long before I got here to support the independent owners, and that's in our run rate. And so I think when we think about how we look ahead to the global automotive business on a stand-alone basis, we'll continue to do that. And as Will just mentioned, we're reimagining even as we speak, how we support independent owners. The independent owner has a -- it's the backbone of this business. It's how the aftermarket grew up and it will always have a place. We just have to find a way to optimize it in a maximized way and continue to grow together and do the right thing for our customers. And so we're going to continue to do that. I don't think even with some of the new things we're considering, it changes the long-term view on cash generation or how we've used the balance sheet. We're just going to use it in a different way, and we'll have more to come on that. Look, I think all of these questions build into what will be a very exciting Investor Day for Global Automotive. We'll be talking about the strength of the 2 channels, the company-owned stores, the independent owners and what we can do as we look ahead. And so that's why we're excited. And that's why I think everyone should be excited about the separation of these 2 businesses and will be 2 great public companies. Michael Lasser: Got you. Very helpful. And you also provided some really helpful commentary on sizing the incremental EBITDA impact from all the geopolitical issues, $10 million to $20 million of EBITDA. Putting a couple of points together, you mentioned that April has been steady for the business. So should we be modeling pretty consistent top line performance in the second quarter with what you experienced in the first quarter and yet take into account this $10 million to $20 million EBITDA hit? And how does that play into your expectations in the back half of the year and how we should be modeling that? Herbert Nappier: Look, maybe I'll answer that on a core basis, Michael. So don't forget the first quarter had a nice tailwind from currency. I think that's the one element that we've assumed about 1 point of FX growth for the rest of the year. We had 320 basis points of FX tailwind in Q1. So let's not -- let's not everybody run out and remodel on that kind of FX tailwind as we look to the balance of the year. When I look at core revenue growth for Q2, I think it will be pretty steady. April has started out steady, March was pretty resilient, April a steady start. And April helped inform the downside risk that I shared earlier. But within that, I think the top line will continue to perform. The things we watch on the top line are the European market conditions, which, as Will mentioned, we're cautiously optimistic have improved from the fourth quarter. They're still muted, but they are improved from the fourth quarter, so we'll continue to watch that. Independent owners had a sequentially improved quarter. We'll continue to stay focused there. And as I shared earlier, I think when we think about revenue in Q2, we'll have what we think is maybe a little bit more pricing benefit from some of the things that are happening with the costs we're passing on to perhaps more muted demand, and that leaves us neutral in our assumptions. So I'd say, keep the core kind of in line and don't model in a bunch of additional FX tailwind, if that's helpful. Operator: And at this time, we have no other questions registered. I will turn the call over to Mr. Tengel -- Stengel. Please go ahead. William Stengel: Thank you, everybody, for joining us today. We look forward to updating you on the transaction and our progress as we move through the quarter on the July earnings call. Thanks again for being with us, and thanks for your support. Have a great day. Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to Tractor Supply Company's conference call to discuss first quarter 2026 results. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Tractor Supply Company. And as a reminder, this call is being recorded. I would now like to introduce your host for today's call, Mary Winn Pilkington, Senior Vice President of Investor and Public Relations for Tractor Supply Company. Mary Winn, please go ahead. Mary Pilkington: Thank you, Victoria. Good morning, everyone. We appreciate your time and participation in today's call. On the call today, participating in our prepared remarks are Hal Lawton, our CEO; Kurt Barton, our CFO; and Seth Estep, our Chief Merchandising Officer. In addition to Seth, we will also have Rob Mills, John Ordus and Colin Yankee, join the call for the question-and-answer portion. Following our prepared remarks, we will open the floor for questions. Now let me reference the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. This call may contain certain forward-looking statements that are subject to significant risks and uncertainties, including the future operating and financial performance of the company. In many cases, these risks and uncertainties are beyond our control. Although the company believes the expectations reflected in its forward-looking statements are reasonable, it can give no assurance that such expectations or any of its forward-looking statements will prove to be correct, and actual results may differ materially from expectations. Important risk factors that could cause actual results to differ materially from those reflected in the forward-looking statements are included at the end of the press release issued today and in the company's filings with the Securities and Exchange Commission. The information contained in this call is accurate only as of the date discussed. Investors should not assume that statements will remain operative at a later time. Tractor Supply undertakes no obligation to update any information discussed in this call. As we move into the Q&A session, please limit yourself to 1 question to ensure everyone has the opportunity to participate. If you have additional questions, please feel free to rejoin the queue. We appreciate your understanding and cooperation, we will also be available after the call for any further discussions. Now let me turn the call over to Hal. Harry Lawton: Thank you, Mary Winn, and good morning, everyone. Before we begin, I want to thank our more than 52,000 Tractor Supply team members. Their commitment and passion for life out here continue to set us apart and their dedication to delivering legendary service remains the foundation of our leadership in rural retail. The retail environment remains cautious but stable, with spending focus on needs and small indulgences with some evidence of trip consolidation. Within farm and ranch, the broader market has slowed, though we continue to gain share. In fact, we estimate we had one of our best share performances in Q1. In Pet, the category remains pressured. And while we are holding our share, our performance is below our expectations. A good example of the consumer spending is around their tax refund behavior. While refunds did come through and we captured our fair share, customers are using these dollars more cautiously. A significant portion is going towards essentials, savings and debt reduction rather than discretionary spending, consistent with the broader environment we're seeing. Our needs-based model continues to perform as expected in this environment, demonstrating its resiliency. We are seeing that in consistent demand across our core categories and continued engagement from our customers. In the first quarter, that played out in distinct phases, driven by weather timing. We ended the year lapping 2 years of significant storms, which created a slower start, followed by a major storm event that drove a pickup in demand. Trends then normalize through the middle of the quarter before a mixed finish with a good start to spring in the South more than offset by continued weather pressure in the North. Overall, weather was neutral to our performance in the quarter. Against that backdrop, I'm very pleased with our execution in the quarter. The team responded well to winter storms, activated strong events and around holidays and regionalized our marketing based on weather patterns. And we executed a clean transition into spring and chick days with encouraging early results. We remain focused on executing across the business. Advancing new store growth, expanding exclusive brands and maintaining disciplined SG&A control while continuing to make progress on our strategic initiatives. Gross margin remained in line with our expectations with ongoing pressure from tariffs, cost inflation and freight, which we continue to actively manage. Turning to our customers. Growth was driven by new stores and our existing customer base with store traffic increasing in low single digits and conversion in their stores roughly flat. Active customer counts grew though visit frequency declined modestly. We saw continued strength in our high-value customers with solid retention and engagement, supported by continued growth in Neighbor's Club penetration and higher engagement from our most valuable members, while new customer acquisition remains softer and was most reliant on new stores. Turning to our first quarter results. Net sales increased 3.6% to $3.59 billion, driven by new store openings. We opened a record 40 traction supply stores in the quarter and new store productivity remained in the 65% to 70% range. New stores remain a hallmark of our performance. Diluted earnings per share were $0.31. Comparable store sales increased 0.5% with average ticket up 1.6% and transactions down 1%. Four of our 5 product categories were positive and 6 of our 7 geographic regions delivered positive results, reflecting the broad-based strength of the business. With the exception of companion animal, our consumable, usable and edible categories delivered consistent performance in line with our expectations, led by poultry feed, bedding, livestock feed and equine feed. Companion animal performance reflects a number of structural headwinds. Sales were below the chain average, reflecting these dynamics. Dog ownership, particularly in larger breeds, has come under pressure, and our mix remains heavily weighted towards dog where we over-index by roughly 20 points. Cat ownership is growing and gaining share, and that's where we under index. Both species are also shifting towards fresh and premium nutrition where again, we are under-indexed. And our pace of share gains in both dog and cat has slowed. All this said, we are taking clear and decisive actions to strengthen our position, include expanding our Freshpet offering, increasing cat assortment, and enhancing our services and Rx capabilities, and Seth will walk through these and more in detail. Seasonal categories developed more gradually early in the quarter with spring category strengthening as the season progressed. Overall, we saw solid performance across both our winter and spring assortments. Big ticket categories performed above the chain average with strength in tractors and riders, generators and welding, partially offset by softness in chicken coops, trailers and recreational vehicles. Our digital business also continues to perform at a very high level with strong double-digit growth in the quarter. And we saw meaningful increases in traffic, along with improved conversion, reflecting the strength of our omnichannel experience. We've made targeted enhancements across our platform, including improvements to how customers shop and navigate our assortment as well as upgrades to our subscription offering as well as our order management and checkout experiences. These efforts are driving a more seamless and efficient experience and supporting continued momentum in the business. As we look beyond the quarter, we continue to make progress on our Life Out Here 2030 priorities. On localization, results are encouraging as we tailor assortments to local needs with more than 200 stores now localized and delivering improved performance and stronger customer engagement. In direct sales, momentum continues to build as we expand our sales force and deepen relationships with our higher-value customers, and this is driving increased productivity, larger basket sizes and repeat engagement. In Final Mile, we're scaling our delivery network, adding hubs and increasing delivery volume, supporting the continued strength in our digital business while improving efficiency and reducing our cost to serve. Within pet and animal Rx, we're seeing encouraging progress across both Allivet and tractorsupply.com as we expand our offering and enhance convenience for customers while driving engagement with new and reoccurring purchases. As we look ahead, we're seeing our typical seasonal ramp take hold as we build towards Memorial Day with stronger seasonal penetration and improving trends in the North, we expect sequential improvement in comparable sales relative to the first quarter. We continue to see strength across our customer base and in the majority of our business. We're taking targeted actions in areas of opportunity while continuing to execute on our strategic priorities. We remain focused on what we can control, investing with discipline, managing costs and most importantly, as always, serving our customers. That approach continues to position us to drive market share gains and long-term value. Lastly, we are reaffirming our full year outlook. And with that, I'll turn the call over to Kurt. Kurt Barton: Thank you, Hal, and good morning, everyone. Let me complement Hal's top line commentary by briefly covering the underlying drivers. Overall, our net sales performance was modestly below our expectations for the quarter. New store sales outperformed expectations in both timing and the number of new stores opened. This was offset by comp store sales performance below our expectations as we planned for Q1 comp sales to be at the low end of our 2026 guidance range. The primary driver of this performance was the softness in companion animal, which represented just over a 100 basis point drag on our comparable store sales. To further break down comp sales performance, average ticket increased 1.6%, driven primarily by higher average unit retail, reflecting a combination of inflation and category mix. Retail price inflation was the primary driver to the average ticket increase at approximately 150 basis points contribution along with a category mix benefit, principally from big ticket sales growth. This was partially offset by a modest decline in units per transaction. The mid-single-digit growth in big ticket categories was generally in line with our expectations. The growth in average ticket was partially offset by a 1% decline in transactions, reflecting customers' continued focus on value and prioritization of spending as Hal mentioned earlier, leading to reduced shopping frequency and trip consolidation. As expected, ticket outpaced transactions in the quarter. Turning to gross margin and SG&A. Gross margin was 36.2%, flat to prior year. The gross margin rate was generally in line with our expectations and reflects supply chain efficiencies and continued execution of our everyday low price strategy, offset by a higher mix of digital and other delivery-related sales, along with the continued pressure of tariff costs. This stability reflects the team's continued focus and cost management in a dynamic environment. And on tariffs, the impacts remained in line with our expectations with pressure largely contained and mitigated through our ongoing cost management efforts. SG&A increased 6.1% to $1.07 billion and as a percent of sales, was 29.7%, an increase of 70 basis points. There were 3 primary drivers of the deleverage. First, fixed cost deleverage given the level of comparable store sales below our 2% breakeven threshold. Second, continued investment in strategic initiatives across the business as we do not begin to cycle the step-up in investments for direct sales in Final Mile until Q2. And third, an accelerated new store opening cadence with 40 stores opened in the quarter. These were partially offset by ongoing productivity initiatives and cost management. As we shared last quarter, we expected Q1 to carry a heavier SG&A burden and that played out in line with our expectations. Our inventory remains in good shape with the average inventory per store increase principally reflecting inflation, inclusive of tariff costs and the timing of spring seasonal purchases. We continue to manage inventory effectively, supporting in-stock levels in key categories while maintaining overall quality and balance across the network. We also remain committed to returning capital to shareholders. Our dividend increase in February marked our 17th consecutive year of dividend increases. Turning to our outlook. We are reaffirming our full year 2026 guidance as outlined in this morning's earnings release. We continue to target comp sales growth in the range of 1% to 3% for each of the remaining quarters. Please keep in mind that we manage the business on the halves and not the quarter. From a margin standpoint, we expect gross margin to strengthen in the second half as comparisons ease and benefits from our new distribution center begin to flow through. SG&A deleverage will be higher in the first half, driven by the timing of new store openings, more normalized incentive compensation and the lapping of prior strategic investments. Our 11th distribution center remains on schedule, with shipping expected to begin in early Q4, and we expect approximately $10 million of incremental expense this year, primarily in the second half. Consistent with our outlook as we entered the year, we expect stronger EPS growth in Q2 and Q4 given the prior year's compares. On tariffs, the current environment remains fluid. We are managing the business based on what we know today and have not assumed any incremental benefit from refunds in our outlook. In closing, the quarter reflects a resilient business with consistent performance across the majority of our categories. We remain confident in our ability to deliver on our full year expectations and drive long-term value for our shareholders. With that, I'll turn it over to Seth. Seth Estep: Thanks, Kurt, and good morning, everyone. Tractor Supply's merchandising strategy is focused on meeting customers where they are today while positioning the business for where demand is going. We are taking deliberate actions to drive relevance, expand our reach and strengthen our position as the dependable supplier for Life Out Here. I'll start with our pet business, where we have a focused structured plan to accelerate performance and capture growth, then followed by key merchandising initiatives across the broader portfolio. As Hal mentioned, the category is evolving with macro trends in dog ownership, growth in cat and a continued shift toward premium fresh and more digitally enabled solutions. While our assortment has historically been well aligned to our core customer, particularly in dry kibble and larger dog formats, incremental growth is increasingly being driven by adjacent segments as we actively expand our presence. To address this, our plan is centered on 4 key areas: first, assortment transformation; second, exclusive brand innovation; third, digital capabilities; and fourth, customer engagement, all supported by continued investment in talent and category leadership. Starting with assortment. We are expanding into the fastest-growing segments of the category. We are aggressively scaling fresh and frozen pet, moving from approximately 80 stores today to more than 250 stores by the end of May with a path to 700 stores by year-end. While still early, we are encouraged that approximately 1/3 of customers purchasing Freshpet in our pilots are either new or reactivated to the category at TSC, demonstrating the traffic-driving potential of this segment. In parallel, we are expanding our presence in cat. Increasing space across our fusion stores, expanding both dry and wet assortments and improving presentation to better capture the opportunity in this rapidly growing segment. In dog, a comprehensive chain-wide upgrade of our food business in Q2 extends into key adjacencies, such as shreds, treats and meal enhancers, while introducing new brands like Stella and Chewy, and broadening the assortment of leading national and differentiated brands like Purina Pro Plan, Hill Science Diet, Victor and Sports Mix. We are also incorporating more localized assortment decisions to ensure relevance by market and customer. A second key pillar is accelerating innovation across our exclusive brands. For Health remains a cornerstone of our strategy with strong scale and continued share gains. We're expanding the brand across multiple formats, including the launch of New for Health shreds formulas and extending into higher growth segments, such as Ambient Fresh and meal enhancers with differentiated offerings. In addition, the Retriever portfolio will be relaunched in Q3 with enhanced formulations, expanded SKUs and updated packaging, further strengthening our value proposition across good, better and best years. Moving to our third pillar. We are accelerating our digital capabilities to better serve pet customers and capture reoccurring demand. Our online pet business grew mid-teens in Q1 led by subscription, which grew by triple digits driving new customer acquisition, strong retention and increasing repeat purchase behavior in core consumables. In addition, we've expanded our Pet Rx offerings across both Allivet and tractorsupply.com, while leveraging our last-mile delivery network to improve the fulfillment experience and lower cost, particularly for large format pet food. Fourth, customer engagement is a key priority with enhanced engagement through Neighbor's Club and continued leverage of our pet services ecosystem to drive higher frequency and lifetime value. Through Neighbor's Club, we have the opportunity to deliver more personalized experiences, reactivate customers and acquire new customers through targeted outreach. We also see a meaningful opportunity to convert our large animal customers into pet customers, leveraging our highly engaged base. Our services offerings continue to play an important role. In Pet wash, we have more than 1,200 locations with strong growth in usage, including double-digit increases in comparable units. This reflects the value customers are placing on this offering. And PetVet mobile clinics performance remains solid, with sales growth building on strong prior year trends with a 2-year stack of nearly 25%. We see continued opportunity to expand access and scale this offering with additional clinics planned in the near term. These services help us drive frequency, attract new customers and strengthen long-term relationships, reinforcing our competitive position in the pet category. We expect to continue expanding these capabilities over time. In supporting all these efforts, we are investing in talent and leadership across the pet category, ensuring we have the right expertise, focus and execution capabilities to drive sustained improvement. All these actions in companion animal are designed to accelerate performance and position the pet business for improved growth and share gains. Importantly, beyond pet, we are very excited about our broader portfolio, which continues to perform with strength and building momentum. We are leaning into our seasonal moments, particularly as we transition into spring and summer. Chick Days is off to an encouraging start, with strong engagement from both new and existing customers, and we are on track to sell a record number of birds this season. This event continues to serve as a powerful traffic driver and a key entry point into our broader animal care ecosystem, driving demand across feed, coops and accessories. In our seasonal big-ticket categories, performance is exceeding expectations, led by live goods and our zero-turn mower lineup. This lineup featuring brands such as Bad Boy, Cub Cadet, Toro and Husqvarna is performing well. And our new flagship stores are driving improved presentation, attachment and overall productivity. Our stores are ready for the spring planting season as we have nearly 50% of our stores with either a garden center or a live goods tenant. We're well positioned for the season with the right assortment, the right presentation and the right momentum to capture the seasonal opportunity. Moving to livestock feed. We recently completed a comprehensive private label network review to ensure consistent quality at the lowest cost to serve, strengthening both our retail and our direct sales capabilities, we've been one of our most important heritage categories. We're also expanding our assortment with key regional brands such as Total Equine, Bluebonnet and Buckeye, allowing us to better localize our offering and meet customer needs across different geographies. We also continue to invest in our exclusive brand portfolio, a key differentiator for Tractor Supply. A great example of this is Field & Stream, where our new product introductions are performing well. The brand is on track to hit over $100 million in sales this year, joining the ranks of 13 other exclusive brands at this sales milestone. We're excited about the continued launch of new programs across our wildlife and recreation department where the Field & Stream brand is helping anchor this strategy. Our in-store conversions of our dedicated wildlife and rec department are off and running, and we are pleased with the early results. As such, we are increasing our outlook from around 500 to approximately 700 store conversions by year-end. Together, all these initiatives are designed to drive near-term performance and strengthen our long-term position ensuring that we continue to meet our customers where they are and support the way they live and work. And with that, I'll turn the call back over to Hal. Harry Lawton: Thanks, Seth. Stepping back, what you're hearing is a clear and focused approach. The fundamentals of our business remain strong with consistent customer engagement and continued strength across our needs-based categories. At the same time, we're operating with discipline in a dynamic cost environment and taking decisive actions to improve performance in companion animal and accelerate growth across our strategic initiatives. We're moving with urgency in areas where we see opportunity. As part of our Life Out Here 2030 strategy, we're making meaningful progress in building capabilities to support long-term growth. We're strengthening what we do best, while continuing to scale new initiatives that expand how we serve our customers and grow our share of wallet. As we look ahead, we expect to build momentum through the year, supported by these actions and continued execution across the business. With that, we'll open the line for your questions. Operator: [Operator Instructions] Our first question comes from the line of Peter Keith with Piper Sandler. Peter Keith: I think I just want to kick it off with companion animal since that was a focus here. Is that category getting worse? Like I guess if you could talk about the trend through the quarter. Then you've got a bunch of initiatives to help stabilize it. Do you think those are starting to kick in now? Or could things get worse before they get better? Harry Lawton: Peter, it's Hal, and thanks for joining the call this morning and appreciate your question. On pet, first off, I'd say a few things. As I mentioned in my opening remarks and Seth did as well, we view our share performance in pet to be stable, and it's been in that kind of stable run rate really for the last 4 or 5 quarters, albeit it's below our expectations. The overall structured dynamics in the industry continued to be under pressure as both Seth and I articulated. And then we also have some additional pressures given the mix and the structure in the industry given our weight on -- towards dog and also our weight outside of the Fresh and Frozen. But as Seth mentioned, we're taking actions on both of those dimensions, expanding our assortment in cat and then also aggressively getting into the fresh and frozen market. More broadly on -- and so I'd say our comp trends have been stable for really the better part of 6, 7 months now in that category, and as we roll into Q2 are stable in that range and then also our share performance stable. As we look forward, while Pet is a kind of headwind in the moment for us, a couple of things I'll just comment. First off, I really, first I'll articulate that we have a kind of broad portfolio inside of the business that we play against, whether it's Q, seasonal, big ticket and certainly as our digital business, as we mentioned, exceeded expectations in Q1. So we do see multiple offsets throughout the balance of the year. The other thing I just want to highlight is the pet over indexes in Q1 by nearly 5 points relative to the average through the balance of the year, and it under-indexes in Q2 before kind of moderating in the back half. So there is a kind of mix impact that we had in Q1 on that as well. But the guidance, and we reiterated guidance today, our plan and forecast assumes that we'll have continued pressure for some time in that category, and then we'll kind of see gradual improvement as those initiatives take hold. But again, a portfolio of categories that we play in [indiscernible] slate out a number of the actions were taken in pet, but also a number of the actions we've taken out -- taken more broadly. We're midway into Q2 now and feel good about the sequential improvement we've seen in the business as the season ramps. Thanks so much, Peter. Operator: Our next question comes from the line of Michael Lasser with UBS. Michael Lasser: It comes on the heels of your comments just now Hal, which is how long do you think it will take to effectuate an improvement within the pet category. And if we assume that Tractor Supply, the updated algorithm may be more like 2% to 3% comp growth rather than the expected range of 3% to 5%, what does that do to the earnings outlook for the business over the longer run? Harry Lawton: Michael, and good to hear from you, and thanks for joining the call today. On the -- how long the improvement, as I mentioned earlier, our plan for the balance of this year assumes continued pressure in that category. As I mentioned, we see number of offsets and a variety of ways that we'll continue to operate in the context of our full year guidance. We are very much operating in that -- the middle of our full year guidance range here kind of almost 4 weeks into Q2. So I feel good about our trends so far into Q2. Remind that no less than 2 quarters ago, we delivered a 4% comp, and our seasonal ramp and execution are building momentum. And so certainly, we have actions and plans around pet, but the performance, I think, will be both dictated by our actions, but also how the overall market continues to evolve. There was 96 million dogs in the market in 2023, that dropped down to about 94 million in 2024. And then I think most folks thought it would kind of stabilize around there. And then in 2025, you had a couple of million more dogs of decline going down to approximately 92. So that will dictate some of the performance. That will dictate equally the performance as well as our actions as we look forward to the balance of the year. And then as it relates to our overall growth algorithm, we're certainly not addressing that today. But I'd just say our business is need based. We do not see this as a structurally lower growth business. Right now, our customers are -- they're playing the macro. They're stable. They're performing. We continue to have strong share gains in farm and ranch, and our customers are shopping to their need now. And we certainly don't see it as a structurally low-growth business. We just see our business and customer shopping as they need right now, and it's certainly a little bit more of a tepid consumer environment in the moment. Operator: Our next question comes from the line of Peter Benedict with Baird. Unknown Analyst: This is [ Zach Back ] on for Peter. Maybe one on the macro kind of in 2 parts. Hal, I know you mentioned seeing consumers kind of use those tax refunds more cautiously. Just curious, any changes in behavior from your core customer, maybe observed since the start of the Iran conflict about 6 or 7 weeks ago. And then secondly, just on oil prices, can you give us a sense of what level of oil prices are embedded in guidance? Maybe what is the sensitivity around this? And how should we think about the impact on margins if oil would stay kind of in that higher range of around $100 a barrel? Harry Lawton: Yes. Zach, and thanks for joining our call this morning. I'll hit both of those topics. First, on the macro, I'd start by a little bit building off of the answer that I just had with Michael. Our customer remains very stable. They're focused on needs-based spending in the moment. We have continued strength in Q more broadly across the business in our essential categories. I'd highlight our high-value customers as remaining very engaged and retained. I think you're hearing that broadly across retail. Our active customer accounts are growing, albeit there's a modest reduction in their frequency and also in their basket at this time. And I think that really just reflects a focus on value, not really demand deterioration when you look at the underlying fundamentals there. So we feel good about our customer. As I said, they're shopping to need. They're engaged, and we're retaining them. And as their spending habits improve, we expect our comps to moderate as well. On oil, our current forecast, their guidance, we've updated our internal numbers to reflect kind of the latest outlook on fuel pricing. And so kind of I would say we're very conservative on that front in terms of having the higher fuel cost kind of forecasted certainly for the foreseeable future in the business, Q2 and into Q3. And then we'll update more so as we get into the back half of the year. But we -- we certainly have been cautious and conservative, and that's incorporated overall guidance, which we reiterated today and feel very comfortable in our ability to manage gross margin in that context. Operator: Our next question comes from the line of Kate McShane with Goldman Sachs. Katharine McShane: We wanted to specifically ask about new customer acquisition remaining softer and that it's being mainly driven by new stores. Could you maybe double-click on that a little bit more? And then just kind of in the same vein, what kind of comp performance are you seeing in the localized stores which you highlighted is about 200 stores at this point? And can you remind us -- remind us for the rollout of this initiative? Harry Lawton: Kate, and thanks for the question today. On new customers, as we mentioned in our prepared remarks, our new customer growth is really right now predominantly relying on new stores, not uncommon in retail, but certainly, we would like to be driving new customer growth in our existing stores as well. But in our existing stores right now, it's mostly active customers that we're retaining and driving the business with. More broadly, if we step back, well, the second part of the question was on -- that's right, localization, -- sorry. If we step back more broadly on localization, I'd start really more with our store base. So we're about 60% of our stores now are in the fusion format. About 400 to 500 of those are new stores that have been built in the last 5 years. Those stores, as you can see in our new store performance curves are having outstanding comp results. Then you look at the balance of the remaining of our 60% of our stores that are in the Fusion format. Those stores are performing at or above the comp average. Certainly, the ones that we've done the localization treatment on in the last year to 1.5 years are now at 200 stores of localization are outperforming the rest of the Fusion store base. And then you take the remaining 40% of stores that are not infusion and not new stores. And those are the ones that are underperforming relative to our overall comp base. So not uncommon in what you see in a store base where you're kind of older stores that have not been remodeled are kind of dragging the comp. Your Fusion remodel stores are slightly above the overall comp and helping pull it up with the localization, meaning they're outperforming, as we've talked about, by that low to mid-single-digit comp run rate and then you get the balance of that performance coming from our new stores. So feeling great about our fusion format, feeling very good about the benefits of localization. And obviously, our focus over the next few years is continuing to move about 175 to 200 stores a year into the Fusion format and continue to drive that improvement in our store base. Operator: Our next question comes from the line of Chris Horvers with JPMorgan. Christopher Horvers: So I want to follow up on companion pet to make sure I got the math right. You talked about the category being a 100 basis point headwind to comps in the first quarter, that would suggest it was down 3%, and that's been a consistent trend over the past 6, 7 months. Guess more fundamentally, how do you think about the headwinds in the category between sort of like structural versus a mix sort of headwind related to what you're assorting and -- the dog, cat side and versus like online penetration. So think about Amazon pushing deeper into rural markets versus not a sorting fresh. And then on the cat side, appreciate that you're expanding an effort to focus more on Cat. Do you think your core customer simply under indexes to the cat category and over-indexes to large dog and sort of so -- perhaps the effort around cat faces some just inherent headwinds relative to who your customer is? Harry Lawton: Yes, Chris. And just to reiterate maybe some of the points we made earlier. So we're about 80% dog, 20% cat versus the market that's 60-40. We've always talked about our customer owns -- about 75% of our customers own a dog. Over 50% of our customers own a cat. And over 50% of our customers own more than 1 dog. So we have heavy pet population counts in our customer base. As we expand into cat, and we've been doing that now for about 6, 8 months, we started talking with you all about that middle of last year. We are seeing performance improvement in the stores that we expand our cat in. And as we roll out more fresh and kind of air drive and heavy nutritional products on the dog side, we're seeing improved performance in that as well. We have no reason to believe that as we expand Cat moving forward that we won't continue to drive performance there. To your point, it's a very competitive industry. You see grocery channels starting to pick back up. Certainly, you see pet specialty trying to recover share, although they continue to lose share at a pretty decent clip. And as you said, you see the balance of the share shifting into online. But the category overall right now is kind of flat to negative in total growth. And certainly, that's the case when you exclude the services piece of it, grooming and the bet element of the pet category. Operator: Our next question comes from the line of Spencer Hanus with Wolfe Research. Spencer Hanus: Just on new store growth. I'm curious what you're seeing from a cannibalization effect. Have you seen any step-up in that? And is that driving any of the softness here? And how are you thinking about that longer term. And then just one more on companion animal. You gave us some interesting stats on the dog population. Do you invent that continuing to decline as we look out here? Or do you expect that to stabilize? Kurt Barton: Spencer, this is Kurt. I'll take the first question on new stores and cannibalization. I'll flip it over to Seth on your follow-up question on dog population. Our new stores are performing really strong. You heard that in Hal's prepared remarks. We continue to see even when we opened up 40 stores this year, averaging over 100 in the last 4 quarters that the new store productivity is performing at the high end of that range of 65% to 70%. Part of that -- I'll just follow up on the earlier question. Localization is also helping the store -- new stores come out the gates strong as we ensure we're offering the right best product assortment in those new markets and those new stores. Now in regards to your question on cannibalization. Cannibalization continues to be modest. In many cases, we'll look at some of that to be healthy cannibalization as we put a second store in a market that's really strong. We look at and review and approve our new stores based on the IRR and incremental benefit net of cannibalization and our cannibalization level is pretty consistent with the last few years, and we measure our performance on our stores as to the net increment to comp sales, net of any level of cannibalization, and we continue to just have a modest and manageable level of cannibalization indicating our new store growth is still in a very healthy position. Seth, maybe turning it over to you on the follow-up question on dog. Seth Estep: Yes. Just one follow-up question on the dog. Just in general, I would just say that we're not currently assuming really any changes in the trend at this point. Obviously, it's macro based a little bit. But obviously, we're staying very close to where those trends are going. But more importantly, it's more about the actions we're taking to make sure that we can make sure that we're not only like remaining in keeping our share, but returning to share growth. And that does go back to, again, our assortment transformation initiatives, our exclusive brand growth, our digital acceleration and all the things that we're doing to work through our customer engagement, whether that be through pet services, Rx, Neighbor's Club, et cetera. We've continued to evolve with this category over time, and we're very confident in what we've been piloting, and we believe that as these continue to roll out a little bit later here in Q2 and into Q3 and start to build all these initiatives to scale that at that point, we'll start to see some kind of incremental and sequential improvement as we close the year and kind of move into next year. Operator: Our next question comes from the line of Simeon Gutman with Morgan Stanley. Simeon Gutman: Back to companion animal. Are you willing to share what level of comp growth you're targeting? Should it be within the middle of this year's comp range? Or is it in the long-term range? Or is it above the range? Curious what you're targeting, if you're willing to share how far off you are, I know someone offered a level of which you might be growing or shrinking at this point. And then any more on what's gotten better thus far in Q2? Is it that mix effect on the total business? Is it some outdoor categories? Can you share some of those details. Kurt Barton: Simeon, it's Kurt. I can offer up some color on your question in regards to the expectation on companion animal and our guidance and then how we see that playing out. I'll go back to Q1, and we made commentary in our Q4 call on the guidance that on our 1 to 3 comp, some of the stronger categories and some of the weaker categories, we said companion animal being under pressure in general at that time, would lag the chain average. And so for the year, we expected flat to slightly positive comps in companion animal. To the point that we made that 100 basis point pressure on the quarter definitely showed that we were running a negative comp in there. We anticipate that to be additionally pressured throughout this year. So companion animal going forward, we believe there's ability to see growth in that performance as the year progresses and our actions take hold. But we anticipate that companion animal will be under some modest pressure and likely to be at a flat or slight negative comp throughout this year. And that's embedded in our expectation for the rest of this year and part of our consideration when we say that we still believe we can run the future quarters within our guidance range of 1% to 3%. Seth Estep: Simeon, this is [indiscernible] second question on Q2 and whether some improvements. Just to recall to some of the commentary we had in Q1 as well. 4 of our 5 merchandise categories were positive. And as Hal mentioned as well, mix in Q1 is much heavier part of that mix than it is as we go into Q2. With that, we are very encouraged with the strength that we're seeing right now in our seasonal business. Mentioned earlier around Live goods is performing very strong. Our Big Ticket categories and seasonal like with our zero-turn lineup, assortment continues to perform. And also like digital continues to be incredibly strong as well. So we're leaning into the categories of strength. We talked about our wildlife and recreation area, some of our men's and women's apparel that we continue to evolve are doing well. And obviously as well, things like our traditional businesses like in Ag, sprayers and chemicals are core areas are well are continuing to perform as we go into Q2. And we see those really being in that range and give us confidence in that 1% to 3% range for our comp guidance. Operator: The next question comes from Chuck Grom with Gordon Haskett Research Advisors. Charles Grom: A question for Seth and maybe Rob too. Can we zoom in on Neighbor's Club, Garden Centers and Direct Mile and maybe double click on the opportunities on each of these fronts. And then my follow-up is for Kurt. Can you remind us any mix implications as you lean into the -- sorry, the category more? And should we be mindful of any investment in price that you may want to take across the Pet business to stimulate demand? Mary Pilkington: Chuck, do you want to kind of narrow down maybe that first part of the question? I just said that we get it because it was kind of mixed in there. Charles Grom: Yes, just maybe just zoom in on Neighbor's Club, Garden Centers and Direct Mile. Just a little bit of an update on each of those fronts. And then just on the margin side for Kurt, any mix implications from the expansion into cat that we should be mindful of? Harry Lawton: Thanks, Chuck. I'll hit real quickly on Neighbor's Club, Garden Center pricing, and then I'm going to turn it over to Colin to talk about Final Mile. Neighbor's Club continues to perform very well. We have not been disclosing as a recent our Neighbor's Club membership. I think it continues to grow at about the same pace as it has the last handful of quarters. So really straightforward there. Retention remains strong. Spend per member remains strong. As we commented several times, our active customer base remains very core and engaged in our business. On Garden Centers. Our Garden Centers are performing very well. Seth highlighted live goods as a -- off to an excellent start for us this year. We are over 1,000 stores now collectively with garden centers and/or live good tents, and both concepts performing very well. And then on pricing, really, nothing of -- that I would call out from a mix difference between cat and dog, the margin structures are reasonably comparable in the food side of things, reasonably comparable on the snack side of things. So as we make assortment shifts there, it's very manageable within the department. I'm going to shift it over to Colin now to talk about Final Mile, which is [indiscernible] a great first quarter and really is kind of one of the core underlying levers that's driving that 20% plus digital growth this -- in the first quarter and continuing here into the second quarter. Colin Yankee: Thanks, Hal. Chuck, good to hear from you. As Hal mentioned, our Final Mile program is exceeding our expectations. Programs really resonating with our customers as they're choosing to have more of their needs delivered, especially for those larger order quantities, and we're lowering the cost per delivery across the entire portfolio as we roll out this program. Reminder, 2 big unlocks for Final Mile. First is enabling demand, whether that's for direct sales or digital. And then the second is that more efficient and lower cost per delivery. We saw it in the volume in Q1, delivery volume was up double digits compared to last year. And I think what's really unique about what we're doing is how we're orchestrating our inventory upstream. So we're making choices about how we deploy inventory, whether it flows through a DC to a store or resource that delivery through the store. And then the partners we're using to get that product from the store out to the customer's property. For those small and medium type items, we're using a series of trusted delivery partners where we really want to get our team members delivering is in those large, extra large and huge kind of deliveries, it's amazing. We'll go to put a Final Mile delivery hub in and all of a sudden, we'll see 250 bags of shavings get ordered, [indiscernible] 16-foot fence panels, just these big orders that nobody else can deliver at scale nationally like we can and something we've never been able to do, and our customers are really responding to it. Last year, we stood up about 200 Final Mile hubs. This year, we're on plan to open up 176 more, and those hubs are trending ahead on our utilization of our expectations. So really pleased. We know we have a lot of work to do still as we build out this program. But all signs point to this being a massive enabler for us digitally and on direct sales. Operator: Our next question comes from the line of Seth Sigman with Barclays. Seth Sigman: I wanted to ask about pricing. So inflation was 150 basis points in Q1. I think that's actually down from where it was in the fourth quarter. Did you guys actually lower prices? Or is that just a mix dynamic this quarter versus last quarter? And then can you also speak to elasticity, the experience that you've had to date? And then just finally on pricing. A lot of the inflation has been tariff-related up until this point. What is your view on commodity-related inflation? How does that play out from here? Seth Estep: Seth, this is Seth. Thanks for the question. As always, when you think about pricing, we've got a very experienced team. We've got all the tools in place set for years that we've been able to really have a good draft on the costs that are coming at us and flowing through the system as well as being able to monitor kind of, call it, the competitive index in our categories out there to ensure that we are priced right in the market. Our strategy on that has not changed. EDLP is our true north. We're going to make sure that we are competitive and in a position to drive share. Relative to the current environment, I'll tell you, though, like there's a lot of dynamics that obviously you're flowing through, whether that be to your point around some of the EDLP tariffs and how that, a little bit put some pressure on the inflationary environment. But obviously, now we're shifting and flowing into some other potential cost pressures relative to fuel, oil, some other inputs, et cetera. And we're just monitoring those closely. I mean there's a lot of uncertainty as we look ahead. But as of right now, we're in a position to continue to operate within kind of our guided range and the expectation of that inflation, call it in that kind of 1% to 2%. And a lot of that would come from price relative to some of the cost pressures that had been there and there's no change to that kind of expectation at that time. Operator: Our next question comes from the line of Scot Ciccarelli with Truist. Scot Ciccarelli: I believe PET is about 25% of total sales and it's also your highest frequency segment. So assuming those statements are both correct. Contractors, comp transactions turn positive, if pet stays negative just given the frequency related to that category? And then secondly, just a clarification. Was overall Q above or below company average? Kurt Barton: Scot, this is Kurt. A couple of clarifications on that. Pet is a traffic driver in some cases, it is an add-on in other cases, to just kind of set the expectation on or at least clarification on the biggest frequency and traffic driver, it's really the large animal. It's the feed category that is the, by far, the biggest traffic driver. So just clarification on that. And then to your point on companion animal and the mix, as I was mentioned earlier, Q1 being a smaller sales quarter, that's really more the routine. It overindexes in feed and pet food in those and lesser in other quarters. And so while it being not the primary traffic driver, and while it's still a solid business for us with a lot of our strategic initiatives with in Q2, with it being a heavy seasonal type category. And as a reference point, you see this in our disclosures, companion animals roughly like 21% in Q2 versus 27%, 28% in Q1. We've got the right drivers. And as Hal mentioned, a majority of our categories are solid in performing. A majority of the markets are performing well. So I wouldn't over-index. We're not over-indexing. We're managing the halves. We believe the customer is still engaged. And to your question, we can comp positive and expect to be able to target that in future quarters even if there's some softness in headwind in the pet companion animal category. Operator: Our next question comes from the line of Steven Forbes with Guggenheim. Steven Forbes: Hal, maybe a 2-part question on companion animal trends just to hit this topic again. The first is I'd be curious just to hear you speak to how you think rural migration household formation, existing housing turnover trends have impacted the outlook for pet as a whole as you see it today? And then secondarily, as you think about your member base, you commented that 50% of members have a dog and cat. So I'm curious if you can just maybe help explain to the group here what you're seeing as it pertains to wallet share of movement across those key customer cohorts where you maybe don't serve them to the level you need to be serving them? How long does it take to onboard them post localization? Like what gives you really the conviction that you can pull them back? Harry Lawton: Yes. Steven, I appreciate the question. On rural migration, I'd say 2 things there. One, certainly the post COVID, so since 2020, when you look at mobility stats, there's been a strong reversal of trends kind of versus pre-Covid. So kind of pre-COVID that you saw urban mobility increasing at the expense of ex-urban, rural and even to some degree, suburban. Post COVID, you've seen the exact opposite with urban exodus, I would say, through '21, '22 and '23, that was -- the Exodus was much stronger in ex-urban. I think now you're seeing it more balance between suburban and ex-urban. But you're still seeing mobility out of urban markets into suburban, ex-urban and rural. I'd also just add that when we look at our store base versus those sorts of geographic cuts, the more rural the store, the stronger the comp is, to a little insight there on our overall customer trends. On our member base, I'd say that not -- what we see with them on their pet purchases is very much a natural just ongoing evolution of the structure that's out there right now. You're seeing pet populations decline on dog, you're seeing pet populations modestly increase on cat. And you're seeing that play out in our business. So more broadly, like if you look at dog food, we were up somewhere in the mid- to high single basis points of comp share gain in Q1. If you look at cat similarly, we were up mid- to high single basis points in share gain in that category in the quarter. But because of mix because we have such a much lower share in cap versus dog, our overall share and overall food between dog and cat was flat. So share is stable. Actually, when you look at it by species, modestly growing. Now what we -- we were growing at about 20 basis points of overall share gain collectively across those categories back in '23 and in '22. So that's the actions that we're taking now to kind of step back into that overall share gain. But to be very clear, we are gaining share in dog food by itself in cat by itself, but when it mixes, it makes us to a flat share on food in total. Operator: Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Charles Cerankosky: You mentioned that weather was neutral for the quarter, but we had some very distinct national weather trends, for example, lack of snow and warm in the Rockies and cold and snowy in the Northeast. How is that set up for the second quarter as we move into spring and when might it do to your salesman? Harry Lawton: Yes. Chuck, I appreciate the question. As I mentioned in my prepared remarks, Q1 really unfolded in phases. And as we exited in March, you had an anomaly where you had kind of a cooler is north going and you had kind of the south warming up. As we mentioned, we saw strong spring sales in the South as we were exiting Q1, but kind of not yet the demand kicking in, in the north as we knew would [indiscernible] turned into April and kind of gotten past Easter and the lapping of Easter last year, you now see the north with the weather having improved, really kicking in. The South is holding. And we're in the midst of that seasonal ramp right now. As Seth commented, we've seen strength in almost all of our garden businesses and all the related garden businesses. So whether it's things like agriculture, ag fencing, even some of the hard lines that are out in the agriculture space. Certainly, things like sprayers and chemicals, lawn and garden tools, live goods, riding lawnmowers, which is a critically important business for us right now as having an excellent year-to-date. So we feel really good about our business as we've turned the corner here into Q2, kind of 3.5 weeks in, as we mentioned, the business is running very much solidly in the range of our overall comp guidance for the year, and that's our expectation for the quarter as well. Thanks so much, Chuck, for the question. Mary Pilkington: So Victoria, that will wrap our call today. We will plan to release our earnings tentatively on Thursday, July 23 for our second quarter earnings. So please join us then. If you need anything, please don't hesitate to reach out. Thank you very much. Operator: Thank you. That will conclude today's call. Thank you for your participation. You may now disconnect your lines.
Operator: Good morning, and welcome to the Mercantile Bank Corporation 2026 First Quarter Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead. Nichole Kladder: Hello, and thank you for joining us. Today, we will cover the company's financial results for the First Quarter of 2026. The team members joining me this morning include Ray Reitsma, President and Chief Executive Officer; as well as Chuck Christmas, Executive Vice President and Chief Financial Officer. Our agenda will begin with prepared remarks by both Ray and Chuck and will include references to our presentation covering this quarter's results. You can access a copy of the presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission's filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Ray? Raymond Reitsma: Thanks, Nichole. Our results for the first quarter of 2026 continue to build on the theme of commercial expertise generating a strong return profile. The consummation of the purchase of Eastern Michigan on December 31, 2025, represents execution of our strategic objectives around deposit growth, loan growth and margin stability paired with strong asset quality and overall financial performance. We continue to demonstrate top cortile return on asset performance relative to our peers built upon the following traits: Trait #1, a strong and durable net interest margin. Over the last 5 quarters, the SOFR 90-day average rate has dropped 67 basis points while our margin increased by 8 basis points to 3.55%. This illustrates effective execution of our strategic objective to maintain a steady margin by matched funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating our proportion of floating rate assets. Trait #2, very strong asset quality. Non-performing assets to total assets remain at the low levels typical of our company at 11 basis points of total assets as of March 31, 2026. Non-performing loans to total loans over the past 6.25 years averaged 12 basis points. The allowance for credit losses stands at 1.18% of total loans as of March 31, 2026, nearly 10x NPAs providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our long-term commitment to excellence in underwriting and loan administration. Trade #3, improved on-balance sheet liquidity and loan-to-deposit ratio. At the end of the first quarter of 2026, our own to-deposit ratio stood at 89% compared to 91% on December 31, 2025, and and 98% in December 31, 2024, and 110% on December 31, 2023. As of March 31, 2026, our loan -- our deposit mix included 25% and non-interest-bearing deposits and 25% lower cost deposits, unchanged from year-end to 2025, but up from 20% at the end of the third quarter of 2025, which has contributed to the stability of our net interest margin. Our acquisition of Eastern Michigan contributed positively to these measures. Deposit growth for the first quarter of 2026 compared to the first quarter of 2025 was 15.8%. The growth was roughly proportional in non-interest-bearing to interest-bearing accounts. Trade #4, strong deposit and loan compounded annual growth rates. Our recent focus on deposit growth is not new to our bank. In fact, the last 5 year in periods demonstrate a deposit compounded annual growth rate of 9.2%. Over the same time period, total loans demonstrate a compounded annual growth rate of 8.6%. As foreshadowed -- in prior quarter's commentary, loan growth was impacted by an elevated level of loan payoffs compared to historical norms in the first quarter of 2026. Payoffs from borrower sales of assets were over $40 million above the elevated quarterly average experience in 2025 and planned refinancing of multifamily projects to the secondary markets, were nearly 5x the quarterly average amount in 2025 or nearly $40 million in gross dollar terms. However, March 31, 2026, commitments to make new commercial loans totaled $289 million and commitments to fund existing commercial and residential construction loans totaled $272 million with each amount representing 5 quarter highs. We expect that loan payoffs will moderate in upcoming quarters and net loan growth for 2026 will follow within the range of previously defined expectations of mid-single-digit percentages. Quarter-to-date loan growth is well aligned with our year-end expectations. Trade #5, continued strong growth in key fee income categories. Growth in commercial deposit relationships has supported growth in treasury management services resulting in a 35% increase in service charges on accounts during the first quarter of '26 compared to the first quarter of 2025. Our credit and debit card offerings report growth of 17.6% in the first 3 months of 2026 compared to the respective 2025 period. Our mortgage team continues to build market share and generate a higher proportion of salable loans contributing to 12.4% growth in mortgage banking income during the first quarter of '26 compared to the prior year first quarter. Trade #6, well-managed expenses. Net revenue, defined as net interest income plus noninterest income grew 18.1% to $67.6 million during the first quarter of 2026, from $57.3 million in the respective 2025 period. Occupancy costs and data processing costs were virtually unchanged as a percentage of net revenue. And salaries and benefits increased from 34.2% to 35% of net revenue, primarily reflecting our investment in the Southeast Michigan market. Other expenses include a $1.2 million increase in allocations to reserve for unfunded loan commitments compared to the respective 2025 period, reflecting the growth in our loan backlog and a $0.9 million increase in the core deposit intangible asset amortization account arising from the acquisition of Eastern Michigan. In sum, these trades have allowed us to report a quarter-over-quarter earnings per share growth rate of 9%, a 1.4% return on average assets and a 12.5% return on average equity for the first quarter of 2026 and an increase in tangible book value per share over the prior quarter. Additionally, our 5-year tangible value per share a growth rate of 9% and 5-year earnings per share, compounded annual growth rate of 15.1% historically placed us in the top tier of our proxy group. We remain excited about our recently completed combination with Eastern Michigan Financial Corporation. The integration of operations is well underway and the cultures have meshed very well in the early stages of the process. That concludes my remarks. I will now turn the call over to Chuck. Charles Christmas: Thanks, Ray, and good morning to everybody. This morning, we announced net income of $22.7 million or $1.32 per diluted share for the first quarter of 2026 compared with net income of $19.5 million or $1.21 per diluted share for the first quarter of 2025. Higher net interest income and non-interest income, combined with lower provision expense more than offset increased overhead costs. Excluding after-tax onetime costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion, net income improved to $25.2 million or $1.46 per diluted share for the first quarter of 2026. Using this non-GAAP basis, which we believe more accurately reflects our core earnings performance. Interest income on loans increased slightly by $0.2 million during the first quarter of 2026 compared to the prior year first quarter, reflecting loan growth that offset a lower yield on loans. Average loans totaled $4.83 billion during the first quarter of 2026 compared to $4.63 billion during the first quarter of 2025, an increase of $199 million that largely reflects the acquisition of Eastern Michigan at year-end 2025. Mercantile Bank's robust commercial loan fundings during most of 2025 and -- in the first quarter of 2026 were largely mitigated by significant levels of payoffs and partial paydowns of certain larger commercial loans during those periods. Our yield on loans during the first quarter of 2026 was 24 basis points lower than the first quarter of 2025, primarily reflecting the aggregate a 75 basis point decrease in the Fed funds rate during the last 4 months of 2025. Interest income on securities increased $3.9 million during the first quarter of 2026 compared to the prior year quarter. reflecting growth in the securities portfolio and a higher yield. The growth in higher yield reflect the acquisition of Eastern Michigan, along with the ongoing portfolio growth and the reinvestment of maturing lower-yielding investments at Mercantile Bank. Average balances were up $357 million, and the average yield increased 54 basis points quarter-over-quarter. Interest income on other interest earning assets, a large portion of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased $1 million during the first quarter of 2026 compared to the prior year first quarter. [Audio Gap] Bank, while the 80 basis point decline in yield primarily reflects the aggregate 75 basis point decrease in the federal funds rate during the last 4 months of 2025. In total, interest income was $5.1 million higher during the first quarter of 2026 compared to the prior year first quarter. Interest expense on deposits decreased $1.9 million during the first quarter of 2026 compared to the prior year first quarter, reflecting a lower cost of deposits that more than offset interest bearing deposit growth. The growth in interest-bearing deposit balances and the lower cost of these funds reflect the acquisition of Eastern Michigan, along with growth and lower deposit costs at Mercantile Bank. Cost of interest-bearing deposits at both banks were positively impacted by the aforementioned decline in the federal funds rate during the latter part of 2025. Average interest-bearing deposits totaled $4 billion during the first quarter of 2026 compared to $3.44 billion during the first quarter of 2025, an increase of $555 million. The cost of all deposits was down 46 basis points during the first quarter of 2026 compared to the first quarter of 2025. Interest expense on Federal Home Loan Bank of Indianapolis advances declined $0.3 million during the first quarter of 2026 compared to the prior year first quarter, largely reflecting a lower average balance. And interest expense on other borrowed funds increased $0.3 million during the first quarter of 2026 compared to the prior year first quarter, largely reflecting the impact of a $30 million term loan we obtained late in 2025 to assist in the cash portion of the Eastern Michigan acquisition. In total, interest expense was $2.3 million lower during the first quarter of 2026 compared to the prior year first quarter. Net interest income increased $7.4 million during the first quarter of 2026 compared to the prior year first quarter, primarily reflecting growth in earning assets and a higher net interest margin. Average earning assets totaled $6.42 billion during the first quarter of 2026 compared to $5.70 billion during the first quarter of 2025, an increase of $719 million that largely reflects the acquisition of Eastern Michigan at year-end 2025, along with securities and overnight funds growth at Mercantile Bank. The net interest margin was 3.55% during the first quarter of 2026 compared to 3.47% during the first quarter of 2025. The improvement is largely due to the Eastern Michigan acquisition. The yield on earning assets declined 31 basis points, while the cost of funds declined 39 basis points during the first quarter of 2026 compared to the prior year first quarter. Impact on our net interest margin over the past couple of years was our strategic initiative to lower the loan-to-deposit ratio, which generally entailed deposit growth exceeding loan growth and using additional monies to purchase securities. A large portion of deposit growth was in the higher costing money market and time deposit products, while the purchased securities provided a lower yield than loan products. Despite that strategic initiative and declines in the federal funds rate during the latter parts of 2025 and 2024, our quarterly net interest margin was relatively stable during that time period ranging from a high of 3.52% to a low of 3.41% and averaging 3.47%. We remain committed to managing our balance sheet in a manner that minimizes the impact of changing interest rate environment on our net interest margin. Basic funds management practices such as matched funding, combined with scheduled maturities of lower-yielding fixed-rate commercial loans and securities and a higher rate time deposits along with the scheduled rate adjustments on residential mortgage loans should provide for [indiscernible] will be stable net interest margin in future periods. We recorded a negative provision expense of $1.8 million during the first quarter of 2026, compared to a positive provision expense of $2.1 million during the prior year first quarter. The first quarter negative provision expense was primarily comprised of improved economic forecast, changes in loan mix, a reduction in the residential mortgage loan portfolio, a decline in specific allocations and limited net growth in commercial loans due to the significant volume of loan payoff and partial paydowns. The reserve balance decreased $1.5 million during the first quarter of 2026, reflecting the net impact of the negative $1.8 million provision expense and net loan recoveries of $0.3 million. The reserve balance equaled 1.18% of total loans as of March 31, 2026, and compared to 1.21% at year-end 2025. Non-interest expenses were $11 million higher during the first quarter of 2026 compared to the prior year first quarter. excluding onetime costs associated with the year-end 2025 acquisition of Eastern Michigan and previously announced core and digital banking system conversion that aggregated $3.2 million. Non-interest expenses increased $7.8 million. The increase in core operating costs largely reflects higher salary and benefit costs. In addition, we recorded a $1.2 million increase in allocations to the reserve for unfunded loan commitments primarily reflecting a significantly higher level of commercial loan commitments that have been accepted by customers. The remaining increase in non-interest expense quarter-over-quarter generally depicts the cost of inflation and the increased cost of a larger balance sheet and office network. Eastern Michigan Bank's non-interest expenses totaled $4 million during the first quarter of 2026. Despite a $3.2 million increase in pretax income during the first quarter of 2026 compared to the prior year first quarter, our federal income tax expense increased only $0.1 million. The acquisition of transferable energy credits and net benefits associated with our low income housing and historical tax credit activities equaled $0.8 million during the first quarter of 2026. The tax benefit resulting from these activities -- both Mercantile Bank and Eastern Michigan Bank have strong and well-capitalized [indiscernible] Mercantile Bank's total risk-based capital ratio was $13.8 million as of March 31, 2026, $215 million above the minimum threshold to be categorized as well capitalized. Eastern Michigan Bank's total risk-based capital ratio was 20.5% as of March 31, 2026, $30 million above the minimum threshold to be categorized as well capitalized. We did not repurchase shares during the first quarter of 2026. We have $6.8 million available in our current repurchase plan. On Slide 23 of the investor presentation, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2026 with the caveat that market conditions remain volatile making forecasting difficult. This forecast is predicated on no changes in the federal funds rate during the remainder of 2026, although we believe our net interest margin will remain relatively stable in a changing interest rate environment as it did during the latter part of 2024 and throughout 2025. We are projecting loan growth in a range of 5% to 7% annualized during each quarter, which encompasses a strong commercial loan pipeline as well as fewer commercial payoffs during the remainder of the year. We are forecasting our second quarter net interest margin to be similar to that of the first quarter with steady increases throughout the last half of the year as we benefit from commercial loan growth, lower levels of monies at the Federal Reserve Bank of Chicago and maturing low-yielding fixed rate commercial real estate loans and investments, along with higher costing time deposits. We are projecting a federal tax rate of 17%, which encompasses continued growth in net benefits from our low income housing and historical tax credit activities along with additional transferable energy tax investments. Expected quarterly results for non-interest income and non-interest expense are also provided for your reference. Non-interest expense projections reflect personnel investments that were made in the latter part of 2025, first quarter of 2026 and expected during the remainder of 2026 and to support expansion in Southeast Michigan as well as to support operational areas as we switch core and digital banking providers to enhance the durability, the efficiency and experience for customers and employees. One-time-type costs associated with the core and digital banking system conversion are not included. In closing, we are very pleased with our operating results during the first quarter of 2026 and continued strong financial condition and believe we remain well positioned to continue to successfully navigate through the myriad of challenges and uncertainties faced by all financial institutions. That concludes my prepared remarks. I'll now turn the call back to Ray. Raymond Reitsma: Thank you, Chuck. That concludes the prepared remarks from management. We will now move to the question-and-answer portion of the call. Operator: [Operator Instructions] Our first question comes from Brendan Nosal from Hovde Group. Brendan Nosal: Maybe just starting off here on the net interest margin. I guess this quarter came in towards the lower end of the guided range. It looks like you tempered the range for the remainder of the year by 10 basis points or so. I guess we haven't gotten any more rate cuts, and you're still not forecasting any in your outlook. So just kind of curious, what were the main drivers of that change to how you see the margin trend due to the balance of the year? Charles Christmas: Yes. And the change -- Brendan, it's a good question. I'm glad you asked it because I wanted to make sure everybody understood that is a reflection of the change in our balance sheet mix. We are expecting -- and really because of the deposit growth that we've seen, I mean, as we talked about, as you saw in our release, we had incredibly strong deposit growth. The growth numbers themselves were incredibly strong, but that comes on the top of -- we typically lose anywhere from $80 million to $100 million in deposits in the first part of the quarter, as our commercial customers pay taxes, bonuses, partnership distributions. So typically, you don't see net growth in the first quarter. I can show you that our customers still paid all those items but yet we were able to demonstrate very, very strong deposit growth. And that deposit growth was throughout the different types of products and the types of customers, business, public unit and personal. And so what we saw was that increase in deposits came at the same time, we saw the paydowns in the commercial loans that didn't allow for commercial loan growth. So really all of that deposit growth went to the Federal Reserve Bank of Chicago. Obviously, a lower yield than what we would have expected on the loan portfolio. Going forward, we do expect, as I mentioned, that the margin will continue to improve pretty much at the same pace as what the expectations were originally back in January with the guidance, but we're just kind of starting at a lower spot. And I would say that we still expect deposit growth to continue at our budgeted pace, obviously, which makes for a very strong year. We do think with our commercial loan pipeline that despite the minimal level of net growth that we had in the first quarter that we will catch back up during the last 9 months of the quarter, and get to where we expected to be. So we're kind of ending with more deposits than what we thought we were, which results in a higher balance of the Fed, which has a small compression effect on our margins. So a lot going on there with the margin, but I think it's -- at the bottom line is just more deposits same level of loans, so those more deposit balances are going into the lower-yielding accounting at the Federal Reserve. Brendan Nosal: Okay. Chuck, that's really helpful color. Perhaps 1 more for me. just kind of pivoting. Can you just update us on the Southeast Michigan initiative you have ongoing with the new team down there? And then on a related note, any updated thoughts on opportunities to capitalize on M&A dislocation across the state? Raymond Reitsma: Sure. This is Ray. We've added some commercial banking talent on the east side of the state, and they have gained some traction and are performing very well relative to our expectations, growing their book, not only on the asset side, but doing a very nice job on the liability side as well. We plan to continue to [Audio Gap] Damon Del Monte: Inside that you didn't want to keep on balance sheet. Raymond Reitsma: No, that was entirely the [Audio Gap] Damon Del Monte: And do you feel that you have room to kind of grow into a loan loss reserve and let that drift a little bit lower as you get this loan growth? Or just looking for a little guidance on the provision line basically? Charles Christmas: Yes. I think when you look at whether it's a negative, whether it's positive and over the last couple of quarters, as you mentioned, it has been negative it's been negative because of the lack of net loan growth onto our balance sheet. As you know, CECL has put banks into a corner in regards to how it calculates its loan loss reserve and how it manages it. With Mercantile having basically minimal losses since coming out of the great recession, we rely really heavily on qualitative factors. As a matter of fact, if you look at the composition of our reserve, about 60% of our reserve balance is supported by qualitative versus quantitative of course, quantitative primarily driven by lost history performance. So it's always a battle. We like to have -- we like strong capital. We also like a very strong reserve. We're very comfortable with the balance of our reserve. Ray already mentioned it relative to our NPAs, which themselves and to your point, Damon, have been pretty pristine for a very, very long time. So I think kind of back to your specific question, I think when we certainly expect to have given our guidance, some very strong loan growth, at least through the remainder of 2026, notwithstanding any other major impacts to our measurements within CECL, we certainly would expect a positive provision expense going forward. The wildcard is the economic forecast on an overall basis, the American United States economy continues to do well. And so we really don't see much. We haven't seen much change in economic conditions have an impact on our reserve for quite a while now. Just a little bit of positives and minuses as we go quarter-to-quarter. We don't really see a lot of changes in our qualitative measurements. A lot of that is levels of NPA, the way that we administer portfolios, those types of things. I don't see really any changes there. So I think the driver of our provision expense is loan growth. As long as we can keep the pristine asset quality, which we think certainly that we can. So future provision, I think, is going to be really dictated by loan growth. And for our comments this morning, we expect to have very solid loan growth for the rest of this year and certainly into the future periods as well. Operator: Our next question comes from Nathan Race with Piper Sandler. Nathan Race: Chuck, just thinking about the level of cash or excess liquidity, you're looking at run rate going forward. Can you just get some light in terms of how much export liquidity you want to keep on the balance sheet maybe versus redeploying the securities portfolio. And within that context, curious if you're pretty content with the size of this book at this point, just based on the initiatives from the last several quarters. Or is kind of thought just to run with higher excess liquidity just given the loan growth guide? Charles Christmas: Yes. I think it's a combination of both. It's a really good question. I think our securities, we're right around 16% of total assets now and the plan is to keep it there. Again, with commercial loan growth, that would drive total assets, which of case will drive the size of the securities portfolio. So we'll have to grow that in congruence with the growth and the rest of the balance sheet, primarily the commercial loan portfolio. Obviously, we love the deposit growth. We'd love to put it into the commercial loan portfolio or residential mortgage portfolio for that matter as soon as we can. But obviously, the deposit growth. We came into the year especially with Eastern joining us with a lot of excess cash sitting at the Federal Reserve, if you will. And that only grew because of the deposit growth and lack of net loan growth in the first quarter. We think that's going to turn. But I think on an overall basis, we'll keep a higher level than historical dollars at the Federal Reserve. But I think it will -- our expectation is it will be less because we do expect to fund loan growth. And with that, we'll have to increase somewhat the size of the securities portfolio. And where that ends with our reserve -- our balance at the Federal Reserve, it's hard to know with all those numbers. Certainly, we expect it to be quite a bit lower than what it has been. But I would say the balance -- my expectation of that balance is to be well much, much higher than historical norms. And I would say historical norm is probably closer to $80 million, maybe $100 million. So I would expect the balance to be well over $200 million at the end of the year. Nathan Race: Okay. Got it. That's really helpful. And Chuck, you mentioned, I think, fixed rate loan repricing is a margin tailwind as we get in the back half of this year. Can you just help us with the yield pickup that you have on that portfolio over the next few quarters? Charles Christmas: Yes. It's based on the time frame on that is the rest of this year and into next year. And going from memory, I don't have it in front of me. I think the rate is about 5% on that portfolio, what's repricing. Nathan Race: And then is it fair to assume new loans on a blended basis are coming on 6.5% these days or? Charles Christmas: Yes, upper 6% is around 7%. Nathan Race: Okay. Great. And then just lastly, do you have the spot rate cost of deposits in March and just generally how you're thinking about deposit costs trending if the Federal remains on pause this year? Charles Christmas: Can you just repeat that second 1 about the cost? I don't quite get that question. Nathan Race: Yes. I was just wondering if you had the spot cost of the deposits in the -- in March and just how you're thinking about the trajectory of deposit costs if the Fed remains on pause this year? Charles Christmas: I brought all this stuff with me, but I didn't bring it on a monthly basis. So I think, as I mentioned, we've seen the growth throughout almost all the categories, and we're down a little bit non-interest-bearing if you look at our balance sheet. But again, that's where a significant portion of those tax bonus payments and partnership distributions come out of. As Ray mentioned, the Southeast Michigan, they brought almost as much deposits as they have loans. And a lot of those deposits are coming with the loan relationships, so they tend to be operating accounts, which obviously, we love. So I would say it's a blend of all the different deposits from 0 to non-interest-bearing, 1% or 1.5% on interest checking, not much in savings. And then our money market account is in the 3s, depending on the type and the size of the balance. So I think it's pretty well a blend. We're not looking for any -- if you look at non-maturity deposits or everything but time deposits, we're not really looking for -- we're not certainly not budgeting for any change in rates on any of those things. And I think the growth will be relatively consistent within those buckets to provide for a steady cost of those types of deposits for the rest of the year. Nathan Race: Okay. That's really helpful. If I could just actually sneak one more in. Could you just update us in terms of how much of expenses do you expect to come out of the run rate in the first quarter next year following the core conversion? Charles Christmas: We're looking for some pretty sizable savings, especially in regards to the new contract on our core. It will be sizable. Maybe that's something that -- that's still something that we're calculating, trying to figure out what this new core looks like, what we need from a personnel standpoint. Maybe we can continue to work on that and give you some better guidance in July. Operator: Our next question comes from Daniel Tamayo with Raymond James. Your line is now open. Please go ahead. Daniel Tamayo: Great. Maybe just to go back to the NIM guide and the loan growth, curious if you can kind of walk us through what may be downside risk given the reduction in margin guidance we saw -- we saw it today, but you did explain it with the deposits which I get. But if the payoffs kind of remain elevated throughout the year or for the next few quarters, curious, I guess, what's driving the confidence that, that will slow. But then if they don't, what kind of impact do you think that would have on the margin and NII? Charles Christmas: Yes. Clear, Daniel, this is Chuck. And clearly, it depends on the magnitude. I think to kind of put things in perspective, we had started to talk about -- because we saw and we were starting to report on in this conference I think at least in July or probably not even April of last year that we saw some pretty big payoffs coming. Clearly, our bankers are talking to the borrowers all the time and understanding whether they were going to put a project in the secondary market, whether they were going to sell their businesses. We usually have a pretty -- some advanced notice where we become aware of the payoffs, especially the bigger ones get everybody's attention. And that has always been that way for whatever reason, the last 3 or 4 quarters, however you want to calculate it, we have seen -- we've talked about it, a pretty high level of payoffs. They're all unrelated to each other. It's just more of a timing coincidence than anything else. Now payoffs, refinancings to the secondary market are a normal part of what we see. And so, we do expect those to continue. But we do expect them to continue more at a normal or -- I would say, normal a typical level that you talked about and put in the release. When we look at our pipeline report, we're not only looking at loan fundings, but we're also looking at paydowns. We look at our pipeline on a net basis and taking the same process that we've always used, that we've always reported always taken into account and managing the balance sheet, we just don't see -- maybe that could change, but we just don't see the same level of payoffs that we've seen more recently, at least for the remainder of 2026. Again, we will see some. We know there's some out there, just not to the level that we've seen. Now having said that, as we reported, we had $180 million, and I'll call it pay downs. There's various categories there in the first quarter alone. That's just on the larger credits. Now we also have, call it, $15 million, $20 million of month just a normal amortization. You put all that together, we funded well over $200 million in commercial loans during the quarter. And that's reflective of a very strong pipeline. And our pipeline right now is even stronger than it was at the end of 2025. So we feel very confident about the level of loan fundings that we're going to have executive management team feels confident on payoffs, given the history that our commercial bankers have shown to be on top of these types of things as they work with their borrowers day in and day out. So we feel very confident sitting here that we're going to see some strong 5% to 7% annualized growth. That's a forecast. I think the surprise would be not in the funding side, but we'd be in the payoff side. If somebody suddenly find there's a rational payoffs coming up. And we see the same level of deposit growth as we're budgeting. Yes, we would end up with a higher level of money sitting at the Federal Reserve, which would put a damper some compression on our margin. Again, the size is going to drive, whether that's 2 basis points, 5 basis points or something like that. So I would kind of put it in kind of what I would see as maybe a normalization of some higher levels of payoffs, I would say, maybe 2 to 5 basis points of margin compression below what the guidance is not from where we are today. But that's kind of a guess as far as that 2 to 5 basis points. But hopefully, my explanation of what we would look at and what the -- what would drive the impact, hopefully made some sense for you. Daniel Tamayo: No, that's helpful, Chunk. And remind us, I think last -- sorry, did you have anything else? Just remind us -- Okay. On the rate sensitivity, I know you have the table in the deck, but still not much impact from a 25 basis point rate cut perspective on your guidance? Charles Christmas: Now. I think there's a -- we're pretty well matched on the balance sheet. We do have the repricing, as we mentioned, the commercial loan, fixed rates, the securities and even some time deposits that would reprice lower. We think that puts us in a pretty balanced position. Daniel Tamayo: Okay. I guess just to go back to my original question, if you were in that position where loan growth ended up being a little bit slower than expected due to payoffs remaining elevated, would that put you in a position to utilize the buyback authorization in the remainder of the year? Or is that something that you're looking at kind of separate from the loan growth conversation? Charles Christmas: Well, I think the loan growth is part of that. I think there's definitely other things to consider when we look at our capital position, where we want it to be relative to certainly the growth. We know that we're a growth company, we need growth to continue to enhance our earnings performance. And certainly, we want to make sure we got enough capital to support the level of growth opportunities that we see, which obviously from our comments this morning, we're very high on. So that's first and foremost. Clearly, we would look at our stock price. The bigger the discount to what we think is appropriate. We will get a bigger appetite. We're also looking at the proposed change in risk-based capital calculations. I'm sure everybody is going through and trying to figure out what that impact would be on the capital calculations. We're also a little bit -- kind of looking to maybe understand how the investing community and the regulators are going to look at that. Clearly, the proposed changes provide for higher capital ratios. Does that just set the new bar? Or do we really get the "spend that and use that?" Our initial calculations under a proposal put all those caveats out there. We're looking at about a -- I'm going to put a number out there, but obviously, it's going to be a ranger owned it. Our CET1 ratio would increase by about 75 basis points. in our total risk-based capital ratio by as much as 1%. So we're looking at some meaningful increases there. Clearly, that would have an impact on how we think about buying back stock. And then just all the other normal things. There's a lot going on in the world. The American United States economy has been incredibly resilient. It usually is, but there's a lot going on. The level of uncertainty is still very, very strong and evident that's out there. So this company has always been pretty cautious when it comes to managing its capital position. But we certainly do understand and appreciate the benefits that could present itself with stock buybacks. So it's always on the table. We regularly talk to our Board about that. Obviously, we haven't bought back any in quite a while now, but it's something that's toys on the stope top. Operator: [Operator Instructions] Our next question comes from Matthew Breese with Stephens Inc. Matthew Breese: I just first wanted to start with securities. Maybe help me walk through the anticipated maturities and cash flows of securities for the balance of the year. And what are some of the roll off versus roll on dynamics of securities? Charles Christmas: Yes, I'm looking at the deck trying to remember if we have that in there. I thought we do. Yes, we do have that on Slide 17, and we start talking a little bit about the portfolio there. So most of the benefit there is in our agency portfolio. And so we're looking at, I think, another $50 million this year. That's got our average rate of, I think, just under 1% that does in the dollar amounts, but also the average rate do increase over time. But if you look at where rates are today, the types of bonds that we buy today, which I would say give us a yield of, call it, around 3.5%. I'm not sure if you look at on an annual basis if we had -- maybe if we go way out. But I would say certainly within the next 5 years, if not the next 7 years, we don't have a year where the average yield is higher than 3.5%. Now that yield -- that average yield does increase over time. Like I said, it's a little under 1% for the rest of the year. I think it's like 1.5% or so next year. and then it continues to increase. The dollars, we continue to be very diligent with a laddered approach. If you look at our mature -- not this year, but if you lay out the next 5 years, we have about $100 million a year maturing and then it slides off a little bit over that over the next 4 or 5 years. But so we have lots -- I'm being somebody base because I don't have exactly the numbers in front of me, but there is some solid repricing opportunities in that portfolio, along with the commercial loans that we talked about earlier. Matthew Breese: So it's give or take $50 million for the year? Charles Christmas: There's $50 million maturing this year yet, but there's $100 million maturing every year for the next 5. Matthew Breese: Got it. Okay. And then I guess back to Nate's question on cash liquidity. The first part of my question is just around seasonality. Is there anything -- I guess, it will be determined by the deposit side of the balance sheet. But anything seasonal in the second quarter that draws down cash a little bit more than usual? And then secondly, I think you had said we should anticipate running north of $200 million in cash by the end of the year. So is it -- we're standing at like $580 million in total cash right now, that's going to come down by a few hundred million by the end of the year. Is that the right message? Charles Christmas: Yes. So I think from a seasonality standpoint, we talked about what happens in the first quarter, which we were able to overcome and then some. We do see some declines here in April as the final tax payments are being made. So April is usually a south a down month, not as dramatic as the first quarter, but there generally is some decline here in April. But there are really no other seasonality for the second quarter. We will see seasonality in the third quarter with our public units as they start collecting their summer taxes. And -- but I would say that when we think about seasonality here, it's the first part of the first quarter, first part of the second quarter and throughout the third quarter. But yes, I think where the cash ends up at the Federal Reserve is anybody's guess. Again, it's going to be driven by both sides of the balance sheet, right? What continued deposit growth we get but certainly more so on the commercial lending side, residential mortgage side, trying to grow that portfolio or at least hold it steady, I should say, going forward and the growth in the securities book, as we keep that ratio at 16%. So that's all going to work out to whatever we keep at the Fed at the end of the day. Matthew Breese: Got it. Okay. Last 1 for me. I think you had mentioned that incremental loan yields are in the high 6s, low 7s. Would love some color just on competitive conditions, both sides of balance sheet lending and deposits. And if anything is changing spread-wise? Charles Christmas: Okay. I'll take deposits and let Ray chime in on the loan side. We have -- deposit rates have been very, very quiet. I would say, all year. Obviously, we battled the credit unions, and we won't get on that setback this morning. But I think from a banking standpoint, rates have been very consistent. We don't see a lot of specials going on right now. And I would say everybody is, in my opinion, kind of everybody is behaving what they're offering out there makes sense from what they're getting on the asset side. And the stability is relatively easy to work through. Raymond Reitsma: And on the loan side, we have target spreads that we like to achieve relative to risk levels. And as we look across that continuum, there I'd say the competitive pressure there really hasn't changed for some time. It's been the normal level of competition that we've come to know and love in the banking industry. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Ray Reitsma for closing remarks. Raymond Reitsma: Thank you for your participation in today's call and for your interest in Mercantile Bank Corporation. The call has now concluded. Thank you. Operator: This concludes our conference. Thank you for attending today's presentation.
Operator: Welcome to the Quest Diagnostics First Quarter 2026 Conference Call. At the request of the company, this call is being recorded. The entire contents of this call, including the presentation and question-and-answer session that will follow are the copyrighted property of Quest Diagnostics with all rights reserved. Any redistribution, retransmission or rebroadcast of this call in any form without written consent of Quest Diagnostics is strictly prohibited. Now I'd like to turn the conference over to Dan Haemmerle, Interim Vice President of Investor Relations for Quest Diagnostics. Please go ahead. Dan Haemmerle: Thank you, and good morning. I'm joined by Jim Davis, our Chairman, Chief Executive Officer and President; and Sam Samad, our Chief Financial Officer. During this call, we may make forward-looking statements and will discuss non-GAAP measures. We provide a reconciliation of non-GAAP measures to comparable GAAP measures in the tables to our earnings press release. Actual results may differ materially from those projected. Risks and uncertainties that may affect Quest Diagnostics' future results include, but are not limited to, those described in our most recent annual report on Form 10-K and subsequently quarterly filed reports on Form 10-Q and current reports on Form 8-K. For this call, references to reported EPS refer to reported diluted EPS and references to adjusted EPS refer to adjusted diluted EPS. Growth rates associated with our long-term outlook projections, including consolidated revenue growth, revenue growth from acquisitions, organic revenue growth and adjusted earnings growth are compound annual growth rates. Now here's Jim Davis. James Davis: Thanks, Dan, and good morning, everyone. Our strong first quarter performance reflects a focused business, delivering innovative solutions that meet our customers' evolving needs for lab insights. During the first quarter, we grew revenues over 9%, almost entirely from organic revenue growth on broad-based demand for our clinical innovations, expansion into new clinical areas and collaborations with elite health care and consumer health organizations. In addition, we grew adjusted diluted earnings per share by approximately 13%, supported by productivity gains from our deployment of automation and AI across our operations both in and outside our labs. Given our strong first quarter momentum and continued strategic focus, we are raising our revenue and EPS guidance for the year. Now I'll provide more detail on how we executed our strategy across key customer channels and operations during the quarter. Quest operates at the center of health care, delivering solutions that make testing simpler and smarter for our core clinical customers, physicians and hospitals as well as customers in higher-growth areas of consumer health, life sciences and data analytics. In the physician channel, we delivered high single-digit revenue growth in the first quarter on strong demand for our clinical innovations, geographic expansion from greater health plan access and increased volume from our growing business in enterprise accounts. We are also pleased with our growth during the quarter in end-stage renal disease, a new clinical area for us, focused on lab testing for dialysis patients. In addition to volume from serving thousands of dialysis clinics operated by Fresenius Medical Care nationwide, we also added independent dialysis clinics and other providers as clients of our lab and water purity testing. In the hospital channel, we grew revenues at a double-digit rate with the majority of this growth coming from our collaborative lab solutions for Corewell Health, a leading health system in Michigan. Our Co-Lab solutions combine our scale, clinical depth and operational excellence to improve quality and cost efficiencies. Our implementation with Corewell Health is proceeding smoothly. We are also advancing our joint venture with Corewell Health with plans to open a state-of-the-art lab in Southeast Michigan next year. Hospitals value our flexible solutions that enable them to free up capital while benefiting from our expertise and innovation. Our pipeline of potential Co-Lab collaborations as well as potential outreach and independent acquisitions remain strong. In the consumer channel, we deliver solutions that empower people to own their health. Similar to recent quarters, we generated significant revenue growth during the quarter, both from questhealth.com and from our portfolio of top consumer health collaborations. Growth from questhealth.com featured robust double-digit customer repeat rates and notable demand for new solutions such as our Elite health profile and autoimmune and hormone tests. Quest is a trusted health care brand with broad reach, which enables us to drive efficient customer acquisition for questhealth.com. In addition, we are the preferred lab engine for top consumer health brands and a key part of our growth this quarter was due to consumers accessing our lab insights within the apps and wearables of our collaborators. Our customer channels are also growing as we continue to deliver advanced diagnostics in 5 key clinical areas: advanced cardiometabolic and endocrine, autoimmune, brain health, oncology and women's and reproductive health. We delivered double-digit revenue growth across several of these areas in the first quarter. I'll comment briefly on a couple of examples. In the areas of brain health, Alzheimer's disease is a progressive dementia that affects over 7 million people in the U.S. and is expected to affect nearly 13 million Americans by 2050. For several quarters, we've spoken about delivering double-digit revenue growth from our AD-Detect blood test for Alzheimer's disease, a trend that continued in the first quarter. To understand this growth, consider that until recently, clinicians typically diagnosed Alzheimer's using PET/CT scans, which are costly and inaccessible for many. While these scans are highly accurate at identifying mid- and late-stage disease, they are less sensitive at detecting Alzheimer's in early stages before major impairment has occurred. Years ago, we recognized the power of blood testing to reveal disease earlier and more affordably so more patients could benefit from the emerging therapies with potential to slow progression sooner. Today, Quest provides a range of tests under the AD-Detect brand, featuring sensitive mass spec tests for amyloid beta and ApoE, a genetic risk marker to complement p-tau217 and p-tau181. We also developed a proprietary algorithm that combines multiple biomarker results to establish Alzheimer's pathology with sensitivity and specificity of 90% or greater. At the same time, we are seeing that physicians are becoming more confident using blood test to aid diagnosis and guide pharmaceutical treatment decisions often in lieu of imaging. As blood tests are increasingly used both in primary and specialty care, we expect to remain a leading source of diagnostic innovation and insights for managing this disease. In other areas, we drove double-digit revenue growth across much of our cardiometabolic and endocrine portfolio, including for tests for Lp(a) and ApoB as well as for kidney, liver and reproductive hormones. New guidelines from the American Heart Association recommend Lp(a) and ApoB testing for the first time, underscoring the clinical value of these important biomarkers. We are also encouraged that the guidelines now recommend screening for high cholesterol at young ages as new research has found dangerous cardiovascular events are increasingly occurring in young adults. In oncology, we recently announced a research collaboration with City of Hope, a cancer and research treatment organization to study the use of our Haystack MRD test to aid recurrence monitoring and treatment decisions in clinical trial participants with solid tumor cancers across 14 U.S. sites. In addition to driving top line growth through innovation and collaborations, our focus on operational excellence aims to improve productivity as well as quality and the patient experiences. Through our Invigorate program, we expect to continue to deliver 3% in annual cost savings and productivity improvements. We have spoken in the past about our growing use of AI and automation in our labs. And while that continues to be a major focus in the first quarter, we stepped up our deployment of these technologies in several other areas. As one example, we boosted productivity by 40% in the first quarter among customer service agents that used AI to triage and route customer emails to speed responses. We are also deploying AI to make testing simpler and smarter for everyone, including our patients. Our new Quest AI Companion transforms complex biomarker data and reference ranges on test reports into clear plain language. By empowering patients with lab insights, our AI tool, which is powered by Google Gemini, can help shift the doctor-patient relationship to be focused on shared decision-making instead of data gathering, potentially improving care outcomes. Patients have engaged Quest AI Companion approximately 350,000 times since we rolled it out to users of our MyQuest app in the first quarter. Lastly, we are scaling the planning and design work for Project Nova, our multiyear initiative to transform our order-to-cash processes and systems and are on track to implement our first wave of solutions in the fall of 2027. And now Sam will provide more details on our performance and 2026 guidance. Sam? Sam Samad: Thanks, Jim. As Jim mentioned, our solid first quarter results reflect the disciplined execution of our strategy. Consolidated revenues were $2.9 billion, up 9.2% versus the prior year, and consolidated organic revenues grew by 9% in the quarter. Revenues for Diagnostic Information Services were up 9.4% compared to the prior year, reflecting strong organic growth in our physician, hospital and consumer channels. Our total volume measured by the number of requisitions increased 10.9% versus the first quarter of 2025, with organic volume up by 10.8%. Fresenius Medical Care and Corewell Health contributed approximately 7% to organic volume growth in the quarter. Our organic volume growth in the quarter was 3.8%, excluding the favorable impact from these 2 relationships. As expected, Fresenius Medical Care and Corewell Health's business mix impacted total revenue per requisition, which was down 1.3% compared to the prior year. As a reminder, the business mix from these 2 collaborations includes a greater proportion of routine tests than most of our clinical testing. Excluding this business mix impact, total revenue per requisition increased by approximately 2.5%. Unit price reimbursement was relatively flat, consistent with our expectations. Reported operating income in the first quarter was $399 million or 13.8% of revenues compared to $346 million or 13% of revenues last year. On an adjusted basis, operating income was $447 million or 15.4% of revenues compared to $406 million or 15.3% of revenues last year. This increase in operating income was primarily due to organic revenue growth and increased productivity, partially offset by the impact of wage increases and to a lesser extent, weather. Reported EPS was $2.24 in the quarter compared to $1.94 a year ago. Adjusted EPS was $2.50 versus $2.21 a year ago. Adjusted EPS grew in the first quarter versus the prior year, largely due to organic revenue growth, increased productivity and lower interest expense, partially offset by the impact of wage increases and weather. Cash from operations was $278 million in the first quarter versus $314 million in the prior year. Cash from operations was lower than a year ago due to the timing of operating receipts and disbursements and higher bonus payments in the current period versus a year ago, partially offset by an increase in operating income. Turning now to our updated full year 2026 guidance. Given the solid performance in the first quarter, we are raising our full year revenue and EPS estimates. We now expect revenues to be between $11.78 billion and $11.9 billion, a growth rate of 6.8% to 7.8%. Reported EPS to be in a range of $9.58 to $9.78 and adjusted EPS in a range of $10.63 to $10.83. Cash from operations to be approximately $1.75 billion, capital expenditures to be approximately $550 million, share count and interest expense to be consistent with 2025, and our 2026 guidance reflects the following considerations. Our revenue guide does not include any contribution from prospective M&A. Operating margin is expected to expand versus the prior year. With that, I will now turn it back to Jim. James Davis: Thanks, Sam. We are very pleased with our start to the year. More than ever, people are turning to our lab insights to illuminate their path to better health. In summary, our first quarter results reflect a strong focused business delivering innovative diagnostic solutions to meet our customers' evolving needs for lab insights. We grew the top line on broad-based demand for our clinical innovations, expansion into new clinical areas and collaborations with elite health care and consumer health organizations. We also grew the bottom line with productivity benefits from automation and AI. Given our first quarter momentum, we are raising our guidance for the full year. I'd like to thank each of my nearly 57,000 Quest colleagues for living our purpose every day, working together to create a healthier world, one life at a time. Your passion and commitment are the engine that empowers Quest to deliver diagnostic insights that improve health and transform lives. Now we'd be happy to take your questions. Operator? Operator: [Operator Instructions] our first question comes from Michael Cherny with Leerink Partners. Michael Cherny: Congrats on a nice quarter. If it's possible to unpack the organic volume dynamics a bit, clearly, that was a standout, especially against a broader macro backdrop. How should we think about the impact of mix, the impact of commercial activities on your part? And if you can, can you just reaffirm the same expected contribution from Corewell and Fresenius relative to what was embedded in your guidance to start the year? Sam Samad: Yes. Sure, Michael. This is Sam. So let me just start with some of the facts about Q1 that we talked about in the prepared remarks. Organic volume growth was 10.8% in the quarter. Total volume growth was 10.9%. So the contribution to volume from Fresenius and Corewell was about 7%. And so if you exclude those from organic volume growth, the organic volume growth, excluding those 2, was 3.8%. The revenue per requisition in total was down 1.3%. If you exclude the impact of Corewell and Fresenius, it was actually up 2.5%. So a solid revenue per requisition. If you look at the impacts within that revenue per requisition, excluding Corewell and Fresenius impact, if you look at what's driving that 2.5%, which is a really strong revenue per req, I would say test per requisition was really the key driver. We continue to see a step-up in terms of the number of tests per requisition. This is being driven by a lot of the things that we have shared over the course of last year and this year, more advanced diagnostics testing, more early detection options and screening options, our consumer business contributing to it as well. So we continue to expect that, that test per req continues to be solid and has benefited Q1 rev per req significantly. Now I think your other question was how should we think about the balance of the year. As we think about Q2 to Q4, we're looking at continued growth in terms of organic utilization. A continued impact, I would say, on revenues from Fresenius, we said it was about a $250 million impact for the year in terms of revenue growth impact from Corewell. So that's, I think, what you should be thinking about in terms of the impact of Corewell. And Fresenius would be an additional roughly, let's call it, between $80 million and $100 million on top of that. So between those 2, it's about a 3.3% increase to our revenue that's embedded in the guide. And we expect an impact on volume, I would say, somewhat consistent with what you saw in Q1, but still expect very strong utilization as we go forward and expect strong revenue per requisition, excluding the impact of those 2 businesses. And Jim had a couple of comments there. James Davis: Yes, Mike, the mix impact has really benefited our business from an organic revenue standpoint. And specifically, our commitment to consumer health and wellness and these partnerships in the wellness industry have really helped us nicely. There's really 2 things there. It's both the absolute test per req, which has a big impact, mixes us up from a test per req standpoint. And then the advanced types of tests that are being ordered on these panels from advanced cardiovascular test to autoimmune testing to hormone testing. And then the last thing, and this comes mostly from our physician channel, both neurologists and primary care physicians. As I mentioned in the script, our Alzheimer's book of testing more than doubled year-over-year. So we're really, really seeing nice lift from our Alzheimer's set of tests. All of those things together, Mike, is what's really driving this nice organic test mix. Operator: Our next question comes from Elizabeth Anderson with Evercore ISI. Elizabeth Anderson: I guess on just a couple of things on a short-term basis. Can you talk about sort of any embedded like weather and sort of flu expectations for the short term in the quarter? And then if we think about going forward for the rest of the year, can you talk about sort of any other expectations in terms of puts or takes on timing for the quarter, particularly in regards to margins on that second part of the question. James Davis: Yes. Liz, on the weather, I'll take that first, and Sam can comment on the second part. If we look at it on a year-over-year basis, it was like a $9 million revenue impact, $7 million operating income. So -- but that's on a year-over-year basis. So now we know in January, it was a rough month. We had some weather in February. But honestly, what we did see in March is that the people who canceled appointments during those bad weather events, about 70% of them made appointments and came back to Quest. So the follow-on from canceled appointments was really good. And that only comes from us e-mailing out to patients, texting patients and really trying to encourage patients to come back from missed visits. Sam Samad: Yes, and with regards to the weather, as Jim said, so we had some impact in the quarter, some negative impact year-over-year, but a good recovery in the last month of the quarter. Now I think the second part of your question, Elizabeth, was on the go forward, what should we expect? If you think about at least from a year-over-year compare, we are expecting in the second half of the year this year that we're going to have some negative weather, which we usually have. Usually in the summer, we'll have the hurricane season and some negative weather. So that's embedded in our guide expectation. And if you compare it to last year, last year was actually a very mild weather season in the summer from -- I think we virtually had no to -- very little to no hurricanes in the summer of last year. So there is some embedded expectation of some more negative weather in the next, let's call it, in the summer versus what we saw. And in terms of the cadence over the next 3 quarters, I think you should expect that similar cadence to last year to some extent with maybe more of a contribution in the first half than what you saw last year than in the second half. So I would call it just over 49% of our revenue and EPS in the first half, just over 50% in the second half. So that's kind of a cadence to think about also to give you more precision on how to think about revenue and EPS. Operator: Our next question comes from Patrick Donnelly with Citi. Patrick Donnelly: Maybe similar, Sam, on some of the moving pieces on the cost. Can you just talk about the Project Nova piece, how the investments are progressing there? Wondering if potentially higher expenses tied to some of the macro conflicts caused you to move those investments around at all. I think it was $0.25 dilution. Is that still the right way to think about it? And again, where those investments are kind of heading and when we see the fruit of those would be helpful. Sam Samad: Yes. Thanks, Patrick. So let me break down some of the impacts that you mentioned. Yes, Nova expectations are still $0.25 for the year, as we shared last quarter. In terms of the cadence of those expenses, slightly changed from my comments on the Q4 call. I think we're expecting now more of those expenses to happen in the second half of the year than in the first half of the year. We had some expenses in Q1. That's going to ramp in Q2. And I'd say we're going to see probably more than 60% of those expenses be in the second half of the year. So that's one portion in terms of just thinking about the cadence of the year. I think it goes back to also the question that Elizabeth asked. And then if you think about the macro, I mean, listen, we're impacted by, obviously, fuel costs. We have a fleet of transportation vehicles. We have a fleet of planes. We have some fuel expenses that were going to be impacted by the higher fuel costs. That, I will size it for you as somewhere in the $7 million to $10 million range, and it's embedded in our guidance. Our expectation is that fuel costs will continue to be elevated somewhere at the $4 per gallon and above. And that embedded in guidance is somewhere in the $7 million to $10 million of fuel cost that, again, will impact the next 3 quarters. So we've sized it. We've included it. It's not that significant, but it's still somewhere between $0.05 to $0.07 of EPS. Operator: Our next question comes from Ann Hynes with Mizuho Securities. Ann Hynes: Just on the organic volume front, was there anything that came in better or worse than your expectations? And maybe just on the ACA, I know the subsidies ran out in December. Did you see any meaningful impact versus what's embedded in your guidance in Q1? James Davis: We didn't, Ann, on the ACA subsidies. I think it's too early to tell. As we've said in the past as well, we can't tell 100% with every requisition, is it an ACA req or not. Not all the commercial plans code the reqs that way. But we think about 60% of our reqs, we know discrete are ACA. And so based on that, we're not seeing any impact to date. On the organic growth, it was strong across the board. I mean our hospital reference business had up 3%. It was very strong. Our Co-Lab business, obviously, with Corewell was up significantly double-digit growth. Our physician business organically was high single digits as we indicated on the call. So it's broad-based. And then obviously, the contribution from all the consumer health in both our direct channel plus our partnerships were strong, strong double-digit growth in that area. So it was pretty broad-based and across all segments that we serve. Sam Samad: And just one clarification, Ann, on the ACA to add to Jim's comments, we have built in, in our guide still the expectation that we do see a 30 basis point impact to revenues as a result of ACA disenrollments or higher subsidies. The enrollments have been good in Q1. We just need to validate that actually the enrollments lead to utilization and some people don't drop off. So we kept the assumption in our guide of 30 basis point impact. But to Jim's comment, we haven't seen really that negative impact in Q1. Operator: Our next question comes from Jack Meehan with Nephron. Jack Meehan: I wanted to ask you about PAMA. So the survey kicks off in 10 days or so. How is your prep work in terms of participating in that? And then just your latest thoughts on how you think the Medicare rates for 2027 will shake out that whole process? James Davis: Yes. Jack, so we're ready. Obviously, we submitted last time. We're going to submit this time. That's the law. And we're going to abide by the law and submit the data after May 1 of this year. I think the period is open until -- basically until the end of July. As you know, Medicare actually this year provided some guidance as to what labs need to submit. So anybody that makes more than $25,000 a year from a revenue standpoint from Medicare requisitions is supposed to submit -- that would really say there's over 2,600 hospital labs that are going to need to submit. Now whether that happens or not, we can't tell. We'll have to wait and see. CMS also came out again and said, if you don't submit, there's potential fines of upwards of $10,000 per day to those that don't submit data. Now they didn't collect those fines last time. So again, it remains to be seen. At the same time, we're going to drive the RESULTS Act as fast and furious as we can. There's a few things that still have to be completed in order for the bill to get through this year. Number one, there has to be a tech assessment done. CMS does that. That is underway. And then second is the CBO scoring. We think that process is underway as well. There's over 80 cosponsors for the bill. There was a hearing already this year in the health subcommittee of Energy and Commerce. It was a good hearing, very positive. So we're hopeful. But we're also mindful of the fact that there's summer vacations coming up and then obviously, elections. And so there's a lot to get done before the end of this year, especially with those 2 things coming up. Now in terms of rates for 2027, I think it's too early to speculate. If RESULTS Act gets done, it would keep rates as is for 2027. If the RESULTS Act does not get done, and we rely on this data collection process. If everybody submits, Jack, we're hopeful that the data will come out and show that our rates should actually go up. If you think about it this way, the last time there was a data submission, there were probably 2 companies that submitted over 80% of the data. And so the 2 companies probably -- and we're one of them and our nearest competitor is the second one, we probably have at best 17% to 20% share of the Medicare market, right? We were disproportionately lower in that portion of our business than in other segments because it's any willing provider. So when only 2 providers submit -- basically 2 providers submit 80% of the data and you have less than 20% of the market, it's obviously going to lead to a very skewed data set. So we're hopeful that the other 80% submit. We know that, that other 80% is paid 2 to 3x Medicare rates by most health plans. And you put all that together, Jack, and it should indicate a price increase. Operator: Our next question comes from Luke Sergott with Barclays. Anna Kruszenski: This is Anna Kruszenski on for Luke. We were hoping to hear more about the consumer business and how that momentum has been building with your recent partnerships. And we saw that Function Health acquired a mobile lab testing company during the quarter. So just any color on how you're thinking about that potentially impacting volumes to Quest? James Davis: Yes. So our consumer business, again, we think of it in 2 segments: our own questhealth.com, our direct-to-consumer business, that grew very nicely in the quarter, somewhere -- let's just call it somewhere between -- in the high 20s. And then all of our partnerships. We have value-added resellers that we provide lab testing to. These include 2 of the wearable companies that we've talked about in the past. And I would just say that the growth in that combined non-Quest Direct is even stronger than our own direct channel in the quarter. Yes, Function Health did acquire Getlabs. We think that's a real positive for Function Health. There's many parts of the country where even though we have 2,000 patient service centers to conduct blood draws and urine collections, there's parts of the country where we simply don't have some of the coverage, and that includes areas in the upper Midwest, the Great Plains. We also know that there's a segment of customers that would prefer a home draw. And so Function having this capability now, Getlabs will acquire the specimens, bring them to our Quest PSC or have them transported to directly and we'll continue to do that lab testing. So we think it's a positive. Sam Samad: And the one addition I'd make to Jim's comments is the growth that we're seeing from some of the collaborations that we have, the wellness companies that we're partnering with is broad-based. We're seeing a lot of growth from different players and a broad ecosystem that we're very encouraged about. Operator: Our next question comes from Eric Coldwell with Baird. Eric Coldwell: A couple of weeks ago, we had this odd day in the market where labs were getting hidden on a Friday afternoon, I think it was. And apparently, there were rumblings or rumors going around about some impact from the CMS' CRUSH RFI. I don't think that's a big deal, but I'd love you to put that in perspective and maybe talk through what you see happening in the government in terms of various fraud, waste and abuse initiatives and then your exposure to any tests that are in question and what potential impacts, positive or negative may come out of this in the future? James Davis: Yes. Thanks, Eric. And we're glad you don't think it has an impact because we don't think it does either. But just for those who may not have heard of CRUSH, it stands for Comprehensive Regulations to Uncover Suspicious Health Care. And first of all, I want to say we applaud the government's efforts to crack down on any fraud waste or abuse. So certainly applaud those efforts. The second thing I'd say is if you look at the test, first of all, it came out of an OIG report, right? There was an OIG report that looked at 2024 Medicare lab spending, and the report noted that lab spending was up 5%. And as you know, Medicare enrollees are probably flat to down. So why would it be going up 5% if pricing stayed flat across the industry. And what the report noted is that there were 10 tests that drove the majority of the increase, okay? Now 7 of those 10 tests were PLA codes, meaning they're very proprietary tests to individual laboratories, okay? We had nothing in those categories, okay? The other 3 categories were genetic or molecular-based tests. And when we look at our billing or our revenue from those tests, it was de minimis, okay? So it really, really wasn't a factor at all. So we don't put Quest in the bucket of driving that 5% increase in Medicare spend. Now the last thing I'd say about the report, and we all ought to be concerned about this. If you looked at that report, it did show that routine and wellness tests that are critical to preventative health and wellness, critical to making the country healthy again, those test categories were actually down. And what I'm talking about is basic CBC panels, CMP panels, those panels and information that really illuminate chronic care conditions, progress towards those conditions or people that aren't making progress. And those are absolutely the kinds of tests that we want to see growing across the Medicare population in order to make sure that people's chronic conditions aren't worsening and become a bigger cost and health burden to the country. So in summary, Eric, we don't think it's an issue, and thank you for asking the question. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: On consumer, I have a follow-up. I understand there's a broad range of types of partnerships that you're engaged in and the economics may vary. But can you speak to the overall margin profile outside of the Quest Direct business? And how should we think about the pipeline of future partnerships. Do you have -- are you talking with several different types of platforms from a wellness or wearable standpoint. And then a follow-up, just a broader question. You gave some interesting stats on AI and automation. And just how do we think about your targets or your goals on that front from an efficiency gain standpoint and what you can leverage from an AI use case? Sam Samad: So this is Sam. I'll take the first question around the margin profile, and then I'll hand it over to Jim, who'll talk about the pipeline and AI. I'll keep it simple. I mean the margin on these deals, both in terms of the deals and collaborations that we have, whether they're wearables collaborations, whether they're wellness companies, but also the margin profile on the questhealth.com business is on par, if not slightly better than our overall enterprise average. These are tests that are out of pocket at least on questhealth.com. And then it's a client bill business with the wellness companies that we engage with. It's all cash pay. So there's no denials. There's no patient concessions. So it's clean business in terms of just at least the complexity or the lack thereof. And it provides a really good margin profile for us. James Davis: Yes. So Erin, yes, we continue to pursue other partnerships. It's part of our goal. As we've said before, we're trying to empower people to own their own health. We want people to be the CEO of their own health care. And there's -- if we find other partnerships out there that meet our brand criteria that are in line with the mission of our company, then we'll certainly support it. And there's others out there that we continue to talk to. So we're encouraged by the growth in both our direct channel as well as the growth that we're getting through these partnerships. In terms of AI and automation, certainly, we continue, I would say, 60%, 70% of our efforts are in the 4 walls of our laboratory because that's where still opportunity exists. Anytime we see somebody looking through a microscope, we ask the question, is what you're looking at? Can we digitize that image? If you can digitize an image, you can apply algorithms to that image. And if you can apply algorithms to that image, it can assist whoever is reading that image and make a higher quality diagnosis as well as improve the productivity. So there are still plenty of areas in our laboratory where we have laboratory technicians or MDs looking at data or looking at slides or looking at pathology, and we know there's ways to automate that. We've made tremendous progress in cytology. We've made great progress in microbiology, hematology, and there's still other areas for us to go. Outside of the laboratory, as I mentioned in the script, we've deployed some tools in our call centers. Our call centers are a big part of our operations. So anything we can do to improve the productivity of the call centers as well as e-mails and text messages that come into the company, we're certainly going to drive that. The last thing I mentioned is we did put that Quest AI assistant out on our MyQuest application. This empowers people to now ask questions about the lab results that we've just provided to you. And we were pleasantly surprised by the use of that AI tool for people trying to decipher what all of these 40, 50, 60 analytes could possibly mean. We think it's a great way to educate patients so that patients can have more proactive discussions with their clinicians, and we think it's a win-win for the industry. Operator: Our next question comes from Kevin Caliendo with UBS. Kevin Caliendo: Sam, if I'm taking your comments correctly, it sounds like the north of 49% comment for one -- for the first half of the year is pretty consistent with what you said before. But then you also commented that you're pushing maybe more of the Project Nova expenses to the second half. There's some higher fuel costs that are going to be impacting the second half of the year. So within your guidance, what's the offset that makes the second half a little bit better? And then just one quick follow-up to Eric's question on CRUSH. Part of the proposal talked about prior authorizations and looking at that. And can you discuss that aspect of it, which isn't necessarily just on the molecular test, but I don't know if they're talking more broadly about how prior authorizations might be handled and if there's anything we should think about with regards to that part of the proposal? Sam Samad: Yes. Thanks, Kevin. So let me start with the second half, first half comment. I would say some of the fuel costs that I mentioned, I mean they basically start now, right? So it's not like just the second half that you have to phase those across. And again, I don't want to make too much of them because it's $7 million to $10 million of additional fuel costs. It's not that significant, but I was just giving it for completeness and to give a full view as to EPS. But they do start now, and they impact Q2 and they impact the second half. Nova steps up in the second quarter. But obviously, the first half, because it's -- because Q1 was lower in terms of Nova spend, the second half is going to be over 60% of the Nova expenses, but it does step up in the second quarter. In terms of why we see the contribution being over 50% in the second half, I mean, I think it's really primarily the margin profile across, again, those 2 partnerships, those 2 important partnerships that we have, Corewell and Fresenius, that margin profile improves in the second half, notably for Fresenius as that business ramps. I've said before that, that business a year in starts to approach the average enterprise margin. It's just the ramp up. There's some ramp-up costs that initially impact us. So I think you start to see some improvement in the margin profile of those businesses and then just the normal seasonality of the business with the strength of utilization. So that's really what I'd point to. James Davis: Yes. And then, Kevin, in terms of your questions on CRUSH, again, I'll remind you that there were 10 tests that contributed to the vast majority of the growth in the spend. 7 of those 10 tests, we have no participation in and 3 of those 10 tests, it's de minimis. So it really Quest was not a driver of those increased costs. In terms of pre-authorization, CMS did put out a request for information, a response. They asked people to comment on the CRUSH initiative. Our trade association did that. I can tell you that pre-authorization is not something we would ask for. But rather, I think what's appropriate is CMS ought to require some type of certificate of accreditation for the labs that are performing these higher complexity tests. That's a way to ensure that those labs that are producing these tests and some of these tests are absolutely necessary in health care today that you know they're being done by certified labs with good quality and a commitment to science, technology and excellence. Operator: Our next question comes from Andrew Brackmann with William Blair. Andrew Brackmann: Jim, I want to ask on the advanced diagnostics strength and all the color that you gave on that business. Can you maybe just sort of talk about any specific investments that are going to those areas in 2026 or in 2027? Just sort of anything to call out with respect to maybe specific clinical trials in some of those areas or sales team increases. I really just sort of want to get a sense of the opportunities that might exist there to maybe further accelerate that growth. James Davis: Yes. Thanks, Andrew. Yes, again, some of these advanced diagnostics tests were certainly a strong contributor to the mix that we saw in the quarter in the organic rev per req increase of 2.5% that Sam cited. But the biggest area again is brain health. As I indicated, the business more than doubled from Q1 of last year to Q1 of this year. We are committed to the space. There are other biomarkers that we are investing in and doing research on in addition to the AB 42/40, in addition to the ApoE, NFL. And then commercially, we procure the p-tau181 and 217 assays. But there's other biomarkers we're working on. We're in constant discussions with the therapy makers who are collaborating with us on looking at different biomarkers that help identify the disease at the earliest possible point. We continue to invest in advanced cardiometabolic testing in various biomarkers, one specifically in the HDL arena that goes beyond just the basic HDL test. And then obviously, I'd be remiss if I didn't talk about Haystack, we continue to invest in the space. We've made progress quarter-over-quarter. As we discussed in the script, we have a great partnership now with City of Hope, which is a leading cancer treatment detection and treatment center on the West Coast. And there's all types of clinical partnerships that we have there. We've discussed a few in the past, Rutgers and MGH. So we continue to invest in that area and continue to make progress. Sam Samad: Yes. And Andrew, maybe to add to Jim's comments, a healthy portion of our $550 million capital investment goes towards our esoteric labs to drive capacity upgrades given the growth that we're seeing in that business, in that advanced diagnostics business. So I don't want to -- I'd be remiss if I didn't mention that as well because in addition to the investments that Jim talked about, which are more on the business side that we do have a significant portion of capital investments going towards those tests as well. Operator: Our next question comes from Tycho Peterson with Jefferies. Noah Kava: This is Noah on for Tycho. I wanted to ask a few on oncology. I believe the partnership with Guardant for Shield went live 1 month ago. If you could speak to early adoption there. And then just on Haystack, what should we be expecting in terms of the phasing of EPS contribution throughout the year and kind of getting to breakeven? James Davis: Yes. Thanks, Noah. Yes, we announced a partnership to distribute -- do blood collections for the Guardant colon cancer CRC test. And so it started in the quarter. We are listing the test on our test menu so that Quest physicians can order that test and patients, regardless if it came from a Quest physician or another physician, patients can bring that requisition to a Quest PSC and we'll draw the blood and send this specimen on to Guardant's lab. I would say it's early. We just got going in the middle part of the quarter. So I can't make a comment yet on the volumes, but it's certainly starting to take hold. On the Haystack margin profile, Sam, I'll ask you to comment on that. Sam Samad: Yes. Thanks, Noah. So Haystack, listen, we're making some really good progress on the test with regards to the order experience, the commercial, both ramp in terms of resources and the uptake in terms of tests ordered. I think oncologists are starting to recognize just the impressive profile of the test with its low limits of detection. Making good progress on the reimbursement front. We have submitted to MolDX, the technical assessment to get Medicare Advantage reimbursement. We have PLA codes now that are basically priced a $3,900 baseline and an $800 monitoring reimbursed price. So we're making really good progress. It's early days to talk about EPS ramp in terms of the dilution or the improvement over the course of the year. We'll provide updates as we go. Again, it's a test, and we have many tests in our portfolio, both in terms of AD, advanced diagnostics and routine tests. So I don't want to be overly focused on just one test. But we -- obviously, it's an important business for us, and we're making good progress on it. Operator: Our next question comes from Lisa Gill with JPMorgan. Lisa Gill: I just was wondering the current M&A environment. I appreciate that there's nothing in your guidance for '26. But are you seeing anything different? Are you seeing any incremental opportunities in the market? I heard your comments earlier around hospitals and their need to submit their rates. Is that changing any of their views around the potential for reimbursement cuts for Medicare going forward? So just anything on an update on the M&A side would be helpful. James Davis: Yes. Thanks, Lisa. The M&A funnel is good. We have a mix of various health system outreach types of deals that are there. And there's not a ton, as you know, of remaining independent labs across the country, but there's still some out there, and we still take a look and sometimes they proactively come to us. I don't think that the Medicare reimbursement changes are affecting a hospital's view of their outreach business. You got to remember, in general, Medicare is our best payer here at Quest Diagnostics. And in general, it's the worst payer for a health system. So if the worst payer goes down a little bit in pricing, I don't think that affects your viewpoint on outreach. What I do think affects their viewpoint on outreach is the commercial view of the lab market in the lab industry. And I think you got a lot of really smart health plans that are starting to wake up and say, "Hey, why am I paying these health system labs 200% to 300% of what we pay 2 of the leading independents across the country." And furthermore, that 200% to 300% price premium that they get, it affects patients. It affects co-pays. It affects co-deductibles. It affects employers who are paying for this health care. And so there's nothing easier to get a quick hit, a quick win from an employer standpoint, from a patient standpoint is to normalize these rates. And we strongly advocate that health plans ought to pay all labs the same amount of money for outreach work. It doesn't do anyone any good to penalize patients and penalize employers who are paying for the majority of the health care cost in this country to reimburse some labs 200% to 300% of what the 2 leading independents are getting paid. Operator: And our last question comes from David Westenberg with Piper Sandler. David Westenberg: So I wanted to talk about the convergence of multiple factors, AI, wearables, consumer-initiated testing. Just given the fact that these AI wearables, et cetera, and consummation tested gamify longitudinal testing, it seems like there would be an increase in longitudinal testing. So am I thinking about this the right way? And how should we think about test per patient right now and where it could go in the next 5 to 10 years? Are you monitoring test per patient right now? And is it trending indeed the right way? And maybe one of the things that I might want to look at is something like are the Function Health people, for example, also doing their annual labs? And is that increasing? I mean where is the momentum going with this? James Davis: Yes. So that's a great question, David. Look, we continue to think that this convergence of consumer health, wellness, wearables and AI are going to have a profound impact on how people think about their health care going forward. I don't think the physical of today where you go see a doctor, they do a physical in the office, they order labs generally after they've done the physical and then the information flows back to the physician, back to the patient and maybe somebody calls the patient and says, here's a few things that are out of range and here's what you should do about it. I honestly think that the future, the physical of the future is going to be really before you ever see the doctor, you're going to download your wearable information. You're going to get your lab work done ahead of time. And all that information is going to be fed into an AI engine and it's going to provide you the patient with a report. It's going to provide the physician with a report. And then when you actually go and see the physician, the physical exam itself is informed by all of that information. And then it becomes more of a discussion between you and the physician on the things that you really need to work on from a biometric standpoint, sleep, diet, heart rate variability, blood pressure, stress, the things that you really need to work on to improve your biomarkers. This linkage between biomarkers and biometrics is so incredibly important. Just this past March, I believe it was March 13, there was a really interesting article written in Nature, some work that Google Health did. It was a study between us, Google Health and Fitbit that really highlighted the linkage between biometrics and biomarkers and the use of artificial intelligence to actually calculate some of these biomarkers in between lab tests. So what we're actually seeing is, I think, this trend that you check your biomarkers, combine it with your wearable data, combine it with artificial intelligence, it's just making people more and more conscious of their -- of what's going on inside their body. And then I think as you indicated, we're likely to see an increased trend of consumers continuing to test certain biomarkers to check to make sure that the things that they're working on, the things they're trying to optimize are actually improving. Okay. Operator, I think that wraps up today's call. I want to thank everyone for joining our call today. We certainly appreciate your continued support. Have a great day, everyone, and good health to all of you. Operator: Thank you for participating in the Quest Diagnostics First Quarter 2026 Conference Call. A transcript of prepared remarks on this call will be posted later today on Quest Diagnostics website at www.questdiagnostics.com. A replay of the call may be accessed online at www.questdiagnostics.com/investor or by phone at (866) 388-5361 for domestic callers or (203) 369-0416 for international callers. Telephone replays will be available from approximately 10:30 a.m. Eastern Time on April 21, 2026, until midnight Eastern Time, May 5, 2026. Goodbye.
Operator: Greetings and welcome to NETSTREIT Corp. First Quarter 2026 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, as a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Miller. Thank you. You may begin. Good morning, and thank you for joining us for NETSTREIT Corp.’s First Quarter 2026 Earnings Conference Call. Matt Miller: On today's call, management's remarks and responses to your questions may contain statements considered forward-looking under federal securities law. These statements address matters subject to risks and uncertainties that may cause actual results to differ from those discussed today. For more information on these factors, we encourage you to review our latest Form 10-K and other SEC filings. All forward-looking statements are made as of today's date and NETSTREIT Corp. assumes no obligation to update them in the future. In addition, certain financial information presented on this call includes non-GAAP financial measures. Please refer to our earnings release and supplemental package for definitions, reconciliations to the most comparable GAAP measures, and an explanation of their usefulness to investors. These materials can be found in the Investor Relations section of the company's website at netstreet.com. Today's call is hosted by NETSTREIT Corp. CEO, Mark Manheimer, and CFO, Daniel Donlan. They will make some prepared remarks followed by a Q&A session. With that, I will turn the call over to Mark. Mark Manheimer: Thank you, Matt, and good morning, everyone. Thank you for joining us today to discuss NETSTREIT Corp.’s first quarter 2026 results. I want to begin by thanking our entire team for their outstanding execution, and we carried strong momentum from our record 2025 into the new year, and the organization has hit the ground running. In the first quarter, we saw continued acceleration on the investment front. We closed on $239 million of gross investment activity, driven by well-priced opportunities in our core necessity and service-based sectors including grocery, convenience store, quick service restaurants, auto service, and other essential retail. These investments were completed at an attractive blended cash yield of 7.5% and a weighted average lease term of 14.1 years. Complementing this, we executed targeted dispositions that further enhanced portfolio quality, reduced tenant concentrations, and recycled capital into higher quality, longer duration opportunities. This robust start to the year reflects the depth of our sourcing platform and our team's ability to move quickly across a number of smaller transactions while still adhering to our stringent underwriting criteria. While there have been a few new participants enter the net lease business in recent years—something that has happened in each and every cycle—the market remains extremely fragmented and rife with attractive opportunities. Turning to the portfolio, we ended the quarter with 804 properties, leased to 138 tenants across 28 industries and 46 states. Our weighted average remaining lease term increased to 10.2 years while the percentage of investment grade and investment grade profile tenants remained flat at 58.3% of ABR. Unit-level rent coverage across the portfolio remains healthy, and ticked up slightly to 3.9x. Occupancy remained at 99.9%, but subsequent to quarter end, our occupancy has returned to 100%. In early April, we backfilled our lone vacancy, a former Big Lots location, with a rated TJ Maxx at a more than 20% increase in rent. While vacancies have been extraordinarily rare in our portfolio, this execution highlights the expertise of our real estate underwriting and asset management teams. On the balance sheet, we continue to maintain a conservative and flexible capital structure. Following the capital raising completed in the quarter, our leverage was an industry-leading 3.2x. With substantial liquidity under our revolving credit facility, and the benefit of previously raised forward equity, we are well positioned to fund accelerated growth without compromising our leverage targets. Given the capital raise during the quarter as well as the strong momentum in our investment pipeline and attractive opportunities we are seeing, we are increasing our full-year 2026 net investment activity to a range of $550 million to $650 million. We are increasing the bottom end of our AFFO per share guidance range to $1.36 to $1.39. In summary, the first quarter represented an excellent start to 2026, highlighted by strong momentum on the acquisitions front and opportunistic capital raising, which largely takes care of our 2026 equity needs. Our differentiated strategy—focused on high quality real estate, rigorous underwriting, proactive portfolio management, and a low leverage balance sheet—continues to position NETSTREIT Corp. for sustainable long-term growth and value creation. With that, I will turn the call over to Dan to review the first quarter financial results in greater detail. We will then be happy to take your questions. Daniel Donlan: Thank you, Mark. Looking at our first quarter earnings, we reported net income of $5.7 million or $0.06 per diluted share. Core FFO for the quarter was $32 million or $0.32 per diluted share, and AFFO was $33.2 million or $0.34 per diluted share, which was a 6.3% increase over last year. Turning to the expense front, our total recurring G&A in the quarter increased 9.7% year-over-year to $5.8 million, which is mostly the result of increased staffing and further investment in our team. That said, with our total recurring G&A representing 10% of total revenues this quarter, versus 11% in the prior-year quarter, our G&A continues to rationalize relative to our revenue base. Turning to the capital markets, we completed a 12.6 million share forward equity offering in early February, which raised $230.3 million of net proceeds. This was supplemented by our ATM activity of 4 million shares or $73.8 million of net proceeds. In total, we sold 16.6 million forward shares or $304.1 million of net proceeds in the quarter, which puts us in an excellent position to fund our forecasted net investment activity this year. Turning to the balance sheet, our adjusted net debt, which includes the impact of all forward equity, was $629 million. Our weighted average debt maturity is 3.8 years, and our weighted average interest rate was 4.27%. Including the extension options, which can be exercised at our discretion, we have no material debt maturing until February 2028. In addition, our total liquidity was $1.1 billion at quarter end, consisting of approximately $11 million of cash on hand, $412 million available on our revolving credit facility, $606 million of unsettled forward equity, and $100 million of undrawn term loan capacity. From a leverage perspective, our adjusted net debt to annualized adjusted EBITDAre was 3.2x at quarter end, which remains comfortably below our target leverage range of 4.5x to 5.5x. Moving on to 2026 guidance, we are increasing the low end of our AFFO per share guidance to a new range of $1.36 to $1.39 and increasing our net investment activity guidance to $550 million to $650 million. We continue to expect cash G&A to range between $16 million and $17 million. In addition, the company's AFFO per share guidance range now includes $0.03 to $0.06 of estimated dilution due to the impact of the company's outstanding forward equity, calculated in accordance with the treasury stock method. Lastly, on April 16, 2026, the board declared a quarterly cash dividend of $0.22 per share. The dividend will be payable on June 15, 2026 to shareholders of record as of June 1, 2026. With that, operator, we will now open the line for questions. Operator: Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Haendel St. Juste with Mizuho. Please proceed with your question. Haendel St. Juste: Hey, good morning and congrats on a strong quarter here. It seems like things are clicking on all cylinders here. I was curious about the level of activity in the first quarter. It was close to a record quarter for you. If you think about what that implies for the rest of the year, it seems there is a pretty meaningful slowdown in activity. So maybe some color on what you saw in the first quarter that drove such robust activity and what you are seeing in the pipeline, and maybe expectations near term, given what the new guide implies for activity going forward. Thanks. Mark Manheimer: Thanks, Haendel. It was a very strong quarter, similar to the fourth quarter that we just had. We are seeing very attractively priced opportunities that fit our investment criteria, which I think is a credit to the acquisitions team and the underwriting team. We are getting all that through the system pretty quickly. We are seeing a very similar environment right now. Pricing, we expect to remain relatively the same, give or take 10 basis points. We just want to be conservative with what is going to happen in the back half of the year. We certainly feel very comfortable that we can sustain this level of acquisitions, but we want to make sure that we are out ahead of our capital needs. Haendel St. Juste: That is helpful. Anything more on the competitive side that you can share? There has been lots of geopolitical and macro volatility. Are you seeing some of the private equity players step back a bit here? Your ability to win your fair share of deals seems to not face any headwinds. How are you thinking about the competitive set and whether the landscape near term will be more of the same or perhaps change in the level of volume or competition given what we are seeing in the macro? Thanks. Mark Manheimer: I think it is a credit to the net lease space that there are more people looking to get in. There are a few that have been pretty active. We are not really running into them very often on a one-off basis. Competition has been in the space for a long period of time. If you go back to post financial crisis, you had Cole and ARC and the non-traded deploying a ton of capital—even more than what we are seeing from the private equity world—and there were still plenty of opportunities for the publicly traded REITs that had a reasonable cost of capital to go out and compete. I would not expect that to change. They may look to acquire more than what they have done in the past, but I do not think that is going to have a huge impact on pricing and our opportunity set. Haendel St. Juste: That is great. Thank you, and congrats again. Operator: Our next question is from John Kilichowski with Wells Fargo. Your line is now live. John Kilichowski: Good morning. Thank you. My first question is on the treasury stock method dilution in the quarter. Could you tell us what your expectations are—what is included at the midpoint in terms of expectation of price versus the low end and the high end? Daniel Donlan: I do not want to go too much into detail. We are expecting $0.03 to $0.06. At the midpoint, call it 4.5. I think we have been fairly conservative on the high end, probably assuming even more than kind of 4.5. Our expectation is that we will drift somewhere into the low $20s and stay there. To the degree that does not happen, that would probably be upside relative to what we provided. We kind of stair-step up the price per share from where we ended the quarter each and every quarter this year. There is a healthy amount of conservatism baked into the high end, just from a dilution standpoint. John Kilichowski: Thanks, Dan. And then maybe a follow-up: what is your strategy to manage those forwards? You have some older dated outstanding forward. Does your strategy for managing those change based on the stock price? And how does this impact your growth profile heading into 2027 as you get rid of these and maybe have a faster churn of your forwards into new investments? Daniel Donlan: The dates really do not matter to us. What matters is what are the lowest price forwards that we have. There is a 12-month expiration to these. We have not had an issue extending those. It is really just taking the lowest price forwards and settling those first because those are the most dilutive. As far as our plan for this year, we would like to get done with everything that is still outstanding that we sold in 2024 and 2025. You should expect that to occur ratably over the course of the year. Mark Manheimer: And you hit on something important there too, John. Looking to 2027, we are taking some of that dilution now that just makes it more accretive when we actually do take down the shares and really allows us to have better growth in 2027 and future years. John Kilichowski: Very helpful. Thank you. Our next question comes from Greg McGinniss with Scotiabank. Your line is now live. Greg McGinniss: Hey, good morning. With the G&A guidance maintained, plenty of liquidity, and a good acquisition market, is there any push or need in your mind to increase the size of the acquisitions team given the success they have had and the potential for more going forward? Mark Manheimer: That is a good question. Right now, the acquisitions team is really humming and bringing in a ton of attractive opportunities. The filter has been pricing and where we are getting the best risk-adjusted returns. I do not necessarily think adding more team members automatically translates into a lot more volume, but we are always making sure that we have a deep enough bench. The team gets along great, fits very well with our culture, and is bringing in plenty of opportunities for us to hit our growth goals and beyond. Greg McGinniss: And then on the disposition side, a healthy 6.6% cash yield on those. Anything specific there that you can talk about or the types of tenants or assets that you either sold in Q1 or that you are looking to sell later this year? Mark Manheimer: The difference between this year and last year is you are going to see fewer dispositions. We are always open to selling any asset in the portfolio if someone is willing to pay us an aggressive cap rate, but it is going to center less on tenant concentrations—although you will see a couple here and there with some pharmacies and maybe a couple of dollar stores—and more on where we are seeing potential deterioration, whether corporate credit or unit-level performance. We like to get well out ahead of that. We have been successful doing that, getting ahead of some risks well before they start reaching headlines and become more difficult to sell, which is why our credit loss stats are what they are. Michael Goldsmith: Good morning. Thanks for taking my questions. Investment volume was robust in the first quarter. You took up the acquisition guidance materially and you have the prefunding. What are the factors that would limit your acquisitions going forward? The fourth quarter was strong, first quarter was equally strong. Should we expect you to continue to step on the gas, or what would hold you back? Mark Manheimer: We have visibility 60 to 90 days out. Beyond that, it is hard to predict—not only what the opportunity set looks like, but also the acquisition environment and pricing. With the war going on and a lot of geopolitical [inaudible], we did not want to get too far over our skis. It is something we are likely to revisit. If the market remains the same and our cost of capital remains the same, there is no reason why we cannot keep this clip going forward for several quarters. Michael Goldsmith: As a follow-up, you were able to continue to acquire quite a bit but at a similar cap rate. You mentioned you were happy with the opportunities and the risk/reward. Can you talk about the pricing environment and what would need to happen for it to change and turn less favorable? Mark Manheimer: The number one thing that could make it less favorable also has an offset where our debt would get cheaper. If interest rates come down, you may see cap rates come down along with it. I do not foresee a slowdown in the opportunity set. Go back to 2021, when the five-year was under 1% until the end of the year. That allowed a lot of small family offices to enter the space and put five-year debt on acquisitions. That is coming due at higher interest rates. We are starting to see some of those groups that maybe do not want to refinance looking to sell smaller portfolios. I think that continues through the rest of the year because that really cheap debt through 2021 with five years gets you through 2026 and into 2027. Hard to predict a slowdown in the opportunity set. Interest rates can drive some cap rates down, but we do not really see that happening too much in the short term. Michael Goldsmith: Thank you very much. Good luck in the second quarter. Matt Miller: Thanks, Michael. Operator: Our next question comes from Jay Kornreich with Cantor Fitzgerald. Your line is now live. Jay Kornreich: Hi, thanks. Good morning. I wanted to ask about tenant credit and the watch list. Recognizing it has only been a couple of months since last quarter’s earnings, have there been any changes to the watch list or how you are thinking about bad debt baked into guidance? Mark Manheimer: We do not see much of a change. If you look at the histograms that we provide in the investor presentation on slide 13, you have seen some improvement across the board with unit-level performance as well as corporate performance improving a little bit. We have a few assets under 1x coverage—believe there are three assets that fit that category—and three or four that are CCC+ on an implied rating basis. Those are ones we are paying attention to, but in each situation we feel like we will have a pretty good outcome. I do not see much impacting AFFO for the next several years. Jay Kornreich: Thanks for that. And then on the dilution from the treasury stock method accounting, should we expect that number to come down throughout the year as you settle forward equity, or as you employ future capital markets activity is that $0.04 to $0.05 range more of a sticky number to expect going forward? Daniel Donlan: It is difficult to answer because I do not know where the stock price is going to go. You should expect us to model the stock price rising throughout the year. Even though you are settling more shares and therefore there would be less dilution from those shares, the dilution stays about even because the stock price is going higher throughout the year. That is how you should think about it. It is certainly going to be higher than what it was in the first quarter. Our average stock price in the quarter was $19.26. As we sit here today, it has been in the $19s and $20s. The midpoint assumes you are staying around the $20 to $21 level, and that probably equates to anywhere from 4 to 5 million shares every quarter until you get out to next year. Jay Kornreich: Okay. That is helpful. Thank you. Operator: Our next question comes from Smedes Rose with Citi. Your line is now live. Smedes Rose: Hi, thanks. I wanted to ask more about what you are seeing in the opportunity set. It looked like you leaned into convenience stores a little more in the quarter. You have talked in the past about QSRs and maybe some more fitness. Where do those line up on your interest level right now and any pricing changes around those categories? Mark Manheimer: We did buy more convenience stores in the quarter. That is probably not going to be the case as much in the second quarter. What we will be buying will be a little more diversified than what we typically have bought. In the first quarter, just under half of what we bought were sale-leasebacks, and a lot of that were convenience store operators—more regional operators buying smaller operators. That is our favorite type of sale-leaseback because you typically see fixed charge coverage go up after those acquisitions. Those were attractive opportunities. Right now, we are seeing a more diversified pool of assets that we have under contract and are looking forward to adding to the portfolio. The convenience store space is certainly one that we like. The fitness business is another one that we like as long as we are dealing with more sophisticated operators that provide unit-level coverage and we get comfortable they have enough members at those locations to generate strong rent coverage. We sourced a decent amount of those in the fourth and first quarters, maybe a little less so in the second quarter. Quick service restaurants is always an area that we like; sometimes the pricing can get pretty aggressive there, so it can be tricky, but we did buy a handful of Starbucks in the quarter that were really strong on Placer and are doing very well. Each quarter is a little different, but I would expect the second quarter to be a bit more diversified. Smedes Rose: We noticed that Family Dollar was upgraded to an investment grade profile from sub-investment grade. What drove that? Mark Manheimer: It was really that they were willing to allow us to put that out there. They are a private company now, and we are subject to NDAs. We cannot share everyone’s financial statements and condition. We got them to agree to allow us to disclose that. They have always been investment grade profile ever since they spun out, but now we are able to share that with the public. Operator: Our next question comes from Wes Golladay with Baird. Your line is now live. Wes Golladay: Good morning, everyone. I have a few housekeeping questions. For the TJ Maxx lease that you signed, has that tenant commenced paying rent as of this moment? Mark Manheimer: They have not. They have some work they need to do within the store. It is a relocation store for them, and we have about a year before they actually start paying rent. Wes Golladay: Okay. And we noticed a few loans were extended, but just for a very short period. Can you give us an idea of what is going on and the visibility on them being repaid? Mark Manheimer: You are probably specifically talking about Speedway. That is an ongoing negotiation where that will get extended much further. We may end up acquiring some of the assets—TBD a little bit—but it should have a very positive outcome for us. Wes Golladay: Thank you very much. Operator: Our next question comes from Eric Borden with BMO Capital Markets. Your line is now live. Eric Borden: Hey, thanks. Good morning. You continue to lean into IG profile and non-IG investments. They tend to have better escalators than true IG. Do you have an internal growth target for these assets? How should we think about longer-term internal growth for the overall portfolio? Mark Manheimer: You are right. We try to negotiate better escalators any time we can, and you have a little more leverage when you are doing a sale-leaseback and writing the lease. A lot of the sub-investment grade or IGP opportunities we are doing are in those categories. We try to get 2% annual; that is what we shoot for. On a blended basis, for future acquisitions we are probably going to be more in the 1% to 1.25% range, and that will continue to bring up our average escalators in the portfolio. Eric Borden: Great. Could you quantify what is assumed in guidance for bad debt? Daniel Donlan: At the midpoint, we are looking around 50 basis points. Eric Borden: Alright. Great. Thank you. Operator: Our next question comes from Michael Gorman with BTIG. Your line is now live. Michael Gorman: Thanks. Good morning. If we could go back to the forward equity for a minute. You have been pretty strong and opportunistic there. With more than $600 million outstanding, that, back of the envelope, is about 18 months’ worth of acquisition volume at a conservative leverage level. What is the target runway you want to keep? Is it that 18-month target, or how should we think about that? Daniel Donlan: Our leverage range is 4.5x to 5.5x—that is where we feel comfortable running the balance sheet. We could complete the $650 million at the high end of our guidance and still be at 4.5x. We will be opportunistic with the ATM where it makes sense. To the degree we continue to see opportunities at the same clip we saw in the first quarter, you should expect us to access that market when appropriate. Your assessment of the runway is fair, but we want to stay on our front foot and make sure we are never in a position where we have to raise. Michael Gorman: That is helpful. And then, Mark, thinking about the loan book again. With some of the volatility in the private credit space, are you seeing more opportunities on the loan side to expand that? If so, how are you thinking about that in the investment pipeline? Mark Manheimer: The answer is no. We are looking at providing developers with capital and some acquisition capital here and there for some people like we did on Speedway. We are not lending directly to tenants; we will likely avoid that. I do not expect private credit volatility to impact what we are doing. The opportunity set on the loan side is probably not as good as it was a couple of years ago, so I would expect us to do fewer loans on a go-forward basis. Michael Gorman: That is very helpful. Lastly, on C-stores—important exposure and a space you like, but evolving. 7-Eleven announced about 650 closures last week. Can you remind us how you think about underwriting the space, both existing and new—KPIs, formats, how you think about the sector? Mark Manheimer: The 7-Eleven news reflects that they are a very old company with a lot of older, smaller stores they are doing away with. We do not own any of those. We are constantly looking at a few factors: gallonage—whether it is going up or down—and inside sales. Those are two separate revenue drivers. We want to be sure they are getting enough volume and margins are staying the same. We are seeing consistent performance across our C-store operators, with gallonage up a little. Three years ago, we had 21 7-Elevens; now we have 13, because we are constantly evaluating which ones are doing well. The ones that are not will not stay in our portfolio until the end of the lease. Our weighted average lease term on our 7-Elevens is about 9.5 years, none below 8.5 years, so we have time to deal with that. Our locations are generating positive cash flow and are not related to the recent 7-Eleven news. There is a move toward larger formats across the board, but fundamentals have not changed: strong inside sales, strong gallonage, and the ability to push price without margin squeeze. If you can do that, you will be successful for a long time in the convenience store space. Michael Gorman: Great. Thank you for the time. Operator: Our next question is from Linda Tsai with Jefferies. Your line is now live. Linda Tsai: Given more volatility year-to-date in the 10-year, looking across your key tenant categories—C-stores, grocers, home improvement, dollar stores—have you seen cap rates shift more so in any of these categories? Mark Manheimer: They have been pretty consistent. We really have not seen much change. We have been at 7.5% for ongoing cap rate with a very similar mix of tenants. The tenant mix will probably change a little and be more diversified in the second quarter, but I would expect very similar pricing. We have not really seen much movement across the board. Linda Tsai: Thanks. A big picture question: your AFFO per share CAGR has been high single-digit since 2021. How do you think about the CAGR over the next several years? Daniel Donlan: We would like to maintain that level. This year at the high end, it is 5.3% year-over-year growth, and I think consensus assumes even higher growth next year. To the degree that we can maintain spreads where they are today, in the roughly 190 basis points range, I certainly think we can be north of where we are this year. It remains to be seen where the stock price and debt go. One thing I feel confident in is our team's ability to underwrite assets and get them into the portfolio expeditiously. If the cost of capital is there, the runway to compound earnings is there for sure. Operator: Our next question comes from Analyst with Bank of America. Your line is now live. Analyst: Thank you. Good morning, and congrats on the strong start to the year. There are lots of questions on C-stores, but could you remind us how you are thinking about the grocery category now that it is above 15%, and could we see further growth there? Mark Manheimer: We have seen a lot of great opportunities in grocery with strong performing stores, great credit, and good lease terms. We expect that to continue. There is not as much in the second quarter, so it is a little difficult to predict. I do not think we would let anything get to 20%. Fifteen percent is nudging up against where we are comfortable. We do not want to let things get too far above that. If there is a great opportunity, we do not want to be precluded from moving forward, but I would expect the 15% to 16% range to be pretty consistent for grocery. The same can be said for convenience stores. Analyst: Thank you. And an update on development projects: it is currently a small part of the business with four underway. Can you remind us of yields there? Would you be willing to increase exposure to development if that is what some retailers prefer? Mark Manheimer: If retailers prefer that route and that is the best way to get the best risk-adjusted returns, we would be more aggressive. Right now, we feel like we are picking up about 25 basis points, and it happens to be tenants we really want in the portfolio. You are not getting paid enough for the risk, in our minds, to get really aggressive on developments right now. If you were picking up 50, 75, 100 basis points, it would be more interesting. Pricing just is not there. People are willing to pay up in single-tenant net lease retail for the most part. The development projects are pretty short, so they do not demand much of a premium. We are able to get similar opportunities outside development and put them on the balance sheet right away, which is what we are looking to do. We have had quarters where almost half of what we did was development; now it is about 10%. If that needs to change, our acquisitions team can move quickly to add those, but we do not see that happening anytime soon. Operator: Our next question comes from Upal Rana with KeyBanc Capital Markets. Your line is now live. Upal Rana: Thank you. Mark, appreciate the color you have already provided on investment pace for the rest of the year. Given we are almost through April and you probably have a good sense on May as well, what is your sense on the pace of investments for 2Q? Mark Manheimer: Second quarter looks strong. I do not think you are going to see too much difference in the second quarter. We will see what closes. We are looking at some opportunities we have under our control that may close in June or in July. We are getting closer to being done with sourcing for the quarter. We like the pipeline, the quality, and the pricing. At least for the second quarter, expect a pretty similar quarter to the first. Upal Rana: Great. That was helpful. And just overall on dispositions for the quarter—and you have talked about this previously—is this a pace that we should be expecting for the remainder of the year as well? Mark Manheimer: I think so. Every now and then, an opportunity comes where someone wants to pay something aggressive or take some risk off your hands. If that were to happen, we would certainly move quickly. In general, you may see a quarter here or there that is a little heavier or lighter, but you can expect a pretty similar pace. Operator: Our next question comes from Daniel Guglielmo from Capital One Securities. Your line is now live. Daniel Guglielmo: Hi, everyone. Thank you for taking my questions. Following up on the escalator question from earlier, as the portfolio mix starts to move from larger tenants to adding some smaller growthier tenants, are there differences in how you manage a smaller tenant that may be less visible to the public versus a large tenant that is a public filer and very visible? Mark Manheimer: I do not think there is much difference in how we manage it. We do not want to let any concentrations get very high with some of the public tenants, because you submit yourself to some headline risk that is not real risk as it relates to our portfolio. We are doing the same things across the board: tracking corporate financial performance, foot traffic, and unit-level performance. We want to be proactive, not reactive, on asset management when we start to see potential issues. If we continue to do that over time, you will continue to see very low credit loss stats. Daniel Guglielmo: Appreciate that. With private credit seemingly less available this year than last, are you seeing more smaller operators search for capital funding elsewhere, like via sale-leaseback? Or is it too early to see that flow through to your transaction market? Mark Manheimer: We have not seen that. I would be surprised if we see a ton of it. The private credit guys were not only focused on retail; they were lending to software companies and a lot of different industries that are less real estate heavy. I do not think it will have a huge impact one way or the other, and we have not seen any impact to date. Operator: We have reached the end of the question and answer session. I would now like to turn the call back over to Mark Manheimer for closing comments. Mark Manheimer: Thank you all for joining us this morning. Good luck the rest of the earnings season, and we look forward to seeing you at upcoming conferences. We appreciate the time. Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Operator: Good morning, and welcome to Forestar Group Inc.’s second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow. If you wish to ask a question during today’s Q&A session, please press [instructions omitted]. Please note this conference is being recorded. I will now turn the call over to Chris Hibbetts, Vice President of Finance and Investor Relations for Forestar Group Inc. Chris Hibbetts: Thank you, Paul. Good morning. And welcome to our call to discuss Forestar Group Inc.’s second quarter results. Before we get started, I want to remind everyone that today’s call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Although Forestar Group Inc. believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. All forward-looking statements are based upon information available to Forestar Group Inc. on the date of this conference call, and we do not undertake any obligation to update or revise any forward-looking statements publicly. Additional information about factors that could lead to material changes in performance is contained in Forestar Group Inc.’s Annual Report on Form 10-K and its most recent Quarterly Report on Form 10-Q, both of which are filed with the Securities and Exchange Commission. Our earnings release is on our website at investor.forestar.com, and we plan to file our 10-Q later this week. After this call, we will post an updated investor presentation to our Investor Relations site under Events and Presentations for your reference. I will now turn the call over to Andy Oxley, our President and CEO. Andy Oxley: Thanks, Chris. Good morning, everyone. I am also joined on the call today by Jim Allen, our Chief Financial Officer, and Mark Walker, our Chief Operating Officer. The Forestar Group Inc. team achieved solid second quarter results, generating revenues of $374.3 million, a 7% increase from the prior-year quarter, on 2,938 lots sold. Our pre-tax income increased 8% from the prior-year quarter to $43.9 million. Our book value per share increased 10% from a year ago to $35.66, and our contracted backlog remains strong with visibility towards $2.2 billion of future revenue. Persistent affordability constraints and cautious consumer sentiment continue to impact the pace of new home sales. In response, we are managing our inventory investments with discipline and flexibility, which allowed us to end the quarter with more than $1 billion of liquidity. We remain focused on turning our inventory, maximizing returns, and consolidating market share in the highly fragmented lot development industry. Our unique combination of financial strength, operating expertise, and a diverse national footprint enables us to consistently provide essential finished lots to homebuilders and navigate current market conditions effectively. We will now discuss our second quarter financial results in more detail. Jim. Jim Allen: Thank you, Andy. In the second quarter, net income attributable to Forestar Group Inc. increased 2% to $32.1 million, or $0.63 per diluted share, compared to $31.6 million, or $0.62 per diluted share, in the prior-year quarter. Our pre-tax income increased 8% to $43.9 million, compared to $40.7 million in the second quarter of last year, and our pre-tax profit margin this quarter was 11.7% versus 11.6% in the prior-year quarter. Revenues for the second quarter increased 7% to $374.3 million, compared to $351.0 million in the prior-year quarter. The current quarter includes $42.9 million in tract sales and other revenue, which was primarily from sales of residential and commercial tracts and, to a lesser extent, the sale of a multifamily site. Mark. Mark Walker: We sold 2,938 lots in the quarter, with an average sales price of $112,800. We expect continued quarterly fluctuations in our average sales price based on the geographic and lot-size mix of our deliveries. Our gross profit margin for the quarter was 21.4%, compared to 22.6% for the same quarter last year. The current quarter margin includes $6.3 million of planned option charges related to deposits and pre-acquisition cost write-offs, compared to $0.9 million in the prior-year quarter. Excluding the effect of the net change in write-offs, our current quarter gross margin would have been approximately 22.9%. Chris. Chris Hibbetts: In the second quarter, SG&A expense declined 1% to $37.9 million, or 10.1% as a percentage of revenues, compared to $38.4 million, or 10.9%, in the prior-year quarter. Our headcount decreased 8% from a year ago as we remain focused on efficiently managing SG&A while maintaining our strong operational teams across our national footprint. To support future growth, we expect our headcount to remain relatively flat for the remainder of the year. Jim. Jim Allen: D.R. Horton is our largest and most important customer. Fourteen percent of the homes D.R. Horton started in the past twelve months were on a Forestar Group Inc.-developed lot, with a mutually stated goal of one out of every three homes D.R. Horton sells to be on a lot developed by Forestar Group Inc. We have significant opportunity to grow our market share within D.R. Horton. We also continue to expand our relationships with other homebuilders. Seventeen percent of our second quarter deliveries, or 488 lots, were sold to other customers. We sold lots to 12 other homebuilders this quarter, including three new customers. Mark. Mark Walker: Our lot position at March 31, 2026 was 94,400 lots, of which 63,500, or 67%, were owned, and 30,900, or 33%, were controlled through purchase contracts. 9,300 of our owned lots were finished at quarter-end; the majority are under contract to sell. Consistent with our focus on capital efficiency, we target owning a three- to four-year supply of land and lots and manage development phases to deliver finished lots at the pace that matches the market. At quarter-end, 24,100, or 38%, of our owned lots were under contract to sell. $209 million of hard earnest money deposits secured these contracts, which are expected to generate approximately $2.2 billion of future revenue. Our contracted backlog is a strong indicator of our ability to continue gaining market share in the highly fragmented lot development industry. Another 29% of our owned lots are subject to a right of first offer to D.R. Horton based on executed purchase and sale agreements. Forestar Group Inc.’s underwriting criteria for new development projects remains unchanged at a minimum 15% pre-tax return on average inventory and a return of our initial cash investment within 36 months. During the second quarter, we invested approximately $279 million in land and land development. Roughly 80% of our investment was for land development and 20% was for land acquisition. Although we have moderated our land acquisition investment over the last year, our team remains disciplined, flexible, and opportunistic when pursuing new land acquisition opportunities. Our current land and lot position will allow us to return to strong volume growth in future periods. We still expect to invest approximately $1.4 billion in land acquisition and development in fiscal 2026, subject to market conditions. Jim. Jim Allen: We have significant liquidity and are using modest leverage to keep our balance sheet strong and support our growth objectives. We ended the quarter with more than $1 billion of liquidity, including an unrestricted cash balance of $362 million and $672 million of available capacity on our undrawn revolving credit facility. During the quarter, we increased the capacity of our senior unsecured revolving credit facility by $50 million. In addition, we collected $130.9 million of reimbursement related to infrastructure costs in utility and improvement districts. Total debt at March 31, 2026 was $793.5 million, with no senior note maturities in the next twelve months. Our net debt-to-capital ratio was 19.2%. We ended the quarter with $1.8 billion of stockholders’ equity, and our book value per share increased 10% from a year ago to $35.66. Forestar Group Inc.’s capital structure is one of our biggest competitive advantages, and it sets us apart from other land developers. Project-level land acquisition and development loans are less available and have become more expensive in recent years, impacting most of our competitors. Other developers generally use project-level development loans, which are typically more restrictive, at floating rates, and create administrative complexity, especially in a volatile rate environment. Our capital structure provides us with operational flexibility, while our strong liquidity positions us to take advantage of attractive opportunities as they arise. Andy, I will hand it back to you for closing remarks. Andy Oxley: Thanks, Jim. The Forestar Group Inc. team remained focused on execution in the second quarter, delivering higher revenues and profits and a stronger balance sheet. As outlined in our press release, we are updating our fiscal 2026 lot delivery guidance to 14,000 to 14,500 lots, while maintaining our revenue guidance of $1.6 billion to $1.7 billion. Our teams have a proven track record of adjusting quickly to changing market conditions. We are closely monitoring each of our markets as we strive to balance pace and price and maximize returns for each project. Our national footprint and more than 200 active projects represent a strategic advantage, providing flexibility to allocate capital based on local market conditions. While home affordability constraints and cautious homebuyers are expected to remain near-term headwinds for home demand, we are confident in the long-term demand for finished lots and our ability to gain market share in the highly fragmented lot development industry. Consistent execution of our strategic and operational plan, combined with a constrained supply of finished lots across much of our diverse national footprint, positions us well for further success. With a clear strategy, a strong team, and a solid operational and financial foundation, we are optimistic about Forestar Group Inc.’s future. Paul, at this time, we will open the line for questions. Operator: Thank you. At this time, we will be conducting a question-and-answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question today will be from Ryan Gilbert from BTIG. Ryan, your line is live. Analyst: Thanks. Hi. Good morning, guys. Was hoping you could talk a little bit more about your goals for market share in the context of the reduction that we have seen in controlled lots, I guess this quarter, but then also the last couple quarters as well? Andy Oxley: Good morning. What we have encountered is a lot of lots in the homebuilders’ portfolios that they gradually worked through in Q4 and Q1. With accelerating starts and sales in Q2, we anticipate going back to a more robust lot closing pattern in 2026. Analyst: Okay. Got it. And then I was hoping you could expand a bit on the land option charges that you incurred in the quarter. Was that concentrated in a single community or a handful of communities? Was it more widespread? And how are you thinking about that line going forward? Andy Oxley: It was in a handful of communities, but the team remains focused and disciplined on our personal land acquisitions. If a project falls outside our underwriting standards, the team works to bring that project back in line, or we simply move on from the project. As we evaluate these month to month and quarter to quarter, the team tries to work them back into the queue, but our pipeline remains very robust, so we do not have to purchase assets that do not meet our standards. Analyst: Okay. Got it. Last one for me: given the cash position and where the stock is trading, what is your appetite, or how are you thinking about share repurchases here? Jim Allen: We continue to believe that our best use of cash is investing for future growth of the business. However, maintaining strong liquidity gives us flexibility to respond to further changes in market conditions, as well as the ability to take advantage of opportunities as they arise. Analyst: Okay. Thanks very much. Operator: Thank you. Again, that will be star one on your phone at this time. The next question is coming from Trevor Allinson from Wolfe Research. Trevor, your line is live. Trevor Allinson: Hi. Good morning. Thank you for taking my questions. First question is on demand trends you have seen from other builders, other than D.R. Horton. I believe your sales to those builders were down close to 50% year-over-year, and if I recall correctly, last quarter they were up. Can you just talk about the trends there? Is that just a comp issue due to sales to a lot banker? Any color on demand from those other customers would be helpful. Andy Oxley: We are still seeing and hearing strong demand from other builders, so that remains strong. To my earlier point, the industry continues to work down inventory levels, so I think it is really based on the cadence of when those communities are coming online. Jim Allen: And to your point, last year we did have 362 lots that were sold to a lot banker, so that influenced the number from last year. Trevor Allinson: Okay. Gotcha. Makes sense. And then the next question on fuel prices, obviously moving higher across the country. Just remind us what portion of development costs fuel accounts for. Are you able to pass those along to your customers, or any concerns about gross margins as we get into the back half of this year and into early next year from higher fuel costs? Mark Walker: As of today, we are not seeing cost increases due to fuel charges, but we are closely monitoring it. Contractor availability continues to free up, which is contributing to cost and time improvements. Trevor Allinson: Okay. Got it. Thank you for all the color, and good luck moving forward. Operator: Thank you. There are no other questions at this time. I would now like to hand the call back to Andy Oxley for any closing remarks. Andy Oxley: Thank you, Paul, and thank you to everyone on the Forestar Group Inc. team for your focus and hard work. Stay disciplined, flexible, and opportunistic as we continue to consolidate market share. We appreciate everyone’s time on the call today and look forward to speaking with you again to share our third quarter results on Tuesday, July 21, 2026. Operator: Thank you. This does conclude today’s conference, and you may disconnect your lines at this time. Thank you for your participation.