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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.
Operator: Welcome to Wintrust Financial Corporation's First Quarter 2026 Earnings Conference Call. A review of the results will be made by Timothy S. Crane, President and Chief Executive Officer; David Alan Dykstra, Vice Chairman and Chief Operating Officer; and Richard B. Murphy, Vice Chairman and Chief Lending Officer. As part of their reviews, the presenters may make reference to both the earnings press release and the earnings release presentation. Following their presentations, there will be a formal question and answer session. During the course of today's call, Wintrust Financial Corporation management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Actual results could differ materially from the results anticipated or projected in any such forward-looking statements. The company's forward-looking assumptions that could cause the actual results to differ materially from the information discussed during this call are detailed in our earnings press release and in the company's most recent Form 10-K. Also, our remarks may reference certain non-GAAP financial measures. Our earnings press release and earnings release presentation include a reconciliation of each non-GAAP financial measure to the nearest comparable GAAP financial measure. As a reminder, this conference call is being recorded. I will now turn the conference call over to Timothy S. Crane. Timothy S. Crane: Good morning, and thank you for joining us for Wintrust Financial Corporation's First Quarter 2026 Earnings Call. In addition to the introductions that the operator made, I am joined by our Chief Financial Officer, David L. Stoehr, and our Chief Legal Officer, Kate Bogie. We will follow our usual format this morning. I will begin with a few highlights. David Alan Dykstra will review the financial results. Richard B. Murphy will share some thoughts on loan activity and credit quality. I will be back with some closing thoughts, including a look at expectations for the second quarter and generally for the remainder of the year. As always, we will be happy to take your questions. Before we begin, I would like to bring your attention to some changes to the presentation document that accompanies the release of our results. We have modified the design, making some updates to how we present the data based on valuable feedback we have received from many of you. We hope you find the format helpful and informative as we continue to try to provide clear information that highlights our strong market position and our disciplined operating approach. Looking at the first quarter 2026 results, I am very pleased that we delivered a fifth consecutive quarter of record net income. Overall, it was a very solid and straightforward quarter. We continue to focus on our strategic priorities: providing an exceptional customer experience, delivering disciplined and strategic growth across our businesses with a focus on prudent risk management, and investing to build upon our foundation to drive a successful future. That said, despite two fewer days in the quarter, we achieved net income of $227 million, up from $223 million last quarter and $189 million in 2025. While David Alan Dykstra and Richard B. Murphy will provide more detail, in summary, net interest income, net interest margin, and both loan and deposit growth were in line with our expectations. We delivered solid growth in noninterest income, led by our wealth management business. Expenses were well managed, and credit quality remained stable. I would highlight that all of our growth is organic. We continue to see good new customer acquisition and market momentum as our clients appreciate our differentiated approach and relentless focus on customer service. In fact, during the quarter, we were recognized once again by J.D. Power for Illinois banking services and by Coalition Greenwich with multiple awards for our commercial middle market banking services. These awards are evidence of our continued success in delivering for our clients in ways that many of our competitors cannot. Overall, a solid quarter. Let me turn it over to David. David Alan Dykstra: Great. Thanks, Tim. Let me start with the balance sheet. Specifically, deposit growth was right at $1.2 billion during the quarter, representing an 8% increase over the prior quarter on an annualized basis. This deposit growth helped to fund continued solid first quarter loan growth of approximately $1 billion, representing a 7% growth rate on an annualized basis. Yields and rates on the major balance sheet categories were slightly lower because of the recent market declines in short-term interest rates, with loan yields moving down 13 basis points in the first quarter from the prior quarter, while interest-bearing deposit costs declined 16 basis points from the prior quarter, thus resulting in a slightly improved gross spread. I would like to note that loan growth during the quarter was heavily back-end loaded; accordingly, period-end loans were approximately $1.2 billion higher than average loans for the first quarter. That is giving us a great start on achieving higher average earning assets in 2026. Turning to the income statement, this was a very solid operating quarter, producing record levels of quarterly net income. Net interest income declined slightly compared to 2025. The benefit to net interest income from an increase of $555 million in average earning asset growth and a 2 basis point increase in the net interest margin was almost enough to offset having two fewer days in the quarter. The net interest margin was 3.56% for the first quarter, and the two fewer days in the quarter positively impacted net interest margin by 2 basis points. The net interest margin has ranged from 3.50% to 3.59% during the last nine quarters, exhibiting sustainability of our net interest margin. The provision for credit losses was relatively consistent with prior quarters, remaining in the $20 million to $30 million range experienced in all the quarterly periods of 2025 as the overall credit environment or asset quality has remained stable as we enter 2026. Regarding other noninterest income and noninterest expense sections, total noninterest income amounted to $134.1 million in the first quarter, which was an increase from the $130.4 million recorded in the prior quarter. The increase was primarily a result of strong wealth management and operating lease revenues. Mortgage banking activity continued to be subdued, and production-related volumes and revenue were essentially unchanged from the prior quarter. As to the noninterest expense categories, total noninterest expenses were $382.6 million in the first quarter, which was slightly lower than the $384.5 million recorded in the prior quarter. Increases in salaries and employee benefits were primarily due to annual merit increases and were offset by lower OREO expenses, travel and entertainment, and various other small expense decreases. Overall, expenses were very well controlled. Additionally, both the quarterly net overhead ratio and efficiency ratio improved slightly relative to the prior quarter. In summary, I will reiterate this was a very solid quarter. The company accomplished good loan and deposit growth, a stable net interest margin, a record level of net income, sustained growth in tangible book value per share, and a continued low level of nonperforming assets. With that, I will conclude my comments and turn it over to Richard B. Murphy to discuss credit. Richard B. Murphy: Thanks, David. As detailed on slide 6 of the investor presentation, the solid loan growth of approximately $966 million, or 7% on an annualized basis, was broad-based. Commercial loans grew by $719 million, including growth in mortgage warehouse of approximately $286 million. Commercial real estate loans grew by $222 million. The Wintrust Life Finance team continued to build their portfolio by $103 million. Our residential mortgage group also had a very solid quarter. From a credit quality perspective, as detailed on slide 14, we continue to see strong credit performance across the portfolio. This can be seen in a number of metrics. Nonperforming loans decreased slightly from $185.8 million, or 0.35% of total loans, to $182.8 million, or 0.34% of total loans, and remain at very manageable levels. Charge-offs for the quarter were 14 basis points, down from 17 basis points in the prior quarter. We believe that the level of NPLs and charge-offs in the first quarter reflects a stable credit environment as evidenced by the chart of historical nonperforming asset levels on slide 15 and the consistent level of our special mention and substandard loans on slide 14. This quarter is another example of our commitment to identify problems early and charge them down where appropriate. Our goal, as always, is to stay ahead of any credit challenges. Turning to slide 21, I want to briefly highlight our exposure to nondepository financial institutions, which totals approximately $3.2 billion, or about 6% of our overall loan portfolio. Importantly, the majority of this exposure is in areas where we have longstanding experience and strong performance. Of our $3.2 billion exposure, approximately $1.8 billion is tied to our mortgage warehouse business, a line of business we have been in for over 30 years with deep client relationships, robust operating systems, and well-established risk management practices. In addition, about $341 million consists of capital call facilities, which are structured with strong underlying investor support and have historically demonstrated very favorable credit characteristics. The balance of the portfolio is broadly diversified across a granular group of relationships with leasing companies, captive finance companies associated with commercial borrowers, insurance carriers, and broker-dealers. Overall, we view this portfolio as well diversified and aligned with our disciplined approach to specialty finance focused on areas where we have expertise, strong structures, and a track record of consistent performance. Also, as noted in the last few earnings calls, we continue to be highly focused on our exposure to commercial real estate loans, which comprise roughly one quarter of our total loan portfolio. As detailed on slide 18, we continue to see signs of stabilization during the first quarter as CRE NPLs remained at very low levels, decreasing from 0.18% to 0.12%, and CRE charge-offs continue to remain at historically low levels. On slide 24, we continue to provide enhanced detail on our CRE office exposure. Currently, this portfolio remains steady at $1.7 billion, or 11.7% of our total CRE portfolio and only 3.1% of our total loan portfolio. We monitor this portfolio very closely, and we will continue to perform deep-dive analysis on a quarterly basis. The most recent deep-dive analysis showed very consistent results when compared to prior quarters. Finally, as we have discussed on previous calls, our team stays in very close contact with our customers, and those conversations continue to reflect measured optimism around the business climate. That concludes my comments on credit, and I will turn it back to Tim. Timothy S. Crane: Great. Thank you, Rich. At the beginning of the call, I briefly mentioned our three strategic priorities: delivering exceptional customer service; generating disciplined and strategic growth across our businesses with prudent risk management—and I would add through all market cycles; and investing in our foundation and the future of our bank. I want to spend just one minute on the first one. Whether high-tech or high-touch, we offer a more personalized level of service than our larger bank or money center bank competitors. And relative to our smaller competitors, we offer more tools and sophistication to meet their needs. As a result, we occupy a unique and advantaged position in what we believe to be attractive markets and in attractive businesses. In the second half of the year, we will open several branches to continue to expand market share and to build franchise value in key communities. We will also supplement that with continued investment in the digital capabilities that provide flexibility and convenience for our customers. For us, it is all about the customer. This unwavering focus is largely what has led to the consistent results we have delivered. So what does this mean for the second quarter, and to a degree for the remainder of the year? We expect outsized loan growth in the second quarter largely from our property and casualty premium finance business, which is seasonally very strong in Q2. Longer term, our pipelines are solid, and we expect to deliver mid- to high-single-digit loan growth for the remainder of the year. Combined with the stable margin David mentioned earlier at around 3.5%, we expect solid net interest income growth in the coming quarters. As always, we will work hard to fund our loan growth with a similar level of deposit growth, expanding our base of deposit clients and building franchise value. Expenses will be seasonally higher in Q2 as a result of a full quarter of annual salary increases, increased marketing expense, and you can expect a normalized tax rate for the remainder of the year. That said, we expect overall expenses will be well managed in line with our revenue growth and will result in operating leverage for the year. With respect to capital, we have reviewed the new proposals. With the proposed standardized approach, we estimate an approximate 6% to 7% reduction in risk-weighted assets, or said differently, about a 60 to 70 basis point improvement in CET1 if adopted in their present form. We are evaluating the ERBA approach, which is a bit more involved and requires some assumptions at this point. If it turns out to be more beneficial, it would likely be a result of the treatment on investment grade loans and some of the retail activity. Overall, we feel good about our momentum and believe we are well positioned for the remainder of 2026. One final note, I would like to take a moment to thank two of our longstanding board members who will conclude their service at our annual meeting next month. Pat Hackett joined our board in 2008 and has served as chairman of the board for the past nine years. And Bill Doyle joined the board in 2017. Both Pat and Bill have provided invaluable guidance over the years, and we are grateful for all they have done to help us deliver value for our shareholders. I also want to congratulate Brian Kenny, who is expected to succeed Pat as chairman pending his reelection at the upcoming annual meeting. We are very fortunate to have an engaged and thoughtful group of directors. Their perspective and insights are helpful to me and our entire management team and are certainly a big part of our success. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Our first question comes from the line of Jon Glenn Arfstrom of RBC Capital Markets. Your line is open, Jon. Jon Glenn Arfstrom: Good morning. Maybe, Rich or Tim, a question on the period-end loan growth you talked about, with period-end being higher than average. Anything you would call out in terms of the trends from early in the quarter versus the period-end strength? And then any impacts you have seen from some of the macro uncertainty in terms of the pipelines? Richard B. Murphy: We had some payoffs at the first part of the year that subdued some of that growth. It was just timing, nothing more than that. We had good momentum through the quarter. We did have some strong warehouse line growth right at the end of the quarter that helped as well. I would not say anything atypical—just timing on prepayments and some end-of-quarter warehouse line growth. As it relates to overall sentiment, we still feel pretty good. The customers we talk to feel the economy, certainly in the Midwest, still feels pretty good. Our pipelines in the C&I space right now are probably as good as they have ever been. Part of that is optimism; part of it is where we sit relative to the competition in Chicago. Right now, it feels like we are in a pretty good spot there. Jon Glenn Arfstrom: Maybe for you, David, on mortgage. It is probably the quarter to ask about mortgage given some of the typical seasonality, but I think it was a little better than I expected. What outlook do you have for the typical seasonal increase in volumes, and warehouse balances as well? David Alan Dykstra: It was a little bit better first quarter than we might expect because during part of the quarter, rates got down below 6% for a little bit of time, so applications picked up. Then rates popped back up and applications came down to scraping the bottom again. We are hopeful about a good spring buying season again this year, but given current rates, we are not seeing a huge pickup yet. We think rates have to get down around 6% or below for there to be any meaningful pickup. Barring that, we probably stick with mortgage revenue in the $20 million to $30 million range, as we have been fairly consistently for a number of quarters; about half of that is servicing income. For mortgage warehouse, that will depend on rates. If the 10-year comes down and mortgage rates get close to 6%, we should do pretty well; if they stay in the mid-6% range, it is probably subdued. Timothy S. Crane: I would only add on the mortgage warehouse that our growth is a little larger there than mortgage in general because we have taken share from some competitors and continue to add very high-quality, generally larger, mortgage originators. Jon Glenn Arfstrom: Appreciate it. Timothy S. Crane: Thanks, Jon. Operator: Thank you. Our next question comes from the line of Nathan James Race of Piper Sandler. Nathan James Race: Tim, going back to your comments around the insurance finance portfolio and the outsized growth that you expect in Q2. Overall loan growth was, I think, 19% in-quarter annualized in the second quarter of last year led by the P&C portfolio. Are you seeing any softening in volumes given what is going on in the P&C market these days? And what are you seeing within pricing as well within that book? Timothy S. Crane: We do not have as much tailwind as we have had from premium growth in prior years. I think premiums are pretty flat to maybe up slightly as opposed to up quite a bit in prior periods, so that will play a little role. But we continue to grow units, which is encouraging for the growth of our business. Pricing is fairly rational in that market. A lot of these are smaller loans where clients are managing cash flow, and small rate differences do not move it much. We continue to expect a good second quarter from a volume standpoint, and pricing is rational. David Alan Dykstra: We have made significant investments in technology associated with that business, and the volume reflects that. Our customers see us as the go-to provider in that space. The overall market can move up or down; our job is to be the premier provider in that space, and it continues to show in the numbers. Nathan James Race: Great. For David, could you provide a guidepost for expenses in light of seasonality and the full-quarter impact of increases within the comp line for the second quarter? Are you still thinking about mid-single-digit year-over-year growth for 2026? David Alan Dykstra: The first quarter tends to be a low expense quarter. The last three years, we have seen it dip a little from the fourth quarter—that trend is consistent. Our outlook is mid-single-digit year-over-year expense growth, 2026 versus 2025. We generally have a pickup in the second and third quarters because of advertising and marketing spends for baseball and summertime sponsorships. We also have a full quarter of the base salary increase that went into effect February 1 versus two months in Q1. T&E is seasonally low in Q1, so expect a little increase there. If you look at increases from prior years’ second quarters directionally, that is a guide to what to expect. Nathan James Race: On the margin, can it grind higher from here if the Fed remains on pause, particularly with some hedges rolling off and more rational deposit pricing competition? I imagine new loan production is accretive to the portfolio yield of about 6.14% coming out of the quarter. David Alan Dykstra: We think we are fairly neutral on the margin now even if rates go up or down one or two times. You will notice in the deck we added three new swaps during the quarter, with swap rates in the mid-3% range up into the 3.60s—very close to one-month SOFR. We continue to replace swaps out into the future to manage the margin to stay neutral in the 3.50s range, which we think is prudent. Loans are coming on in the low 6% range and deposits will be relatively flat, so we think we hold yields and rates and keep the margin relatively flat in the 3.50s going forward. Nathan James Race: And just to clarify, is incremental deposit growth neutral to your all-in interest-bearing deposit costs? David Alan Dykstra: I would think loan rates and deposit rates will be relatively consistent next quarter barring some move by the Fed and market rates. Nathan James Race: Understood. Appreciate the color. Congrats on another great quarter. Operator: Thank you. Our next question comes from the line of Analyst from TD Cowen. Please go ahead. Analyst: Not only are your period-end loans almost $1.2 billion above your average for the quarter, but your period-end noninterest-bearing deposits are also $1.1 billion above the average. I would assume a lot of that is you taking market share with your service as a differentiator. Should we expect any adjustments in the second quarter, or is that a good run rate heading into Q2? Timothy S. Crane: A couple of things. You are correct—we continue to win business in the market and grow our deposit base. Quarter-end is a little bit lumpy with respect to noninterest-bearing deposits, and the better way to look at that is average noninterest-bearing deposits over the period. It will continue to move around a little bit, but we had a very nice quarter-end and continue to build the deposit franchise. Analyst: Thank you. With NIM in the 3.5% handle for the rest of 2026, NII in Q2 should benefit a lot from strong period-end balances. Double-digit NII growth in 2026 does not seem unrealistic. Is there anything I am missing? Would you still look for mid-single-digit expense growth if that were the case? How should we think about the level of POL you want to achieve for the year? David Alan Dykstra: If we have stronger loan growth, we do not expect a significant increase in expenses. Our infrastructure can handle that. Q2 will be a very strong quarter because of the seasonality of premium finance loans—generally plus or minus $1 billion in Q2 just from premium finance. We expect a very strong Q2, which should be above our range. Looking out to the third and fourth quarters, given the volatile interest rate environment, we still stay within mid- to high-single-digit year expectations for the year. It is possible the economy keeps plugging along and we do better than expected, but we have consistently thought the pipelines and business plan produce at least mid- to high-single-digit loan growth, likely the higher end of that range given results so far. Operator: Our next question comes from the line of David John Chiaverini of Jefferies. Please go ahead, David. David John Chiaverini: Thanks. I wanted to drill into deposit competition. We are hearing mixed messages, with one of the larger banks in the Midwest saying competition is fairly intense. Is this impacting Wintrust Financial Corporation much? Timothy S. Crane: It is still fairly reasonable in Chicago. We have strong market share in three markets: Southeastern Wisconsin, Northern Illinois/Chicago area, and Grand Rapids. Pricing is rational—promotional CDs around 4%, promotional money market in the low 3% range. We are not seeing anything atypical at this point, though we appreciate that some other Midwest markets may be a little frothy. It feels okay to us. David John Chiaverini: Thanks. On expenses and positive operating leverage, I think you have spoken previously about approximately 200 basis points for this year. Is that still the expectation or could we do better? Timothy S. Crane: We had a strong first quarter and expect a good second quarter. We will see. We continue to invest to position the bank for growth. The 200 basis points is not out of the question, and we would work to improve on that. Operator: Our next question comes from the line of Analyst from Stephens Inc. Please go ahead. Analyst: Good morning. On credit, I noticed special mention increased about 20% during the quarter. It looks like it stemmed from the commercial portfolio. Is that accurate? If not, could you expand on that increase? Richard B. Murphy: That is accurate; it is in the commercial portfolio. It is hard when you look at those numbers because levels are low, so periodic increases draw attention. We are very active in our loan ratings, and when customers have a bit of a miss in a quarter, we will adjust. There is nothing systemic here—more one-off situations across a couple of customers, not concentrated by industry. We anticipate it will probably hang around this level for the next few quarters. Customers generally are operating with reasonable results, so nothing to read into it. Analyst: Thanks. On fees, operating lease income stepped up. Historically it is not abnormal to see one or two quarters step up and then go back down. On a go-forward basis, should we look at that as more of a $15–$16 million run rate, or is this $19 million the new rate? David Alan Dykstra: It is probably somewhere between $16 million and $19 million. Occasionally, you get gains on sales during the quarter—normal course of business. They happen on a recurring basis, but you cannot always judge the size of them each quarter. Not out of the question it could be $19 million again next quarter, but somewhere in between is a good bet. Operator: Our next question comes from the line of Jeffrey Allen Rulis of D.A. Davidson. Please go ahead, Jeff. Jeffrey Allen Rulis: Good morning. Sticking on fee income, the wealth management side was pretty impressive. At about $42 million, that is strong. What is the outlook from here for this year? Timothy S. Crane: A really nice quarter in a business we like and are growing steadily. There is a seasonal element to the strong growth this quarter that accounts for a little more revenue than we would expect in coming quarters. Overall, good news and momentum. As a better go-forward number, look for something between the fourth quarter and the first quarter. Jeffrey Allen Rulis: Thanks. And checking in on M&A conversations as you target smaller institutions—what is the appetite and level of conversations? Timothy S. Crane: Not much change since we last spoke. Some high-level conversations that I would characterize as exploration. No change to our posture—we are a disciplined and skilled acquirer. We will look at opportunities with good strategic and cultural fit and are well positioned to take advantage if they present themselves. Operator: Our next question comes from the line of Benjamin Tyson Gerlinger of Citi. Please go ahead, Ben. Benjamin Tyson Gerlinger: In your prepared remarks, I think you said “several” branches. Were these in Chicago? And for David, I am assuming that is in the expense guide you provided? Timothy S. Crane: I said “several,” not seven. We have new branch activity in each of our three markets for the second half of the year. In some cases, these are sub-markets we are not in; in other cases, opportunistic builds as populations move. These are nice opportunities that help build out the franchise and deposit base. David Alan Dykstra: And they are included in our expense forecast. Benjamin Tyson Gerlinger: With these new branches, should we expect intentional marketing or over-market rates to spin up deposits faster given branches take roughly three to four years to breakeven? Timothy S. Crane: When we enter new markets, we want to be aggressive and build the size of those branches quickly. I do not think on an overall basis it will change the trajectory of the financials in a way that is easily recognizable, but we will be aggressive in those markets. Operator: Our next question comes from the line of Jared David Shaw of Barclays. Please go ahead, Jared. Jared David Shaw: Listening to the optimism around loan growth and a stable margin, mid- to high-single-digit revenue growth feels conservative. Is that the right way to think about it, with a little conservatism built in on economic uncertainty? Or as we get through Q2 and the premium finance benefits, do Q3 and Q4 tail off a bit? Timothy S. Crane: We have visibility to a very good start to Q2 and the seasonal P&C business. Pipelines look good for the second half. If that continues, we might be on the high end—we are certainly working to be on the high end. But there is uncertainty with some geopolitical issues. Our clients are cautiously optimistic, but beyond six months, visibility gets less clear. Jared David Shaw: On capital, how should we think about capital continuing to grow from here? If there is not a deal, is there a limit to how high you want it to go near to mid-term? Timothy S. Crane: We ended the quarter with CET1 at 10.4%. With substantial growth in the second quarter, that number probably will not move much, and if we do really well, it might move down a little. We would expect to grow CET1 the remainder of the year at mid- to high-single-digit loan growth. Once we cross about 10.5%, and depending on what happens with the proposals, we will evaluate appropriate capital levels and make decisions. Our order remains: organic growth; if we find an appropriate acquisition, we may need capital; and we have an authorization in place for stock buybacks if we ended up with a lot more capital. Operator: Our next question comes from the line of Analyst from Truist. Your line is open. Analyst: If no M&A emerges, with some activity around your markets, are there opportunities you are watching for team hires, de novo market expansion, or opportunistic client acquisitions? Any benefit from M&A happening around you right now? Timothy S. Crane: We always look for talented people to hire; that tends to happen when someone is frustrated with their ability to take care of customers at their institution. We have had some success there, though we typically do not highlight it on these calls. We are excited about de novo expansion; the communities we will enter are attractive and represent good opportunities. On M&A, it happens when it happens—we will continue to talk to institutions that are a cultural and strategic fit. I would characterize the current state as more exploration than serious conversation, though that can change. Analyst: On expenses, to clarify, the mid-single digits is full-year 2026 versus full-year 2025, not off the fourth-quarter annualized base? David Alan Dykstra: Correct—full year 2026 versus full year 2025, mid-single digits. Operator: Our next question comes from the line of Christopher Edward McGratty of KBW. Your line is open, Christopher. Christopher Edward McGratty: Good morning. On capital, rating agencies are one of the constituents to be mindful of as you consider Basel III opportunities. How important is the TCE ratio over the next couple of years? Any thoughts on balancing the ratios? David Alan Dykstra: The rating agencies acknowledge that our capital levels are sufficient given our risk profile. About a third of our portfolio is premium finance, which is low risk, and life finance, which has been zero basis points of loss over the years. From a risk-adjusted perspective, our capital is more than sufficient, and the rating agencies understand that. Our ratings have stayed stable and our capital has been growing. Even if we did a buyback and brought that down a little, we have room. We are comfortable with our capital levels and with how the rating agencies look at it. Christopher Edward McGratty: Within the NII expectations, what is your deposit mix outlook? DDA has grown on an unaveraged basis pretty solidly in the last six months. Any seasonal patterns and expectations? David Alan Dykstra: As Tim said, the better way to look at DDA is averages, because at quarter- and year-ends there are fluctuations. I would suspect the mix will stay relatively the same. In good growth quarters, we tend to add more interest-bearing deposits than noninterest-bearing deposits, but the absolute dollar amount of DDA should stay relatively consistent on an average basis and then grow as we bring more customers in. Beyond that, interest-bearing growth will be a little faster than noninterest-bearing simply to support loan growth. I would not expect big changes in the mix. Operator: I would now like to turn the conference back to Timothy S. Crane for closing remarks. Timothy S. Crane: Thank you. Again, a good start to the year. We feel good about the outlook for 2026, and that is really a tribute to the great team we have at Wintrust Financial Corporation. They are very focused on our strategic priorities. I want to thank them for all they do for the customers and communities in which we operate and, most importantly, our shareholders. Thank you, and hope everybody has a nice day. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning and welcome to Peoples Bancorp Inc. Conference Call. My name is Chuck and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarter ended 03/31/2026. Please be advised that all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then 1 on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, please press star then 2. This call is also being recorded. If you object to the recording, please disconnect at this time. Please be advised that the commentary in this call will contain projections and other forward-looking statements regarding Peoples Bancorp Inc.’s future financial performance and future events. These statements are based on management's current expectations. The statements in this call which are not historical fact are forward-looking statements and involve a number of risks and uncertainties, detailed in the Peoples Bancorp Inc. Securities and Exchange Commission filings. Management believes that the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples Bancorp Inc.’s business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples Bancorp Inc. disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples Bancorp Inc.’s first quarter 2026 earnings release and earnings conference call presentation were issued this morning and are available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-generally accepted accounting principles, or GAAP, financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 15 to 20 minutes of prepared commentary, followed by a question and answer period, which I will facilitate. An archived webcast of this call will be available at peoplesbank.com in the Investor Relations section for one year. Participants in this call today are Mr. Tyler Wilcox, President and Chief Executive Officer, along with Ms. Katie Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Tyler Wilcox, you may begin the conference. Tyler Wilcox: Thank you, Chuck. Good morning, everyone, and thank you for joining our call today. Earlier this morning, we announced that we entered into an agreement to merge with Citizens National Corporation. Citizens has approximately $700 million in assets and operates 12 branches in eight counties in Kentucky. We expect to close the merger in 2026. We are excited about this partnership which expands our presence in Kentucky markets that both overlap and complement our existing footprint. Citizens is a deposit-rich franchise that shares a similar philosophy in serving the needs of clients and communities. We look forward to welcoming their shareholders, employees, and clients to become part of the Peoples Bancorp Inc. team. We believe this merger will improve shareholder value and benefit associates of both Citizens and Peoples Bancorp Inc. while offering clients of Citizens more diversified products. I will go into more details on the planned merger later in the call, and you can refer to our accompanying slides for additional details. Now I would like to highlight our results issued this morning. We reported diluted earnings per share of $0.81 for the first quarter. Our results included several improvements compared to the linked quarter. For the first quarter, our net interest margin expanded 4 basis points driven by lower deposit costs. We had a $400 thousand increase in fee-based income. We had loan growth of $13 million when we had originally anticipated loan growth to be flat due to expected paydowns during the first quarter. Our nonperforming loans and delinquency levels improved, while we also experienced reductions in our criticized and classified loan balances. Our noninterest-bearing deposits grew over $41 million, or 3%. Our loan-to-deposit ratio improved to 88.5%. Our tangible equity to tangible assets ratio increased 12 basis points to 8.91%. Our book value per share grew 1% on an annualized basis compared to year-end, while our tangible book value per share improved 3% on an annualized basis. All of our regulatory capital ratios improved, and our diluted EPS of $0.81 exceeded consensus analyst estimates of $0.80. As we have noted previously, we typically have annual first quarter one-time expenses that occur which include stock-based compensation expense related to the annual forfeiture rate true-up on stock vested during the first quarter along with upfront expense on stock grants to retirement-eligible employees, which combined for a total of $764 thousand, negatively impacting diluted EPS by $0.02 per share, and employer health savings account contributions of $689 thousand, which reduced diluted EPS by $0.02 per share. For the first quarter, our provision for credit losses totaled $9.7 million, increasing our allowance for credit losses as a percent of total loans to 1.16% from 1.12% at year-end. Our provision for credit losses for the quarter was driven by a deterioration in macroeconomic conditions used within our models and is not indicative of issues we are seeing within our portfolio. However, we are cautious and disciplined within our underwriting and portfolio management as we assess the impact of the Iran conflict on oil prices and inflationary pressure on prospects and clients. Our annualized quarterly net charge-off rate improved to 40 basis points compared to 44 basis points for the linked quarter. Our small-ticket lease charge-offs totaled $3.8 million for the first quarter and contributed 23 basis points of our annualized quarterly net charge-off rate. While we experienced a reduction in our net charge-offs for the first quarter from a dollar perspective, we do anticipate our second quarter net charge-offs to be consistent with recent quarters. We continue to project that net charge-offs will come down in 2026 compared to recent quarterly levels. We continue to reduce the size of our high balance accounts in our small-ticket leasing business, which totaled around $9 million at March 31, down from nearly $13 million at year-end. For more information on our small-ticket leasing business-related net charge-offs, please refer to our accompanying slides. Our nonperforming loans declined over $3 million compared to the linked quarter, mostly due to reductions in several categories of loans 90-plus days past due and accruing. We also had improvements in our criticized loans, which were down $12 million compared to the linked quarter-end, and our classified loans were down $5 million. At March 31, our criticized loan balance as a percent of total loans improved to 3.31%, while our classified loans as a percent of total loans declined to 2.1%. Our delinquency levels improved, and at March 31, 98.9% of our loan portfolio was considered current compared to 98.6% at year-end. Moving on to loan balances, we generated loan growth of $13 million. We had significant commercial and industrial loan growth of over $111 million, which was partially offset by reductions in construction and commercial real estate loans of about $55 million combined. We also had declines in premium finance and leases of $24 million and $15 million, respectively. We experienced some of the payoffs we had anticipated for the first quarter; however, some of those migrated to the second quarter. I will now turn the call over to Katie Bailey for a discussion of our financial performance. Katie Bailey: Thanks, Tyler. Our net interest income declined $629 thousand compared to the linked quarter, while our net interest margin expanded 4 basis points. Most of the reduction in net interest income was driven by declines in accretion income, which totaled $1.3 million compared to $1.8 million for the fourth quarter, contributing 6 basis points and 8 basis points, respectively. We had two fewer days in the first quarter than in the fourth quarter, which also contributed to the decline in net interest income. The improvement in our net interest margin was partially driven by a 12 basis point reduction in our core deposit costs, which exclude brokered CDs. We also had a decrease in our brokered CD position, which helped to increase our net interest margin. From a total balance sheet perspective, we have worked to minimize our interest rate risk exposure and are in a relatively neutral interest rate risk position. As it relates to our fee-based income, we had growth of $400 thousand compared to the linked quarter. We recognized $1.2 million related to our annual performance-based insurance commissions, which we typically receive in the first quarter of each year. This income was partially offset by lower electronic banking income and deposit account service charges, which are seasonally higher in the fourth quarter of each year. Our noninterest expenses were up $341 thousand compared to the linked quarter. As Tyler mentioned, we typically recognize additional employee-related expense during the first quarter of each year, which drove the increase compared to the fourth quarter. If you exclude our additional one-time expenses from the first quarter, our noninterest expense is actually down compared to the fourth quarter. Our reported efficiency ratio was 58.6% for the first quarter and 57.8% for the linked quarter. The increase in our ratio was driven by the one-time expenses from the first quarter, coupled with lower accretion income. Looking at our balance sheet at quarter-end, our loan-to-deposit ratio improved to 88.5% compared to 88.8% at year-end as our influx of deposits outpaced our loan growth for the first quarter. Our investment portfolio as a percent of total assets declined slightly to 20.3% at March 31, compared to 20.5% at year-end. Our core deposit balances, which exclude brokered CDs, increased $192 million compared to the linked quarter-end. This improvement was due to $102 million of governmental deposit growth coupled with an increase of $41 million in noninterest-bearing deposits. This growth was partially offset by $154 million of declines in our brokered CDs as we reduced our position, opting for lower short-term borrowing rates as a funding source. As a note, our governmental deposits are seasonally higher in the first quarter of each year, so we anticipate seeing some of that money flow out in the second quarter. Our demand deposits as a percent of total deposits were flat at 35% for both quarter-end and year-end. Our noninterest-bearing deposits to total deposits grew to 21% at March 31, compared to 20% at year-end. Moving on to our capital position. All of our regulatory capital ratios improved compared to the linked quarter-end. Our tangible equity to tangible assets ratio improved 12 basis points to 8.9% at quarter-end compared to 8.8% at year-end. Our book value per share grew to $33.85, while our tangible book value per share improved to $22.95, or 3% annualized. We increased our quarterly dividend rate for the eleventh consecutive year to $0.42 per share. This results in an annualized dividend yield of 4.84%. Finally, I will turn the call over to Tyler for his closing comments. Tyler Wilcox: Thank you, Katie. Looking to our results for the full year of 2026, we expect the following, which excludes the impact of noncore expenses and the proposed merger. We expect to achieve positive operating leverage for 2026 compared to 2025. We anticipate our net interest margin will be between 44.2% for the full year of 2026, which includes one 25 basis point rate cut. Each incremental 25 basis point reduction in rates from the Federal Reserve is expected to result in a 3 to 4 basis point decline in our net interest margin for the full year, while similar increases have a 3 to 4 basis point improvement in our net interest margin. We believe our quarterly fee-based income will range between $28 million and $30 million. We expect quarterly total noninterest expense to be between $73 million and $75 million for the remaining quarterly periods of 2026. We believe our loan growth will come in towards the low end of our guided range of 3% to 5% due to the movement of paydowns from late 2025 to 2026, coupled with the macro environment changes that occurred in the first quarter. We anticipate a slight reduction in our net charge-offs for 2026 compared to 2025, which we expect to positively impact provision for credit losses, excluding any changes in the economic forecast. As far as our proposed merger, we find the Citizens merger attractive for many reasons. While we have talked more frequently about large deals to cross 10 billion, we have consistently sought opportunities for depth and efficiency in our existing market. This opportunity with Citizens meets all of those other criteria while retaining the strategic flexibility to organically stay under 10 billion as well as pursue additional merger and acquisition opportunities. Citizens has high-quality, low-cost deposits, and an attractively low loan-to-deposit ratio. This merger will give us increased efficiency in markets where we already have a meaningful presence. Our diversified products and services will allow us to expand offerings to the Citizens client to engage them in a more robust overall financial experience, while giving our existing clients more access to convenient locations. We look forward to welcoming the Citizens associates into our organization and allowing them to continue to deliver high-quality service to their clients while giving their clients the opportunity to work with our other lines of business in fulfilling their needs. This transaction is valued at approximately $77 million, with shareholders of Citizens receiving 2.1 shares of Peoples Bancorp Inc. stock and $8 in cash for each share of Citizens stock. The merger is priced attractively for our shareholders with an expected tangible book value earn-back period of less than one year. As far as assumptions, we anticipate realizing 40% cost savings associated with this transaction, which should improve our combined efficiency ratio. We expect the transaction to be accretive to our 2027 EPS by $0.20. We also anticipate that our regulatory capital ratios will improve at the close of the merger based on pro forma results. We have included additional details regarding the proposed merger within our accompanying slides. The Citizens merger transaction is subject to the satisfaction of customary closing conditions, including regulatory and shareholder approvals. Last quarter, we provided clarity as to our anticipated crossing of 10 billion in assets. We said that absent actions taken, we would cross that mark in 2027. This remains the case, and we also continue to retain some flexibility to remain under 10 billion for a period of time using the levers we described last quarter, including flexibility in our investment portfolio, beyond proposed actions taken related to the merger. Going forward, we will continue to consider all viable paths. These include a larger bank acquisition in the 2 to 5 billion asset range as our primary priority. We additionally see a path where we do more small deals given the larger number of available partners at that level and the potential for efficiencies as seen in our recently announced deal. Additionally, we believe the current regulatory environment is generally favorable to bank mergers and acquisitions, giving opportunities for multiple deals which our team is capable of pursuing and executing. Finally, we will weigh the trade-offs of crossing 10 billion organically in the future and the negative impact of the Durbin Amendment. Ultimately, we acknowledge some uncertainty is inherent in our share price and has been noted by us, our analysts, and our shareholders. Crossing 10 billion in any of these described manners could serve to provide strategic clarity. We continue to strive to increase shareholder value by producing stable and reliable financial results, being mindful with our strategic and organic growth, while giving our clients a robust financial offering. We will always work to make decisions that are in the best interest of our shareholders, associates, and clients. This concludes our commentary, and we will open the call for questions. Once again, this is Tyler Wilcox, and joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you. Operator: Thank you. We will now open the call for questions. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Our first question for today will come from Jeff Rulis with D.A. Davidson. Please go ahead. Ryan Payne: Good morning. This is Ryan Payne on for Jeff Rulis. We could start with how the deal came to be and overall your relationship with the bank. Tyler Wilcox: Yeah. Thanks. Appreciate the question. So in 2018, we did the First Commonwealth acquisition, which was headquartered very close in proximity geographically. That represented our first of multiple expansions into Kentucky. And even at that time, we looked around those markets, saw the attractive cost of deposits, saw the kind of like-minded associates and communities where we can make a difference, and, frankly, have had an interest in this franchise ever since then. So we have been watching and waiting for some number of years. They have been a good performing bank and have been committed to independence, and given their recent decision to proceed with exploring a sale, we found that I think we were great partners for each other. And it came together nicely because of that fit, because of that overlap, and because of that long-term interest that we had. Ryan Payne: Great. Appreciate the NIM guide for the full year. But looking ahead with the transaction, where could we see the margin shaking out post the planned security sales and borrowing paydowns? Katie Bailey: Yeah. I mean, I think there is obviously upward trajectory to that number. I think 2026 is going to be impacted, but not until the later part of the year. So I think when we look at 2027 on a more full-year basis, I think there is a 15 to 20 basis point opportunity over our standalone guide on the margin side. Ryan Payne: Got it. Last one for me. So with the 40% cost savings, what is built into that number? Is that more so back office and systems? And do you have estimates on timing of those cost saves? Tyler Wilcox: Yeah. I will address the timing first. We expect about 50% of that cost savings to be effectuated within 2026 and the remainder within the beginning of 2027. As to the mix of that, it is a combination of everything. There are contracts, there are duplicate locations, there is staffing, and so forth. So it is the usual mix of efficiencies gained from the two organizations combining. Ryan Payne: Got it. Thanks, guys. Tyler Wilcox: Thank you. Operator: The next question will come from Tim Switzer with KBW. Please go ahead. Tim Switzer: Hey, good morning. Thanks for taking my question. Hey, congrats on the deal. One quick one, and sorry if you already said this, but any more color you can provide on the timing of the deal close? Are we thinking end of Q3, beginning of Q4? Trying to get a better idea for the model. Tyler Wilcox: Probably right near the ending of Q3 slash beginning of Q4 for closing. We expect conversion in the second quarter sometime of next year. Tim Switzer: Got it. Okay. And does the Citizens acquisition preclude you at all from announcing another merger before closing? Or do you think you still have the capability to do that if the right opportunity arises? Tyler Wilcox: Yeah. If given the right opportunity, we are ready, willing, and able and, you know, obviously continue long-term in many conversations. So should any of those come to fruition, we would be ready to announce that and execute on it. So this does not put us on the sidelines in any way, shape, or form. Tim Switzer: Okay. That is great to hear. And my guess would be no, just given the size, but does this acquisition alter your view on the type of bank you would like to acquire, the size of bank, your strategy or approach to that as you cross 10 billion? Tyler Wilcox: You know, it does not. I think, like I said in the prepared remarks, although we have talked probably more frequently about our number one choice being a single large acquisition, we have left open that possibility, especially in the last year given the regulatory favorability to time to close and those types of things that we have seen in other transactions. So we see that and notice it, and then if we find something that is very attractive in the 1 billion range, maybe a little bit more, maybe a little bit less, that has a lot of the metrics that are attractive for our shareholders like this one is, we would absolutely pursue that and then be on the train to continue that over time and continue to be open in that scenario to larger or smaller deals going forward. Tim Switzer: Gotcha. Very helpful. Thank you, Tyler. Tyler Wilcox: Thank you. Operator: The next question will come from Brendan Nosal with Hovde. Please go ahead. Brendan Nosal: Hey. Good morning, folks. Hope you are doing well. If I look at slide 22, just the actions that you plan around the 10 billion threshold, are those contemplated in the deal accretion of 5.6%? Or would that be further accretive just given where securities roll off versus where the borrowing costs are? Katie Bailey: The transaction, the selling of the securities, is in the metrics that we noted related to the deal. But any further action outside of selling part of their securities portfolio and part of ours is not contemplated in the deal. Brendan Nosal: Sorry. Say that again, Katie. What is included in the deal accretion you provided and what is not? Katie Bailey: Included is the selling of about 303.1 billion of our securities and their securities portfolio. So the 560 million noted on slide 22 is contemplated, or is included, in the deal math that we articulated. Brendan Nosal: Okay. Thank you. That is helpful. Maybe turning to expenses. Even with the seasonally higher items that tend to hit in the first quarter, I thought expenses were really well contained, but it looks like you did increase the expected run rate the final three quarters of the year. Is this just a timing difference for when you realize certain things? Or is there maybe something else worth pointing out? Katie Bailey: The one thing I would point out is it is mostly impacted by operating lease expense, which has corresponding revenue associated with it from our Vantage leasing operations. And so it is positive to pretax earnings, but it does increase the expense base, and that is what is driving that increase in the guide. And there is revenue on the other side, like I said, but that revenue side stayed within our previous guide. Brendan Nosal: Got it. Okay. And let me sneak one more in here. Just on the loan mark for Citizens, I mean, 4% loan mark feels somewhat heavy for the current credit environment. Was there anything particular that drove the mark to that level, whether it is a specific portfolio or something you saw in the diligence process that might not be super obvious to those of us on the outside? Tyler Wilcox: Yeah. I would agree with you that especially their reported metrics, which we found to be validated, had very, very few charge-offs. I would say, one, it is a very small denominator, so one or two loans can significantly move that a little bit. As we did our analysis, they had one or two very small emerging situations that we wanted to take a cautious approach to and ensure that we are fully reserved for. So there is no systematic issue. We are very satisfied with the credit. But that one or two relationships of reasonable size for them is what drove that mark. Brendan Nosal: Okay. That is helpful color, Tyler. Thanks for taking the questions. Tyler Wilcox: Yeah. Thank you. Operator: The next question will come from Adam Kroll with Piper Sandler. Please go ahead. Adam Kroll: Hi. I am on for Nathan Race. Good morning, and thanks for taking my questions. Maybe a question for Katie. You had some really nice reductions in funding costs during the quarter. Are you still seeing opportunities to reduce deposit costs even with the Fed on hold? Katie Bailey: Yeah. We continually evaluate. I think we meet at least twice a month, and more regularly offline, to evaluate pricing and compare our pricing competitively as well as the balances that we are seeing in our portfolio. So we have continued to remain strategic and opportunistic as it relates to deposit costs, and most notably, the retail CD product. Adam Kroll: Got it. Maybe switching to the loan growth guide for the year, just given some of the commentary in the deck on the macro environment changes, I was just wondering if you could provide some color if you are seeing that come through in the pipeline or hearing some of your borrowers pausing on projects. Is it more just being conservative? Tyler Wilcox: I will start by saying it is generally more being conservative. And when we look at the pressures on our net loan growth, it is really about the payoff activity. For context, we expect a little over $400 million in payoffs for the full year, and the vast majority, about $380 million of that, we expect in the first half, just to give you an idea of where we are coming from there. So our commentary about the macro environment: we still continue to see really robust, as shows in our results, C&I loan demand. Maybe tinge down in the CRE project funding and sourcing, but still experienced growth there. And then, finally, I would say maybe on the consumer side, we are seeing a little bit more slowdown, particularly in our indirect and residential, as interest rates remain high and affordability—for example, in the auto industry, I think we have all seen the headlines around the average auto price hitting $50 thousand. And so I think rising fuel costs and some of those things are impacting the consumer demand a little bit more than the commercial demand. Adam Kroll: Got it. Really appreciate the color, Tyler. Maybe just last one on credit. On the North Star portfolio specifically, I was wondering if you had the charge-off contribution specifically from the high balance accounts during the quarter? Tyler Wilcox: The high balance accounts as a percentage of the charge-offs—this quarter they were about $1.15 million of the $3.8 million of the charge-offs within that business, so about 30%. Adam Kroll: Okay. Got it. Thanks for taking my questions. Tyler Wilcox: Thank you. Operator: The next question will come from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thank you. Good morning, Tyler. Good morning, Katie. I am going to dig a little bit more into the size of the deal. I know you made comments in the prepared remarks and then answered a question on it. But you have obviously been looking for a deal for a while, and then this one comes along and it is significantly smaller, I think, than what we were potentially looking for, which I do not think is a bad thing. Is it fair to say—and you said it—but is it fair to say that the 2 to 5 billion deal that checks all the boxes is much harder to find maybe than you were anticipating, and the more likely path, or at least the easier-to-see path over the next few years, is you do a number of these smaller deals to find your way over 10 billion? Tyler Wilcox: Yeah. I mean, just playing the odds, Danny. One, I would say the old saying, the neighbor's farm only goes on sale once a generation. Right? And so this is a deal that, because it became available now, we felt like we had to be opportunistic and seize on it. But if you are just playing the numbers, there are literally hundreds of banks that fit within the kind of billion-dollar range, and there is a much smaller number in the larger range. So strategically and execution-wise, it is, for all the reasons we have said all along, much more preferable to grab that 3 or 4 billion bank. But there are just fewer. I would say I am still as optimistic as I have been because we continue to have conversations with banks that are in that space. Whether those materialize in two quarters or two years, I cannot say right now, but I am optimistic enough to continue to talk publicly here about that being something that we see as a viable path. But given the numbers and given the favorable regulatory environment and given our ability to execute on that, I would not say it is more likely that we will do a smaller deal, but it maybe is as likely. And we are ready, willing, and able because, again, those who have followed us for a while like you have remember the four deals in four quarters—we are not announcing that, to be very clear—but our team is capable of that. And so we see it as a viable path. Daniel Tamayo: That is great. Thanks, Tyler. Anything else in the loan book or business-wise that you think you are interested in getting out of or selling from their balance sheet? Tyler Wilcox: No. They have a very—you know, their balance sheet and their loan portfolio are very much in line with what you look at First Commonwealth Bank, you look at Premier. Although I would say it is maybe higher quality than some that we have looked at in the past. So there is nothing that we are going to wholesale walk away from. We will work with those clients, and we are looking forward to that. It is in, again, communities we know. There are many loans that we had at some point that they picked up and vice versa. So that is the good of being in markets that we are highly familiar with. Daniel Tamayo: Okay. So the way to think about the net add from a balance sheet perspective is kind of their balance sheet that they are bringing on minus the 560 million securities—meaning that is kind of the way to think about it before any growth, obviously, and maybe some runoff. But that is a fair place to start? Tyler Wilcox: Yeah. That is fair. I think their loan portfolio is about $350 million, you know, CRE and one-to-four family. And it is just very community bank. No surprises. Some c-stores, some hotels, all things we are familiar with. Daniel Tamayo: And, sorry, some cleanup items here. Katie, the 15 to 20 basis points of NIM expansion that you talked about, how much of that is accretion, do you think? Katie Bailey: A couple basis points. It is not a significant contributor to the margin impact. I think the more significant margin benefit is coming from the reduction of low-yielding securities and the paydown of higher-cost overnight wholesale funding. Daniel Tamayo: Got it. Okay. I do not want to take everybody's questions. I am not sure if I am the last one or not. If I am not, let me know, and I will jump off. Otherwise, thanks. Tyler Wilcox: Thank you. Operator: The next question will come from Analyst with Stephens Inc. Please go ahead. Analyst: Hey. Good morning. Maybe just to start, what is the current Durbin-related revenue risk upon crossing 10 billion? Tyler Wilcox: It is about $10 million pretax before this deal. Analyst: Okay. And is there any incremental expenses, or you have kind of already checked off that box? Tyler Wilcox: No. We have our expenses baked in. We are ready to cross, and there will not be a negative dividend to that on expenses for us. Analyst: Okay. And, Katie, I think you had mentioned just kind of the remixing or the repricing of securities. Could you give us some sense for expected cash flows the rest of the year in the securities book and kind of the roll-on, roll-off dynamics within that? Katie Bailey: On a standalone basis for our portfolio, it still remains in that $15 million to $20 million a month of cash flow that we receive. Analyst: Do you know what the yield is on those cash flows? Katie Bailey: I would guess somewhere in the range of 3.50%. Analyst: And you are putting it back on at 100 to 150 bps better? Katie Bailey: Sometimes. It just depends where we are with loan growth and where we are on the funding side. But yes, if we are reinvesting it, I think your number is correct, maybe upwards up to 5% depending where we are in the cycle of the market. Analyst: Do you have—think you had said it is just a couple of bps from accretion from the deal. Is that right out of the gate? Katie Bailey: Correct. Analyst: Alright. That is all I had. Thanks for taking my questions. Tyler Wilcox: Thank you. Operator: The next question is a follow-up from Adam Kroll with Piper Sandler. Please go ahead. Adam Kroll: Hi. Just a follow-up for me, maybe for Katie. I would be curious: what are new loans coming on the portfolio at, and more broadly, what are you seeing from a competition perspective, and maybe just remind us what you have in terms of fixed-rate loans repricing over the next year or so? Katie Bailey: Sure. So the rate that is coming on, as you might imagine, varies meaningfully across all the portfolios that we have on the lending side. I would say it is somewhere between 7% and 7.25%. And then as far as fixed versus variable, it is about 50/50. I think we are slightly—maybe 55% variable and 45% fixed as we sit here today. And I cannot remember if there was another component to your question. If so, please feel free to re-ask. Adam Kroll: Just in terms of fixed-rate loans maybe repricing higher over the next twelve months or so that could be kind of a tailwind to yields? Katie Bailey: Yes. I think that is correct. And the other thing I have highlighted the last few quarters is the production in our [inaudible] from a rate perspective on new origination. Tyler Wilcox: We expect that ramp up to—as we have talked about, new management there—towards the end of this year, beginning of next year is when you will see that begin to make an impact. Adam Kroll: Got it. Really appreciate the color there. Tyler Wilcox: Thank you. Operator: The next question is a follow-up from Brendan Nosal with Hovde. Please go ahead. Brendan Nosal: Hey, guys. Just not to beat a dead horse on the merger assumptions, but, Katie, you said the security sales were contemplated in the 0.6% EPS accretion. Does that also include the impact of the borrowing reduction? Katie Bailey: Yes. The whole balance sheet trade right there is included. Brendan Nosal: Okay. Perfect. And then one other for me, just on North Star. I get the work you have done on the high balance stuff. But given that two-thirds of the charge-offs from North Star are coming from outside of that particular sleeve, is there anything else you need to contemplate to get the loss content in that book where you need to, or is the high balance activity sufficient in your view? Tyler Wilcox: No, there is action taken. We talk about the high balance quite a bit because it is a quantifiable portfolio that we have not originated for well over a year now, and we want to make clear that that is not going to be a recurring issue. As to the rest of it, one, the denominator has continued to shrink, and that is, as Katie just acknowledged, by design. And so the charge-off rate is a bit higher than we would like, but historically we would like to get back to that 4% to 6% charge-off rate. So as we turn that portfolio around to growth and originate what we will be seeing that is non–high balance and that is of the quality that will deliver that 4% to 6% charge-off ratio, we feel good about where the credit target is. I think we are right over the target that we want to be at, and it is just going to take a while for that rate to normalize as the portfolio begins to grow again. Some of that is non–high balance but is related to the 2022–2023 vintages. But with what we have been putting on the books and in this new credit regime over the last year, we have a high degree of confidence that we have it under control, and it is a viable business that we are pretty excited about for the reasons that Katie articulated in the future. Brendan Nosal: Okay. Fantastic. Thank you for taking the follow-ups. Tyler Wilcox: Thank you. Operator: The next question will come from Daniel Cardenas with Brean Capital. Please go ahead. Daniel Cardenas: Good morning, guys. Congrats on the deal. Just absent the transaction, maybe if you could—and I apologize if I missed this; I have been jumping around here—give us some color on competitive factors on the deposit side. Are those beginning to pick up in your footprint, or are they still manageable at the moment? Tyler Wilcox: Yeah. I would say it is manageable. Katie talked a little bit about our regular pricing committee where we do evaluation of our extensive geography. There are always some outlier players, often smaller banks or credit unions. But we are able to maintain where we want to be from a macro perspective. We do not—as we shared last quarter—we do not chase stupid. It is a technical banking term, but we really value our margins. So we do not price to the lowest common denominator, and we are competing largely against rational actors in the community bank and larger regional space. Daniel Cardenas: Perfect. All my other questions have been asked and answered. Thank you. Tyler Wilcox: Thank you. Operator: The next question is a follow-up from Daniel Tamayo with Raymond James. Please go ahead. Daniel Tamayo: Thanks, guys. Super quick one. The Durbin hit of $10 million I think you said was before the deal. I imagine it is really small, but do you have a sense for what Citizens would add to that? Tyler Wilcox: It is about $1 million, Danny. Daniel Tamayo: Great. Okay. Thanks. That is all I had. Tyler Wilcox: Yep. Thank you. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Mr. Tyler Wilcox for any closing remarks. Tyler Wilcox: Yes. I want to thank everybody for joining our call this morning. Please remember that our earnings release and a webcast of this call, and our earnings conference call presentation, will be archived at peoplesbancorp.com under the Investor Relations section. Thank you for your time, and have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Equifax Q1 2026 Earnings Conference Call Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions] It's now my pleasure to turn the call over to Trevor Burns, Senior Vice President, Investor Relations. Trevor, please go ahead. Trevor Burns: Thanks, and good morning. Welcome to today's conference call. I'm Trevor Burns, with me today are Mark Begor, Chief Executive Officer; and John Gamble, Chief Financial Officer. Today's call is being recorded and an archive of the recording will be available later today in the IR calendar section of the News and Events tab at our Investor Relations website. During the call, we will be making reference to certain materials that can be found in the Presentations section of the News & Events tab at our IR website. These materials are labeled 1Q 2026 earnings conference call. Also, we will be making certain forward-looking statements, including second quarter and full year 2026 guidance to help you understand Equifax and its business environment. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from our expectations. Certain risk factors that may impact our business are set forth in filings with the SEC, including our 2025 Form 10-K and subsequent filings. During this call, we will be referencing certain non-GAAP financial measures, including adjusted EPS, adjusted EBITDA, adjusted EBITDA margins and cash conversion which are adjusted for certain items that affect the comparability of our underlying operational performance. All references to EPS, EBITDA, EBITDA margins and cash conversion are references to non-GAAP measures. These non-GAAP measures are detailed in reconciliation tables, which are included with our earnings release and can be found in the Financial Results section of the Financial Info tab at our IR website. Now I'd like to turn it over to Mark. Mark Begor: Thanks, Trevor. Turning to Slide 4. Equifax delivered very strong first quarter results with reported revenue of $1.649 billion, up 14%, which was $37 million above the midpoint of our February guidance. On an organic constant currency basis, revenue growth of 13%, which was over 200 basis points above the midpoint of our February framework. Ex FICO, revenue growth was up about 10% and at the top end of our 7% to 10% long-term growth framework. The revenue outperformance was principally in U.S. mortgage, which was up 38% and better than our February guide from stronger mortgage activity in the middle of the quarter before rates increased due to the Iran conflict. USIS Mortgage also benefited from stronger revenue growth related to its new wins in pre-approval products driven by our TWN Indicator solution. These mortgage customer wins are a good proof point that our differentiated TWN Indicator solutions are resonating with mortgage customers. We also expect customer share gains this year in card, auto and P loan as we drive TWN indicator deployment more broadly. As a reminder, we are offering the TWN indicator as well as our cell phone utility and Pay TV attributes at no cost in mortgage to drive share gains. Organic diversified markets constant revenue dollar growth grew almost 6% in the quarter, consistent with our guidance. This was principally driven by strong broad-based execution in Workforce Solutions. Importantly, first quarter EBITDA of $477 million was up 13% with an EBITDA margin, excluding FICO of 31.2%, up a strong 80 basis points and a very strong 110 basis points above the midpoint of our February framework. The 80 basis point expansion versus last year in EBITDA margin was both above our 75 basis point target for the year and 30 basis points above our long-term 50 basis point framework. The strong EBITDA margins were driven by strong operating leverage, mortgage flow-through and AI-driven cost productivity. Equifax reported EBITDA margins were 29% in the quarter. EPS at $1.86 per share was also up a very strong 22% and $0.18 above the midpoint of our February guide. As a reminder, first quarter EBITDA margins and EPS are lower than the remainder of the year, primarily due to a large percentage of our employee equity plan expenses being recognized in the quarter. We returned $327 million to shareholders in the quarter, including repurchasing 1.3 million shares or about 1% of shares outstanding for 260 million to take advantage of a weaker Equifax stock price. And last month, we increased our quarterly dividend by 12% to $0.56 per share. Equifax paid $67 million of dividends in the quarter. We continue to expect strong free cash flow of over $1 billion in 2026 with a cash conversion over 100%, which will deliver capacity of approximately $1.5 billion for bolt-on M&A and return of cash to shareholders while maintaining strong leverage levels. The team also continued to execute very well against our EFX2028 strategic priorities in the quarter by leveraging EFX.AI-based solutions built on our cloud-native infrastructure to drive innovation, new products and growth. In the first quarter, our Vitality Index of 17% was at record levels and reflects the focused execution of our teams in driving customer-focused growth through accelerated innovation based on advanced EFX.AI, leveraging our proprietary data assets. As a reminder, we added over 40 EFX.AI-based patents in 2025 and 10 more AI-based patents in the first quarter for a total of 400 pending or granted AI-based patents as we continue to invest in differentiated explainable AI capabilities at Equifax. In the middle of the first quarter, we saw strength in diversified markets, U.S. credit and mortgage activity as overall economic activity remained robust, inflation expectations moderated in interest rates decline. In March, the Iran conflict drove market uncertainty and higher interest rates, and we saw a weaker overall U.S. transactional activity from higher interest rates impacting mortgage and, to a lesser degree, auto and banking. Broadly, the U.S. consumers is resilient even in these uncertain times. We've seen mortgage activity decline in the last 6 weeks from elevated levels in February from the higher interest rates and we expect these lower levels of inquiries to continue until the Iran conflict is resolved and interest rates moderate. Current mortgage run rates are slightly below the levels reflected in the 2026 framework we shared in February. Despite our very strong first quarter results and given the significant uncertainty related to the current Iran conflict, we felt it was prudent to maintain our 2026 guidance we put in place in February until there's more clarity on the direction of the economy and importantly, inflation and interest rates. Absent the uncertainty in economic conditions related to the Iran conflict, we would have raised our full year guidance based on our strong first quarter results. We are maintaining our 2026 guidance for mortgage revenue growth of over 20%, consistent with the framework we provided in February, as a stronger-than-expected first quarter mortgage revenue growth is offset by our expectation of current trends of slightly slower growth over the remainder of the year versus our February guide. For the full year, we continue to expect our diversified markets revenue to be up high single digits, consistent with the guidance we provided in February. We expect strong execution from EFX.AI-driven new products and customer share gains to allow us to deliver at the levels consistent with our February framework. We also expect to deliver strong full year margin expansion, excluding FICO of 75 basis points from operating leverage of strong top line growth, higher margin new products and AI-driven productivity. The 75 basis points is 25 basis points above our 50 basis point long-term margin framework. Turning to Slide 5. Workforce Solutions revenue was up over 10% and better than our expectations. Verifier revenue was up a strong 14% with diversified markets revenue growth of 14%, which is a great start to the year. Within diversified markets, government had a very strong quarter, building off their fourth quarter performance with revenue up mid-double digits from continued strong state-level penetration. We expect government revenue in the second quarter to be about flat sequentially against a very tough comp from the SSA contract win last year and timing of state contract activations. We continue to see strong momentum in government from OB3 and the big $5 billion TAM that they operate in. Talent Solutions revenue was up almost 10% in the quarter. This is the second consecutive quarter of high single-digit revenue growth in a challenging white collar hiring market. In February, we discussed weaker hiring volumes in January that have begun to improve later in the quarter. Despite the overall weaker hiring macro in the first quarter, Talent Solutions continued to outperform their underlying markets, driven by client penetration, higher hit rates from record additions, pricing and product penetration, including data incarceration and education solutions. The team is doing a great job delivering new solutions to the market, enabling employers to make the right hires with speed and confidence. EWS mortgage revenue was up a strong 14% in the quarter from better-than-expected volumes, new products, including TWN Income qualified for mortgage, record growth and pricing. Consumer lending continues to perform very well with revenue up strong mid-double digits from double-digit revenue growth in P loans and auto. This is the seventh consecutive quarter of double-digit revenue growth in these verticals. Consumer lending is increasingly becoming a larger portion of Verifier revenue. Workforce Solutions EBITDA margins of 52.3% were very strong and up 200 basis points versus last year from operating leverage from higher revenue growth and AI-driven productivity, while continuing to invest in new products, government and record additions. TWN record additions continue to be very strong again in the first quarter with 211 million active records, up 11% and 120 million total current records, up 9%, which represents 105 million unique SSNs. The record growth drives higher hit rates and revenue growth and outperformance against underlying markets across our EWS Verifier verticals. In addition to payroll provider partnerships, EWS continues to expand relationships outside of the traditional payroll processing space, including HR software companies to obtain additional sources of income and employment data. We have a long runway for record growth against 250 million income-producing Americans. Turning to Slide 6. We remain energized about the mid- and long-term growth opportunities for EWS government at both the federal and the state level in meeting new federal requirements regarding accuracy of income validation in Medicaid and SNAP as well as work, education and community engagement requirements and Medicaid benefits. We are seeing strong interest with our pipelines for new and existing expanded government services up over 2x versus last year. As is typical in government, we are seeing some timing issues in new deal closures and activations as states-managed technology implementations and challenging budget frameworks. We continue to expect to see the benefit of the new OB3 opportunities later in '26 and in '27 and beyond. As state agencies implement required validations of expanded work requirements and increased redeterminations for certain Medicaid populations and take actions to reduce SNAP error rates, Equifax is serving as a key adviser leveraging our differentiated income and employment data to drive speed, accuracy and productivity. Our new products such as continuous evaluation for SNAP built using EFX.AI that we launched in the first quarter have already delivered strong results for a few states by identifying errors within their beneficiary population. We also see expanding opportunities with multiple federal agencies in support of their focus on reducing improper payments. Given our strong value proposition from TWN on speed of social service delivery, case worker productivity and accuracy of income verifications, we are uniquely positioned with our differentiated TWN data assets and new solutions to help state agencies increase efficiency and strengthen program integrity, particularly with SNAP and CMS. EWS has significant opportunities for long-term revenue growth supporting government programs and their big $5 billion TAM. Turning to Slide 7. Before discussing USIS results, I'd like to welcome David Smith, our new USIS President, to the team. David's broad consumer finance experience, proven executive leadership, customer focus, innovation capabilities and regulatory depth will be a big asset for USIS as they drive innovation and revenue growth for their customers. It's great to have David on the Equifax team. In the first quarter, USIS revenue was up a very strong 21% and 8% excluding FICO, driven by significant mortgage outperformance. The 8% growth is strong and at the high end of our 6% to 8% long-term framework for USIS. USIS mortgage revenue was up 60% and up a strong 24% excluding FICO and better than our expectations. USIS saw meaningful share gains in mortgage pre-approval, soft pull products with our new TWN Indicator, contributing to mortgage revenue outperformance in the quarter. And as mentioned previously, USIS saw increased mortgage activity in the middle of the quarter before rate increases from the Iran conflict reduced activity over the past 6 weeks. USIS diversified markets revenue grew 3% in the quarter and were slightly below our expectations with B2B up 2% and B2C up a strong 9%. While B2B delivered low single-digit growth rates, core online auto and FI transaction revenue delivered solid mid-single-digit growth. Off-line batch was about flat, principally related to a tough comp due to the strength in offline batch jobs last year. We did not see changes in customer marketing or risk management behavior in the quarter. And we expect USIS diversified markets revenue growth to be up mid-single digits in the second quarter. USIS EBITDA margins were 30.3% in the quarter, excluding FICO, USIS EBITDA margins were 37.9% and down slightly compared to last year. Absent some onetime costs incurred in the quarter, margins would have grown at levels consistent with our expectations. We continue to expect USIS EBITDA margins ex FICO to be almost 40% in the year up over 75 basis points versus 2025. Turning to Slide 8. As a reminder, we make no margin on the sale of FICO scores. FICO Mortgage Scores revenue is about 50% of the USIS mortgage revenue and 6% of total Equifax revenue, delivering zero margin. To be conservative, our 2026 framework continues to assume Equifax will calculate and sell only FICO scores this year, and there will be no vintage conversion in 2026. However, we are seeing strong momentum from mortgage originators on using Vantage. We expect conversions to VantageScore to accelerate once FHFA activates VantageScore and indications are that we're getting closer to FHFA formally activating VantageScore for Agency mortgage originations. A few weeks ago, we lowered our Vantage mortgage pricing from $4.50 to $1 to further incent conversion by the industry. We believe this pricing change will further accelerate mortgage originator conversions to Vantage, given the substantial $1 billion of annual savings opportunity for originators and consumers by using Vantage. The FHFA's decision last July to allow mortgage score choice between Vantage and FICO is a win for consumers and for the industry. We currently have over 240 mortgage originators ingesting our free VantageScore with a paid FICO Score offering, and we have over 50 principally non-GSE mortgage lenders using Vantage for their mortgage originations. For perspective and to provide data for your analysis, we have included a chart in the appendix of our earnings deck that provides details on the annual $35 million margin upside from full conversion of VantageScore at current mortgage run rates. As we move through 2026 and there is more clarity on Vantage conversion timing or the FICO direct license program, we will update our guidance to reflect this shift and the opportunity for mortgage industry, consumers and Equifax. Turning to Slide 9. International revenue was up 4% in constant currency and consistent with our expectations of mid-single-digit growth. International saw strong high single-digit revenue growth in Canada and ANZ in LatAm and the U.K. and Spain CRE businesses delivering mid-single-digit revenue growth in the quarter. International EBITDA margins were 25% in the quarter, up a very strong 80 basis points versus last year. Turning to Slide 10. As we discussed in February, there's a strong AI moat around Equifax' unique and proprietary data. 90% of Equifax revenue is generated from proprietary data sources, including our income and employment exchanges in the U.S. U.K., Canada, Australia, our U.S. and international consumer and commercial credit exchanges and our alternative data sets, including our NCTUE, telco and utility exchange in the U.S. This proprietary data has contributed to Equifax and its uses managed by Equifax and is subject to significant regulatory and privacy controls. To be clear, the data is not available on the web and only Equifax can access this data. Equifax' scale and proprietary data along with our cloud-native global technology platforms that include implementation of leading AI and ML capabilities is at the center of our momentum on new product innovation that has delivered accelerating NPIs and driven our NPI Vitality Index to almost 14% over the past 3 years. The application of advanced EFX.AI-based and traditional IT-based analytical techniques allows us and our customers to rapidly develop new solutions that are built off our only Equifax proprietary data. Turning to Slide 11. Our cloud-native technology and EFX.AI capabilities have accelerated our innovation cycle over the past 5 years since we moved to the cloud. Last year, over 90% of our products were built on our new global cloud-based platforms. With more efficient cloud-native technology, leveraging global platforms and EFX.AI, we have quadrupled the number of products in our innovation funnel and reduced product development life cycles by half resulting in a record level of new products launched in 2025, which is up 2x over historic levels. 100% of our new models and scores in 2025 were built using EfX.AI. We're building more complex products generating higher performance for our customers with about 50% of our new products now powered by multiple EFX data assets. And last, we're seeing higher performing products with year 3 NPI revenue up about 70% in '25 over historical levels. We are just getting started leveraging the power of our proprietary data, the new Equifax cloud and EFX.AI to deliver higher-performing products, models and scores to help our customers grow and deliver higher growth and free cash flow to Equifax. Recently, we launched Ignite AI adviser for auto, an AI platform that provides lenders with instant plain English analytics, benchmarking and automated insights alongside conversational agents for deeper exploration by our customers. We expect to launch similar solutions in cards and personal loan portfolios this year while integrating advanced synthetic and credit abuse fraud detection. As EFX.AI advances, we'll leverage our new global cloud infrastructure, combined with our [ agentic ] AI and Google Vertex AI capabilities and proprietary data to deliver higher-performing analytical solutions at an accelerating pace, positioning these advanced analytical solutions for more customers. Equifax is on offense with AI. Turning to Slide 12. As I previously mentioned, USIS is gaining traction with their TWN indicator solutions in mortgage that supported our strong mortgage revenue growth in the quarter. In April, we were energized to launch The Work Number Record Indicator or TWN indicator for auto lenders and personal loan originators, which are additive to our suite of TWN indicator solutions for mortgage, auto dealers and card. These solutions deliver income and employment insights from the Work Number alongside the Equifax consumer credit report at the prequal or marketing stage of the auto or personal loan application process. The TWN indicator returns a response indicating whether a verification of income or employment is available for an applicant from the EWS Work Number. This immediate visibility gives lenders the ability to instantly segment their workflows, fast-tracking appropriate borrowers through an automated paperless path while proactively identifying those who may require manual documentation. By reducing guess work from the start of the application process, lenders can offer appropriate loans while borrowers can benefit from a faster approval process. We expect continued share gains from our TWN indicator suite as we move through 2026. And as a reminder, Equifax is delivering TWN income and employment attributes at no cost to our customers to drive credit file share gains in TWN VOI and VOE growth in the future. Now I'd like to turn it over to John to provide our second quarter and full year framework. John Gamble: Thanks, Mark. Slide 13 provides the specifics of our 2026 full year guidance. As Mark indicated, we are holding our full year 2026 revenue guidance on a constant currency basis to be unchanged from our February guidance. Even with our strong first quarter performance, there continues to be a heightened level of economic uncertainty as well as uncertainty in the direction of interest rates and therefore, mortgage volumes. We increased our guidance to reflect the impact of FX changes since February, increasing the midpoint of our reported revenue guidance by $25 million to $6.745 billion and adjusted EPS by $0.04 per share to $8.54 per share. FX is about 90 basis points favorable to revenue growth for the year. Diversified markets revenue growth at the midpoint is expected to be up high single digits and U.S. mortgage revenue to be up over 20% with mortgage market originations down low single digits. For your perspective, as you determine your view of the 2026 U.S. mortgage market based on a review of Equifax data on mortgage home purchase issuances since early 2022, we estimate that there are over 15 million mortgages that were issued with an interest rate over 5%, including about $13.5 million with rates over 6% and over $9.5 million with rates over 6.5%. This provides a perspective on the pool of mortgages potentially available to refinance as mortgage rates change. Expectations for EWS overall performance in 2026 are unchanged from the levels we discussed in February, with EWS expected to deliver revenue growth of high single digits and EBITDA margins at 51.2% to 51.7%, about flat at the midpoint with 2025. We continue to expect Verification Services revenue to be up high single digits to low double digits. In Employer Services, revenue is now expected to decline slightly in 2026 as work opportunity tax credit legislation has not been extended by the federal government. Historically, when the renewal occurs, it has been retroactive, and we would expect to recover the revenue. USIS and International business unit revenue growth and EBITDA margin guidance expectations are unchanged from February. The slide also includes additional detail on revenue growth rates and EBITDA margins, excluding FICO mortgage score royalty pass-through revenue and expected BU revenue and EBITDA margins. We expect to deliver growth of 7% to 9%, excluding the impact of FICO mortgage royalties in 2026 within our long-term financial framework and we expect to grow EBITDA margins, excluding the impact of FICO mortgage royalties by a strong 75 basis points, which is 25 basis points above our long-term framework. In 2026, we expect to deliver over $1 billion of free cash flow and a cash flow conversion of at least 100%. As we discussed in February, with EBITDA increasing to about $2.1 billion at the midpoint, we are also generating an additional $400 million in debt capacity at our current debt leverage. This creates $1.5 billion in capital available in 2026 for M&A and return of cash to shareholders. We continue to look for attractive bolt-on M&A to strengthen Workforce Solutions, our differentiated proprietary data assets as well as international platforms and we have substantial capacity for share repurchases, continuing from the $260 million we repurchased in the first quarter. Slide 14 provides the details of our 2Q '26 guidance. In 2Q '26, we expect total Equifax revenue to be between $1.680 billion and $1.710 billion, up 10.3% on a reported basis year-to-year at the midpoint. Constant dollar revenue growth at the midpoint is up 9.4%. Excluding the impact of FICO mortgage scores, 2Q '26 reported revenue is expected to be up about 6.5% at the midpoint. Diversified markets revenue is expected to be up mid-single digits on a constant currency basis and down sequentially from first quarter given the more difficult EWS government comparison that Mark discussed. U.S. mortgage revenue is expected to be up over 20% and high single digits, excluding FICO royalties. EPS in 2Q '26 is expected to be $2.15 to $2.25 per share, up about 10% versus 2Q '25 at the midpoint. Equifax 2Q '26 EBITDA dollars are expected to be $537 million to $554 million, up just over 9% at the midpoint. EBITDA margins are expected to be [ about ] 32.2% at the midpoint of our guidance. And excluding the impact of FICO mortgage royalties, EBITDA margins in 2Q '26 would be 34.3% to 34.7%, up over 80 basis points at the midpoint from 2Q '25 on the same basis. We believe that our full year and 2Q '26 guidance are centered at the midpoint of both our revenue and EPS guidance ranges. In the supplemental information to this presentation, which will be shared after this call, we have added a slide that provides a 5-year view of U.S. mortgage originations by quarter. The data is determined based on submissions to Equifax' U.S. consumer credit file. Going forward, we will update this slide to provide originations data 90 days in arrears. So today, we are providing data through December 2025. As full contributor mortgage origination data can take up to 150 days, we will update this slide each quarter based on any updated data we receive. As we did in February, going forward, our guidance will include our expectations for U.S. mortgage originations for the current calendar year. As a reminder, this mortgage detail and more analytical detail based on the Equifax U.S. credit files are published monthly in our credit trends reports and can be found on our website under business trends and insights. Historically, Equifax has provided USIS hard mortgage credit inquiries as a measure of U.S. mortgage market activity. Given changes that have occurred over the last several years and how mortgage originators use hard and soft mortgage inquiries, during the loan origination process, hard inquiry volumes have become less correlated to changes in the U.S. mortgage market originations. As such, we will stop disclosing USIS mortgage hard credit inquiries beginning in 2027. Now I'd like to turn it back over to Mark. Mark Begor: Thanks, John. Wrapping up on Slide 15, Equifax is off to a strong start in 2026, executing very well against our EFX2028 strategic priorities in a challenging economic environment. The new Equifax is leveraging the Equifax cloud EFX.AI and proprietary data assets to accelerate innovation and help our customers grow. With the EFX cloud transformation substantially complete, we are focused on leveraging the new cloud capabilities and focusing our team on EFX.AI and NPI initiatives to deliver innovation to our customers, resulting in record levels 17% Vitality Index in the quarter and driving operational efficiencies inside of Equifax. We are using our single data fabric, EFX.AI and Ignite, our analytics platform to develop new credit solutions powered by TWN indicators in verticals like mortgage, auto, card and P loan that only Equifax could provide, which is leading to share gains and incremental growth. Our first quarter financial results are a strong proof point on the broad-based Equifax operating model, including the strong 80 basis point of EBITDA margin expansion in the quarter. Given our strong free cash flow generation with cash conversion over 100% in 2026, we're also delivering on our commitment to return substantial excess free cash flow to our shareholders. In the first quarter, we returned $327 million to shareholders. And in 2026, we expect to have $1.5 billion available to invest in both bolt-on M&A and return cash to shareholders through share repurchases and dividends. I'm energized about our strong start to 2026, but even more energized about the future of the new Equifax. And with that, operator, let me open it up for questions. Operator: [Operator Instructions] Our first question today is coming from Jeff Meuler from Baird. Jeffrey Meuler: How are you thinking about the timing of the revenue from the expanded government opportunity? I get the tough Q2 comp, but Q1 was really good. So to what extent did the expanded opportunity drive that strength? And then just help us understand what you're trying to signal when you're talking about timing factors related to system integration and budget challenges. Mark Begor: Yes, Jeff. We remain very bullish about our government vertical, given the big TAM and also OB3, we've talked about that a bunch. We've been clear since really last July when OB3 was passed that we expect the substantial portion of that to be later in the year, but really principally in 2027, when that takes effect, whether it's the Medicaid or the SNAP benefits or the more frequent 6-month redeterminations. We said in our prepared comments that our pipelines for government are very robust, up 2x over where they were a year ago. So we feel good about the pipelines. But government can be bumpy, both on when deals not only close and sign, but also when they activate. And then there's always budget pressures at the government level. And as you point out, we had a big win with SSA a year ago in April. So that's a comp that's challenging in the second quarter, and we just wanted to highlight that. Jeffrey Meuler: Okay. And then for USIS diversified markets, what dragged it down in Q1? Because I think the online growth was slower overall than card and auto was. So what dragged it down in Q1? And then maybe it's because of whatever that factor is, but what drives the acceleration in Q2 because it sounded like there was also a little bit of softening ex mortgage related to rates and macro volatility later in the quarter? Mark Begor: Yes. I'll jump in, and John can also chime in also. First, on the -- what happened in the first quarter is we had some larger batch volumes, which can be choppy on when they land during the year and one quarter to another quarter last year versus this year. So I think that's the principal impact on the first quarter. As we look forward, we've got a lot of new products that we're rolling out. I think we talked a bunch on our prepared comments around the TWN indicator that we have in market. We just launched it for auto, lenders and also for card, and we've seen good progress there. We expect that to help as we go through the year. Anything else you'd add, John? John Gamble: Not just what we have in our comments, right? We saw weakening as we went into the March period, and that affected not only online but to a degree as we indicated [ by batch ], right, and it was in auto, it was to a degree in FI and across some other verticals as well. So I think the general economic situation that we ran into in March just resulted in a little slower volumes, not just in online, but as we all know, oftentimes [ batch ] is repetitive, right? So some of the batch jobs that occur very frequently just slowed. Operator: Our next question today is coming from Andrew Steinerman from JPMorgan. Andrew Steinerman: I wanted to ask about EWS mortgage revenue outperformance. What did you see in the first quarter? And what are you assuming in the guide in terms of EWS mortgage revenue outperformance? Mark Begor: Mortgage had a strong first quarter at EWS. I think we talked about some new products that we've rolled out that we're getting some traction on. Anything else you'd add on that, John, for the first quarter? John Gamble: Yes. I think we consistently said we expect to see high single-digit type of outperformance relative to transaction volumes, and we saw a very good performance in the first quarter, and that continues to be our expectation going forward. Operator: Your next question today is coming from Toni Kaplan from Morgan Stanley. Toni Kaplan: I wanted to go back to CMS and basically, when you think about competition, we saw an article a couple of months ago about one of your private company competitors who uses connectivity for verification and winning a contract on the Medicaid and SNAP eligibility side. So I was just hoping you could frame for us how you see your product versus maybe a cheaper product like because of the state budgets, always seeming to be challenged. Like does that lead to a cheaper solution gaining traction? or -- and then also the friction point you always mentioned, does that resonate as much in this market as in the lending market? Just wanted to understand the sort of go-to-market strategy and positioning between your products, which is maybe more premium and very good accuracy versus maybe a cheaper connectivity product. Mark Begor: Yes. When you say cheaper connectivity, I think you're referring to consumer consent and data. And there's clearly a place for that. As you know, we rolled out last summer, our own solution called Complete income that we've seen traction on. And with this demographic, there's a lot of W-2 income in here, but there's also a lot of gig income, which we have less of in our database. So our large coverage is still a big asset for us, having over 150 million current records is a big asset in our data set that we can deliver instantly. When you go down the consumer consented path, it adds friction to the process, both for the case worker and for the recipient. They have to do things to participate in it. Where we've seen why we invested in it and we launched our solution that's integrated between hitting our TWN database first and then water falling to our own consumer consented solution. that integrated solution, we think is a superior one, delivers that same benefit. And what the states we're after is more coverage. It's really hard to get that income verification. And that consumer consent, it really covers a lot of the records that we don't have, and that's why we've invested in the solution, and we've already landed a handful of states that are now using that solution in the marketplace. Toni Kaplan: Yes. Great. And wanted to ask just on VantageScore. I guess, what's taking so long with the grid? And I guess, when -- how is the reception to your lowering the price of the score? And does that sort of lead to FHFA maybe to sort of be less concerned about pricing in the industry? Mark Begor: Yes. That's a hard question. These kind of changes take time. As you know, FICO was used for 30 years, it's the only score in mortgage. And last July, Director Pulte introduced score competition. It takes a lot of technical time. Our view is that the integrators, meaning the software systems are ready for Vantage. They've built that out over the last number of months. Our customers are ready. We talked about 250 customers ingesting the free VantageScore. We felt that there would be an advantage for Equifax and our competitors did the same thing by lowering the price to $1 versus $450 to create a real price advantage for customers to really incent them in the industry to really move forward with Vantage. And the feedback has been very positive. And I think as you've seen in various publications. If you use that $1 versus the $10 FICO score, that's $1 billion worth of run rate annual cost savings for the industry. That's a big incentive to change. So all indications are we're getting closer. We had the same indications last time we talked in February, but we're certainly closer now that we're in April. And the industry is clearly ready for it. They want to take advantage of it. So we expect it to move forward. But as you know, in our guidance, we laid out that we don't know when that timing is. So we really can't forecast Vantage conversion. So we assume that FICO stays there through the year. But just to be clear, and I know you know this, Toni, that it doesn't impact our P&L if FICO stays there long term. There's an advantage to our P&L with the margin we make on the VantageScore, if there is Vantage conversion. So we think Equifax is well positioned because, as you know, you can't calculate a credit score without our credit file, and that's the data that's used there. So we think we're well positioned, whether it is FICO or Vantage, but there's definitely a lot of energy and enthusiasm about moving to Vantage once it gets activated by the agencies. Operator: Next question today is coming from Manav Patnaik from Barclays. Manav Patnaik: I think we all saw the mortgage data kind of taper off in March. But Mark, I think you mentioned there was some impact to a lesser degree in auto and banking. I was hoping you could just elaborate on that just to appreciate the sensitivities and how you think that could be impacted? Mark Begor: Yes. It was really -- I mean not more in auto. We saw a little bit in banking, but it's probably harder to find in the rounds. Auto is a big ticket transaction. When rates went up a little bit. We saw some tail off. It's typically a very -- a larger auto financing market around tax season and there was some dampening of that. Part of it's auto prices, for sure, have increased, and then you add to it, auto rates have increased, but it was still a positive market for us, but we just thought we'd highlight that. Anything you'd add, John? John Gamble: No, I think you covered it. Yes. And we saw it run through March, and I think it's kind of continued into April. Manav Patnaik: Okay. Got it. And I think your point on reemphasizing the proprietary data, that's well understood. You also mentioned using Ignite and some of your other analytical tools. I was just wondering how connected or packaged is those Ignite and analytic tools to the data? Just trying to appreciate if you -- how you think of the potential disruption risk to the software side of things, which is the big market talk right now? Mark Begor: Yes. As you know, the so-called software is a small part of our business. It's one we certainly invest in, particularly for our -- broadly our mid-market customers that don't have larger tech platforms that they can use to ingest our data. But we sell data. We sell scores, we sell models, we sell products. That's the vast, vast majority of our revenue. We're very, very small in the revenue from software sales. And we really have our investments in Ignite and interconnect really to facilitate the sales of our data. We don't really view it as a way that we deliver our data to market. John Gamble: Yes. Ignite AI Advisor is to allow smaller customers to ingest more of our data by seeing the value in the scores and the lift they get by using not just credit data but also alternative data and other data sources. So that's what it's intended to do. We are very excited about the fact that it's going to drive more data sales, but it isn't a licensing play. That isn't what we do. Yes. Operator: Next question today is coming from Shlomo Rosenbaum from Stifel. Shlomo Rosenbaum: Mark, can you talk a little bit more about The Work Number indicator? And is there some way to quantify some of the market share gains? It really looks like a unique position that you guys can kind of wedge in there and gain some more share. So I'm wondering if there's some way to quantify it. Since you've rolled it out, where have you seen the share shift? You noted one large client last call, I think, in the mortgage space, but -- if you can talk about what's happened since then? And then has there been any reaction with any of the unique data from the other bureaus that they've been putting in for free aside their own credit reports? And then I have a follow-up. Mark Begor: Yes, sure. We think, obviously, we have a unique asset in the TWN data set. By adding the TWN indicator, we think it benefits both our credit file, but also benefits pull-through of our TWN data in underwriting process because the originator now knows that we have a record. So it's a benefit really on both sides. And we've seen really positive response. As you know, it's still early days. We really only launched this in the second half of last year and initially in mortgage. And as we talked in February and again today, that's where we're seeing the most interest. And when you think about it, if you're a mortgage lender and then as you know, we're rolling it out in auto, cards and P loans, if you're underwriting a consumer, you typically, for 20, 30 years, have done that off the credit file, the credit score and credit data, but you are really invisible in that marketing process, the early stage in your funnel when you bring a consumer into your application process or pre-application process about whether they're working or not or what their income is. And number one, it's kind of binary if you're not employed, but you're applying that generally is going to be more challenging with credit. But if you're working and then dependent upon your income levels and your ability to pay, it allows the lender to give that consumer a larger loan at a lower interest rate and really drive approval rates. And it really is getting the consumer into the right products. So it's very unique solution that we have and one that we're super energized about. I think you can see in our mortgage results for the first quarter, versus the underlying market, you can do the math. There's clearly some lift in there that we're seeing with share benefits in the prequal and we attribute that to one of the factors, for sure, is the fact that we're offering the TWN indicator there at no charge. I think I talked about on the February call that some of the early customers that are using that were seeing not only that they're using more of our credit file because it has that attribute with it, it's very valuable in that mortgage funnel. But we're also seeing a lift in some of the TWN poles because they know we have a record and they're able to access that record later in the process when they're doing the VOE and VOI full verification versus the thinner set that we have in the TWN indicator. So we're very energized about it. And then the feedback we're getting from the other financial services verticals is very positive. Obviously, getting that kind of rich data for free is very valuable and a differentiator for us. And then beyond just the TWN indicator, I think you know that we're also working to offer in the mortgage space, our cellphone utility attributes in the mortgage file. That's another very unique Equifax data set, one that only we have. It's got real scale. It covers most Americans so it's got a lot of data in there, and we're adding those attributes to the mortgage file really same basis at no charge, but to differentiate our mortgage credit file for share gains. So we're energized, but kind of -- I think the encapsulated it's early days, meaning we're still in the -- we just launched literally this week, some of the solutions in card and auto lenders. So we're getting in that marketplace, but the response is very positive. John Gamble: In the first quarter, a very meaningful part of that 24 points, excluding FICO was share gains, right, so it was a significant contributor. Shlomo Rosenbaum: And then just as a follow-up, can you talk about where you are in terms of completing the cloud platform in the international markets? Mark Begor: Yes. We finished the year a few months ago, 2025 at about 90% of our revenue in the new cloud. That's substantially all of the United States. As you know, that was our strategy. And what we have left to finish is Australia, a couple of Latin American countries and a few other in India, so a few other pieces. And most of that will be complete this year. It's really a game changer for us to have the cloud behind us. As I talked in my prepared comments, having that cloud capabilities, our scaled differentiated data, we're really purpose-built now with the investments we've made to really activate our AI initiatives and our multidata solution initiatives to really differentiate Equifax in the marketplace. And you're seeing that in our vitality index, the 17% Vitality in the quarter in the large pipeline we have of new products that we're planning to roll out, like we just talked about TWN indicator in really every financial services vertical, that's really exciting and stuff we couldn't do before the cloud. So it's really energizing time for us, having the cloud at this stage and substantially behind us, particularly in our large and most profitable and EBITDA generating market in the United States, it's an exciting time. Operator: Our next question today is coming from Kyle Peterson from Needham & Company. Kyle Peterson: Great. Just one for me. I wanted to touch on talent. Great to see you guys performing. It's been a pretty tough hiring market. But I wanted to see if you guys could unpack a little bit what kind of the bigger drivers are? Obviously, it seems like records is helping a lot with hit rates and stuff, but maybe between like whether it's record price, bigger package density like longer background screening. Just any more detail or color there would be really helpful for us. Mark Begor: Yes, I think you've hit on it. Clearly, records are real positive. And as you know, we had strong record growth again in the quarter which is super attractive for all of our Workforce Solutions verticals. Chad and the team are doing a great job on continuing to expand our data set. We have price in their prices. One of the elements we took price up [ 11 ], so that's definitely benefiting all of our verticals in Equifax and AWS, including talent. We've got a bunch of new products that the team is rolling out. So really a lot of innovation coming there. And remember, not only are we selling -- helping the background screeners by delivering that work history from our data set because we get the job title with every payroll record and we have that digital resume but increasingly, we're delivering education data incarceration data and other data elements to the background screeners and then in different formats. We're getting more sophisticated in delivering on our customers really requirements around the different job categories and what data is required in a white collar, in your world, financial services job, there's a lot of more history job history and education history than there is in a blue-collar job. So we've rolled out some more blue collar, which think about it as a last job worked kind of solution versus the last 5 years of employment. So just being more deliberate around having a suite of products to help our background screening customers. Operator: Your next question today is coming from Jason Haas from Wells Fargo. Jason Haas: I'm curious, why did our government verification business declined quarter-over-quarter. I think historically, you typically see like that revenue go up from 4Q to 1Q. And then I also had a question just on 2Q. Why is that flat year-over-year just because historically, that typically increases also from 1Q to 2Q? Mark Begor: Yes. So it went up in 1Q. We shared that earlier. So we had a very strong quarter, and we're very pleased with the momentum, not only in the quarter, but in particular, more the long-term pipeline, which we shared was up kind of 2x year-over-year. Second quarter, as we talked about in our prepared comments and one of the earlier questions, is we got a tough comp because we had a large win last year with SSA that we're comping that activated in April of last year. So that's a tougher comp, which is really driving the performance in the second quarter. John Gamble: Yes. And seasonally, we're expecting to see revenue up in the second quarter versus the first, which is not unusual, right? [indiscernible] I don't think there's really anything unusual in the trends that we saw this year. Jason Haas: Okay. So that SSA contract, was that like a onetime benefit? I thought that, that's launched in 2Q, but then that becomes an ongoing benefit. Mark Begor: It does, but it's -- we're comping against it because it was a new contract in 2Q. And as you point out, it does go on in the future beyond 2026. But the comp is one that is -- one we have to overcome, and it was a big contract. Jason Haas: Okay. That's fair. And then just on the margins were really strong for EWS. The guidance now implies it looks like they're going to be down in the rest of the year. So yes, what drove the [ beat ]? And why does that not continue going forward? Mark Begor: Yes. And I hope you saw that Equifax margins were also quite strong in the quarter. And as you know, we've got a guide for 75 basis points of margin expansion for the year, which is well above our 50 basis point long-term framework. So we feel really good about the operating leverage for EWS in particular, they had a very strong first quarter and then that operating leverage flow through. And that's why we're still investing heavily in EWS. We're -- it's our fastest-growing business over the long term, and we're continuing to invest in the government vertical. We're investing -- Chad is investing in a bunch of new products, and we're also investing in capabilities and record additions. So it's one that we're continuing to invest in the business, and you just had the strong operating leverage flow through. Operator: The next question is coming from Ashish Sabadra from RBC Capital Markets. Ashish Sabadra: The CMS recently launched Emmy, an income verification tool. How is this expected to change any competitive landscape for the Government Verification Services? Mark Begor: Yes. I think it's still early days on that solution. It's one that we think we can be complementary with. As you know, our scale data set provides an instant verification. It has large coverage. It provides a lot of productivity for the case workers at the state level. We think that's -- their solution looks a lot like our complete income. Obviously, it's not integrated in there to go after either records we don't have or to go after some of the gig income that we may not have in our data set. But we think it's -- our data set is just so much more comprehensive and instantly available. We think there's still a large position for us to continue to grow with CMS. And then you add to it some of the new requirements with OB3 on work requirements, education requirements or volunteering requirements. We're rolling out a solution that will really deliver those capabilities, but it's going to be integrated with our core TWN dataset income offering that we think will be quite beneficial for the Medicaid, Medicare verifications. John Gamble: And it would just be another distribution channel for us. Obviously, we'll make sure our customers can get to our data in the way they want to. Mark Begor: Yes. Ashish Sabadra: That's very helpful color. And if I can ask a question around agentic AI, one of the concerns that we've heard is agentic AI could potentially displace manual verification. And just given that manual verification is one of the key competition in your verification business, how does -- one of the questions that we get is how does the technology shift, if any, Equifax, again, positioning in the verification business? Mark Begor: Yes. We think it's pretty hard because, as you know, that's all proprietary data. You're talking about income and employment data is proprietary in our data set, and it's all permissioned by permissible purpose because of the Fair Credit Reporting Act solution. And then the contributors, we have almost 5 million companies now contributing data to us every pay period, it's proprietary in their data set or with their payroll process or HR software company. So it has to be consumer permission. There's a lot of friction with that. I don't -- we don't see how AI can really facilitate that consumer permissioning to access that data because the data is not available anywhere in the worldwide web. It's all in proprietary house environments, including Workforce Solutions at Equifax. So we just don't see that as a threat, which is really part of that AI data moat that we highlighted in one of the charts in our deck this morning, and we did it again in February that the work number as well as our credit data and our other data sets really are quite unique because AI can't access them. Only Equifax AI can access them or when we deliver it to our customers on a permission basis, they can access it, but it's just not available on the worldwide web. Operator: The next question today is coming from Faiza Alwy from Deutsche Bank. Faiza Alwy: First, I just wanted to clarify on the government business. I think you said earlier in the call that you expect sort of second quarter revenue to be flat versus first quarter. And then I think you just said in response to a question that you expected to be up. So maybe if you could just sort of... Mark Begor: No. I did not say that. My intention was to say it was -- we had a strong first quarter, which we were pleased with. We also talked about our pipelines, which when we think about pipeline, you'd think about later in the year in 2027, that's generally how the kind of deal cycle is in government. It's longer term. But we did say that we expect the second quarter to be flattish because of the tough comp versus last year. Faiza Alwy: Got it. And then just to put a finer point on the year. I think previously, we are expecting that you can grow sort of in line with your long-term growth rate for EWS this year, which is up 13% to 15%. Do you think that we sort of do that this year? Or is that more -- are you expecting more of that benefit in 2027? Mark Begor: Go ahead, John? John Gamble: To be clear, we had only provided guidance for EWS and Verification Services in total, right? And EWS and the Verification Services guidance were not. They were below the long-term framework. We think they were very good and nice growth from 2025, right, but no, they weren't at the long-term framework yet, right, part of it due to mortgage, part of it due to other factors like weaker hiring market. So I think what Mark covered in his remarks and already is that our expectation is we're going to continue to see improved performance in government as we move through this year, but that the major opportunities that we have regarding the new programs that were passed by the government, et cetera, that Mark covered in detail, we expect that really to start benefiting us in 2027. Faiza Alwy: Understood. Makes sense. And then I just wanted to ask, have you seen any impact on mortgage volumes from the trigger lead legislation? I think, John, you'd previously said that it might -- you might shift more towards hard inquiries. So just curious if there's been any impact on overall volumes or any kind of shift that we should watch out? John Gamble: Not yet. Now admittedly, it's very new in the quarter, right? So not yet. And I think our guidance doesn't assume much in the second quarter will occur either. Operator: Our next question today is coming from Kevin McVeigh from UBS. Kevin McVeigh: Great. I guess obviously, the big focus on mortgage, but I wonder if you had any thoughts as to how the VantageScore could impact auto, consumer and some of the other areas from a kind of share perspective? And then just from a regulatory perspective as well? Mark Begor: Yes, I think it's a great question. As you know, there's already a large penetration in non-mortgage or diversified markets. You've got large lenders that have been using Vantage for many years. Number one, because of the performance of the score is more predictive because it includes more data than the current Vantage Classic score. Vantage 10T will close some of that gap. But it has a performance element. And then there's just a cost element. It's a less expensive score. We charge much less than FICO does over there. I think the other element that we think about is that if you're a multi -- if you're not a [ monoline ] and your financial institution that's doing mortgage, auto, card, p loan, you're doing multiple products, you're likely going to be incented to move your mortgage volume over because of that significant cost savings and the fact that with an agency mortgage, if it's approved, they're going to take that loan and take it into the pools that they've purchased from the mortgage originators but if you're using Vantage in mortgage, you're likely going to use the Vantage when you rescue your portfolio. And we see the same opportunities over the medium and long term to drive more Vantage adoption in the diversified markets or non-mortgage spaces. And there already is a lot of adoption there. There's, as I said, large lenders that are entirely vantage outside of mortgage because as you know, there's never -- there's no regulatory requirement in non-mortgage, there only was in the mortgage space by the agencies that require the FICO score up until last July for 25-plus years. So we see it as an opportunity for sure. Kevin McVeigh: That's helpful. And then just from a pricing perspective, I know you adjusted the VantageScore pricing for mortgage, any thoughts around auto? Mark Begor: Same. Yes. We're going to offer the VantageScore. We're already in the market doing that at a discount to FICO. Again, we sell the credit file plus the score when we sell the FICO score in mortgage or auto or any other market, we don't make any margin on that score sale. When we sell Vantage, we make some margin on it. So we're obviously incented to deliver that to our customers, and we see that as an opportunity going forward. Obviously, much smaller given the significant $10 price in mortgage versus it's much less the FICO score in auto, cards and P loans, but there's still a performance and a margin opportunity for our customers. So we're certainly going to take advantage of that. And I think as you know, last summer, we rolled out the free VantageScore with every paid FICO score, not only in mortgage but also in diversified markets or non-mortgage. So we've got lenders that are taking -- that are using FICO, that are taking Vantage to make sure they understand it and understand the performance and evaluate it. So as I said a couple of times, we see that as an opportunity going forward. Operator: Our next question is coming from Curtis Nagle from Bank of America. Curtis Nagle: Terrific. So maybe just sticking on the subject of Vantage, how soon you could provide a little more detail and I think you said 50 mortgage lenders are currently in production with Vantage. I guess just to confirm, so I think these are non-GSE mortgages? Are they being underwritten? Are they being held on the books? Securitized? Any sense of kind of the nationals? Just trying to get a size of sort of where things sit before we get kind of full acceptance with GSEs. Mark Begor: Yes. These are admittedly smaller lenders, but they are lenders that a year ago were not using Vantage in the mortgage space. They're non-GSE, as you point out, they're some of the other federal agencies that don't fall under FHFA as well as other lenders. And it's just reassuring to us to see that they're taking these loans, in many cases, balance sheeting them, but see the power and the performance of the VantageScore and obviously, the cost opportunity of buying it at a lower price than what FICO is currently charging. And we see that as another indicator that the industry is going to be ready. I think a more powerful one is the 240 GSE lenders. Many of them also have some element of balance sheet for the non-agency loans or securitizations on their own, but the fact that they're taking the VantageScore, ingesting it in their system, and obviously, we talk to them all the time. There's a lot of interest around using Vantage once it gets activated by the agencies. John Gamble: And for lenders that are non-GSE and are exclusively non-GSE, we think the share of Vantage is very high, right? So where the opportunity exists the movement has occurred. The volumes are very low, but the share is very high. Curtis Nagle: Okay. Understood. And then maybe just a quick one just on -- I think, at least at a high level, you pointed out some cost productivity from AI. Maybe just a little more detail. Is that some, I guess, output of higher throughput? Is it raw expense takeouts, some combination of the two? Something else? Just any more detail there would be helpful. Mark Begor: Yes. So maybe I'll be a little broader on it. Obviously, we were pleased with our margin expansion ex FICO in the quarter, and we're also pleased and I hope you are too with our guide for the year to be up 75 basis points. You think about that as being -- the first big piece there is operating leverage, having our strong revenue growth that is at the kind of higher end of our long-term framework delivers that incremental margin. So that's a positive. We also have in the quarter, which was substantially higher than our guide in the first quarter, you had that mortgage lift that we had kind of in the middle of the month before rates went up, that kind of pass through and went through to the bottom line. I think that is indicative of when mortgage markets recover, we've been very clear with you that margin is going to drop through and you certainly saw it drop through in the first quarter. And then last, as you point out, we're really getting some traction, and I would characterize it as still early days, meaning the runway we have around deploying AI across our operations inside of Equifax. We call it AI for EFX operations, think about call centers and our paper processing centers is kind of the first frontier there. We're making a bunch of progress of using agents to start taking calls from consumers using agents in AI to process hundreds of thousands of paper documents we get every month from consumers here in the United States and around the world. There's a lot of productivity there. And then we see productivity opportunities going forward in technology where we have a large workforce. We're seeing real momentum around using some of the AI tools to do coding which we're very energized about is the opportunity of that going forward. And then broadly, in our kind of support teams, whether it's finance, HR, legal, all of the support teams are deploying AI to increase their efficiencies. So I would expect kind of AI-driven productivity to be a multiyear lever for Equifax going forward. And I think it is going to be for all companies. We all read about it, but it's really real. And the acceleration tools. We're using things today that we weren't using 6, 9, 12 months ago inside of Equifax to drive our speed, efficiencies and accuracy. So it's really exciting. So I think those 3 together are really what's driving our above long-term framework margin expansion for the year, and we're very pleased with that kind of operating leverage. And then obviously, it generates incremental free cash flow that we can return to shareholders or use for bolt-on M&A. Operator: Our next question today is coming from Surinder Thind from Jefferies. Surinder Thind: John, can you maybe talk about just the hard inquiries versus the overall mortgage originations? Thinking about it from a lender behavior perspective, just any changes that you're seeing in hard versus soft and what the implications this is from a revenue perspective here, is just more usage of soft equals less revenue? Or how should we think about the pending changes here [ around the party ]? John Gamble: I think what we've seen over the past several years, right, is a significant acceleration in the use of soft early in the mortgage process to give lenders a better view in terms of who they're working with, who are submitting the applications or who are they marketing to, right? So I think it's both -- there has been some shift of activity from hard to soft, that's certainly true. But there's also been an expansion of opportunity as lenders utilize these lower-cost soft pulls in order to get a better view of how they want to sell and market in the business. So overall, what we think has happened is you're just -- you have seen more activity over the time period if you combine hard and soft together, right? Also, we think what has happened is that hard inquiries, therefore, have become less indicative of just the trend that's occurring in originations, as we mentioned in the prepared remarks, right? So that's why we're going to start sharing with you the origination data that we have from the credit file. Yes, it's a little bit in arrears, but we think it's very valuable information that we can share. And we'll continue to guide as we go forward based on our expectation on annual origination volume for the industry so we can get a perspective on what our expectation is for the year. Surinder Thind: Got it. And just to clarify, is the idea here that we're going to continue to see the mix shift changes? Or are we kind of approaching some point of stabilization? John Gamble: I think we're going to continue to see changes in the mortgage industry based on the new products we launch, right? So -- and we're continuing to see that occur. So for example, we're very excited about the growth that we're seeing in our soft pulls based on TWN indicator and the other data we're providing, right? So we're continuing to offer richer products on the front end, which drive more volume. Exactly how the market shifts as we go forward. I think we're going to see it together. But at this point in time, what we're seeing is we're seeing ourselves drive more growth in soft as we believe we're taking share by offering more value on the front end. Surinder Thind: Got it. And then as a follow-up, on the whole VantageScore-FHFA debate, I mean when we think about -- like do lenders actually care about the performance of the credit scoring model as the current the market system works, meaning that I feel like the debate has been in VS4 versus classic FICO, but I also think there's 10T in the mix. And the preliminary data suggests that there may be differences in performance model and which would be perhaps another consideration in addition to price here, like how do we think about that? Mark Begor: Yes, I think that it's a great question. I think broadly, lenders will use scores that are approved by the agencies. You have to. So I think you got to start with that. And remember that the lenders are broadly originating the loan and then selling it to the government. So they want to follow the specifications that they have. But I would make sure that we both think about and we do too, is that in that mortgage prequal and application process, if you've got a mortgage score or data that's going to allow you to either approve more customers or put the customers, the consumer, the future homeowner in the right loan because there's more data. In the case of Vantage 4.0, there's just more data used in that score. So it should allow for a more accurate picture on that consumer. And then we believe allow them to originate more, which is a good thing and put them in the right loans because what you don't want to do is have someone going through the application process, and then they get disappointed because either they have to have a higher down payment or the interest rate is higher than they think because of not having as much data information. But -- so I think both are true. And from our perspective, I think it's broadly recognized, although some maybe would disagree with this, but Vantage 4.0 is a score that has more data in it than FICO Classic. I think 10T closes that gap once it's rolled out than Vantage 4.0. But what's approved by the agencies is what the originators are going to use, and that's what's important. And I think we're all -- I don't think there's a debate. I think we're all just waiting for when will the agencies be ready to accept the VantageScore, and we just think we're getting closer to that stage. And again, from an Equifax perspective, we're advantaged either way. Our guide for 2026 assumes no Vantage conversion. We've laid out for you what the upside is, if there is Vantage conversion, it's only upside. And there's really not a downside to Equifax because both of these scores are calculated using our credit data. and you can't calculate the score without the credit data. So it's -- we think we're well positioned going forward, and we're trying to be responsive to our customers by offering the VantageScore that delivers performance and certainly significant economic value with $1 versus $10. Operator: The next question is coming from Andrew Nicholas from William Blair. Andrew Nicholas: Just one question for me on maybe the AI front. You talked about operating efficiency from AI, product funnels, development life cycles, patent generation, all the benefits you're seeing in the way that you use the technology. Could you speak more to how clients are interacting with you and the data differently, if at all? Are you seeing any changes in usage patterns or evolution in how often clients are interacting or [ why did they ] interact with your data? Any insights there would be great. Mark Begor: Yes. So I think there's long been a macro and it's still -- we're still in that macro about our customers want more data. They want more alternative data. They want more differentiated data and that's one that's a macro that's still, in my opinion, in early innings, meaning there are large lenders that only use the credit file today and aren't using alternative data. And they know that they're going to get a lift with alternative data. What AI is allowing us to do, and again, Equifax has more alternative data than our competitors, which we think is an advantage for Equifax in an AI world, because it allows you to really ingest that differentiated and additional data that's going to drive a more predictive or higher-performing solution for either underwriting or identity or whatever the process is. So we're super energized around, number one, having the cloud substantially complete. We put all our data in a single data fabric. We've got large-scale differentiated data that's proprietary. We have an AI moat around it. And now we're really investing in delivering that data to our customers, either the individual data sets or for lots of customers, scores and models that incorporate more data in it. I mean you can't do that without the explainable AI that as you point out, we've been investing in from a technology standpoint and with our patents, around the ability to deliver that explainable AI that our customers require for their regulators and for their own internal processes and the Fair Credit Reporting Act requires. So really, both of those become another area that is an important differentiator in our space and for Equifax to make sure we're delivering solutions that have that higher performance. And AI is -- we're really seeing a lot of momentum there. I think we pointed out that 100% of our scores last year were using our AI capabilities, and that means higher performance. Our products now are increasingly using AI and we talked about some of our platforms that are having conversational AI, so our customers can use them more readily inside of their operations. So it's still very much early innings between the ability to deliver more differentiated data to our customers and then the ability to do that with AI. Operator: The next question is coming from Scott Wurtzel from Wolfe Research. Scott Wurtzel: Just one for me. We've been getting a lot more questions around just whole kind of tri-merge to bi-merge dynamic and the potential of that move taking place, I guess, given some of the rhetoric we've heard from industry participants. So just kind of wondering what -- if there's anything you guys have heard from whether it's your conversation with regulators or other industry participants just around that whole dynamic and the potential for that... Mark Begor: Yes. Our conversations are quite broad that it's well understood that there's large enough differences between the 3 credit files, that a tri-merge provides performance, meaning it includes more people, provides a more complete picture. If you think about it, most consumers have multiple bank accounts, not every bank will contribute to all 3 credit bureaus. And we've shared stats before. There's 10 million roughly consumers, they're only on one credit bureau. So if you're pulling one or two, you're never going to approve or even see that. And then if you ever look at your credit score between the 3 credit bureaus, it's going to be different by 30, 40, 50 points. And that's because not every bank contributes to all. So our view is that there's a broad understanding that the Tri-Merge delivers both access to credit, meaning having a more complete picture on the consumers, and it also delivers the same in safety and soundness, meaning you're seeing every trade line that a consumer has, both the good and the bad trade lines. So you've got a complete picture. So we think that there's broad support on the Hill with the regulators and with our customers about the power of tri-merge and I think I've shared before on other calls. If you look at the more sophisticated, in my opinion, lenders outside of mortgage, think about cards or others there's many that pull a tri-merge because they get a more complete picture about the consumer for approvals, meaning they can improve more. And they see all the trade lines, so they make sure that they're managing their losses, and they're not missing a trade line that might be a negative trade line in one of the bureaus if they're only pulling a [ 1 or 2B ]. So we think there's a lot of support for it. Operator: The next question is coming from Ryan Griffin from BMO Capital Markets. Ryan Griffin: I was just wondering what percentage of your volumes are soft versus hard pull? And I was wondering where you see that mix evolving over time with some of the new products benefiting in prequal? John Gamble: Yes. So we don't specifically disclose soft versus hard and I think what we've indicated is over the last several years, what we've seen is soft pulls obviously grown meaningfully as a percentage of total pulls. Mark Begor: And I would point you to our revenue is quite strong in hard and soft pulls, which we were very pleased with. Ryan Griffin: Appreciate it. And then just on the lenders onboarded thus far, testing the VantageScore. I was wondering if you could give any information on that group in terms of the customer size or type of lending institution, whether it's banks or independent mortgage brokers? Mark Begor: All of the above. 240 is a lot and includes smaller ones, but a lot of the big ones. So it's broadly, our customers understand how Vantage operates. They understand that it's a performing score. They understand that Fannie and Freddie are going to activate it. It's just a matter of time. It feels like we're getting closer. And then they also understand the cost advantage, which is significant to them. And remember, 1 in 8, 1 in 9, 1 in 7 loans close, the others don't. And that's breakage for the mortgage lenders and at $1 of breakage versus $10 times 3, it's a significant cost savings. As you know, it's been quantified for the industry. It's over $1 billion of cost saves by moving to Vantage. So that gets the attention of the lenders. Operator: Our next question is coming from Kelsey Zhu from Autonomous Research. Kelsey Zhu: Could you maybe talk a little bit more about your expectation around VantageScore market share gains and future pricing policy and the mortgage vertical over the medium term? Mark Begor: Yes. It's hard to put numbers on it and I don't know how far medium term is, but let's say, over the next couple of years, in my opinion -- I think in our opinion, once Vantage is activated by the agencies, there will be adoption and that will be positive for Equifax. It's not in our guide. So that will be incremental margin. Our revenue will go down because we're selling a $1 score versus a $10 score, but our margins will go up because we're going to make a buck instead of making zero and over the medium term, I think there's going to be substantial conversion. Why would a lender if the agencies are approving Vantage, why would they pay $10 versus $1. It's one that's kind of common sense. As far as pricing, we're going to be certainly intended to be very competitive. I think the dollar reflects that versus the current FICO pricing. I don't think any of us know what FICO is intending to do in January of 2027, which is not that far away, whether their price is going to go up, down or sideways, but we're going to be very competitive going forward. And we don't need a lot of price to deliver our long-term framework. That's not how we operate. We're multifaceted in our ability to grow our business. Price is one element. But more important for us is share gains, new product rollouts. In the case of Workforce Solutions, record additions, new verticals that we're penetrating. We've got multiple levers for growth. And in the case of Vantage, it's really going to be a margin opportunity for us to grow our margins going forward. Kelsey Zhu: Got it. Second question, I was wondering if you can talk a little bit more about your outlook for volume growth across card, auto, personal loans for the rest of the year? John Gamble: So I think we gave guidance for our diversified markets for the second quarter. We gave some perspective on the full year, and I think that's kind of consistent... Mark Begor: There's really not a lot of change. Yes. John Gamble: But not a lot of change, right? It's pretty consistent across the rest of the year. Yes. Mark Begor: The consumer is still broadly resilient. Delinquencies are still managed well. Our customers are strong, meaning the financial institutions. I think one variable is how long does this conflict go on in the Middle East? And what is the impact on oil prices? What's the impact on inflation? What's the impact on consumer spending and does that impact financial services? That's hard to handicap how long this is going to go. I think we all hope it gets resolved fairly quickly, and the market seem to reflect that kind of bias. And I think you heard last week and to a lesser degree, this week from the large banks reporting that they're having good originations and managing their delinquencies broadly quite well. So I think that's a good outlook for us in FI when you look through the rest of the year. Operator: Our next question is coming from Craig Huber from Huber Research Partners. Craig Huber: I think a few people could probably blame you guys for not raising your guidance after the very strong first quarter, just given the macro issues out there. But my very specific question is in the month of March with this war starting, this Iran war starting at the end of February, is there any areas in your business that you saw material movement down in the revenue growth rates given this Iran war that you can attribute to? Mark Begor: Mortgage. Craig Huber: Anywhere else though that you can talk about? Mark Begor: It was meaningfully mortgage for sure meaning mortgage, we saw an uptick kind of in the middle of the quarter as rates came down before the Middle East conflict started. And then we saw I think a combination of rate increases and probably consumer psyche about something like that happening in the Middle East, things -- mortgage slow [Audio Gap] And then we talked about -- we saw a little bit in auto, slowdown from probably higher rates. There's also the higher prices of cars from the flow-through of tariffs and other impacts. But we shared earlier that where mortgage is kind of running over the last 4, 5, 6 weeks is kind of back down in line with our February guidance for the year. So that's why we -- it's slightly below that actually, but that's why we held the year. And we're hopeful that if the conflict gets resolved and inflation comes down from the oil impact that there will be some rate reduction. And John pointed out, and I hope you saw that the significant, I would call it, pipeline mortgages at these higher rates that continues to build because mortgage hasn't stopped, but you've got a large pipeline or portfolio consumers that have mortgages at these higher rates of 5, 5.5 and over 6 that will be ready for a refi as soon as rates tick down 25 basis points, 30 basis points, 50 basis points, that creates an opportunity for a refi that's going to be good news for us when that happens. And again, we saw a small piece of that in the middle of the quarter. Craig Huber: And then my follow-up question, if I could. On the securitization market for mortgages, how important is that market there? Any feedback there, et cetera, for getting VantageScore up and rolling and moving along here with market share gains on mortgages? Mark Begor: We don't see it as a real event because there's a lot of securitization that's done in the non-mortgage space. In auto and cards, there's large lenders that are exclusively Vantage that have been securitizing auto portfolios and card portfolios for years, 5 years, 6 years, 7 years. So it's well understood. We don't think it has an impact. It's really more getting the agencies to get their technology and their pricing tables set up to take in that VantageScore. And the indications we're getting is that they're getting close to being ready for that. Operator: The next question is coming from Zachary [indiscernible] from FT Partners. Unknown Analyst: This is [ Zach ] [indiscernible] on for Zachary [indiscernible]. Just a couple of questions on employer. Since the macro is causing some deceleration there. Can you just talk about the underlying trends you're seeing? Is it just the tax credit legislation? Are there other factors maybe between blue-collar versus white-collar, maybe geographically? Jeffrey Meuler: The employer, the big impact is the Work Opportunity Tax Credit, or WOTC, not being -- expiring and not being approved. I think we're -- we and lots of others are lobbying to get that through Congress. There's, I think, broad support to do it because it promotes the employment of certain individuals that really benefit from that. Just as a reminder, we're continuing to process the WOTC applications, even though they're not being accepted for the tax credit [ same ] meaning that we're building a pipeline when it does get activated. And it's hard to handicap when that's going to happen. But that's a meaningful impact in that vertical and employer because it's a larger business for them that we're not able to generate any revenue today, but we're building a pipeline once it does get activated to submit those WOTC applications for approval. Operator: Our next question today is coming from Owen [indiscernible]. Unknown Analyst: I just have a quick clarification on that $35 million margin upside from VantageScore conversion. Could you please talk about the assumptions behind how can we get to this [ map ] by $35 million and the margin profile of VantageScore at $1 per score? Mark Begor: Yes. The margin profile on a dollar is 100% margin. Think about it that way. It's zero with our FICO score. And it's really just taking that dollar current mortgage activity. And the $35 million assumes full adoption at today's run rate of mortgage transactions. Obviously, if the mortgage market improves, that becomes a bigger number. Would you have anything, John? John Gamble: No. It's just based on -- its adoption at our 2026 guidance for the mortgage margin, right? It's just consistent with our guidance. If there was no FICO and 100% Vantage, that's how you get to the $35 million. Mark Begor: And again, just to reclarify, our guide for the year assumes 100% FICO delivery and no Vantage conversion. So this is an upside for us. And again, if there is FICO to Vantage conversion, our revenue would come down, but our margins would go up by that run rate of $35 million. Unknown Analyst: Got it. So that conversion is 100% conversion from zero to... Operator: The next question is coming from Simon [indiscernible] from [ Wolf Child & Company Redburn ] Unknown Analyst: Just wanted to change subject a little bit. And just going back to the discussion you had on consumer permissioning within the verification business. I note that the current friction we have with consumer [indiscernible] are I think that the consumer just has to put in their own -- offer their login details and passwords. And obviously, that creates a huge amount of friction in the whole process. Is there a world in which the requirement actually input passwords and log-in details goes away where just actually giving permission allows access to that data via those providers. I'm just curious about your thoughts around that kind of the legal pathway to that kind of environment. Mark Begor: Yes. It's hard to see that happening. I don't know where they would -- I think you're going down the path of like an AI agent somehow would have to get access to that user ID and password from that individual consumer because they're all individualized by every individual for every account they have and everyone's got lots of accounts. So it's hard to see that happening. What we see in consumer friction, and we participate in it, is that there's a lot of friction with it. And our customers typically don't want to use it because in an application process, too many consumers drop out when they're asked to do more, meaning they want a friction-free, very smooth process, which means instant decisioning and you can't do instant decisioning with consumer permission. So there's a place for it. And that's why we've rolled out our complete income solution for government, and we've had some wins in the government space that where that consumer is willing to invest the time, I think that's where you really get to. And as far as the AI element, it's hard to see. Unknown Analyst: Okay. That's helpful. And just one quick follow-up. Really from a sort of technical perspective here, when you talk about your ex FICO revenue growth, how are your reseller revenues treated [indiscernible]? Are you stripping the FICA revenues out [indiscernible] group as well... Mark Begor: All the way through. Unknown Analyst: All the way through? So that includes the FICO revenues from the [ resold ] FICOs from the other bureaus within that? Mark Begor: We have a tri-merge business. This really assumes the Equifax piece. John Gamble: So what we assume is just any revenue that we paid to FICO or any revenue that would be paid to FICO by Experian and TransUnion has effectively passed through to us by the price that they charge us, right? So this is to try to cover as best we can all of the FICO score revenue that we are paying either directly or indirect. Operator: Our final question today is coming from Arthur Truslove from Citi. Mark Begor: Sorry, Arthur, can you get closer to the phone? We can't hear you. Arthur Truslove: Sorry about that. So for me, you obviously mentioned earlier that AI is contributing to your margin development, and that's very positive. Obviously, your sort of midterm margin guide has always been 50 bps since I've been involved covering the stock. I guess my question would be, like in what sort of set of circumstances could you see that midterm margin guide being bumped up to 75 or 100 basis points? So I just wondered what might bring that about? Mark Begor: Yes. It's a fair question. We're obviously pleased with our guide for the year and super pleased with our performance in the quarter. And as you know, the margin expansion really has two big levers. One is the core operating leverage from the business and the strong top line growth with the operating leverage you get from that generates some of that margin lift, which is directionally that 50 basis points with our long-term framework for revenue growth. And if we're able to grow revenue faster, that's going to be attractive for us as far as operating leverage. On the AI side, it's kind of early days. We're only months into this as far as deploying it. And I think as we get further into it, we see some of the further benefits in operations, which think about that as our call centers and operation centers, which are quite substantial. As I mentioned earlier, as we start getting into the technology side and our ability to use to really accelerate our coding capabilities, which we're seeing some early progress there. I think as that unfolds and then across the rest of the organization, we see some of the benefits, we'll certainly, at the right time, take a look at our long-term margin goal. Today, we feel very comfortable with the 50 bps. We're very pleased with our outperformance guide for 2026 and at 75 bps, and then we'll certainly look at it in the future as we get further into the AI journey. Operator: Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Trevor for any further closing comments. Trevor Burns: Thanks for everybody's time today. If you have any follow-up questions, please reach out to Molly and I. Thank you, and have a good day. Operator: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
Operator: Good day, and welcome to the Steel Dynamics, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised this call is being recorded today, 04/21/2026, and your participation implies consent to our recording this call. If you do not agree to these terms, please disconnect. At this time, I would like to turn the conference over to David Lipschitz, Director, Investor Relations. Please go ahead. David Lipschitz: Thank you. Good morning, and welcome to the Steel Dynamics, Inc. First Quarter 2026 Earnings Conference Call. As a reminder, today's call is being recorded and will be available on our website for replay later today. Leading today's call are Mark D. Millett, Chairman and Chief Executive Officer; Theresa E. Wagler, Executive Vice President and Chief Financial Officer; and Barry T. Schneider, President and Chief Operating Officer. Other members of our senior leadership team are joining us on the call individually. Some of today's statements, which speak only as of this date, may be forward-looking and predictive, typically preceded by believe, expect, anticipate, or words of similar meaning. They are intended to be protected by the Private Securities Litigation Reform Act of 1995 should actual results turn out differently. Such statements involve risks and uncertainties related to integrating or starting up new assets, the aluminum industry, the use of estimates and assumptions in connection with anticipated project returns in our steel, metals recycling, fabrication, and aluminum businesses, as well as to general business and economic conditions. Examples of these are described in a related press release as well as in our annually filed SEC Form 10-Ks under the headings Forward-Looking Statements and Risk Factors, found at sec.gov, and applicable in any later SEC Form 10-Q. You will also find any referenced non-GAAP financial measures reconciled to the most directly comparable GAAP measures in the press release issued yesterday entitled Steel Dynamics, Inc. reports first quarter 2026 results. I will now turn the call over to Mark. Thank you, everyone, and good morning. Mark D. Millett: Thanks for sharing your time this morning for our first quarter 2026 earnings call. As reported, our teams achieved a very strong first quarter financial and operational performance. Several highlights for the quarter included record quarterly steel shipments of 3.6 million tons. We saw significant progress within our aluminum operations. It really is exciting to see our vision coming to life there. We had adjusted EBITDA of $700 million. And, again, most importantly, our teams continue to keep safety top of mind. We have an amazing group of people that achieves best-in-class performance each and every day. I am incredibly proud of them and the whole team. Our world-class safety culture continues to evolve, and our team's dedication to our controlled safety philosophy is extraordinary. At some 135 Steel Dynamics, Inc. locations, 94% operated in the first quarter without one lost-time injury. I am continually inspired by the commitment they have for one another, consider themselves family, and challenge the status quo each day. But, as always, we will never be dissatisfied until we achieve a zero-incident environment. Before I continue, I would like to shift to Theresa and Barry for their commentary. Theresa? Theresa E. Wagler: Thanks, Mark. Good morning, everyone, and thank you for joining us this morning. For the first quarter 2026, our net income was $403 million, or $2.78 per diluted share, with adjusted EBITDA of $700 million. First quarter 2026 revenues were $5.2 billion and operating income was $538 million, higher than sequential fourth quarter results driven by higher realized steel pricing and record steel volumes. Our steel operations generated operating income of $557 million in the first quarter, a 73% sequential increase as average selling prices per ton increased $86. From an index perspective, average HRC pricing increased from an average of $850 per ton in the fourth quarter to $975 per ton in the first quarter. Today it is over $1,000. Barry will talk more about the market in a moment. Value-added spreads to HRC have also improved. As the largest coater in North America, this will especially be helpful to our forward performance. As a quick reminder, approximately 75% to 80% of our flat rolled steel business is linked to lagging priced contracts, in aggregate generally lagging two months. So the most recent flat rolled steel price increases will positively impact our second quarter results. Additionally, demand and related pricing for our long product steel is strong, with pricing also continuing to improve. From a metals recycling perspective, first quarter 2026 operating income was $47 million, or 155% higher than sequential earnings, based on higher pricing for both ferrous and nonferrous scrap. Shipments were modestly lower in the first quarter due to inclement weather several weeks in January and February. Scrap flows are strong again with expectations for seasonally increased shipments in the second and third quarters, in addition to increases related to further support of our aluminum operations. Our steel fabrication team achieved first quarter operating income of $90 million, aligned with fourth quarter results, as a benefit from higher shipments was offset by the increase in steel input prices. Our fabrication business generally maintains between 10 to 12 weeks of steel inventory, which can tighten margins in a rising steel price environment. Our steel joist and deck demand remains solid, evidenced by very strong order activity with March representing the current high point. We were with the aluminum management team last week, and things are going incredibly well. That said, a quick reminder that we are still constructing and commissioning while we are in operational startup. Mark will provide specifics in a moment. As for the related first quarter financial impact, earnings for aluminum were lower than we originally expected, with an operating loss of $65 million. Operating costs were significantly higher in January as the team experienced normal startup issues necessitating a temporary pause in operations and a write-down of some inventory. Things were resolved quickly and are operating smoothly now with increasing volumes already being realized. We generated cash flow from operations of $148 million in the first quarter. Cash was reduced by $120 million related to our annual company-wide retirement profit-sharing funding and an additional $150 million related to working capital growth specifically associated with our new aluminum investment. We also experienced significant working capital growth related to increased pricing across our businesses, increasing both customer accounts and inventory values. Our cash generation is consistently strong based on our differentiated circular business model and highly variable low-cost structure. At the end of the quarter, we had liquidity of $2 billion, comprised of cash and investments of $800 million and our fully available unsecured revolver of $1.2 billion. During the first quarter, we invested $138 million in capital investments. We believe total investments for the entirety of 2026 will be in the range of $600 million. In the first quarter, we increased our cash dividend and repurchased $115 million of our common stock, with $687 million remaining authorized at March. These actions reflect the strength of our capital foundation and consistently strong cash flow generation, and our continued confidence in our future. Our capital allocation strategy prioritizes high-return growth, with shareholder distributions comprised of a base positive dividend that is complemented with a variable share repurchase program, while we remain dedicated to maintaining our investment-grade credit designation. Our free cash flow profile has fundamentally changed over the last number of years, from an annual average of $540 million from 2011 to 2015, to $2.4 billion for the most recent five-year period. If you exclude our growth investments related to our Texas steel mill and our new aluminum investment, the average is $3.2 billion per year. And there is more coming. We have invested over $5 billion in three primary organic growth investments, including our Texas mill, our value-added flat roll coating lines, and our aluminum platform. These projects have an estimated through-cycle annual EBITDA of approximately $1.4 billion. We placed ourselves in a position of strength to have a sustainable capital foundation that provides the opportunity for meaningful strategic growth and strong shareholder returns while maintaining our investment-grade metrics. I also want to give a shout-out to our Biocarbon team. Last week, instead of a ribbon-cutting ceremony, we had a log-cutting ceremony, which I think probably has not been done anywhere else in the world. Kudos to that team—it is doing very well as well. Barry? Barry T. Schneider: Thank you, Theresa. Our steel fabrication operations performed well in 2026, delivering strong earnings. Steel joist and deck order backlog was solid at quarter-end, with December through March representing some of the strongest order entry we have seen in the past 18 months. This backlog extends into 2026. We continue to have high expectations for the business this year due to positive customer sentiment, quoting activity, continued manufacturing onshoring, and public funding for infrastructure and other fixed asset investment programs. The uplift from this macro environment could be considerable. Our steel fabrication platform provides meaningful volume support for our steel mills, particularly critical in softer demand environments, allowing us to operate at higher through-cycle utilization rates than our peers. This also helps mitigate the financial risks associated with lower steel prices. Metals recycling operations also performed well in the quarter as scrap prices increased during the quarter, more than doubling operating income—congratulations to the team. They had some tough weather earlier in the year. The North American geographic footprint of our metals recycling platform provides strategic competitive advantage for both our steel mills and our scrap-generating customers. In particular, our Mexican operations strengthen the raw material positions of our Columbus and Sinton facilities. They also provide strategic support for aluminum scrap procurement for our flat rolled aluminum investments. Our metals recycling team is partnering even more closely with our steel and aluminum teams to expand scrap separation capabilities through enhanced processes and technology. This will help mitigate potential prime scrap challenges over time and provide a meaningful advantage in increasing recycled content in our aluminum flat roll products, while expanding our earnings capabilities. The steel team delivered a solid quarter with record shipments of 3.6 million tons. During 2026, the domestic steel industry operated at an estimated production utilization rate of 77%, while our steel mills operated at 89%. We consistently achieve higher utilization due to our value-added product diversification, differentiated customer supply chain solutions, and the support of our internal manufacturing businesses. This higher through-cycle utilization is a key competitive advantage supporting our strong and growing cash generation and best-in-class financial metrics. Regarding the flat rolled steel markets, conditions continue to improve, supported by strong demand and lower imports. Lead times remain elevated and customers remain optimistic about the outlook. Specifically, in flat rolled steel, we see improving value-added spreads returning with the impact of the core trade cases that we won in 2025. Long product steel markets continue to be strong in 2026, and we expect another solid year as demand and pricing remain favorable, particularly in structural steel and railroad rail, with our Columbia City and Roanoke mills both achieving record months in production. SBQ markets are also improving across various sectors with increasing manufacturing and energy product support. Regarding the steel market environment, North American automotive production estimates for 2026 are expected to be similar to 2025. Our specific automotive customer base has not only remained stable, but has provided opportunities for growth. We have become a supplier of choice for many U.S.-based European and Asian automotive producers due in part to our lower carbon content capabilities. Nonresidential construction remains strong, led by data centers and an increase in multifamily home building. Our platforms continue to benefit from ongoing onshoring activity and domestic manufacturing projects. In the energy sector, oil and gas activity has been strong, with the pipe mills already booked well into the summer, and solar continuing to remain strong in our order books. Overall, we remain optimistic concerning demand for our diversified value-added steel products in the coming year. And with that, I will return it to Mark. Mark D. Millett: Alright. Theresa, thank you. As you can see, it has been an incredibly good quarter, with great performance by everyone—something to celebrate for sure. We are also celebrating Barry's birthday today, and it is rarely that we get donuts anymore in the office, but today was a special day, so we are celebrating that too. Sustaining positive results does not just happen. It is the result of the strategies implemented and executed by the teams over time. We have continually invested strategically to provide scale of business, product and market diversification, unique customer supply chains, and we have been linking operating platforms to optimize market opportunities throughout economic cycles. When combined with our performance-driven incentive culture, we consistently achieve at the highest levels compared to our peers. Our foundational focus on market and product diversification into high-margin, value-added products drives higher through-cycle utilization and superior financial metrics. We optimize cash generation, allowing for a consistent and balanced cash allocation strategy that has consistently delivered strong shareholder returns. Our disciplined investment approach continues to support a strong, growing, through-cycle cash generation profile, while maintaining one of the highest ROIC metrics among our industrial peers. At the moment, our largest current investment is in the aluminum flat rolled products arena. When touring the facilities there, the excitement of the aluminum team is palpable as you watch them perform, now transitioning from construction and commissioning to production and serving customers with high-quality products. They are also constructively navigating a roiling aluminum market, manifested by the tragic impacts of the Iranian war and domestic supply chain challenges. But beyond these hopefully near-term constraints, we are also experiencing a unique and very favorable long-term market environment. There is a significant and fundamental domestic supply deficit of over 1.4 million tons of aluminum sheet, and this deficit is forecast to grow with additional demand in the coming years. In 2024 and 2025, that deficit was supplied through high-cost imports, which are now even higher as tariffs increased from 10% in 2024 to the current 50% level. This investment is in clear alignment with Steel Dynamics, Inc.’s core competencies. Our construction capabilities have once again been proven. Both Columbus and our cathouse in Saint Louis Portoci are state-of-the-art facilities, brought on in record time compared to other facilities and at a very reasonable cost, on budget, or near to budget. We are using Steel Dynamics, Inc.’s deep operational know-how in combination with the technical expertise of aluminum industry experts, and our proven incentive-driven performance culture will drive higher efficiency and lower-cost operations compared to our competitors. We also believe we have an advantaged commercial position. Two-thirds of our existing carbon flat rolled steel customers also consume and process aluminum flat rolled sheets. Our growth in the automotive sector will complement our existing steel position and provide customer material optionality. The beverage can market provides countercyclical market diversification and a more stable earnings profile within the aluminum space, further enhancing the consistency of our through-cycle cash generation. Our raw material platform will also facilitate high recycled content. We are the largest North American metals recycler, which includes aluminum, and we have successfully developed new separation technologies allowing us to have more access to usable aluminum scrap at a lower cost. Production to date, even at its early stages, is already confirming our expected earnings differentiation. When markets normalize, we are confident the through-cycle EBITDA expectation for normalized markets remains at $650 million to $700 million, plus a further $40 million to $50 million for our recycling platform. As we have spoken in the past, the four key areas of advantage result from labor efficiency, higher recycled content, high yield, and optimized logistics, all driven by our performance-based operating culture utilizing state-of-the-art equipment. This strategic investment is a cost-effective and high-return growth opportunity providing Steel Dynamics, Inc. with additional countercyclical diversification while further stabilizing and growing our cash generation capabilities. We have seen that the customer base is hungry for a new market entrant—one that is known to be innovative, customer-focused, and responsive. We view business relationships as long term, founded on trust with a continuous goal of creating mutual value—not simply financial value—by providing new supply chain solutions and new products with preferred quality and service. Many customers have already experienced this through the actions we have taken to help solve some of the recent supply chain challenges. It has been fortuitous for us, allowing us to help the market while accelerating material qualification. All startups have their challenges, and I would like to thank our customers for their patience as we fine-tune our operations and continue our ramp-up. Today, we have received certifications from multiple customers for industrial and can sheet finished products, as well as certification for automotive aluminum hot band. What is incredible to me is that even finished automotive products are currently in the qualification process with several automotive customers, and we believe we can receive approvals in the coming weeks. This accelerated certification should allow us to shift our product mix to a higher-margin mix this year, reaching the planned optimized mix of 45% can sheet, 35% automotive, and 20% industrial sometime in 2027. The hot side is fully operational now and has demonstrated the ability to run at full rated capacity. The last of four preheat furnaces will be in service at the end of the second quarter, and we have successfully rolled 3000, 5000, and 6000 alloys. Two of our three cold mills are now ramping operations and producing prime product. The third cold mill is expected to begin producing in the third quarter. The cold reversing mill in particular is successfully producing shippable 3003, 5052, and 3104 product. The first of two automotive continuous anneal and solution heat treat lines (CASH lines) is now operational and producing material for qualification for automotive customers. The team has brought that particular line on in absolute record speed; it truly is testimony to the team we have there, and we believe we should receive qualification from several customers in the coming weeks. The second CASH line is expected to begin commissioning in the third quarter. The team is incredibly excited with the earlier-than-anticipated product certifications, and again it is testament to the incredible talent we have embedded throughout the facility. There is great energy and great momentum. We are extremely excited by the physical production and quality capability of the mill today, especially this early in the startup. We are focused on achieving operational and quality consistency. We continue to believe we will be exiting 2026 at a monthly rate of 90% capacity. As we continue to be impassioned by our current and future growth plans, they will continue to drive the high-return growth momentum we have consistently demonstrated over the years. The earnings growth of our most recent projects is compelling. The capital funding for Sinton, the four value-add lines, and Aluminum Dynamics is basically complete for the projected future through-cycle EBITDA contribution at $1.4 billion a year. I am excited as our teams, customers, and investors recognize the power and consistency of our strong cash generation combined with our disciplined, high-return capital allocation strategy. It is our belief that the steel industry has undergone a paradigm shift in recent years. Supported by a pervasive sense of mercantilism, appropriate trade mechanisms will provide a level playing field. Fixed asset investment will continue to grow, which directly correlates with increased metal products demand. Reshoring of manufacturing continues to increase and, along with AI and cloud computing, will support nonresidential construction—further strengthening what is an already robust long products market. Decarbonization itself will materially steepen the global cost curve, providing Steel Dynamics, Inc. with a huge competitive advantage to gain market share and increase metal spreads. Our diversified value-added product capabilities provide us with a very unique advantage to leverage this evolving business environment and amplify our relative earnings capability. In closing, I never tire of saying that our people are our foundation. Thank you to them for their passion and dedication. We are committed to them, and I remind those listening today that safety for yourselves, your families, and each other is the highest priority. We would be remiss not to thank our loyal customers, many of whom have supported us since our inception. These partnerships are based on trust—on doing what we say we will do—and creating new solutions to enhance the value proposition. Our new aluminum partners are experiencing the same. Also, to our suppliers and service providers, who we value and trust and work with each and every day—thank you. We look forward to creating new opportunities for all of us today and in the years ahead. Thank you, and we will take questions now. Operator: Thank you. We will now open the call for questions. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. If you pressed star 1 earlier during today's call, please press star 1 again to ensure our equipment has captured your signal. Also, we ask that you please limit yourself to one question to facilitate time for everyone. Any additional questions can be addressed upon reentering the queue. Please hold a moment while we poll for questions. The first question this morning is coming from Albert Bellini from Jefferies. Albert, your line is live. Please go ahead. Albert Bellini: Hi. Good morning, all. Thank you for taking my question. So on aluminum, obviously a lot of external moving parts impacting fundamentals here. One, maybe if you could just talk through some of the impacts you expect to see on the business going forward from the recent change in tariff policy? And then I believe last quarter you briefly touched on mark-to-market margins being higher than what was used in calculating the guided through-cycle EBITDA number for the business. Since that point, we have had some significant global supply impact. Could you provide any further color in terms of how much potential upside to those numbers you see at spot prices or margins? Thank you. Mark D. Millett: I am not so sure our crystal ball is any clearer than yours for the future. Obviously, the market today is absolutely phenomenal from the standpoint of entering a new facility, so qualifying products quicker has been very fortuitous. Margins today are very strong, which is helping a startup ramp. From the performance today—looking at yields, efficiencies, etc.—we are more than confident in the $650 million to $700 million of EBITDA per year, and we do not see downside in the future. Theresa E. Wagler: You are spot on. The spreads that we used from a profitability standpoint—just market-related for each of the product sets—are significantly lower than the spreads available today. Right now, we would like to continue to have the teams perform incredibly well, but there is a significant difference and a significant benefit that would inure to us in today’s spread environment that we think does have more of a structural shift. In the coming months, we would like to discuss what we think through-cycle is. Just like the steel industry went through a structural change and what that might look like, the aluminum industry as well. So I would just say more to come on that. Operator: Thank you. Your next question is coming from Carlos De Alba from Morgan Stanley. Carlos, your line is live. Please go ahead. Carlos De Alba: Thank you very much. Just staying with the aluminum business—congrats on the ramp-up. I wanted to get a little more color on the issues that you faced in the past quarter and related to the inventory write-off you had. Was that due to quality issues, or maybe just more color in general on what happened in the business? And what makes you feel comfortable that you have put those behind and will continue to ramp volumes? Thank you. Mark D. Millett: Thank you, Carlos. Essentially it was principally limited to January and leaked a little into February. You are right; it was a quality issue. It was a stain on the product. We should have caught it, should have seen it, but it has been resolved. Theresa E. Wagler: It was not an equipment issue, Carlos. It was a process issue. Carlos De Alba: Got it. If I may add, any views on how you might ramp up the volumes? Clearly, as you mentioned, current prices are significantly above what everyone expected, so the more you can produce and sell, the better. Any color on that would be great. Thank you. Mark D. Millett: As a ramp—in Q4 we were around 14,000 tons of shipments, give or take. Q1 was around 22,000. Barring any unexpected disruptions, we think we should be around 60,000 to 70,000 tons in the second quarter. The cold reversing mill was running pretty well in the first quarter, and we have the full addition of the first tandem mill, which should change things dramatically. Theresa E. Wagler: To reemphasize the quality point, a majority of what we shipped in the first quarter—and will be in the second quarter as well—is can sheet. So it is high-quality material. Operator: Your next question is coming from Timna Tanners from Wells Fargo. Timna, your line is live. Please go ahead. Timna Tanners: Good morning. Wanted to see if you could provide a little more color about your mix. With the coated lines ramping up, how is that progressing? I did not hear the breakout—if you still provide that, it would be helpful. And a second question: given the strong free cash flow outlook and the fall in CapEx, what are you thinking about in terms of uses of cash? Theresa E. Wagler: Good morning, Timna. Apologies for not covering that earlier. First quarter flat rolled shipments: hot band was 1.017 million tons; cold rolled was 151,000 tons; and coated was 1.53 million tons. The four new value-added lines are operating incredibly well and at full capacity right now, and the markets they service were the most impacted by the court cases. So we are enjoying high-quality production, making our customers happier, and ensuring we have the right mix. From a capital allocation perspective, we are focused on consistently doing what we have been doing: growing the business as our priority, complemented by a progressively positive dividend profile and our share repurchase program, which we are still engaging in. We did take a bit of a pause in the first quarter related to working capital growth for the new operations and increased pricing across the business, but you should continue to expect to see the same balanced approach. Operator: Your next question is coming from Martin Engler from Seaport Research Partners. Martin, your line is live. Please go ahead. Martin Engler: Good morning. Had a question on unit conversion costs. Could you qualitatively touch on positives and negatives quarter-on-quarter—what moved higher, what moved lower—and whether energy was a meaningful influence in the quarter? Barry T. Schneider: Martin, we did not see any huge increases. We have seen some increases in things like paint. As for energy, there were small boosts here and there, but not to a level that concerns us. Despite what is happening around the world, we have very good relationships and we are very efficient with our energy. Our teams respond when there are immediate upsets in energy, and we are able to continue running at very high rates of production. Otherwise, it is not a major concern based on what we have seen so far. Theresa E. Wagler: To Barry’s point, there is nothing specific to point out—just remember product mix has a pretty significant impact when viewed from the outside in. Structural or long steel products generally have higher conversion costs, so as they continue to have robust shipments and volumes due to demand, it can look like our conversion costs are a bit higher. Operator: Your next question is coming from Tristan Gresser from BNP Paribas. Tristan, your line is live. Please go ahead. Tristan Gresser: Thank you, and happy birthday, Barry. On pricing—upcycles have historically seen big swings, but this time increases have been gradual, almost weekly. How do you explain that, and does it improve the sustainability of the current rally? How do you view supply and demand for flat rolled, and any risk of imports picking up? Barry T. Schneider: We are seeing more customer confidence. The tariff environment of the last two years has had impacts, but more importantly, customers have learned supply chains matter. Our local, diverse supply chain position allows us to engage with customers on a longer-term frame than a quarter or half year. We have confidence the market is strong and demand-driven. Pricing has been responsive as capacity has ramped up across the industry. Unfairly dumped imports are very disruptive. Subsequent cases have been filed regarding circumvention. All those steel tons at sea have to find a home. With global interruptions right now, we are happy to have Section 232 protections. The executive orders in early April that further defined steel and aluminum products and derivative products are very helpful because they encompass the entire supply chain. We are feeling the results of U.S. businesses picking up and our supply chain excellence taking hold. We are super excited about long products. There are many big projects where engineering and ownership are getting involved early with our long products team. We market long products and fabrication together to establish positions across projects—pharma, EV production, energy—offering solutions. It is a robust market. We hope globally things calm down, and we will keep making our customers happy. Operator: Your next question is coming from Kashyyanik Kashia. Your line is live. Please go ahead. Kashyyanik Kashia: Thank you. Maybe on the pig iron side—prices are moving higher. How much pig iron do you currently import, and any mitigating factors you are taking? Barry T. Schneider: We only use pig iron at our flat rolled mills. Our Butler mill has its own technology for making liquid iron that takes care of about 90% of Butler’s needs, produced from recycled iron oxide products—very sustainable. Columbus and Sinton are the primary users of pig iron. We will use anywhere between 12% to 22%, based on the quality and product requirements. Mitigation really comes through our relationship with Omni, our scrap provider. We have an incredible connection between scrap and steel. Scrap is continually cleaning the shred (what we call Shred 1) so we know exactly what we will get in the melting furnace. We put very clean shredded product and very clean busheling in intentionally when we need it, and use pig iron to supplement. We look at cost and availability every day. We keep good positions, mindful of working capital, and do not binge. Our teams between Omni and scrap and our melt shops do a great job, coordinated by a strong iron team. It is a benefit of our teams being closely connected and empowered to make decisions quickly. Prices go up, but we keep finding better ways to minimize impact. Operator: Your next question is coming from Samuel McKinney from KeyBanc. Samuel, your line is live. Please go ahead. Samuel McKinney: Good morning. After the solid results in structural and rail—you put up the best quarterly shipment number in a couple of years, and demand remains very strong—could you dig deeper into what is driving the uptick in activity and how the 2026 contracts shook out versus last year? Barry T. Schneider: On long products, our incentive-based system drives our people to make better things and more of them. The team has been very efficient in sequencing. Last month, the melt shop in Columbia City cast 200,000 tons, a difficult achievement for a long products mill due to section changes. Operational efficiency helps put the right backlog and inventory in place. Our sales team across long products is working together to ensure Roanoke, Soelia (West Virginia), and Columbia City are equally represented to customers, securing the best positions to make what they need. Optimization is part of our ongoing challenge. Our mills operate with incentives. There has been a shock to the railroad rail system over the last year; we were able to increase some of those products to help alleviate supply-side problems in rail. It continues to be a good part of our offering. Our SBQ mill, with increased sales and relationships in automotive, energy, and forging customers, has also been purchasing from Columbia City. We worked all long products efficiently together. Good decisions made two to three years ago we get to enjoy today. We do not see it slowing down and are engaging projects early to help with spec’ing and laying out the best solution through our fabricating networks. Operator: Your next question is coming from Lawson Winder from Bank of America. Lawson, your line is live. Please go ahead. Lawson Winder: Thank you, operator. Good morning, Mark, Theresa, and Barry—and happy birthday, Barry. You have never passed up an opportunity for growth. Given the opportunity in long products, can you make a compelling case today for a material expansion there? And similarly, now that you are active in aluminum rolling, do you see a case for investment by Steel Dynamics, Inc. into that market as well for new capacity? Mark D. Millett: You know our team—it is incredibly inspiring to see the opportunities and ideas they bring forth. We have a broad pipeline of strategic opportunities—greenfield growth across all the spaces. Aluminum Dynamics for sure has opportunity. The industry reminds us of the steel industry 30-plus years ago—has not consistently earned cost of capital, reinvested, or grown. We would like to take advantage of that. There are product lines where we feel we could invest long term, and there is a massive supply deficit that will continue to grow. We see tremendous opportunity in aluminum. At the same time, we are a steel company, and the steel teams have their own innovative projects. As we see fit, we will invest accordingly. Operator: Your next question is coming from William Chapman Peterson from JPMorgan. Bill, your line is live. Please go ahead. Bennett: Good morning. This is Bennett on for Bill. Thank you for taking my questions. I wanted to ask about steel substitution amid the elevated aluminum price environment. We have heard from companies in both sectors that this may be starting to unfold. Given that Steel Dynamics, Inc. now sits on both sides, are you hearing about this from customers, or seeing evidence to date? Mark D. Millett: The good thing is we have optionality and can take advantage of whatever direction the market may go. We have not seen or heard of any substantial substitution, to be honest. Theresa E. Wagler: Counter to the idea of substitution, there were recent announcements from a major automotive producer adding additional aluminum in auto bodies in the Midwest, increasing demand. That further supports the idea of lack of substitution. Operator: Your next question is coming from Tristan Gresser from BNP Paribas. Tristan, your line is live. Please go ahead. Tristan Gresser: Two quick follow-ups. First, you mentioned in December that the aluminum plant was EBITDA positive—could you share if it was EBITDA positive in March? Second, regarding BlueScope—what is the situation at the moment? Are discussions ongoing? Theresa E. Wagler: Thanks, Tristan. From an aluminum perspective, the plant was not EBITDA positive on a full quarter basis, but it was basically breakeven combined for February and March because we had that pause in January. They are doing an incredible job now, with full expectations for the remainder of the year to be very positive from an EBITDA perspective. Mark, on BlueScope? Mark D. Millett: Obviously, we never talk with great specificity as to what we are doing from a strategic standpoint. Suffice it to say, we have an incredibly strong partnership with Ryan Stokes and the SGH organization. As you know, we presented what we consider a best-and-final joint offer. It was, in our view, full and fair—that was back in February. As you have seen, that offer was summarily rejected, and there has been no constructive engagement by the company since. Operator: Your next question is coming from Timna Tanners from Wells Fargo. Timna, your line is live. Please go ahead. Timna Tanners: Since you addressed BlueScope, I will try another angle. How are you thinking about downstream versus steel growth versus organic projects? In the way past there was talk of a new plate mill—plates are really strong; beams I hear are sold out. Are there other expansion opportunities there, or are you thinking more of a downstream approach? Mark D. Millett: Thank you, Timna. Our strategic philosophy has not changed. We pursue and explore all opportunities. I cannot remember ever saying there might be interest in plate. When Sinton does address sub-plate needs—that is part of the reason the technology was chosen. With Nucor’s entry there, the plate market is well served. Our focus has been and will be downstream—innovative ways to improve and bring value to the supply chain in different products we are not in today. We are not in business just to grow to get bigger. We focus on value-add, differentiating products and supply chains. The team has a myriad of opportunities under exploration. We took a bit of a hiatus given CapEx for Sinton and Aluminum Dynamics. Now that is behind us, we will continue to explore those opportunities. In aluminum, it is phenomenal where we could go. Operator: That concludes our question-and-answer session. I would like to turn the call back over to Mr. Millett for any closing remarks. Mark D. Millett: Thank you. For those still on the call and those that have supported us in the past and today, we will endeavor to spend your money wisely and continue to deliver the best shareholder return in the steel business. Our team—phenomenal job. It is incredible what you do. You inspire me personally. Make sure you are safe and look after each other out there. To our customers and service providers, we cannot do it without you. Thanks for your patience with us—we can be tough at times, but we are doing tough, challenging things, and together we will succeed. Thank you, everybody. Appreciate your support. See you next quarter. Bye. Operator: Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation, and have a great and safe day.
Operator: Good morning, ladies and gentlemen, and welcome to the Alaska Air Group, Inc. 2026 First Quarter Earnings Call. At this time, all participants have been placed on mute to prevent background noise. Today's call is being recorded and will be accessible for future playback at alaskaair.com. After our speakers' remarks, we will conduct a question and answer session for analysts. I would now like to turn the call over to Alaska Air Group, Inc.'s Vice President of Finance, Planning and Investor Relations, Ryan St. John. Ryan St. John: Thank you, operator, and good morning. Thanks for joining us today to discuss our first quarter 2026 earnings results. Yesterday, we issued our earnings release along with several accompanying slides detailing our results, which are available at investor.alaskaair.com. On today's call, you'll hear updates from Benito, Andrew, and Shane. Several others of our management team are also on the line to answer your questions during the Q&A portion of the call. Alaska Air Group, Inc. reported a first quarter GAAP net loss of $193 million. Excluding special items, Alaska Air Group, Inc. reported an adjusted net loss of $192 million. As a reminder, forward-looking statements about future performance may differ materially from our actual results. Information on risk factors that could affect our business can be found within our SEC filings. We will also refer to certain non-GAAP financial measures, such as adjusted earnings and unit cost excluding fuel. As usual, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release. Over to you, Benito. Benito Minicucci: Thanks, Ryan, and good morning, everyone. To start, I want to thank our more than 30,000 employees across Alaska, Hawaiian, and Horizon for their continued focus, professionalism, and commitment to taking care of our guests through another unpredictable start to the year. The operating backdrop shifted rapidly this quarter. Sharply higher fuel prices driven by geopolitical events created uncertainty across global markets and meaningful pressure on the airline industry. At the same time, our network faced more disruption than normal, from once-in-a-generation rainstorms in Hawaii to civil unrest in Puerto Vallarta. Through it all, our teams have demonstrated remarkable resilience. Their response day in and day out remains the foundation of our performance and long-term success. While these events created close-in challenges, we remain convicted and excited about our strategy and the future we are building at Alaska Air Group, Inc. as we continue to unlock the initiatives we laid out under Alaska Accelerate. Throughout our history, we have leaned into periods of disruption to strengthen the company. After the 2001 downturn, we built a transcontinental network. Coming out of the 2008 financial crisis, we established our Hawaii franchise. And most recently, following the COVID pandemic, we acquired Hawaiian Airlines, secured more than 50% market share in Hawaii, and launched long-haul international travel out of Seattle. Each of these moments shaped who we are today. The near-term pressure facing the industry today is real. Fuel costs were more than $100 million higher in the first quarter, and we expect incremental fuel costs of $600 million or more in the second quarter. That represents approximately a $0.70 impact to earnings per share in Q1 and over $3 in Q2. Offsetting some of that pressure is a strong demand backdrop with fare increases holding—Andrew will share more in his comments. Importantly, our position of strength allows us to manage through environments like this while continuing to build long-term earnings power. Today's backdrop reinforces why we designed Alaska Accelerate the way we did: to create a structurally stronger, more diversified, and more resilient airline capable of delivering value across cycles for our owners, employees, and guests. Scale, relevance, and loyalty with an emphasis on premium experiences and international travel remain central to that foundation. And while fuel volatility may dominate near-term headlines, the initiatives most critical to our trajectory remain firmly within our control, and we will continue to execute on them because it is the right strategy. Now turning to the business, we continue to make meaningful progress on Alaska Accelerate, advancing our priorities and not standing still, even in a challenging environment. From an integration standpoint, we've completed preparations for our single passenger service system cutover, our final major guest-facing milestone. Beginning tomorrow, our systems will operate on a single platform, eliminating the friction of a dual environment. This is a significant moment for Alaska Air Group, Inc. We are moving forward with our combined and globally expanding network and award-winning loyalty program and premium offerings across our entire fleet. Along with the PSS cutover, Hawaiian Airlines has officially joined oneworld, expanding benefits for our loyal guests in Hawaii, attracting new oneworld guests onto the Hawaiian brand, and extending our global reach to meet the full range of business and leisure travel needs. Our network continues to grow as we connect our guests to the world. We launch Rome next week and London and Reykjavik later this spring, all tracking toward full flights. I could not be more excited to see the Alaska brand set foot in Europe for the first time in our 94-year history, marking a major milestone in becoming the fourth global carrier in the United States. At the same time, our premium and guest experience continues to improve. Premium retrofits on our 737 fleet are now more than 90% complete, increasing our share of premium seats across the network and driving higher premium revenue. Our entire regional fleet is now retrofitted with free Starlink Wi-Fi and Boeing 737 installations are underway, further enhancing our end-to-end guest experience. Guest satisfaction has already improved 15 points across all Starlink-equipped aircraft and nearly 30 points on regional jets. Another core pillar of Alaska Accelerate—our loyalty platform—continues to gain momentum. We recently agreed to a multiyear extension with enhanced economics and a deeper partnership with Bank of America, supporting continued growth in our loyalty ecosystem and reinforcing loyalty as one of the most powerful earnings drivers in our business. We're also pleased to have reached an agreement with Amazon that eliminates losses under the legacy Hawaiian terms and creates mutual value as the relationship evolves, with still more to do. And finally, despite winter weather and severe rainstorms in Hawaii, we delivered the industry's number one on-time performance in the first quarter along with very high net promoter scores—another indicator that integration friction is in the rearview mirror for Alaska Air Group, Inc. Collectively, these initiatives are reshaping the composition of our revenues and making our business more durable. Today, more than half of our revenues come from outside the main cabin, driven by premium products, loyalty, cargo, and ancillary streams, and we expect that share to keep growing. To close, Alaska Air Group, Inc. is operating from a position of strength. We have a healthy balance sheet, strong liquidity, and a fleet and network that provides flexibility as conditions evolve. I want to reiterate my confidence in our people, our strategy, and our future. We are navigating this environment with discipline, clarity, and purpose. The challenges we are navigating today do not change our longer-term trajectory, our ability to achieve a $10 EPS target, or remain a top margin-producing airline. While the path is rarely linear, the direction is clear, and our conviction in where we are headed has not wavered. Airlines with caring and committed people, strong brands, loyal guests, disciplined cost structures, and financial flexibility are best positioned to emerge stronger, and I firmly believe Alaska Air Group, Inc. fits that profile. I will now turn the call over to Andrew for the financial results. Andrew R. Harrison: Thanks, Benito, and good morning, everyone. Today, I will walk through our first quarter financial performance, our perspective on the near-term demand and revenue environment, and the significant progress we are realizing on the core initiatives that underpin Alaska Accelerate. Total Q1 revenues reached $3.3 billion, up 5% year over year on capacity growth of just 1.7%. Our unit revenues were up 3.5%, in line with our initial expectations for the quarter and building on a strong prior-year comparison. From a demand and revenue perspective, performance in the first quarter was resilient despite the volatile macro backdrop and material demand headwinds uniquely impacting our spring break revenue given our network. Specifically, we experienced significant headwinds in Hawaii and Puerto Vallarta, which together represent approximately 30% of our system capacity. In Hawaii, unprecedented storms—with rainfall reaching as much as 3 thousand percent of normal historical levels during March—disrupted travel plans and drove a spike in cancellations and near-term book-away. In Puerto Vallarta, where Alaska Air Group, Inc. is the largest U.S. carrier, civil unrest leading up to the spring break travel period had a meaningful impact on demand as well. Together, these impacts reduced first quarter unit revenues by nearly one point, with effects continuing into April and May. In response, we have reduced Puerto Vallarta flying by approximately 30% in the second quarter to better align capacity with demand. In Hawaii, we have maintained near-term capacity as the severe weather was transitory. We are busy taking great care of local travelers and welcoming visitors with the Hawaiian experience they know and love, and this past week saw bookings return to last year's level on strong fare increases. Setting aside these regions, we saw broad-based strength across our network. Premium demand continued to outperform the system and was up 8% year over year. With over 90% of our premium fleet retrofits complete, we are on track to sell all 1.3 million incremental premium seats across the network ahead of the peak summer travel season. Encouragingly, first class revenue continues to produce positive unit revenues even as capacity increases 5%. Internationally, the Reliance AI network continues to drive strong results as guests are choosing to fly with us in more ways than ever before. Seattle–Tokyo reached profitability in March, less than a year after its launch, and load factors for both Seattle–Tokyo and Seoul exceeded 90%. We are extending this momentum with the launch of Rome next week followed by London and Reykjavik next month. Early booking trends are tracking in line with expectations, with demand building nicely and premium cabins performing particularly well. Notably, more than 70% of guests booked on our new Rome service are Atmos members, materially higher than the rest of our network. Managed corporate travel was exceptionally strong, up 19% in the first quarter. Our international expansion has meaningfully increased Alaska Air Group, Inc.'s relevance with corporate customers. As a result, we are competing for and in some cases exceeding our fare market share in business travel on these long-haul routes, particularly in the U.S. point of sale. We are also seeing improved domestic corporate relevance as global connectivity strengthens our value proposition for corporate travelers. Managed corporate demand remains robust in Q2 with held revenue over the next 90 days up almost 30%. We are seeing broad-based strength across all industries, in particular manufacturing, financial services, and technology, and are beginning to see traction through greater signups for small and medium businesses in our Atmos for Business platform. Turning to loyalty, growth remains a priority for Alaska Air Group, Inc. Every major initiative we are executing on is driving relevance and growth for our members. These large-scale enablers—such as the Hawaiian acquisition and resulting domestic and international network expansion, the launch of our Atmos Rewards platform, issuance of a premium co-brand card, and free Starlink Wi-Fi onboard for Atmos members—are all designed to accelerate growth across our portfolio and deepen engagement with our most valuable guests. And it is working. In the first quarter, we generated $615 million in cash remuneration from our co-brand cards, up 12% year over year, while active membership in the Atmos program grew by 13% year over year. Importantly, we are seeing particular strength in our Hawaii loyalty metrics, with double-digit year-over-year growth across members, new cardholders, and card spend. Over 70% of the Hawaii adult population is now enrolled in Atmos Rewards, reflecting the strong value proposition of our combined network and loyalty program, with two beloved airline brands and oneworld's expansive global connectivity. Spend from our Hawaii-based cardholders increased 19% year over year and now accounts for nearly 6% of the state's GDP. Our top-rated Atmos Rewards program is clearly resonating, attracting more guests, keeping them within our ecosystem, and reinforcing the strength of our loyalty flywheel. As we look to further accelerate the growth and relevance of our Atmos Rewards program, yesterday, we announced a long-term extension of our multidecade partnership with Bank of America. This newly expanded agreement delivers improved economics, all-new capabilities, and a significant step-up in marketing investment as we move to a single issuer of Atmos-branded co-brand products. Through 2030, the agreement secures an additional $1 billion of total cash remuneration while offering what we believe will be a step change in portfolio growth. These economics are incremental to what we shared as part of the Alaska Accelerate vision and go meaningfully beyond the $150 million of loyalty profit we targeted by 2027. We are grateful to the team at Bank of America for their longstanding and continued partnership. Turning to our outlook, we ended the year with one of the most prudent growth plans in the industry. The vast majority of our 2026 growth is concentrated in long-haul flying out of Seattle as we continue to build our new global hub and generate new revenue streams. At the same time, in response to the current fuel environment, we proactively trimmed nearly a point of capacity in May and June, including reductions in Mexico and select late-night departures in high-frequency markets. We now expect second quarter capacity to be up approximately 1% year over year—again among the lowest growth rates in the industry—comprised entirely of our long-haul international service out of Seattle. While our North America capacity is down slightly year over year, the overwhelming majority of our capacity remains deployed in core hubs where we have scale, relevance, and strong loyalty. As conditions evolve, we will continue to prioritize margins, consistent with the disciplined actions we took last year, when we were the first large airline to reduce capacity in response to a challenging macro environment. Demand has shown resilience in the face of higher fares. Incoming yields for continental U.S. markets have sustained an increase of 20%+ year over year in recent weeks, pushing held unit revenues in these regions to up double digits for the back half of the quarter. Given that we still have 35% of revenue to book in the quarter, and provided this demand continues, we would expect to see the system achieve high single-digit unit revenue gains with a path to 10% in Q2, despite an overall two-point drag from Hawaii-specific impacts in the quarter. To wrap up, while the near-term environment remains volatile, we continue to make strong strides on the initiatives that matter most to the long-term value of this business. And importantly, we are not standing still, as evidenced by our new co-brand agreement with Bank of America and the transition to a single passenger service system this week, which will unlock the depth and breadth of our guest products and services seamlessly across our global network. We are executing against Alaska Accelerate, improving the durability and quality of our revenue, maintaining prudent capacity discipline, and investing in areas that strengthen our earnings power over time. I remain confident that the actions we are taking today position Alaska Air Group, Inc. to emerge stronger as conditions evolve. With that, I will pass it over to Shane. Shane R. Tackett: Thanks, Andrew, and good morning, everyone. While we entered 2026 with strong momentum, geopolitical events have quickly disrupted that trajectory, driving an acute run-up in fuel prices that has put pressure on the entire industry. In moments like this, it is important to separate what has changed from what has not. Fuel has moved sharply higher and remains volatile. Demand for air travel has remained both resilient and strong. And we have continued to execute on both our integration and the Alaska Accelerate plan, which is focused on building strength into the business for the long term. While we are once again navigating an unexpected and challenging backdrop, we know that successful airlines will be those with scale, relevance, and loyalty. The Alaska Accelerate plan delivers in each of those areas, and also broadens our commercial model as we expand internationally and in our premium offerings—two areas where demand continues to grow rapidly. As we navigate the near term, we will double down on our core business model: operational excellence, high productivity, and providing award-winning service to our guests, while also delivering on continued investment in the initiatives that will grow our earnings over time. Against that backdrop, our first quarter adjusted loss per share of $1.68 came in better than the midpoint of our revised guidance, reflecting both the resilience of demand and the discipline with which we are managing the business. Absent fuel—which alone accounted for approximately $0.70 of incremental EPS pressure versus our original plan—and the impactful, though transitory, events in Puerto Vallarta and Hawaii that Andrew mentioned, we would have been well above the midpoint of our original guide. Our financial position also remains strong. We have approximately $2.9 billion of total liquidity, including cash on hand and our undrawn line of credit, and $20 billion in unencumbered assets. Net leverage was 3.3x, and our debt-to-capital ratio finished the quarter at 61%. During the quarter, we repaid $340 million of debt and we expect to repay $65 million in the second quarter. Given the dislocation in our share price in March and April, our share repurchases accelerated, bringing our year-to-date total to $250 million, which should more than offset dilution this year. We have $180 million remaining under our $1 billion authorization, but we will pause further repurchases to evaluate the outlook for the remainder of the year. Turning to first quarter results and the second quarter outlook, first quarter unit costs were up 6.3% year over year, in line with our expectations, as we lapped the final quarter of our new flight attendant CBA and experienced some pressure from winter weather and storms in Hawaii. Unit cost for the second quarter, given a close-in reduction of one point of capacity, will be modestly higher than our first quarter result. There are three areas driving this that are transitory in nature. These include the crew training costs for ramp-in of our 787 international flying, a headwind year over year given gains on the sale of our 737-900 fleet last year, and a planned employee recognition expense tied to achieving a single PSS system—the last major customer-facing milestone of the integration. There were several positive trends in our core costs in the first quarter as well, including strong improvements in both aircraft utilization and in productivity across our operation, which were achieved while moving back into the position of the industry's best operation. We also had strong performance in our maintenance division and positive trends in selling-related expenses, where we will continue to realize incremental synergies as we drive revenue growth. Our first quarter fuel price averaged just $2.98 per gallon, reflecting the initial increase in fuel cost that began in late February. We have seen refining margins more than double, and in Singapore, refining margins spiked more than 400% during the quarter. As a result, fuel sourced from Singapore—which historically has been consistently the lowest-cost portion of our supply—became the most expensive, impacting roughly 20% of our total consumption. Given how dynamic the current fuel price and demand backdrop are, we are suspending our full-year guide until conditions stabilize and we have better line of sight to earnings beyond the current quarter. For the second quarter, the range of potential financial outcomes remains wide and difficult to predict. In just the past seven days, fuel prices have moved to as high as $5.15 per gallon and as low as $4.45. Given this, we are providing more detailed information on closed-end unit revenues and unit costs than last quarter, where we focused our guide on an EPS range and capacity only. In the future, we plan to revert to EPS-focused guides as the long-term health and earnings capability of our business remains our top financial priority. For the second quarter, we expect unit cost to be about 1.5 points above our first quarter result given we have reduced one point of capacity close in. Unit costs will inflect down in Q3 and Q4 to low single digits. Assuming continued strength in demand—where the balance of bookings that come during the quarter are at currently observed yields—we expect a path to unit revenues of 10%. And for fuel, in April, we will pay approximately $4.75 all-in, and given the current forward curve, we would put the quarter average at $4.50 per gallon. As of today, we are recovering approximately one-third of incremental fuel. We are also assuming a 32% tax rate, though this could change meaningfully depending on both in-quarter performance and also our full-year outlook as we exit the quarter. Any tax accrual changes are not expected to have cash flow impacts, as we expect to not be exposed to cash taxes in the near term. These assumptions result in an EPS estimate of a loss of approximately $1 per share. It is important to step back from the immediate challenges of fuel price, as fuel alone is driving the change in our expected immediate financial performance, and we believe that will normalize over time. Fuel price assumptions are adding $600 million of expense versus expectation for the second quarter, which is a $3.60 impact to EPS alone. The underlying business model is strong, and we see it getting stronger with all of the work we are doing on the commercial side of the business. Absent the fuel price spike, we would have expected to be guiding to a solidly profitable quarter. And absent the transitory Hawaii headwind to RASK, we believe our unit revenue trends are as strong as others who have reported. While this is not how we envisioned starting the year, the underlying demand environment gives us confidence, and the work ahead of us is clear. We are now on the eve of our single passenger service system cutover—a peak integration milestone that, once complete, puts much of the integration friction firmly in the rearview mirror. That unlocks a simpler, faster-moving airline and allows us to fully turn our energy toward the opportunities in front of us. We remain fully committed to deepening the structural advantages that drive long-term success in this industry: scale, relevance, and loyalty. Over time, we expect our revenue profile to increasingly reflect that shift, with a growing share of premium, loyalty, and ancillary streams that provide greater earnings durability across cycles. We are building the right business model, making real progress on the areas within our control, and do not anticipate slowing down in that pursuit. With that, let's go to your questions. Operator: At this time, I would like to invite analysts who would like to ask a question to please press star, then the number 1 on your telephone keypad. Our first question today will come from Jamie Nathaniel Baker with JPMorgan. Jamie Nathaniel Baker: Hey, good morning. Good morning, everybody. So when thinking about the RASM commentary that you just gave—so let's just stick with that 10% round number. Obviously, year on year, there are a lot of initiatives that are impacting that, plus some headwinds in Hawaii, which you laid out. I guess the question is, if we looked at same-store RASM in the second quarter, what do you think that number would look like relative to the 10% path that you've cited? Andrew R. Harrison: Sorry, Jamie, if I am quite understanding your question—when you say same store, is year over year, which is sort of what we gave you; capacity, I think, was marginally consistent year over year. I am just trying to understand specifically—are you asking about synergies and initiatives impact? Well— Jamie Nathaniel Baker: Yeah. So basically, it is what that 10% RASM number would look like without the synergies and the initiatives, just to get down to sort of the core. So that is the question. What would the core RASM be without the synergies and initiatives that you have cited? It is a RASM question, not capacity. Andrew R. Harrison: Sure. It is probably, you know, a couple of points. But again, some of these things like loyalty are just embedded in the core of our revenue now. But I would say a couple of points, just to give you an answer on that. Jamie Nathaniel Baker: Okay. And then second, it is a quick question. On the PSS cutover, I know you were drawing down reservations on the outgoing system. Is the number of PNRs that you have to port over, I guess by hand, consistent with what your expectations were? Andrew R. Harrison: Yeah. Actually, it was a very small number, I think 10,000—give or take on that. But essentially, we drained down the vast majority of the system. And at 6:30 a.m. Eastern Time this morning, our Incheon–Seattle, our Haneda–Honolulu, and now our JFK–Honolulu check-ins have already started, and passengers are already booking in, and things are going fantastically. Jamie Nathaniel Baker: Excellent. Thank you for the color. Appreciate it. Benito Minicucci: Thanks, Jamie. Operator: And our next question will come from Conor T. Cunningham with Melius Research. Hi, everyone. Thank you. Conor T. Cunningham: Shane, maybe I could jump to you. I was hoping you could unpack the puts and takes on the second-half cost trajectory. I realize you called out a fair bit of near-term headwinds. I am just trying to understand how those potentially roll off, and then maybe just directionally how you see each quarter. The only reason why I bring that up is that comps are all over the place. So any help there would be good. Thank you. Shane R. Tackett: Yeah, hey, Conor. Thanks, appreciate the question. Happy to unpack this a little bit. I just want to reiterate—and we said much of this in the script—but just to frame: in the second quarter, we are a bit up from the first quarter. I think there are three to four points in the second quarter that are not really structural to the business. We cut one point of capacity close in. That is always tough to remove the costs when we do that, though it was totally the right thing to do. We have got a point of buildup of crew for our 787 Seattle international flying. That is going to normalize in the business as we begin this flying in earnest out of Seattle, which starts here in a couple of weeks into Rome and then throughout the summer. We do have some planned recognition for employees, given all they have been through over the past year and a half or so with integration. And we are lapping some asset sales from last year. So structurally, the core business is not at closer to the 8%, but probably more like 4% to 5% on a really low growth rate. In the second half, what you are going to start to see—I do think a lot of this is enabled by getting through this last PSS integration milestone—we really are at peak friction over the last couple of quarters with integration, and now we can go to peak focus on optimizing the airline. Unit wages will exit the year at a rate that is equivalent to or lower than our Q4 2025 results. So we are starting to see productivity really tick up; there is more to come. We have got a lot of fleets; we have got a lot of opportunity over time to continue to right-size the network, the banking in our airports, and ultimately rationalize the fleets over the next several years and accrue some more productivity gains through those efforts. Our third-party costs for the operation—where we use partners to manage ramp and manage airports—are down on a unit basis, and will continue to reduce on a unit basis through the second half of the year. We are absorbing all of the core inflation in those contracts through just getting more productive with those partners. Aircraft maintenance per block hour—you will see continue to perform well throughout the second half. Aircraft maintenance is always a little bit spiky; it will go up and down quarter over quarter with volumes, but we expect 2026 in total to be less on a per block hour basis than it was last year. We mentioned in the script we have structurally lower cost of revenue through selling expenses and, even though selling expenses likely rise with much higher revenues and fares, on a unit basis they are lower cost than they were pre-integration. Those are a few of the areas. The places where we have challenges that are more structural, we have talked about—there is nothing new. Airport costs: we have generational investments in the West Coast, very similar to the rest of the industry. Those are still normalizing into the cost base and will be for the next couple of years. And then we have these buildup costs that are really related to transforming the airline into an international player in Seattle. Obviously, I mentioned crew, and then we have some guest-facing costs as well. The last thing that we have in front of us is joint CBAs. We need to bring the Hawaiian employees up to Alaska rates. There is no real timing on that; I think the backdrop makes some of those discussions probably spread out a little bit. But the last thing I would say—nothing that we see in the cost side of the business is a surprise to us. And we actually see most of the areas that we are really focused on performing better, and over time really starting to gain traction. I think you will see that in the third and fourth quarter of the year, and we will have a lot to say about it when we get to those earnings calls. Conor T. Cunningham: That was a very detailed answer, thanks. And then, Benito, conviction level on the $10 figure still sounds really high. It sounds more like it is floating now rather than a 2027 number, and you can correct me if I am wrong there. But in an unpredictable environment over the past 15 to 16 months, what is working that gives you so much conviction there? It seems like international is better, loyalty is a lot better, but there are obviously a lot more headwinds associated on the cost side that are out there in the world. What gives you more conviction on this $10 figure long term? Thank you. Benito Minicucci: No, Conor, it is a great question—thanks for asking it. Look, from where I sit, absent fuel, our company is firing on all cylinders. When I look at Alaska Accelerate—when I look at each and every initiative that we laid out there—this company is executing. You look at PSS; this is a major, major milestone. We are executing it. It is going to be a flawless execution, and I feel really good. One of the things—and I am surprised we have not got the question yet—even with 2027, a couple of things: one, this new Bank of America deal—again, I am not sure if you caught it in Andrew's script—it is $1 billion of incremental cash over the next five years, which in 2027 will add a point of margin. We reworked the Amazon deal from losses to not having losses, and we have a little more work to do there as well. And then overall, I think if you believe that fuel prices will moderate—I am not saying it is going to go back to what it was pre-crisis—but if they moderate and some of these fare increases are sticking, we are getting an average of, give or take, $25 on an average fare depending on the market. I believe we have a strong chance of coming out of 2027 and hitting that $10 EPS. Now I cannot tell you from where I sit today because the world is unstable. But as we get into the third and fourth quarter, we will have some pretty good line of sight to tell you where we will be. But I will tell you, if it is not 2027, it is coming. I have never been more convicted. Things are working. Our strategy is working. We are executing, and I feel really good about it. Conor T. Cunningham: Appreciate it. Thank you. Operator: We will move next to Andrew George Didora with BofA Global Research. Andrew George Didora: Hi, good morning, everyone. Maybe moving to demand a little bit. One of the bigger questions we get from investors is around demand elasticity. Based on your prepared remarks, it does not seem like there is much evidence of that at all. But first, are there any particular markets where you might be seeing some pushback on this higher price—obviously outside of, say, Hawaii or Puerto Vallarta? And second, if not, how do you generally think about demand elasticity in this environment? Are you thinking about positioning your network differently than what is planned today in order to get ready for that? Andrew R. Harrison: Hey, thanks, Andrew. I will just say on a personal note that of course there is elasticity in demand in my personal view. In fact, we have seen it here personally. We have had all these fare increases that have been great, and then our RM folks had to go in and manage some of the buckets down, and we found a really good sweet spot. So there is absolutely elasticity. But I think in the current environment it is well able to absorb the double-digit increases in the fare environment. People want to fly. The airplanes are full. So I think that is all good stuff. As it relates to the network, we are only really growing two to three areas. We are growing San Diego at around 20%. We are growing Portland in the high teens. And we are growing an international gateway. Those are all areas of opportunity and strength—loyalty, revenue, seat share—so we feel really good. And as I shared in my prepared remarks, the reality is that the only real absolute growth domestically—because the Portland and San Diego was moving seats around—is really international. We are just very excited, and we are seeing loyalty, fares, front cabin strength. We have a long way to go to get really proficient here, so it is really good. As we sit here today, as long as demand holds up, we feel really good about our network shape. And, Andrew, it is Benito—the other thing I will add to what Andrew said: we have a fantastic fleet now. What is different between before Hawaiian and post-Hawaiian is we have a much more diverse fleet that we can be more creative in exploring new markets where we see higher revenue potential. We have got 30 widebodies now, and that is a lot of dry powder for us to do some pretty novel things. There is a lot that we can and are going to do to make sure that we get the most revenue coming into this company. Andrew George Didora: Thank you for all of that. And then just my second question: obviously, industry consolidation has been in the headlines recently. You have been one of the very few acquirers over the last decade or so in the space. Do you think further consolidation is something Alaska Air Group, Inc. would want to continue? Benito Minicucci: Look, I think consolidation can only happen—having had the experience doing it—it has got a big hurdle, Andrew. It has got to be pro-consumer and pro-competitive. Those are the two hurdles that you have to get over with the DOJ, with the DOT, and a lot of other stakeholders. We know how hard it is to get past those two big hurdles. We have the experience. We know how to do it. But I am super excited about our organic growth plan. I am focused on a $10 EPS, and that is where we think a lot of value is going to come with our plan. Now look, our plan is always to look at what is good for our company and the stakeholders—the people who care about Alaska Air Group, Inc. What do our employees, customers, and our communities, as well as our shareholders, look for from Alaska Air Group, Inc.? And we will always make the right choice given that. Andrew R. Harrison: Thank you, Benito. Benito Minicucci: Thanks, Andrew. Operator: We will move next to Savanthi Syth with Raymond James. Savanthi Syth: Hey, good afternoon. Just curious—you mentioned long-haul operations and how Seattle is progressing. I was curious how the Hawaiian long-haul operation is progressing. Andrew R. Harrison: Hi, Savi. As you may recall, we made some adjustments to Hawaii. We discontinued Fukuoka. We discontinued Narita and moved that to Seattle. So on a year-over-year basis, it is improving. We are mostly left with Japan and Australia, and we continue to move unit revenue forward there. The other thing I should add is now the Hawaii long haul will welcome oneworld into the fold, which will give all these elite guests—whether it is Qantas or Japan Airlines—fantastic benefits. Savanthi Syth: Appreciate that update. And can I ask—you mentioned in the opening remarks improvements to the Amazon contract. Wondering if you could give an update on cargo in general. Benito Minicucci: Yeah, thanks, Savi. Maybe I will hit Amazon very quickly, and I do not know if Jason wants to say cargo in general, because I think it was a bright spot here for us in the first quarter. We have really enjoyed getting to work more closely with the folks at Amazon. We know them because they are neighbors of ours. We have folks who used to work at Alaska over there. So we have worked on deepening the partnership, and I think it is going well. The partnership is getting better. It is getting healthier. We are continuing to talk about how we can deepen it further in a way that is mutually beneficial. We had a nice update to the agreement that is in force today that helps us on the economic side, and we are hopeful that we can expand that through more partnership over time. Maybe just very quickly, Jason, because we are going to try to move to— Jason Matthew Berry: Hi, Savi. Just on the high level on the cargo piece, at the start of the year, we did get to our own single cargo system, which really allowed us to unlock that connectivity that we have been talking about, and we are really beginning to start to harvest from that. Savanthi Syth: Appreciate that. Thank you. Benito Minicucci: Thanks, Savi. Operator: Our next question will come from Scott H. Group with Wolfe Research. Scott H. Group: Hey, thanks. So historically, whenever we see fuel go up, RASM goes up a lot—we are seeing that right now. And then when fuel goes back down, usually RASM goes back down with it. Do you think it is different this time? Shane R. Tackett: I will take a shot at answering that, Scott. We believe there are a lot of reasons that it could be different this time. Fifteen years ago, we had different reasons—but a similar spike in fuel, a tough economy, structural changes in the industry—and then fares that were modestly higher coming out of it and actually did great from an earnings profile perspective for several years. The rapidity with which some of the fares have gone up and the stability with which bookings have held over the last several weeks suggest—like Andrew said—people really want to travel. When they have discretionary income, one of the priorities that they have, it would appear, is to go out and experience the world. Some of these fare increases—$10, $15, $20—on the total cost of a vacation is pretty modest. That is on the consumer side. It is really important that people on our airplanes feel like they have a lot of value for the fare that they are paying, and we are focused on investing in all of the experiences that we have throughout the entire aircraft, on the ground, and also digitally. We are conscientious about the incremental price being paid, and we need to deliver good value for that. On the other side, the industry structurally has to get healthier. You have got multiple airlines near failure before $4–$4.50 fuel, and that just does not work structurally long term. So I think there are a lot of factors that suggest this could be stickier, but we do not know. It is really dependent on how the economy unfolds over the next several quarters. Scott H. Group: And then just one quick follow-up. I think, Andrew, in an earlier question, you were sort of implying that of the 10 points of RASM, a couple of points is more company-specific or synergy—whatever you want to call it. Do you think that couple of points continues at that pace? Can it accelerate from here with the credit card deal? Does it naturally at some point start to slow? How do you think about that two points going forward? Andrew R. Harrison: Yeah, I think—I am just looking at my CFO and CEO here—that it is an imperative that it will continue. Jokes aside, we have dynamic pricing about to hit. We have got O&D coming. As I shared, the economics of the bank relationship—that $1 billion over the original term, which is going to happen—does not include actual incremental growth from our historic growth rates, which had started to flatten out. So overall, we absolutely still have the view that we can close the RASM gap to the industry and that we will continue our unique momentum on the revenue side. Shane R. Tackett: And, Scott, I would just remind: a lot of the initiatives’ value are to come. We are just completing the 800 remodels. We have not begun selling the full fleet of those. We have other things that we need to do in the widebodies, which are beyond 2027, but will be further initiatives that we control that are not really subject to the rest of the industry. So there are a lot of initiatives still to come for us to keep driving something like two points into the P&L for a while yet. Scott H. Group: Thank you, guys. Benito Minicucci: Thanks, Scott. Operator: Next question comes from Thomas John Fitzgerald with TD Cowen. Thomas John Fitzgerald: Hi, thanks very much for the time. Maybe just sticking with the bank deal again—you talked about it being a step change in portfolio growth. Can you elaborate on that a little more? And then put a finer point on the cadence and any benefit this year, and then in between the point of margin in 2027 and as you get to that $1 billion by 2030? Andrew R. Harrison: Yes, thanks, Tom. Maybe Shane will get the second part of that. Just to be clear, because it is a really important thing that is going on here, what is happening is that with our partner, Bank of America, this refreshed agreement—with many different elements in it that have changed—is going to help us realize the benefits of: number one, the acquisition of Hawaiian; number two, the launch of Atmos Rewards; and number three, the expansion of a long-haul network out of Seattle. We are already starting to see that, and of course the marketing investment—there is a big step change there. At the end of the day, the changes in Alaska Air Group, Inc.'s business and fundamentals, and the changes in the agreement, are going to create for us a much longer-term, wider pathway for growth in loyalty and especially in credit card, which, as you know, are very important to our economics. Shane R. Tackett: Quickly on the margin, it is roughly a half point of margin this year and a full point of margin next year. That is before what Andrew was just alluding to, which is portfolio growth that could be stronger than we are seeing today. That is our expectation, but we are not putting any of that into a forecast or guide at this point. Thomas John Fitzgerald: Okay, that is really helpful. Appreciate that, guys. And then thinking about some of the network initiatives—the growth in San Diego, the rebanking of Portland—would you mind maybe just running through your hubs, by RASM or profitability, and rank-ordering them? Where are you seeing the best performance and maybe room for improvement? Thanks again for the time. Andrew R. Harrison: Thanks, Tom. Those are questions we do not really answer, but obviously Seattle is our largest hub and Honolulu is our second largest. If you look at what we are doing, those are 40%, 50%, nearly 65%+ of our total capacity. We have got two large accelerants in both of those—Seattle with rebanking and global long haul, and in Honolulu and Hawaii in general with the integration and all the good things that come from that. We continue to feel really good about the improvement in the economics there. In places like Portland and San Diego, we believe our product, our customer service, and what we are offering will continue to be very valuable. Operator: Thanks, Tom. Our next question will come from Atul Maheswari with UBS Securities. Atul Maheswari: Good morning. Thanks a lot for taking my question. I had a question on costs. Is the back-half low single-digit CASM ex-fuel a good run rate for us to use for 2027 as well now that the PSS integration is behind us? Or are there any puts and takes specifically as it relates to 2027 on the cost side that we need to be aware of? Shane R. Tackett: Thanks, Atul. A couple of things. Our long-term view on growth is around 3% to 4%. We have not grown at those target rates for a couple of years. We think the core cost inflation in the business is 4% to 5%. So we need to ultimately get into the 3% to 4% range to have an opportunity to fully offset the core inflation. But there should be opportunities to go get at least a point of better unit cost performance through optimization of the business and through productivity. That is our thinking structurally about the business over the next year or two. We do have, as I mentioned before, joint CBA deals that are in front of us. It is hard to say if those will be in cycle or out of cycle with the rest of the industry as those other deals come up on other properties. But that would be the one outstanding area that we are going to have to ultimately get deals with our employees on and absorb those into the P&L. I do not think they are super material, but they are the one outstanding item that is nonstandard. Atul Maheswari: Got it, that is helpful. And then as my second question, I was reading some energy reports that global refining capacity is basically down 6% to 8% since the war started. How long can this disruption persist, in your view, before it causes real jet fuel availability problems in markets like Singapore where you source from? What are you seeing in that market right now, and how are you preparing the business should supply actually become an issue there? Shane R. Tackett: Thanks, Atul. I am going to answer as much as I can. We obviously are not the absolute expert on global oil supplies or refineries. We do understand our markets really well and our supply chain really well. We do not foresee any disruption anytime in the foreseeable future across our network. We are not sole-sourced out of Asia or Singapore into any of our markets, and if we need to supply Hawaii—just as an example—from the domestic market, that is totally within our ability to do so. Our hope is long term it normalizes, Singapore refineries come back on strong, and those costs return to where they were pre-conflict, as it was a really nice lower-cost source of fuel for us into the network. We would like to enjoy that structurally over time. We have also talked about this a bit—we need to work on the West Coast Jet-A supply issue long term. There is increasing desire to fly and demand for Jet-A, and we do not have the pipeline infrastructure or refinery infrastructure that the Gulf Coast or the East Coast has. That will take time, but it is something that we are focused on, and I think other airlines are starting to focus on along with us. Atul Maheswari: Thank you, and good luck with the rest of the year. Benito Minicucci: Thank you, Atul. Operator: We will move next to Catherine Maureen O'Brien with Goldman Sachs. Catherine Maureen O'Brien: Hey, good morning, everyone. Thanks for the time. Maybe just on some of the route network changes—you noted that the Seattle-to-Tokyo route has already reached profitability, and load factors are really strong. Can you speak to the profit swing from moving those aircraft from more leisure-focused Japan point-of-sale flights to more mixed travel purpose U.S. point-of-sale? How big of a bottom-line impact was that in 1Q, or any way to think about what that swing could look like, and how that is ramping versus your expectations back when you announced the transaction? Thanks. Andrew R. Harrison: Yeah, thanks, Katie. High level, what I will tell you is—and we track this as part of our synergies—the movement from Honolulu–Narita to Seattle–Narita has driven a meaningful increase in the profitability of that route. Of course, it accrues significantly to our loyalty base and corporate base. We are already seeing numbers there. It has really helped us, from a network perspective, invest and continue to grow Seattle. So I think that has been a very good move. Shane R. Tackett: Katie, I do not think we have priced the losses that were associated with the aircraft we were using for these markets, but they were in the tens of millions. So it is a meaningful change to the underlying economics of the company. Catherine Maureen O'Brien: That is great. Maybe just a follow-up on the corporate angle here. On the 19% managed corporate revenue growth, is it possible for you to break out what the domestic growth was versus the total? I am just trying to get a sense of how meaningful layering in that international connectivity is. And do you have enough international flying to maybe try to go after additional share in an extra round of corporate negotiation? Andrew R. Harrison: Yeah, thanks, Katie. To put this in perspective, the vast majority of all of our managed corporate travelers is obviously still North American domestic, and we will probably give a little bit more visibility over time. What I can tell you—obviously London is going to be huge—but we are already seeing, as a percent of our managed corporates, that it is a very low percentage, but it is already moving up and revenue is multiple points ahead of the actual passenger share as well. More to come—we are in very early innings here. As we get these all launched, and single passenger service system and loyalty and all the rest of it, we will have a lot more exciting things to share, but it is headed in the right direction. Catherine Maureen O'Brien: Great, thanks for the time. Operator: Our next question will come from Brandon Oglenski with Barclays. Brandon Oglenski: Hey, good morning, and thanks for taking my question. Benito, I appreciate the confidence in hitting $10 at some point here. But at the same time—it is different issues—but it is the second year that we are talking about fuel prices and specifically West Coast challenges. I think maybe Shane hit it there that longer term there could be an issue here. How are you positioning your business, from a commercial perspective, to potentially deal with a higher differential on the West Coast? Benito Minicucci: Brandon, it is a great question. If you would have asked me three years ago with the standalone Alaska, it would have been a lot more difficult. But now, we have flying to different geographies and we have the airplanes to access any part of the world today. What gives me confidence is: every year, there is something happening in the world where you have to pivot and move the business somewhere else, and I think we are becoming good at it. We are getting through this acquisition. This acquisition is making us a more resilient, bigger, stronger airline, and we will have—from what I believe are strong hubs that we operate from—relevance and loyalty to build on those networks. I am confident. I cannot predict the future, but I can predict the way we are executing. I know what we have: we have a phenomenal group of employees who are excited, we have great assets, we have a great balance sheet, and we have a track record of delivering and executing. That is what gives me confidence. I am not going to predict the future, but I am going to bet on Alaska Air Group, Inc. Shane R. Tackett: Brandon, just on the second part of the question on fuel structure—and I alluded to some of it—I think long term, we do think Singapore is going to be a nice, stable source of much lower-cost fuel than Gulf Coast. We were doing 20% of our fuel from there, and we like the idea of moving that up materially, maybe even to 30% or 40% over time. The other thing we are doing is, with some partners, working on building infrastructure here in Seattle to be able to take tanker fuel into Seattle, which would be a game changer for us in terms of the supply chain. I think there is a lot of interest in ultimately getting that work done. These are long-tail investments, though, so it is nice to talk about them, but it is probably a ways away before we structurally resolve this. One last reminder: we have had a $0.10 to $0.15 fuel disadvantage structurally for our entire life out here on the West Coast. This is not new for us, and even with that, we have been able to outperform most of the industry on margins over time. Brandon Oglenski: Appreciate those responses. And just maybe really quick for Andrew, is the new co-brand deal included in your RASM guide for the quarter, or should we expect those benefits to actually ramp later in the year? Thank you. Andrew R. Harrison: The agreement is reflected in the second quarter results as it ramps in and, as Shane mentioned, it is roughly a half point of margin this year ramping to a point of margin on the structural changes, and I think we can do even better than that. Brandon Oglenski: Thanks. Benito Minicucci: Thanks, Brandon. Operator: We will move next to Duane Thomas Pfennigwerth with Evercore ISI. Duane Thomas Pfennigwerth: Hey, thanks. Just on pilot training, can you speak to changes across the two segments? You said you are back to growing Alaska, but overall growth is flattish. Maybe speak to what is growing versus what is shrinking. And what are the drivers of increased pilot training costs? Is this all aircraft that are coming over from Hawaiian? Is attrition a component? And when do you expect that to normalize? Shane R. Tackett: Thanks, Duane. A few questions on pilot training. It is not attrition—attrition is effectively zero absent retirements. We have normal retirement patterns; we are not seeing our folks leave for other airlines. The majority of this in Q1 on a year-over-year basis is really building up the Seattle international flying. We have announced and have opened a pilot base here in Seattle on the 787. That flying takes more pilots per flight than Honolulu to the West Coast—even on a widebody—would have taken. So we have just got to get that ramped up into the base, get the flying started, and then it will normalize on an annualized basis as we take one or two 787s per year over the next few years. On the Alaska side, coming out of the last couple of years, we had room in our productivity within the current number of folks we had on the property for Alaska, and we are back to starting to look forward to taking incremental units throughout the back half of the year—you have got to train early to get ready for summer flying. So we have got some modest incremental costs year over year on the Alaska training side. Duane Thomas Pfennigwerth: Thanks. And then just a quick follow-up on cargo. Can you frame how big of a headwind it was to your recent results? And is the goal to get this to breakeven or something better than that? If the goal is breakeven, then why do it? Thank you. Shane R. Tackett: Thanks, Duane. I will not share the specific economics on the freighters. But no—we are not aiming for breakeven. If we are going to put time into flying aircraft around, we feel like we need to earn a reasonable margin, not a breakeven margin. That is not our philosophy in terms of investment. We will be focused on generating decent returns on this flying. Over the next year or two, we are excited—regardless of the freighter contract—about the opportunities with belly cargo on the widebodies, the opportunities to continue to grow our own freight market share up in the state of Alaska and along the West Coast, and we are anxious to talk more about that over the next year or two. Appreciate the question, Duane. Benito Minicucci: Alright, everybody. Thanks for joining us, and we will talk to you next quarter. Operator: This does conclude today's conference call. Thank you for attending. You may now disconnect. The host has ended this call.
Operator: Good morning, ladies and gentlemen, and welcome to the Home Bancorp's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Home Bancorp's Chairman, President and CEO, John Bordelon and Chief Financial Officer, David Kirkley. Please go ahead, Mr. Kirkley. David Kirkley: Thank you. Good morning, and welcome to Home Bank's First Quarter 2026 Earnings Call. Our earnings release and investor presentation are variable on our website [indiscernible] please refer to the disclaimer on forward-looking statements in the investor presentation and our SEC filings. Now I'll hand it over to John to make a few comments about the first quarter and outlook for 2026. John? John Bordelon: Thanks, David. Good morning, and thank you for joining our earnings call today. We appreciate your interest in Home Bancorp as we discuss our results, expectations for the future and our approach to creating long-term shareholder value. Yesterday afternoon, we reported first quarter net income of $11.4 million or $1.46 per share -- sorry, $1.45 per share. Earnings per share were down $0.01 for the fourth quarter, but increased 6% from a year ago and represented a good start to the year. Net interest margin expanded to 4.16% which was 10 basis points higher than the fourth quarter and 25 basis points higher than a year ago. Return on assets also increased to [ 1.3% ] in the first quarter. This quarter, margin expansion was driven by a 22 basis point decline in our cost of funds, which contributed to a 25 basis point decline in our overall cost of funds. Loans declined by 1% in the first quarter as paydowns continued to outpace new production. We continue to see customers delay projects and transactions while they wait for additional clarity on interest rates. Despite the low balances, we maintained pricing and structure discipline continue to generate new loan originations at attractive spreads and risk-adjusted returns. Our loan pipeline has improved in recent months, although the timing and pace of future loan growth remain difficult to predict, given continued market volatility and uncertainty around interest rates. Total deposits increased by $54 million in the quarter or 7% annualized as core deposits increased $118 million and were offset by noncore CD declines of $64 million. Noninterest-bearing deposits increased $37 million and continue to represent 27% of our total deposits. As a result of our success on the deposit front, our loan-to-deposit ratio declined to approximately 90% and positioning us well for future growth. The strength of our franchise is especially evident when you consider how we performed despite a challenging rate and economic environment. Over the past 2 years, diluted earnings per share have increased by more than 25%. Return on assets has improved by nearly 20%. Net interest margin has expanded by more than 50 basis points and our cost of deposits has declined by more than 100 basis points. We also continue to have success in Texas with loans that are growing to approximately 21% of our total portfolio compared to 15% when we entered the market through an acquisition in 2022. The new Northwest Houston branch opened during the quarter and gives us full service presence in one of the fastest-growing areas in the market. The branch square footage allows for significant growth in the region and will help our well-established commercial team continue to build our franchise. Several organizations have already requested to utilize the branch meeting rooms for their companies. The combination of the branch, its location and our team of bankers should make the Tomball region very successful. Credit remains manageable. Nonperforming assets increased during the quarter by $3.8 million primarily due to the downgrade of 3 relationships. However, we continue to believe losses of these credits will be immaterial given the collateral protection and guarantor support. Our net charge-offs remain extremely low at just 6 basis points annualized. Finally, we're in the middle of our annual business to all markets and hosting our [indiscernible] crawfish boils, as we've done in previous years, executives [indiscernible] with all the fixing and refreshments, reflecting our culture of servant leadership that is such an important driver of our success. These gatherings are a great way to embrace that culture and generate enthusiasm. The time of the branches also gives management an opportunity to answer questions from frontline staff and meet customers both big and small. With that, I'll turn it back over to David, our Chief Financial Officer. David Kirkley: Thanks, John. Please feel free to refer to the investor presentation we have provided, as I discuss the company's first quarter financial results. Net interest income totaled $34.5 million in the first quarter, an increase of $434,000 from the fourth quarter and $2.8 million from a year ago. This was the highest quarterly net interest income in Home Bank's history and was driven by both lower funding costs and materially improved balance sheet structure. Slide 20 of the presentation has a 2-year history of the yields that drive net interest income and NIM. And you can see the progress we've made bringing funding costs down while keeping loan yields relatively stable. The cost of interest-bearing liabilities peaked in the third quarter of 2024 and has come down 64 basis points as we proactively reduced our exposure to higher cost funding. Over the same period, disciplined underwriting and loan portfolio comprised of 56% fixed rate loans have enabled us to maintain our loan yield within 12 basis points of the peak reached in the third quarter last year. And we're still making progress. In the first quarter, the average cost of interest-bearing deposits declined 22 basis points to 2.29%, while our overall cost of deposits declined by 16 basis points to 1.68%, which is less than half of the current Fed funds target rate. During the quarter, we had strong deposit growth of $54 million or 7% annualized despite a $64 million reduction in CDs of which 70% were noncore CD customers. The decline in CD funding was offset by growth in lower-cost relationship-based nonmaturity deposits. Seasonal fluctuations in public deposits of $43 million contributed to the $118 million growth in non-maturity deposits during the quarter. We had solid growth in noninterest-bearing deposits which increased $37 million quarter-over-quarter and $75 million year-over-year and represent 27% of total deposits. Finally, due to our success in growing core deposits, we were able to repay all of our more expensive FHLB advances which is a minor improvement of $3 million in quarter over quarter with a material improvement compared to the $175 million in advances we carried at year-end 2024. Given our lower cost of funds and the repricing opportunities in earning assets, we continue to readvance additional opportunity for NIM expansion. Slide 14 details expected repricing opportunities from our loans and investments over time. We continue to see a positive spread of approximately 40 basis points on new loan originations versus pay downs. New investment yields were north of 4% in Q1 versus expected roll-off yield of 2.43% over the next 12 months. Slide 15 and 16 of the presentation provides some additional detail on credit. Nonperforming loans increased $1.6 million to $35.8 million or 1.31% of total loans. This was primarily due to the downgrade of 3 relationships with the largest being $1.4 million, partially offset by the foreclosure of a $2.6 million property in Houston. We recorded a provision expense of $922,000 in the quarter compared to $480,000 in the fourth quarter. The increase was primarily due to changes in individual declared reserves associated with these downgraded credits. Our allowance for loan losses increased to $33.1 million or 1.23% of loans and we continue to feel very confident in our reserve levels. Slide 22 of the presentation has some additional detail on noninterest income and expenses. Noninterest income decreased by $260,000 to $3.7 million, which was slightly below expectations due to lower other income and bank card fees. We continue to expect quarterly noninterest income to be in the range of $3.8 million to $4 million. Noninterest expense declined by $106,000 to $22.9 million and was in line with expectations. We continue to expect noninterest expense to increase modestly beginning in the second quarter as annual raises take effect and technology investments ramp up. For the remainder of 2026, we expect quarterly noninterest expenses to be between [ $23.3 million ] and $23.7 million. Slides 23 and 24 summarized the impact our capital management strategy has had on Home Bank. Since 2019, we have increased adjusted tangible book value per share at an annualized rate of approximately 9.7%, increased EPS at more than 11% annualized rate. increased our quarterly dividend by more than 50% and repurchased approximately 17% of our shares. Tangible book value per share increased to $46.04 this quarter, up almost $5 or 15% from the first quarter of 2025. And with that, operator, please open the line for some Q&A. Operator: [Operator Instructions] And your first question comes from the line of Stephen Scouten from Piper Sandler. Stephen Scouten: I'm curious -- and apologies if I missed any color you gave already, David. But in terms of the NIM trajectory from here, if we were to get no cuts, how does that affect kind of I think some of your previous statements of expecting expansion for the remainder of '26. Does that actually improve that expectation or make you a little more bullish given your asset-sensitive nature? Or how do you think about the NIM with this rate environment? David Kirkley: I think, as I mentioned, we have a lot of opportunity for repricing in both the loan and investment securities portfolio. And you'll see that with -- you've seen that with our stable loan yield and slightly increasing investments. So I still think without any rate cuts, we're still seeing expansion in our loan yield on picking up about 40 basis points on cash flow versus new originations. I think that deposits are probably without any further rate cuts probably around their floor. So I still think that there is opportunity without any great cuts for expanded NIM. John Bordelon: I would just add that the deposit side probably will dictate the pace of the growth of that NIM. We know that we have loans repricing. But assuming rates stay where they are, I'm not sure exactly where deposit rates are going to have to go for us to sustain the level that we have today. Stephen Scouten: Yes, that makes sense. And then could you give a little bit of color on kind of what you saw from a production standpoint on the loans on maybe customer demand throughout the quarter. I know you mentioned the strength in the Texas market. I think you said 3% growth there, but kind of how maybe that demand segmented by time of the month as well as those different markets? John Bordelon: Yes. The demand, of course, the last 3 quarters, second, third and fourth of last year were, I guess, really hurt by some pay downs, companies selling businesses, selling whatever. This first quarter was very typical of previous quarters other than the last 3 years, first quarter -- I mean, first quarter typically are relatively flat and people kind of getting their footing and moving forward. The last 3 years, though, first quarter was much more productive. So I think this is a more natural period where I think we're looking for lower interest rates, they realized we're not going to get it. So I think we'll see higher demand potentially in second and third quarter. Assuming also geopolitical issues throughout the world are not slowing that demand. Stephen Scouten: Makes sense. Makes sense. Okay. And maybe just last thing for me. I'm curious, obviously, the stock has had a really nice run over the last 5 years or what have you, does that allow for any potential M&A conversations to pick up or escalate -- or conversely, if nothing is able to happen, do you at any point, start to think about partnering with a larger institution? John Bordelon: Absolutely. I think M&A will come a little more into focus. What we did look at over the last 3 years, more so were smaller transactions because we did not have the commodity to be able to utilize our stock. So I think with our stock price trading most of the 140 of tangible, we think we can do a deal this year. So potentially something a little more size than what we've been looking at for the last 3 years. Operator: And your next question comes from the line of Joe Yanchunis from Raymond James. Joseph Yanchunis: So a pretty good quarter on the deposit front. And as you discussed in your prepared remarks, the lowered cost improved funding mix, can you talk about what you're seeing in the market from a competitive standpoint? John Bordelon: I would say going back to Q4, when we started seeing the rate cuts, a good portion of the banks did lower their deposit rates accordingly. There are a couple of -- and we did as well. we saw an outflow of CDs. I think I mentioned that dollar amount, and we lowered our CD rates. And so we did have some CD runoff from noncore customers. Looking at some of the competitive peer data, we did see a couple of outliers in the 4% range. And we had to adjust our CD rates up slightly. When I say slightly, I'm talking from 3.65% as our top rate to 3.85% in most markets. And that stemmed the outflow of CDs for us a little bit. We are still seeing with rate expectations going cut rate going away. We have seen a couple of other competitors in Houston as well be a little bit more aggressive in the 4% to 4.25% range. Joseph Yanchunis: I appreciate that. And David, just kind of going back to your expense guide. It sounds like you lowered your out-quarter expense guide from what you said on the prior quarter. Just wondering what's driving that decrease? David Kirkley: Joe, I feel like it didn't change the guidance for the rest of 2026, I'll have to follow up with you individually on that. I feel like didn't change that guidance at all. So I'll have to connect with you. Joseph Yanchunis: And just to be clear, you had said 23.3% to 23.7% is the kind of go-forward number? David Kirkley: Yes. Joseph Yanchunis: Got it. And then I kind of want to hit on the loan book a little one more time. So in your prepared remarks, you mentioned that the pipeline has improved I guess I was wondering, are you able to quantify the change in the pipeline versus the end of the December quarter? And then additionally, it looks like C&I utilization dipped about 400 basis points this quarter. In your view, what needs to happen to see some recovery there? John Bordelon: Yes. I think one of the things that we focused on probably going back 2 years now is we're action in our appetite for nonowner-occupied. So what you've seen so far in 2026 first quarter was a reduction in those types of loans. There are some players out there that are very, very competitive on rates. And so we were able to hold on to those. So those are a lot of rental properties and things of that nature. So that's where our loan reduction is coming from. So we still have a decent pipeline, but we've lost -- I don't remember the number, Dave, man in those 2 categories yes. So we anticipate that, that runoff maybe slows down a little bit, but -- and that will help us add balance in the second and third quarter, maybe even the fourth quarter, assuming the rate cuts. Rate cuts may even spur that on a little bit more on the oil side. Joseph Yanchunis: Okay. I appreciate that. Then last one for me here. David Kirkley: The pipeline increased about $30 million as of March compared to December. Joseph Yanchunis: And what's the $30 million of what base, if you don't mind? David Kirkley: To about $122 million. Joseph Yanchunis: That's great, certainly from a percentage standpoint. And then last one for me. While relatively small, it looks like SBA volume has ticked higher this year, while the average deal size has been cut in half. versus 2025. Can you talk about your SBA strategy and how it's evolved? John Bordelon: Yes. It's been a very slow process. We've looked at a lot of C&I-type loans on the SBA side. A lot of the brokers are taking some of the [indiscernible] type loans. We haven't -- I don't think we've originated any [indiscernible] loans in the last couple of years. So it's been very tough either they don't fit our appetite or very competitive bidding and the prices are such that we're not in. But -- that's something that we're actually discussing our strategy for SBA. It's not going to be a big part of our portfolio. To be able to make it a big part of our portfolio, we would have to invest in a lot of lenders in that world. And we wanted to have that as a go-to but not necessarily drive for significant success. Operator: [Operator Instructions] Your next question comes from the line of Feddie Strickland from Hovde. Feddie Strickland: Just wanted to touch on loans first. David, I think you mentioned a 40 basis point pickup on loan yields, kind of the stuff is renewing. But I was curious, what's the average rate on new production today? David Kirkley: About 7%. Feddie Strickland: Okay. And then on the credit side, I was wondering if you could just walk through a little bit more of kind of maybe what's maybe in workout and maybe some changes that we could see later this year, just as you kind of work through the credit. So I appreciate that you've mentioned in the release that the losses should be immaterial, but just curious if we could maybe see a directional change in NPAs later this year. John Bordelon: Well, I think the biggest issue that we've seen probably in the last 2 or 3 years is the time it's taking to run these special assets through the process. We had some that were working on in New Orleans that filed bankruptcy the day before the foreclosure. And so we're in year 2 of collections on that. Our oldest classified asset is trying to refinance outside and hopefully, that happens. But that's been a bad asset for 7 years. So the longevity of these and our ability to get them and work them seems to be the biggest problem because once we get them, we can work them whether we take a loss or we're able to recover our load is irrelevant. We want to work and get them out and get that money back working. And it's just been a very low process over the last couple of years and getting that done. So that's why we're having a little bit more accumulation. It's not like we had that much in the quarter, $3 million additional, but we didn't have $3 million of runoff. That's the problem. Feddie Strickland: Got it. And just another question on the deposit side. It was good to see solid DDA growth. Just curious, I know that's kind of tough in this environment with where you're sitting where they're at. But do you think there's an ability to continue to grow, [indiscernible] you see anything on the horizon that could lead that number to continue to climb higher? John Bordelon: Yes. I think the biggest change for us has been attracting bankers that are more C&I-driven and so we're getting total relationships and some of those relationships come with very healthy deposits. And so as long as we continue to do that and for a long period of time, we were a CRE bank, and our focus changed about 4 years ago away from that to more of a C&I customer. And I think that's what you're seeing here is the influx of deposits, not necessarily big loan amounts. Operator: [Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. John Bordelon for any closing remarks. John Bordelon: Thank you all for joining us today. We appreciate your questions and your concern for Home Bancorp. We look forward to speaking to many of you in the coming days and weeks, and hope everyone has a wonderful week. Thank you very much. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the MSCI Inc. First Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded. At this time, participants are in a listen-only mode. Later, we will conduct a question-and-answer session where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulan, Head of Investor Relations and Treasurer. Jeremy, you may begin. Jeremy Ulan: Thank you, Operator. Good day, and welcome to the MSCI Inc. First Quarter 2026 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the first quarter of 2026. This press release, along with an earnings presentation, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of the presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-Ks and our other SEC filings. During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures. You will find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics, such as run rate and retention rate, is available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO, and Andy Wiechmann, our Chief Financial Officer. With that, let me now turn the call over to Henry Fernandez. Henry? Henry Fernandez: Thank you, Jeremy. Good day, everyone, and thank you for joining us. MSCI Inc.’s first quarter results affirm our foundational, mission-critical role in global investing while also showcasing the highly diversified nature of our business. Our key financial metrics included organic revenue growth of over 13%, adjusted EPS growth of nearly 14%, and adjusted EBITDA growth of almost 19%. We remain long-term believers in the MSCI Inc. franchise, and we are committed to maximizing value creation through the disciplined deployment of our excess capital. Between January 1 and yesterday, we repurchased more than $464 million of MSCI Inc. shares at an average price of about $556 per share. In addition, we recently completed three very exciting and highly strategic small bolt-on acquisitions in key growth areas. Our Q1 operating metrics included total run rate growth of nearly 13%, fueled by a record asset-based fee run rate of $872 million, growing 25%, and recurring subscription run rate growth of 9%, fueled by net new recurring subscription sales of $39.6 million, growing 52%. It was our best first quarter for net new recurring subscription sales since 2022. The retention rate across all MSCI Inc. product lines was 95.4%. Our increased business momentum is starting to reflect the relentless adoption of agentic AI in everything we do, ranging from how we capture data and build models and platforms, to how we launch and market our products, to how our people work every day. This momentum cuts across geographic regions, product lines, client segments, and asset classes. We did well in all regions in Q1, with Asia Pacific a particular standout. In fact, we posted our strongest ever Q1 on record for recurring sales in APAC, at $15 million, up 46% from a year earlier. Across product lines, MSCI Inc. has built our momentum through sales of both newer and more traditional solutions. In Index, for example, subscription run rate growth returned to double digits in Q1 at 10.7%, and we achieved a record level of Q1 recurring sales at nearly $33 million. These results were driven mainly by our market cap indices, but we also delivered impressive growth in custom indices. With more than $21 trillion in AUM benchmarked to MSCI Inc. indices, the ecosystem around our products is scaling to new heights. This includes $7.4 trillion of indexed equity benchmarked to MSCI Inc. indices, comprised of $2.4 trillion in ETF products and $4.9 trillion in non-ETF products. Q1 was our best quarter since 2023 for traded volumes and run rate from listed futures and options contracts linked to MSCI Inc. indices. This further reinforces the power of our ecosystem and our shared success with the MSCI Inc. exchange partners, including our new licensing agreement for options on MSCI Inc. indices listed on the New York Stock Exchange. AI is helping us capitalize on these trends by offering more flexibility, faster customization, and greater interoperability. For example, our new IndexAI Insights connector makes it easier for clients to answer questions about our index data and methodologies using their preferred AI large language models, such as GLOWL and ChatGPT, or on MSCI One. Hundreds of clients have used IndexAI Insights since our launch in late February. MSCI Inc.’s recent acquisition of Compass Financial Technologies, a Swiss-based provider of index calculation services, extends our customization capabilities into additional asset classes, such as commodities, digital assets, and equity derivatives. Meanwhile, in Private Capital Solutions, we delivered recurring net new sales growth of nearly 44% in Q1 while driving adoption of both newer and established solutions. Some of our reimagined and innovative new tools include daily private valuation indices and benchmarks for private equity and private credit. MSCI Inc.’s AI capabilities in private assets have increased dramatically over the past year, including a new connector on cloud linked to our Private Capital Intelligence fund benchmarking. We are helping allocators streamline the due diligence and evaluation of private fund managers at scale with our private asset due diligence platform. Our recent acquisition of VantageR, a platform built entirely on AI, accelerates our ability to help clients perform better due diligence when investing in private markets. Likewise, our acquisition of PM Insight earlier this month will help us deliver secondary market pricing, liquidity, and reference data, which will support more robust portfolio construction and the development of indices and analytics solutions. Turning back to MSCI Inc.’s Q1 performance, in Analytics, we drove recurring net new subscription sales of $8.2 million, up nearly 55%, reflecting large wins and renewals of our equity offerings and enterprise risk tools. These wins underscore the continued innovation of our factor capabilities, such as our next-gen models and the release of basket-building solutions for the market-making and trading community. They also demonstrate our advancements across total portfolio solutions, including our unparalleled private asset coverage, as seen in our new private credit risk models. Among client segments, MSCI Inc. had an especially strong quarter with hedge funds and traders. Among hedge funds specifically, we posted subscription run rate growth of 17%, along with our highest ever level of Q1 recurring net new subscription sales, at roughly $12 million. These results were driven mainly by Index and Analytics. These wins included a seven-figure Index rebalancing deal with a top global hedge fund. In Analytics, hedge funds are also licensing our crowded trade datasets to support their alpha generation. Among banks and broker-dealers, we delivered subscription run rate growth of almost 11%, along with our best ever Q1 for recurring net new sales at nearly $11 million. Shifting to asset owners, MSCI Inc. achieved subscription run rate growth of nearly 10%, driven by Private Capital Solutions and Analytics. As more pension funds diversify into private markets, we see growing demand for our total portfolio solutions and private asset tools, including our tools for benchmarking and for transparency. Moving on to asset managers, we posted subscription run rate growth of over 6%, along with nearly 11% recurring net new sales growth, including notably strong growth in Analytics and a retention rate of close to 96%. MSCI Inc. is executing on key growth opportunities for the asset management segment, including advanced datasets, private assets, total portfolio solutions, and active ETFs. Looking at our Q1 performance as a whole, we once again demonstrated the benefits of our all-weather franchise. Our client segment and product diversification, recurring revenue financial model, and the growing liquidity and scale of the investment ecosystem linked to our indices and our IP are key strengths. Our ongoing technology- and AI-driven transformation will strengthen these advantages. To help us lead that transformation, Dinesh Gupta joined MSCI Inc. last month as our new Chief Data Officer and Global Head of Operations. Dinesh came to us from Goldman Sachs, where he spent nearly three decades and held leadership roles spanning multiple business lines, including asset and wealth management. Dinesh served as Global Head of Data Engineering at Goldman, and he also led the organization responsible for building agentic AI platforms and machine learning capabilities across the whole firm. He is ideally suited to help MSCI Inc. strengthen our comprehensive data strategy, reinforce our technology- and AI-first mindset, and accelerate our transformation. And with that, let me turn the call over to Andy. Andy? Andy Wiechmann: Thanks, Henry. As you indicated, it is a very exciting time to be at MSCI Inc. We closed one of the strongest first quarters in our history, reaffirming our traction across key initiatives. We are growing our market share and expanding our influence in the increasingly AI-centric investment industry. Index organic subscription run rate growth reaccelerated to low double-digit levels at over 10%, with record Q1 recurring net new sales of $25 million, up 75% year over year. We benefited from a few large deals with trader and hedge fund clients, where these opportunities included new custom index content, such as our non-ETF custom index and constituent datasets, which span rebalancing and history use cases. Additionally, we had another quarter of strong traction with our market cap modules, where we saw success across asset managers, hedge funds, and broker-dealers. Index retention was nearly 97% for the quarter, further improving from last year’s levels. Asset-based fee run rate growth was 25%, fueled by the incredible flows to products linked to MSCI Inc. indexes. Equity ETFs linked to our indexes captured a record $103 billion of inflows during the quarter, representing roughly 35% of all flows in equity index-linked ETFs. To put that in context, the prior record for quarterly inflows was $67 billion, which occurred in the fourth quarter of last year. Global investors continued to deploy significant capital into ETF and non-ETF products linked to MSCI Inc. developed markets ex U.S. indexes and MSCI Inc. emerging markets indexes. Additionally, our clients are seeing very strong performance in European-listed ETFs linked to our indexes. In general, we see attractive whitespace opportunities in the European market. Nearly $1.1 trillion of the $2.4 trillion of AUM in equity ETFs linked to our indexes comes from European-listed products. During the first quarter, we saw European-listed ETFs capture $46 billion of inflows, which was nearly 50% of all flows in the region. In Analytics, run rate growth was in the high single digits, driven by new recurring sales of $17 million, which grew 30% from a year ago. We saw continued strength in equity Analytics, and we had some large enterprise risk and performance wins. The Analytics Q1 revenue growth was over 10%, although this reflected a higher volume of implementations recognized in non-recurring revenues. For Q2 2026, we currently expect Analytics year-over-year revenue growth to be roughly 5% for the quarter. In Private Capital Solutions, subscription run rate growth accelerated to nearly 16%. We have seen strong momentum with our transparency data, Private Capital Intelligence, and Total Plan offerings, all of which have benefited from numerous enhancements and new capabilities. In Real Assets, we still face some headwinds with our property transaction solutions, although we had another quarter of improving cancels and solid sales of our Index Intel offering for property benchmarking use cases. In Sustainability and Climate, while new recurring sales grew modestly, they were offset by higher cancels. We are seeing clients focus spend on their most critical sustainability priorities, which leads to some down-sells, although it has also led to competitive wins for us. We expect these pressures and the muted growth in Sustainability and Climate to continue in the near term. Our capital position remains strong with close to $400 million of cash on our balance sheet at the end of March. As Henry noted, we completed the acquisitions of VantageR and Compass during the first quarter and PM Insight earlier this month. These three acquisitions add a relatively modest contribution to run rate and ongoing expenses. On guidance, we updated our full-year outlook on D&A by $5 million to incorporate the impact of intangibles related to the acquisitions. Given the strong ABF performance, and the assumption of very gradual market appreciation in the back half of the year, we are trending to be in the top half of our expense guidance range. The Q1 effective tax rate reflected lower tax windfall benefits from the vesting of stock-based compensation compared to recent years. I would highlight our effective tax rate outlook for 2026 is unchanged, and for Q2, we expect to have an effective tax rate between 18% and 20%. The free cash flow outlook for the full year is unchanged, although Q2 is seasonally the highest quarter for cash tax payments for us. Looking ahead, we have an attractive pipeline of opportunities as we drive adoption of our new and existing solutions across the investment landscape. Our strong start to 2026 reaffirms the mission-critical nature of our solutions in today’s AI-first economy. We are seeing solid momentum in delivering new products and capabilities, supported by enhanced go-to-market efforts, which are translating through to tangible results. We are focused on meeting client needs and enhancing value across client segments. We look forward to keeping you posted on our progress. And with that, Operator, please open the line for questions. Operator: Certainly. As a reminder, if you have a question, please press 1-1 on your telephone. We ask that you please limit yourself to one question each. You may get back in the queue as time allows. Our first question comes from the line of Alex Kramm from UBS. Your question, please. Alex Kramm: Yeah, hey. Good morning, everyone. I just want to talk about the sales momentum a little bit here. I mean, the first quarter had a choppy ending with all the volatility in markets in March, so good to see still good momentum there. So just wondering, did anything slip given the environment? But more importantly, given the second quarter is generally a more important sales quarter for you, any kind of insight into what you are seeing so far, in particular in Index and Analytics? Thanks. Henry Fernandez: Hi, Alex. Thanks for the question. Except for a slowdown in dialogue and presentations and, obviously, demos in the Gulf region—the countries in the Arabian Gulf region—we have not seen any effect of the Iran war anywhere else in the world. It has obviously been a bit surprising to us, but we have not seen clients pull back. We have not seen clients delay decisions. They have been operating on a business-as-usual basis, and that was the case at the end of March and also in the first three weeks of April. Thank you. Operator: One moment for our next question. Our next question comes from the line of Manav Patnaik from Barclays. Your question, please. Manav Patnaik: Thank you. Good morning. I just wanted a little bit more color. These are obviously some impressive net new sales numbers out there, especially in this environment where we all perceive your main customers to be budget challenged. Are you taking share? Are you just taking more of the wallet? Can you talk a little bit about some of the product areas, innovation, and where this growth is coming from? Henry Fernandez: Yeah. In our own internal discussions and analysis, we have not seen—the operating environment and the end markets that we are serving have not changed for the last few quarters, not changed almost at all. A few things are a little better, a few things a little worse, but they have not changed. What has changed in terms of this performance of Q1, and also the past performance of Q4 of last year, is stronger execution across MSCI Inc. in three big categories. The first category is selling what we currently have—the products that we currently have—more aggressively, more creatively, more energetically across all client segments and all regions of the world. Number two is significant acceleration of the launch of new products, or I should say the start of an acceleration in the launch of new products. We launched an equal number of products in Q1 as we did in the full year of 2025. And number three, a significant acceleration in adoption of AI tools in everything we do, along the lines of what I said in my prepared remarks. Those three areas have helped us increase our recurring and new, have bigger penetration, take market share away from competitors—especially in the Sustainability and Climate area—and grow faster. We believe that, as we have said before, Q3 was a little bit of the bottom, Q4 was better, Q1 is better to expectations, and we think we are on a growth path here. Operator: Thank you. Our next question comes from the line of Toni Kaplan from Morgan Stanley. Your question, please. Toni Kaplan: Thanks so much. I was hoping if you could talk about whether you have seen any uptick to revenue specifically related to AI. I know you talked about the products built on AI. And any quantification around expense savings with regard to AI? Thanks. Henry Fernandez: Yeah, Toni, basically every new product we are launching has an AI component to it. Some of them are AI native, some of them are AI powered, and some of them have some AI enablement. Depending on the product and the area, the importance of AI is very big in the AI-native ones or is just one of the ingredients that go into the launch of the product. That is pretty much across the board in any new product. Therefore, we have been tracking last year the revenues associated with “AI products,” and we keep doing that, but it is almost irrelevant right now because everything that we are launching has an AI component to it—it is just a matter of degrees. The second part of your question is efficiencies. We are seeing significant early efficiencies in the use of AI across the whole board. That started in earnest in applying AI to the data and the data development in private assets and in Sustainability and Climate. That has accelerated significantly to the point that it allows us to dramatically increase the amount of data gathering and data development with the same level of headcount that we have, rather than adding headcount. We are beginning to see significant productivity as well in software development—new software development, new software applications—and we have not yet started rewriting the current software that we have, in terms of either production or applications, with AI, but that will be a big project that we want to get into in the near future. And then thirdly, and also very importantly, we began to use AI across the board in the development of models and methodologies. For example, in custom indices—we are ramping up the development of custom index capabilities—we are now using AI, obviously managed and monitored by our humans in our Research department, in the creation of custom indices at a much faster speed than we have ever done before. We are also using AI for Analytics models, and we just revamped the entire Sustainability ratings system, ESG ratings systems, using AI. That is in the process of being relaunched, and that is going to give us enormous productivity and scalability. Andy Wiechmann: Toni, one other point to highlight which adds to the benefit side of the ledger from AI is we are starting to see clients that are interested in licensing more content and getting access to more content for AI-driven use cases. We think that is early days and potentially a huge opportunity for us—something we get very excited about given the unique content that we have. So, that added to all the points that Henry highlighted reaffirms that AI is definitely a boon for us. Operator: Thank you. Our next question comes from the line of Owen Lau from Clear Street. Your question, please. Owen Lau: Hi. Good morning. Thank you for taking my questions. So Analytics revenue was up over 10% year over year, and, Andy, you also mentioned that you had some pretty strong nonrecurring revenue related to implementation. Could you please talk about the outlook there, in specific for implementation? And then how high is the correlation between the strength of Index and the strength in Analytics in the first quarter? Thanks. Andy Wiechmann: Sure. A few points there. Let me talk first about the momentum we are seeing in Analytics, which definitely has been encouraging. We continue to have strong success with our equity Analytics, and we had some big wins in the quarter, and we also had some nice wins on the multi-asset class side. The success that we saw in Analytics in the quarter was across multiple fronts. We are seeing strength across client segments. We continue to see very strong growth with hedge funds—we actually had 14% growth in Analytics with hedge funds. We are also seeing strong momentum with banks, where we had 10% growth, and asset owners also are a big win area for us, which Henry highlighted earlier. A lot of that is enabled by our total portfolio capabilities, which really lean on our differentiated private content. We saw 9% growth with asset owners. So, good momentum across client segments. Our factor franchise continues to get a strong boost within the hedge fund community, but excitingly, we are seeing traction outside of hedge funds. We had some wins with traditional asset managers as well. We are encouraged by the momentum across Analytics, and you see that in the run rate where we have been kind of steady in the high single-digit type area. Your comment about Analytics revenue growth is that there are some unique factors at play in the quarter. We did have a large implementation that was completed during the quarter, and hence you saw some meaningful nonrecurring revenues within Analytics, which drove the overall revenue growth to be slightly above 10% within the segment. As you have seen in the past, there can be some lumpiness with regard to when those implementations are completed and the comparisons to the prior-year period. In Q2, we do expect the revenue growth to be more mid-single digits—so closer to 5%—within Analytics. Beyond Q2, we do expect the revenue growth to track much more closely to run rate growth. Looking forward longer term, we think run rate growth is a good indicator of the revenue growth and, as I alluded to, that is an area where we see good momentum and strong traction. Your question about correlation with Index—there are dynamics that are overlapping. Within the trading and hedge fund community, our content sets are very complementary. We have seen strong traction both in Analytics and in Index within that client segment. We also see general environmental factors at play that drive both. As you can tell by the results, we had a good quarter in Index and a good quarter in Analytics, so there is some correlation there. But there are also different dynamics across different parts of the business, so I would say it really depends. Operator: Thank you. Our next question comes from the line of Ashish Sabadra from RBC Capital Markets. Your question, please. Ashish Sabadra: Thanks for taking my question. Really strong subscription run rate growth in hedge funds, asset owners, and broker-dealers. But I wanted to focus on the asset manager where it moderated a bit from 7%, I believe, last quarter to 6%. Can you just talk about the puts and takes there? How should we think about that momentum in asset managers going forward? Andy Wiechmann: Sure. There are some FX factors at play with the growth rates in any given sector. We actually have seen good momentum and a pickup with asset managers in spots. As Henry alluded to earlier, we are benefiting from the innovations that we have made—the new product development—as well as just more generally enhanced execution, and that includes how we cover our asset manager clients. The success was multifaceted. We had success in licensing more content and broader usage of our tools across asset managers. For many of the larger clients, we have taken more of an enterprise-type approach to how we work with them, and that leads to some very attractive additional licensing opportunities, and it also leads to more stability in the segment. As we alluded to, we saw very strong retention with asset managers in the quarter. From a geographic standpoint, we saw good momentum in EMEA and good momentum in APAC, and we have seen it both in Analytics and Index. To double-click quickly: on the Index side, beyond broader licensing, we have released content sets that are helping these clients in the portfolio construction process, but also in the sales enablement process—meaning how they communicate to their clients and how they think about launching new products. We also have solution sets that are getting traction for active ETFs, and more generally supporting indexed investing in many forms and fashions. On the Analytics side, we have had some big multi-asset class wins, and we have also seen some traction with our factor franchise. Overall, it is encouraging. A lot of it, as Henry alluded to, is driven by our efforts and our execution, and we continue to view asset managers as a key and core client segment for us. Operator: Thank you. Our next question comes from the line of Craig Huber from Huber Research Partners. Your question, please. Craig Huber: Thank you. Maybe just talk a little bit further about the little bit better numbers in Sustainability and Climate there. It is obviously nowhere back to where it was before. Seems like the environment for that has not dramatically changed here in recent quarters. But just talk about what is driving a little bit better momentum there, if you would, please. Thank you. Henry Fernandez: Craig, it is important to start by differentiating Sustainability—formerly ESG—from Climate. They have been a little bit linked in the past, not because they have similar dynamics or supply and demand or competitive landscapes, but because sometimes the sales that we did were in one package, which we are increasingly separating. We believe that Sustainability we will continue to sell—and sell well—but there is a lot of rationalization of cost, and there is significant market share that we are taking away from competitors on Sustainability. On Climate, we are cautiously optimistic that at some point it will reaccelerate, especially in physical risk. This past quarter, we had an important win with the central bank of Germany, which subscribed to a series of climate risk tools from our side on behalf of the European Central Bank system, which incorporates all the national central banks. We are very encouraged by that because it was a competitive win—we were selected as the best provider—and now we have the work of penetrating each one of the national central banks. That tells you how important they view climate risk and how important they view the MSCI Inc. offering. We continue to focus on the transition elements of climate change, but very importantly, we are now more and more focused on the physical risk part, and we see increasing demand there. We believe that the Iran war and the energy shock that has come out of that will underscore significantly the energy transition that many countries need to make to ensure less dependence on oil and gas coming from the Gulf, and that is going to bode well for a lot of our tools. Operator: Thank you. Our next question comes from the line of Alexander Hess from JPMorgan. Your question, please. Alexander Hess: Hi, guys. I want to jump into the active ETF business. It seems like, from our data, there was some pickup in active ETFs more broadly, and they seem to be doing pretty well as a category. Maybe you could highlight what that business looks like, how that may have helped your fund flows in 1Q or not, and then anything we should understand about how you participate in that business and how that flows through your numbers? Thank you so much. Henry Fernandez: We are very excited about that part of our business, for a number of reasons. First, we believe that this is an area of significant expansion by the active asset management industry. A lot of what they are getting hit with in outflows in mutual funds and other forms of active management, they can latch onto active ETFs and revive growth. This is a client base that we know exceedingly well. They recognize our datasets and our indices extremely well, and therefore we can be very helpful to them. Second, it is important to recognize that something like 70%–80% of the active ETFs that are being launched have some elements of systematic investing or index investing in them. They are not pure-play stock-picking ETFs like some mutual funds could be. That is fertile territory for MSCI Inc. to be of significant help—in terms of the underlying database and the organization of the database, to the indices that are built on the database, and then to the quantitative tools that can be applied on top of the indices to do overlays that are more actively managed. We are very bullish about that. Third, our role in this industry on the passive side is significant, as you know, and a lot of our clients are coming to us to help them on active ETFs because of our brand and the trust in our database, indices, and methodologies in order to build this active ETF business. We are very hopeful that will be a growth area for us with active managers around the world. Andy Wiechmann: And, Alex, to answer the part about where it shows up in our financials: we are very actively used as a benchmark on active ETFs. Oftentimes that is not a new sale for us. If a client is licensed already for the module, when they use us as a benchmark on the active ETF, that is not going to be a new sale. But to the extent it helps with the health of the asset manager and helps them grow, that can lead to additional sales for us. As Henry alluded to, we also license additional content sets—specific sets like our Index Universe data but also broader content sets—that can be used as part of the portfolio construction process, overlays, and risk management as part of our clients’ active ETF management. That is an additional module license for us on the subscription side. We have also launched our financial product license—this is where we can do more for the client and be an integral part of the overall portfolio management, including calculating the index on an ongoing basis—and that can translate through to ABF revenue. We can benefit both on the subscription side and the ABF side. It is very early days, so it is small for us. We are getting good traction as a benchmark and have had quite a bit of success early days in licensing additional content sets, but we think the opportunity is much bigger going forward to help on both the ABF side and the subscription side. Operator: Thank you. Our next question comes from the line of Faiza Alwy from Deutsche Bank. Your question, please. Faiza Alwy: Yes, hi. Thank you so much. I wanted to ask about the strong growth that you saw in custom indexes. I am curious if it is driven by your ability to process things faster, or is it more a function of end market demand? Just trying to understand the sustainability of the higher growth that you saw this quarter. Henry Fernandez: Basically, let us start with the end market demand. In systematic investing—and a big part of that is index investing—the vast majority of the historical work that we have done has been on market cap exposures. That is “give me the market cap of your emerging markets,” “give me the market cap of Japan or Europe,” or one way or another. What is now happening is that the door is now wide open to do systematic investing and rules-based investing—in what we call non-market cap—which is “give me a portfolio or an index of all the equity securities in the world that have low volatility, high quality, high ESG ratings, low climate risk,” or whatever the flavor. That is an investment thesis, not just a market exposure. Therefore, there is incredible growth in that in equities. We are now seeing it in fixed income. We are even getting requests about that in private assets, like private credit or private equity. We are uniquely positioned to benefit from that because not only do we have the index universe, the index methodologies, and a great index brand, but we have all the other ingredients: we have the factor models to create factor compositions; we have the ESG ratings; we have the climate exposures; we have the thematic scores. We can put everything together to build an index. Some of that gets translated into standard, off-the-shelf indices that we create, but the vast majority is coming into the form of a custom index—for either active management for active ETFs, for passive management in ETFs or institutional, for structured products, for an over-the-counter swap or option, and so on. The demand is very significant. We have been ramping up our ability to meet that demand. That comes in three components. First, the workflow application to help people and help us design these indices, and that is the acquisition of Foxbury. Second, once you have that workflow application and you design what you are looking for, how do you link that to an industrial-scale production environment in which you have tens of thousands of custom indices being produced safely and with high quality? We have done that work already. Third, how do we accelerate the process of creating the methodology—the index algorithm? We were doing that with humans in our Research department, and we are now doing that with AI to help accelerate it. The demand is there. We are meeting most of the demand, but we are leaving some money on the table, and with these improvements in these three areas, we are now well-positioned to capture the vast majority of this demand in the world, and we are uniquely positioned to achieve that. Operator: Thank you. Our next question comes from the line of Analyst from Goldman Sachs, on behalf of George Tong. Your question, please. Analyst: Hi. This is Anna on for George. We saw very strong AUM growth of ETFs linked to MSCI Inc. indices last quarter, especially in developed markets ex U.S. and emerging markets over the period of time. Can you provide more color around the momentum of the international inflows outside of the U.S.? How do you see the trends going forward? Additionally, do you expect the trends to drive broader subscription growth opportunities for you going forward, given MSCI Inc.’s unique exposure to international markets? Andy Wiechmann: Sure. As you alluded to, we have a unique and differentiated franchise in ex-U.S. markets. If you look over the last ten years, we have captured about a 35% share of ex-U.S. equity ETF AUM. That sustained leadership is supported by consistent inflows, the strength of our comprehensive offering, our strong position with the asset owners of the world, and the fact that we really have fit-for-purpose indexes tailored to whatever need our clients have. Over that ten-year period, you saw meaningful outperformance of the U.S. market for most of the period, and we did fine during that period. But over the last eighteen months, you have seen a rotation start to take place into international equities—non-U.S. equity exposure—and that has been a big benefit for us. We saw tremendous inflows throughout last year. We saw record inflows into ETFs linked to our indexes in the first quarter—north of $100 billion—and, importantly, we are capturing a significant percentage of the market share of those flows, which speaks to the strength of the franchise. Another stat to highlight: within the European-listed ETF markets, we have a very strong position. We captured 40% of flows into European-listed funds within the first quarter. We also had very strong flow capture in the U.S. for international exposure products, but Europe has been an area of outsized strength for us. The growth in AUM in European-listed ETFs, and ETFs more generally, helps fuel the broader ecosystem for us. It drives more demand for clients to create new ETFs based on our indexes and helps in the derivatives markets, both over-the-counter and listed. It is an important point of strength. I do not want to speculate on what happens going forward, but given many of the fiscal and geopolitical dynamics at play, we have seen sustained momentum of outsized growth into international exposure areas, and that is a huge opportunity for us. We have an all-weather franchise that can benefit in all environments, but this environment creates numerous opportunities across different product areas, client segments, and geographies for us. Henry Fernandez: I normally say that we are only getting started in the indexed investing world and, in this case, the ETF world. The only thing that has been largely captured and conquered is market cap exposures. When you think about the non-market cap investment thesis—which is the vast majority of the investment process worldwide—it is being systematized, turned into rules-based, just like the active ETFs I was mentioning. There is now a revolution going on in fixed income as well, and in commodities and in equity derivatives. The acquisition of Compass Financial that we made is going to help us dramatically penetrate other asset classes like commodities—creating indices and systematized structures for commodities, for cryptocurrencies, for other digital assets, and for equity derivatives. I want to make sure you pay attention to that acquisition because it is going to open up a lot of new doors for us. By and large, we are the provider of choice for these custom indices across the board. That has been the strength of our fixed income ETF franchise linked to MSCI Inc. indices—not the market cap fixed income indices, but the non-market cap, where there is an ESG overlay, a Climate overlay, or a Factor overlay. You are seeing that growth. Lastly, to reinforce what Andy was saying: the two big ETF markets in the world are the U.S. and Europe. Our presence in Europe is $1.4 trillion-plus out of the $2.4 trillion, and we are extremely well positioned, capturing a significant amount of the flows there, in addition to the strength we have in the U.S. Operator: Thank you. Our next question comes from the line of Scott Wurtzel from Wolfe Research. Your question, please. Scott Wurtzel: Hey, guys. Thanks for taking my question. Just wanted to ask on the growth that you are seeing with hedge funds. It has been pretty impressive in this quarter and in the past couple quarters as well. I am just wondering if you can maybe contextualize what inning we are in in this opportunity to sell into the hedge fund channel, given the growth that you have seen in recent quarters? Thanks. Andy Wiechmann: Sure. Maybe I can broaden it to traders, broker-dealers, and hedge funds—what we have referred to as the trading ecosystem in the past. This has been a strong growth area for us, and it has been our highest growth area for the last couple of years, but it is also very strategic for us. We have seen growth in both Index—where we had 27% subscription run rate growth within Index with hedge funds—and in Analytics—where we saw 14% subscription run rate growth with hedge funds. We have similarly had very strong traction with trading firms and with broker-dealers. A lot of this is fueled by our actions. We have benefited from the health and asset growth that you have seen within multi-strat hedge funds and the growth of certain strategies, but importantly, we have been actively innovating and enhancing the services that we deliver to these organizations, and we have been becoming much more of an enterprise-wide partner to many of them. We offer custom indexes used for structured products and over-the-counter derivatives, custom bespoke strategies, custom index stats and content sets used for systematic and index rebalancing strategies, related index methodology datasets, and we continue to enhance our risk models and broader systematic solutions, which create additional upsell opportunities. We believe this is a big market where we will be a critical partner to these organizations. It is a sustainable area where we have a long way to go in terms of doing more for them at an enterprise level. As I alluded to earlier, this is very strategic for us as a firm because it helps fuel opportunities in the ETF market, the non-ETF passive market, and the over-the-counter market as well. It provides more liquidity and more opportunity for asset owners looking to implement index strategies, and opportunities within the wealth segment. It has been a nice growth engine in the short term within those three client segments, but more generally it is helping to fuel the power of the overall franchise for us. We believe it is attractive and sustainable, and we continue to innovate and enhance our service there. Operator: Our next question comes from the line of Analyst from Bank of America. Your question, please. Analyst: Great. Going back to the net new, very notable in 1Q—great results. Andy, would you be able to disaggregate how much of that was due to larger, concentrated deals, which you alluded to in the prepared remarks, versus the substantial increase in product velocity and execution? Any comments on that would be helpful. Andy Wiechmann: Sure. As Henry mentioned, we saw a notable pickup in the number of new products launched in the first quarter, and we also saw a notable increase in sales from new products compared to the first quarter of last year. Our actions are definitely playing a role in the acceleration in growth we have seen. If you look at where some of that momentum is, we have seen strong momentum in Index, where growth reaccelerated back to double digits. We have seen an acceleration in PCS on both fronts. We have been very active in the pace of new product development as well as enhancing our go-to-market efforts. Things like new Index content sets that we have been delivering; within PCS, a host of new capabilities like our Document Management and Source View offerings; our asset- and deal-level metrics; and a number of content sets that are helping drive growth across basically all of our PCS offerings—all have been released in recent periods. On the custom index side, Henry alluded to that area where we have been heavily investing, broadening our capabilities, and becoming a partner of choice. There are probably some environmental aspects at play; the momentum is constructive, but a lot of the momentum has been driven by the efforts and actions that we have been taking. Operator: Thank you. Our next question comes from the line of David Motemaden from Evercore ISI. Your question, please. David Motemaden: Hey. Thanks for squeezing me in. I wanted to talk a little bit about some of the momentum since the February rollout of IndexAI Insights. It sounds like that is driving increased monetization, or at least a bit of a pickup in licensing data. How might the economics differ whether it is going through MSCI One or third-party apps like Copilot or ChatGPT? Thank you. Andy Wiechmann: Sure. Consistent with our past approach, we want to make our content as easily accessible and available however clients want to get access to it. As we alluded to, you can get access to it through Cloud MCP, through MSCI One; we even have certain content sets available through Copilot. The economics are generally consistent regardless of how clients access it. Depending on how and where they are using it, there can be upcharges and upsells for us, but our goal is to make it easier for clients to access the content and use it in a multitude of use cases. This is one of those areas where we are increasing value to clients. We have seen notable traction, given that we just released it in February, in clients accessing IndexAI Insights. Clients are getting more value out of the content sets they have, so they can query and interrogate what is going on in the index, what drives the methodology, and what the constituents are. It is also a natural upsell driver for them to ask for additional content sets and to want to get insight into our risk models across the firm. We think this is a key enabler. It does help support price increases on the margin and can lead to upcharges around usage. This is step one for us, and over time, we think clients are going to want to use more of our content within their AI-driven processes. As they start to want to use that content to train models and use it as part of their AI investment processes, those are areas where there are meaningful sales opportunities for us. We are spending a lot of time thinking about the right licensing models there and how we can capitalize. We know directly from our clients that they want to use our content heavily, and these initial ways that clients can access the content via AI channels are the first step, but we believe there is a long journey of additional things that we can do and opportunities to monetize the content we have. Operator: Our next question comes from the line of Jason Haas from Wells Fargo. Your question, please. Jason Haas: Hey, good afternoon. Thanks for taking my question. There has been a lot of fear in the private credit markets recently around credit risk. How is that impacting your PCS business? Is it a headwind or a tailwind? Thank you. Henry Fernandez: It is definitely a tailwind for us. Think about it similarly to our Analytics offering. In equity factor Analytics and multi-asset class Analytics, the period of highest interest and highest demand is when there is a lot of volatility in the marketplace. What we are seeing right now in private credit is that, because of the lack of transparency on the funds, people do not understand the sector exposure of various credits, what the valuations are, what the liquidity is, and so on. There is increasing interest in many of the tools that we provide: transparency tools to understand what is in the fund, the terms and conditions of the loans in the fund, the credit assessments—in our partnership with Moody’s—what is the market risk of those funds based on factors, and the like. We are increasingly focused on creating valuations on private credit. This is a major tailwind for us. There will be more and more people wanting to look at that in order to understand what they bought and whether they should keep it, sell it, or add to it. Operator: Thank you. Our next question comes from the line of Kelsey Zhu from Autonomous. Your question, please. Kelsey Zhu: Good morning. Thanks for taking my question. How does AI change the competitive dynamics for you, particularly for the Analytics business? Are you seeing any intensified competition there? And if so, is it coming from startups or large customers who may try to build some of these products themselves? Thanks a lot. Henry Fernandez: It is a very good question. So far, we have not seen any kind of intense competition from either the traditional competitors of MSCI Inc. or the startups. We are not relaxed—we are monitoring and focused on that intensely to make sure that we continue to have a very deep and wide competitive moat. What we have seen is a significant acceleration from MSCI Inc. in terms of product creation: starting with gathering more data, accelerating the pace of model creation and methodologies and index production, and creating efficiencies that can help us save headcount and expenses that we can then reinvest into even more product creation and more distribution. I believe that the ultimate big opportunity for us is not only in the data and the models and the enhancement of the software capabilities that we have, but in changing the business model of how our clients consume our content. As you know, a lot of our content is consumed either by our own applications—MSCI One, RiskManager, Private i, etc.—by clients’ own software applications, or by third-party applications that aggregate our content with others. Through what we are doing—significantly increasing the creation of agents that our clients can use to consume our content—we can change that. We can get clients to consume a lot more of our content with a lot more people in many different locations. That is what we are aiming for in the medium to longer term, and that will dramatically redefine how clients consume our content and give us a lot more control and ability to expand. Operator: Thank you. This does conclude the question-and-answer portion of today’s program. I would like to hand the program back to Henry Fernandez for any further remarks. Henry Fernandez: Well, thank you all for joining us today. I would like to emphasize that our strategy last year and going forward is to significantly increase the pace of growth of our existing product segments like Index and Analytics with our traditional client segments of asset owners, asset managers, hedge funds, broker-dealers, etc., and simultaneously step up significantly the pace of development and growth of our newer product lines, such as Climate and PCS, sold to the traditional client base and newer client bases like GPs, banks as principals, insurance companies, market makers, and other parts of that trading ecosystem. Ultimately, we aim to become an even bigger long-term compounder of growth, which has always been our goal. We are underway on that strategy. The benefit of what you are seeing is that this is not growth in the periphery; this is growth in the existing big parts of the product line with existing clients, highly supplemented by the newer product lines and the newer client segments to add to that growth. We are very optimistic. It is an all-weather franchise—diversified across products, client segments, and asset classes. The question is how far and how aggressively we can optimize and monetize it to develop compound growth over the years and significant value creation for all of our shareholders, including our shareholders in the management team. Thank you very much. Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good morning, and welcome to United Community Bank's First Quarter 2026 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; President and Chief Banking Officer, Rich Bradshaw; and Chief Risk Officer, Rob Edwards. United's presentation today includes references to operating earnings; pretax, pre-credit earnings; and other non-GAAP financial information. For these non-GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measure in the Financial Highlights section of the earnings release as well as at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of the first quarter's earnings release and investor presentation were filed this morning on Form 8-K with the SEC, and a replay of this call will be available in the Investor Relations section of the company's website at ucbi.com. Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on Page 5 and 6 of the company's 2025 Form 10-K as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I will turn the call over to Lynn Harton. Herbert Harton: Good morning, and thank you for joining our call today. We've got a lot to cover. I'm going to start with our quarterly earnings update, and then we will close with the details of our acquisition of Peach State Bank headquartered in Gainesville, Georgia. We had a great start to 2026. For the first quarter, we realized net income of a little over $84 million, translating into EPS of $0.69. On an operating basis, our EPS was $0.70, representing a 19% increase from the first quarter of 2025. Annualized loan growth of 4.5% for the quarter and an expansion of our net interest margin of 3 basis points helped to drive these results. Credit also performed very well this quarter with total charge-offs of 22 basis points, only 10 basis points, excluding Navitas. Nonperforming assets as a percentage of loans were 50 basis points, down 1 basis point from Q1 2025, and special mention in substandard loans totaled only 2.9% of total loans, down 2 basis points from Q1 of 2025. Our operating return on assets was 122 basis points, an 18 basis point improvement year-over-year, and our operating return on tangible common equity was 13.1%. Given our high capital levels, we continued to return capital to shareholders, both via a $0.25 quarterly dividend and the repurchase of $37 million of our common stock. We also announced the intention to redeem our remaining $100 million in sub debt in the second quarter, only 20% of which qualified as Tier 2 capital. Even with the dilution from our repurchase activity, tangible book value per share grew at an annualized rate of nearly 6% for the quarter and by 10% year-over-year. We were also excited to have been recognized by J.D. Power as the top-ranked bank for retail client satisfaction in the Southeast during the quarter. This is the 12th time the United team has received this recognition. I'm very proud of the dedication and genuine care that our teams across the footprint demonstrate every day. It's because of them that we are the most recognized bank for customer satisfaction in the Southeast. I'll now turn it over to Jefferson to cover our first quarter's performance in more detail. Jefferson Harralson: Thank you, Lynn, and good morning to everyone. I will start on Page 5 and talk about our deposit results. On an end-of-period basis, our customer deposits grew by $237 million or 4% annualized, mostly driven by DDA growth in the quarter. We were also very pleased that our cost of deposits moved down 9 basis points to 1.67% and that our cumulative total deposit beta stands at 39% in this down cycle, which exceeded our goal. On Page 6, we turn to the loan portfolio, where our growth continued at a 4.5% annualized pace. Our growth came primarily in the HELOC and C&I categories, which are 2 of our current areas of focus for growth. Turning to Page 7, where we highlight some of the strengths of our balance sheet. We believe that our balance sheet is in good position from a liquidity and capital standpoint to be ready for any economic volatility. We have very limited broker deposits and very limited wholesale borrowings of any kind. Our loan-to-deposit ratio remained low and was unchanged at 82% this quarter with a solid end-of-period deposit growth. Our CET1 ratio was flat at 13.4% and remains a source of strength for the bank. On Page 8, we look at capital in more detail. As I mentioned, our CET1 ratio was 13.4% and our TCE was also flat at 9.92%. We were active in our buyback again in the first quarter, buying back $37 million in shares, which equated to 1.1 million shares in the quarter or just under 1% of our shares outstanding. Moving on to spread income on Page 9. Spread income was down in Q1, mainly due to having 2 less days in the quarter. On a year-over-year basis, our spread income was up 10%. Our net interest margin increased 3 basis points in the quarter to 3.65% and up 29 basis points compared to last year, and the first quarter is the fifth quarter in a row of margin expansion. We continue to experience a margin tailwind from our back book repricing and from the mix change towards loans away from securities. In the next year, using just maturities, we have about $1.4 billion of assets, paying down in the 4.63% range. And because of this continued impact, I would expect the margin to be up between 3 and 5 basis points in the second quarter. Moving to Page 10. Noninterest income was $43.7 million in the quarter. This included a $5.2 million gain on an interest rate cap that was hedging a sub debt issuance that we intend to redeem on April 30. Excluding the cap gain, noninterest income benefited from a strong mortgage quarter and was offset by seasonally lower service charges. And we opted to sell less Navitas loans than usual. Last quarter, we sold $41.6 million in Navitas loans compared to $8.3 million this quarter. Our GAAP expenses were $157.3 million in the first quarter, and our operating expenses were $151.6 million. We had a small amount of our normal merger charges, but we had 2 more unusual and offsetting nonoperating expenses. First, we had fully accrued for the FDIC special assessment that came after the Silicon Valley failures. That said, the FDIC refilled this bond faster than expected and is not asking for the full assessment. We had taken the original assessment as a nonoperating loss, and so the release of the assessment of $1.9 million comes through nonoperating as well. We also had another nonoperating charge in the first quarter related to a change in our payroll process necessitated by changes in legislation. We had paid our employees on a current basis, and we changed this to paying our employees in arrears. As a result of the transition in payroll timing, some of our employees would have gone nearly a month without a paycheck, so we paid an additional check to bridge the gap. Aside the one-timers, expenses were $151.6 million, relatively flat compared to the fourth quarter. Moving to credit quality on Page 12. Net charge-offs were 22 basis points in the quarter, improved from last quarter and flat to last year. We also saw relatively flat NPAs and a nice improvement in past dues as credit quality remains strong. I will finish on the quarterly results on Page 13 with the allowance for credit losses. Our loan loss provision was $10.9 million in the quarter, which was in line with our net charge-offs. With the loan growth, our allowance coverage of credit losses moved down slightly to 1.15%. With that, I'll pass it back to Lynn. Herbert Harton: Thank you, Jefferson. Now let's move into a discussion of our Peach State Bank announcement, and I'll start with a bit of history. United began de novo in Gainesville, part of Hall County in 2005. Over the past 20 years, we've enjoyed strong organic growth there with now $827 million of deposits in the county. Peach State was founded that same year, 2005, and has also enjoyed strong organic growth. Total assets for the company are $788 million as of the end of the first quarter with $713 million in deposits. Hall County is a rapidly growing part of the overall Atlanta MSA. And after this transaction, the combined bank will have the #1 deposit share in the county. Culturally, we fit well together. We know each other personally. We work in the community together. We go to school together. We go to church together. Peach State shares the same passion for customer service as United. There's a tremendous amount of mutual respect between the 2 teams, and I'm very excited to see them come together and continue to win in this market. Jefferson, let me turn it back over to you now to cover the financial aspects of the transaction. Jefferson Harralson: Okay. Well, first, Peach State has approximately $800 million in assets or about 3% of our assets. The deal value is about $100 million and will be a 50-50 cash stock mix. We are paying 1.9x tangible book value and 6x cost saved earnings. Given our overlap, we are estimating 40% cost savings. While the deal is 50-50 stock and cash, we plan on repurchasing the $50 million in shares issued by year-end. As structured, we estimate the deal to be $0.09 accretive in 2027. And with the planned buybacks, we estimate the deal to be $0.12 accretive. With that, I'll pass it back to Lynn to conclude. Herbert Harton: Thank you, Jefferson. This is a great example of what we want to do in the M&A space. It is in market, manageable size, a history of strong performance, great upside potential and an attractive way to leverage capital and continue to grow our business and our brand. I'd like to now open the call to questions. Operator: [Operator Instructions] Our first question today comes from Russell Gunther from Stephens. Jake Morton: This is Jake Morton on for Russell Gunther. My first question is on deposit costs. How would you expect them to trend from here in an interest rate scenario where the Fed remains on pause on a stand-alone basis and including Peach State? Is there room for you to bring these down further? Or should we expect some pressure going forward? Jefferson Harralson: I'll take that one. Thanks for the question. I would expect our deposit cost to be relatively flat. We have some tailwind from CD maturities, but we are seeing competition out there, and we do want to grow our deposits this year. So I think if you layer in relatively flat deposit costs, that's a good place to start. And the deal being only 3% of our assets, doesn't change those numbers meaningfully. Jake Morton: Got it. I appreciate the color there. And my second question is for -- so do you have the spot cost of deposits at the end of the quarter? And also, can you talk to the competition that you were seeing in your market? And like where is it most aggressive, which specific product and also competitor-wise, if you could talk to that. Jefferson Harralson: Yes. Thanks. Great question. The spot cost is relatively close to the quarterly average, so not a major difference in spot versus quarterly average. I may pass to Rich to talk about deposit competition of what we're seeing. Richard Bradshaw: In terms of competition, in terms of past quarters, I would say, it's slowed down a little bit. We're not getting a lot of special request on pricing from the market. So I'd say it's kind of normalized. And we really don't have it. We're in 6 states. So we have a lot of different competitors, no single one. Operator: Our next question comes from Michael Rose from Raymond James. Michael Rose: Just wanted to start on loan growth. Obviously, really strong results in both C&I and commercial real estate. You did have some continued paydown on the construction side. I guess my question is, are we getting towards the end of the kind of more accelerated paydowns here? Because it seems to me, just given the growth that you've had and the momentum you've had in both C&I and CRE, that loan growth could actually accelerate from here. So I just wanted to just better understand that? And then if you can talk to some of the competition just given all the dislocation in and around your markets from the deal activity that we're seeing. Richard Bradshaw: Sure. I'm writing these down. Let's start with -- yes, so we are pleased with Q1 loan growth. It's usually a seasonally low quarter for us. So we're very pleased. And in terms of the geography, South Florida led with Matt Bruno and South Carolina and Coastal Georgia were second with North Florida in third. And in terms of the commercial lines of business that led the way, it was middle market, ABL and Navitas. And then lastly, on the retail side was HELOCs. In terms of paydowns, we actually saw the biggest amount of paydowns in hospitality, which we think is a good thing. So don't see a big pickup. Normally, we do a lot of construction CRE lending. So it's just kind of the normal flow. So I don't see a material change there. And in terms of loan growth going forward, we remain optimistic. We think it will be in the 5% to 6% range, providing nothing else goes on unusual in Iran. And then lastly, on hiring, we've talked about that because that's influencing things. In Q1, we saw a net increase of 10 revenue producers, and we're aiming for 10% annual growth on that in 2026. And we have 9 more to hit the goal, and we think we'll get there or get close by the end of Q2. Michael Rose: All right. Really, really helpful. Maybe just as a follow-up, just on expenses. If I exclude kind of all the moving parts, it looks like you guys had really good kind of expense control. Maybe you can just talk about some of the hiring efforts that you guys might have in place as we contemplate the next couple of quarters. And then if you could just touch on maybe some early investments on AI and what you guys are doing and what we could expect there from an expense build. Jefferson Harralson: All right. All right. Great. Rich just spoke about the kind of the numbers of the new hires that we're very excited about. I think if you think about our expense growth, we're targeting this 3.5% range, but now we have these hires that you might add on to that. I think the hires could add about $1 million to $1.2 million a quarter. We're not factoring in the better growth that could happen later in the year, but that should happen sometime late '26 or early '27. So we're excited about our ability to grow our producers and it could have some effect on expenses in the near term. Richard Bradshaw: Yes, I would agree with that in terms of -- you got to -- you see a little bit of a lag with the new hires. You kind of expect it to start kicking in, in 5 months to 6 months reasonably when you hire them. And so we're expecting to see late in Q2, some help from Q4, which is also a good hiring quarter. Herbert Harton: And Michael, you mentioned AI. So far, I would say our AI investments have been very good and have a strong payback. For example, most of our AI at this time is coming in through vendors. We've -- on the fraud side, all of our vendors are heavy users of AI and our fraud losses have actually dropped by 50% over the last 2 years partially because of that. And that's not even counting the benefits to our clients, which would be on top of that. Our contact center, where we have chatbots and other AI-enabled tools, we're seeing the ability to take more calls with the same number of agents. The same in our programming. We're doing more programming work today without adding programmers as they're using AI. So as we think about the next steps, an Agentic AI -- I think there are clearly possibilities for some of our kind of more mundane processes, for example, flood and other things where we could get some benefit from AI. That's at just the conversational stage now. But so far, I would say I wouldn't -- any expense build -- our history is any expense build we come out of that, we more than have realized savings on. Operator: Our next question comes from Gary Tenner from D.A. Davidson. Gary Tenner: I just wanted to touch on M&A for a second. You guys have talked about being pretty focused in-market, small banks. Obviously, Peach State fits the bill there. Given the environment we're in, do you see a pipeline of activity where you could potentially sort of announce another deal in lockstep with this one? Any reason to think that this would take you out of the market for any period of time? Herbert Harton: Great. Thank you. Great question. No, I mean, if -- we would not have any issue. I don't believe in doing another deal while Peach State is active. Certainly, given the size, given the regulatory environment, given our history, if we saw the right deal, which would have similar metrics and conditions to Peach State, I'd be more than happy to move forward with that. Gary Tenner: And then just the comment around the accretion in 2027 kind of adjusted for share repurchase. I guess it's sort of semantics, but I mean, the repurchase shares, presumably, that would be over and above what you would plan to do anyway, right? So how do you kind of balance that if that question is fine. Herbert Harton: Well, and I guess I'll start with that. And the reason we presented it that way with showing the effect of the repurchase. Our original intent was to do the entire deal all cash. In our view, and I understand it's different than a share repurchase. But at the same time, if I'm evaluating a share repurchase at 11, 12x earnings versus buying a bank at 6, hey, why not buy the bank at 6x earnings. So I guess that was in our mind, and that's kind of the way we presented it. Jefferson Harralson: I think that's well said. I don't have a lot to add to that, but I will say we have $63 million left on our authorization. We have been active in the buyback already with $67 million over the last 2 quarters. So it's a great question. But I think Lynn hit it on how we're thinking about the deal as a use of capital. Operator: And our next question comes from Catherine Mealor from KBW. Unknown Analyst: This is [indiscernible] stepping in for Catherine Mealor. And congratulations on the acquisition. So my first question is kind of a follow-up on the buyback activity. You bought back around 30 million shares in the past 2 quarters. And with the merger announcement, you mentioned that repurchasing shares could offset the dilution. I was just wondering if you could talk a little bit about the timing and the amount of buybacks we can expect moving forward from here. Jefferson Harralson: That's a great question. And I do think we will buy back the $50 million by year-end. We are somewhat price sensitive. So I cannot -- I don't want to guarantee that we're buying back shares in any given quarter. So I don't know if I would put that in the model for Q2. But I do think we are creating about $30 million of excess capital every quarter. That is the amount that we will be contemplating purchasing on a given quarter. But it depends on the price and some other things we might have going on, it might not be an every quarter thing. So I can't help you so much on the modeling there. But I think by year-end, we will get the $50 million in. Unknown Analyst: That's great. And then my other question is about your fee outlook. Your fees came in strong this quarter, and I was kind of wondering where you expect fees to go from here. Jefferson Harralson: Right. I expect a modest growth rate in our fee income. We have some nice growth businesses within here. Our treasury services has been growing well. We've made relatively significant investments in our wealth area that we're very excited about. Our mortgage business has been going really strongly. We also have seasonal strength coming in mortgage and Navitas as we go into the second quarter and SBA. So I think you will see a nice growth rate off of this seasonally low first quarter. Operator: Our next question comes from Stephen Scouten from Piper Sandler. Stephen Scouten: A couple of follow-ups maybe to some conversations that have already been covered to some degree. But Lynn, you said this was kind of like the exact type of deal you guys would look for given culture and deposits and so forth. How about like from a size perspective, I mean, would you guys lean towards these smaller types of deals moving forward still? Or would you like to do something a little more sizable if that were available? What would be your preference there? Herbert Harton: Yes. We have typically done deals 10%, probably at the most, 15% or less of our size. We just find that the institutions of that size, they tend to align with us better on employee experience, client experience, community involvement, and we can be more additive. So yes, if Peach State had been twice as large, would we be excited about it? Absolutely. There's just a limited number of those larger, call them, $2.5 billion to $3.5 billion banks. But certainly, we would be interested in those as well. This one is, I think, really unique, again, given the history of the 2 companies together, the growth in Hall County and this really rapidly growing county, #1 job-creating county, I believe, in Georgia. And so to be able to have that kind of team together and to share together made it really attractive. Stephen Scouten: Makes sense. I appreciate that. And then on the hiring target, I think if I heard Rich correctly, you guys might actually kind of hit your stated target for the year by the end of 2Q. So would you anticipate ramping up that plan further? Or would it more be, hey, let's let these people ramp up over that 5- to 6-month time line before we add incremental expenses on continual hiring? Richard Bradshaw: Steve, that's a great question. I mean, certainly, we want to hit goal, but we would be opportunistic. If we saw the right people out there with the right experience and the right sized portfolio, we would certainly look to do that. Herbert Harton: Yes. And I would just say, too, the seasonality as you get in the year, just with bonuses, those kinds of things, first quarter, second quarter are strong, starts to slow down in the third and fourth quarter, it's more difficult. So I think Rich getting out to an early start has been a great thing. Stephen Scouten: Yes. That cadence makes a lot of sense. Okay. And then maybe just last thing for me would be kind of overall NIM trajectory from here, maybe for Jefferson. I know you said spot cost deposits were kind of the same as the quarterly average and maybe expect them to stay flat from here. So would you expect a little bit of incremental upside on the loan repricing? I think you called out $1.4 billion in fixed rate assets. Jefferson Harralson: Yes, I do. I think we'll -- I had mentioned that I think we'll get 3 to 5 basis points of margin expansion in the second quarter. I think that we are slightly asset sensitive and the outlook for no rate cuts doesn't really hurt us. We're relatively flat, but slightly asset sensitive. But I think this back book repricing story continues. I think this mix change towards loans away from securities continues. So we do have a wider margin in our model throughout the year, but we do have a nice 3 to 5 expectation in the second quarter. Operator: And our next question comes from Christopher Marinac from Brean Capital. Christopher Marinac: I want to go back to Peach State Bank for a second. Would you only buy banks that have excess deposits, and that seems like an attractive feature of this transaction? And is that something that will guide your M&A interest going forward? Jefferson Harralson: I would say no to that question. We like to have a low loan-to-deposit ratio. We think we can put those deposits to work. But that's the -- one good thing of many of having an 82% loan-to-deposit ratio is that we can also buy banks, small banks that are loaned up as well and give them some more capacity for growth. So that was a nice to have in this acquisition. We also think we can help out high loan-to-deposit ratio banks as well if that type of bank came about. Christopher Marinac: Got it. And then for the new hires, is there a deposit mandate with these folks? And how will that play out as '27 comes into focus? Richard Bradshaw: Certainly, on the loan side, we are requiring a depository relationship whenever we do a loan, so we'll start there. But these people all have existing clients. And so we're hoping that the first thing they can bring over is the deposits. It's easier than the loans. So we see that pretty fast, and that's all part of the package. Operator: Our next question comes from Kyle Gierman from Hovde Group. Kyle Gierman: This is Kyle on for Dave Bishop. Just wanted to follow up back on fee income. I wanted to go into mortgage banking, saw some nice trends there. I was wondering how sustainable that might be going forward? And any initiatives in place to enhance that line item? Jefferson Harralson: So I'll start maybe and then pass it to Rich on the initiatives. We have one thing working for us and one thing working against us as we go into the second quarter for mortgage. First, rates you had rates dipped to -- mortgage rates dipped to the 6% range at the end of February, which helped promote a little mini refi boom that helped out this quarter. But also, we're going into the second and third quarters, which are the strongest seasonal quarters for mortgage. So you get a little bit of an offset as you go into Q2. I'll pass it to Rich for initiatives. Richard Bradshaw: I'd say the -- on the mortgage side, obviously, we're expecting, as Jefferson said, a stronger Q2. The challenge in mortgage is interest rates drive so much of it. And so that's a little bit -- it's a little bit hard to say. We do have a few more shorter on-balance sheet products that have driven some interest. So we'll continue looking at that. Kyle Gierman: And maybe a final question. Saw a slight uptick in NPAs this quarter. I was wondering if you could provide some color on what drove that? And then maybe just a broad view of the credit quality trends. Robert Edwards: Yes. This is Rob. Thanks, Kyle, for the question. So I sort of anticipate asset quality to be stable. And I would expect NPAs to kind of fluctuate up and down. If you look back, maybe 10 basis points up or down over time. There wasn't any one credit that moved into NPA this quarter that's a highlight or anything. It's just a standard movement in and out of nonaccrual. Operator: And ladies and gentlemen, with that, we'll be concluding our question-and-answer session. I would like to turn the floor back over to Lynn Harton for any closing remarks. Herbert Harton: Great. Thank you, and I appreciate everybody joining the call. And again, any further questions, reach out to Jefferson or myself, and we look forward to talking to you again soon. Have a great day. Operator: The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, everyone. Welcome to the RBB Bancorp Q1 2026 earnings call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Rebecca Rico. Rebecca Rico: Thank you, Kelly. Good day, everyone, and thank you for joining us to discuss RBB Bancorp’s first quarter results for 2026. With me today are President and CEO, Johnny Lee; Chief Financial Officer, Lynn Hopkins; Chief Credit Officer, Jeffrey A; and Chief Operations Officer, Gary Sand. Johnny and Lynn will briefly summarize the results, which can be found in the earnings press release and investor presentation. Please refer to the disclaimer regarding forward-looking statements in the investor presentation and the Company’s SEC filings. Now, I would like to turn the call over to RBB Bancorp President and Chief Executive Officer, Johnny Lee. Johnny Lee: Good day, everyone, and thank you for joining us today. The first quarter was a strong start to the year with continued earnings growth, expanding margin, and further improvement in operating metrics. We generated net income of $11.3 million, or $0.66 per share, which was an 11% increase from the fourth quarter and our highest quarterly earnings level in two years. Return on assets increased to 1.09%, and we continued to grow tangible book value per share. Net interest margin increased another 60 basis points to 3.15%, marking our fifth consecutive quarter of margin expansion. The increase was driven by both lower funding costs and higher asset yields. Our cost of deposits declined 10 basis points, and our spot rate on deposits ended the quarter at 2.79%, which gives us some additional opportunity for improvement in the second quarter. Loan growth was more modest in the first quarter, with loans increasing by approximately $11 million, or 1% annualized. We originated $131 million of new loans at an average yield of 0.4%, but that growth was offset by elevated payoffs and paydowns as some borrowers refinanced or sold assets. As we mentioned before, we remain disciplined on pricing and structure and have focused on profitable growth. Our pipelines remain healthy, and we continue to believe we are positioned to deliver stronger loan growth over the balance of the year. Deposits declined slightly during the quarter due to a reduction in wholesale deposits, but this was more than offset, from a quality standpoint, by another quarter of growth in retail relationships. We also continue to make progress on credit. Nonperforming assets declined 9% from the prior quarter and are down 24% from a year ago. Overall, we believe the first quarter reflected continued progress in returning RBB to its historical levels of performance. We continue to focus on disciplined growth, maintaining strong credit quality, and increasing long-term shareholder value. With that, I will hand it over to Lynn to talk about the results in more detail. Lynn? Lynn Hopkins: Please feel free to refer to the investor presentation we have provided as I discuss the Company’s 2026 financial performance. As Johnny mentioned, net income for the first quarter was $11.3 million, or $0.66 per diluted share, which compares to $10.2 million, or $0.59 per diluted share, in the fourth quarter. Despite two fewer days in the quarter, net interest income increased $1 million to $30.5 million and included a $1.4 million decrease in interest expense partially offset by a $390 thousand decrease in interest income. The decrease in interest expense was due mainly to the shorter quarter and lower rates on retail deposits, as we continue to benefit from the repricing of our deposit portfolio into the current rate environment following the Federal Reserve rate cuts made toward the end of 2025. Retail deposits increased by $50 million and included a shift from time deposits into a high-yield savings product. The decrease in interest income was due to the shorter quarter and lower cash and securities yields, offset by higher loan yields and the receipt of a $430 thousand FHLB special dividend. Our net interest margin increased to 3.15% in the first quarter from 2.99% in the fourth quarter. The increase included an 8 basis point increase in the yield on earning assets and an 8 basis point decline in the overall cost of funds. The FHLB dividend added 4 basis points to our NIM in the first quarter. Turning to credit quality, nonperforming loans remained basically unchanged. Substandard loans decreased $2.7 million, and special mention loans increased $5.5 million. All special mention loans are on accrual status. We had effectively no net charge-offs in the quarter, and we recorded a small reversal of provision for credit losses supported by paydowns on nonperforming loans, overall stable credit quality, and positive economic indicators in the underlying forecast. We believe that we are adequately reserved, and with credit quality generally improving over the past year, we expect future provisions to reflect that. Noninterest income increased $1.4 million to $4.3 million. The increase was driven primarily by an $890 thousand higher net gain on REO, $484 thousand in a recovery on a fully charged-off acquired loan, and $360 thousand of interest income on tax refunds related to purchased federal tax credits. Noninterest expense increased by $293 thousand to $19.3 million due mainly to higher payroll taxes and employee benefit costs at the beginning of the year. Even with the increase, our efficiency ratio improved to 55% from 59% in the fourth quarter. We expect noninterest expense for the next few quarters to be in the $18 million to $19 million range. Turning to the balance sheet, total assets were $4.2 billion at quarter end. Loans held for investment increased $11 million since year-end, and deposits declined $10.5 million. Importantly, the mix of deposits continued to improve as we reduced wholesale funding and grew lower-costing retail deposits. Book value per share increased to $31.10, and tangible book value per share increased 2% to $26.84. This concludes my prepared remarks. We will now open the call for questions. Operator: Certainly. The floor is now open for questions. If you have any questions or comments, please press 1 on your phone at this time. Please hold for just a moment while we poll for questions. Your first question is coming from Brendan Nosal with Hovde Group. Please pose your question. Your line is live. Brendan Nosal: Hey, folks. Hope you are doing well. Thanks for taking the questions. Sorry—having a little trouble with the line. Can you folks hear me now? Okay, great. Maybe just starting off on asset quality. It is nice to see continued workout and improvement in ratios this quarter. Can you offer a little bit of color on some of the larger nonperforming assets you still have in the workout process? And then, to the extent that you are able to continue to work those out, what do you view as a normalized reserve-to-loan ratio as you work through the noise? Lynn Hopkins: Okay, how about I start with the end of your question and work backwards. We will acknowledge we are elevated on our NPLs, and we would expect those to normalize down to a much smaller percent of our total loans. I think you are familiar that 90% of our NPLs are represented by the same three relationships, so that remains stable and understood. As far as a normalized coverage ratio, given the composition of our overall loan portfolio, we could see it coming down somewhat relative to the levels it is now. But we do go through a robust process and have to take into consideration everything that is going on in the market. I think it has an opportunity to move lower. As you recall, last year it was much higher with those reserves that ultimately—after some charge-offs—supported resolved loans. So that is where we would say we are going forward. With respect to specific comments on the NPLs, I can turn that over to Johnny or Jeffrey. Johnny Lee: NPL actually is virtually unchanged during the quarter. However, there is a reduction of the number of the loans. There were two exits—one in [inaudible]—and those exits were successful workouts and then they paid off. One in there had just some technical issue that became nonaccrual. But virtually, it was a pretty quiet quarter. Lynn Hopkins: I will just add, we have represented that our largest one is working its way through a bankruptcy process, and we will continue to work on that. So we do see an opportunity for NPLs to be resolved during 2026. But it is a process. Johnny Lee: I will probably just add, they are still paying down. Brendan Nosal: Okay, that is super helpful color on that topic. Thank you. Maybe turning to capital. Ratios obviously remain quite strong. Asset quality is incrementally getting better from here with good line of sight. Any updated thoughts on deployment from here? I think you had a tranche of sub debt that was repricing and perhaps looking at the buyback at some point, but any updated color there would be great. Lynn Hopkins: Sure. We have stated that we have been focused on the sub debt that is coming up for repricing. We recognize that its capital treatment will start to sunset. It does reprice April 1. We view the sub debt as a capital instrument that we are going to address this year. I think there is also an opportunity for us to look at a stock buyback, but the sub debt is our first priority. Based on the current interest rate environment and how we are looking at the balance sheet, there may be a good reason to look to retire a good portion of it. We are working through that process. As everyone knows, it does require regulatory approval. Brendan Nosal: Fantastic. I am going to try and sneak one more here. On the margin, can I get your thoughts on whether that 4 basis points of margin from the FHLB special dividend is one-time in nature? And then, to the extent that we do not get any more Fed cuts for the foreseeable future, talk about your expectations for the margin path from here. Lynn Hopkins: Excellent question. There are definitely a few dynamics in our net interest margin. You are right: the FHLB special dividend is one time in nature. We would welcome a special dividend every quarter, but we do not view that as recurring. With the sub debt, our retirement dates are the first date of each quarter. In the near term, we will be absorbing the sub debt at a little bit higher price in the second quarter at least. The other thing I would point out is half of our mortgage portfolio is priced on a 30/360 basis, so we do get a bit of a benefit in the shorter quarters, and then it will normalize over the rest of the year. On one hand, we will have more days—which is usually higher net interest income—but from a margin perspective, it may push down a little bit. Having said all of that, I think we still have an opportunity to expand our margin from a more normalized basis, which is probably closer to or just above 3% with balance sheet growth in the current environment and some modest repricing of our deposits. That is where we are headed in the near term. Operator: Your next question is coming from Kelly Motta with KBW. Please pose your question. Your line is live. Kelly Motta: Hi, thanks for the question. Maybe on loan growth—the growth for the quarter was a bit more muted than we had expected. I think the pipelines coming into the quarter were quite strong. Can you provide any color as to where that variance came from, what drove that, and how pipelines are looking as we look ahead here? Johnny Lee: Hi, Kelly. Thanks for the question. Q1 is always somewhat seasonal and, with the geopolitical risk and everything, there is still a lot of uncertainty out there. We try to balance—quality first—and then look to see, based on the competition on the pricing side, whether it makes sense to aggressively compete on certain types of deals. We were not prepared to compete at market rates in the 5.5% to 5.75% range for multifamily, and even lower for some CRE loans. So we stayed pretty disciplined during the first quarter in keeping our rates above 6%, unless there were enhancements to the yield with ancillary business such as deposits or other potential fee income that might come with the relationship. In that sense, we did let go of a few deals during the quarter. There were also somewhat higher paydowns and payoffs during the quarter, which impacted net growth. As to the pipeline, it is still very healthy. For Q2, based on the build we have right now, we should be able to trend toward what we have achieved in past years for the same quarters. I am very positive about the pipeline overall, but again, we are looking for quality first and making sure any pricing we compete on makes sense. Kelly Motta: Got it, that is helpful. And then on the deposit cost, those came down quite nicely. You mentioned in your prepared remarks you had shifted some customers to different categories to help manage that. As we look ahead, barring rate cuts, is there still room to bring down deposit costs within categories outside time? And then within time, can you remind us of the roll-on versus roll-off rates? Lynn Hopkins: I think there is still some opportunity, though with the latest changes in interest rates and the belly of the curve moving up, there is probably less opportunity. We have historically had a very strong 12-month CD ladder, and as those CDs mature—98% mature over a 12-month period—those have typically repriced into a lower environment. For the amounts that are coming off, they are probably pretty similar to these higher interest rates and the competition we are seeing. We are seeing things as high as 4% now being offered by other banks, so the opportunity is smaller. Having said that, our spot rate at the end of the quarter is lower than what the average was over the quarter, so I do think there is still a little bit of opportunity. We did mention that a portion of our CDs moved to a higher-yielding savings product. Looking at both our CDs and this particular product, about a third is able to reprice in the first quarter, and it probably reprices similarly or maybe a little bit lower than what we saw in the fourth quarter. We still have a fair amount repricing into the current quarter, but maybe it is a few basis points. Kelly Motta: Got it, that is helpful. Last question, if I can just sneak it in, is regarding reports that there may be an executive order requiring banks to collect citizenship data on their customers. Have you looked at this, and any preliminary thoughts on how that could impact the way you do business? Johnny Lee: Are you speaking to the SBA-type executive order? Kelly Motta: I think this is broader. It is hypothetical, but there has been discussion about potentially requiring banks to collect citizenship data on their customers. Johnny Lee: The only thing that we are watching more closely is the SBA administration’s recent procedural guideline, which restricts applicants to only be U.S. citizens. That is the one we are watching more closely. Kelly Motta: You do have an SBA business—does that have any bearing on your expectations for that on a go-forward basis? Lynn Hopkins: Not yet. There is no impact based upon our assessment. Johnny Lee: We do not have any impact to that based upon our assessment. Kelly Motta: Got it. Thank you so much. Operator: Your next question is coming from Matthew Clark with Piper Sandler. Please pose your question. Your line is live. Matthew Clark: Thanks. Good morning, everyone. Just wanted to drill into the loan growth outlook a little more. Coming into the year, the expectation was for high single digits. It looks a little more challenging after the first quarter. Do you still think you can bounce back and get close to something in that high single-digit range? Lynn Hopkins: Let me make a couple comments, then I will turn it over to Johnny. We had loan production of about $145 million in the fourth quarter. We came into the first quarter with about $130 million, approximately the same yield, holding the line as we observed interest rates stop moving down, and even some talk of potentially moving up. We recognize our funding base. While we did not observe much of an impact from the government shutdown in our SBA business, I would say our originations in that area were a little lighter in the first quarter, so there is opportunity there. Our second and third quarters have historically been our highest producing quarters, so much so that they achieve that higher number. We are stringing together positive quarters. There is business to be done. With interest rates as high as they are, it will depend on whether people come off the sidelines and move forward. When I think about the range—high single digits—I would put it mid to high single digits. We are building off of a $3 billion and change portfolio. We are in big markets, and we should be able to participate. But to the extent that we are operating inside this interest rate environment, that might be tempered with maintaining NIM. Piecing together everything we are seeing—an attractive pipeline, and the fact that fourth and first quarters can be a little lower—we would still remain optimistic, but let us maybe anchor it in the mid to high single digits. Johnny Lee: I echo Lynn’s comments. I am comfortable with mid to high single digits. Our pipeline is healthy. We just want to be very disciplined in the types of loans we fund, quality-wise, and ensure we are generating appropriate returns for the bank with these new relationships. Matthew Clark: Great. The other one I had was to get a little more color on the CD repricing and the savings promotional product. Can you share the specific amount of CDs that are coming due and the related rate? And then it sounds like the renewal rate is similar—maybe a little bit lower—but I would like those specifics, including the promotional savings rate product. Lynn Hopkins: We are looking at about 60% of our deposits fitting into the CDs and the flexible savings product, and about a third of them repriced in the first quarter. Our observation in the marketplace is that the more rate-sensitive money is now costing between 3.85% to 4%. We have been successful a little bit lower than that, and that is what it is actually coming off at. Our ladder at the same time last year, when we were putting on 12-month money, was around the 3.75% level, and that is what is coming due. Interestingly, it is now 3.85% to 4%, despite short-term or Fed funds rates being lower. Yes, we still have about 60% of our funding base in CDs and savings. About a third reprices in the first quarter, and we have been kind of in the 3.70% to 3.75% range. We are competing heavily and have done a really great job, but we are observing rates at 3.85% to 4% when we look around at offer rates. Matthew Clark: Okay. Perfect. Thank you. Operator: Your next question is coming from Jackson Laurent with Stephens. Please pose your question. Your line is live. Jackson Laurent: Good morning. This is Jackson on for Andrew Terrell. Maybe coming back to the margin, I appreciate the color on the short-term glide path. But looking a little longer term—you have run at a 4% NIM in the past. Do you see a path to get back to that level? And if so, what is required to get back there? Lynn Hopkins: What you may be referring to is a point in time in RBB’s history where there was a very high percent of noninterest-bearing deposits. In order to move to a mid-3% net interest margin and beyond, it requires a high percent of noninterest-bearing deposits. We remain focused on building the commercial, or C&I, part of our business, which tends to have the more attractive deposits and funding base associated with it. Before we start talking about a NIM with a 4% handle, we need to squarely get into 3% to 3.25%. We believe we have the opportunity to do that, but it does require staying focused on our C&I business, growing that, bringing in more noninterest-bearing or less rate-sensitive customers, and continuing to work with our existing relationships so that we can move down our wholesale funding, which we did in the first quarter. Jackson Laurent: Got it, that is helpful. Thank you. And then just last one for me on fees. Could you talk about gain-on-sale margin trends and how we should think about loan sales versus loan retention going forward? Lynn Hopkins: Loan sales fall into two buckets. One is our mortgage banking business, which tends to be higher volume and lower premium. We like to test the secondary markets to make sure we have an off-ramp relative to our loan production, but generally we hold the majority of it, look at our prepayments, and then balance our mortgage portion of the portfolio against our overall total portfolio. We have kept that at about 50%. We would like to continue to grow our commercial side, which includes multifamily, CRE, C&I, and SBA. On the SBA loan sales, those are smaller dollar volume but higher premium, and we would expect to be at similar, if not higher, levels than what we were able to achieve in 2025. 2025 was a little bit lower than 2024, with a little bit of disruption from the government shutdown and some noise. We still see that as a good opportunity. We hired a couple of people last year, so I think there is still opportunity in fee income to have that move higher in other quarters compared to the first quarter. Jackson Laurent: That is all I had. Thank you for taking the questions. Johnny Lee: Thanks, Jackson. Lynn Hopkins: Thank you. Operator: There appear to be no further questions in the queue at this time. I would now like to turn the floor back over to Johnny Lee for any closing remarks. Johnny Lee: Thank you. Once again, thank you for joining us today. We look forward to speaking to many of you in the coming days and weeks. Have a great day, everyone. Thank you. Operator: Thank you, everyone. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Vicor First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jim Schmidt, Chief Financial Officer. Please go ahead. James Schmidt: Thank you. Good morning, and welcome to Vicor Corporation's Earnings Call for the first quarter ended March 31, 2026. I'm Jim Schmidt, Chief Financial Officer, and I'm in Andover with Patrizio Vinciarelli, Chief Executive Officer; and Phil Davies, Corporate Vice President, Global Sales and Marketing. Earlier this morning, we issued a press release summarizing our financial results for the 3 months ended March 31, 2026. This press release has been posted on the Investor Relations page of our website, www.vicorpower.com. We also filed a Form 8-K today related to the issuance of this press release. I remind listeners this conference call is being recorded and is the copyrighted property of Vicor Corporation. I also remind you various remarks we make during this call may constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Except for historical information contained in this call, the matters discussed on this call, including any statements regarding current and planned products, current and potential customers, potential market opportunities, expected events and announcements and our capacity expansion as well as management's expectations for sales growth, spending and profitability are forward-looking statements involving risks and uncertainties. In light of these risks and uncertainties, we can offer no assurance that any forward-looking statement will, in fact, prove to be correct. Actual results may differ materially from those explicitly set forth in or implied by any of our remarks today. The risks and uncertainties we face are discussed in Item 1A of our 2025 Form 10-K, which we filed with the SEC on March 2, 2026. This document is available via the EDGAR system on the SEC's website. Please note the information provided during this conference call is accurate only as of today, Tuesday, April 21, 2026. Vicor undertakes no obligation to update any statements, including forward-looking statements made during this call, and you should not rely upon such statements after the conclusion of this call. A webcast replay of today's call will be available shortly on the Investor Relations page of our website. I'll now turn to a review of Q1 financial performance, after which Phil will review recent market developments, and Patrizio, Phil and I will take your questions. In my remarks, I will focus mostly on the sequential quarterly changes for P&L and balance sheet items and refer you to our press release or our upcoming Form 10-Q for additional information. As stated in today's press release, Vicor recorded product and royalty revenue for the first quarter of $113 million, up 5.3% sequentially from the fourth quarter of 2025 total of $107.3 million and up 20.2% from the first quarter of 2025 total of $94 million. Advanced Products revenue increased 3.7% sequentially to $64.9 million, and Brick Products revenue increased 7.7% sequentially to $48 million. Shipments to stocking distributors increased 0.5% sequentially and increased 63.6% year-over-year. Exports for the first quarter decreased sequentially as a percentage of total revenue to approximately 48.9% from the prior quarter's 49.3%. For Q1, Advanced Products share of total revenue decreased to 57.5% compared to 58.4% for the fourth quarter of 2025, with Brick Products share correspondingly increasing to 42.5% of total revenue. Turning to Q1 gross margin. We recorded a consolidated gross profit margin of 55.2%, a 20 basis point decrease from the prior quarter. Q1 gross margin increased 800 basis points from the same quarter last year. I'll now turn to Q1 operating expenses. Total operating expense increased 4% sequentially from the fourth quarter of 2025 to $45.5 million. This increase included higher legal expenses related to enforcement of our IP. The amounts of total equity-based compensation expense for Q1 included in cost of goods, SG&A and R&D was $836,000, $1.000959 million and $1.057 million, respectively, totaling approximately $3.9 million. Turning to income taxes, we recorded a tax benefit for Q1 of approximately $0.3 million, representing an effective tax rate for the quarter of minus 1.3%. The company's tax provision and effective tax rate for the quarter ended March 31, 2026, was positively impacted by stock options exercised in the quarter. Net income for Q1 totaled $20.7 million. GAAP diluted income per share was $0.44 based on a fully diluted share count of 47,254,000 shares. Turning to our cash flow and balance sheet. Cash and cash equivalents totaled $404.2 million in Q1, an increase of $1.4 million sequentially. Accounts receivable net of reserves totaled $67.4 million at quarter end, with DSOs for trade receivables at 42 days. Inventories net of reserves increased 3.8% sequentially to $94.8 million. Annualized inventory turns were 2.1. Cash flow used for operating activities totaled $3.9 million for the quarter, which was net of a litigation settlement payment of $28.6 million. Capital expenditures for Q1 totaled $12.4 million. We ended the quarter with a construction in progress balance primarily for manufacturing equipment of approximately $10.7 million and with approximately $33.9 million remaining to be spent. I'll now address bookings and backlog. Q1 book-to-bill came in above 2 and 1-year backlog increased 70% from the prior quarter, closing at $300.6 million. 2026 is a year of great opportunity for Vicor. We expect Q2 revenues of nearly $126 million and 2026 revenues of nearly $570 million. This guidance is based on conservative assumptions about our licensing practice, specifically that we will not enter into new licensing agreements until our second ITC case gets it's final -- to its final determination in 2027. Additional exclusion orders further restricting importation of infringing computing systems will provide motivation to close new licensing deals on the right terms. Along with revenue growth in 2026, we expect margin expansion. Phil? Philip Davies: Thank you, Jim. With a book-to-bill above 2, Q1 bookings were strong across our high-performance computing, industrial and aerospace and defense markets. They remained strong in the second quarter, and I'll discuss each of them in turn. Our leading -- our lead computing customer is continuing a steep production ramp of its wafer scale engine with best-in-class AI inference performance. Wafer scale engines and future embedded multi-die and CoWoS packages for AI chiplet solutions are uniquely enabled by vertical power delivery. Further advances in AI performance are about to be enabled by Vicor's second-generation VPD solution with 3 amps per square millimeter current density and a current multiplication factor of up to 40 in the 1.5 millimeter thin package. Through my Q4 comments, engagement with other HPC customers for second-generation VPD solutions will follow the generational transition by our lead customer. With capacity in our first chip fab earmarked for existing strategic customers, we will continue to be selective as we add additional customers. On the VPD front, competition is handicapped by a multiplicity of issues, including inadequate current density and stacked packages that are not mechanically and thermally adept. That's because competition copied a first-generation VPD solution whose pioneering aspects are still immature and at risk of continuity of supply challenges caused by patent infringement. Our broad industrial market, which is supported by our global distribution partners, had a strong first quarter. And our top 100 industrial OEMs in the automated test and semiconductor manufacturing equipment markets continue to benefit from the AI data center build-out with strong order placement. We are also winning next-generation platforms with earlier generation and new factorized power system solutions. Our current multipliers supplying high power to ASIC and memory test heads and pin electronics remain unchallenged in terms of current density, low noise and thin packages. Geopolitical developments have been a key driver of our aerospace and defense business in recent quarters. Increases in spending as a percentage of GDP and replenishment of defensive and offensive systems supports the growth of this market. Our objectives, goals and strategies for 2026 remain unchanged with a focus on a portfolio of 100 customers globally across 4 market segments. Future growth opportunities will require capacity expansion, including a second fab. Our combinatorial strategy of being the power system technology innovator and an IP licensing company is delivering results. With that, we'll take your questions. Operator: [Operator Instructions] Our first question comes from the line of Quinn Bolton with Needham & Company. Quinn Bolton: Congratulations on the nice results and outlook. I guess I wanted to start with just the assumptions you're making around 2026 for the IP licensing business. It looks like royalty revenue in Q1 was about $15 million or about $60 million annualized. I know you're not assuming any additional or new licenses signed. But where do you see royalty or licensing revenue this year as part of that $570 million guidance? Patrizio Vinciarelli: The $570 million guidance includes royalties, which would increase somewhat based on existing licensing agreement. But in terms of providing safe guidance, we thought it would be best to set aside any opportunity with respect to, if you will, early deals relating to current actions. So our working assumption for guidance purposes is that we're not going to have any until we get a further diminution on our second case next year, but it could be that we do get some ahead of that time frame. Quinn Bolton: And then, Patrizio, last quarter, you seemed pretty confident that the utilization in Andover would approach 80% by the end of '26 or early 2027. It looks like you're on a strong product ramp. But are you still sort of comfortable or still expecting utilization to sort of achieve those levels that you discussed last quarter? Patrizio Vinciarelli: Yes. In absolute terms with respect to product revenues, what has transpired since we last spoke on this topic is that we actually have a significant level of elasticity with respect to expansion capacity within the Federal Street facility that's giving us a little bit more flexibility with respect to the timing and choice of the location for the second fab. So to get a little bit more specific, we've seen an opportunity for relatively significant expansion in capacity. It could be as much as 50% above what have been planned to be supported in terms of annual revenues out of the Federal Street facility. So that gives us cushion with respect to timing, which we're putting to good use in terms of the choice of location. And to give you a little bit more flavor with respect to that, we've also come out to focusing on existing buildings as opposed to piece of land because of the fact that with an existing building, we can execute much more rapidly in terms of capacity expansion. And part of the strategy with respect to getting more out of the Federal Street facility is to selectively source outside of that facility, some of the process steps that can be more easily relocated. So that should give you the picture with respect to both the capacity utilization and the plans with respect to capacity expansion. Quinn Bolton: Sorry, Patrizio, just a quick clarification. Did you say that in the first Andover facility, you would be outsourcing some manufacturing steps either to third parties? Or would that be to the second chip fab? Patrizio Vinciarelli: It would be to an interim location for the second chip fab. This will still be totally within Vicor control. But there are process steps that can be easily located in a nearby building. And that's part of the plan to extend capacity of the Federal Street facility. Operator: Our next question comes from the line of Justin Clare with ROTH Capital Partners. Justin Clare: So I think first off, you mentioned engagement with additional VPD customers, I think, could follow the generational transition for the lead customer from Gen 4 to Gen 5. I was wondering if you could just provide an update on the anticipated timing of that transition. I think you had previously been looking for the second half of 2026. And then so trying to get a sense for when the potential orders with additional customers could be and what the revenue timing might be? Patrizio Vinciarelli: Yes. So the generational transition we're referring to here, it will be enabled in the second half of this year. And we expect a ramp to begin before the end of this year with respect to that next-generation capability with the lead customer. And we will follow that with additional customers for second-gen VPD solution. As Phil pointed out earlier, we are planning for the incremental capacity that we're going to have available to support opportunities that are -- as in the case of our lead customer, long-term strategic to Vicor. And fundamentally, in spite of capacity expansions, we expect to remain capacity constrained for a substantial time frame. And that leads us to want to pick the right companies, the right applications where as in the case of the lead customer, we can make a very substantial difference with respect to levels of performance and opportunity to win substantial market share. Justin Clare: And then just on the backlog, in Q1, backlog increased significantly here to just over $300 million. Wondering if you could speak to how quickly you anticipate turning that over? And then assuming you get to -- well, and then I guess, just as the business continues to scale, how do we think about the lead times and the conversion of that backlog? And then maybe how much backlog do you think may be necessary in order to support the $800 million run rate that you have previously talked about? Patrizio Vinciarelli: Well, so starting with Q2, the bookings are just as strong as they were in Q1. So we expect to, once again in Q2, we have a very strong book-to-bill. So the backlog is going to keep building up as we step up the revenue levels and capacity utilization as the year progresses. Phil, do you have... Philip Davies: No, I think the question was the existing backlog. I mean that rolls pretty much over the next 12 months. That's how we recognize it. So... Patrizio Vinciarelli: Yes, yes. Justin Clare: Got it, got it. Okay. James Schmidt: Justin, in any backlog we quote, the bookings we quote, it's always a 12-month window, just, yes. Justin Clare: Got it. Okay. And then maybe just one more on the capacity. So you're talking about expanding capacity at Fab 1. How much capacity do you anticipate adding? What level of revenue do you think could be supported by the first fab? And then I think you had talked about this a little bit in terms of the potential size of Fab 2, but I'm not sure I caught it. So maybe just what revenue level could be supported by the second fab? Patrizio Vinciarelli: So you might recall in the past, we had earmarked capacity out of Fab 1 at roughly $1 billion per year run rate. We see a way to get that to at least $1.5 billion at this point. And that's coming out of a combination of initiatives, we've identified with certain process steps that have been historically capacity limiting overall opportunities to get to a shorter cycle time and increase capacity with those steps. So that's a key element of this capacity expansion plan. To complement that, as I mentioned earlier, we see opportunities with process steps that are not as critical and which can be easily redeployed an opportunity to redeploy them in an existing neighboring facility, again, as a stepping stone to the second fab, which has got a longer lead time in terms of what it takes to bring it to fruition. So we believe this approach gives us a lot more flexibility. It will improve our opportunity for significant margin expansion because we will not be incurring for a certain level of toll capacity as much in terms of additional equipment and depreciation. And overall, it's a plan that meets the combination of objectives that we set ourselves and the need to support a variety of market opportunities, not just in the compute space, but in the other markets where we're seeing considerable strength. Operator: Our next question comes from the line of Jon Tanwanteng with CJS Securities. Jonathan Tanwanteng: Congrats on the nice quarter and the strong orders and outlook. My first question is, Patrizio, you mentioned you expect to be capacity constrained before you expect the new fab to come up. And I don't know if the expansions will occur before that as well. But what does that mean for your customers and their sourcing strategies? Do they need to turn to your competitors? Or do you have some kind of licensing strategy that you may employ or have in mind to help them avoid that constraint? Just help me understand what the timing is around their growth trajectory is and what you expect your capacity to be underlying that? Patrizio Vinciarelli: So first of all, we purchased a second 3Di or Three Dimensional interconnect line that's going to be installed in the Q3, Q4 time frame. So that in and of itself is an element of the capacity expansion plan. Second, as I mentioned earlier, within each of the 3D interconnect lines, we have identified ways to reduce cycle time and increase capacity in inverse proportion. Beyond that, we have expansion plans outside of the Federal Street facility. And we are engaged in discussions that could lead to an open source for our second-gen VPD technology, which we believe is going to be in great demand for a variety of reasons in years to come because fundamentally, it is the only way we know how to address the current demands of processors with all of the right attributes, right? The way it is done with competitive alternatives to some degree, build upon what we call our first generation VPD technology is, as suggested in the earlier remarks, challenged in a number of respects because of the inadequate current density. So it's fundamentally a domino effect. In other current density forces stacking of the elements of the solution. The stacking has mechanical complexity and terminal challenges because the heat gets trapped within the stack, is fundamentally inapt of keeping up with escalating current density needs in future generation of processors. So even though we have ambitious capacity expansion plans, we see an alternate source playing a key role in years to come in terms of achieving greater overall penetration and win-win opportunities in the marketplace. Jonathan Tanwanteng: Could you also talk about the upcoming 800-volt data center architecture and the potential for transition to like a 6-volt intermediate bus and where your 48- to 12-volt systems sit within that, do you expect maybe the NBM market to continue to grow as those architectures take share? Or is there a transitory period where maybe that falls off and maybe transitions to your VPD technology and licensing and royalties on that side? Patrizio Vinciarelli: So we believe the initiative to go directly from 800-volt to 6-volt is frankly ill conceived. It's internally inconsistent, and it's relatively easy to understand why. The logic of busing power at 800-volt is predicated on that power distribution being at a higher voltage, more efficient. And there is an opportunity to improve efficiency by a few percentage points through the use of an 800-volt bus. But inherent in that is the opposite effect at the other end of that proposed bus conversion step because going all the way down to 6-volt, as you can imagine, relative to 48-volt, the ratio being essentially 8:1. You have to square that. So the square of 8 is 64x. So the proposition of changing power distribution next to the point of load down to 6 volts is fundamentally challenged by the extreme inefficiency of distributing any amount of significant power at 6 volts. You can only go short distances and retain some level of efficiency. But to some extent, that's incompatible with an 800-volt bus not being safe, right, because it can give rise to hazards. So there's a lot of challenges with that whole concept. And fundamentally, it's a change in direction away from where the power should be, which is at the point of load with respect to vertical power delivery. That's where the core challenge technically resides. And going off and trying to figure out how to save a few points out of 800-volt distribution, particularly when you combine that with a step all the way down to 6 volts is, in my opinion, a bad idea. But time will tell. And by the way, Vicor has proprietary technology at 800-volt. We did a lot of pioneering developments with respect to bus conversion from 800-volt. And should that be successful to any degree, there's going to be issues with respect to IP there, too. But in terms of your question as to what we expect to happen with that, we expect it to move forward, but we think it's a diversion from the real challenge, which is at the point of load and in particular, the point of load with respect to vertical power delivery. Operator: Our next question comes from the line of John Dillon with DNB Capital. John Dillon: First of all, congratulations, especially on the bookings. It looks really good. I just wanted to go back to capacity for a minute. I want to make sure my numbers are right. If I heard correctly, you've got about $1 billion in capacity in your current fab. You can add another $0.5 billion. But on top of that, you have bricks. And I would guess your bricks would be at least $250 million. So am I right in assuming that your capacity with this expansion in the current area is about $1.75 billion? Patrizio Vinciarelli: No. So the Bricks are part of it. I don't think they're quite at the level of $250 million. And as we've been saying for quite some time, before too long, there practically relevant. We shouldn't be thinking about bricks. And in effect, part of our strategy with respect to the expansion of capacity at Federal Street is to minimize the footprint taken up by legacy products that don't have the growth opportunity of advanced products, in particular, second-gen VPD. So the number I quoted earlier as a step-up in our capacity plan for Federal Street from $1 billion to $1.5 billion. That's an all-inclusive number. Now that all-inclusive number could potentially go further up, but it wouldn't be because of the big contribution. It would be because of more opportunity for special capacity of advanced products. John Dillon: So you -- see you could get above $1.5 billion excellent. Patrizio Vinciarelli: Yes, we feel comfortable with a $1.5 billion target at this point in time. And again, the same process that has led us to identify opportunities to set capacity up measured in revenues per year from $1 billion to $1.5 billion may have yet some further opportunity. Again, the logic behind it is to give ourselves more runway with respect to the next set of steps, which include a variety of strategic choices ranging from the second fab to alternate sourcing. John Dillon: Excellent. And with this expansion capacity, will you be able to satisfy the OEM and the hyperscaler customers you talked about in Q3 that came to you back in Q3 conference call, you mentioned those two. And I'm wondering if this expansion capacity will be able to satisfy them? Patrizio Vinciarelli: Yes. Operator: [Operator Instructions] Our next question comes from the line of Richard Shannon with Craig-Hallum Capital Group LLC. Richard Shannon: I guess my first is a simple one here. The backlog has risen very nicely, I think, 70% sequentially. If you could characterize the sources of that increase here, whether it's from the lead VPD customer or anyone else in the kind of the high-performance computing space and in all other markets. If you could characterize between those three, that would be helpful. Philip Davies: Richard, it's Phil. So in high-performance compute, yes, it was the lead customer and the hyperscaler customers that we have. But we also saw some really good lift in industrial and the defense, aerospace markets, as I commented. It was really strength across the board in our broad markets as well as in high-performance compute with a few lead customers. Richard Shannon: My follow-on question is, and apologies if I missed something, I had a couple of interruptions here. But wondering if you could discuss the engagement or even design win status with follow-on VPD customers here. It sounds like if I heard correctly, you're talking about strategic reservations on either capacity in the first fab or the proposed second one here. Wondering if you can discuss the dynamics around those follow-on customers. Patrizio Vinciarelli: So as suggested earlier, Richard, we're very much focused on competing readiness with respect to starting a generational change with a lead customer and with some other opportunities relating to that. I guess a way to think about this is that in spite of the capacity expansion that we are pursuing, we see ourselves being essentially sold out in terms of capacity for the foreseeable future. And that gives us the opportunity to be very selective with respect to new engagements in terms of their strategic significance and alignment of interest for the medium to long term. So in a way analogous to the comments I made earlier regarding expansion of capacity coming out of Federal Street, first of all, giving us more time and opportunity with respect to parallel initiatives. On the front end of the business, just like the back end of the business, the fact that we're going to be enjoying strong bookings and strong backlog, and we have a near-term capacity nearly sold out gives us an opportunity to align ourselves with the right applications and the right customers going forward. So we don't have to feel a sense of urgency because of where we stand in terms of the demand side. Operator: Our next question is a follow-up from Quinn Bolton with Needham & Company. Quinn Bolton: Patrizio, just a quick clarification on the capacity expansion in Andover. When would you expect to reach that $1.5 billion of capacity? Is that end of '26? Is it going to take sometime in 2027? And then I've got a follow-up. Patrizio Vinciarelli: Well, so I don't think we want to be that specific at this point in time. As I'm sure you noted, because of changing circumstances, we achieved the necessary comfort level to provide guidance for revenues for this year. But as we get past that, there are still so many different scenarios that it would be unwise to become very specific beyond saying that we have a plan to step up the capacity further, and we believe there is the market demand to use that expanded capacity as we get into '27 and beyond. Quinn Bolton: That's understandable. And then I just wanted to come back. I think, Phil -- it was Phil that mentioned on the second-gen VPD, your solutions are 1.5 millimeters high. I just wanted to clarify that. And if that's the case, I guess at the recent APAC conference, there are a ton of presentations on vertical power with folks like NVIDIA and Google asking suppliers to hit 3 millimeters or below. It sounds like you may be well below that threshold already. And so just wondering if you can talk about the interest you're seeing on the VPD products because it does sound like you may have a major advantage in package height versus the competition. Patrizio Vinciarelli: We do. And actually, it is even bigger than you might think for reasons I'm going to explain in a moment. It's not just that our solution is 1.5 millimeter thin. But as Phil pointed out in his prepared remarks, it's that combined with the fact that our solution provides 40x current multiplication. And it does all that with 3 amps per square millimeter current density. You need to really -- in order to assess the figure of merit of the technology, you need to look at these 3 elements. in combination. You can't just look at one. As an example, so-called integrated voltage regulators, IVRs, they can be even thinner than 1.5 millimeter, but they don't provide any meaningful current multiplication. They only step up the current by 2x, which is practically speaking, useless in terms of efficient power delivery to the point of load because in order to deliver, let's say, 0.6 volt, 0.7 volt, 2,000 amp, they would require a 1,000 amp feed, which is obviously extremely problematic. So it's not just thickness, it's thinness combined with current density and most importantly, current multiplication because in order to have a VPD solution that is capable of supporting wafer scale or other kinds of advanced compute capabilities, you really need the combination of all these elements, not just one of them. Operator: Our next follow-up comes from the line of Jon Tanwanteng with CJS Securities. Jonathan Tanwanteng: Jim, can you touch on the taxes in the quarter? What went into that tax rate? And then what rate can we expect going forward? And then I have a follow-up after that. James Schmidt: Yes. So when we closed fourth quarter, we reversed a significant portion of the valuation allowance and our expectation was more or less that we would be in the range of 20%-ish -- 20% of -- in terms of an effective tax rate. What happened, Jon, in Q1 is that there was a substantial pent-up demand in terms of stock options that get exercised at a nice spread between strike and exercise price, and that's a tax benefit for us. So that's a onetime discrete item that doesn't get baked into the effective tax rate. And our feeling is that going forward, there'll still be that effect, which is a positive effect for us, but planning can be more in the line with a 20% kind of a rate. Jonathan Tanwanteng: Perfect. And then Patrizio, could you talk a little bit more or maybe Phil, just about the demand from the defense and Semi test businesses? What percentage of revenue are they, number one? And number two, just with regards to defense piece specifically, are you able to meet the critical defense needs that the U.S. has with the upcoming capacity constraints that you're modeling? Patrizio Vinciarelli: I'm sorry, some of your words are [indiscernible] Can you repeat the first question? Jonathan Tanwanteng: Yes. First, the percentage of Semi test and defense in the revenue today? And second, can you meet defense demand as it grows given that it's critical, given the capacity constraints that you're modeling going forward? Philip Davies: Yes. So Jon, it's Phil. We don't break those things out. But the answer to the question is we can meet the needs of the defense market with the capacity that we have. Operator: Our next follow-up comes from the line of John Dillon with DNB Capital. John Dillon: I was just wondering, does Vicor have any vertical power licensing agreements that will generate revenue this year? Patrizio Vinciarelli: So there may be opportunity of alternate sourcing of the second-gen VPD technology. But this is not something that we're prepared to talk about today. John Dillon: And Phil, on the bookings, can we assume a bookings run rate of what we saw today for the rest of the year? Philip Davies: So John, I think the bookings are going to be above -- well above 1, like Patrizio talked about, but they're lumpy. So I don't want to be pegged to a particular ratio, but they are very strong going into Q2, and we'll say well above 1. Operator: Our next question comes from the line of Don McKenna with D.B. McKenna & Company, Inc. Donald McKenna: Yes, Phil, could you give us an idea of what percentage of the backlog is attributable to your lead customer? Philip Davies: Again, we don't break that out. They're an important lead customer for us, but they're not the only major one. We've got a hyperscaler and big customers across industrial and defense and aerospace that are ramping as well as just the broad market. So it's just general strength, right now that's really good that we're benefiting from. Operator: [Operator Instructions] Our next question comes from the line of [indiscernible] shareholder. Unknown Shareholder: In the past, you said you expect that royalty income could grow to as much as 50% of product revenue. Do you still have that expectation? Philip Davies: The expectation of the licensing as a percentage of product revenues, we talked... Patrizio Vinciarelli: Yes. Philip Davies: As much as 50%. The question was, can we -- do we still hold to that? Patrizio Vinciarelli: Yes. We feel very good about our licensing practice. We are investing heavily in it. We'll be investing in it at an escalating rate because we see that business as being both a high-growth business in terms of its top line and need to say, it's nearly 100% margin in terms of profitability. We anticipate as discussed in prior meetings that there will be a time in the not-too-distant future when OEMs and hyperscalers will be Vicor licensees with only perhaps rare exceptions. We see that dynamic progressing. And we think we're pretty close to a crossing of the chasm with respect to the industry wanting to be protected in terms of a license to enabling power system technology from Vicor. Unknown Shareholder: Do you expect that some of the other lawsuits that you have had for violating your patents, has anyone approached you to settle after the big settlement you received earlier last year? Patrizio Vinciarelli: So we carried the first ITC case to a successful conclusion. And to be clear, that conclusion doesn't mean that there isn't ongoing opportunity relating to the first ITC case. In fact, there is an action pending accustoms as we speak, relating to that first exclusion order. While we're working with the case we brought earlier this year, for which the ADC once again chose to institute an investigation to get that to its final determination, which should result in a second exclusion order. And this may not be the end of the road. I mean, in Italy, we are saying that there is no 2 without 3. So there's been 2 thus far. Don't be surprised if you see a third one. And so this is, again, part of a very comprehensive campaign. Vicor has been the pioneer in the power system industry, always very much in the forefront of very high power density and performance for nearly 40 years. As a long-standing pioneer in the industry, we have -- we got to places well ahead of any competitor and scouting this new landscapes with respect to power distribution architecture, power conversion engines, control system, advanced power conversion components. We have consistently pursued an extensive protection through many patents. And lo and behold, the industry, given demands in AI and with respect to other electronic systems, now is very much in need of those kinds of technologies that Vicor pioneers. So licensing is going to be an expanding portion of our business, a very significant one in its own right beyond our module maker through, again, unique fabs revenue capability. Unknown Shareholder: Okay. And next question on, are there any expenses affiliated with licensing revenue as part of your SG&A perhaps? James Schmidt: Any expenses associated with licensing revenue, of course, the legal. Patrizio Vinciarelli: Yes. So we have partnered with law firms that have a share of the interest in the outcome, subject to caps and so on and so forth. So as we record the licensing income, we record an operating expense. for the share of the proceeds from the litigation that led to the licensing deal owed to our partners. Operator: Our next question is a follow-up from Justin Clare with ROTH Capital Partners. Justin Clare: So just want to hear -- so we did see a large transaction announcement between OpenAI and a wafer scale supplier last week. And just wondering against that backdrop, can you share how your visibility into demand has evolved over the last quarter? And then maybe if you could comment on the size of the opportunity you're seeing with your lead customer for vertical power and how that compares to the visibility you had last quarter? Patrizio Vinciarelli: Well, I think we felt very strongly about our lead customer technology and their market opportunity. And frankly, for a number of years, I was confronted with a degree of skepticism by investment bankers and the like. We didn't share the same level of confidence Vicor had in our lead customer. And so that's been proven out to be the right expectation. We think they have a real technological advantage, at least for a certain class of AI applications. And that will translate into share -- market share growth and we believe substantial success in years to come. And that's an opportunity for us, as to say, as we have with the AI market in general. Operator: Our next follow-up comes from the line of Richard Shannon with Craig-Hallum Capital Group. Richard Shannon: Let me follow up, kind of a multipart question around licensing. Maybe you can update us on the number of licensees you currently have generating revenues. And if there's multiple licenses per licensee, that would be probably a good understanding there. And then also wondering if you have any licenses that are expiring and need to be renewed like this calendar year. And then ultimately, you talked about the ability or the belief in growth in this business here. To what degree do we need to see growth in licensees versus number of licenses? Or can you grow at a rate that you're expecting without any growth in those numbers? Patrizio Vinciarelli: So I view our business model as being very resilient, very redundant because we have great opportunities as a module maker, and we have great opportunities as a licensor of enabling technology. And those 2 opportunities are very synergistic because in our licensing deals, we provide incentives for OEMs, hyperscalers to be more than licensees to be customers of our modules and advanced technology power system solutions. So we feel -- I feel, speaking for myself, very confident we're going to be very successful on each of those two fronts. And again, they reinforce each other in pretty much every way. Philip Davies: Richard, maybe I can also, if you don't mind, I'll add a little bit to that. So if you look at products that are getting launched later this year, maybe early next year from different GPU companies or even hyperscalers, a lot of them are going lateral and vertical because they can't really solve the full vertical problem, the vertical challenge because of what Patrizio has talked about, lack of current density, mechanical issues. And so you'll see a little bit of lateral with a bit of vertical. And that vertical, as we talked about, copies our first-generation VPD. If you go to what Cerebras and the wafer scale companies do, you've got a challenge there of bandwidth, which they solve through their wafer scale engine. Everybody now is starting to look at the CoWoS packaging, the packaging that Intel has brought to market with multi-die chiplet. The only way to power that stuff to solve the memory bandwidth problem is pure vertical power delivery. And that's where you need 1.5 millimeter height packaging greater than 3 amps per millimeter squared current density and 40x the -- if you like, the capability of the power delivery to that network. Patrizio Vinciarelli: Current multiplication... Philip Davies: Current multiplication, where you -- at 6 volts, you've got 64x the power losses than at 48 volts. And at 2 volts, you've got 526x the power losses for an IVR system. So you start to run into real fundamental issues here where the VPD technology, our second-generation VPD technology for these future technologies where we're going to focus on these strategic alignments where they really need the Vicor VPD, that's where we're headed. Patrizio Vinciarelli: Again, the competition tends to focus on one element, like current density, and they can make some headway with respect to that element. But inherent in the architecture is a conflict among key elements of the solution where fundamentally, you got to trade off one to make it a little better for the other when the right solution, the necessary solution must involve all of these ingredients, high current density, high current multiplication in a solution that is relatively thin. And by the way, we're not stopping at 1.5 millimeter, we're going thinner. So because as we get to power and package, it will need to be thinner and with our technology, we can go a lot thinner. Operator: Our last question comes from the line of Don McKenna with D.B. McKenna & Company. Donald McKenna: This is a simple one, guys. I haven't been able to attend the annual meeting for the last few years because of a conflict of timing. And I'm hoping that you don't schedule it for the 20th of June this year. James Schmidt: Well, the 20th of June is a Saturday. And so it's -- I'll let the cat of the bag, the proxy is coming out soon. The annual meeting is Friday, June 19. Donald McKenna: 19, okay. Thank you very much. Patrizio Vinciarelli: Okay. Thank you. Operator: This concludes the question-and-answer session. Thank you all for your participation on today's call. This does conclude the conference. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Atlantic Union Bankshares First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bill Cimino, Senior Vice President, Investor Relations. Please go ahead, sir. William Cimino: Thank you, [ Michelle, ] and good morning, everyone. I have Atlantic Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Alex Dodd, with me today. Since Alex is only 8 days into his job, former CFO, Rob Gorman, will cover the first quarter financial results in his transition capacity as a senior financial adviser to the company until his September 30 retirement. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release and the accompanying slide presentation we are going through on this webcast are available to download on our Investor website, investors.atlanticunionbank.com. During today's call, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in the appendix to our slide presentation and in our earnings release for the first quarter of 2026. We will also make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future expectations or results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise or update any forward-looking statement, except as required by law. Please refer to our earnings release and slide presentation issued today and our other SEC filings for further discussion of the company's risk factors and other important information regarding our forward-looking statements, including factors that could cause actual results to differ from those expressed or implied in the forward-looking statements. All comments made during today's call are subject to that safe harbor statement. And at the end of the call, we will take questions from the research analyst community. And now I'll turn the call over to John. John Asbury: Thank you, Bill. Good morning, everyone, and thank you for joining us today. I am pleased to introduce Alex Dodd as our new Chief Financial Officer. Alex brings a wealth of experience, having successfully helped guide a smaller institution through its transformation into a larger, more complex financial organization. His background aligns well with our executive leadership team, and I am confident he will add tremendous value as we continue to drive growth and innovation. Over the next few months, we look forward to having Alex meet many of you during our active Investor Relations calendar. While Rob Gorman will remain with us full time until his retirement at the end of September, I do want to extend my sincere gratitude to Rob for his invaluable contributions and his dedication to ensuring a seamless CFO transition. Atlantic Union Bankshares reported solid first quarter financial results, reflecting disciplined execution and a successful conclusion of the integration of Sandy Spring Bank. We believe the adjusted operating financial results for the quarter showcased the organization's earnings capacity. While we had a final set of merger-related charges impact this quarter's results, the underlying operating performance supports our continued confidence in achieving the financial outlook for adjusted operating return on assets, return on tangible common equity and efficiency ratio that we have set for 2026. We do look forward to reporting results without the merger noise starting next quarter, which we believe should more clearly demonstrate the financial strength and operational efficiency we are committed to delivering for our shareholders. Our commitment to creating shareholder value remains unwavering. We believe Atlantic Union is well positioned to deliver sustainable growth, top-tier financial performance and long-term value for our shareholders. We believe the strategic advantages gained from the Sandy Spring acquisition, combined with continued organic growth opportunities due to our robust presence in attractive markets, reinforce our status as the premier regional bank headquartered in the lower Mid-Atlantic. I'll briefly cover the Q1 2026 highlights and share market insights before Rob presents the financial review. And here are the highlights from the first quarter. Quarterly loan growth was approximately 2.2% annualized during the typically slow first quarter with total loans ending at $27.9 billion. For additional context, quarterly loan growth averaged roughly 5.9% annualized over this year's first quarter. Loan production remained strong and when compared to the previous 4 quarters was second only to the fourth quarter of last year. We were pleased to see record level fundings from Atlantic Union Equipment Finance and record level production from our North Carolina-based commercial real estate team. However, we also experienced elevated payoffs late in the quarter, particularly within our commercial real estate portfolio due to a number of property sales. This activity highlights the strength of our CRE markets, robust investor demand and the availability of ample liquidity. The first quarter saw a slight increase in line of credit utilization from the fourth quarter and was relatively flat year-over-year. At the end of the first quarter, our loan pipelines were noticeably higher than at the beginning, giving us confidence that we are pacing to meet our loan growth targets for 2026. A deeper look at the pipeline report reveals that our construction and development pipeline has achieved a record high. For those familiar with my construction lending bathtub analogy, this means our pipeline is filling up at a faster rate than draining, which positions us well for continued growth in construction lending balances throughout the year. While forecasting loan growth remains challenging in this uncertain macroeconomic environment, particularly with the recent energy price shocks, we continue to expect 2026 year-end loan balances to range between $29 billion and $30 billion. Our deposit base demonstrated strong customer deposit growth this quarter, nearly offsetting the planned reduction in high-cost broker deposits. Broker deposits currently represent just 2% of total deposits and play a purposeful role in our liquidity strategy. We believe this approach provides us flexibility to add broker deposits in the future if needed. And depending on cost and market conditions, we anticipate any new additions, if any, would be at lower rates than those currently rolling off. Above all, our core customer deposit base remains the crown jewel of the franchise, and our primary focus is on growing customer deposits and expanding our share of wallet. Net interest margin, excluding the impact of accretion income, which can be volatile, improved by 4 basis points quarter-over-quarter, matching our expectations. Our reported FTE net interest margin declined 11 basis points to 3.85%, mainly because accretion income was lower compared to the elevated levels seen in Q4 '25. Rob will provide more detail about the factors influencing NIM performance in his section. Credit quality continues to show strength and improvement. Our first quarter annualized net charge-off ratio was just 2 basis points. For the year, we are still projecting a range of 10 to 15 basis points, although we do not yet have full visibility into reaching that range. Key asset quality indicators remain robust and are improving. Nonperforming assets as a percentage of loans held for investment declined by 6 basis points to 0.36% from 0.42% in the prior quarter, bringing us closer to our historical operating levels. Criticized and classified assets also improved, decreasing to 4.5% of total loans from 4.7% last quarter. And looking at the most current unemployment data, the Bureau of Labor Statistics reported January -- Virginia's January unemployment rate remained stable at 3.7%, Maryland's unemployment rate was 4.3% and North Carolina's was 3.8%, all of which are at or below January's national average of 4.3%. We continue to expect unemployment levels in Virginia, Maryland and North Carolina to stay manageable and comparable to or below the national average, consistent with Moody's current state-level forecast. We remain confident in our markets and consider them among the most attractive in the country. I do want to acknowledge the ongoing conflict in Iran and its potential impact on our bank and the markets we serve. We are closely monitoring the geopolitical developments and their effects on the broader economy. The most immediate consequence has been the sharp increase in petroleum prices. Should this trend persist over an extended period, our primary concern is not a direct credit event given our portfolio's limited sensitivity to energy prices, but rather a possible decline in consumer and business confidence. At present, our loan pipelines remain strong. Business sentiment across our markets is positive and the underlying economy in our footprint continues to be favorable. Additionally, it appears likely that defense spending will rise as a result of the geopolitical situation, which should provide a stimulative effect for certain areas of our markets. We remain vigilant and believe we're well positioned to navigate these challenges while supporting our clients and our communities. We have deliberately and thoughtfully built a distinctive valuable franchise outlined in our strategic plan, delivering on our commitments and establishing the banking platform we set out to create. With a strong foundation, we believe we are well positioned to capitalize on our expanded markets, drive continued growth in Virginia and pursue new organic opportunities in North Carolina and in our specialty lines. With disciplined execution of our prior acquisitions and no additional acquisitions currently planned during this phase of our strategic plan, our focus has shifted to demonstrating the franchise's earnings power and capital generation ability. After dedicating capital to strategic investments over the past 2 years to complete the company we envisioned and worked diligently to build and consistently communicated our plans to do so, we believe we are well positioned to demonstrate clear and tangible benefits from these efforts. In summary, we had a good start to 2026, and we believe that our full year results will demonstrate the differentiated financial performance compared to our peers, which in turn will help build long-term shareholder value. With that, I'll turn the call over to Rob for a detailed review of our quarterly financial results. Rob? Robert Gorman: Well, thank you, John, and good morning, everyone. I'll now take a few minutes to provide you with some details of Atlantic Union's financial results for the first quarter of 2026. My commentary today will primarily address Atlantic Union's first quarter financial results presented on a non-GAAP adjusted operating basis, which for the first quarter excludes $9 million in pretax merger-related costs. As John noted, we don't expect to incur any additional Sandy Spring merger-related costs going forward. In addition, in the first quarter, we finalized the fair value assets acquired and liabilities assumed related to the Sandy Spring acquisition, inclusive of measurement period adjustments primarily related to loans, other assets and other liabilities. The 1-year measurement period related to the Sandy Spring acquisition concluded and related goodwill was finalized as of March 31 at $541 million. In the fourth quarter, reported net income available to common shareholders was $119.2 million and earnings per common share were $0.84. Adjusted operating earnings available to common shareholders were $126.2 million or $0.89 per common share for the first quarter, which resulted in an adjusted operating return on tangible common equity of 19.6%, and adjusted operating return on assets of 1.41% and an adjusted operating efficiency ratio of 49.9% in the quarter. Turning to credit loss reserves at the end of the first quarter. The total allowance for credit losses was $321.9 million. Please note that effective January 1, 2026, the company made certain changes to its allowance for credit losses methodology as part of the continued enhancement of its credit modeling practices, resulting in the company moving from 2 loan portfolio segments, Commercial and Consumer to 3 loan portfolio segments, Commercial Real Estate, Commercial and Industrial and Consumer. These model enhancements enable more dynamic and precise modeling and allow for more granularity in monitoring our estimated credit losses. As a result, and paired with portfolio mix changes, the total allowance for credit losses as a percentage of total loans held for investment decreased 1 basis point to 115 basis points at the end of the first quarter. The allowance for loan losses as a percentage of total loans held for investment decreased by 2 basis points from the prior quarter to 104 basis points, while the reserve for unfunded commitments coverage ratio increased 1 basis point to 11 basis points on March 31, which was primarily driven by higher construction and land development unfunded commitments. As John mentioned, net charge-offs were $1.6 million or only 2 basis points annualized in the first quarter. Now turning to the pretax pre-provision components of the income statement for the first quarter. Tax equivalent net interest income was $316.9 million, which was a decrease of $17.9 million from the fourth quarter, primarily driven by a decrease in loan accretion income, the lower day count in the first quarter, lower average earning assets and the full quarter impact on variable-rate loan yields following the cumulative 75 basis point reduction in the Fed funds rate between September and December 2025. The decreases in tax equivalent net interest income were partially offset by a decrease in interest expense, primarily from lower deposit costs. As John noted, the first quarter's tax equivalent net interest margin declined by 11 basis points from the prior quarter to 3.85% due to lower earning asset yields, which were partially offset by lower cost of funds. Earning asset yields decreased 20 basis points from the prior quarter to 5.79%, primarily due to lower loan accretion income of $13 million, which was inclusive of the impact of a $3.5 million nonrecurring loan fair value measurement period adjustment related to the Sandy Spring acquisition and lower yields on variable-rate loans as previously noted. Cost of funds decreased 9 basis points from the prior quarter to 1.94% for the first quarter due primarily to lower deposit costs of 13 basis points, which reflected the impact of Fed funds rate reductions on customer deposit rates and the decline in higher cost in average broker deposit balances. Of note, excluding the impact of net accretion income, our core net interest margin increased by 4 basis points to 3.45% from 3.41% in the prior quarter, which is primarily driven by lower deposit costs, partially offset by lower core loan yields. Noninterest income declined by $2.2 million to $54.8 million for the first quarter, primarily driven by lower loan-related interest rate swap fees due to seasonally lower transaction volumes, which was partially offset by higher capital markets income. Reported noninterest expenses decreased by $33.4 million to $209.8 million for the first quarter, primarily driven by a $29.6 million decline in merger-related costs and a $2.3 million decrease in amortization of intangible assets. Adjusted operating noninterest expense, which excludes merger-related costs in the fourth quarter of '25 and the first quarter of '26 and the amortization of intangible assets in both quarters decreased by $1.6 million to $185.3 million for the first quarter. This decrease was primarily due to $3.1 million reduction in other expenses, primarily due to lower noncredit-related losses on customer transactions, a $2.3 million decrease in professional services expenses related to strategic projects that occurred in the prior quarter and a $1.9 million decrease in technology and data processing expenses. These decreases were partially offset by a $5 million increase in salaries and benefits expense, primarily due to seasonal increases in payroll taxes and 401(k) contribution expenses. At March 31, loans held for investment net of unearned income were $27.9 billion, which was an increase of $150.3 million or 2.2% annualized from the prior quarter. At March 31, total deposits were $30.4 billion, which was a decrease of $80.4 million or approximately 1% annualized from the prior quarter, primarily due to decreases of $517.9 million in broker deposits, partially offset by an increase of $438.5 million in interest-bearing customer deposits. At the end of the first quarter, Atlantic Union Bankshares and Atlantic Union Bank's regulatory capital ratios were comfortably above well-capitalized levels. In addition, on an adjusted basis, we remain well capitalized as of the end of the first quarter if you include the negative impact of AOCI and held-to-maturity securities unrealized losses in the calculation of the regulatory capital ratios. AOCI increased [indiscernible] million during the first quarter as term interest rates increased from the prior quarter. Company paid a common stock dividend of $0.37 per share in the first quarter, in line with the fourth quarter's dividend amount and an increase of 8.8% from the previous year's first quarter dividend amount of $0.34 per common share. On a linked quarterly basis, tangible book value per common share increased $0.24 or 1% to $19.93 per share in the first quarter despite the headwinds caused by the increase in the AOCI unrealized losses. We estimate that the increase in AOCI had a negative impact to our tangible book value of $0.16 per share in the first quarter. As noted on Slide 17, we are updating our full year 2026 financial outlook for AUB to the following: we expect loan balances to end the year between $29 billion and $30 billion, while year-end deposits balances are projected to be between $31 billion and $32 billion. On the credit front, the allowance for credit losses to loan balances is projected to remain at current levels in the 115 to 120 basis points range, and the net charge-off ratio is expected to fall between 10 and 15 basis points in 2026, although we don't currently have a line of sight to reaching that range this year. Fully taxable equivalent net interest income for the full year is projected to come in between $1.34 billion and $1.35 billion, inclusive of accretion income of between $140 million and $145 million. As a result, we are projecting that full year tax equivalent net interest margin will fall in a range between 3.90% and 4% for the full year, driven by our baseline assumption that the Federal Reserve Bank will not cut the Fed funds rate in 2026 and that term rates will remain stable at current levels. On a full year basis, noninterest income is expected to be between $220 million and $230 million, while adjusted operating noninterest expense is estimated to fall in the range of $742 million to $752 million, including the expense impact of our North Carolina investment and other 2026 strategic initiatives. Based on these projections, we expect to generate annual growth in tangible book value per share of 12% to 15%, produce financial returns that will place us within the top quartile of our proxy peer group and meet our objective of delivering top-tier financial performance for our shareholders. In summary, Atlantic Union delivered solid operating results in the first quarter and 2026 is off to a good start. We remain firmly focused on leveraging this valuable Atlantic Union Bank franchise to generate sustainable, profitable growth and to build long-term value for our shareholders in 2026 and beyond. Before I transition the call back to Bill, I would like to briefly reflect on my tenure at AUB. When I joined the organization in 2012, AUB had approximately $4 billion in total assets with a market capitalization of around $360 million. Currently, our assets have grown to nearly $40 billion, and our market capitalization exceeds $5 billion, establishing us as the largest regional bank headquartered in lower Mid-Atlantic. It's been a great privilege to have played a part in the company's growth and financial success over the past 14 years. And looking ahead, I'm pleased to have Alex step into the role of CFO as my successor, and I'm confident that his extensive financial leadership experience will contribute significantly to Atlantic Union's future success. I'll now turn the call over to Bill to see if there are any questions from our research analyst community. William Cimino: Thanks, Rob. And [ Michelle, ] we're ready for our first caller, please. Operator: [Operator Instructions] And our first question is going to come from the line of Russell Gunther with Stephens. Russell Elliott Gunther: Wanted to start on the core margin, please. Nice to see that up a little bit this quarter. Would be helpful to get a sense for how you expect that to trend over the course of the year and particularly touching on the direction of deposit costs from here with the Fed on pause. Just wondering if you have the ability to lower further or if there's an upward bias to deposit costs. Robert Gorman: Yes. In terms of the core margin, Russell, we do expect it can grind higher from here and we do expect that. As I mentioned in my comments, we don't expect the Fed to cut this year. So there shouldn't be an impact on our variable-rate loan yields on a negative -- from a negative perspective. However, it also means longer for -- or higher for longer rates will impact our ability to reduce deposit costs meaningfully lower from here, basically saying that it's probably going to be stable. Maybe there's a little -- we may see that tick up a bit on the customer deposit side. The good news there is we do have some broker deposits that are still outstanding that are maturing this quarter and next quarter. And those broker deposits are paying about 5.15% currently. So we will get a pickup on that if you look at what current broker rates are or even customer deposit CD rates and money market rates are. So we will get some positive out of that in the near term. The real impact of the grind higher in core net interest income or net interest margin is basically, we've got the continuing back book -- fixed rate loan back book repricing, and that will continue throughout the year. As we mentioned, we're projecting that term rates, 5-year term rates are pretty -- will stay pretty stable going forward here. And we've got about $850 million to $900 million of maturing fixed rate loans on the legacy AUB side per quarter through the rest of this year. So you see about a pickup of call it, 90 to 100 basis points from portfolio yields on that portfolio on the 5.10%, 5.15% level repricing into the 6% to 6.10% range. So that's really the underlying context of our thoughts that core margin will grind a bit higher. Russell Elliott Gunther: Got it. Okay. Rob, that's helpful detail. And then last one for me would be on the expense front, solid result this quarter. You lowered that guide. At the Investor Day in December, that deck had mentioned considering some additional branch rationalization in '26. So wondering if that is at all contemplated in the lower guide? And if not, given the lower NII outlook, is that on the cards at all as a potential offset? Robert Gorman: Yes. It's certainly not in the guidance that we just provided in those numbers on the noninterest expense side. There's always some thoughts around that where we could be looking at that if we really thought the revenue growth was not going to materialize. But we do think we've got a pretty good handle on the expense -- discipline around expenses. That's why we did lower that. Part of that was this first -- the first quarter, we came in better than we expected. That should continue as we go forward. As you know, we said that the first quarter is of the seasonally high expense quarter for the year. So you should see that stuff coming -- things coming down, especially on payroll taxes and 401(k), which are at the high end. I mean, that was an increase of over $5 million quarter-to-quarter. That's going to come down over time. It's just elevated due to incentive payments, et cetera, which drive those higher in the first quarter. So you should see those costs come down. Now we did mention that we do have investments being made primarily in the North Carolina franchise, opening 10 new branches, not all this year, probably 3 branches will be opened by year-end, another 5 or 6 next year and then the remainder early in 2028, but that expense will start coming on board later this year, call it, second, third and fourth quarter will start to increase. So those are somewhat offset to this reduced level of payroll taxes and 401(k) that we'll see going into the next 3 quarters. William Cimino: Our [ Michelle, ] we're ready for our next caller please. Operator: Our question will come from the line of Janet Lee with TD Cowen. Sun Young Lee: So I want to get some clarification. Much of the deposit decline in the quarter seems to be driven by a runoff of broker deposits. I assume that lower broker deposits is partly attributing to your lower deposit guide for the full year, but it would be great to hear the direction of travel for core customer deposits and broker deposits over the course of '26 that's assumed in your updated deposit guide. Robert Gorman: Yes. So on the customer deposit side, we're looking for 3% to 4% growth on that front. In brokered deposits, we paid down quite a bit. I think quarter-to-quarter, we were down about $500 million. Those are high cost, obviously. And from a funding perspective, with a lower loan growth quarter, we did not need to refinance those or fund those with new brokerage. So that was a positive. And as I said, we got about [ $200 million ] this quarter in brokered that are maturing at high cost and another [ $80 million ] or so in the third quarter. We'll see how that plays out in terms of brokered, but that is part of the reason -- maybe a lot of the reason why we've lowered our deposit -- total deposit costs, including brokered. Now we'll see what happens there, Janet, really depends on seeing a pickup in loan growth over the next several quarters and maybe see if we're on the higher end and maybe producing the higher end, we may have to go back and bring in some brokered deposits to fund the gap there. Sun Young Lee: Got it. And the accretion income declined $13 million quarter-over-quarter and looks like it included some onetime measurement period adjustments of $3.5 million. Is it fair to -- are you still maintaining your PAA guide of $150 million to $160 million for the full year? Or is that impacting your NII guide? I know it's harder to forecast the accretion, but I wanted to see where that should trend going forward. Robert Gorman: Yes. We have lowered that, Janet, to, call it, $145 million to $150 million accretion. Part of that was the $3.5 million onetime, which wasn't anticipated in the earlier guide. And we do expect kind of more of a normalization of prepayments on that portfolio, was a pretty low quarter compared to the fourth quarter in terms of prepayments and accelerated accretion. On a baseline perspective, excluding any early or prepayments accelerated accretion, it's about $10 million to $11 million on the loan accretion side on a -- from a baseline, you can expect that per quarter. And then the wildcard is what's the accelerated prepayments look like and the accretion that comes through related to that. And it's been running probably normalized, is probably more in the $3 million a month kind of thing. So that's kind of what is in our projection for that. William Cimino: [ Michelle, ] we are ready for our next caller, please. Operator: Our next question comes from the line of David Chiaverini with Jefferies. David Chiaverini: So I wanted to touch on loans. You mentioned about the loan pipelines being strong. Can you talk about customer sentiment and what you're seeing there in terms of drivers? John Asbury: Yes. Dave Ring, our Head of all of our Commercial-related businesses, which we call wholesale is here. Dave, do you want to speak to what you're seeing? I can give my perspective, too. But... David Ring: Sure. Like you said, pipelines are significantly higher than they were this time last year or even at the end of the quarter, first quarter. The sentiment is -- we are not seeing a lot of companies not doing transactions, but we're seeing companies sometimes pause them, and it's largely driven by interest rates, not some of the other things going on in the economy. So as interest rates kind of stabilize, we will see, I think, our pipeline convert pretty quickly. John Asbury: Yes. I think -- and Dave, when you say interest rates, you mean people are -- we've heard some feedback that clients were sort of waiting, right, on lower rates. And now we're in what appears to be a higher for longer environment. And as they see that rates are likely not about to come down, they move forward. It is important to point out, as I commented, that we saw our record quarter, best ever in Atlantic Union Equipment Finance fundings in Q1. We saw record production out of the North Carolina-based commercial real estate team that operates throughout the Carolinas. Pipelines look really good. And I also mentioned that the construction lending pipeline looks really good, too. So we are seeing activity out there. And despite all the uncertainty and concern about what's going on with this Iranian situation, doesn't really seem to have impacted sentiment. I agree with Dave, we've heard more comments on people that were kind of speculating on what rates might do. So we feel good about the outlook from here. The fundamentals are pretty good across the footprint. David Chiaverini: Great. And then shifting over to capital management. Can you comment on to what extent, if any, the Basel III endgame proposal could have on Atlantic Union? And then also touch on your buyback appetite and timing, is later this year still in the cards? Robert Gorman: Yes. In terms of the first question on the Basel III impact, we've estimated that, that impact based on what's out there today and the proposal is -- would reduce risk-weighted assets in the 6% to 6.5% range, which translates into from a CET1 regulatory capital ratio of an increase of 65 to 70 -- 75 basis points. So we'll see where that comes out in the final rules or what's approved, but that's our current estimate of the impact there. So pretty positive from a regulatory capital ratio perspective. In terms of potential buybacks, yes, so as we've said, we look at anything over 10.5% CET1 as excess capital available for us to buy back shares and kind of manage between 10% and 10.5% CET1. We haven't come off our plans to -- well, I should say, we are projecting that we will hit that 10.5% mark coming out of Q2. Nothing's changed really there into Q3. So we're in a position to request an authorization from our Board of Directors subject to their approval. And we would expect to be in the market, assuming approval there in the near future. William Cimino: And [ Michelle, ] we are ready for our next caller, please. Operator: Our next question is going to come from the line of David Bishop with Hovde Group. David Bishop: Congratulations, Rob, on the retirement. Enjoyed working with you. John, Dave, just curious from the net charge-off guidance I see in the slide deck, you're still sticking with the 10 to 15 basis points guidance. Just curious, is there any line of sight into reaching even that lower end, just given what's happening on a high-level basis? And maybe what could get you there on sort of a worst-case scenario, maybe what the portfolios can drive that higher? John Asbury: We don't see anything. We have no line of sight to meeting even the lower end of the guide at this moment, meaning we don't see anything coming. Having said that, we know from experience, it's usually the [ infamous ] one-off which can happen from time to time. Doug Woolley is here as well. So Doug, you may want to -- our Chief Credit Officer, do you see anything that would be sort of a systemic or kind of secular concern? Douglas Woolley: Yes. No portfolios at risk. Like John said, they inevitably end up being one-offs, sometimes larger than we expect, but always resolved quickly once identified. John Asbury: As a $38 billion bank, we're not going to run the bank with 2 bps of annualized net charge-offs. Having said that, I've made similar comments for 9.5 years. So I mean, it would be great. We would love to do that very thing, but we'll see. We think it's a reasonable assumption based on what we know right now, Dave. David Bishop: Got it. And one follow-up. I know you mentioned the seasonal impact on swap fees were down this quarter. If we do see maybe stability in the term structure of rates, do you think that impacts the overall level of swap fees this year from a go-forward basis? Robert Gorman: And again, Dave, the term rates, I didn't catch the... David Bishop: Yes, I think you're saying that you expect sort of relative stability in the outlook for interest rates. Does that have a depressive impact if rates aren't volatile on the outlook for swap fees moving forward? Robert Gorman: Yes. I think -- yes, so on swaps, yes, we had a pretty good quarter. We'll continue to see how that plays out. But I think you're right, the volatility will play into that. I don't know if Dave has anything -- Dave Ring has anything to add to that, but... David Ring: Yes. I mean for swaps, we're actually not seeing -- volatility doesn't normally play a role in our swap sales. It's really a function of new transactions getting booked. So we have a pretty strong -- very strong methodology around making sure we're eyeballing all transactions that are coming in the bank, and we're trying to help clients decide whether to manage the interest rates or not. But we -- I think the way -- the reason we're so successful in swap production is our methodology and the fact that we are -- we close a lot of new transactions every quarter. John Asbury: I would say that if there's no expectation that rates are about to drop, that's generally helpful based on my experience, meaning there's not much to wait for those people aren't sort of betting on lower rates. William Cimino: [ Michelle, ] we are ready for our next caller, please. Operator: Our next question comes from the line of Brian Wilczynski with Morgan Stanley. Brian Wilczynski: I wanted to just quickly go back to the net interest income outlook for the year. For 2026, it looks like you brought that down by about $18 million at the midpoint. It sounds like the lower purchase accounting accretion explains a portion of that. But I was just wondering if you could speak to any change in the core net interest income outlook and anything new that you're seeing on that front specifically? Robert Gorman: Yes. So Brian, yes, the bulk of the adjustment there is accretion income that you saw in the first quarter that we brought that down a bit. The other driver there is we've increased our deposit rate outlook from our original guidance earlier in the year. We're seeing some competition in some of our markets. We do regional pricing. But in terms of the regions where we're seeing some increases, and we've raised rates in those regions is the Metro D.C. area, former Sandy Spring footprint. And then some impact, even though it's not as large for us is North Carolina. We've also seen heavy competition from our -- from the bigger players in those markets and some of our peers. So we did increase those rates a bit. For instance, we now have CD specials in the 4% range or CDs offerings in the 4% range for 3 and 6 months. And we also now have an advantaged money market rate, which is in the 3.80% range. That requires new money to come in, but those are increasing deposit rate outlook as we go through this year. John Asbury: Rob, on the accretion income expectations, is it fair to say that's more of a timing issue? Robert Gorman: Well, it's a timing issue in terms of -- yes, will the acceleration of accretion income come through prepayments from the Sandy Spring acquired portfolio, those activities. And it could be more higher, it could be lower. I'd say, we were high in the fourth quarter, as we talked about last quarter, and we were lower this quarter excluding that $3.5 million adjustment that was nonrecurring. So it kind of does fluctuate quarter-to-quarter depending on what prepayments we get. John Asbury: Yes. You still have that -- as you pointed out, you still have this base level that's a pretty good accounting tailwind and then the volatility comes in with prepayment activity, which is very difficult to predict. Robert Gorman: Yes, that's right. Brian Wilczynski: And maybe just to clarify on the PAA, the updated expectation, is it $145 million to $150 million? I may have misheard, but I think earlier in the call, you might have said $140 million to $145 million. So just wanted to clarify what the new expectation is. Robert Gorman: It's really $140 million to $150 million, Brian, I kind of misstated that. So midpoint of about $145 million is what we're thinking. Brian Wilczynski: Got it. Got it. And then you mentioned the strong production during the quarter on the loan side. It sounds like loan pipelines are quite strong, albeit with some paydowns towards the end of the quarter. I'm wondering, to the extent that loan growth surprises negatively over the course of the year, say, in a scenario where paydowns remain elevated, do you think that the NII guidance is still achievable? Would there be more offsets maybe on the deposit side? Or would the NII guidance become more challenging in that scenario? Robert Gorman: Yes. I think the range that we put out there assumes that there's much lower growth than what we're projecting internally. So the range is what 3% to 7% if you look at the loan guidance and then the net interest income related to that is kind of on the low end. But certainly, if it comes in lower or it's flat, that will have some impact on that guidance and likely bring it lower, but we're not projecting that flat growth rate. But certainly, as I said earlier, we may then take other actions maybe from an expense point of view, maybe on the deposit cost perspective to maintain that net interest margin. But we do have some other levers on the expense side we could pull if the revenue growth doesn't come through. John Asbury: Just for market clarity, Rob has not retired yet. So -- like we're going to get our money's worth out of him until September, but Alex is CFO as of now, and we'll go through a very planful transition, as you know. William Cimino: And [ Michelle, ] we are ready for our next caller, please. Operator: Our next question will come from the line of Catherine Mealor with KBW. Catherine Mealor: One more on the loan side or on the NIM side. Could you repeat what loan maturities you have maturing per quarter? And then on average, where new loan yields are coming on the books today? Robert Gorman: Yes, it's about -- just speak to the fixed rate portfolio, it's about $850 million to $900 million maturing on a quarterly basis. And those new loans are those loans refis or new loans coming on are in the 6% to 6.10% range versus the portfolio at about 5% to 5.10%. Catherine Mealor: Okay. And are those just legacy... Unknown Executive: Yes, just legacy, yes... Catherine Mealor: Okay. That doesn't include... Robert Gorman: Yes. So if we bring in Sandy Spring, it's about that $900 million goes up to about $1.2 billion to $1.3 billion quarterly. Catherine Mealor: Great. So you're seeing that going from about 5% to 6.10%. Unknown Executive: Yes. Robert Gorman: Yes, right. Catherine Mealor: Got it. Great. And then are you -- we talked a lot about deposit cost competition on this call. What about loan competition? Are you still seeing -- can you talk about the competitive dynamic in lending, both on how that impacts volumes and how that impacts rate today? John Asbury: It's competitive. It's always competitive, particularly for a bank like us that deals with what I would call the higher quality set of credit. Dave, do you want to comment on what you're seeing? David Ring: Yes. It's competitive in structure and price. So it really depends on the asset. The better the organization or better the company or better the prospect, the more competitive it gets for sure. What we're seeing now is the larger banks are very active in the markets we're in now, and so we feel like we compete best against them actually. So we feel like strong competition, but we're teed up to compete against them. John Asbury: Yes, we'll get our fair share, Catherine. Catherine Mealor: Great. And then maybe one more question on just the growth. You've left your end-of-period growth guide unchanged. Is there -- I know this is a hard question, but it matters for the full year NII guide relative to the growth. I mean, do you feel like that growth is back-end loaded? Or do you feel like we're -- I know paydowns are kind of heavy in the back part of this quarter? Or do you feel like we're going to get -- as you see it today, a big improvement in growth even starting in the second quarter. So we see that kind of ramp to growth starting sooner rather than later? John Asbury: Yes. Truthfully, Q1 was better than I would have expected based on production. And we were looking -- we were approaching 4% point-to-point annualized loan growth until literally the last week of Q1. Notice that the average loan growth for Q1 versus Q4 was 5.8%, which would be a very strong number for Q1, which is seasonally slow coming off a very strong Q4. So the productivity is there. We're off to a very good start in Q2. And I would say we're on pace to where we'll continue to see it ramp. We're not effectively saying we don't see much happening until we get into the second half of the year, for example. Do you have anything to add on that, Dave? I mean we can see it in the pipeline. David Ring: Yes. The pipeline, if you were to just look at quarter-over-quarter pipeline is up 26%, even though we had a really strong fourth quarter. And so I think it's just a matter of conversion, and we're doing that. Like John said, we already had a good start to the second quarter. So we're confident that our conversion rates will be good. John Asbury: So Catherine, right now, we feel pretty good in terms of being on pace to meet our expectations. It's not all back-end loaded. Having said that, Q4 is traditionally -- in my 37-year career, Q4 is always the best quarter of the year, but it's not like we're waiting on that. William Cimino: And [ Michelle, ] we're ready for our last caller. Operator: And our last question will come from the line of Steve Moss with Raymond James. Stephen Moss: Just maybe not to beat dead horse, but just following up on deposit costs. Just kind of curious, how are you thinking about the marginal cost of deposits for you guys? I hear you on the 4% CD rate, but just think about the blended holistic dynamic what you're bringing in, where does that roughly shake out these days? Robert Gorman: Yes. So if you look at the mix of deposit growth, it's going to be in the money market and the CD book. And as I said, those are probably -- on a marginal cost basis, those would be in the ranges that I just mentioned. So they'll start to tick up -- the average cost of deposits will tick up a bit. On the money market side, that's not repricing the back book. So that's not as big an impact at all, but it will grind higher over a period of time. And then CDs as they mature, you'll see that coming in again over time. So I think that's kind of the way to think about it. Those are the growth engines at this point from the deposit other than we are bringing on some operating accounts and things of that nature. Of course, we always look for that from a growth point of view. But in terms of the drivers of the growth, it's going to be in those categories. Stephen Moss: Okay. And then maybe just kind of think along the lines, just given how high the cost is, just curious if you guys are thinking about maybe running off more securities here as the year goes on just to fund growth, if we see remix that way, maybe how low are you guys willing to take securities and cash here? Robert Gorman: Yes. Yes, that's a good question, Steve. Yes, we are bringing down the securities portfolio as a percentage of total assets. That's part of the equation to help fund any gaps between deposit growth and loan growth. Right now, we're about 13.5% of the securities portfolio as a percentage of total assets, and we're expecting to see that come down to about 12.5% -- 12% to 12.5%, which historically is where we've been. So there is that funding from the maturities coming out of the securities portfolio. Cash flows are about $75 million a month out of the securities portfolio. So that gives us some good funding opportunity for loan growth moving that to the loan book. Stephen Moss: Okay. And then just on the reserve methodology change here. Kind of curious, maybe just explain kind of underneath what the dynamic is that how this could impact the way your reserve behaves in future periods? Or -- and I know you guys said it wasn't a material benefit. Is it just like $1 million, $2 million to the provision? Just kind of curious how we think about the dynamics for this quarter and just like the way sensitivity changes going forward. Robert Gorman: Yes. The big change there, as we said, is we now have modeling on 3 segments. We split Commercial Real Estate and the Commercial and Industrial portfolios. And the real benefit there is that we now have loan-level credit modeling available to us on the Commercial Real Estate side, and that can get very granular in terms of where collateral is and things like -- of that nature. The other component here is if you look at our allowance for credit losses under the previous modeling, we had about 50% of our reserve was what we considered qualitative factors versus quantitative modeling. And now under the new modeling, we still have qualitative factors, but they're more in the 20% to 25% range. And the quantitative model, the more granular model is producing 75% of the, give or take, of the total allowance. So it's really a much better, more detailed model for us, and we feel like it's -- I don't think you'll see very much volatility in it going forward, depending on the economic forecast. I mean that can change it a bit going forward, but that would be under the old model as well. So we feel good about the changes that we made. We've continued to evolve. This is -- we have 3 models. This is the fourth model, and this is probably -- this is obviously the best model we've had. And interestingly enough, it kind of underpinned what we are putting as qualitative because the new model wasn't that really much different from the ACL levels that we have on the balance sheet. Stephen Moss: Okay. That's helpful. I'll take a little more offline there, but I appreciate all that color. And then maybe just in terms of -- John, I heard you on the loan pipeline or talked about good dynamics in North Carolina, I believe you said. Just kind of curious what is that looking like these days? And just kind of what percentage of the loan pipeline or maybe size it up a little more would be helpful. John Asbury: You mean coming out of the Carolinas? Stephen Moss: Correct. John Asbury: Yes. And when I say North Carolina, I should say broadly Carolinas because the commercial real estate team covers both of the Carolinas. Dave, do you want to speak to like how do you think about that in terms of how much of a broadly North Carolina, where Carolinas are as a part of the overall equation in terms of pipeline? David Ring: No. I mean it certainly helped this quarter that Carolinas was our second largest growth engine for the company for commercial. So that kind of speaks for itself. I think the pipelines are strong enough to replicate this performance in the Carolinas. So we feel really good about it. John Asbury: And we're expanding. It used to be -- and a few years ago, when we talked about Carolinas, what we really meant was the commercial real estate team based in Charlotte. And so thanks to the acquisition of American National Bank that gave us a base principally in the Piedmont Triad. We have our Wilmington LPO, which is doing well, which we did post-American National acquisition. We've been expanding in Raleigh. We've got the branch investment going on in the Greater Raleigh area and Wilmington, and we're continuing to expand the team at a reasonable pace. So Steve, I think it will become more important over time. It is arguably one of the best growth markets in the country. And they're gaining employment faster than most places as well, and it's right next door. So we feel really good. It's very important to understand how diversified Atlantic Union Bank is. I don't think we get credit for that. We need to do a better job of explaining we are a diversified bank over 3 very good states. And we have specialty lines as well that can go beyond like equipment finance. So we feel good about our opportunity. Unknown Executive: Great. Thank you all so much... William Cimino: Thanks, everyone, for joining us, and we look forward to talking with you next quarter. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.
Jane Brunton: Good morning. Good morning, everyone. Apology for the delay. We had a bit of a technical issue. Thank you for joining the 2026 March Quarter Results webinar. I'm joined by CFO, Luke Anderson. [Operator Instructions] I will now hand over to Mr. Bob Fulker, CEO and Managing Director at Hillgrove Resources. Robert Fulker: Thanks, Jane, and good morning, everyone. Sorry for that slight technical hiccup. I'm hoping everyone can hear us now. Thanks for joining the Hillgrove Resources 2026 March Quarterly Results webinar. I'm joined on the call today by Luke Anderson, our CFO. Certainly living in interesting and changing times, with global uncertainty and pressure on both commodity price, exchange rate, and our cost base. These have not adversely affected us as of today, but we are closely monitoring the fuel situation and the Middle East events, like I'm sure most others are. Of importance, with all the uncertainty, is that the Australian copper price remains strong. Operationally, the March quarter delivered a strong start to the year, with key highlights being 3,120 tonnes of copper delivered, a fourth quarter-on-quarter increase. Mine generated $14.6 million of operating mine cash flow and a net mine cash flow of $6.6 million after capital and rehabilitation expenses. Our cash balance increased by $4.6 million, increasing the group cash balance by 22% to $25.2 million at quarter end. On costs, Kanmantoo delivered an all-in sustaining cost of $6.20 per pound of payable copper sold, within the guidance range of 2026. Adjusting for sales timing, the all-in sustaining cost on a produced basis was $5.65 per pound, which better reflects our underlying cost performance and ongoing cost reduction initiatives. Overall, we're on track to deliver the 2026 production and cost guidance. As mentioned last quarter to you'll start to hear us referring to copper equivalents more frequently. This number has become more relevant as we increase Nugent mining, which has higher gold and silver grades. During the March quarter, we delivered 872 ounces of gold and over 24,000 ounces of silver, bringing our copper equivalent produced tonnes to 3,671. Mining is advancing through the interpreted pinch zone. Both stope volumes and grades are showing improvements. Ore mined was stable above 400,000 tonnes, making March the second consecutive quarter at a 1.6 million tonne per annum run rate. We'll have the third production driller arriving during the June quarter, enabling the next planned increase in run rate to 1.7 million to 1.8 million tonnes by the end of the June quarter. This rig is part of the program to insource our production drilling, which is expected to reduce our ongoing operating costs. Processing plant performance remains steady with our copper recovery at 95%. To date, we have not experienced any diesel supply constraint. Being close to Adelaide and the port material reduces our supply chain risks, and our processing plant operates on grid power, also reducing our exposure to fuel costs, as well as giving us access to over 70% renewable energy. During the quarter, the first stage of the Emily Star exploration drive was completed, enabling shorter and more targeted holes to close out information gaps within the Emily Star mineralization. The 2026 diamond drill program at Emily Star commenced shortly after the quarter end on the 4th of April. We also commenced the development of the Kavanagh North exploration drive in preparation for the planned 2027 diamond drilling program. Both Emily Star and Kavanagh North form important parts of the pathway for Kanmantoo to become a 2 million tonne plus operation. Underground diamond drilling continued to progress according to plan with over 17,000 meters completed by quarter end. Underground diamond drilling at Nugent has intercepted copper-gold mineralization with core intercepts of 8.5 meters at 3.28% copper and 5.8 meters at 1.4% copper. We also received the assay results for the final two Emily Star drill holes from the 2025 drilling program, and these notable results were 7.25 meters at 1.6% copper and 4.6 meters at 1.57% copper. These results continue to demonstrate the continuity and grade of the Emily Star system. Surface drilling targeting the depth extension of the Kavanagh system is also progressing well, with over 1,400 meters drilled during the quarter. On our broader tenement holding, we relinquished over 2,000 square kilometers of ground during the quarter, allowing us to focus on the high priority prospects within our portfolio. One such target is the Kanappa target, located approximately 50 kilometers northeast of Kanmantoo. Last week, we defined a Kanappa exploration target and received regulatory approval to commence drilling. I'll now pass on to Luke to discuss the financials. Luke Anderson: Thanks, Bob, and good morning, everyone. I'll now walk you through the financial performance for the March quarter. All amounts I refer to are in Australian dollars and all unit cost metrics are calculated on a copper payable pound sold basis unless otherwise stated. As Bob has mentioned, the March quarter marked a strong start to the year and reflects several ongoing activities to improve the mine and its financial performance. The headline results include record underground quarterly copper production of 3,120 tonnes was achieved at an all-in sustaining cost of $6.20 per pound, within the upper end of the 2026 guidance range of $5.75 to $6.25. 2,842 tonnes of copper payable was sold at an average realized price of $16,629 per ton. Also, Kanmantoo generated $14.6 million of operating mine cash flow, contributing to net group cash flow of $4.8 million for a cash balance of $25.2 million at quarter end. Before turning to the detail, I would note that with the reclassification of Hillgrove to a producing entity by the ASX, we are no longer required to produce an Appendix 5B and have included a full cash flow table in the quarterly for the first time. Revenue increased 5% for the quarter to $53.8 million, reflecting higher copper and by-product pricing. This was also achieved despite an increase in concentrate inventory to 1,105 tonnes due to the timing of concentrate sales. Operating costs increased by 2% quarter-on-quarter to $39.3 million, reflecting higher fuel and transport costs, and with Nugent now classified as an operating asset with more costs to expend. The operation spent $2.3 million on major growth capital, with $1.4 million spent on Emily Star and $600,000 on Kavanagh Drilling to identify the fifth swell zone. Overall, mine operating cash flow for the quarter increased 16% to $14.6 million to generate total group net cash flow of $4.8 million. This has seen the company's cash balance increase to $25.2 million at March 31, with a trade and other receivable balance of $6.5 million and unsold concentrate of $4.3 million. The copper market remains strong despite some volatility due to the current geopolitical situation. Copper prices have continued to increase this year, closing at USD 12,160 per tonne at March 31. The increasing price levels have been driven by some important short-term developments, including supply disruptions at several major mines and a buildup of U.S. copper inventories due to tariff uncertainty. They have also been underpinned by some underlying factors, such as challenges in developing new copper mines and the anticipation of strong demand growth from electrification and artificial intelligence. These dynamics contribute towards a structurally tighter market for copper concentrate and Hillgrove is well positioned to benefit from the current market environment as we grow production. Higher copper prices saw the average realized price for copper sold during the quarter of $16,629 per ton, which included delivery into a number of lower priced hedges. On hedging, the company closed out 1,650 tonnes of copper hedges at an average price of $14,390 per tonne during the quarter. As the hedge price was below prevailing spot prices, these settlements tempered the revenue benefit from the stronger copper market. At March 31, the company had 2,200 tonnes of copper hedges outstanding at a weighted average price of $14,559 per ton, which is scheduled for delivery from April 26 to September 26. No new hedges were entered into during the quarter. Now moving to costs. All-in sustaining costs for the quarter decreased slightly to $6.20 per pound compared to the December quarter. The unit all-in sustaining cost base was skewed by concentrate shipment timing, as tonnes of payable copper sold were lower than the December quarter. All-in sustaining cost on a payable copper produced base was $5.65, which is more reflective of the cost reduction initiatives realized despite increasing fuel and transport costs. Unit mining costs increased to $4.16 per pound of payable copper sold, driven by lower payable copper sales and a higher proportion of operating development at Nugent ahead of the planned production ramp up and some impact from higher fuel costs. Higher diesel prices have not had a material impact on site operations as diesel only accounts for around 3% of operating costs, given our relatively short underground mine hauls and the processing plant operating on grid power. We have, however, experienced some concentrate transport costs increasing in line with broader fuel pricing environment. On the corporate front, a binding tailings processing agreement was executed with Heavy Minerals for the extraction and sale of garnet from the Kanmantoo process tailings and tailings storage facility. An initial payment of $50,000 was received at the signing of the agreement. If Heavy are successful in their project to extract garnet, the agreement will see Hillgrove benefit from an ongoing royalty stream. The transfer of our standing rehabilitation liabilities to Heavy upon the closure of the mine. In summary, a good quarter. Record copper production. An increase in cash balance of $25 million from strong cash flow generation. Costs within guidance, and on track to continue to grow the operation. I'll now pass back to Jane for any questions. Jane Brunton: [Operator Instructions] First question comes from Carlos. Carlos, please go ahead. [Operator Instructions] Our second question come from Chris. Chris, please unmute and go ahead. Christopher Drew: Thanks, Jane. Can you hear me, guys? Robert Fulker: Yes, we can, Chris. It's Bob speaking. Christopher Drew: Nice quarter, guys. Well done on that. Just a couple of questions from me. Can you talk through a little bit more where you're at in terms of the pinch-and-swell zone, the understanding there, and perhaps what we should be thinking about in terms of grade over the next quarter or two, please? Robert Fulker: Yes, no worries. Thanks, Chris. We are working through it. As we said last quarter, it will be the first two quarters of this year. We are starting to see the grades lift and the zones getting wider as we actually develop down through it. We're pretty comfortable that the second half of the year, as we talked about earlier in the year, will be better. The grades this quarter will be commensurate with what we got last quarter, and then they'll start lifting again in the third quarter. Our tonnages will go and will start to lift, though. This third production drill rig will give us the ability to start boring and firing stopes up to that 1.7 million to 1.8 million tonne rate. We should start to see our production rate lift. That production drill rig is due in the next couple of weeks. Christopher Drew: That's helpful. A second question, and I note the comments on the diesel supply. That's really helpful. Certainly doesn't look like a major cost risk, but are you able to elaborate at all on the supply side from the sound of it? It sounds like you're good in the shorter term. Do you have any visibility beyond that sort of availability from suppliers and things like that? I appreciate that might be a bit tricky to answer, but appreciate any thoughts you might have on that at the moment. Robert Fulker: Yes, I'll answer a question you didn't ask. Fuel is around about 3%, Luke, of our total costs, 2.5% to 3%. It's not a big percentage, but it is a percentage that we keep an eye on. We're sort of focused on the delivery on a daily and a weekly to make sure that our supplies on site don't diminish. We haven't seen any constraint to the delivery to date. It seems from Luke, the supply seems to be constant coming into Adelaide. Up till now, it's been okay. We do have and we do get updates from SACOME, which is our industry body here in the government, on a weekly basis. On site, they track it on a daily and a weekly basis of deliveries. We're very focused on it, but we haven't seen any issues to date. Christopher Drew: Great. Thanks very much, Bob. That's all from me. Thanks. Robert Fulker: No worries. Carlos, can you go off mute yet? Carlos Crowley: Yes. Thanks, Bob. Sorry about that. Look, just a brief question on Emily Star. Can you just elaborate a bit more on timing and, yes, there's a reference to considering two options for a portal at surface as well, in addition to the underground access. Robert Fulker: Yes. Carlos Crowley: Are you obviously trying to finalize that before June or what's the timing for that and can you just give us a bit more color on that comment, please? Robert Fulker: Yes. No problems, Carlos. We've finished the first stage of the drilling. Sorry, the first stage of the development. We've started diamond drilling of that upper section. That's commenced. We've actually started assessing multiple decline/portal accesses to get a surface access into Kanmantoo and to Nugent. It will give us access to Emily Star as well. We're just assessing that at the moment because we're doing studies on the geotech regimes and the best location from a closeness to the plant. We are doing those now in preparation for decision still in the third quarter, so post-June this year. We will have the drilling completed. We will have the data ready to make a decision, an FID decision, for Emily Star towards the end of this quarter, beginning of next quarter. That's what our plan has been. The reason for the two locations is we've got two locations that from our initial assessment came out as being potentially acceptable. We're just doing further assessments from a geotech and a track route/TKM perspective. We're just doing those assessments now in preparation. Carlos Crowley: Yes. Thanks, Bob. Robert Fulker: Anything else? Carlos Crowley: No, that's it from me. Cheers. Jane Brunton: Next question coming from Paul. Paul, please unmute and go ahead. Robert Fulker: Paul, can you hear me? Can you go off mute? Jane Brunton: [Operator Instructions] Robert Fulker: Paul, did I hear you come online? Paul Hissey: Yes. Sorry. I got a phone call, which kicked me off this conference call just as you asked me the question. Just to follow up Carlos's question on Emily Star, and we're just, I guess, unpacking that a little bit more over the medium-term, can we expect that to operate in parallel to existing ore feed or sequentially so you'll move on to this mining area exclusively over the medium term? Robert Fulker: The idea, Paul, is that we use Emily Star to supplement the feed from Kavanagh and Nugent. That's how we go above that 2 million tonne per annum rate. In Kavanagh North, I would expect the same. The diamond drilling is showing that the Kavanagh system continues to go down at depth. I'm not expecting that to stop anytime soon. The drilling into that fifth ore zone has started to hit mineralization. We haven't got any assays back yet, but as soon as we do, we'll get it out. These additional ore zones will supplement the current. It won't replace it. I guess what I'm trying to say is this helps us go above that 2 million tonne rate. Paul Hissey: Yes. In terms of paying for it, would I be right to assume that the CapEx guidance you've provided is for the ongoing studies of these only? If and when the time arrives to properly commit, you'll disclose an incremental level of expansionary capital to bring them online? Robert Fulker: Correct. What we said earlier was that the major capital that we put in there was just to get to FID for Emily Star. Paul Hissey: Yes. Robert Fulker: As well as some other minor, major capital. Once we make that decision, then we'll come out and say how much it was. If you remember back last year, we delivered Nugent production for $21 million. We said we estimated that Emily Star would be in that $23 million to $25 million. We don't know what that is yet, but that's the sort of range of numbers that we're thinking about for Emily Star to come online. Paul Hissey: Great. Just a couple of other ones. Just to clarify the costs, and I think everyone's sort of quite focused on diesel, but Luke, did I hear you say it was 3% of the mining cost? Bob, you said it was 3% of the total cost. Can I just clarify which one of those it is? Is that 3% at $1 a liter where it was four months ago? Or is it 3% at, I don't know, probably $2 and change you're paying now? Luke Anderson: Yes, it's 3% of our total cost. It's reflective of the increase, but not over a full period. Fair to say, we could see that sort of percentage increase a bit more if the price stays where it is, over a consistent basis. Robert Fulker: If you'd asked me. Paul Hissey: Yes. Robert Fulker: In January, Paul, what it was, I would've been saying 2% to 2.5%, so. Luke Anderson: Yes. Paul Hissey: Yes. I thought I read yesterday that Rio bought diesel last year for AUD 0.80 a liter, which is quite remarkable. Anyway, all right. We clarified that. Just one last question, if I may. Just on the deal around the garnet. It does seem at the margin, but maybe there's some benefits there around rehab and your obligations at the end of the mine life. Can you just expand a little bit more on, Luke, the comments you made about perhaps some of that obligation being passed on to the other party? Just in practical terms, what does that all mean? Luke Anderson: Yes, look, for us, there's obviously a bit more work that they need to do, to get the project up and going. For us, it just gives us a bit of a revenue stream. As you rightly point out, importantly, it would allow us to hand over our rehab liabilities when we close the mine. It would provide a long-term future for the Kanmantoo operation beyond our activities. Yes, they're the main benefits. Robert Fulker: I guess from my perspective, Paul, there's the royalty through our operation, which is, it's not significant. It's a small amount, but it's nice. It's not our main game in town. Our main game is copper and copper production at Kanmantoo. But that ability to hand over the lease for a couple of reasons. One is long-term economic benefit to the community. It's demonstrating that a mine can have a life after what was originally thought the primary reason for it to be there. It does actually give the rehab liability to Heavy Minerals, because they will be operating the mine through their life of whatever they manage to get their life to be. As Luke said, there's still some way to go for them to get into production, but it's a nice sort of way to look at how mining can actually help the community, help the environment, and work together to get a better outcome for the long term. Paul Hissey: Yes. Just to follow up, did I hear or read correctly that via them reprocessing some tails, it will sort of create some incremental capacity for you guys, so potentially negate some of the need for future TSF lifts? Robert Fulker: I'll answer it, but I might not answer it. If I don't answer it, tell me and I'll try and answer it. Our tailings stream has 30% of garnet in it. They aren't taking all of that out of our tailings stream. They're taking somewhere around 5% to 10% of the garnet out of our tailings stream. That will obviously be a reduction in our deposition on the TSF or tailings storage facility. It changes over time depending on how much they draw of our tailings stream and how much they actually recover. It does have some beneficial benefits to us. I wouldn't call them material at this stage, but it does have a little bit. Jane Brunton: [Operator Instructions] There are no further questions at this time. I will now hand back to Mr. Fulker for closing remarks. Robert Fulker: Thanks, Jane. In closing, the March quarter was a strong start to the year, with consistent operating performance and an improved balance sheet. We remain focused on creating shareholder value through safe and cost discipline operations, continuing the production profile ramp-up and advancing Emily Star as a potential third ore source. Finally, investing our capital prudently. We are on track to increase the mine run rate to a 1.7 million to 1.8 million tonnes per annum by the end of June, and to deliver the 2026 production and cost guidance. Our next goal is to develop a pathway to beyond 2 million tonnes per annum. That concludes our webinar today, and I'd like to thank everybody for listening in, and you may now disconnect. Thank you, everyone.
Operator: Ladies and gentlemen, welcome to the Temenos Q1 2026 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Takis Spiliopoulos, CEO and Interim CFO. Please go ahead, sir. Panagiotis Spiliopoulos: Thank you. Good afternoon, good evening. Thank you for joining our Q1 '26 results call. As usual, I will talk you through our key performance and operational highlights before updating you on our financial performance. Starting on Slide 6. We delivered a strong performance in Q1 '26 across all our key metrics and our product revenue continues to grow above market. This follows on from the strong performance in 2025, where we delivered above-market growth in product revenue in the first year of our strategic plan. The sales environment remained stable through the quarter. And in fact, we had a particularly good performance in the Middle East and Africa, signing a number of deals with new and existing customers. Importantly, we also saw good momentum in the U.S. As we discussed at our Capital Markets Day, we have a strong pipeline of deals in the U.S. and several of these are progressing nicely through the sales process and we fully expect to sign some of them this year. Of course, it is hard to give precise timings given the complexity of the deal process. But I'm confident we will convert the U.S. pipeline into revenue and this is one of our key measures of success for the business this year. We also delivered another strong quarter of growth for maintenance, again, largely driven by premium maintenance signings as we continue to upsell across our customer base. We have a well-funded investment plan in place for the year, with planned incremental investments of $28 million to $35 million partially offset by around $10 million of cost efficiencies. One quarter into the year, we are on track with our investment plan, and I would like to highlight that we made several senior hires in sales and product. I'm also pleased to announce the hiring of our new CFO, Daniel Schmucki, who will join us on August 3 this year. Daniel brings a wealth of experience, most recently as CFO of SIX Group and before that, as CFO of publicly listed Zurich Airport. Daniel has a strong track record in building and leading high-performance teams in complex international businesses and he will be an excellent addition and strong partner for Executive Committee and senior management. Turning back to the business. We delivered good operational leverage in the quarter with a cost base growth from investments we made last year, offset by strong revenue growth in Q1 '26. And lastly, we have reconfirmed our 2026 guidance and 2028 targets. Moving to Slide 7. I'd like to highlight some of the key deals with clients in the quarter across different geographies and peers. We had a number of expansion deals with existing clients, including a Tier 1 bank in Japan for new core and payments solution and a leading Swiss private bank expanding their payment suite across several geographies. In SaaS, we extended our partnership with a digital arm of a leading bank in GCC, and we signed with a leading bank in APAC for core, payments and FCM to support their launch of a new digital bank serving retail, corporate and wealth clients. The diversity of deals across customer tiers, geographies, business models, products, and delivery types demonstrates the breadth and depth of our banking domain knowledge, customer trust and product capability. Turning to Slide 8. I'd like to highlight the value we are delivering to our customers. Given all the focus on the Middle East, I'd like to show one success story from the region this quarter with Al Salam Bank in Bahrain going live on our core banking platform. They selected Temenos to future-proof their business as we were able to demonstrate our platform's scalability and support their future growth. They wanted a platform that could enable market-leading digital services, support their AI initiatives and help them meet their regulatory compliance requirements. In the implementation, we replaced multiple siloed legacy systems with 2 acquired banks migrating to our single platform, delivering a significant increase in capacity and throughput and enabling the bank to launch a new digital app for real-time integrated services, thus creating new revenue opportunities. This is a great example of what our platform can do for banks looking to scale with confidence and reflects the kind of partnership and execution that sets Temenos apart. Moving to Slide 9. We showed this slide at our Capital Markets Day in February, but I want to reiterate our positioning in the AI era. AI is clearly reshaping technology markets. But banking is not a typical technology environment, and that distinction matters. Banks operate at the intersection of 2 of the highest thresholds in technology, product complexity and customer risk aversion. This is not an environment where generic AI solutions can simply be dropped in. The requirements are fundamentally different, and that is where Temenos' competitive moat is strongest. On the product side, banks demand trusted domain expertise that handle highly complex workflows, proprietary data and platforms that can be extensively audited. These obligations do not shrink with AI. As banks automate more, these obligations become more concentrated in critical systems. From a customer risk perspective, our solutions are mission critical. Banks operate in one of the most highly regulated sectors and have 0 tolerance for errors or hallucinations. Every decision must be deterministic. The cost of getting it wrong is existentially high. That's why we sit in the upper right quadrant of this matrix, where both product complexity and customer risk aversion are highest as is the threshold for AI adoption. But the benefits of AI are real and adoption will increase over time, and Temenos provides the regulated backbone for banks globally. By embedding AI into our platform, it allows customers to automate, scale and innovate without compromising on compliance or reliability. We are not only protected from AI innovation from peers, incumbents and customers, it is increasingly foundational to our right to win. Turning to the next slide. We have a well-defined AI strategy to capitalize on our advantage across our products, our process and our people. Our strategy will lower total cost of ownership for our customers to embedding AI across our products, and it will speed up our software development life cycle and support customers with GenAI assistance. And lastly, it will empower our people to leverage AI and enable greater productivity. As I mentioned before, the adoption threshold for AI in the banking sector is very high, where there is high product complexity and significant risk aversion. This combined with deep customer trust and domain knowledge creates a strong competitive moat for Temenos and gives us the right to win in the AI era. Moving to Slide 11. I'd like to give you an update on the progress we made in the first quarter on executing our strategy. Our product teams have made good progress on the product road map and we are on track for several new product launches in the second quarter across core, digital, AI and composability while also increasing the range of AI capabilities embedded in our products. We have continued investing in the business, in particular with several senior hires in our global sales organization. These individuals bring significant expertise to Temenos to further support and drive our core banking sales pipeline as well as expanding our team responsible for delivering large complex deals with Tier 1 banks in particular, which requires a specific skill set and the ability to manage highly complex negotiation to a successful closing event. We also launched our new pricing and packaging in the first quarter, which will drive better value for our clients and for Temenos by simplifying our approach, especially for deals involving multiple modules or products. And lastly, we continue to roll out AI tools across the company, most notably including the rollout of Anthropic in our product teams to enhance our software development life cycle. I will now run through our Q1 '26 financial highlights, focusing on constant currency non-IFRS financials. On Slide 13, we delivered strong ARR growth of 13% and despite the headwind from the BNPL client that moved off our platform at the end of last year. For those interested, we have shown the underlying growth rates for all our key metrics this quarter in the appendix excluding the impact of the BNPL client. We had good growth this quarter across all our recurring revenue lines, both subscription and SaaS as well as maintenance. And this was also reflected in the strong product revenue growth of 14%, well above the market run rate growth. Turning to Slide 14. Subscription and SaaS grew 12% in Q1 '26 continuing the strong performance from the previous year. As I mentioned earlier, there has been so far no visible impact from events in the Middle East with the region having a strong quarter in terms of deal signings with a good performance in SaaS in particular. Outside of EMEA, we also saw broad-based growth across client tiers and products. This was complemented by strong growth in maintenance and also decent services growth, which together drove total revenue growth of 13% in the quarter. Moving to Slide 15. Both non-IFRS EBIT and EPS grew 20% in the quarter. The year-on-year increase in our cost base is reflecting the significant investments we made throughout 2025 in product, go-to-market and operations. However, this was more than offset by the strong revenue growth and benefits from efficiency gains in the quarter. Pro forma non-IFRS R&D costs were up 14% year-on-year in constant currency as we are accelerating our investments into product as communicated in February. All this together demonstrates the strong operational leverage in our business. Premium maintenance, in particular, attracts a high margin and continues to help drive the growth in profit. Let me highlight a few items on Slide 16. ARR stands at $860 million despite the headwind from BNPL giving us excellent visibility on future recurring revenue and cash flow. The 15% growth in maintenance revenue was largely linked to strong premium maintenance signings as our sales teams continue upselling to our existing client base. We continue to guide for maintenance growth of 7% to 8% for the full year as we are taking a prudent view on the remaining demand for premium maintenance across our customer base. On profitability, EBIT margin improved by 190 basis points to 32.7% year-on-year, reflecting strong operating leverage and some benefit from cost efficiencies. Moving to nonoperating items on Slide 17. Net profit was up 19% in Q1 '26 and EPS grew 20%. Our EPS continues to benefit from the strong growth in profit and the lower share count from the shares canceled at last year's AGM from prior buybacks. We saw an increase in net finance charges and taxes in Q1, partially offset by FX. We had a slightly higher tax rate this quarter with the expected full year tax rate unchanged at 19% to 21%. On Slide 18, free cash flow for the quarter came in at $60 million, growing 22% year-on-year, driven by strong ARR growth, good EBIT to cash conversion and our disciplined approach to capital allocation, which we outlined at our Capital Markets Day in February. Our strong growth in free cash flow is a key metric for us and is in line with our expectations, given we are now in the fourth year since introducing subscription contracts in 2022. We raised our 2028 target for free cash flow in February this year, reflecting our confidence in the strength of our operating model, balance sheet and cash generation. On Slide 19, we set out our changes in group liquidity in the quarter. We generated $204 million of operating cash and bought back $104 million worth of shares as part of the buyback launched in December. We ended the quarter with leverage at 1.3x comfortably within our target range of 1.0 to 1.5x. Turning to Slide 20, a few comments on our debt, leverage and capital allocation. We completed our share buyback program for a total of CHF 100 million in April 2026. With shares representing 1.9% of registered capital purchase to be used for general corporate purposes. This was the second share buyback we launched in 2025 with the first for CHF 250 million completed in August 2025. The shares purchased in that larger buyback are to be canceled at the AGM in May this year. Our reported net debt stood at $609 million at quarter end. We reiterated our disciplined approach to capital allocation at our Capital Markets Day in February. Our priority is to invest in our business, in particular, to accelerate our R&D road map and using share buybacks to ensure capital efficiency and enhance shareholder return while maintaining flexibility to support our growth levers through bolt-on acquisitions. We also have a progressive dividend policy, which reflects the recurring nature of our business model. Next, we have reconfirmed our 2026 guidance, which is non-IFRS and in constant currency, except for EPS and free cash flow, which are reported. The guidance reflects the strong performance in 2025 and the investments we made last year which we are now starting to benefit from. The guidance includes the headwind from the termination of a BNPL client in 2025, which we have given on the slide. There will be no further headwind from this beyond 2026. And lastly, we have reconfirmed our 2028 targets based on our strong first year of execution, confident in our strategic positioning and good visibility. Operator, please can we open for questions. Operator: [Operator Instructions] Our first question comes from Charlie Brennan from Jefferies. Charles Brennan: Congratulations on good results. Maybe I'll start just with a geographic question, if I can. If I've done the numbers right, it looks like most of the growth in the quarter has come from Middle East and Africa, perhaps maybe not what I would have expected given some of the news flow that we've seen. Can you give us a sense of whether you felt any disruption in March and could the numbers have been better? And I guess, aligned to that, it looks like the U.S. was broadly flat in the quarter. Was there any sense of disappointment for you in the U.S.? Panagiotis Spiliopoulos: Charlie, thanks for the question. So maybe first on, I think, the situation in the Middle East. And clearly, when they started at the end of February, we, like everyone else, were worried about the safety of our people. So we went into this like prepared from past events like COVID. So the company handled this really well and especially locally. So thanks to everyone. Now from a business perspective, I think it's worth taking a step back in Middle East and Africa. These are 2, let's say, large regions broadly balanced in terms of contribution. So both the Middle East and Africa, with Africa having seen, in the past, quite strong growth, stronger than the Middle East. We have, throughout the month and actually also into April, seen overall a stable sales environment and also specifically to the Middle East and Africa region -- or Middle East, no change. So I think this is important to note. And while there was some limited disruption of travel at times, we should note and if you look at the situation on the ground, governments are putting significant resources and everything they can to keep business operating as normal. This is what we saw throughout March. So yes, no impact seen in terms of -- no negative impact seen so far, either on pipeline generation or conversion rates, and this is what we have seen also in the first few weeks in April. Now looking at the other regions. I think on specifically the Americas, U.S. developed actually as planned, LatAm as well. Europe was probably also in line where we saw some, I think -- because we had a tough comparison base with Asia Pacific. But overall, I think the performance was pretty much in line what we expected. We didn't -- I think we didn't save deals or anything for Q2. So nothing actually specifically to call out in terms of the regional performance. Operator: The next question comes from Frederic Boulan from Bank of America. Frederic Boulan: If I can ask a question on the revenue guidance. So we have subscription and SaaS growth of 12% in Q1. You've kept full year guidance unchanged at around 9%. It would be good to discuss any specific phasing we should expect or specific points. And maybe we can also extend that question to the EBIT guidance, 20% in Q1, guidance of 9% for the full year. So here as well, I mean, any specific items we should have in mind? Or is just a guidance framework prudent at this stage? Panagiotis Spiliopoulos: Fred, so on guidance, I mean, we've never raised guidance after Q1. Q1 is like every year, the smallest quarter. There are still quite a number of uncertainties out there on the macro side. We don't know what's going to happen. So I think we having a good start is really helping with the full year guidance visibility. But at this point in time, I think it's the right approach to stay prudent. Also, if you look at the details, clearly, we had good performance in subscription and SaaS and maintenance and services. So across the board, we invested as planned. So the upside ultimately on the growth came really from stronger top line, demonstrating the operating leverage. Yes, we're tracking ahead on all KPIs. Q2 is a bit a more difficult comparison base. Let's see where we end up then. But for now, I think it's the right prudent approach. Operator: The next question comes from Toby Ogg from JPMorgan. Toby Ogg: Maybe just bigger picture one. We've obviously seen over the last couple of quarters, better momentum, and that's obviously been translating into upward revisions to expectations. When you take a step back what do you think are the key drivers that have been yielding that upward momentum? Panagiotis Spiliopoulos: Toby, good question. Overall, if you look at the track record over the last few quarters where we put a lot of effort into transforming Temenos across the organization, clearly accelerating on the product road map, putting a lot of investments into the company across go-to-market and also product and operations. All this on the back of, let's say, stable sales environment. We have seen an environment where banks were printing good results. And I think that's also the expectation going forward. It's also -- so that's -- if you want a stable sales environment, coupled with a more determined, more focused organization is clearly something that's helping us on top, and this is where we always believe it's worth and the first time we do upfront investments, we're reaping now the benefits of that. We -- if you go back early 2025, we said it's going to be an investment year. We've done the investments. We said in February, we're accelerating the investment because there is a very, very large revenue opportunity. And this is what we're seeing the benefit from. And the one element, what I mentioned, expanding what we call the large deal team. This is also driven because we see, as we've seen in the past years, more and more large deals coming into pipeline, which -- where we need -- where we want to have dedicated resources driving those deals end-to-end. And this is across the regions, and this is across the tiers, not just Tier 1s, so this is -- again, you need to invest ahead and reap them the benefits, and this is what we are seeing and obviously striving for more. Operator: The next question comes from Grégoire Hermann from Barclays. Grégoire Hermann: Maybe just I think you had clearly a good start into the year. But I think Q2 is maybe a very difficult comp. Can you tell us maybe how is the pipeline coverage looking like next quarter? Can you provide any indications on the level of growth we should expect for the second quarter, please? Panagiotis Spiliopoulos: Grég, so as we said at the start of the year, that was 2 months ago when we initiated -- when we issued the initial guidance for 2026, we said the pipeline coverage is there for delivering those numbers, also stating we want to be prudent. So 2 months down the road and as you would expect with more salespeople being onboarded and being now live and generating pipeline, the pipeline evolution has been very pleasant to put it like this. What we also said is there are a number of large deals embedded in our full year guidance, and we didn't sign any large deals in Q1. We had a good start in Q2. So we're always taking a risk-weighted approach to large deals, yes? Not all of them need to come. So we're confident that we can grow our SaaS and subscription as well also in Q2 despite the, yes, tougher comparison base. Operator: The next question comes from Mark Hyatt from Morgan Stanley. Mark Hyatt: Congrats on the results. I've just got 2, please. Firstly, if we just touch on the maintenance side of things. Obviously, you called out strong growth there, 15% and strong premium maintenance signings were a driver of that. Obviously, you've given some guidance and help around how we should think about the full year result. But could you just tell us a little bit more around how sustainable that tailwind is for the rest of the year? How should we think about the phasing? And if you can quantify how much of that upsell opportunity you've already worked through, that would be really helpful. And then secondly, maybe just a bigger picture question on AI. Could you talk about what you're hearing from bank's C-suite members today on the AI type priorities? Are they still mainly focused on productivity uplifts and customer-facing use cases? Or are they starting to think about AI more deeply being embedded in core banking and operations? How are they engaging with Temenos as a strategic partner for that at this stage? Panagiotis Spiliopoulos: Mark, so on maintenance, yes, 15% growth was a bit ahead of the full year growth rate we have envisioned, we said about 7% to 8%. But you need to think about it's Q1 '25, which posted a relatively benign comparison base, which is going to become incrementally more difficult to lap. And clearly, we see -- we're always positively surprised and continue to see a good uptake of our premium maintenance offerings on the one hand. But it's also we have -- we see very little downsell or attrition on that, yes? So that helps basically with the -- on the renewal of these maintenance offerings. Overall, I'm not going to -- I can't give you that level of detail how much opportunity there is still there. But clearly, we are -- it's still a very small part of our overall maintenance number. And therefore, I think the growth will continue. I think with 7% to 8% for the full year, clearly, growth rates probably coming down into single digits for the rest of the quarters. I think this is the phasing we would see. And then longer term, so '27 and beyond, we said about 6% -- 5%, 6% is the right number. Again, let's stay prudent because we've been positively surprised before, but I think we're now seeing really the tracking according to what I just said. On AI, there is -- basically, there are 2 areas where we see demand from our banking customers. On the one hand, is overall use cases around the core, if you want, whether it's in digital or something like FCM AI. And this is where we're going to launch a number of new ideas, a number of new products this year. What we do with our clients, with our banks is really develop those use cases in what we call a design partnership, we're trying to find ideas where we can basically take across our installed base. If something is very bank specific, we're not the ones to basically do the custom development of that. But if we find AI use cases like FCM AI, this is something we can then deliver to our installed base. The other area where I think clients are very keen to get AI expertise is -- and this is the main questions they're asking us, and we're developing some ideas, trialing some ideas, both ourselves, but also with partners is can you, with the help of AI, help us accelerate the implementation time line, the upgrade time because this is where they would save a lot of money. So far, we don't have discussions on AI in the core, but really those areas, specific use cases around the core in digital, in FCM and then can you help us accelerate the implementation and the upgrade time because this is where they spend a lot of money. And we have some ideas, but I think it's still early to talk about. Operator: The next question comes from Pavan Daswani from Citi. Pavan Daswani: Could you maybe come back to the EBITDA growth guidance question, given the strong start to the year. Are there any kind of phasing of costs that we should be thinking about for the rest of the year particularly, you mentioned some senior hires in the quarter? And are there any further investments needed to drive the pipeline conversion that you kind of aim for, for the rest of the year? Panagiotis Spiliopoulos: Pavan, so there is, I think, nothing unusual what we plan in terms of the phasing this year. As you heard, we have an investment budget of $28 million to $35 million, which is clearly something we're putting in place, especially in the first half of the year. There's also the exit cost. We exited 2025 with our fully invested cost base. There is clearly -- if we continue to see if there is upside on the top line, this will -- this shows the operating leverage on this. But again, as with the top line, I think we want to stay prudent. We want to see -- so far, we see the investments coming through. There is nothing extraordinary planned. The bulk of investments really go into product acceleration. So -- and this will continue throughout the quarter. So I think the cost base as you would expect, let's say, normal seasonality. And so let's say, Q2 will be maybe, I don't know, $12 million to $15 million higher as we had last year, yes, and then also increase slightly in Q3. And then in Q4, you have basically all the variable costs coming in, yes. So this is overall the $50 million cost increase year-on-year. Operator: The next question comes from Mohammed Moawalla from Goldman Sachs. Mohammed Moawalla: Congratulations on the quarter. I just wanted to concentrate a bit on North America. I know sort of 18 months back with regard to add more capacity, you've obviously been bringing some of that on. Can you give us a sense of sort of the pipeline? I know you touched on potentially some larger deal wins to come how is North America kind of a key part of that? And more importantly, obviously, in terms of the strategy more broadly for North America, are you focusing more on that kind of Tier 2 of regional banks and credit unions versus a very long sales cycle of kind of Tier 1 deals? Panagiotis Spiliopoulos: Mo, on the U.S., so we have seen and we continue to see good progress on a number of -- a lot of deals through the pipeline, as you would expect. Now given this is all new logos and new procurement, it's usually difficult to quantify the time until really you have -- from being selected until you have the contract signed. But this is what's driving the pipeline and where those deals stand, which is driving our confidence that they will get converted in 2026. Now if I look at the pipeline overall, and we always targeted those 150, 160 banks we have a very substantial number of these banks is in our pipeline, which shows also the effectiveness of building pipeline. We still have to convert those and maybe not all will turn into deals. But clearly, that drives our confidence on the -- in the U.S. Now what we see is given we hired a lot of salespeople, what we also see is the U.S. innovation hub is really making a difference for the U.S. pipeline because it's something which we didn't have before. It's a different approach, and it's resonating well with prospects. The other thing which we didn't do before is investing upfront in not just go-to-market, but also the support organization and the backbone. And this is something clients want to see there happening because these are long-term decisions they're taking in the core space. So I think where we still have opportunities is that, as you mentioned, in larger deals, and this is why we're expanding the teams. This is not specifically to the U.S., but clearly also in the U.S. We still haven't moved away from a target market in the U.S. It's still the lower Tier 2, Tier 3 market as occasionally, you get also Tier 1 opportunities. But clearly, again, we're taking a very risk-weighted approach on large deals, whether they are in the U.S. or in any other country. So overall, we're feeling very confident about execution of the pipeline. Operator: The next question comes from Justin Forsythe from UBS. Justin Forsythe: Congrats on a good start to the year. Just a couple of questions from my end, if you don't mind. The first one, I just wanted to unpack that Middle East and Africa number a little bit more. Understood that you said earlier in the Q&A that Africa is contributing a little bit more than the Middle East. I think you talked a little bit about that win in Bahrain as well. Maybe you could just be a little bit more specific on the countries within Africa, which you're seeing strength and the type of banks which you're working with and what types of products you're selling them? Is it the Islamic banking solution? I think you've talked about that in the past? Or is it something else? And maybe what degree of continued strength in the Middle East is baked into the guidance versus closing of some of those U.S. deals popping through the pipeline? And then just a broader high-level question for my second one. Can you just talk a little bit about the mix within core banking between some of these different factors? So for instance, retail side of core banking, corporate, LMS and wealth, clearly, it encompasses a lot of different types of products. And what is expected to be the go-forward driver of growth, the most material go-forward driver of growth within those? Panagiotis Spiliopoulos: Justin, thanks for the question. Let me start with Middle East and Africa. What I said is it's broadly balanced in terms of size, but Africa had the -- more recently, the faster growth rates, yes? So if you look at back some of the last few quarters, yes? We don't -- I think if I look at the pipeline across both the Middle East and Africa, it's very strong. It's very healthy. And Middle East and Africa has been a strong performance over the last couple of years, a lot of structural reasons. So we don't expect any change or we don't assume any change in conversion rates, neither an improvement nor a deterioration for the rest of 2026. As we've shown on one slide, the -- we're doing everything in Middle East, yes. It's also picking up in terms of SaaS. We signed this Tier 2 bank where basically they expanded the core banking partnership with their basically digital subsidiary in GCC. So that's just one example. In terms of products, it's really front to back for many banks, but also core, also digital. I think wealth, we're seeing quite some pickup as well. Islamic banking that remains a key pillar. So it's really across the products we see for Middle East. On your second question, it's quite an interesting one. So wealth, I think we see wealth for especially the larger banks. We're especially dominant and play in the high-end ultra-high net worth piece. So that's for the wealth opportunity. If you look at pure core, it's mainly retail and corporate. What I would say is the last few years, so post COVID, you saw a lot of demand for retail because this is where banks felt the pressure from basically the nonincumbents, yes, with price pressure. So they needed to lower the cost. So their investment was first and foremost in retail because they wanted to protect their offering, their profitability. I would say in the last 2 years because they basically fought off the nonincumbents to a large extent. Now their focus has turned more towards corporate. There is still very good profitability and banks want to protect and even expand profitability. And there is much less competition on the corporate side from non-incumbents, whether it's trade finance, treasury and so on. So this is where we see clearly -- from a pipeline perspective and from a demand perspective, this is clearly where we have seen the pickup in the last 2 years. Operator: The last question comes from Josh Levin from Autonomous Research. Josh Levin: Just 2 questions from me. Takis, you said there's no visible in -- can you hear me? Panagiotis Spiliopoulos: Yes, we can. Yes, Justin, yes, we can. Josh Levin: Yes, yes, yes, you said there's no visible impact so far from the war in the Middle East. But if the war resumes or oil prices stay high and we're heading towards sort of a global recession that some people are talking about, how do we think about how exposed Temenos is to that? How do bank executives think about sort of this as -- they're going to push through this because this is really a long-term project versus actually retrenching on spending on software because they are concerned about the recession? And then secondly, the Orlando investment hub, I think it's been open since June, so it's maybe a bit early, but any lessons so far, any successes, anything that's unexpected from that? I know it's a key part of the U.S. strategy. Panagiotis Spiliopoulos: Josh, yes, unfortunately, we don't have a crystal ball here at Temenos. So we take a prudent view on uncertainty and macro risks coming back to the Q1 performance and the guidance. So what we believe is -- and this is the lessons learned from the past, if you see -- as long as you see only a short-term disruption to anything, so short term being a few months, there is maybe a lower likelihood for a recession. If this keeps going and lasts into well into, I don't know, Q3, the second half, then probably you would expect to see an impact on overall GDP growth and maybe a higher risk for global recession. What we have seen, again, in the past is sometimes countries tipped into like technical recessions without any impact on demand for our software, yes? So we're not -- we have not been benefiting in upward cycles if economies were booming, but also being less affected in, let's say, more recessionary environments as long as there is no massive external event like GFC or COVID. So for now, the way we look at this is obviously being very alert on what's happening day-to-day. Again, the countries there, and we have most exposure is obviously Saudi and UAE, much less on the other ones. Clearly, the governments are doing everything to keep operating normally. They're open for business. And I think this is how we see the banks behaving so far, yes? So this is as much as we can say, again, taking an overall prudent view on what can happen and will happen. On Orlando, it's really a success story from different angles. It's on the one hand, we're getting very good, highly skilled people there. It's something we see resonating well also for our prospects. We have a lot of banks coming in, ideaizing, looking at what can be done. We have very interesting demos there. And it's really the hub where we keep investing and keep hiring as we do in India as well. It's -- we do a lot of 1 or 2, ultimately, a lot of U.S. product-specific development there, which is obviously also resonating well with clients. We're now about 70-plus people, and we'll keep expanding there because, yes, we have demand for U.S.-specific product, and we want to deliver, but clearly also have a strong pipeline in the U.S. So this will -- I'm very happy about the progress in Orlando. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Takis Spiliopoulos for any closing remarks. Panagiotis Spiliopoulos: Yes. Thanks, everyone, for joining us for this Q1 update. Looking forward to update you in July with our Q2 '26 results.
Ulrika Hallengren: Welcome to the presentation of Wihlborgs' first 3 months report 2026. Growth, cash flow and core business is our mission. And even if the world gives us some challenges, our region continues to deliver not only [Audio Gap] quarter in 11 years, but I see no new trend in this, just a reminder that a quarter is a short period. Net debt to EBITDA at 10.5x, good access to financing continues, and we have acquired our first premises in Carlsberg Byen in Copenhagen. And with some figures on that, the rental income was SEK 1.150 billion, a new record, the operating surplus SEK 800 million and in terms of property management SEK 520 million. The result for the period increased to SEK 548 million, corresponding to SEK 1.78 per share and EPRA NRV has increased by 10% to SEK 101.14 per share adjusted for paid dividend. A comparison of the rental income Q1 '25 and Q1 '26, indexation, plus SEK 13 million; acquisition, plus SEK 46 million; currency effect, minus SEK 12 million; additional charges, plus SEK 23 million, and completed projects, new leases and renegotiation plus SEK 35 million. And the net letting was negative with minus SEK 35 million, the first negative quarter after 43 quarters in a row with positive numbers. New leases of SEK 49 million and terminations of SEK 84 million. Even if every single termination is a loss, the volume of termination as such is close to last year and no drama in that, but the amount of new leases in Q1 are too low to meet that. The year started quite slowly, picked up a bit. But then when the war in the Middle East was a fact, all discussions were pushed forward. Over 50% of the termination was in Denmark, and we know that the market there is quite strong, so I expect that we will see a pickup. We also had SEK 8 million in Sweden from bankruptcies that affected the result with minus SEK 1 million, but terminations had a yearly rental value of SEK 8 million. Now, in April, things have changed, and I think the list of possibilities and the ongoing discussions actually are quite good. That doesn't mean that things will be easy ahead, and I cannot promise positive net lettings in the coming 4 to 3 quarters, but at least we have a number of good discussions ongoing. Here are some of the tenants that we have signed during Q1, the defense industry, which, for example, the new and expanded lease with MilDef is a growing sector. And we also see some examples of interesting and growing tech companies like Intermail and the tech hub Hedge in Helsingborg also continues to attract innovative AI companies. Here, we have the net letting in a historical perspective, lettings in green, terminations in light blue and dark blue stacks are the net letting. We don't win every lease opportunity, which is annoying, but the hit rate over time is good, and let's see how we can develop this further on. And the list of our 10 largest tenants in alphabetic order, strong customers, and they contribute with 90% (sic) [ 9% ] 90% of rental income, 7 out of 10 are governmental tenants and the public sector contributes with 22% of rental income. The rental value as of 1st of April '26 is SEK 5.157 (sic) [ 5.127 ] billion per year, first time over SEK 5 billion, plus 11.6% and rental income, SEK 4.523 billion, plus 10.3%. Strong figures, and this is an effect of acquisitions, indexation, investments and, of course, tenants willing to pay for the right quality. Looking at the like-for-like figures, the properties we owned a year ago, excluding projects compared with updated figures, we can see that rental value is up 2.2% and rental income is up 1.1%. Like-for-like does not include the large acquisition we did 1st of April '25. As said last report, it's good with the growth also in the like-for-like stock, but to get the growth we aim for, acquisition and investments will continue to be important, especially in times of higher vacancy. Changes in the market value of our properties, we started the year with SEK 64.414 billion in accordance with the external valuation of 100% of our portfolio. We have made acquisitions, which add on SEK 534 million; investments SEK 562 million; divestment, minus SEK 4 million; changes in valuation, plus SEK 19 million and together with currency translations of SEK 117 million, that summarized to a value of SEK 65.642 billion. Valuation parameters haven't changed since last -- since year-end, and that includes assumed indexation of 1%. So very small changes of valuations that growth comes mainly from investments and the transaction we made in Copenhagen. Here's a long-term trend for portfolio growth from SEK 7 billion to SEK 65.6 billion in 21 years and growth every year without taking in any new equity from our shareholders. These figures, the running yield show how we actually perform in relation to the valuation, so this is not the valuation yield. For the whole portfolio, the occupancy rate is 90%, excluding project and land, and with an operating surplus of SEK 3.356 billion that gives a running yield of 5.5%. Fully let, the portfolio would give around a running yield of 6.3%. Good earnings capacity in relation to the value of the portfolio and good cash flow generation is the foundation also ahead. The occupancy has improved in some areas and lost a bit in others. What we know is that of the total vacancy, approximately 14% are already signed, but not entered yet and for additional 6% of the vacancy, we have ongoing discussions with possible tenants. So a lot of positive work in that, but we will also add on vacancy from terminations. Additional new build projects will move from the project line to the running portfolio line and possible transaction may also affect vacancy, so no exact guiding ahead. But I expect occupancy numbers for the portfolio to be relative flat next quarter, but with somewhat increased income from the base rent figure. Parking and additional charges may vary. In the office portfolio, the market value is SEK 51.451 billion with an occupancy rate of 90%, 90% in Malmo, continue with small improvements in Helsingborg to 91%, 89% in Lund and 91% in Copenhagen. The operating surplus from offices summarized to SEK 2.781 billion and a running yield of 5.4%, 6.2% fully let. The logistics production portfolio have a value of SEK 9.315 billion, 92% occupancy in Malmo, 83% in Helsingborg, 95% in Lund and 97% in Copenhagen. In all, 88% occupancy with a running yield of 6.2%, 7.3% fully let. The development of our total portfolio running yield, 5.5% brings stability, not least since the portfolio overall has a high quality and good location. As noticed before, a good increase of the running yield since 2021. Some sustainability highlights. We have improved from 0% to 35% certified area in our Copenhagen portfolio within 1 year, and there is more to come. We have also new sustainability targets from 1st of January and we will report on a wider spectrum with focus on energy efficiency, carbon dioxide emissions and climate adaptation as well as important social and governance measurement. More on that topic in the report, but I'll show you some figures here. It was a cold start of the year but to be able to compare how we improve our energy use, we also present figures normal year corrected, and of course, also in kilowatt hours per square meters. Here you can see the improvements quarter-by-quarter and year-by-year. We present the carbon dioxide emissions from Scope 1 and 2 in the same way. Here, we have higher emissions in Q1 according to more gas used in Denmark during this period of energy uncertainty in the world. We also compare energy production from solar cells and not at least, we have a new goal till 2020 (sic) [ 2030 ] to replace refrigerants in our cooling systems to more environmental neutral gases, and this work continues. A catalog of our value and properties in our 4 cities end Q1 '26, 38% of the value is in Malmo, 23% in Helsingborg, 17% in Lund and 22% in Copenhagen. Commuting across the Oresund Strait continues to increase and the entire region benefits from the fact that Sweden and Denmark complement each other's economic cycles. The increased focus on defense and resilience also contributes to investments in the region, not only correlated to industries such as Saab and MilDef, but also due to the fact that 90% of the important food to Sweden passes through our region. That means that Sweden depends on the infrastructure in the region and harbors, highways, railways and of course, the Oresund Bridge must be in good condition and well protected. The region as such benefits from that also in a long-term perspective. During the first quarter, we have acquired 10,300 square meters office and retail in Caroline Hus in Carlsberg Byen, property value of DKK 370 million and location that attractive both for living and working. A high density close to the city center, interesting mix of older refurbished building and new build, and as we see it, potential for growth rent in the area. And time for financials. Over to you, Arvid. Arvid Liepe: Thank you very much, Ulrika, and good morning, everyone. If we look at the income statement for the quarter, Ulrika has touched upon the figures already, but I would like to highlight that the rental income of SEK 1.150 billion is actually a record for the fourth quarter in a row when it comes to rental income in an individual quarter, up 10% versus the same quarter 2025. And as we write in the report, we had a positive one-off effect of SEK 15 million coming from a terminated lease in the Danish portfolio, which was settled with a so-called termination fee. But nevertheless, we had a good growth of 10% of the rental income. The operating surplus amounted to SEK 800 million, up 9%, and that is despite, as you can imagine, having higher costs for snow removal and for heating during Q1. For those of you living in Sweden, you know that the winter was colder and longer than most winters, not least so here in Southern Sweden. Income from property management amounted to SEK 520 million, which is up 12% versus the same quarter previous year. Value changes in the property portfolio were basically flat, plus SEK 19 million, so no big changes at all. And the underlying assumptions, as Ulrika mentioned, was also basically the same as at year-end. We had positive value changes in our interest rate derivatives portfolio, plus SEK 191 million and in total, a profit for the period of SEK 548 million. On the next slide, looking at the balance sheet, investment properties versus 12 months previously went up by SEK 6.5 billion and stood at SEK 65.6 billion in total. Is the presentation of the slides working or not? Ulrika Hallengren: Not sure. Let's see again. Arvid Liepe: Let's see, if we can get a signal from somebody if the slides are visible. Looks okay over there. Equity end of March stood at SEK 24.9 billion, up SEK 1.4 billion versus 12 months previously. And then we've, of course, during that period, paid almost SEK 1 billion in dividends. The borrowings stood at SEK 34.2 billion, up SEK 5 billion versus 12 months previously. And as you remember, we have made acquisitions of approximately SEK 3 billion during that period. And also, we've had a high investment level in our project portfolio. Moving to the next slide, looking at our key numbers, the equity assets ratio now stands at 36.8%, the LTV has gone up slightly to 52.1% and the interest cover ratio continues to be at a strong level at 2.9x. Looking at per share numbers, the EPRA NRV stands at SEK 101.14 per share, which adjusted for paid dividend is up 10% versus 12 months previously. Looking at the next slide, the long-term development of EPRA NRV is visible in this graph and the average annual growth still stands at 15% adjusted for dividends, so a strong long-term growth trend in EPRA NRV. On the next slide, you see the long-term trend for the other financial ratios that we continuously monitor. On the left-hand side, you see the interest cover ratio. And as you remember, it was on extremely high levels during the 0 interest rate period 2019, 2020, 2021. But the 2.9x level where we are currently is well above the long-term goal of or the goal that we have of a minimum of 2.0x. On the right-hand side, you can see the equity assets ratio, well above our threshold of 30%, stands at 36.8% currently. And the loan-to-value is well below our limit of 60% at 52.1%. On the next slide, you can see our net debt in relation to EBITDA. Also there, we have a long-term stable development; this ratio now stands at 10.5x. And we think it's a very relevant number since it reflects the cash flow that we actually generate in our core business. On the next slide, you can see our sources of funding as of end March. Half of our funding comes from bilateral bank agreements with Nordic banks, 16% from the bond market, 34% from the Danish real mortgage system. The bond market is, of course, more sensitive to the geopolitical development than the bank market is. But I would still claim that the bond market works in a quite okay way also over the past month or so. The beginning of the year, the bond market was actually quite strong, and we issued some new bonds in January, beginning February on attractive levels, I would claim. Our ongoing discussions with our banking relationships tells us that the banks are continuously willing to lend money. So a positive sentiment from that front. And the Danish real mortgage system, I would claim has a stable positive development as always. On the next slide, you can see the structure of our loan portfolio with lots of details. The average interest rate that we're paying currently is 3.21%, 3.24% if you include the cost of committed credit agreements. This means that our marginal cost of debt is actually pretty close to the average cost of debt that we're paying currently. On the next slide, you can see the development of the fixed interest period, which now stands at 2.6 years and the average loan maturity, which stands at 4.8 years. No drama in the development of these numbers, and we continue to work according to our financial risk management policy. On the next slide, you can see the development since 2019 of available funds, currently SEK 2.6 billion, which gives us day-to-day flexibility to manage our operations in a good way. And with that, I hand the word back to you, Ulrika. Ulrika Hallengren: Thank you. I'll give you an update on our investments and progress and a quick overview of our largest project. During Q1, we have invested SEK 562 million, and it remains SEK 1.738 billion to invest in approved projects. We continue to expect yield on cost at 6% or a bit over 6% for new build offices and 7% or a bit above for industrial and a good mix of refurbishment and new build in the portfolio. Let's start with projects soon to be completed. In Malmo and Hyllie, we continue with Blackhornet 1, Vista, an SEK 884 million investment. The mobility hub was completed end '24 and now the first tenants are in place. One new lease signed in Q1, but we work hard for the next ones, yield on cost 6.2% and approximately 40% pre-let. From 1st of January, the total area of the building are included in Malmo offices best classified as project. And during Q2, we will count the project as completed even if adaptations for tenants will continue, of course. In Lund, Posthornet Phase 2, a new modern office right beside the Central Station will also be completed in Q2, but moving in continues rest of '26, 10,100 square meters, SEK 448 million, yield on cost 6.5%, a very successful project. In the southern part of Lund, we continue the development of Tomaten; this project is for BPC, will also be completed in Q2 '26, and we invest SEK 79 million, 3,600 square meters and yield on cost 7%. And next to that at Surkalen 1, Note have started to move in and Lund University will move in, in Q4. Well-used land area and long leases in total, 14,500 square meters, investment SEK 260 million and yield on cost 9.2%. The large project at Amphitrite 1 in Malmo for Malmo University is running well in accordance with plan, a bit above 20,000 square meters for Malmo University at a 10-year lease, investment SEK 1.130 billion and completion is planned to late Q4 '27. Discussion is ongoing regarding a positive -- a possible prolonging of the lease to 20 years, both positive and possible. At Kranen 7 in Malmo, we will invest approximately SEK 136 million in a preschool for the municipality, 2,900 square meters zoning plan approved and completion is expected to Q3 '27. Public Procurement Act for the contractor is still ongoing. And at Skrovet 6 in Malmo, we refurbished 11,000 square meters, 50% is pre-let to Cloetta and Media Evolution with completion starting Q3 '26, investment SEK 149 million for a total technical shift in the building and a quick change from a quite closed building for Saab and now open up to being the new entrance to the Dockan area. Good interest from tenants and several ongoing discussions. A new project in Helsingborg at Muskoten 20, where we invest for our tenant MilDef, a combination of refurbishment of an existing vacant building of 2,400 square meters. We have new build 3,400 square meters and adding on the existing lease of 4,400 square meters. So in total, 10,200 square meters and SEK 97 million investment, including value of the land. Yield on cost, 7.2% and completion in Q3 '27. And the new project started at Sunnana 12:26. It will be a mix of tenants and a flexible building for smaller industrial logistics. It's a good product where we have very low vacancy in Malmo, pre-let 30% to one tenant, investment SEK 87 million, and completion is planned to Q4 '27. That was some of the ongoing project and just to touch on future possibilities, just as a reminder that we always look for new opportunities and are ready to start when we think the timing is right. Here are some office possibilities in Malmo in the area of Nyhamnen and Dockan, where we continue to work with the zoning plans, high interest for the future, of course and even if the figures on gross floor area are estimates, the volume are interesting as a part of the other development in the area. And 4 other possibilities in Malmo, industrial at Spannbucklan, research and offices at Medeon site, housing at Kranen 5 and offices at Naboland 3. In Lund, we continue to develop the land at Brysselkalen in the southern part of Lund. At the Ideon site, we have 3 project possibilities for offices and laboratories, 2 of them on these pictures, Ideontorget and Delta 2. And at Vasterbro, the work with the zoning plan continues. In Helsingborg and Landskrona, we also have a mix of different possibilities and the main part is in the Logistics and Industrial segment. And just a summary of Q1 again. Rental income up 10%; operating surplus plus 9%; income from property management plus 12%; negative net letting minus SEK 35 million; net debt to EBITDA at 10.5x. We see good access to financing, and we continue to grow this quarter an acquisition in Carlsberg Byen. And it goes without saying we continue with our focus on cash earnings and our future growth. And with that, we are open for questions. Operator: [Operator Instructions] The next question comes from Tobias Kaj from Nordea. Tobias Kaj: First question regarding the EU income in Q1 in Denmark. How large was the annual rental income in that contract? And did that already impact the occupancy rate in Q1? Or will we see the effect first in Q2? Arvid Liepe: Let me think if I have that number off the top of my head. It relates to Slotsmilen [indiscernible], where ATP have left the building. So it is vacant currently. I don't have the annual rental income off the top of my head, but giving a bit more flavor of what -- the way it works in the Danish market is that when a tenant terminates a lease, they're obliged to restore the premises to the shape the premises were when they moved in, which basically means that when a tenant leaves, you end up in a negotiating position to see how much should they actually pay to restore the premises to the original shape. And it's that type of payment that these SEK 15 million relates to in this quarter. Tobias Kaj: Okay. I understand. Also regarding the general occupancy rate, I think you previously have said that you expect some improvement during this year, and you write in the report that 14% of the vacancy is already pre-leased. Does that indicate that we should expect roughly a 1 percentage point increase in occupancy rates during the remainder of the year? Or will it take longer time to see that positive effect? Ulrika Hallengren: You should not expect that it's too early to say that because we also have terminations, of course. So what I see now is that we will be quite flat until Q2. And then it depends on what will happen with project completions and terminations ahead. But I definitely see as we have also given some notice before that the rental income continues to increase. Tobias Kaj: Yes. Regarding your interest expenses, how much do you capitalize related to project? And should we expect a significant increase in coming quarters as you expect lots of projects, both in the first quarter and in the second quarter? Arvid Liepe: SEK 9 million were capitalized in interest in the first quarter this year. And given that the project volume was very high during 2025, and it will still be reasonably high in 2026, but probably not as high, I wouldn't expect that number to go up. Tobias Kaj: Okay. And one final question. I think you have a swap contract of SEK 1.25 billion with very low interest rates that matures during this year. Is that like one contract in one single quarter? Or will it be a gradual effect in [indiscernible]? Arvid Liepe: No, it's spread out over Q2, Q3, Q4. It's not one contract. Operator: The next question comes from Lars Norrby from SEB. Lars Norrby: I'm looking at that net letting chart, Page 7. Looking at the termination volumes, which is, as I think you pointed out, is quite similar to the past few quarters. It's more an issue of, I guess, the amount of leases signed during the quarters that haven't been high enough to get a positive figure. But just on the termination figures, can you mention, are there any individual contracts of size that you can mention? And if so far, in that case, where geographically? Ulrika Hallengren: We have two leases with PostNord, one in Sweden of SEK 2.5 million and one in Denmark of -- I think it was SEK 7 million or something. Arvid Liepe: SEK 6 million, SEK 7 million. Ulrika Hallengren: In Denmark? No, SEK 4 million in Denmark. So in total, SEK 6 million, SEK 7 million. And we have Ahlsell here in Malmo with minus SEK 7 million. And then just a few on minus SEK 2 million. So nothing really large or something like that. But what we see is that the large portion of these smaller leases that always is a great motor in the business during Q1, the cautiousness was very -- everybody was very worried about what will happen, and we really saw that in the discussion. So we missed that volume in the new leases. Arvid Liepe: On the termination side, Ulrika also mentioned it during the presentation, but we had tenant bankruptcies, a few different, not one big one. But those bankruptcies have an annual rental value affecting the net lettings of between SEK 7 million and SEK 8 million in the quarter. That does not mean that we have credit losses of that amount. But in the net letting figure, it affects the numbers negatively. Lars Norrby: One more question. You mentioned here earlier on the call, I think, something along the line that after what happened in the Middle East, lease discussions ongoing were prolonged or delayed. Have you had cases where they've been -- the discussions have actually been terminated without having a signed contract related to what's happened geopolitically? Ulrika Hallengren: No, not what I can -- no. And as I mentioned, the list of ongoing discussion have increased significantly since February, March. So April and ahead looks quite decent, I would say. Operator: The next question comes from Fredrik Stensved from ABG Sundal Collier. Fredrik Stensved: I have three questions, if I may. First one is a follow-up to one of the earlier questions about the nonrecurring item in Denmark. Is -- the way I understand the answer, Arvid was that they moved out in Q1, but is this a large material lease in terms of annual rent? And if so, did they contribute fully throughout Q1 and then moved out in late March? I'm just trying to... Ulrika Hallengren: They moved out earlier, I think, in Q4 or something. So this was just a negotiation about the termination fee that were decided during Q1. Fredrik Stensved: Okay. Very good. Very clear. Perfect. Second answer, also, I think, pretty straightforward. Arvid, you talked about the bond market and the banking relationships and they were still sort of eager to lend, et cetera. Have you seen any moves in terms of margins with bank discussions during these, call it, 2 months of geopolitical uncertainty and the general uncertainty in the market? Arvid Liepe: We haven't had any refinancings or new financings. So we don't have any, so to speak, hard evidence of the prices. But my take is that the bank margins during March, April have basically been stable. I have not gotten the impression that they have moved much over the past couple of months. Fredrik Stensved: Very good. Then last question on the project completions that you talked a little bit during the presentation, Ulrika, Blackhornet and Posthornet now completed in Q2. But the way I understand it, at least Blackhornet, probably some move-ins already in Q1 and then some Q2 and then maybe Q3. How should we think about sort of the contribution in Q1, Q2? Will the tenants start paying in Q2 or later? And did they contribute anything to Q1 at all? Ulrika Hallengren: Yes, we had contribution during Q1, and we will see contribution during the autumn as well. But in a slower pace, no large significant moment where things suddenly will contribute in a more smooth, I would say. Fredrik Stensved: Okay. Is it similar for Posthornet? Or is that more binary? Ulrika Hallengren: Posthornet has the largest contribution during Q2 and -- but also during the autumn continued. Fredrik Stensved: Okay. So a little bit in Q2 and then fully or 70%, at least given the occupancy rate from Q3 and onwards? Ulrika Hallengren: Yes. We have something assigned for moving in, in Q4 as well in Posthornet, but most of it is now in Q2. Operator: The next question comes from James Cattell from Green Street. James Cattell: I had a question on the EPRA CapEx table on Page 25 of the report. I noticed that tenant incentives have increased quite significantly by almost SEK 100 million versus the first quarter last year. And also on the annualized basis was higher than full year '25. Is this going to be the run rate going forward for the whole of '26? Or is this just due to some one-off items? Arvid Liepe: To be open and frank with you, James, predicting the split of CapEx into these different categories is not extremely easy. So the tenant adaptations or the tenant or what EPRA calls tenant incentives will continue to be an important part of our CapEx because into that category falls a number of measures when we adapt premises to new tenants, and that will continue to be an important part of our ongoing business. But predicting the magnitude of these different parts of our CapEx is still tricky. Operator: [Operator Instructions] Ulrika Hallengren: Are there any written questions? Arvid Liepe: I have seen nothing arriving digitally. Okay. Operator: There are no more phone questions at this time. So I hand the conference back to the speakers for any closing comments. Ulrika Hallengren: Okay. Thank you for this. And of course, if you have further questions, you know just reach out to us, and we'll answer. So thank you for today. Arvid Liepe: Yes. Thank you, everyone, for listening in.
Jane Morgan: Good morning and thank you for joining us for the Amaero Ltd Q3 FY '26 Investor Webinar. I'm Jane Morgan, Investor and Media Relations Manager. And today, I am joined by Chairman and CEO, Hank Holland, who'll be running through the Q3 results and the presentation, which was lodged with the ASX this morning. [Operator Instructions] Hank, I'll hand over to you. Hank Holland: Thank you, Jane. Good morning and thank you for everyone else for joining us. I'm Hank Holland, Chairman and CEO of Amaero. We're pleased to report Q3 FY 2026 results that came in line with our expectations and to share an update on the continued momentum we're seeing across our business heading into a very strong fourth quarter. I'll take you through our financial performance, the state of our revenue pipeline and several strategic initiatives that we've advanced this quarter, including our re-domiciliation to the United States and progress towards a potential less IPO. We'll then open the line for questions. Let me start with reaffirming our FY '26 revenue guidance of $18 million to $20 million. And as of today, over $18 million of that guidance is fully contracted. In Q3, we recognized $2.6 million in revenue, a 301% increase year-over-year. That figure breaks down is $1.8 million from powder sales and $0.7 million for our PM-HIP business. It came in right on top of the $2.5 million in contracted revenues we disclosed back in January. Looking ahead to Q4, we have $8.4 million in contracted revenue, up from $7.2 million of contracted revenue disclosed in January. We expect a significant inflection point in the fourth quarter with contracted revenue in the quarter contributing approximately 45% of total FY '26 realized and contracted revenue. On the cost side, trailing 12-month G&A expense grew 18% year-over-year, even as trailing 12-month revenue expanded by more than 300%. I'll come back to that contrast in a moment. It's an important part of the financial discipline and the operating leverage story. We ended the quarter with $38.3 million cash balance, which included $4.9 million restricted cash. During Q3, we submitted a draw request in the amount of $5.8 million to EXIM Bank for incurred capital expenses, and we expect to receive the disbursement in April. Pro forma cash balance adjusted for the receipt of EXIM disbursement equals $44.1 million, including restricted cash. On strategic milestones, Tim Johnson has been nominated to join our Board, our re-domiciliation of the U.S. is on track to be completed by the end of June, our PCAOB audit with BDO USA is advancing in parallel, and we continue to work towards a potential U.S. listing and late calendar 2026 or early 2027. I'll cover each of these in more detail shortly. 12-month -- trailing 12-month revenue reached $11.8 million in Q3, an increase of 347% year-over-year. Both business segments are contributing to growth. Powder revenue driven by exclusive supplier agreements and contracted shipments contribute approximately 80% of total revenue. And PM-HIP manufacturing contributed approximately 20% of total revenue. PM-HIP manufacturing contracts have longer sales cycles and require customer qualification, but those processes are well underway. And we expect PM-HIP growth to outpace our overall growth rate and increase its share of revenue mix as we move into FY '28. We currently have atomization contracts for 14 refractory alloys that include niobium, moly, tantalum, tungsten and rhenium, and we have 14 active PM-HIP contracts. The FY '26 revenue bridge is straightforward. We recognized $10.3 million year-to-date across the first 3 quarters. We have $8.4 million contracted for FY -- for quarter 4. That gives us line of sight, the $18 million to $20 million guidance range with over $18 million contracted. Next slide, please. On the investment side, tangible assets, gross PP&E plus inventory have grown for approximately $41 million in Q3 FY '25 to $72 million today. That capital is going directly into production capacity and inventory. It supports the revenue ramp, enables us to fulfill contracted demand and mitigates tariff supply chain risk. Every dollar we've deployed is aimed at scaling the business and create a differentiated and defensible market position. As other companies are beginning a multiyear capital investment plan, we are concluding a 3-year $72 million investment plan. And we're positioned to take immediate advantage with production scale of the favorable thematic tailwinds for defense industrial base for critical mineral supply chain and for sovereign manufacturing. Our core principle has been to invest early to attract an experienced team that spans technical, operational and financial leadership, then grow the team and GA expenses in a disciplined manner. As the Chairman and CEO and as a large shareholder, this is yet another example of alignment of interest with management and shareholders. The data supports the case. Trailing 12-month revenue is up 347% year-over-year while trailing 12-month G&A expenses were up 18% year-over-year. That divergence, revenue grew at nearly 20x the rate of G&A, its operating leverage, it's our ethos and it's a discipline that we will maintain. Let me walk through the cash bridge for Q3. We started the quarter with a cash position of $52.6 million, including restricted cash. From there, net cash used in operations was $7.1 million. Inventory purchase is $0.6 million. CapEx Was $5.4 million. FX exchange impact of $1.2 million brought us to our March 31 closing balance of $38.3 million, which included $4.9 million of restricted cash. During Q3, we submitted a [ draft ] request in the amount of $5.8 million to EXIM Bank for incurred capital expenses, and we expect to receive the disbursement in April. Pro forma cash balance adjusted for the receipt of the EXIM reimbursement equals $44.1 million, including restricted cash. We are on schedule and on budget to complete the 3-year $72 million capital investment plan this quarter. Let me spend a moment on a re-domiciliation because we believe it's strategically important step not just a structural formality. In February, we announced our attention to re-domicile from Australia to the United States, establishing a new Delaware parent entity. Our ASX listing will be maintained, the 3DA ticker will be unchanged and shareholders will retain equivalent economic ownership through CDIs. Our operations, strategy and management remain entirely unchanged. What change is our corporate home. On the commercial side, re-domiciliation positions us to satisfy Department of War's foreign ownership, control and influence or FOCI requirements. That's a prerequisite for eligibility on classified defense contracts which represents a meaningful expansion of our addressable market. On time line, our scheme booklet is expected to be distributed to shareholders in early May. Re-domiciliation is expected to be completed by the end of July, subject to shareholder and regulatory approvals, with a PCAOB audit completed in parallel. Beyond the operating rationale, re-domiciliation supports three important objectives: First, U.S. market positioning. We gained greater visibility with U.S. customers and stakeholders. It helps address foreign ownership, control and influence issues and improves our comparability with the U.S.-listed defense and advanced manufacturing peers. Second, strategic flexibility. It simplifies our structure for potential M&A or partnerships and positions us for a potential U.S. IPO in late calendar '26 or early '27. And third, capital access. A U.S. domicile and potential IPO give Amaero access to a larger, deeper investor base and the potential for improved valuation and liquidity, along with enhanced access to lower cost debt and equity capital. Tim Johnson's Board nomination in March was in preparation of a potential U.S. listing. Taken together, this is about ensuring that as we grow our corporate structure and market access reflects and supports the end market customer while supporting the enterprise valuation and liquidity. On the financing, we are pleased to announce that EXIM Bank has increased its loan commitment to Amaero from USD 22.8 million to USD 26.1 million, a USD 3.3 million increase. This is non-dilutive capital that directly supports incremental CapEx deployment. The amendment reflects EXIM Bank's continued endorsement of our platform and further aligns us with our Make More in America Initiative. Government-backed non-dilutive financing of this kind is accretive to the capital stack and it provides an important signal of support from the U.S. government. On the commercial front. Two announcements deserve specific attention. First, we're also pleased to announce that we've entered into a 3-year distribution agreement with United Performance Metals or UPM, an affiliate of O'Neal Industries, which generated approximately USD 3.4 billion sales in calendar year '25. Amaero has been appointed as UPM's exclusive supplier titanium powder. We've already received initial purchase order of 4,000 kgs, which is included in FY '26 contracted revenue. And UPM is committed, obligated to maintain a minimum inventory of 4,000 kgs with ongoing replenishment orders, create a recurring volume dynamic that scales with their end market demand. This is a significant distribution channel addition and is generating revenue from day 1. Second, next page, please. After the end of the period, we announced a 1-year Master Purchasing Agreement for FY '27 titanium powder shipments with minimum contracted revenue of $7.8 million. To put that in context, it's roughly equivalent to our total FY '26 titanium powder revenue in a single contract. Shipments are structured as equal quarterly deliveries from July '26 through June '27 with fixed pricing on committed volumes and upside from additional orders. The customer expects FY '27 orders to exceed the minimum commitment. Combined with a planned 100% increase in titanium powder production capacity FY '27 over FY '26, this agreement gives us strong early visibility into next year's revenue ramp. Stepping back to the broader commercial picture. We've taken a very deliberate approach to aligning with select strategic partners via long-term agreements. In each case, the partner strategically positioned in a market vertical. In the case of ADDMAN, Dr. Gao and the organization have pioneering experience in printing C103 and other refractory alloys. In the case of Velo3D, they have differentiated position as the only made in U.S.A. OEM with large-format printing capability for defense and space applications. In the case of Titomic, they're the leading force in the U.S. defense industrial base for cold spray manufacturing of qualified components. In the case of Knust-Godwin, they're a trusted partner for processing PM-HIP manufacturing components and they have a large expansion underway for 3D printing machines dedicated to titanium. And in the case of UPM, a leading distributor, aerospace, defense and medical industries with a large sales organization. Separately, we have numerous programs, plural, and numerous defense primes, plural, that are advancing first articles and qualification for production contracts. As is our practice, we will announce the commercial opportunities once we are awarded the production contract. Specifically, looking at Q4, we expect titanium revenue to increase 62% compared to Q3. I'm pleased to share that this will reflect full capacity utilization for the current quarter. We have orders for 14 refractory alloy powders in the backlog, and we have 14 active PM-HIP contracts, only one of which has been announced. That's a strong commercial foundation entering the largest quarter in our company's history. To bring it together, Q3 delivered on plan, Q4 is fully contracted and represents a step change in quarterly revenue; FY '26 guidance is reaffirmed at $18 million to $20 million, 100% contracted. Our balance sheet is solid with pro forma cash position of $44 million post-EXIM reimbursement. We're advancing our U.S. re-domiciliation on schedule. We expect to enter FY '27 with strong revenue visibility with long-term agreements and contracted shipments. We are executing. We are scaling. We are focused on where we need to be in a year and in 3 years to address critical needs for our partners in the U.S. government Department of War in the commercial sector. Amaero is uniquely positioned as a leading advanced material business and a leading advanced manufacturing business. We acted boldly to commission the largest scale and lowest unit cost U.S. production of refractory and titanium alloy powders and to position Amaero as the leading PM-HIP manufacturer of complex near-net shape parts. Thank you for your time this morning, and I'm happy to take your questions. Jane Morgan: Wonderful. Thank you for that. [Operator Instructions] There's been quite a few that have already come through, so let me jump into them. So Hank, Q2 revenue came in at $2.6 million, which, of course, is a 301% lift on the prior corresponding period. Can you walk shareholders through how the team has converted the commercial pipeline into contracted revenue? Hank Holland: Yes. Part of we announced earlier in the year was we had contracting revenue that was delayed given the FY '25 continuing resolution and the government shutdown. We have seen since the government reopened late last year an acceleration of contracting. Part of that is reflected in the contracts we have in the current quarter, the fourth quarter of this year. So we have not only, I think, done a good job at converting these current contracts in the Q4. But as we look into next year. As I mentioned on the titanium side, the contract that we announced of $7.8 million, that's equivalent to roughly a FY '26 titanium revenue, right? I think as we go into FY '27, that will be about 1/2 of plan for FY '27 that one contract. In that same announcement I said that before the end of this fiscal year, we expect to announce a refractory development contract. That, too, I think, will be about 1/2 of our planned refractory revenue in FY '27. And likewise, on the PM-HIP side, I think by the time we get to the end of June, I think roughly 1/2 of our planned PM-HIP revenue will already be contracted. So I think we'll go into FY '27 with significant portion of our plan contracted and probably already have contracted roughly equivalent to FY '26 revenue. Jane Morgan: Wonderful. That answers one of the questions there. The second one, what impact, if any, are you experienced from the increase in energy costs? Obviously, from the Iran conflict. And how are you managing to keep overall costs growth down? Hank Holland: So one of the things I am grateful for is when we came to Tennessee, amongst other incentives, we signed a 10-year subsidized electricity agreement at $0.058 a kilowatt hour. The national average before this energy shock was $0.19, right? And mind you, most of the electricity in the U.S. is gas-fired, right? Most of our electricity demand, most of our electricity generation. So those electricity rates will be climbing. So we were immune. We have no impact whatsoever from the fuel increase that we're seeing in the broader energy increases that we're seeing in the U.S. And we're over -- we're not impacted in any way by the shipping curtailment in the Hormuz Strait and in general, in the Middle East. What little imports we have from outside come from China, which, again, that shipping has not been impacted. And likewise, we have -- you've seen a lot of inflation in certain base metals, as everyone is aware. In the case of titanium, which is a primary thing that we import from China -- as you might recall, we've got a long-term U.S. supplier agreement with Perryman, and we have a long-term agreement with an aerospace [ mill ] in China. In fact, our titanium prices in China have come down about $2 a kg from about $16.75 a kg at the start of this year to about $14.50 a kg now. So we've actually been able to negotiate lower prices on titanium bar. Jane Morgan: Thank you. Bear with me. There's a lot coming through. So trailing 12-month revenue was up 347% year-on-year while G&A expenses grew only 18%. You touched on this in the preso, but can you talk to how the team is maintaining that operating leverage as the business scales? Hank Holland: Yes. Primarily, if you think about early on, going back a year ago, 18 months ago, we decided to be on our front foot and to aggressively invest the and stand up, I believe, the most experienced team in our industry in the U.S. I think we've got a very, very strong team, particularly when it comes to gas atomized titanium. On our team includes the inventor of gas atomized Fred Yolton. Eric Bono, who's worked with him for 3 decades. So a lot of costs early on to stand up our team. Since then, we've been -- we continue to add to our team, but we've been very, very disciplined to add on the G&A side. Most of our incremental hires today are in the factory, right, actually in production, not in G&A, if you will. And then likewise, other expenses. Obviously, we've got certain fixed expenses we've had to absorb as far as the facility and so forth. We'll see our gross margin improve as our revenues scale. But on the G&A side, it's primarily a discipline in hiring is where we've been able to maintain that growth. Jane Morgan: Wonderful. This one has come through quite a few times. So U.S. federal budget now resolved and the Department of War sovereign manufacturing agenda is gaining momentum. How is Amaero position to benefit from this policy environment, particularly with the U.S. Navy Letter of Support and PM-HIP qualifications underway? Hank Holland: Yes. So let me -- it's a great question. And let me give a direct and maybe some might consider an indirect benefit. On the direct side, and the same would be true with the Iran conflict right now, obviously, we live in a world that is increasingly unstable from a geopolitical standpoint. The President has recently submitted a $1.5 trillion, $1.5 trillion defense budget. That's a $1.15 trillion baseline and a $350 billion reconciliation bill on top of that. So a $1.5 trillion defense budget. So that obviously helps us significantly. One thing that I would point you to in the most recent announcement I made in my quote -- there's a quote that -- this won't be verbatim, but roughly said, we will continue to collaborate closely with our partners in the U.S. government and the U.S. Navy to innovate, to integrate and to scale. Notice that it's the first time I said to integrate. So one of the challenges that we have in the U.S. right now is you've got these parts that travel all over the country for disparate processing. And what we've got to do a better job of in U.S. is to co-locate and to integrate adjacency capabilities. This creates a great expansion opportunity for us. and one that would be very well supported by the U.S. government. So stay tuned for more there, and that is a direct benefit and the shift in policy that we're seeing. On top of that, I would argue, other than AI, and of course, in the U.S., we've got a bit of a software hiccup from a valuation standpoint in general, there is not a more sought-after investment theme than where a Amaero sits at the nexus of, three things: defense industrial base, critical mineral supply chain, sovereign manufacturing, right? And thus, as we are in conversations right now about a potential IPO in the U.S., incredibly strong support of the investor base here. Another data point on that, if you look at the defense ETF in the U.S., it's at a 52-week high. If you look at Amaero and most of our peers in the Australian market, the ASX, we're all trading about 35% to 40% discount for a 52-week high, right? So there's a real valuation arbitrage between the U.S. market and the ASX as well. And particularly with small cap investors because there aren't that many investable companies, a lot of interest in companies such as Amaero in this theme. By the way, I would point out to you, it's been announced, one of our suppliers for tungsten and moly, a company called Elmet, E-L-M-E-T, they have filed to go public. They've given a range that's supposed to price on Wednesday of this week. I would suggest watch Elmet and see how they do when they go public. Velo3D went public August of last year at $3. Today, I think they're trading around $12. So watch other companies that are considered in a similar ecosystem as where Amaero sits. Jane Morgan: Thank you, Hank. Next one here. So is there still interest in C103 powder? And what percentage of sales do you expect it to be going forward? And again, further, what's the outlook for the C103 pricing? Hank Holland: Yes. So in general, what we felt all along is that as we scaled that -- albeit we'll have 3 atomizers for titanium, we'll only have 1 atomizer for refractory. But because refractory prices are so much higher -- and by the way, the refractory atomizer will never have probably more than about 50% or 60% capacity utilization. So we're going to keep that where we're going to be very agile and be responsive to orders, where titanium will get up to running essentially 100% capacity utilization. This current quarter, on the atomizer dedicated titanium, we are adding 100% capacity utilization. We're full. We cannot accept other orders this quarter, okay, to give you an example. That being said, going forward, we expect the refractory revenues will roughly equal titanium revenue. okay? Only 1 atomizer to 3 atomizers, but refractory revenues will roughly equal titanium revenue. If you ask me 2 years ago, I would have thought more of that would be C103 than now. Hasn't changed our revenue outlook. It's just changed the mix of those revenues. So I announced that we expect before the end of June to announce a development refractory contract. So stay tuned. Coming. We feel confident about that. But notice the name of that contract, development refractory. What does that entail? Hafnium prices, which, keep in mind, C103 is about 10% hafnium or up about 75% in the last 9 months. So as hafnium has gotten increasingly expensive and thus C103 has gotten increasingly expensive, the Department of Defense is increasingly as to what other development refractory alloys can we atomize that have similar high temperature application, right? And so this is something working closely with the government on again. Stay tuned. So yes, there is demand for C103. Keep in mind, C103 was first used in 1969 in the Apollo lunar landing vehicle. So we've got 6 decades of decade. These other alloys we don't have, right, years of decade. So there will be certain very mission-critical applications that C103 will be called for. And that price is actually relatively stable. It's climbing albeit not as much as happening. If anything, the margin has come down a little bit given that. So yes, there will be C103 demand. I think prices climb, but not by a lot from where they are now. But I think the refractory opportunity in general is about the same as a percent of revenue, but the mix of that is going to shift to other development refractory alloys from C103, I would expect. Jane Morgan: Wonderful. Next one. This webinar attendee just asked for your long-term vision for Amaero. So is it to build the company for potential acquisition? Or is it to maintain ownership and establish Amaero was a national asset to the Navy defense force? Hank Holland: So my background is essentially as an investor in private equity. So I think of businesses as platforms, and part of what -- I always had the vision of Amaero, now I think we're on that cusp, and it's another really, really important reason for now at the time for the IPO in the U.S. and the re-domiciliation of the U.S. is we've established a foundational capability, a leader in refractory and titanium spherical powder, a leader in PM-HIP manufacturing, and we're now at the stage that we'll begin to scale revenue. The opportunity for us now where we've got -- I've been in Washington, D.C. 10 of the last 14 weeks, right, to put some context on this. And the reason for that is there is so much interest in the U.S. government to essentially create these regional manufacturing hubs. And so the real opportunity I see for us in my vision is how do you take our foundational capability and a very disciplined, thoughtful way, expand that. Expand that into adjacencies where we become an integrator, advanced material manufacturing company that is essential not only to defense but also to the commercial sector. In a perfect world, I'd like to be 50% government source revenue and 50% commercial source revenue. So what we call a traditional dual-use company. But that would be my vision. As far as selling, I always want to build this business where we would be an attractive acquisition target to someone else. And part of the way you get a higher multiple is you want to be involved in very strategic businesses. I -- addressing critical vulnerabilities in the supply chain will get us a higher multiple. I think that we are 1.5 years away, 2 years away from being deemed highly strategic in the U.S. manufacturing and supply chain ecosystem. Do we sell? Do we merge? Do we just continue to operate at that point because we're a highly profitable company as we get down the road? You want to have all those options. But I certainly have a corporate strategy that is going to make us an attractive target to someone else. Sorry. You're muted, Jane. Jane Morgan: Sorry. This one again has come through quite a few times. Just commenting on the expected time lines for the argon recycling plant. And given the positive effect on the margins, can the installation be potentially brought forward? Hank Holland: So we ordered the argon recycling in December of last year. We announced at that time we expected to complete the installation by the end of this year, so December of this year. We are on track for that. It probably then takes 3 months to optimize all the operations. So we'll begin to see savings in the first quarter of the calendar year '27. Probably really get the most significant amount of those savings beginning in the second quarter and then you'd continue to optimize for some period. But you're exactly right, we're already the lowest cost producer, and this will significantly improve our unit cost profile. And I think that we'll begin to realize that early in '27. I don't think it's possible to pull it forward more. We really shortened the -- initially, it was estimated 18 to 20 months. We brought that into 12 to 13 months. I think we can achieve that. Unlikely we can pull forward more than that. At the same time, as you might recall, we ordered the fourth atomizer. Third one dedicated titanium. As we speak right now, if you were here in our factory, ALD's technicians are on site. They're installing the third atomizer, which we said would commission in June. We have a pretty good experience or a track record of doing that ahead of time. If you were here, what you would see is Atomizer #2 is covered in a curtain. The reason it's covering a curtain is we don't want the ALD technicians to see the changes, the modifications that we made to the earlier atomizer. And so Atomizer 1, Atomizer 2 are off limits to ALD. We will accept that. We'll then make the modifications that we make. That will be -- we are at capacity, as I said, currently. We'll get more capacity as we roll into next quarter with the next atomizer. Jane Morgan: Thank you, Hank. This one's come through a few times as well. So given the global supply concentration in both niobium and titanium, can you walk us through your sourcing strategy, specifically whether you rely on multiple suppliers? And how resilient your supply chain is to geopolitical risks such as tariff sanctions or trade disruptions? Hank Holland: So a great question. Let me take those separately beginning with titanium. So titanium, we don't have an element issue. So titanium comes from mineral sands, ilmenite and rutile which, for example, probably close to half of the global supply is in Australia, right? So you've got a lot of the ore -- you've got a lot of the precursor elements. The challenge is titanium sponge, which is then used -- the way you make titanium bar is about 20% titanium sponge, master alloy and then scrap. That's how you make titanium bar that we then buy and atomize. China has got about 65% or 70% of the titanium sponge capacity in the world, okay? In the developed world, in the allied world, about 20% plus is in Japan. By the way, that's the highest quality sponge in the world is in Japan, and the Kingdom of Saudi Arabia has stood up in recent years actually in a joint venture with the Japanese company, some Ti sponge capability as well. We have a long-term supply agreement with Perryman, a private titanium producer in the U.S. There's 4 producers in U.S. TIMET, ATI, Howmet and Perryman. We've got a long-term supply agreement with Perryman. They, in turn, have a long-term supply agreement for a Japanese titanium sponge. So we've got a very secure relationship for U.S. titanium. China, we've got a long-term supply agreement with a very, very well-respected aerospace mill. This company actually came to us to a defense -- I'm sorry, a medical company that we're working closely with. And the real issue there is price. So even after a 50% tariff, which is what we pay today on Chinese titanium bar, unfortunately, our U.S.-sourced titanium bar is 100% more expensive even after a 50% tariff. So secure titanium supply chain, it's real the price issue is a determinant. On the other side, niobium is the least of our worries. So niobium, yes, it's highly concentrated largely coming out of Brazil. But keep in mind, unlike users, that is bar, sheet metal, tubing that use large, large, large amounts of product, we're using a very small amount. I mean niobium this year, we might use 10 tonnes. It's a tiny number in the ground scheme of metals, if you will. And so we've got no issue getting niobium. Not a worry at all. Hafnium, zirconium, harder, right? Hafnium and zirconium put together as far as they exist together as elements. And again, a large amount of that is coming in China. We do have some of those deposits in North America as well. And then really, where you're seeing the price appreciation right now is tungsten, for example. We've got an atomization project we're doing right now with tungsten and tantalum. Tungsten prices since we put in our order for bar, which is the start of this year, tungsten prices are probably up 150%, maybe 200% since January, right? And this is really China going out very aggressively buying tungsten supply all over the world and essentially trying to push the U.S. out Tungsten is really important in the U.S. right now for certain munition applications, also for thermal protection systems, given the high temperature. So it's less of an issue of can we get it. And again, niobium is not a concern. It's more of an issue or some of these were seen price increases given the pressures from China. Jane Morgan: Thank you for that. Again, lots of questions coming through. Has the U.S. government shown any interest in taking equity stakes in companies like 3DA as they have with companies in strategic minerals such as MP materials? Hank Holland: Again, great question. I want to be somewhat careful with what I say here. The White House and this administration, the Trump administration, really beginning in the fall of last year pivoted and made a strategic decision to really focus, given the prior question about China and critical minerals, right, in sourcing materials, rare earths in particular, think about the battery supply chain, right, in particular, to really focus on creating more resilience and independence and duplicity in supply chain of critical minerals. And so they went out and what they've done is they have made a number of strategic investments in companies, primarily in the critical minerals area and very narrow in critical minerals. For example, rare earths, okay? And then what they've done is in certain other applications that are adjacent. So think semiconductors, they made a 10% investment in Intel, right, as an example. Historically, a company like Amaero would go get government funding, government grants from something called Defense Production Act Title III or IBAS, Industrial Base Analysis and Sustainment. And I'm of the opinion that those programs are largely on pause. I don't think that capital is available the same way that it was. And thus, we've taken the proactive initiative to begin conversations with U.S. counterparts for other possible capital opportunities with the U.S. government. And I really can't say more about that at this time. I'm not necessarily interested in a scenario where the government would take equity interest in Amaero. I think there will be other scenarios that we could approach that would not require that. Jane Morgan: Wonderful. Okay. Next one, this webinar user is just asking about the fifth atomizer, if that's still the plan and will it fit in the existing floor space. Hank Holland: So the current plan that we've committed to is 4 atomizers, all of which have been ordered, right? We've commissioned the first two. We'll commission a third one by June and a fourth one that is on order now. That will be 3 dedicated titanium and one for refractory. That's all that we have the current plan for. So we do not currently have a plan for EIGA #5. We do in the titanium room, have room for an EIGA 5 and an EIGA 6. But the only way that I would envision that we would order 5 and 6 is with a binding offtake agreement with a strong credit counterparty. And that's what we're saving that for. We're working on some very large commercial opportunities right now. We've held that back, and that would be a way for us to structure a preferential commercial agreement, partner with someone, not unlike Tesla did with Panasonic on their mega battery installations. So that's along the lines that we're thinking. We do not, though, currently have plans to order EIGA #5. And again, I would only see that in conjunction with the binding offtake agreement. Jane Morgan: Thank you, Hank. Sorry, we are getting through them. This one is just on TJ Johnson's appointment. I encourage webinar attendees to go back and read his experience because it is very impressive. This question asks, what drew him to the Board to him specifically? And what does his appointment signal about Amaero's next chapter? Hank Holland: So let me provide insight on a question that wasn't asked that is related. As an ASX-listed company, we're all ASX-listed companies are required to have a minimum of 2 Australian residents as Board members. I mentioned earlier in this call about FOCI or foreign ownership, control and influence. So if you want to get a classified defense contract, you've got to go through an evaluation process where the Department of War evaluates foreign ownership, control and influence. And part of what they look at and candidly, they scrutinize is non-U.S. persons on your Board. So one of the things that we will evaluate with the U.S. listing is do we recompose our Board of only U.S. persons given the increasing work that we're doing with defense, all right? So a determination has not been made. No announcement has been made, but it's something the Board will evaluate in consideration with these FOCI issues, if you will. So now to the question about Tim. TJ and I have known each other for years. He was on the Board of a prior portfolio company called LogicSource, a company that I bought from Bain Capital Ventures, was most recently the CFO of Victoria's Secret, very large public company, is currently on the Board of, I believe, it's 3 New York Stock Exchange-listed company. And we brought him on the Board, not only as someone with very, very strong experience as a director but in anticipation of chairing our Audit Committee, which is increasingly important as a U.S.-listed company. And he's very, very well suited for that. So I know him, we've got very good chemistry and he's very qualified. And so as we continue to round out the Board, part of what we'll look at now is what is that matrix of roles that we need, right? I could imagine, for example, we don't have anyone on our Board today that's a -- that comes out of the U.S. military, that spent time, whether it's in program management, logistics, whatever it might be. And my nature is I don't want someone involved titularly. I don't want someone involved for their name. I only want someone involved if they're going to be substantively involved. H.R. McMaster, I don't talk a lot about Lieutenant General H.R. McMaster. H.R. McMaster and I talk on a very regular basis. He is a very close friend. He's a close, trusted adviser, right? He's engaged actively with Amaero. And so we'll look at that for the Board. And I think that will be -- part of what we look at is do we -- invariably, we'll add people to the Board, but do we more broadly reconstitute the Board to account from some of these U.S. issues relating to classified programs? Jane Morgan: Thank you, Hank. Next one. So do we expect any opportunities to flow for meeting the FOCI requirements? Hank Holland: Yes. And what I said in the U.S. earnings comments that I made, and I was very -- I underscored it, we are advancing multiple programs, plural, with multiple defense primes, plural, to qualify classified programs. And so the first step is to move forward to qualify those programs. After that, there's a process that you have to go through to get your facility as a secure facility, right, essentially a classified facility. And all of this would be part of that review that I described. So yes, if you think about what we're doing on the last page of the presentation, I -- we have not announced the counterparties, and I'm not in a position to now, but I did have a logo on there for the U.S. Navy and the U.S. Air Force. So think submarines, think missiles, right? And those would be areas that you would expect that increasingly, we would be involved over time. Jane Morgan: Wonderful, Hank. Well, that looks like that's all the questions that have come through. Perhaps if you want to just give some final comments on what investors can look forward to from a news flow perspective over the next sort of 6 to 12 months? Hank Holland: So first of all, I very much appreciate everyone, shareholders and other investors looking at Amaero. It's an exciting time. This is a year we always said would be an inflection point for Amaero. It would be the yield that we began to scale revenue. I think that is the case. We are glad to reaffirm $18 million to $20 million guidance of this quarter. We equally feel good about going into FY '27. I think we'll be well positioned with good visibility going into FY '27. So stay tuned. Exciting time for Amaero, and we very, very much appreciate all the investor support. Thank you. Jane Morgan: Absolutely. Thank you all for joining us. And if we have missed any of your questions, please feel free to reach out via the contact details on the bottom of ASX releases. We look forward to hosting you next time. Hank Holland: Thank you.
Operator: Good day, and thank you for standing by. Welcome to Yancoal First Quarter Production Report Conference Call and Webcast. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the call over to Mr. Brendan Fitzpatrick, Head of Investor Relations. Thank you, Brendan. Please go ahead. Brendan Fitzpatrick: Thank you, Desmond, and thank you to everyone on the call for joining this briefing on Yancoal's first quarterly production report for 2026. We have several members of Yancoal's executive leadership team to recap the quarter and participate in the question-and-answer session. The commentary provided today is based on the quarterly production report published on the Australian Securities Exchange and the Stock Exchange of Hong Kong announcement platforms on the 20th of April. There is no presentation pack for this call. The Yancoal website holds past presentations for any participants who require additional information on the company. I'll hand over to our Chief Executive Officer, Sharif Burra, to provide the first quarter highlights. Sharif Burra: Thank you, Brendan. I also welcome everyone joining us on today's conference call. We would have spoken to some of you just a few days ago after announcing the Kestrel Coal Mine acquisition. The acquisition price for Kestrel is USD 1.85 billion plus a potential contingent cash consideration. Adding a long-life asset that produces hard coking coal at strong margins is a compelling step forward for Yancoal. We're working with the vendors to reach completion in late Q3 of 2026. As important as the acquisition will be, we're maintaining our focus on the existing portfolio, which underpins our financial performance and our capacity to pursue growth. In this context, let's now turn to the first quarter performance. Collectively, our operations are running to plan so far this year. When setting our 2026 guidance, we indicated the first quarter would have comparatively lower production with output increasing over the remaining quarters. This profile is similar to our 2025 production profile. ROM coal volume was 1% lower than the first quarter last year and saleable coal was 5% lower. After the first 3 months, we're in a comparable position to last year. If we can exceed last year's 12 months performance, it would be another record year for Yancoal. Understandably, we've received a number of queries about diesel supply and implications for costs. We can confirm we secured diesel supply until around the end of May and are working closely with our main suppliers. Beyond this horizon, continuity of diesel supply depends on events in the global market. As a prudent measure, we have established contingency plans should continuity of supply become less certain. Given the outlook for diesel prices, we now anticipate cash operating costs for the year could be close to the upper end of our $90 to $98 per tonne guidance range. Uncertainty in global oil and diesel markets will require ongoing assessment of our cost profile. The positive aspect of the global energy market disruption is the potential for higher realized coal prices. The international coal price indices we sell against increased 5% to 14% during the quarter despite some buyers in the thermal market running down winter stockpiles. Due to our contract structures, the benefit of rising prices will start carrying through to our realized prices from the second quarter onwards. I'll now hand over to other members of the executive team to share further details from the first quarter, starting with David Bennett, our Executive General Manager of Operations. David Bennett: Thank you, Sharif. Our positive trend for total recordable injury frequency rate continued. It reduced to 5.77 at the end of March. Although our rate is below the industry weighted average of 9.6, we remain committed and focused to further improving our safety performance. During the quarter, we produced 15 million tonnes of ROM coal, 1% less than the first quarter last year. From our ROM coal, we produced 11.9 million tonnes of saleable coal, 5% less than the first quarter last year. Sharif mentioned diesel supply. Yancoal's operations and procurement teams have been working closely with our diesel suppliers regarding continuity of delivery. Currently, operations are running normally, and we expect this to remain the case until at least the end of May. Longer term, there is some uncertainty as supply will ultimately be influenced by the availability of crude oil in the global market as well as the regional refining and shipping activity. Should diesel supply become less certain in the future, various adaptions to our open cut mine plans are possible. These adaptions include reducing lower priority fleets, slowing overburdened removal activity whilst delivering ROM coal and maximizing use of our electric rope shovels and draglines instead of diesel-powered hydraulic excavators. As our underground mines are less diesel intensive, revisions of those mine plans should be minimal. Looking at the operational performance in the first quarter, the Queensland mines, Yarrabee and Middlemount were impacted by extropical Cyclone Koji early in the quarter, but subsequently recovered the lost production. By contrast, New South Wales mines had minimal weather-related disruptions during the quarter. To facilitate production throughout the remainder of the year, we have prioritized overburden removal at most open cut mines, and this should ensure we meet our forecast production. However, as Sharif mentioned, the outlook for our cash operating costs has changed since we provided the guidance in February. In 2025, diesel comprised approximately AUD 7 a tonne of direct mining costs. This figure was consistent within our 2026 budget. However, as diesel pricing increases have started to have an effect, we now suggest cash operating costs for 2026 could push towards the top end of the range. I'll now hand over to Mark Salem, our Executive General Manager of Marketing and Logistics, to provide commentary on the coal markets. Mark Salem: Thank you, David. Our attributable sales were 8.2 million tonnes, a decrease from the prior quarter that reflected lower sales production and the timing of shipments relative to the reporting period. During the quarter, the API5 index averaged USD 81 per tonne, up 5% from the prior quarter, and the GC Newcastle Index averaged USD 120 per tonne, up 12%. In the met coal market, the Platts Low Vol PCI index averaged USD 161 per tonne, up 14%, and the Platts Semi-Soft index averaged USD 146 per tonne up, 14% as well. These increases are yet to flow through to our realized prices. After converting to Australian dollars, our first quarter average realized prices were similar to the prior quarter at AUD 134 per tonne for thermal coal and AUD 213 per tonne for metallurgical coal. Our overall average realized prices for the first quarter was AUD 146 per tonne compared to AUD 148 per tonne in the prior quarter. The year started with conditions in international coal markets gradually improving before global energy markets were disrupted due to the Middle East conflict throughout March. There was immediate increase in speculative coal trading activity, direct impacts on the physical coal markets have been slow to emerge. The general expectation across energy market participants is that reduced Middle-Eastern liquefied natural gas LNG supply prompts gas-to-coal switching for power generation. This thesis is supported by indications that Japan, South Korea and Taiwan will lift restrictions on coal-fired power generation to improve power generation stability. However, higher levels of post-winter coal stockpiles in these countries have mitigated underlying demand as many end users take a wait and see stance. Across the seaborne thermal coal market, there was a moderate decrease in supply during the first quarter compared to the same period last year. Supply from Australia was the same due to limited weather disruptions and minimal shipping queues. Indonesian exports were 5% lower due to uncertainty about export policy implementation and were also constrained by the expiry of temporary quota allowances. So far this year, there has been a mixed demand activity in seaborne thermal coal market. The 2 largest importers, China and India have reduced imports due to elevated stockpiles and domestic production. Reductions were 5% and 12%, respectively. Elsewhere, demand increased 3% in Japan, where coal is a balancing fuel source for power generation and the removal of restrictions on low-efficiency coal-fired power plants are planning to conserve LNG. Also, South Korea demand increased 25% as cost optimization in power sector favored coal-fired power stations. Looking at the metallurgical coal markets, they were broadly balanced through the quarter. One positive factor to note was an apparent shift in conditions to cost-based pricing rather than demand-driven pricing. This shift suggests supply has rebalanced to the point where the marginal cost of supply is setting spot prices. If that is the case, higher costs associated with diesel prices might be passed on to metallurgical coal customers. I will now hand over to Kevin Su, our Chief Financial Officer, to address the financial position. Ning Su: Thank you, Mark. For the past several quarters, we have talked about our strong financial position. The cash balance and access to debt allow us to continue Yancoal growth story with the cash flow acquisition. We ended the quarter with over $2 billion in the bank. As Mark mentioned, sales were lower this quarter due to factors such as the timing of the shipments, but the differential between production and sales always evens out over time. The cash flow will be caught up in the subsequent periods. In the cash flow announcement, we said between [ USD 650 million and USD 850 million ] of the upfront payment will be funded with cash. The final amount will be influenced by cash accumulation between now and completion late in the third quarter. [ Kevin ] explained how we are projecting higher operating costs than we were when we set our guidance, but Mark also alluded to the higher realized prices we are likely achieve in the near term. We will determine the optimal cash amount as the completion date approaches. One of the factors in the determination will be the outlook for the shareholders' distribution in the future periods. Speaking of distributions, just last week, we paid [ $0.12 ] per share fully franked final dividend for 2025. This took [ $161 ] million from our cash position. I'll now hand back to Brendan to coordinate the Q&A session. Brendan Fitzpatrick: Thanks, Kevin, Mark, David and Sharif for highlighting the drivers of our first quarter performance. We will now move on to the question-and-answer session, starting with questions from the phone, then moving on to questions submitted via the webcast. Desmond, could you please initiate the process for questions via the phone? Operator: [Operator Instructions] There are currently no questions on the phone. Please continue. Brendan Fitzpatrick: Thanks, Desmond. I'll come back to you shortly to check against the phone. In the meantime, let's take a look at the webcast questions coming through. Unsurprisingly, diesel is one of the topics at the top of the list. We did provide some comments through the earlier part of the webcast. But if we could look at some of the questions and address them once more, could we provide an update on the diesel shortage situation in Australia, whether we see any easing of the conditions and if coal production has been impacted as a result of diesel supply. I'll take that to mean both at a company level, but also at an industry-wide level, Sharif, could you provide an initial comment? Sharif Burra: Yes. Thanks, Brendan. At the moment, we have stability and security of supply at the very least until the end of May. We are working very closely with our suppliers. And whilst at this point in time, there is uncertainty, we are preparing the operations in the event we do get some constrained supply for our operations. We haven't adjusted our production guidance or target for 2026 at this point with the exception of the cost increases that we expect to start to see flowing through with the higher diesel price. We do have operational flexibility, and it's not an apples-for-apples across all the operations. Our underground mines use comparatively very low volumes of diesel, and we would anticipate to be materially less impacted than perhaps some of the open cut mines, albeit some of our open cut mines, we do have a higher proportion of electric powered equipment, draglines and road shovels, et cetera, that we will optimize. So at this point in time, we are looking at some options across particularly the larger open cut mines if the constrained supply does eventuate. But a direct supply constraint won't necessarily materialize as a direct impact on ROM production. And as you will note, we are prioritizing overburden removal in the front half of the year to allow us to free up the coal and production for the second half as well. So I might leave it there, Brendan. Brendan Fitzpatrick: Thanks, Sharif. It's a good and expansive answer. It covers a lot of the topics coming through -- sorry, a lot of the questions coming through on the topic of diesel. There is a question there that asks us to think ahead. And if the disruptions supply from the conflict in the Middle East was to last 50 or even 90 days, do we have a sense for what the potential diesel shortage might look like. And again, I'll ask that question both at a company level, but then more collectively at an industry level. Sharif Burra: Yes. Thanks, Brendan. I wouldn't anticipate that diesel would be turned off completely for 50 or 90 days or likely is a reduction in supply. Now that gives us the opportunity to optimize the diesel usage within our minds to optimize our portfolio in terms of output. And I would anticipate the industry would do this. This broadly would impact all mining operations throughout Australia and at different levels, given the makeup of the diesel usage for each of those operations and sites. At Yancoal, we understand this very well. We understand where we would prioritize our diesel usage to optimize our returns. But I don't, at this point in time, envisage a scenario where diesel is totally turned off. Brendan Fitzpatrick: Let's stay on that topic of diesel. With regards to our diesel supplies and having secured supplies until late May, are we able to provide any commentary about the nature of the longer-term contracts we have with refiners and suppliers or whether we have inventories on site or outside the mine site that we can draw upon? Sharif Burra: Yes. I won't go into the detailed contractual detail of our suppliers. We are -- our sites are under supply obligations. Our sites have been maintained at the requisite supply levels on site. We do carry those stocks on site, but we do rely on our suppliers to maintain those supply levels on site. I might leave it there. Brendan Fitzpatrick: Okay. Perhaps just to clarify on that -- in the context of supplies to our mines, do we see any differentiation between Yancoal and the supplies of diesel it receives relative to other industry participants in the domestic coal producing sector? Sharif Burra: I think materially, Yancoal is under long-term supply contracts. I would anticipate many of our peers to be of a similar nature, given that we are less exposed to the spot market for diesel, where some others may not be, but we're focused on Yancoal supply and security of supply. Brendan Fitzpatrick: Let's move off the topic of diesel for a moment and on to the coal markets. There's a question seeking clarification on how much thermal coal is sold at spot prices versus fixed-term contracts and how much of the increase in recent coal prices Yancoal has captured or will capture in its contract structures. Mark, could I turn to you for a comment on the contract structures and the price activity and what we're realizing now and going forward? Mark Salem: Yes. Thanks, Brendan. Happy to answer that question. Look, I suppose in line with the market shifts, we're seeing a lot more buying on index-based pricing. And even if it's a term contract, it can still be associated with an index-linked formula. So the old traditional fixed term contracts at a fixed price or at a negotiated price per quarter is changing to more of an index-linked price based on a period of time typically prior to shipment. If it's a term contract where we have multiple shipments, those shipments are typically priced ahead of the delivery period. So we have a known position still based on an index. And most of our business is contracted in that manner these days. And this is why we always talk about this lagged impact on index pricing to realize pricing aspect. Does that cover the question? Brendan Fitzpatrick: I think that's sufficient. Desmond, I'll turn it back to you. We'll check if there's any questions coming through on the phone line, please. Operator: [Operator Instructions] There are currently no questions on the phone. Please continue. Brendan Fitzpatrick: Okay. Back to the webcast questions, sticking with the topic of energy markets. The question coming through is, are we surprised by the relatively muted response from coal prices given the disruption to the global LNG market? And is it related to shoulder season demand weakness and running down of inventories. Mark, could I turn to you once again, please? Mark Salem: Sure. I suppose -- thanks, Brendan. In terms of being surprised, I think the answer is no. We realized that prior to March, most of our buyers had very high stocks. and we're well covered coming into this energy crisis caused by the Middle East conflict. As a result -- in addition to that, I should say, we're also going into the shoulder season, which the question also highlighted. So we weren't surprised that we've seen a dramatic increase in the paper prices to go up, but we've also seen a dramatic fall since the Strait has reopened. So we're assessing that. We're continually assessing. We are coming into the summer season. We hope that we'll see some more buying coming through. Brendan Fitzpatrick: Thanks, Mark. Let's move on to some questions in the financials. There's -- one of our participants has identified the relatively flat cash balance from end of December through to the end of March and seeking clarity on whether it is due to inventory build and normal seasonality, testing whether there's cost or CapEx components in the first quarter that were relevant to this outcome and any other factors that might be relevant to the circumstance. Kevin, could we turn to you, please? Ning Su: Sure. Thanks, Brendan. I think that's the right observation. The lower cash balance largely driven by lower shipment, which reflected by a higher inventory [ base ]. From a CapEx perspective, everything is pretty consistent with what we have been planning. Are there are some other potential reasons contributing to the lower cash balance such as some tax payment for timing difference. But at end of the day, is largely driven by the shipment, as I just mentioned. Brendan Fitzpatrick: And Kevin, as you indicated in the comments earlier, the shipments balance out over time. So the difference between production and sales in any one period will normalize over time. Ning Su: Yes, that's right. Yes. Brendan Fitzpatrick: Thanks, Kevin. On the topics of the financial setting, the question looking back to the acquisition of Kestrel, which we announced last week. And the question asking what is the outlook for dividends and dividend capacity going forward. Kevin, please? Ning Su: Yes. I think -- thanks, Brendan. I think that's quite a simple feedback to the investors. It's not in our company's intention to change our dividend policy. We will still pay dividend as what we've been planning as 50% free cash flow and 50% NPAT, whichever is higher at the general guidance. Brendan Fitzpatrick: Thanks, Kevin. Sharif Burra: Brendan, the other comment I'd make is the acquisition is expected to be immediately earnings per share and free cash flow accretive. Brendan Fitzpatrick: That's good observation. Thank you, Sharif. Just about through the end of the webcast questions. If anyone on the webcast has a question, please take the opportunity to type and submit as soon as you can. Desmond, I'll come back to you for a final check for questions on the phone. Operator: [Operator Instructions] There are no questions from the line. Please continue. Brendan Fitzpatrick: Okay. I see one final question on the webcast. It's returning to the topic of diesel. And then the second question has come through, I'll get to both of these. First one on the topic of diesel. With the diesel supply that we've been talking about, is there any capacity for Yancoal to consider alternative power, structures, renewable energies and the likes. Sharif given the nature of our operations, do we have any flexibility to adjust our diesel consumption and usage? Sharif Burra: I think this comes back to what David had mentioned previously, where we do have electrified equipment. So the underground operations, they're already electrified. We rely on electricity in the open cut mines, some of the mines have the electric shovels and the draglines and we would obviously see no impact on those that don't consume diesel. With regards to the heavy mobile as moving equipment, trucks and the like the transition to renewable energy on those is something at the moment that whilst the industry and we are certainly looking at is not readily available for deployment. So that would be something that couldn't be readily deployed immediately, i.e., battery electric truck technology, et cetera. That's still a little way down the track. Brendan Fitzpatrick: Now, we do have a few more questions coming through. Again, on the topic of diesel, can we comment on the influence on the potential for higher diesel prices to influence and affect our cash operating costs? Sharif Burra: Yes. I think what we would say is what we've said here is our forecast cash operating cost of $90 to $98 per tonne our guidance provided at the start of the year. Our initial forecast suggests that the higher prices could push 2026 cost towards the top end of that range. Brendan Fitzpatrick: Okay. And speaking of costs, there's a question coming through asking what realized price Yancoal would need to achieve to be cash breakeven for 2026. There are several components to this. I appreciate the cash operating costs, which we've guided to and then the subsequent elements, CapEx and the like. It's not typically something we've been specific on. But Kevin, is there some commentary we could provide that would provide context for this question? Ning Su: I think, Brendan, you made a very good summary already. It's a good indication from the guidance, we can look at operating cash cost. But at the same time, there's a big component need to be balanced, which is the CapEx. And I put these 2 together, largely going to decide what would be the cash breakeven. Yes, but at least not something we just openly disclose to the market. Brendan Fitzpatrick: Given currently, there's no debt, so there's no financing costs. We would make our tax payments typically on a monthly basis of pay-as-you-go. There'll be those components and the corporate overheads. So it would be dependent on all those elements being aggregated to reach an estimate for the breakeven price. There's a couple of questions on the acquisition. And Kevin, we momentarily -- a moment ago, we talked about the payout ratio and the dividend structure that the company has in place. If the acquisition does not affect the dividends, does that mean the payout ratio remains above or around 50%? Ning Su: Thanks Brendan. Our general guidance is about 50% of free cash and/or 50% NPAT, whichever is higher. In the case, the free cash flow is better than NPAT, which has happened in the past few years, you will notice the payout ratio could be above 50%, and we are not changing our plan. Brendan Fitzpatrick: Okay. Kevin, I'll stay with you. One of the questions coming through is regarding the cost of debt we're using to fund the acquisition. Is there anything we can say on the cost of debt that we have on that facility that we plan to put in place? Ning Su: Thanks, Brendan. I would love to share the cost but unfortunately, we are bound by the confidentiality agreement with the financiers. So we are not able to disclose precisely how much funding costs we are paying and will be paying. However, we just want to assure our investors, Yancoal is very proud about our funding history. We always have a very competitive facility with us. And then in the future, when we disclose our annual results, we normally disclose the average earning cost in our financial results. So that's a good place for any interested investors to have a look. Brendan Fitzpatrick: Thanks, Kevin. We've had several questions on these availability and production impacts at the operational level. But a different topic coming through now is the comment on shipping freight, fuel costs, what that could potentially mean for our customers and the delivery of seaborne coal to the international marketplace. Mark, do you have any thoughts you could provide on this topic? Mark Salem: Sure. Yes. Thanks, Brendan. Look, we have seen charter party rates appreciate in terms of reports due to the cost of fuel and bunkering. In the height of the crisis, we also saw some countries restrict bunkering and we saw a lot of vessel diversions from normal bunkering ports to other ports bunkering which ended up delaying some spending. But more recently, we've basically seen a return to normal bunkering and very minimal impact on the business. Vessels are reviving at their scheduled time of arrival, and we're not seeing any delays in natural physical arrivals. Brendan Fitzpatrick: Okay. So at this point in time, there's no suggestion that we could be looking at circumstances similar to 2022 with supply constraints, albeit at that point in time was largely weather related. But in terms of current market conditions and supply constraints that we might potentially encounter in the international trade? Mark Salem: Yes. No, the supply is still quite strong from a coal supply point of view. The LNG supply comes from a variety of different markets. And we haven't seen a very strong switch of the coal to -- from LNG to coal. And in terms of coal usage, we haven't seen that jump as expected due to the energy crisis. Brendan Fitzpatrick: But is it potentially still yet to play out in its entirety, given the time lag between supply and delivery in oil and gas markets and then the carryover to coal markets and then the regional impacts around the world? Mark Salem: Yes, we could still see that throughout the -- especially towards the end of Q2 coming into the summer burn period when demand picks up, we could see some impact from the crisis -- lagged impact from the crisis. Brendan Fitzpatrick: Thanks, Mark. Just one question has come back through again. It was on the topic of renewable energy and asking whether Yancoal considers renewable energy. I asked it previously in the context of operational supply, but is there a broader thought we need to contemplate in terms of general power usage and renewable energy consumption and energy mix across the company? Mark Jacobs: Look, I think -- Mark Jacobs here. We have looked at renewable energy opportunities in the past, and we considered solar in the past. The problem that we have is that all of our operations are 24-hour operations. And so we're still reliant on the grid. We are, however, very close to getting state government approval for our Stratford Pump hydro projects which will provide long duration storage of renewable energy into the grid. So that is one opportunity that we're continuing to investigate. Brendan Fitzpatrick: Thank you, Mark, and thanks to everyone on the call. I've addressed all the questions coming through on the webcast. Sharif, could I please hand across to you to provide the closing remarks. Sharif Burra: Thanks, Brendan. This is the fourth time we've engaged with the market since the start of 2026. In January, following the fourth quarter report, we highlighted the production records delivered in 2025, thanks to our world-class assets run by some of the most capable people in the industry. With all that is happening in global energy markets and our acquisition of Kestrel, it's important to remember our large-scale, low-cost thermal coal mines are the foundation of our business. We delivered a great production performance last year and hope to improve upon it this year. In February, following the 2025 results, we talked about continuing to reward our shareholders with fully franked dividends. We also highlighted the strong net cash position and continued access to debt markets that provided considerable financial flexibility. Then just last week, we were in a position to tell you how we'd utilize that financial flexibility by acquiring Kestrel Coal Mine. We strongly believe Kestrel is a high quality and attractive acquisition that will deliver on Yancoal's value-adding growth aspirations and positions the business to deliver strong performance and shareholder returns in the future. We see this acquisition as another great step forward for the business. Through all these discussions, I see a common theme, we deliver on what we say we will do. This starts with operating our mines safely and efficiently to deliver great operational performances. We reward our shareholders with dividends while being disciplined with our capital management allocations. Then when the right opportunity was available, we acted decisively to continue growing the business with a great asset that will enhance our portfolio. Thank you once again for joining us. I hope you have a great day. Brendan Fitzpatrick: Thank you, Sharif. Desmond, could you please conclude the call. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Ulrika Hallengren: Welcome to the presentation of Wihlborgs' first 3 months report 2026. Growth, cash flow and core business is our mission. And even if the world gives us some challenges, our region continues to deliver not only [Audio Gap] quarter in 11 years, but I see no new trend in this, just a reminder that a quarter is a short period. Net debt to EBITDA at 10.5x, good access to financing continues, and we have acquired our first premises in Carlsberg Byen in Copenhagen. And with some figures on that, the rental income was SEK 1.150 billion, a new record, the operating surplus SEK 800 million and in terms of property management SEK 520 million. The result for the period increased to SEK 548 million, corresponding to SEK 1.78 per share and EPRA NRV has increased by 10% to SEK 101.14 per share adjusted for paid dividend. A comparison of the rental income Q1 '25 and Q1 '26, indexation, plus SEK 13 million; acquisition, plus SEK 46 million; currency effect, minus SEK 12 million; additional charges, plus SEK 23 million, and completed projects, new leases and renegotiation plus SEK 35 million. And the net letting was negative with minus SEK 35 million, the first negative quarter after 43 quarters in a row with positive numbers. New leases of SEK 49 million and terminations of SEK 84 million. Even if every single termination is a loss, the volume of termination as such is close to last year and no drama in that, but the amount of new leases in Q1 are too low to meet that. The year started quite slowly, picked up a bit. But then when the war in the Middle East was a fact, all discussions were pushed forward. Over 50% of the termination was in Denmark, and we know that the market there is quite strong, so I expect that we will see a pickup. We also had SEK 8 million in Sweden from bankruptcies that affected the result with minus SEK 1 million, but terminations had a yearly rental value of SEK 8 million. Now, in April, things have changed, and I think the list of possibilities and the ongoing discussions actually are quite good. That doesn't mean that things will be easy ahead, and I cannot promise positive net lettings in the coming 4 to 3 quarters, but at least we have a number of good discussions ongoing. Here are some of the tenants that we have signed during Q1, the defense industry, which, for example, the new and expanded lease with MilDef is a growing sector. And we also see some examples of interesting and growing tech companies like Intermail and the tech hub Hedge in Helsingborg also continues to attract innovative AI companies. Here, we have the net letting in a historical perspective, lettings in green, terminations in light blue and dark blue stacks are the net letting. We don't win every lease opportunity, which is annoying, but the hit rate over time is good, and let's see how we can develop this further on. And the list of our 10 largest tenants in alphabetic order, strong customers, and they contribute with 90% (sic) [ 9% ] 90% of rental income, 7 out of 10 are governmental tenants and the public sector contributes with 22% of rental income. The rental value as of 1st of April '26 is SEK 5.157 (sic) [ 5.127 ] billion per year, first time over SEK 5 billion, plus 11.6% and rental income, SEK 4.523 billion, plus 10.3%. Strong figures, and this is an effect of acquisitions, indexation, investments and, of course, tenants willing to pay for the right quality. Looking at the like-for-like figures, the properties we owned a year ago, excluding projects compared with updated figures, we can see that rental value is up 2.2% and rental income is up 1.1%. Like-for-like does not include the large acquisition we did 1st of April '25. As said last report, it's good with the growth also in the like-for-like stock, but to get the growth we aim for, acquisition and investments will continue to be important, especially in times of higher vacancy. Changes in the market value of our properties, we started the year with SEK 64.414 billion in accordance with the external valuation of 100% of our portfolio. We have made acquisitions, which add on SEK 534 million; investments SEK 562 million; divestment, minus SEK 4 million; changes in valuation, plus SEK 19 million and together with currency translations of SEK 117 million, that summarized to a value of SEK 65.642 billion. Valuation parameters haven't changed since last -- since year-end, and that includes assumed indexation of 1%. So very small changes of valuations that growth comes mainly from investments and the transaction we made in Copenhagen. Here's a long-term trend for portfolio growth from SEK 7 billion to SEK 65.6 billion in 21 years and growth every year without taking in any new equity from our shareholders. These figures, the running yield show how we actually perform in relation to the valuation, so this is not the valuation yield. For the whole portfolio, the occupancy rate is 90%, excluding project and land, and with an operating surplus of SEK 3.356 billion that gives a running yield of 5.5%. Fully let, the portfolio would give around a running yield of 6.3%. Good earnings capacity in relation to the value of the portfolio and good cash flow generation is the foundation also ahead. The occupancy has improved in some areas and lost a bit in others. What we know is that of the total vacancy, approximately 14% are already signed, but not entered yet and for additional 6% of the vacancy, we have ongoing discussions with possible tenants. So a lot of positive work in that, but we will also add on vacancy from terminations. Additional new build projects will move from the project line to the running portfolio line and possible transaction may also affect vacancy, so no exact guiding ahead. But I expect occupancy numbers for the portfolio to be relative flat next quarter, but with somewhat increased income from the base rent figure. Parking and additional charges may vary. In the office portfolio, the market value is SEK 51.451 billion with an occupancy rate of 90%, 90% in Malmo, continue with small improvements in Helsingborg to 91%, 89% in Lund and 91% in Copenhagen. The operating surplus from offices summarized to SEK 2.781 billion and a running yield of 5.4%, 6.2% fully let. The logistics production portfolio have a value of SEK 9.315 billion, 92% occupancy in Malmo, 83% in Helsingborg, 95% in Lund and 97% in Copenhagen. In all, 88% occupancy with a running yield of 6.2%, 7.3% fully let. The development of our total portfolio running yield, 5.5% brings stability, not least since the portfolio overall has a high quality and good location. As noticed before, a good increase of the running yield since 2021. Some sustainability highlights. We have improved from 0% to 35% certified area in our Copenhagen portfolio within 1 year, and there is more to come. We have also new sustainability targets from 1st of January and we will report on a wider spectrum with focus on energy efficiency, carbon dioxide emissions and climate adaptation as well as important social and governance measurement. More on that topic in the report, but I'll show you some figures here. It was a cold start of the year but to be able to compare how we improve our energy use, we also present figures normal year corrected, and of course, also in kilowatt hours per square meters. Here you can see the improvements quarter-by-quarter and year-by-year. We present the carbon dioxide emissions from Scope 1 and 2 in the same way. Here, we have higher emissions in Q1 according to more gas used in Denmark during this period of energy uncertainty in the world. We also compare energy production from solar cells and not at least, we have a new goal till 2020 (sic) [ 2030 ] to replace refrigerants in our cooling systems to more environmental neutral gases, and this work continues. A catalog of our value and properties in our 4 cities end Q1 '26, 38% of the value is in Malmo, 23% in Helsingborg, 17% in Lund and 22% in Copenhagen. Commuting across the Oresund Strait continues to increase and the entire region benefits from the fact that Sweden and Denmark complement each other's economic cycles. The increased focus on defense and resilience also contributes to investments in the region, not only correlated to industries such as Saab and MilDef, but also due to the fact that 90% of the important food to Sweden passes through our region. That means that Sweden depends on the infrastructure in the region and harbors, highways, railways and of course, the Oresund Bridge must be in good condition and well protected. The region as such benefits from that also in a long-term perspective. During the first quarter, we have acquired 10,300 square meters office and retail in Caroline Hus in Carlsberg Byen, property value of DKK 370 million and location that attractive both for living and working. A high density close to the city center, interesting mix of older refurbished building and new build, and as we see it, potential for growth rent in the area. And time for financials. Over to you, Arvid. Arvid Liepe: Thank you very much, Ulrika, and good morning, everyone. If we look at the income statement for the quarter, Ulrika has touched upon the figures already, but I would like to highlight that the rental income of SEK 1.150 billion is actually a record for the fourth quarter in a row when it comes to rental income in an individual quarter, up 10% versus the same quarter 2025. And as we write in the report, we had a positive one-off effect of SEK 15 million coming from a terminated lease in the Danish portfolio, which was settled with a so-called termination fee. But nevertheless, we had a good growth of 10% of the rental income. The operating surplus amounted to SEK 800 million, up 9%, and that is despite, as you can imagine, having higher costs for snow removal and for heating during Q1. For those of you living in Sweden, you know that the winter was colder and longer than most winters, not least so here in Southern Sweden. Income from property management amounted to SEK 520 million, which is up 12% versus the same quarter previous year. Value changes in the property portfolio were basically flat, plus SEK 19 million, so no big changes at all. And the underlying assumptions, as Ulrika mentioned, was also basically the same as at year-end. We had positive value changes in our interest rate derivatives portfolio, plus SEK 191 million and in total, a profit for the period of SEK 548 million. On the next slide, looking at the balance sheet, investment properties versus 12 months previously went up by SEK 6.5 billion and stood at SEK 65.6 billion in total. Is the presentation of the slides working or not? Ulrika Hallengren: Not sure. Let's see again. Arvid Liepe: Let's see, if we can get a signal from somebody if the slides are visible. Looks okay over there. Equity end of March stood at SEK 24.9 billion, up SEK 1.4 billion versus 12 months previously. And then we've, of course, during that period, paid almost SEK 1 billion in dividends. The borrowings stood at SEK 34.2 billion, up SEK 5 billion versus 12 months previously. And as you remember, we have made acquisitions of approximately SEK 3 billion during that period. And also, we've had a high investment level in our project portfolio. Moving to the next slide, looking at our key numbers, the equity assets ratio now stands at 36.8%, the LTV has gone up slightly to 52.1% and the interest cover ratio continues to be at a strong level at 2.9x. Looking at per share numbers, the EPRA NRV stands at SEK 101.14 per share, which adjusted for paid dividend is up 10% versus 12 months previously. Looking at the next slide, the long-term development of EPRA NRV is visible in this graph and the average annual growth still stands at 15% adjusted for dividends, so a strong long-term growth trend in EPRA NRV. On the next slide, you see the long-term trend for the other financial ratios that we continuously monitor. On the left-hand side, you see the interest cover ratio. And as you remember, it was on extremely high levels during the 0 interest rate period 2019, 2020, 2021. But the 2.9x level where we are currently is well above the long-term goal of or the goal that we have of a minimum of 2.0x. On the right-hand side, you can see the equity assets ratio, well above our threshold of 30%, stands at 36.8% currently. And the loan-to-value is well below our limit of 60% at 52.1%. On the next slide, you can see our net debt in relation to EBITDA. Also there, we have a long-term stable development; this ratio now stands at 10.5x. And we think it's a very relevant number since it reflects the cash flow that we actually generate in our core business. On the next slide, you can see our sources of funding as of end March. Half of our funding comes from bilateral bank agreements with Nordic banks, 16% from the bond market, 34% from the Danish real mortgage system. The bond market is, of course, more sensitive to the geopolitical development than the bank market is. But I would still claim that the bond market works in a quite okay way also over the past month or so. The beginning of the year, the bond market was actually quite strong, and we issued some new bonds in January, beginning February on attractive levels, I would claim. Our ongoing discussions with our banking relationships tells us that the banks are continuously willing to lend money. So a positive sentiment from that front. And the Danish real mortgage system, I would claim has a stable positive development as always. On the next slide, you can see the structure of our loan portfolio with lots of details. The average interest rate that we're paying currently is 3.21%, 3.24% if you include the cost of committed credit agreements. This means that our marginal cost of debt is actually pretty close to the average cost of debt that we're paying currently. On the next slide, you can see the development of the fixed interest period, which now stands at 2.6 years and the average loan maturity, which stands at 4.8 years. No drama in the development of these numbers, and we continue to work according to our financial risk management policy. On the next slide, you can see the development since 2019 of available funds, currently SEK 2.6 billion, which gives us day-to-day flexibility to manage our operations in a good way. And with that, I hand the word back to you, Ulrika. Ulrika Hallengren: Thank you. I'll give you an update on our investments and progress and a quick overview of our largest project. During Q1, we have invested SEK 562 million, and it remains SEK 1.738 billion to invest in approved projects. We continue to expect yield on cost at 6% or a bit over 6% for new build offices and 7% or a bit above for industrial and a good mix of refurbishment and new build in the portfolio. Let's start with projects soon to be completed. In Malmo and Hyllie, we continue with Blackhornet 1, Vista, an SEK 884 million investment. The mobility hub was completed end '24 and now the first tenants are in place. One new lease signed in Q1, but we work hard for the next ones, yield on cost 6.2% and approximately 40% pre-let. From 1st of January, the total area of the building are included in Malmo offices best classified as project. And during Q2, we will count the project as completed even if adaptations for tenants will continue, of course. In Lund, Posthornet Phase 2, a new modern office right beside the Central Station will also be completed in Q2, but moving in continues rest of '26, 10,100 square meters, SEK 448 million, yield on cost 6.5%, a very successful project. In the southern part of Lund, we continue the development of Tomaten; this project is for BPC, will also be completed in Q2 '26, and we invest SEK 79 million, 3,600 square meters and yield on cost 7%. And next to that at Surkalen 1, Note have started to move in and Lund University will move in, in Q4. Well-used land area and long leases in total, 14,500 square meters, investment SEK 260 million and yield on cost 9.2%. The large project at Amphitrite 1 in Malmo for Malmo University is running well in accordance with plan, a bit above 20,000 square meters for Malmo University at a 10-year lease, investment SEK 1.130 billion and completion is planned to late Q4 '27. Discussion is ongoing regarding a positive -- a possible prolonging of the lease to 20 years, both positive and possible. At Kranen 7 in Malmo, we will invest approximately SEK 136 million in a preschool for the municipality, 2,900 square meters zoning plan approved and completion is expected to Q3 '27. Public Procurement Act for the contractor is still ongoing. And at Skrovet 6 in Malmo, we refurbished 11,000 square meters, 50% is pre-let to Cloetta and Media Evolution with completion starting Q3 '26, investment SEK 149 million for a total technical shift in the building and a quick change from a quite closed building for Saab and now open up to being the new entrance to the Dockan area. Good interest from tenants and several ongoing discussions. A new project in Helsingborg at Muskoten 20, where we invest for our tenant MilDef, a combination of refurbishment of an existing vacant building of 2,400 square meters. We have new build 3,400 square meters and adding on the existing lease of 4,400 square meters. So in total, 10,200 square meters and SEK 97 million investment, including value of the land. Yield on cost, 7.2% and completion in Q3 '27. And the new project started at Sunnana 12:26. It will be a mix of tenants and a flexible building for smaller industrial logistics. It's a good product where we have very low vacancy in Malmo, pre-let 30% to one tenant, investment SEK 87 million, and completion is planned to Q4 '27. That was some of the ongoing project and just to touch on future possibilities, just as a reminder that we always look for new opportunities and are ready to start when we think the timing is right. Here are some office possibilities in Malmo in the area of Nyhamnen and Dockan, where we continue to work with the zoning plans, high interest for the future, of course and even if the figures on gross floor area are estimates, the volume are interesting as a part of the other development in the area. And 4 other possibilities in Malmo, industrial at Spannbucklan, research and offices at Medeon site, housing at Kranen 5 and offices at Naboland 3. In Lund, we continue to develop the land at Brysselkalen in the southern part of Lund. At the Ideon site, we have 3 project possibilities for offices and laboratories, 2 of them on these pictures, Ideontorget and Delta 2. And at Vasterbro, the work with the zoning plan continues. In Helsingborg and Landskrona, we also have a mix of different possibilities and the main part is in the Logistics and Industrial segment. And just a summary of Q1 again. Rental income up 10%; operating surplus plus 9%; income from property management plus 12%; negative net letting minus SEK 35 million; net debt to EBITDA at 10.5x. We see good access to financing, and we continue to grow this quarter an acquisition in Carlsberg Byen. And it goes without saying we continue with our focus on cash earnings and our future growth. And with that, we are open for questions. Operator: [Operator Instructions] The next question comes from Tobias Kaj from Nordea. Tobias Kaj: First question regarding the EU income in Q1 in Denmark. How large was the annual rental income in that contract? And did that already impact the occupancy rate in Q1? Or will we see the effect first in Q2? Arvid Liepe: Let me think if I have that number off the top of my head. It relates to Slotsmilen [indiscernible], where ATP have left the building. So it is vacant currently. I don't have the annual rental income off the top of my head, but giving a bit more flavor of what -- the way it works in the Danish market is that when a tenant terminates a lease, they're obliged to restore the premises to the shape the premises were when they moved in, which basically means that when a tenant leaves, you end up in a negotiating position to see how much should they actually pay to restore the premises to the original shape. And it's that type of payment that these SEK 15 million relates to in this quarter. Tobias Kaj: Okay. I understand. Also regarding the general occupancy rate, I think you previously have said that you expect some improvement during this year, and you write in the report that 14% of the vacancy is already pre-leased. Does that indicate that we should expect roughly a 1 percentage point increase in occupancy rates during the remainder of the year? Or will it take longer time to see that positive effect? Ulrika Hallengren: You should not expect that it's too early to say that because we also have terminations, of course. So what I see now is that we will be quite flat until Q2. And then it depends on what will happen with project completions and terminations ahead. But I definitely see as we have also given some notice before that the rental income continues to increase. Tobias Kaj: Yes. Regarding your interest expenses, how much do you capitalize related to project? And should we expect a significant increase in coming quarters as you expect lots of projects, both in the first quarter and in the second quarter? Arvid Liepe: SEK 9 million were capitalized in interest in the first quarter this year. And given that the project volume was very high during 2025, and it will still be reasonably high in 2026, but probably not as high, I wouldn't expect that number to go up. Tobias Kaj: Okay. And one final question. I think you have a swap contract of SEK 1.25 billion with very low interest rates that matures during this year. Is that like one contract in one single quarter? Or will it be a gradual effect in [indiscernible]? Arvid Liepe: No, it's spread out over Q2, Q3, Q4. It's not one contract. Operator: The next question comes from Lars Norrby from SEB. Lars Norrby: I'm looking at that net letting chart, Page 7. Looking at the termination volumes, which is, as I think you pointed out, is quite similar to the past few quarters. It's more an issue of, I guess, the amount of leases signed during the quarters that haven't been high enough to get a positive figure. But just on the termination figures, can you mention, are there any individual contracts of size that you can mention? And if so far, in that case, where geographically? Ulrika Hallengren: We have two leases with PostNord, one in Sweden of SEK 2.5 million and one in Denmark of -- I think it was SEK 7 million or something. Arvid Liepe: SEK 6 million, SEK 7 million. Ulrika Hallengren: In Denmark? No, SEK 4 million in Denmark. So in total, SEK 6 million, SEK 7 million. And we have Ahlsell here in Malmo with minus SEK 7 million. And then just a few on minus SEK 2 million. So nothing really large or something like that. But what we see is that the large portion of these smaller leases that always is a great motor in the business during Q1, the cautiousness was very -- everybody was very worried about what will happen, and we really saw that in the discussion. So we missed that volume in the new leases. Arvid Liepe: On the termination side, Ulrika also mentioned it during the presentation, but we had tenant bankruptcies, a few different, not one big one. But those bankruptcies have an annual rental value affecting the net lettings of between SEK 7 million and SEK 8 million in the quarter. That does not mean that we have credit losses of that amount. But in the net letting figure, it affects the numbers negatively. Lars Norrby: One more question. You mentioned here earlier on the call, I think, something along the line that after what happened in the Middle East, lease discussions ongoing were prolonged or delayed. Have you had cases where they've been -- the discussions have actually been terminated without having a signed contract related to what's happened geopolitically? Ulrika Hallengren: No, not what I can -- no. And as I mentioned, the list of ongoing discussion have increased significantly since February, March. So April and ahead looks quite decent, I would say. Operator: The next question comes from Fredrik Stensved from ABG Sundal Collier. Fredrik Stensved: I have three questions, if I may. First one is a follow-up to one of the earlier questions about the nonrecurring item in Denmark. Is -- the way I understand the answer, Arvid was that they moved out in Q1, but is this a large material lease in terms of annual rent? And if so, did they contribute fully throughout Q1 and then moved out in late March? I'm just trying to... Ulrika Hallengren: They moved out earlier, I think, in Q4 or something. So this was just a negotiation about the termination fee that were decided during Q1. Fredrik Stensved: Okay. Very good. Very clear. Perfect. Second answer, also, I think, pretty straightforward. Arvid, you talked about the bond market and the banking relationships and they were still sort of eager to lend, et cetera. Have you seen any moves in terms of margins with bank discussions during these, call it, 2 months of geopolitical uncertainty and the general uncertainty in the market? Arvid Liepe: We haven't had any refinancings or new financings. So we don't have any, so to speak, hard evidence of the prices. But my take is that the bank margins during March, April have basically been stable. I have not gotten the impression that they have moved much over the past couple of months. Fredrik Stensved: Very good. Then last question on the project completions that you talked a little bit during the presentation, Ulrika, Blackhornet and Posthornet now completed in Q2. But the way I understand it, at least Blackhornet, probably some move-ins already in Q1 and then some Q2 and then maybe Q3. How should we think about sort of the contribution in Q1, Q2? Will the tenants start paying in Q2 or later? And did they contribute anything to Q1 at all? Ulrika Hallengren: Yes, we had contribution during Q1, and we will see contribution during the autumn as well. But in a slower pace, no large significant moment where things suddenly will contribute in a more smooth, I would say. Fredrik Stensved: Okay. Is it similar for Posthornet? Or is that more binary? Ulrika Hallengren: Posthornet has the largest contribution during Q2 and -- but also during the autumn continued. Fredrik Stensved: Okay. So a little bit in Q2 and then fully or 70%, at least given the occupancy rate from Q3 and onwards? Ulrika Hallengren: Yes. We have something assigned for moving in, in Q4 as well in Posthornet, but most of it is now in Q2. Operator: The next question comes from James Cattell from Green Street. James Cattell: I had a question on the EPRA CapEx table on Page 25 of the report. I noticed that tenant incentives have increased quite significantly by almost SEK 100 million versus the first quarter last year. And also on the annualized basis was higher than full year '25. Is this going to be the run rate going forward for the whole of '26? Or is this just due to some one-off items? Arvid Liepe: To be open and frank with you, James, predicting the split of CapEx into these different categories is not extremely easy. So the tenant adaptations or the tenant or what EPRA calls tenant incentives will continue to be an important part of our CapEx because into that category falls a number of measures when we adapt premises to new tenants, and that will continue to be an important part of our ongoing business. But predicting the magnitude of these different parts of our CapEx is still tricky. Operator: [Operator Instructions] Ulrika Hallengren: Are there any written questions? Arvid Liepe: I have seen nothing arriving digitally. Okay. Operator: There are no more phone questions at this time. So I hand the conference back to the speakers for any closing comments. Ulrika Hallengren: Okay. Thank you for this. And of course, if you have further questions, you know just reach out to us, and we'll answer. So thank you for today. Arvid Liepe: Yes. Thank you, everyone, for listening in.