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Operator: Good day, and thank you for standing by. Welcome to the Lynas Quarterly Results Briefing [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lynas. Please go ahead. Jennifer Parker: Good morning, and welcome to the Lynas Rare Earths Investor Briefing for the quarter ending 31 March 2026. Today's briefing will be presented by Amanda Lacaze, CEO and Managing Director. Joining Amanda on the call today are Gaudenz Sturzenegger, CFO; Pol Le Roux, COO; Daniel Havas, VP Strategy and Investor Relations; Chris Jenney, VP, Sales and Market Development; and Sarah Leonard, General Counsel and Company Secretary. To Amanda to commence the briefing. Please go ahead, Amanda. Amanda Lacaze: Thank you, Jen, and thank you, everyone, for joining us again this morning. Jen tells me that we've had people registered to ask questions about a quarter 2 midday. So on that basis, I will keep my comments to a minimum. So we have plenty of time to deal with the question. But just sort of a few general comments, I often say that we've had a very busy quarter and guess what, which has had a really busy quarter, actually maybe busier than most. We were very pleased with our progress during the March quarter. When we put in place a number of initiatives which will provide foundations for the future success of the business and improved resilience and also ran an operationally a good business in the meantime in terms of continuing to be the only non-Chinese producer at scale of both NdPr of lights and heavies. So during the quarter, I mean, I think most people have observed that the price of NdPr has progressively firmed over the year. We certainly saw the benefits of that, and we recorded one of our top 3 of our quarters in terms of revenue. And it does appear that the market settings remain positive for the fourth quarter of this financial year. And in interest sort of looked back on the very first quarterly that I ever delivered and this puts into stark contrast, the difference between maybe businesses at the start of the journey in rare earth and where they may be some years later. The first quarterly that I was -- again delivered was 445 tonnes NdPr. Well, we delivered 2,000 tonnes this quarter. $31 million in revenue versus $265 million in revenue this quarter. So it's I think, a reminder of just sort of the various steps that we have taken over that period of time to consolidate our position as a global leader outside China. Well, our production is not quite at our 10,500 tonnes per year run rate, but it is moving towards it. During the quarter, we have continued to ramp up the final part of the Mt Weld expansion. And I am delighted to say that we have that ramp-up so far is at or above a McNulty 1 ramp-up curve. And I think that's the first in rare earth. But even with that, there are still some challenges as we bought that facility online, ensuring that like in the early stages, con grade was lower than it had been in a nice mature little old plant. And so the team has been working on that, and they've lifted that up, but that did give us a few challenges downstream. And we've had a few logistics challenges, but I'm sure that many of you on this call who have listened to any sort of results call would recognize that logistics has its own set of challenges at present. Heavy rare earth production, that's really the performance during this quarter just reflects the batch processing nature of our heavies at this stage. And for those of you who've been up to the lab, you will have seen that the -- we're packaging this in 25-kilo drums and you will have seen the small furnace that we use. And so we accumulate material. We run it through on a batch process. And so therefore, there's a bit more lumpiness in our production outcomes. However, suffice to say that within sort of our sales process, with respect to the heavies, we are having a great deal of success in being able to place us carefully and leverage full benefit from those sales. Of course, our sales outcome, the total revenue was very pleasing. I've seen some comments already on the sort of the price per kilo. And of course, we aim to make that clear within the report that, that reflected primarily product mix with some higher sales of lower-value La and Ce during the time. And the comparison on the NdPr is, of course, that we sell our NdPr on contracts. And with many of those, there's about a 1-month lag until we see sort of the price flow through into our revenue due to the nature of the contract. Costs remain tightly controlled, and notwithstanding we have indicated in this that we would expect that there may be some further influences from the conflict in the Middle East. This could sort of will likely reflect those materials, which are sort of directly affected by oil and gas, but also just looking at things like, for example, the Fair Work determination last night on ensuring that transport providers are able to recover costs, increased cost from fuel as a consequence of the Middle East conflict. However, I would point to you something of which we are enormously proud and that is, as we have moved to our hybrid renewable power station at Mt Weld that our diesel use now is on -- is virtually only in the mining fleet at the Mt Weld side. And the renewable power station is actually delivering significantly more than design where we're expecting renewables to be delivering around about 70% about our power requirement and the average renewable content was 95.7%. That is 870,000 liters of diesel saved just during the March quarter. So this does put us in a much better position as we're looking at sort of the various global effects at present. It's a pretty exciting quarter in terms of putting together a number of the long-term building blocks for our company. The JARE offtake agreement, which was announced on the 10th of March is really significant. And I think everybody has read that in some detail by now, but firm offtake with a small price is really important to us, an upside sharing arrangement, which is, we believe, relatively modest, although beneficial to both parties and we are sort of seeing this is really a really solid base for the business as it moves forward. Followed that up with an MoU on merging alongside our Japanese partners on further resource development, either at Mt Weld or other resources, and this is our work with JARE and JOGMEC on resource development has proven to be very constructive for our company over time, and we look forward to pursuing that further. And in addition, we announced the U.S. letter of intent -- binding letter of intent with the U.S. government, which sees the funding, which was previously allocated to Seadrift being reallocated to the purchase of rare products from our existing and planned facilities. And then, of course, as we have indicated previously, we are focused on developing strong and constructive partnerships with respect to metal and magnet making our key announcements there during the quarter as both related to Korean firms who we see as being potentially extremely good partners technically and also in terms of efficiency and economic outcomes. So LS Cable for metal making at their Vietnam plant and continued work to move to definitive agreements with JS Link for the new Magnet facility in Malaysia. So all in all, as I said, a very busy quarter where we focused on running a good business, continuing to take full advantage of the fact that we are the only ones who can take full advantage of the positive market at present. But at the same time, ensuring that we're setting ourselves up for success including with the sort of agreements, the agreements with both Japan and the U.S. the development of new capability and also within our sales group. So within our sales team, ensuring that we're setting up a customer portfolio, which will serve us well in the future and ensure that we leverage full benefit from our bundled sales. And of course, the final and really significant point also which sort of underpins the ongoing success of the business is the new license, which was renewed in Malaysia. Our operating license was renewed for 10 years from the third of March. We have been advocating for some time for an extended license rather than the 3-year license period on which we have operated to date. That requires a change to the AELA, the Atomic Energy Licensing Act in Malaysia, which was affected late last year and was then under that -- those varied conditions is the issuance of this 10-year license. It certainly, we're very pleased with that. We remain strongly committed to Malaysia, which has proven notwithstanding few twists and turns to be a very productive environment in which Lynas has operated. So having got to there. I'm really happy to take any questions now. And I think, Jen, are you the one sorting those out? Jennifer Parker: No. Maggie is going to open up for questions now. Amanda Lacaze: Back to you, Maggie, then. Operator: [Operator Instructions] First question comes from Rahul Anand from Morgan Stanley. Rahul Anand: Amanda and team, thank you for the call. Appreciate it. Look, my one question would be around Kalgoorlie. If you can please provide a bit of an update in terms of power reliability there. Is that fully remediated now at Kal? And are there any risks into the fourth quarter as we step into that just in terms of MREC availability? Amanda Lacaze: Thanks, Rahul. So since the really very serious situation towards the end of last year, we did engage very effectively, I believe, with Western Power and a couple of issues as it turned out, we're probably affecting power availability in a way that they didn't need to. And so we have had relatively stable power within the ELPS sort of framework through this quarter. It has not had the same effect on operational availability, uptime that we had seen, particularly in the previous quarter. I'm loathed to make a forecast on power in Kalgoorlie because as we have indicated previously, in Kalgoorlie, there is both a problem that she sort of the power available and also with some elements of the distribution network when everything's going well, this is not an issue, but I wouldn't want to be forecasting that everything will remain operating perfectly. I mean, I think everyone will remember the power being taken out by the lightning strikes on the transmission line -- transmission towers. So we continue to work on sort of alternatives. We have not taken the step of putting in place a diesel power station, because as I noted in my comments, we're pretty proud to make some significant savings on diesel at Mt Weld. However, even on the stated plan with respect to the network, we would see that the lead times to really making a significant change in power availability in Kalgoorlie as such that it is prudent for us to consider alternate solutions. But right now, we are not forecasting a problem in this quarter, touch wood, but I'm loathe to make any sort of definitive assertions on that basis. Rahul Anand: Okay, I understand. So I guess, tactically, it's quite hard to make a call on availability. But given that needs to be in your plans in terms of having reliable power going forward. Is there any time frame whereby you want to decide that and then flag that to the market so that there's clear visibility in terms of when you're planning to build a power plant? Amanda Lacaze: No, I don't want to make any further comment on it at this stage. Operator: Next, we have Paul Young from Goldman Sachs. Paul Young: Amanda, good progress for the quarter as you stated in Mt Weld's ramping up and tracking well. And I saw you're on top of the improved removal at Kalgoorlie which is fantastic as well. But just a question on potential shortage of chemicals in particular, sulfuric acid. Can you talk through your security of supply and maybe some of the cost sensitivities. And I'm noting I think you use somewhere between 1 to 2 tons of acid for every tonne of concentrate cracked and leached? Amanda Lacaze: Yes. Good question, Paul, and one which has our team highly exercised at present. Which, I'm sure, is the same came with most supply chain teams across the industry. So if I start first with Australia. We source -- we do not have an issue with supply in Australia at present, and we have some options for access locally, which we think is going to ensure that we're in a good position at least through to the end of the year. So the issue becomes more of an issue in Malaysia, not in Australia. And last week, I did get a few sort of inquiries when the Chinese put out an announcement that they would not be exporting acid. Well, we don't source any of our acids from China, so that's okay. The market is tight, but we're pretty confident about our ability to get the volume. So the effect will be a price effect and I think as everybody knows, that's a day-to-day event. And so we're managing that, but we would expect that sulfuric alongside some of the other sort of transport cost increases, et cetera, will make it a little more challenging for us in terms of costs in the fourth quarter, but we are all over it at present. And once again, sort of loathed to give you a forecast because as I think everyone knows, it is changing on a daily basis, but we would expect there will be some cost impacts in the fourth quarter. Operator: Next, we have Neal Dingmann from William Blair. Neal Dingmann: My question is around the MoU you have with JARE. I'm just wondering, how should we think about the timing of the mineral exploration around this MOU? And I'm also wondering, you didn't mention in the release, if there any update on the MoU around with Noveon Magnetics? Amanda Lacaze: Neal, welcome to the call. The MoU with respect to the development and the cooperation on other resource development, I would expect that we will be in a position to provide an update on that sometime during this quarter, notwithstanding that sort of definitive agreements are not going to be a bottleneck on that. I mean we have a long trusted relationship and we find, particularly in terms of resource development, geology, metallurgy that we have higher complementary skills. So yes, we think that we will be able to give you a little more on that in the coming quarter. And I'm sorry, the line branch has got cut here, I missed what was your second part of the question? Neal Dingmann: Just any update on the Noveon Magnetics MOU if there's anything going on there? Amanda Lacaze: Look, our teams are engaged there, Noveon did a further -- I think during the quarter or maybe late last quarter, did a further capital raise themselves and have a particular they're sort of completing their own internal business planning. To my understanding, we continue to work with them and particularly on offtake agreements to ensure that we are supplying relative material for some of the sort of highest priority customers. But I'll invite Chris Jenney who's on the call to add anything if there's anything there. Chris Jenney: No, nothing to add, Amanda, Yes. So obviously, there's lots of moving parts in the U.S. market. So we're just working very closely with the team at Noveon to work out the best offtake arrangements to meet their needs and obviously, to meet our needs. So we'll just give you updates as we progress through that. Operator: Next, we have Chen Jiang from Bank of America. Chen Jiang: I hope this is not the last time we speak to you on the results analyst call. First question just on this quarter's NdPr production. If I do the run rate or annualize this quarter's NdPr, it gives me roughly 8,000 tonnes of NdPr or roughly 22 metric tonnes per day of NdPr. That is likely to be 75% of your current NdPr annual capacity of 10.5. So I'm just wondering, I think previously, you mentioned a run rate of like 25 metric tonnes a day of NdPr. I'm just wondering what's the best way to think of your production versus capacity is 75% utilization rate we should apply or it should be higher. I guess the question harder. I'm just trying to get what kind of production going forward versus your current capacity of 10.5. Amanda Lacaze: Thanks, Chen. And I think as with all of these elements, as we've always indicated, the bottleneck tends to move around. We're a bit different from many mining companies. We have capacity at Mt Weld, at Kalgoorlie and then also at the LAMPS facility and each can be at a different stage. You're right. The annualized run rate at present is about 8,000 tonnes per annum. It would be our intention that, that is, again, in the coming financial year and the dependencies for that are partly the continued ramp-up bear in mind that we're only today, 6 months into the ramp-up of a big facility at Mt Weld. And so we're -- as I indicated, we didn't have an issue with the volume of material, but the con grade dropped a bit, which absolutely has an effect on downstream production. But I think that certainly, our objective would be to be moving up beyond the 25 tonnes per day. But maybe we're still sort of another year into consistent ramp-up right across the system to deliver that 10,500 tonnes. Pol, did you want to add anything to that? Pol Le Roux: Yes. Can you hear me? Amanda Lacaze: Yes. Pol Le Roux: Okay. Good. Yes, it's a good approach to address the nameplate capacity as tonnes per day. So we are way higher than what you can see in our numbers in terms of downstream daily capacity. And then you have two factors to take into account. One is a normal operation, you always face problems from time to time. So you have what we call OE, overall equipment efficiency, which is reflective of any failure you can have on equipment. So that's an 80% to 90% normal ratio. And then you have specific, as Amanda said, specific challenges for us is to adjust align the ramp-up of Mt Weld, Kalgoorlie and all the processes here in LAMPS. So -- but we're moving forward, it's in close to having an easier to forecast volume for easier to forecast. Amanda Lacaze: So the short answer, I mean, 25 tonnes a day will be the next sort of stop on the bus route, and then we will keep on moving from there. Chen Jiang: Right. So you are still ramping up. Okay. Amanda Lacaze: We are still ramping up. Chen Jiang: Yes. Got it. Can we have another follow-up of your price realization? So by looking at the China NdPr benchmark, quarter-over-quarter, it's a significant increase, almost 40% from USD 68 kilogram average in December quarter to USD 94 per kilogram in March quarter, excluding that, of course. But Lynas NdPr selling price is only up 25% quarter-over-quarter. So I'm wondering why -- or what I'm missing, why Lynas NdPr selling price is not increasing to the same scale to the index pricing in the March quarter? I understand some of your volumes are independent, but the price flow are still higher than index pricing. Is there any lagging or what I'm missing? Amanda Lacaze: Yes, yes. So I did actually try to explain that, Chen. We have our largest customers are on contracts, which referred to the prior month's pricing. So -- and I think we've tried to explain this previously. So on the way up, it lags, but on the way back down, it also lags. So generally about sort of a month lag by virtue of the fact that we are not selling into the spot market, and that's not ever our intention. Operator: Next, we have Daniel Morgan from Barrenjoey. Daniel Morgan: Just a follow-up on price basically or revenue. Can you help us in some way with the mix? I mean, you've highlighted quite clearly you did have a lower sales mix of high-value products. Just wondering if in any way you could give us a feel for how big the NdPr inventory build in the period was? And did you sell any Dy Tb and was there any marketing motivation behind the sales mix at all? Amanda Lacaze: Okay. So no, we didn't build significant inventory the sort of final numbers on sales often depend upon how many ships sale in the last week of the month. So if they didn't go at the end of the month, they've gone in the first week of April, say, for example. So no significant inventory build. Yes, more sales of La and Ce. And given that they are high volume, low price, they can -- they have an effect on that average selling price of limited sales of the heavies. And we are using our heavies very strategically. We -- we've talked about this previously, but we seek at all times to be in the business of long-term relationships with our customers. We don't sell into the spot market. We also don't sell our heavies just because somebody wants to buy a few heavies from us but don't have a broader relationship with us. So we bundle our heavies with other material and so our heavies sales and inventory management is managed in such a way that we can serve our customers say, for example, in the magnet market with sort of a magnet ratio of NdPr to Dy, Tb, something like 30:1. So the heavies are used strategically. And I think as we've talked previously, yes, they deliver margin in their own right, but it still remains that the Lynas cake is in the NdPr and the icing is the heavies. And so we continue to work on that basis. Operator: Next question comes from Reg Spencer from Canaccord Genuity. Reg Spencer: Most of my questions have been answered already. So I'm going to go somewhere where I'm not sure how you'll answer it. But clearly, there's been some M&A in the rare earth sector overnight, Amanda. And I'm certainly not expecting you guys to provide any comment on what your M&A strategy is. But when could we expect some further detail around plans for your Malaysian clay assets or your joint venture? Amanda Lacaze: So we are working through the definitive documents on the magnet factory with JS Link and hopefully, we'll be able to provide sort of additional information on that relatively soon. I mean with all of these things, it's always the case that we actually have to -- we can only control our position. I mean, negotiation is a negotiation. However, we are comfortable that project is proceeding, that material relevant equipment is being ordered, particularly the long lead time equipment and we're feeling very, very confident about that. With respect to the ionic clay assets, I think that as we work through right back at the beginning when we were talking about the JARE MoU, we will provide a bit more information on some of that resource work we're doing over the next couple of quarters, I would expect. And yes, there's lots of happy investment bankers in the world these days, aren't there? Lots of deals to be done sort of big numbers. I just would highlight the fact that we are the only ones bringing 2,000 tonnes of NdPr and Dy and Tb and now samarium to the market every quarter. And so we will continue to focus on ensuring that we have a strong position in the rare earths market. Reg Spencer: Can I ask a cheeky very quick second question, Amanda. And again, feel free not to answer it. But do you see increasing competitive tension given, obviously, the strategic importance being played from assets, especially those with enriched heavy content. Do you see evidence of that and in all of the conversations, I assume you have? Amanda Lacaze: I think that we have a very -- we know the various projects well, and we have a clear understanding of the potential and I think I might leave it at that. Reg Spencer: That's more than I was expecting. Thanks, Amanda. Appreciate it. Operator: Next, we have Austin Yun from Macquarie. Austin Yun: Just one more question on Kalgoorlie. Great to see that you finished the ramp-up of the recent process improvement I'm just keen to understand, do you have any other process improvement plan for the Kalgoorlie facility in this calendar year? And also given the tightness in the chemicals, would you actually pace the ramp-up of Kalgoorlie, given the sulfuric acid and other things, the price is going up. I understand there's no supply challenges at the moment. Amanda Lacaze: Thanks, Austin. Look, the answer to the first part of your question is we are always improving the process at every facility, right? So we are not done with process improvements at Kalgoorlie, not by a long shot. What we are flagging there is that we've done a couple of sort of major improvements in terms of process flow, some of the actual flow sheet that we've executed and that really has allowed us to step up. We look on a weekly basis, I look at it, sort of what Pol was talking to, which is the operational availability, which is really the reliability question and then also looking at quality and are we producing the quality, which is going to be able to be processed at the land cost effectively. And as we indicated, sort of early on, we had some issues associated with that, which is perfectly reasonable and to be expected and we have addressed those issues. But we are never going to stop looking for ways to continue to improve both the process and the reliability of that process. We are still assessing what are the implications of some of the price effects from the Middle East conflict. We don't think that sulfuric acid is going to be the pain point in Kalgoorlie. But I'm sure many of you would have noted the determination from the Fair Work Commission last night, which indicated that we need to be working with our suppliers on a fortnightly basis to ensure that costs are being appropriately recovered. But at this stage, we are not seeing that this would lead us to make a decision to dial back the Kalgoorlie facility. We continue to work to actually ramp that up in terms of reliability and delivering to forecast. Operator: Next, we have Jonathon Sharp from JPMorgan. Jonathon Sharp: Yes. My one question, just as previously mentioned, an acquisition of Serra Verde overnight announced. Now there's reporting that there's some offtake of Dy and Tb floor prices $575 per kilo and just over $2,000 per kilo. This looks like it's about 2 to 3x spot. How do you view this floor pricing from Lynas' perspective maybe from what you're getting yourself? Amanda Lacaze: There is a reason why we have not specifically disclosed either our floor prices or our achieved prices in this market. We actually think that this is an important part of our -- we think these are appropriate and commercial and confidence. The numbers need a surprise nor impress. Operator: Next, we have Dim Ariyasinghe from UBS. Dim Ariyasinghe: Most of my questions have been asked, but just one on what's to come on the downstream, which I think is pretty exciting. How do you think about metallization again through everything else you're doing with JS Link and then the Vietnam announcement earlier this quarter? Like is the plan to continue metallization in Vietnam or -- and build on that? Or how? Maybe you could expand a little bit on what that could look like? Amanda Lacaze: Yes. Dim, nice to talk to you. And actually Chen, yes, this may be my last quarterly report. So hopefully, we will all talk to each other at some time before a shuffle off this Lynas coil. But Dim, yes, I think we've indicated this previously that we think that metal is a somewhat unloved part of the value chain, but a crucial part of the value chain. And so we are delighted that LS Cable, which is one of the largest cable sort of manufacturers in the world still many metal processes in the world has chosen to enter the rare market. This reflects sort of encouragement, particularly from the Korean government to improve resilience in Korea, whereas we know the key industries, automotive and electronics, both rely on rare earth and rare earth magnets. The LS Cable facility into which this plant will be integrated is in Vietnam. And so we see that as being very positive in Vietnam. It is a cost environment which is constructive for the production of metals. And there is some sort of domestically developed capability there as well. But I think that we really see LS Cable as an outstanding partner for further development of metal making and we see that Vietnam is really sort of a critical step in the supply chain, not just with LS Cable, but with our current metal maker as well. Operator: Next, we have Matt Hope from Ord Minnett. Matthew Hope: Just my question was what was the motivation for having the MoU with JARE for exploration? I noticed that in your announcement, you even talked about exploration and development of Mt Weld. And I was wondering in what way would you want the Japanese actually involved in your sort of key mining asset. Amanda Lacaze: Just so you may recall -- maybe you weren't [indiscernible]. But you may recall that actually in some of the work that we've done on the carbonate, we have had access to some really some additional and highly skilled resources from JOGMEC in terms of particularly geology and metallurgy. And they work with us to both fund some of the cost of the Mt Weld carbonatite program, but also had on-site working with our team, some really experts in these areas. We have found this to be very helpful for our business. Accessing that additional expertise, and we have an extremely productive relationship with JARE and JOGMEC and are happy to extend that into additional project work. Matthew Hope: All right. Okay. So -- okay. So it's the expertise that they offer. And if I could just sneak one extra one in. I just wanted to know samarium, this seems that you've had a big priority on developing that at the moment. Is that really about price? Or is it a strategic rare earth that would allow you to sort of get involved with the U.S. and because this isn't something that nobody else produces. So is it really about strategy? Or is it about the price of samarium? Amanda Lacaze: So samarium is an excellent case study of the dysfunction that has existed in the rare earth market, we probably kind of produced samarium earlier than we have done. We were certainly not motivated to produce samarium earlier because the price has been sitting at basically a couple of dollars a kilo. So like with lanthanum and cerium, where we sort of produce those say, selectively. I mean, at a couple of dollars a kilo, it didn't make sense financially for us to produce that material. As certain customers of some of these materials have understood all of the things that everyone wanted to talk about over the last 2 or 3 years around supply chain, reliability, et cetera. They have actually indicated that, well, yes, they will be prepared to pay a price, which is a reasonable price that gives us a reasonable return or, in fact, a good return on our efforts. And so therefore, producing samarium to spec and in the volumes that the market requires, bearing in mind that we are not talking with any of these heavies about sort of the same sort of volumes as we get for our lights. But notwithstanding that, we now are in a position where it is commercially sensible for us to produce samarium. So therefore, we are producing samarium. Operator: [Operator Instructions] Jennifer Parker: Maggie, if we run out of questions, we should come into the queue. Operator: One more question, Amanda, one more. We have a follow-up from Austin Yun. Austin Yun: Just a quick follow-up. Really good news that you provide 2 offtake agreements updated during this quarter. I'm just keen to understand, given a large portion of your production is not covering those, is there any intention or interest to further expand your offtake portfolio both from a production perspective also from your geolocation customer perspective, conscious that you have Japan and covered U.S. coverage, but there's a big chunk of the world that's not covered yet. Amanda Lacaze: Yes. Good question, Austin. I think that -- I think the best way to respond is that the sales team has a very clear plan on ensuring that over time, we sell our material. We continue to sell it on a contract basis. We don't engage in the spot market. but we ensure that we have a customer portfolio that ensures that we are capturing the highest value, highest margin customers. The government contracts are beneficial in terms of setting -- and the focus on customers and concluding customer-based agreements, remains the #1 priority for our business. It is way more important than any other mechanism that we might have, because we're just like every other business, you don't exist without customers. The agreement with government, right? I really about sending a message with respect to market dynamics, I think everyone has that there is -- this market has been dysfunctional for some time. And I think that the government agreement helped to address that. And in a manner, we have advocated that these, if we have consistent amplification across those various agreements, that no government should ever actually have to write a check because the price naturally will move to that level. And we have seen some evidence of that. So the sales team's focus absolutely is on customers. We have excellent long-term agreements with a number of both magnet makers and magnet buyers, and we will remain focused on doing that with the government agreements essentially helping to address market dynamics. Operator: We have one more question. Last question, follow-up from Chen Jiang from Bank of America. Chen Jiang: I'll take my last chance, Amanda. So Amanda, as the CEO for Lynas over the last decade, and now we have 2.5 months left until the end of the current financial year. You are going to your next chapter of your life. I'm just wondering in your view, what can the CEO quality can lead Lynas to the next level of success, which is Lynas 2030 growth story, amid the backdrop of increasing geopolitical risk, supply chain development trying to decouple from China will remain dependent on China and Lynas rounding fully integrated rare mine oxide operations in Australia and Malaysia and your view what the Board is looking for and in your view? Amanda Lacaze: Okay. So I can tell you my view, I can't speak on behalf of the Board now. And I would encourage you to speak to the Chairman to get that. I mean -- and my view is only sort of a view because much as I would love and for those of you who have known me for 12 years, would know that I actually love being the final decision, in this case. I will not be the final decision maker. I wish that I was though. I wish I could say to you, this is the sort of person that we would like to see, and this is who it is. But ultimately, it will not be my decision. However, my experience of operating in Lynas is that we are -- the profile of the person to run an organization like Lynas with it stakeholder complexity process and processing complexity is maybe a little different from many of our other Australian enterprises. Certainly needs -- we operate with more risk in our environment than many Australian businesses who sort of run their operations and sell their materials inside Australia, we operate with sort of real global risk. And of course, I've been quite vocal previously about the fact that I would be delighted to see another woman appointed to this role. I think that we have made great strides in the mining industry in terms of bringing more women into the industry, but we are yet to get to the sort of many mining companies have targets of 30% or 40% women within their workforces, but we are yet to see that within the CEO ranks. And I would be very sad if my departure was the departure of present, the only woman other than Mrs. Reinhart as the owner, who is running a mining minerals company in Australia. So those are some of the things that I think are important. But we are a complex business and we are subject to sort of external factors that don't necessarily affect all Australian businesses, and I think that needs to be taken into account as the Board sort of proceeds with the appointment of my successor. And I watch it kindly because I've spent 12 years of my life on this, and I hate it to fall in a screaming heap. But on the other hand, I also recognized that I can't actually control what happens after I leave. So it's been great. I have loved every day in my job, and I still do, but it is time for the transition. And I trust that our Chairman will ensure that an excellent appointment is made. Operator: Thank you, Amanda. We have no more questions. Amanda Lacaze: Okay. Well, thank you very much, and I do look forward to you. It's not quite the end of the road yet. As Chen said it's another 2.5 months. I expect that I will have a chance during that time to touch base with most of you on this call, and I look forward to doing so. So thank you very much and talk to you all soon. Bye. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to Northrop Grumman Corporation's First Quarter 2026 Conference Call. Today's call is being recorded. My name is Josh, and I will be your operator today. At this time, all participants are in a listen-only mode. I would now like to turn the call over to your host, Todd Ernst, Vice President, Investor Relations. Mr. Ernst, please proceed. Todd Ernst: Good morning, and welcome to Northrop Grumman Corporation's First Quarter 2026 Conference Call. Before we start, matters discussed on today's call, including guidance and outlooks for 2026 and beyond, reflect the company's judgment based on information available at the time of this call. They constitute forward-looking statements pursuant to safe harbor provisions of federal securities laws. Forward-looking statements involve risks and uncertainties, including those noted in today's press release and our SEC filings. These risks and uncertainties may cause actual company results to differ materially. Today's call will include non-GAAP financial measures that are reconciled to our GAAP results in our earnings release. In addition, we will refer to a presentation that is posted to our Investor Relations website. On today's call are Kathy Warden, our Chair, CEO and President, and John Green, our CFO. At this time, I would like to turn the call over to Kathy. Kathy? Kathy Warden: Thanks, Todd. Good morning, everyone, and thanks for joining us today. The Northrop Grumman Corporation team is proud of the work we do in support of the world's most important national security imperatives. As we are seeing in recent military operations, many of our systems are playing a critical role in successfully executing the mission and returning our service members home safely. We contribute enduring assets like the B-2 stealth bomber and the E-2D that continue to demonstrate tremendous value decades after their first flight. Our ISR and C2 systems provide the needed intelligence to plan and conduct successful operations across all domains, and our munitions are instrumental to execute these missions. We share in the responsibility and urgency of our customers to provide our nation and allies with the best technologies in the world, and we are increasingly focused on the speed with which we deliver them. With this goal in mind, we have been investing in our business for several years to build capability and capacity and provide the solutions at the scale our customers need to compete in this environment. In fact, in the last two years, we have opened over 20 new facilities and added more than 2 million square feet of manufacturing space across the United States. Since the beginning of 2026, we have agreed with our customers on plans to accelerate the Sentinel program, increase the rate at which we build the B-21, become a second source supplier of solid rocket motors on several programs, and ramp our rate of production on another handful of programs. And we are just getting started. We are in discussions on numerous additional opportunities to help achieve the department's goal for speed and scale. Central to all these agreements is our partnership with our customers as we transform the way we work together. Our teams are aligned in unprecedented ways to deliver on our commitments and enable our armed forces to win. Earlier this morning, we released our first quarter results which reflect strong demand, solid operating performance, and progress we are making on key programs. First quarter organic sales were up 5%, a great start to the year and consistent with our full year expectations. Sales were largely driven by growth in our work on modernizing the triad, which is a top priority in the U.S. National Defense Strategy. We had another quarter of solid bookings, reinforcing the foundation for continued growth over the coming quarters and into next year. Our results and our confidence in our outlook are supported by a robust demand environment driven by rising global defense budgets. Countries around the world are recognizing a fundamental shift in the geopolitical environment, leading to global military spending rising approximately 40% over the past decade, and it is expected to continue to rise as Western nations modernize and grow their forces. In the Middle East particularly, there is a heightened sense of urgency for our solutions, such as IBCS, GATOR, and Counter-UAS solutions. In the U.S., $1 trillion has been appropriated for fiscal year 2026, and funding from this budget and reconciliation are starting to flow to industry. Earlier this month, the administration submitted a $1.5 trillion defense budget request for fiscal year 2027. The budget emphasizes modernization and represents a 44% increase over current funding levels. The budget proposal is made up of several components, with a base budget of $1.1 trillion. The base budget alone, compared with the FY 2026 base budget, represents nearly a 30% increase, and it sustains support for many of our key programs including B-21, Sentinel, IBCS, E-2D, and numerous restricted programs. If enacted, the 2027 budget would bring spending to about 5% of GDP, and while this represents an increase to the 3% we have seen in recent years, it is closer to the levels we saw during the Cold War. We are encouraged by the strong bipartisan support for strengthening U.S. defense budgets aligned to the global security challenges we are facing, and we look forward to working with policymakers as they consider this budget request. In response to these high levels of global demand for our solutions, the administration is working closely with industry to provide clear, long-term demand signals through structured production frameworks. So let me share details of some of the agreements I referenced earlier in the call. Our Defense Systems business growth is fueled by the growing demand for solid rocket motors, smart munitions, ammunition, and tactical missiles. We are a key SRM supplier of more than 15 systems including GMLRS, PrSM, Hellfire, and AIM-9X among others, and we are taking the necessary steps to qualify as a supplier on other high-demand systems such as PAC-3. To position the company for this growing market, we invested more than $1 billion over the past several years in SRM and munition technologies, and in modernizing our facilities. This proactive approach established a strong U.S. manufacturing base with capacity available today to support our customers' growing demand for critical munitions. Our tactical SRM production capacity has already doubled, and we have further expansion which will be completed by 2027. These modern production facilities provide us modular, adaptable production lines that can produce multiple products allowing us to flex with demand. Overall, our weapons business is nearing 10% of total company sales and is positioned to grow at a pace well above the company average. In addition to a focus on munitions, we and the Department of Defense remain committed to accelerating the triad modernization. For Sentinel, we are working closely with the Air Force and making significant progress advancing missile development, command and control systems, and maturing the design and construction approach. In March, we broke ground on a prototype of the Sentinel launch silo tube which will validate the structural design and construction approach, a key enabler to accelerate fielding. We expect to reach the Milestone B decision later this year, first flight in 2027, and initial operating capability in the early 2030s. We expect strong growth from Sentinel throughout the year as we ramp up on the new baseline, with the program already delivering double-digit growth in the first quarter. On the B-21 program, we are moving through testing at an aggressive pace, including aerial refueling trials beginning earlier this month. We are on a path through both testing and production for B-21 to arrive at Ellsworth Air Force Base in 2027. Consistent with this progress, we received a Lot 4 LRIP award in the first quarter, closely following the Lot 3 award received in Q4 last year. As previously announced, we finalized an agreement with the Air Force to increase the annual production rate of the B-21 by 25%. This agreement demonstrates the strong operational requirements for the platform and confidence in our team to accelerate the delivery of this generation capability for the warfighter. The production ramp up will be supported by customer funding included in last year's reconciliation package, alongside approximately $2.5 billion of company-funded investment primarily for new facilities. These investments will be phased in over multiple years. Importantly, this agreement accelerates production for our customer, enhances the program's long-term economics, and creates the potential for a larger program of record. We are pleased to have this agreement in place, and excited for this transformative technology to begin arriving on Air Force bases next year. In another area of our portfolio, widespread adoption of ballistic missiles and drones by potential adversaries is reinforcing the urgent need for air and missile defense capabilities. Demand in this area has been exceptionally strong, and today, our missile defense business accounts for nearly 10% of company sales. Northrop Grumman Corporation is well positioned to capitalize on opportunities such as Golden Dome, as well as other program areas. Our advanced interceptors, sensor systems, and command and control technologies remain critical to strengthening layered defense architectures. Shortly after the close of the quarter, we secured an award to accelerate development of the Glide Phase Interceptor, bringing the total contract value to $1.3 billion. GPI is designed to intercept hypersonic missiles that can evade traditional missile defense systems, a critical capability given the proliferation of hypersonic weapons. Before concluding, I would like to highlight our role in the historic Artemis II launch. It is a reflection of the diversity of our space business, which extends across a wide range of missions. Two Northrop Grumman-built solid rocket motors generated an astounding 7.2 million pounds of thrust—over 75% of the rocket's total thrust—to propel the SLS rocket and the astronauts on their journey around the moon. We are incredibly proud of our team, and I would like to congratulate NASA and the Artemis II crew on a successful mission. In summary, we continue to see an opportunity-rich environment. Our investments in our business, rigor in program execution, and the speed with which we are bringing innovative solutions to our customers give us confidence in our position today and into the next decade. When coupled with our strong backlog and unprecedented opportunity set, we are optimistic we can continue growing our business and creating value for all of our stakeholders. I will now turn the call over to John Green for the financial results. John? John Green: Thank you, Kathy, and good morning, everyone. I will start with our first quarter segment results on Slide 4. We continue to experience robust demand for our products and capabilities. Awards totaled $9.8 billion in Q1, and we ended the period with $96 billion in backlog. First quarter sales were $9.9 billion, up 4% year over year. Organic sales increased 5%. On the bottom line, segment operating income increased to over $1 billion and segment margins improved to 10.8%. First quarter results were driven by higher sales and improved performance in Aeronautics Systems. AS sales increased by 17%, driven by higher sales on B-21 and other restricted programs. TACAMO sales were also higher as the program continues to ramp. Higher sales on B-21 reflected the inclusion of the agreement with the Air Force to expand production capacity, which I will address in a moment. The sales increases were partially offset by lower volume on F/A-18. On the bottom line, first quarter AS operating margins improved to 9.3%. The increase was driven by the absence of the B-21 loss provision booked in 2025. As Kathy mentioned, we are pleased to have an agreement in place to increase the production rate on the B-21 program. To support the acceleration of aircraft deliveries, we agreed to sell an aircraft to the Air Force that was previously planned to be utilized as a company-owned test asset. The asset sale accelerated revenue into the quarter but does not change the total number of aircraft we expect to deliver in the LRIP phase of the program. Additionally, after reviewing our profitability estimates on the LRIP phase of the program, which now includes the agreement, there were no significant changes to the EAC. We had some increased production cost on earlier lots, which were offset by improved profitability on the remainder of the program. With the agreement in place, we are accelerating the program and have an opportunity to earn improved returns over a multiyear period. Moving to Defense Systems, Q1 sales increased 5% year over year. Organic sales increased 10%. This was driven by higher volume on Sentinel as the program continues to ramp. Sales were also higher due to increased volume on tactical solid rocket motors and integrated battle command programs. First quarter operating margins at DS were solid at 9.7%. Mission Systems first quarter sales increased by 2%, driven by increased volume on restricted airborne radar and marine programs. These increases were partially offset by lower volume on SABR and electronic warfare programs. MS operating income increased by 20%, driven by a higher level of net favorable earnings adjustments. This increased their first quarter OM rate to 15.1%. In the Space segment, first quarter sales and operating income were down compared to the prior year. This was driven by two factors. First, the NGI program recognized $98 million in first quarter sales last year as part of the contract closeout. This created a year-over-year headwind in Q1 this year. Secondly, we recognized an unfavorable earnings adjustment of $71 million on the GEM 63XL program. This adjustment lowered sales and operating income in the period. Performance elsewhere in the Space portfolio was strong, with growth on SDA programs and restricted space. Turning to earnings per share on Slide 5, first quarter diluted EPS was $6.14, up substantially compared to the prior year. This was driven by higher sales and segment operating income partially offset by lower net pension income. In terms of cash flow, the first quarter reflected a use of approximately $1.8 billion, in line with the prior year. Consistent with our historical patterns, we expect cash flows to ramp throughout the year with the most significant cash generation in Q4. We expect CapEx to follow the same pattern as we continue to invest to support the strong demand environment and our future growth. As I indicated on the fourth quarter call, we repaid $527 million of fixed-rate debt in Q1. We ended the quarter with over $2 billion of cash on the balance sheet. Turning to our 2026 guidance, we are reaffirming our outlook for sales, earnings, and cash. We ended the first quarter with positive momentum and continue to expect full year results within the existing guidance ranges. This includes full year sales between $43.5 billion and $44 billion. We continue to expect sales to accelerate throughout the year, similar to the cadence in 2025. For the second quarter, we expect high single-digit sequential sales growth, and for the full year, we continue to expect broad-based sales growth across the portfolio. Segment operating income guidance reflects continued strong performance and a low-to-mid 11% margin rate. Margins are expected to improve over the course of the year driven by strong performance, production timing, and mix. Our capital deployment strategy remains focused on driving growth, reinvesting in the business to scale capacity, and maximizing shareholder value. This includes an additional $200 million we expect to invest this year to support the increased production capacity on B-21. As a result, we now expect $1.85 billion in 2026 capital expenditures. However, we are maintaining the free cash flow guidance range of $3.1 billion to $3.5 billion. Given the increased capital investments, we are working to offset the free cash flow impacts. To summarize, we continue to generate strong financial results. I am confident that we are well positioned for continued profitable growth and value creation. Before we open the call for questions, I would like to take a moment to congratulate Todd on his retirement at the end of this month. We appreciate his contribution over the past seven years. Todd has been a highly valued team member and a trusted business partner. We wish him well as he embarks on the next chapter. We will now open the call for questions. Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone and wait for your name to be announced. Please limit yourself to one question and one follow-up. One moment for questions. Our first question comes from Robert Stallard with Vertical Research. You may proceed. Robert Stallard: Thanks so much. Good morning. First of all, thanks, Todd, for all your help over the years—much appreciated. And then, second, on the B-21, Kathy, you have this 25% production capacity situation sorted out now. Can you give us some idea of how the timeline progresses here in terms of Northrop Grumman Corporation spending on CapEx and how the production flows through? And also, if you have protections in here against a B-2-style curtailment? Thank you. Kathy Warden: Yes, Rob. We expect about $200 million of CapEx this year, and that is why we reflected that increase in our CapEx guidance for 2026. As we have said before, we expect the majority of the capital to happen in the 2027–2029 time frame and largely be completed this decade. The additional capacity that is coming online does give us a meaningful increase in throughput, which will generate revenue over the life of the program. But as I have stated, it takes a while for us to get that online, so you should expect the revenue profile to follow the production facility completion. Why it is not like the B-2? In terms of this contract, we have a committed quantity on the contract, and we know that the Air Force is considering increasing the program of record as we sit here today. That decision has not been taken, but we believe there is strong support by the administration for this capability that manifests itself in their commitment to the triad modernization in the U.S. National Defense Strategy, and we believe it reflects the view of multiple administrations on the need for this platform as an effective deterrent, as we have seen recently with the B-2 in conducting military operations. Operator: Thank you. Our next question comes from Gautam Khanna with TD Securities. You may proceed. Gautam Khanna: Yes. Good morning. I was wondering if you could elaborate on some of the Sentinel developments that you mentioned on IOC and how that program is progressing with respect to timing. And congrats to Todd as well. Thank you. Kathy Warden: For the Sentinel program, in partnership with the Air Force in the past quarter, we have agreed to an acceleration of the program that would have completion of Milestone B later this year and then would allow us to move forward with the program, as I said, to first flight in 2027 and an initial operating capability early in the 2030s. We are doing a series of things together with the Air Force to enable the schedule acceleration. One I mentioned that got started in the quarter is a prototype of the missile's launch silo, and that will help us further increase the fidelity of our design for the silo itself. That is just one example of numerous things that are happening across the program to mature the design and progress toward that first flight milestone in 2027. Operator: Thank you. Our next question comes from Peter Arment with Baird. You may proceed. Peter Arment: Yes, thanks. Good morning, Kathy and John. Congrats, Todd. Kathy, on the color on international—if we could click into that a little bit. You were up 20% in 2025. A lot has changed in the last few months. Can you talk about opportunities? Is there anything on international that can be pulled to the left? I know you are expecting a healthy book-to-bill of over one this year. Any dynamics there that can accelerate the timing? Kathy Warden: Peter, we see the opportunity to accelerate timing on international in areas where urgency has increased over the last couple of months. I specifically called out the Middle East, where clearly the conflict with Iran has created a heightened sense of urgency, and we are seeing those opportunities move to the left. With that said, we see high demand for products that we produce across the entire globe, including Europe, and our team is working in any way possible to accelerate demand and turn that demand into sales. International does tend to have a longer cycle than domestic; that has not changed, just in terms of the steps we must go through to get that demand signal translated into contract. We are working with the department on a number of things that help to accelerate export approval, and we are looking at aggregating international demand. Those are all positive steps forward in the way the process is working that could lead to acceleration, but I largely see those things impacting us beyond this year. Peter Arment: Got it. And as a follow-up, you mentioned missile defense is roughly 10% of your overall revenue mix today. Can you talk about opportunities in the counter-drone area? We have seen a lot of focus on lower-cost solutions. How do we think about Northrop Grumman Corporation’s position there? Thanks. Kathy Warden: We have opportunities in counter-drone, including low-cost solutions that are based on work we have been doing in that arena for a number of years. Programs like our FADC2 program and even IBCS are effective in connecting sensors and shooters in that counter-drone space. We have seen an increase in demand both from the U.S. and international, and we expect the international contribution to be greater than the domestic in counter-UAS solutions. We see that developing over the next couple of years. We are already seeing some revenue today in that space, and, as I noted, now nearly 10% of company sales is in missile defense, which is a significant increase from where we were just a few years ago. Operator: Our next question comes from Kristine Liwag with Morgan Stanley. You may proceed. Kristine Liwag: Great. Good morning, everyone. Good morning, Kathy, John, and Todd—congrats on your retirement. Maybe a high-level question. Kathy, when you look at the backlog of $96 billion—it is near record, providing sales coverage for over two years. Mid-single-digit growth seems reasonable in a more normal environment, but in the past few years you have called out urgency now in the geopolitical environment, and it seems like things continue to deteriorate. We are seeing the Pentagon seek out new players, and the White House has called out potentially firing up the Defense Production Act for the auto industry to increase capacity. Can you give more color about how you think about overall output for Northrop Grumman Corporation? Where are the areas of bottleneck, and what has to happen for the company to deliver on double-digit growth? Kathy Warden: We are seeing an opportunity-rich environment. It is only early 2026, and we are just starting to see reconciliation dollars flow into our contracts. Our performance this quarter was in line with our full-year guide of mid-single-digit growth. For higher sales growth, it would come from winning numerous new competitive opportunities—we would expect to continue to see a high competitive win rate on those opportunities. We would also need to see an accelerated ramp on the demand for our missile components—I talked about solid rocket motors earlier on the call. We have the capacity; we need to get that on contract and start producing. We need to convert our international pipeline to sales, as I referenced earlier. And our suppliers need to be able to scale with us. We are doing the work to remove those bottlenecks in our supply chain—first by identifying them, second by helping those suppliers to resource their own scaling and have the capacity that we need from them. We are working on all of these strategies to increase our growth rate beyond the mid-single digits. I have a lot of confidence in our longer-term outlook for sales based on the growing backlog and the opportunity to add to that backlog this year. The real question is timing—when do we reach that inflection point—and it is based on all of the factors I just shared. Kristine Liwag: Super helpful. And as a follow-up, the Chief of Naval Operations said yesterday that one of the two companies vying for the F/A-XX contract lacks the capacity to deliver the fighter on time. With the potential down-select in August for this program, can you discuss how you think about Northrop Grumman Corporation’s positioning? And if you are selected, how should we think about the potential upside to the 2026 outlook? Is the funding for this program clear to potentially provide upside for 2026? Kathy Warden: This is a good example of one of those competitive opportunities I just mentioned, and we do expect the department to make an award selection in the third quarter. We are confident in our ability to deliver our solution to the Navy. We and our suppliers are prepared to bring the workforce and infrastructure needed to execute the program, and our track record on B-21 demonstrates the ability to deliver a complex aircraft on schedule. Regarding the financials, we would expect upside to sales and earnings from our current guidance if we are selected to build F/A-XX, and it would be a top priority for our company. Operator: Thank you. Our next question comes from Sheila Kahyaoglu with Jefferies. You may proceed. Sheila Kahyaoglu: Thank you. Good morning, Kathy and John, and thank you, Todd, for everything over the years. Kathy, in your prepared remarks, you gave us lots of color on the growth drivers of missiles. You said missile defense is 10%, weapons at 10%. Can you size B-21 and Sentinel? How do we think about these four growth drivers from both the revenue and earnings perspective? Kathy Warden: Let me start with Sentinel. The program is about 6% to 7% of company revenue today, and we expect it to grow low double digits this year, which is in line with how it performed in the first quarter. We then expect it to continue to grow annually, growing toward 10% of revenue over time. Its real inflection point is when we start to have long lead for production, which we expect later this decade. For the B-21 program, it is nearing 10% of revenue, and with this accelerated production rate, we expect that over the next several years it will likely begin to exceed 10% of company revenue and sets the program up for enduring growth as well. For weapons, we expect that to continue to be one of, if not the, fastest-growing segments of our business. It includes opportunities where we are currently qualified to provide components like solid rocket motors, and also our prime position as a weapons integrator that we expect to grow over time as programs like AARGM-ER and Stand-in Attack Weapon mature into production. That part of the portfolio today in aggregate is also about 10%, but we expect it to be one of the fastest growers and proportionally become larger over the next several years. The growth rate will be dependent on how many new programs we add to the portfolio. On margins, the margin profile on Sentinel, B-21, and our weapons portfolio are all expected to increase as we move into production, because many of them are in various stages of development at the moment. John Green: Most of that work is in our Defense Systems business. You can see the guide we provided at the beginning of this year in terms of the growth we will see there—approaching 10%. And Sentinel, as Kathy said, is about 6% of total sales; it is about a third of the sales in the Defense Systems guide. That will help you triangulate what we think the drivers are there and support the acceleration of potential growth into the future. Operator: Thank you. Our next question comes from Seth Seifman with JPMorgan. You may proceed. Seth Seifman: Good morning. I wanted to ask on B-21 and the impact of the production agreement. I think you mentioned some pluses and minuses in terms of the estimate. You have noted before that the agreement could potentially lead to higher profitability on the LRIP units. Should we assume that higher profitability on the LRIP units and reversal of charges is still a possibility depending on company performance over the next several years, or should we be thinking about the increased profitability coming more on later units and beyond? John Green: The agreement we reached with the Air Force was a great outcome for both the company and the customer. As that agreement plays out, a good portion will be subject to our execution on the LRIP phase. Based on how it came together, there was no meaningful change in the overall EAC. There were some increased production costs that were offset with increased profitability in later phases of the program. Positive overall. As the program matures, manufacturing capability will continue to improve, production rates will improve, and it gives us an opportunity to expand margins and hopefully sales with the increased rate of production. Seth Seifman: Great. And as a follow-up, after this year there is probably $2 billion-plus of B-21 CapEx over 2027–2029. When we think about the 2028 cash flow target, you were able to offset the impact of incremental B-21 CapEx this year, but it is obviously in the future. How should we think about the ability to offset that? John Green: That is a substantial investment. We guided and held our 2026 cash flow guidance and intentionally did not give guidance on 2027 or 2028 for two reasons: large awards outstanding—one of which we hope to hear sometime in the third quarter—and the investment we are making, the $2.5 billion, with the lion’s share in 2027 and 2028. As we roll things forward, we will take a look at what free cash flow looks like. Not to be lost is the cash generation power of this business—it will continue to generate substantial free cash flows, and the investment will be subject to the opportunities we see. Operator: Our next question comes from Richard Safran with Seaport Research Partners. You may proceed. Richard Safran: Todd, congrats to you. This question could be for either Kathy or John. Could you talk generally about the contracting environment overall? Are you seeing a more favorable environment—specifically, revised contract language with award or incentive fees or other incentives for good execution—and what might that mean for margins and cash? Kathy Warden: We are seeing the department engage with industry in several positive ways. One is the sense of urgency to get work on contract. Two is the desire to give a long-term sustained demand signal and commitment around demand to both help us plan and drive down costs that come with change or production gaps if there is not certainty of demand. We are also seeing more use of OTAs and other nontraditional contracting mechanisms. All of these are positive for industry, and I do not see a desire by the department to push industry profitability down; quite the contrary. Helping reduce costs benefits both the customer and industry profitability, and placing incentives on contracts to drive early delivery is in everyone's best interest. I see real alignment and an opportunity to create better economics for industry and the government. Operator: Thank you. Our next question comes from Scott Mikus with Melius Research. You may proceed. Scott Mikus: Morning, Kathy. Backlogs for you and your peers are already elevated, and it seems like a lot of the reconciliation funding from the big supplemental is yet to be put on contract. We could also have a $1.5 trillion defense budget and another supplemental for Operation Epic Fury. The demand signals are great, but are we starting to see European customers become wary about ordering equipment from U.S. companies given uncertainty on delivery timing? Kathy Warden: There is definitely a desire for European countries to buy U.S. product, and we are still seeing robust demand there. There is sensitivity to buy local if possible where there is a comparable product that can meet requirements, and there is sensitivity around timelines for U.S. companies to deliver, particularly given increased demand from the U.S. For the Northrop Grumman Corporation portfolio specifically, we have been investing in capacity—I talked about the 20 facilities we have opened in the last 24 months and the over 2 million square feet of manufacturing space we have added. This gives us the capacity to do both. We are supplying demand for both the U.S. and Europe, and we foresee the ability to continue to do that. Scott Mikus: The administration has also talked about trying to increase significantly the number of space-related FMS approvals. Are you starting to see the administration speed up that process, and are you engaged with international customers about building a pipeline of opportunities for your Space Systems segment? Kathy Warden: We are engaged with international customers related to space, and we see that pipeline growing. We have seen some contract awards; in the quarter, we announced a relationship with a Hungarian company and are pursuing work there. We are starting to see the maturation of that demand signal turning into pipeline and even contract award. It is the business that has the least international pipeline of our four segments, but it is growing, and we expect five to ten years from now international to be a key contributor to our Space business just as it is in our other three segments. Operator: Thank you. Our next question comes from Scott Deuschle with Deutsche Bank. You may proceed. Scott Deuschle: Hey, good morning. John, is the customer providing any incremental cash advances or working capital support to help offset some of these increased capital investments in the B-21 program? John Green: We are making significant investments to support the program, and the customer is making significant investments to support the program. The cash flow timing related to the program loosely will align with the investment rate, but there are certainly components that will not. That is about as much detail as I can get into on the nature of the cash flows related to the program given the classified nature of the contract and the program itself. Kathy Warden: I will add that the deal improves the economics for the program for the government and Northrop Grumman Corporation. When we look at the return on invested capital over the life of this program, this deal has improved that outlook. For the government, we are able to produce and deliver capability faster. In our view and the Air Force's view, this is a win-win—both contributing and both benefiting. Scott Deuschle: For the life of the program, do you see the ROIC now meaningfully above your cost of capital? Kathy Warden: We do. Scott Deuschle: And there have been news reports stating that many F-35 aircraft are delivering without radars. Could you give us an update on that program and how performance has been tracking more recently on your F-35 radar production line? Kathy Warden: We are somewhat limited in what we can share given the classified nature of the program, so I will refer to comments the Joint Program Office has made. We are building an advanced radar and, in coordination with the JPO, taking on concurrent development and production. This was a known risk when we started down this path to ensure we could deliver the capability as quickly as possible. The JPO has stated plans to accelerate the production capacity to deliver the radars that meet the requirements, and we are working with them. We are continuing to work to complete development, which includes testing, and then quickly ramp production. One of the facilities I referenced earlier in the call is being built for the purpose of accelerating production on this program in particular. We have opened that facility, have the tooling, and are working to train the workforce, so we are ready to go as soon as we get through test milestones on the program and are already starting to produce. The important takeaway is we are moving as expeditiously as possible to get this radar delivered because we understand what a game changer it is for the capability. Operator: Thank you. Our next question comes from Analyst with BTIG. You may proceed. Analyst: Thanks. Good morning, Kathy and John, and congrats, Todd. In the past couple months, we saw you get tapped to support the C2 layer of whatever the Golden Dome initiative ends up looking like. What additional color can you give there, and how might that eventually materialize in the financials as we progress in the coming quarters and years? Kathy Warden: We were selected to be part of a broad set of companies developing the C2 layer, and we are looking forward to contributing to a very aggressive timeline for both developing and demonstrating that capability. It is one of General Guetlein’s top priorities, and we are optimistic that we bring a lot of legacy experience and knowledge, both in C2 and in understanding layered defense in the missile defense arena, to that team. Analyst: Got it. Maybe pivoting to the YFQ-48—there are a lot of CCA opportunities with the Navy, Air Force, Marine Corps. Where are you in bidding for those, and what are your expectations as we move forward? Kathy Warden: We are pursuing a number of opportunities with the Air Force and were given the YFQ-48 designation so that we can continue to test our offering as we progress toward Increment 2. We have also been awarded for the Marine Corps our MUX TAC Air offering, and have been announced as one of the participants in the Navy CCA program. There is a broad set of activities underway to take our unmanned experience—over 500,000 flight hours—and the investments we have made in Talon, both Talon Blue, the aircraft, and TalonIQ (formerly known as Beacon), to test and mature vehicle management systems and autonomy. We hit some key milestones on that effort in the quarter that we announced as well, and we are bringing all of that expertise forward to all three services pursuing CCAs and putting our best foot forward for their next competitions. Operator: Josh, we have time for one more question. Thank you. Our last question comes from Matt Akers with BNP. You may proceed. Matt Akers: Congrats, Todd, on the retirement. Kathy, could you touch on the classified/restricted portion of your business? It is a big chunk that is difficult for us to track. Based on what you are seeing and the budget request, do you think that grows faster or slower than the other parts of your business? Kathy Warden: We had seen it growing faster than the other part of our business, but with the strong demand in munitions and missile defense—which are not part of our restricted portfolio—on a go-forward basis I could envision that the restricted business will grow more in line with the rest of the portfolio. The key takeaway is we see growth in both, and that is a nice position to be in. Matt Akers: Great. Thanks. I will leave it at one. Thank you. Kathy Warden: Great. Thank you. I want to close the call by once again thanking our entire team for their contributions to national security and space exploration. Since the beginning of this year alone, we have boosted North American astronauts back to the proximity of the moon, and we have helped our military in several operations in multiple regions across the globe return home safely after completing their mission. I know our team has been working tirelessly to support these efforts, and I am very proud of them. I would also like to recognize Todd. As many of you have mentioned, he is completing his final earnings call with us today. It has been my pleasure to work with him over the last seven years, and we are glad that he chose Northrop Grumman Corporation as the place for the capstone for his career as he transitions into what is a well-deserved retirement. Congratulations, Todd. Thank you all for joining us today. We look forward to continuing to engage with you throughout the quarter. That concludes our call for today. John Green: Thank you. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
Operator: Good morning, and welcome to Washington Trust Bancorp Incorporated Conference Call. My name is Elliot, and I'll be your operator today. [Operator Instructions] As a reminder, today's call is being recorded. And now I'll turn the call over to Sharon Walsh, Senior Vice President, Director of Marketing and Corporate Communications. Please go ahead. Sharon Walsh: Thank you, Elliot. Good morning, and welcome to Washington Trust Bancorp, Inc.'s Conference Call for the First Quarter of 2026. Joining us this morning are members of Washington Trust's executive team, Ned Handy, Chairman and Chief Executive Officer; Mary Noons, President and Chief Operating Officer; Ron Ohsberg, Senior Executive Vice President, Chief Financial Officer and Treasurer; and Bill Wray, Senior Executive Vice President and Chief Risk Officer. Please note that today's presentation may contain forward-looking statements, and our actual results could differ materially from what is discussed on today's call. Our complete safe harbor statement is contained in our earnings release, which was issued yesterday as well as other documents that are filed with the SEC. All of these materials and other public filings are available on our Investor Relations website at ir.washtrust.com. Washington Trust trades on NASDAQ under the symbol wash I'm now pleased to introduce today's host, Washington Trust's Chairman and Chief Executive Officer, Ned Handy. Ned? Edward Handy: Thank you, Sharon. Good morning, and thank you for joining our first quarter conference call. We appreciate your time and your continued interest in Washington Trust. I'll begin with a brief overview of our first quarter results, and then Ron will provide more detail on our financial performance for the quarter. Following our remarks, Mary and Bill will join us for the question-and-answer session. Building on the momentum generated throughout 2025, quarterly performance was driven by continued net interest margin expansion reflecting the underlying strength of our core banking business and continued benefits from our December 2024 balance sheet repositioning transactions. The Q1 results do, however, include a higher provision related to reserve builds on 2 free credits moved to nonaccrual in March, and we'll provide details on those in the Q&A session. Our capital ratios remain strong, providing the flexibility to support continued execution across the business. In the first quarter, we completed a digital banking conversion for personal accounts that provides enhanced security and technology and a better customer experience, reinforcing our focus on service and relationships. We will continue the conversion of our business accounts in the ensuing quarters. With recent industry shifts locally, these investments position us well to attract new customers by pairing modern capabilities with the personalized service that defines Washington Trust. We're also leveraging our strength as a community bank that prioritizes local decision-making to attract experienced bankers to our commercial team. We recently added new talent across C&I, CRE and business banking, all of whom bring deep experience and strong client relationships in the region. The institutional banking team we added in January is showing strong momentum that positions us for loan and deposit growth as the year progresses. In addition, our planned branch opening later this year in Pataka, Rhode Island will further expand our presence in the northern part of the state. Overall, we're encouraged by the progress we are making to position the company for long-term success. With that, I'll turn the call over to Ron to provide additional detail on our financial results. Ron? Ronald Ohsberg: Okay. Thank you, Ned, and good morning, everyone. Net income in the first quarter was $12.6 million or $0.66 per share compared to $16 million or $0.83 per share last quarter. PPNR was down 6% from Q4 and up by 23% year-over-year on an adjusted basis. Net interest income was $40.5 million, down by 1% from Q4 and up by 11% year-over-year. The margin was 2.63%, up by 7 basis points from Q4 and up by 34 basis points year-over-year. Q1 included $116,000 of loan prepayment fee income, which benefited NIM by 1 basis point compared to $516,000 or 3 basis points last quarter. Noninterest income was down $1.2 million or 6% compared to Q4 and up by 11% year-over-year on an adjusted basis. Loan-related derivative income, which is transactional in nature, was down by $854,000 compared to Q4. Wealth Management revenues were down by $205,000 or 2%. Average AUA for Q1 decreased by 1% and increased by 10% year-over-year. Mortgage banking revenues were $3 million, seasonally down 6% and were up by 32% year-over-year. Our mortgage pipeline at March 31 was $114 million, up by $33 million or 41% from the end of December. Noninterest expense totaled $37.8 million in Q1, down by 1%, and Other noninterest expenses were down by $1.2 million in Q1, largely due to a $1 million contribution made to our charitable foundation in Q4. In the first quarter, salary and employee benefits expense was up by $693,000 or 3%, reflecting merit increases and higher payroll taxes associated with the start of a new calendar year. Our Q1 effective tax rate was 21.6%, and we expect the full year 2026 effective tax rate to be approximately 21.5%. Balance sheet total loans were down 2% from December 31. Total commercial loans decreased by $95 million, reflecting mainly payoffs in the CRE portfolio. The commercial pipeline in total is approximately $156 million. Residential loans decreased by $21 million as we continue to amortize that portfolio. End market deposits were down 2% from the end of Q4 and and up by 3% year-over-year and wholesale funding was down by $50 million or 8% from the end of December. Our loan-to-deposit ratio decreased slightly to 96.9% at the end of March. Turning to asset and credit quality. At March 31, nonaccruing loans were 81 basis points on total loans and increased by $27.5 million from the prior quarter, largely due to 2 commercial real estate office loans. Past due loans were 33 basis points on total loans. In the first quarter, we recognized a $4 million provision for credit losses, largely reflecting an increase in specific reserves on the 2 Cree office loans. The allowance totaled $41.1 million or 82 basis points. And at this time, I will turn the call back to Ned. Edward Handy: Thanks, Ron. And now we'll take questions. Operator: [Operator Instructions] First question comes from Justin Crowley with Piper Sandler. Justin Crowley: Good morning, everybody. I was wondering if you could start off just giving a little more detail on the 2 office loans. Just anything on geography? And then maybe some more specifics on what occurred to drive the downgrades in specific reserves -- so just things like occupancy levels or perhaps just how close they even were its maturity, I'm not sure that may be necessitated a new appraisals? Edward Handy: Yes. Bill, do you want to take that? William Wray: Sure. They're both loans that have been current up until this point. In both cases, in March, there were sort of triggering events that led to us deciding to make the decision for quarter end to put them on nonaccrual. Both of them have strong, sophisticated sponsors, and we're engaged with both of them right now on. One was a maturity, the other doesn't mature until next year. We're engaged with both of them on the right next steps. So I don't want to get into too much detail on what that means. But we -- like with most of our assets that have been in criticized either special mention or classified most of them emerge unscaled. And in this case, though, we took the step to put reserves in place that we thought were appropriate reflect any potential loss down the road. So again, we think they're both solid properties with solid sponsors, and we expect that we'll continue to drive resolution, and we're hoping that within the next few quarters, these will either exit or they will emerge back into performing status. Justin Crowley: Okay. Got it. And then Were there any general reserves allocated to office? Or was it all specific with regard to these 2 loans? I guess trying to get a sense of how you think about the risk and the rest of the office book at this point and the cycle for this asset class and the thinking there has changed at all? William Wray: Well, I think our office exposure peaked at $300 million a couple of years ago. It's now down to $230 million. And we think we've done that with a fairly small amount of charge-offs along the way relatively. So we expect to continue to reduce our office exposure over time. Within the CECL methodology we make sure that we use qualitative factors especially to address issues in office. And so we have taken some of those steps. And we believe going forward that there's always going to be a handful of properties that are sort of on the bubble that needs some attention and focus. But -- as you can see, these -- all of our other office properties are performing. There's -- there aren't delinquencies there that we're concerned about. So we just expect that assets will move into lower ratings and then we'll emerge from those. And we certainly spend a lot of time thinking about maturity wall analysis and refinance risk. And so we're constantly juggling those handful of properties that look like they might raise some issues down the road and try to stay ahead of them. So I guess the best way of saying we're cautious on office, and we'll continue to be cautious on office, but we also think the scale of the problems within -- are well within our capabilities to handle from an earnings standpoint and a reserving standpoint. Justin Crowley: Okay. And then I guess, somewhat larger-sized loans here. It sounds like they were self-originated. Was that the case or were either participation? Just want to confirm that. William Wray: I'm not sure which ones you're referring to, but there's only there's 5 loans. Justin Crowley: The 2 office loans that's migrated and... William Wray: Participations, we're we're the lead on the Class A. The Class A office space one, we're 2/3 participants in the lead, and then we are the minority participant on the lab space. Justin Crowley: Did you call it maybe 5% growth previously. I know a lot has changed since then with some of the geopolitical now. Just curious for an update there? Edward Handy: Yes, I'll take that one. Thanks for the question. We're -- yes, so the quarter saw pretty significant pay downs, payoffs and mostly in the Cree space and not the kind of commensurate new origination that we're -- that we're used to. But the path ahead looks very good. We're sticking with our mid-single-digit growth for the year projection. And it's important that we talk about where that's going to come from -- at this point, we're feeling like CRE is probably going to be low single-digit growth for the year. They've got some making up to do based on the first quarter payoffs and then we're thinking kind of flat to 1% growth in CRE, which is somewhat intentional. Most of the growth is going to come from our core C&I business and our institutional banking business. We're expecting sort of high single-digit growth out of our core C&I business, which you'll recall is -- has a current outstanding in the kind of $560 million level. So you can do the math there. And then most of the C&I growth is going to come out of our relatively new institutional banking group. We expect $50-plus million in fundings in this quarter and the pipeline is growing. And I think importantly, alongside that is the strategic growth in deposits that will come from that portion of our C&I business. There expecting to kind of fund at -- self-fund at a 30% to 40% level, which is much higher than certainly CRE and much higher than our core C&I business. So that's an added benefit. They joined the group in late January. So it's to be expected, it will take a little while for them to get up and running, but the pipeline is growing as we expected, and we're very encouraged by that. So back to the start sticking with the mid-single-digit growth, if not a little higher. And again, very encouraged by the types of credit, the quality of credit that we're seeing in the pipeline build. So -- more to come on that at the end of next quarter. Justin Crowley: Okay. Great. And then just 1 last 1 on the margin. I think I might have missed this in the prepared remarks. I know there was some elevated prepayment fees last quarter. Was there any of that in the $263 million for the first quarter? Ronald Ohsberg: Yes, like 1 basis point. Justin Crowley: Okay. And then I guess just thoughts on the margins in there. I think you'll get that left from the swap termination, but could you just remind us the benefit there? And then just also how you're thinking about organic expansion through the year? Ronald Ohsberg: Yes. So the swap termination will add 9 basis points in the second quarter and another 4 basis points in the third quarter. Justin Crowley: Okay. And then I guess just go ahead. Go ahead. Ronald Ohsberg: Go ahead, Justin. Justin Crowley: I was just going to ask outside of that, just the almond benefit on the swap, just how you're thinking about this margin lift from here as we get through the year? Ronald Ohsberg: Yes. There's modest expansion by quarter. First quarter was probably a little higher help by the prepayment helped actually helped a little bit by the shorter day count in the quarter actually added about 2 basis points to the NIM. But when we look ahead to the fourth quarter, we're thinking $275 million to $280 million in the quarter. Operator: We now turn to Damon DelMonte with KBW. Damon Del Monte: Ron, could you just repeat the last comment you made on the margin, the $275 million to $280 million. Was that for the second quarter? Or is that for where you expect it to be at year-end? I missed that, sorry. Ronald Ohsberg: Sorry, Damon, yes, just to be clear, fourth quarter. Damon Del Monte: Fourth quarter. Ronald Ohsberg: So we're looking at $265 million to $270 million in the second quarter. Damon Del Monte: Got it. Okay. Yes. That is with what you were describing from the benefit. Okay, great. And then I guess, -- maybe a little bit on expenses and kind of how you're thinking about the outlook from there? You've made some hires. I'm assuming that's all kind of baked into the numbers. your -- I think the expenses were around, what, $37.8 million. So just kind of modest growth off of this? Or do you think you could actually keep it kind of flat? Ronald Ohsberg: Yes. We're actually seeing about a $1 million increase in Q2 and some of that is -- really, there's 3 areas we're looking at advertising, mortgage commissions and then we've got some project implementation expenses that will be coming through in the quarter. Damon Del Monte: Got it. Okay. Ronald Ohsberg: And then -- further to that item. Further to that, we're adding a branch, which will probably open in the towards the end of the third, beginning of the fourth quarter. Those expenses will start to hit in Q3. And so we're probably looking at about $500,000 in 2026 -- related to the branches. Damon Del Monte: Got it. Okay. Great. And then -- on Wealth Management, AUM were down a little bit this quarter. Is that just fluctuation of the market? Or was there some outflow of clients? Ronald Ohsberg: Yes. It was mostly market -- and by mostly, that means not all. So yes, we did have some net outflows. Damon Del Monte: Got it. Ronald Ohsberg: You can see markets have rebounded so far in April. So no one knows what the future holds, but it could at least a lot of the declines that we saw in the quarter have reversed so far in the second quarter. Damon Del Monte: Got it. Okay. And then just lastly, given the outlook for the loan growth going forward, how do we think about provision and kind of the reserve level? I mean, obviously, you built the reserve this quarter for those loans that went to nonaccrual status. But if we assume that there's no other credit deterioration, do you kind of have the provision such that it keeps the reserve flat given the loan growth? Ronald Ohsberg: Yes. We're kind of thinking somewhere in the range of $1 million to $2 million per quarter. And that covers loan growth and maybe that gives us a little bit depending on what we book and when we book it, it could give us a little bit of a reserve build going forward. Operator: We now turn to Laurie Hunsicker with Seaport Research. Laura Havener Hunsicker: Ron Maryville. Just to stay with where Damon was loan loss provision. So the $4 million loan loss provision I know you said, obviously, that was heavy with the office. What exactly was the dollar amount there associated with office of the $4 million build? Ronald Ohsberg: Laurie, it was essentially all of -- yes, all of it. Laura Havener Hunsicker: Got it. Okay. Perfect. And then I just wanted to dive a little bit deeper here in office. So just I have a series of questions here. So thanks for the on this. So you've got 59% maturing in the next 2 years, $136 million. Is any of that currently in special mention cost side, nonaccrual? And if so, -- when is that actually maturing? William Wray: Well, of the 5 deals that are in the office space in special mention or classified 1 of them matured and that was 1 of the deals that we moved to nonaccrual. There's another one, the Class B special mention that's actually maturing in the third quarter of this year. And 1 reason we moved into special mention was just kind of as a marker as we work with the sponsor who's a well-known and committed sponsor on a refinance approach. And then the other deal that went to nonaccrual doesn't mature until the third quarter of next year. So we -- as we disclosed, we look at all of our maturing office loans very carefully. And when we know enough to with an emphasis on caution, we will take steps to make it special mention the deals that we talked about here, both were put on special mention, 1 at the -- in the fourth quarter of '24, the other in the third quarter of last year. So -- and you'll also see that we've had some positive migration out of special mention and classified, the large lab loan, for example, as special mention now and as free rent burns off, we believe if contractual rates pay us agree that, that will be coming out of special mention before too long. So we think our migration track record is pretty solid, and we feel the same about the deals that are in there now. And again, there's 5 that make up that disclosure. Laura Havener Hunsicker: Yes. Great. Okay. So just for my clarification purposes, you had 2 moved into nonaccrual. With -- was it the $22 million that matured that triggered that? Or was it the -- okay. So that 1 matured. William Wray: No, the $22 million was not the one that matured. -- matured was the $6.5 million. Laura Havener Hunsicker: Okay. So that mature. Okay. Got it. Okay. So the other 1 -- so the $22 million that matures in the third quarter of $27 million, you said? William Wray: Yes. Laura Havener Hunsicker: Okay. And then what is the occupancy running on that one, that Class A? William Wray: Well, it's it's solid. I mean, it's north of 50%. And there's actually been a fair amount of leasing momentum. The move made here was more triggered by a notification of a potential lease termination for next year, but that tenant is renegotiating. So this generates a pretty material NOI. And we feel it's a solid property with a solid sponsor in a solid market. But like most sponsors, they're looking ahead and thinking about what their capital requirements are going to be. And so we're having discussions at this point on that topic. Laura Havener Hunsicker: Okay. Okay. And then just the cross fee that you mentioned, just that $3.8 million that's on special mention that was new to special mention. What is the occupancy on that? And how are you thinking about a resolution there? William Wray: It's in the high 60s. It's got some solid tenants. It's a well-known sponsor to us. By the way, all of these are in our core markets in the Tri-State area. And so our expectation is that we'll work something out with the sponsor and keep it on special mention as long as we need to, to make sure, it's payment season and then potentially do an upgrade. So again, special mention here is sort of more just a prudential judgment to put a marker on something and watch it through its refinance process. Laura Havener Hunsicker: Okay. And then obviously, with the... William Wray: It's the fully performing loan at this point, and we expect it to continue that way. But we are being cautious as we face the maturity issue in the third quarter. Laura Havener Hunsicker: Got you. Okay. And then the lab space. So I had thought there were the $33 million, $34 million, I thought that was all related. And then it looks like just 1 you moved over. Are those 2 completely separate loans? William Wray: Two completely separate loans. Laura Havener Hunsicker: Got you. Okay. So the $6.6 million that was triggered by the miscerity. What -- and determine coverage here is 0. So occupancy here is 0. Am I thinking about that the right way? Or what? William Wray: Yes. Yes. Occupancy, that building is still in its initial lease-up phase. So it doesn't -- it's 0. The other building is effectively fully leased and it's just a matter of -- as you know, that's a very competitive market. The -- as free rent burns off in its payment season, we expect that to come back to fully performing and pass rated. We're just watching as tenants come out of free rent and make their payments. So there's very strong positive momentum on that one. On the other one, again, we're in a situation where it matured and we're talking to the sponsors about what's going to happen next. Laura Havener Hunsicker: Got you. Okay. And so the 1 that's fully leased, the $27.5 million. In other words, positive momentum happens this year, happens next year. And I guess when is that -- go ahead. William Wray: I'm sorry, you cut out a little bit. But if you're asking when that comes back out, again, we think it's probably within the next few quarters. We want to make sure the tenants are making their payments as agreed and that we're going to let it season a little bit and judge that. But we are feeling very solid about the leasing status and the performance status to date. Laura Havener Hunsicker: Yes. Okay. And then 1 last question on this lab loan. When does this $27.5 million mature? William Wray: That is 2029. Laura Havener Hunsicker: Okay. 2029. Okay. Great. Okay. And then Yes, I think that answers all my questions on that. Really appreciate the details that you guys put on Page 11. And actually -- oh, I'm so sorry, 1 more question. So you had $2.2 million of Class C that was in special mention last quarter, and now it's gone, which is great. How was that resolved? Was that sold? Or what happened there? William Wray: No. It ended up being fully leased -- and it was performing all along. They were paying as agreed. But now that it's fully leased and we've gone through that process, we've moved it back into past rated. Laura Havener Hunsicker: Perfect. Perfect. Okay. Great. Okay. So just 2 more questions. Now for you, Bill, I guess, this goes back to you, Ron. Do you have the spot margin for March? Ronald Ohsberg: Yes, $259 million. Laura Havener Hunsicker: $259, great. Okay. And then Ned, for you. This is my last question. buybacks -- your capital levels are very, very strong, and your credit, obviously, ex office is very, very strong. You're 1 of the fee banks in New England not repurchasing shares. Can you just help us think a little bit about your approach to buybacks and how you're thinking about it here? Ronald Ohsberg: Yes. Yes. Laurie, I'll take it. I mean we consider that all the time, -- and I think we've talked about it on previous calls. So I can make some arguments in favor of and also, again, doing the buybacks. Our dividend is still relatively high. The payout ratio is still relatively high. And so at this point, we maintain a buyback program, but we really are not at this point intending to be buying back shares at this point in time. Edward Handy: Thanks, Laurie. Operator: We have no further questions. I'll hand back to Ned Handy for any final comments. Edward Handy: Well, thank you all for joining. As we move through 2026, we remain focused on what has defined us for 26 years, paring personalized service and local decision making with a comprehensive suite of financial products and services. We very much look forward to quarters ahead and sharing the news about those quarters with you as we progress. So thank you for your time today. We certainly appreciate your interest and support, and we look forward to speaking with you again soon. Have a great day, everybody. Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.
Operator: Good morning, and welcome to the AGNC Investment Corp. First Quarter 2026 Shareholder Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katie Turlington in Investor Relations. Please go ahead. Katherine Turlington: Thank you all for joining AGNC Investment Corp.'s First Quarter 2026 Earnings Call. Before we begin, I'd like to review the safe harbor statement. This conference call and corresponding slide presentation contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice. Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. Participants on the call include Peter Federico, President, Chief Executive Officer and Chief Investment Officer; Bernie Bell, Executive Vice President and Chief Financial Officer; and Sean Reid, Executive Vice President, Strategy and Corporate Development. With that, I'll turn the call over to Peter Federico. Peter Federico: Good morning, and thank you all for joining our first quarter earnings conference call. Agency MBS performance in the first quarter was driven by 2 very divergent investment themes. In January and February, the administration's focus on reducing interest rate volatility, maintaining mortgage spread stability and improving housing affordability and drove strong performance across the fixed income markets. Agency MBS performance was particularly strong during this period as President Trump's January 8 directive instructing the GSEs to purchase $200 billion of agency mortgage-backed securities, pushed spreads through the lower end of the recent 3-year trading range. In March, however, uncertainty associated with the war in Iran and the potential for a more widespread conflict in the Middle East caused interest rate volatility to increase investor sentiment to turn negative and Agency MBS spreads to widen significantly. As a result, AGNC's economic return in the first quarter was negative 1.6%. Despite the spread widening to swaps quarter-over-quarter, Agency MBS outperformed U.S. treasuries and investment-grade corporate bonds in the first quarter, again demonstrating the diversification benefits of this unique, high credit quality fixed income asset class. At the beginning of the year, I discussed a number of factors that we believe would benefit Agency MBS performance in 2026. Among these were low interest rate volatility and an accommodative monetary policy stance. In the first quarter, however, the Middle East conflict caused interest rate volatility to increase and Fed rate cuts to become more uncertain. While the duration and economic implications of the conflict are still unknown, recent developments are encouraging, and these factors could once again be positive catalysts for Agency MBS performance. More importantly, many of the other factors that I discussed actually improved in the first quarter and now further strengthen the outlook for Agency MBS. Most notably, at current spread levels, the return profile on Agency MBS is more attractive. At the time of our fourth quarter earnings conference call, the spread differential between current [ coupon ] MBS and a blend of swaps was 135 basis points. Over the last 2 months, that spread has ranged between 150 and 175 basis points as a result of heightened geopolitical and macroeconomic risks. We believe Agency MBS in this spread range represent compelling value on both an absolute and relative basis. The supply outlook for Agency MBS also improved in the first quarter. At the start of the year, the net new supply of Agency MBS was expected to be approximately $250 billion assuming a mortgage rate of just below 6% with mortgage rates now about 50 basis points higher, MBS supply could be $50 billion to $70 billion lower this year. The demand outlook for Agency MBS improved in the first quarter as well. Money manager demand for MBS increased materially in the first quarter as bond fund inflows came in about double the pace of the previous 2 years. U.S. bank regulators also released their proposed bank regulatory capital framework for common. As expected, the proposal includes lower capital requirements for high-quality mortgage credit. These favorable capital requirements could lead banks to retain a greater share of mortgage credit in whole loan form or to utilize the private label securitization path to a greater extent, thereby reducing the GSE footprint over time. Finally, with mortgage spreads wider and the mortgage rate now in the low to mid-6% range, the administration may take further actions to improve housing affordability. Such actions could include more aggressive GSE purchases or increases in GSE portfolio size limits. Either or both of these actions would benefit mortgage performance. In addition, while the funding markets for Agency MBS are deep and liquid, further actions by the Fed to improve the functionality and accessibility of the standing repo program could also be catalysts for tighter mortgage spreads and lower mortgage rates. In summary, although the sharp increase in geopolitical and macroeconomic risk, creates a more challenging investment environment over the near term, the return profile and technical backdrop for Agency mortgage-backed securities improved in the first quarter. In addition, actions by the administration to improve housing affordability are more likely. As we are continually reminded, market conditions change quickly. A prompt resolution to the Middle East conflict while at times difficult to predict could lead to a substantial reduction in volatility and inflationary pressures. Collectively, these conditions support our favorable outlook for agency mortgage-backed securities. Moreover, AGNC remains well positioned to capitalize on these favorable conditions and build upon our lengthy track record of generating strong risk-adjusted returns for our stockholders over a wide range of market cycles. With that, I will now turn the call over to Bernie Bell to discuss our financial results in greater detail. Bernice Bell: Thank you, Peter. For the first quarter, AGNC reported a comprehensive loss of $0.18 per common share. Our economic return on tangible common equity was negative 1.6% for the quarter, consisting of $0.36 of dividends declared per common share and a $0.50 decrease in tangible net book value per share, driven by wider mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was up approximately 6% for April or 5% net of our monthly dividend accrual. With the recovery in April through the end of last week, our tangible net book value has now largely reversed the first quarter decline. We ended the first quarter with leverage of 7.4x tangible equity up slightly from 7.2x as of Q4, while average leverage for the quarter was unchanged at 7.4x. We also ended the quarter with a significant liquidity position of $7 billion of unencumbered cash and Agency MBS, representing 60% of tangible equity. Net spread and dollar roll income was $0.42 per common share for the quarter, up $0.07 from the fourth quarter. The increase was largely due to a 25 basis point increase in our net interest spread, which was driven by a combination of a greater allocation of interest rate swaps in our hedge portfolio, lower repo funding costs, more favorable TBA implied financing levels and a modest increase in the yield on our asset portfolio. Our quarter-over-quarter results also benefited from reduced compensation expense as our fourth quarter results included year-end incentive compensation accrual adjustments. The average projected life CPR of our portfolio increased 70 basis points to 10.3% at quarter end from 9.6% as of Q4. The increase was largely due to prepayment model updates implemented in the first quarter and portfolio composition changes, partly offset by higher mortgage rates. Actual CPRs averaged 13.2% for the quarter compared to 9.7% in the prior quarter. Lastly, during the first quarter, we issued $401 million of common equity through our at-the-market offering program at a significant premium to tangible net book value per share, continuing our active capital management strategy and generating meaningful accretion for our common stockholders. And with that, I will now turn the call back over to Peter to discuss our portfolio. Peter Federico: Thank you, Bernie. Agency MBS performance varied meaningfully by coupon and hedge type in the first quarter. Low coupon MBS meaningfully outperformed high-coupon MBS due to heavy index buying from money managers in response to outsized bond fund inflows. This variation in performance by coupon was significant with lower coupon MBS tightening about 10 basis points to treasuries during the quarter, while higher coupon MBS widened about 5 basis points on average. MBS performance also varied materially by hedge type as swap spreads tightened during the quarter. 10-year swap spreads, for example, tightened by almost 10 basis points. As a result, and MBS position hedged with a 10-year pay fixed swap versus a 10-year treasury, experienced spread widening of about 10 basis points, all else equal. This tightening in swap spreads was directly related to Middle East uncertainty. The market value of our portfolio totaled $95 billion at quarter end, during the quarter, we purchased $1.7 billion of predominantly low coupon specified pools. In addition, we rotated a portion of our portfolio down in coupon. Consistent with these changes, the weighted average coupon on our portfolio declined to 4.95% from 5.12% the prior quarter, and the percentage of our assets with favorable prepayment characteristics increased slightly to 77%. The notional balance of our hedge portfolio increased to $64 billion due to the addition of shorter-term pay fixed swaps prior to the sharp sell-off in interest rates in March. We also reduced our exposure to treasury-based hedges during the quarter. As a result, in duration dollar terms, our swap hedge allocation increased to 78% from 70% the prior quarter. Lastly, in the current environment, we continue to favor operating with a positive duration gap which we view as additional prepayment protection in a down rate scenario. With that, we'll now open the call up to your questions. Operator: [Operator Instructions]. The first question comes from Bose George with KBW. Bose George: Peter, you mentioned for spreads that you compared to spread level at the earnings call last time where it is now. But if you compare it from the end of the fourth quarter to where it is now, are the returns pretty comparable? And what is the ROE currently imply? Peter Federico: Yes. Thanks for that question, Bose. Yes, that's a good way of putting it. In fact, Bernie mentioned that our year-to-date book value is almost unchanged from the end of the fourth quarter. So when you think back about where mortgage spreads were, again, I always kind of refer to them off the current coupon to the blend of the swap curve, but they were right in that neighborhood of around 150 basis points. And then when we got the announcement on the purchases of the -- from the GSEs, it really pushed them, as you recall, about 15 -- maybe 16 basis points tighter got us down to the [ 135 ] level. And now we're right back to where we were this morning, there are about 151 basis points. And at that level, that's the swap curve. The current coupon to treasuries is about 120-or-so basis points to the curve, not to a specific point on the treasury curve. But you're looking at an average spread of somewhere between 140 and 150 depending on what amount of swaps we use. And at that level, I would say returns are kind of broadly in the 15% to 17% range. centered right around 16%, which aligns pretty well with our total cost of capital. Bose George: Okay. Great. And then actually, it looks like specialness improved a little bit. Can you just talk about that and how much of a contribution that is now? Peter Federico: Yes. No, that's a very significant change from what we've really observed over the last couple of years, the TBA position, we've talked about it, our TBA position has not been very significant because the implied financing levels on TBA have really been unattractive. And in fact, for a lot of the last 2 years, TBA implied financing levels were well through, in some cases, the repo levels. And that really dates back to the regional banking crisis in 2023, where it was the combination of the regional banking crisis. It was QT, it was regulation. It was just a lot of things putting a lot of pressure on balance sheets. And that really had an implication for TBA funding. What we've seen is a lot of that pressure easing, and we really got the benefit of it in the fourth quarter. Obviously, the Fed has stopped Q2. Importantly, at the end of last year, they started reserve management purchases and growing their balance sheet with really eased funding pressures. They rebranded the standing repo facility to be the standing repo program. And then, of course, we now, as we expected, got reform to the original Basel [ Endgame ]. All those things have been really positive for funding, reducing balance sheet constraints. And as a result, the TBA implied financing levels are generally back to through or equal to repo levels. And in fact, for several coupons, they've actually been meaningfully better than TBA finance. So we were able to take advantage of that in the first quarter with our TBA position. We actually had both longs and shorts in our TBA position, which contributed to the uptick in our dollar roll income. So we expect these implied financing levels to sort of remain in this level in this area. So it's a new opportunity for us that we haven't had over the last couple of years. Operator: The next question comes from Crispin Love with Piper Sandler. Crispin Love: Just on quarter earnings. [ Net spread ] dollar roll income, very strong in the first quarter. I think since a year ago, can you just some of the dynamics there, the sustainability yields higher cost of [indiscernible], and you just had mentioned some of those financing dynamics. But can I think that's even if you just going a little bit down in coupon. So just as you look forward, would you expect core earnings to compress a little bit closer to the dividend. Just any thoughts there? Peter Federico: Yes. No, great question. You're right. When you think about our net spread and dollar roll income and our margin, our margin, as Bernie mentioned, did increase 25 basis points to 2.06. And if you think about that on a return on equity basis, that's really close to 20%. I would describe that as being above the long-run economics of the current environment. But if you're looking for sort of a range, and we talked about this when our net spread and dollar roll income was down around $0.35, $0.36, we said generally that we thought it was going to move up. So I would say that probably a good range of expectation over the relatively near term mean several quarters would be high 30s and low 40s. And some of the things that we talked about definitely showed up, particularly, as I just mentioned, the same benefits that we saw in the TBA implied financing levels, obviously, that's a tailwind now. But just more broadly and more importantly, the easing of repo pressures that we -- thanks to the Fed and their activities really made a big difference. If you recall, we were seeing real significant month end and quarter end pricing pressure in the repo market that has abated and repo is now trading right where the Fed wants it in the middle of the Fed funds target. Obviously, the timing of capital raises and how we deploy that capital can have a little bit of period-to-period implications. But generally speaking, I feel like the range that I talked about is probably the right range, somewhere in the high 30s, low 40s in terms of net spread and dollar roll income. Crispin Love: Okay. That makes sense. And then just on hedging. Hedge ratio, it ticked up a little bit, but still fairly low when you look at historical levels. So just in today's environment, the war rate fall the administration being supportive of the housing sector. Just how comfortable are you with the current levels in that 65% to 75% range versus if you, going back a little bit, you were at 90% plus in the past? Peter Federico: Well, it goes back to the -- really what we talked about in the fourth quarter is we were positioned and we still are positioned. You're right. Our hedge ratio increase -- and the hedge ratio that I'd like to look at is the 1 net of our receiver swaptions, which is about 8%. And that tells you that we are still positioned to benefit from lower short-term rates, meaning that if short-term rates go down, we would ultimately could close that hedge ratio. And we did some of that in the first quarter because there was a period of time in the first quarter, where if you recall, the 2-year rate and 2-year swap spreads really got down into the -- I think they dropped down to around [ 3.18 ], maybe it was the lowest, right? So not that far off of where the Fed's neutral target is. Obviously, that's not known right now, but it's probably somewhere in the -- right around 3% as to Fed's neutral target. So as short-term rates approach that long-run neutral target, it would make sense for us to close our hedge ratio and move higher, essentially lock in that of funding. Obviously, there's a lot more uncertainty about the direction of short-term rates right now. In fact, during the first quarter, we went from pricing in 2 eases at least to, in effect, at one point during the quarter when the really going there was expectation of Fed tightening. So we have more uncertainty on that, but still long run, we think that this ultimately will be resolved and that some of the underlying fundamentals will come back and that the Fed will ultimately adopt a more accommodative monetary policy stance later in the quarter, and we should stand to benefit from that. So I would describe us as sort of as neutral right now in terms of changes to our hedge position. But we did close it a little bit when we had the opportunity. Operator: The next question comes from Marissa Lobo with UBS. Ameeta Lobo Nelson: So how do you think about optimal leverage in a policy supportive environment, but where near-term volatility keeps remaining a recurring feature? Peter Federico: Yes. Certainly, an important question in today's environment. I guess I would start by saying, from our perspective, when we think about our leverage, we obviously are thinking about our leverage and setting our leverage according to the spread range that we expect to be operating and we saw that really play out really well for us in terms of being well positioned for the volatility and the spread volatility that we incurred in the first quarter. Obviously, you saw us grow our portfolio. And the key as a levered investor is you want to make sure that you have sufficient excess liquidity to withstand all of the uncertainty and stressful environments that we ultimately encounter on a regular basis and not have to change the asset composition, not have to delever your portfolio. And we've been able to successfully do that because we sized our position accordingly. And during the quarter, for example, our leverage sort of stayed right in this range, maybe got as low as 7% and maybe got as high as 7.5%. And so we have to wait and see how the environment unfolds. Obviously, there's a lot that can change and a lot that will change over the next quarter or 2, both with respect to the economic outlook, the monetary policy outlook, the geopolitical uncertainty that we face. And then the administration and what actions that they may take that will ultimately impact housing affordability. All those will go to inform us as to what the right the right leverage level is. But importantly, we are able to operate now in today's environment where spreads are, and particularly since spreads have widened, with a very reasonable leverage position and still generate excellent returns for shareholders. That gives us a lot of ability. What we're trying to do is we're trying to generate the best return we can while putting ourselves in a position to preserve book value across a wide range of market conditions. So we're always trying to optimize that. We will be informed over time whether or not we have to take our leverage up or take our leverage down based on the market conditions and the stability of spreads. If we get the war resolved, if the inflation pressures come down, Fed's more accommodative. And importantly, the administration goes back to focusing as they were on interest rate, volatility, in reducing interest rate value and importantly, reducing agency spread volatility, then ultimately, it would be a favorable environment we could operate with potentially a different leverage profile. But we certainly like the leverage profile that we're operating right now. Ameeta Lobo Nelson: And then moving to GSE activity. It's been framed as more opportunistic than programmatic. How does that shape your trading strategy and your coupon selection relative value trade? Peter Federico: Yes, that's a great question because it goes back to your previous point about leverage. One of the things that we did expect, and it's very difficult to tell what we kind of realized with the GSEs is while they put out their portfolio numbers to their monthly volume summary is about a month after the fact. I don't believe that those numbers capture their TBA position. So it's not quite clear exactly what the growth is of the GSEs quarter-over-quarter. But what I would say, and I would fully expect and I believe that they do this is that they would approach this from a really economic perspective. And when mortgage spreads widen, particularly like they did, in March, I would expect the GSEs to take advantage of that. They're not only putting on more profitable book of business, but importantly, they're serving a very important role in the market, which is to reduce interest rate volatility. And excuse me, not interest rate but mortgage spread volatility. And that ultimately is beneficial to the mortgage rate. So I do think that they would approach it that way from an opportunistic perspective and ultimately, the more that they do that, the more other capital gets attracted to the system. And one of the things that really will benefit mortgage rates and mortgage spreads is having a more diverse investor base. And we're starting to see that now. We're seeing that on the bank side, with the changes in bank capital. I do believe that banks will be a bigger buyer. We're seeing that with money managers. We're seeing foreign investors start to come back into the market. And obviously, to the extent that mortgage spread volatility comes down, in part due to the actions of the GSEs that allows more levered money to come into the system. That's a virtuous cycle that will ultimately lead to lower mortgage rates. So I think that's a critical role that the GSEs do play and can continue to play. Operator: The next question comes from Trevor Cranston with Citizens JMP. Trevor Cranston: Peter. A follow-up on the question you were just talking about with leverage. It looks like you guys didn't really add much to the portfolio during the widening in March, at least based on the quarter end numbers. Can you talk about kind of what you would need to see in the future belts of volatility in order to significantly add to the portfolio? And if the GSE is sort of being there is a potential buyer and widening scenarios sort of gives you any added confidence and potentially adding if spreads are to widen again in the future? Peter Federico: Yes, you're right. We didn't -- our portfolio growth in the first quarter was, as I mentioned, $1.7 billion. And that was true, obviously, at the end of the quarter. Obviously, we have seen more stability in the market since quarter end, importantly, obviously, given the change in tone and what's happening in the conflict. And so to the extent, as I mentioned that in my prepared remarks, to the extent that we continue to see positive developments that will ultimately change the macroeconomic outlook and particularly the inflationary implications it would be positive from a growth perspective. So we do -- as I mentioned, I do believe that mortgages in this 150 to 160 range where we've been trading our attractive long run, and I do expect mortgage spreads to tighten over time once we have more resolution and once the monetary policy outlook starts to become more clear. So over time, that can all happen. And I do -- again, I do think that the GSE is stepping in and buying mortgages when they [ cheap ], if the fact that's what they have done, I think that would ultimately be positive. Trevor Cranston: Okay. That makes sense. And I think you said with the -- for the purposes you guys made during the first quarter, they were in lower coupons. Can you just maybe add some detail around that kind of where you guys are buying in the coupon deck and finding the best value right now? Peter Federico: Yes. We did both is our purchases, even though it was less than $2 billion, our purchases were concentrated in lower coupon specified pools. And importantly, we also did rotate a portion of our portfolio into lower coupons. And the reason why we did that is because we track on almost a daily basis, bond fund inflows, and we did see that bond fund inflows were coming in materially faster in the first quarter than the previous couple of years. So we knew that, that would ultimately translate to the outperformance of lower coupons. And now that has abated somewhat. So we are always looking for opportunities to move up in coupon, move down in coupon, be opportunistic. We're able to do that in the first quarter to some extent and we'll continue to look for opportunities. We have seen bond fund inflows starting to actually slow down quite a bit. In fact, I think quarter-to-date, they're probably running slower than the pace of the previous 2 years in the second quarter of the year. So we'll watch that closely, but there was an opportunity in low coupons. So we took advantage of that. and we'll continue to be opportunistic. Any follow-up on that, Trevor? Trevor Cranston: No. That's very helpful. Operator: And our last question comes from the line of Harsh Hemnani with Green Street. Harsh Hemnani: Peter, maybe can you talk a little bit about the timing of the equity raises last quarter on the prior earnings call, it sounded like it would be more opportunistic and given everything that happened with spreads this quarter. Could you share some color on timing of those equity raises? And then can we expect the rest of the year to be similarly opportunistic? Peter Federico: Yes. Thank you for that, Harsh. Yes, I think you characterized at least my expectation from the last call that I did -- if I go back to the fourth quarter earnings call, I would say that my expectation for the capital issuance would have been a little slower than what we ultimately did. As Bernie mentioned, it was about $400 million in the first quarter. And the reason why that ended up being a little faster than the pace that I had anticipated was, obviously, I didn't anticipate all of the volatility that we saw. And so having more capital certainly is beneficial from that perspective. But importantly, when you think about the economic benefit to our existing shareholders of that capital, it was significant in the first quarter. Obviously, the capital that we raised was accretive from a book value perspective given the fact that we are trading at a premium to book. But also it was significantly accretive from an earnings perspective because we're able to deploy those proceeds. And we haven't deployed them all yet, by the way, but we have deployed most of them. We were able to deploy that at returns, call it, like, as I mentioned, at around [ 16 or so percent ]. And you can compare that to what the dividend yield on the stock is around 13.5%. So it's accretive from an earnings perspective. It's accretive from a book value perspective and having more capital in times of volatility is certainly beneficial and it gives us the opportunity now to take advantage of that. We -- there's a lot of times when -- the issuance of the capital does not align perfectly from a timing perspective with the deployment of it. Part of it is our risk management strategy, part of it is trying to be opportunistic, waiting for the right opportunity to deploy those proceeds and assets at really attractive return levels. And so that's the approach we took in the first quarter and feel like we're in a good position as we start the second quarter. Harsh Hemnani: Got it. That's helpful. And then maybe you talked early in the call about [ role ] specialists improving and that should lead to more DDA in the portfolio. I guess how are you comparing those percentages versus maybe capitalizing on the better [ role ] specialists versus still seeking some prepayment protection with specified pools? Peter Federico: Yes. So a couple of points there. One, it doesn't necessarily -- the role specialists may not necessarily translate into an a net TBA position that's materially bigger. For example, our average TBA position in the first quarter was, I think, 10.3% versus 9.6% the previous quarter, yet our income was materially higher. And that is because, as I mentioned, we can't have offsetting positions there that will allow us to take advantage of the TBA specialness in particular, also not only did conventional TBA implied specialist levels improve, but we have as we -- as has been the case for now several quarters, there's significant specialists in the Ginnie Mae market. So we'll continue to do that. You may not necessarily see though, an uptick in the aggregate size of our TBA position. To your point about specified pools, we obviously still are in this environment very focused on managing prepayment exposure. We do believe that over time, once this uncertainty abates, that prepayment risk will be sort of our predominant risk. And as I mentioned, we are operating now with -- from a positive prepayment pool characteristic perspective, a significant portion of our portfolio, 75% -- 77% of our portfolio, for example, has some prepayment characteristics that we deem to be valuable, and we will continue to do that. What's important is, in this environment, because TBA implied financing levels are where they are, we are able to now deploy capital quickly in TBA, not lose carry because of the funding levels. It gives us more time to then slowly over time rotate out of TBAs into specified pools when those opportunities exist. That has not been the case for the last couple of years. To have a TBA position while you holding that while you wait for the opportunity to rotate into specified pools actually has cost us carry today in this environment, that's not the case. So it gives us a lot of flexibility to deploy capital and then ultimately rotate into specified pools, but we will continue to operate with a high percent of specified pools in this environment. We also, as I mentioned in my prepared remarks, we'll likely continue to operate with a positive duration gap. In fact, our duration gap in the first quarter was a little higher than what we've reported for the last couple quarters because we do want to position our portfolio to benefit from that in a lower rate scenario. Operator: We have now completed the question-and-answer session. I'd like to turn the call back over to Peter Federico, for concluding remarks. Peter Federico: Well, again, I appreciate everybody joining the call this morning. We look forward to talking to you again after our second quarter. Operator: Thank you for joining the call. You may now disconnect.
Operator: Please standby. Good morning. Thank you for joining OFG Bancorp's conference call. My name is Nikki; I will be your operator today. Our speakers are José Rafael Fernández, Chief Executive Officer and Chairman of the Board of Directors; Maritza Arizmendi, Chief Financial Officer; and Cesar A. Ortiz-Marcano, Chief Risk Officer. A presentation accompanies today's remarks. It can be found on the homepage of the OFG Bancorp website under the first quarter 2026 section. This call may feature certain forward-looking statements about management's goals, plans, and expectations. These statements are subject to risks and uncertainties outlined in the Risk Factors section of OFG Bancorp's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Instructions will be given at that time. I will now turn the call over to Mr. Fernández. José Rafael Fernández: Good morning, and thank you for joining us. We are pleased to report our first quarter results. Let us go to Page 3 of our presentation. We started the year with a strong financial performance. Earnings per share diluted were up 26% year-over-year, on 4% growth in total core revenues. This was driven by ongoing loan growth, high-quality credit performance, core deposit strength, expense discipline, and proactive balance sheet management. Loans grew 5% year-over-year, and new loan production grew 9%. Reported core deposits declined 1%; excluding the previously announced $500 million government deposit transfer, core deposits grew more than 4% year-over-year. This demonstrates how our strategies and operating model continue to deliver, supported by momentum in our businesses and disciplined execution across the franchise. We furthered our commitment to capital management. We purchased $44.5 million of common shares and increased the dividend 17%. Despite growing geopolitical uncertainties and their effect on energy prices, Puerto Rico’s economy continues to grow, and businesses’ and consumers’ balance sheets are solid with high liquidity levels. Please turn to Page 4. Our core digital strategy consists of three main pillars. The first is our service offerings. We are targeting specific customer segments with accounts that meet their needs: Libre for the mass market, Elite for the mass affluent, and MyBiz for small businesses. This targeted approach is driving strong market adoption and deeper customer relationships. The second pillar is technology. Our omnichannel platform allows customers to interact with us seamlessly across all touch points. This is driving continued digital adoption, resulting in efficiency and savings that we reinvest in new ways to serve our customers. The third pillar is intelligent banking, leveraging data and real-time insights to help customers better manage their finances. We are increasingly seeing real customer connections being built through our digital channels. Please turn to Page 4. As proof of our success, we are driving innovation year-over-year. Retail digital enrollments are up 10%, digital loan payments 5%, and virtual teller usage up 7%. Net new retail and commercial customers each grew by close to 3%. The added benefit is that this enables us to free up more of our teams to provide personal, value-added services, focus on sales to expand our market share, and develop new digital products and services. Now here is Maritza to go over the financials in more detail. Maritza Arizmendi: Thank you, José. Let us turn to Page 6 to review our financial highlights. All comparisons are to the fourth quarter unless otherwise noted. Core revenues at $186 million were approximately level. Total interest income was $194 million, a decrease of $3 million. This reflected lower average balances of cash and investment securities at lower average yields. This was partially offset by higher average balances of loans at higher average yields. First quarter interest income included $3.3 million from a PCD loan paid in full. There were two fewer days in the first quarter; this negatively affected interest income by about $3.1 million. Total interest expense was $40 million, a decrease of $4 million. This reflected lower average balances of core deposits at lower average yields. This was partially offset by higher average balances of brokered CDs and borrowings at lower average yields. The two fewer days reduced interest expense by approximately $1 million. Total banking and financial service revenues were $32 million, a decrease of $600 thousand. This reflected favorable MSR valuation of about $1.3 million, while the fourth quarter included $2.3 million in annual insurance commission recognition. The other income category was $200 thousand compared to a loss of $1.1 million. The change reflected the absence of several previously reported items from the fourth quarter. Noninterest expense totaled $95 million, down $10.3 million from the fourth quarter. The first quarter included $1 million in merit raises, $700 thousand in payroll taxes, $1 million in costs related to our capital market readiness and registration process, $3.6 million in business-related volume incentives compared to $3.1 million a year ago, and $2.5 million net cost savings. The fourth quarter included net $6.8 million in previously reported expense items. Income tax was $14.9 million compared to a benefit of $8 million in the fourth quarter. The first quarter ETR was 21.6%. Looking at some other metrics, tangible book value was $30.14 per share. Efficiency ratio was 51%. Return on average assets was 1.78%, and return on common equity was 16.4%. Now let us turn to Page 7 to review our operational highlights. Average loan balances were $8.2 billion, up $1.55 billion from the fourth quarter. This reflected increases in Puerto Rico and U.S. commercial loans, partially offset by lower balances in residential mortgage, auto, and consumer. Loan yield was 7.87%, up 14 basis points. Excluding the first quarter loan recovery, loan yield was 7.71%, down 2 basis points from the fourth quarter. New loan production was $[inaudible]. This mainly reflected an increase in auto loan production. Year-over-year, new loan production increased 9%, primarily reflecting increases in new commercial loans with auto moderating as anticipated. Average core deposit balances were $9.6 billion, down 4% from the fourth quarter. This reflected the $500 million government deposit transfer to wealth management early in the first quarter. By the end of the quarter, this was partially offset by increases in retail and commercial deposits totaling more than $150 million across all categories: demand, savings and, to a lower extent, time deposits. Core deposit cost was 1.29%, down 13 basis points. This was mainly due to the previously mentioned government deposit withdrawal combined with lower average rates. Excluding public funds, cost of deposits was 1.00% compared to 1.02%. Also, reported average noninterest-bearing deposits of $7 billion in the first quarter increased 1.41% sequentially and 4.55% year-over-year. Investments totaled $2.8 billion, down $55 million. This reflected principal paydowns and maturities. This was partially offset by purchases of $49.2 million of mortgage-backed securities and residential mortgage securitization of $23.5 million. Average borrowings and brokered deposits totaled $929 million compared to $787 million in the fourth quarter. The aggregate rate paid was 3.98%, down 5 basis points. By the end of the first quarter, balances were down to $747 million due to intentional runoff compared to $897 million at prior quarter end. Period-end cash at $636 million was 39% lower due to the government deposit transfer. Net interest margin was 5.36%, reflecting the previously mentioned $3.3 million interest recovery and lower cost of deposits and borrowings. Cesar will provide more details on our credit quality in a moment. But first, let me summarize the quarter. We demonstrated year-over-year loan growth and production in line with expectations, and continue to expect low single-digit growth with our expanding presence in commercial more than offsetting a decline in auto. Our digital-first strategy is continuing to lead to more customer engagement and digital and debit card transactions. Digital-first also helped grow deposits in line with our strategies. We continue to anticipate growth this year with our Libre, Elite, and MyBiz accounts. We now expect net interest margin to range from 5.1% to 5.2%. This updated range assumes no additional rate cuts in 2026, compared to two cuts previously expected, and incorporates the exit of the large remaining government deposit later this year. Noninterest expenses were maintained within our expected run rate. We remain on track to keep expenses in a range of $380 million to $385 million this year. Based on our first quarter results, the estimated tax rate for 2026 is anticipated to be 22.3%, excluding any discrete items. We were very active returning capital to shareholders. We will continue to be selective and opportunistic, balancing shareholder returns with disciplined growth. Now, here is Cesar. Cesar A. Ortiz-Marcano: Thank you, Maritza. Please turn to Page 8. Before getting into the details, let me start with the key highlights for the quarter. Our thesis that higher customer liquidity in the first quarter drives better credit metrics was reinforced. We saw that most clearly across the retail portfolios, where early-stage and total delinquency trends improved sequentially, consistent with normal seasonality. Net charge-offs totaled $21 million, down $5.5 million, reflecting normal portfolio activity with continued improvement in retail loss trends. Net charge-offs reflected $3.9 million from our final settlement of a previously reserved U.S. loan, while the fourth quarter included $4.8 million related to a nonperforming loan sale. The net charge-off rate was 1.05%, an improvement of 27 basis points from the fourth quarter. The auto net charge-off rate declined sequentially to 1.52%, an improvement of 29 basis points. The consumer net charge-off rate also improved to 4.40%, 15 basis points better than the fourth quarter. Provision for credit losses was $22.5 million, down $9 million from the fourth quarter. This reflected $17.5 million from increased loan volume, $3.7 million in added reserves for a previously reserved commercial loan, and $1 million for newly classified small commercial loans. Allowance coverage remains strong at 2.48% of loans, and reserve levels continue to appropriately reflect the risk profile of the portfolio. Looking at other retail credit metrics, early and total delinquency rates declined meaningfully from the fourth quarter to 2.2% and 3.4%, respectively. These improvements were broad-based across the retail portfolios, with auto, consumer, and mortgage all showing better early-stage performance. The nonperforming loan rate was 1.47%, down 12 basis points. Retail nonperforming loan rates improved sequentially in auto and consumer, while remaining stable in mortgage. Overall, retail credit behavior was consistent with the seasonal improvement we typically see in the first quarter, supported by higher customer liquidity and strong employment conditions in Puerto Rico. Turning to commercial, the nonperforming loan rate declined to 2.36% from 2.5% last quarter, reflecting sequential improvement. Commercial asset quality outside of one specific trade continues to perform as expected. As we discussed last quarter, the commercial portfolio continues to include a single-name telecommunication exposure that moved to nonaccrual late last year. This exposure remains well understood and idiosyncratic, and does not represent a broader trend within the commercial portfolio. Overall, credit continues to perform well. While we remain mindful that there are various geopolitical and economic headwinds that may increase the cost of living or inflationary pressures in Puerto Rico, the first quarter performance benefited from strong employment conditions and higher seasonal customer liquidity. Credit metrics remain well controlled and within our risk appetite, and the portfolio is performing in line with our expectations and risk framework. José Rafael Fernández: Thank you, Cesar. Please turn to Page 9. The Puerto Rico economy continues to perform well. Business and consumer liquidity levels are strong, and unemployment is at historically low levels. Public reconstruction funds, private investments, and new onshoring projects continue producing economic tailwinds. And as Cesar mentioned, we are closely watching geopolitical and macroeconomic uncertainties and their impact on the island, particularly with higher energy prices and overall inflation. Against this economic backdrop, OFG Bancorp remains very well positioned. Our digital strategy is driving unique customer experiences, attracting deposits, and growing our customer base steadily. Our culture of continuous improvement and investments in people, technology, and automation are producing tangible efficiencies. We continue to have a solid commercial loan pipeline, stable credit trends, and strong risk management and discipline in liability management. All these factors, combined with Puerto Rico’s level of business activity, position us well for continued growth. Before I end my prepared remarks, I want to highlight the recognition we received in the first quarter, where we were honored with a 2026 Gallup Exceptional Workplace Award. For us, this recognition goes well beyond employee engagement scores. It reinforces a culture we have been intentionally building for many years—one that emphasizes agility, openness to challenge, and innovation. At OFG Bancorp, our teams are encouraged to question how things have always been done, to move quickly in responding to customer and market needs, and to continuously improve how we operate. That mindset enables faster decision making, more innovation across our digital and operating platforms, and better execution in a dynamic environment. This recognition highlights how our people, culture, and strategy are united by a shared sense of purpose, driving meaningful progress for all our stakeholders. It is this commitment to purpose that empowers us to consistently achieve strong, long-term results while making a positive impact across all our stakeholders. We will now open the call for questions. Operator: Thank you. Star one on your telephone keypad. If you wish to remove yourself from the queue, press star two. We will take our first question from Analyst. Please go ahead. Your line is open. Analyst: Good morning. Wanted to start just on the margin. Even excluding the $3.3 million, that would have made it about 5.24%. That was better than anticipated. When I look at the cost of deposits—if I heard correctly, 1% excluding the government deposits in the quarter—it seems like things turned out better than expected on the margin. I know the guidance is for a slightly lower level from here, but any thoughts on potential positives for the margin relative to the guidance, whether it be loan pricing or any other factors? It seems like you are probably getting close to a bottom on funding costs. José Rafael Fernández: So, Brett, before I let Maritza give you the specifics, let us be clear. For us to provide guidance on the margin is a little tricky given the uncertainty on when and how much of the large government deposit will exit and how those funds will be replaced. So when we give guidance on the NIM, we are using the most conservative guidance possible because we really do not want to promise something that we do not deliver on. Bear that in mind. We still have significant deposits from the government that have been telegraphed to us that they will depart sometime. We do not know if it is tomorrow or if it is next year. Replacing those deposits, we certainly bet that our business teams—the commercial team as well as the retail team—as they did this first quarter, will deliver and deliver substantially better than what we expected in the first quarter. It definitely has a lot to do with the economic background that we are living in Puerto Rico, and sometimes we undermine that in our own forecast, given the 22 or 23 years that we have operated on the island. Now I will pass the answer to Maritza so she can give you the specific details. Maritza Arizmendi: Thanks, José, for that. For the first quarter, deposits increased at a higher rate than expected. It was very good momentum for us. The reality is that, going forward, thinking about the rate scenario we are managing—with no cuts—we do not see much flexibility to push down more the cost of deposits. So we will continue to see deposit costs at the same level as we saw during the first quarter. The other element embedded within the range I provided is asset composition, because we will continue to see the commercial book becoming a higher proportion as auto continues to go down, as I shared in the prepared remarks. That means we also have some impact in the loan yield that during this quarter went down 2 basis points ex-recovery. We are seeing the asset sensitivity and the liability sensitivity somehow compensating between the two. Since the NIM we saw during the quarter—excluding the recovery—was 5.25%, we expect it roughly stable, maybe 5 basis points down or up. That is why we are giving the 5.1% to 5.2% range for the full year. We will also need to manage liquidity through the year, as José was mentioning. José Rafael Fernández: And you know us—we are going to be conservative in all the guidance that we provide. We have been doing that for many years. That is where we stand, Brett. Analyst: Okay. And can you remind me, José Rafael, how much of the government deposit piece is left? I know you are unsure of the timing, but any thoughts? José Rafael Fernández: Around $600 million on the one deposit. Remember, the other $500 million went to our broker-dealer, so we are getting a little bit of a fee there. That is where it stands right now. Analyst: Okay. And then on credit quality, I heard the comments and it makes sense—there is some seasonality related to early-stage delinquencies—but there was some nice improvement this quarter. Was there anything else that might have been driving the improvement other than seasonality and customers having higher liquidity during 1Q? Are you seeing any other broad-based things that were improving credit? José Rafael Fernández: Back in late 2022, we improved the underwriting standards to make sure that we booked higher quality, because that was a record-breaking period. We wanted to use that moment to improve our portfolio quality. Now we are seeing the results of those improvements in the credit metrics, where the auto portfolio is 99% prime. We are starting to see the benefits in the credit metrics of those adjustments that we did in 2022. When you think about it, the seasonality of the vintage that is coming due in 2026 is one that already has 80% plus in prime. So we expect to have lower loss content in the vintages that are becoming seasonal in the next couple of years. That is an additional element of our consumer credit portfolio. Analyst: Yep. Okay. And then just last one for me around the broad macro. I saw this morning that construction in Puerto Rico was slightly off in January, maybe February, and with higher oil prices and inflation—anything you are seeing in terms of macro in Puerto Rico and opportunities or challenges? José Rafael Fernández: You have heard me before talk about Puerto Rico’s economy, and it remains very constructive, very positive. Puerto Rico is in its best economic position in many decades. Right now, Puerto Rico has only 30% debt-to-GDP. Puerto Rico has the lowest levels of unemployment in seventy-some years. Puerto Rico receives around $4 billion to $6 billion in reconstruction funds a year and will continue to receive them for the next five to seven years. Puerto Rico is benefiting from onshoring of medical devices and pharmaceuticals, leveraging infrastructure that has been in place for many years. Manufacturing is around 45% of the island’s economy. We are also back in the limelight in terms of our geopolitical positioning; you saw when the military went into Venezuela, it all came from Puerto Rico, and they are increasing their military presence on the island. We will certainly have to face threats coming from geopolitical events and inflationary pressures, and if the United States potentially goes into a recession, we will get some of those effects. But Puerto Rico is in a much stronger position today than several decades ago to embark on those challenges. Month-to-month changes in economic data points are real, but on the ground we are seeing high levels of liquidity, strong interest in building infrastructure, strong private investments. We are meeting with commercial clients—just yesterday I had lunch with clients who are putting money to work in different industries. I think the next several years in Puerto Rico are going to continue to be steady growth. We are seeing a solid, positive economic environment that is not exempt from threats and risks, but we have been managing them for many years, and we are confident that we will continue to grow our client base, our loans, and our deposits—being very strategic and very intentional. Our team is really focused on being the challenger bank on the island and gaining market share. That is my view. Analyst: I appreciate all the color, and it has been good to see the onshoring. Thanks. José Rafael Fernández: Thank you. Operator: We will move next with Analyst. Please go ahead. Your line is open. Analyst: Thanks. Good morning. The deposit growth surprised me. Despite the government deposit you had guided as coming out, you had pretty strong growth in the quarter to cover that, where I thought it would actually come in through the borrowing side. You mentioned that Libre, Elite, and MyBiz all contributed. Are you seeing any particular growth in any one of those products, and were you doing anything special to drive that growth in the first quarter? José Rafael Fernández: The three products are the driving force for us—very targeted, very focused. We do not have 50 different deposit accounts. We have one for mass market, one for mass affluent, and one for small business. That focus helps our team members. We also have excellent benefits for each of those accounts, and that is what is driving adoption, account opening, and customer growth. It is across the board. With Libre and Elite on the retail side, we saw increasing deposits. Libre is mostly noninterest-bearing and a digital account you can open online. We continue to see great adoption there, growing client base steadily. In mass affluent, we also saw great growth in deposits and deeper relationships—more Elite customers using lending with Oriental and OFG Bancorp. On MyBiz, it is our flagship. Our team members go out there; we have a solid cash management offering, and the platform compares well to those banks in the States have. Customers are identifying those benefits, and we are seeing the results. Certainly, the economy helps with a lot of liquidity, but I do not want to underestimate the power of our strategy and execution. Analyst: Great. That is helpful. On Slide 5, you have always talked about the digital-first aspect and the statistics are impressive. Any particular new investments on the technology side to continue to improve those statistics? José Rafael Fernández: We have made investments over the last several years, and some of what you are seeing today is the benefit of those investments. We continue to invest. Right now, the biggest focus as we finalize our data management is making sure we have data readily accessible, so we can extract insights for our customers, improve their lives, and provide value-add. We are already doing that and expanding it, with a team working on it for many years. The benefits of artificial intelligence are first and foremost on efficiency. When you heard Maritza talk about expenses and our flat guidance versus last year, we continue to see good opportunities to leverage AI and bring efficiencies to the bottom line for 2027 and beyond. The other side is value-add to our customers—how do we make their lives simpler. Those are the things we are investing in right now. It is tricky—we will hit some good investments and we might miss some—but that is how we operate. We bet on innovation. Banking will require innovation going forward, and Puerto Rico is behind on that curve. OFG Bancorp is the one driving that innovation in Puerto Rico. Analyst: Thank you. Operator: Thank you. We will move next with Analyst. Please go ahead. Your line is open. Analyst: Hi. Good morning. Thanks for the question. Just a quick guidance clarification for Maritza: that 5.10% to 5.20% margin—is that for the full year or the balance of 2026 quarters? Maritza Arizmendi: It is for the full year. I already shared how we are seeing and why we are seeing that range, including the timing of the big government deposit transfer and the fact that we are not seeing rate cuts during the year. Analyst: Got it. That is helpful. Similarly, I thought a real strength of the quarter was the core deposits. I know Puerto Rico has a government tax rebate. Did you see any positive impacts from that in 1Q, or if not, can you help with the timing? José Rafael Fernández: That is usually at the end of the quarter. We saw a little bit at the end of the quarter, and it plays out throughout the first half of the year. We see the child tax credit and the tax refunds in general, and that plays out through the first half. Analyst: Great, helpful. Turning to capital, you announced a meaningful dividend raise earlier in the quarter and were more active with the buyback with the new authorization out. Capital looks very healthy. Can you remind us of any guideposts or thoughts around the capital side of things? José Rafael Fernández: Everything starts with how we deploy our capital. We want to deploy it first and foremost in our business here in Puerto Rico. If there are opportunities to deploy it in a growing balance sheet, we will do that—that is the first level of thinking. We certainly see the buyback as a way to continue to return capital to shareholders. We are methodical and opportunistic, as we showed in the first quarter, and will continue to be so during the rest of the year. For the dividend, we feel very confident about the earnings power we have. With CET1 close to 14%—around 13.75% this quarter given the buybacks—we feel that returning capital to shareholders is part of our strategy, and we will continue to do so, Kelly. Analyst: Great. Helpful. Last modeling question: I appreciate the color on margin and the interest recovery. Looking at your average balance sheet, it looks like there was a jump in PCD interest income. Just to confirm, was that where the interest recovery came in? Maritza Arizmendi: Yes. It was the pay-in-full of a loan within that book. Analyst: Great. Thank you for confirming. I will step back. Really nice quarter. José Rafael Fernández: Thank you, Kelly. Operator: Thank you. We will move next with Analyst. Please go ahead. Your line is open. Analyst: Hi. How much did taking out Fed rate cuts help that NIM guide? And if we did get one rate cut, what would you expect the impact to be? Maritza Arizmendi: Thank you, Manuel. We continue to be asset sensitive, but a 50 basis point rate cut would have a very low impact—less than 1%—to NII. We are taking that into consideration in this new guidance because we were expecting two cuts midyear and then at the end of the year. That is no longer impacting the commercial book, so it is impacting the guidance positively. We moved it about 10 basis points, not necessarily fully related to the change in rate expectations, but also due to a better funding mix from the inflows we received during the first quarter. It is encouraging us for the rest of the year. We expect core deposits to continue growing, which will help funding mix in front of the potential exit of the government deposit. That is embedded in the guidance. Analyst: I appreciate that. So the success you are having with the new account types—as long as they keep growing, they can replace borrowings and should benefit your funding. Is that what you are hoping? José Rafael Fernández: Yes. It also has another component we do not talk about often: the large commercial book and business we have. We have some good-sized commercial accounts that have been long-standing clients of ours that also are benefiting from higher liquidity levels. Analyst: On that front, I know your loan growth is commercial-led this year, a little less on the auto side. How do pipelines look? Any update to the mix of loan growth from last quarter? Is there going to be a seasonal improvement in growth? José Rafael Fernández: We have a pretty good pipeline, and we are continuing to stick with our guidance of low single digits. Not because we do not feel comfortable with the commercial pipeline, but because we are modeling a reduction in the auto loan book that is hard to predict given the landscape in Puerto Rico. We are very happy with the commercial business. We continue to grow it and have a very strong pipeline. Analyst: My last question is on credit. Is this improvement in past dues—which is somewhat seasonal—likely to drive a bit lower net charge-off levels for the year? I think we are looking at closer to 1% plus. José Rafael Fernández: We talked about the 1% last quarter too. I do not want to project this quarter’s seasonality forward. I would stick to 1% for the year, and hopefully it will be better because of the improvements in the FICO quality of the portfolio, which should translate into a better charge-off rate. But as of now, I would say 1%. Analyst: I appreciate it. Thank you. José Rafael Fernández: Thank you for your question. Operator: Thank you. Again, if you would like to ask a question, press star then the number one on your telephone keypad. One moment while we queue. At this time, there are no further questions. I will now turn the call back over to Mr. Fernández for closing remarks. José Rafael Fernández: Thank you, operator. Thanks again to all our team members, and thank you to all our shareholders who are listening. Have a great day. Operator: Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the 3M First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Tuesday, April 21, 2026. I would now like to turn the call over to Chinmay Trivedi, Senior Vice President of Investor Relations and Financial Planning and Analysis at 3M. Chinmay Trivedi: Thank you. Good morning, everyone, and welcome to our first quarter earnings conference call. With me today are Bill Brown, 3M's Chairman and Chief Executive Officer; and Anurag Maheshwari, our Chief Financial Officer. Bill and Anurag will make some formal comments, then we will take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on the homepage of our Investor Relations website at 3m.com. Please turn to Slide 2 and take a moment to read the forward-looking statements. During today's conference call, we will be making certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of these most important risk factors that could cause actual results to differ from our predictions. Please note, throughout today's presentation, we'll be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in the attachments to today's press release. With that, please turn to Slide 3, and I will hand the call off to Bill. Bill? William Brown: Thank you, Chinmay, and good morning, everyone. We delivered solid operating performance in Q1 with earnings per share of $2.14, up mid-teens versus last year. Operating margin increased 30 basis points to 23.8%, and free cash flow was over $500 million, up double digits. During the quarter, we returned $2.4 billion to shareholders, including $400 million in dividends and $2 billion of share repurchases. We had a light start to the year on the top line with organic growth of 1.2%, driven by pockets of macro pressure. But we saw encouraging order trends that support our outlook for acceleration in the balance of the year. Looking forward, we remain confident in achieving our full year 2026 guidance despite the volatile environment. Our performance reflects strong execution on productivity, cost discipline and commercial rigor. We're building a stronger foundation based on commercial, innovation and operational excellence, underpinned by a relentless focus on strengthening our performance culture. In commercial excellence, we're seeing benefits from improved sales effectiveness and lower customer attrition, and we continue to make progress on cross-selling opportunities. To date, we've closed on approximately $80 million of new business against the 3-year, $100 million target we laid out at Investor Day with a pipeline of $85 million of additional cross-sell opportunities. We've introduced AI tools to drive growth, reduce churn and automate manual work, including an agent that analyzes our sales and opportunity pipeline data to develop customized coaching plans for sales managers to help reps meet their targets. And we believe digital tools like Ask 3M, a new AI-powered digital assistant that helps customers find solutions to design challenges using 3M products, will allow us to reach a broader population of customers. Our pace of new product introductions is accelerating with better on-time performance, reduce cycle times and clear governance and accountability across R&D. We launched 84 new products in Q1, up 35% versus last year, and we're on pace to launch 350 in 2026. This will put us ahead of our Investor Day target to launch 1,000 new products through 2027. We've maintained OTIF service levels above 90%, while at the same time, reduced inventory by 3 days and delivery lead time by 25%, improving our competitiveness with customers. OEE improved over 100 basis points year-on-year as we optimize asset run length, run time and changeovers, creating a stronger foundation for sustained productivity and fixed cost leverage. And cost of poor quality decreased by approximately 100 basis points versus Q1 last year, driven by more structured root cause analysis, significantly increased Kaizen activity and tighter process controls. What matters is that these are not isolated wins. They collectively reflect greater execution discipline and constancy of purpose. And that consistency and momentum gives us confidence that we can meet or exceed the medium-term goals we outlined at our Investor Day last year, even in an uncertain macro environment. While we continue to strengthen our foundation and shift from a holding company to an operating company model, we're beginning a broad-based transformation of the company, simplifying and standardizing processes, reducing complexity, reshaping our portfolio and improving resilience and predictability. We see substantial opportunities to streamline operations and consolidate facilities. The transformation includes both deliberate footprint actions as well as targeted investments in manufacturing and process technology. For example, transitioning from solvent to solvent-free coating, which brings cost capital and environmental benefits. Earlier this month, we closed on the previously announced sale of our precision grinding and finishing business within SIBG, which reduced our footprint by 7 factories. And we closed 1 factory and announced 3 other full or partial closures, bringing our total projected manufacturing site count to below 100. At the same time, we're investing more than $250 million over the next 3 years in standard, easy-to-replicate automation across our plants and distribution centers. By automating material handling in our warehouses, replacing manual slitters with automated systems and automating our current manual visual inspection processes, we are improving safety, reducing labor costs, increasing yield and putting ourselves in a better position to support demand as volumes recover. To illustrate the opportunity, we have 7,000 material handlers and over 600 operators performing manual visual inspections across our network and about 500 manual slitters. When we automated the slitting operation at our [ Novato ] facility late last year, we achieved a 30% increase in square yards per hour productivity. Over time, this transformation will allow us to accelerate towards a structurally higher growth, higher margin potential portfolio of priority verticals. Slide 4 provides a more detailed view of growth and orders by end market. When you look across our portfolio, roughly 60% of our businesses showed relative strength in Q1, including general industrial and safety. Importantly, we also saw strong orders in these markets, which gives us visibility and reinforces that the demand environment in these verticals remains healthy. At the same time, we experienced macro and industry-driven softness in about 40% of the portfolio that we've been highlighting as watch areas. In electronics, we delivered flat year-over-year growth in Q1 versus mid-single digits last year. Our performance in semiconductor and data centers was very strong, while consumer electronics was soft due to industry-wide memory chip issues, which is impacting demand. Electronics orders were up double digits due to significant activity in semis and data centers, which will convert to revenue in Q2 and the second half. In automotive, the market was soft as expected in the first quarter. Global IHS build rates were down about 3% overall and 10% in China, which pressured volumes. And in Consumer, we continue to see soft U.S. consumer discretionary spending with a few pockets of strength in categories with recent new product introductions. POS trends in the U.S. improved over the course of the quarter and were positive in 7 of the last 8 weeks, providing some encouragement heading into Q2. Overall, orders were up slightly over 10% in Q1 and backlog grew double digits, both sequentially and year-over-year, giving us momentum into Q2. This strength reflects the combined impact of our new product introductions, continued progress in commercial excellence and orders for longer lead time products, with some additional benefit from pre-buying ahead of recent price actions. It's encouraging to see order strength continue into the first few weeks of April. Turning to Slide 5. As part of our ongoing focus on portfolio shaping, last month, we announced the acquisition of Madison Fire & Rescue, which will be combined with our Scott Safety business to create a leading global fire and safety business. The combination of Scott Safety's premium self-contained breathing apparatus with Madison Fire & Rescue's premier portfolio in rescue technology and fire suppression creates an $800 million revenue business, growing at a high single-digit growth rate. This strategic transaction broadens our safety portfolio, one of our priority verticals by expanding our market reach and building scale for future growth. It positions us to maintain above-market growth, enhance margins and drive strong free cash flow generation. I also want to highlight our growing data center and associated power utility business with current revenue of approximately $600 million, $100 million inside the data center and about $500 million bringing power to the facility. This is a priority vertical space, where we are introducing new products like EBO or Expanded Beam Optics, a high-performance optical connector engineered to improve installation speed, reliability and operational efficiency within data centers. EBO builds on our existing TwinAx copper connector for high-speed data transmission and positions us well for the copper to fiber transition underway. With hyperscaler validation, a significant order in hand and $1 billion-plus addressable market, we're investing to more than double our capacity to support growing AI demand. We see additional opportunities here as demand expands to ceramics, silicon photonics and on-chip optical connectors. We have strong IP to support this evolving market and a clear road map to develop new products that further drive growth. Overall, I'm pleased with our progress this quarter, encouraged by the pace, op tempo and executional rigor of the 3M team. We're on a multiyear journey and progress won't be linear, but we're building the capability to execute consistently, to innovate with purpose and to allocate resources toward the parts of the portfolio that deliver the most value. I'm grateful to the 3M team for their commitment, hard work and focus as we deliver progress every day. With that, I'll turn it over to Anurag to share the details of the quarter. Anurag? Anurag Maheshwari: Thank you, Bill. Turning to Slide 6, we had a good start to the year, performing ahead of expectations on orders, margins, earnings and cash. Starting with top line, we delivered organic sales growth of 1.2%. SIBG showed continued momentum and grew over 3%, slightly better than expectations. TEBG was flat, lighter than expectations due to ongoing weakness in certain end markets like consumer electronics and auto as well as late timing of order intake within the quarter. In CBG, we did not see the expected recovery in the U.S. consumer market, resulting in organic sales down 1%. Notably, we saw significant strength in orders this quarter driven by progress on commercial excellence and NPI. Overall, orders grew slightly more than 10%, with SIBG and TEBG growing mid-teens, driven by industrial, safety, data center, semiconductor and aerospace. The auto momentum accelerated through the quarter, resulting in backlog growth of 20% over last year and 35% sequentially, positioning us well for the second quarter. First quarter adjusted operating margins were 23.8%, up 30 basis points year-on-year, driven by strong volume and broad-based productivity, which more than offset approximately $145 million of tariff impact, stranded costs and investments. Operating income from the 3 business groups was up $85 million with 60 basis points of margin expansion driven by supply chain productivity, including improvements in cost of quality and procurement and logistics and continued focus on structural G&A reduction. Corporate was a 30 basis point headwind from planned wind down of Solventum transition services agreements. Our sustained operational performance of driving growth and productivity led to EPS improvement of $0.26 or 14% to $2.14. In addition, we benefited from lower share count, timing of tax benefit and FX of selling tariffs, stranded costs and investments. Adjusted free cash flow was $540 million in the quarter or up 10% from strong earnings growth and improvement in inventory, a decrease of 3 days while maintaining service levels of greater than [ 90% ]. In addition, we returned $2.4 billion to shareholders in the first quarter, including approximately $400 million in dividends, reflecting a 7% increase per share and $2 billion through opportunistic share repurchases. Turning to Slide 7, I will provide an overview of our business group performance for the first quarter. First, Safety and Industrial had another quarter of 3%-plus growth as we continue to gain traction on commercial excellence initiatives and realized benefits from new product launches. We delivered mid-single-digit growth across industrial adhesives and tapes, safety, electrical markets and abrasive systems, driven by continued share gains from new product introductions and targeted commercial initiatives to reduce customer churn, strengthen sales coverage and increase cross-selling. Collectively, this growth more than offset continued weakness in roofing granules as the housing market and consumer sentiment remains soft. Even though auto repair claims were down mid-single digits, it was encouraging to see our auto aftermarket business be flat to slightly up after a couple of years of decline from good execution of the key account strategy. Turning to Transportation and Electronics. While growth was flat, orders were up low teens, accelerating through the quarter, resulting in backlog up about 30%. Approximately half of the business delivered mid-single digits growth, including double-digit growth in semiconductor and data center, driven by continued market demand and ramp-up of EBO that Bill referenced earlier. In addition, we saw growth in aerospace and commercial branding from better sales effectiveness. This was offset by the other half of the business, which is exposed to consumer electronics and auto where the market was down. Finally, Consumer first quarter organic sales were down 1%, driven by weakness in USAC as we did not see the expected pickup in retail traffic in the early part of the quarter. We did see pockets of strength. Scotch-Brite grew approximately 10% on the back of new product launches. We also saw good traction in international markets, especially in China and Asia, but it was not enough to offset the impact of USAC, which makes up a majority of the CBG revenue. By geography, in China, we again grew mid-single digits despite soft auto and consumer electronics end market as we executed on our key account strategy and launched local NPIs in a relatively strong industrial market. USAC was up slightly with mid-single-digit growth in industrials being offset by softness in Electronics and Consumer. Asia had another quarter of good growth, with India in the high teens as we drove higher sales coverage across the country. EMEA was down about 1% due to market weakness in auto. Moving to Slide 8. Though the macro remains uncertain, given our good performance in the first quarter, we are reiterating our guidance for the year. Organic sales growth of approximately 3%, earnings per share ranging from $8.50 to $8.70 and free cash flow conversion of greater than 100%. For sales, the strong backlog combined with continued strength in orders in the first 3 weeks of April gives us confidence that all 3 business groups will accelerate growth in the second quarter and through the balance of the year. On margins, we had a solid start with the 3 business groups growing 60 basis points despite 100 basis points year-on-year tariff impact. As we lap tariff pressure in the second half, the continued momentum on productivity and volume acceleration gives us confidence in our expectation of approximately 100 basis points margin expansion for business groups this year. On nonoperational, we expect positive trends driven by a $2 billion share repurchase in the first quarter and lower net interest expense. Overall, we are maintaining our EPS guidance, which includes a contingency, and we will go through the components of the earnings bridge on the next slide. Given the strong earnings growth and good progress on working capital, particularly inventory and continued CapEx efficiency, we believe our free cash flow will be more than $4.5 billion for the year and greater than 100% conversion. Slide 9 shows the trend of key earning elements and the current guidance. We are trending $0.05 to $0.15 higher on earnings from momentum on productivity and lower share count and interest expense. We are facing higher input costs due to the recent increase in oil price, but have implemented targeted price increases to mitigate the impact at the current levels. Given that we are early in the year and we are operating in a volatile macro environment, we think it is prudent to keep a contingency until we have more clarity about the rest of the year. Overall, we are moving with determined pace, and we'll continue to calibrate as the year progresses. Regarding cadence, we expect sales growth to accelerate in Q2 and the back half of the year. Backlog conversion and continued order strength is expected to support growth momentum in both SIBG and TEBG in the second quarter. We anticipate consumer to improve as point of sale is on an upward trend, resulting in normalized inventory levels. On EPS, given the contingencies for the second half, we expect the first-half EPS to be higher than the second half. Our 2026 financial outlook puts us on pace to exceed our medium-term financial commitments that we laid out during Investor Day around growth, margin and cash. And on capital allocation, we have already returned over $7 billion of the $10 billion shareholder returns that we had committed to. Before we open the call for questions, I want to take a minute to thank the team for a strong start to the year and being proactive in this environment to mitigate risk and control the controllable and for their commitment to strengthen the foundation and drive profitable growth. With that, let's open the call for questions. Operator: [Operator Instructions] And our first question comes from the line of Jeff Sprague with Vertical Research. Jeffrey Sprague: Bill or Anurag, just trying to dig into the order commentary a little bit more, maybe you could give us a little more perspective on the pre-buy, the size of it, if you could. And I guess the prebuy would imply getting ahead of price increases and the like. So maybe a little bit of color on how much additional price is now embedded in your organic growth forecast. And just also on these backlog numbers, obviously, the delta sound great, but it's not really a backlog business. So kind of the question, is it law of small numbers on those deltas? Or is there actually significant visibility that you can anchor to as you look into Q2? William Brown: Jeff, thank you for the question. I'll start, and maybe I'll pass on to Anurag on the backlog point. As we said, we had very good orders in the first quarter, up double digits, which was very good. And you're right, we're not really a backlog-driven business, but backlog was very strong coming out of Q1 and continues to build into Q2. Over the course of the quarter, we saw good order growth in January and February, kind of up mid-single digits. But it accelerated quite a bit in the month of March. So it would be well over the double-digit number that we ascribed for the whole quarter. And it continues into April, which I think is very encouraging. Now how much is price? I mean the reality is we do a price increase every year on April 1. So it's hard to discern how much was a prebuy. We think there's some of it. We've signaled to investors -- to customers rather that we're going ahead with a price increase on top of what we went out with April 1, associated with the price of oil coming up. So that could cause a little bit of pre-buy, if you will. But again, it's hard to discern exactly how much would that be. You asked about price for the year. For the year, we had guided before at about 80 basis points. We came in a little bit below that in Q1. We still see -- outside of oil-based increases around 80 basis points. But when you add in oil and the expected price increase from oil, it could be around an extra 50 basis points is what we're thinking at the moment. So price for the year around 1.3 points. I don't know, Anurag, maybe share a little bit about the backlog. Anurag Maheshwari: Yes. Thanks there, Bill. You are right that we are largely a book-and-ship business. We have about 75% of our revenue in a quarter comes from book and ship, but we do get backlog coverage as we enter the quarter. With the numbers that we mentioned, which was about 35% up sequentially to 20% year-over-year, provides us about 400, 500 basis points of additional coverage as we enter into the quarter, which is not insignificant given the growth acceleration that we expect from Q1 and Q2. So I think it's really good to kind of see that we are starting with a very good backlog coverage for the quarter. Combined with the order momentum that Bill spoke about in the first 3 weeks of April, it gives us really confidence for acceleration of growth through the -- through second quarter. And typically, we do not talk about orders and sales because of the book and ship because they converge together. But this time, you could see the big spike. And as Bill mentioned, part of it could be the pre-buy, but a lot of it is commercial excellence, NPI and other initiatives that we are driving, which resulted in order acceleration. Jeffrey Sprague: Great. And then maybe just a quick follow-up then. Just a comment about then accelerating into the remainder of the year. By that, do you mean each quarter will be a faster growth quarter than the one that preceded it, even though the comps are getting tougher in the back half of the year? William Brown: Yes, we see Q2 being better than Q1. And we see the second half being better than the first half, is the way we're currently looking at it, Jeff. Operator: Our next question comes from the line of Scott Davis with Melius Research. Scott Davis: Just to follow up on Jeff's question. Are customer inventories low and there's a little bit of a restock occurring? Or are they balanced? How do you guys kind of see that element right now? William Brown: So we track it pretty carefully on the Safety and Industrial business group, the distribution inventory is relatively normal, I'd say maybe a tick below what we typically would see. We would typically see 65, 70 days, and it's a bit below that. On the Consumer side, it's about normalized from where we were last year, around 13 weeks of supply coming into the year was a bit higher, maybe 13.5. But right now, we're around 13. So on the Consumer side, fairly normal. On the Safety and Industrial side, I'd say normal to maybe a bit light in the channel. Scott Davis: Okay. Helpful. I think you mentioned your factory footprint is down like 10%. Is there another 10%? I mean how do you guys kind of think of where the endpoint on that journey is? William Brown: So it's -- we're going to keep talking about this with investors as we go forward. I mean, at the end of last year, with 108, we sold and closed on PG&F, the precision grinding business, which was 7 factories scattered across Europe, one in Asia, a couple in the U.S. So it was not a large business, but a big factory footprint. So that brought down by 7. We closed 1 in the first quarter. We announced a couple of others. So that will close over the course of this year into next year. So that puts us below 100. The number will be below where we happen to be today. We'll continue to look at that and size it for investors as we go. But clearly, the footprint just under 100 is bigger than we really need today. Operator: Our next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: Just wanted to start maybe if you could give any color around the second quarter dynamics in a bit more detail, understand the organic sales growth accelerates year-on-year from the 1% in Q1. Also, I think Anurag, you said first half EPS more than second half because of the contingency. So I just want to gauge sort of how much sequentially or year-on-year EPS should grow in Q2? And what's the sort of margin embedded in that guide would be? Anurag Maheshwari: Sure. Sure, Julian. Let me answer those questions. So first, just on the revenue growth. As we mentioned because of the good backlog and the auto momentum, we expect organic growth in the second quarter to be higher than 3%, with all the 3 BGs accelerating. SIBG, which was at 3.2%, obviously going higher than that. TEBG, low single digit. And CBG flat to positive. So that's the expectation of the revenue growth acceleration. Obviously, that's going to come with high flow-throughs. We're going to continue with the productivity that we did in the first quarter will continue to the second quarter. And between volume and productivity, we'll offset all the last quarter of the tariff year-over-year impact for us, a pickup in stranded costs and investments. So you will see operationally for us, it's going to be a solid margin, about 24.5%, and good EPS flow-through coming from that. On below the line, we will see a couple of pennies of headwinds relative to last year. Last year, in the second quarter, we had a divestment of an investment that we had in India, which was about $0.08 to $0.10. Then you see a little bit of tax, which was favorable in Q1 coming back in Q2. So those are two headwinds. Of course, they will be offset by the share buyback, which we did in the first quarter, which is going to help us in the second quarter, plus a little bit on the non-op pension side. So you put all of that together, we should grow more than $0.05 in the second quarter, which for the first half would put us at about $0.30-plus of EPS growth, which is more than half if you include the contingency for the full year. Now the contingency, as I mentioned, we kept it for the second half of the year, depending on how things evolve. If we continue performing the way we do, revenue grows over 3% in the second quarter, which is a good exit rate as we enter into the second half. And if it continues at that a little bit better with good volume flow-through, no tariff headwind, the margins in the second half could be much higher than the first half. Yes. Julian Mitchell: I appreciate all the color. Just one very quick follow-up. That was very thorough. Maybe on the pre-buy dynamics, credit for calling that out, but trying to understand what you're assuming for how much that sort of reverses because you've got organic sales growth accelerating in Q2. We have maybe some sort of -- I don't know if a prebuy is helping that or the unwind hurts that. Maybe flesh out that prebuy sort of dynamic over the balance of the year. William Brown: So Julian, I mean we -- it's hard to discern exactly how much is pre-buy. I mean we get orders coming in, it's quite strong. But we are seeing much better traction on new product introductions, a lot of momentum building on commercial excellence. And keep in mind, part of what was driving Q1 growth, including into early April, are some longer-lead products that will go into semis, more importantly, in data centers, delivering in Q2 in the back end of the year. So you have all these factors in there. I think when I step back and look at the full year, as we said, we'll see acceleration into Q2 and then in the back half. And all these pieces come together. And any pre-buy that's happened will wash out in Q2, but we do see acceleration in the back half on the back of really core operating fundamentals around NPI and commercial excellence. Operator: Our next question comes from the line of Joe O'Dea with Wells Fargo. Joseph O'Dea: On the $0.05 to $0.15 of contingency tied to oil macro uncertainty, can you just outline kind of roughly how you think about the split on the demand side versus the cost side of that and your planning assumptions? And then really looking for any color on the oil exposure sort of across the business, and what you're thinking about that contingency could flow through if you need to use it? Anurag Maheshwari: Okay. Let me start with the contingency, and then I'll -- and then Bill, you can add from there on. On the $0.05 to $0.15 of contingency that we kept, it's actually across the 2 buckets that you mentioned around here. As I mentioned, in the second quarter, we'll be above 3%, we expect -- which is a good exit rate as we go into the second half. So if there is a little bit of an impact on the volume piece because of macro, which we are not currently seeing right now or a little bit of the input cost that goes up, so I guess it gets spread between the two, Joe, to be honest. Our objective right now is to continue driving what we control on the NPI commercial excellence continue to outperform the macro and drive more productivity so that we don't have to use the contingency in the second half. William Brown: And Joe, on the oil price, the way we look at it is really two pieces. One is on the supply side. The other is demand. And on the supply side, we have about 45% of our cost of goods is raw materials and about 1/3 of that -- so it's about $6 billion of raw material spend. And about 1/3 of that is its basis in polychem. So it's ethylene, it's propylene, esters, acrylates, all those various things. And we are seeing some upward cost pressure on that. What we've seen so far and expect is about $125 million of cost increase there, which are offsetting into pricing. As I mentioned earlier on that we expect about a 50 basis point uplift on price coming from that oil-based exposure. How that affects the overall macro economy? What's going to happen with consumer spending, auto? I mean that's still all unfolding as we speak and depending upon what happens in the Middle East, but that's our current assumption as we speak today. Joseph O'Dea: Got it. And then just on the transportation, electronics commercial excellence program, can you talk about where you are on that trajectory? I think you started to see traction in SIBG last year, and that continues, but just the efforts that are underway. And as we think about the growth acceleration, just any quantification of how you're thinking about commercial excellence contributing to better T&E growth as you move through the year? William Brown: Yes. So it's a good question. I mean, they're doing a great job on this. They're falling right behind what we've done in SIBG, which has been very, very successful. I'm very pleased with the traction on the sales force, on pricing discipline, on cross-selling, on churn reduction and looking very hard at attrition with the predictive AI models that we have in place. And the team at TEBG is doing the same sorts of things. I think the cross-sell opportunity is not going to be as robust, but they move very aggressively on improving on the sales force and better incentives, better targeting. We're close, we're on targets. They're tracking attrition rates, which I think is very good. They have the same predictive models tailored for TEBG into that business. So they're making good progress. It's going to roll out over the balance of the year. One of the key things we're focused on is making sure we have the right mix and focus of our sales reps versus application engineers. Are they -- do we have the right mix between the two? And are they calling at the right level in the customer, for example, in automotive at the OEE versus the tiers? So it's a little bit different than what we see in SIBG, but they're working it pretty hard. And I think you're going to see in the back end of the year certainly improvements in TEBG coming from a lot of that commercial excellence work. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Andrew Obin: So on the Transportation and Electronics, to just to dig in a little bit further, also double-digit orders. So it seems like we -- a lot of questions into the quarter about weakness in consumer electronics. So does that mean that we are offsetting consumer electronics into the second half? William Brown: Yes, Andrew, it's exactly what's happened and will happen. In fact, when you -- again, when you discern with TEBG, just in Q1, I mean they were flattish, but half of the business was up mid-single digits and half the business was down mid-single digits. And you can really isolate that in the 2 areas, which is auto, auto OEE and commercial vehicles, and consumer electronics. So we show in our slides that electronics as a whole is flattish. What you see there is you see very strong semiconductor, data center business offsetting a weaker consumer electronics business. As we look at the balance of the year, we see electronics start to get modestly positive. Again, I think CE, or consumer electronics, may soften a little bit. But we are seeing better trajectory and growth in the data center and the semiconductor business. Andrew Obin: And Bill, just to follow up on that. At CES, you showcased some pivot in strategy on consumer electronics. You've also talked to your analyst -- your first Analyst Day about the need to rebuild the R&D pipeline, particularly on the electronics side. Can you just talk about how these two internal initiatives impacting your growth and the growth trajectory over the next 12 months, let's say? William Brown: Yes, that's a great question. I mean, we're putting a lot of time and effort into making sure we have good new product introductions in consumer electronics, both for the premium segment as well as for the mainstream segment. Wendy has been talking about this quite a bit. We are seeing good traction here. Unfortunately, the market isn't cooperating with us. We do see a greater downturn in LCD, which is where our strength happens to be. But we do see a lot of innovation in this space. We are gaining some share modestly in the mainstream side. When you look at content per device, 3 or 4 China OEMs have increased their content per device in the first quarter and the fourth one, we saw a pretty good order for us. So I think we're making some progress here. And this comes on the back of a lot of the NPI work that's happened in TEBG, and there's more to come. Operator: Our next question comes from Andy Kaplowitz with Citi Group. Andrew Kaplowitz: So can you give us some more color into what you're seeing in Consumer? I know you talked about share gain actions in Consumer. So maybe you can elaborate on what you're doing there? And how much discounting do you have to do to get there? And should Consumer contribute to your margin performance this year? Or could Consumer margin continue to be pressured a bit over the year? William Brown: So look, I'm pleased with what's happening in Consumer. The market for us, we're 70% U.S. So it's really focused on the U.S. consumer. We sell a discretionary product. As Anurag mentioned, we had a couple of pockets of strength in the year from new product introductions. I think the team has really gotten back to basics, focusing on priority brands and started to innovate again. The reality is we went for a lot of years without a lot of new product introductions, a lot of Class 3, so they're incremental, some are Class 4, but really starting to kind of be more aggressive on new product introductions. And I think we're holding our own and in fact, starting to gain back shelf space because we have new product coming into the marketplace. Yes, it's not a segment that we see upward movement on pricing, we're trying to contain the discounting that happens half the year. Again, the market is a little bit soft. For the year, we expect to see some growth. It will be positive. It won't be a meaningful driver of the overall 3M growth in the year. But again, we're down 1.3 in Q1, down a little bit more than that in Q4. We were up sort of modestly for the first 9 months of last year at 0.3 points. So I mean, they're hanging right around flat to up a little bit. And when the consumer starts to spend more, we'll have the right products with good innovation, great commercial excellence efforts there, and we'll see that business to return to growth. Andrew Kaplowitz: Helpful. Then Bill, maybe just a little more thoughts about portfolio management. You obviously opted for a JV structure with the purchase of Madison, despite seemingly leaning into safety as one of your priorities. So maybe a little more color on why you chose the JV structure there. And then stepping back, can you give us an update on how you're thinking about overall 3M portfolio? I think you've said in the past 2% or 3% of your portfolio is actionable in terms of divestitures, 10% is commodity. Like is that still the right numbers of the company? William Brown: Yes. So look, I'm really pleased with the structure and the conclusion of this Madison, Scott and [ SCBA ] joint venture, where we're a 51% owner, it's going to be consolidated. It's a strategic bolt-on acquisition. And what you just referred to as a priority vertical, it is. It does strengthen our SCBA business. It's a great brand. We have been innovating in this space. We talked last year about some new innovations coming on to the marketplace. This also creates some scale by putting this business together for future organic and inorganic opportunities. Madison and all of its fire and rescue products, have been performing very well. They bring a terrific management team. They're growing double digits. The margins are coming up. So it's -- I think it's a great combination in a space that we like quite a bit. Bain Capital is our partner on this. They're 49%. We know them well. They are very good at post-merger integration, they bring a lot of operating rigor and good expertise on driving incremental M&A while we focus on other areas around the company. So when you put all that together, I think it's a strategic opportunity for us. It gives some optionality for do we pull it back or do we suit something else over time. But the reality is it's a terrific deal. It is going to be accretive to our growth, margins, earnings over time. So I feel pretty good about that particular deal. We closed on PG&F, the Precision Grinding business on April 1. It wasn't very big, but businesses that don't perform sometimes can be difficult to transact on. But I'm very, very pleased that, that one got over the line. We continue to look at the rest of the portfolio. Yes, we're around 10% of our business is more commodity like. We don't have a clear right to win, not a lot of technology differentiation. We said 2% to 3% was in flight, PG&F was part of that. We continue to evaluate this, and we'll talk to investors as we go on what that shaping happens to be. But the reality, the investors should see the transaction on Madison with Scott as an important strategic signal for investors around the things that we want to do to reshape our portfolio to be higher -- structurally higher growth and higher margin potential. Operator: Our next question comes from the line of Chigusa Katoku with JPMorgan. Chigusa Katoku: First, can you maybe recalibrate us on the outlook for U.S. IP and electronics you're embedding and your assumptions for the full year? I think it was U.S. IP flat and electronics up mid-single digit last quarter. William Brown: Sorry, Chigusa. You're talking about IPI, the macro? Chigusa Katoku: Yes, the U.S. IPI. William Brown: Okay. So well, thanks for the question. And I guess, congratulations on the role. Welcome to the call. So just in terms of the macro, as we came into Q1, we saw some of the similar trends we saw in '25 continue. So maybe a couple of comments relative to where we were in January. Global IPI is still around 2%. It's not moved around very much. USAC or U.S. is up a little bit better. EMEA is down a little bit. China is still mid-single digits. And interestingly, those trends are exactly what we saw in our business through Q1. So U.S. up a little bit, Europe down a little bit, China mid-single digits. So it's pretty much aligned with that. GDP is still sort of in that same 2.5% range. Auto builds are still floating around between flat to down 1. It's really early in the year. I think that tends to be more of a backward-looking indicator. But right now, it's sort of flat to down a little bit. U.S. retail is flattish. The place that we're watching a little bit is consumer electronics where the outlook is for a little bit more softness as we get into the back end of the year. But overall, the macro is trending about where we saw it in January and through last year. Chigusa Katoku: Okay. Great. And then on this contingency, I was just wondering what it would take for you to remove this. I think it's prudent that you're including in guidance, but you've been seeing good order trends, you're operationally raising guidance by about [ $0.025 ]. And without this contingency, it would have been a $0.10 raise. So kind of what would it take for this to be removed? Anurag Maheshwari: Yes. Thank you for the question, Chigusa. Listen, we'll probably give you an update in our next earnings call on that. As we go through the next couple of months, we're pretty confident with the backlog and auto momentum on the Q2 revenue. We'll see how that plays out as well as we have executed. We have a very good playbook on -- which we adopted from the tariffs last year in terms of working with the customers and pushing out the price increases over there. So that's an area we will kind of monitor on the yield over there over the next couple of months plus and see where oils are at which levels they are after a few months. And if we continue performing the way we did in Q1, both on the productivity as well as in operational excellence, and come July, we will give you an update on where we stand for the full year. Operator: Our next question comes from the line of Nigel Coe with Wolfe Research. Nigel Coe: We covered most of the topics. So I just wanted to -- a couple of quick follow-ons. Just going back to the pre-buy comments, just trying to understand, why you think there may have been a pre-buy? Is it because you're trying to rationalize the strong orders? Or is there something else that you're hearing from customers? So just maybe cover that. And then on the 50 basis points of additional price, is that in the form of a surcharge? It certainly seems like it's in the surcharge, so that rolls back if oil comes down. And would that hit in 2Q? Or is that more in the back half of the year? William Brown: So really, Nigel, thanks for the questions. Look, it's hard to avoid the fact that we're pushing pricing a little bit more aggressively. We know there's an inflationary environment. We know price oil is going to go up. We know the impact on our company. We know perhaps what we did 4, 5 years ago, maybe not moved as quickly on pricing when oil came up, which we're correcting for that. I think we're being a lot more attuned to what's going on in the macro. And we're enforcing it better. If a shipment goes out beyond a date, that shipment will have a price increase associated with it. I think the customers have seen that and heard that. And then when you put all that together, it gives us a sense that perhaps there's some advanced buying from these price increases that are going out. So again, we'll know more in the next month, 6 weeks, how much of that might be prebuy, simply because we'll watch the orders through the balance of the year into the balance of the quarter and into May. So that's kind of basically how we're thinking about the prebuy here at the moment. On pricing, we do see right now about $125 million worth of cost impact, which we've been relating to pricing, and that would translate to about 50 basis points. So that's factored into the guidance of about 3% organic for the year, but that's kind of what we're thinking at the moment on pricing. Operator: Our next question comes from the line of Chris Snyder with Morgan Stanley. Christopher Snyder: I wanted to also follow up on pricing and I guess a little bit on price cost. When do these surcharges take effect? I would imagine some point in Q2, but any color on when they take effect would be helpful. And it just seems like with the $120 million of cost inflation that you referenced, Bill, on the 50 bps of price, the plan here is to be, I guess, be neutral on price cost. And I asked because if I remember a year ago, you guys were actually EPS negative on the tariff inflation. Just want to make sure I have that neutral view right. William Brown: So Chris, I think we've learned a little bit. Yes, we're moving a lot faster than we did last year on tariffs, tariffs came on. And I think maybe we're a little tentative at front, but I think we ended up offsetting a good part of the tariffs on cost and price. We're trying to be careful on that. So yes, exactly, we will offset cost increases associated with oil through price increases, and that's the assumption that we're making here. I mean you're right. Historically, we have covered material cost inflation with pricing. So historically, with a 2% material inflation, that would translate into roughly 50 basis points of price. For the year, we are guiding to about 80 basis points, again, a little bit lighter in Q1, but inflation in Q1 came in a little bit lighter as well. So for the year, 80 basis points. With oil coming in, that's driving an incremental 50 basis points of price, so a total of about 1.3 points roughly for the year on pricing. And that's our current expectation. It's not a surcharge. The price is going out embedded into the pricing of our products. And that's kind of -- and it's depending on the product and the geography, but generally speaking, it was less of a surcharge, more being built into the underlying price. Anurag Maheshwari: Yes. And in terms of the rollout in the timeline, we've already started in April in a couple of countries in Asia. And then in the United States, it starts in May 1 and Europe as well. So it is imminent right now with all the letters going out to the customers, knowing when the surcharge is going to impact them, oil price increase is going to impact them. Yes. Christopher Snyder: Appreciate that. And then maybe if I could follow up, just any color you could provide on how firm or how much flexibility is there on these delivery dates for these orders or what's in the backlog? And then I guess asked because I remember a year ago, there was elongation on those orders, I think, tied to some of the preordering ahead of tariffs. And it seems like there could be some of that again now. So just kind of wondering, trying to gauge that as a potential risk into Q2. Anurag Maheshwari: Chris, the delivery is limited to the lead times that we have. So it's not like an order can be placed for 6 or 12 months of delivery. So it's definitely within the time frame that is we always describe. Yes. Operator: Our next question comes from the line of Amit Mehrotra with UBS. Unknown Analyst: This is [ Neil ] on for Amit. So I know we just got first quarter results, but if I could ask about the growth algorithm into 2027 because the outlook suggests some meaningful improvement in trends exiting this year. If I just look at new product introductions, for example, I mean, these are accelerating. And if we add maybe 2 points of macro growth to new product introduction, would that math imply that 3M is growing around 4.5% organically next year? Anurag Maheshwari: Yes. Thanks for the question, Amit. I'll start and Bill can add from there. William Brown: [ Neil ]. [ Neil ] on for Amit. Anurag Maheshwari: Yes, I'm sorry. [ Neil ] for Amit. Yes. So I -- we said this year that we will grow about $330 million, $300 million above macro. And as we get into the second half of the year, from the exit rates, you are right, we will be north of 3.5%, which would imply that we would be above where we are in the first half and above where the full year would be. So we do feel very good as we enter into next year with what we are doing on the NPI as well as what we are doing on commercial excellence and how that is translating. So first is, obviously, we've got to grow in the second quarter about 3%. And if we do grow above the 3.5% in the second half of the year, I think it will give us good momentum to kind of accelerate the growth into 2027. But it's a little bit too early to kind of talk about that, and we'll provide more color as we go through the course of the year. Operator: Our next question comes from the line of Deane Dray with RBC Capital Markets. Deane Dray: I was hoping we can address the point-of-sale momentum. I mean that's a surprising number, up 7 on the last 8 weeks, given the pockets of macro pressure. So just your impression here, is this consumer driven? Is it more on the commercial side at all? Just some context and the momentum into April? William Brown: Deane, so it is consumer driven because it's in the consumer business group. I think it's very encouraging for us to see POS up. That's a sell-out 7 of 8 weeks, which I think is really good. It does kind of make us feel a little bit better going into Q2. And that business, Consumer business stabilizing, perhaps growing a little bit in Q2 and the balance of the year, so those are good trends. I think it reflects the team's very aggressive efforts on driving promotions, getting shelf space, driving NPI, being really aggressive at hustling at the customer interface, good on-time performance still in at 95%, 94.5% range. So just really good work. Anurag talked a little bit about a couple of pockets that are growing a bit better, but it's pretty broad-based. We see really good trajectory here through the first quarter now going into Q2 on the clubs, which is not surprising, given where consumers happen to be today. But we feel good about the trends and good about the outlook for Q2 so far. Deane Dray: Good to hear. And I'd love to hear a bit more about the Expanded Beam Optics opportunity. There's a lot of focus on this. It's addressing the data transfer bottlenecks in AI processing. So just where do you stand competitively? How quickly can you ramp on this? Is there any question of manufacturing capacity? Because the take rate on this is one of the fastest growing right now in data centers. William Brown: Well, Deane, exactly. That's why we're so optimistic about it and why we're talking more about it. And the fact that we've had some really good robust IP protection around the technology. It is expanded beams. So it's not a point-to-point fiber connection to the data center. It's sort of like an easy click between two pieces of multi-fiber device referrals that come together. And we can put that together at 80% less time with a less strain technician; better reliability, can operate in a dusty environment, which is why it's gotten some good take rate. We've had at least a validation by at least one hyperscaler, a second one is in testing. I expect that will be positive as well. We had a fairly large order coming in, in Q1 relating to the hyperscaler that has certified it. We are in a ramp-up mode. We will double capacity towards the back end of the year. We're investing quite significantly to expand capacity, relying on other partners in the space. Hyperscalers won't go with a single source of supply. So we've got to make sure we have some dual source, either a couple of factories or us with a contract manufacturer. So all of this is working. We're working the ecosystem. The pace at which this has happened is very encouraging, and the team is pushing hard. I'm really optimistic about where it's going to go from here. This is a polymer EPO as it moves to ceramics, which is more EBO or fiber to the chip. I think it opens up a lot more opportunities with a lot of other players in the space. So look, it's encouraging, which is why we want to share today with investors. Operator: Our next question comes from the line of Nicole DeBlase with Deutsche Bank. Nicole DeBlase: I'm just going to ask one since we're near the top of the hour, and we've gotten through a lot of the questions on my list. Just on some of the margin puts and takes, so have you guys seen any changes to your full year productivity assumption or stranded costs or growth investments? And I guess was any of that kind of front-loaded into the first quarter? How are we thinking about phasing throughout the year of those 3 items? Anurag Maheshwari: Right. Thanks for the question, Nicole. So we said that we have a contingency of $0.05 to $0.15. So let's say, at the midpoint, it's $0.10. About half of that is because of productivity, and most of that was in the first quarter. So the -- I would say the only two changes that we made from our previous guidance, about $0.05 of that was very good productivity both on the supply chain side as well as the G&A. And a lot of it we saw in the first quarter. And obviously, we try to continue with the momentum that we have. The second $0.05 at the midpoint, I would say, is because of our active capital deployment where we bought back $2 billion of shares in the first quarter of 2.5 billion, which obviously gives us accretion through the course of the year and active cash management with the cash balance that we have. Those are the big changes. William Brown: But we're not changing our productivity guidance, stranded cost guidance at [ $150 million ] tariffs. I mean that all stays the same as it was back in January. Operator: Our final question comes from the line of Laurence Alexander with Jefferies. Laurence Alexander: Just very quickly, can you just address what your customers are saying about potential supply chain bottlenecks, I guess, particularly in the kind of sulfur, helium, methanol derivative chains? And does that -- are those factored into your contingency that you kind of see ways to work around those shortages if they develop in the back half of the year? William Brown: So Laurence, it's a good question. I mean that's probably affecting some of the pre-buy activity perhaps. Look, I think we're all working through this. We're in direct contact with all of our suppliers trying to manage all of our sources of supply, making sure we've got a variety of players that we can go to. So it's on our minds. So I know it's on theirs, and it's going to affect behavior as we go through the next several months, and we watch what's happening in the Middle East and through the Strait of Hormuz. So we'll keep you updated on that, but it's certainly a factor that's on everyone's mind today for sure. So thank you. Operator: This concludes the question-and-answer portion of our conference call. I will now turn the call back over to Bill Brown for some closing comments. William Brown: So I know we're a couple of minutes late, but thank you all for joining today. And I want to thank again all of the 3Mers for their efforts, for their dedication and executing against our priorities, strengthening the foundation, as Anurag say, controlling the controllables, delivering value to our customers and shareholders. So thank you. Thank you all for joining today. Have a good day. Operator: Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.
Operator: Greetings. Welcome to Valmont Industries First Quarter 2026 earnings conference call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Renee Campbell, Senior Vice President, Capital Markets and Risk. Ms. Campbell, you may begin. Renee Campbell: Good morning, everyone, and thank you for joining us. With me today are Avner Applbaum, President and Chief Executive Officer; John Schwietz, Executive Vice President and Chief Financial Officer; and Eric Johnson, Chief Accounting Officer. Earlier this morning, we issued a press release announcing our first quarter 2026 results. Both the release and the presentation for today's webcast are available on the Investors page of our website at valmont.com. A replay of the webcast will be available later this morning. To stay updated with Valmont's latest news releases and information, please sign up for e-mail alerts on our Investor site. We'll begin today's call with prepared remarks and then open it up for questions. Please note that this call is subject to our disclosure on forward-looking statements, which is outlined on Slide 2 of the presentation and will be read in full after Q&A. With that, I'd now like to turn the call over to Avner. Avner Applbaum: Thank you, Renee. Good morning, everyone, and thank you for joining us. Turning to Slide 4. I'll start with a few key messages for the quarter. First, we delivered a strong start to the year with sales growth, record first quarter earnings per share and progress against our strategic priorities. This reflects our discipline and focused execution across the business. We remain committed to serving customers, managing what we can control and advancing our value drivers. Our performance reflects the execution of our strategy. We're prioritizing high-value offerings, strengthening our core businesses and improving operational performance. Our strategy is anchored in markets with durable demand drivers, most notably utility while continuing to improve the quality and resiliency of our earnings. Second, infrastructure is performing well, supported by a growing demand for energy. This includes the need to expand the electrical grid to support data centers and the need to replace aging assets. Our capacity expansion plans are on track, and these actions are driving improvements in throughput and overall operational performance as reflected in the 27% sales growth in North America Utility. Third, in agriculture, we were able to grow in North America year-over-year due to favorable pricing. I also want to recognize our teams in Middle East who continue to navigate a very challenging environment. The safety and well-being of our employees remain our top priority. We are focused on supporting them as they manage through the ongoing situation. We appreciate their commitment to one another and to our customers during this time. Turning to Slide 5 for a review of our current market dynamics, starting with North America Utility. Our customers are implementing multiyear increases in capital spending, driving strong demand in utility infrastructure. U.S. Utilities are planning roughly $1.4 trillion of investment through 2030, up meaningfully from prior expectations driven by load growth, grid modernization and increasingly data center demand. This environment supports our growth outlook and the capacity expansions we have underway. Industry supply remains constrained with extended lead times and favorable pricing and margins. North America Coatings is also capturing growth from infrastructure activity and increasing exposure to data center construction. Our galvanizing services play a critical role in protecting and extending the life of steel structures. In North America Lighting and Transportation, market conditions remain mixed. In Lighting, demand continues to be impacted by softer housing activity and commercial development. In Transportation, the market is supported by stable infrastructure spending. From an operational standpoint, we have made progress, but we are not yet where we want to be in terms of consistency. Our priority is improving performance to deliver reliably for our customers. Turning to International Infrastructure. Market conditions across Europe and Asia Pacific remained soft, but stable. We are advancing commercial discipline and improving operational performance. Turning to Slide 6. Agriculture markets are navigating a dynamic environment as we begin the year. In North America, grower sentiment remains cautious, reflecting tighter farm economics supported by USDA data. Seasonal order patterns have been more muted with no meaningful acceleration in the spring selling season. Taken together, current indicators, including input costs and overall farmer profitability, suggests the market will remain under pressure in the near term. International markets are seeing variability in demand, ongoing challenges in the Middle East, including logistic constraints and reduced operating capacity are impacting activity and the pace of execution. At the onset of the conflict, our Dubai facility operated at a minimal level, prioritizing employee safety in alignment with local government guidance. The plant has currently paused operations until conditions stabilize. We have mitigated some of this impact through our global manufacturing footprint, leveraging other facilities to support demand in the region. Long-term demand is supported by investment in food security and water infrastructure. In Brazil, tight credit availability and delays in government-backed financing continue to weigh on near-term demand. Over the longer-term, Brazil remains an attractive growth market, supported by favorable agronomics, multiple crop cycles and compelling returns on irrigation equipment. We continue to advance our priorities in technology and aftermarket positioning agriculture to perform through the cycle. Turning to Slide 7. I'd now like to welcome and introduce John Schwietz as Valmont's Chief Financial Officer. John has been with Valmont for more than 16 years with leadership roles across both our Infrastructure and Agriculture segments. He brings deep knowledge of the business and a strong track record of financial discipline and execution. John leads with integrity and accountability, brings a passion for serving our customers and is deeply committed to continuous improvement and delivering results. This is a seamless transition as our strategy, value drivers and capital allocation priorities remain unchanged. We're confident in John's leadership as we continue to build on our momentum. I'll now turn the call over to John to review our first quarter financial results and updated 2026 outlook. John Schwietz: Thank you, Avner. Good morning, everyone, and thank you for joining us today. I'd like to start by thanking Avner and the Board for their confidence in me as I step into the CFO role. I appreciate the opportunity to build upon the strong foundation already in place. I look forward to working closely with our teams across Valmont to reinforce financial discipline, support our strategy, and deliver long-term value for our customers, employees and shareholders. Turning to Slide 9. Net sales of $1.03 billion increased 6.2% year-over-year driven by sales growth and infrastructure, particularly North America Utility. Operating income increased to $155.6 million and operating margins improved 190 basis points to 15.1%, reflecting stronger performance in both segments. Our tax rate remained steady at approximately 26%. Diluted earnings per share was $5.51, a 27.5% increase from prior year. Moving to our segment results on Slide 10. I want to start by highlighting a change to our infrastructure product line revenue reporting beginning this quarter. We have realigned to better reflect the markets that we serve and how we manage them. We are now reporting our North America Infrastructure businesses separately and have consolidated international infrastructure and global solar into 1 product line. A quarterly recast for 2025, reflecting these updates is included in the appendix of today's presentation. Now moving to Infrastructure results. Sales of $806 million grew 14.1% year-over-year. North America Utility sales increased 27.4% driven by pricing and higher volumes. Sales in North America Lighting and Transportation declined 4.4% due to the production challenges as noted by Avner. North America Coatings sales increased 13.3% supported by healthy infrastructure and data center demand. North America Telecommunications sales decreased 3.9% as volume softened due to a shift in carrier spending allocation. International Infrastructure sales increased 6.9% due to favorable foreign exchange impacts. Operating income was $143 million or 17.8% of net sales an increase of 110 basis points as a result of our pricing actions and fixed cost leverage. Turning to Slide 11. First quarter Agriculture sales decreased 15.1% year-over-year to $227 million, driven by lower international sales. North America Agriculture increased 1.5% year-over-year. Importantly, operating margin improved to 14.8% in the quarter, returning to double-digit levels. This reflects the benefits of our continued focus on pricing, cost management, and risk mitigation. Following up on last quarter, we reached a settlement on the material Brazil legal matter we previously discussed, and it was resolved within our existing accrual. Moving to Slide 12. For Cash, liquidity and capital allocation. We had another quarter of healthy operating cash flows, generating $103.5 million. We ended the quarter with $160.2 million of cash and our net debt leverage is approximately 1x. During the quarter, we invested $35 million in CapEx, primarily for utility capacity expansion. As previously discussed, we finalized the acquisition of Rational Minds and the purchase of the remaining minority shares of ConcealFab for a combined $20 million. We returned $71 million to shareholders, including $13 million through dividends and $58 million through share repurchases. In February, we also increased our quarterly dividend by 13% to $0.77 per share or $3.08 on an annualized basis. Turning to our 2026 outlook on Slide 13. We are increasing our full year EPS guidance. Net sales are projected to be between $4.2 billion to $4.4 billion. We are increasing infrastructure sales to be between $3.3 billion to $3.45 billion. This is offset by a decline in Agriculture with sales to be between $0.9 billion to $0.95 billion. In Infrastructure, the increase is driven by North America Utility. We expect pricing and volumes to remain elevated throughout the year. In Agriculture, given recent changes in market conditions and project economics, primarily related to the Middle East conflict, we have become more selective in our pipeline aligning with our disciplined approach and focus on long-term value. Diluted earnings per share are projected to be in the range of $21.50 to $23.50. At midpoint, this represents a 4.8% growth in revenue and a 17.9% growth in adjusted EPS. Higher pricing and volumes in North America Utility are driving the increase in our EPS target. Also included in our EPS guidance is the impact of the tariff changes that went into effect on April 6. These primarily affect a portion of our North America Utility production sourced from Mexico. Importantly, we are mitigating much of this exposure by using primary U.S melt and poured steel which limits the incremental Section 232 tariff to 10%. Looking ahead, we remain focused on what we can control and prioritizing opportunities that support sustainable, higher-quality earnings. With that, I'll turn the call back to Avner to review our value drivers. Avner Applbaum: Thank you, John. Moving to Slide 14. We continue to advance our 3 core value drivers, catching the infrastructure wave, positioning agriculture for growth and executing disciplined resource allocation. These priorities are guiding how we invest in capacity, strengthen our product and technology offerings and align our cost structure supporting improved performance and more consistent profitable growth over time. We continue to drive above-market growth in Infrastructure through targeted investments in capacity and operational efficiency, and we're seeing the benefits reflected in our sales volume. In Agriculture, we are growing our presence in emerging markets and investing in aftermarket and technology to improve the mix of higher-margin business. Finally, our disciplined resource allocation initiatives are on track. Overall, we are confident in our 2026 performance and achieving our long-term value driver targets. We look forward to sharing more details at our upcoming Investor Day on June 16. Before we close, I want to thank the entire Valmont team for their efforts navigating a dynamic first quarter. With that, I will now turn the call over to Renee. Renee Campbell: Thank you, Avner. At this time, the operator will open up the call for questions. Operator: [Operator Instructions] Our first question is from Nathan Jones with Stifel. Nathan Jones: Good morning, everyone. I guess I'll start with a question on the 232 tariffs. We've been getting a lot of questions from investors, as I'm sure you guys have as well. I think the anticipation was probably that these new tariffs were going to be more impactful to Valmont than you guys are talking about them being. Can you maybe just provide a little bit more color on -- I know John said using poured and melted U.S. steel helps protect from that. But can you just -- any more color you can give us around that? And then how you plan to mitigate that with customers? Avner Applbaum: John, do you want to take that one? John Schwietz: Yes. Thank you. So Nathan, first, of course, we welcome the clarity that we got on April 6 with the updated regulations. So our understanding of these rules are incorporated in our guidance. As you mentioned, really, the upside of this guidance is that we need to maximize U.S. poured and melted steel. So that's what we've been doing for the last few quarters is maximizing that, and that's what we'll continue to do. Of course, tariffs are changing, they adjust and as they adjust, we adjust our pricing and also our supply chains. This takes a little bit of time to take hold. But overall, we feel comfortable with it. And as we've mentioned on prior calls, the objective for us is to be tariff-cost-profit neutral. And so -- and that's what's incorporated in our guidance. Nathan Jones: That's helpful. I guess my second question is around the U.S. Utility business. Through the last 12 to 18 months, I think the company has been talking about effectively being out of capacity and having to increase CapEx to add capacity which it's been doing. But I think the story was kind of that $1 of CapEx was going to increase capacity by $1 and the business is clearly outperforming the level of CapEx that's going into it. Can you talk a little bit about where the additional productivity is coming from or how we should think about $1 of CapEx now translating into maybe more than $1 of capacity? Avner Applbaum: Sure. So we are -- let me start up, we're very pleased with our quarterly results. I mean, we've grown Utility by more than 27%. And to your point, a lot of the growth is driven by the strength in the environment with -- coupled with our investment in capacity. Capital is clearly one of the areas that we're investing to increase our capacity, and we're going to invest between $170 million to $200 million this year, with the majority of that going into Utility. So capital is one lever, but let me just address it a little broader, right? It's a whole system of capacity increases. So we have our capital. We have our operational capacity, and we have our commercial capacity. So just to give a little bit more flavor to that, while we're adding capital, every day, our employees go into the shop and look for opportunities to increase our throughput. And we are getting a lot of innovation, continuous improvement to drive the increased output. So as an example, in one of our plants, we're looking at bottlenecks, and we noticed that in some cases, if we add some labor, we will increase our output. And we did a quick, very successful hiring event, and we were able to increase the capacity at that site. We had another site where we saw that the flow was not perfect. We did a couple of Kaizen events. We got the flow significantly improved, just to name another example. So we have over -- we have 24 facilities in the U.S. Each one of them, we are taking many actions to drive the increased output. And we should see this trend continued into Q2. We're expecting to see a very strong similar type growth or even better in the second quarter. And in fact, we should expect to see a very strong year in Utility as well. So just to sum it up, we're taking many initiatives, capital being one of them. We are seeing that with capital, we're driving more than one for one. So that is another area of an improvement. And we look forward to keep on capitalizing on the strength of this market. Operator: Our next question is from Chris Moore with CJS Securities. Christopher Moore: Recognizing you don't necessarily provide backlog on a quarterly basis. Can you give any big picture thoughts in terms of kind of what it looks like today versus kind of year-over-year or sequentially? Avner Applbaum: Yes, sure. So we are seeing -- sequentially, our backlog is relatively flat, but it has been up year-over-year. And I think it's important to note, the backlog reflects the strength of our business, but it is only a data point, reflecting the strength in that market. So just to give a little bit more color, we do take an approach to managing our lead times. We're currently improved our lead times. We have best lead times in the industry right now between 42 to 44 weeks on our bid market. We have a lot of projects in the pipeline that don't show up in the backlog with a lot of our alliance customers. It actually -- it's an advantage to us not to have them in the backlog. So you don't have to take too much risk as it relates to the pricing of steel, et cetera. But overall, I think the most important point is we are seeing unprecedented demand in this market. We are -- I mentioned that the IOUs are planning to spend $1.4 trillion through 2030, which is significantly higher than we've seen just recently. So that's -- which was about $1.1 trillion. So call that about 27% increase in their projections. So going into the year, we were thinking we're going to grow 8% to 10% on our Utility. Well, right now, this year, it's going to be much stronger than that. We're probably going to see growth between mid-teens to high teens in the Utility space. So overall, all indications are this market is robust, we have not seen it like this for decades, and we're very pleased on where we are positioned with our backlog, our lead time and our alliance with our customers. Christopher Moore: Very helpful. And maybe just one on Ag. So maybe can you talk a little bit about rising fertilizer prices, potential impact on pivot demand, not necessarily for '26. It sounds like there could be kind of a lag in demand, but what might be felt in '27? And just how much visibility do you have on that front? Avner Applbaum: So there's not great visibility into 2027. But the way we look at it, fertilizer is an input cost -- significant input cost, and it will have impact on farmers, will put more pressure on their profitability, and they have been under pressure. So at this point, we continue to expect to have a challenging environment in 2026. And we're focused on areas where we could drive farmer profitability. We're supporting our farmers with our aftermarket, our technology, enabling our dealers to ensure they can improve their profitability. And as we know, these markets have strong long-term fundamentals. And as the market will improve, we'll be ready to capitalize. Operator: Our next question is from Tomo Sano with JPMorgan. Tomohiko Sano: John, congrats on your new role. John Schwietz: Thank you. Tomohiko Sano: And for North America Utility, could you comment on any changes in pricing or the competitive landscape on pricing power infrastructures? What gives you confidence in your ability to sustain or enhance pricing, especially as competitive dynamics evolve, please? Avner Applbaum: Thank you for the question. The market environment continues to be extremely strong right now. We always focus on value pricing. We are the leader in the market with the highest market share. And we provide the utilities with mission-critical products and solutions supported by our strength in our engineering, our reliability, quality, on-time delivery. And in this environment, there's very strong value in our offering, especially in a constrained environment. And the entire industry has been very disciplined around pricing. So while there will continue to be growth in this area and our competitors will continue to invest, we remain very disciplined, taking pricing leadership and as evident by our Q1 performance, which had significant pricing in our performance pretty much demonstrates that there's no concern regarding pricing in this environment. Tomohiko Sano: And follow-up on Ag margins, have you hold up well despite lower sales. If the sales headwinds persist what structure -- structural mix factors do you see as most critical for sustaining or even expanding margins in this segment, please? Avner Applbaum: Yes. Thank you, Tomo. So as you mentioned, Ag margins did well this quarter. We're pleased with the result at 14.8%. So that was driven, as you know, by favorable pricing and also an improved product mix and regional mix. As we look through the rest of the year, as you mentioned, there are some headwinds. And so if we look at our margins for the rest of the year in Ag, we have the seasonality impact of moving more towards international, less in North America, that will put some pressure on our margins for the rest of the year. Also, the impact of the fixed cost deleverage in our Dubai facility will also add pressure to our margins. So I'd say that we'll -- certainly, this year, we will be in the mid-teens to low teens for margins in Ag this year. Operator: Our next question is from Brian Drab with William Blair. Brian Drab: Like Nathan, most of the questions lately have been around the Section 232. So I just wanted to ask one -- maybe the same question just in a little bit different way. But -- you have in the 10-K, I think that there's about $220 million worth of product in the Utility business coming in from Mexico. And I haven't found that 10% figure anywhere. So I'm just curious, is that part of the new structure? Is it stated that it's 10% if you're using melted and poured U.S. steel for finished product coming in from Mexico? Or is that just kind of how your assessment after looking through everything? And if so, given it's 10%, is this -- and you put that on the $220 million or so, so it's an incremental roughly $20 million in costs that you have to absorb? Avner Applbaum: Thank you for the question. So yes, 10% is part of the new regulation, and you're thinking about this the right way. So that's approximately the number from Mexico from our output for Mexico and exports to the United States, that varies year-by-year. As I mentioned earlier about the transition of our supply chain. So -- the goal here is to maximize the U.S. melt and pour steel, and that will reduce our tariff exposure and cost over time. That's what the teams are doing. And that will take some time. But we're making rapid progress in making sure that we adjust that to maximize our U.S. melt and pour steel. That will bring us closer to the incremental 10%. Brian Drab: Okay. But you can't size the incremental cost for us at all. You don't want to quantify that today. I don't want to press you too much on it, but that's what we're looking for? John Schwietz: Yes. So I'd say your general range, how you're thinking about it is approximately right. Avner Applbaum: And I'll just add, right, we're seeing strong growth, right? So that $220 million is going to easily be $250 million. So as we grow and capitalize on the market, well, we'll pay more tariffs. But of course, we make very strong margins out of our plant in Mexico. So no concerns on our end. Brian Drab: Right. Well, and it all just seems like my conclusion at the moment is it is kind of negligible given the size of that business and given the pricing power and given the pricing dynamics across the industry and what you're doing operationally. So -- but thanks for the clarification. On the Utility business, also you mentioned that the price and volume drove the growth. You mentioned in the press release, you listed price first in the description of that strength. Can you just talk about the breakdown of price versus volume driving the business? And then also is the price being supported more just by steel kind of skyrocketing. Or is it -- and secondarily by the market demand? John Schwietz: Okay. So thanks for the question. So if we look at Q1, the 27% increase was driven primarily by price, as you know. It's important to note, though, that volume was an important contributor as well for Q1, that was in the double digits. As we look through the rest of the year, Avner noted mid-teens to upper teens and growth rate expectations for Utility, we expect that, Brian, to be a balance between price and volume for 2026. As it is to your question about the price environment, Avner gave some good comments on what we're seeing in the price environment. To Avner's comments, we are pricing to market. We're constantly testing the top of that market. But yes, some of that is passed through contract pricing with regards to material escalations and then also logistics escalation. So yes, that's a component of it. But as Avner mentioned, we have confidence in the overall pricing environment for Utility. Operator: We have reached the end of our question-and-answer session. I will now turn the call over to Renee Campbell for closing remarks. Renee Campbell: Thanks, everyone, for joining us today. A replay of this call will be available for playback on our website and by phone for the next 7 days. We look forward to speaking with you again next quarter. Operator: These slides and the accompanying oral discussion contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on assumptions made by management considering its experience in the industries where Valmont operates, perceptions of historical trends, current conditions, expected future developments and other relevant factors. It is important to note that these statements are not guarantees of future performance or results. They involve risks, uncertainties, some of which are beyond Valmont's control and assumptions. While management believes these forward-looking statements are based on reasonable assumptions, numerous factors could cause actual results to differ materially from those anticipated. These factors include, among other things, risks described in Valmont's reports to the Securities and Exchange Commission, SEC, the company's actual cash flows and net income, future economic and market circumstances, industry conditions, company performance and financial results, operational efficiencies, availability and price of raw material, availability and market acceptance of new products, product pricing, domestic and international competitive environments, geopolitical risks and actions and policy changes by domestic and foreign governments, including tariffs. The company cautions that any forward-looking statements in this release are made as of its publication date and does not undertake to update these statements, except as required by law. The company's guidance includes certain non-GAAP financial measures, adjusted diluted earnings per share and adjusted effective tax rate presented on a forward-looking basis. These measures are typically calculated by excluding the impact of items such as foreign exchange, acquisitions, divestitures, realignment or restructuring expenses, goodwill or intangible asset impairment, changes in tax law, change in redemption value of redeemable noncontrolling interests and other nonrecurring items. Reconciliations to the most directly comparable GAAP financial measures are not provided, as the company cannot do so without unreasonable effort due to the inherent uncertainty and difficulty in predicting the timing and financial impact of such items. For the same reasons, the company cannot assess the likely significance of unavailable information, which could be material to future results.
Operator: Good day, and thank you for standing by. Welcome to Atos Group Q1 2026 Performance Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Philippe Salle, Group Chairman and CEO. Thank you. Please go ahead, sir. Philippe Salle: Thank you very much. Good morning, everybody. I am today with Jacques-Francois, and we're going to talk about Q1. So let's go directly on Page 6, on the business highlights. So first point is solid financial performance. I think we are quite happy, let's say, with the start of the year. We have always said that's the lowest point of the year. And then we gradually, I would say, improve the growth. Further progress in the execution of the Genesis plan. So the Genesis is doing also very well. We will finish the first Genesis plan probably by mid of this year. And we have extended the plan, I would say, with another savings to be finished probably by the end of 2026. The idea, of course, is to have the full savings of the new, I would say, the extended plan in the course for the year 2027. We have a positive business momentum, and I will come back to this. With, I would say, book-to-bill that is the highest for the last 5 years. And so now, we have a clear focus on our strategic pillars. Agentic AI, we have launched a manifesto. Sovereign, we have launched also a manifesto internally, and it's going to be externally in the coming weeks. And, of course, Cyber, where we are #1 in Europe. So if we go on the key numbers on Page 7, order entry is EUR 1.5 billion. It's 89% for Atos. It's 87% with Eviden. And of course, as you can imagine, with Eviden, the order entry was a little bit low in Q1 with the war. We definitely think that it's going to be much better after, let's say, the war, but we don't know, unfortunately, when it's going to be finished. Revenue is EUR 1.7 billion plus. It's roughly EUR 1,640 million what we call with the go-forward perimeter, the go forward, it's without Build that we have sold on the 31st of March and Latin America, and we expect to close Latin America next week. If it's not next week, beginning of May, but we will try, I would say, to finish this transaction, let's say, next week, which means that the perimeter is roughly the perimeter going forward. There are still some countries we want to close, but are very small. But in terms, let's say, of sale, I think it's finished. Net change of cash, I think very good news. It's minus EUR 47 million. So you have to understand that we have EUR 71 million of restructuring. So it means that we have produced roughly EUR 24 million of cash. And also, we have the Build cash consumption. Unfortunately, we are not able to estimate that cash consumption for now. We will do this, in fact, when we're going to close H1 -- just for information, build EBITDA was around minus EUR 25 million; CapEx, minus EUR 30 million. So EBITDA minus CapEx is minus EUR 55 million. We estimate that probably there is a positive working cap, but it's possible, of course, that Build has an impact of, let's say, around EUR 10 million, EUR 20 million, EUR 30 million, we'll see. So it means, in fact, that the production of cash is much higher than, in fact, EUR 24 million. And then the liquidity EUR 1.7 billion, it's a little bit above last year, December 2025. And remember also that we have bought already EUR 62 million of the EUR 1.5 [indiscernible]. So of course, there is less cash, but we have also less debt. So let's go on the 3-year for the Genesis. So I'm not going to highlight -- remember that there were 7 pillars in Genesis. There are a lot of things that we are doing. So the first one, is the growth. So as I say, we have redesigned completely for me the engine of growth. And it's going to, I would say, produce a lot of, I would say, of course, results in the coming months now and years. So I would say the teams are in place, most of them. We have, I would say, also put a focus with Florin, the CTO on our 3 strategic pillars, so Agentic, Sovereign and Cyber. We have now launched this morning for 2 or 3 months campaign also in France, I would say, to, let's say, push the image of Atos. And I would say the main, I would say, message is that Atos is back. And as I say on the term, the target operating model, in fact, in sales is completely in place. You will see also, for example, that the pipeline has increased almost by EUR 1 billion in 1 quarter. And that's -- I would say that gives, of course, a very good signs for the rebound that we estimate that will happen, in fact, in Q3. In terms of country review, so we sold iDEAL, it's a company that was in Nordics. It's mainly, in fact, Norway and Finland. So we closed the deal on end of Jan. South America, as I say, next week, and Build was done also end of March. In terms of operational costs, I think we are continuing, I would say, the progress. The billability rate now is above 80%, and it's, in fact, close to 85%, the target that we have. We are now, let's say, recalculating a little bit differently this billability rate because we take into account the average salary of the people that are not billed versus, I would say, the salary of people that are billed. And then there is -- and we see that there is, of course, a discrepancy and there is no, I would say, magic, but usually the people that are more costly, unfortunately, are more on the bench than the people that are billed. So I would say we will not recalculate, I would say, this rate, but we will adjust it, I would say, to the salaries. Legal entities, we continue to simplify the number of entities. We want to shave, I would say, the number of entities by hundreds still. And then we are also putting some AI internally. And right now, for example, we are testing AI on the revenues. So in fact, we are looking at all the contracts that we have, it's several thousands, and we look also at the options I would say, the paragraph in the different contracts that we have signed where we can extend the pricing or bill a little bit differently. So it can give, I would say, some rooms of improvement in terms of margin and revenues for the teams. But Genesis is going very well. The Genesis, the initial plan will be finished mid-'26. So we estimate that the EUR 650 million saving plan is almost complete. And that's why we have extended now the plan to have, I would say, a plan that will finish end of '26. So it means it's a target above EUR 700 million. In terms of workforce on Page 9, as you can see, so we started the year at 63,000. We continue, I would say, the restructuring, and we also managed the levers versus hirings to be negative. So we finished at 61,000. You take out Build to 2,500. So we are now at a little bit below 59,000. If you take South America, we are probably close to 56,000. So that's probably where we will be probably at the end of next week. And I would say we will -- I definitely think that we can -- we will land around 55,000 when Genesis will be complete. So we are almost there. We go on Page 10 on the order book. So first, the book-to-bill is very strong, 89 for -- and in North America, it's above 100. Just for the analysts, that's the -- I always say that the book-to-bill is a proxy, unfortunately, of growth. And I think we have a very good example. The book-to-bill of North America is above 100. They continue to decrease, unfortunately, in terms of top line in Q1. The book-to-bill of U.K. is below 100 and now they are growing. So as I say, unfortunately, it's not an immediate, I would say, readings when you have a book-to-bill at below 100 that it means that we're not going to grow. I don't think that it's the case. We are still looking to find a better measure. It's not an easy one, but we are working on it. I hope that we can probably share some, let's say, results in H1 or at the end of the year. The qualified pipeline, as I say, is up roughly close to EUR 1 billion. We are now at EUR 13 billion roughly of qualified pipeline, so almost 2 years of revenues, a little bit less than 2 years, of course. The renewal rate also is 94%. The good news is that we don't have big renewals now going forward. So in fact, for this year, I think we are not going to lose any other contracts. It has been done, of course, in the course of '25. The 2 big contracts in the U.S. have been renewed. One has been signed, in fact, in end of March with CNA. It's a very big contract, $480 million. And we're also discussing probably to extend the contract to more than this $500 million. We will have probably -- we're still in negotiation in the course of Q2. And the second one also is in California. We have won the contract. It will be signed in the course of April or May. It's done. We are just waiting, I would say, the signature of the client. And then for the U.S., it's done. We don't have big renewals, in fact, in other parts of the world. There is a medium-sized contract, in fact, in BN right now. We are waiting the answer probably next week. And that's all, which I think is very good news. And that's why we are very confident on the rebound of the top line in Q3. And then as you can imagine, we have a good traction in cloud, in cyber and in data AI because we are growing, in fact, in these 3 service line, let's say. You can see below some contracts that we have renewed. So for example, CNA in the U.S., it's a very big contract. There is some CM&I, there is a digital workplace and cyber, and we are also now looking for digital applications and the data AI, in fact, for the client, and it's an insurance company. So I definitely think that Agentic has a big impact in fact, in this company. We have, for example, with Gigalis in France, renewed a 4-year plan with cyber. It's what we call framework agreement. So it means that we have after that the possibility, I would say, to tender, put people or put, I would say, new projects in place. Most of the work, in fact, are not in the book-to-bill. So we are very cautious on this. And that's why it doesn't -- I think probably the book-to-bill is a minor, I would say, minor of probably what is going to happen on the revenues going forward. In the U.K., we have won a very good contract with the Ministry of Housing at GBP 63 million 7 years for digital applications. And for example, in the Germany, Austria, in Austria, we have won also a very big contract with OBB, EUR 48 million for 9 years. But I think that there is good traction. I see that there is more and more, I would say, appetite. Doors are open from the clients. I think it's much better than last year. And definitely, I think now we need to win, I would say, the contract. So I would say we are back to a normal business. If we go on Page 11, this is the 3 pillars in terms of technology. This is where we're going to invest most of our R&D and push, I would say, very hard. So Agentic, sovereign, and cybersecurity. So Agentic, as I say, we launched already the manifesto. We have already studios in place in the 4 big countries, and we have now signed different clients. And there is an ecosystem around us of start-ups that will help us, I would say, deliver the Agentic and the agents in the different scenarios of our clients. Then with the sovereignty, so there is a manifesto also that we're going to produce. It has been already shared with the top 200 within Atos in fact, last week, and we're going to share it externally in the course of next week or probably beginning of May. There is a lot of appetite, as you can imagine, right now, especially in Europe. And then cyber, of course, there are a lot of things going with this. We see also some developments with Agentic there. And of course, we have a very strong position, as you can imagine, in Europe, and we are pushing now also cyber in North America. Now if I go to the next page. So the next section is the Q1 revenue performance. So I can go through, I would say, the main numbers. So first, as you can see, when we looked at the Q1 restated, it's roughly EUR 2 billion. We take out the scope and the foreign exchange, the divestitures. So in fact, the perimeter going forward, which is without Build and without IDL and of course, without Latin America was roughly EUR 1.8 billion. We finished at EUR 1,640 million, which is roughly minus 11%. And as I say, we were, in fact, anticipating, let's say, a weak Q1. It will be much better, in fact, in Q2, and we are still looking to make the rebound in Q3. If you look, in fact, on Page 14 by region, we were probably a little bit, let's say, not surprised, but North America probably is too weak, the sentiment, in fact, the economic sentiment is a little bit, let's say, challenging in this area. The rest is okay. As you can see, U.K. now is growing at plus 5%. We estimate also that Germany will be on positive growth in Q2. So we see, I would say, region by region that I would say we are coming back to a positive territory in the coming quarters. If I go, let's say, region by region, so I start with Germany on Page 15. I think Germany is doing quite well. As you can imagine, also the EBIT now is positive in Q1. It was negative last year. And by the way, just for information, the EBIT of the group has more than tripled with our bill in Q1 versus last year. We don't publish, of course, the EBIT -- we will do this, in fact, in H1. But I would say we see the benefits of Genesis now going -- falling through, I would say, the P&L already, of course, in the beginning of '26. Then you have, I would say, some contract wins. I'm not going to go over, but I would say we are stabilizing, I would say, Germany. And as I say, we estimate that the rebound will happen in the course of this year. Now North America is probably the most difficult, let's say, region. In fact, the start of the year was probably lower than anticipated, but we are signing, in fact, a lot of new contracts and the book-to-bill is 10 -- so it's big. And definitely, now we estimate that we're going to ease, let's say, this contraction of revenues in coming quarters. You can see some below some big wins. The biggest one, of course, is CNA. And also, we have another one on CM&I at $30 million, as you can see below on the bottom, I would say, of the page. 17% is France. So France is still also challenging. Remember also that we did not have a budget in January and February. So it freezes a lot of our public and defense customer and public and defense in France is 40% of the revenues. So we know that the start of the year is probably, of course, lower than anticipated in the budget for us. But we have some very good signs for example, with SNCF, SNCF when I arrived last year, they said that they want to stop to work with Atos. And finally, we work -- we won a very big contract with them. So it means that the doors are open, as I say, in many customers. Gigalis also, it's a big contract we have won also for cyber. And you can see also other, I would say, wins and qualifications. U.K. on Page 18. So that's the rebound of the U.K. and also the profitability also is skyrocketing, as you can imagine. So we are very happy. And there is more to come. I think we have win also a big contract in Q2 that will be probably public. So I would say we are quite confident right now in the U.K. And as I said, that's the first region to come back to growth, and there will be more, of course, in the coming quarters. Last, international markets on Page 19. So we have taken out the 28, 30 that's Latin America. So in fact, without Latin America, it's around EUR 220 million, so minus EUR 12 million. It's mainly, in fact, impacted by one client in Asia, in fact, that is stopping the CM&I contract because they want to manage internally, I would say, their data. The good news is that we suffered, in fact, in '25, and we continue to suffer in '26. But at the end of the year, this ramp down is completely finished. So it means that we are quite confident that we will restart growing, in fact, in the course of '27. You can see also some wins that we have in Singapore, Spain and Slovak governments. Last, in fact, and it's not -- it was not international, sorry, is, of course, at Benelux, so Benelux or BN, what we call with Atos. This is also a slow, let's say, start of the year, but we are, I would say, quite confident also that this region is doing very well. We have win also different with Eurocontrol with -- in the automotive sector with DAF and also in the financial services, as you can see. Now Eviden as you can see on Page 21. So without Build, in fact, the revenues were EUR 71 million, and we are roughly at EUR 69 million. It's roughly flattish. In fact, we have been impacted by the war because part, for example, for Vision AI, a big chunk of our business is in Middle East. So we definitely think that it will be much better after the war concludes, but when nobody knows. But I would say we have a good traction in terms of also contracts, and we are very confident that we will accelerate both in the book-to-bill going forward and also, I would say, in the top line. So that's it for me. I give the floor now to Jacques-Francois for the liquidity position. Jacques-François de Prest: Thank you, Philippe, and hi, everyone. So on Page 23, as a reminder, the publication of the quarterly liquidity position is part of our regular reporting requirements, which have been defined and agreed with the group's financial creditors. So the certificates are available on our website. Our liquidity position remains strong at the end of March, thanks to the limited estimated cash consumption over the last quarter. In Q1, the net change in cash is estimated to be approximately minus EUR 47 million, which includes EUR 71 million spent related to the restructuring. This figure is reported without any use of the account receivable factoring or without any specific optimization on trade payables. This number is also reflecting the results before the estimated impacts. So you can -- we take them from the left to the right on the slide. So a, the change in the unsolicited payments received in advance of the invoice payment due date during the year. So that's the minus EUR 115 million. Then you have the exchange rate fluctuation, which amounts to approximately minus EUR 2 million. You have the M&A impact, which is plus EUR 257 million, and you have the debt repayment of minus EUR 62 million. So these amounts are excluded from the net change in cash, which I announced is minus EUR 47 million. And that brings us as a result, as of the end of March '26 to have the Atos Group's liquidity at EUR 1.736 billion, which is to be compared with EUR 1.705 billion at the end of December '25. And this is more than EUR 1 billion above the minimum requirement of EUR 650 million set by the credit documentation. So with that, I'll now hand over to Philippe. Philippe Salle: Okay. So just for the outlook, just I give you the numbers now with the FX at the end of March. So it's a little change just because, of course, as you can imagine, the dollar is weaker. So it gives in euro, let's say, a smaller revenues at the end of '25 with the FX of March. So we are still at EUR 7.1 billion. So compared to EUR 7.1 billion, of course, at the end of '25, EUR 312 million as the EBIT. We are now close, as I said, to 56,000 people without. And we are now in 54, sorry, countries of operation. So as I say, we continue also to close some countries will below 50 by the end of the year. Now if I go on Page 26 for the guidance of this year. So remember that at the beginning of this year, we say we will try to touch a positive, let's say, organic growth with, let's say, the start of this year and, let's say, the economic sentiment, we estimate that it's not going to be possible. So we have narrowed, I would say, the range. It's between minus 1% and minus 5%. So we still keep, I would say, the worst case at minus 5%. We think we will do probably better than that. And the best case, let's say, to minus 1%, so roughly a flattish revenue. Operating margin confirmed at 7%. As I say, we have tripled -- more than tripled the EBIT, in fact, in Q1. So we are very confident on the profitability of this group for '26, of course, and a positive net change in cash. So in fact, you've seen that we have already spent EUR 70 million with Genesis in Q1. Genesis this year is probably between EUR 150 million and EUR 200 million. So we have, in fact, spent more than, I would say, the average that we should have by quarter, and it's normal because we are accelerating the plan. And of course, the EBIT of the Q1 is always the lowest. So it means that it's a good sign, I would say, for the cash going forward. And then I would say for 2028, next year and 2028, we are still looking for an acceleration of the top line, still targeting around 10% of profitability. And of course, the deleveraging will continue. In fact, I would say with this year, the deleveraging, in fact, will be seen already in fact, in '26. And in fact, with hundreds of millions of cash next year because, in fact, the Genesis in terms of cash outs next year will be very small. We will produce a lot of cash to either do M&A or deleverage, I would say, the balance sheet. With that, I can now, with Jacques-Francois, take any questions that you have on the Q1 results. Our Q1 performance, it's not really results because we don't produce the P&L. Operator: [Operator Instructions] Our first question comes from the line of Frederic Boulan from Bank of America. Frederic Boulan: If I can ask 2. Firstly, on demand. So you flagged a strong order book momentum, a number of big contract wins. Can you discuss a little bit the nature of discussions with clients, any impact on demand from the current macro? I mean you flagged that for Eviden, but would be keen to hear any broader impact on the overall demand environment? And then specifically around pricing, it would be good to understand where you see price points in the deals you've been signing recently, how it's comparing versus, let's say, a year ago? And is this pricing driven by any kind of competitive or AI factors? Philippe Salle: Yes. So on the second point, Frederic, for example, CNA, the margin is 25%, which is roughly in line with the former margin that we have with CNA. Remember that the goal we have is to be around 25%, 26%. It's very important. And I'm very adamant on this. So I think probably, and that's why also the book-to-bill also last year and this year is probably lower than what we can achieve because we are still watching very closely the margin that we want to produce. Profitable growth, remember, is the goal for us. It's not very difficult to buy some contracts, but I would say it's far-ridden, of course, as you can imagine, since now beginning of '25. In fact, in some contracts, for example, like CNA, and it probably goes with the sentiment of the clients. Everybody, of course, is talking about AI. Nobody probably understands the impact of AI because it's very difficult right now to see what is going to happen. There are a lot, of course, disappointments, in fact, with some clients trying to put some agents because it's not that easy. And my view is that Agentic is the new revolution. It's coming, but it will take probably 2 to 5 years to be really in force, probably more in the U.S. at the beginning and after in Europe. So we see that in these contracts, for example, for its 8-year contracts, we're going to give, for example, some savings after year 3 and 4 in terms of -- let's say, in terms of Agentic. But in fact, we -- as I probably said already, since we don't know exactly the number of savings, in fact, we're going to share part of the savings that we're going to produce. But it's difficult, in fact, for clients and even for us to see the impact -- the real impact, I would say, of the savings we're going to have. So there are a lot of studies, and I'm sure that you've read some of them saying that we can divide by 2 by 3 by whatever. Unfortunately, there is one cost that nobody knows, it's the price per token. And we definitely think that this will probably say out in the future. And so it means that, in fact, there is a price for agents. There is probably, of course, less people cost in the contracts going forward. But the sum of the 2 right now is still, I would say, unknown. So I would say everybody is talking about AI. Everybody wants to us, let's say, to give some rebates or not rebates, but I would say, to apply, let's say, Agentic in our delivery and then give, of course. But I would say it's too soon even with the big contracts we are signing right now. They understand that there will be an impact, but it's too soon to say that there is a big impact. And as I say, for us, we're going to protect the margin. So we estimate that the margin of '25 probably will be more after that. And then we can probably produce more output on a given framework. Now the sentiment, I would say, of clients, it depends on the sectors. I think there are some sectors that are probably more difficult than the rest. Automotive is one, transportation, luxury goods. And other sectors, we don't see, in fact, a big impact on right now, let's say, the economy, the banking sector, insurance sector, defense, of course, and public, where we are very strong health care. So I would say it's a mix of sentiment, but you know that in economy, unfortunately, the fact that we -- there is a lot of uncertainty, it doesn't give, I would say, the sentiment to clients that they can spend more, specifically with AI. So I would say that for the moment, probably there is a postponement of some contracts or projects. They are looking exactly probably waiting, let's say, to see how the economy is going to rebound after the war. So there is more wait and see in some clients, let's say, for some projects. And that's why -- that's what we see for the moment. My view is that the projects will happen. But in fact, if you, of course, extend or postpone, let's say, by 3 to 6 months, it has an impact, in fact, in the -- for the '26 year. And then, of course, it will be good news for, let's say, end of this year and of course, in 2027. Operator: [Operator Instructions] Our next question comes from Sam Morton from Invesco. Sam Morton: Two questions, please. The first is on the bond buyback. So I think you bought back EUR 62 million of the 1.5 lien. Certainly the last time we spoke, I think you've been buying back the second lien. So I'm trying to understand what's the change in strategy there? And then secondly, any update you can provide on the refinancing, that would be really helpful. Philippe Salle: Yes. I think Jacques-Francois is going to answer your 2 questions. Jacques-François de Prest: Sam. So yes, the change of strategy is more or less in line, I think, with what we announced in the Q4 publication call, where we said that at the end of fiscal year '25, we thought the second lien was really very low actually and bought opportunistically a little bit of that. So last year, this was EUR 2.5 million of second lien. Now when we look at the NPV, the second lien has gone up. And it's true that the EUR 62 million amount we have bought back on the market, on the open market was only 1.5 lien bonds. Again, we noticed that -- how can I say, this bond was momentarily trading below due to geopolitical situation, nothing to do with the performance of the company. So since we had a little bit excess of cash, we decided to take advantage of that. We signaled that, and we implemented this program, which is not finished, by the way. It might be pursued in the coming weeks or months. That's the first question. On the second question, the refi, well, we are monitoring the market. The company is ready. So we have nothing to announce today other than we are checking how the market is evolving. We have some banks advising us. And when we think there is a good window allowing for a good operation and a good pricing, you and investors might hear from us. Operator: Our next question comes from the line of Laurent Daure from Kepler Cheuvreux. Laurent Daure: I have 2 really quick questions. The first is on revenue trends during the year. I think if I take the midpoint of your guide minus 3%. How do you see the phasing from Q1 to Q4? And what are the main drivers of improvement? Do you still have some contract ramp-up that makes the revenue trend much better, maybe starting in Q2? Or is it comps impact? Any granularity on how you see the year shaping would be helpful. And my second question is on the bond buyback. To clarify, you made EUR 62 million. are you cautiously looking at your balance sheet? Could you do much more than EUR 62 million, like EUR 200 million, EUR 300 million? Is it a question of liquidity of those bonds? So anything on the strategy on that would also help. Philippe Salle: Yes. So in fact, for the -- we estimate Q2 will be around minus 6% and then positive in Q3 and Q4, the positive, then you calculate whatever you want. The central scenario, let's say, at minus 3% for me probably is okay. And of course, if you have minus 11%, minus 6%, then plus and plus, if you divide it after that by 4, you are probably around this minus 3%. So I would say the central is around minus 3%. The worst case is at minus 5%. Then for the bond buybacks, the question for us, of course, we have probably plenty of cash, as you can imagine. And also, in fact, we're going to produce some cash this year. So if we start at minus EUR 50 million, of course, we're going to produce EUR 50 million plus now in the coming quarters. We want to buy, in fact, 1.5L bond, in fact, and that's the one we are looking at that is below EUR 100 million. So I think it's a good, let's say, buy for the group because it's cheaper than, I would say, the par, in fact, on -- for the bonds. And remember that the bond is around 9% yield. We are -- remember that we are also looking at refinancing. So that's why we have to be a little bit cautious between the refinancing. And remember also that we have some repayments of the 1.5L with the proceeds of M&A that should occur, in fact, at the end of the year. So it's an equation, I would say, with all these variables. So we will see if we continue to buy back bonds or we refinance first and then we continue to buy back also, we will see. Laurent Daure: So at the end of this year, you have to pay back with this half of your proceeds from M&A. Is it right? Philippe Salle: Exactly. The proceeds of WorldGrid, the proceeds of Latin America of [indiscernible], of course, it's small amounts for the 2 and the proceeds of Bull, it could be EUR 500 million plus. So remember that we have this EUR 500 million plus cash out that will happen at the end of the year. Jacques-François de Prest: May I complement, Laurent, this is as part of the credit documentation. We have a couple of moments in time in the near future where we are going to do the liquidity test. There is a bar at EUR 1.1 billion of liquidity. At the end of June, we are testing that on a forward-looking basis meaning that the company will -- we will do our forecast internally and the amount which are above EUR 1.1 billion at the end of December, we will use them to reimburse as a mandatory early repayment the 1.5 lien tranche. That's the first test. And the second test is we take the liquidity position, the actual liquidity position at the end of December. And again, against the EUR 1.1 billion, the amounts coming from the M&A proceeds will be used to repay early some -- the EUR 1.5 billion lien capped at the amount, which leaves us above the EUR 1.1 billion position. I hope it's clear. Laurent Daure: To be even clearer, if you do all that, what is your best estimate in terms of interest savings in '27 versus 2026 at the group level? Jacques-François de Prest: I'm afraid there are too many unknowns in the question to give you a number. Philippe Salle: If we do the refinancing, there are a lot of things that could happen again in the course of this year. So it's too soon to give you already, let's say, guidance on interest rates for '27. We can probably give this with the Q3 results. So probably in October I think we will have a better view. Operator: Our next question comes from Benoit De Broissia from Keren Finance. Benoit De Broissia: I have just one very quick question. It's -- you had one black contract in the U.K. involving Aegon. I noticed that Aegon sold its U.K. subsidiary in the weeks -- in a few weeks ago. Do you think that you could renegotiate with the purchaser, the contract you have and that is set to terminate in a few years in 2034, '33, if I'm not wrong. Philippe Salle: It's a very good question. Yes, the end of the contract is 2034. Yes, you have noticed that Aegon U.K. has been sold. So we are talking now to the buyer. It will be in May. In fact, we need to wait. And of course, the buyer has already a platform. So the good news is that do they want to keep only one platform or not and then stop the platform of Aegon, which then, of course, will stop the contract. It's too soon because, of course, we haven't talked yet, I would say, to the buyer. So we will have, of course, a better view in the coming months. But I think for us, it's a good news because I definitely think that they will not keep -- in terms of economies of scale, it doesn't make sense for them, I would say, to have 2 platforms. I think that their platform also is very efficient. So we will see how they want to play this. So there is a possibility effectively that they ask us to stop the platform that we have and then transfer the data to their new platform. So it means that the contract can end in the course, for example, of 2027. We will see. I don't know yet. It's too soon. But it's a very good question. It gives a good opportunity for us, yes. Operator: Our next questions will come from the line of Ryan Flew from PVTL Point. Ryan Flew: Just one quick one for me. So you've given quite clear guidance on sort of the cash add-backs or the adjustments to net change in cash to get to a true sort of unlevered or pre-debt repayment cash generation. Can you just help steer us on your '26 guidance? And clearly, there's a range there, but it feels from the adjustments you've discussed that actually the net change in cash will be considerably better than just positive. So just any further sort of color you could give would be really helpful. Philippe Salle: Jacques-Francois? Jacques-François de Prest: Well, Ryan, thanks for your trust and your faith. At this stage, our commitment and our guidance is to be free cash flow positive. I'm sorry, I will not deviate from that. Bear in mind that we have -- Philippe mentioned, the Genesis cash out impact is between EUR 150 million and EUR 200 million. So that's not nothing. And we have all the other lines of the cash flow statement, which are still consuming some cash. So yes, we're shooting for more, but our commitment is to be free cash flow greater than 0. Philippe Salle: But as you say, it's probably a conservative guidance, let's say. Operator: Our next question comes from Derric Marcon from Bernstein. Derric Marcon: Two questions from me. The first one on the book-to-bill. I just want to understand if it's -- the 87% is applied to the reported figures or the fully planned scope. And in this book-to-bill, talking about in absolute term, what's the proportion between renewal and new business? That would be helpful to have this figure. And my second question is on the M&A, the EUR 257 million you mentioned, can you reexplain what is included in this figure? Philippe Salle: Okay. So the 87%, it's Atos and Eviden. Atos only is 89% because as I say, Eviden has suffered from the war more than -- I would say the impact is more influenced, I would say, than Atos. And Eviden is more Europe, Middle East, in fact. So that's why probably I think the impact is higher. We definitely think that the rebound will come, but of course, we need to have more, let's say, stability. Then the book-to-bill between renewables. Derric Marcon: Is it from the go-forward perimeter or on the reported perimeter? Philippe Salle: Yes, the go forward... Derric Marcon: EUR 1.7 billion or the EUR 1.6 billion. Philippe Salle: No, no, it's only on the perimeter without Latin America and Bull. So 87%, 89%. 87% is the go forward and 89% is only Atos, okay? And it's Atos without Latin America, 87% is with Eviden without Bull. Then the renewals versus -- we don't have this number available right now. I cannot tell you. So we will come back to you on this one. And remember also, you're right that with renewals, of course, as I said, it inflates also the book-to-bill. And that's why it's a proxy for the book-to-bill. Be careful on this. It's not because the book-to-bill is below 100 that we're not going to grow on the company. I definitely think that it's possible. And in fact, we have shown this in the U.K. Then for Bull. So Bull, in fact, remember, there is a lump sum of EUR 300 million at the beginning, plus 2 earn-outs. The EUR 300 million is the EV, the EUR 250 million is the equity. So in fact, we went from EV to equity without the provisions and the pensions, okay? So it means that the EUR 250 million was the equity check that we had for Bull without the 2 earn-outs. Then the EUR 250 million, we take out the carve-out cost. We estimate around EUR 50 million. A part of it was expense, I would say, in the course of '25, the rest, of course, in Q1. We estimate around EUR 50 million. So it means that the net cash for us is close to EUR 200 million, okay? Remember also that Bull has a negative cash flow in Q1. We don't know how much. So we need to take this also into account. So the EUR 200 million will be probably less, EUR 170 million, EUR 180 million. I don't know yet exactly how much. As I said, it depends on the working capital we're going to have on Bull, but it's quite tricky for us to calculate the working capital of Bull, because, in fact, for some of activities of they were on the same company as Atos or the other, Eviden. And that's why even on the bank accounts, unfortunately, we need to look line by line on the cash, I would say, to reconstruct, let's say, working capital. And that's why we're going to give you the figures with the H1 figure, in fact. So that's roughly EUR 200 million without carve-out cost and I would say, equity check, probably less with the cash outflow of Bull in Q1. And then we still have the earn-out. The first one is maximum EUR 50 million, and we estimate we can gain around, let's say, EUR 40 million plus. We will see, I would say, they need to close their accounts. And it's, I would say, linked to the gross margin of Bull. And then the second earn-out is on the EBIT of Bull in '26. But of course, as you can imagine, the EBIT of Bull in '26 is not in my hand, unfortunately. So it's difficult to see what is going to happen on the second earn-out. So we will see what happens on the first one. It's going to be a negotiation that will start, I would say, after the closing of the accounts. Unfortunately, Bull is not very, let's say, quick on the closing accounts. So we will have probably -- numbers probably after the summer. Derric Marcon: And so to get -- Philippe, to get to the EUR 257 million mentioned in the liquidity position. So you have Bull EUR 200 million after carve-out, if I understood correctly, plus other things like Scandi or Latin America... Jacques-François de Prest: So I can say the angle Philippe took was the angle of explaining the story for Bull. Now in the carve-out costs, some of that has been spent in '25 already, a little portion in Q1 '26, and there is a bit more to come in the rest of '26. The vast majority of the EUR 257 million you can see is coming from Bull, the vast majority of that. You have then a plus EUR 10 million and the minus EUR 10 million, which comes from the disposal of some other relatively small assets and some deduction for the carve-out cost for Cartier, but you can assume that 95% of that is Bull. Derric Marcon: Okay. And Latin America and Scandi will come later in the year? Jacques-François de Prest: Scandi has been closed. Scandi has been closed already. That's what I was referring to as other proceeds. That has been completed in Q1 already. And for Latin America, the closing is scheduled in the coming weeks. So there is not a penny yet of proceeds from Latin America in our Q1 numbers. Operator: We have no further questions from the line. Allow me to hand the call back to management for closing. Philippe Salle: Okay. Can you ask one more time if there are other questions or not, and then we can close. Operator: [Operator Instructions] Philippe Salle: Okay. If there are no more questions, then thank you, everybody, for this morning. We have some, let's say, a small road show, I would say, with some investors today and tomorrow. And we, of course, remain at your disposal if you have any questions. But overall, I would say we are very confident on the rebound of the company. I'm very pleased, I would say, on the results and very confident that this year of the rebound and in terms of cash flow, I think there is no surprise for us, neither on, I would say, the profitability and cash flow and the rebound will occur in the course of H2. So next time, I will talk to you end of July. So have a good day, and see you in 3 months. Bye-bye. Operator: That does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Welcome to Getinge Q1 Report 2026 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead. Mattias Perjos: Thanks, and welcome, everyone. Thanks for joining the call today. As mentioned in the intro here, it's me and our CFO, Agneta Palmer, with you today. And in today's conference, we'll go through performance and some of the highlights in the first quarter of 2026 before opening up for a Q&A. So let's move directly to Page #2, please. And I'd like to start by looking at the development of some of our strategic KPIs. And as you can see here, it's evident that we continue to clearly track in line with plan to increase the share of sales from recurring revenue and also accelerating the share of sales from higher-margin products like, for example, our ECLS offering, our consumables in Infection Control and our BetaBags within the Sterile Transfer product category. This is all supported, of course, by solid and effective quality processes. And if we look at the specifics here, you can see that sales from recurring revenue continue to make up 2/3 and high-margin products closing in on about 70% right now. When it comes to quality, the number of field actions in relation to sales has decreased significantly, and we see this positive trend sequentially continue also into the beginning of 2026. And these improvements, we always act with -- in line with thinking of responsible leverage and an attractive long-term return on invested capital. We can move to Page #3, please. So if we then look at some of the key takeaways from the first quarter, we managed to beat last year's record quarter and grow top line organically. Net sales grew by 0.8% organically with positive development specifically in Life Science and in Surgical Workflows. And on the order intake front, we saw an organic increase of 3.9%. When it comes to our adjusted gross and EBITA margins, they were down in the quarter, mainly due to the strong headwind from currency and from tariffs. And adjusting for the SEK 226 million in currency and tariff headwinds in the quarter, the EBITA margin was about 50 basis points higher than last year's Q1. So the conclusion from that is that the underlying performance in business -- in our business continues to be strong, and it's developing according to the plans, the long-term plans that we have laid out. We also have a strong cash flow and continue to have a solid financial position. So our financial leverage is at 1.5x and well below the 2.5x EBITDA that we have kind of as an internal threshold. We can then move over to Page #4 and some of the key events during the quarter. And if we start with our product offering and our customers, I think one situation that is, of course, evolving on a daily basis is the situation in Middle East, and we continue to monitor this closely. Our first priority is, of course, to tend to our employees in the region and continue to support our customers. And if you look at the region as such, it makes up about 2% of our sales and where Saudi Arabia is half. And so far, the impact on top line and on cost has been very limited for us. To our Life Science customers, we launched a new steam sterilizer dedicated to larger items for use for labs and for research applications. And when it comes to the sustainability and quality perspective, I'm very happy to see that we got the CE approval for Cardiohelp II in the quarter, and I'll talk more about that on the coming slide here. In addition to this, we have in our implants business received EU MDR certificate for the Intergard Synergy, which is a vascular graft with an antimicrobial coating, to minimize the risk of infections. Furthermore, in the quarter, we released our annual report for 2025, including our sustainability statement and the annual report provides a lot of good information on Getinge. So I encourage you to have a look at this if you haven't done so already. We can then move to Page #5, please. So just wanted to elaborate a moment on the positive news about the CE approval for Cardiohelp II. And just to remind everybody, this is a market segment where we are already the global market leader within ECLS therapy, thanks to our strong existing portfolio. With the launch of Cardiohelp II now, we become even more relevant for our customers. And some of the systems' key features are that it's even more lightweight and transportable, meaning that it can be used for both in-hospital and intra-hospital use. It also has an attachable gas blender as an option, which is something that is highly appreciated by our customers. And from an interface standpoint, we have an interface now that is even easier for users to operate, and it includes also several smart monitoring functionalities for better decision support for our customers. We have initiated a limited market release now in the beginning of the second quarter to a handful of customers and very happy to see how positive the reception from our customers have been for this important product. The plan now is to do a full CE market release at the beginning of the third quarter. And when it comes to the important U.S. market, the plan is still to make the submission of the Cardiohelp II system, including our HLS Advanced consumables in the second half of this year. We can then move to Page #6 and talk about the top line for a moment. So overall, we had a solid top line performance in Life Science and in Surgical Workflows. And when it comes to order intake for the group, we grew 3.9% organically. The order intake for Acute Care Therapies decreased mainly due to the temporarily high comparative figures in ventilation, where one competitor last year drastically exited the market. So we're very successful in capturing some of that market share. At the same time, we saw really good growth when it comes to ECLS consumables across the board. And this is, as you know, one of our key categories. In Life Science, the organic order intake increased in the quarter, for example, because of an anticipated improvement from low levels that we've seen in bioprocessing for quite some time. And this is something that [indiscernible] and it's good to see some of the momentum here. [ Surgical Workflows ] grew double digit in the quarter, mainly on the back of the strong development across all our product areas, which is also encouraging to see. Net sales there, we had growth of 0.8% organically for Acute Care Therapies. Organic net sales decreased mainly on the back of last year's consolidation in the ventilation market, that I just mentioned. In Life Science, they had a really strong quarter in terms of deliveries, and they grew organic net sales in all product areas. BetaBags and Sterile Transfer continues to show significant traction and momentum. In Surgical Workflows, the organic net sales increased primarily thanks to growth in Infection Control consumables within service and within our operating table category. With that, we can move over to Page #7, and I hand over to you, Agneta for a moment. Agneta Palmer: Okay. Thank you, Mattias. So overall, the headwind from tariffs and currency continued in the first quarter. Even so, we managed to hold up margins, thanks to continued pricing and productivity. Starting with adjusted gross profit for the group, adjusted gross profit amounted to SEK 3.828 billion in the quarter, heavily impacted by currency and tariffs. Adjusted gross margin was down by 0.7 percentage points in total in spite of healthy contribution from price and mix. If we then look at adjusted EBITA, cleared for currency, adjusted gross profit effect on the EBITA margin was plus 0.3 percentage points, while OpEx adjusted for currency had a negative impact on the margin by about minus 1 percentage points in the quarter. And FX impacted by minus 0.3 percentage points. So all in all, this resulted in an adjusted EBITA of SEK 824 million and a margin of 11.1%. Let's then move to Page 8, please. And here, we can clearly state that we remain in a solid financial position. Free cash flow amounted to SEK 842 million in the quarter. Compared with last year, free cash flow was impacted by improved operating profit and changes in capital. Working capital days continued to be well below 100. We are now at roughly 90 days. On operating return on invested capital, we are at 11.4% on a rolling 12-month basis, which is well above the cost of capital. At the end of Q1, net debt decreased to SEK 9.3 billion. If we adjust for pension liabilities, we are now at SEK 7 billion. This brings us to a leverage of 1.5x adjusted EBITDA, which is well below the 2.5x that we have set as an internal threshold. If we adjust for pension liabilities, leverage is at 1.1x adjusted EBITDA. Cash amounted to approximately SEK 4 billion at the end of the quarter. So all in all, we can conclude that the financial position continues to be strong. Let's now move to Page 9, please, and back to you, Mattias. Mattias Perjos: Okay. Great. Thank you, Agneta. Just a moment then to focus on the impact from tariffs and FX in the quarter. So this was, in total, a drag on adjusted EBITA in Q1 of more than SEK 200 million, so SEK 226 million altogether. Tariffs made up just over SEK 100 million of that. And if we exclude the impact of tariffs and currency, our adjusted EBITA margin in Q1 would have been 12.6%. And there, as you can see, showing then an underlying improvement. As tariffs were first implemented in Q2 of 2025, then we expect the year-on-year comparison to be a little bit cleaner from Q2 and onwards if tariff levels remain. And that's, of course, something we'll continue to update you on. We can then move over to Page #10, please. So I want to talk a little bit more about the long term as well. So zooming out and returning to what we said at the Capital Market update that we had in May of 2024. There, we talked about an adjusted EBITA margin of 16% to 19% by the end of 2028. And I think we're on a steady path of reaching that despite the headwind factors that we have seen, that we were not aware of when we announced this target. The main drivers which will enable this are growth, mix and productivity. From a growth perspective, from regulatory approvals and key strategic product launches such as Cardiohelp II in ECMO that we've talked about here and also launching our low-temp sterilization in the U.S., having the sales restrictions removed for Cardiosave in our Intra-Aortic Balloon Pump business. It's just to mention a few factors here. Specifically, when it comes to Cardiosave, I'm happy to say that we, at the end of last week, got the release for sales in CEE countries in line with the plan for Q2. We also expect that the investment fatigue that we've seen in the pharma industry will improve and some of the decision anxiety that we've seen in the last year will go away here as well. We will also, in addition to this, get our share of the announced U.S. investments and benefit from the recovery in bioprocessing. And of course, we will also continue our diligent and successful work with realizing price increases annually. When it comes to mix, we have been successful in our strategic intent to steer our business towards a continued rotation to high-margin products and consumables. And if possible, we prefer to have products made up of a competent hardware with captive consumables attached to it, similar to what we have in our ECLS offering with Cardiohelp and HLS and in the Sterile Transfer offering with Alpha Ports driving the consumption of BetaBag. Our strong R&D and innovation pipeline is, of course, set to support this. When it comes to productivity, here, we've already done a lot in different parts of the business, and we are still excited that there remain quite a few opportunities across the business as well. One thing to mention, I think, is the heightened extraordinary quality costs connected to the product uplift of Cardiosave and Cardiohelp that is expected now to go down in the second half of 2026 and that we will be on a lower level in 2027 and '28. Furthermore, we will, of course, continue with our production excellence effort, where we also have some very tangible measurable benefits and helping us further optimize our supply chain and remain with an overall tight cost control across the company. So this all supports our assessment that our target for 2028 is still within good reach. Then we can move over to Page 11, please. So for the remainder of 2026, we confirm the financial outlook for 2026. As we all know, there are some geopolitical uncertainties that we need to navigate. But based on the underlying demand and the dialogue that we have with our customers on a daily basis, our expectation remains for an organic net sales growth in the range of 3% to 5%, adjusted for the phaseout of the surgical perfusion product category. Surgical Perfusion is still expected to have some net sales in 2026, but declining from about SEK 250 million last year to SEK 50 million this year. We can then move to Page 13, please. So in terms of summarizing here, the key takeaways from the first quarter. We did achieve organic growth in our top line despite the record quarter last year. Tariffs and FX continue to be a significant headwind, but our underlying performance is improving. Cash flow in the quarter was really strong in the quarter, and our financial position remains solid as well. For 2026, we reiterate our guidance for organic net sales growth of 3% to 5% adjusted for the phaseout of the Surgical Perfusion. And when it comes to our priorities for 2026, you've heard them before, we are focused on addressing the remaining challenges when it comes to quality remediation in Acute Care Therapies. We focus on sustainable productivity improvements and cost consciousness when it comes to navigating the geopolitical uncertainty and also addressing the impact from tariffs. And most importantly, we continue to focus on the work hand-in-hand with our customers, adding value for them and the patients that they serve. With that said, I open up for questions. Operator: [Operator Instructions] The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: A couple of questions. First of all, with regards to the ventilator headwinds you had here in Q1, if I remember correctly, you had pretty good sales development for ventilators also in Q2 last year. So is it fair to assume that the headwind will continue into Q2? That would be my first question. Mattias Perjos: Maybe to some extent, it's not something -- it's not going to be a significant factor, I think, for Q2, but it certainly won't be a big help either. Sten Gustafsson: Okay. Excellent. My second question is regarding Cardiohelp II. And what kind of gross margin should we assume for that product compared to the existing Cardiohelp product? Is it going to be accretive? Or is it fairly similar gross margins on those 2 products? Mattias Perjos: Yes. We don't guide on and disclose gross margin levels on any of our products and Cardiohelp II is no exception. Generally, though, when we work with product development and new launches, we make sure that the products that form the next generation of any therapy or product category have a better gross margin than the generation that they replace, and Cardiohelp II should be no exception to this. Sten Gustafsson: Okay. And one final, if I may. You talk about these lower extraordinary quality costs going forward. Could you please sort of quantify those? I mean we've heard SEK 800 million in the past. And where we are today? How low those will be going forward? Mattias Perjos: Yes. Yes, I think you're right. We said that they peaked at about SEK 800 million in 2024. We saw a small decrease in 2025. We expect another small decrease this year and then a slightly bigger decrease from 2027 onwards. And the end game here is to at least halve those costs. Operator: The next question comes from Erik Cassel from Danske Bank. Erik Cassel: First, I want to get some more color on the composition of the ACT decline. I mean, obviously, you talked about ventilators, but you're also talking about Cardiac Assist, et cetera. And I think last quarter, you said that the demand for Cardiac Assist was quite positive on the hardware side. So I wanted to ask if something has changed on that side. And if you could, if possible, give some more color on how much the ACT Americas part declined by the different parts? Mattias Perjos: Yes. No, thanks for the question. We don't dissect the business that much. What I can say on Cardiac Assist is that we had hoped to be able to resume deliveries in Q1 already of balloon pumps in CEE markets. And that was not the case. We only got the final approval to start this last Friday. So it will be a Q2 event. So that's been a little bit of a drag on sales. And also, it has a direct impact on order intake as well because customers don't order new pumps unless they have received what they're expecting to be delivered. Erik Cassel: Can you say anything on how much the ventilator decline did on that 8.5%? Mattias Perjos: No, we don't disclose subcategory financial parameters, unfortunately. Erik Cassel: But can you say anything if it would have been, say, positive organic growth if it wasn't for ventilators? Mattias Perjos: No, I can't answer that either, unfortunately. Erik Cassel: All right. Fair enough. I got to try. Then on the guidance side, I view it as the wording is a bit softer, perhaps the visibility is worse now and maybe you're even seeing a bit more, say, negative outlook. Can you just talk a bit about what you're seeing for the rest of '26 in terms of the, say, customer behavior and dialogues that you're referring to? Has it become slightly more negative? Or is this just a wording change that I'm dwelling too much on? Mattias Perjos: Yes. No, that was not the intent of the wording change at all. It was really just a way of recognizing that we do operate in a rather volatile environment, and we're mindful of that, but we feel confident reconfirming our guidance here even if the word, semantics, had changed a little bit. Erik Cassel: Okay. Just a last question then. Surgical Workflows, obviously quite strong in terms of order intake, especially for Americas and Digital Health. Is there some specific projects that this relates to that sort of makes it nonrecurring? Or are you seeing a more upbeat environment in the U.S. specifically for Surgical Workflows? Mattias Perjos: It's a bit of both. If you look at DHS, it's always lumpy. I mean they tend to be rather large projects, and we do have that, but there's also a little bit of an underlying better confidence, I think, generally in the market and also, I think in the way we operate in this business as well. We made some tweaks to how we organize ourselves, which hopefully also for the long term has a better, more positive impact. But there's absolutely a bit of -- you cannot call them one-offs because they're not. It's just project business that is a little bit fluctuating by nature. Erik Cassel: Okay. Can I ask one short one? Will you tell us anything on the potential impact of the change in steel content tariffs? Or is that something you're going to not disclose? Agneta Palmer: What we can say there is that it's still under analysis, how it impacts us. It's fairly recent. But the preliminary evaluation is that it's mainly if it hits us. It's components and spare parts, not complete products. And the absolute majority of our exposure is on the complete products. Erik Cassel: So the SEK 500 million for full year still holds, you think? Agneta Palmer: I don't think that we have guided on this, but that sounds like a fair assumption given the current levels, yes. Operator: The next question comes from Filip Wetterqvist from SB1 Markets. Filip Wetterqvist: I have a couple. First one, given recent pricing hikes that we have seen on raw materials such as plastic, steel, aluminum, it seems like you do not see any material effect of this in Q1, and I assume contracts are negotiated a few quarters in advance. But do you anticipate any higher input costs in the coming quarters? Or do you not expect any effect at all from this? Agneta Palmer: Yes. Thank you for that question. If we dissect it a bit into parts. When it comes to freight, which is the more direct near-term impact, we have very limited impact in Q1. But if it's prolonged, yes, there will be some impact in Q2 onwards. When it comes to plastics, et cetera, it's too early to say that we have any effects there. Filip Wetterqvist: Okay. And at the Q4 call, you indicated price increases of around 2% for 2026. Did that materialize here in Q1, meaning the 0.8% organic growth was hampered by lower volumes? Or -- and do you -- are you able to accelerate price increases further there if you see increasing costs here in the coming quarters? Agneta Palmer: Yes. We still stand by that, roughly 2%. It is a gradual rolling during the year. So it's slightly less than that in Q1, but we are progressing well towards that level. Filip Wetterqvist: Okay. But let's say, we see -- so if costs are increasing, you won't be able to translate that onwards to your customers, you still anticipate only a 2% price increase then? Agneta Palmer: This is always an ongoing discussion that we have with the -- all the commercial dynamics and the cost levels that we have. So of course, we will adapt our ways of working if we see that we get higher inflation, but it's not an automatic or sort of something that we can directly pass on. Mattias mentioned it for tariffs and it's similar then for raw material. But we do have very active pricing. Operator: The next question comes from Kristofer Liljeberg from DNB Carnegie. Kristofer Liljeberg-Svensson: I have a few short ones. I hope that's okay. First of all, is it possible to quantify at all the positive effect you expect here from the new ECMO approval in Europe or whether that potential positive effect is more a factor of when and -- yes, when you get the U.S. approval, again? And then could you just clarify a little bit about the Cardiosave status here in Europe and the U.S. filing? And then finally, on tariffs, if it's fair to assume really neutral effect here year-over-year from the second quarter? Mattias Perjos: Yes. I think we can't quantify. But of course, there is a positive effect from the launch of Cardiohelp. I mean this is an important part of our product range. So definitely a net positive, but I can't give you a magnitude of that. When it comes to the Cardiosave status, we got approval to start shipping last Friday. So the first pumps are being delivered in CEE markets this week. And the U.S. filing, there is no change here. We still expect to do that before the half year mark. Agneta Palmer: And then when it comes to tariffs, it's dependent, obviously, on the tariff level, but also on the product mix of imports. But generally speaking, yes, it sounds like a fair assumption to assume that. Operator: [Operator Instructions] The next question comes from David Adlington from JPMorgan. David Adlington: Maybe could you quantify the impact of foreign exchange hedges in Q1, how they roll off through the next 12 months or so? And then secondly, obviously, we're a quarter in now, still no margin guidance. Just wondering if you're willing to give us an idea around how you're seeing margins for the year, whether up, down or sideways? Agneta Palmer: Yes. If we start with FX, we have not changed anything specifically regarding our hedging strategy, and we will not disclose that. But just a reminder, I think we have talked about it on this call before, looking at the natural hedge, around 60% of what we sell in the U.S., we also produce in the U.S. And then the second thing maybe to mention regarding natural hedging and FX exposure is that we work very actively with our payment flows to compensate or offset as much as possible. So those are the 2 things to highlight there, but no quantification of the hedging effects as such. Mattias Perjos: And on the margin guidance, I mean, there's still [Technical Difficulty] said in the presentation, we are confident about the long-term margin guidance of 16% to 19%. David Adlington: Sorry, Mattias, you broke up again. I might have missed the first part of that. Would you mind just repeating the margins for this year? Mattias Perjos: Yes. I just said that we -- there's a lot of uncertainty in the world, as you know. So we are not going to do any margin guidance for 2026. We remain with the top line guidance only, and we remain with the long-term margin guidance of 16% to 19%. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: Yes. I just have a follow-up on ACT. So on ECLS consumables continued to grow despite being up against a rather tough comparison numbers. And I assume there was some flu-related headwinds here given the lower hospitalizations Q1 '26. So I just wonder if there were any one-offs or stocking of consumables that you saw here in the quarter or if it's rather the underlying run rate? Mattias Perjos: You broke up for a second. Can you repeat the question on the ECLS consumables, please? Ludvig Lundgren: Yes. So it seems pretty strong considering the quite tough comparison. So I just wonder if you saw any stocking or one-offs here in the quarter or if it rather reflects the underlying run rate? Mattias Perjos: Yes. No, there were no abnormal events in Q1. I think your analysis of this seems correct. It's a good underlying demand. Ludvig Lundgren: Yes. Okay. And can you just confirm that like the flu-related sales was lower this quarter versus Q1 '25? Mattias Perjos: [indiscernible] confirm that we see the same flu data as you when it comes to hospitalizations. How our customers use the product they buy, whether it's for treating flu or something else, we don't have perfect insight into it. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Mattias Perjos: Okay. Thank you very much. I think I already made the summary before the Q&A. So I just wanted to say thanks, everyone, for joining, and I wish you a good rest of the day. Thank you very much.
Operator: Welcome to Getinge Q1 Report 2026 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Mattias Perjos; and CFO, Agneta Palmer. Please go ahead. Mattias Perjos: Thanks, and welcome, everyone. Thanks for joining the call today. As mentioned in the intro here, it's me and our CFO, Agneta Palmer, with you today. And in today's conference, we'll go through performance and some of the highlights in the first quarter of 2026 before opening up for a Q&A. So let's move directly to Page #2, please. And I'd like to start by looking at the development of some of our strategic KPIs. And as you can see here, it's evident that we continue to clearly track in line with plan to increase the share of sales from recurring revenue and also accelerating the share of sales from higher-margin products like, for example, our ECLS offering, our consumables in Infection Control and our BetaBags within the Sterile Transfer product category. This is all supported, of course, by solid and effective quality processes. And if we look at the specifics here, you can see that sales from recurring revenue continue to make up 2/3 and high-margin products closing in on about 70% right now. When it comes to quality, the number of field actions in relation to sales has decreased significantly, and we see this positive trend sequentially continue also into the beginning of 2026. And these improvements, we always act with -- in line with thinking of responsible leverage and an attractive long-term return on invested capital. We can move to Page #3, please. So if we then look at some of the key takeaways from the first quarter, we managed to beat last year's record quarter and grow top line organically. Net sales grew by 0.8% organically with positive development specifically in Life Science and in Surgical Workflows. And on the order intake front, we saw an organic increase of 3.9%. When it comes to our adjusted gross and EBITA margins, they were down in the quarter, mainly due to the strong headwind from currency and from tariffs. And adjusting for the SEK 226 million in currency and tariff headwinds in the quarter, the EBITA margin was about 50 basis points higher than last year's Q1. So the conclusion from that is that the underlying performance in business -- in our business continues to be strong, and it's developing according to the plans, the long-term plans that we have laid out. We also have a strong cash flow and continue to have a solid financial position. So our financial leverage is at 1.5x and well below the 2.5x EBITDA that we have kind of as an internal threshold. We can then move over to Page #4 and some of the key events during the quarter. And if we start with our product offering and our customers, I think one situation that is, of course, evolving on a daily basis is the situation in Middle East, and we continue to monitor this closely. Our first priority is, of course, to tend to our employees in the region and continue to support our customers. And if you look at the region as such, it makes up about 2% of our sales and where Saudi Arabia is half. And so far, the impact on top line and on cost has been very limited for us. To our Life Science customers, we launched a new steam sterilizer dedicated to larger items for use for labs and for research applications. And when it comes to the sustainability and quality perspective, I'm very happy to see that we got the CE approval for Cardiohelp II in the quarter, and I'll talk more about that on the coming slide here. In addition to this, we have in our implants business received EU MDR certificate for the Intergard Synergy, which is a vascular graft with an antimicrobial coating, to minimize the risk of infections. Furthermore, in the quarter, we released our annual report for 2025, including our sustainability statement and the annual report provides a lot of good information on Getinge. So I encourage you to have a look at this if you haven't done so already. We can then move to Page #5, please. So just wanted to elaborate a moment on the positive news about the CE approval for Cardiohelp II. And just to remind everybody, this is a market segment where we are already the global market leader within ECLS therapy, thanks to our strong existing portfolio. With the launch of Cardiohelp II now, we become even more relevant for our customers. And some of the systems' key features are that it's even more lightweight and transportable, meaning that it can be used for both in-hospital and intra-hospital use. It also has an attachable gas blender as an option, which is something that is highly appreciated by our customers. And from an interface standpoint, we have an interface now that is even easier for users to operate, and it includes also several smart monitoring functionalities for better decision support for our customers. We have initiated a limited market release now in the beginning of the second quarter to a handful of customers and very happy to see how positive the reception from our customers have been for this important product. The plan now is to do a full CE market release at the beginning of the third quarter. And when it comes to the important U.S. market, the plan is still to make the submission of the Cardiohelp II system, including our HLS Advanced consumables in the second half of this year. We can then move to Page #6 and talk about the top line for a moment. So overall, we had a solid top line performance in Life Science and in Surgical Workflows. And when it comes to order intake for the group, we grew 3.9% organically. The order intake for Acute Care Therapies decreased mainly due to the temporarily high comparative figures in ventilation, where one competitor last year drastically exited the market. So we're very successful in capturing some of that market share. At the same time, we saw really good growth when it comes to ECLS consumables across the board. And this is, as you know, one of our key categories. In Life Science, the organic order intake increased in the quarter, for example, because of an anticipated improvement from low levels that we've seen in bioprocessing for quite some time. And this is something that [indiscernible] and it's good to see some of the momentum here. [ Surgical Workflows ] grew double digit in the quarter, mainly on the back of the strong development across all our product areas, which is also encouraging to see. Net sales there, we had growth of 0.8% organically for Acute Care Therapies. Organic net sales decreased mainly on the back of last year's consolidation in the ventilation market, that I just mentioned. In Life Science, they had a really strong quarter in terms of deliveries, and they grew organic net sales in all product areas. BetaBags and Sterile Transfer continues to show significant traction and momentum. In Surgical Workflows, the organic net sales increased primarily thanks to growth in Infection Control consumables within service and within our operating table category. With that, we can move over to Page #7, and I hand over to you, Agneta for a moment. Agneta Palmer: Okay. Thank you, Mattias. So overall, the headwind from tariffs and currency continued in the first quarter. Even so, we managed to hold up margins, thanks to continued pricing and productivity. Starting with adjusted gross profit for the group, adjusted gross profit amounted to SEK 3.828 billion in the quarter, heavily impacted by currency and tariffs. Adjusted gross margin was down by 0.7 percentage points in total in spite of healthy contribution from price and mix. If we then look at adjusted EBITA, cleared for currency, adjusted gross profit effect on the EBITA margin was plus 0.3 percentage points, while OpEx adjusted for currency had a negative impact on the margin by about minus 1 percentage points in the quarter. And FX impacted by minus 0.3 percentage points. So all in all, this resulted in an adjusted EBITA of SEK 824 million and a margin of 11.1%. Let's then move to Page 8, please. And here, we can clearly state that we remain in a solid financial position. Free cash flow amounted to SEK 842 million in the quarter. Compared with last year, free cash flow was impacted by improved operating profit and changes in capital. Working capital days continued to be well below 100. We are now at roughly 90 days. On operating return on invested capital, we are at 11.4% on a rolling 12-month basis, which is well above the cost of capital. At the end of Q1, net debt decreased to SEK 9.3 billion. If we adjust for pension liabilities, we are now at SEK 7 billion. This brings us to a leverage of 1.5x adjusted EBITDA, which is well below the 2.5x that we have set as an internal threshold. If we adjust for pension liabilities, leverage is at 1.1x adjusted EBITDA. Cash amounted to approximately SEK 4 billion at the end of the quarter. So all in all, we can conclude that the financial position continues to be strong. Let's now move to Page 9, please, and back to you, Mattias. Mattias Perjos: Okay. Great. Thank you, Agneta. Just a moment then to focus on the impact from tariffs and FX in the quarter. So this was, in total, a drag on adjusted EBITA in Q1 of more than SEK 200 million, so SEK 226 million altogether. Tariffs made up just over SEK 100 million of that. And if we exclude the impact of tariffs and currency, our adjusted EBITA margin in Q1 would have been 12.6%. And there, as you can see, showing then an underlying improvement. As tariffs were first implemented in Q2 of 2025, then we expect the year-on-year comparison to be a little bit cleaner from Q2 and onwards if tariff levels remain. And that's, of course, something we'll continue to update you on. We can then move over to Page #10, please. So I want to talk a little bit more about the long term as well. So zooming out and returning to what we said at the Capital Market update that we had in May of 2024. There, we talked about an adjusted EBITA margin of 16% to 19% by the end of 2028. And I think we're on a steady path of reaching that despite the headwind factors that we have seen, that we were not aware of when we announced this target. The main drivers which will enable this are growth, mix and productivity. From a growth perspective, from regulatory approvals and key strategic product launches such as Cardiohelp II in ECMO that we've talked about here and also launching our low-temp sterilization in the U.S., having the sales restrictions removed for Cardiosave in our Intra-Aortic Balloon Pump business. It's just to mention a few factors here. Specifically, when it comes to Cardiosave, I'm happy to say that we, at the end of last week, got the release for sales in CEE countries in line with the plan for Q2. We also expect that the investment fatigue that we've seen in the pharma industry will improve and some of the decision anxiety that we've seen in the last year will go away here as well. We will also, in addition to this, get our share of the announced U.S. investments and benefit from the recovery in bioprocessing. And of course, we will also continue our diligent and successful work with realizing price increases annually. When it comes to mix, we have been successful in our strategic intent to steer our business towards a continued rotation to high-margin products and consumables. And if possible, we prefer to have products made up of a competent hardware with captive consumables attached to it, similar to what we have in our ECLS offering with Cardiohelp and HLS and in the Sterile Transfer offering with Alpha Ports driving the consumption of BetaBag. Our strong R&D and innovation pipeline is, of course, set to support this. When it comes to productivity, here, we've already done a lot in different parts of the business, and we are still excited that there remain quite a few opportunities across the business as well. One thing to mention, I think, is the heightened extraordinary quality costs connected to the product uplift of Cardiosave and Cardiohelp that is expected now to go down in the second half of 2026 and that we will be on a lower level in 2027 and '28. Furthermore, we will, of course, continue with our production excellence effort, where we also have some very tangible measurable benefits and helping us further optimize our supply chain and remain with an overall tight cost control across the company. So this all supports our assessment that our target for 2028 is still within good reach. Then we can move over to Page 11, please. So for the remainder of 2026, we confirm the financial outlook for 2026. As we all know, there are some geopolitical uncertainties that we need to navigate. But based on the underlying demand and the dialogue that we have with our customers on a daily basis, our expectation remains for an organic net sales growth in the range of 3% to 5%, adjusted for the phaseout of the surgical perfusion product category. Surgical Perfusion is still expected to have some net sales in 2026, but declining from about SEK 250 million last year to SEK 50 million this year. We can then move to Page 13, please. So in terms of summarizing here, the key takeaways from the first quarter. We did achieve organic growth in our top line despite the record quarter last year. Tariffs and FX continue to be a significant headwind, but our underlying performance is improving. Cash flow in the quarter was really strong in the quarter, and our financial position remains solid as well. For 2026, we reiterate our guidance for organic net sales growth of 3% to 5% adjusted for the phaseout of the Surgical Perfusion. And when it comes to our priorities for 2026, you've heard them before, we are focused on addressing the remaining challenges when it comes to quality remediation in Acute Care Therapies. We focus on sustainable productivity improvements and cost consciousness when it comes to navigating the geopolitical uncertainty and also addressing the impact from tariffs. And most importantly, we continue to focus on the work hand-in-hand with our customers, adding value for them and the patients that they serve. With that said, I open up for questions. Operator: [Operator Instructions] The next question comes from Sten Gustafsson from ABG Sundal Collier. Sten Gustafsson: A couple of questions. First of all, with regards to the ventilator headwinds you had here in Q1, if I remember correctly, you had pretty good sales development for ventilators also in Q2 last year. So is it fair to assume that the headwind will continue into Q2? That would be my first question. Mattias Perjos: Maybe to some extent, it's not something -- it's not going to be a significant factor, I think, for Q2, but it certainly won't be a big help either. Sten Gustafsson: Okay. Excellent. My second question is regarding Cardiohelp II. And what kind of gross margin should we assume for that product compared to the existing Cardiohelp product? Is it going to be accretive? Or is it fairly similar gross margins on those 2 products? Mattias Perjos: Yes. We don't guide on and disclose gross margin levels on any of our products and Cardiohelp II is no exception. Generally, though, when we work with product development and new launches, we make sure that the products that form the next generation of any therapy or product category have a better gross margin than the generation that they replace, and Cardiohelp II should be no exception to this. Sten Gustafsson: Okay. And one final, if I may. You talk about these lower extraordinary quality costs going forward. Could you please sort of quantify those? I mean we've heard SEK 800 million in the past. And where we are today? How low those will be going forward? Mattias Perjos: Yes. Yes, I think you're right. We said that they peaked at about SEK 800 million in 2024. We saw a small decrease in 2025. We expect another small decrease this year and then a slightly bigger decrease from 2027 onwards. And the end game here is to at least halve those costs. Operator: The next question comes from Erik Cassel from Danske Bank. Erik Cassel: First, I want to get some more color on the composition of the ACT decline. I mean, obviously, you talked about ventilators, but you're also talking about Cardiac Assist, et cetera. And I think last quarter, you said that the demand for Cardiac Assist was quite positive on the hardware side. So I wanted to ask if something has changed on that side. And if you could, if possible, give some more color on how much the ACT Americas part declined by the different parts? Mattias Perjos: Yes. No, thanks for the question. We don't dissect the business that much. What I can say on Cardiac Assist is that we had hoped to be able to resume deliveries in Q1 already of balloon pumps in CEE markets. And that was not the case. We only got the final approval to start this last Friday. So it will be a Q2 event. So that's been a little bit of a drag on sales. And also, it has a direct impact on order intake as well because customers don't order new pumps unless they have received what they're expecting to be delivered. Erik Cassel: Can you say anything on how much the ventilator decline did on that 8.5%? Mattias Perjos: No, we don't disclose subcategory financial parameters, unfortunately. Erik Cassel: But can you say anything if it would have been, say, positive organic growth if it wasn't for ventilators? Mattias Perjos: No, I can't answer that either, unfortunately. Erik Cassel: All right. Fair enough. I got to try. Then on the guidance side, I view it as the wording is a bit softer, perhaps the visibility is worse now and maybe you're even seeing a bit more, say, negative outlook. Can you just talk a bit about what you're seeing for the rest of '26 in terms of the, say, customer behavior and dialogues that you're referring to? Has it become slightly more negative? Or is this just a wording change that I'm dwelling too much on? Mattias Perjos: Yes. No, that was not the intent of the wording change at all. It was really just a way of recognizing that we do operate in a rather volatile environment, and we're mindful of that, but we feel confident reconfirming our guidance here even if the word, semantics, had changed a little bit. Erik Cassel: Okay. Just a last question then. Surgical Workflows, obviously quite strong in terms of order intake, especially for Americas and Digital Health. Is there some specific projects that this relates to that sort of makes it nonrecurring? Or are you seeing a more upbeat environment in the U.S. specifically for Surgical Workflows? Mattias Perjos: It's a bit of both. If you look at DHS, it's always lumpy. I mean they tend to be rather large projects, and we do have that, but there's also a little bit of an underlying better confidence, I think, generally in the market and also, I think in the way we operate in this business as well. We made some tweaks to how we organize ourselves, which hopefully also for the long term has a better, more positive impact. But there's absolutely a bit of -- you cannot call them one-offs because they're not. It's just project business that is a little bit fluctuating by nature. Erik Cassel: Okay. Can I ask one short one? Will you tell us anything on the potential impact of the change in steel content tariffs? Or is that something you're going to not disclose? Agneta Palmer: What we can say there is that it's still under analysis, how it impacts us. It's fairly recent. But the preliminary evaluation is that it's mainly if it hits us. It's components and spare parts, not complete products. And the absolute majority of our exposure is on the complete products. Erik Cassel: So the SEK 500 million for full year still holds, you think? Agneta Palmer: I don't think that we have guided on this, but that sounds like a fair assumption given the current levels, yes. Operator: The next question comes from Filip Wetterqvist from SB1 Markets. Filip Wetterqvist: I have a couple. First one, given recent pricing hikes that we have seen on raw materials such as plastic, steel, aluminum, it seems like you do not see any material effect of this in Q1, and I assume contracts are negotiated a few quarters in advance. But do you anticipate any higher input costs in the coming quarters? Or do you not expect any effect at all from this? Agneta Palmer: Yes. Thank you for that question. If we dissect it a bit into parts. When it comes to freight, which is the more direct near-term impact, we have very limited impact in Q1. But if it's prolonged, yes, there will be some impact in Q2 onwards. When it comes to plastics, et cetera, it's too early to say that we have any effects there. Filip Wetterqvist: Okay. And at the Q4 call, you indicated price increases of around 2% for 2026. Did that materialize here in Q1, meaning the 0.8% organic growth was hampered by lower volumes? Or -- and do you -- are you able to accelerate price increases further there if you see increasing costs here in the coming quarters? Agneta Palmer: Yes. We still stand by that, roughly 2%. It is a gradual rolling during the year. So it's slightly less than that in Q1, but we are progressing well towards that level. Filip Wetterqvist: Okay. But let's say, we see -- so if costs are increasing, you won't be able to translate that onwards to your customers, you still anticipate only a 2% price increase then? Agneta Palmer: This is always an ongoing discussion that we have with the -- all the commercial dynamics and the cost levels that we have. So of course, we will adapt our ways of working if we see that we get higher inflation, but it's not an automatic or sort of something that we can directly pass on. Mattias mentioned it for tariffs and it's similar then for raw material. But we do have very active pricing. Operator: The next question comes from Kristofer Liljeberg from DNB Carnegie. Kristofer Liljeberg-Svensson: I have a few short ones. I hope that's okay. First of all, is it possible to quantify at all the positive effect you expect here from the new ECMO approval in Europe or whether that potential positive effect is more a factor of when and -- yes, when you get the U.S. approval, again? And then could you just clarify a little bit about the Cardiosave status here in Europe and the U.S. filing? And then finally, on tariffs, if it's fair to assume really neutral effect here year-over-year from the second quarter? Mattias Perjos: Yes. I think we can't quantify. But of course, there is a positive effect from the launch of Cardiohelp. I mean this is an important part of our product range. So definitely a net positive, but I can't give you a magnitude of that. When it comes to the Cardiosave status, we got approval to start shipping last Friday. So the first pumps are being delivered in CEE markets this week. And the U.S. filing, there is no change here. We still expect to do that before the half year mark. Agneta Palmer: And then when it comes to tariffs, it's dependent, obviously, on the tariff level, but also on the product mix of imports. But generally speaking, yes, it sounds like a fair assumption to assume that. Operator: [Operator Instructions] The next question comes from David Adlington from JPMorgan. David Adlington: Maybe could you quantify the impact of foreign exchange hedges in Q1, how they roll off through the next 12 months or so? And then secondly, obviously, we're a quarter in now, still no margin guidance. Just wondering if you're willing to give us an idea around how you're seeing margins for the year, whether up, down or sideways? Agneta Palmer: Yes. If we start with FX, we have not changed anything specifically regarding our hedging strategy, and we will not disclose that. But just a reminder, I think we have talked about it on this call before, looking at the natural hedge, around 60% of what we sell in the U.S., we also produce in the U.S. And then the second thing maybe to mention regarding natural hedging and FX exposure is that we work very actively with our payment flows to compensate or offset as much as possible. So those are the 2 things to highlight there, but no quantification of the hedging effects as such. Mattias Perjos: And on the margin guidance, I mean, there's still [Technical Difficulty] said in the presentation, we are confident about the long-term margin guidance of 16% to 19%. David Adlington: Sorry, Mattias, you broke up again. I might have missed the first part of that. Would you mind just repeating the margins for this year? Mattias Perjos: Yes. I just said that we -- there's a lot of uncertainty in the world, as you know. So we are not going to do any margin guidance for 2026. We remain with the top line guidance only, and we remain with the long-term margin guidance of 16% to 19%. Operator: The next question comes from Ludvig Lundgren from Nordea. Ludvig Lundgren: Yes. I just have a follow-up on ACT. So on ECLS consumables continued to grow despite being up against a rather tough comparison numbers. And I assume there was some flu-related headwinds here given the lower hospitalizations Q1 '26. So I just wonder if there were any one-offs or stocking of consumables that you saw here in the quarter or if it's rather the underlying run rate? Mattias Perjos: You broke up for a second. Can you repeat the question on the ECLS consumables, please? Ludvig Lundgren: Yes. So it seems pretty strong considering the quite tough comparison. So I just wonder if you saw any stocking or one-offs here in the quarter or if it rather reflects the underlying run rate? Mattias Perjos: Yes. No, there were no abnormal events in Q1. I think your analysis of this seems correct. It's a good underlying demand. Ludvig Lundgren: Yes. Okay. And can you just confirm that like the flu-related sales was lower this quarter versus Q1 '25? Mattias Perjos: [indiscernible] confirm that we see the same flu data as you when it comes to hospitalizations. How our customers use the product they buy, whether it's for treating flu or something else, we don't have perfect insight into it. Operator: [Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments. Mattias Perjos: Okay. Thank you very much. I think I already made the summary before the Q&A. So I just wanted to say thanks, everyone, for joining, and I wish you a good rest of the day. Thank you very much.
Operator: Good morning, ladies and gentlemen, and welcome to the Goodfood Q2 2026 Earnings Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, April 21, at 8:00 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation. I would like to turn the meeting over to your host for today's call, Selim Bassoul, Goodfood Chief Executive Officer. Mr. Bassoul, you may proceed. Selim Bassoul: S [Foreign Language] Good morning, everyone. Welcome to our Goodfood earnings call in which we will present our results for the second quarter of fiscal 2026. You can find our press release and other filings on our website and SEDAR+ and all figures on this call are in Canadian unless otherwise noted. With me today are Najib Maalouf, our newly appointed President and Chief Operating Officer; Vanessa Hadida, our Vice President of Finance; and Ross Aouameur, our outgoing Chief Financial Officer. Before we begin, I wanted to highlight two things. First, Najib and I joined Goodfood with a clear mandate: stabilize the business, protect cash and rebuild discipline. That work is underway, and albeit today's results will show the impact of a license suspension, we have made significant strides in advancing our mandate. Also, for fiscal 2026, both Najib and I have made the deliberate decision to forgo our base salaries. This is a voluntary choice. Our employment agreements remain unchanged, but we believe that in this phase of the company's transformation, accountability needs to start at the top. This is not a signal that we expect others to do the same. Our priority is to build a stronger, more resilient company, one that creates long-term opportunities for our teams, delivers for our customers and earn the trust of our shareholders. The second thing I wanted to highlight is that today is the last earnings call our Chief Financial Officer. I want to recognize Ross for his strong leadership and disciplined financial stewardship over the years. He has been instrumental in the transition, and we wish him continued success in his upcoming next chapter. I will now turn it over to Najib to begin our review of the quarter with Slide 3. Najib Maalouf: Thank you, Selim. First, I wish to say that it is a privilege to be serving alongside you one more time. Slide #3 captures the reality of the quarter. We are executing a necessary reset while absorbing short-term disruption. During Q2, operational factors, including a temporary regulatory-related disruption impacted order volumes and created cost inefficiencies, particularly in logistics. These pressures were real that they were also temporary. More importantly, they accelerated our execution. We responded quickly with disciplined cost actions, namely reducing marketing intensity, optimizing head count and tightening our focus on profitable demand. As a result, we continue to see strength in average order value and customer quality. At the same time, the reset is well underway. We are simplifying the operating model, removing complexity, aligning the cost structure to current volumes and focusing the business on core profitability. In parallel, we are sharpening the product offering, improvements in ingredient quality, meaningful increase in portion sizes and faster recipe cook time to 20 minutes or less are designed to delight customers and in turn, better retention and increase wallet share from our most engaged customers. So while Q2 reflects pressure, it also reflects progress. The actions we're taking are deliberate, structural and focus on improving the earnings profile of the business. I'll now turn it to Vanessa to walk through the financials. Vanessa Hadida: Thank you, Najib. As shown on Slide 4, net sales and active customers declined year-over-year reaching $22.5 million and $59,000, respectively. These figures reflect three primary factors: the temporary license disruption during the quarter, lower order frequency, and our intentional pullback in marketing and incentives. The reduction in marketing and coupon intensity is a conscious trade-off. We are prioritizing revenue quality over volume and that is reflected in the continued increase in net sales per active customers year-over-year, reaching $382 higher basket sizes and lower discounting are driving the improved unit economics. This is an important point. While the top line is lower, the underlying revenue base is becoming more efficient and more profitable on a per customer basis. I will now turn to Slide 5 to discuss margins and profitability. Profitability in the quarter was impacted by a combination of higher shipping and labor costs and lower fixed cost absorption due to the reduced volume as a result of a temporary license suspension. As such, gross profit was $7 million for a gross margin of 30.6%. These pressures resulted in margin compression and negative adjusted EBITDA for the quarter to the tune of negative $1 million. That said, we view a significant portion of these results as transitional in nature rather than a structural change. Indeed, when the license suspension occurred, we shipped Ontario orders from our Calgary facility, which is significantly more costly than shipping from our Montreal facility, which we have now resumed. Of course, the current operating environment with heightened fuel cost and food inflation remains a meaningful headwind. We also have already taken action to address these cost drivers, both through operational simplification, tighter cost control and pricing, which we expect to support margin stabilization going forward. Moving now to Slide 6. Cash flow in the quarter reflects the impact of profitability as well as working capital timing with certain payments shifting into Q2. Importantly, capital expenditures remain tightly controlled, and we continue to operate with a disciplined approach to cash management. Our focus is clear: improving cash generation through better margins controlled investments and continued working capital discipline. I will now turn to Slide 7. The key takeaway from this slide is that Q2 reflects a combination of lower scale and temporary cost pressures. At the same time, the results reinforce why our current priorities, cost discipline, margin protection and cash generation are the right ones. We are actively addressing the drivers of performance and the actions underway are designed to improve both profitability and liquidity over time. With that, I will now pass it back to Najib to walk through our outlook. Najib Maalouf: Thank you, Vanessa. Let's now turn to Slide 8. Our path forward is focused and disciplined. First, on the operating model. We're simplifying the business and aligning the cost structure to current demand levels. We're not relying on a market recovery to improve performance. We are designing the model to perform under today's conditions. Second, on the product. We are repositioning the offering around value, quality and convenience. We have introduced a simpler menu that is designed to fit our customers' busy lives. We also increased portion sizes and have sourced better ingredients to ensure the consistent quality of our subscribers' experience. This is already contributing to a stronger basket size and is expected to support retention and lifetime value. Third, on capital and the balance sheet, our priority is consistent cash generation and liquidity preservation. Every dollar of capital is being allocated with discipline with a clear objective of maintaining flexibility. And fourth, on growth, we will remain selective. We see opportunities in adjacent categories such as heat and eat, but we will pursue them in a measured way with a strict focus on returns and cash flow. The common thread across all of these priorities is discipline. We're simplifying the business, improving execution and positioning Goodfood to generate more consistent and sustainable financial performance. I will now turn it back to Selim for closing remarks. Selim Bassoul: Thanks, Najib. This quarter was not about optics. It was about action. We addressed operational issues, reduced complexity and reinforce discipline across the organization. We are running the business with a clear set of priorities: protect margins generate cash and maintain balance sheet flexibility. We have $44 million of convertible debt on the balance sheet with large interest payments that is hindering our transformation and ability to invest in the business. We are focused on strengthening the business while evaluating a range of financial alternatives to address our debt situation and enhance long-term value. We are not depending on external improvements to deliver results. We are focused on what we control, which are execution cost structure and product relevance. This is how we will rebuild performance and create long-term shareholder value. With that, I will now turn it over to the operator for Q&A. Operator: [Operator Instructions] There are no questions at this time. I will now turn the call over to management for closing remarks. Selim Bassoul: Thank you for joining us on this call. We look forward to speaking with you again at our next call. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Good day, and welcome to the Northern Trust Corporation First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Jennifer Childe, Director of Investor Relations. Please go ahead. Jennifer Childe: Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's First Quarter 2026 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Steve Carroll and Trace Stegeman from our Investor Relations team. Our first quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This April 21 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through May 21. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. [Operator Instructions] Thank you again for joining us today. Let me turn the call over to Mike O’Grady. Michael O'grady: Thank you, Jennifer. Let me join in welcoming you to our first quarter 2026 earnings call. We're off to a strong start in 2026, reflecting our ability to capitalize on a constructive market and rate environment while continuing to advance our One Northern Trust strategic priorities. Against this backdrop, first quarter trust fees increased 11%, net interest income grew 15% and total revenue rose 14%, all on a year-over-year basis. While continuing to invest in key growth initiatives, we generated more than 700 basis points of positive operating leverage, driving our pretax margin up nearly 500 basis points to 32% and fueling EPS growth of 43%. Return on average common equity reached 17.4%, which is at the higher end of our new medium-term target range, and we returned $510 million to shareholders, representing a total payout ratio of 100%. This included $359 million in share repurchases in the first quarter, contributing to a 5% reduction in share count as compared to the previous year. These results confirm that our One Northern Trust strategy is driving steady improvement in organic growth, consistent efficiency gains and resiliency in a volatile environment. AI is increasingly embedded in how we operate, enabling our teams to deliver more value with greater consistency and speed. Moving forward, we are accelerating this deployment in ways that will further advance our strategy and financial objectives. We're applying AI not only to drive incremental efficiency, but also to scale knowledge and expertise while maintaining the resilience, governance and client confidence that define our franchise. Our AI strategy is anchored in 3 outcomes: hyper-personalization, AI-generated alpha and infinite scalability. Together, these outcomes focus investment where it matters the most, enhancing the client experience, improving decision quality and increasing operating leverage. Hyper-personalization allows us to move toward highly contextual tailored engagement. A tangible example is our One Wealth Assistant, which integrates the Northern Trust Institute insights directly into workflows. With future enhancements, this will equip our wealth management advisers with real-time client-specific context. Connecting market insights, portfolio considerations and client objectives to support more informed, high-touch conversations with speed at scale. AI-generated alpha focuses on strengthening investment outcomes through faster synthesis of information and generating deeper insight. Within asset management, AI-assisted research and product construction tools are enabling teams to process significantly larger structured and unstructured data sets, identify patterns more quickly and test scenarios more efficiently. This enhances both investment decision-making and operational execution, supporting stronger client outcomes without adding complexity. Infinite scalability is a key driver of operating leverage. By digitizing work through agents, we further disconnect the relationship between growth and staffing, allowing for consistent execution across value chains and supporting stronger controls, all of which enable us to scale while maintaining rigorous risk management. With that backdrop, let me now turn to business performance for the quarter, beginning with Wealth Management. Momentum from last year carried into the first quarter as improved organic growth underpinned by both strong advisory and product fees drove low double-digit trust fee growth. The regions delivered another quarter of solid results with trust fee growth accelerating to 11%, supported by especially robust performance in the Central region. We made good progress implementing various client acquisition initiatives across talent, centers of influence and digital channels. Talent is our most important growth driver. We're advancing plans to increase revenue-generating roles by high single-digit percentages by year-end. This includes significant increases in critical producer roles. Centers of influence, which include attorneys, accountants and other professionals, are a vital referral source, driving nearly 25% of our new business activity. In the first quarter, we introduced a more robust and structured outreach framework to engage key centers of influence, including hiring a senior leader to accelerate this initiative, targeting a 10% increase in opportunities in 2026. Digital channels also continue to be an increasingly important source of new business. To boost the transition from interest to conversion, we're enhancing data integration, lead qualification and personalization at scale. Notably, the opportunities originating from digital channels in the first quarter grew by nearly 50% year-over-year. Within our Global Family Office business, strength in international markets and investment management fees drove healthy performance. We also continued to scale family office solutions with early traction and client wins across several new markets. Expanding our investment offerings, particularly within alternatives, remains an important focus area. We had 7 funds in the market during the first quarter, up from 5 in the previous quarter. Looking ahead, we will continue to build out our alternatives platform with a number of new alternative investment funds and strategies planned for launch later this year with the goal of increasing alts fundraising by 25%. These offerings spanning areas such as venture capital, co-investments and secondary funds will broaden access and flexibility for clients seeking diversified sources of return while maintaining our disciplined approach to portfolio construction and manager selection. Collectively, these initiatives are strengthening our ability to generate repeatable, scalable growth while enhancing both the client and employee experience. Turning to Asset Servicing. The business delivered another quarter of solid organic growth and strength in profitability, driven by disciplined execution of our strategic priorities. Trust fee growth of 10%, coupled with significant NII and capital markets activity fueled over 700 basis points of year-over-year pretax margin expansion. Our differentiated service model, deep institutional expertise and strength in supporting complex client needs continues to resonate, particularly with global asset owners. During the quarter, we secured 9 new mandates across foundations, endowments and health care institutions, including 4 not-for-profit health care systems. As a result, we now serve 3/4 of the top 50 health care systems in the United States. Within alternatives, we remain a market leader with assets under administration approaching $1 trillion across hedge funds, private capital and semi-liquid vehicles. Demand for scalable institutional-grade services remains strong, supported by more than a dozen wins during the quarter. These included Igneo's planned second quarter launch of a new private equity fund focusing on energy infrastructure in Europe, further expanding our global relationship across Europe, Australia and the U.S. We also announced an expansion of our CLO middle office services, delivering a unified operational and compliance framework that supports the full life cycle of CLOs as interest in this offering continues to grow. Strong momentum in capital markets continued in the first quarter as elevated volatility and heightened client activity drove 34% growth, including another quarter of robust FX and core brokerage fees. We're also seeing continued interest in our digital asset strategy, particularly in custody, reporting and servicing of tokenized assets as tokenization moves towards scale. During the quarter, we onboarded 5 new clients, providing custody and other services for tokenized real-world assets, U.S. stablecoins, European money market funds and carbon credits. Turning to Asset Management. NTAM made good progress in the first quarter with strength across liquidity, alternatives and equities, positioning the business well to meet its 2026 targets. Within liquidity, we extended our streak to 13 consecutive quarters of positive flows with associated AUM increasing to $350 billion. Importantly, we continue to diversify our funding sources across global liquidity vehicles and third-party platforms while gaining overall market share. We also launched the tokenized share class for our NIF treasury instruments portfolio during the quarter, marking Northern Trust's entry into the digital asset marketplace. By applying tokenization to institutional-grade liquidity strategies, we're offering clients a modern digital-first way to access money market investments while maintaining our high standards for risk management and service. Within equities, ETF momentum remains strong with a fourth consecutive quarter of positive flows. This was supported by the successful launch of the Northern Trust U.S. equity ETF, our latest active ETF designed to deliver tax-efficient outcomes for investors. We also launched our first Saudi Arabia equity index strategy with $1 billion in client capital, reflecting our expanded presence and strategic partnerships in the Middle East. NTAM continued to broaden its alternatives capabilities through active fundraising, which included 3 new sizable custom solutions and advisory mandates spanning secondaries, private credit and private equity. Earlier in the quarter, we announced an important milestone in our third-party distribution strategy. Our institutional quality direct indexing capabilities became available on Envestnet's platform, the largest independent TAMP, which supports approximately 1/3 of all financial advisers in the U.S. This will enable advisers to access our diverse lineup of equity strategies, empowering them to personalize portfolios at scale while managing tax outcomes. Finally, reflecting the strength of our active investment platform and the expertise of our investment professionals, NTAM was recognized by Barron's as a top fund family in 2025, ranking fourth overall and fifth in general equity out of 46 fund families. To wrap up, as we enter the second quarter, our priorities are clear, and we remain focused on disciplined execution. With that, I'll turn it over to Dave to walk through our first quarter financial results. David Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our first quarter 2026 earnings call. Let's discuss the financial results of the quarter, starting on Page 4. This morning, we reported first quarter net income of $526 million, earnings per share of $2.71 and our return on average common equity was 17.4%. We're off to a strong start to the year. We delivered our seventh consecutive quarter of positive organic growth, positive operating leverage and year-over-year improvement in our expense to trust fee ratio, all excluding notables. We also returned 100% of our earnings to shareholders. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 120 basis points and unfavorably impacted our expense growth by approximately 130 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment and other servicing fees totaled $1.3 billion, an 11% increase compared to last year, driven by favorable markets, currency and new business generation. Other noninterest income was up 33% year-over-year, reflecting very strong FX trading and securities commission and trading income, which benefited from elevated macro volatility and uncertainty. Net interest income on an FTE basis was up 1% sequentially to $662 million, a new quarterly record and up 15% from a year ago. Our assets under custody and administration were down 1% sequentially, but up 10% compared to the prior year. Our assets under management were also down 1% sequentially and up 11% year-over-year. Overall, our credit quality remains very strong with all key credit metrics in line with historical standards. We recorded a $3 million reserve release in the first quarter, driven by improvements to the C&I portfolio, which was partially offset by a small number of nonperforming loans. Our effective tax rate was 25%, down 150 basis points from the previous quarter due to higher benefits associated with share-based compensation. We still expect the effective tax rate in 2026 to be approximately 26% to 26.5%. There were no notables in either the first quarter of 2026 or the first quarter of 2025. Turning to our Wealth Management business on Page 5. Wealth Management started the year well with strength in trust fees across both GFO and the regions, spanning both advisory and product channels. Assets under management for our wealth management clients were $498 billion at quarter end, down 2% sequentially but up 11% year-over-year. Trust, investment and other servicing fees for wealth management clients were $601 million, up 11% year-over-year with particularly robust organic growth within GFO. Average deposits within Wealth Management were flat sequentially, while average loans were up 1%. Wealth Management's pretax profit rose 9% over the prior year period, while the pretax margin remained flat at 37.1% as we continue to reinvest in the business to support future growth. Moving to our Asset Servicing results on Page 6. Our Asset Servicing business also had a good start to the year, boosted by healthy new business generation, coupled with robust capital markets activity. Assets under custody and administration for Asset Servicing clients were $17.3 trillion at quarter end, reflecting a 9% year-over-year increase. Asset servicing fees totaled $741 million, up 10% over the prior year. Custody and fund administration fees were $498 million, also up 10% year-over-year, largely reflecting the impact from strong equity markets, favorable currency movements and net new business. Assets under management for Asset Servicing clients were $1.3 trillion, up 11% over the prior year. Investment management fees within Asset Servicing were $169 million, up 11% year-over-year due to favorable markets and new business activities. Asset Servicing average deposits were unusually strong, increasing 11% sequentially, while average loan volume decreased 2% from fourth quarter levels, albeit off a small base. Asset Servicing pretax profit grew 59% over the prior year period, and the pretax margin expanded 740 basis points year-over-year to 28.3% benefiting from elevated deposit levels, higher volatility-driven capital markets activities and the pivot in our new business approach. Moving to Page 7 on our balance sheet and net interest income trends. Our average earning assets were up 7% on a linked-quarter basis as higher deposit levels drove an increase in money market assets and in our securities portfolio. The fixed percentage of the securities portfolio remained flat at 52% in the first quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.44 at the end of the quarter, and the duration of our total balance sheet continued to be under 1 year. Deposit levels were higher than expected throughout the quarter as a result of both elevated volatility and general uncertainty in the marketplace. Average deposits were $129 billion, up 8% compared to fourth quarter levels and 11% year-over-year. In the deposit base, interest-bearing deposits increased by 8% sequentially and noninterest-bearing deposits increased by 5%, remaining at 15% of the overall mix. Net interest income on an FTE basis was up 1% to $662 million sequentially and up 15% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, including growth in noninterest-bearing deposits, along with the impact from fixed asset repricing and deposit pricing actions we've taken, which was partially offset by the full quarter's impact from the fourth quarter rate cuts. Our net interest margin on an FTE basis decreased sequentially to 1.75%, primarily reflecting several large short-term institutional deposits and the absence of the higher FTE adjustment recorded in the fourth quarter. Turning to our expenses on Page 8. Expenses increased 6% year-over-year. We delivered 410 basis points of trust fee operating leverage and 740 basis points of total operating leverage and our expense-to-trust fee ratio, while seasonally higher at 112.4% was down 440 basis points year-over-year. This translated to a pretax margin of 32%, up nearly 500 basis points year-over-year. Turning to Page 9. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach decreased by 60 basis points on a linked-quarter basis to 12%, driven by an increase in RWA related to elevated capital markets activities. Our Tier 1 leverage ratio was 7.3%, down 50 basis points from the prior quarter, driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available-for-sale securities was $446 million. We returned $510 million to common shareholders in the quarter through cash dividends of $151 million and stock repurchases of $359 million, reflecting a 100% payout ratio. Turning to our guidance. For the full year, we now expect NII to grow by mid- to high single digits over the prior year, which is an increase from our previous guide of up low to mid-single digits. We still expect to generate more than 100 basis points of positive operating leverage, and we expect to return at least 100% of our earnings to shareholders. Before we open it up for questions, I'd like to take a moment to thank Jennifer Childe, our Head of Investor Relations, and congratulate her on her upcoming retirement. Steve Carroll, currently the CFO of Northern Trust Asset Management, will be stepping into the role and will work closely with Jennifer over the coming weeks to ensure continuity. Jennifer has been a trusted partner to me and the leadership team, and we're very grateful for her many contributions over the years. And with that, operator, please open the line for questions. Operator: [Operator Instructions] We'll now take your first question coming from the line of Ebrahim Poonawala with Bank of America. Ebrahim Poonawala: I guess maybe just 2 questions. One, just at the very top of the house, when we look at the pretax margin, the ROE performance this quarter, including in asset servicing, but for the entire business, given just -- there's a component of the macro being very strong for Northern, but there's also a self-help component that was kicked off about a couple of years ago. As we think about the sustainability of the ROE or the pretax margin, just maybe frame for us where you think there might be a little bit of cyclical tailwinds that's leading to over-earning on these relative to structural actions that have been taken over the last couple of years that may improve the resiliency relative to what we reported for 1Q? Michael O'grady: Sure, Ebrahim, it's Mike. I'll take that. So our goal is to be a consistently high-performing company. And as you pointed out, that's something we put out there a few years ago, along with our One Northern Trust strategy. So we're very focused on executing on the 3 pillars of that strategy. We'll do that in different environments. And this past quarter was a very constructive environment. And so there's no question that we got a lift in our financial performance as a result of that. Equity levels are still relatively high. The level of volatility is attractive for our capital markets business, and there's a fair amount of liquidity, broadly speaking, in the market, which helps us with deposits, with money market funds as well. So very constructive on that front. That said, we also, to your point, think about it from a self-help perspective and try to just execute as well as possible, whether it's a really strong environment or not so strong. As far as the targets at the last earnings call, we put out medium-term targets. Some of those, as I mentioned, we've kind of largely hit or close to. That said, it was in this strong environment. So we're going to keep driving towards those medium-term targets. Ebrahim Poonawala: Got it. And I guess maybe just switching to the Global Family Office. It's been a strong business over the last few years. Maybe talk to us around the win rate and the competitive landscape there and just the evolution of that client once they are on board, how do you think about just the growth runway and the opportunity to improve the ROI on the client once they're on board at Northern. Michael O'grady: Sure. So the Global Family Office business is absolutely one of our strongest businesses. It's an area where truly we can deliver the entire firm. It's the best of all 3 of the businesses and working together for these largest families and their family offices. And as you pointed out, it's grown at a high rate. And once again, here in the first quarter, the organic growth rate for GFO was above the average for the businesses. And there's a number of dynamics that are allowing us to continue to grow at that high rate. One is certainly just the competitive position that we have and our offering on that front. But second is that it's still largely a U.S. domiciled or focused business. Right now, international is less than 15% of the client base and the revenues, and yet it's growing at a faster growth rate. And we do believe that this is something that is not only, I'll say, attractive offering globally, but also is something that is scalable globally. And then to the latter part of your question, you're absolutely right that often the relationship with the family office can start with a more limited breadth of offering. So it may focus primarily on custody and reporting to start, but then that's the opportunity to do much more with the family office when it comes to other opportunities, particularly along the lines of investment management. And you saw some of that in the first quarter as well. So we think it's a great business and continues to have a lot of upside. Operator: Your next question will come from the line of Manan Gosalia with Morgan Stanley. Manan Gosalia: I wanted to start on the operating leverage side. I mean, 740 basis points of operating leverage this quarter, really strong. I think you reiterated the guide of generating over 100 basis points of operating leverage this year. Can you help us just think through how we should think about, I guess, expense growth this year? Are there any investments that were maybe got pushed out? Any timing differences or anything else we should be considering here? David Fox: Our expense growth methodology hasn't really changed. If you think a little bit about the expense growth in this particular quarter, most of it was driven by incentives, and there was some noise from currency as well. So actually, when you make more money, you obviously are going to have a rising expense line. We still have in process the idea behind productivity funding investment and then solving for an expense growth as a result of that. And so we haven't changed. And what I would say is the productivity targets for the first quarter hit their target. The investments that we wanted to make, we were able to make and the expense growth we managed to was pretty much spot on where we thought it would be. And so that discipline and flexibility is built into our planning, which is why at the beginning of the year, I talked more about operating leverage than I did about attaching myself to a finite expense growth number. We wanted to have the flexibility to react when markets were conducive, but also have the discipline to be able to flex down in environments that are less. So when I think about expenses, I think about a dynamic expense line that basically is something we look at on a very continuous basis. And so -- it's very much driven today by the productivity and the investment side of the equation. Manan Gosalia: Got it. And then maybe to pivot over to capital. Any thoughts on the new Basel endgame proposal and maybe how it impacts your capital deployment strategy going forward? David Fox: Yes. I think it's too soon to think about how it might impact the capital return part of it. I will say that on measure, our preliminary view of it is it is a net -- could be a net positive for us as it relates to, obviously, the commercial loan side and the operational risk is something that we probably have less of than some other peer banks. And so net-net, we think that it's going to be a positive for RWA. But it's still early days. We're in the comment period. And so I would say it's taking a cautious look to it. I don't think it's going to have a massive impact. But if it does, it will certainly be net positive at this point. Manan Gosalia: Congrats, Jennifer. Operator: Your next question will come from the line of Mike Mayo with Wells Fargo Securities. Michael Mayo: Look, wealth is growing double digits. As you said, firm-wide revenues up 14%, the higher end of return targets. So it seems like it was working this quarter. But what got my attention is, I think, new news that you look to grow wealth producers by 7% to 9%. I think that's this year. And so -- and correct me if you disagree, but I think this is the most competitive market we've seen in the wealth business like almost ever. So the question is, I'm not saying it's a wrong strategy. The question is, why now do you look to increase the wealth producers? And what's your pitch? Because I think every -- literally every large bank, large brokerage firm is looking to expand wealth at this time. What's your pitch when you try to get the new producers? Michael O'grady: Thanks, Mike. So you're right. We are focused on hiring and investing in talent in the wealth management business. And you're absolutely right, it's a very competitive marketplace for the best talent, which is what we're looking for. And we are trying to focus on roles that are revenue generating for us and within that producer roles. And part of it is, as we look back over the last several years, although that group has grown, it has grown at a lower rate than the growth of the business itself. And so there's an acknowledgment that we need more talent to increase the growth rate, the organic growth rate within wealth. As far as being able to have an attractive value proposition for wealth management professionals and advisers, we think we have a very different value proposition. We have an excellent brand. We are positioned within the upper tiers of the market, which, I'll say, the highest levels of expertise want to be able to not only serve that client base, but look to bring on new clients on that front. We've been investing in the platform to do that. We've talked a lot about family office solutions, which we believe really is a differentiated offering. It's, in our view, better and more attractive than stand-alone virtual family offices because it brings the full set of resources and banking capabilities that we have. And yet it's also an opportunity to leverage the history and the fiduciary capabilities that we have and trust capabilities. So we think for an adviser or a professional that's looking to be able to apply their trade, if you will, and succeed, we offer the best platform for them to be able to do that. So that's a big part of it. It is a different model here at Northern. And that -- as you know, that's part of why we think it's more attractive. Michael Mayo: And as part of this increased investing for growth, whether it's wealth or firm-wide because you rattled through a lot of growth initiatives. Is that -- and maybe I got this wrong, but you're still guiding for 100 basis points of operating leverage this year, but you had over 700 basis points of operating leverage in the first quarter. Is the reason for no change in that guide just conservatism or also because you think you might be ramping up some spending as you bring on these new producers? Michael O'grady: Yes. So as I mentioned before, obviously, it's a very constructive backdrop and macro environment for us. So there's definitely some acknowledgment that the strong revenue growth here was driven and supported by that backdrop. We don't know what's going to happen as we go through the year. And there are also some tough comps in the sense of last year, we had strong second, third, fourth quarters. So acknowledging that, that's ahead of us as well. And as Dave mentioned, we've really tried to align our, I'll say, resource deployment strategy based on productivity and looking to ensure that we're driving productivity to fund that investment. And so we haven't pulled off of that. Yes, we expect to continue to invest in these areas that we talked about, but the plan is to try to generate more productivity to do it and not necessarily change the expense growth profile that we've been on. David Fox: Yes. And I'd just like to add to that, the direction of travel on expenses is down for the remainder of the year. Operator: Next question will come from the line of Brennan Hawken with BMO Capital Markets. Brennan Hawken: So Dave, you flagged strength as far as the deposit growth goes. And it looks like a lot of -- from the presentation, a lot of the deposit growth was driven by the servicing business. You also flagged some large institutional deposits weighing on NIM. So was that part of that deposit strength, some large institutional deposits? And how should we be thinking about the profile of deposits as we move forward and what your expectations are for that through the course of the year? David Fox: Yes. Yes, we had some largely unexpected extremely large deposits. I mean you've heard me speak in the past about why we keep our capital ratios where we keep them. And we want our balance sheet to be open at all times for our largest clients. And so occasionally, some of our clients will do some strategic repositioning -- and we want to be in a position to capture those deposits when they do that. They're not core operational deposits. They weren't there for a long period of time, but we want to be able to accommodate them. So in this particular quarter, it really drove up the average deposit level significantly. And that isn't going to obviously translate into a Q2, although I do think the increase was roughly $9 billion, and I think we're going to keep $4 billion to $5 billion of that. So in terms of average deposits. But at the end of the day, that's really what you saw there was client-driven specific very large deposits from just a handful of just really important big clients. Brennan Hawken: Got it. Okay. That makes a lot of sense. And you also spoke to robust organic growth in the GFO business, but we didn't see a lot of deposit trends. We certainly saw the revenue look good. Is the organic growth in that business less tied to deposits the way we normally think about that, and therefore, that's the divergence? And also maybe could you give a little color around your new efforts around the GSO and how that's going? And when you guys talk about GFO, do you categorize those 2 together? Michael O'grady: Sure. So just on the liquidity part of the question there, Brennan. So these family offices have significant liquidity, which they are, I'll say, utilizing and moving around quite a bit. And so it can move from on the balance sheet as deposits to into our money market funds or short-term treasuries. So it's, I'll say, a pretty active management of liquidity that we do, I'll say, on their part and for them. And so from quarter-to-quarter, for example, those deposit numbers can move up and down. And to your point, it's less of an indicator, I would say, of the organic growth and more of an indicator of just their activity. To the second part of your question, we have the benefit of having this strong family office business, which we've been in for quite a while and have built up the capabilities. And to your point, what we've looked to do with family office solutions is leverage those capabilities, but in such a way that we can create the virtual family office experience for a family that doesn't want to have to set up their own office. So it's not run as one business together, but I would say 2 businesses that are very closely related and highly coordinated in what they're doing because they're leveraging some of the technological capabilities, some of the expertise that cuts across that. And it's just a different service model where we're acting as essentially the head of that family office for them as opposed to that person and team being employees of the client's family office. Brennan Hawken: Jennifer, congrats on your retirement. Operator: Your next question will come from the line of Alex Blostein with Goldman Sachs. Alexander Blostein: So Mike, top of the house question. So the tone in your prepared remarks and to some of the Q&A feels like leans on organic growth acceleration a little bit more than we heard from you guys in the past, and you talked about some of the investments you're making to sort of support that. Can we talk through maybe the areas where you see the most opportunity to accelerate growth? And ultimately, what you think Northern's organic fee growth, so, ex markets, should look like over the next couple of years if you achieve these goals, both across the institutional business and the wealth? Michael O'grady: Sure. So I would start, Alex, by saying that we see the organic growth opportunity across all 3 businesses. The nature of it is going to be different. We talked somewhat on the call here about wealth management. A lot of the investment, but also then the opportunity on the wealth management front is to add talent to that to increase the growth rate. So I think we've talked through that part of it. But it also cuts across other aspects that drive growth. In thinking about marketing, I talked about digital marketing that we're doing, a focus on centers of influence. There are other areas where we're trying to essentially bring in more opportunities at the top of the funnel in order to increase that growth rate. And many of them require investment to be able to do that. And I would also say on that front, that's an area where we believe that AI is going to create opportunities for us to continue to transform the client experience and the adviser experience, particularly as you work down the wealth tiers. So we're excited about that, but that also does require investment to be able to drive that. Within the Asset Servicing business, as we've talked about there, the real goal is around scalable growth. And I would say staying focused on our current footprint, our current offerings, the segments that we're in, that's where we expect to get this continued growth at a very profitable level and expect to continue to drive the margins up in that business. And then within asset management, really, you've seen a lot of growth that's come from the core products for us, certainly liquidity. But where we're really investing there is on the ETF front as well as tax-advantaged equity and also quant. And that requires investment in the sense of building out our distribution capabilities for third party. But we believe that's an avenue, which right now represents a relatively small part of our asset management business that could grow at a much higher growth rate. So that's the -- I'll say, the combination across the businesses. And we've talked about an organic growth rate that we've targeted around 3%. And certainly, from what I talked through there, that's going to drive the 3%, but we hope above that as well. Alexander Blostein: Got it. And then a quick follow-up just around capital management. With the Visa shares become available to you guys this year. Can you maybe just talk through the amount of proceeds you expect the use of these proceeds and timing when it comes to potentially bigger buybacks? David Fox: Yes. So we'll roughly get half of our position, let's say, $470 million pretax, so $350 million posttax depending on the share price. And we've only just begun to sort of think about what we're going to do with it. I don't think we're going to use the same, obviously, playbook we had a few years ago. We've got other options at this point, but we're going to weigh it against all our other priorities and take a look at what to do at that point in time, but haven't landed yet on that. Operator: Your next question comes from the line of Ken Usdin with Autonomous Research. Kenneth Usdin: I want to ask a question just about the balance sheet. You mentioned that the benefits that came through the size of the balance sheet and the deposits, maybe some of that doesn't stay, maybe some of it does. But just given the higher for longer environment, how do you think just about duration of the securities portfolio and any other changes to that? Or is it really more of a wait and see because you're not 100% sure if this elevated size of the balance sheet lingers? David Fox: Yes. So when you think about the upside to our balance sheet and to our NII during the course of the year, there's a bunch of different things we think of and trying to figure out what we're going to guide. And so the first one would be the investment securities maturity replacement. Obviously, we still have back book repricing, and we can take advantage of that through the full year in '26. We did take some deposit pricing actions as well towards the end of last year, let's say, third and fourth quarter, and we haven't lapped those yet. So those are built-in increases that we see coming in the year. We've been leaning a bit more into some incremental investment strategies around higher-yielding opportunities. We've been looking at our wholesale funding mix a little bit more, leaning a bit more into FICC repo as well. And so when you put all those together, and then obviously, the deposit growth. So we still are -- we're thinking about having some deposit growth in line with the businesses. And we also no longer have the potential headwind in our mind anyway of rate cut in the U.S. and taken that off the table and may even have some rate increases in Europe. And so you put all that together, and that's sort of how we come up with it. It doesn't -- we're not going to reach for yield. We're not going to materially change our profile in terms of duration to try to get there. We don't need to, to be honest with you, to get there. We feel we can do it without that. So -- and there's a lot of uncertainty out there. So I think our positioning right now is pretty stable. Kenneth Usdin: And just a bigger picture follow-up. We've got potential new Fed chair coming on, talks about potentially shrinking the size of the Fed balance sheet. That Fed balance sheet has already been down $2.5 trillion and trust bank deposits keep growing. But can you just remind us of the rule of thumb to think about if the Fed balance sheet continues to shrink over time, how insulated is your balance sheet from that in terms of deposits? Michael O'grady: So Ken, I would say that is something that we are obviously observant of and what's happening. And frankly, I'll say a little surprised that liquidity levels have remained so high on our balance sheet and in our funds given that the Fed has reduced its balance sheet as much as it has. To the extent that we're in, I'll say, some level of stabilization there, I think that's good because that means our deposit levels and money market fund levels will grow with our organic growth. So yes, there is definitely some exposure to the extent the Fed were to really shrink its balance sheet more. I think that pulls liquidity out of the marketplace. And our model as well as others, it tends to expand and contract with that somewhat. So yes, some exposure on the downside, I think less on the upside. Operator: Your next question will come from the line of Steven Chubak with Wolfe Research. Hang Leung: It's actually Sharon Leung filling in for Steven today. Just wanted to ask on the margins in the business segments. The margin in Asset Servicing has expanded nicely, but in Wealth, the margin was flat year-on-year despite like some strong revenue growth. So just wanted to understand like what are the components that are going to drive the, I guess, the path towards your medium-term target of 33% in the margin? Michael O'grady: So the goal of the Asset Servicing business, as I mentioned, is scalable growth. And as much as we did have a strong pretax margin here in the quarter, this is something that we're trying to consistently move up. And so the expectation is that we will continue to try to see a higher margin in the Asset Servicing business. We've talked about a particularly strong macro backdrop here. So capital markets, very strong, NII, very strong in Asset Servicing. So that definitely contributed to the higher pretax margin for this quarter. But we want to make that even more sustainable, if you will, and a more resilient high level of margin. So there's more opportunity on that front. On Wealth Management, where we have had a very attractive pretax margin, that's an area you've heard a lot where we've talked about growth and making investments for growth. So we feel like we're in, I'll say, a good range for that margin, but we are emphasizing growth as opposed to trying to see that margin go up. And to the extent we did have some pressure on the Wealth Management margin as we make some of these investments in the near term, the expectation is that we'll more than make up for those with improvement in asset servicing. Operator: Your next question comes from the line of David Smith with Truist Securities. David Smith: On organic growth, you cited 7 consecutive quarters of positive growth for the business as a whole, and then there's a 3% target that you put out there, but you think there's opportunity to do better over time. Can you help us get a sense of where organic growth is today and where you were a year ago? We know GFO is above average, but is Asset Servicing and the regional part of Wealth fairly positive today, 1% or so, 2% or so? Sure it can bump around some quarter-to-quarter, but maybe over the past year, what kind of organic growth have each of those businesses earned and then where were those, say, like the year prior? Michael O'grady: Sure. So to just start with this quarter, each of the 3 businesses had positive organic growth. And that would also be true within the major segments of the business. But to your point, if we look at each of them individually and a little bit, I'll say, over time, within Wealth Management, the organic growth has been closer to a consistent, I'll say, 1% with GFO being above that and the regions being a little bit below that. And that's where we're looking certainly for GFO to continue to grow at a high rate, but it's more with the regions incrementally increasing that growth rate as we go forward this year and into next year to move it up in total above the 3%. So made progress this quarter. But again, it's all about consistency. In the Asset Servicing business, just given the nature of some of the larger mandates, that organic growth rate can, I'll say, swing or vary more from quarter-to-quarter or even in a year. So we did -- if you went back a few years, we did have some periods where we had some business that rolled off that did bring that down to kind of flat to negative organic growth. As I mentioned, it's positive right now, again, in about the same range as the Wealth Management business, but we see the opportunity likewise to continue to see that growth rate increase, but with the focus on profitability and scalability for it. In Asset Management, overall, a lot of the organic growth more recently has been primarily driven by liquidity, but we're seeing greater diversification in the growth with that business as well. So in the past quarter here, likewise, some of the areas that I mentioned around ETFs and for some time period, tax-advantaged equity have had nice organic growth across that front. So once again, in about the same range there and same expectation to see that increase. David Smith: Got it. And do you expect over time, all the major businesses to be doing 3% organic? Or medium term, would you expect to get there for the company as a whole, but some to be above and some to be below? Michael O'grady: Yes. So the target is for all of them to be above the 3%. But just given the way that it varies, I'll say, from quarter-to-quarter or even year-to-year, they may not all be, but that's the benefit of having the 3 businesses. Operator: Your final question will be coming from the line of Gerard Cassidy with RBC. Gerard Cassidy: Mike, I think you called out in your prepared remarks that you saw outsized growth in the Wealth Management area in your central region. Can you highlight what drove that? Michael O'grady: Sure. You're right, Gerard, we did. And I would say, often, given that the company has been in the central region and headquartered in Chicago for a very long time, we have a very strong business here. And often, people think that it's a mature business that is not going to grow at the same rate or even a higher rate. But the fact of the matter is the team and the leadership of this region, particularly under John Fumagalli and his team, have consistently leveraged that strength to be able to grow at a higher rate. And one of the areas, I would say, more recently is around the family office solutions that I talked about. That's the area where we started with that solution set and with that offering. It's already gained momentum in this region, and now we're in the process of rolling that out to the other regions in the same way. So that's part of the driver of the strong quarter. Gerard Cassidy: Very good. Obviously, the dominance of questions are all about the Wealth Management and the Custody business. So I want to pivot because it's always good to ask you folks about credit quality since it's always so superb. You guys obviously don't take a lot of risk in lending. Your portfolio is not that big relative to your asset size. Can you share with us what are you guys seeing in the credit quality trends? They're very strong, we understand that. Have things changed meaningfully from the financial crisis and pandemic that customers are more resilient today? Any color there? Michael O'grady: Sure, Dave. David Fox: Yes. I mean -- so just keep in mind, when I look at Northern's portfolio that we have a very -- we're very tilted toward investment grade on the corporate side. And then -- and our clients in Wealth, we're usually doing secured facilities. And so at the end of the day, for those to be in the stress scenario, it would take quite a bit of downside to do that. So that's why you see our credit quality so high. And we're not obviously also exposed to the same extent in the private equity and/or private credit space either where there's some pressure right now. We don't lend on the valuation or performance of the underlying fund investments. And so we do subscription facilities where the underlying obligor, which most of whom are institutional borrowers are really quite strong. And so from our perspective, we're not in the high-yield market. We're not in the leveraged loan market, if you will. So we're not seeing the same kind of pressures that other firms might be experiencing in that regard. Operator: And it appears there are no additional questions at this time. I will now turn the call back to Jennifer Childe for closing remarks. Jennifer Childe: Thanks for joining us, and we look forward to speaking with you again in the future. Michael O'grady: Once again, Jennifer, thank you very much. David Fox: Thanks, Jennifer. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Good morning, and welcome to the UnitedHealth Group First Quarter 2026 Earnings Conference Call. A question-and-answer session will follow UnitedHealth Group's prepared remarks. As a reminder, this call is being recorded. Here are some important introductory information. This call contains forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. This call will also reference non-GAAP amounts. A reconciliation of the non-GAAP to GAAP amount is available on the financial and earnings reports section of the company's Investor Relations page at www.unitedhealthgroup.com. Information presented on this call is contained in the earnings release we issued this morning and in our Form 8-K dated April 21, 2026, which may be accessed from the Investor Relations page of the company's website. I will now turn the conference over to the Chairman and Chief Executive Officer of UnitedHealth Group, Stephen Hemsley. Stephen Hemsley: Thank you, Lisa. Good morning, and thank you for joining us today. The first quarter unfolded largely as expected, reflecting actions taken in the past several months to drive consistent performance across each business. The quarter saw continued progress in advancing our organization's performance, culture and better business practices. All of our major business segments exceeded plan for the quarter. At UnitedHealthcare, pricing is improving relative to elevated health care cost trends and affordability initiatives are generating positive momentum. At Optum Health, operational improvements continue to take hold as we more deeply embed disciplined, integrated value-based care practices market by market. Optum Insight is seeing increased market interest with its AI-first enterprise approach. Tim Noel and Patrick Conway will discuss these efforts in more detail in a minute. We're encouraged by the way the year has started. We remain grounded in the need for consistent execution in managed care fundamentals and on a strategy to help build an integrated value-based health system that together makes things better and simpler for care providers, patients and customers. We are investing in AI-enabled modernization, while early, these capabilities are already improving experiences for consumers and care providers, increasing productivity and reducing administrative burden. The application of technology has long been foundational to how this enterprise operates and how we can help others across the health system improve their operations through Optum Insight. We remain on track to invest nearly $1.5 billion in AI-related initiatives in 2026. I hope our conversation today gives you a sense of the momentum building at our company and the steps we've taken to strengthen the enterprise and position it for long-term success. We have refocused the organization squarely on U.S. health care exiting non-U.S. businesses. We have refreshed nearly half of our top 100 leadership roles. Our accelerated technology and AI investments are showing meaningful potential, and we're actively evolving business practices in areas such as data and processing interoperability and speed, pharmacy practices, prior authorization, product and reporting transparency and management practices more broadly. At the corporate level, we strengthened governance by creating a Public Responsibility Committee of the Board, naming a new Lead Independent Director, new committee chair, adding a new independent director and accelerating our Board recruiting process. And we've redoubled community engagement and support with renewed focus and resources through the United Health Foundation and an expanding commitment to improving rural health care, expanding the health care workforce, strengthening maternal and children's health, addressing the challenges of behavioral health and more. We strive to be an organization people proud to work for and with these efforts and others will remain central to those goals. With that, I'll turn it over to Tim and Patrick to provide insights on our quarter and goals for the remainder of the year. Tim? Timothy Noel: Thanks, Steve. As Steve said, the actions initiated last year are driving early momentum in UnitedHealthcare, both in our business results and in the experiences members and care providers have when they engage with us. Medicare & Retirement results reflect disciplined pricing strengthened by affordability initiatives in an elevated but stable medical trend environment. Community & State results continue to reflect the pressures in state-based rate environments, but were within the overall expected range. Commercial and ACA results were consistent with pricing and trend assumptions, albeit still early in the year. Our 2026 approach prioritizes margin recovery and product stability with a deliberate trade-off on membership growth, particularly in Medicare and commercial markets. Care utilization trends in the quarter remained consistent with our expectations for 2026. The quarter's medical cost performance overall was driven primarily by net reserve development, better mix and enrollment dynamics in government programs. As we monitor underlying utilization trends, they remain consistent with the high levels we saw in the prior year. At this distance, we anticipate trends to remain at the anticipated levels for 2026. In Medicaid, we remain focused on improvements in high acuity care management and operating cost management. First quarter performance reflected a combination of favorable reserve development and early in-year medical cost experience. We continue to expect membership attrition and negative margins in 2026 in light of continuing high trend and insufficient funding with modest margin improvements beginning in 2027. Many state rate processes are still open for the remainder of 2026 and into 2027. Appropriately aligning state rates to elevated medical cost trends in these programs is essential to sustainably serving people who rely on them. We continue to advocate for this with state partners, alongside our own disciplined cost management and operational efficiencies. We are intensifying our work with states to address areas of potential fraud, waste and abuse. For our commercial business, membership levels, renewals and trends were generally in line with the expectations we shared with you. The pricing actions we have previously discussed are materializing as intended, preserving margin while contributing to some moderation in growth. Self-funded offerings continue to perform well. We are approaching the 2027 selling season with a focus on appropriate pricing for the elevated cost environment and meeting employer needs for more modern tools to support consumer engagement and affordability. As anticipated, the individual ACA business continues to contract. We still expect total membership to decline by approximately 1/3 in 2026. Our approach in the ACA market continues to be directed towards the bronze and gold tiered products, where member mix and utilization rates are largely aligned with plan. As a reminder, we pledge to refund any 2026 profits from these plans and our first quarter results reflect this pledge. In Medicare, medical trends remain elevated, but in line with our pricing assumptions. This reflects continued service intensity and higher provider billing patterns consistent with what we saw exiting last year. This is an issue that we are squarely addressing. Turning to enrollment. Results from the annual enrollment period were largely as expected, and OEP retention has remained stable. At this point in the year, we expect membership to contract consistent with previous guidance, but centering more around a drop of 1.3 million. On the final Medicare Advantage rate notice for the 2027 plan year, we appreciate that the Trump administration better aligned funding with increasing health care costs. It's an important step to preserving stability for the millions of seniors who rely on MA and toward ensuring this vital program's long-term sustainability. Turning now to our efforts to improve the patient and clinician experience when they engage with us, starting with prior authorization. Prior authorization remains a critically important tool for eliminating fraud, waste and abuse and for helping ensure patient safety and quality care. We also recognize it is a source of frustration, and we are working to reduce that. Nearly 95% of prior authorization requests are now submitted electronically. About 50% of those are processed in real time, and more than 90% are approved on average in 1 business day. We are working to enable more prior authorization submissions to be made directly within care provider workflows. In addition to the steps we are taking to further reduce the overall number of medical prior authorizations by 30% or more by the end of this year. Member adoption of UHC AI-powered digital tools continues to grow. Almost half of all members are now registered for and using UHC digital access. We saw 73 million digital visits in Q1, up 42% over the last 2 years, reflecting sustained and growing engagement with our digital platform. Digital self-service is now the primary way members interact with us, with over 80% of consumer contacts through digital formats and an NPS in the top quartile of the industry. For care providers, digital channels continue to grow, with transaction volumes up 75% year-over-year and about 75% of in-network providers using our portal or API tools. This improves real-time access to eligibility, benefits and claims status while reducing manual outreach, enabling clinicians to spend more time on caring for patients. We are intensifying our efforts to help independent rural health care providers. We will accelerate payments in all lines of business by 50% for rural hospitals and exempt rural health care providers for most medical prior authorization requirements. And we are building network partnerships between rural providers and leading regional health systems. Together, these initiatives will help lower costs and simplify processes for care providers and greatly enhance access to quality care for people in rural communities. All these efforts and others like them are part of our commitment to pursue and invest in new and innovative ways to fulfill our mission to help people live healthier lives and help make the health system work better for everyone. With that, I'll turn it over to Patrick. Patrick Conway: Thanks, Tim. Across Optum, positive first quarter results reflect strengthened operations, continued investment in growth and changes that make engaging with us easier for patients and provider and clinician partners. I'll start with Optum Health. Adjusted earnings of $1.3 billion reflect pricing and operational improvements that began in the back half of 2025 as well as actions taken to improve contracts and reshape our value-based care portfolio to better align with the original purpose and risk profile for that strategy. As we have shared over the past 3 quarters, our efforts are focused on management and process improvements that steadily improve margins at Optum Health for 2026 and accelerate into 2027. A key part of the progress is Optum Health's returned to a disciplined, integrated value-based care model with increasing prices from health systems, rising patient acuity and higher consumer expectations, integrated value-based care is the most effective way to improve outcomes and manage total cost of care over time. We are privileged to serve over 20 million patients in our Optum Health care models across the country, including over 4 million in fully value-based arrangements. Both patients and care providers do better when incentives are aligned towards care outcomes and not the quantity of services provided. For example, new research published in the American Journal of Managed Care showed that among nearly 2 million dual-eligible patients, those in value-based care arrangements had 24% fewer acute inpatient hospital admissions and 29% fewer emergency room visits than patients in traditional Medicare. We are improving patient experience and outcomes through efforts to stabilize staffing, increase productivity, improve scheduling and standardized workflows in both our value-based and fee-for-service models. It is this kind of operational focus that improves clinical outcomes by better focus and deployment of clinical resources to the right care, time and setting. And that gives us a clear path to long-term sustainable margin levels of 6% to 8%. One example, our West region, where in response to rising patient acuity, we deployed more data-driven clinically-led navigation in areas such as hospital admission and discharge, skilled nursing facility transitions and emergency department encounters. Since the last quarter, clinical reviews have increased by more than 50% and with earlier patient intervention and more consistent care coordination. We're already seeing inpatient and skilled nursing admissions trending sharply below historical levels, including an approximately 35% reduction in skilled nursing admissions in the first month compared to last year. These efforts are expanding to additional markets and reflect how using real-time data, strong clinical leadership and coordinated care to improve outcomes can drive more predictable performance. Within our fee-for-service businesses, we've brought more managed structure and accountability, starting with clear scheduling guidelines, stronger regional leadership and better data and analytics to match supply and demand. These new standards are now in place across nearly 70% of our settings and are on track to reach nearly 80% by the end of the second quarter. They have already driven a 12% year-over-year increase in patient-facing hours which is better for both clinicians and patients. We are rapidly scaling self-service digital scheduling, including AI-enabled tools that guide patients to the right appointment in the right setting at the right time for them. That's improving access, reducing friction and expanding capacity without adding incremental clinical burden. Moving to Optum Rx. We started the year by onboarding more than 800 new clients while reducing contact call center volume 25% through enhanced digital and AI-enabled self-service with member satisfaction over 95%. Our unique PreCheck Prior Authorization capability reduces prescription approval time from over 8 hours to under 30 seconds and provides a 68% reduction in denial due to missing information and an 88% reduction in appeals, easing interaction for clients, members and providers. First quarter utilization and drug cost trends were as expected, with scripts down slightly year-over-year reflecting some membership mix and attrition. As manufacturers continue to implement significant drug price increases and with more complex specialty drugs, representing over 50% of drug spend, the role of pharmacy care is more important than ever in helping patients access affordable drugs. At Optum Insight, new AI-first products continue to gain traction. Optum Real is helping payers and care providers deal more efficiently with administrative functions, such as claim adjudication and coverage validation and can reduce manual contact costs by 76%. Other AI initiatives help automate provider, payer and internal workflows, improving accuracy, reducing administrative burden and strengthening our role as a technology partner for the health system. Within Optum Insight, Optum Financial Services continues to perform well and has agreed to acquire Alegeus Technologies, a leading health financial services business. This is an important step in providing more flexible consumer-centered solutions for the people we serve. This transaction is expected to be accretive in 2027. Our AI-enhanced performance gives just a flavor of what Optum can do to help physicians and clinical care teams, payers and patients. Wayne, I'll turn it over to you. Wayne DeVeydt: All right. Thank you, Patrick, and good morning. Our first quarter results reflect improving fundamentals and a strengthening of operations across our businesses. As Steve mentioned, all our operating segments exceeded our plan for the quarter with particular strength in Medicare and Optum Health. For the first quarter, we reported adjusted earnings per share of $7.23, well ahead of our expectations and backed by strong quality metrics, including cash flows and reserves. We continue to balance near-term performance with disciplined investment in longer-term strategic priorities. Total revenues in the quarter were $111.7 billion, reflecting 2% growth year-over-year, driven by disciplined pricing actions and member mix. We now serve 49.1 million total members domestically, compared to 49.8 million at the end of 2025. Turning to medical costs. Our reported medical care ratio of 83.9% compares to 84.8% in the first quarter of 2025 and is a result of pricing discipline, strong medical cost management and favorable reserve development. The first quarter benefited modestly from seasonal dynamics, including lower-than-expected respiratory activity. Consistent with our guidance, we expect some of these dynamics to moderate as we move further into the second quarter, particularly given the impact of IRA-related changes to Part D seasonality, which meaningfully shifted the earnings profile beginning in 2025. Importantly, underlying utilization trends remain broadly consistent with our expectations, and we are seeing early signs of improved alignment between pricing and medical cost trends. The operating cost ratio was 13.8% in the quarter, reflecting the timing of targeted investments across operations, technology and care delivery as well as incremental investments in areas such as AI, customer experience, cybersecurity and community engagement. We also recorded approximately $900 million in incentive compensation for the quarter as compared to $35 million in the first quarter of 2025, reflecting our performance. We continue to expect operating cost ratio trends to normalize over the course of the year as these investments scale and begin to deliver productivity benefits. Our operating results were supported by solid operating cash flows of $8.9 billion in the quarter or 1.4x net income. Our capital priorities remain consistent: invest in growth, strengthen our balance sheet and return value to shareholders. With our cash flow performance this quarter, we were able to bring the debt-to-capital ratio down to 42.9%, on track to our year-end goal of 40%. We initiated share repurchases earlier than anticipated and expect to deploy at least $2 billion by the end of the second quarter. Based on our current share price and the deep intrinsic value discount at which our shares are currently trading, returning value through share repurchases will remain a priority. And we anticipate further capital allocated into strategic acquisitions that support long-term growth. We will be measured in pursuing such assets while prudently managing our balance sheet. One other item of note for the quarter. As previously discussed, as part of the restructuring actions taken in the fourth quarter of 2025, we will continue to remove from our 2026 adjusted results, the residual impacts of those actions. The net negative impact of these items was about $50 million for the quarter and was excluded from adjusted earnings per share. This impact includes, among other things, a $525 million gain on the sale of our U.K. business, which was successfully closed in the first quarter. We used $400 million of these net proceeds to provide additional funding to the United Health Foundation. Our intention is to improve the focus and discipline of our core operations while using proceeds from nonrecurring gains to further advance our mission by helping build healthier communities and a robust health care workforce. In addition, at Optum Health, we had the positive impact of the lost contract, offset by the final true-up of losses related to assets, which were held for sale as of December and divested during the first quarter. While it is still early in the year, we've updated our full year outlook to greater than $18.25 per share. This refresh view balances the performance we saw in the first quarter with a prudent level of patience to see how the remaining months evolve. Our earnings cadence for the year remains consistent with prior expectations. We continue to expect approximately 2/3 of earnings in the first half of the year and the remaining 1/3 in the second half. That said, the earnings profile varies meaningfully across the portfolio. UnitedHealthcare earnings are over 75% weighted to the first half of the year. Similarly, for Optum Health, we expect earnings to moderate throughout the year from Q1 levels with a significant majority of full year reported earnings occurring in the first half. In contrast, Optum Insight and Optum Rx are more naturally weighted to the back half with each generating approximately 60% of earnings in the second half. This pattern also similarly influences the progression of our medical cost ratio with first half levels more than 250 basis points below the midpoint of our full year guidance and second half levels more than 200 basis points above. Overall, this has been a strong start to the year as we continue to improve our business performance and advance our mission. Steve, back to you. Stephen Hemsley: Thanks, Wayne. Before we turn to your questions, let me kind of summarize where I think our company stands today. This was a solid quarter across all segments, positioning us for similarly solid progress going forward. The historic disciplines and innovations of UnitedHealthcare are rounding back into place. Optum Health is clearly focusing on the right basic elements and gaining traction. Optum Insight has untapped potential in an AI-centric world. They're starting to sell business and building broader service relationships around that reality, but to evolve more modern scale solutions and for users to be ready to embrace them, will take more time in my mind later into 2026 and into 2027. Our enterprise-wide AI ambitions are meaningful and the agenda is in motion. We're getting after business units and functions alike and importantly, critical processes that are core to several of our businesses. This is not just a matter of being more productive at what we already do, but a reimagining of how we organize, operate and work going forward. Few, if any, large organizations have ever done things like this at this scale, so we match our desire for speed with prudence and humility. We remain focused on advancing business and management processes and continue making progress in areas such as governance, transparency, stakeholder experience and more. Underpinning these steps is the undertaking to deeply reenergize our mission and culture across this company, an effort in which our leaders and people are engaged avidly. This management team believes we are a long way from performing to our full potential, and we're committed to getting to that potential quarter after quarter and reporting to you on our progress. With that, operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from A.J. Rice with UBS. Albert Rice: Just to maybe drill down on the comments around what you're seeing in trend. I know the last 2 years, I think the general consensus is the Medicare Advantage cost trend was running about 7% to 8%. I know that coming into this year, you guys described what you have been thinking about pricing for it being closer to 10%. You're saying it's been consistent so far with what you've seen historically in your expectations. I'm wondering, can we focus in on is it running close to 10%? Or is it more in the 7% to 8%? And if it's accelerated, where has it accelerated or if it's moderated, where is it moderating? Stephen Hemsley: Tim, do you want to take that? Timothy Noel: Yes. A.J., thank you for the question. So as we referenced broadly speaking, across UnitedHealthcare, trend is progressing in line with our expectation. And again, our focus for 2026 was to focus on margin recovery and product stability across all of these businesses. And we continue to see the utilization patterns continue at the high elevated levels that we experienced inside of 2025. And you're correct. We were talking about a 7% to 8% trend in Medicare Advantage with a pricing assumption of around 10% into 2026. We're seeing some modest favorability in the government programs which would then include Medicare Advantage, commercial very consistent with those expectations. It's really early right now. We'll have a more fulsome view when we talk in Q2 and can get down into some of the specific service categories. But right now, the takeaway is modest favorability in government programs, but progressing at those elevated high levels. We're not seeing any inflection point, and we're really comfortable with the pricing posture that we had coming into 2026 based on how things are playing out in the early innings. Operator: Our next question comes from Kevin Fischbeck with Bank of America. Kevin Fischbeck: Great. Maybe just following up on that trend question. I think you specifically mentioned this in context to the Medicare Advantage, but you talked about acuity and provider billing and how you're trying to address that. So can you maybe size how much of the trend component is this acuity dynamic? And then what exactly you can do to address it? And how it may happen? And then just clarify, was that really just an MA comment? Or was that a common trend across all products? Timothy Noel: Kevin, I think I can -- this is Tim. I think I can really address that across all products. When you think about trend drivers, our assumption is that the activity that we would see for 2026 will be pretty consistent with what we saw in '25. And as I just stated that's really playing out. What we've done is a couple of things. We talked in the Medicare Advantage space of our product positioning, leaning more towards HMO-based products as a means to be able to better manage outlier activity. But broadly speaking, themes that you can think about in terms of how we're managing it is we have better tools to early identify some of the outlier patterns that we're seeing and were some of the trend drivers inside of 2025 and engage early with clinical programs with payment integrity programs, then also, in certain cases, take network actions, which we have done to be able to address those things. And we are making good progress in that area, and we'll continue to focus on affordability across all of the product lines inside of 2026 and probably be able to offer more information around that in the Q2 call as well. Operator: We'll move next to Andrew Mok with Barclays. Andrew Mok: Could you help us unpack what's driving the outperformance in Optum Health this quarter? Specifically, how much is contract or benefit-driven versus utilization driven? And can you clarify what's driving the strong moderation in Optum Health profit such that the majority of earnings are recognized in the first half? Stephen Hemsley: Sure, Krista. Krista Nelson: Yes. Thanks, Andrew, for the question. We're really encouraged by what we're seeing in the first quarter, which is really a direct reflection of intentional actions that we've taken over the past few months to improve core performance. I'll just call out two drivers of the performance improvement. First, we're seeing medical from prior periods restate favorably relative to our expectations. But this is actually largely concentrated in markets where we've really focused on clinical and medical management efforts. Patrick highlighted one of the examples in the West, where we saw an opportunity to help support members in key moments of transition. And as we've increased and invested in leadership and process improvement and clinical reviews, we've actually seen a pretty sharp decline and improvement in unnecessary inpatient admissions as well as SNF admissions. And again, just really pleased with what we're seeing. We expect this performance to continue and also are scaling some of those efforts across all of our markets. The second driver I would point to is just we've seen continued improvement in operating performance, which includes cost management, which was a really big focus for us last year, but also just kind of fundamentals around operating execution. So the example we gave in our opening remarks just around scheduling. That was a key focus for us to make sure we're creating access points for all of our patients. And year-over-year, after that focus, we've seen an improvement, 12% increase in patient-facing hours. That is happening actually across all of our regions where, again, we've just really focused on core operating improvement. So I would say while it's early, those two things are really giving us confidence that we're focused in the right places and that we would expect some of this improved performance to continue rest of the year. I think to your last question, just around pacing, with the move of Optum Financial into Optum Insight, Optum Health is -- really resembles our risk business in terms of seasonality. So that's really why the majority -- the significant majority really of the earnings will occur in the first half versus the second half. Stephen Hemsley: Krista, thank you. So mostly utilization and the result of management. Operator: Our next question comes from Justin Lake with Wolfe Research. Justin Lake: I wanted to stay on Optum Health for a minute, and I appreciate all the details there. I wanted to make sure the -- first of all, the $1.3 billion of adjusted earnings, is that the right comparable to the guidance of $1.575 billion at the midpoint on an adjusted basis? And then Krista, you mentioned that some of the benefit was from PYD. I'd like to understand what the internal expectation was because that $1.3 billion is significantly higher than I think anybody expected. I just want to understand what you were expecting internally and maybe how much of the difference versus internal was PYD versus run rate? And then lastly, maybe you could share something similar on kind of how the businesses are running at Optum Insight, Rx versus internal expectations because those looked a little lighter than consensus was expecting. Stephen Hemsley: Okay. I think that's three, Justin, if I'm counting. So maybe, Wayne, you might take the first. Krista, the second, and then we'll maybe come back to the third. Wayne DeVeydt: Yes, Justin, let me unpack this. I think I can address this fairly easily. As you think about Optum Health, yes, you should be comparing the $1.3 billion of adjusted earnings to the guide of $1.575 billion that we provided originally for our true run rate. We believe that is a clean view of looking at the business, and removes noncash accounting implications of the loss contract as well as the final disposition of assets in the quarter. The one thing I would say around Optum Insight and Rx, very similar to Optum Health. It's very important to recognize in the prepared remarks that these are fully burdened by incentive compensation this year in Q1, and they were not fully burdened in Q1 of last year comparing $900 million to roughly $35 million. So that really creates an unusual anomaly for our sell-side investor analysts out there that are trying to model this, and that was why we tried to call that out. I would say that all 4 segments did actually exceed our internal plan expectations. Krista, do you want to maybe address the prior year? Krista Nelson: Yes. Yes. So to your question, just on some of the prior period development, while some of this was favorable to our expectations, I just also want to reiterate, it's really based on specific actions that we took in the fourth quarter. So the performance is coming in a little bit better, but I'm not surprised by just how it's coming in, given some of the intentional work that we've done. I also mentioned that we are seeing some improvement in our operating costs, which is also contributing. But also, it's early in the year, and we're taking a really prudent approach to make sure that we see another quarter of medical mature. And then frankly, we also continue to focus on some of the basic blocking and tackling. There still remains a significant amount of opportunity for Optum Health to achieve its full potential. And so again, we're just focused on core performance and improving that consistently across our markets. Operator: And we'll move now to Stephen Baxter with Wells Fargo. Stephen Baxter: A couple of questions about Medicare Advantage. I guess with visibility to the final rate, I would love to hear if you could discuss your confidence level in further margin recovery for 2027. And then just as add-on to that specific question, as we about the moving parts. Have you indicated that you'd participate in the BALANCE program for GLP-1s? And if you are indicating that you'd participate, do you anticipate the industry thresholds for participation will be met? Stephen Hemsley: Bobby, do you want to take that? Bobby Hunter: Yes. Thanks, Stephen, for the question. So on the final notice, maybe just to start, I do want to express my appreciation for the active and ongoing engagement that we've had with CMS. The changes made by CMS in the final notice were both important and impactful for the program and more importantly, for the Medicare beneficiaries. However, also, I need to acknowledge the reality that while the expected medical trend for 2027 is still meaningfully above these funding levels. So consistent with our strategy in 2026, we're going to remain focused on financial sustainability, product durability and then the path to margin recovery that we're on within that 2% to 4% long-term range that we've discussed. For 2026, maybe just to hit that one as a jumping off point, we're only a couple of months into the year, but feel good about achieving the 50 basis point year-over-year margin advance that we had previewed last quarter. And then for 2027, our aspiration is to be in the upper half of the 2% to 4% long-term range and doing that while continuing to deliver the quality, the value and delivering on the full expectations that I know that our members have of us. As it relates to your question about the BALANCE program, so we've been a good active dialogue with both CMS and CMMI on that front. We'd like to find a path to yes, there on coverage over time, but there are some notable challenges and outstanding questions with the currently planned structure. So we're still working through that process internally, and we look forward to continuing the dialogue with CMS. We have provided some specific recommendations that we believe would serve all stakeholders really well. As you know, we'll be participating in the Bridge demo here starting in July, and I think we'll learn a lot about the best way to advance this priority through that experience. Thanks for the question. Operator: Our next question comes from Lisa Gill with JPMorgan. Lisa Gill: Just want to understand a couple of things. The first would be the Optum Insight and Optum Rx really being back half weighted. It seems like that's a little bit higher than it's been historically. So is there anything to think about there? And then secondly, since we last spoke last quarter, the PBM legislation has passed. And I just want to understand, are there any incremental investments that you need to make? I know you've been a lot more transparent than others. But is there anything to think about? And if you do come to a settlement with the FTC, do we need to think about redomiciling the GPO to the U.S.? And is there any cost there? Stephen Hemsley: Yes, we'll handle those separately. Wayne, do you want to talk about the slope? Wayne DeVeydt: Yes. The one thing I would say on the slope is for Optum Insight, I would view this as what we're doing is a couple of things. One is slowly decommissioning old products that were not AI-based and reinvesting in those products through the AI investments. So you're getting the slow rundown of those products in Q1 and then the investments to transfer those over into more AI based. And I think you'll see the benefits of that coming into the back half. Relative to Optum Rx, we are onboarding almost 800 new clients this year, of which the vast majority of those will be going into next year in terms of the actual run rate. So you're getting the full impact of those onboarding starting early in the year. But I think as the year progresses and we begin to migrate and bring folks over, you'll start to see that subside. And I would also just remind you that we've assumed a little bit of lower script volume, obviously, due to the membership that we had. But as the year progresses, I think you'll see some of our G&A initiatives and AI investments coming through, and that will actually improve the outlook in the back half. Stephen Hemsley: Thanks, Wayne. And Patrick and Jon, do you want to address PBM? Jon Mahrt: Sure. Happy to. Thanks again for the question, Lisa. So if I look at PBM, first, let me hit the -- I'll hit the punch line, which is we've accounted for these impacts in our guidance both for the remainder of 2026 as well as our out-year guidance. As it relates to the GPO, just to hit that one head on, our GPO is domiciled in the U.S. So no impact as we think about GPO. Broadly, I want to hit a couple of things. First, look at what's happening in Tennessee, and I would just say that we're really concerned about that legislation as we sit here today, primarily for what it means for access. What's playing out in Tennessee is targeted at the retail pharmacy space, but the impact here goes well beyond the intented scope of retail. Specifically for us, it will harm access for nearly 150,000 Tennesseans with complex conditions, think cancer, think HIV, think serious mental illness that rely on specialty and behavioral health pharmacies designed to uniquely serve those populations. So very concerned, and we'll continue to advocate for those that we serve in Tennessee and elsewhere. Beyond that, with other emerging legislation, I want to say that our work over the last 2 years has put us in the leadership position in the industry, and you referenced that with the transparency comments. It goes even beyond transparency. There's 4 drivers here, Lisa, maybe just to touch on. First is the independent pharmacy stability. As you know, again, we don't play in the retail space. We rely on a vibrant pharmacy network for more than 80% of the claims that flow through our PBM. And so we're well ahead of the curve with 100% of our independent pharmacies reimbursed at a cost-based reimbursement mechanism. We're leaning into health system pharmacies through our CPS business as well and expanding the reach for those pharmacies. The second driver is consumer affordability. On that front, Price Edge now serves 14 million members. And between Price Edge, Specialty Savings IQ and our Critical Drug Affordability, we'll deliver more than $1.5 billion this year in affordability to the patients that we serve through this business. The third driver is the patient provider experience. Patrick mentioned PreCheck by prior auth on this one. We're moving that from scale with the Cleveland Clinic to serve more than 20 health systems this year and continuing the work in the streamlining of prior authorizations for 180 drugs. And I'll round out least on payer transparency. This is what's driving our growth. Wayne mentioned a record growth year. We're experiencing another strong selling season, and that's largely driven by a compelling 15-part transparency guarantee for those that we serve. So we feel good about our leadership position have accounted for all this in our guidance. Thanks again for the question. Stephen Hemsley: Patrick, do you want to comment? Patrick Conway: Just on overall Optum because it's come in a couple of ways. Look, all 3 segments, as we said, exceeded expectations. If you look at Optum Health, core management of medical trend and operational execution. Optum Rx has a lot of momentum in the marketplace, winning new clients, and renewals, but also ahead in the policy agenda and leading. And then Optum Insight, as Wayne and others mentioned, Sandeep and team leading AI-first product and services that we're making those investments now. And those investments are starting to pay dividends. And as Steve said in the opening, we'll pay dividends in the long term. Stephen Hemsley: Yes. And ahead on PBM business practices because we've been at this for a couple of years. So great question, thank you. Operator: And we'll go to Dave Windley with Jefferies. David Windley: I wanted to come back to Optum Health or -- yes, the Optum Health on the PDR and the lives associated with that, I believe, are in a couple of tranches of that add up to 1 million lives that you're kind of in various stages of negotiation and scaling on. And I wondered if you could give us an update on the status of those? And are you at a point where you're having conversations with new provider groups or new populations of members that you could add into your value-based care base? Or are we still rightsizing down to the logical profitable base of lives that you can manage in VBC? Stephen Hemsley: Okay. If I understand that, basically, there's two pieces to that, the PDR and then kind of how we're engaging in the market. So Wayne will touch on the PDR and Krista will pick up the market. Wayne DeVeydt: Yes. Thanks, Dave. Let me just quickly on the PDR. We laid out, what we estimated the PDR to be for the full year. It was north of $600 million, and that was a reflection of contracts that we fully anticipate either renegotiating to appropriate rates or we will de-delegate or exit. You'll see the numbers actually slightly lower in Q1. That is a reflection of some of the assets that we disposed of in the quarter that had a PDR associated with them. But the team is still in active negotiations. I'll let Krista comment on that. Krista Nelson: Yes. Dave, thanks for the question. So we -- I mean, we are really in active negotiations and continue to partner with all of our payer partners just across our portfolio and really pleased with the progress underway. We started significantly earlier. We've put a lot more data and infrastructure and support and leadership behind this. And frankly, at this distance, there's still a number of levers we can work through with all of our payers, whether that's product and benefit design for 2027, network opportunities, looking at the markets and the footprint that we're in as well as recalibrating appropriate rates. And I think just like Wayne mentioned, I'll reiterate our confidence in making sure that we get these items settled and get into a better position for 2027. Stephen Hemsley: I think that kind of reflects a little bit of the cultural change in terms of the way we're engaging and how we are working with relationships kind of across the board in a constructive way. So great response, Krista. Operator: And we'll move to Ann Hynes with Mizuho Securities. Ann Hynes: I just want to focus on AI. I know it sounds like you're doing a lot of investment. Can you share some maybe targets you have on how you think AI will -- from the cost side, maybe like SG&A, do you have a target internally, how you think it could save? And then just also on the revenue side with Optum Insight, do you think your investment in AI could like structurally shift the growth rate of that segment? Stephen Hemsley: Yes. I think it's true on both fronts. So Sandeep, do you want to start? Sandeep Dadlani: Sure. Thanks, Ann, for the question. As we said earlier, we are spending about $1.5 billion in AI across UnitedHealth Group. Think about it this way, 1/3 of this is explicitly invested into software products and platform, accelerating Optum Insight's transition of business models into an AI-first software and services firm. The remaining 2/3 is spent across signature end-to-end processes and functions across UnitedHealth Group. Let me give you some examples. Areas like consumer member experience, you must have noticed we just launched Avery, a generative AI chatbot answering member questions for UnitedHealthcare, which will be expanded to over 20 million members by the year-end. Another example is in administrative simplification, Tim spoke about prior auths and the automation in UHC as well as Optum Health and Optum Rx. A third area is clinical workflows. For example, Ambient rollout for physicians and nurses in Optum Health and then summarization capabilities for nurses and clinical reviews. And then functions like HR, finance, marketing, fundamentally reimagining these processes and areas. In the end, all internal investments in AI use cases is routed through Optum Insight and has the potential to be commercialized outside of UHG, and we expect to return conservatively of 2:1 on these programs over the next few years, many of them paying back within the next 12 to 18 months. Optum Insight AI-first products are already seeing great external traction. Example, this quarter, we launched Digital prior auth in keeping with the enterprise priority on prior auths. We already have a couple of payer clients and provider clients using them, another 50 clients in the pipeline. And the early results are that prior auths submitted through our software have shown a 96% approval rates on first submissions. Optum Real, an AI-first platform launched a couple of quarters ago, now has 0.5 billion transactions year till date and expects to close the year at over 2.5 billion transactions. And Optum AI, our new AI consulting arm has already signed its first few contracts, helping companies like LabCorp through their operational AI initiatives. So that should give you a good sense of AI inside and outside the company. Thank you. Stephen Hemsley: Thanks, Sandeep. So I think really good potential. I think we're going to be very measured as we go about this in terms of expectation because I think it's new for everybody. But definitely, we are leaning into this. We think it can be quite impactful to our enterprise and to this whole industry. So good question. Thank you. Operator: Our next question comes from Erin Wright with Morgan Stanley. Erin Wilson Wright: Great. I wanted to just follow up on the AI and automation front. And what should we, though, expect in terms of these savings accelerating in 2027, '28? I guess, should we anticipate that the cost and contributions or how do we weigh the cost and then contributions of some of the efficiency gains there? And how could this accelerate or even drive upside to the long-term target margins across the different segments? And then just one quick follow-up on capital deployment. Just in terms of buybacks, you announced a $2 billion today. I guess I just wanted to be clear what was embedded in guidance from a share repurchase standpoint. Stephen Hemsley: I'll let Wayne handle the second one. The first one is a very good question. This is kind of uncharted territory when you think about the scope that this could have. So we aren't giving any guidance with respect to the compounding effect, if you will, of these kinds of changes across the business. But I will comment and reinforce something Sandeep said, and that is we're really deploying it kind of across the enterprise, looking at our large core processes with an idea of modernizing those and then ultimately taking those to the outside marketplace. And then the large overall functions typical of an organization of this size and scope. And I think the potential is great. But I think it would be very premature to offer you kind of guidance in terms of what the impact of those could be. But I wouldn't be making these investments if we didn't think that these were not only strategically important to maintaining the competitiveness of our organization, but also having long-term positive impact, mostly for the consumer and the experience that others will have with us. And then secondarily, with very natural productivity lift that it should produce. Wayne, do you want to take the other one? Wayne DeVeydt: Yes. Relative to capital deployment, our original guidance was approximately $2.5 billion back half loaded. So think of later Q3, Q4. At this stage with the intrinsic value discount we see, we thought it was important for shareholders that we would get at that sooner and the confidence we have in our results. So no changes in the guidance but view it as we are moving quicker at this stage. Stephen Hemsley: And ultimately headed back to kind of where we were. So this is kind of restoring where we were in terms of this program that had been in place for almost 20 years. Operator: Our next question comes from George Hill from Deutsche Bank. George Hill: Wayne, a quick accounting question is, could you quantify the PYD or the impact of the PYD in the quarter? And is there a way to break that out between the UHC impact and the OH impact? Wayne DeVeydt: I think ultimately, you'll see when we file the Q, PYD on a net basis is around a little bit north of $500 million for the organization. While that benefits the quarter, it's important to recognize that we believe we've established somewhat of a similar level of conservatism or prudent view, I would say, at March 31. Until we can see more of this development in April and May from Q1. I think at this stage, it would just be prudent to have a bit of patience right now. But that's roughly the net number that came through from the prior year. Stephen Hemsley: I do think that -- everybody needs to understand that this is the first quarter. Second quarter is usually quite informative in terms of the rest of the year. And so we're, I think, appropriately positioning ourselves based upon what we see so far. We'll take about two more questions, please, and then we'll be available to answer questions through the balance of the day. Operator: Our next question comes from Michael Ha with Baird. Hua Ha: Just a quick clarification. First, how much of the $400 million contribution to the United Health Foundation is Optum Insight? And then my real question, just wanted -- yes, sorry. And then my real question I just wanted to ask about the proposed MA risk model recalibration. So I understand it's now delayed. But when it is eventually implemented, possibly in 2028, a significant number of chronic condition code reimbursement is being cut, and the magnitude of those cuts is what appears concerning to us, the top 10 HCC code being chronic condition making up the majority of RAF prevalence all across the industry and presumably higher for value-based care providers. So with the reimbursement of some of those codes being cut down to 20%. This concerns us for Optum Health. So again, I know it's delayed, but when it is eventually implemented, how do you expect the impact to Optum Health versus industry average? Do you still believe impact should be roughly in line with the industry average? And how do you justify that when your value-based care business is purpose-built to care for polychronic members and therefore, disproportionately exposed to these material cuts to chronic conditions? Stephen Hemsley: Well, I'm not sure that's a question or a statement, but we'll respond to that. Let's take the first part. Wayne DeVeydt: Yes. Relative to the $400 million contribution to the foundation, we are trying to match those contributions relative to where the gains reside. So when we sold and closed our European operations. The gains were all within Optum Insight, north of $500 million and the entire foundation then came out of Optum Insight. And that is included in the reconciliation to our adjusted segments that we provided in the press release. Stephen Hemsley: And that's going to be a pattern we follow to the extent we get gains and things like that, we are invested in the notion that the foundation can be used as a means to really advance the health care system kind of be part of the responsibility we bear for that. We did that in the past and had kind of strayed from that in the last few years and just we're returning to that theme with real commitment. And Bobby, do you want to talk about, start with the... Bobby Hunter: Yes. Thanks, Michael. I'll start with kind of our view on modernization of the program, and I'll kick it to Krista to then talk a little bit about the Optum Health dynamic. So maybe just kind of big picture, we're again, very appreciative of the active and ongoing engagement with CMS in the zones around modernization opportunity. I'm not going to speculate on what changes could happen to the program in future years. That said, we do believe there are opportunities to improve the program. We support modernization. We for example, advocated for chart linking, which was just finalized in the final rule and final notice. We are committed to making the system simpler, more efficient, more transparent, and Krista will get into it, but we see value-based care as a critical and foundational tool to ensuring that success long term. In terms of risk adjustment, specifically, we actually wrote to our modernization agenda in response to both the advance notice and proposed technical rule. So big picture, we remain supportive of a policy that advances and improves the program. But I think as you saw in this last rate cycle, it's important that we all acknowledge that this work is complicated and should be done thoughtfully with appropriate testing and staging and with program stability at the forefront. And in that regard, we stand ready to partner in any and all respects. So maybe then, Krista, if you want to add on the value-based care Optum Health piece. Krista Nelson: Yes. I would just start by echoing what Bobby said just, again, appreciative of the improvement that CMS made. More importantly, their commitment to the Medicare Advantage program and really foundational their commitment to value-based care. The direction of their comments just continue to reinforce what our patients experience and what our payers experience, which is our value-based care model delivers better outcomes, improved health status, better experience and a lower total cost of care for the patients that we serve. And that alignment of incentives is really central to CMS' goal, which they have stated is for all of Medicare, not even just for Medicare Advantage. And so again, just reiterating our commitment to value-based care has really never been stronger. Our focus is really on just improving our execution and our core operating performance in our model, working closely with our payer partners to thoughtfully expand this to more patients and more providers over time. And at this distance, it's really too early to suggest what the impact could be for 2028. But I would also just say inside of some of the proposed changes, there were puts and takes for complex populations. And that's really where our model has a significant benefit for patients as well as our payer partners. And again, we just remain focused on core fundamentals, improving outcomes for our patients and making sure that we can continue to scale value-based care for more patients over time. Stephen Hemsley: And that should carry the day at the end of the day. So we have time for one more question, and then we'll be done. Operator: Our last question comes from Sarah James with Cantor Fitzgerald. Sarah James: I want to try to unpack MLR outperformance under the lens of cost categories. Can you speak to trends across physician, hospital and drugs, how those are performing in the different books versus expectations? And then bridging that to your earlier comments on traction you're seeing from engaging members in clinical programs and network actions, can you clarify what cost categories you're seeing that move the needle on? Stephen Hemsley: Sure. Tim, do you want to comment on it? Timothy Noel: Yes. Thanks, Sarah, for the questions. So again, a little early to get into that level of specificity on utilization patterns. But I think generally, this modest outperformance that we've cited in government programs under the umbrella of UHC, which is largely aligned with our expectations. There's no category I would spike out as being out of line compared to what our expectations were and the modest favorability that we've talked about around government programs is really kind of across the board based on the visibility that we have at this distance in Q1. Stephen Hemsley: Patrick? Patrick Conway: Just on the Optum side of house, Optum Rx is purpose-built to help payers and employers manage drug costs, and we'll save billions and billions of dollars again this year, focus on affordable access to drugs as Jon described, and has been leading in the marketplace. On Optum Health, as Krista described, these are programs that decrease admissions for patients, keep them out of the hospital, get people into their homes where they want to be and care for them across the care continuum, and it's really purpose-built for some of the most complex patients that need this care the most. And our payer partners, whether that's UnitedHealthcare or others, as Bobby said, and we hear this from external payers as well, want that care for their members because it's better quality, better experience and more affordable care. Stephen Hemsley: Thanks, Patrick. So thank you all for the time today. As we kind of build on the momentum as we get started in this year, we realize there's a great deal more work to do. And I think you'll see sustainable progress to position this enterprise to serve all of its stakeholders in a progressively better way quarter after quarter. That's kind of our agenda. And we're going to return to that, and we'll see you next quarter. Thank you. Operator: This does conclude today's conference. Thank you for your participation.
Operator: My name is Chelsea, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Danaher Corporation's First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I will now turn the call over to Ms. Rachel Vatnsdal, Vice President of Investor Relations. Ms. Vatnsdal, you may begin your conference. Rachel Vatnsdal: Good morning, everyone, and thanks for joining us on the call. With us today are Rainer Blair, our President and Chief Executive Officer; and Matt Gugino, our Executive Vice President and Chief Financial Officer. I'd like to point out that our earnings release, quarterly report on Form 10-Q, the slide presentation supplementing today's call, the reconciliations and other information required by SEC Regulation G relating to any non-GAAP financial measures provided during the call and a note containing details of historical and anticipated future financial performance are all available on the Investors section of our website, www.danaher.com, under the heading Quarterly Earnings. The audio portion of this call will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of this call will be available until May 5, 2026. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. Our Form 10-Q and the supplemental materials I referenced describe additional factors that impacted year-over-year performance. Unless otherwise noted, all references in these remarks and supplemental materials to company-specific financial metrics relate to the first quarter of 2026, and all references to period-to-period increases or decreases in the financial metrics are year-over-year. We may also describe certain products and devices which have applications submitted and pending for certain regulatory approvals or are available only in certain markets. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings, and actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements, except as required by law. With that, I'd like to turn the call over to Rainer. Rainer Blair: Thank you, Rachel, and good morning, everyone. We appreciate you joining us on the call today. We're off to a solid start to the year. Our team executed well in a dynamic environment, leveraging the Danaher Business System to accelerate innovation, drive productivity gains and deliver better-than-expected adjusted EPS growth. On the top line, continued strength in bioprocessing and better-than-expected performance in Life Sciences largely offset the impact of a lighter-than-normal Q1 respiratory season at Cepheid. Now looking across the portfolio, trends in many of our end markets were modestly better than our expectations entering the year. In large pharma and biopharma, commercial monoclonal antibody production remained robust, and we continue to see gradual improvement in R&D spending. Trends at smaller biotech and academic and government customers were stable sequentially with some pockets of improved order and funnel activity. Meanwhile, clinical and applied end markets performed well, consistent with recent quarters. Geographically, we saw an acceleration in our Life Sciences and Biotechnology businesses in China. Now the global environment has become more dynamic since the start of the year, including the ongoing conflict in the Middle East. And while we have limited direct revenue or supply chain exposure to the region, we're mindful of potential pressures from a sustained conflict. That said, we remain focused on controlling what we can control, including leveraging the Danaher Business System to proactively manage our supply chain and mitigate inflationary pressures while continuing to invest for the long term. At the same time, we're enhancing our portfolio through strategic M&A, including the pending acquisition of Masimo, where we believe there are significant opportunities to improve performance over time through DBS and our global scale. With the strength of our balance sheet and robust free cash flow generation, we're well positioned for further capital deployment going forward. So with that, let's take a closer look at our first quarter 2026 results. Sales were $6 billion in the first quarter, and core revenue was up 0.5% year-over-year with a 2.5% headwind from respiratory revenue, partially offsetting 3% core revenue growth in the rest of the business. Despite a lighter-than-typical Q1 respiratory season, underlying momentum across the portfolio improved as many end market headwinds began to moderate. Geographically, core revenue in developed markets were down slightly with a mid-single-digit decline in North America and a mid-single-digit increase in Western Europe. High-growth markets were up low single digits with solid performance across most regions, including mid-single-digit growth in China. In China, better-than-expected growth in Biotechnology and Life Sciences more than offset the expected high single-digit decline in Diagnostics, which continued to be impacted by volume-based procurement and reimbursement policy changes. Our gross profit margin for the first quarter was 60.3%, and our adjusted operating profit margin of 30.2% was up 60 basis points, reflecting the benefit of year-over-year cost savings, more than offsetting the negative impact from lower respiratory revenue year-over-year. Adjusted diluted net earnings per common share of $2.06 were up 9.5% year-over-year. We generated $1.1 billion of free cash flow in the quarter, resulting in a free cash flow to net income conversion ratio of 105%. Turning to capital deployment. In February, we announced our intention to acquire Masimo, a leading provider of mission-critical pulse oximetry and patient monitoring solutions in acute care settings. We followed Masimo for over a decade and believe the company is well positioned with its trusted brand, differentiated technology and attractive financial profile. Looking ahead, we believe there are clear opportunities to run the same playbook that has driven value creation across our portfolio for many years, leveraging DBS to drive growth and expand margins while further strengthening our value proposition with customers. We expect Masimo to be accretive to adjusted diluted net earnings per common share in the first full year post acquisition and to deliver high single-digit return on invested capital by the fifth full year of our ownership. The transaction remains subject to customary closing conditions, including regulatory approvals, and we look forward to welcoming the talented Masimo team to Danaher later this year. Now alongside M&A, we made significant progress on organic growth initiatives across Danaher, including new product introductions and strategic partnerships. These efforts are strengthening our competitive positioning while helping customers improve quality and yield, reduce costs and accelerate the delivery of life-changing therapies and diagnostics. So let me highlight a few examples. In Biotechnology, Cytiva launched Fibro dT, a next-generation mRNA purification platform that improves manufacturing speed and efficiency. By eliminating diffusion limitations associated with traditional purification methods, Fibro dT reduces processing time, increases yield and lowers material usage, enabling more cost-effective higher throughput production of mRNA-based therapies. Additionally, Cytiva will showcase its next-generation automated perfusion system, or APS, at the INTERPHEX trade show this week. APS is a cutting-edge tangential flow filtration platform designed to address key challenges of currently available process intensification systems, including product loss, filter clogging and scalability. In Life Sciences, Beckman Coulter Life Sciences announced a strategic partnership with Automata, combining its liquid handling genomic and cell analysis technologies with Automata's AI-ready automation platform. This partnership is positioned to empower scientists with AI-driven tools in an automated workflows to improve throughput, workflow reliability and data integrity and increasingly autonomous research environment. Lastly, Beckman Coulter Diagnostics continued to make progress on menu expansion for the High Resolution DxI 9000 Immunoassay Analyzer with FDA clearance of the HBc IgM assay for acute hepatitis B. With this clearance, nearly all core blood virus assays for the DxI 9000 are now cleared in both the U.S. and the European Union. This closes a historical gap in Beckman's immunoassay test menu and positions Beckman to accelerate new placements, customer wins and growth as the DxI 9000 rollout continues. So now let's take a closer look at our results across the portfolio and give you some color on what we saw in our end markets. Core revenue in our Biotechnology segment increased 7%. Core revenue in Discovery and Medical declined low single digits. Growth in medical filtration and research consumables was more than offset by declines in protein research instrumentation as academic customers continue to face funding constraints. Core revenue in bioprocessing grew high single digits in the first quarter. High single-digit growth in consumables was driven by robust demand for commercialized therapies globally with notable strength in China. Equipment declined modestly in Q1, but we were encouraged to see orders growth of more than 30%, marking the first quarter of year-over-year equipment order growth in nearly 2 years. Stepping back on bioprocessing, monoclonal antibody production remains robust and is expected to continue growing at historical or better rates, driven by new molecules, biosimilars and increased utilization of existing therapies. In fact, we saw a sustained pace of new biologic drug approvals in the first quarter of 2026, building on a robust level of approvals in 2025. At the same time, equipment investment has been relatively muted, which we believe creates a growing need for incremental capacity in the coming years. We're encouraged by improved trends in bioprocessing equipment and believe we're in the early stages of a multiyear investment cycle. We see activity in brownfield projects today with larger greenfield investments expected to follow. Given Cytiva's expansive global footprint, broad portfolio and depth of technical expertise, we're well positioned to benefit from this capacity expansion across biologic drug production. Turning to our Life Sciences segment. Core revenue increased by 0.5%. Core revenue in our Life Sciences Instruments businesses declined low single digits, primarily driven by weakness in North America academic research customers as we expected. While demand at academic research customers remain muted in the quarter, we saw early signs of momentum building in our order book. We continue to see a gradual improvement in large pharma and biopharma investment. Instrumentation demand at biotech customers remain muted but stable, but we were encouraged to see recovery in the funding environment drive improved funnel activity. Core revenue in our Life Sciences consumables businesses collectively grew low single digits. Aldevron grew in the quarter, driven by solid commercial execution and an improved biotech funding environment. And we also saw early pockets of improvement in academic customers and research consumables, contributing to growth at Abcam. We're particularly pleased by Abcam's recent performance as DBS-driven commercial execution has gained traction and cost structure initiatives have driven meaningful margin expansion since acquisition. As end markets improve, we expect continued progress on both growth and margins at Abcam. Moving to our Diagnostics segment. Core revenue declined 4%. Core revenue in our clinical diagnostics businesses grew low single digits, with mid-single-digit growth outside of China. In China, pricing headwinds in the quarter from volume-based procurement and reimbursement policies were consistent with our expectations and the anticipated impact from remaining policy changes remains consistent with our expectations from the start of the year. At the same time, volume growth in China was slightly better than our expectations, an encouraging indicator for future demand and growth as we move past the most significant year-over-year impacts from current policy headwinds. Beckman Coulter Diagnostics delivered another strong quarter with mid-single-digit growth outside of China, led by immunoassay reagents and instrumentation. In Molecular Diagnostics, Cepheid's revenue declined in the quarter as respiratory revenue was down approximately 25% year-over-year, given lower than typical seasonal respiratory infection rates. Cepheid's core nonrespiratory test menu was up mid-teens, led by our 20% growth in sexual health and hospital-acquired infection assays. Now we've seen strong early demand and several notable customer wins for Cepheid's recently cleared Xpert GI panel, a multiplex PCR test that quickly detects 11 common gastrointestinal pathogens from a single patient sample. This strong momentum supports Cepheid's broader multiplexing strategy, and we believe it provides a long runway for continued installed base growth and increased utilization. Now let's briefly frame how we're thinking about the second quarter and the full year 2026. For the full year 2026, there is no change to our expectation of core revenue growth in the 3% to 6% range. This includes an assumption that a slightly lower respiratory revenue outlook of approximately $1.6 billion to $1.7 billion will be offset by modestly better core growth in the rest of the business. Additionally, given our strong Q1 performance, we're raising our full year adjusted diluted net EPS guidance to a range of $8.35 to $8.55 versus our previous range of $8.35 to $8.50. In the second quarter, we expect core revenue to be up low single digits. Additionally, we expect the second quarter adjusted operating profit margin of approximately 26.5%. So to wrap up, we're encouraged by the first quarter momentum across our portfolio and expect growth to accelerate throughout the year as we continue on the path towards consistent, higher core revenue growth. Cost and productivity execution translated into strong Q1 earnings growth, enabling us to raise our 2026 adjusted EPS expectations. During the quarter, we also announced the pending acquisition of Masimo. And with the strength of our balance sheet and more than $5 billion of expected 2026 free cash flow, we're well positioned for further capital deployment going forward. Now we see a bright future ahead for Danaher. Across the portfolio, we're helping customers solve some of the world's most important health care challenges from enabling faster, more accurate diagnoses to accelerating the discovery, development and manufacture of therapies. Over time, we also believe the emerging opportunity in AI will further accelerate the pharma development and commercialization flywheel, improving success rates, lowering development costs and driving increased demand. This in turn is expected to drive incremental demand for our Life Science solutions as well as in bioprocessing as commercial drug production expands. So with the combination of our differentiated portfolio, our talented team and balance sheet optionality all powered by DBS, we're positioned to drive long-term shareholder value while making significant strides in applying science and technology to advance human health. So with that, I'll turn the call back over to Rachel. Rachel Vatnsdal: Thanks, Rainer. That concludes our formal comments. We're now ready for questions. Operator: [Operator Instructions] And our first question will come from Michael Ryskin with Bank of America. Michael Ryskin: Great. Congrats on the results. Rainer, I want to ask a little bit on that progression through the year. As we look at 1Q, you guys did 0.5%. I'm backing into something like 2% core growth in the second quarter, given the various segments. I think that's what the low single-digit implies. So you've got a little bit of an acceleration in the second half of the year. Can you just talk to what's driving that across the segments? I think you're lapping, obviously, some of the respiratory headwinds in some of the Aldevron and VBP, but just confidence in the rest of the business to get that second half ramp and sort of the progression that's implied in the guide through the year? Rainer Blair: Mike, good morning. Well, there's certainly a lot going on in the world today. But as we've said, we're focusing on controlling what we can control, and there's really no change to how we view the progression throughout the year that we laid out in January. In January, we said there are 3 things really needed to happen to support the ramp throughout the year. And all 3 of those things played out as we expected or actually even a touch better in Q1, and we feel good about the balance of the year and here's why. In Diagnostics, the China diagnostic policy headwinds are playing out as we expected and actually patient volumes are higher. We also saw good momentum across the rest of Diagnostics, which showed another quarter of mid-single-digit growth without China and respiratory. And while respiratory was a touch softer, we continue to take share and our core molecular business grew mid-teens. So we expect our broader Danaher portfolio compensates for the touch of softness that we saw there in respiratory. But the quarter also demonstrated strong high single-digit EPS growth even if respiratory was a little bit softer. So those are some important proof points here around the resilience of our portfolio and the work that we're doing. Now as you think about bioprocessing, here, we see strong underlying commercial biologic drug production continue and it drives strength in consumables, and notably, we are really encouraged to see improvement in our equipment order book with over 30% year-over-year growth. Now turning to Life Sciences and the progression there, both China and Life Science consumables globally performed better than we expected. And that includes growth at Abcam and Aldevron, which is really encouraging. And we saw a broad stabilization in our life science end markets with pockets of improvement. So we're also seeing better funnel activity there as a result. So all in, look, we feel really good about how we started the year, and we believe this momentum continues. Matthew Gugino: And Mike, maybe just to give some details around the numbers and the specifics here on the progression. So the way we're thinking about it is core growth, low single digits in the first half of the year, sequential improvement from Q1 to Q2, you see this reflected in the Q2 guide. Together, the headwinds that we've talked about, China diagnostics, respiratory, some of the comps in Life Sciences, they're collectively about a 300 basis point, maybe a little bit higher impact in the first half of the year. These essentially go away by the end of the year and why we believe we'll exit Q4 in that mid-single-digit range. So for the purpose of the guide, the way we've laid it out is we're not really assuming any improvement in our end markets to exit the year at that mid-single digits, and that's why we feel comfortable about that progression through the year. Michael Ryskin: Okay. That's both those super helpful answers. And let me squeeze a follow-up on the bioprocess specifically. Like you talked about, Rainer, strength in consumables, the 30% or greater than 30% equipment order book. It doesn't sound like you're assuming any of that will come through later this year? Or could you see some benefit in the fourth quarter? Should that inform how we think about equipment growth next year? I mean just sort of how do we take those end points -- those data points of consistent high single-digit consumables and order book turning to think about [ BT ] later this year and into 2027? Rainer Blair: Well, we continue to see that strength in consumables. And so we see that progressing through the year consistently. Equipment, what we're seeing there in the order book certainly underwrites and reaffirms the year-over-year improvement that we expected. Recall last year, we were down double digits. This year, the guide assumes that we're flat on equipment. But we do like the activity levels here in equipment, and that marker of 30% year-over-year growth is an important one that is certainly supportive of the out years, and we'll have to continue to see how customer readiness plays in here. Sometimes these equipment orders come and it gets to be a little bit lumpy as customer readiness is a real important factor here as to when you actually end up recognizing the revenue. So we certainly see the guide underwritten here going forward, and we think positively about what this means certainly for the out years. Operator: Our next question will come from Vijay Kumar with Evercore ISI. Vijay Kumar: And want to pass along my congratulations to Matt Gugino and Rachel. Good to have you both on the call. Rainer, maybe my first one for you on your comment around Masi acquisition. I think initially, when people saw the deal, it was a little confusing. People thought this was a MedTech deal. But maybe just walk us through on this strategic rationale. I think you guys mentioned call point synergies between Radiometer and Masimo. My understanding is Masi, some of their tech board sales are perhaps tied to players like Philips, GE HealthCare. So how do you see the call point synergies and potential for DBS driving high single-digit ROI for the business? Rainer Blair: Thanks, Vijay. Look, we see the Masimo transaction as a very typical Danaher deal. And by way of update, the process continues to progress well there, and we're excited to get the Masimo team on board. So all things are positive in that regard. And look, we've been following Masimo for over a decade based on the learnings that we had with Radiometer, which is really our Diagnostics acute care strategy, where we believe that Masimo is a mission-critical player, differentiated technology, all the things that we like to see when we talk about our 3 dimensional acquisition framework. This is a great end market with long-term secular growth drivers. Two, this is the premier asset in pulse oximetry and other applications in acute care diagnostics. It's supportive of what we're doing at Radiometer. In fact, there's geographic synergies as well as Masimo is a little stronger than Radiometer in the U.S., and that reverses as you think about Europe. So those are all very positive. And really, these solutions sit next to each other here in these acute care settings. So to your call point synergies, they are significant, and they are direct synergies as well. And then I'll also add, from a financial profile, this is a transaction that's accretive at all levels, whether it's growth, whether it's gross margins or operating margins. And at the same time, we've been able to identify some pretty significant value reserves here to help us drive that return on invested capital to that high single-digit ROIC in year 5. Matthew Gugino: And Vijay, just to follow up, I mean Rainer talked about some of the synergies here, but what we outlined here a couple of months ago when we announced the deal was, we expect both cost and revenue synergies, $125 million of cost synergies realized by year 5, call it, $50 million of that is on the gross margin side, $50 million on the OpEx side and about $25 million of public company costs and then about $50 million of revenue synergies. Rainer outlined some of the opportunities there where we can probably help Masimo through our Danaher Diagnostics platform, get stronger in positioning around the IDNs or integrated delivery networks. And then there's probably some opportunity for Masimo to help us, including Radiometer, in the U.S. So really excited as Rainer said, to get the team on board here later this year. Vijay Kumar: That's fantastic. Matt, maybe my second one was on margins. I think typically, you guys have some seasonality Q1 to Q2 on respiratory, but I just feel like second quarter, maybe margins, the step down. It's a little bit more than what we saw in the last 2 years. Maybe just talk about sequential margins just given Q1 was such a good execution from a margin standpoint? Matthew Gugino: Yes. Sure, Vijay. I mean like you mentioned, I mean, we typically see a several hundred basis point step down in operating margins Q1 to Q2, that's driven by that typical step down -- seasonal step-down in respiratory. There's probably a little bit more FX impact here Q2 versus Q1, just given where the dollar has moved over the last couple of months. And then also, I think given the Q1 beat here, we wanted to take some of that beat, accelerate some growth investments from the second half of the year into Q2. So the way we're thinking about it is we just did -- we're expecting mid- to high single-digit earnings growth in the first half of the year, all in, and that puts us on the right path here for the rest of the year as we go forward. Operator: Our next question will come from Scott Davis with Melius Research. Scott Davis: Congrats. Can you talk about raw materials, just resins, cost? Rainer Blair: Sure. So with the spike in oil prices and the associated increases in petrochemical derivatives, we have our eyes firmly focused on what's going on there. And while we see some of that pressure out there, it hasn't been really meaningful yet as it relates to our own cost position. That said, we're incredibly vigilant there and leveraging the Danaher Business System as well as our contract positions to mitigate any pressures that are there. And I'll just say, as you would expect of us, Scott, here with the Danaher rigor, we -- every month, with every business, every operating company work through the entire P&L to understand what measures we're taking and how raw material volatility might affect the business. So we are all over that proactively, and to date, we haven't seen any meaningful pressure there. Scott Davis: And same with Middle East, Rainer? Rainer Blair: Well, the Middle East is really driving a good part of that pressure, Scott, in the sense that the volatility in oil prices are driving that. In terms of supply from the Middle East, that really doesn't affect us. So our supply chain is not directly affected by the Middle East, but of course, the indirect effects that you're alluding to here are something that we have to address head on. Operator: Our next question will come from Jack Meehan with Nephron Research. Jack Meehan: One of the big topics in the market at the moment is AI, wanted to get your thoughts on that. The first question is, as you look across the business segments, how do you think AI is influencing customer spending behavior? Your referenced bioprocessing could be a beneficiary. I was curious what you also thought about Life Sciences and Diagnostics, any signs of increased or reduced spending in the business? Rainer Blair: Sure. So let me get started here. You were a little bit in and out in terms of the volume on the question, but I think I've got it. Let me start with the conclusion here, which is we think AI is going to be a growth accelerator for the pharma and biotech industry, both in the near and in the long term. And the reason for that is we think that AI will accelerate the drug development and commercialization flywheel and result in better development pipeline yields. So as you know, the average yield in the drug development pipeline today is just above 10%. There's an enormous opportunity here to improve the yield of the pipeline and to accelerate the biopharma flywheel along with the flywheels of life science tool providers like ourselves. And so this improved yield drives both growth and profitability and reinvestment in the pharma industry. And that, of course, in turn, drives more investment into discovery, including wet lab validation, development in the clinic as well as commercial drug manufacturing. So in the short term, what we're seeing actually is incremental more demand, which we expect to accelerate in the building of biologic models. Autonomous science is the current buzzword that refers to the building of biologic models, and of course, that requires automation, which we're very well represented in. It requires more analytical instruments and it requires more reagents as well. So that's the short-term impact as this practically new market segment of autonomous science starts to play out here, and that plays out first in discovery and then continues to accelerate through the development pipeline. And of course, we're very well positioned here with our life science tools. I mentioned automation, analytical instruments that, of course, increasingly are AI-enabled reagents that support all of those models going forward. And that's a several year driver. These biologic models are in the single-digit percentage of information coverage required, very different than large language models. These biologic models require significantly more information in order to become general use type of model. So that's the short term. And as I indicated then in the long term, what we're going to see is the cycle time of pharma development being compressed and the hit rate, i.e., the yield to be increased. And that flywheel is going to be very good for patients. It's going to be very good for the pharma industry and those partners like ourselves that support that industry. Now as you think about that going through development, Jack, sorry, just to finish up, of course, these more commercialized drugs means more business for our bioprocessing business. We're the best positioned there with the broadest and deepest portfolio. I talked about the innovations that we're launching there. And then lastly, a lot of these drugs are going to be more sophisticated. They are going to require more sophisticated, more accurate diagnostics. If they're not personalized diagnostics, they will require near personalized diagnostics to come online. So again, I start with the conclusion, which is AI is a tailwind in the short and in the long term and is healthy for all market participants, and of course, we're very well positioned there. Jack Meehan: Excellent. Yes, it's clear. There's a lot of exciting things across the business. Maybe for you, Rainer, or for Matt, just extending that from a DBS perspective, are you seeing any tangible signs of productivity benefits from AI in the business? Any cost savings or revenue targets that you'd be comfortable sharing at this point? Rainer Blair: We are getting to the point, Jack, where DBS and AI are synonymous to us in terms of accelerating cycle times and driving efficiencies, and we bring those together. So we talk about AI-enabled DBS and DBS-enabled AI in one sentence, and that will continue to drive efficiencies. Let's just tee it up this way. As you think about the conversation I just had as it relates to the pharma development pipeline, think about Danaher's flywheel also being accelerated by AI-enabled DBS. That will result in more and better products that are AI-enabled, it's going to result in lower costs that we gained through efficiencies, and together, that's going to drive growth and earnings expansion going forward. Operator: Our next question will come from Tycho Peterson with Jefferies. Tycho Peterson: Rainer, I want to go back to bioprocessing. I appreciate you touched on order trends and how that may translate to revenues. But wondering if you can unpack a little bit more what you're seeing pharma versus biotech versus CDMOs? Secondly, are you seeing any replacement cycle demand? We've heard about replacement cycle heating up a little bit as we've done some checks. And then how are you sizing the China opportunity in biotech? I think it was around $1 billion, $1.3 billion if you go back a couple of years, but how are you sizing that opportunity today? Rainer Blair: Thanks, Tycho. Well, starting with China here where you ended up, China continues to be in recovery mode. We're very encouraged with what we saw in China here in the first quarter with double-digit growth in the bioprocessing business. The China biologics and -- driven by the biotech market that you referred to is accelerating. The monetization of the therapies being developed there has been resolved with both the license deals that you see with multinationals, but also the stock exchange and IPOs, once again, functioning properly. And so we expect that to continue to be a growth driver here as we get back to normality. So is the original $1.3 billion that we saw there at the peak in the cards? Well look, we're on the way to improved markets. We're happy to see that. We want to get through 2026 here to see that continued positive progression on China. As it relates to the equipment orders that we saw there, we think that continues to be very constructive to our hypothesis around 2026 and beyond. Both the funnel activity is encouraging as well as you saw that year-over-year orders growth. As I said, that underwrites how we're thinking about the year here. And let's see how the next quarters progress to see whether that has any impact here in 2026, but certainly, it will as we go beyond 2026. Tycho Peterson: Okay. And then maybe just shifting over to Life Science. Encouraging to see the turn there. I think you talked about improved funnel activity, obviously, Aldevron. I think coming out of 4Q, you hadn't assumed Aldevron will grow in the first half of the year. So that's encouraging to see. And then A&G consumables a bit better for Abcam. I guess maybe just talk a little bit about where you're feeling better as we think about the remainder of the year for the Life Science business? Rainer Blair: So in Life Sciences, and you just touched upon it in the consumables area, we expect it to be slightly down here in the year, albeit off of an improved second half of the year. I think as we go forward, we see positive growth for our Life Science consumables business here. For the full year, while that might be a little bit lumpy as we go through the next quarter or 2, we do expect that to go from slightly negative to slightly positive, and that's quite encouraging. And then we also saw China. China is continuing or, let's say, starting up and investing again also in Life Science instruments that was nice to see here in the quarter and the funnels there continue to be quite constructive. So all in all, we see some nice pockets of improvement there. Pharma was strong, continued to improve here quarter-over-quarter. Clinical was robust. The applied markets are playing out as we thought. Only academic remains a bit muted, albeit stable. So we're encouraged here by what we saw in Life Sciences in the first quarter and expect that to play out positively for the rest of the year. Operator: Our next question will come from Casey Woodring with JPMorgan. Casey Woodring: So nice to see the greater than 30% bioprocessing equipment order growth in the quarter, but I assume that number is probably coming off of a lower base year-on-year. So can you just give us any sense of what orders grew sequentially in 4Q or what book-to-bill was in the quarter? Any sense of how those came in relative to your expectations? And then, I'd also be curious to hear more about the brownfield versus greenfield investment dynamic that you talked a little bit about? You highlighted brownfield investments are flowing through and said greenfield would be expected to follow. Just curious on your expectations of when we could potentially see those greenfield orders start to flow through? Is that something you wouldn't be surprised to see in the second half? Rainer Blair: Yes. So Casey, the first quarter orders growth was the first positive year-over-year orders growth that we have seen in nearly 2 years. So by definition, then the comp is a little bit lighter. But if we look at the activity level here quarter-over-quarter, while the first quarter orders were actually down a little bit sequentially, that's absolutely expected as a result of the first quarter activity seasonality step down. So we always see that, and that's why that year-over-year comparator is so important. But at the same time, we see our funnel activity continue to be robust on the equipment side. So I wouldn't focus as much on that as a data point that we're seeing year-over-year growth now, whereas previously, it was sequential growth. So very encouraged, as I mentioned earlier about what we're seeing in the equipment orders. Some of those orders are starting to get a little bit larger. And that dovetails into the second part of your question. So we see equipment orders growth and the funnel activity driven by 2 different dimensions. The first one is that we have seen underinvestment in the industry for the last 2 years as it relates to capacity. Despite the fact that we've seen very robust growth, our consumables business demonstrates that the activity level has been robust and strong here for the last couple of years now. And that means that capacities require expansion. We have biosimilars coming on the market. We have new compounds coming on to the market and, of course, a little bit of underinvestment. So that really explains what we're seeing there, both in terms of brownfield investments as well as the one or the other additional line or even greenfield investment. The second vector is this reshoring dynamic. And here we see, again, increased dialogue, already some funnel activity, even the one or the other order here for brownfield expansions as it relates to reshoring. So we're really encouraged by what we're seeing here. On the equipment side, as I say, it underwrites our hypothesis for the year, and it further supports how we think about the equipment progression and the bioprocessing strength beyond '26. Casey Woodring: Great. That's helpful. If I can just squeeze one more in quickly. Rainer, you talked about solid growth across nonrespiratory within Diagnostics, and you held the guide for the year in Diagnostics, even with the lower respiratory number. So maybe can you just walk through what exactly is offsetting that lower respiratory number for the year? And what's getting better in that nonrespiratory piece that's enabling you to hold the guide? Rainer Blair: Well, there's a couple of things going on there, Casey. The first one being that we continue to take share at Cepheid in the core business, which is very important, and our hypothesis around Cepheid continues to play out. We're launching new assays there. The gastrointestinal -- GI panel is doing very well. Our MVP panel is doing very well. So even within Cepheid, you see strength here that is playing out. And then in our nonrespiratory business and you take out China, we continue to see mid-single-digit growth there with our innovation strategy playing out. We've launched at Beckman Coulter an entire series of new instruments and equipment there, none more important than the high resolution DxI 9000, which opens up entirely new pieces of menu to us. We've closed that blood virus menu gap. And of course, we have that fast track device certification for Alzheimer's disease testing. So we continue to see positive momentum there. And then we haven't even talked yet about the implications of Masimo joining the portfolio. So then the last point I would make, as it relates to China, VBP and the guideline discussions that we have, we're in a very strong dialogue with the China government here. And we've had visibility of what has been going on there for some time. So we feel good about our assumptions around the $75 million to $100 million headwind there in China, and that's only been validated by what we've seen in China here in the first quarter, even if the patient volumes were actually a little higher. Operator: Our next question will come from Dan Brennan with TD Cowen. Daniel Brennan: Maybe just on M&A, the balance sheet is in good shape post Masi. Just wondering how you're prioritizing M&A today if you look at your 3 business segments? Where do you see the biggest opportunities? It's a question we get a lot from investors. And kind of what does the funnel look like? Do you think you could see another sizable deal this year? Rainer Blair: We're very encouraged by what we're seeing in the funnel. As you know, multiples have come in and our 3 -- vector filter on M&A is becoming more and more relevant here. As we've talked about so often, one, our bias to capital deployment is M&A; two, we will not compromise on our discipline as it relates to being in the right end market with the secular growth drivers that we like to see, two, having a premier asset that has defensible positions or the opportunity with real value reserves. And then lastly, of course, the financial model has to work. And what we've been seeing in the current context is that the financial models are becoming more viable. So just to reiterate, one, the Masi deal for us was one that we have envisaged for a long time and the timing of that deal is defined ultimately by the processes that are run and we were ready with the balance sheet and the point of view to execute on that deal, and we're really excited about that. And that fits right into our acute care strategy. Now what is not is a broader investment thesis around the broader MedTech market on the one hand. But on the other hand, it is also not indicative of our point of view as it relates to Life Sciences, Diagnostics and Bioprocessing. We see here plenty of opportunity to deploy capital and are fully prepared to do that as the opportunities arise. Matthew Gugino: And Dan, I mean, from a balance sheet perspective, post close of Masimo, we'll go to about 2.5x net debt EBITDA. Given our strong free cash flow of $5 billion plus per year as well as EBITDA generation, I mean, this leverage will come down fairly quickly. So it gives us the ability to remain active on the M&A front even in the near term. So feel good about how we're positioned from a balance sheet side of things. Daniel Brennan: Yes, that sounds great. And maybe back to a question, I think Mike started off the call with. Your core growth is anchored at 3% this year. I think consensus is around 5% next year. So assuming the consensus is in the right ZIP code, can you just walk through the key levers to generate 5% growth next year, including what could push down or higher up in your LRP towards the high single-digit level? Matthew Gugino: Yes, Dan, I mean it's April of 2026, I think we're a little bit too early to talk about '27, but I'll just kind of go back to what we talked about with Mike here at the beginning of the call, where we're talking about low single-digit core growth in the first half of this year. There's about 300 basis points or a little bit more of impact from the headwinds that we talked about. China Diagnostics, respiratory, the comps in Life Sciences, that's why we feel comfortable about exiting Q4 in that mid-single-digit range. And really getting through those headwinds enable us without really any improvement on the end market side to get comfortable into that mid-single-digit range. Operator: And our last question will come from Doug Schenkel with Wolfe Research. Douglas Schenkel: Matt, maybe a follow-up on your comments there at the end in response to Dan's question. What gets you to the high end of guidance for the year? Is it really just what you described there moving past the headwinds and maybe those actually reversing in a more robust way than we're seeing right now? And maybe related to that, as we sit here today, should -- would you recommend that we essentially stay at the lower end of the guidance range for the year until we see some improvement, both in terms of those headwinds abating and maybe some improvement in end markets. So that's the first topic. And then another follow-up on M&A. Just to be clear there, from a readiness standpoint, could you do something in any segment as we sit here today, or given the pending Masimo deal, would it be less likely that you would do something in Diagnostics as you're in the process of integrating that business or getting ready to integrate that business? Matthew Gugino: Thanks, Doug. So look, we talked about in January, continue to anchor to that -- the low end of the 2026 core growth guide for planning purposes. In terms of what gets us to the higher end of the guide, I think you need to see a couple of things, Doug. First, you need to see some further improvement across the Life Sciences end markets. I think we're encouraged by what we saw here in Q1, but we need to see some of those policy headwinds further abate, especially in the U.S. and what we've seen there. I think China, good start to the year, but we need to see further growth acceleration as well. And then on the biotech funding side, again, starting to see some improvement, but we want to see that funding turn more quickly into orders. I think the second thing, bioprocessing, we probably need to see it a little bit better than the high single-digit growth. We need to accelerate on the consumable side as well as get that equipment growth going here, again, encouraged by the order patterns, but probably need to see it move a little bit quicker. And then the other thing here that we talked about on the respiratory side, we probably need to see a little bit above normal respiratory season to finish the year here in Q4 back to that kind of endemic $1.8 billion rate that we see going forward. So I think all in all, we're encouraged by the start to the year. We're already at 3% ex respiratory today and encouraged to see some of the underlying trends improve as we talked about. Rainer Blair: And Doug, as it relates to M&A, we have both the balance sheet capacity as well as the leadership bandwidth here to execute additional acquisitions in any of the 3 segments and feel very good about how we've positioned our talent and develop that talent in order to be able to do that. Operator: We've now reached our allotted time for questions. So I'll turn the call back over to management for any additional or closing remarks. Rachel Vatnsdal: No, perfect. That is all we have. You can reach us with questions today. Thank you so much for joining. Rainer Blair: Thanks, everyone. Operator: Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Ahmed Moataz: Hello, everyone. This is Ahmed Moataz from EFG Hermes, and welcome to IDH's 2025 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, Chief Executive Officer; Sherif El Zeiny, VP and Group CFO; and Tarek Yehia, Director of Investor Relations. As usual, the company will start with a brief presentation, and then we'll open the floor for Q&A. IDH's management, please go ahead. Tarek Yehia: Good afternoon, ladies and gentlemen, and thank you for joining us for the full year results. My name is Tarek Yehia, I'm Head of Investor Relations. Joining me today Dr. Hend El Sherbini, our CEO; and Mr. Sherif El Zeiny, our CFO. Dr. Hend will begin the call with a summary of the main highlights from the year. After that, I will discuss in more detail the main macro and geopolitical trends seen across our markets. After my presentation, Mr. Sherif will offer a deeper analysis of our financial performance. We will then open for Q&A. With that, I will hand it over to Dr. Hend for her introduction. Please, Dr. Hend. Hend El Sherbini: Thank you, Tarek, and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. I'm pleased to report that 2025 was another very strong year for the group with robust operational and financial performance across our core markets and continued progress on our strategic priorities. The results we are presenting today reflect not only improving market conditions in key geographies, but also the tangible impact of the strategic initiatives we have been implementing over the past 2 years, particularly around network expansion, service diversification, digitalization and operational optimization. Throughout the year, we continue to strengthen our leadership in Egypt and Jordan while making very encouraging progress in Nigeria and Saudi Arabia. We are also very pleased with the sustained improvements in profitability across the income statement, which continue to validate the scalability of our model and our ability to translate growth into stronger returns. More broadly, we are encouraged by the increased resilience of our platform, which today combines scale, a richer service mix and improving efficiency across markets. Turning to our performance in more detail. During 2025, we continue to build on the strong momentum established over the prior year, delivering 37% revenue growth year-on-year supported by growth across both volume and value metrics. Test volumes increased by 11% during the year, with all operation geographies contributing to this expansion, supported by stronger patient engagement, deeper penetration in both walk-in and corporate channels and improving refer flows. At the same time, our average revenue per test rose 24%, and reflecting a richer test mix, broader uptake of radiology and specialized diagnostics [indiscernible] of the pricing actions introduced earlier in the year. These trends also helped us further strengthen our average test per patient metric, which reached 4.6 tests per encounter, demonstrating the continued depth of patient relationship and our success in expanding cross service utilization across our platform. In Egypt, momentum remained very strong throughout the year, supported by solid growth in both volume and value alongside strong brand equity and a more supportive macroeconomic backdrop. Test volumes in Egypt continue to expand steadily, while average revenue per test saw a strong uplift driven by favorable mix dynamics, including higher value radiology, radiotherapy, specialized diagnostics and corporate channels. Egypt remained the core engine of the group performance, contributing 84.6% of total revenue in 2025 and continuing to demonstrate strong scalability, resilience and operating efficiency. The continued expansion of our physical network in Egypt remained a key growth driver during the year. Over the past 12 months, we added 137 new branches in Egypt, bringing the total to 724 locations nationally at year-end. These new sites have helped deepen our presence, not only in Greater Cairo, but also in underserved and fast-growing regional cities. Allowing us to better serve both contract and walk-in patients. Our household service remains a strategic differentiator, sustaining its strong contribution of around 20% of Egypt's revenues continues to demonstrate the effectiveness of our post-pandemic strategy and reinforces our position as an early mover in home-based diagnostics in the region. Al Borg Scan continues to demonstrate strong momentum as a key component of our long-term strategy to build a more integrated diagnostics platform. During 2025, we took an important strategic step with the acquisition and integration of Cairo Ray for Radiotherapy, which broadened our capabilities in radiotherapy and strengthened our position in oncology diagnostics. This transaction enhances our ability to participate more meaningfully in higher-value specialized diagnostics and supports our ambition to build a more comprehensive offering for patients and referring physicians. We expect radiology and radiotherapy to play an increasingly prominent role in our growth mix over the coming period, supported by expanding service capability, greater patient awareness and growing demand for specialized imaging and treatment support service. Over the past 2 years, a key strategic priority for IDH has been the successful launch and upscale of our Saudi operation. I'm pleased to share that our presence in the Kingdom continued to progress very encouragingly during 2025. With strong momentum supported by growing demand, deeper market visibility and sustained improvement in both volume and value metrics. During the year, Biolab KSA generated SAR 5 million in revenue, representing a 252% year-on-year growth as test volumes and patient throughput increased sharply, and the business benefited from the expansion of the network to 3 branches. This growth continues to highlight the effectiveness of our ramp-up strategy in the market, which is designed to accelerate revenue growth and establish Biolab KSA as a recognized provider in the large but highly fragmented [ Saudi's ] diagnostics market. At the same time, we continue to advance our growth approach, which includes targeted marketing campaigns to build brand recognition, selective promotion initiatives to drive patient acquisition and ongoing efforts to strengthen physician and patient engagement. While still in the early stages of development Biolab KSA is demonstrating strong operational traction and reaffirming our belief in the long-term potential of Saudi Arabia as a key pillar in the group's regional growth strategy. As always, profitability remains a core focus for us, and we are very pleased to see sustained improvement across all levels of the income statement. We continue to benefit from strong operating leverage, tighter cost controls and better resource allocation across our subsidiaries, including Nigeria, where Echo-Lab delivered a full year of positive EBITDA, marking a key milestone in its turnaround and confirming the potential of this high-growth market. Overall, both COGS and SG&A as a share of revenue continued to decline, supported by disciplined cost management and our growing digitalization efforts. COGS to revenue fell from -- fell to 57.3%, while SG&A declined to 15% from 16.9% last year, underscoring the success of our optimization initiatives. Consequently, our EBITDA margin expanded to 34.9% from 29.7% last year, while gross profit margin rose to 42.7% compared with 38.1% in 2024. These efforts, combined with strong top line growth and improved pricing and mix have translated into meaningful margin expansion and greater earnings quality with adjusted net profit increasing 79% year-on-year. I'm also very pleased to share that the Board of Directors has declared a dividend of USD 0.0085 per share for the year ended December 2025, presenting a total distribution of USD 4.9 million. This reflects our commitment to delivering sustainable shareholder value while preserving the flexibility to fund attractive growth opportunities. In parallel, we remain prudent in our capital allocation approach, and we'll continue to reassess distribution in line with evolving market conditions and investment needs. Before handing the call back to Tarek, I would like to briefly touch on how we view the business as we move into 2026. We entered the year with a stronger platform, broader geographic footprint and improved profitability profile, which we believe positions us well to continue expanding access to high-quality diagnostics while driving sustainable growth. Our focus remains on deepening our leadership in Egypt, accelerating the ramp-up in Saudi Arabia, building on the turnaround achieved in Nigeria and continuing to improve operating efficiency across the group. At the same time, we remain mindful of evolving regional developments including the escalation of the U.S., Israel conflict with Iran in early 2026, which may introduce heightened uncertainty across the region, particularly in markets such as Jordan and Saudi Arabia. With that, I'll hand the call back over to Tarek and Sherif, who will take you through key trends across our markets and a more detailed breakdown of our financial performance of the year. Thank you very much. Tarek Yehia: Thank you, Dr. Hend. So far this year, we have continued to operate in a relatively stable condition with supportive macro trends and constructive trajectory across all our key markets. In Egypt, we saw inflation continue to ease materially compared to prior periods, helping support a more constructive operating environment for both business and consumers, improve ForEx liquidity and a stronger investment confidence continue to a more stable backdrop for Egyptian pound during much for the year, which in turn supported planning visibility and reduce pressure on imported inputs. More recently, however, management has been closely monitoring, evolving regional developments, including escalation of U.S. conflict with Iran in early 2026. Similar to Egypt, Nigeria also saw gradual improvement during 2025 with reforms and relative currency stabilization, helping support a recovery in patient activity and more predictive operating conditions. Over in Jordan and Saudi, the health care demand backdrop remained broadly supportive through 2025. Also both markets continue to be exposed to wider regional geopolitical developments. Jordan continued to benefit from a stable health care system supporting consistent demand for diagnostics, while Saudi continued to benefit from structural reforms momentum under Vision 2030. Recent geopolitical development in the region have increased uncertainty and continue to monitor the potential implication for economic activity and patient volumes. Turning quickly to our latest full year results. Egypt continued to deliver a strong broad-based growth with revenue rising 41% year-over-year supported by both volume expansion and significant increase in average revenue per test, particularly driven by radiology, radiotherapy and higher value diagnostic. Meanwhile, Jordan continued its solid performance reporting revenue growth in both Egypt and local currency terms, test volumes increased by 21% year-on-year, supported by Biolab ongoing promotional digital outreach and loyalty initiatives. In a market where volume-led growth remains critical for long-term sustainability, we are pleased to see Biolab's strategy continue to support strong demand and patient retention. In Nigeria, Echo-Lab achieved a full year of positive EBITDA, supported by successful implementation of turnaround strategy and improving operational conditions. We are increasingly confident in the long-term potential of our Nigeria subsidiary to expand its service offering and capture significant upside offered by this growing market. In Saudi, the ramp-up continued very encouraging with revenues increasing supported by stronger brand visibility, network expansion and patient growth. With the third branch now operating and the group aiming to launch 3 additional branches over the coming months, we expect a further growth in revenue and scale in the Kingdom. Finally, in Sudan, operation remains significantly constrained by the ongoing conflict with only 1 branch partially operating and no material change to the report at this stage. I will now hand the call over to Mr. Sherif, who will provide a more detailed overview of our cost, profitability and balance sheet position for the year. Sherif Mohamed El Zeiny: Good afternoon, ladies and gentlemen, and thank you for your time today. As Tarek mentioned during my presentation, I will focus on costs, margins, profitability and our working capital and liquidity position before we open the floor to your questions. In line with the priorities we set out at the start of the year profitability for fiscal year '25 improved materially supported by our group-wide efforts to enhance operational efficiency and maintain tight control over spending. A major focus area over the past 2 years has been digitalization where we have continued integration data tools and analytics into our internal platform, procurement systems and financial planning process to improve decisions making and cost discipline. These efforts, combined with stronger operating leverage and better resource allocation helped drive meaningful improvements in efficiency with both COGS and SG&A as a share of revenue declining versus last year. More specifically, our COGS to revenue ratio improved to 57.3% in '25, down from 61.9% in '24, supported by disciplined inventory management and stronger purchasing costs. The most notable improvements came within raw materials, which decreased to 19.3% of revenue from 22% last year, reflecting our scale advantages and smarter procurement practices. At the same time, total wages and salaries as a share of revenue remained well controlled, underscoring our balance between supporting our staff with operation -- appropriate salary adjustments and continuing to optimize headcount and productivity. As you can see in bottom right chart, these efficiency gains translated directly into stronger profitability with gross profit margin expanding to 42.7% from 38.1% last year and adjusted EBITDA margin rising to 34% from 29.7% in '24. On the SG&A front, spending remained well contained. With SG&A as a share of revenue declining to 15% despite continued investment in strategic growth initiatives. The main increases within SG&A were in wages and salaries as well as advertising and marketing expenses, reflecting annual salary adjustments, selective additional -- additions to support growth and continued marketing investments in Saudi Arabia alongside targeted campaigns in Egypt and Jordan. Even with these investments, the group continued to capture operating leverage highlighting the scalability of the business and the impact of tighter cost discipline across function. Moving to our bottom line. We reported net profit of EGP 1.3 billion in '25, up 29% year-on-year. As highlighted earlier, fiscal year '24 included elevated ForEx gain, which created a high comparative base and distort direct comparisons. When controlling for ForEx expects in fiscal year '24 and nonrecurring items in fiscal year '25, adjusted net profit increased 79% year-on-year to EGP 1.26 billion with an associated margin of 16.1%. As always, we maintain a disciplined approach to working capital management while supporting growth and preserving a strong liquidity. Similarly, we saw our cash conversion cycle improved further to reach 104 days in December '25 versus 155 days at the end '24. It is also important to mention that, as expected, we saw a decline in Days Inventory Outstanding, a stronger sales momentum and more efficient inventory turnover during the second and third quarter of the year following the seasonal Ramadan slowdown in March. Finally, as 31st of December '25. Our total cash reserves stood at EGP 2.1 billion compared with EGP 1.7 billion in '24, with a net cash balance of EGP 472 million versus EGP 226 million last year. This strong liquidity position supported the Board's decision to declare dividends of USD 4.9 million while preserving flexibility to fund attractive growth opportunities. Thank you for your attention. We now welcome any questions you may have. Thank you. Ahmed Moataz: [Operator Instructions] We've actually received a couple of questions in the chat. I'll take them one by one, so that you're not confused. Within the volume growth that you've seen in Egypt, would you say that it has been driven by both existing and recently opened branches or it's entirely driven by recently opened ones and the like-for-like within the mature ones are either flat or declining? Tarek Yehia: Actually, it is both the new branches that we opened during the year and all the existing ones, both were contributing to the sales. Ahmed Moataz: Understood. The second question is on your plan for Saudi in terms of branch openings. Do you have a set in place number of branches you intend to open in '26 and beyond? That's one. And the second, would you be able also to provide us on when you expect EBITDA breakeven for the operations in Saudi and maybe also revenue contribution, not just right now, but maybe a longer-term revenue contribution? Tarek Yehia: Saudi during 2025 have existing 3 branch, and we are planning for next year is 6 branch -- in 2026, another 6 branch to reach by end of 2026, 9 branches across all Saudi as much as we can. And EBITDA is turning positive by 2028. Ahmed Moataz: All right. The following question is on Sudan update, but you've already mentioned that till now, there is no update. You only have 1 branch opened. Another question is on guidance for 2026. If you can provide on that? And also, if you can also disclose the magnitude of price increases that you've already done in January of 2026. Tarek Yehia: For 2026, we are expecting an increase of 25% on sales, a 10% increase in prices and 15% from volume. We're keeping an EBITDA of range -- same range of EBITDA of around 33% to 34%. Ahmed Moataz: Understood. The last part is with the recent weakness in the Egyptian pound and also the geopolitical issues that are somewhat reflecting in higher either freight costs or importation cost, maybe also raw material costs. How do you see this impacting the business? And also how much coverage of inventory do you already have that is secured into the business that would kind of save -- act as a safe haven before you start to see that impact on your P&L? Tarek Yehia: Business till now is not affected in Egypt, and we are securing inventory in order to keep the operation up and running, and we secured the inventory until August. Ahmed Moataz: Understood. [ Jena ] has 3 questions. You've answered -- the first one, I'll just say it out loud, so that's covered by everyone. Please provide revenue, EBITDA and net income guidance for 2026. You've already answered this, but maybe if you have guidance for net income. You've mentioned revenue and EBITDA. The second is -- you've answered most of the second question. The only thing is, that hasn't been answered, what's the percentage of total test kits that are imported? And another follow-up is how many months of test kit stocks do you have? I'm not sure if when you answered and said till August, this covers the test kits or your entire raw materials? Hend El Sherbini: So we import all our kits. So nothing is produced in Egypt, almost nothing. We -- and yes, we have a coverage till August. Ahmed Moataz: All right. And for the entire business, what is the annual target for a number of branch openings going forward? Tarek Yehia: Around 200 across Egypt, Saudi and Jordan. Ahmed Moataz: This is for 2026? Or this is an annual target in general? Hend El Sherbini: This is for 2026, but it includes clinics and hospitals. So they are not -- they're just the regular branches. Ahmed Moataz: Okay. Understood. Andrea is asking -- or actually, first, congrats on the results. Can you please provide any details and guidance on the share of radiology revenue as a percentage of total as it has stayed flat at 4.7% despite the Cairo Ray acquisition. Tarek Yehia: It's still 5% of revenue. Ahmed Moataz: You mean the target in general is 5%, right? Tarek Yehia: The actual is 5%, and it will be increased over years when the business is picking up more and more. Ahmed Moataz: Okay. [ Jena ] is asking with almost $40 million of cash on your books, are you looking to do a buyback? Hend El Sherbini: We have -- we actually have an approval for a buyback. However, we haven't decided to do that. But it is an idea that we're discussing. Ahmed Moataz: Understood. Someone is asking a follow-up on a prior question, which is do you have any revenue targets for Saudi Arabia in 2026? Tarek Yehia: Yes. The target is SAR 18 million. Ahmed Moataz: Right.[ Zoher ] is asking your branch openings target in 2026 for Saudi was 6. Why has this now been pushed out? Tarek Yehia: No, it is the same 6. We have 3 existing in 2025, and we're increasing by another 6 in 2026. Total will be by end of 2026 is 9. Ahmed Moataz: All right. Another follow-up from [ Zoher ] is why decide such a low dividend payout when the CapEx in Egypt ahead is low, given the clinic and hospital model that you have? Tarek Yehia: As we are balancing between investing and distributing dividends, we declared these dividends, and we are seeking more investments in order to grow. So we will revisit if needed, but still we keep it as it is now. Ahmed Moataz: Understood. [ Anup ] is asking household service percentage of revenue has been stable at around 20%. Is this the level of saturation for the service? Or is there further potential to increase household service contribution to total revenues? Hend El Sherbini: We're continuously expanding household service, expanding the team and the service and the value creation for our patients. Right now, it's 20% of revenue. However, the revenue itself is increasing. So the -- I mean the revenue coming from household is also increasing. But I think we still have a big room for growth in household. Ahmed Moataz: Understood. [ Zoher ] is asking if you can provide CapEx forecast or budget for 2026? And if you can break that down by geography? So Egypt, Jordan and Saudi. Tarek Yehia: CapEx is around 5.9% of total sales versus last year of 4.8%. The main CapEx will be for Egypt. Some will go for the new branches. Some goes for IT warehouse, then followed by Saudi and followed by KSA. Ahmed Moataz: [Operator Instructions] So the final question we've received for the time being is how much of your Egypt expansion do you expect will come from hospitals and clinics. Tarek Yehia: It's around 9% coming from this new business, we are going in-house and clinics -- hospitals and clinics. Ahmed Moataz: All right. We haven't received any further questions. So I'll pass it back to you in the case you have any concluding remarks. Otherwise, I can conclude the call now. Hend El Sherbini: Thank you very much, everyone. Ahmed Moataz: All right. Thank you very much to IDH's management and to everyone who participated today. Have a good rest of the day, everyone. Sherif Mohamed El Zeiny: Thank you very much. Bye-bye.
Vesa Sahivirta: Good morning, everyone, and welcome to Elisa's First Quarter 2026 Conference Call. We start with a presentation given by CEO, Topi Manner; and CFO, Kristian Pullola. And after that, we move on to Q&A. And I think we are ready to start, and I give word to Topi. Please go ahead. Topi Manner: Thank you, Vesa, and good day, everybody. Welcome to this Elisa Q1 earnings call. And let's get right down to business and briefly go through the Q1 highlights. During the quarter, our revenue decreased by 1.3%, and this was to a large extent driven by lower equipment sales impacted especially by higher device prices due to the shortages of memory chips worldwide. Telecom service revenue increased by 0.5%, driven by fixed service revenue. The mobile service revenue declined by 0.1% as the full impact of intense campaigning in Q4 was visible in the MSR. International software services revenue increased by 6.9%. During the quarter, however, we sold a small software business in Brazil. Adjusting for this, the comparable organic revenue growth was 7.7% in Elisa Industriq. Comparable EBITDA on group level increased by 2.2%, especially driven by our cost efficiency measures. Cash flow continued to develop strongly during the quarter and increased by 15.7%. What was notable during the quarter was that the churn decreased to 17.2% from 23% level of Q4. So this 6% decrease -- 6% unit decrease in churn is a bigger decrease than the typical seasonality would be. Post-paid voice subscriptions decreased by 2,700. And in the fixed broadband subscription base, we experienced strong growth, 14,000 on the back of the strong customer demand that we are seeing on the market. The transformation program, where we are targeting EUR 40 million of cost savings during the calendar year of '26 is progressing well according to the plan, and we will deliver the communicated savings during this year. So it was indeed a quarter of slower growth, as stated, driven by equipment sales. What impacted the revenue was a small divestment that we made, EpicTV that impacted the revenue with EUR 3 million. However, it did not have any EBITDA impact as such. The biggest increases in revenue came from the international software services and from digital services. EBITDA during the quarter landed at EUR 203 million in accordance with our own expectations. EBITDA margin increased to 37%, partially reflecting the little bit different mix of revenue resulting from the decrease in equipment sales. In telecom service revenue, as stated, we grew with 0.5%. And there, we did see the full impact of the lower price levels in Q4. The upsells from 4G to 5G, however, continues intact. I will come back to this a little later. And then certainly, in the fiber broadband, we saw growth as described a moment ago. The churn during the quarter was 17.2%, and this is broadly in line with the long-term average churn on the Finnish market. And what is notable is that the churn also decreased to a lower level than it was in Q1 2025. So then looking into the mobile KPIs in a little bit deeper fashion. It is good to note that our new sales prices in mobile subscriptions on the consumer side of the business returned to Q1 '25 levels in March. So in the upper right-hand corner in the graph, you are seeing the prices of new consumer mobile subscriptions. And what you also see there is that during the year '25, we saw gradual pressure to new sales margins culminating in the campaigning of Q4. And now we have been seeing the mentioned return to Q1 '25 levels. What is also noteworthy that going forward, there will be a bit of time lag in how the new sales prices turn into mobile service revenue as there are fixed term contracts in the customer base of our competitors. And when we acquire those customers to us, there typically is a time lag of some months before the new prices actually come into effect. The churn we already discussed in terms of sales and marketing costs. During the Q4 last year, we had EUR 5 million of more sales and marketing costs. And then those campaigning-related costs were decreased during Q1 in line with the churn development. However, the sales and marketing costs are still a tad higher than they were during Q1 '25. But all in all, these metrics are pointing to the right direction. Then briefly going through the business segment by segment. In consumer customers, the revenue continued to be weighed by the competitive situation and the mentioned equipment sales. However, the cost savings measures were effective and EBITDA improved with 1.4%. Broadly, the same story in corporate customers business. The equipment sales impacted the revenue negatively. So very much the same phenomenon related to equipment sales was seen also on the corporate side of the business. Our traditional fixed network, PSTN will be ramped down at the end of June altogether. And there we are seeing a decreasing number of customers, and that is weighing on revenue a bit. But as stated, the cost savings measures also on the corporate side of the business were successful and the EBITDA grew with 2.1%, in line with the total Elisa number. International software services, the comparable organic revenue growth was the mentioned 8%. And we took a step forward in terms of profitability during the quarter. The EBITDA grew to EUR 3 million in this business from the EUR 2 million on the same period last year. So we are seeing gradual improvement in the Elisa Industriq profitability, and we expect to continue to see that when we go forward. However, in software business, you will need to remember that there is a little bit different type of seasonality in Elisa Industriq. Q1 and Q4 are typically the strongest, whereas Q2 and Q3 are seasonally softer. In Estonia, our revenue increased by 3.4% and EBITDA increased by 2%, in line with the rest of Elisa. The churn number remained on the level of previous quarters in Estonia and is 11.7%. We are very focused on implementing our strategy. In the mobile part of the business, you saw the key metrics and the development during the Q1 as stated, there's a bit of time lag in the new sales prices turning into mobile service revenue. But during the latter half of this year, we expect to see improved momentum in mobile in line with the guidance that we have been giving. In the fiber business, we see strong customer demand, and we are investing in FTTH as well as FTTB. And also the data center connectivity, fiber connectivity for data centers is a tangible business opportunity. And during the course of this year, we would expect to see some deals coming through in this customer category. In international software services, we are continuously improving the profitability, and we do see further potential in that one by accelerating the growth, but also by integrating the multinational business and various business units better together and realizing synergies in the process. In terms of productivity, we are progressing with our transformation program. And as stated, we will be delivering the targeted cost savings during the course of this year. At the same time, we have taken note of the development of LLMs recently, and that's a clear indication that there is further productivity potential in AI, meaning that we will also continue the AI-driven transformation going forward during the coming years. So these 3 areas, 5G and fiber, international software services and productivity will be the main levers to take us toward the strategy targets that we have communicated. 5G penetration at the end of the year passed 15% -- 50% milestone. And that upsales trend continues to be intact. During the quarter, we reached 53% penetration. And we are especially seeing now big corporates on the corporate side of the business increasing their 5G subscription take-up rate. The average billing increase when we upgrade customers from 4G to 5G continues to be intact. That monthly billing increase is EUR 3. And also in terms of value-added services, we have continued to increase the penetration of security features in our mobile subs -- customer base, by means of new sales. And now the hard bundled security features have been taken up by 700,000 of our consumer customers. During the quarter, we also launched a new value-added service called Who's Calling service, which enables customers to see the caller ID even if they don't have that recorded in their phone previously. And this has been very well received by our customers. We already by now have 130,000 paying customers for this service. What is also notable related to the Estonian market is that in Ookla Speedtest Awards, we got the award for the best 5G network in Estonia, giving us competitive advantage. In the fiber business, in the mentioned way, the momentum is strong, and we continue to invest in fiber. In new -- in digital services related to home services, during the quarter, we published a fifth season of Ivalo, which is the most popular of our Elisa Entertainment original series, getting good reviews from customers. On the corporate side of the business, we continue to win new customers. Earlier this week, we announced that we have been winning the cyber and network business of Valmet, a global large Finnish company, also clearly outlining that we have the capability to serve our large corporate clients globally in these areas. In International Software Services, we continue to have a record high backlog. And the order intake, the bookings during the quarter were strong. We won a number of new customers, big, large global customers in these areas. Some of these are not public references. Some of them are. Boygues Telecom in France is one. And then also for Gridle for our energy optimization business, we won Vantage Towers as a customer in Spain, Vantage Towers being the tower company of Vodafone, the biggest tower company in Europe. What is also worthwhile to mention that in Elisa Industriq business, we saw some revenue delays from customers in Middle East due to the war in Iran. And that brings me to the outlook and guidance for this year. So the guidance remains unchanged with the range of EBITDA that we have been communicated previously, the CapEx guidance and then the guidance-related assumptions, especially related to the telecom service revenue, where we are indicating a range of 1% to 3% growth during the course of the year. So with that, I will hand over to Kristian. Thank you. Kristian Pullola: Good. Thank you, Topi, and also welcome on my behalf. In Q1, we saw solid EBITDA performance despite lower revenues. This was helped by our transformation efforts coming through as well as good cost discipline in general. As Topi said, the temporary sales costs were lower on a sequential basis, however, still slightly up year-on-year. Some of the revenue decline that we saw in Q1 related to divestments and ramp-downs of older technologies. The EBITDA impact of these was limited. The same is true for the decline in the equipment sales, which was driven by increased uncertainty as well as higher device prices on the back of especially memory component shortages. One note here, Elisa has somewhat seasonal business when it comes to Q1 versus Q2. Both are positive -- both of these 2 drivers are positive for Q1 and negative for Q2. As Topi said, in Industriq, we typically see strong licensing revenue in Q1 as a result of annual renewals. And in that sense, there's a negative seasonality going into Q2. Also in TechOps, we do see higher network-related costs in the second quarter when the overall construction activity starts in spring. And for this year, spring has arrived early in Finland, so we will see somewhat more of this impact. Also then maybe a second reminder, just on the yearly dynamics. Last year was solid when it comes to the first half and weaker when it comes to the second half, especially Q4 was weak on the back of the competitive intensity. Thus, we will have a tougher compare in Q1 and Q2 and then kind of easier compares as we work into the second half and especially for Q4. Then when it comes to CapEx, our strict disciplined continued. Our investments are focused on the areas of improving our technology leadership and which will enable us to continue to upsell both 5G and work on the -- work with the fiber momentum. In addition to this, our investment is going into us renewing our IT infrastructure so that we will be able to drive both simplification as well as productivity longer term. On the cash flow side, the first quarter was a continuation of our strong cash performance. We have now seen 5 consecutive positive quarters of positive development for net working capital. We will continue to drive improvements in cash flow as we move on. But of course, improvements in net working capital is going to be tougher and tougher to achieve when we have optimized the different items. Inventories are already at good levels. As I said last quarter, there's more work to be done on both receivables as well as on the payable side. But overall, a solid quarter from a cash flow development point of view. As a result of that, our capital structure continues to be solid. Our maturity profile is good. We did not have any material -- we did not have any material transactions during the quarter. And during the remainder of the year, we will start to focus on proactively refinancing the '27 maturities that we have. Then on capital returns, Elisa continues to have industry-leading capital returns. We saw a slight uptick as a result of having somewhat lower cash balances at the end of Q1 compared to the slightly elevated levels that we saw at the end of the year. And we do believe that with cash flow focus and continued strict discipline on CapEx, we will continue to produce industry-leading returns also going forward. With that, Vesa, back to you, and let's start Q&A. Vesa Sahivirta: Thank you, Kristian. And now we move on to Q&A part. And we have many questions on the line, so we appreciate that we'll keep them short. Thank you. Operator: [Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. Firstly, on your cost or sales and marketing costs. And then secondly, on your visibility on the mobile service revenue trends through the year. On the sales and marketing costs, you mentioned -- you highlighted they're still above where they were a year ago. Can you explain why that is, given churn is back to average levels and the pricing environment recovered? What's driving that heightened sales and marketing cost competition? And then secondly, just on the mobile service revenue trends, it sounds like the first quarter is the trough for mobile service revenue growth. But could you just help us understand how we should see that improvement come through in the second quarter and then into the second half? It sounds like it will be a more meaningful improvement into Q3 than into Q2. How that's going to be balanced between volume and ARPU? And how much visibility you have on that given the lags that you mentioned? Kristian Pullola: So maybe if I start on the sales and marketing costs. You're right, the costs were still somewhat elevated compared to a year ago, but down sequentially. And I think the logic here is that you don't pull back your sales and marketing efforts before you see evidence of the market environment being such that it justifies lower spend. And we started to see the evidence during the quarter. And because of that, we took down the temporary costs during the quarter, and thus, they were still a bit up on a year-on-year basis. Topi Manner: And then, Andrew, related to your question about MSR. So, starting with the metrics that we just went through. So the new sales prices during the quarter returned to Q1 levels in March. And the churn was notably lower than it was in Q4. And now the churn is in line with our long-term average. When you consider the mechanics of how the new sales prices turn into mobile service revenue, you will need to factor in a time delay of some months, approximately a quarter. This is because mobile operators in this market have fixed-term contracts in their portfolio. And when we win customers from our competitors, we do the deal now, but the mobile's subs actually transforms into our customer base with the agreed pricing a little bit later when the fixed-term contract with the competitor actually ends. So this is a mechanic that will need to be factored in. And then related to Q2, what is perhaps a useful reminder is that last year, in Q2, we started the rollout of the security features, the hard bundled security features to our mobile subs, supporting the MSR for that particular quarter. There is no similar initiative in the plans for this year. And thus, when you consider mobile service momentum, that momentum should be visible on the latter half of this year, increasing towards the end of the year. And all this boils down to our telecom service revenue guidance where we are guiding a range of 1% to 3% during the course of the year where mobile service revenue is the main contributor. Andrew Lee: Can I just follow up, so just on the sales and marketing costs. So it sounds like you're reducing those through Q1. As things stand today, late April, sales and marketing costs now today where they were a year ago? Or are they still not back to normalized levels? Kristian Pullola: So I think we are here to discuss the first quarter. But as I said, we are responding to the market situation with our costs. And because of that, the costs started higher during Q1 and ended up lower during Q1. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: My first is on the cost savings. You mentioned EUR 40 million. Just wondering what's been delivered in Q1 and how you expect that phasing to look for the remainder of the year? And then my next question was just around the MSR into Q2. You mentioned that you're not going to have the support of security features, which got launched this time last -- well, Q2 last year. But surely, you will still have a better improving effect because you're going to have more people moving on to security versus Q2 last year because you would assume you'd have ramped up that business. So isn't that still going to be a tailwind in Q2? Kristian Pullola: So maybe if I start with the cost savings. So as Topi mentioned, we are on plan on delivering the full EUR 40 million. And as we have said earlier, the majority of the cost savings kicked in during the first quarter. Some of it is visible in our lower operating expenses and impacting positively the personnel costs because a large chunk of the savings that were implemented came from there. But of course, we also have driven activities outside of headcount reductions, which is visible. Some of it is also coming through the CapEx line item and thus coming through as depreciation -- lower depreciation at a later point. And so in that sense, there will not be much more acceleration of the impact as we move through the quarter because of the fact that the majority is already up and running as we speak. Topi Manner: And then related to your question about MSR and the security features, so if we look at MSR development in Q1 and we decompose that a bit, then clearly, the impact of intense campaigning and the lower prices in Q4 introduced a drag to mobile service revenue during Q1. And that drag was offsetted by the continued upsales from 4G to 5G and the value-added services where the security features are the most important element. And actually, when you look at the upsales isolated. And when you look at the value-added services isolated, they continue to provide the consistent growth that we have been seeing in the past. Then in terms of security features and the mechanics of security features supporting the MSR during the course of this year. What you need to remember is that when we started the rollout of security features last year, we rolled that out to that part of our customer base, roughly 600,000 customers where the customer contracts were of ongoing nature in force until further notice and the terms and conditions allowed us to change the offering and with that, change the pricing of those customers. Now that back book rollout has largely been completed. And what we are now doing is that we are offering the security features to customers in new sales. And the 100,000 pickup that you saw during the quarter is a result of new sales. Operator: The next question comes from Andreas Joelsson from DNB Carnegie. Andreas Joelsson: I was just a little bit curious and I hope you can help us understand a little bit the experience that you have from the higher churn environment that you had in Q3 and Q4. If something similar would happen again, would you react the same way as you did last year? Or have you -- some new experiences that will make you change that action that you took at the end of last year? Topi Manner: No, I think that -- I mean, our market is competitive and every situation in the market is unique. And we continue to monitor the market, and we continue -- and we focus on developing our own competitiveness, our own services in the market. And when you look at the things that we have been doing recently, as an example, we have been increasing the penetration of fixed-term contracts in our customer base as a churn prevention measure. And that measure has been bearing fruit in Q1, as you see in the churn number. Andreas Joelsson: Perfect. Maybe a follow-up on the mobile post-paid subscriber base. It is continuing to decline. Can you explain or tell us a little bit more where that decline is? And then I talk about excluding machine-to-machine, of course. Topi Manner: Yes. I mean if you look at that number, what is important to remember is the market trend in mobile broadband. So mobile broadband subscriptions are declining for us, and they seem to be declining on the whole market when customers are transitioning partially to fiber connections. And we do see a pickup in fiber connections as witnessed by our numbers. So this is something that you will need to factor in. And then when we look at the post-paid voice subscriptions and the development of net adds in that number, then as stated, the churn decreased notably during the quarter. Also, our intake of new customers decreased during the quarter. And this was because we did not respond to all of promotions that we saw on the market. Operator: The next question comes from Fredrik Lithell from Handelsbanken. Fredrik Lithell: Just a follow-up on your last comment that you described in Q1 that you did not respond to all of the promotions you saw in the market. Is that the same to say that you have seen sort of more activity in terms of campaigning in Q1 compared to earlier -- not compared to Q4, but maybe compared to Q1 '25, i.e., they don't need to be more aggressive, but more of them in the market. Is that a fair point? Topi Manner: The market continues to be competitive in Finland. But I think that here, I come back to the slide that we presented. So during the quarter, we saw the new prices -- new sales prices return to Q1 levels in March, and we saw the sales and marketing cost decrease. We saw a significant drop in churn that is clearly more than the typical seasonal drop in Q1 would be. Fredrik Lithell: Okay. That's perfect. My original question was really about the ISS, if I may. I mean you had 7% growth in the quarter, and you depicted a few details around your situation there with the pipeline that seems to be growing and some delays in Middle East. How are these sort of contracts structured? They are not perpetual licenses. Are they SaaS type of contracts with some variable components in them for revenue to grow with volume? Or how does it work in these contracts? Topi Manner: Yes. Absolutely. So as stated in Elisa Industriq business, the organic growth during the quarter was 8%, and we saw a step forward in terms of profitability the way we would like to see in this business. And if we decompose the contract structure a bit, then part of the revenue is driven by licenses. Part of the revenue is driven by recurring revenue, SaaS model and maintenance. At the end of last year, the share of recurring revenue was 50%, and there's some quarterly fluctuation in that share based on how many licenses we have been selling on a given quarter. And then part of the revenue is also driven by implementation projects with customers. And here, in that category of revenue, the revenue recognition is dependent on how the implementation projects move forward with customers. Operator: The next question comes from Derek Laliberte from ABG Sundal Collier. Derek Laliberte: So I wanted to come back on pricing. You mentioned this selective price increases in early Q1. Can you elaborate a bit on the scope and customer response of this? And during Q1 and into early Q2 now, are you still seeing improved rationality amongst the competitors? Or are there still pockets of sort of aggressive or increased aggressiveness on pricing? Topi Manner: Yes. I think that we will need to come back to the Q2 developments when we report the Q2 during the summer. In terms of the market development in Q1, what I would just like to come back to is the slide that we presented that our new sales prices returned to Q1 '25 levels in March and then the decrease in sales and marketing cost and the notably significantly lower churn. So looking at those numbers, I think that you get a good picture of the market development during Q1. Derek Laliberte: Okay. Great. And then strategically for you, I mean, has there been any change here given the current environment in terms of how you're prioritizing ARPU versus subscriber growth? Topi Manner: Yes. I mean our long-standing target on the market has been that we maintain our market share, and we will continue to do so going forward. That is part of our strategy. And what we have also communicated already in our Capital Markets Day a bit more than a year ago is that we focus on providing customer value. Upsales from 4G to 5G in mobile services is a big growth driver for us and so is value-added services, namely security features. So we continue to focus on that strategy, and we bring new value elements, new offerings to customers and to the market all the time. And then during this quarter, a good example is the Who's Calling service that already has 130,000 paying customers. Derek Laliberte: Okay. And finally, on the B2B trends, apologies if you mentioned this, but you have flagged some pressure there. So what did you see in Q1 in terms of, say, demand pricing and the contract renewals? Topi Manner: Could you please repeat the question? So was it about broadband or what... Derek Laliberte: About B2B -- no B2B corporate trends. Topi Manner: Yes. In B2B corporate, if we talk about mobile services, it continues to be a competitive marketplace. Our offering in B2B mobile services is strong with the value-added services and for example, with AI tools, where we clearly differentiate from competition. And then if you look at the other product categories of B2B business, IT services, cybersecurity and these kinds of things, we continue to enjoy some momentum in that one. We are clearly competitive on a market that is tough. The market is characterized by sluggish macroeconomic situation in the Finnish market, impacting corporate customers' willingness to invest. And that, of course, impacts the competitive landscape on B2B business. But at the same time, we are clearly competitive, and we are winning customers, both in IT and especially in cybersecurity, where our capabilities are really strong today. Operator: The next question comes from Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: I just want to come back to the topic of cost cutting, please. Obviously, this year, you've got a big benefit from the EUR 40 million of savings. And you referred to earlier in the call, the idea of sort of using AI to drive further savings. As we look into next year, do you anticipate a sort of similar sized benefit from your cost measures? Or in other words, do you think you can continue to do a similarly sized sort of big headcount reduction? Or should we expect the cost-cutting benefits to normalize as we head into next year? Kristian Pullola: So again, we have nothing new to tell here in addition to the EUR 40 million transformation program that we announced last year. And as I said earlier, which is now kind of up and running in our P&L as savings. In the prepared remarks and in our report today, we do acknowledge that we live in a world where transformation will need to be on the agenda for now, and that's what we're going to do. Transformation related to AI means both improving your competitiveness and driving revenues through that as well as then driving productivity improvements on a structural as well as on a continuing basis. There is no new program or no new amounts to be announced here. We feel that we need to do this to be able to achieve our strategic targets that we have set for ourselves. Topi Manner: And generally speaking, related to the AI, we clearly see that our industry and Elisa in specific, will be benefiting from AI. AI will be increasing our bread and butter business, namely mobile and fixed connectivity. And we have an opportunity to use AI for digital services growth and for software growth. And then in the areas of productivity or in the productivity-related areas, we are working continuously in improving the automization of our customer service. And where we do see possibilities is in the area of AI-assisted coding -- prompting to be exact, improving the productivity of our software development. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is really on your comments earlier about the interest in the market of taking on fiber products. I'm just wondering if you can share with us about your fiber investments, whether you think it could be a good opportunity to organically expand your fiber footprint or you could be looking at some infrastructure opportunities if some of the network is up for sale? And the second question I have is really on your comments earlier about the -- pushing the upgraded security features into your base. I think last year, when you talk about the rollout I had an impression that you would -- it's possible to roll out throughout the base within 18 to 24 months of the launch. But now I think you're commenting on you are actually adding on new sales. Just wondering whether that could create a particular delay of this 18 to 24 months time frame? And if so, any reason behind that? Kristian Pullola: So maybe I'll take the fiber-related question first. So as I said in the prepared remarks, we do see momentum in fiber. Customers want reliable and fast connections for their homes, for their base and fiber is now from an affordability point of view at the price point where consumers are responding well to it. We will -- on the back of this, we are investing in fiber, building additional fiber. As I said a quarter ago, we are leveraging a joint venture structure that we announced last year for the majority of that build. And at the same time, we will be pragmatic and look at, are there more cost-efficient ways of doing that by also looking at the existing assets. And if they are at sale at reasonable cost, then we'll evaluate that against building new fiber ourselves. Topi Manner: And related to your question about the rollout of the security features, yes, the rollout schedule of security features has been prolonged. And the driver of this is that during the -- due to the competitive situation last fall, as a churn prevention measure, we increased the share of our fixed-term contracts notably. And now we have a larger share of those fixed-term contracts in our customer base. And for those contracts, we cannot do the back book changes in similar fashion than we can do for those contracts that are in force until further notice. However, all of this is something that we have already factored in into our guidance. And the guidance assumptions where we are stating that the telecom service revenue is increasing during this year within the range of 1% to 3%. And that mobile service revenue is the main contributor. Operator: The next question comes from Felix Henriksson from Nordea. Felix Henriksson: I have 2. One is very simple, just to double check on MSR. Do you think that growth will further decelerate in Q2 versus Q1 before turning better in H2 given the time delay that you discussed as well as the tough comps? And then the second question is relating to the data center connectivity, which you have started to talk about. Could you expand a bit on the opportunity? What could the potential contract structures in this domain look like? And how large deals are we talking about? Topi Manner: Yes. So coming back to the mobile momentum and mobile service revenue. As mentioned earlier in this call, when we look at the new sales prices and how they translate into mobile service revenue, it's good to understand the mechanic and the time delay, when we win customers from our competitors, a meaningful portion of those customers are having fixed-term contracts with their old providers. And that means that even though we do the deal today, those customers might be moving to our customer base 2 months from now, 3 months from now. And that delay needs to be understood. And then as stated in Q2 last year, we started the rollout of the security features, which provided support for MSR for Q2 last year. Putting all of this together, we should be seeing improved mobile momentum during the latter half of this year, in line with the guidance that we have been giving on telecom service revenue. And then to your question related to data centers, I mean, this market is about to take off in Finland, and we have been seeing data center operators reserving land and quite a bit of that has taken place. We have been also seeing announcements for new data centers starting to come in during the course of this spring. So this leads us to expect that during the course of this year, we will be seeing sizable data center announcements on the market. And we do have a business opportunity in that. We are naturally advantaged in a sense that we have the most extensive backbone network, fiber network in the country, and it's shorter distance to connect to that backbone. And then therefore, we feel that it's realistic for us to get a sizable chunk of that data center connectivity market going forward. It is an emerging market. During the course of this year, we will be seeing most likely deal announcements and then the revenue starts to come in, in '27 and onwards. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: Just 2 questions. Just coming back to Finnish mobile, price rises on new offers in Q1. I was just wondering, was this a deliberate action from Elisa to raise prices? Or did pricing just follow the market? Just wondering your previous comments that you did not respond to some promotions over the past few months. I'm just wondering, are you trying to lead the market as a rational incumbent? Or was it the MNO's pulling back in the quarter? And then just secondly, on cash flow, comparable cash flow is a clear focus for you, but we don't have cash flow guidance. So just 2 parts to this question. Can you clarify if free cash flow is expected to grow over the next couple of years? And secondly, how important is cash flow in assessing the success of the business? Is it as important to you as revenue growth, EBITDA, ROCE, all these other sort of financial KPIs? Topi Manner: Well, to your first question, we are the market leader in this market. And we certainly would like to think that we are rational in managing our business. So then looking at Q1, what you see in the mobile metrics is that we come back to Q1 levels in terms of new sales prices in March. And you see the churn decreasing significantly more than the seasonal drop typically would be and also the sales and marketing cost decreasing. So coming back to my earlier point, I think that, that gives quite a good picture of what happened on the market and for our business during Q1. Kristian Pullola: And again, on the cash question, cash is a critical KPI for us that we both drive as well as assess our success based on. You're correct that we haven't guided specifically on cash flow as of now, something for us to consider for the future. But clearly, it is a measure that we judge our performance based on. And if anything, we'll be doing more of going forward rather than less. Operator: The next question comes from Ulrich Rathe from Bernstein. Ulrich Rathe: I have one clarification and a question. The clarification is you pointed out the mechanics of the customer sale versus the contribution. Can I just confirm that you're not including these customers that you have signed up in your customer base that you report before they actually start to contribute revenues? The second question or the real question is, if we look back at what happened there in autumn, how confident are you, if you look at the market overall, about the sustainability of the current recovery away from this slump? In other words, how stable do you think the market environment is vis-a-vis the causes of what happened last autumn? Topi Manner: Yes. On the first question, so -- no, we count customers into our net adds once they move into our customer base and the revenue recognition starts. So that's it. And then in terms of the market dynamics, I think that, first of all, we just need to come back to this in the coming quarters when we report our Q2 and when we report our Q3. If you look at the long history of the market, you have been seeing previously also these kinds of periods of intense competition like we saw during the latter half of last year. Similar phase was gone through during the years of '17 and '18. Operator: The next question comes from Ondrej Cabejšek from UBS. Ondrej Cabejšek: Two questions from me as well, please. The first one, apologies, I may have misheard on your back book, but I wanted to -- on the back book comments that you made, but I wanted to basically understand if now that the market seems to be stabilizing and the macro situation in Finland seems to be also improving. Are you again planning to kind of put in effect some kind of back book price rises the same way and the same kind of quantum on the -- that you did in 2Q '25, I believe it was around 400,000 customers that you raised prices for. Is there something similar plan for 2Q '26 because I believe that was the kind of assumption going forward? That's the first question. And second question, if I may, on the promotions that have been kind of dragging effective pricing down, are we correct to assume that most of these people or subscribers are locked in for 12 months. And so as they come out of the heavily kind of promoted pricing, I guess, around 2H '25, the assumption would be that they get back to some kind of normal pricing levels? Or what do you expect there as they come out of contract? Topi Manner: Starting from your latter question. So yes, you would be correct to assume that those customers that we took in during Q4, to a large extent, were with fixed-term contracts for 12 months. And then that will be a factor that will be impacting the market, the mobile market at the latter end of this year. And then related to your first question about back book price increases and offering changes, the like of offering changes that we did in the spring of last year with the security features, as stated -- we are introducing new individual services to the market all the time like we, during Q1 did with the Who's Calling service that now has 130,000 paying customers. But we do not have bigger offering changes like the security features in the plans for Q2. On corporate side of the business, B2B side of the business, there might be some sort of inflationary price changes that will be conducted, which is part of the sort of normal cycle in the B2B business. Ondrej Cabejšek: And apologies if I may follow up because the line was a bit choppy. So last year, you mentioned there were -- part of the 2Q price rises were the hard bundled security features, and you do not plan to do something similar this year, but straight price rises is something that is kind of in the plan? And also, yes, if you could please answer that, this is the straight price rises, I guess, is that something that the market is now allowing you to do you think? Topi Manner: No such plans. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have also 2 questions. Still wanted to get a bit more color on the situation at ISS. I think you mentioned some delivery headwinds from the geopolitical turmoil in Q1. Are you anticipating more headwinds going into Q2? And any comments from sort of order intake during the recent months? And then secondly, you booked EUR 4 million of one-off costs in Q1, where this related to the EUR 40 million savings program? And do you still see more coming during later of this year? Topi Manner: Yes. Related to Industriq, we did see strong bookings in Q1 and then quite happy with that. And then related to the war in Iran and the Middle East situation, we saw some revenue delays in Q1, partially because for customers in the Middle East, some projects were delayed. And with that, the revenue recognition was delayed and then partially because the anticipated sales just was prolonged given the outburst of the war in Iran and the impact to places like Dubai. So those were the short-term impacts that we have seen. And then generally, the impact of war in Iran, as a business, I think that we are in a fortunate position that the direct impacts of war in Iran to our business are very, very limited. To Industriq, we will need to see what those impacts are. As stated so far, we have been only seeing limited impact to a handful of existing clients and prospective clients in the Middle East. Kristian Pullola: And I think on the transformation costs, yes, we did book some in the quarter. And yes, they relate to the measures that we have taken. And yes, based on our prepared remarks, we do see that in the current environment, there is an opportunity to do transformation on an ongoing basis. So I would expect that there would also be some such costs also in future quarters as we take the appropriate measures. However, not to the same extent as we had kind of higher costs in Q4. Operator: The next question comes from Max Findlay from R & Company Redburn. Max Findlay: Apologies if the first question has already been answered while I was struggling with the line. So last year in ISS, there were some delivery delays in Q1, which saw revenue deferred into Q2. And in your preprepared comments, you mentioned that there was some revenue delay in this year's Q1. So I guess I'm trying to triangulate these comments with other comments you've made about 2Q and 3Q being weaker quarters generally. Should we expect these quarters to be lower than the 8% achieved this quarter? And then there's been a change in ISS' leadership. Can we expect any changes to strategy to accelerate growth to achieve your 10% organic growth target? And any comments on further acquisitions and disposals? Topi Manner: Yes. So indeed, Mikko Soirola has been appointed as the CEO of Elisa Industriq business. He is a very experienced software leader, having worked in international software space for 20 years. And the better part of last decade, he has been a CEO of successful software businesses. So the job to be done for Mikko is to accelerate growth, to improve the profitability of Elisa Industriq, carry out bolt-on M&A and integrate the M&A and integrate the portfolio of businesses that we have today better to achieve synergies. So it is a new strategic phase that we are entering into in Elisa Industriq. And then related to the first part of your question, what I was referring to is that the typical seasonality in Elisa Industriq business and in many of the other software businesses for that matter, is that Q2 and then Q3 are sort of seasonally softer than the start of the year and especially Q4. So that is something that is good to keep in mind when understanding the sort of dynamics of the Elisa Industriq business on a stand-alone basis and the impact to Elisa numbers. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Vesa Sahivirta: Thank you, and thank you for participating in this conference call. Thank you, Topi. Thank you, Kristian, and we wish you a very great reporting seasons. Topi Manner: Thank you very much. Kristian Pullola: Thank you. Bye-bye.
Operator: Good day, and thank you for standing by. Welcome to the PrairieSky Royalty Limited First Quarter 2026 Financial Results 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, Andrew Phillips, President and CEO. Please go ahead. Andrew Phillips: Thank you, Daniel. Good morning, and thank you for dialing into the PSK Q1 2026 Conference Call. On the call from PSK are Pam Kazeil, Dan Bertram, Mike Murphy and myself, Andrew Phillips. Before we begin, there is certain forward-looking information and statements in our commentary today, so I'd ask listeners and investors to review the forward-looking statements qualifier in our press release and MD&A, which can be found on our website. Funds from operations totaled $94.9 million, an 11% increase from Q1 2025, resulting from higher production and stronger bonus consideration. Total production grew 4% from Q1 of 2025 with oil production showing 2% growth year-over-year. Condensate and pentane production reported as part of the NGL stream remains at record highs for PrairieSky at approximately 35% of the NGL stream. Elevated bonus consideration was a result of 48 new leasing arrangements with 37 distinct oil and gas companies. Given the lower rig count year-over-year, we are pleased with the 201 spuds on PrairieSky lands versus the 200 in prior years -- prior year. With the increased pricing for oil and a continued weak Canadian dollar, we are observing early indications of higher planned activity levels post breakup. Based on strip pricing, we're anticipating a material reduction in debt levels by the end of 2026. A number of our recent leasing arrangements are for exploration rather than pure development, which is a positive trend. Rising capital cycles can help unlock the vast optionality inherent in an 18.6 million acre land base. In addition to this, more operators in the Clearwater are exploring for oil up and downhole where they already have an existing producing horizon. We expect this will unlock numerous new developments over the next 10 years. With the current development inventory on land, we can replace the approximate 9.5 million barrels of royalty production on our lands for 61 years. New discoveries have the potential to unlock more inventory. I will now turn the call to Mike to further discuss activity on our lands. Michael Murphy: Thanks, Andrew. The first quarter saw a record number of Duvernay wells spud at 26, including 20 in the West Shale Basin. First West Shale completions from this program are currently underway with new wells expected to be on production starting in mid-May and driving light oil growth through the back half of the year. Similar to 2025, we expect the Duvernay to be our fastest-growing play in 2026 based on budgeted activity levels. Multilateral activity continues to grow on PrairieSky lands with 66 spuds in Q1 '26 relative to 41 in the first quarter of last year. In the Clearwater, expanding waterflood development continues to promote a highly sustainable production base and positively impacting corporate decline rates. With depth and quality of inventory in the play, we anticipate outsized Clearwater growth to continue for years to come. In the Mannville Stack, oil production was estimated at greater than 1,000 barrels a day in Q1, given the strong winter drilling activity. Finally, our thermal volumes are positioned for near-term growth with a new 8-well pair pad at Lindbergh currently steaming with oil volumes expected to ramp to a peak rate of approximately 260 barrels a day at the PrairieSky. I'll now turn it over to Pam to discuss the financials. Pamela Kazeil: Thank you, Mike. Good morning, everyone. PrairieSky's first quarter production increased by 4% compared to Q1 2025, reflecting 2% growth in oil royalty volumes and 6% growth in NGL production. Oil growth was led by the Clearwater play, where production rose approximately 20% year-over-year and the Duvernay, where oil royalty volumes increased by approximately 75% from Q1 2025. NGL growth was driven primarily by activity in the Duvernay and Montney plays. Higher production combined with strong benchmark pricing resulted in royalty revenue of $118.5 million for the quarter. Other revenues totaled $15.3 million, supported by another strong quarter of leasing activity. Lease bonus consideration reached $12.3 million, more than double the level recorded in Q1 last year, with the majority of activity concentrated in the Duvernay play and the Mannville heavy oil play. We continue to view leasing activity as a leading indicator of future development and anticipate that operators will be active across these plays throughout 2026 and beyond. Funds from operations were $94.9 million or $0.41 per share, representing a strong start to the year. PrairieSky declared dividends of $61.6 million during the quarter, corresponding to a payout ratio of 65%. Excess cash flow was allocated to acquisitions totaling $4.2 million, share repurchases under our NCIB of $8.3 million, which canceled 269,000 shares and a debt reduction of $6 million. We ended the quarter with net debt of $257.7 million. PrairieSky also declared its second quarter dividend of $0.265 per common share for shareholders of record on June 30, 2026. With that, I'll turn it back to the moderator to begin the Q&A. Operator: [Operator Instructions] Our first question comes from Jamie Kubik with CIBC. James Kubik: Just a quick question on oil volumes for the quarter. Obviously, good volumes out of the key plays for PrairieSky. But can you talk about some of the plays that perhaps didn't perform as well in the quarter that led to the slight volume decline quarter-over-quarter? Andrew Phillips: Yes, you bet, Jamie. The big one when you look from Q1 of last year to Q1 of this year was the 200-barrel net decline net to us from the Lindbergh thermal project, and that's more of a transitory item. So if you added that back, you'd kind of be in line with all of our quarters for the last 16 quarters. And in addition, you had a little slower Q4 just on the more conventional assets and saw modest declines there, but we're still expecting the kind of mid-single-digit number on average throughout the year on the oil side. James Kubik: And then last one for me. Can you just talk a little bit more on the bonus consideration that you saw in the quarter? Is that repeatable? And should we think about activity on that side of things with respect to what was leased? Andrew Phillips: Yes. The bonus consideration is definitely a bright spot. I don't think there was one larger bonus there with respect to a smaller Duvernay lease. Just given the pricing that's come up so substantially in that area, we were able to command a higher price for that. But I think overall, the entire portfolio of assets saw pretty strong leasing right from Southeast Saskatchewan, where there's really short cycle times, and we're expecting a bit of an uptick in activity all the way through to Western Alberta. So it's definitely a positive sign to see more activity from producers and people increasing their inventory there. But to answer your question on the repeatability, probably that would be a higher one. I think that was the highest one we've had in 15 quarters or something like that. So that was great. We're very pleased with that. And activity on the leasing side does remain robust, but that was a higher-than-anticipated number for the following quarters for the balance of the year. Operator: [Operator Instructions] Our next question comes from Aaron Bilkoski with TD Cowen. Aaron Bilkoski: So I have another question about your lease issuance bonuses, but more on the structure of them. If I remember some point in the past, you started offering some flexibility to your counterparties. You offered lower upfront bonuses in exchange for multiyear reoccurring cash payments. I think the idea was to leave more cash with the producers to spend so you could generate royalty revenue from that faster. I guess my question is, are you still using this type of structure on the lease issuance bonuses? Andrew Phillips: Yes. It's a good question, Aaron. And I think for the right play, like typically for the longer-term leases, we'll enter into agreements like that. We've done that with some of the small-scale site deleasing in Saskatchewan, whereby they get up to a 7- to 9-year lease depending on where it is. And they have to have a minimum amount of activity and then pay a recurring bonus after 3 years and then another 3 years. We've also done some agreements like that in the Duvernay. So we are expecting a meaningful Duvernay payment in the back half of the year. But again, for most conventional leasing, a lot of the leases that we entered into -- in the previous quarter were shorter-term leases, people with near-term drilling activity plans and just onetime bonus payments. But the great thing about the very short-term ones is if they don't get to it in the 1-year time, we'll typically be able to re-lease those lands right away to either that operator or a competing operator in the area. Aaron Bilkoski: Andrew, on the shorter-term leases, are there capital or activity commitments associated with that? Or you just put a short-term lease on it and if they don't drill, you get it back? Andrew Phillips: Exactly the latter. And I think there's a bit of a balance. Like if you're going to hold our lands for a longer period of time, we'd like to see some activity committed and/or back-end bonus payments if you want to retain the lands. But with these shorter-term leases, it's effectively a drilling commitment. If you have a 1-year lease, you've almost -- by the time you survey the well, get the well license, get it drilled, get it on production, you almost need that year just to do that. So typically, we view a 1-year lease and in some areas, a 2-year lease as a drilling commitment to a certain extent, but we do not ask for drilling commitments on those shorter-term leases. Operator: I'm showing no further questions at this time. I would now like to turn it back to Andrew Phillips for closing remarks. Andrew Phillips: Thank you to all our shareholders very much for your support, and I hope everyone has a great rest of your week. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Vesa Sahivirta: Good morning, everyone, and welcome to Elisa's First Quarter 2026 Conference Call. We start with a presentation given by CEO, Topi Manner; and CFO, Kristian Pullola. And after that, we move on to Q&A. And I think we are ready to start, and I give word to Topi. Please go ahead. Topi Manner: Thank you, Vesa, and good day, everybody. Welcome to this Elisa Q1 earnings call. And let's get right down to business and briefly go through the Q1 highlights. During the quarter, our revenue decreased by 1.3%, and this was to a large extent driven by lower equipment sales impacted especially by higher device prices due to the shortages of memory chips worldwide. Telecom service revenue increased by 0.5%, driven by fixed service revenue. The mobile service revenue declined by 0.1% as the full impact of intense campaigning in Q4 was visible in the MSR. International software services revenue increased by 6.9%. During the quarter, however, we sold a small software business in Brazil. Adjusting for this, the comparable organic revenue growth was 7.7% in Elisa Industriq. Comparable EBITDA on group level increased by 2.2%, especially driven by our cost efficiency measures. Cash flow continued to develop strongly during the quarter and increased by 15.7%. What was notable during the quarter was that the churn decreased to 17.2% from 23% level of Q4. So this 6% decrease -- 6% unit decrease in churn is a bigger decrease than the typical seasonality would be. Post-paid voice subscriptions decreased by 2,700. And in the fixed broadband subscription base, we experienced strong growth, 14,000 on the back of the strong customer demand that we are seeing on the market. The transformation program, where we are targeting EUR 40 million of cost savings during the calendar year of '26 is progressing well according to the plan, and we will deliver the communicated savings during this year. So it was indeed a quarter of slower growth, as stated, driven by equipment sales. What impacted the revenue was a small divestment that we made, EpicTV that impacted the revenue with EUR 3 million. However, it did not have any EBITDA impact as such. The biggest increases in revenue came from the international software services and from digital services. EBITDA during the quarter landed at EUR 203 million in accordance with our own expectations. EBITDA margin increased to 37%, partially reflecting the little bit different mix of revenue resulting from the decrease in equipment sales. In telecom service revenue, as stated, we grew with 0.5%. And there, we did see the full impact of the lower price levels in Q4. The upsells from 4G to 5G, however, continues intact. I will come back to this a little later. And then certainly, in the fiber broadband, we saw growth as described a moment ago. The churn during the quarter was 17.2%, and this is broadly in line with the long-term average churn on the Finnish market. And what is notable is that the churn also decreased to a lower level than it was in Q1 2025. So then looking into the mobile KPIs in a little bit deeper fashion. It is good to note that our new sales prices in mobile subscriptions on the consumer side of the business returned to Q1 '25 levels in March. So in the upper right-hand corner in the graph, you are seeing the prices of new consumer mobile subscriptions. And what you also see there is that during the year '25, we saw gradual pressure to new sales margins culminating in the campaigning of Q4. And now we have been seeing the mentioned return to Q1 '25 levels. What is also noteworthy that going forward, there will be a bit of time lag in how the new sales prices turn into mobile service revenue as there are fixed term contracts in the customer base of our competitors. And when we acquire those customers to us, there typically is a time lag of some months before the new prices actually come into effect. The churn we already discussed in terms of sales and marketing costs. During the Q4 last year, we had EUR 5 million of more sales and marketing costs. And then those campaigning-related costs were decreased during Q1 in line with the churn development. However, the sales and marketing costs are still a tad higher than they were during Q1 '25. But all in all, these metrics are pointing to the right direction. Then briefly going through the business segment by segment. In consumer customers, the revenue continued to be weighed by the competitive situation and the mentioned equipment sales. However, the cost savings measures were effective and EBITDA improved with 1.4%. Broadly, the same story in corporate customers business. The equipment sales impacted the revenue negatively. So very much the same phenomenon related to equipment sales was seen also on the corporate side of the business. Our traditional fixed network, PSTN will be ramped down at the end of June altogether. And there we are seeing a decreasing number of customers, and that is weighing on revenue a bit. But as stated, the cost savings measures also on the corporate side of the business were successful and the EBITDA grew with 2.1%, in line with the total Elisa number. International software services, the comparable organic revenue growth was the mentioned 8%. And we took a step forward in terms of profitability during the quarter. The EBITDA grew to EUR 3 million in this business from the EUR 2 million on the same period last year. So we are seeing gradual improvement in the Elisa Industriq profitability, and we expect to continue to see that when we go forward. However, in software business, you will need to remember that there is a little bit different type of seasonality in Elisa Industriq. Q1 and Q4 are typically the strongest, whereas Q2 and Q3 are seasonally softer. In Estonia, our revenue increased by 3.4% and EBITDA increased by 2%, in line with the rest of Elisa. The churn number remained on the level of previous quarters in Estonia and is 11.7%. We are very focused on implementing our strategy. In the mobile part of the business, you saw the key metrics and the development during the Q1 as stated, there's a bit of time lag in the new sales prices turning into mobile service revenue. But during the latter half of this year, we expect to see improved momentum in mobile in line with the guidance that we have been giving. In the fiber business, we see strong customer demand, and we are investing in FTTH as well as FTTB. And also the data center connectivity, fiber connectivity for data centers is a tangible business opportunity. And during the course of this year, we would expect to see some deals coming through in this customer category. In international software services, we are continuously improving the profitability, and we do see further potential in that one by accelerating the growth, but also by integrating the multinational business and various business units better together and realizing synergies in the process. In terms of productivity, we are progressing with our transformation program. And as stated, we will be delivering the targeted cost savings during the course of this year. At the same time, we have taken note of the development of LLMs recently, and that's a clear indication that there is further productivity potential in AI, meaning that we will also continue the AI-driven transformation going forward during the coming years. So these 3 areas, 5G and fiber, international software services and productivity will be the main levers to take us toward the strategy targets that we have communicated. 5G penetration at the end of the year passed 15% -- 50% milestone. And that upsales trend continues to be intact. During the quarter, we reached 53% penetration. And we are especially seeing now big corporates on the corporate side of the business increasing their 5G subscription take-up rate. The average billing increase when we upgrade customers from 4G to 5G continues to be intact. That monthly billing increase is EUR 3. And also in terms of value-added services, we have continued to increase the penetration of security features in our mobile subs -- customer base, by means of new sales. And now the hard bundled security features have been taken up by 700,000 of our consumer customers. During the quarter, we also launched a new value-added service called Who's Calling service, which enables customers to see the caller ID even if they don't have that recorded in their phone previously. And this has been very well received by our customers. We already by now have 130,000 paying customers for this service. What is also notable related to the Estonian market is that in Ookla Speedtest Awards, we got the award for the best 5G network in Estonia, giving us competitive advantage. In the fiber business, in the mentioned way, the momentum is strong, and we continue to invest in fiber. In new -- in digital services related to home services, during the quarter, we published a fifth season of Ivalo, which is the most popular of our Elisa Entertainment original series, getting good reviews from customers. On the corporate side of the business, we continue to win new customers. Earlier this week, we announced that we have been winning the cyber and network business of Valmet, a global large Finnish company, also clearly outlining that we have the capability to serve our large corporate clients globally in these areas. In International Software Services, we continue to have a record high backlog. And the order intake, the bookings during the quarter were strong. We won a number of new customers, big, large global customers in these areas. Some of these are not public references. Some of them are. Boygues Telecom in France is one. And then also for Gridle for our energy optimization business, we won Vantage Towers as a customer in Spain, Vantage Towers being the tower company of Vodafone, the biggest tower company in Europe. What is also worthwhile to mention that in Elisa Industriq business, we saw some revenue delays from customers in Middle East due to the war in Iran. And that brings me to the outlook and guidance for this year. So the guidance remains unchanged with the range of EBITDA that we have been communicated previously, the CapEx guidance and then the guidance-related assumptions, especially related to the telecom service revenue, where we are indicating a range of 1% to 3% growth during the course of the year. So with that, I will hand over to Kristian. Thank you. Kristian Pullola: Good. Thank you, Topi, and also welcome on my behalf. In Q1, we saw solid EBITDA performance despite lower revenues. This was helped by our transformation efforts coming through as well as good cost discipline in general. As Topi said, the temporary sales costs were lower on a sequential basis, however, still slightly up year-on-year. Some of the revenue decline that we saw in Q1 related to divestments and ramp-downs of older technologies. The EBITDA impact of these was limited. The same is true for the decline in the equipment sales, which was driven by increased uncertainty as well as higher device prices on the back of especially memory component shortages. One note here, Elisa has somewhat seasonal business when it comes to Q1 versus Q2. Both are positive -- both of these 2 drivers are positive for Q1 and negative for Q2. As Topi said, in Industriq, we typically see strong licensing revenue in Q1 as a result of annual renewals. And in that sense, there's a negative seasonality going into Q2. Also in TechOps, we do see higher network-related costs in the second quarter when the overall construction activity starts in spring. And for this year, spring has arrived early in Finland, so we will see somewhat more of this impact. Also then maybe a second reminder, just on the yearly dynamics. Last year was solid when it comes to the first half and weaker when it comes to the second half, especially Q4 was weak on the back of the competitive intensity. Thus, we will have a tougher compare in Q1 and Q2 and then kind of easier compares as we work into the second half and especially for Q4. Then when it comes to CapEx, our strict disciplined continued. Our investments are focused on the areas of improving our technology leadership and which will enable us to continue to upsell both 5G and work on the -- work with the fiber momentum. In addition to this, our investment is going into us renewing our IT infrastructure so that we will be able to drive both simplification as well as productivity longer term. On the cash flow side, the first quarter was a continuation of our strong cash performance. We have now seen 5 consecutive positive quarters of positive development for net working capital. We will continue to drive improvements in cash flow as we move on. But of course, improvements in net working capital is going to be tougher and tougher to achieve when we have optimized the different items. Inventories are already at good levels. As I said last quarter, there's more work to be done on both receivables as well as on the payable side. But overall, a solid quarter from a cash flow development point of view. As a result of that, our capital structure continues to be solid. Our maturity profile is good. We did not have any material -- we did not have any material transactions during the quarter. And during the remainder of the year, we will start to focus on proactively refinancing the '27 maturities that we have. Then on capital returns, Elisa continues to have industry-leading capital returns. We saw a slight uptick as a result of having somewhat lower cash balances at the end of Q1 compared to the slightly elevated levels that we saw at the end of the year. And we do believe that with cash flow focus and continued strict discipline on CapEx, we will continue to produce industry-leading returns also going forward. With that, Vesa, back to you, and let's start Q&A. Vesa Sahivirta: Thank you, Kristian. And now we move on to Q&A part. And we have many questions on the line, so we appreciate that we'll keep them short. Thank you. Operator: [Operator Instructions] The next question comes from Andrew Lee from Goldman Sachs. Andrew Lee: I had 2 questions. Firstly, on your cost or sales and marketing costs. And then secondly, on your visibility on the mobile service revenue trends through the year. On the sales and marketing costs, you mentioned -- you highlighted they're still above where they were a year ago. Can you explain why that is, given churn is back to average levels and the pricing environment recovered? What's driving that heightened sales and marketing cost competition? And then secondly, just on the mobile service revenue trends, it sounds like the first quarter is the trough for mobile service revenue growth. But could you just help us understand how we should see that improvement come through in the second quarter and then into the second half? It sounds like it will be a more meaningful improvement into Q3 than into Q2. How that's going to be balanced between volume and ARPU? And how much visibility you have on that given the lags that you mentioned? Kristian Pullola: So maybe if I start on the sales and marketing costs. You're right, the costs were still somewhat elevated compared to a year ago, but down sequentially. And I think the logic here is that you don't pull back your sales and marketing efforts before you see evidence of the market environment being such that it justifies lower spend. And we started to see the evidence during the quarter. And because of that, we took down the temporary costs during the quarter, and thus, they were still a bit up on a year-on-year basis. Topi Manner: And then, Andrew, related to your question about MSR. So, starting with the metrics that we just went through. So the new sales prices during the quarter returned to Q1 levels in March. And the churn was notably lower than it was in Q4. And now the churn is in line with our long-term average. When you consider the mechanics of how the new sales prices turn into mobile service revenue, you will need to factor in a time delay of some months, approximately a quarter. This is because mobile operators in this market have fixed-term contracts in their portfolio. And when we win customers from our competitors, we do the deal now, but the mobile's subs actually transforms into our customer base with the agreed pricing a little bit later when the fixed-term contract with the competitor actually ends. So this is a mechanic that will need to be factored in. And then related to Q2, what is perhaps a useful reminder is that last year, in Q2, we started the rollout of the security features, the hard bundled security features to our mobile subs, supporting the MSR for that particular quarter. There is no similar initiative in the plans for this year. And thus, when you consider mobile service momentum, that momentum should be visible on the latter half of this year, increasing towards the end of the year. And all this boils down to our telecom service revenue guidance where we are guiding a range of 1% to 3% during the course of the year where mobile service revenue is the main contributor. Andrew Lee: Can I just follow up, so just on the sales and marketing costs. So it sounds like you're reducing those through Q1. As things stand today, late April, sales and marketing costs now today where they were a year ago? Or are they still not back to normalized levels? Kristian Pullola: So I think we are here to discuss the first quarter. But as I said, we are responding to the market situation with our costs. And because of that, the costs started higher during Q1 and ended up lower during Q1. Operator: The next question comes from Ajay Soni from JPMorgan. Ajay Soni: My first is on the cost savings. You mentioned EUR 40 million. Just wondering what's been delivered in Q1 and how you expect that phasing to look for the remainder of the year? And then my next question was just around the MSR into Q2. You mentioned that you're not going to have the support of security features, which got launched this time last -- well, Q2 last year. But surely, you will still have a better improving effect because you're going to have more people moving on to security versus Q2 last year because you would assume you'd have ramped up that business. So isn't that still going to be a tailwind in Q2? Kristian Pullola: So maybe if I start with the cost savings. So as Topi mentioned, we are on plan on delivering the full EUR 40 million. And as we have said earlier, the majority of the cost savings kicked in during the first quarter. Some of it is visible in our lower operating expenses and impacting positively the personnel costs because a large chunk of the savings that were implemented came from there. But of course, we also have driven activities outside of headcount reductions, which is visible. Some of it is also coming through the CapEx line item and thus coming through as depreciation -- lower depreciation at a later point. And so in that sense, there will not be much more acceleration of the impact as we move through the quarter because of the fact that the majority is already up and running as we speak. Topi Manner: And then related to your question about MSR and the security features, so if we look at MSR development in Q1 and we decompose that a bit, then clearly, the impact of intense campaigning and the lower prices in Q4 introduced a drag to mobile service revenue during Q1. And that drag was offsetted by the continued upsales from 4G to 5G and the value-added services where the security features are the most important element. And actually, when you look at the upsales isolated. And when you look at the value-added services isolated, they continue to provide the consistent growth that we have been seeing in the past. Then in terms of security features and the mechanics of security features supporting the MSR during the course of this year. What you need to remember is that when we started the rollout of security features last year, we rolled that out to that part of our customer base, roughly 600,000 customers where the customer contracts were of ongoing nature in force until further notice and the terms and conditions allowed us to change the offering and with that, change the pricing of those customers. Now that back book rollout has largely been completed. And what we are now doing is that we are offering the security features to customers in new sales. And the 100,000 pickup that you saw during the quarter is a result of new sales. Operator: The next question comes from Andreas Joelsson from DNB Carnegie. Andreas Joelsson: I was just a little bit curious and I hope you can help us understand a little bit the experience that you have from the higher churn environment that you had in Q3 and Q4. If something similar would happen again, would you react the same way as you did last year? Or have you -- some new experiences that will make you change that action that you took at the end of last year? Topi Manner: No, I think that -- I mean, our market is competitive and every situation in the market is unique. And we continue to monitor the market, and we continue -- and we focus on developing our own competitiveness, our own services in the market. And when you look at the things that we have been doing recently, as an example, we have been increasing the penetration of fixed-term contracts in our customer base as a churn prevention measure. And that measure has been bearing fruit in Q1, as you see in the churn number. Andreas Joelsson: Perfect. Maybe a follow-up on the mobile post-paid subscriber base. It is continuing to decline. Can you explain or tell us a little bit more where that decline is? And then I talk about excluding machine-to-machine, of course. Topi Manner: Yes. I mean if you look at that number, what is important to remember is the market trend in mobile broadband. So mobile broadband subscriptions are declining for us, and they seem to be declining on the whole market when customers are transitioning partially to fiber connections. And we do see a pickup in fiber connections as witnessed by our numbers. So this is something that you will need to factor in. And then when we look at the post-paid voice subscriptions and the development of net adds in that number, then as stated, the churn decreased notably during the quarter. Also, our intake of new customers decreased during the quarter. And this was because we did not respond to all of promotions that we saw on the market. Operator: The next question comes from Fredrik Lithell from Handelsbanken. Fredrik Lithell: Just a follow-up on your last comment that you described in Q1 that you did not respond to all of the promotions you saw in the market. Is that the same to say that you have seen sort of more activity in terms of campaigning in Q1 compared to earlier -- not compared to Q4, but maybe compared to Q1 '25, i.e., they don't need to be more aggressive, but more of them in the market. Is that a fair point? Topi Manner: The market continues to be competitive in Finland. But I think that here, I come back to the slide that we presented. So during the quarter, we saw the new prices -- new sales prices return to Q1 levels in March, and we saw the sales and marketing cost decrease. We saw a significant drop in churn that is clearly more than the typical seasonal drop in Q1 would be. Fredrik Lithell: Okay. That's perfect. My original question was really about the ISS, if I may. I mean you had 7% growth in the quarter, and you depicted a few details around your situation there with the pipeline that seems to be growing and some delays in Middle East. How are these sort of contracts structured? They are not perpetual licenses. Are they SaaS type of contracts with some variable components in them for revenue to grow with volume? Or how does it work in these contracts? Topi Manner: Yes. Absolutely. So as stated in Elisa Industriq business, the organic growth during the quarter was 8%, and we saw a step forward in terms of profitability the way we would like to see in this business. And if we decompose the contract structure a bit, then part of the revenue is driven by licenses. Part of the revenue is driven by recurring revenue, SaaS model and maintenance. At the end of last year, the share of recurring revenue was 50%, and there's some quarterly fluctuation in that share based on how many licenses we have been selling on a given quarter. And then part of the revenue is also driven by implementation projects with customers. And here, in that category of revenue, the revenue recognition is dependent on how the implementation projects move forward with customers. Operator: The next question comes from Derek Laliberte from ABG Sundal Collier. Derek Laliberte: So I wanted to come back on pricing. You mentioned this selective price increases in early Q1. Can you elaborate a bit on the scope and customer response of this? And during Q1 and into early Q2 now, are you still seeing improved rationality amongst the competitors? Or are there still pockets of sort of aggressive or increased aggressiveness on pricing? Topi Manner: Yes. I think that we will need to come back to the Q2 developments when we report the Q2 during the summer. In terms of the market development in Q1, what I would just like to come back to is the slide that we presented that our new sales prices returned to Q1 '25 levels in March and then the decrease in sales and marketing cost and the notably significantly lower churn. So looking at those numbers, I think that you get a good picture of the market development during Q1. Derek Laliberte: Okay. Great. And then strategically for you, I mean, has there been any change here given the current environment in terms of how you're prioritizing ARPU versus subscriber growth? Topi Manner: Yes. I mean our long-standing target on the market has been that we maintain our market share, and we will continue to do so going forward. That is part of our strategy. And what we have also communicated already in our Capital Markets Day a bit more than a year ago is that we focus on providing customer value. Upsales from 4G to 5G in mobile services is a big growth driver for us and so is value-added services, namely security features. So we continue to focus on that strategy, and we bring new value elements, new offerings to customers and to the market all the time. And then during this quarter, a good example is the Who's Calling service that already has 130,000 paying customers. Derek Laliberte: Okay. And finally, on the B2B trends, apologies if you mentioned this, but you have flagged some pressure there. So what did you see in Q1 in terms of, say, demand pricing and the contract renewals? Topi Manner: Could you please repeat the question? So was it about broadband or what... Derek Laliberte: About B2B -- no B2B corporate trends. Topi Manner: Yes. In B2B corporate, if we talk about mobile services, it continues to be a competitive marketplace. Our offering in B2B mobile services is strong with the value-added services and for example, with AI tools, where we clearly differentiate from competition. And then if you look at the other product categories of B2B business, IT services, cybersecurity and these kinds of things, we continue to enjoy some momentum in that one. We are clearly competitive on a market that is tough. The market is characterized by sluggish macroeconomic situation in the Finnish market, impacting corporate customers' willingness to invest. And that, of course, impacts the competitive landscape on B2B business. But at the same time, we are clearly competitive, and we are winning customers, both in IT and especially in cybersecurity, where our capabilities are really strong today. Operator: The next question comes from Abhilash Mohapatra from BNP Paribas. Abhilash Mohapatra: I just want to come back to the topic of cost cutting, please. Obviously, this year, you've got a big benefit from the EUR 40 million of savings. And you referred to earlier in the call, the idea of sort of using AI to drive further savings. As we look into next year, do you anticipate a sort of similar sized benefit from your cost measures? Or in other words, do you think you can continue to do a similarly sized sort of big headcount reduction? Or should we expect the cost-cutting benefits to normalize as we head into next year? Kristian Pullola: So again, we have nothing new to tell here in addition to the EUR 40 million transformation program that we announced last year. And as I said earlier, which is now kind of up and running in our P&L as savings. In the prepared remarks and in our report today, we do acknowledge that we live in a world where transformation will need to be on the agenda for now, and that's what we're going to do. Transformation related to AI means both improving your competitiveness and driving revenues through that as well as then driving productivity improvements on a structural as well as on a continuing basis. There is no new program or no new amounts to be announced here. We feel that we need to do this to be able to achieve our strategic targets that we have set for ourselves. Topi Manner: And generally speaking, related to the AI, we clearly see that our industry and Elisa in specific, will be benefiting from AI. AI will be increasing our bread and butter business, namely mobile and fixed connectivity. And we have an opportunity to use AI for digital services growth and for software growth. And then in the areas of productivity or in the productivity-related areas, we are working continuously in improving the automization of our customer service. And where we do see possibilities is in the area of AI-assisted coding -- prompting to be exact, improving the productivity of our software development. Operator: The next question comes from Siyi He from Citi. Siyi He: I have 2, please. The first one is really on your comments earlier about the interest in the market of taking on fiber products. I'm just wondering if you can share with us about your fiber investments, whether you think it could be a good opportunity to organically expand your fiber footprint or you could be looking at some infrastructure opportunities if some of the network is up for sale? And the second question I have is really on your comments earlier about the -- pushing the upgraded security features into your base. I think last year, when you talk about the rollout I had an impression that you would -- it's possible to roll out throughout the base within 18 to 24 months of the launch. But now I think you're commenting on you are actually adding on new sales. Just wondering whether that could create a particular delay of this 18 to 24 months time frame? And if so, any reason behind that? Kristian Pullola: So maybe I'll take the fiber-related question first. So as I said in the prepared remarks, we do see momentum in fiber. Customers want reliable and fast connections for their homes, for their base and fiber is now from an affordability point of view at the price point where consumers are responding well to it. We will -- on the back of this, we are investing in fiber, building additional fiber. As I said a quarter ago, we are leveraging a joint venture structure that we announced last year for the majority of that build. And at the same time, we will be pragmatic and look at, are there more cost-efficient ways of doing that by also looking at the existing assets. And if they are at sale at reasonable cost, then we'll evaluate that against building new fiber ourselves. Topi Manner: And related to your question about the rollout of the security features, yes, the rollout schedule of security features has been prolonged. And the driver of this is that during the -- due to the competitive situation last fall, as a churn prevention measure, we increased the share of our fixed-term contracts notably. And now we have a larger share of those fixed-term contracts in our customer base. And for those contracts, we cannot do the back book changes in similar fashion than we can do for those contracts that are in force until further notice. However, all of this is something that we have already factored in into our guidance. And the guidance assumptions where we are stating that the telecom service revenue is increasing during this year within the range of 1% to 3%. And that mobile service revenue is the main contributor. Operator: The next question comes from Felix Henriksson from Nordea. Felix Henriksson: I have 2. One is very simple, just to double check on MSR. Do you think that growth will further decelerate in Q2 versus Q1 before turning better in H2 given the time delay that you discussed as well as the tough comps? And then the second question is relating to the data center connectivity, which you have started to talk about. Could you expand a bit on the opportunity? What could the potential contract structures in this domain look like? And how large deals are we talking about? Topi Manner: Yes. So coming back to the mobile momentum and mobile service revenue. As mentioned earlier in this call, when we look at the new sales prices and how they translate into mobile service revenue, it's good to understand the mechanic and the time delay, when we win customers from our competitors, a meaningful portion of those customers are having fixed-term contracts with their old providers. And that means that even though we do the deal today, those customers might be moving to our customer base 2 months from now, 3 months from now. And that delay needs to be understood. And then as stated in Q2 last year, we started the rollout of the security features, which provided support for MSR for Q2 last year. Putting all of this together, we should be seeing improved mobile momentum during the latter half of this year, in line with the guidance that we have been giving on telecom service revenue. And then to your question related to data centers, I mean, this market is about to take off in Finland, and we have been seeing data center operators reserving land and quite a bit of that has taken place. We have been also seeing announcements for new data centers starting to come in during the course of this spring. So this leads us to expect that during the course of this year, we will be seeing sizable data center announcements on the market. And we do have a business opportunity in that. We are naturally advantaged in a sense that we have the most extensive backbone network, fiber network in the country, and it's shorter distance to connect to that backbone. And then therefore, we feel that it's realistic for us to get a sizable chunk of that data center connectivity market going forward. It is an emerging market. During the course of this year, we will be seeing most likely deal announcements and then the revenue starts to come in, in '27 and onwards. Operator: The next question comes from Paul Sidney from Berenberg. Paul Sidney: Just 2 questions. Just coming back to Finnish mobile, price rises on new offers in Q1. I was just wondering, was this a deliberate action from Elisa to raise prices? Or did pricing just follow the market? Just wondering your previous comments that you did not respond to some promotions over the past few months. I'm just wondering, are you trying to lead the market as a rational incumbent? Or was it the MNO's pulling back in the quarter? And then just secondly, on cash flow, comparable cash flow is a clear focus for you, but we don't have cash flow guidance. So just 2 parts to this question. Can you clarify if free cash flow is expected to grow over the next couple of years? And secondly, how important is cash flow in assessing the success of the business? Is it as important to you as revenue growth, EBITDA, ROCE, all these other sort of financial KPIs? Topi Manner: Well, to your first question, we are the market leader in this market. And we certainly would like to think that we are rational in managing our business. So then looking at Q1, what you see in the mobile metrics is that we come back to Q1 levels in terms of new sales prices in March. And you see the churn decreasing significantly more than the seasonal drop typically would be and also the sales and marketing cost decreasing. So coming back to my earlier point, I think that, that gives quite a good picture of what happened on the market and for our business during Q1. Kristian Pullola: And again, on the cash question, cash is a critical KPI for us that we both drive as well as assess our success based on. You're correct that we haven't guided specifically on cash flow as of now, something for us to consider for the future. But clearly, it is a measure that we judge our performance based on. And if anything, we'll be doing more of going forward rather than less. Operator: The next question comes from Ulrich Rathe from Bernstein. Ulrich Rathe: I have one clarification and a question. The clarification is you pointed out the mechanics of the customer sale versus the contribution. Can I just confirm that you're not including these customers that you have signed up in your customer base that you report before they actually start to contribute revenues? The second question or the real question is, if we look back at what happened there in autumn, how confident are you, if you look at the market overall, about the sustainability of the current recovery away from this slump? In other words, how stable do you think the market environment is vis-a-vis the causes of what happened last autumn? Topi Manner: Yes. On the first question, so -- no, we count customers into our net adds once they move into our customer base and the revenue recognition starts. So that's it. And then in terms of the market dynamics, I think that, first of all, we just need to come back to this in the coming quarters when we report our Q2 and when we report our Q3. If you look at the long history of the market, you have been seeing previously also these kinds of periods of intense competition like we saw during the latter half of last year. Similar phase was gone through during the years of '17 and '18. Operator: The next question comes from Ondrej Cabejšek from UBS. Ondrej Cabejšek: Two questions from me as well, please. The first one, apologies, I may have misheard on your back book, but I wanted to -- on the back book comments that you made, but I wanted to basically understand if now that the market seems to be stabilizing and the macro situation in Finland seems to be also improving. Are you again planning to kind of put in effect some kind of back book price rises the same way and the same kind of quantum on the -- that you did in 2Q '25, I believe it was around 400,000 customers that you raised prices for. Is there something similar plan for 2Q '26 because I believe that was the kind of assumption going forward? That's the first question. And second question, if I may, on the promotions that have been kind of dragging effective pricing down, are we correct to assume that most of these people or subscribers are locked in for 12 months. And so as they come out of the heavily kind of promoted pricing, I guess, around 2H '25, the assumption would be that they get back to some kind of normal pricing levels? Or what do you expect there as they come out of contract? Topi Manner: Starting from your latter question. So yes, you would be correct to assume that those customers that we took in during Q4, to a large extent, were with fixed-term contracts for 12 months. And then that will be a factor that will be impacting the market, the mobile market at the latter end of this year. And then related to your first question about back book price increases and offering changes, the like of offering changes that we did in the spring of last year with the security features, as stated -- we are introducing new individual services to the market all the time like we, during Q1 did with the Who's Calling service that now has 130,000 paying customers. But we do not have bigger offering changes like the security features in the plans for Q2. On corporate side of the business, B2B side of the business, there might be some sort of inflationary price changes that will be conducted, which is part of the sort of normal cycle in the B2B business. Ondrej Cabejšek: And apologies if I may follow up because the line was a bit choppy. So last year, you mentioned there were -- part of the 2Q price rises were the hard bundled security features, and you do not plan to do something similar this year, but straight price rises is something that is kind of in the plan? And also, yes, if you could please answer that, this is the straight price rises, I guess, is that something that the market is now allowing you to do you think? Topi Manner: No such plans. Operator: The next question comes from Sami Sarkamies from Danske Bank Markets. Sami Sarkamies: I have also 2 questions. Still wanted to get a bit more color on the situation at ISS. I think you mentioned some delivery headwinds from the geopolitical turmoil in Q1. Are you anticipating more headwinds going into Q2? And any comments from sort of order intake during the recent months? And then secondly, you booked EUR 4 million of one-off costs in Q1, where this related to the EUR 40 million savings program? And do you still see more coming during later of this year? Topi Manner: Yes. Related to Industriq, we did see strong bookings in Q1 and then quite happy with that. And then related to the war in Iran and the Middle East situation, we saw some revenue delays in Q1, partially because for customers in the Middle East, some projects were delayed. And with that, the revenue recognition was delayed and then partially because the anticipated sales just was prolonged given the outburst of the war in Iran and the impact to places like Dubai. So those were the short-term impacts that we have seen. And then generally, the impact of war in Iran, as a business, I think that we are in a fortunate position that the direct impacts of war in Iran to our business are very, very limited. To Industriq, we will need to see what those impacts are. As stated so far, we have been only seeing limited impact to a handful of existing clients and prospective clients in the Middle East. Kristian Pullola: And I think on the transformation costs, yes, we did book some in the quarter. And yes, they relate to the measures that we have taken. And yes, based on our prepared remarks, we do see that in the current environment, there is an opportunity to do transformation on an ongoing basis. So I would expect that there would also be some such costs also in future quarters as we take the appropriate measures. However, not to the same extent as we had kind of higher costs in Q4. Operator: The next question comes from Max Findlay from R & Company Redburn. Max Findlay: Apologies if the first question has already been answered while I was struggling with the line. So last year in ISS, there were some delivery delays in Q1, which saw revenue deferred into Q2. And in your preprepared comments, you mentioned that there was some revenue delay in this year's Q1. So I guess I'm trying to triangulate these comments with other comments you've made about 2Q and 3Q being weaker quarters generally. Should we expect these quarters to be lower than the 8% achieved this quarter? And then there's been a change in ISS' leadership. Can we expect any changes to strategy to accelerate growth to achieve your 10% organic growth target? And any comments on further acquisitions and disposals? Topi Manner: Yes. So indeed, Mikko Soirola has been appointed as the CEO of Elisa Industriq business. He is a very experienced software leader, having worked in international software space for 20 years. And the better part of last decade, he has been a CEO of successful software businesses. So the job to be done for Mikko is to accelerate growth, to improve the profitability of Elisa Industriq, carry out bolt-on M&A and integrate the M&A and integrate the portfolio of businesses that we have today better to achieve synergies. So it is a new strategic phase that we are entering into in Elisa Industriq. And then related to the first part of your question, what I was referring to is that the typical seasonality in Elisa Industriq business and in many of the other software businesses for that matter, is that Q2 and then Q3 are sort of seasonally softer than the start of the year and especially Q4. So that is something that is good to keep in mind when understanding the sort of dynamics of the Elisa Industriq business on a stand-alone basis and the impact to Elisa numbers. Operator: There are no more questions at this time. So I hand the conference back to the speakers. Vesa Sahivirta: Thank you, and thank you for participating in this conference call. Thank you, Topi. Thank you, Kristian, and we wish you a very great reporting seasons. Topi Manner: Thank you very much. Kristian Pullola: Thank you. Bye-bye.
Ahmed Moataz: Hello, everyone. This is Ahmed Moataz from EFG Hermes, and welcome to IDH's 2025 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, Chief Executive Officer; Sherif El Zeiny, VP and Group CFO; and Tarek Yehia, Director of Investor Relations. As usual, the company will start with a brief presentation, and then we'll open the floor for Q&A. IDH's management, please go ahead. Tarek Yehia: Good afternoon, ladies and gentlemen, and thank you for joining us for the full year results. My name is Tarek Yehia, I'm Head of Investor Relations. Joining me today Dr. Hend El Sherbini, our CEO; and Mr. Sherif El Zeiny, our CFO. Dr. Hend will begin the call with a summary of the main highlights from the year. After that, I will discuss in more detail the main macro and geopolitical trends seen across our markets. After my presentation, Mr. Sherif will offer a deeper analysis of our financial performance. We will then open for Q&A. With that, I will hand it over to Dr. Hend for her introduction. Please, Dr. Hend. Hend El Sherbini: Thank you, Tarek, and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. I'm pleased to report that 2025 was another very strong year for the group with robust operational and financial performance across our core markets and continued progress on our strategic priorities. The results we are presenting today reflect not only improving market conditions in key geographies, but also the tangible impact of the strategic initiatives we have been implementing over the past 2 years, particularly around network expansion, service diversification, digitalization and operational optimization. Throughout the year, we continue to strengthen our leadership in Egypt and Jordan while making very encouraging progress in Nigeria and Saudi Arabia. We are also very pleased with the sustained improvements in profitability across the income statement, which continue to validate the scalability of our model and our ability to translate growth into stronger returns. More broadly, we are encouraged by the increased resilience of our platform, which today combines scale, a richer service mix and improving efficiency across markets. Turning to our performance in more detail. During 2025, we continue to build on the strong momentum established over the prior year, delivering 37% revenue growth year-on-year supported by growth across both volume and value metrics. Test volumes increased by 11% during the year, with all operation geographies contributing to this expansion, supported by stronger patient engagement, deeper penetration in both walk-in and corporate channels and improving refer flows. At the same time, our average revenue per test rose 24%, and reflecting a richer test mix, broader uptake of radiology and specialized diagnostics [indiscernible] of the pricing actions introduced earlier in the year. These trends also helped us further strengthen our average test per patient metric, which reached 4.6 tests per encounter, demonstrating the continued depth of patient relationship and our success in expanding cross service utilization across our platform. In Egypt, momentum remained very strong throughout the year, supported by solid growth in both volume and value alongside strong brand equity and a more supportive macroeconomic backdrop. Test volumes in Egypt continue to expand steadily, while average revenue per test saw a strong uplift driven by favorable mix dynamics, including higher value radiology, radiotherapy, specialized diagnostics and corporate channels. Egypt remained the core engine of the group performance, contributing 84.6% of total revenue in 2025 and continuing to demonstrate strong scalability, resilience and operating efficiency. The continued expansion of our physical network in Egypt remained a key growth driver during the year. Over the past 12 months, we added 137 new branches in Egypt, bringing the total to 724 locations nationally at year-end. These new sites have helped deepen our presence, not only in Greater Cairo, but also in underserved and fast-growing regional cities. Allowing us to better serve both contract and walk-in patients. Our household service remains a strategic differentiator, sustaining its strong contribution of around 20% of Egypt's revenues continues to demonstrate the effectiveness of our post-pandemic strategy and reinforces our position as an early mover in home-based diagnostics in the region. Al Borg Scan continues to demonstrate strong momentum as a key component of our long-term strategy to build a more integrated diagnostics platform. During 2025, we took an important strategic step with the acquisition and integration of Cairo Ray for Radiotherapy, which broadened our capabilities in radiotherapy and strengthened our position in oncology diagnostics. This transaction enhances our ability to participate more meaningfully in higher-value specialized diagnostics and supports our ambition to build a more comprehensive offering for patients and referring physicians. We expect radiology and radiotherapy to play an increasingly prominent role in our growth mix over the coming period, supported by expanding service capability, greater patient awareness and growing demand for specialized imaging and treatment support service. Over the past 2 years, a key strategic priority for IDH has been the successful launch and upscale of our Saudi operation. I'm pleased to share that our presence in the Kingdom continued to progress very encouragingly during 2025. With strong momentum supported by growing demand, deeper market visibility and sustained improvement in both volume and value metrics. During the year, Biolab KSA generated SAR 5 million in revenue, representing a 252% year-on-year growth as test volumes and patient throughput increased sharply, and the business benefited from the expansion of the network to 3 branches. This growth continues to highlight the effectiveness of our ramp-up strategy in the market, which is designed to accelerate revenue growth and establish Biolab KSA as a recognized provider in the large but highly fragmented [ Saudi's ] diagnostics market. At the same time, we continue to advance our growth approach, which includes targeted marketing campaigns to build brand recognition, selective promotion initiatives to drive patient acquisition and ongoing efforts to strengthen physician and patient engagement. While still in the early stages of development Biolab KSA is demonstrating strong operational traction and reaffirming our belief in the long-term potential of Saudi Arabia as a key pillar in the group's regional growth strategy. As always, profitability remains a core focus for us, and we are very pleased to see sustained improvement across all levels of the income statement. We continue to benefit from strong operating leverage, tighter cost controls and better resource allocation across our subsidiaries, including Nigeria, where Echo-Lab delivered a full year of positive EBITDA, marking a key milestone in its turnaround and confirming the potential of this high-growth market. Overall, both COGS and SG&A as a share of revenue continued to decline, supported by disciplined cost management and our growing digitalization efforts. COGS to revenue fell from -- fell to 57.3%, while SG&A declined to 15% from 16.9% last year, underscoring the success of our optimization initiatives. Consequently, our EBITDA margin expanded to 34.9% from 29.7% last year, while gross profit margin rose to 42.7% compared with 38.1% in 2024. These efforts, combined with strong top line growth and improved pricing and mix have translated into meaningful margin expansion and greater earnings quality with adjusted net profit increasing 79% year-on-year. I'm also very pleased to share that the Board of Directors has declared a dividend of USD 0.0085 per share for the year ended December 2025, presenting a total distribution of USD 4.9 million. This reflects our commitment to delivering sustainable shareholder value while preserving the flexibility to fund attractive growth opportunities. In parallel, we remain prudent in our capital allocation approach, and we'll continue to reassess distribution in line with evolving market conditions and investment needs. Before handing the call back to Tarek, I would like to briefly touch on how we view the business as we move into 2026. We entered the year with a stronger platform, broader geographic footprint and improved profitability profile, which we believe positions us well to continue expanding access to high-quality diagnostics while driving sustainable growth. Our focus remains on deepening our leadership in Egypt, accelerating the ramp-up in Saudi Arabia, building on the turnaround achieved in Nigeria and continuing to improve operating efficiency across the group. At the same time, we remain mindful of evolving regional developments including the escalation of the U.S., Israel conflict with Iran in early 2026, which may introduce heightened uncertainty across the region, particularly in markets such as Jordan and Saudi Arabia. With that, I'll hand the call back over to Tarek and Sherif, who will take you through key trends across our markets and a more detailed breakdown of our financial performance of the year. Thank you very much. Tarek Yehia: Thank you, Dr. Hend. So far this year, we have continued to operate in a relatively stable condition with supportive macro trends and constructive trajectory across all our key markets. In Egypt, we saw inflation continue to ease materially compared to prior periods, helping support a more constructive operating environment for both business and consumers, improve ForEx liquidity and a stronger investment confidence continue to a more stable backdrop for Egyptian pound during much for the year, which in turn supported planning visibility and reduce pressure on imported inputs. More recently, however, management has been closely monitoring, evolving regional developments, including escalation of U.S. conflict with Iran in early 2026. Similar to Egypt, Nigeria also saw gradual improvement during 2025 with reforms and relative currency stabilization, helping support a recovery in patient activity and more predictive operating conditions. Over in Jordan and Saudi, the health care demand backdrop remained broadly supportive through 2025. Also both markets continue to be exposed to wider regional geopolitical developments. Jordan continued to benefit from a stable health care system supporting consistent demand for diagnostics, while Saudi continued to benefit from structural reforms momentum under Vision 2030. Recent geopolitical development in the region have increased uncertainty and continue to monitor the potential implication for economic activity and patient volumes. Turning quickly to our latest full year results. Egypt continued to deliver a strong broad-based growth with revenue rising 41% year-over-year supported by both volume expansion and significant increase in average revenue per test, particularly driven by radiology, radiotherapy and higher value diagnostic. Meanwhile, Jordan continued its solid performance reporting revenue growth in both Egypt and local currency terms, test volumes increased by 21% year-on-year, supported by Biolab ongoing promotional digital outreach and loyalty initiatives. In a market where volume-led growth remains critical for long-term sustainability, we are pleased to see Biolab's strategy continue to support strong demand and patient retention. In Nigeria, Echo-Lab achieved a full year of positive EBITDA, supported by successful implementation of turnaround strategy and improving operational conditions. We are increasingly confident in the long-term potential of our Nigeria subsidiary to expand its service offering and capture significant upside offered by this growing market. In Saudi, the ramp-up continued very encouraging with revenues increasing supported by stronger brand visibility, network expansion and patient growth. With the third branch now operating and the group aiming to launch 3 additional branches over the coming months, we expect a further growth in revenue and scale in the Kingdom. Finally, in Sudan, operation remains significantly constrained by the ongoing conflict with only 1 branch partially operating and no material change to the report at this stage. I will now hand the call over to Mr. Sherif, who will provide a more detailed overview of our cost, profitability and balance sheet position for the year. Sherif Mohamed El Zeiny: Good afternoon, ladies and gentlemen, and thank you for your time today. As Tarek mentioned during my presentation, I will focus on costs, margins, profitability and our working capital and liquidity position before we open the floor to your questions. In line with the priorities we set out at the start of the year profitability for fiscal year '25 improved materially supported by our group-wide efforts to enhance operational efficiency and maintain tight control over spending. A major focus area over the past 2 years has been digitalization where we have continued integration data tools and analytics into our internal platform, procurement systems and financial planning process to improve decisions making and cost discipline. These efforts, combined with stronger operating leverage and better resource allocation helped drive meaningful improvements in efficiency with both COGS and SG&A as a share of revenue declining versus last year. More specifically, our COGS to revenue ratio improved to 57.3% in '25, down from 61.9% in '24, supported by disciplined inventory management and stronger purchasing costs. The most notable improvements came within raw materials, which decreased to 19.3% of revenue from 22% last year, reflecting our scale advantages and smarter procurement practices. At the same time, total wages and salaries as a share of revenue remained well controlled, underscoring our balance between supporting our staff with operation -- appropriate salary adjustments and continuing to optimize headcount and productivity. As you can see in bottom right chart, these efficiency gains translated directly into stronger profitability with gross profit margin expanding to 42.7% from 38.1% last year and adjusted EBITDA margin rising to 34% from 29.7% in '24. On the SG&A front, spending remained well contained. With SG&A as a share of revenue declining to 15% despite continued investment in strategic growth initiatives. The main increases within SG&A were in wages and salaries as well as advertising and marketing expenses, reflecting annual salary adjustments, selective additional -- additions to support growth and continued marketing investments in Saudi Arabia alongside targeted campaigns in Egypt and Jordan. Even with these investments, the group continued to capture operating leverage highlighting the scalability of the business and the impact of tighter cost discipline across function. Moving to our bottom line. We reported net profit of EGP 1.3 billion in '25, up 29% year-on-year. As highlighted earlier, fiscal year '24 included elevated ForEx gain, which created a high comparative base and distort direct comparisons. When controlling for ForEx expects in fiscal year '24 and nonrecurring items in fiscal year '25, adjusted net profit increased 79% year-on-year to EGP 1.26 billion with an associated margin of 16.1%. As always, we maintain a disciplined approach to working capital management while supporting growth and preserving a strong liquidity. Similarly, we saw our cash conversion cycle improved further to reach 104 days in December '25 versus 155 days at the end '24. It is also important to mention that, as expected, we saw a decline in Days Inventory Outstanding, a stronger sales momentum and more efficient inventory turnover during the second and third quarter of the year following the seasonal Ramadan slowdown in March. Finally, as 31st of December '25. Our total cash reserves stood at EGP 2.1 billion compared with EGP 1.7 billion in '24, with a net cash balance of EGP 472 million versus EGP 226 million last year. This strong liquidity position supported the Board's decision to declare dividends of USD 4.9 million while preserving flexibility to fund attractive growth opportunities. Thank you for your attention. We now welcome any questions you may have. Thank you. Ahmed Moataz: [Operator Instructions] We've actually received a couple of questions in the chat. I'll take them one by one, so that you're not confused. Within the volume growth that you've seen in Egypt, would you say that it has been driven by both existing and recently opened branches or it's entirely driven by recently opened ones and the like-for-like within the mature ones are either flat or declining? Tarek Yehia: Actually, it is both the new branches that we opened during the year and all the existing ones, both were contributing to the sales. Ahmed Moataz: Understood. The second question is on your plan for Saudi in terms of branch openings. Do you have a set in place number of branches you intend to open in '26 and beyond? That's one. And the second, would you be able also to provide us on when you expect EBITDA breakeven for the operations in Saudi and maybe also revenue contribution, not just right now, but maybe a longer-term revenue contribution? Tarek Yehia: Saudi during 2025 have existing 3 branch, and we are planning for next year is 6 branch -- in 2026, another 6 branch to reach by end of 2026, 9 branches across all Saudi as much as we can. And EBITDA is turning positive by 2028. Ahmed Moataz: All right. The following question is on Sudan update, but you've already mentioned that till now, there is no update. You only have 1 branch opened. Another question is on guidance for 2026. If you can provide on that? And also, if you can also disclose the magnitude of price increases that you've already done in January of 2026. Tarek Yehia: For 2026, we are expecting an increase of 25% on sales, a 10% increase in prices and 15% from volume. We're keeping an EBITDA of range -- same range of EBITDA of around 33% to 34%. Ahmed Moataz: Understood. The last part is with the recent weakness in the Egyptian pound and also the geopolitical issues that are somewhat reflecting in higher either freight costs or importation cost, maybe also raw material costs. How do you see this impacting the business? And also how much coverage of inventory do you already have that is secured into the business that would kind of save -- act as a safe haven before you start to see that impact on your P&L? Tarek Yehia: Business till now is not affected in Egypt, and we are securing inventory in order to keep the operation up and running, and we secured the inventory until August. Ahmed Moataz: Understood. [ Jena ] has 3 questions. You've answered -- the first one, I'll just say it out loud, so that's covered by everyone. Please provide revenue, EBITDA and net income guidance for 2026. You've already answered this, but maybe if you have guidance for net income. You've mentioned revenue and EBITDA. The second is -- you've answered most of the second question. The only thing is, that hasn't been answered, what's the percentage of total test kits that are imported? And another follow-up is how many months of test kit stocks do you have? I'm not sure if when you answered and said till August, this covers the test kits or your entire raw materials? Hend El Sherbini: So we import all our kits. So nothing is produced in Egypt, almost nothing. We -- and yes, we have a coverage till August. Ahmed Moataz: All right. And for the entire business, what is the annual target for a number of branch openings going forward? Tarek Yehia: Around 200 across Egypt, Saudi and Jordan. Ahmed Moataz: This is for 2026? Or this is an annual target in general? Hend El Sherbini: This is for 2026, but it includes clinics and hospitals. So they are not -- they're just the regular branches. Ahmed Moataz: Okay. Understood. Andrea is asking -- or actually, first, congrats on the results. Can you please provide any details and guidance on the share of radiology revenue as a percentage of total as it has stayed flat at 4.7% despite the Cairo Ray acquisition. Tarek Yehia: It's still 5% of revenue. Ahmed Moataz: You mean the target in general is 5%, right? Tarek Yehia: The actual is 5%, and it will be increased over years when the business is picking up more and more. Ahmed Moataz: Okay. [ Jena ] is asking with almost $40 million of cash on your books, are you looking to do a buyback? Hend El Sherbini: We have -- we actually have an approval for a buyback. However, we haven't decided to do that. But it is an idea that we're discussing. Ahmed Moataz: Understood. Someone is asking a follow-up on a prior question, which is do you have any revenue targets for Saudi Arabia in 2026? Tarek Yehia: Yes. The target is SAR 18 million. Ahmed Moataz: Right.[ Zoher ] is asking your branch openings target in 2026 for Saudi was 6. Why has this now been pushed out? Tarek Yehia: No, it is the same 6. We have 3 existing in 2025, and we're increasing by another 6 in 2026. Total will be by end of 2026 is 9. Ahmed Moataz: All right. Another follow-up from [ Zoher ] is why decide such a low dividend payout when the CapEx in Egypt ahead is low, given the clinic and hospital model that you have? Tarek Yehia: As we are balancing between investing and distributing dividends, we declared these dividends, and we are seeking more investments in order to grow. So we will revisit if needed, but still we keep it as it is now. Ahmed Moataz: Understood. [ Anup ] is asking household service percentage of revenue has been stable at around 20%. Is this the level of saturation for the service? Or is there further potential to increase household service contribution to total revenues? Hend El Sherbini: We're continuously expanding household service, expanding the team and the service and the value creation for our patients. Right now, it's 20% of revenue. However, the revenue itself is increasing. So the -- I mean the revenue coming from household is also increasing. But I think we still have a big room for growth in household. Ahmed Moataz: Understood. [ Zoher ] is asking if you can provide CapEx forecast or budget for 2026? And if you can break that down by geography? So Egypt, Jordan and Saudi. Tarek Yehia: CapEx is around 5.9% of total sales versus last year of 4.8%. The main CapEx will be for Egypt. Some will go for the new branches. Some goes for IT warehouse, then followed by Saudi and followed by KSA. Ahmed Moataz: [Operator Instructions] So the final question we've received for the time being is how much of your Egypt expansion do you expect will come from hospitals and clinics. Tarek Yehia: It's around 9% coming from this new business, we are going in-house and clinics -- hospitals and clinics. Ahmed Moataz: All right. We haven't received any further questions. So I'll pass it back to you in the case you have any concluding remarks. Otherwise, I can conclude the call now. Hend El Sherbini: Thank you very much, everyone. Ahmed Moataz: All right. Thank you very much to IDH's management and to everyone who participated today. Have a good rest of the day, everyone. Sherif Mohamed El Zeiny: Thank you very much. Bye-bye.
Operator: Greetings. Welcome to BOK Financial Corporation's First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Simply press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Thank you. As a reminder, this conference call is being recorded. I would now like to turn the presentation over to Heather King, Director of Investor Relations for BOK Financial Corporation. Please proceed. Heather King: Good afternoon, and thank you for joining our discussion of BOK Financial Corporation’s first quarter 2026 financial results. Our CEO, Stacy Kymes, will provide opening comments. Scott Grauer, Executive Vice President of Wealth Management, will cover our fee-based results, and our CFO, Martin Grunst, will then discuss financial performance for the quarter as well as our forward guidance. We refer you to the disclaimers on Slide 2 regarding any forward-looking statements made during this call. The slide presentation and press release are available on our website at bokf.com. I will now turn the call over to Stacy Kymes, who will begin on Slide 4. Stacy Kymes: Thank you, Heather. We appreciate you joining the call this afternoon. We reported earnings of $155.8 million, or EPS of $2.58 per diluted share, for the first quarter. What stood out this quarter was the consistency of execution across the company and how our teams continue to build on the momentum we established in 2025. During the quarter, total loans grew $536 million, or 2.1% sequentially. That growth was well distributed across the portfolio. We saw strong momentum last year, and we are encouraged to see that continue. Pipelines remain solid, and business activity across our footprint and customer base has been constructive, even with more macroeconomic uncertainty. Growth was also well balanced geographically across our franchise, with Texas growing $[inaudible] or 8% on an annualized basis, Oklahoma posting growth of $163 million or approximately 9%, and Arizona increasing by $236 million. Our fee-based businesses also performed well, even in an environment with elevated uncertainty and a rapidly changing macroeconomic backdrop. The revenue exceeded three of the past four quarters, reflecting the diversification and underlying strength of those platforms. Expenses declined meaningfully this quarter, reflecting our continued focus on managing our core cost structure. Over the past several quarters, we have worked to better align expenses with market opportunities and customer needs. This quarter illustrates that progress. Expenses were down $6.9 million and we posted an efficiency ratio of 63.2%. Importantly, this quarter provides a clean view of a more typical expense profile, with prior actions now embedded and temporary items less meaningful. Capital levels remain very strong, with tangible common equity at 9.3% and CET1 at 12.6%. Slide 6 provides a closer look at our loan portfolio. Total outstanding loans grew 2.1% this quarter, with strong growth across our core C&I portfolio, energy, and commercial real estate. Our core C&I loan portfolio, which represents our combined services and general business portfolios, grew 2.1% sequentially. This is the fourth consecutive quarter of growth in this portfolio, reflecting long-term, sustained customer relationships. Health care loans decreased 1.3%. Loan production in this segment remains at record highs with a very strong pipeline. This business has also supported our fee income lines with strong syndication fees generated during the quarter. The reduction in loan balances this quarter is primarily related to cyclical payoff activity. We believe we are well positioned to grow this portfolio throughout the remainder of the year. Energy loans grew this quarter, increasing 4.3%. This marks another reversal of the payoff trends we discussed last year. We are not currently seeing clients seeking to add production capacity yet. Our CRE business increased 3.7% compared to the prior quarter. We remain well within our concentration limits for this segment, which allows us to be selective about opportunities and deploy capital where structure, terms, and returns make sense. Mortgage finance loans totaled $228 million, an increase of $50 million from the fourth quarter. We are happy with the progress this business is making. It is important to note that the loan growth exhibited in the first quarter was driven by our existing businesses. Moving to Slide 7, I will keep my comments short again this quarter. Credit quality remains strong. NPAs not guaranteed by the U.S. government decreased $14 million to $52 million. The resulting nonperforming assets to period-end loans and repossessed assets decreased six basis points to 20 basis points. Committed criticized assets decreased this quarter, remaining very low relative to historical standards. We had net charge-offs of just $1.9 million during the quarter, averaging three basis points over the last twelve months. I will reiterate that the limited charge-offs we have seen show no patterns or concentrations that raise concerns about specific business lines or geographies. I would also note proactively we have virtually no exposure to private credit facilities. Over the long term, we do expect credit metrics to normalize. In the near term, we continue to expect net charge-offs to remain below historical average. No provision was required this quarter. Our provision benefited from the favorable impact of higher projected oil prices in our energy portfolio, offset by loan growth, improved overall credit quality, and a modest downward revision to economic forecast assumptions. Our combined allowance for credit losses is a healthy $323 million, or 1.23% of outstanding loans. Overall credit performance this quarter was exceptionally strong. With that, I will turn the call over to Scott. Scott Grauer: Thank you, Stacy. Turning to our operating results for the quarter on Slides 9 and 10. Fee income remained solid this quarter, despite the volatile market environment and macroeconomic backdrop. Fees declined $5.1 million sequentially following a very strong fourth quarter. Fee income totaled $209.8 million, exceeding three of the past four quarters and underscoring the underlying strength of our fee-based business in any market environment. Total trading revenue, which includes trading-related net interest income, increased modestly to $34.7 million from $34.1 million in the prior quarter. Customer hedging revenue grew $1.1 million as our energy customers predictably increased their hedging activity when higher short-term crude oil prices presented themselves. Investment banking revenue, which includes investment banking and syndication fees, decreased $4.1 million after delivering two outstanding quarters. Results reflect the normal seasonality of this business, with a quieter first quarter before activity begins to build in the second quarter. I would note that 2026 is the strongest first-quarter syndication activity on record. This result represents a 40% increase from the same quarter a year ago. Mortgage banking revenue grew $2.0 million linked quarter with higher production and refinance activity. Turning to Slide 10 to discuss our asset management and transactions business. Fiduciary and asset management revenue delivered strong results, contributing $66.5 million to revenue. This was the second strongest quarter on record, only surpassed by the prior quarter. As a reminder, the prior quarter included higher-than-usual transaction-related fees. AUMA declined $3 billion to $123.6 billion, driven by lower market valuations and normal seasonality. Transaction card revenue continued its trend of record-setting results, contributing $32.0 million to revenue. These results demonstrate the strength of this franchise, which has been created through sustained momentum and reliable execution. Taken together, our fee income performance this quarter reflects disciplined execution and the strength of these businesses, even amid shifting market conditions. The overall foundation remains solid and continues to support consistent fee generation. With that, I will hand the call over to Marty to cover the financials. Martin Grunst: Thank you, Scott. Turning to Slide 12. Net interest income decreased $2.7 million and reported net interest margin declined eight basis points. Excluding trading, core net interest income decreased $4.8 million and core margin decreased seven basis points. We continue to expect margin expansion over the course of 2026. Fixed-rate asset repricing and loan growth were positive drivers for this quarter and are expected to persist. However, we saw several small negatives impacting the quarter all at the same time. Noninterest DDA declined, with Q1 being the seasonal low point. Day count, of course, played a role. Loan fees were down sequentially. SOFR spreads were abnormally wide in Q4 and we benefited from that, but spreads returned to normal in Q1 and drove some compression sequentially. Funding costs for counterparty margin posted to exchanges for energy derivatives had a small negative effect. Lastly, we saw the full-quarter impact of the sub debt issued last November. Each of those items had a one or two basis point negative effect individually, which accumulated to overcome the positives of loan growth and fixed-rate asset repricing in the first quarter. Turning to Slide 13. Total expenses decreased $6.9 million, producing an efficiency ratio of 63.2% for the quarter. Personnel expenses were down $11.6 million. Normal increases from payroll taxes and merit increases were more than offset by lower incentive compensation as well as the benefits of the realignment we took in late 2025. Nonpersonnel expense increased $4.7 million; however, during the fourth quarter, we experienced a $9.5 million benefit from the updated FDIC special assessment. Excluding that prior-quarter benefit, nonpersonnel expense decreased $4.8 million, largely related to lower professional fees. Slide 14 provides our outlook for full year 2026. On loan growth, we continue to produce strong results. We expect to see loan growth near 10% for full year 2026. Our guidance for total revenue has not changed. We expect growth to be in the mid-single-digit range. The mix of that revenue between NII and fees is somewhat rate-curve dependent, as trading income can shift between the two. Our current forecast reflects no rate cuts in 2026 versus the two cuts reflected in our prior guidance. Our NII expectations for 2026 are now slightly lower at $1.42 to $1.45 billion, and our fee income expectations are now similarly higher at $820 to $845 million. We continue to anticipate the growth rate for expenses to be in the low single digits. This should result in a 2026 full-year average efficiency ratio in the 63% area. We expect 2026 provision expense to be in the $15 to $35 million range. Portfolio credit quality continues to be exceptionally strong, and we see no tangible evidence of credit normalization. Our guide does allow for some amount of normalization later in the year. Lastly, I will note that Visa announced on April 13 that its second exchange program for Visa Class B shares has officially commenced. This allows us to monetize 50% of our remaining Visa B shares. We currently hold the equivalent of approximately 190 thousand common shares, and monetizing half that position would equate to roughly a $29 million pretax benefit based on Visa’s April 13 closing price of $309 per share. While this potential gain is not reflected in our guidance, we expect to participate in the exchange and recognize a gain based on the market value at the time of the exchange or disposition. With that, I would like to hand the call back to the operator for Q&A, which will be followed by closing remarks from Stacy. Thank you. Operator: We will now open the call for questions. If you would like to ask a question, please press star one. Your first question comes from Michael Rose with Raymond James. Please go ahead. Michael Rose: Hey, good afternoon, everyone. Thanks for taking my questions. Maybe, Marty, if we can go back to the margin. It seems like there was just a confluence of factors this quarter that drove the compression, but I think if I heard you right, you would expect margin expansion from here. Can you give us some details behind that—what you would expect in terms of deposit betas as we move forward, loan pricing, and fixed asset repricing opportunities—just the puts and takes as we contemplate no rate cuts this year? And then as a follow-up, you mentioned the Visa Class B program has commenced. I think you said about half of that position would equate to roughly a $29 million pretax benefit. Is the plan to monetize half of that, and would you look to potentially repurchase shares with the proceeds? Martin Grunst: You bet. As you think about each of those factors, the one that has been durable and will continue to be durable is the fixed-rate asset repricing. You will see both the bond portfolio and fixed-rate loan portfolio continue to pick up spread there. On deposit betas, deposit competition in the market is kind of like it has been for the last few quarters. Without rate moves, I do not think you will see a lot in the betas. To the extent that we have incremental rate moves, our cumulative down beta has been 66% in deposits, and we would continue to see that play out as it would relate to future rate moves to the extent you have them. A couple of the things that affected this quarter were loan fees and DDA. What is typical is to see growth in those two components in the back half of the year, so you will see some support there as we get into the third quarter. Loan competition is always competitive. We have seen some incrementally competitive behavior at the high end of the credit size and the very strong end of the credit quality spectrum in investment-grade territory, but not enough to really move the needle this quarter. All those components give us confidence in the trajectory of margin. One thing I might add on margin: if you think long term, you can take our 2.90% margin that we printed this quarter and rerun both the available-for-sale and held-to-maturity securities portfolios at their mature rates—where we are replacing at about 4.50%—and that would recast our margin at just a little over 3.15%. While it will take some time to get there, that gives you perspective on the big picture and what the long run looks like for our margin expansion story. On Visa, our expectation is that the program will officially start transacting shares later this quarter, and we would be able to recognize that gain in Q2. We have not yet determined exactly what we will do with the proceeds, but all those avenues are on the table for us, including potentially repurchasing shares or paying down debt. At this point, we look forward to being able to capture that gain. Stacy Kymes: Michael, this is Stacy. We will let the year play out and see what may unfold to reinvest those gains. If you recall, when we did the Visa exchange before, there were attractive opportunities in our investment portfolio to get really good IRRs by selling securities at losses and using those gains to keep our run-rate earnings relatively flat. That equation is not as compelling this time. The IRRs are not very good relative to where they were before. Obviously, the unrealized losses in the portfolio are much smaller today than they were when we had this opportunity before. We have also looked historically at contributing those to our foundation, but changes to corporate tax policy make that a little more challenging to do and get the tax benefit. For now, it is an all-of-the-above set of options, including doing nothing. We will see as the year unfolds whether we want to invest that gain or if we do not see an opportunity that merits the return profile we should consider. Michael Rose: Alright. Appreciate the color and context. I will step back. Thanks. Operator: Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead. Jon Arfstrom: Hey, thanks. Good afternoon, everyone. Stacy, I wanted to ask you a little bit about the loan growth environment. Can you talk about the general business balance drivers? And then on energy, you used the term “not yet” in describing clients seeking to add production. What do you think needs to happen there for that to show more of a growth profile? And then for Marty, a follow-up on deposit costs—you had a nice step down in the interest-bearing deposit costs this quarter. How much more room do you think you have in an environment without any further cuts? Stacy Kymes: Sure. The loan growth was broad based by geography and by loan type. We have been exerting significant effort around core C&I and are really excited to see that expansion continue. We continue to invest there and are excited about the future. It has been nice to see a bounce back on the energy side. We troughed around this time last year and have been stable to increasing since then. For folks to continue to drill, you need to look at the strip. People often focus on the prompt month or spot price, but it is really the strip price out two to three years—really three years—that creates the incentive for people to drill for oil. If you look at three years, oil is below $70, and I think $70 is kind of a magic number. My view is you will not see folks drilling unless they can lock in a return with oil above $70 out that long. Things are volatile and the curve has moved a lot, but it is more important to look at the curve three years out than the prompt month in terms of driller behavior. The rig counts reflect that there is no impetus right now for folks to drill given the backwardation of the curve. That could change, but we are not seeing that today. Martin Grunst: On interest-bearing deposit costs, there is probably still a little bit of room, but as we have been chipping away at that over the quarters, it is a situation of declining returns. There is still a bit more there, but not as much as there was a year ago relative to where short rates are. Jon Arfstrom: Okay. Thank you very much. Operator: Your next question comes from the line of Peter Winter with D.A. Davidson. Please go ahead. Peter Winter: Thanks. Good afternoon. Stacy, there has been a lot of merger activity in your markets. Are you seeing opportunities for team lift-outs—something that you have done successfully in the past? And then, Marty, you have always maintained really strong capital levels. Could you quantify the estimated impact and benefits from the new regulatory proposals? Stacy Kymes: As you know, that is a strategy for us. Some of the periods of most rapid growth in our history have been when there has been broad dislocation created from mergers and acquisitions. You have both employees and clients of those institutions who did not choose to be a part of that institution, and they may select to go somewhere else. We see it, it is prevalent in our footprint, and you can assume that we are being very active in prospecting for both employees and customers in this environment. Nothing specific to report today. Martin Grunst: Peter, we do not have a number yet, but it is definitely going to be a benefit to us, both on the loan book—particularly in the real estate-secured loan book, given those LTV parameters—and in the trading book. You know how we underwrite. Because of where our LTVs and FICOs and so forth are, that is going to be a benefit to us on RWAs in the loan book. In the trading book, we will get a little benefit there too based on our read at this point. Operator: Your next question comes from the line of David Chiaverini with Jefferies. Please go ahead. David Chiaverini: Hi, thanks for taking my questions. Back on deposits, I think you mentioned that the noninterest-bearing DDA deposits should bottom in the first quarter. What is the driver of the rebound in the second quarter and potentially the magnitude? And should this rebound continue through the year? And then on mortgage finance, we saw balances grow nicely on a percentage basis. Previously, you mentioned getting to $1 billion in commitments by the end of this year. With a higher-for-longer environment, are you still comfortable with that commitment level? Martin Grunst: A little context on DDA. DDA was pretty steady for us last year, and that rate-seeking behavior you had seen in prior years had come to an end. We typically see a seasonal increase at the end of the fourth quarter, which we did see, and then a seasonal decrease in the first quarter, which we also saw. We also saw a little bit of our commercial middle-market customers deploy some of their cash into their businesses, which is healthy for business growth. It has been several years since you have had a nice “normal” DDA pattern to look at, but what is typical for us—and to some extent the industry—is to see DDA climb more in the back half of the year than the front half as people build cash flows. That is our expectation for the year. Stacy Kymes: On mortgage finance, I think what we talked about was being at $1 billion in commitments by the end of the year, with roughly 50% of that committed amount outstanding. Given where we are in the newness of the business for us, I still feel good about that. There will be some seasonality; the second and third quarters tend to be pretty good, and it will track the broader mortgage business. We will not be perfect on the timing, but I still feel good about the target. David Chiaverini: Very helpful. Thank you. Operator: Your next question comes from the line of Matt Olney with Stephens. Please go ahead. Matt Olney: Thanks. I want to go back to the liability side of the balance sheet. In the deck, you mentioned you moved from wholesale deposits into more wholesale borrowings this past quarter. Can you expand on that strategy? And as a follow-up, how should we think about funding the loan growth from here in terms of core funding, wholesale deposits, versus borrowings? Martin Grunst: Good question. If you go back to Q4, after a couple of rate cuts and some market dislocation, we were able to find some deposits—technically deposits, but wholesale in the way we source them—at prices that were actually better than wholesale funding, which is rare. We put on a little over $1 billion of those deposits in Q4. We mentioned on the last call that would probably run off in Q1, and it did. That run-off is the main driver of the deposit decline from Q4 to Q1; it was an opportunistic wholesale deposit trade we did in Q4 running off. Going forward, at the loan-to-deposit ratio we have, we certainly have flexibility in how we fund. Our expectation is to see loan growth consistent with our guidance and history. Deposit growth will probably be a little bit less than that, but we do expect deposit growth this year. We can end with a slightly higher loan-to-deposit ratio at year-end. Generally, loan growth and deposit growth will be somewhat aligned, while knowing we have flexibility to let that float around a bit. Matt Olney: Yep. Makes sense. Thanks, Marty. Operator: Your next question comes from the line of Jared Shaw with Barclays. Please go ahead. Jared Shaw: Hey, everybody. Thank you. Marty, can you give the dollar impact of the loan fee reduction quarter over quarter that you called out? Also, are the trends you are seeing in customer hedging activity as we go through 2Q staying pretty strong? And finally, on the provision guidance for the year, should we think about equal contribution over the next three quarters, or is it a little more back-end weighted with growth? Martin Grunst: The loan fee impact is basically two basis points quarter over quarter. There is always a bit of noise, but broadly speaking that is a good growth area for us year over year. On provision cadence, you do not want to get too cute with quarterly, but given how the portfolio looks today, it is logical to think there is a little back-end weighting. The portfolio looks very clean today. You can usually have a little visibility into the next quarter or two; after that it is harder. That is the right way to think about provision. Scott Grauer: On customer hedging activity, with the volatility in the global setting, we have seen spurts of activity on the energy side. We have seen less activity on interest-rate hedging given a relatively stable rate environment, but we continue to see good demand across hedging opportunities, with the biggest focus being on energy. Jared Shaw: Great. Thank you. Operator: Your next question comes from the line of Woody Lay with KBW. Please go ahead. Woody Lay: Hey, thanks for taking my question. On expenses, they are very well managed, and it was good to see the run rate come in following some of the actions you took in the fourth quarter. You touched on the efficiency ratio being down a little bit. Is there conviction that you could be on the lower end of the stated range, or is it too early to tell given some of the hiring question marks? And then one more for me: you mentioned oil prices factored into the ACL. Can you walk through how that is included in your CECL model, and is there any risk that if oil prices normalize lower, it could require a catch-up provision in the future? Martin Grunst: We feel really good about how Q1 turned out in terms of a clean run rate for expenses. Looking into Q2, you will have a little bit as the rest of the merit increase flows through, with an offset from how payroll taxes play out. We are always looking to hire producers, as you know, but those are the main puts and takes. We feel pretty good about the guidance of the efficiency ratio in the 63% area. On CECL and oil, higher oil prices are supportive for the energy loan book—both collateral valuation and borrower cash flows—so that is a positive. There is also the impact of higher input prices on parts of the broader C&I book, which we recognize as an offset. Those are natural offsets in how we manage CECL. There is not a lot of risk, on a net basis, of that being a driver of an adverse future outcome if oil normalizes lower. Woody Lay: Got it. Makes sense. Thanks for taking my question. Operator: Your next question comes from the line of Brett Rabatin with Stonex. Please go ahead. Brett Rabatin: Hey, good afternoon, everyone. Back to guidance on fee income. I get that the change is partly a function of interest rates and how you account for the income, but the $820 to $845 million range—given the seasonal investment banking in the first quarter—it seems like that could have been higher. Are there any other businesses you are expecting not to grow this year, or other factors in that outlook? And then, Stacy, you talked about producer adds and possibly adding people with disruption. Do you have a net producer add number for the quarter? Lastly, on the decrease in provisioning for the year despite slightly better loan growth expectations—does that reflect better visibility that 2026 will continue to be fairly benign? Martin Grunst: We feel very good about the fee businesses. The trajectory is really good, and we are confident in the history and outlook across the board. One thing to remember is that in the trading business, part of that revenue shows up in the fee line and part shows up in the NII line. You really have to combine those when you think about the strength of the fee businesses. If you are looking at multiyear trends, some of that revenue may move into the NII line; you should recombine that to evaluate the business. Stacy Kymes: On talent, that is not the way we think about it. We think about adding A-level talent. We do not have a goal around adding a set number of net new producers each quarter. We have a perpetual goal of adding the best talent in every market we are in. Those discussions have been ongoing for years in many cases. As we have an opportunity to add talent, we do it. If it is not the A talent in the market, then we do not. We do not track it that way, so I do not have anything to report. On provision guidance, the reduction is pretty small and really just a reflection that we have already got one quarter behind us now. When I was in credit, I used to say the crystal ball is pretty good for three to six months, and then it gets foggy. With one quarter in the bag, we have a little more visibility, so we brought guidance down just a bit. It is not that different, really. Brett Rabatin: Great. Appreciate the color, guys. Operator: That concludes our question and answer session. I will now turn the conference back over to Stacy for closing comments. Stacy Kymes: To wrap up, the first quarter has set the stage with solid core operating results. Diversified loan growth, resilient fee performance, excellent credit quality, and disciplined expense management have us off to a strong start in 2026, and we are well positioned for growth as the year progresses. We appreciate your interest in BOK Financial Corporation and your willingness to spend time with us this afternoon. Please reach out to Heather King if you have any further questions at h.king@bokf.com. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation, and you may now disconnect.