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Operator: Good morning, and thank you for attending Unifi, Inc.'s Third Quarter Fiscal 2026 Earnings Conference Call. During this call, management will be referencing a web presentation that can be found in the Investor Relations section of unify.com. Please familiarize yourself with page two of that slide deck for cautionary statements and non-GAAP measures. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Our speakers are listed on page three of today's presentation and include Albert P. Carey, Edmund M. Ingle, and Andrew J. Eaker. I will now turn the call over to Albert P. Carey. Please turn to page four of the presentation. Albert P. Carey: Thank you. Good morning, everyone, and thanks for joining our call. We are pleased to report that our yearlong effort to reduce our cost base and improve cash generation is providing results. As a matter of fact, we are a bit ahead of expectations for Q3. Andrew is going to take you through the full story in a few minutes, but here are the three top headlines. The Madison plant closure is complete. Number two, the much improved efficiencies in our current plant. And three, we have optimized our product lines and SKUs so that we do not have products that contribute no profitability to our lineup. These actions set us up for improved profitability, especially as revenue begins to pick up and we are able to see higher levels of capacity utilization. There was one area that did not see a reduction in cost over the last 12 months, and that was the work that we are doing on product innovation. These products will provide revenue growth for the future, so they are very important. We have begun to get traction with our customers on these products, and that will move us into a very important priority right now, which is to begin to commercialize these innovations. The innovations are, first, textile-to-textile recycling, second, products for categories that are outside of apparel and provide higher profitability, and third, products with performance benefits that customers and consumers are looking for. Now Edmund is going to take you through the full story on that in just a minute. The textile industry still has plenty of headwinds, especially as our customers navigate around the tariff complexities and the oil prices. We believe those headwinds will diminish and our profits will improve even in the current environment that we are in right now. I would like to say one last thing and turn it over to Edmund. We are very proud of our team, the executives, the managers, and the front employees as well. Over the last 12 to 15 months, it has been a rough road. But the team has worked through the challenges collaboratively. There really is a special resiliency about the people from Unifi, Inc., and their loyalty has been very evident throughout this entire time frame. So we are grateful for their big efforts over the last several months, and we are looking forward to returning to growth. So now I would like to turn the call over to Edmund and Andrew who will provide you with the full story. Thank you. Edmund M. Ingle: Thanks, Al. And, as Al just noted, this really was a stronger quarter for Unifi, Inc., and it clearly highlights the benefits of the actions we have taken to realign our cost structure, optimize our operations, and improve the conversion margins through portfolio management and, of course, targeted pricing that Al has inferred. We have kept our inventories flat. Spend was managed with discipline, and the margin improvement that you see in the numbers in part reflects this strong operational progress. We are a significantly more resilient business today, and despite geopolitical headwinds, we have managed our balance sheet very effectively. Structural changes to our customer contracts, combined with faster commercial decision-making, have positioned us well to be able to respond more proactively to today's market conditions. I am going to turn the call over to Andrew now to walk you through the financial details for the quarter, and then I will come back shortly to discuss our near-term priorities, our innovation progress, and what lies ahead for Unifi, Inc. Andrew? Andrew J. Eaker: Thank you, Eddie, and good day, everyone. I will start off by discussing our consolidated financial highlights for the quarter on slide four. Consolidated net sales for the quarter were in line with our expectations, down 11% year-over-year but up 7% sequentially. Our markets continue to be impacted by geopolitical events, as well as trade- and tariff-related uncertainties. Consolidated gross profit was 9.1 million dollars, and gross margin was 7% during the period compared to a gross loss of 400 thousand dollars and gross margin of negative 0.3% for the prior-year period. SG&A was 11.2 million dollars during the quarter, a 9% improvement from one year ago, while adjusted EBITDA during the period was 4 million dollars, a nearly 9 million dollar improvement on a year-over-year basis. These stronger results during the quarter, as Eddie and Al mentioned, reflect serious operational improvements, both on the cost and efficiency side, that we have implemented over the last several quarters now translating into real results. Turning now to slide five. In the Americas, net sales were down 16%, as the region continues to face volume headwinds. Despite the lower sales during the quarter, we did generate gross profit of 3.6 million dollars in that segment. This is the first time we have been able to deliver positive gross profit in the Americas for some time now, which further highlights the benefits of footprint consolidation and cost actions we have taken to improve our domestic operational efficiency. Slide six displays our Brazil segment, which saw net sales increase by 1 million dollars and gross profit decline just slightly by 200 thousand dollars. Overall, the performance in Brazil during the period was solid due to a particularly strong March with both volume and pricing contributing. This March for Brazil was our best sales volume month on record because of cost and price dynamics where the scales tipped in our favor. While this dynamic may normalize soon, we expect to see robust results in the fourth quarter for Brazil. On slide seven, our Asia segment net sales and gross profit declined to 22.6 million dollars and 2.7 million dollars respectively, primarily due to lower sales volumes associated with the tariff uncertainties and pricing dynamics in the region. Margins have continued to hold up well in Asia given the asset-light model we employ there, and we did see some momentum in the region improve during March that we are hopeful will continue. Slide eight outlines our improving balance sheet and capital structure. During the third quarter, we generated 7.2 million dollars of free cash flow, bringing year-to-date free cash flow to 20.5 million dollars. The positive free cash flow in the third quarter was a major beat against our expectations, as we were originally anticipating that we would experience some cash burn during this quarter. But thanks to our operational improvements and diligence, we experienced a nice increase in cash flow generation. CapEx for the quarter came in at just 800 thousand dollars, and our CapEx on a year-to-date basis was 3.9 million dollars, a 50% decline compared to the prior-year period as we continue to closely manage all spending. Net debt was reduced to 68 million dollars, a stark improvement from recent levels, and our working capital remains balanced, healthy, and lower due to our leaner operations in the U.S. This significant improvement to our balance sheet and capital structure was directly attributable to the hard work that our whole team has executed across the globe over the last few years. We aligned our cost, consolidated our footprint, and drove improved efficiencies, all of which have helped us establish a more efficient manufacturing base in the U.S. Looking at the fourth quarter, we do anticipate a moderate increase in working capital to accommodate a modest increase in sales and the higher-cost raw materials purchased thus far. We estimate between 4 million and 7 million dollars of working capital impact to the fourth quarter, which will obviously fluctuate in terms of amount and duration based on current geopolitical events. This concludes my financial review, and I will now pass the call back to Eddie. Edmund M. Ingle: Thank you, Adrian. And as you have just heard from Andrew in quite a amount of detail, we are continuing to see the benefits of our operational improvements and the business is demonstrating improved resilience and flexibility in what I would consider an ever-changing business environment. So let us turn to slide nine for an overview of our priorities going forward. As we look ahead, our focus continues to remain on returning Unifi, Inc. to long-term growth and enhanced profitability. In order to achieve this goal, we are keeping our efforts focused on four key areas. First, we will continue to build on the operational improvements that we have implemented and ensure we do not lose any of the enhancements to the business that we have made. At the same time, we will continue to invest in our capabilities and technologies and reinforce and scale our platform of sustainable solutions. Next, we have a culture built around innovation, and as Al mentioned, we have not given up on those efforts. In new product developments, we will continue to invest in resources necessary to advance the customer adoption of our innovative solutions to support future growth. And finally, we are focused on making sure we do everything we can to navigate the current trade and geopolitical environment that is creating some challenges for us. We are also maintaining a sharp focus on positioning the business to drive more consistent top-line growth as some of these global economic headwinds subside. It is good to see some momentum in a number of our innovative initiatives, especially in the U.S., with what we have called Beyond Apparel. You have heard us talk a lot about the potential we are seeing for our Beyond Apparel business, and while Q3 was still a work in progress, we are seeing real commercial success in Q4. Moving on to slide 10. A key highlight for the last quarter was the global launch of Luxel, a new yarn technology that delivers the look and feel of linen while adding performance benefits like moisture management, wrinkle resistance, and odor control. It is made with REPREVE recycled polyester, including a minimum of 30% textile-to-textile recycled content with our REPREVE Take Back. Luxelle is designed to help brands reduce environmental impact while maintaining the look and feel of linen with easy care. The innovation can be used in a wide range of applications from footwear, apparel, and home goods. And Luxelle is just another example of how we at Unifi, Inc. have continued to develop yarn technologies that can replicate the performance of natural fibers and enhance the technical performance beyond what nature can actually provide. And in our military and tactical markets, much of the success we are seeing is centered around our Fortisyn brand. We are seeing success here because we offer enhanced strength nylon yarns, natural white, all with color embedded into the yarns, and in addition, these products can be made with REPREVE nylon as the base polymer. These advancements that we have made in this market, with the performance promise backed up by Unifi, Inc.'s quality systems, alongside a sustainable offering, are finally starting to move into the serious commercialization stage. So alongside the Beyond Apparel growth of military and tactical, carpeting is getting more traction. Packaging has continued to perform well, with volumes growing in both these markets too. We expect to see further growth in the periods ahead. In Asia, we are beginning to see more activity in both REPREVE Take Back, our textile-to-textile fiber platform, and Thermal Loop, our innovative circular insulation product. In a couple of quarters, I expect to be able to discuss openly which additional brands and retailers have been adopting these offerings once they themselves go public. Turning to slide 11. In February, we released fiscal year 2025 sustainability snapshot highlighting progress in scaling our REPREVE recycled materials platform and advancing sustainable manufacturing. We announced a new goal to recycle 65 billion plastic bottles by 2030, and updated our other established goals, such as converting the equivalent of 1.5 billion T-shirts worth of textile waste into REPREVE products. The sustainability snapshot, as we call it, really helps telegraph to the brands and retailers how serious we are about helping them meet their sustainability targets and, of course, how committed we are at Unifi, Inc. to product innovation and building out our already substantial sustainable product portfolio. Turning to slide 12. In April, which is recognized globally as Earth Month, we celebrated our partners through our Champions of Sustainability program, announcing the winners of our ninth annual REPREVE Champions of Sustainability Awards, recognizing brands and mills who are advancing circularity and responsible manufacturing across the textile industry. This year's program introduced new textile waste awards to spotlight partners accelerating circular solutions, reinforcing our commitment to scaling recycled and traceable materials globally. And since the event was held in our main U.S. manufacturing location in Yadkinville, North Carolina, it gave those who attended a view into the production of REPREVE Take Back and the process. Moving to slide 13 for an overview of our outlook and how we anticipate sustaining our financial momentum. For the fourth quarter, we expect to see our Brazil segment benefit financially from the supply chain dynamics that currently exist in the market, and we will be able to leverage the long supply chain to our advantage in the coming months. In the Asia segment, there is an expectation that we will see increased adoption resulting in revenues from our technologies and circular solutions. The Americas segment should improve in terms of volumes and revenues, primarily from pricing actions and our value-added Beyond Apparel portfolio. However, we are still facing some demand challenges with our underlying business, specifically in Central America. To wrap up, we are encouraged by the progress that we have made, which is now being reflected in our financial results. Our business is in a stronger position today than it has been in some time, and we are continuing to remain focused on ensuring that our operational enhancements translate into sustained financial improvements that will help create value for our shareholders. And before I hand the call over to the operator, I would like to acknowledge that the improvements to the business were a team effort, and I want to take the opportunity to thank each of the teams in the regional businesses for their hard work and efforts. With that, let us open the line for questions. Operator? Operator: We will now begin the question-and-answer session. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open. Please go ahead. Analyst: Good morning, everyone, and thanks for taking the questions, and yes, certainly nice to see the improvement in the earnings results and also the pretty good cash flow in the quarter as well. So first, just can you talk about pricing versus unit volumes in Q3 and how that might change in the fourth quarter here given the increased input costs and some of the supply chain dynamics? I think Brazil is probably the one where you would probably see the most in terms of pricing actions, but just wondering if you could comment on the quarter that you just reported, plus also give some more details about the pricing and volume dynamics that you may anticipate here in the fourth quarter? Andrew J. Eaker: Sure, Anthony. It is Andrew. A bit of a mixed bag. I will try to go slow on some of that and ask Eddie to help as well. But if we start from a year-over-year perspective, we have the majority of decline in the Americas is volume-based. There is some price and mix in there, but predominantly volume. When we look at Brazil, their year-over-year was predominantly price movement—again, Q3 versus Q3—that was based on a lot of the competitive activity, lower prices coming from imported product. And third, in Asia, year-over-year, we did have a larger pricing impact versus volume impact as well. So now when we look sequentially, Q3 to Q4, like you asked, we do see generally flat volumes in the Americas but certainly some pricing as we have had to make some responsive pricing actions given the movement in petrochemical markets. In Brazil, we will also see meaningful pricing increase, but also a bit of volume. And in Asia, we see a mix of volume and price there, again partly with petrochemical-related inflation and partly with some of the recovery that we mentioned beginning with the month of March in Asia headed into Q4. And I will ask Eddie to add on any more there. Edmund M. Ingle: Yes, he has covered most of it. I just want to add one specific thing around the velocity of the pricing. We are in a situation today where more of our pricing is order-to-order and not index like it had been in the past. So we are able to react more responsibly. We are being careful, of course, to talk to customers and be responsible suppliers. But because of the nature of the raw materials and the speed at which they have increased, we have had to react faster than we normally do. So during the fourth quarter, especially by the time we exit, we expect to be caught up on any raw material increases, unfortunately, that we have to pass on. Analyst: Got it. Thank you both. So just to clarify, you expect the pricing actions to essentially fully offset any of the cost headwinds that you are seeing at the moment, right? Edmund M. Ingle: I think there will be a little bit of lag in the U.S., but primarily most of the cost increases will be passed on as we move through this quarter, and we are seeing that already. Analyst: Got it. Okay. Thanks for clarifying that, Eddie. And then, in terms of the Asia segment, you highlighted that you expect improved adoption of innovative and sustainable platforms. Can you give some additional details in regards to that? And then as far as some of the new products that you have talked about, which one do you think has the most potential to make a difference in terms of the sales contributions? Edmund M. Ingle: Yes. Here in the U.S. on the Beyond Apparel, in Q4, we are expecting to see about a 2 million dollar uplift in the quarter from these Beyond Apparel initiatives, which is primarily from our military and tactical Fortisyn programs, our carpeting business, and also the packaging business that we have. These are all margin-accretive opportunities for us, and we are—especially on the Fortisyn product—we spent a lot of time. We talked a lot about this on the calls. It takes a long time to get traction, primarily because it is just such a technically difficult product to make, and then of course the customers are very sensitive to make sure that if they do make a switch, that they are switching to a product that can sustain itself and give them the advantages that we have described to them. We are at the point now where we are getting adoption, and I am very excited about that. I think the volumes potentially, overall for the whole market, will increase because of what is happening with Iran. But overall, we are certainly very positive about that market and where it can bring us in the next few quarters, but specifically in this quarter. It is not going to be huge, but we have got commercial programs that we did not have just a quarter ago. And then in Asia, it is a mixture of our Thermal Loop—which most of the insulated jackets are made actually in Asia, so we do not expect to see any of that here in the Americas—and we are starting to get traction. This is the season to make insulation for the fall jacket sales. We have good programs there. We have good programs in our REPREVE Take Back, which is our textile-to-textile, and also our technologies such as TruTemp 365 and SolveJek; they are also starting to create traction. So our revenues in Q4 will be up in Asia, primarily driven by our technologies. And in Brazil, they actually have increased the ratio of value-added sales, which is in part why the revenues will go up. Analyst: Thanks so much for all that color. This is more of a longer-term, bigger-picture kind of question. As we look at the Americas, it is your very asset-heavy segment where you have taken out a lot of fixed costs. So even with lower revenue, you were able to generate much better gross profit here in Q3. As the segment recovers at some point, how should investors think about gross margin potential here in this segment with better revenue that you may see at some point? Andrew J. Eaker: Sure, Anthony. I will start that and ask Eddie to add any. We are certainly proud of what was achieved in this third quarter, again beating expectations on what the team was able to accomplish in terms of getting cash back, cost out, and improving efficiencies in the facilities that remain. From a long-term perspective, we certainly want to get back to some of those better levels that were in the around 10 years ago. Those margin levels were certainly healthy in the Americas, and with a lot of what Eddie has outlined in terms of new programs, new customer penetration, and continued efficiencies and cost management in the Americas, we do see that as a relevant goal and an achievable goal when those catalysts do hit. Edmund M. Ingle: Yes. I just want to add, we are very, very careful about our spend—more than we ever have been before—and it is across every part of the organization. It is a new mindset. All we need is a little bit of volume to really get those margins that Andrew was talking about. We still expect it to come back, especially in Central America. We are getting the bright signals, but we are still just waiting patiently. While we are waiting, we still believe we can manage our spend relative to the revenues that we have to continue to give us positive profit in the Americas. Albert P. Carey: Anthony, this is Al. I would add one thing to the Central America business. In many conversations with customers, all indications are they are going to use Central America for near-shoring because it is a good option for them to not be so dependent on China, and it is also a good option for close-in supply chain. We are just waiting. I think what is happening in the sourcing organizations of these companies is they are trying to determine, with the tariffs changing so much, is it a better deal to buy from the U.S.? Is it better to ship from China to Vietnam over to the Americas? It is going to happen, but it has just been very confusing. We are waiting for it to happen. All indications are it will happen. Analyst: Understood. Thanks for all that color. And somewhat of a similar question in regards to Brazil. Obviously, the near-term picture looks bright there, but just looking back over the last few years, there has been quite a lot of volatility in the Brazil segment in terms of sales and gross margins. Maybe if you guys could talk about what is different now, other than the supply chain dynamics, and how should we think about the longer-term opportunities and challenges beyond the current quarter? Edmund M. Ingle: Thanks for the question, Anthony. The market is still continuing to grow because of the population and because of the general economy down there. We are the only large player down in that market. We have talked about the dumping that has been going on from Asia into Brazil. With this higher-cost dynamic, we are advantaged a little bit. So we do expect our margins to become a little bit more stabilized. Like we have said on this call, Q4 should be pretty strong, and going forward, we should get back to more normal EBITDA and more normal gross profits in Brazil on that business segment. The dumping has lessened simply because the Asians appear to be a little bit more constrained from a petrochemical perspective, and they are passing those costs on to the market. Analyst: Got it. That is very helpful context. Thank you very much, and best of luck. Andrew J. Eaker: Great. Thank you, Anthony. Operator: There are no further questions at this time, and this concludes today's call. Thank you for attending. You may now disconnect.
Operator: Please stand by. We are about to begin. Good morning, ladies and gentlemen, and welcome to Genworth Financial, Inc.'s First Quarter 2026 Earnings Conference Call. My name is Jess, and I will be your coordinator today. As a reminder, the conference is being recorded for replay purposes. We will facilitate a question and answer session towards the end of this conference call. I would now like to turn the presentation over to Christine Jewell, Head of Investor Relations. Please proceed. Christine Jewell: Thank you, and good morning. Welcome to Genworth Financial, Inc.'s First Quarter 2026 Earnings Call. The slide presentation that accompanies this call is available on the Investor Relations section of the Genworth Financial, Inc. website, investor.genworth.com. Our earnings release and financial supplement can also be found there and we encourage you to review these materials. Speaking today will be Tom McInerney, President and Chief Executive Officer, and Jerome Upton, Chief Financial Officer. Following our prepared remarks, we will open the call for questions. In addition to our speakers, Jamala Arland, President and CEO of our Closed Block Insurance business, Greg Caruana, General Counsel, Kelly Saltsgeber, Chief Investment Officer, and Samir Shah, CEO of CareScout, will also be available to take your questions. During this morning's call, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. Today's discussion also includes non-GAAP financial measures that we believe may be meaningful to investors. In our investor materials, non-GAAP measures have been reconciled to GAAP where required and in accordance with SEC rules. Additionally, references to statutory results are estimates due to the timing of the statutory filing. And now I will turn the call over to our President and CEO, Tom McInerney. Tom McInerney: Thank you, Christine, and thank you all for taking the time to join our first quarter earnings call this morning. In the first quarter, we continued to execute across our strategic priorities and have once again generated strong shareholder value. We advanced our long-term growth strategy through CareScout, and we further strengthened the self-sustainability of our closed block. Before turning to our results, I would like to briefly address an update to how we present and evaluate our core operating earnings. As we have discussed, our closed block of legacy insurance products is separate from our other business lines and self-sustaining, and the quarter-to-quarter GAAP volatility does not reflect the underlying economics or how the business is strategically positioned for the long term. As a result, going forward, we will report Genworth Financial, Inc.'s consolidated adjusted operating income excluding the closed block. We believe this view of our operating performance better aligns with our strategy and capital allocation framework, driving current and future shareholder returns through Enact and long-term growth opportunities with CareScout. We will continue to report the adjusted operating income for the closed block separately in our disclosures. For the first quarter, Genworth Financial, Inc. reported net income of $47 million with adjusted operating income, excluding the closed block, of $109 million. Our results this quarter were led by continued strong performance from Enact, with adjusted operating income of $140 million. The holding company ended the quarter with a solid liquidity position, holding $166 million of cash and liquid assets. Turning to our strategic priorities, I am pleased with our progress as we execute with discipline across the businesses. First, we continue to create shareholder value through Enact's growing market value and capital returns. Our approximately 81% ownership stake in Enact remains a key source of cash flows to Genworth Financial, Inc. and helps fuel our disciplined approach to capital allocation. This strategy includes returning capital to shareholders through share repurchases while also investing in our long-term growth opportunities through CareScout. This balanced approach enables us to drive near-term value while still positioning the company for sustainable long-term growth. In the first quarter, we received $99 million in total capital returns from Enact. Supported by these strong cash flows, we continue to execute on our share repurchase program. Since the initial authorization of our current buyback program, we have bought back a total of $875 million worth of shares at an average price of $6.38 as of April 30, 2026. Turning to our next strategic priority, we continue to drive growth from CareScout, which represents a significant long-term opportunity given the growing demand for aging care, including from 70 million baby boomers now aged 62 to 80 in 2026. We are building a comprehensive aging platform designed to help people understand, find, and fund the quality long-term care they need, all in one place. We do this in three ways. First, comprehensive solutions, providing access to a full suite of services across the aging journey from care planning and guidance to finding providers to funding care. Second, expert guidance, leveraging our data, technology, and decades of claims experience to match individuals with the right care provider options and help them make informed decisions with confidence. And third, technology-enabled human connection, delivering that expertise through trained advisers who provide personalized local support and help families navigate what is often a complex, fragmented, and emotional process. Under Samir Shah's leadership, we are integrating these capabilities across the platform to deliver a seamless experience and build a capital-light, scalable business for long-term growth. During the first quarter, we continued to expand the CareScout Quality Network, or CQN, at an impressive pace across both home care and senior living communities. In the first quarter, we added our first senior living communities to the network. This development marks another important step in broadening access beyond home care and expanding options available to consumers in the marketplace. As we continue to integrate senior living communities from our acquisition of SeniorLeaf, we are building a more comprehensive network that can support people across different stages of the aging journey. By the end of 2026, we anticipate having more than 1,000 home care locations and approximately 2,000 senior living communities as part of the CQN. As a reminder, our revenue model for senior living communities differs from our home care model, with CareScout earning a one-time placement fee upon a successful move-in, consistent with how the broader industry operates. Over time, we expect this to complement our existing home care discount model and contribute to a more diversified, scalable, and substantial stream of revenue in the business. In home care, our network now covers approximately 97% of the U.S. population aged 65 and older. We continue to see strong interest from more providers every day as we expand into additional markets and strengthen coverage in geographies with high demand. As the network grows, we remain focused on optimizing coverage and pricing efficiency while ensuring quality, consistency, and long-term scalability. We facilitated approximately 1,500 matches between care seekers and providers in the first quarter, reflecting strong sequential and year-over-year growth. This was driven in part by the expansion beyond home care matches and into senior living communities. The Q1 figure includes our first direct-to-consumer matches, which we are making in both home care and senior living communities. While quarterly pacing may vary, we are building momentum and remain on track toward our previously discussed target of approximately 7,500 matches in 2026, compared to 3,255 matches in 2025. As our network continues to scale and brand awareness grows, we expect to drive increased traction across the platform. We also expect a higher share of Genworth Financial, Inc. policyholders to utilize CQN providers and benefit from more efficient care coordination by our team, helping to stretch their benefit dollars further while generating claim savings for the closed block over time. We also continue to work with other insurance carriers managing closed LTC blocks to leverage the CareScout Quality Network. Integrating other LTC insurance carriers along with select affinity groups represents an important opportunity to introduce more consumers to the CareScout brand, extend our platform beyond Genworth Financial, Inc., and generate additional fee-based revenues over time. In parallel, we are scaling our fee-for-service offerings that generate recurring revenue streams and create additional pathways for CareScout's growth. Overall, we continue to expect $25 million of CareScout service revenues in 2026, and we are making steady progress towards that goal. Turning to CareScout Insurance, we continue to build out our differentiated product offerings and expand our distribution capabilities. Our new CareAssurance product is clearly differentiated in the LTC insurance market by giving customers and their families access to a more holistic aging experience through our services business, including access to the CareScout Quality Network, wellness support tools, and care planning services. We believe this integrated approach provides a distinct advantage in a market that remains fragmented and very underserved relative to the growing demand for long-term care over time. Looking ahead, we plan to launch our CareAssurance worksite product later this year. The worksite channel will broaden access through employers and associations. We are also developing additional offerings, including hybrid LTC insurance products with innovative designs that pair a minimum LTC benefit with low-cost fixed income and equity accounts designed for accumulation. Hybrid products offer a broader set of funding solutions designed to meet evolving customer needs and solve critical gaps in retirement income and retirement security in the marketplace. As the U.S. population ages, CareScout will continue to broaden its capabilities with a focus on ensuring families can more easily access the support, guidance, and resources they need to navigate the complexities of aging. Turning to our third priority, we continue to actively manage our self-sustaining, customer-centric closed block of LTC, life, and annuity products. This business is being managed with a focus on delivering high-quality policyholder experiences, maintaining capital discipline, and ensuring long-term sustainability as we position Genworth Financial, Inc. for growth through CareScout. Our multiyear rate action plan, or MYRAP, remains our most effective lever for maintaining that sustainability. In the first quarter, we secured $5 million of gross incremental premium approvals. We have built on this progress in the second quarter, already achieving another $45 million. As we enter the later stages of the MYRAP program, we expect premium approvals to be lower and benefit reductions to be higher because the future premium runway is shortened as Genworth Financial, Inc. policyholders age, as shown on Appendix Slide 20. That said, we expect full-year 2026 premium approvals and benefit reductions to be broadly in line with 2025 levels, contributing approximately $1 billion of economic value on a net present value basis. Since the program began in 2012, we have achieved approximately $34.5 billion in net present value through a combination of premium increases and benefit reductions. We remain focused on executing this program with discipline to ensure the long-term self-sustainability of the closed block. Next, I will provide a brief update on the Absa litigation. The appeal hearing is scheduled for July. We expect the Court of Appeal to reach a decision within approximately three to six months of that hearing. If the judgment is ultimately upheld and all appeals are favorably resolved, we expect to recover a total sum of approximately $750 million, subject to exchange rates at that time. We do not expect to pay taxes on this recovery. As we said previously, any potential recoveries are not factored into our capital allocation plans. If proceeds are received, we would deploy them in line with our existing priorities: investing in CareScout, returning capital to shareholders, and reducing debt. Before I turn it over to Jerome, I would like to briefly address the current macroeconomic backdrop. We continue to closely monitor an uncertain and dynamic external environment, including uneven consumer spending and the potential for higher inflation and interest rates. We believe Genworth Financial, Inc. is well positioned to navigate a range of market conditions in 2026 and beyond. Enact continues to operate from a position of strength supported by disciplined underwriting and a strong capital position and provides Genworth Financial, Inc. with strong free cash flow. We continue to integrate new technology and operational capabilities across the organization, enabled by artificial intelligence. We have several AI and generative AI initiatives underway with key partners focused on improving efficiencies in claim management, enhancing the policyholder and customer service experience, and supporting more scalable growth across CareScout. Even as we advance these capabilities, our approach remains grounded in the tech-enabled, human-centered support our policyholders rely on throughout the aging journey. In closing, we are pleased with the progress we have made in the first quarter across our strategic priorities, supported by another quarter of strong performance from Enact. As we move towards the midway point of the year, we remain focused on disciplined execution and building long-term value for our shareholders. And with that, I will turn the call over to Jerome. Jerome Upton: Thank you, Tom, and good morning, everyone. We entered 2026 with strong momentum, and as Tom highlighted, we continued to execute against our strategic priorities while enhancing our financial flexibility and positioning the company for long-term success. Enact's first quarter results reflected continued strategic and operational strength underpinned by its strong balance sheet and liquidity profile that continue to create value and fuel our capital allocation priorities. We also made further progress scaling CareScout and strengthening the self-sustainability of our closed block. I will begin with an overview of our first quarter financial results and key drivers, followed by a discussion of our investment portfolio and holding company liquidity. I will then cover our capital allocation priorities and provide an update on our guidance for 2026 before we open the call for Q&A. Starting with the financial results on Slide 9, as Tom mentioned, going forward, we are updating the presentation of our consolidated earnings to exclude results from our Closed Block segment to better align with our strategy and capital allocation framework managing the closed block on a standalone basis. We will continue to report the adjusted operating income for the closed block separately in our disclosures. First quarter adjusted operating income, excluding the closed block, was $109 million, driven by strong performance in Enact, partially offset by losses in Corporate and Other. Enact delivered another strong quarter of performance with adjusted operating income of $140 million to Genworth Financial, Inc. Results included a pretax reserve release of $39 million reflective of continued strong cure performance. Results are down versus the prior quarter reflecting a lower reserve release and up versus the prior year reflecting increased investment income and favorable expenses. In Corporate and Other, we reported an adjusted operating loss of $31 million for the quarter, reflecting continued investment in CareScout and ongoing holding company debt service. The prior quarter included a benefit from favorable tax-related items. Our Closed Block segment reported an adjusted operating loss of $32 million. This was driven by a liability remeasurement loss related to the actual variances from expected experience, or A to E, of $36 million pretax, primarily in LTC. Our results in LTC were favorably impacted by net insurance recoveries in the quarter of $65 million pretax. Mortality in both LTC and life insurance was seasonally higher sequentially but lower than the prior year. While results can vary quarter to quarter, we expect to see A to E losses in the range of approximately $300 million for the full year 2026. As a reminder, these GAAP fluctuations do not impact our cash flows, economic value, or how we manage the business. Now taking a closer look at Enact's performance underlying its strong financial results beginning on Slide 10, new insurance written of $13 billion in the quarter decreased versus the prior quarter primarily based on seasonal trends but increased versus the prior year as a result of lower interest rates early in the quarter. Primary insurance in force increased year over year to $272 billion supported by the growth in new insurance written and continued elevated persistency. Earned premiums in the quarter were $243 million, down slightly versus the prior quarter and prior year. As shown on Slide 11, Enact's favorable $39 million pretax reserve release drove a loss ratio of 15%. Enact's estimated PMIERs sufficiency ratio remains strong at 162%, or approximately $1.9 billion above requirements. Genworth Financial, Inc.'s share of Enact's book value, including AOCI, was $4.3 billion at the end of the first quarter, down slightly from $4.4 billion at year-end 2025, driven by movements in the market value of the investment portfolio as a result of increased interest rates. While maintaining its strong balance sheet, Enact has continued to deliver significant capital returns to Genworth Financial, Inc. We received $99 million from Enact in the first quarter. Looking ahead, Enact remains well positioned to navigate the current macroeconomic environment supported by its strong balance sheet and disciplined underwriting. Turning to our Closed Block segment on Slide 12, we continue to proactively manage and reduce LTC risk and improve self-sustainability through prudent in-force management, including benefit reductions and premium rate increases. As of the end of the first quarter, we had achieved approximately $34.5 billion of benefit reductions and premium increases on a net present value basis since 2012. As part of our multiyear rate action plan, we offer a suite of options to help policyholders manage premium increases while maintaining meaningful coverage. These benefit solutions enable us to reduce our exposure to certain higher-cost features, such as 5% compound benefit inflation options and large benefit pools. Cumulatively, about 61% of policyholders offered a benefit reduction have elected to take one, lowering our long-term risk. These initiatives have helped reduce our exposure to the riskiest LTC policy features. Notably, our exposure to the 5% compound benefit inflation option has decreased below 36%, down from 57% in 2014, and the percentage of our policies with lifetime benefits has decreased to 11%. We remain committed to managing GLIC and its subsidiaries as a closed system, leveraging their existing reserves and capital to cover future claims. We will not inject capital into these companies and, given the long-tail nature of our LTC insurance policies, with peak claim years still over a decade away, we also do not expect capital returns. Turning to Slide 13, our investment portfolio remains resilient and is conservatively positioned. The majority of our assets are in investment-grade fixed maturities held to support our long-duration liabilities. New money yields continue to exceed those on sales and maturities, with cash in our life insurance companies being invested at yields of approximately 6.3% for the quarter. Our alternative assets program is largely comprised of diversified private equity investments and has targeted returns of approximately 12%. Quarterly realizations fluctuate, with first quarter transactions affected by geopolitical tensions. We remain committed to growing our alternative assets portfolio within regulatory limitations due to its robust track record of returns, diversification benefits, and natural fit with long-term liabilities. Next, turning to the holding company on Slide 14, we ended the quarter with $166 million in cash and liquid assets. When evaluating holding company liquidity for the purpose of capital allocation, and calculating the buffer to our debt service target, we excluded approximately $50 million of cash held for future obligations, including advanced cash payments from our subsidiaries. Moving to capital allocation on Slide 15, our priorities remain unchanged. We will continue to invest in long-term growth through CareScout, return cash to shareholders through our share repurchase program when our share price trades below intrinsic value, and opportunistically retire debt. During the quarter, we repurchased $66 million of shares at an average price of $8.61 per share. We repurchased an additional $19 million through April 30, 2026. We also retired approximately $5 million of principal debt in the quarter, bringing our holding company debt down to $778 million. We maintain a disciplined capital structure with a cash interest coverage ratio on debt service of approximately nine times. I will now turn to our outlook for 2026 and provide an update on the guidance we shared in February on our fourth quarter earnings call. As announced yesterday, Enact has increased its quarterly dividend and continues to expect to return approximately $500 million of capital to its shareholders in 2026. Based on our approximate 81% ownership position, we continue to expect to receive around $405 million to $450 million from Enact for the full year. Second, we continue to create value for our shareholders through our share repurchase program. For the full year 2026, we now expect to allocate between $195 million and $225 million to share repurchases. As we have said before, this range may vary depending on market conditions, business performance, holding company cash, and our share price. Third, turning to CareScout. As Tom indicated, in the services business, we continue to target approximately 7,500 matches in 2026, including matches across both home care providers and senior living communities. CareScout services generated $6 million in revenue in the first quarter, and we continue to expect revenue in this business of $25 million for the full year. We plan to invest approximately $50 million to $55 million in services in 2026 as we continue scaling the business and expanding its reach. These investments will support the continued build-out of our technology platform, the addition of new products and care settings, and growth across both consumer and B2B channels. We are also deepening carrier partnerships and enhancing operational infrastructure to support higher volumes, recurring revenue, and long-term scalability. For insurance, we currently do not expect any additional investments in 2026 following our $85 million investment to launch our inaugural product last year. As we expand our product suite, grow our distribution network and sales levels, and refine our operating platform, we will make appropriate investments in the business. We have made good progress overall with CareScout and remain confident in its continued growth in 2026. As we have noted previously, scaling these businesses and achieving breakeven will take time. In closing, we are delivering on our strategic priorities and enhancing financial flexibility while proactively managing our liabilities and risk. Our focus remains on driving durable growth through Enact and CareScout, which serve as a foundation of our long-term value creation strategy. At the same time, we are strengthening the self-sustainability of our closed block, maintaining our commitment to return capital to shareholders through share repurchases, and opportunistically retiring debt. These actions position Genworth Financial, Inc. to deliver long-term value for our shareholders. We will now open the call for questions. Now, let us open up the line for questions. Thank you. Operator: Ladies and gentlemen, we will now begin the Q&A portion of the call. As a reminder, please refrain from using cell phones, speakerphones, or headsets. Please press star 1 to ask a question. We will go first to a question from Joshua Estrach with Credit Insights. Your line is open. Please go ahead. Analyst: Hey. Good morning, folks. Thanks for taking my question. So, modest decline in the estimated RBC ratio at GLIC at quarter-end, and I know you folks have been adamant for years that no capital contributions to life entities are planned. But I am wondering if there is, like, a specific RBC ratio level at which you would either be forced or consider contributing capital, or, you know, alternatively, if there is a lever you can pull to bolster RBC in the life units to the extent it becomes necessary without a capital contribution. Tom McInerney: Thank you for your question, Josh. Our target is to have RBC at $250 million or more, and so we are very comfortable with where we are. Obviously, the RBC did go down in the first quarter because of the statutory loss, but that is why we have quite a bit of room. There is no requirement from a regulatory perspective. I mean, we are well above, at almost three times required capital, what the regulators require. Jerome Upton: Josh, good morning. Thanks for the question. Look, we felt some pressure in the first quarter, as Tom indicated, down to 2.89. That is still a good ratio. We did see mortality; it went up in the quarter, but it certainly was not at the level that we would have expected. I think that impacted LTC, but I believe that was felt across the industry as well. We also saw some life pressure from our post-level term block coming through and some reserve build. We do not expect that to continue. What I would highlight to you is we are going to continue to execute our strategy. That strategy and our statutory results are premised upon our ability to get the multiyear rate action plan, which, as Tom highlighted, has been very successful, our benefit solutions, and our Live Well, Age Well program as well as our CareScout Quality Network. We are active in achieving those benefits, and those will be key drivers of our RBC and our statutory results going forward. Operator: Thank you very much. Analyst: And if you do not mind, maybe I can sneak in one more here and pivot a little bit. I appreciate the color and the commentary you gave earlier on the investment portfolio front, but if maybe you can give a little bit more detailed color on the private credit portfolio, maybe even just at a high level, the characteristics either from a ratings or asset class or sector basis, and maybe you can just briefly tell us how you perhaps source the investments or any of the partnerships you might have to bolster your private credit capabilities. Jerome Upton: Sure. Thanks for the question. Kelly is on the call, so we will ask Kelly to comment. Kelly Saltsgeber: Yes, thanks, Josh, for the question. Private credit has been referred to in the media of late really as what we call direct lending or middle market loans, which are private loans to small companies, and we have very minimal exposure there. We have about 1% of our portfolio in middle market loans, and we access that market through a well-regarded and experienced manager through a separately managed account. Our direct lending portfolio actually has no exposure to what is classified as the software category, and so it is very different from what you are reading about with some of the BDCs. Now, we have other private investments. We have been in the private placement market for decades, and that is an investment-grade portfolio. We also have recently started accessing private asset-based finance, also primarily through external managers, and that is an investment-grade mandate with an average rating of single-A or triple-B. We also access the private equity market mainly through advisers that are very experienced in the space, including Neuberger and JPMorgan. I would say our private exposure is almost exclusively investment grade with the exception of the 1% in middle market loans that I mentioned. Analyst: Got it. Thank you very much. I appreciate everyone's time this morning. Jerome Upton: Thanks, Josh. Operator: Once again, ladies and gentlemen, it is star 1 if you have a question. It appears there are no questions at this time. Ladies and gentlemen, I will now turn the call back over to Mr. McInerney for closing comments. Tom McInerney: Thank you all very much for joining the call today and for your continued support and interest in Genworth Financial, Inc. At this point, I will turn the call back over to Jess to have her close it. Operator: Thank you, sir. Ladies and gentlemen, that will conclude the call. We thank you for your participation. You may disconnect at this time.
Operator: Ladies and gentlemen, thank you for standing by. Today's presentation will begin momentarily. Good morning, and welcome to the Rayonier Advanced Materials Inc. First Quarter 2026 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open to questions with instructions to follow at that time. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Daniel Bradley, Vice President of Investor Relations. Daniel, you may begin. Daniel Bradley: Good morning, and welcome to the Rayonier Advanced Materials Inc. First Quarter 2026 Earnings Conference Call. Last evening, we released our earnings report and accompanying presentation materials which are available on our website at ryan.com. These materials provide key insights into our financial performance and strategic direction. During today's discussion, we may make forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our earnings release, SEC filings, and on Slide 2 of the presentation. We will also reference certain non-GAAP financial measures to offer additional perspective on our operational performance. Reconciliations to the most comparable GAAP measures can be found in our presentation on Slides 19 through 21. We appreciate your participation today and your ongoing interest in Rayonier Advanced Materials Inc. I will now turn the call over to Marcus. Marcus J. Moeltner: Thanks, Daniel. Good morning, everyone, and thank you for joining us. Before I turn to the quarter, I want to begin on Slide 4 and address the announcements we made on April 20, 2026. As disclosed, a formal review of strategic alternatives to maximize shareholder value has been initiated, and the company has engaged Morgan Stanley as financial adviser in connection with that review. At the same time, an interim office of the CEO has been established to provide continuity during the transition and the search for a permanent CEO is underway. Importantly, the members of the interim office of the CEO bring more than 60 years of combined experience at Rayonier Advanced Materials Inc. and Témiscaming, which provides continuity and deep knowledge of the business. We remain focused on safety, reliable operations, serving our customers, executing our 2026 priorities, and improving value across the portfolio. That has not changed. With that in mind, the strategic review is appropriately broad. The alternatives under evaluation include, but are not limited to, continued execution of our stand-alone strategic plan; a strategic investment or partnership that strengthens the business; a merger or other business combination; and the sale of part or all of the company. They may also include capital structure actions designed to improve financial flexibility, including potential debt refinancing or restructuring, covenant relief, or other collaboration with our lenders. Any path under consideration ultimately needs to be evaluated against the same core objective: what best strengthens the company, improves financial flexibility, and maximizes shareholder value. As we said in the press release, we have not set a timetable for completion of the review and we do not intend to provide updates unless and until disclosure is appropriate or required. So today, my focus is where it should be: on execution, on the operating path forward, and on the actions that improve value under any outcome. Turning to Slide 5, the message is straightforward. Our 2026 priorities are unchanged. We have four operating priorities for the year. First, deliver positive free cash flow. Second, assert our leadership in CS. Third, drive year-over-year EBITDA improvement across every business. And lastly, exit 2026 with momentum. These priorities reflect both where we are today and what must happen next. We entered 2026 with negative free cash flow and elevated debt. So our task this year is clear: strengthen the earnings profile of the business, improve cash generation, and build momentum quarter by quarter. The first quarter was an early step in that process. I will cover the detailed results on the next slide, but at a high level, the quarter was broadly consistent with the operating plan we laid out in March as pricing, mix, and commercial actions to strengthen our leadership in CS continued to come together. Let us turn to Slide 6 and the first quarter results. Adjusted EBITDA in the quarter was $8 million. High Purity Cellulose generated $24 million of adjusted EBITDA, and we achieved a 17% increase in average CS sales price year over year, while CS volumes were lower and commodity mix was higher. Paperboard and High Yield Pulp were a negative $5 million, reflecting continued pressure from new third-party supply in paperboard and continued domestic oversupply of high yield pulp in Asia. Corporate and other costs were $11 million for the quarter, with favorable foreign exchange rates compared to the prior-year quarter providing some offset. Importantly, we ended the quarter with total liquidity of $160 million, comprising $68 million of cash on hand, $88 million of availability under the ABL, and $4 million available under our factoring line in France. The quarter came in broadly in line to slightly ahead of the expectation embedded in our prior outlook. Although still below the level required to achieve our full-year objectives, that outcome reflects continued execution of the commercial and operating initiatives required to strengthen our leadership in CS as the near-term benefit from those actions is building. The free cash flow bridge also makes an important point. Even with a weak first quarter, we generated $12 million of adjusted free cash flow. This reinforces that positive free cash flow in 2026 will come from a combination of better operating performance, improved mix, commercialization of new offerings, disciplined capital allocation, and balance sheet actions as needed. Turning to Slide 7, our new product pipeline reflects how we are advancing growth through focused innovation and value-added products across the portfolio. What is important here is that these opportunities are not dependent on any single product or end market. They are spread across multiple businesses and, in many cases, leverage assets, technical capabilities, and commercial positions we already have in place. The initiatives highlighted in green on the slide are the ones I want to focus on today because they represent the most tangible near-term progress. In paperboard, we continue to gain traction in both freezer board and oil-and-grease-resistant board, and we are targeting approximately 10 thousand metric tons of annual sales in 2026 in each of these markets as commercialization and customer qualifications continue to advance. In high yield pulp, we see a path to approximately 20 thousand metric tons of annual sales in 2026 for softwood high yield pulp rolls as we move into higher-value, absorbent end markets, while the wrapper product provides a near-term opportunity to support internal cost reduction and create a path to future external sales. In cellulose commodities, odor control fluff remains one of our more differentiated growth and margin-accretive opportunities in the pipeline, which I will come back to on the next slide. The broader point is that this pipeline supports both near-term earnings improvement and longer-term portfolio value creation. The slide that follows highlights a few representative examples of how the value is being developed through targeted product innovation, sharper commercial focus, and a more dynamic operating approach. So turning to Slide 8, this slide brings together three representative examples of how we are working to create value through more focused commercial execution, differentiated product development, and a more dynamic operating approach. First, in nitration grade cellulose, what we have learned is that customers in qualification-intensive energetic applications are buying certainty, technical support, and disciplined specification control, not simply material that meets a basic spec. Rayonier Advanced Materials Inc. is well positioned here because we are the only supplier with a multisite sulfate and sulfite production footprint across North America and Europe. Our actions are focused on the highest-priority conversion and qualification opportunities, and on continuing to strengthen customer support, qualification continuity, and supply assurance in the applications where reliability matters most. Second, odor control fluff is a different type of opportunity, but it reflects the same discipline. Adult incontinence is the fastest-growing fluff segment, and there is a clear unmet need for immediate odor control. Our product offers a differentiated urine-activated solution that can be used as a drop-in replacement in existing products. The commercial approach here is also deliberate. We are targeting brands directly in order to pull the solution through the value chain. Third, dynamic asset allocation is the internal discipline that connects strategy to day-to-day execution. What we have found is that there are still barriers and bottlenecks that can be removed to raise production and improve mix, and that we have more flexibility than we have historically used to allocate capacity across our grade portfolio to maximize value. A good current example of this is in the fluff market, where pricing has strengthened. As those market conditions have improved, we have further prioritized volumes into fluff and other attractive softwood pulp markets to take advantage of that pricing environment. The broader point across all three examples is the same: we are becoming more targeted in how we deploy technical, commercial, and operating resources, and that is an important part of how we intend to improve the earnings quality of the business going forward. Let us turn to Slide 9 and the 2026 outlook. The core message on this slide is that 2026 remains a transition year, but one in which we are building leadership momentum and laying the foundation for a stronger 2027 and beyond. The first quarter came in broadly in line to slightly ahead of the near-zero EBITDA level we had anticipated, as the benefit of our CS leadership initiative is building. So while the year still depends on sequential improvement from here, the underlying direction of the plan remains intact. The items on the right side of the slide reinforce that point. In the first quarter, average CS sales price increased 17% as our leadership actions continued to build. We are also advancing trade actions to support fair competition in Rayonier Advanced Materials Inc.’s U.S. domestic markets. Across the CS value chain, we expect inventory conditions to become more favorable as we move into 2027, while CS supply-demand conditions remain tight and continue to support disciplined pricing actions. We also expect to benefit from improving commodity pricing as supply and trade dynamics continue to normalize, with pricing currently forecasted to increase sequentially over the balance of 2026. Beyond the market backdrop, we continue to take actions within the business to improve the earnings and cash flow profile. That includes ongoing inflation mitigation work across the enterprise and continued progress on new product and grade-specific leadership initiatives that are expected to contribute incremental value in 2026 and beyond. Taken together, these actions are intended to build a stronger earnings base and improve cash generation over time. That said, our priorities for 2026 are unchanged. We continue to target positive free cash flow, assert our leadership in CS, drive year-over-year EBITDA improvement across every business, and exit the year with stronger momentum. We also remain focused on safer operations, strengthening our organization, and executing with greater precision and speed. In closing, I have confidence in the plan we are executing and in the team that is advancing it. Regardless of which plan is ultimately chosen, execution remains the anchor under any outcome. The initiatives we discussed today are the right initiatives for the company. They strengthen our financial position, improve our commercial posture, increase operating discipline, and enhance the strategic value of our assets. The best way we can support the strategic review is to execute the initiatives in front of us, improve our earnings and free cash flow quarter by quarter, and continue building a stronger company. If we do that well, we will reinforce the business under any scenario and position Rayonier Advanced Materials Inc. for a stronger 2027 and beyond. We will now open the call for questions. Operator: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star followed by the number one. Your first question is from the line of Daniel Herriman with Sidoti. Daniel Herriman: Thank you. Good morning, Mark. I will start with a couple and then get back into the queue. Marcus, heading into 2026, it was very clear that CS volumes would be under pressure as you continue to push price, and obviously Q1 results were consistent with that. Can you provide us with an update regarding where you stand on those pricing conversations today and when you expect to have that fully placed? I believe you had maybe between 12–15% still to go. And then with the breakdown on the CS volume decline, the release calls out elevated acetate inventories and also soft ethers demand. I was hoping to get an idea of how much of the volume weakness is market-driven versus self-imposed by those higher prices, and if that at all changes your confidence in the back half of the recovery. Thanks so much. Marcus J. Moeltner: Good morning, Daniel. Thanks for your questions. As an update to the negotiations and asserting our leadership strategy, we have secured the majority of our 2026 CS volume at pricing that is meaningfully higher than 2025. A good reference point is the evidence we shared with the 17% increase in Q1. This really reflects deliberate commercial actions we have taken to manage pricing and improve our mix, and better align value with the value our products bring to the applications. In our industry, Hawkins Wright publishes capacity and demand figures, and anything above 88% is really balanced. We are above 90%, so we are still in the backdrop of a very constructive market. Our discussions are well advanced, and we continue to make progress. On acetate and ethers markets, we continue to advance our discussions with the acetate customer base in the backdrop of an end-use market that does have elevated inventories, but it is improving. In ethers, that is the market where you see weakness from European construction, and there is also the impact of competing products from China that make their way into that end-use market. Overall, consistent with our last message, in the back half of the year we will continue to complete these negotiations. Daniel Herriman: That is really helpful. Thanks so much, Marcus. Operator: As a reminder, to ask a question, press star followed by the number one on your telephone keypad. Your next question is from the line of Matthew McKellar with RBC Capital. Matthew McKellar: Hi. Good morning. Thanks for taking my questions. First for me, you disclosed on April 20, 2026 that you are engaged in a formal process to explore strategic alternatives. There is some language in the presentation suggesting you do not have a specific timeline, but to help us get a sense of timing, can you help us understand when you formally began this process and, more broadly, what you think is driving interest in Rayonier Advanced Materials Inc. at this point in time? What do you think public markets have underappreciated about your business? Thanks. Marcus J. Moeltner: Good morning, Matt. Thanks for your question. As I mentioned in my prepared comments, engaging Morgan Stanley was a decision made given interest expressed by third parties. It is a very broad mandate that could involve numerous permutations of corporate development activities with the real focus to maximize shareholder value. There is also a piece related to continuing to address the balance sheet of the company and to look to optimize the capital structure. The process has the overarching objective to maximize shareholder value, because I truly believe there is value within Rayonier Advanced Materials Inc. that is not recognized by the marketplace. We have a unique offering, and you are seeing that offering reinforced in the current backdrop of what is going on in the world, where you have pressure on oil-based products and our cellulose-based products are well positioned in any environment to be perceived as having high value. Matthew McKellar: Great. Thanks for that perspective. Maybe next for me, can you provide a bit more color on the conditions you are seeing in the fluff market right now and how those conditions might be different than your expectations going into the year? With that, can you talk about your mix in the commodities business—what your mix of fluff looked like in Q1 compared to the past couple of quarters—and whether you would expect mix to evolve much through the balance of the year compared to Q1? Marcus J. Moeltner: Thanks, Matt. Higher fluff pricing is a positive backdrop to our business right now, and it aligns well with the dynamic asset allocation strategy I referenced in my comments. Given what we are seeing in the fluff space, there is definitely upward pricing movement. We are seeing the ability to pivot and drive our mix toward more fluff production. If I contrast Q1 versus Q2, we certainly had a higher mix of paper pulp in Q1 versus where we will be this quarter, given that we are going to drive pricing and volumes to fluff. We are picking up that there are some further pricing announcements pending here—in the range of a net $55 increase in China and $120 in North America and Europe. I think there is a lot of positive momentum in fluff. Additionally, as we advance the commercialization of the softwood roll product in Témiscaming, we will have products across the continuum of fluff grades and can position our product made out of Témiscaming out of high yield to get further value there as well and drive improved mix. I am really excited about that project as well. Operator: Your next question is from the line of Dmitry Silversteyn with Water Tower Research. Dmitry Silversteyn: Good morning, Marcus. Thank you for taking my call. Quick question. There was a development at the end of last year in the antidumping case concerning Brazilian and Norwegian imports. The ruling was positive for you in the sense that there was some damage assessed, but the amount of remedy was a little disappointing. Can you talk about what other things we can look forward to in terms of that trade dispute? And then as a follow-up, you mentioned in your press release that your shipping costs have gone up, particularly to China. Is it in any way related to the geopolitical conflict going on in the Middle East now? Or, asked differently, are there any impacts on your logistics and shipping costs as a result of that conflict? Marcus J. Moeltner: Good morning, Dmitry. Thanks for your questions. On trade, we feel positive about the direction and where things are headed across the tariff-related workstreams we have, including AD and CVD. As you know, Rayonier Advanced Materials Inc. is the sole remaining U.S. producer of high purity dissolving wood pulp, and we think the importance of a reliable domestic supply is paramount. It is particularly important for critical infrastructure and certain defense-related applications, and it is continuing to be better understood. It is early days, but we are optimistic on the direction this is taking and like the trajectory we are on in those discussions. On inflationary pressures on logistics, like everybody, we are seeing the impact of higher oil pricing and diesel costs, and there are surcharges coming through on freight. We are certainly focused on that. It is creating pressure as well on some chemicals—think of the sulfur and ammonia families—but we are actively managing this through supplier negotiations. We have targeted commercial recovery actions that we are pursuing, and, where appropriate, we continue to pursue cost discipline to mitigate these impacts. Thanks again for your questions. Dmitry Silversteyn: Thank you, Marcus. Just a quick follow-up. You mentioned in your presentation several new businesses or business lines that are gaining traction in the first quarter and second quarter, some by the end of the year. If we were looking at relative performance versus your expectations within your guidance, which of those products do you think will have the greatest impact on your results—provided successful commercialization and share gains—for 2026? And which should we think about as more impactful for 2027 and beyond? Marcus J. Moeltner: Thanks again, Dmitry. Looking at our new product pipeline, several of those products are Témiscaming-centric—think of freezer board and oil-and-grease-resistant board. Those will help us drive better mix across our paperboard portfolio, and those will have impacts in the second half of 2026. As well, as we advance the commercialization of the roll product—the fluff product—at Témiscaming, that is another value-adder for the second half. We see all those products produced in Témiscaming as providing a nice benefit for Rayonier Advanced Materials Inc. for the balance of the year. Longer term, as I mentioned, odor control fluff is a real differentiator and a strong prospect. I can see that adding considerable value to our fluff portfolio going forward. We are really excited about all those products, but think of Témiscaming as having a nice impact from these activities. Operator: As a reminder, to ask a question, press star followed by the number one on your telephone keypad. You do have a follow-up from the line of Matthew McKellar with RBC Capital. Matthew McKellar: Hi. Thanks. Just one follow-up for me. Referencing Slide 8 and the dynamic asset allocation comments you have made, can you give us any more detail around how you have achieved this greater flexibility to increase production and allocate capacity across grades? And then can you share any perspective around how we should think about the sequential change in CS shipments into Q2, and whether the fire you addressed will have any impact to acetate volumes in the quarter? Marcus J. Moeltner: Thanks again, Matt. Examples of execution in leveraging this dynamic asset allocation strategy include being more nimble and quicker to respond to market changes, because our production lines are quite flexible. It is about leveraging that capability and putting it into action to adapt quickly. We had to do that in Q1—adapting be-line to making a mix of commodity paper pulp to keep the lines running—and as that is now filled with acetate, you can see how we have put that into action. Another example is as fluff markets have improved, driving that mix higher. We have that same capability at Tartas, where we can pivot between ethers-type grades and make a fluff product. It is being mindful of our asset capabilities and putting that into action in real time. On volumes sequentially, CS volumes will be higher from the base. We just did over 70 thousand tons of CS; we could be upwards of 15–20% higher on those volumes. We will also drive better fluff pricing, and that mix should be greater given that we will make less paper pulp. Lastly, on the fire, as we mentioned, this was a very isolated and contained event. Relative to the previous fire, it had a minor impact, in the range of $5 million. As far as production, we were more focused on paper pulp as we started up from the outage, so the impact on acetate is de minimis. Operator: At this time, there are no further audio questions. I will now hand the call back over to the presenters for any closing remarks. Marcus J. Moeltner: Thank you for your time today and for your continued interest in Rayonier Advanced Materials Inc. We really appreciate the support and engagement of our shareholders and other stakeholders. Our focus remains on disciplined execution, open communication, and continuing to build value in the business. We look forward to updating you further on our progress next quarter. Thank you again. Operator: This concludes today's presentation. Thank you for joining. You may now disconnect your lines.
Operator: Good day. Operator: And welcome to the Spire Inc. Second Quarter 2026 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Megan L. McPhail, Managing Director, Investor Relations. Please go ahead, ma'am. Megan L. McPhail: Good morning, and welcome to Spire Inc.'s fiscal 2026 second quarter earnings call. We issued an earnings news release this morning, and you may access it on our website at spireenergy.com under Newsroom. There is a slide presentation that accompanies our webcast, which can be downloaded from our website. Before we begin, let me cover our safe harbor statement and use of non-GAAP earnings measures. Today's call, including responses to questions, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. These statements include, among others, statements regarding our expectations, plans, and objectives for future performance, future operating results, earnings guidance, capital investment plans, and the expected timing and benefits of, and risks associated with, acquisitions, dispositions, and related integration and transition activities, including the acquisition of the Piedmont Natural Gas Tennessee business; the sale of Spire Marketing; and the announced sales of Spire Storage and Spire Mississippi. Our forward-looking statements on today's call speak only as of today, and we assume no duty to update them unless required by law. Although our forward-looking statements are based on estimates and assumptions that we believe are reasonable, various uncertainties and risk factors may cause future performance or results to be different than those anticipated. These risks and uncertainties are outlined in our quarterly and annual filings with the SEC. In our comments, we will be discussing non-GAAP measures used by management when evaluating our performance and results of operations. I want to highlight that our results and guidance discussed today are presented on a continuing operations basis. This reflects the classification of Spire Marketing and Spire Storage as discontinued operations and is intended to provide a view of the earnings profile of the business going forward. As a part of this change, we are no longer presenting separate midstream or gas marketing segments in results or segment earnings guidance. The MoGas pipeline, which was previously reported in the Midstream segment, is now included in Corporate and Other. Explanations and reconciliations of these measures to their GAAP counterparts are contained in both our news release and slide presentation. On the call today are Scott Edward Doyle, President and Chief Executive Officer, and Adam W. Woodard, Executive Vice President and Chief Financial Officer. With that, I will turn the call over to Scott Edward Doyle. Scott? Scott Edward Doyle: Good morning, and thank you for joining us. This has been an exciting and transformative period for our company. Since announcing the acquisition of Piedmont Tennessee on July 29, 2025, we have successfully closed that transaction and taken decisive steps to further strengthen our portfolio. We announced agreements to sell Spire Storage and Spire Mississippi along with the sale of Spire Marketing, which have enabled us to fund the Tennessee acquisition without the need for external equity, while also sharpening our strategic focus on our regulated gas utility businesses. Together, these actions enhance the quality and visibility of our earnings, improve our overall risk profile, and position the company for more consistent long-term value creation. I want to take a moment to thank our colleagues at Spire Marketing for their professionalism, dedication, and meaningful contribution over many years. Their work supported our customers, strengthened the organization, and helped to position the company for success in the future. Turning now to performance for the quarter on slide four. On a continuing basis, we delivered second quarter adjusted earnings per share of $3.76 compared to $3.17 in the prior year. Underpinning that result is what we focus on every day: safe, reliable natural gas delivery along with continued disciplined cost management and customer affordability. On the regulatory front, we received approval from the Missouri Public Service Commission for a $16.5 million increase in our Infrastructure System Replacement Surcharge, or ISRS, request. Rates were effective in March and are supporting cash flow and recovery on infrastructure investment. In addition, in March, we filed an accounting authority order, or AAO, with the Missouri PSC related to the impact of lower weather-driven usage we experienced during the winter months. Adam will touch on our proactive approach to addressing these extraordinary conditions in a moment. Looking ahead, we are providing a fiscal 2026 adjusted EPS guidance range on a continuing operations basis of $3.90 to $4.10 per share. At the same time, we are reaffirming fiscal 2027 adjusted EPS guidance, which includes results from Spire Tennessee; our 5% to 7% long-term growth target; and our $11.2 billion 10-year capital plan. This underscores the durability of our strategy and the strength of our regulated growth platform. Slide five highlights our strategic approach concentrating the company around our core regulated gas utility businesses. Today, our business profile is centered on regulated gas utilities and our FERC-regulated pipeline, with growth driven by disciplined capital investments. With the sales of our non-core activities including marketing and storage, we have removed market-based earnings exposure from our growth profile. As a result, the company's earnings profile has become more straightforward and more predictable, with improved long-term earnings visibility. Looking ahead, long-term growth is anchored in our regulated utility, supported by rate base growth and constructive regulatory mechanisms. Moving to slide six. Building on our key messages and new business profile, I want to take a moment to walk through our 2026 business priorities, which reflect the recent actions we have taken and how we are managing the business going forward. First, operational excellence remains core to our strategy. We continue to focus on the safe and reliable delivery of natural gas, disciplined deployment and recovery of capital across our regulated utilities, and maintaining a strong emphasis on customer affordability through effective cost management. From a regulatory perspective, we remain focused on achieving constructive outcomes across our jurisdictions while continuing to advance the regulatory path forward in Missouri, including preparation for a future test-year rate case filing later this year. Financially, our priority is to deliver adjusted earnings within our fiscal 2026 guidance range from continuing operations, maintaining balance sheet strength, and a disciplined approach to financing. Finally, from a strategic transactions and integration standpoint, we are executing against our priorities—successfully integrating Spire Tennessee, divesting non-core assets, and maintaining our focus on regulated utility growth, reliability, customer affordability, and long-term shareholder value. Together, these priorities support a simpler, more concentrated business mix with improved earnings visibility and a strong foundation for long-term growth. Turning now to slide seven for an update on the Tennessee acquisition. We completed the transaction on March 31, marking an important milestone for Spire Inc. The approval process with the Tennessee Public Utility Commission took just six months from filing, highlighting the constructive and efficient regulatory environment, with continuity of rates and a clear framework that supports disciplined investment and long-term planning. With this acquisition, we have added Spire Tennessee to our portfolio as a leading regulated natural gas utility in one of the fastest-growing markets in the country. Spire Tennessee is now serving more than 200 thousand customers across the Greater Nashville area and surrounding counties. From a financing standpoint, the transaction is now fully funded without the need to issue common equity. The balance financing mix includes $900 million of junior subordinated notes, $825 million of Spire Tennessee senior notes, and proceeds from our recently announced asset sales. To bridge financing until the closing of the asset sales, we entered into an $800 million term loan to be paid as funds are received. Integration is also progressing smoothly. More than 200 employees transitioned to Spire at close, and we have an 18-month transition services agreement in place to support a seamless handoff. Our teams are already working closely together to align systems, processes, and safety practices. Overall, we are very pleased with the execution around this transaction—from financing to close to early integration—which we believe positions Spire Inc. well for long-term value creation. Moving to slide eight. The sales of our marketing, storage, and Mississippi businesses are deliberate actions to better align the company with where we see the strongest long-term value and the most consistent earnings profile. We reached agreements with strong buyers for each of these businesses. The sale of marketing to Boardwalk Pipelines was completed on April 30, just one month after announcement, and the transactions to sell storage and Spire Mississippi are expected to close in the coming months. From a capital standpoint, these sales generate meaningful cash proceeds, providing flexibility to fund the Tennessee acquisition and continue investing in our regulated infrastructure. More importantly, from a strategic perspective, these actions further concentrate Spire Inc. to regulated natural gas utilities where we have scale in each state. This improves our business risk profile and enhances earnings visibility while allowing management to stay focused on operating excellence, customer service, and disciplined growth. When these transactions are complete, Spire Inc.'s business portfolio will be fully regulated, positioning us well going forward and directly supporting our long-term strategy of investing in infrastructure, customer affordability, and delivering steady, predictable value for shareholders. Overall, we delivered solid second quarter results from our continuing operations, advanced our portfolio simplification strategy, and remain focused on executing in our regulated gas utilities. While lower weather-related usage in Missouri weighed on results, our underlying performance and long-term growth outlook remain intact. With that, I will turn the call over to Adam to walk through the financial results and our updated guidance in more detail. Adam W. Woodard: Thanks, Scott, and good morning, everyone. I will begin with our quarterly results, which are presented on slide nine. With Marketing and Storage now classified as discontinued operations, the results we are presenting today provide a more straightforward and transparent view of our overall performance and the key factors driving performance. For the second quarter, we reported adjusted earnings of $224 million, or $3.76 per share, compared to $189 million, or $3.17 per share, a year ago. Gas Utility earnings totaled $235 million, an increase of over 20%, or $40 million, compared to the prior year, driven primarily by the implementation of new rates in Missouri and Alabama. Importantly, this increase reflects recovery of earnings on approximately $1 billion of incremental Spire Missouri rate base placed in service since rates were last updated. Favorable run-rate operations and maintenance expense performance also contributed to earnings growth. These benefits were partially offset by the impact of Spire Alabama customer refund provisions under the RSC framework, which include a reversal of a provision in 2025 and a refund provision in 2026. Lower customer usage in Missouri, net of weather mitigation, further offset earnings relative to the prior year, with current-year usage also coming in significantly below our expectations. Earnings were additionally impacted by higher depreciation expense and taxes other than income taxes, a portion of which is recovered through new Missouri rates as amortization schedules are updated. Interest expense was modestly higher in the current year, primarily reflecting higher long-term debt balances. Finally, Other activities reported an adjusted loss of $11 million, approximately $5 million higher than the prior year, reflecting higher corporate costs and higher interest expense in the current year. Turning to slide 10, let me walk you through the weather-driven usage impacts we have seen in Missouri so far in fiscal 2026, and how we are managing through them. Customer usage was materially below historical patterns and below the assumptions embedded in Missouri's weather normalization mechanism, driven by an unusually mild and uneven winter. Missouri heating degree days were 11.5% below normal through 2026, with residential usage per heating degree day during the winter heating season being 7% below 2024, which is the historical test year used to establish current billing determinants. The specific customer usage pattern we experienced was not fully mitigated by the weather normalization mechanism, and the lower-than-expected usage resulted in a margin shortfall versus our year-to-date expectations. In addition, Missouri rate design has shifted a greater portion of margin to the winter heating season, increasing sensitivity to weather and usage. We have been proactive on the regulatory front. In March, we filed an application for an accounting authority order with the Missouri Public Service Commission seeking recovery of the volumetric margin shortfall caused by this extraordinary weather pattern. This dynamic is the primary driver of the reduction in our full-year Gas Utility guidance. The margin impact is mechanical and weather-driven; it does not reflect any change in strategy or in the regulatory framework that continues to support our long-term growth plan. We are confident parties understand the significance of this shortfall and look forward to working with the Commission and other key stakeholders on a constructive solution. Turning to slide 11, today we are reaffirming our long-term 5% to 7% adjusted EPS growth target, anchoring to the original 2027 guidance midpoint of $5.75. This outlook continues to be supported by strong rate base growth in Missouri and Tennessee, steady regulated equity growth at Alabama and Gulf, and execution of our 10-year $11.2 billion capital plan. Focusing on near-term guidance, our 2026 adjusted EPS range from continuing operations is now $3.90 to $4.10 per share. This excludes earnings related to Marketing and Storage and, consistent with our previous guidance, also excludes any results from Spire Tennessee for the year. We are updating our adjusted earnings targets for the Gas Utilities segment and Other to reflect first-half results and expectations for the rest of the year. We are lowering the Gas Utility range to $275 million to $295 million, primarily due to the impact of lower usage and weather-related margin headwinds. We do not expect the year-to-date impact to change materially through the balance of the year due to the volumetric nature of our earnings. The Corporate and Other loss is expected to be in the range of $40 million to $46 million. That range includes earnings contributions for the MoGas pipeline and also reflects higher-than-anticipated interest expense due to the timing of financings, as well as allocated costs that remain following the divestitures. The rate design changes and updated amortization schedules implemented in the last Missouri rate case have shifted the intra-year earnings profile. While it is not our practice to provide quarterly guidance, we have outlined our expected earnings per share distribution for the remainder of the year on slide 11 to assist in quarterly modeling. Looking ahead to 2027, we are reaffirming our adjusted EPS range of $5.40 to $5.60 per share. This outlook reflects a full year of expected earnings from Spire Tennessee and excludes earnings from Storage, Marketing, and Mississippi. Overall, our earnings outlook remains firmly anchored by capital investment, constructive regulatory jurisdictions, and a regulated business profile. Moving to slide 12. In the first half of the year, we invested $386 million in capital expenditures driven by system upgrades, infrastructure modernization, and new business connections at the Gas Utilities. Year-over-year CapEx spending declined primarily due to the completion of the advanced feeder upgrade program in Eastern Missouri. We expect full-year 2026 capital expenditures of $797 million across our utilities, consistent with our 10-year $11.2 billion capital plan. These investments support rate base growth of 7% in Missouri and 7.5% in Tennessee, with 6% regulated equity growth in Alabama and Gulf. This disciplined long-term investment strategy underpins our confidence in delivering 5% to 7% adjusted EPS growth over time. On slide 13, we provided an update to our financing plan, which is largely consistent with what we previously outlined. In February, we issued $400 million of Spire Inc. senior notes, with proceeds used to refinance notes that matured March 1 and to support our ongoing general corporate needs. Importantly, following the recently announced divestitures and the resulting reduction in business risk, we have lowered our FFO-to-debt target to 14% to 15%. This adjustment better aligns our targets with the company's more focused regulated business profile, and we expect to achieve this over the next few years. That concludes our prepared remarks. We will now take your questions. Operator: Thank you. We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble the roster. The first question will come from David Arcaro with Morgan Stanley. Please go ahead. Analyst: Hi, this is Alex Zimmerman on for Dave. Good morning. Starting with the weather normalization, what are your latest thoughts and your strategy to improve the weather normalization in Missouri? And is this something you would consider addressing in the next rate case? Scott Edward Doyle: Good morning. Sure. A couple of things. As the comments that we made in the script indicated, we have filed an accounting authority order with the Commission. A procedural schedule has been put in place, with a hearing scheduled for September 9. We do believe that the Commission sees this as an important issue and one that we are spending time having dialogue on and providing information to them as we experienced the weather that we did. In the next rate case, there is also an opportunity to address it as well. For us, we are taking a look at the timing of the rate case. Our initial plan is to file in the fall, around November, but we will look at that timing depending on how we are able to work through this process with the Commission. Analyst: Got it. Very clear. And then shifting to dividends—now that you have the funding of the Tennessee acquisition addressed and higher cash flow visibility from the regulated business, how are you thinking about the dividend trajectory going forward? And where do you see the optimal payout ratio for the company? Adam W. Woodard: We remain unchanged there. The payout ratio, as we have said in the past, is typically in the 55% to 65% area, and we would expect the dividend to grow along with earnings. Analyst: Perfect. Thank you so much. Operator: The next question will come from Alex Kania with BTIG. Please go ahead. Analyst: Good morning. Thanks for taking my questions. First question, as a follow-up on the accounting request—just want to make sure I understand the mechanics. Given the procedural schedule, it looks like it would be tough to have a sizable impact on earnings for this fiscal year. Is it just a question of recovering over time the cash representing the lost margin, or would it have a subsequent earnings impact in future years if the outcome goes as you requested? And second, post-divestitures of the Storage and Marketing businesses in particular, how do you think about the underlying cadence of growth that is possible here? In the past, Marketing and Storage were seen as relatively low growth. Now, shifting to the fully regulated footprint, do you think there is an opportunity to finance growth? Scott Edward Doyle: Sure, Alex. Adam and I will collectively answer. On the mechanics of the AAO, traditionally the AAO sets up a regulatory asset for future recovery. That is how they traditionally work, and we will want to work with the Commission through this process and work toward a constructive outcome. With regard to the divestitures and our growth profile going forward, when you looked at how we invested in storage in the past, those were step-up opportunities as we made capital investments and then were able to pull that into earnings over longer periods of time. With those divestitures and now the concentration of the portfolio into utilities, we have a more normal growth trajectory that is centered on that 5% to 7% earnings profile. Adam, if you want to comment any more clearly about that? Adam W. Woodard: It really would be rate base–driven and recovery-driven from there. As we have talked about, the relatively linear paths in each of our jurisdictions on a go-forward basis should create a pretty predictable growth trajectory. Analyst: Great. Thanks very much. Operator: The next question will come from Paul Fremont with Ladenburg. Please go ahead. Paul Fremont: Thanks. My first question has to do with the fact that we thought weather normalization was dealt with in the last GRC. What exactly, in terms of the changes that you made, did not work? Scott Edward Doyle: Good morning, Paul. Good question. We very directly worked on weather normalization in the last case. What we saw in this particular winter weather was really a decoupling of usage from the HDDs that underpin the usage assumptions that underpin the weather normalization adjustment. As a result, because that was extraordinary, that is why we filed the AAO in particular. We saw the greatest breakage taking place in January, where our usage was actually 28% lower than what our base year that is used to set up the weather normalization adjustment would indicate. Those are the reasons why we have put this back in front of the Commission—to both have a dialogue about it, quantify it, and work toward a constructive solution. Paul Fremont: Is it possible, you believe, to get weather normalization that is essentially reflective of whatever change in usage actually occurs? And is that going to be your goal on a go-forward basis? Scott Edward Doyle: Yes. That is the simple answer. I will let Adam comment a little more specifically. Adam W. Woodard: Absolutely—that is the goal, Paul. It is frustrating for us as well that, as Scott mentioned, the usage set in the last GRC that went into effect last October was based off of 2024. We saw a very high correlation in the usage-per-HDD averages going into 2024 and off the 2024 numbers, and felt secure with that. As Scott mentioned, usage per HDD came down quite a bit over those two years. Paul Fremont: What led to your decision to sell Mississippi? Clearly, it was not in any of your original plans that you shared with investors. Can you give us an idea of why, last minute, you announced the sale of the Mississippi subsidiary? Scott Edward Doyle: Sure, Paul. This was something we had been in dialogue with Delta for quite some time leading up to the sale. As you know, the business that we have in Mississippi is subscale—18 thousand customers. There is quite a bit of capital investment that needs to take place, and the capacity of that customer base to support that investment can be challenged from time to time. By them folding into a larger utility within the state, it allows them to spread some of those costs over a broader base. As a result, Delta was a natural owner for them and it worked to a very good outcome. We still have to get approval—that is going to take a while this year as we go through the regulatory process—but we believe this is a benefit both to our customers and to Delta utilities as well. We look forward to bringing that to a conclusion later this year. Paul Fremont: The timeline for getting a decision in your AAO filing—and if the decision is favorable, how would you treat the earnings impact for this year? Or would it be treated as non-operating? Adam W. Woodard: Great question, Paul. It really depends on the timing of an order—we are getting closer to our September 30 year-end—as well as the wording of that order. Both of those elements would impact what we would recognize in earnings. Paul Fremont: So a simple follow-up—if they were to agree to setting up a regulatory asset before your year-end, should we assume that could result in an adjustment in guidance for 2026? Adam W. Woodard: It really depends on what the wording of that AAO is, Paul. There are a lot of things that dictate what our decision tree would look like on that. Paul Fremont: Great. Thank you very much. Scott Edward Doyle: Thanks, Paul. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Edward Doyle for any closing remarks. Scott Edward Doyle: Thank you again, everyone, for joining us this morning. We look forward to seeing many of you at the upcoming AGA Financial Conference later this month. Everyone have a good day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: At this time, I would like to welcome everyone to the International Flavors & Fragrances Inc. First Quarter 2026 Earnings Conference Call. To ask a question at that time, please press star 1 on your telephone keypad. If you would like to remove your name from the queue, please press star 2. Participants will be announced by their name and company. In order to give all participants an opportunity to ask their questions, we request a limit of one question per person. I would now like to introduce Michael Bender, Head of Investor Relations. You may begin. Michael Bender: Thank you. Good morning, good afternoon, and good evening, everyone. Welcome to International Flavors & Fragrances Inc.'s First Quarter 2026 Earnings Conference Call. Yesterday afternoon, we issued a press release announcing our financial results. A copy of the release can be found on our IR website at ir.iff.com. Please note that this call is being recorded live and will be available for replay. During the call, we will be making forward-looking statements about the company's performance and business outlook. These statements are based on how we see things today and contain elements of uncertainty. For additional information concerning the factors that can cause actual results to differ materially, please refer to our cautionary statement and risk factors contained in our 10-K and press release, both of which can be found on our website. Today's presentation will include non-GAAP financial measures, which exclude items that we believe affect comparability. A reconciliation of these non-GAAP financial measures to their respective GAAP measures is set forth in the press release. Also, please note that all the sales and EBITDA growth numbers that we will be speaking to on the call are on a comparable currency-neutral basis unless otherwise noted. With me on the call today are our CEO, Erik Fyrwald, and our CFO, Michael DeVeau. We will begin with prepared remarks and then take questions at the end. With that, I would now like to turn the call over to Erik. Erik Fyrwald: Thanks, Mike, and hello, everyone. Thank you all for joining us today. International Flavors & Fragrances Inc.'s first quarter 2026 results reflect our continued focus on execution, while serving customers with leading innovations and driving productivity and cash flow. Even amid uncertain market conditions around the world, we are making solid progress on our commitments as we continue to strengthen International Flavors & Fragrances Inc. for long-term success. I will start today’s call by briefly summarizing the first quarter, and then I will talk about the key strategic progress we have made so far this year. I will then turn the call over to Mike, who will provide more details on the first quarter results, segment performance, and our outlook for 2026. Turning to Slide 6. Our team delivered a solid start to the year in the first quarter. Across all our businesses, we delivered solid sales growth driven by volume improvements. Our Health & Biosciences segment led with mid-single-digit sales growth, while Taste, Food Ingredients, and Scent all grew low single digits. This growth, combined with our productivity initiatives, resulted in a higher margin. In the first quarter, we also generated a strong free cash flow improvement compared to last year. This reflects a focus on cash, including working capital. Over the past few years, we have made significant progress simplifying our portfolio. This strategic effort is resulting in our being able to focus and reinvest in our core and highest growth businesses while achieving our deleveraging targets. In March, we completed the divestiture of our commodity soy crush, concentrates, and lecithin business to Bunge for $110 million. Looking ahead, the sale process for our Food Ingredients business continues to make very good progress. While we do not have any additional information to share today, we are pleased by the strong interest in this business and we will let you know as soon as there is news to share. In the first quarter, we also announced regional production and added innovation capabilities to better support the continued strong growth of our Health & Biosciences business in Latin America. This includes the startup of our Areito site in Argentina, our first full fermentation-based enzyme production in the region, and we opened a household care application laboratory at the International Flavors & Fragrances Inc. Innovation Center in Brazil. Together, these will improve our speed, reliability, and locally relevant solutions for markets including brewing, animal nutrition, biofuels, and home care. Now, with respect to the macroeconomic environment, including the ongoing Middle East conflict, it is clear that uncertainty and challenges will continue to persist through 2026. But we remain focused on advancing our commercial and innovation pipelines, driving productivity, and working with customers to offset inflation. This, when combined with our solid start to the year, de-risks the balance of the year and gives us the confidence to reaffirm our full-year 2026 financial guidance ranges despite this uncertain environment. International Flavors & Fragrances Inc.’s diversified portfolio, the essential nature of our business, strong value proposition, and disciplined execution position us well to navigate ongoing volatility. In sum, we are doing what we said we would do with discipline and clarity. International Flavors & Fragrances Inc. is laser focused on achieving the strategic goals we clearly laid out two years ago. Our leadership team and our highly dedicated IFFers all around the globe are committed to delivering high-value products that anticipate and solve the evolving needs of our customers. While there is more to do, I am proud of our progress and how our global team keeps strengthening how we serve customers to enable us to deliver on our commitments. And with that, I will pass the call over to Mike to offer a closer look at this quarter's consolidated results. Mike? Michael DeVeau: Thank you, Erik. Thanks, everyone, for joining today. International Flavors & Fragrances Inc. delivered revenue of greater than $2.7 billion in the first quarter, with volume growth across all businesses. This solid performance led to 3% sales growth for the quarter, driven by mid-single-digit growth from Health & Biosciences and low-single-digit increases from Taste, Food Ingredients, and Scent. Adjusted operating EBITDA totaled $568 million for the quarter, an 8% increase driven primarily by volume growth and productivity gains. Our adjusted EBITDA margin also increased by 110 basis points on a currency-neutral basis to 20.7%, our highest EBITDA margin since 2022. We continue to focus on what we can control, and the strategic progress we have made across all of our segments is clearly visible in these results. On Slide 8, I will provide a closer look at our performance by business segment. In Taste, sales increased 2% to $656 million, growing in all regions with a notable mid-single-digit performance in Greater Asia. The segment also recorded a very strong quarter of profitability improvements with adjusted operating EBITDA of $153 million, an 18% increase from the year-ago period. Profitability gains were primarily driven by volume growth, favorable net pricing, and productivity gains. Food Ingredients sales were up 3% to $839 million, as growth in nearly all businesses was led by strong double-digit increases in Inclusions and mid-single-digit growth in Systems. Volume growth in the quarter was approximately 5%, the highest it has been in several years. Food Ingredients had a strong quarter profitability-wise as well, delivering an adjusted operating EBITDA of $114 million, a 12% increase year over year, led by volume growth and productivity gains. Our Health & Biosciences segment achieved sales of $595 million, an increase of 5% from the prior year, which was all volume-driven with growth across nearly all businesses, especially in Animal Nutrition and Food Biosciences. From a profitability standpoint, Health & Biosciences delivered adjusted operating EBITDA of $153 million in the first quarter, an increase of 7% from the prior year, driven primarily by volume growth. Lastly, our Scent segment delivered sales of $651 million, representing 1% growth from the prior year. First-quarter performance was led by growth in Fine Fragrance, which had a strong double-digit year-ago comparable, and Consumer Fragrances. Fragrance Ingredients was down in the quarter as expected due to continued market softness and price competition in the commodity portion of our portfolio. Adjusted operating EBITDA for this segment decreased 2% to $148 million as benefits from volume growth and productivity gains were more than offset by unfavorable price-to-input costs, specifically in the commodity portion of our Fragrance Ingredients business. Turning to Slide 9. Cash flow from operations totaled $257 million, which is an increase of $130 million year over year, and capex was $165 million year to date, or roughly 6% of sales. Our free cash flow position in the first quarter was $92 million, increasing $144 million year over year. As mentioned last quarter, we remain disciplined in our execution across all elements of working capital, as it is a key priority in 2026 as we remain focused on driving a meaningful improvement in cash flow this year. During Q1, we also returned $102 million to shareholders through dividends and an additional $35 million through our dilution-cost share repurchase program. Our cash and cash equivalents finished at $562 million at the end of the first quarter. As of March 31, our gross debt totaled $5.85 billion, a significant decrease of more than $3 billion compared to the prior-year period. Our trailing twelve-month credit-adjusted EBITDA totaled approximately $2.1 billion. Our net debt to credit-adjusted EBITDA ended Q1 at 2.5 times, slightly below last quarter. Disciplined capital allocation remains a core focus for us as we maintain our balance sheet strength through operational execution. Turning to Slide 10, I would like to walk you through our full-year outlook for 2026. We are off to a solid start, with first-quarter results that outperformed our expectations going into the year. This strong performance de-risks the balance of the year and gives us confidence to reaffirm our full-year 2026 financial guidance ranges. We are operating in an unpredictable environment, particularly as it relates to the ongoing conflict in the Middle East. While we cannot control the macro backdrop, the factors that we can control, including the strength of our commercial pipeline, the depth of our customer partnerships, and our continued productivity gains, give us confidence in our ability to execute through this period. For full-year 2026, we are reiterating our sales expectation of $10.5 billion to $10.8 billion, representing 1% to 4% growth. We expect to deliver top-line growth in all our divisions supported by new wins and a robust innovation pipeline. From a profitability perspective, we continue to expect full-year adjusted operating EBITDA of $2.05 billion to $2.15 billion, representing 3% to 8% growth with solid margin expansion. We continue to expect foreign exchange to have a roughly one percentage point positive impact on full-year sales growth with a minimal impact on adjusted operating EBITDA growth. Our full-year guidance now reflects only two months of the soy crush, concentrate, and lecithin business, as the divestiture closed about a month ahead of schedule on March 2 versus the April 1 date embedded in our original guidance. As a result of the ongoing Middle East conflict, inflationary pressures are expected to build over the course of 2026. We are proactively working with our customers to offset these pressures through pricing actions, starting with surcharges related to logistics and energy costs, and then building to account for raw material inflation. In terms of phasing, we expect these inflationary trends to adversely impact profitability in the second quarter of 2026, where costs will begin to increase and our pricing actions are not fully implemented. Post-Q2, we expect this pressure to gradually ease through the back half of the year as pricing actions take full effect. In addition, our most significant exposure to the Middle East conflict, both from a sales and margin perspective, fits within our Scent business—and our Fine Fragrance business in particular. We anticipate that Fine Fragrance volume in the Middle East will be impacted in the second quarter, in part due to slower market demand but also temporary supply chain challenges our customers are facing, such as getting packaging into the region. When combining these impacts, we expect absolute EBITDA dollars in the second quarter to be lower than the $568 million we reported in the first quarter, mostly driven by lower volume, unfavorable price-to-input costs, and weaker mix related to Fine Fragrance softness. Stepping back, our full-year outlook we are reaffirming today reflects a different shape than what we expected 90 days ago—with a stronger Q1 and a more measured balance of year given the Middle East conflict. But our full-year goal is unchanged. Behind that consistency is the strategic progress we continue to make at International Flavors & Fragrances Inc. We are applying stronger discipline to direct capital allocation towards higher-value initiatives, strengthening our innovation and R&D pipeline, investing commercially where we have great opportunities, and driving structural productivity that will compound profitability leverage moving forward. We are pleased with what we are building in terms of a more focused, more competitive International Flavors & Fragrances Inc., and that gives us confidence in the value we are creating as we move forward. With that, I would now like to turn the call back to Erik for closing remarks. Thanks, Mike. Erik Fyrwald: Now to close, I want to reiterate that the core businesses at International Flavors & Fragrances Inc. are strong and performing well. Our Q1 2026 results reflect the continued progress we are making in delivering on our commitments. Even in an uncertain and evolving macroeconomic environment, we have stayed focused on what we can control and doing what we told you two years ago we would do: getting to a focused portfolio of three strong businesses that are performing well with significantly more potential to create value for many years to come. I continue to spend a lot of time traveling the world to visit our teams and customers, and I am ever more energized and confident about our future based on what I see and hear, including how our commercial and innovation pipelines continue to grow and advance, and I am pleased that our focus allows us to reaffirm our full-year 2026 guidance. We are investing for the future—in innovation, commercial, and supply chain capabilities, and in customer partnerships that matter most. I am confident that we have the right strategy, the right team, and the right innovation to continue to create long-term value. Thank you. We will now open the call for questions. Operator: We will now begin the Q&A session. If you would like to remove your question, press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. As a reminder, we kindly ask that you limit your questions to one question per person. Our first question comes from the line of Ghansham Panjabi with Baird. Ghansham, your line is now open. Ghansham Panjabi: Thank you, Operator. Good morning, everybody. On the outperformance that you delivered during the first quarter, can you give us more color on the specifics that drove the upside? And also, looking back at the quarter, do you think you benefited from any out-of-pattern ordering due to customer pre-buying, etc.? Thank you. Michael DeVeau: Good morning, Ghansham. Thanks for the question. The strong top line and operating leverage during the first quarter was driven by, first of all, volume-led growth across all our segments, which was great to see, and continued solid productivity. We continue to strengthen our productivity muscle. Although we do not know all the reasons for specific orders from all of our customers, we have not seen any indication of significant pre-buying. Operator: Thank you. Our next question comes from the line of Lisa De Neve with Morgan Stanley. Lisa, your line is now open. Lisa De Neve: Hi. Thank you for my question. You talked a little bit on the call on the Food Ingredients exit, which is helpful. Can you share where you are in the process right now and maybe when you intend or hope to update the market on any potential events? Thank you. Erik Fyrwald: Thanks, Lisa. We are running a very disciplined process, and it is going very well, with several potential buyers going through second round of due diligence, and the feedback has been very positive so far. The business, as you know, is performing well. It had double-digit EBITDA growth in 2025, and again in the first quarter of this year. That gives us a lot of confidence that we will get through this process in a very positive way. As I said before, we expect to have an update by our second quarter earnings call. Operator: Thank you. Our next question comes from the line of Nicola Tang with BNP Paribas. Nicola, your line is now open. Nicola Tang: Thanks. Hi, everyone. I wanted to ask what assumptions on both pricing and input inflation you are baking into your top line and EBITDA outlook. I would love to understand magnitude and how much of the inflation you expect to offset this year. Thank you. Michael DeVeau: Hi, Nicola. Thank you for the question. You are right. We are seeing inflation across various inputs. Just to dimensionalize, Brent crude is a good indicator, as it is up significantly versus the average of 2025, and that impacts a couple elements of our cost baskets. At first, it starts with energy and logistics inflation, where we are already seeing double-digit increases coming through, and then, over time, it will make its way to some of the raw material costs, which we have not seen a big change in yet, but we expect it to come later this year. Please remember, we do have inventory on our balance sheet, so we have some protection in the short term as it relates to raw materials. Our focus now is energy and logistics, given it is more real time. We are working with our customers to implement pricing surcharges. This is underway and will build throughout the quarter. As you know, pricing in our industry is a strong part of our algorithm. Consistent with historical inflationary cycles, we collaborate with our customers to fully offset any inflation, and usually it is a 12- to 18-month period. We do not expect anything materially different this time around as we continue to engage with customers. Operator: Our next question comes from the line of Fulvio Cazzol with Berenberg. Fulvio, your line is now open. Fulvio Cazzol: Yes, good morning, gents. Thanks for taking my question. Back in February, you anticipated a slow start to 2026 and for organic sales growth to sequentially accelerate through the year, supported by the strong innovation pipeline and the improvement in commercial execution. I understand the comments that you made regarding the Scent business in the second quarter, but for the rest of the segments, is that still your expectation? Erik Fyrwald: Thanks, Fulvio. The first quarter came in better than expectations with really good execution across all of our businesses. However, we did not anticipate the Middle East challenges. But as you can see, we have developed the ability to deal well with unexpected global challenges over recent years. Our second quarter is challenged due to factors that Mike explained, but we do expect the commercial pipelines to continue to deliver in the second half, and that is why we are confident in our full-year guidance. Operator: Thank you. Our next question comes from the line of Kristen Owen with Oppenheimer. Kristen, your line is now open. Kristen Owen: Hi. Good morning. Thank you for the question. Can you discuss some of the scenarios around the remainder of the year given some good color on Q2? Given the strength of the Q1 results, what needs to happen to get you to the high end and the low end of the guide? Thank you. Michael DeVeau: Thanks, Kristen. We are very pleased, as Erik said earlier on the call, with the start of the year. Volume and profitability came in a bit better than we expected. As we look towards the balance of the year in our forecast, we are cautiously optimistic in terms of the operating environment. For top-line performance, we are assuming there is no fundamental change in the lower consumer demand environment. So for us to achieve the higher end of the range, end-market demand would have to pick up and improve, and conversely to be at the lower end. Fortunately, we have a very strong innovation pipeline and a commercial pipeline that we are working with our customers on; that is a big part of why we have confidence in the sales guidance range. In terms of EBITDA performance, we remain focused on driving profitability, and our guidance range reflects the now inflationary environment that developed post our original guidance in February. The team is fully focused and committed to working with customers to offset inflation—initially through pricing actions related to surcharges for logistics and energy—but that does take some time. As we progress over the course of the year, we will see an improvement there. Any material difference between the 3% and the 8% range really is going to come from the pricing aspect to offset the inflation. At the same time, we are working on incremental productivity initiatives. If we have flexibility, we will work to drive profitability over the course of the year. While the environment has changed, we are consistent in what we are trying to achieve and consistent in our outlook for the full year. Operator: Thank you. Our next question comes from the line of Michael Sison with Wells Fargo. Michael, your line is now open. Michael Sison: Hey, guys. Nice start to the year. You and the industry had to raise prices; it is pretty obvious why. At what point does this inflation flow through to the consumer and start to impact demand? When I run by duty free, you look at the fragrance prices—they are pretty high. So in the businesses, at what point does demand start to get impacted by the higher prices? Erik Fyrwald: Thanks, Mike. I expect demand to continue to be solid given everything that we are seeing. In Fine Fragrance, we expect to see continued solid growth for the full year, although less than the double-digit growth we have been seeing. As we discussed, there is a temporary slowdown in Fine Fragrance in the important Middle East due to the factors of what is going on there. In Consumer Fragrance, we have seen the pipeline grow and lots of interest in innovation that we are bringing to the marketplace. Other than the commodity ingredients, which is about half of our Fragrance Ingredients sales, everything else is on a solid base for the full year. Operator: Thank you. Our next question comes from the line of John Roberts with Mizuho Securities. John, your line is now open. John Roberts: Thank you. Good morning, everyone. A quick one on Scent. The Ingredients business continues to be the weak link, it seems like. How should we think about that business now, especially with raw materials going up and the hydrocarbon cost? And how are we thinking long term—your position being net long, sending within production? Erik Fyrwald: Thanks for the question. To reiterate, our Fragrance Ingredients business outside sales is about $500 million a year and is roughly half specialty and half commodity. The specialty side is very attractive, and we will continue to emphasize that part of the business and further strengthen it with a strong R&D pipeline where we are driving for both internal formulation use and external use. We will do more here in specialties. We will do more in naturals, synthetics, and biotech molecules. On the commodity side, that is the part that is very challenged—challenged by Indian producers and Chinese producers—and it is an area where we need to continue to have competitive costs for our internal formulation use, but we are de-emphasizing external sales. You will see that happen over the coming year or so. Operator: Thank you. Our next question comes from the line of Kevin McCarthy with Vertical Research Partners. Kevin, your line is now open. Matt Hauer: Hi. This is Matt Hauer on for Kevin McCarthy. With your balance sheet in better shape and incremental cash flow from the divestiture of Food Ingredients on the come, how are you thinking about capital allocation—stock buybacks, R&D investment, bolt-on M&A opportunities, and new ventures like AlphaBio? Michael DeVeau: Thanks, Matt, for the question. We remain very disciplined in our capital allocation strategy. Our net debt to EBITDA leverage is 2.5 times, and we have implemented a share buyback program to offset dilution. In the event that we do have an influx of cash from a potential divestiture, we will look to maintain our net debt to EBITDA leverage plus or minus 2.5 times. Use of proceeds would focus on opportunities to minimize any potential dilution related to a transaction. At the same time, we will fund organic growth investments that have high return profiles and pursue potential bolt-on acquisitions and ventures that create strong shareholder value. We will be disciplined in how we allocate capital to ensure we are generating strong shareholder returns. Operator: Our next question comes from the line of David L. Begleiter with Deutsche Bank. David, your line is now open. Emily Fusco: Good morning. This is Emily Fusco on for David L. Begleiter. Do you still expect North American Health trends to improve starting in the back half of the year with a full recovery in 2027? Thanks. Erik Fyrwald: Thanks, Emily. The short answer is yes. As we said earlier, we expect the first-half Health to be flattish and then return to growth in the second half, with acceleration into 2027 as our commercial and innovation pipelines deliver with customers. We are very pleased with the team we have in place now, the efforts they are making, and what we are hearing back from customers. Operator: Thank you. Our next question comes from the line of Josh Spector with UBS. Josh, your line is now open. Anoja Shah: Hi. Good morning, everyone. It is Anoja Shah sitting in for Josh. Thank you for the guidance on Q2, but can you give us a little more detail there—maybe some of the moving parts to get to what you are guiding to for Q2? Michael DeVeau: Sure. Thanks for the question. As you know, we do not give specific quarterly guidance. We are focused on delivering the full-year objectives and results. To help with modeling, in Q2 we expect EBITDA to be lower than our Q1 performance. There are three primary drivers: one, we expect growth to be more moderate in Q2 versus Q1; two, we expect some unfavorability in terms of price to input costs—we are seeing energy and logistics charges rising, and we have not fully implemented our surcharges yet, which will happen over the course of the quarter, creating margin pressure; and three, Fine Fragrance will be under pressure because of the Middle East, which creates a small mix headwind. As we move through the second half, all three elements should improve, and we expect to finish within our full-year guidance range. Operator: Thank you. Our next question comes from the line of Laurence Alexander with Jefferies. Laurence, your line is now open. Laurence Alexander: Erik, if memory serves, one of your goals for the segments was to recoup the share positions that they used to have with a flat to higher gross margin for each of the subunits. Can you give an update on that strategy, what you have seen so far, how long you think it would take to get there, and what it could mean over the next three to five years? Erik Fyrwald: Sure. Thanks for the question, Laurence. I feel like we are making very good progress across the company. We have done a great job of getting to the right portfolio; the sale of the Food Ingredients business is the next important step. Looking at the three future businesses: in Health & Biosciences, we continue to make really good progress, particularly in enzymes. The one area we are focusing on further improving is Grain Processing, both in enzymes and yeast—there is great opportunity there. Health is the area we talked about needing a turnaround. I think we are well on our way with strong leadership, an increasingly strong commercial pipeline, and a strong innovation pipeline. We see that starting to turn in the back half of this year and accelerating into 2027. In Scent, we have a very strong position in Fine Fragrance, with some temporary issues we are working through. In Consumer Fragrance, we have a very strong team with a very good pipeline. Our R&D machine has really picked up in the last year; it takes 18 to 24 months to deliver, but we are seeing progress in that pipeline that will deliver in 2027 and beyond. The real issue in Scent is the commodity Ingredients that we talked about, and we are dealing with that. By 2027, we expect that to go away as a headwind and unleash the full potential of the rest of the Scent business. In Taste, I am very proud of the team. We now have a number of quarters of strong performance ahead of the market, with a good pipeline. Finally, in Food Ingredients, you know about the sales process, and performance has been enhanced by the great work Andy Mueller and his team have delivered. In 2023, we had 9% EBITDA margin; in 2024, they built it to 12%; 2025, 13%; and this year, I think we will exceed 14% EBITDA margin. As the portfolio was optimized within that organization and focused on higher growth opportunity areas, we have seen a return to top-line growth that we expect for the full year. Overall, solid performance, including in productivity. Are we satisfied? No. We are pleased with the progress, but we know we have so much potential that we are creating a bigger ambition across each business, and we expect to realize that in the coming five years. Operator: Thank you. Our next question comes from the line of Patrick Cunningham with Citigroup. Patrick, your line is now open. Alex: Hi. Good morning. This is Alex on for Patrick. With all the different puts and takes now, what are your expectations for free cash flow in 2026? Michael DeVeau: Thanks for the question. Cash flow improvement is a key priority in 2026. For the year, I continue to expect a meaningful improvement driven by: one, improvements in profitability; two, improvement in working capital; three, lower interest expense; and four, a lower incentive compensation payout year over year versus prior year. We are off to a very good start, but we still have more work to do over the next three quarters. As I explained on our Q4 call, we have also added a compensation metric for the entire organization based on free cash flow conversion to EBITDA, so we are not only driving it strategically, we are also comping on it to drive the right behavior. In terms of a specific target, I will refrain from providing one until we have clarity on Food Ingredients. The only thing I will say is that I expect it to be better in 2026 than it was in 2025—we will see a year-over-year improvement. Operator: Thank you. Next question comes from the line of Silke Kueck with JPMorgan. Silke, your line is now open. Silke Kueck: Hi, good morning. Can you talk about in which segments you think you gained share this quarter, whether it is in Taste or Health & Nutrition? And can you quantify in some way the product launches that are coming in the back half and which areas they will come in? Erik Fyrwald: Great question. First of all, I think it is unhelpful to just look at one quarter; we need to look at trends over time. I am very pleased with the progress we are making in Health & Biosciences enzymes and in cultures/food biosciences. The area of challenge that we have talked about is Health. I am pleased with the progress we are making to turn that around, and we will start to see some progress in the second half, accelerating into next year. In Scent, we have done very well versus the market in Fine Fragrance; we talked about some temporary challenges there. On the Consumer Fragrance side, we fell a little bit behind; we now have a really strong team in place, a very strong commercial pipeline, and we are starting to see that turn. You will see that in the second half and into 2027. We have a really good innovation pipeline in our Scent business that we did not have before; you will see that starting to manifest in the marketplace later this year, with real impact in 2027 and beyond. In Taste, very solid performance; we are performing ahead of the market, and I expect that to continue with a very good commercial and innovation pipeline. In Food Ingredients, the transformation and turnaround continue, performing well against competitors across the business, which is why we expect the sale process to continue to go well. Overall, very pleased. We have a couple of areas—the commodity Scent Ingredients and Health—where we need to get back to performing ahead of the market and deal with the commodity Scent Ingredients business. We are making progress in all those areas—pleased but not satisfied, more to do. Operator: Thank you. Our next question comes from the line of Christopher S. Parkinson with Wolfe Research. Christopher, your line is now open. Harris Fein: This is Harris on for Chris. Thanks for taking my question. On the Taste margins, they came in a fair bit better than we were expecting on not a huge amount of organic growth. Can we zoom in on what is happening there? Is it productivity? Is it mix? How should we be thinking about that? Thanks. Michael DeVeau: Sure. Great question. Thanks, Harris. When I think about the Taste business, they have been doing very well in terms of overall growth performance. Quarter after quarter, whether you compare versus competition or historical trends, they are continuing to deliver—predicated on really good volume growth. At the same time, they have been driving pricing, which has been favorable in terms of net raw material cost, so that is also helping—not only volume leverage, but a favorability in terms of net price to input costs. Third is productivity. The team has done a really good job being disciplined in driving productivity throughout the business to support margin performance. Regarding Q1 performance on a go-forward basis, timing of inventories and some of that leverage will abate. The 18% currency-neutral EBITDA growth is very high; I would not expect that to persist. It will normalize. The team did a very good job with the hand they were dealt in Q1. Operator: Our next question comes from the line of Kate Grafstein with Barclays. Kate, your line is now open. Kate Grafstein: Thanks. As you start to have pricing discussions with your customers, are you noticing any pushback? And at what level of pricing would you need to offset the expected inflation over the next twelve months? I have a follow-up after. Michael DeVeau: I had the fortune to run pricing in our Taste division for a couple of years at International Flavors & Fragrances Inc., and nothing is fundamentally different. Pricing conversations are always a give-and-take relationship. What is really important is to engage based on facts. From a market standpoint today, nobody can refute logistics and energy increases. We are having tactical conversations specifically on that. We also want to collaborate with our customers; we can offer solutions to help them reduce cost by reformulating and doing different things, and we are absolutely willing to do so. So this is consistent with historical norms. In terms of the level of pricing, I would categorize it as a modest benefit this year as we work through logistics and energy. As we go forward, we are focused on raw materials; as we go into the back half of this year and into 2027, we will work with our customers there. It is modest over the next couple of quarters in terms of overall price, but it will build over time as we progressively move forward. Erik Fyrwald: Let me add that having trust with our customers is really important to us. We are being very clear that we are not trying to take advantage of this to increase our margins; we are trying to just pass through the cost increases we are seeing from higher costs and being very clear about the cost. Where we are trying to drive our margin improvement is through great innovation that customers love and that helps them profitably grow, and through productivity. Kate Grafstein: Thanks. On the productivity piece, it has been very strong—last year and this quarter. Is it possible to accelerate productivity as another lever if pricing does not come through as strong as you expect? Michael DeVeau: Yes. You can always look at the organization and incremental opportunities. We have a long-term productivity plan that the teams are working on as they think about their margin evolution. In the short term, if there is pressure, we have levers we can pull to drive incremental productivity to help minimize any potential gaps. First and foremost, we are focused on getting the surcharges in place, and as we progress over the course of the year, we will consider whatever we need to do in terms of productivity to cover. Operator: At this time, I would now like to turn the conference call back over to Erik for any closing remarks. Erik Fyrwald: Thanks, everybody, for joining. To summarize, two years ago, we laid out our plan and direction. We are executing well—doing what we said we would do. We said we would drive our commercial and innovation pipelines—that is happening. We said we would deliver on productivity—that is happening. I am very proud of Team IFF all around the world for making this happen. We love our customers, and we love bringing them leading innovation that helps them drive profitable growth and enables us to also profitably grow. Thank you. Operator: Thank you. That will conclude the International Flavors & Fragrances Inc. First Quarter 2026 earnings conference call. Thank you for your participation. You may now disconnect your lines.
Operator: Good morning. My name is Rifka, and I will be the conference operator today. At this time, I would like to welcome everyone to the Bowman Consulting Group First Quarter 2026 Conference Call. All lines will be placed on mute for the presentation portion of the call with the opportunity for questions and answers at the end. Please note that many of the comments made today are considered forward-looking statements under federal securities laws. As described in the company's filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and the company is not obligated to publicly update or revise those forward-looking statements. In addition, on today's call, the company will discuss certain non-GAAP financial information such as adjusted EBITDA, adjusted net income, and net service billing. You can find this information together with the reconciliations to the most directly comparable GAAP information in the company's earnings press release filed with the SEC and on the company's Investor Relations website at investors.bowman.com. Management will deliver prepared remarks, after which they will take questions from research analysts. A replay of this call will be available on the company's Investor Relations website. Mr. Bowman, you may begin your prepared remarks. Gary P. Bowman: Great. Thank you, Rifka. Good morning, everyone, and thank you for joining our first quarter 2026 earnings call. Bruce J. Labovitz, our CFO, and Dan Swayze, our chief operating officer, are with me today. First, I would like to welcome all Bowman Consulting Group Ltd. employees on today's call, including those from Smith and Associates Land Surveying in Las Vegas, who are the newest members of the Bowman Consulting Group Ltd. team. After my introductory remarks, I will turn the call over to Bruce who will cover our financial performance and technology initiatives. Dan will provide more detail on the opportunities we are seeing across our end markets. Now turning to the first quarter. From a performance standpoint, we delivered double-digit growth in gross contract revenue, net service billing, and adjusted EBITDA. Our backlog reached a record level of over $650 million. These results were driven by both organic execution and continued contribution from our acquisition strategy. We saw growth across our diversified end markets. Demand remains robust, and we continue to benefit from markets where we have deep expertise, strong client relationships, and increasingly integrated service delivery. Our capabilities are increasingly important in high-barrier, high-demand sectors where our expertise, national scale, and ability to self-perform work position us to win and execute consistently. All this reinforces what we are seeing in the business: strong demand, durable revenue streams, and increasing opportunities to expand both organically and through targeted acquisitions. Based on our performance and outlook, we raised our full-year 2026 guidance and now expect over 20% revenue growth for the year. For 2026, we expect net revenue to be in the range of $520 million to $540 million, and we expect to report adjusted EBITDA margin between 17.25% and 17.5%. With that, I turn the call over to Bruce. Bruce J. Labovitz: Thanks, Gary, and good morning, everyone. I will begin with a review of our financial performance for the first quarter, and then I will turn the call over to Dan to bridge Q1 to year end. After that, I will return to share some thoughts on how we are thinking about technology and automation, and begin to draw a line towards its impact on the future of Bowman Consulting Group Ltd. The first quarter culminated with a record March that capped off a solid start to 2026. Our results reflect the durability of our end markets, the scalability of our operating platform, and disciplined execution of our long-term strategic plan. Gross contract revenue of $126.5 million represented a 12% increase over Q1 last year. At a 90% net-to-gross ratio, net service billing was $114.2 million, up 14% year over year. The increase was anchored by 6% organic growth enhanced by strong performance from recent acquisitions. Looking ahead, we expect to see our net-to-gross ratio come down by about 3 to 5 points based on new awards and new service lines with higher subcost ratios. Power was our fastest-growing sector, with 37% growth of gross revenue year over year. Transportation followed at 13%, with natural resources at 6%, and building infrastructure at 1%. Dan will talk more about where growth is coming from. Growth of organic net service billing was 6% year over year with the highest organic growth rate coming from natural resources at 16%, followed by transportation at 13%, power at 5%, and building infrastructure at 2%. I will point out that there is a significant amount of organic growth embedded in power and utilities revenue characterized as inorganic for now. Our mix of gross revenue continues to evolve with power up to 28% and building infrastructure down to 41%. In just one year, data center activities have more than doubled to a bit over 6% of revenue. Over the course of the next few quarters, we do expect to see a noticeable shift in mix as natural resources will expand by virtue of a significant new award being classified in that category. Contract costs represented approximately 48% of gross contract revenue at a 52% gross margin. When we combine a bit of a slow start in January and February with mobilization costs for assignments that begin in Q2, total overhead as a percentage of revenue was up around 50 basis points compared to last year. I will also point out that 2026 is the year we exit emerging growth company status, which generates some incremental costs this year that will normalize next year. With accelerating revenue and relatively stable overhead, however, we expect to see total overhead once again trend down as a percentage of revenue moving forward. For the quarter, we reported a GAAP loss of $3.7 million. Unlike adjusted EBITDA, that result includes noncash amortization of acquired intangibles, acquisition-related expenses, financing costs, and other nonrecurring items, including those associated with the CEO transition. Adjusted EBITDA was $16.8 million, up 14.7%, at a margin that expanded year over year. We generated $11.6 million of cash from operations in the quarter, representing approximately 70% conversion of adjusted EBITDA to cash. It is nice to finally report a quarter with no deferred R&D tax adjustments on the cash flow. During the quarter, we used cash to repurchase approximately $9.2 million of our stock and advance future organic growth initiatives through investments in data capture, automation, and internal-use software, among others. Big fund spending on geospatial and data collection assets associated with specific new future revenue opportunities represented about half of our CapEx in the quarter, along with another $1 million or so of OpEx spending which is not added back to adjusted EBITDA. To accommodate anticipated increases in CapEx this year, we expanded our revolving credit facility to $250 million, which provides sufficient liquidity to support continued investment in organic growth and acquisitions. Backlog increased to approximately $653 million, 56% year over year and 36% sequentially from year end. Backlog growth in the quarter was entirely organic. Net of one unusually large organically generated contract award, backlog grew at a 20% annualized pace. As Gary mentioned, we are raising our 2026 net revenue guidance to a range of $520 million to $540 million and increasing our margin forecast. The guidance increase implies more than 20% growth of organic net revenue this year and nearly 28% year-over-year growth of adjusted EBITDA at the midpoints. In terms of revenue cadence, we expect the remaining three quarters will build on each other as some consequential assignments ramp up through the second half, with third quarter being at or near the midpoint of the second and fourth quarters. It is notable that this is a bit of a change from prior years. With that, I am going to turn the call over to Dan. Dan Swayze: Thank you, Bruce. Today, I am going to spend a few minutes bridging the revenue gap from Q1 to our full-year forecast. Backlog is a foundation of any revenue bridging exercise, and we have discussed in prior calls that somewhere between 70% to 80% of our backlog typically converts to revenue within a 12-month period with timing influenced by contract structure, phasing, and notice to proceed. For the remainder of the year, approximately 60% of our expected revenue is supported by existing backlog, with the balance driven by sell-and-deliver activity. As we move through the year, the mix naturally shifts more heavily towards backlog conversion. Looking at Q2 through Q4, approximately $250 million of our remaining revenue is supported by backlog, leaving the remaining 40% or roughly $170 million to be delivered through new bookings within the year. When accounting for normal conversion timing between bookings and revenue, that translates to just under a 0.7x book-to-burn ratio to meet our full-year guidance. This remains at a manageable level given our ability to deliver book-to-burn above 1x on a consistent basis. The priority is ensuring our resources and capacity are aligned at the right time to deliver high-quality, on-schedule outcomes for our customers, something we actively plan for and manage every day. Let me cover where I believe our greatest opportunities are for new bookings. Transportation is in a strong position to continue delivering results. Required book-to-burn is lower than average based on substantial existing backlog coverage for this year's forecast. With many long-term and recurring revenue assignments across infrastructure design, construction engineering, corridor management, and inspection services, we are well positioned to deliver. Power and energy: Longer-than-desired timelines to secure power from the traditional grid are forcing end users to develop their own power solutions. When our customers move forward with alternative power solutions, we expand our wallet share. Recent acquisitions have significantly broadened our reach and opportunities within the energy services vertical. They have also transformed the characteristics of our assignments to include higher-velocity sell-and-deliver opportunities. To deepen our engagement with customers, address the resource void in the marketplace, and become more entrenched in long-term durable revenue, we have expanded to offer procurement services across the sector. Awards for services relating to midstream pipeline infrastructure, energy reliability centers, compressor stations, and terminal operations have shown meaningful increase of late and show no signs of abating. We are also seeing increased demand for renewable energy solutions, particularly as customers respond to upcoming expirations of IRA incentives. Natural resources includes a wide range of services and is a sector in which we will report the large government contract award going forward, as Bruce previously advised. It is also much of where our industry-agnostic geospatial data collection efforts are reported. Recent upgrades to our fleet of data collection assets have already been impactful, opening opportunities for new streams of revenue. As an example, a recent manned aerial award from a long-standing government agency customer was nearly triple that of last year. Accelerated activity in mining and renewed demand for water resources have likewise supported sustained demand. Geospatial, while not a vertical, is a service that sits at the core of everything we do across all our markets. High-resolution 3D imaging and complex GIS-embedded point clouds are increasingly the basis of infrastructure planning and management. Availability of intuitive and predictive real-time analytics is rapidly becoming a post-operational imperative. Having a comprehensive suite of data collection assets has led us to be engaged earlier and longer with customers. The key takeaways are these: We see the strongest bridge from work to revenue coming from mission-critical and adjacent energy infrastructure markets, along with transportation engineering and geospatial services. Our outlook for outsized organic growth this year is rooted in booked backlog conversion and predictable booking levels that are supported by a strong pipeline, a broad and expanding portfolio of capabilities, and disciplined execution. Continuing to ensure we have the capacity to deliver, the discipline to convert demand into profitable revenue, and the tools to innovate remain our top operational priorities. With that, I will turn the call back to Bruce. Bruce J. Labovitz: Thanks, Dan. Before turning the call back to Gary, I want to briefly address the narrative surrounding AI and automation in engineering, specifically in the context of pricing, margins, and long-term customer engagement. During our year-end call, I said, and I quote myself, we need to be sure we are prioritizing investments in processes and services relating to deliverables sold at stable values as opposed to efficiencies that merely cannibalize the value of work sold by the unit. That was true then, and it is still true now. But that was two months ago—a lifetime in this moment of technological change—and the message is expanding as we execute on our strategy. There is a misconception in parts of the market that AI will cause an unsustainable compression in pricing and margins across all engineering services. In a vacuum, without a broader understanding of what is really happening inside the industry, the concern that AI leads to fewer hours, which equates to lower billable revenue, sounds reasonable, but it is not a plausible reality for established multidisciplinary engineering firms. Before we go any further, let us acknowledge that engineers and infrastructure professionals operate in an environment where tolerance for error is nonexistent and where the deliverables are foundational to public safety and reliable infrastructure performance in the face of ever-changing environmental stresses. As a result, professional judgment, real-world experience, technical expertise, and accountability remain central to the engineering services value proposition, regardless of efficiencies deployed in the workflow. It is important to remember that this is not the first time technology has presented opportunity for process evolution in engineering. Our client engagements are not transactional; they are relationship-oriented, and that matters. A majority of our assignments are priced on a fixed-fee and not-to-exceed basis, where customers compensate us based on the value our deliverable produces over the entire life cycle of the asset. It is rare that we are engaged for one discrete individual hourly task. Where work remains on a cost-plus or time-and-materials basis, it is generally with large public clients who prioritize professional intermediation and judgment over expedience and bargain hunting. These clients understand the inclusion of indirect costs such as compute and processing on burdened rate structures, and are grounded in the long-standing foundations of professional accountability and dependability. It is important to remember that engineering services represent a relatively small portion of total infrastructure project cost. The larger opportunity is combining AI-enabled automation with engineering know-how to help clients improve outcomes beyond construction to the broader asset life cycle. As professional accountability, AI, process automation, and data analytics become more intertwined, we believe the conversation shifts from the pricing of individual tasks to the value of better decisions, reduced risk, and improved asset performance. The tools we are building are based on both inference and deterministic routines. Without getting too technical, this architecture allows for the harnessing of decades of engineering, construction, and operating knowledge in a platform that facilitates leveraging the collective expertise of everyone in the value chain. To date, we have developed and introduced more than 25 proprietary tools to our operations, with additional capabilities in process that include an integrated operating environment designed to better connect us and the data embedded in all of our systems both internally amongst ourselves and externally with our clients post-operationalization. While our architecture is designed to minimize the operating cost of compute, the tools are focused on generating higher-value deliverables to customers through better execution and faster delivery. With all that said, do not view the impending wave of AI as a driver of commoditization. Rather, we see it as an opportunity to enhance differentiation for firms that invest in the right capabilities at the right cost structure and integrate the tools effectively into empowering operating environments. From where we sit, this is not a race to the bottom. To the contrary, it is a race to the top. I am now going to turn the call back over to Gary for concluding remarks. Gary P. Bowman: Great. Thank you, Bruce. Stepping back, what this quarter demonstrates is that our strategy is working. We are building a business with strong visibility, diversified demand, and a scalable operating model that continues to deliver. The combination of record backlog, consistent growth across our end markets, and continued investment in our capabilities—whether through technology, integrated service delivery, or targeted acquisitions—positions us extremely well for the future. We are seeing a clear path to sustained growth, margin expansion, and strong performance, not just through the balance of 2026, but into 2027 and beyond. We will now open the call for questions. Operator: We will now open the call for questions. As a reminder, to ask a question, you will need to press 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press 1-1 again. The first question comes from the line of Aaron Michael Spychalla of Craig-Hallum Capital Group. Your line is now open. Aaron Michael Spychalla: Yes, good morning, Bruce, Gary, and Dan. Thanks for taking the questions. First for me, any more details you can share on the government contract—what you are doing and the cadence of revenue? It sounds like a little higher, maybe subcontract mix, so just your confidence in execution there. And then just broadly, it seems like you are starting to see some larger awards. Can you talk to the scale and capability and other drivers that are driving that? Bruce J. Labovitz: Aaron, good morning. I am going to take the first question on the government contract and reply that there is a limited amount of information that we can disclose based on nondisclosure agreements associated with the award. However, you are correct to infer from our commentary that it will operate at a slightly lower-than-average net-to-gross ratio, higher-than-average gross spread. If you think about the math behind lowering it by five points or so, that would indicate probably somewhere in the ~75% range for net-to-gross there. And that contract, as we have talked about, has a 36-month term to it and has a not-to-exceed value in total of about $177 million. We are mobilizing for it and have been mobilizing for increasing activity there as we speak. As the commentary suggests, we would think that it would have most consequential impact on the second half of this year and into next year. Aaron Michael Spychalla: Thanks for that color, and can appreciate that. And then on the margin front—you just hit on it—but it sounds like a slow start to the year for a couple months and then maybe ramp ahead of this and other projects. Just your confidence in the outlook for margin improvement and thoughts going forward there as you invest for growth? Bruce J. Labovitz: We have looked ahead at where revenue growth is going to be and assessed that relative to overhead growth and the multipliers that we will be able to achieve on work in the remaining three quarters of the year, and we feel confident that we will be able to deliver margins in excess of where the year guide is, because in order to compensate for first quarter, those obviously have to be at a higher rate than the 17.25% to 17.5% that we have guided to. We think about it from the perspective that it does not take a whole lot more machine to support the contribution margin coming from incremental revenue. It is not a zero-sum game, but it is a margin-expanding exercise. Aaron Michael Spychalla: Alright. Thanks for taking the questions. I will turn it over. Bruce J. Labovitz: Thanks, Aaron. Operator: One moment for our next question. Our next question comes from the line of Liam Burke of B. Riley Securities. Your line is now open. Liam Burke: Thank you. Good morning, Gary, Dan, Bruce. Bruce, I guess the fixed-price contracts are a competitive advantage for you. It is also a nice source of a pretty consistent margin. If I look at your backlog, is there a larger percentage of fixed-price contracts, or is the ratio pretty much the same? And on permitting, which is one of your competitive advantages, are you seeing any increase in that process to move projects along faster, or is it pretty much the same? Bruce J. Labovitz: I think we are seeing a migration to a higher percentage of fixed-price contracts as the mix is changing a little bit. I would not characterize it as off-the-charts dramatic in its movement, but it is steady-state moving. It is also that some industries we work in are really just resistant to that—it is the way it has always been done. But in any opportunity where we have a chance to price on a fixed price, that is where we are driving contracting. Dan Swayze: This is Dan Swayze speaking, Liam. Nice to talk with you. It is generally the same. We are seeing some hints that people would like to move faster, but we have yet to see a material shift that makes the permitting move faster than where it has been. Bruce J. Labovitz: And that is not necessarily a negative. The effort involved is the service we provide. Yes, we like to be able to do more of it more quickly, but it is also— Dan Swayze: We are hopeful we do see a shift on the NEPA front related to NEPA-type permits in the future, but we have yet to see it. Liam Burke: Great. Thank you. Bruce J. Labovitz: Thanks, Liam. Operator: One moment for our next question. Our next question comes from the line of Tomasano of JPMorgan. Your line is now open. Tomasano: Hi, good morning, everyone. I would like to ask about the 6% organic net service billing growth. What is the contribution from pricing, volume, new clients, and deeper penetrations of existing clients? And how sustainable do you see this growth for the next couple of quarters? Bruce J. Labovitz: Tom, the organic growth that we have delivered historically is related to increased workload and not a function of pricing. I would not say that it is always a zero contribution from pricing—there is always some appreciation there—but when we look at the growth of our workforce and the sustained utilization of our workforce, we see that it is more people doing more work for more customers. It is really about increased capacity, increased volume of assignments, and increased wallet share with existing customers. When we look ahead at organic growth over the course of this year, we expect it to be in excess of 20%, so we do not think that the 6% is unsustainable in any way. In fact, we think we are going to achieve a significantly greater amount of organic growth this year. Tomasano: Thank you. And then a follow-up on margins, especially SG&A as a percentage of the gross contract revenue, was up significantly year over year. What are the main causes, and how will you control these costs? And also, Bruce, you talked about adopting AI—do you see it becoming a key tool for improving SG&A efficiency going forward? Bruce J. Labovitz: The total cost of SG&A was about 50 basis points higher this quarter than last year's first quarter. The absolute amount grew, but the percentage of revenue grew modestly, and we acknowledge that. We think it will begin a downward trajectory again as higher-revenue quarters absorb more of that overhead. There is a level of cost to run the machine, and as we move forward to future quarters, we expect that to start coming down sequentially. Compared to last quarter, it was up about 200 basis points, but I think that is really a function of revenue, not anything else. Tomasano: I was asking about the SG&A percent of GCR, which was 57.8%, plus 730 basis points compared to last year. Bruce J. Labovitz: If you are talking about COGS, we generally try to focus more on total SG&A cost because the way we allocate labor cost into the payroll line can vary from quarter to quarter based on how timesheets are allocated. I think movements there are less consequential than overall movements in the overall cost of labor and SG&A. Tomasano: Okay. That is clear. Thank you. And any comments on AI with SG&A opportunity? Bruce J. Labovitz: Certainly. Part of what we are building are tools that will make operations—back office and front office—more efficient. Technology continues to provide process improvement opportunities throughout the business. I think that is going to be a natural evolution of technology. The higher-value orientation is really towards client engagement, client assignment, and client connectivity. We are not uninterested in what is going on in the back office, and yes, I think there are some points of improvement to be had there, but our primary focus is really on the front office. Tomasano: Thank you. Appreciate it. Operator: One moment for our next question. Our next question comes from the line of Mincho of Texas Capital Securities. Your line is now open. Mincho: Good morning. Thank you for taking my question. You had mentioned that data centers were about 6% of revenue. Can you remind us how many data center projects you have worked on in the past and what that looks like today? And can you talk about data centers in your current backlog? Bruce J. Labovitz: I am not sure any of us could give you an exact number of how many data center projects, other than to say that the fact we do not know exactly how many means it is a lot. I would also add that many of the data center clients are very strict about nondisclosure, so it is hard for us to talk about a specific project. When you aggregate all of the experiences that the collective here has had—between us getting into data centers early in the Northern Virginia cycle and extending that to what is now really a power solutions play for data centers—the intersection with data centers that we have has grown faster than the number of projects has grown. We are doing more for more data centers, including existing clients. I would say that even where the project is the same, we are doing more things for the project today. And I would say that it is relatively aligned in our backlog, maybe slightly disproportionate to recognized revenue. We see that as a continually growing space and, particularly coming off of the E3I, Laysen, and RPT acquisitions, there is just so much momentum in the space surrounding energy consumption—not just data centers, but other large-scale utility-size consumers—that it is a growing portion of our backlog. Dan Swayze: From an operations perspective, there is not a week that goes by where we are not trying to shift resources to accommodate additional data center work. It is continuing to come in, and it is quite a substantial portion of our growth. Mincho: Perfect. Thank you. Also, you announced the smaller acquisition of Smith and Associates. Can you talk about how that fits into your broader geographic and service expansion plan? And more broadly on M&A, how the pipeline is looking—are you still looking at smaller or larger projects—and any change in valuations recently? Gary P. Bowman: Hey, Minh. On Smith and Associates, the play was really adding talent and productive capability to an existing big client we have in that geography, in addition to expanding into the geography. We already had a small presence in Vegas; the client was demanding a lot more, so it is a production capability play. The pipeline is still robust. We are evolving to be more narrow, focused, and strategic in what we are looking at. We will continue to look at a mix of large and small ones. As we go to more strategic targets, the market is not driving multiples up—we see that fairly steady—but as we go to more strategic targets, the multiples are going up a bit because of the high demand in the energy markets, the utility markets, and so forth. Bruce J. Labovitz: I think Smith is a good example of “we acquire to generate organic growth.” It is a little bit of one of those conundrums of yes, it is acquired, but it is for an organic opportunity. Mincho: Got it. Okay, I think that does it for me right now. Thank you very much. Bruce J. Labovitz: Thanks, Minh. Operator: As a reminder, to ask a question, you will need to press 1-1 on your telephone and wait for your name to be announced. One moment for our next question. Our next question comes from the line of Jeffrey Michael Martin of ROTH Capital Partners. Your line is now open. Jeffrey Michael Martin: Thanks. Good morning, guys. I wanted to dive into the decision that went into going after this large government contract. It is not the norm for Bowman Consulting Group Ltd. to pursue something like this. If you could walk us through the thought process and the competitive approach that you went in pursuing this contract, and secondarily, is this something that we could anticipate becoming more frequent in the future? Bruce J. Labovitz: Jeff, part of what happens is as you ascend through the tiers of size, opportunities present themselves to you that might not have otherwise presented themselves to you. I would not characterize this as a deliberate multiyear chase for an opportunity. We had assembled the right capabilities in the right place at the right time to meet the demand that a client had for work, and so it was opportunistic, but it was not accidental that it happened. In terms of contracts like it in the future, we certainly hope so. I think this establishes a precedent. It establishes a foundation and a threshold for the kinds of work that we can accept and complete. While I do not know that there is one in particular of like size, like kind sitting in our pipeline today, that does not mean that there will not be tomorrow. Dan Swayze: Just to further expand on what Bruce was saying, this contract and the reach-out that occurred to us aligns directly with some of our strengths in our core services. This was not a reach at all for us to submit a proposal, provide the required scope, and meet their objectives, because it is the core services that we provide and that we are really good at. Gary P. Bowman: Jeff, from a broad point of view, this contract really expands our paradigm internally of what we can do and what we go after. It has very positive cultural effects that are really cool to see. Jeffrey Michael Martin: Well, congratulations on the contract. Bruce, I wanted to dig in on scaling up the resources that you need on this contract. Is there any short-term margin impact that comes back to you in the back half of the year? How should we think about utilization? I know in the past you have staffed up in anticipation for contracts coming on. Is that the case in this situation? Bruce J. Labovitz: Yes. We have talked about margin in the business being a bit of a roller coaster based on the timing of notice to proceed and the accumulation of the resources needed. We do not capitalize any costs associated with future work in anticipation of it; it just gets expensed as incurred. There was definitely staffing up for the project. It is going to be consequential enough through the rest of the year that we are not really calling it out as any particular item, other than to point out that the revenue we are going to deliver through the rest of the year that is in backlog does take staffing in real time, and so it does have some drag on Q1 from a multiplier perspective across the portfolio, because there is labor that was not as productive as it will be. But that is absolutely a variable in the margin expansion equation. It is not just for that project, but for other projects as well—this was not a one-trick quarter. Backlog grew another ~5% independent of it, which also suggests having to staff up for growing revenue. Jeffrey Michael Martin: Appreciate the time. Operator: Ladies and gentlemen, as there are no further questions, we will conclude today's conference call. Thank you for joining. Gary P. Bowman: Thank you. Bye.
Operator: Good day, everyone. Welcome to the Jackson Financial Inc. First Quarter 2026 Earnings Conference Call. All participants will be in listen-only mode until the question and answer session begins. Following the presentation, we will conduct a question and answer session. This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Elizabeth Ann Werner, Head of Investor Relations. Please go ahead. Elizabeth Ann Werner: Good morning, everyone, and welcome to Jackson Financial Inc.’s 2026 First Quarter Earnings Call. Today’s remarks may contain forward-looking statements, which are subject to risks and uncertainties. These statements are not guarantees of future performance or events. Jackson Financial Inc.’s filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by law, Jackson Financial Inc. is under no obligation to update any forward-looking statements. Today’s remarks may also refer to certain non-GAAP financial measures. The reconciliation of those measures to the most comparable U.S. GAAP figures is included in our earnings release, our financial supplement, and earnings presentation, all of which are available on the Investor Relations page of our website at investors.jackson.com. Presenting on today’s call are Jackson Financial Inc.’s CEO, Laura, and CFO, Don Cummings. Joining us in the room are our President of PPM America, our management subsidiary, Chris [inaudible], and our Head of Asset Liability Management, Brian Michael Walta. At this time, I will turn the call over to our CEO, Laura Louene Prieskorn. Laura Louene Prieskorn: Thank you, Elizabeth Ann Werner. Good morning, everyone. I appreciate you joining us today for Jackson Financial Inc.’s first quarter 2026 earnings call. I will start by highlighting the quarter’s positive results and the solid progress toward achieving our 2026 financial targets. Following my remarks, Don Wayne Cummings, our Chief Financial Officer, will discuss our financial results in greater detail. Beginning with the bigger picture, 2026 is off to a strong start. Through a volatile market, we successfully executed our capital management and growth initiatives. Turning to the quarter’s key metrics on slide three, you will see we maintained a resilient capital position. Total adjusted capital of $5.5 billion is up nearly 5% from the first quarter last year. Our strong capital generation continues to support both distributions to our holding company and consistent capital return to shareholders. During the quarter, we distributed $288 million from our operating company to Jackson Financial Inc., our holding company. Our common shareholders benefited from an 11% increase in capital return from a year ago to $257 million in the form of shareholder dividends and share repurchases. We remain focused on maintaining a balanced approach to capital management, including investing in new business while maintaining our financial strength and consistent capital return to our shareholders. Looking ahead, we are confident in our ability to generate free cash flow supported by a healthy book of business and expectations for profitable growth. Turning to earnings, our operating performance was strong. Pretax operating earnings were up 12% from a year ago, excluding the impact of notable items. On a per-share basis, the increase was 18%, reflecting the benefits of our share repurchase program. Growth of spread-based earnings more than offset the impact of market volatility on fee income. We expect continued momentum here driven by our spread-based business and the benefits of our expanding product lineup, our enhanced investment capabilities, and our broad distribution reach. For the first quarter, retail annuity sales increased 31% from a year ago, a great result. Much of that growth came from our Market Link Pro 3 and Market Link Pro Advisory 3, our leading RILA offerings. RILA sales have now exceeded $2 billion in quarterly sales since we launched the products in May 2025. We are proud these sales have elevated us to be the industry’s third-largest RILA provider with more than $21 billion in RILA assets. We expect continued strong demand from advisers and their clients who value the combination of growth potential and downside protection that these products offer. Further adding to retail annuity sales growth was our spread-based business, including the recent launch of Jackson Income Assurance, our fixed indexed annuity, or FIA. Our FIA offers a highly valued income benefit and helps advisers deliver retirement income protection solutions their clients can count on. Since our launch in August 2025, our FIA offering has been positively received and we expect FIA sales momentum to continue. In the first quarter, fixed annuity and FIA sales reached $750 million, a significant increase from $174 million a year ago. We anticipate future sales momentum for our spread-based products. With PPM’s broad-based investment expertise and the recently announced investment partnership with TPG, we are confident in our ability to offer competitive spread-based products to our many distribution partners. Importantly, we saw considerable improvement in net outflows, which improved by 30% from a year ago and decreased nearly 6% from the fourth quarter 2025. This improvement reflects significant RILA inflows and lower variable annuity surrenders and withdrawals. The decline from last quarter reflects recent equity market uncertainty, which typically leads to lower surrender activity. As our variable annuity block continues to mature, we do expect continued withdrawal activity as policyholders take advantage of their valued benefits. On the distribution front, we are expanding and making annuities more accessible as a retirement solution. Within the advisory channel, we are a leading provider and have accelerated our product diversification efforts. In the first quarter, RILA and Elite Access accounted for more than 70% of fee-based advisory sales. Additionally, our new competitive FIA product accounted for more than 10% of total advisory sales this quarter, and we anticipate continued growth in its contribution to sales in this channel. As advisers and their clients navigate changing markets and individual financial goals, we believe our solutions-based and consultative approach underscores a unique value proposition across a growing annuity market. With our full suite of products and industry-leading service, Jackson Financial Inc. remains a trusted partner across a growing and dynamic annuity market. Turning to slide four, you can see the significant shift in our business since our separation. Today, nearly 40% of our account values come from spread-based and investment-only variable annuities. A meaningful shift that reflects the progress we have made in diversifying our in-force book. Nearly five years into our journey as a public company, our focus remains clear. We are driving growth through a diversified and broader product portfolio and expanded distribution reach. Staying disciplined and execution-focused is a long-held strength for Jackson Financial Inc. As we execute on our growth initiatives and deliver on our commitments, we expect to build long-term value in our business and for our stakeholders. Now turning to slide five and looking ahead to the full year, we have started the year off strong and are on track to achieve our 2026 financial targets. In the quarter, free capital generation was $271 million, and we expect that to build over the course of the year under our current modest market assumption. We continue to expect to reach our 2026 free capital generation target of $1.2 billion along with our capital return to common shareholders in the range of $900 million to $1.1 billion. Further, at the end of the first quarter, our holding company liquidity is nearly $650 million, comfortably above our minimum buffer. As you know, we recently established a long-term strategic partnership with TPG, which brings expertise in asset-based finance and direct lending—areas that complement PPM’s existing capabilities and create opportunities for enhanced investment returns. We have already started allocating new money to TPG-managed assets and, while we do not expect an outsized allocation to these asset classes, we do believe the investment returns will support profitable growth across our spread-based products over time. Importantly, a relatively low current exposure to private credit provides us the flexibility to invest opportunistically when market volatility creates attractive entry points. We continue to maintain our disciplined investment approach working closely with TPG, and see great value in our strategic partnership. Later in our remarks, you will hear more about our investment portfolio and how the asset classes and the expertise TPG brings fit well within our current portfolio and business strategy. At this time, I will turn the call over to Don. Thank you. Don Wayne Cummings: Let us turn to slide six and walk through our consolidated financial results for the first quarter. We reported pretax adjusted operating earnings of $430 million, or $503 million excluding notable items, which I will discuss in more detail shortly. On this ex-notables basis, earnings increased 12% year-over-year, reflecting continued momentum across our spread-based businesses and steady growth in in-force assets under management. Sequentially, ex-notables earnings were modestly lower than the fourth quarter of 2025, primarily due to approximately $30 million of headwinds in fee income this quarter. These headwinds were driven by slightly lower average AUM and fewer days in the quarter. Excluding these timing-related factors, earnings were up modestly from the prior quarter. Our spread-based earnings continued to demonstrate a strong growth trajectory, supported by a full suite of competitive product offerings and a high-quality, conservatively managed investment portfolio. Diversification and disciplined credit management remain central to our investment approach, and that consistency continues to deliver solid results. Sales of our spread-based products also reflect the enhanced asset sourcing capabilities at PPM, which have enabled us to allocate new money into select higher-yielding asset classes. This measured shift in new money deployment, combined with a compelling product lineup, has helped Jackson Financial Inc. maintain a stable and competitive position in the spread product market through late 2025 into 2026. We are also seeing positive early results from our new strategic partnership with TPG, along with the ongoing benefits of our capital-efficient strategy. TPG began deploying capital in the quarter, further expanding our investment opportunities and supporting higher new money yields. Before turning to notable items for the quarter, I would like to highlight the continued strength and profitability of our in-force business. Our adjusted operating return on equity for the trailing twelve months ended March 2026 was 14.8%, up from 13.2% for the comparable period ending March 2025. This improvement underscores the resilience and underlying profitability of the business as we continue to grow and diversify our sales mix and balance sheet in a disciplined, value-accretive way. Turning to slide seven, I will walk through the notable items that affected adjusted operating earnings this quarter. Free capital generation, which I will cover later, was also impacted by these notable items in the quarter. We reported adjusted operating earnings per share of $5.15. After excluding $0.90 of notable items and normalizing for the difference between our actual tax rate and our 15% tax guidance, adjusted operating EPS was $5.94. This represents an 18% increase compared to the first quarter of last year, reflecting the strong spread income growth I discussed earlier, as well as the benefit of a lower diluted share count from our ongoing share repurchase program. These positive factors more than offset the impact of the 4.7 million shares issued to TPG midway through the quarter. During the quarter, we experienced a $0.48 unfavorable impact from limited partnership results, which came in below our long-term 10% return assumption. While valuations of our limited partnership investments can experience quarterly fluctuations, we remain confident in the underlying strength and long-term performance of the portfolio. In addition, we proactively enhanced our process and data sourcing to more efficiently identify deceased policyholders. This initiative resulted in higher claims during the quarter, leading to a $0.42 unfavorable impact. While this initiative will temporarily affect results, it strengthens our data integrity, streamlines the policyholder experience, and ensures greater consistency in future reporting. Our effective tax rate for the quarter was 13.5%, modestly lower than our 15% tax guidance. Turning to slide eight, we take a closer look at the diverse, expanding new business profile within our retail annuity segment, which holds a top-three leadership position in both our traditional variable annuity and RILA product lines. The segment delivered 31% year-over-year sales growth in the first quarter, underscoring the success of our comprehensive product suite. Spread-based products represented 52% of total sales, reflecting the continued balance across our offerings. On a sequential basis, sales were modestly lower, consistent with typical seasonal patterns. Our RILA product suite continues to be a standout performer. We achieved $2 billion in RILA sales, an increase of 68% from the year-ago quarter. Since launching the product in 2021, RILA assets under management have grown steadily, reaching a record high of more than $21 billion at the end of the first quarter. As mentioned earlier, our spread-based products are also benefiting from strong momentum. The successful launch of our new fixed index annuity offering contributed to $756 million in fixed and fixed index annuity sales during the quarter, an increase of over 300% year-over-year. Combined with our recently announced strategic partnership with TPG, we are well positioned to sustain this growth and further expand the potential of our spread-based business. Turning to net flows, strong RILA sales and spread product performance drove $2.5 billion of non-variable annuity net inflows in the first quarter. Within variable annuities, the all-in surrender rate declined both year-over-year and sequentially, resulting in modestly lower net outflows for the quarter. We continue to expect equity market volatility to influence surrender activity within our in-force block. Importantly, while equity markets were volatile early in 2026, we entered the second quarter with equity indices near all-time highs. Should this environment persist, we may see higher surrender activity, but it would also support growth in variable annuity AUM and fee income over the remainder of the quarter. Lastly, we have included advisory sales trends to highlight the breadth of our distribution capabilities. Jackson Financial Inc. maintains a leading position in the advisory annuity space, supported by a full spectrum of product offerings. Notably, in 2026, nearly 50% of advisory sales came from products other than variable annuities, demonstrating the continued strength in our growth and diversification strategy. Turning to slide nine, we highlight our first quarter net hedge results by product along with a waterfall comparison of pretax adjusted operating earnings to the GAAP pretax loss attributable to Jackson Financial Inc. Since moving to a more economic hedging approach in 2024, we have seen a meaningful improvement in the consistency of our hedging program outcomes, which in turn has supported stronger and more predictable capital generation. As a reminder, last quarter we enhanced our disclosure of net hedge results to separately present outcomes for our variable annuity and RILA businesses. This additional transparency provides a clearer view of the offsetting equity risk between these product lines and, excluding the impact of implied volatility and market benefit liabilities, offers insight into the change in equity at Brook Re. After isolating the volatility effects, our overall net hedge result for the quarter was a loss of $101 million. Given the size and complexity of our liability profile, we view this result as a very stable and well-managed outcome. As shown on the slide, the RILA and FIA products generated a modest gain while the loss was concentrated in our variable annuity business. The variable annuity net hedging results reflect the breadth of available funds on our separate account platform, which includes both indexed and actively managed strategies. During the first quarter, market dislocations driven by investor sentiment around artificial intelligence and ongoing geopolitical developments led to divergent performance between certain actively managed funds and their benchmarks. This relative underperformance versus the indices we use in our hedging program resulted in the modest net hedging loss for the quarter. It is important to note that this dynamic can move in both directions and, historically, these effects have tended to balance out over time. Despite the modest loss from our hedging program during the quarter, Brook Re’s capitalization remains well above both our internal risk management target, which reflects a range of severe stress and tail scenarios, and our regulatory minimum operating capital level. Aside from the $500 million of growth capital contributed to Hickory Re, there were no additional capital flows for Brook Re during the quarter. Looking ahead, we will continue to manage Brook Re on a self-sustaining basis, consistent with the long-term nature of its liabilities and our disciplined approach to capital management. Overall, these results underscore the effectiveness of our hedging program in maintaining capital stability, proactively managing economic risk, and preserving the durability and resilience of our business model. Turning to slide 10, we highlight the consistency of our capital return and free cash flow. At Jackson Financial Inc., we operate under a straightforward philosophy: Earn it, then pay it. This framework is built on three pillars: generating free capital—this is where we earn it; converting that capital into free cash flow—this is where we pay it; and returning capital to common shareholders—the outcome of the first two steps working together. In the first quarter, after-tax debt capital generation was $342 million. We view this as one of the clearest indicators of the underlying strength of our business, and it serves as a key guidepost in balancing future growth with capital return to shareholders. Free capital generation was $271 million in the quarter, reflecting the estimated change in required capital driven by our strong and diversified new business results. For full-year 2026, we continue to expect to generate at least $1.2 billion in free capital, assuming equity markets deliver a 5% return and interest rates move in line with the year-end forward curve. While we maintain our RBC risk appetite at 425%, the stability in RBC levels over the past two years gives us confidence to focus on sustained free capital generation consistent with our earn-it-then-pay-it approach. Free capital generation was modestly reduced by the same limited partner returns and elevated claims that impacted adjusted operating earnings. Additionally, slightly lower average AUM and fewer days in the quarter weighed on fee income. However, the market recovery early in the second quarter positions us well for the remainder of the quarter. Excluding these temporary factors, capital generation was broadly consistent with the 2025 run rate. Free cash flow remained strong and consistent, totaling $288 million at the holding company, up 35% year-over-year after funding expenses and other cash flow items. Our robust free capital generation and growing free cash flow enabled us to return $257 million to common shareholders in the first quarter, an increase of 17% year-over-year on a per diluted share basis. Since becoming an independent public company, Jackson Financial Inc. has returned nearly $3 billion to common shareholders, exceeding our initial market capitalization at separation. These results reinforce Jackson Financial Inc.’s strong capital generation profile, the stability of our cash distributions, and our continued commitment to delivering long-term value for shareholders. Turning to slide 11, this slide highlights Jackson Financial Inc.’s robust capital and liquidity position. Our in-force business continues to be a key driver of profitability. Fee income from our variable annuity-based contracts, combined with growing spread-based earnings, supported solid capital generation during the quarter. As noted earlier, results were modestly impacted by the notable items we discussed previously. At Jackson National Life, our capital position and RBC have become significantly less sensitive to equity market movements, reflecting the benefits of the Brook Re structure. Today, changes in the equity markets primarily influence our assets under management and future capital generation, rather than our immediate capital levels. In many ways, this evolution has made our earnings profile increasingly resemble that of an asset management business—steady, diversified, and capital efficient. Consistent with our disciplined approach of taking smaller periodic distributions, we paid $325 million to the holding company during the first quarter. After considering the impact of that distribution on our deferred tax assets, total adjusted capital ended the quarter at $5.5 billion with an estimated RBC ratio of 554%, comfortably above our minimum target. These results underscore that Jackson Financial Inc. is operating from a position of real strength as we progress through 2026. At the holding company level, we ended the quarter with nearly $650 million in cash and investments, well above our minimum liquidity buffer and providing strong financial flexibility. The slight decline from the fourth quarter primarily reflects capital return to shareholders. Overall, our first quarter results show strong momentum, supported by a solid balance sheet, healthy capital and liquidity levels, and a business model well positioned for continued success. Slide 12 highlights the substantial liquidity sources we maintain across our legal entities, which underpin our strong capital position and now include our recently issued PCAPS facility. We view the PCAPS facility as an important extension of our commitment to balance sheet strength and enhanced risk management. This $900 million contingent capital facility strengthens our liquidity profile and reinforces capital resilience across market cycles while allowing us to maintain a lean and efficient balance sheet. The facility is designed for flexible application, serving both as a buffer against severe market stress events and as a tool to proactively manage our capital structure. This ensures that Jackson Financial Inc. remains well capitalized under a wide range of market conditions and scenarios. When combined with holding company cash and highly liquid securities, along with our undrawn revolving credit facility, total available liquidity at Jackson Financial Inc. stands at approximately $3 billion. At the operating company level, Jackson National Life maintains more than $35 billion of available liquidity, including $7 billion in cash and U.S. Treasury securities, and an additional $25 billion in other highly liquid marketable securities. Jackson National Life also benefits from our long-standing relationship with the Federal Home Loan Bank, which provides $2.6 billion of additional capacity through its collateralized loan advance program. Finally, financial leverage remains modest at 19.8% excluding AOCI. Our combination of strong capitalization, substantial liquidity, and modest leverage provides meaningful financial flexibility and supports our ongoing commitment to maintaining a balance sheet built to perform through multiple market cycles. Turning to slide 13, this slide highlights PPM America, our wholly owned asset management subsidiary. PPM oversees approximately $95 billion in total assets under management and, together with our new strategic relationship with TPG, enhances Jackson Financial Inc.’s ability to source attractive yields and maintain product competitiveness across both our retail and institutional businesses. PPM is a core component of Jackson Financial Inc.’s strategic growth profile, managing $59 billion of Jackson Financial Inc.’s assets and an additional $36 billion of third-party AUM, which has grown meaningfully since our separation. PPM manages our general account investment portfolio, directly supporting the profitable growth of our business and our objective of maintaining strong capitalization. Our ownership of PPM provides structural advantages and strategic alignment, including synergies across asset liability management, product design, and investment execution. This integration ensures that our investment strategy remains closely aligned with our product and risk management frameworks. PPM has also expanded its investment capabilities, enabling new money allocations to select, higher-yielding asset classes such as emerging markets, residential and commercial mortgage loans, and investment grade structured securities. These enhancements strengthen our ability to optimize portfolio returns while maintaining a disciplined approach to credit quality and diversification. In addition, PPM maintains oversight of third-party asset managers, including our strategic partnership with TPG. This oversight encompasses the establishment of guidelines for asset classes managed by TPG and ongoing monitoring of deal flow and performance. While the partnership is still in its early stages, collaboration between the teams has been strong, and we are encouraged by the positive initial progress. We remain highly optimistic about PPM’s growth trajectory and the opportunities to further expand its capabilities, reinforcing its role as a strategic differentiator and a key contributor to Jackson Financial Inc.’s long-term success. Moving to slide 14, we highlight the quality, diversification, and conservative positioning of our investment portfolio as of the first quarter. Jackson Financial Inc. takes a disciplined approach to managing our assets and liabilities, which guides how we make strategic decisions about asset allocation. Our fixed maturity portfolio remains high quality and defensively positioned, with a meaningful allocation to highly liquid U.S. Treasuries, which represent approximately 6% of the portfolio. The market-to-book ratio of 95% reflects our disciplined approach to asset selection and prudent portfolio management. Exposure to below investment grade securities remains very limited at just 1% of the portfolio, consisting almost entirely of corporate bonds and loans. The portfolio is well diversified by asset type. Corporate securities account for roughly 57% of invested assets, complemented by mortgage loans, asset-backed securities, and a modest allocation to private equity through our limited partnership investments. Our commercial mortgage portfolio is conservatively underwritten, supported by strong loan-to-value and debt service coverage ratios, ensuring resilience across market cycles. Overall, our investment portfolio reflects a conservative credit philosophy centered on quality, diversification, and liquidity, which continues to support the stability of our capital position and the durability of our earnings profile. Given the recent headlines surrounding asset-based finance and direct lending, slide 15 provides enhanced disclosures on our private investment exposure. As noted last quarter, Jackson Financial Inc. remains underweight in direct lending relative to peers. We view the current market dislocation as an opportunity to invest selectively at more attractive valuations than those seen in recent vintages. In addition, our strategic partnership with TPG provides access to deep expertise in direct lending, particularly in the lower middle market segment. TPG emphasizes strong covenants and rigorous credit underwriting. This positions us well as we gradually and prudently build exposure in this space. As of the first quarter, our private debt portfolio consisted of 63% traditional private placements, with the remainder allocated to infrastructure, asset-backed securities, and credit tenant leases. From a ratings perspective, the portfolio is 99% investment grade, with private letter ratings representing only 6% of total invested assets. Exposure to Egan-Jones–rated securities is immaterial and our software industry exposure is modest, focused exclusively on high-quality, investment grade issuers. Overall, our private investment portfolio is conservatively positioned and supported by robust credit oversight. We maintain substantial capacity to deploy capital on attractive terms, reinforcing our growth and diversification strategy while preserving the strength and stability of our balance sheet. I will now turn the call back to Laura. Laura Louene Prieskorn: Thank you, Don Wayne Cummings. Turning to slide 16, our outlook remains strong. We expect to continue our track record of maintaining capital strength, generating excess capital, and delivering on our financial targets. Throughout all types of market environments, the need for retirement security is highly valued, and we are committed to our mission of helping Americans secure their financial futures. As always, we are grateful for the dedication of our associates, whose contributions each quarter remain our greatest strength. At this time, I will turn the call over to the operator for questions. Operator: We will now open the call for questions. If you would like to ask a question and have joined via the webinar, please use the raise hand icon which can be found in the black bar at the bottom of the webinar application screen. If you joined via telephone, please press 9 on your keypad to raise your hand. When you hear your name called, you will be prompted to unmute your line and ask your question. Our first question comes from Suneet Kamath with Jefferies. Suneet Kamath: Sorry, I think I just unmuted. Can you hear me? Don Wayne Cummings: We can. Suneet Kamath: Okay, sorry about that. Good morning. I wanted to start with annuities. Do you have a sense of what percentage of your sales represent exchange activity versus true new business? Laura Louene Prieskorn: Good morning, Suneet. Thank you for the question. The first quarter sales, which were very healthy at $5.3 billion, are a reflection of new business without any internal exchanges. So the sales reported would be all new business minus any internal exchanges. Suneet Kamath: Okay. And then I guess maybe a bigger picture question. Oh, sorry—there is some background noise. So, bigger picture question: obviously, there is a pretty large merger of equals going on in the annuity space. We have not seen one of those in, I do not know, twenty years or so. Just wondering, Laura, if you think this changes the industry dynamic at all, and any thought that you could give on overall consolidation in the space would be helpful. Thanks. Laura Louene Prieskorn: I agree with you. This is a large change and one that we have not seen in the industry in quite some time. From a competitive perspective, I would say we compete with both organizations that are recently involved in the merger announcement. We have a diversified product set that I think, in comparison to the combined organization, will allow us to continue to compete well. In terms of any other consolidation, I would not have any comment on what else might occur. But I think we will continue to compete constructively with both organizations as we have in the past, and look forward, from our diversified product offerings, to continuing to focus on growth across all those annuity types. Don Wayne Cummings: And just to chime in on the merger, as Laura highlighted, we already have a comprehensive product suite, and we also happen to have one of the largest distribution forces in our space. Our wholesaler group has been quite effective over the last several years, and we are expanding this year. So we feel well positioned both with our product suite and with our distribution capabilities going forward. Suneet Kamath: Got it. And then just one other one for Don, if I could. Just on Brook Re and the additional capital that is now in the subsidiary, I guess related to Hickory. Does that change the timing of when you might be able to take dividends out of Brook Re? Any update there would be helpful. Don Wayne Cummings: Sure, happy to take that question, Suneet. You are right—we did put $500 million of capital into Brook Re during the quarter. That is the growth capital that we have designated for Hickory Re. After the capital contribution and the roughly $100 million loss we experienced at Brook Re during the quarter, we are still up in capital there. In terms of the timing of when we expect to be able to distribute capital from Brook Re, as I mentioned on the fourth quarter earnings call, we would anticipate that Hickory will start generating capital that we will be able to distribute in the near term—think the next few years. Capital that would be distributed from the business that is sitting at Brook Re on a standalone basis would be more of a longer-term timeframe. Hopefully that helps. Operator: Thank you. Our next question comes from Ryan Krueger with KBW. Please unmute to ask your question. Ryan Joel Krueger: Hey, thanks. Good morning. My first question was on capital generation. Given the continued headwinds to alternative returns, can you give us any sense of how sensitive your capital generation is to the alts returns? I know we can look at the dollar-for-dollar return impact, but I think there is probably also an offset in required capital given high capital charges against alts. So just any sensitivity that you could provide would be helpful. Unknown Speaker: Thanks. Don Wayne Cummings: Yeah, good morning, Ryan. Thanks for that question. You are right—there is a bit of sensitivity with capital generation, and you do get a bit of an offset given the higher capital charge. As we look at the results we generated in the first quarter, and given the recovery in markets since the end of the quarter—equity markets are back near or at all-time highs—we feel pretty comfortable for the full year in being able to hit our $1.2 billion target. And as a reminder, that was based on a 5% total equity market return. We feel good about that. We do not see any issues with our alternative returns, but I will ask Christopher Allen Raub to add a little color on how we look at that asset class and our recent performance as well as long term. Christopher Allen Raub: Thanks, Don. Ryan, thanks for the question. Just some flavor to help you as you think about that portfolio: it is predominantly private equity investing with a middle-market buyout focus. We also have a modest amount of CLO equity and some other fund investments in there. Returns are reported on a one-quarter lag and will reflect market conditions at the time. Nothing we saw in the quarter changes our thoughts around the 10% long-term assumption. In fact, that is a measure we have outperformed since being public a number of years ago. Ryan Joel Krueger: Thanks. And then on the TPG relationship, I know you talked about allocating new money to assets managed by TPG. I think you had also talked about maybe an opportunity to reposition some of the existing assets, particularly in the payout annuity book. Can you give us any sense of the timing on that? Is this going to take a while to do, or is that something that could happen more quickly on repositioning of the existing assets? Don Wayne Cummings: Thanks, Ryan. We closed the partnership with TPG midway through the quarter, and we have started seeing some capital deployed by TPG. It is early days. In terms of being able to reposition our overall portfolio outside of our new business flows, we still have that potential. That is certainly on our list to work through as we get the partnership fully stood up. Operator: Thank you. Our next question comes from Alex Scott with Barclays. Please unmute to ask your question. Alex, please unmute to ask your question. Alex Scott: Hi, good morning. Hope you can hear me. I just wanted to first ask about the growth that you are seeing in some of the RILAs and FIAs. Can you take us into some of the feature changes and things that you are doing to prompt more of the growth? Are there bonuses on the products? Have you increased cap rates? What features are you tweaking to make it more attractive? Laura Louene Prieskorn: Good morning, Alex. Thank you for the question. Throughout 2025, we refreshed our RILA product, and in the fall we launched an FIA product as well. Both Don and I have talked about the diversification of our sales being a goal, and RILA sales were about 40% of our total retail sales in the first quarter. The product update for RILA in 2025 included flexibility and choice that differentiate it from other products in the market—in terms of crediting methods, the protection level, and the number of indexes available. On the FIA front, that launch included a living benefit option that can be elected not just at sale, but also post-sale, which is a unique feature. We have seen great momentum in FIA sales, and as we continue through this year, we expect spread-based sales growth to benefit not just from the product refresh, but also from the efforts at PPM to seek greater yield, the establishment of the captive for fixed and FIA, as well as the partnership with TPG that Don just discussed. We are excited about the growth on the spread-based side. Alex Scott: That is helpful. Thank you. Next question I had is on the PCAPS, actually. I thought it was interesting as you were describing the PCAPS—you mentioned that it could potentially allow you to run leaner on capital. Is that something I should pay more attention to? Your RBC ratio in the operating company is pretty high at the moment, and your holdco cash is pretty high relative to your thresholds. Does adding that kind of contingent liquidity change the way you may be able to manage some of those levels? Don Wayne Cummings: Hey, Alex. Let me first highlight our RBC levels. As we have talked about on prior calls, given our shift to continuing to focus on our business and more on spread-based products, we do expect to see our RBC ratio come down over time. So that is point one. Second, specifically around the use of PCAPS, we think the way that facility is structured provides a very good source of contingent capital should we get into a severe stress scenario, and that is one of the features we found attractive. We obviously do very robust stress testing at a variety of levels and, as we went through our overall enterprise stress testing, felt that a facility like PCAPS provides a good source of capital in a very severe stress environment. Operator: This concludes our Q&A session. I will now turn the call back to Laura Louene Prieskorn for closing remarks. Laura Louene Prieskorn: Thank you. Jackson Financial Inc.’s strong first quarter performance reinforces the resilience of our business. We look forward to continuing these discussions and sharing our progress toward our 2026 targets after next quarter. Thank you for your ongoing interest in Jackson Financial Inc. Operator: The call has concluded. Thank you for joining. You may now disconnect.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Good day, and welcome to Performance Food Group Company's Fiscal Year Q3 2026 Earnings Conference Call. I would now like to turn the call over to Bill Marshall, Senior Vice President, Investor Relations for Performance Food Group Company. Please go ahead, sir. Bill Marshall: Thank you, and good morning. We are here with Scott E. McPherson and H. Patrick Hatcher. We issued a press release this morning regarding our 2026 fiscal third quarter results, which can be found in the Investor Relations section of our website at pfgc.com. During our call today, unless otherwise stated, we are comparing results to the results in the same period in fiscal 2025. Any reference to 2025, 2026, or specific quarters refers to our fiscal calendar unless otherwise stated. The results discussed on this call will include GAAP and non-GAAP results adjusted for certain items. The reconciliation of these non-GAAP measures to the corresponding GAAP measures can be found at the back of the earnings release. Our remarks on this call and in the earnings release contain forward-looking statements and projections of future results. Please review the cautionary forward-looking statements section in today's earnings release and our SEC filings for various factors that could cause our actual results to differ materially from our forward-looking statements and projections. With that, I would now like to turn the call over to Scott. Scott E. McPherson: Excited to share our results from the third quarter, which demonstrate the strength of our strategy, solid execution in the field, and building momentum that we expect to continue through the fourth quarter and into fiscal 2027. At our Investor Day last May, we laid out the long-term vision for the company. Central to this plan is leveraging the diversification of our business across the entire food-away-from-home market. We believe that our broad position across the U.S. is a unique strength for Performance Food Group Company and will result in many years of sustained growth. The most recent quarter demonstrates the benefits of this strategy. There has been much discussion about the challenges facing our industry, including soft foot traffic into restaurants, price inflation, major weather events, and political disruption. Despite these items, we were able to achieve the high end of our guidance outlined in February, exceeding expectations in several of the metrics that underpinned our projections. All three of our operating segments displayed positive signs of resilience and a strong foundation to grow upon in future quarters. Let us discuss some of the business highlights from the quarter in each of our businesses. I will then turn the call over to Patrick, who will review our financial performance and updated outlook for the fiscal year. Starting with our Foodservice segment, strong sales execution combined with disciplined margin management translated into high single-digit EBITDA growth in our foodservice business excluding Cheney. This performance underscores the durability of our foodservice model and our ability to grow profitably even in a choppy macro environment. Our ability to gain market share and grow independent cases has been a strength of Performance Food Group Company's business throughout our history. Consistent with that theme, we are incredibly proud of our sales organization and their independent performance in the third quarter. For the period, independent cases accelerated from the second quarter, growing 6.5%, exceeding our stated benchmark of 6%. Our performance was the result of consistent market share gains through the quarter and wallet share gains from existing customers. Net new account growth was approximately 5.4% as account wins continue to drive the majority of our case growth. At the same time, we were pleased to see a 100 basis point differential between new account growth and total case growth, which indicates positive trends in account penetration within existing accounts. This performance occurred within a backdrop of consistent low-single-digit foot traffic declines according to Black Box, demonstrating the strong execution of our salesforce. Our focus on recruiting, training, and incentivizing our salesforce is a key factor in our multiyear outperformance within the independent restaurant space. We continued to strengthen our talented sales team by providing them with industry-leading brands and technology that enables great customer engagement. And once again, we increased our headcount by mid-single digits compared to the prior year. Double-clicking on technology, we continue to see excellent traction from our online ordering platform, Customer First. Since highlighting this technology at our Investor Day, we have deployed multiple AI agents that provide our customers and salespeople a digital partner when researching items, recipes, and products to place the optimal order. Customer First is not only a powerful tool for our restaurant business; it will become our digital solution for all three operating segments, demonstrating the cross-company collaboration that defines our PFG One initiative. Turning to our chain business, we saw case volume increase in the third quarter. This was particularly impressive given the difficult backdrop that chains have experienced and reflects our efforts to partner with growth concepts. Also encouraging is our pipeline of new chain business, which is robust and should provide a lift to our foodservice volume performance in fiscal 2027. Before turning from the foodservice segment, a few comments on Cheney Brothers. In the third quarter, we continued to see strong sales growth at Cheney, particularly with independents where cases grew north of 6% as did the sales headcount. Their growth culture remains vibrant, and their brand portfolio is growing, providing additional sales and margin opportunities ahead. Critical to continuing this growth are the investments we have made in their physical infrastructure discussed last quarter. The headline investment is our recently opened state-of-the-art broadline distribution facility in Florence, South Carolina, which started shipping to existing and new customers towards the end of the second quarter. This new facility will not only provide room to grow in the Carolinas, but will also free up capacity in other facilities in the Southeast. We are making investments today that will pay dividends in future periods. These activities did cause higher-than-anticipated expenses in the fiscal second and third quarters, and we have embedded a continuation of some cost items in our fourth quarter outlook. As we move through the fourth quarter and into fiscal 2027, we are confident Cheney will become a significant contributor to our revenue and profit growth moving forward. Turning to our Convenience segment results, I am extremely proud of how our Core Mark associates have risen to the occasion and led our company in revenue and EBITDA growth. For the past two quarters, we have discussed adding two meaningful pieces of business with Love’s and RaceTrac. While exciting, these types of large customer wins also bring potential execution risk. I am proud to say that Core Mark has done a great job onboarding these customers and continues to work tirelessly to execute while building strong and lasting partnerships with these iconic convenience retailers. The results speak for themselves. Convenience delivered 8.3% organic case growth and 8.7% total revenue growth in the quarter, and an outstanding 34.1% adjusted EBITDA performance. While the top-line performance is certainly impressive, Core Mark’s ability to deliver on volume increases of this magnitude exemplifies the commitment this organization has to its customers. As I said at the onset of the call, Performance Food Group Company aspires to be the leader in the food-away-from-home space, and this diversification has played a significant role in the success we are seeing with Core Mark. Core Mark has leveraged the broader enterprise to develop food expertise, expanding its food and brand portfolio, providing customers with a differentiated offer. That, coupled with great customer-facing technology, strong supply chain execution, and a focus on building lasting partnerships, has resulted in significant market share wins for the segment. Looking ahead, the addition of Love’s and RaceTrac will continue to be an incremental benefit to our Convenience performance through mid fiscal 2027. We have visibility into additional customer wins and some offsetting losses, though not nearly the size of either of these two pieces of business. We believe the outlook for our Convenience segment is bright and we continue to resonate with customers looking for a partner to help them drive their business performance. Finishing with our Specialty segment, this is a unique asset within the Performance Food Group Company portfolio as there is no pure-play competitor that has the reach of Vistar in the candy, snack, and beverage market. As a result, we are able to pursue a range of business opportunities for long-term growth. An example of this is the continued expansion into the e-commerce fulfillment space. While still a relatively small channel for us, our ability to ship direct to businesses and consumers across the U.S. makes Vistar an attractive partner for a wide array of businesses and manufacturers trying to reach their end consumer. Vistar also continues to benefit from growth in other emerging channels, including specialty grocery and campus retail, and is currently pursuing additional avenues that we are confident will fuel future growth. During the quarter, growth across most of Specialty’s channels drove solid top-line performance. Case growth of 1.1% produced a 5.3% revenue increase year over year. During the quarter, Specialty saw difficult margin dynamics including lapping higher prior-year inventory gains. Expenses in the third quarter were also elevated due to shipping and fuel costs, resulting in negative EBITDA performance in the quarter compared to the prior-year period. Despite a challenging quarter, the Specialty segment’s attractive overall margins and prospects for continued revenue performance give us a high degree of confidence in their long-term profit opportunities. To summarize, all three of our operating segments contributed nicely to our top-line growth, allowing us to achieve sales results at the top end of the guidance we laid out in February. Our adjusted EBITDA came in above the high end of our guidance range even as we invested in our business to support future growth. This performance was possible because of our diversification efforts and share gains across the U.S. food-away-from-home market. I am excited for the final months of fiscal 2026 and expect a nice acceleration in fiscal 2027, putting us well on track to achieve our three-year targets laid out last May. I will now turn the call over to Patrick, who will review our financial performance and outlook. Patrick? H. Patrick Hatcher: Thank you, Scott, and good morning. Today, I will review our third quarter financial results, provide color on our financial position, and review our tightened guidance for 2026. Performance Food Group Company’s total net sales grew 6.4% in the third quarter, with growth in all three operating segments and particular strength in Convenience. Total company cases increased 4.4% during the quarter, highlighted by a 6.5% organic independent restaurant case growth and an 8.3% organic case gain for our Convenience segment. We are very pleased with the contribution from the addition of the Love’s and RaceTrac business, which accounted for the majority of the growth in Convenience. Total company cost inflation was approximately 4.5% for the quarter, in line with what we experienced in the prior quarter. Foodservice inflation of 1.5% was slightly below recent trends, with continued deflation in the cheese, poultry, and egg categories, somewhat offset by higher inflation in beef. At the same time, while cheese and poultry remained deflationary on a year-over-year basis, we did not see the dramatic declines we experienced during the fiscal second quarter and, as a result, these items were less impactful to our overall financial results. Specialty segment cost inflation was up 5.1% year over year, about 25 basis points lower than the prior quarter, mainly the result of candy and hot drink price inflation. Convenience cost inflation increased 7.9%, slightly higher than the prior quarter due to inflation in tobacco and candy. The inflationary environment has been active over the past several years, but as a company, we have demonstrated our ability to handle a range of outcomes. We expect the inflation rate to remain in the low- to mid-single-digit range for the remainder of fiscal 2026. Moving down the P&L, total company gross profit increased 6.4% in the third quarter, representing a gross profit per case increase of $0.20 as compared to the prior year period. This improvement was driven by strong mix, execution of our procurement initiatives outlined at our Investor Day, and continued execution of our brand strategy. We are very pleased with our gross profit results which demonstrate our ability to execute on our priorities outlined in our three-year plan. In 2026, Performance Food Group Company reported net income of $41.7 million, a 28.5% decrease year over year due to an increase in operating expenses. Adjusted EBITDA increased 6.6% to $410.6 million. Diluted earnings per share in the fiscal third quarter was $0.27 while adjusted diluted earnings per share was $0.80, an increase of 1.3% year over year. Our EPS was impacted by below-the-line items, including higher interest and depreciation expense. Our effective tax rate was 25.4% in the third quarter, a slight decrease from 25.8% last year. We expect our full year 2026 tax rate to be close to our historical range of around 27%. Turning to our financial position and cash flow performance, in the first nine months of 2026, Performance Food Group Company generated over $1 billion of operating cash flow, an increase of approximately $245 million compared to the same period last year. We invested approximately $266 million in capital expenditures during the first nine months of 2026. We have been diligent around new capital projects and expect full year 2026 CapEx to be below our long-term target of 70 basis points of net revenue. The organization is striking a good balance of investing in infrastructure and high-return projects to support our long-term growth while maintaining excellent free cash flow performance. In the first nine months of 2026, we generated $[inaudible] of free cash flow, up $312 million compared to last year. We are extremely pleased with our cash flow performance. We are fully committed to investing back into our business to support our growth, and as you can see from our nine-month results, we are generating significant cash flow to fund this investment. During the quarter, we repurchased a total of $1.2 million of our stock at an average cost of $83.11 per share. We will continue to be opportunistic around share repurchase, but our priority remains debt reduction and investing in our growth. The M&A pipeline remains robust, and we continue to evaluate strategic M&A. Performance Food Group Company has a history of successful acquisitions to drive growth and shareholder value. We expect that to continue. At the same time, we will apply our typical high standards and robust due diligence to evaluate high-quality acquisition opportunities. Turning to our guidance, today we tightened the guidance range for fiscal 2026. For the full fiscal year, our sales target is now a range of $67.7 billion to $68 billion compared to the previously stated $67.25 billion to $68.25 billion range. We now expect full year adjusted EBITDA in a range of $1.9 billion to $1.93 billion compared to the previously stated $1.875 billion to $1.975 billion in 2026. Our results keep us on track to achieve the three-year projection we announced at Investor Day with sales in the range of $73 billion to $75 billion and adjusted EBITDA between $2.3 billion and $2.5 billion in fiscal 2028. To summarize, we are very pleased with our progress despite a challenging business environment in the third quarter. We are in a solid financial position, which supports our growth investments and capital return to our shareholders, and expect strong execution to finish the year, setting the stage for a strong fiscal 2027. Thank you for your time today. We appreciate your interest in Performance Food Group Company. With that, Scott and I would be happy to take your questions. Operator: Thank you. If you would like to ask a question, press 1 on your keypad. To leave the queue at any time, press 2. Once again, that is 1 to ask a question, and we will pause for just a moment. Thank you. Our first question comes from Edward Joseph Kelly with Wells Fargo. Please go ahead. Your line is now open. Edward Joseph Kelly: Morning, everyone, and nice quarter. It is good to see such strong top-line momentum in the business. What I wanted to ask about is that you did trim the Q4 guidance at the midpoint. I think you had an acquisition that came into the quarter, so presumably maybe there is some help there. But can you just talk about the offsets that you are seeing in Q4 to drive a slightly more conservative view? H. Patrick Hatcher: Yeah, Ed, this is Patrick. I will take that, and maybe Scott will add something on the acquisition if he wants to. But really, we gave the full year guidance. You are talking about the implied Q4 and how we are looking at it as we exit Q3 with a really strong top-line momentum and a nice EBITDA increase of 6.6%, the top end of our guidance. So we are feeling really confident about the things that we have line of sight to and controllables. As we mentioned in our comments, really strong momentum. We are seeing positive improvement at Cheney, although there will be some pressure there during the quarter. And we are obviously looking for improvement in Specialty. Outside of our control are things like the macro environment. Obviously, there is some pressure from fuel that we experienced a little in Q3. We expect some of that pressure in Q4 as well. So really very confident about Q4. There are some pressures on the numbers, as I mentioned. And then we are looking really towards 2027. We see a really nice setup, and we will obviously give you much more color on that in August. Scott E. McPherson: Hi, Ed. This is Scott. Just real quick on the acquisition. We did have an acquisition that came in late in the third quarter, something that we have been really excited about. Cash-Wa is a broadline foodservice distributor in Kearney, Nebraska. Three facilities that really cover Nebraska and the Dakotas, giving us a little more presence facing West. Great family company, great culture. I think they are really excited to be a part of Performance Food Group Company, and we are excited to have them in the fold. Edward Joseph Kelly: Great. And then maybe just a follow-up, and Patrick, you kind of hinted at this a little bit, but Cheney had drags as we think about fiscal 2026. I was hoping maybe you could talk about what that drag was again in Q3, and then I do not know if you can sort of summarize what the drag has been for the year. I mean, I think the math would say it could be $30 million, something like that. Do you get all of that back next year? Because I think you have talked about you expect Cheney to be a pretty strong contributor in 2027. Scott E. McPherson: Really good question, Ed. From a Cheney standpoint, the first thing I would say that we are really happy about is, as we mentioned, their top line. Cheney has done a great job continuing to grow independent cases, continuing to grow share across Florida and the Carolinas. I think their sales culture is fantastic. They are set up for the balance of this year and 2027 from that perspective. Over the last couple of quarters with the opening of the new facility, we certainly saw some expense drag, and we mentioned that will carry on into the fourth quarter. But we have great line of sight to get those things under control. The rollout of that facility has gone very well. We have transitioned three of our four phases of customers into there. We feel like their setup for 2027 is great, and we are really looking forward to their contributions both top and bottom line going forward. Operator: Thank you. We will move next to Lauren Danielle Silberman with Deutsche Bank. Please go ahead. Your line is now open. Lauren Danielle Silberman: Thanks a lot and congrats on the quarter. A couple of follow-ups and then one question. On Q4, are you able to quantify the net impact of fuel costs that you are embedding for the quarter? I know there are some offsets of surcharges, but not fully. I am just trying to figure out if it basically accounts for the $20 million to $30 million tick down in the implied Q4. And then on the cleaning expense drag, what exactly is driving these higher expenses? I guess I am just trying to understand whether these expenses roll forward into fiscal 2027 just within the base or if some of them come off. And then on the independent case growth side, there is obviously a lot of different dynamics and noise throughout the quarter. Any color you could provide on the cadence you saw as you moved through the quarter, and any you can share on what you have seen into April, thoughts on the fourth quarter? Thank you. H. Patrick Hatcher: Lauren, good question. As we exited Q3, we saw the impact of fuel come in. You are going to get much more detail in the 10-Q on this, but the gross impact for Q3 for that month was $7.3 million, and that is not just because of higher fuel prices; that is also because of new customers and miles driven. Because of the timing of surcharges, we were not able to adjust the surcharge in March, but that was adjusted in April and again in May. So we do have some headwind in Q4, but it is not material. It is something we are working through. We called it out as a headwind because it is one, but it is one of a few things that we embedded into our guidance, and that is why we gave the range we did. Scott E. McPherson: On the Cheney expense drag, there are a couple of things I would outline. The primary one is the new facility in Florence. Right now, we have customers that we are shifting from other buildings into that facility. We had to hire and staff that facility for all of that inbound volume, and at the same time, before we transition those customers, we are still servicing them in our existing facilities. It is kind of double headcount to service that volume, and that has continued over the course of four or five periods, which has been impactful from an expense standpoint. The other thing that drops off is expense as we move past certain integration milestones. We have talked about our synergy flow. At the end of Q3 of this year, or really at the end of the second year anniversary of Cheney, we have a nice pickup in synergy that will continue on through year three and beyond. So we definitely have a couple of things that will be good momentum from the Cheney expense standpoint. On independent case growth cadence, January was a great month. Towards the end of January into February, you saw pretty material weather impact. If I look at the average of January and February, that is kind of what we saw in March, and we saw that continue into April. We have been pretty consistent over the last couple months. If you took the January–February average, that equals what we saw in March and April. Operator: Thank you. We will now move next to Kelly Ann Bania with BMO Capital. Please go ahead. Kelly Ann Bania: Thanks. Scott, just wanted to clarify one point on the Cheney expenses. Did your view of the impact of those to the fourth quarter change since you reported last quarter, or is that just coming in line as you expected it to still be an impact into the fourth quarter? And then, Scott, you made the comment about 2027 and looking for an acceleration in sales and profit growth there. You mentioned cycling some of these expense headwinds and also the synergies, but you also mentioned some new chain business at Foodservice. Could you help bucket some dollars or how we should think about what that might look like in the coming quarters? And then also the procurement savings target should maybe start to build. Is that a factor we should think about being impactful in fiscal 2027 as well? Scott E. McPherson: Thanks for the question, Kelly. There was a little more spillover into the fourth quarter than we probably anticipated a few months ago. We had four waves of customer transition shifting business from existing buildings into that new facility. We have completed three of those waves, and that fourth wave will take place here in the next couple of weeks. We thought we were going to have all four of those waves completed in the third quarter, but we had a little weather impact when we started that building that pushed it back a couple weeks, and we have taken our time to make sure we do a great job servicing those we shift over. We have seen sales growth in that new building on a same-store basis since day one. All those customers that we shifted in there have continued to grow, so really positive results from the transition. On 2027 acceleration, you touched on the key drivers. In Foodservice, we see continued momentum in independent case growth. We have a really nice chain pipeline that we think will help keep chain growth positive for next year. Convenience obviously had a great year from a market share gain standpoint and has some carryover into next year. Specialty has improved its growth three quarters in a row and has a nice pipeline as well. On margins, we feel good about mix and about procurement synergies; that really helps the margin profile. We will also have some spring-back on Cheney expenses and overall efficiency from adding volume. The setup is really nice for next year. Operator: Thank you. We will move next to Mark David Carden with UBS. Please go ahead. Your line is open. Mark David Carden: Good morning. Thanks so much for taking the questions. To start, I know it is pretty much impossible to predict the duration of the Middle East conflict, but if we see higher oil prices continue at their current level for an extended period of time, how much of an impact would you expect it to have on your product inflation outlook over, call it, the next few quarters? And then a follow-up on Cash-Wa. How does its mix of business compare to the base Foodservice business? Does it lean any more or less heavily towards independents? And then more broadly, how is your traction going on building out some of your independent business organically out West in select markets? Scott E. McPherson: I will take a stab at this and let Patrick fill in the blanks. We have talked about how we handle fuel surcharges and fuel inflation, and we have a really good plan around that. Our fuel surcharges mitigate a lot of that impact, though there is a little headwind in Q4. We cannot anticipate whether fuel prices go up significantly or down over that period and beyond, but we think we have a good setup around fuel surcharges. As far as other product inflation, we have not seen any material impacts to date other than a little noise around petroleum-based products—some products we sell are petroleum-based, and there is packaging and containers as well. The longer the duration, at some point you could see inflation tick up. Across the third quarter, we saw inflation tick up a little period by period, and we have seen it tick up a little as we started this quarter, but we feel well positioned to navigate that. On Cash-Wa, their Foodservice business is very much in line with what we see across broadline. They have a really nice independent mix. They also have some broadline national customers, and they have a segment of their business that does have some Convenience sales—snacks, candy, a little cigarette and tobacco as well. So a very diversified mix that fits well into our overall portfolio. Out West, we have continued to add capacity in California, Oregon, Arizona, and Colorado. The West is our fastest growing region by a fair amount. The team is doing exceptionally well in the West, and we are proud of their ability to gain share. H. Patrick Hatcher: Just a little more color on inflation. We manage a very large basket of commodities. As Scott mentioned, maybe some of the petroleum-based might see a little bit of impact. It is hard to predict. Over time, we have managed through a variety of markets well. Specifically in Foodservice inflation, we started January very low, below 1%, and we finished in March at 2%. That is still well within low single digits, an area we manage very well. Operator: Thank you. We will move next to John Edward Heinbockel with Guggenheim. Please go ahead. Your line is open. John Edward Heinbockel: Hey, Scott. Two quick questions on local independent case growth. One, is there still an opportunity to reduce the account loss rate from where it is today? And then if you look at the pickup in lines per account, where is that concentrated? Are you gaining some traction with center of the plate versus where you might have been? And on Cheney, now that they have South Carolina open, where are they in terms of capacity—meaning I do not think they will need to open another facility for a while. And if you took synergy out and just looked at Cheney apples to apples, does it outgrow the rest of Foodservice because of the economic growth in its markets? Scott E. McPherson: On loss rate, we have been fairly consistent over a number of quarters. Is there an opportunity to improve? Absolutely. We are always focused on improving that and spend a lot of time on it. Turning customers is obviously not the goal. Overall, it has been fairly balanced; we have not seen a big shift. On lines per drop and cases per drop, that was the headliner of our penetration in the quarter—really nice increases. It continues to be driven by our brands. If you asked our sales reps their biggest lever, brands would be one of the top one or two. We have had really nice performance in center of the plate—our protein strategy and seafood are working to drive that. But brands are where the focus and real growth have been. On Cheney capacity, we are taking volume out of a facility that was about 90% full and now will be more like 50%–60%. We are going to have three facilities that have 40%–50% available capacity—maybe one is not quite that high—but three facilities with a lot of capacity, creating a whole network with capacity across the network. Really well positioned to continue to grow. Absent synergies, Cheney is certainly in one of the fastest growing markets in the country. As a broadliner with a great reputation and presence in that market, with capacity available, I think they have a really nice growth future ahead of them. Operator: Thank you. We will move next to Alexander Russell Slagle with Jefferies. Please go ahead. Your line is now open. Alexander Russell Slagle: Thanks. Good morning. A follow-up on Cheney. I know the synergies are not really expected until year two or three, but as you have had more time to evaluate the business and see how it pairs up against Performance Food Group Company, do you see any incremental opportunities there? And also curious on the private label at Cheney and your latest thoughts. Also, I wanted to ask on inbound logistics opportunities and potential offsets for some of the higher freight and inbound costs that you have had. Scott E. McPherson: The biggest opportunity is around brands. Cheney has established some of their own really solid brands. Their brand percentage of sales is a lot less than what we see across the rest of broadline, but they do have strong brands, and one of those brands we have taken into the rest of broadline. The procurement piece around brands is going to be a really nice part of the synergy. We have also found some other core competencies that Cheney has that we think will help the broader business, which is why we take our time in that first year and try not to jump in and make big changes. Maybe we do not generate as much EBITDA in the first year, but in the long run it positions us really well. We feel like the future of Cheney and the setup for 2027 and beyond is really strong. On inbound logistics and redistribution, we talked at Investor Day about redistribution and that we continue to grow our redistribution network. That network has performed really well this year. I would highlight the West—we have opened up a facility in the West to help us get our brands to all of those centers. Seeing how those distribution centers aided by redistribution are growing makes me very bullish on what we can do around redistribution. On the broader inbound landscape, we certainly think that is an opportunity—being more efficient in getting goods to our buildings. It is something that helps us today and has more opportunity ahead. Operator: Thank you. We will move next to Jeffrey Andrew Bernstein with Barclays. Please go ahead. Your line is now open. Jeffrey Andrew Bernstein: Great. Thank you very much. First question is on the underlying consumer, excluding the weather noise you talked about in January. You noted the ongoing negative foot traffic for the restaurant industry. Talk specifically about the impact a spike in gas could have on your business. It does not seem like it has had much, but how have your segments been impacted in the past? It would seem like the Convenience store segment might be the most vulnerable as it ties in with gas stations. Any color you could provide in terms of that underlying consumer behavior excluding weather that you have seen in recent months and what you might expect as we close out the fiscal year? And as a follow-up on the independents, your case growth is very strong at roughly 7%. You seem confident sustaining that in the fiscal fourth quarter. Who do you think you are taking share from—large national peers, or perhaps the big three taking from the rest of the industry? Scott E. McPherson: When I think about the restaurant consumer, we have seen our independents hold up exceptionally well, and with our share gain that has been really nice. We have seen a little downdraft on the chains; chains feel more of the foot traffic headwind. So right now, independents tend to be outperforming chains. On overall fuel impact, it comes down to discretionary income. In restaurants, if fuel prices continue to climb higher, that can impact discretionary income. In Convenience, my history would tell me that as price goes up, there is an environment where trips actually go up. The Convenience store consumer getting gas may not fill the tank every time. We have seen trips tick up over the last few months in Convenience stores. There is an inflection point where if fuel gets pretty high, then it is a discretionary income issue. Right now, the consumer has been very resilient across Convenience and Foodservice, and we anticipate they will continue to perform that way as we look to the fourth quarter. On share gains in independents, it is hard for us to tell exactly who we are taking it from. Some is certainly coming from specialty players; some might be coming from bigger or smaller competitors. We are focused on gaining share in each and every customer we service, and we saw that in the penetration numbers. Our brands are a big lever. Another big lever has been our tech stack around customer-facing ordering—Customer First. The combination of our physical relationship with the rep and the digital relationship with Customer First has helped our penetration and share gains. Operator: Thank you. We will move next to Brian James Harbour with Morgan Stanley. Please go ahead. Your line is now open. Brian James Harbour: Thanks. Good morning. Following up on Convenience stores, what does penetration there look like lately? If you separate out the new customer wins, which certainly help, how would you describe that in the Convenience segment? And you said you have done a little bit better with chains, notwithstanding tougher industry traffic. Anything you would call out that is helping there—specific segments you cover? Scott E. McPherson: Convenience is a little different than traditional Foodservice because in Convenience you really have a primary supplier. You do not typically split between multiple broadliners like you might in Foodservice. Where you might have penetration is in foodservice programs within the store—you might have an external vendor there—and that is where we have done a great job of penetrating in our Convenience segment. Over the last couple of years, our Convenience segment on a same-store basis has greatly outperformed the industry. The tools we bring to customers around product mix, how to set your store, how to grow foodservice, and our customer-facing technology have really helped us outperform the market. On chains, it is really two things. We have partnered with a couple of the more progressive foodservice players in the space—those continuing to grow—which has helped us on a same-store basis. The other is share gain. We have had a really nice pipeline in the chain space, and we see that continuing into 2027. Our ability to resonate with chain customers and be a great partner has really helped us. Operator: Thank you. We will move next to Peter Mokhlis Saleh with BTIG. Please go ahead. Your line is now open. Peter Mokhlis Saleh: Great. Thanks for taking the question. I am curious if you could give us a little bit more color on strength and weakness by cuisine. More specifically on the Italian segment, if you are seeing any major changes at all, and then I have a follow-up. Scott E. McPherson: Looking at some of the publicly reporting chains, pizza and Italian growth has been a little muted as of late. Internally, we continue to grow share in pizza and Italian, which is a really big, strong part of our business. Interestingly, we are growing pizza and Italian outside of traditional pizza and Italian locations—growing it in bar and grill, and in our Convenience segment through both Foodservice and Core Mark. So we are holding our own in pizza and Italian, although the segment has been a little more challenged. We are seeing really nice growth in other specialty segments—nice growth in our Asian segment, continued market share gains in our Hispanic segment. One of the biggest share gain areas we have in Foodservice right now is sales into Convenience. The share gains there have been very significant and a big driver for us. Peter Mokhlis Saleh: Great. There has been a lot of discussion in the industry around GLP-1s and the impact. Are you seeing any sort of impact or changes in behavior among restaurants and what they are purchasing that would indicate any change? Scott E. McPherson: We follow the statistics on GLP-1 and eating behavior. In the first year that someone is on those, there could be a tick down in their consumption across food in general—across grocery and all channels. There is a little bit of compression on snack and candy in that first year, but that consumer seems to bounce right back afterward. In restaurants, there is certainly a focus on protein and fiber. We are seeing demand for smaller portions in some places and more to-go containers—so we are selling more containers. There has been some behavior shift. I think that is one of the reasons the independent restaurant has done so well; they are able to react, change menus, change pricing fairly rapidly, and they have reacted to that behavior really well. Operator: Thank you. We will move next to Analyst with Bernstein. Please go ahead. Analyst: Thank you. I would like to ask a couple of strategic questions. First on your M&A pipeline and potential future moves. In your framework, you highlight pursuing transformational opportunities, and recently we have seen two major players acquire cash-and-carry businesses and provide more vertical integration through the customer life cycle. Is this a strategy that you would entertain? Why or why not? And then on the strength you are seeing in the chain business, could you expand on what is causing the incremental focus on the chain business and whether you have seen this as a strategic fit given that it could be a potentially lower margin business? Scott E. McPherson: We spent a lot of time at Investor Day outlining our M&A strategy. Our M&A strategy is really focused around broadline Foodservice. Cash-Wa is a great example, Cheney was a great example, and we continue to have a pipeline of opportunity in broadline Foodservice. There are tangential areas around Foodservice we continue to look at, including protein and seafood. In Convenience and Specialty, we made a small acquisition last year in Convenience, and we will continue to look at opportunities there. But our core focus is broadline Foodservice—that is the field we want to play in. On chain business, there has not been a strategic shift. The chain business has been an important part of our portfolio for a long time. Our independent-to-chain mix in Foodservice is about 40% independent and about 60% chain—a really balanced portfolio. We consistently grow independents faster than chains, and that has been a calling card. But when a big portion of your sales are chain, we are just as focused on growing that as well. We are resonating with customers in both segments and gaining share. We are happy with how our salesforce is performing in both areas. Operator: Thank you. We will move next to Karen Holthouse with Citi. Please go ahead. Your line is now open. Karen Holthouse: Great. Thank you for taking the question. A couple on the Convenience side. Some of the packaged food companies have started to talk about understanding pushback to inflation in the grocery aisle and proactively decreasing prices on some things. Are you seeing anything similar on the single-serve Convenience side of things? And looking out over the next six to twelve months, is there anything that should be on our radar for incremental new customers that might be onboarded specific to the Convenience side? Scott E. McPherson: We have not seen any deflationary noise at all in the Convenience segment. Historically, we do not see actual price deflation. What we see is manufacturers discounting at point of sale—promotional activity that lowers the end cost to the consumer. It really has no impact on us or our margins. That activity has probably ticked up a little, and it would not surprise me if that continues, but it does not impact us from a revenue or profit standpoint. Specific to Convenience customer onboarding, we will lap the Love’s and RaceTrac next year. We have a really nice pipeline. We have a couple of other customers we will onboard and a couple we will offboard over the next six to twelve months. We have had some competitive reaction, and competitors have put a little pressure on the competitive market, but overall the setup for Convenience for 2027 is really strong. The customer shifts I am talking about are much smaller in magnitude than a Love’s or a RaceTrac. The setup is really good. Operator: Thank you. We will take our question from Analyst with Melius Research. Please go ahead. Your line is now open. Analyst: Hey. Good morning. Could you talk about the pipeline or just conversations you are having in the Convenience segment with potential customers? How much of your Foodservice capabilities or broader PFG One capabilities impact those conversations? And then a question on Cheney—thoughts on putting Performance Food Group Company private label into Cheney or taking some of Cheney private label—where you think the opportunities are there and how we should think about that going forward? Scott E. McPherson: The Convenience segment’s core competency around Foodservice over the past three years has increased dramatically. The product mix we offer in our opcos, the turnkey solutions we offer, and the knowledge of that organization around food have been a big feather in our cap in customer interactions. We have to be a great partner, an efficient distributor, and supply the full basket of goods, but having that core competency around Foodservice has helped in negotiations on new chains and account wins. On Cheney and private label, I see it going both ways. We have already taken a couple of Cheney’s private labels and started to roll those out across the broader Performance Food Group Company organization. We have been evaluating the labels that we would put into the Cheney organization as well. Cheney’s brand penetration was in the 15%–20% range at acquisition. We just had a record brand penetration in the legacy Foodservice segment at 54%. Combined, if we were going to reset a target, we would be right at 50% in brand cases to independents. That is a number I think we can grow, and Cheney will be a big portion of that growth. Operator: Thank you. At this time, this concludes our question and answer session. We will now turn the meeting back to Bill Marshall. Bill Marshall: Thank you for joining our call today. If you have any follow-up questions, please reach out to Investor Relations. Operator: Thank you. This concludes today’s meeting. We appreciate your time and participation. You may now disconnect.
Operator: Will host a question and answer session. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. I will now hand the conference over to Kimberly Booth, VP of Investor Relations. Please go ahead. Kimberly Booth: Good morning, and welcome to Corteva, Inc.'s first quarter 2026 Earnings Conference Call. Additionally, Judd O’Connor, executive vice president seed business unit, and Robert King, executive vice president, Crop Protection Business Unit, will join the Q&A session. We have prepared presentation slides to supplement our remarks during this call which are posted on the Investor Relations section of the Corteva, Inc. website and through the link to our webcast. During this call, we will make forward-looking statements, which are our expectations about the future. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Our actual results could materially differ from these statements due to these risks and uncertainties, including, but not limited to, those discussed on this call and in the Risk Factors section of our reports filed with the SEC. We do not undertake any duty to update any forward-looking statement. Please note, in today's presentation, we will be making references to certain non-GAAP financial measures. Reconciliations of the non-GAAP measures can be found in our earnings press release and related schedules along with our supplemental financial summary slide deck available on our Investor Relations website. It is now my pleasure to turn the call over to Charles. Our prepared remarks today will be led by Charles Victor Magro, Chief Executive Officer and David P. Johnson, Executive Vice President and Chief Financial Officer. Charles Victor Magro: Thanks, Kim. Good morning, everyone, and thanks for joining us today. Spring is always a busy and exciting time for agriculture, and this year is no exception. Planting in the Northern Hemisphere is proceeding well, the weather has cooperated for the most part, and we are well positioned with technology that is in high demand. However, farmers remain cautious and value-driven. Crop mix and technology choices are increasingly strategic, aligning acreage and input decisions towards crops with the best demand signals. Overall, strong crop acreage is supporting strong seed and crop protection volume demand. There are some back half risks we are monitoring. We will discuss those today, but let us start with the quarter. Both Seed and CP delivered healthy double-digit EBITDA gains, with all-in benefits on price mix, volume, cost, and currency. Year-over-year, Corteva, Inc. delivered a 21% increase in Q1 EBITDA and over 200 basis points of margin expansion driven by our core portfolio, our growth platforms, and focused cost execution. While some of Seed's strong North American volume performance can be attributed to timing shift, price mix gains in every region are a clear signal that regardless of tight margins, farmers continue to plant our latest hybrids and varieties in order to increase yield per acre and their own profitability. Volume gains in crop protection across all regions were driven by double-digit gains in new products and Spinosyns, reflecting continued demand for our premium technologies. This performance allows us to reaffirm our full-year guidance, which we announced in February. It also allows us to de-risk the second half of the year slightly—David will explain more. Factored into our guidance is the fact that farmers in the U.S. are expecting to shift planted area from corn to soybeans, resulting in a projected 3% to 4% reduction in corn acres. And if current trends hold, Enlist beans will be planted on about 65% of all U.S. soybean acres in 2026. As it approaches maturity, Enlist is the number one selling soybean technology in the U.S. As you know, our focus is now set on becoming the leading provider of soybean technology in Brazil, the largest soybean market on the planet. Our branded corn business already holds the number one position in Brazil, and we are confident our licensing model for soybeans will allow us to efficiently gain share in this critical market. We are making great strides on that front, and we are expecting trait penetration to cross into double digits this year. With regards to the Middle East conflict, although we have minimal commercial presence in the area, we are monitoring the situation closely. Given what we know today, while we are keeping an eye on any feedstock exposure to our supply base, the main impact for Corteva, Inc. is currently related to increases in oil prices. However, given typical inventory cycle turns, we believe the 2026 impact is manageable within our current guidance range. David will get into the details, but we are also seeing some favorability on the tariff front from what we communicated in February. Globally, from an overall industry perspective, we continue to see mixed fundamentals. Record demand for grains and oilseeds continues, and farmers are investing in premium seed and crop protection technologies to enhance and protect their yields. Overall, crop prices have increased from a year ago, but margins are still tight as large global crop production and geopolitical uncertainty continues to weigh on the markets, and several farmer input costs such as fertilizer and fuel have been impacted by higher oil prices. Our latest view on the crop protection market for the full year assumes modest growth with low single-digit volume gains more than offsetting slightly negative pricing. For Corteva, Inc., we expect mid single-digit volume gains more than offsetting low single-digit pricing headwinds. So as we sit here today in May, I am pleased with our first quarter performance. As we all know, the first quarter does not dictate the full year in agriculture, but I would say the first half is playing out a little better than expected. We are showing good progress on our growth platforms, and I believe we have the appropriate level of attention on improving our cost position through our controllable levers. Crossing the milestone of royalty neutrality into royalty positive later this year is a monumental accomplishment and a sign of what is to come. We already have over 100 independent seed company licensees for PowerCore and Enlist Corn and Enlist E3 soybeans. These self-help levers continue to drive value creation for the company and provide meaningful margin enhancement through the ag cycle. Let me also give you a quick update on our separation. First, we remain on track for a separation sometime in the fourth quarter and we are trending favorably against our estimated $100 million of net dis-synergy estimate. As you will have seen a few weeks ago, we announced the new CEO for the company that will become Corteva, Inc., home to our CP business. Luke Kism is an experienced CEO with a proven track record of delivering results and we are pleased he will be joining the company on June 1. We also announced the two executive leadership teams for the new companies, both of which include a mix of existing and new members, but all of whom are aligned to our culture and values. As such, they share a passion for agriculture science and innovation, as well as a commitment to the teams that they will lead and the employees, customers, and shareholders they will serve. In addition, we filed our initial Form 10 with the Securities and Exchange Commission with the intention of having a public filing later in the second quarter. And last but not least, earlier this week, we announced the name of the future pure play global advanced seed and genetics company. When we started thinking of a new name for our new company, we knew we wanted to honor the legacy of the generations of employees and farmers whose ingenuity and hard work have fed the world and made us an undisputed leader in solving some of the world's biggest challenges, including food and energy security. We wanted to ensure that the technology that stands our company apart was reflected in the brand with a look and feel that was modern and tech forward but still rooted in the conviction that science and innovation can change the world for the better. I am therefore pleased to introduce the culmination of our efforts—Vylor. The name itself is derived from the word “valor,” again acknowledging the generations whose work made Vylor possible. We will talk more about this at our September 15, 2026 Investor Day event, but Vylor's success will be driven by industry-leading germplasm, biotech and gene editing capabilities, as well as a world-class pipeline that includes an exciting new licensing business, proprietary hybrid wheat technology launching next year, and the next-gen biofuels development program. And with a nod towards the future, Vylor reflects our passion, our ambition, and our shared determination to advance agriculture to maybe one-day opportunities beyond row crops. So you can see that this year is off to a busy start as we work to get this separation across the finish line while ensuring our customers continue to get the level of performance and support they have come to expect from Corteva, Inc. Before I turn it over to David, I would like to take a minute to honor the fact that just a few weeks ago, Pioneer turned 100—an iconic brand if there ever was one. In 1926, Pioneer and its hybrid corn did not just change agriculture. It changed the world. And we are about to do it again, and just like last time, we will do it with groundbreaking technologies, from gene editing to hybrid wheat to safe, effective, sustainable crop protection products including biologicals. It is easy to lose sight of accomplishments when we are so focused on the critical tasks at hand, but a milestone like this deserves to be celebrated. Lastly, I want to take a moment to recognize our employees for staying focused on what matters most—executing for our customers—while managing a significant number of competing priorities during the quarter. David, over to you. David P. Johnson: Thanks, Chuck, and welcome everyone to the call. Let us start on slide six, which provides the financial results for the first quarter. Results for the quarter were strong, led by an expected timing shift from fourth quarter and early season start in seed deliveries, and crop protection volume gains in all regions. Organic sales were up 7% compared to last year, with seed up 9% and crop protection up 4%. Currency was a tailwind to the top line at 4% of sales, in line with expectations. Seed price mix was up 3% in the quarter, with gains in all regions as we continue to price for value. Seed volumes were up 6% compared to the prior year. Volume shifts in North America from fourth quarter 2025 were expected, and we also had an early start to the North America season due to favorable weather. In addition, we saw continued growth in our Brevant retail brand. Crop protection price was down 2% as expected, driven by competitive market dynamics, primarily in Latin America. Crop protection volume was up 6% with gains in every region. Notably, new products and Spinosyns delivered double-digit volume gains in the quarter. As mentioned before, it is more meaningful to look at our business by half. Timing shifts between the first and second quarter are routine in our industry, while performance in Northern and Southern Hemisphere is more complete when looking at the six-month period. Operating EBITDA was up 21% over last year. Operating EBITDA margin of over 29% was up 240 basis points driven by organic sales growth and continued cost savings from productivity. Moving on to slide seven for a summary of first quarter operating EBITDA performance, operating EBITDA was up nearly $250 million to over $1.4 billion. Volume gains, price and mix, currency, and cost benefits more than offset headwinds from higher selling expenses. Seed continues to make progress on the path to becoming royalty positive later this year, with another $30 million decrease in net royalty expense this quarter. This improvement was driven by lower royalty expense on certain Enlist traits. Seeds and crop protection combined to deliver roughly $70 million in productivity and input cost benefits, including lower seed commodity costs. In the first quarter, SG&A was up compared to prior year driven by unfavorable currency, bad debt, higher commissions from sales increases, and higher compensation and functional spend. We expect first-half SG&A as a percentage of sales to be relatively flat compared to 2025. Currency was roughly a $60 million tailwind on EBITDA, primarily driven by the euro. Both Seed and Crop Protection had an impressive first quarter and delivered double-digit EBITDA growth and meaningful margin expansion. Moving to slide eight, let me briefly reaffirm our full-year 2026 guidance. We continue to expect operating EBITDA in the range of $4 billion to $4.2 billion with margins of 22% to 23%, and operating EPS of $3.45 to $3.70, representing approximately 7% growth at the midpoint. This outlook is underpinned by broad-based organic growth, supported by continued execution on our controllable levers. While we are seeing some favorable signs from an early start to the northern season, we will have a better view in a few months if we foresee any changes to our full-year expectations. With that, let us go to slide nine and transition to the key assumptions for the first half and second half of the year. Starting with the first half, our performance is driven by strong execution in North American seed. Overall price mix is expected to be roughly flat with seed up low single digits offset by low single-digit declines in crop protection. We continue to keep an eye on broader ag input pricing but believe the majority of U.S. inputs have already been purchased for the season and will not be impacted by recent price increases. We are also seeing meaningful benefits from productivity and lower input costs in the first half, which is helping support margin expansion. At the same time, SG&A is expected to increase modestly from the prior year from higher commissions and bad debt. From a currency standpoint, we are seeing a benefit in the first half primarily driven by the euro. Turning to the second half, we expect continued momentum driven by volume growth in crop protection, particularly in Latin America, with our biologicals portfolio contributing more meaningfully as it is weighted to the back half. On the seed side, we see a stable demand environment supported by stable corn acreage in Brazil. From a price mix perspective, seed is expected to improve low to mid single digits while crop protection pricing remains pressured, with low single-digit declines year-over-year. Productivity will continue in the second half across both businesses. We also expect to see the net impact of tariffs and higher oil prices show up more meaningfully in the back half of the year, aligned with crop protection inventory turns. As a reminder, tariffs are included in our guide and are trending slightly better than expected, while higher oil prices are driving a $40 million headwind—also included in guide—with active mitigation underway. And finally, currency is expected to be a tailwind in the second half as well, driven by exposure to the Brazilian real. With that, let us go to slide 10 and summarize the key takeaways. First, we delivered a strong start to the year with first quarter performance ahead of expectations, driven by continued organic growth across both seed and crop protection. This reflects the strength of our portfolio and continued execution of price-for-value strategy. We are seeing clear benefits from our focus on controllables, with input cost savings and productivity improvements translating into meaningful margin expansion in the quarter. In addition, we made solid progress this quarter on our path to becoming royalty positive. We also remain on track to return significant capital to shareholders, including a plan to complete approximately $500 million of share repurchases in the first half of the year. As expected, first quarter cash flow was impacted by the Bayer agreement and separation items. Absent these items, we would expect our full-year free cash flow conversion to be in line with our midterm target discussed at the 2024 Investor Day. And we are reaffirming our outlook, which reflects continued growth in sales, EBITDA, and margin for the full year. This is supported by strong demand for our differentiated technology and disciplined operational execution across the business. Finally, we remain on track with the separation, announcing many key milestones over the last several weeks. We recently filed our initial Form 10 and expect to have a public filing towards the end of the second quarter. Due to regulatory requirements, the separation is being treated as a reverse spin-off in the Form 10 and new Corteva, Inc. presented as a discontinued operation. We expect one-time cost to be approximately $350 million, consistent with external benchmark ranges, with the majority expected to be incurred during the second half of the year. We are also seeing some favorability in our previous estimate of $100 million in net dis-synergies, with $50 million included in our 2026 guide. And finally, I wanted to share an important update regarding our ongoing capital structure setup. Last week, the board approved a $1.5 billion discretionary contribution to the U.S. pension plan. This decision is a strategic part of our broader capital structure setup, aimed at positioning both companies for long-term success. By taking this step, we are ensuring that each entity develops a strong investment grade credit profile on a standalone basis, which is made possible by the strength of Corteva, Inc.'s balance sheet today. With that, let me turn it back to Kim. Kimberly Booth: Thanks, David. Now let us move on to your questions. I would like to remind you that our cautions on forward-looking statements and non-GAAP measures apply to both our prepared remarks and the following Q&A. Operator, please provide the Q&A instructions. Charles Victor Magro: Thank you. Operator: We will now begin the question and answer session. We ask that you limit yourself to one question. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Christopher S. Parkinson with Wolfe Research. Please go ahead. Christopher S. Parkinson: Great. Thank you so much. Chuck, obviously, there is a lot going on this year in terms of the world of agriculture between yourself, you know, Syngenta, BASF. And the numbers, you know, have kind of spoken for themselves thus far. But in terms of your competitive positioning as a company within the industry, and I do not care if you want to focus on the seed side of it, or the crop protection side of it. But everybody is kind of touting their portfolio and how it is best. Where do you think investors should be focusing the vast majority of their time into the second half? Where is the most optionality? What should we be the most enthusiastic about? I would love to hear your perspectives on that in terms of the trajectory of the company for the next few years. Thank you. Charles Victor Magro: Yes. It is a great question. And I will give you some thoughts today, but of course, this is going to be the entire focus of the Investor Day that we have planned for September 15, 2026 in New York, and both companies will lay out actually multiyear financial and strategic plans. So that is my plug for the morning—please dial in for that. But let me just give you some thinking. So, look, I think from an overall perspective, Corteva, Inc. laid out the three-year plan. We are well on track—some could say even trending slightly better than that. And if you come down to why that is, there are really two big levers that we are pulling. We are using our technology, and we are developing new technology and putting it into the hands of farmers—and let me unpack that in just a minute. And then I think we have been one of the first in our industry to really go after cost productivity with a very set of disciplined processes internally. That has created an awful lot of value. In the last three-year plan we put in place, there was $1 billion of cost, and we are trending a little ahead of that. Beyond that, to answer your question, we would stack up our technology and our pipeline on both sides of the house to anybody in the industry. In fact, I would say in many ways we are leading. If you look at new Corteva, the crop protection business, we have talked about the size of the portfolio, and in the next decade, we are going to have something like seven new active ingredients, plus a whole host of new biologicals. In fact, we are going to roll out our first biocontrol, which would be one of the first in the industry with the efficacy that we think we have. There is a lot of excitement there. We made the investment a few years ago in biologicals, and today, our CP business would be one of the leaders there. The separation, I think, is going to open more doors for the crop protection business, but I would say that our portfolio is extremely strong in CP. On the other side of the house, when it comes to now Vylor—so no more SpinCo, which I think is one of my favorite things of this call today—you think how we are going to grow the seed business in the future. It is going to come down from out-licensing, and this is the first year that we are going to be royalty positive—and that is new information for this morning. We were thinking we would be royalty neutral, but with the Bayer agreement that we signed back in February, we are seeing very strong demand for our corn and soybean technology. We said last quarter that that would be about $1 billion incremental revenue over the next decade or so—pretty sizable growth from licensing our bread and butter, which is corn and soybeans. On top of that, you have got the hybrid wheat program—another $1 billion opportunity. It may be a little longer term, but a $1 billion opportunity nevertheless, with our own proprietary sterility system, and we are going to take that technology globally. Beyond that, the gene editing and biotech capabilities that we have today—especially gene editing capabilities—we feel we can go beyond corn and soybeans and potentially wheat to other row crops and even potentially beyond that. That is the information that we are going to share in September and our longer-term growth strategy. But even the core growth we just said—if you start thinking about what that looks like from a growth perspective, I think Vylor is a classic growth compounder when you look at its margins, its conversion to free cash flow, and its top and bottom line growth. Operator: Your next question comes from the line of Vincent Stephen Andrews with Morgan Stanley. Please go ahead. Vincent, a reminder to please unmute yourself locally. Sorry. I have not done that in a while. Vincent Stephen Andrews: Thank you, and good morning, everyone. Chuck, in the press release, you talked about, or you kind of teased us with, the idea that the S&D environment in crop chemicals is starting to improve with some developments out of China. So I am wondering if you could speak to that and when you think that might manifest itself in your results. It does not seem like you are putting anything into the back half of the year for it. Charles Victor Magro: Yes. Good morning, Vincent. We all know where we are in the global CP industry cycle. If you think about 2025, that was the first year we were actually flat, and we sort of celebrated that we saw a flat market because the prior two years, 2024 and 2023, were pretty tough in this industry. In February, when we gave our annual guide, we said 2026 will be the first year in several that will see the industry return to growth—but do not get excited because it is going to be modest, and we said low single digits. We are still of that view. So the macro perspective for us has not changed. We think globally, the crop protection industry will grow slightly in 2026, but it is a lot better than where it has been. What is driving our conviction on that? A couple things. With higher energy and oil pricing around the world, that is adding cost inflation to AI production in low-cost production jurisdictions around the world, namely India and China. We are seeing price increases for certain AIs. We are also seeing a slight slowdown in China exports into Brazil. It is slight; I would not say you can call it a trend yet because the data is recent as of March, but it is a good data point. When we add it all up, for 2026 the impact is probably minimal, just to be candid, because Brazil has the inventories they are going to need for at least most of the year. But this could be a positive sign as we get late 2026 and as we enter 2027 first half. Also, China put some export controls of EAT back on, which is causing about an 8% price increase for certain amounts of AI—another positive data point, Vincent. Operator: Your next question comes from the line of Joel Jackson with BMO Capital Markets. Please go ahead. Joel Jackson: Hi. Good morning. A couple of questions together. Can you just first talk about how much of earnings from Q4 got pushed into Q1? And then I know you do not like, Chuck, to change your guidance in May for a year until the season is over for North America. But can you talk about the bridge for 2026 and what has changed versus a few months ago? FX seems a bit better, royalty is a bit better, energy cost a bit worse. Can you maybe just give us the high-level buckets of what is better and worse versus what you had a few months ago? Charles Victor Magro: Yes, Joel, I will have David answer those questions, but you are right. In agriculture, we are still planting right now. There is not much difference between what we know in February and what we know at the end of the first quarter. So we usually do not adjust guidance. We think about our business squarely first half, second half, and we will make the necessary adjustments after Q2. Overall, there are puts and takes. David will walk you through those, but overall, the year is shaping up to be a little better than we expected in February. David, over to you. David P. Johnson: When you look at the amount that went into the first quarter, we had that in our original bridge. So versus our original assumptions, we are pretty much in line. Q1 was a very strong start. We did say that even though we look at our business in halves, we expect the first half to be up more than we had originally expected. We had expected both halves would be fairly flat from a year-over-year percentage increase, around that 7% kind of number, but right now we expect the first half to be a little bit stronger than that. For the bridge items, you laid them out well. Currency is likely to be a little bit favorable. Our royalty journey is probably going to be a little more favorable than our original assessment. But there are things like the Iran conflict adding to inflation, mainly in the back half of the year. We have sized that up as a negative $40 million kind of number right now. Tariffs are expected to be slightly favorable. Add all that together, and these are pretty minor puts and takes when you think of a $4-plus billion outlook number. Again, we will look at these items, and also things like our interest expense and tax rates, because I do feel like we are a little bit favorable, probably on the lower end, on our tax rate assumptions also. Operator: Your next question comes from the line of David L. Begleiter with Deutsche Bank. Please go ahead. David L. Begleiter: Thank you. Good morning. Chuck, I know you mentioned input costs would not impact U.S. farmers this year. But looking to next year, do you expect any impact on farmer behavior and buying decisions given what we have seen on the cost side? Thank you. Charles Victor Magro: Good morning, David. Starting with what we have seen this year, if you look at the futures pricing, the market right now is calling for a bit more corn area to be planted, and our order book would reflect elements of that. As we said in the prepared remarks, the majority of U.S. farmers already had fertilizer for the season, so we do not anticipate that higher energy prices today have or will impact U.S. planting decisions. Higher fuel pricing on the farm is stressing farmers in the U.S. and around the world as well. We are watching this for the second half in Latin America. If higher energy prices persist, it could impact not only the amount of area planted but also what is planted in Brazil specifically. Our second half forecast is around flat area for safrinha, and this is an uncertainty we are monitoring. Looking forward into the U.S. second half of the year and into 2027, there are a lot of puts and takes. One thing we are quite confident in for the U.S. is that you are going to see 180 million acres planted of corn and soybeans. The mix will be determined by energy prices, fertilizer availability and cost, as well as futures pricing. For this year, we are still very comfortable with 95 million acres of corn and around 85 million acres of soybeans being planted—that is directionally what we are thinking about for this spring. Operator: Your next question comes from the line of Kevin William McCarthy with Vertical Research Partners. Please go ahead. Kevin William McCarthy: Thank you, and good morning. Chuck, was wondering if you might walk us through some of the next mileposts that you are most focused on in terms of the pending separation. Nice to see the new name, Vylor, and the new management as well. Sounds like a Form 10 is coming over the next month or two. But more interest on the operational side—maybe you can elaborate on what you are able to do, if anything, to attack the dis-synergies pre-spin versus post-spin, and other mileposts that you need to pass prior to the Capital Markets Day? Charles Victor Magro: Good morning, Kevin. I will start, and then David can add some details. Bottom line, there have been no surprises so far in the separation process. Lots of moving parts—we have literally hundreds of people doing two jobs right now, separating and taking care of their customers. We are on track for Q4 and that still feels very good. As David mentioned, the net dis-synergies are trending a little better than the $100 million, and we have $50 million built into the guide. We had some important milestones in Q1—we announced Luke as the new Corteva, Inc. CEO, which we are delighted about; we named the two executive leadership teams; we filed the initial Form 10; and we now have a name for the seed and genetics company, Vylor. We still have some headquarter decisions to make—where we are going to base our operations—so that will be in the second quarter. We will have the public filing in the second quarter as well. In the second half of the year, we will announce the board of directors for both companies, finalize the capital structure, and then September 15, 2026 will be the highlight where both companies will introduce the management teams and the strategic and financial plans. David, what did I miss? David P. Johnson: You hit just about everything, Chuck, but I will give a little more color on the net dis-synergies. When we first came out, we said about $100 million. Break it into two major categories: there is an outside spend component—think IT costs, corporate costs, external public company costs—and those are trending where we expected and will be dis-synergies, or just more cost whenever you separate the businesses. Then the other side is organizational structure. A lot of the heavy lifting recently, other than IT, was getting our org structures appropriate for both businesses. We have talked before that the new Corteva, Inc. business is basically operated as a global functional business, and Vylor will be more of a regional business. As we have unwound that, we have implemented a restructuring program of about $80 million that we took in Q1. That is to get these two org structures appropriate for both businesses. Add that up, and that is probably where we are a little bit favorable versus our original estimates. Splitting 22 thousand-plus people into two organizations is a lot of work, but that is where a lot of heavy lifting has been recently. Operator: Your next question comes from the line of Jeffrey John Zekauskas with JPMorgan. Please go ahead. Jeffrey John Zekauskas: Thanks very much. The first quarter was a little bit puzzling because corn volumes were up 7% and soybeans were down. But all things being equal, soybean acres should be up this year and corn acres down. So why was corn up and soy down? And for Dave, I think you said you are going to contribute—there was no free cash flow slide—and I think you plan to contribute $1.5 billion to your pension plan, which comes out of cash flow from operations. So are you giving an adjusted number for free cash flow? And in the first quarter, you used I think $100 million more cash flow than you did last year. Can you break that up into pieces and explain it? Thanks. Charles Victor Magro: We will have Judd answer the corn-soy question and David can handle free cash flow. Go ahead, Judd. Judd O’Connor: Thanks, Jeff, for the question. Maybe just touch on both. North America, in particular, is a first-half business versus a first-quarter business. That March 31/April 1 date—one week of deliveries—can make a big swing. We did have some volume of corn that came out of fourth quarter 2025, just because we did not get as much into fourth quarter 2025 as we had typically in prior years. Then on the soy volume side, we will just have to wait and see. From an order book standpoint, we are in a solid position. It is timing between first quarter and second quarter, and we will know more at the half. No red flags—crops are going in the ground well. We are a little bit ahead for both corn planting as well as soy planting. We feel like we have a very strong position from a corn share perspective, and soy acres we believe are going to be up, and we are going to be participating on our share of those acres. Let us get through planting and we will be able to give you the full story. David P. Johnson: On free cash flow, we always said going into this year that free cash flow was going to be a little bit unusual because we would have some discrete elements regarding our capital allocation, mainly setting up the two structures going forward. In Q1, the roughly $700 million usage—by and large, the biggest impact was the Bayer agreement that we paid out in Q1. From an operational side—the most important side—the business itself is still right in that 40% to 50%, 45% at the midpoint, conversion rate. As we go forward, we will have elements of one-time separation costs we outlined—$350 million. We have the Bayer agreement. We will have the $1.5 billion in pension, which is on a pretax basis; the tax savings on that is about $290 million. Operator: Your next question comes from the line of Duffy Fischer from Goldman Sachs. Please go ahead. Duffy Fischer: Good morning, guys. I want to drill down on Latin America and the upcoming season. You are holding your expectation for corn acres flat, but nitrogen is what has really ripped in the last couple months, which makes soy more favorable, all else equal, relative to corn. So what is the logic in holding that? And if you move a million acres from corn to soy in Latin America, what would that do to your P&L in Latin America? And as working capital has become—or bad debts have become—a bit of an issue in North America, how are you thinking about that for Latin America? How much working capital are you willing to put out this year relative to last year? Judd O’Connor: I will take the first couple pieces and then David can touch on the bad debt question. From a safrinha perspective, it is a bit different in Latin America, particularly Brazil, than it is in North America. North America is corn acre or soy acre. In Latin America, the safrinha acre goes after the soy acre in the timing of that crop—it is a double crop system. When we say we are flat with safrinha, that reflects we have continued to expand that second corn crop following soybeans for the last eight to 10 years in a row. This year, with fertilizer prices, we are looking at a flat year—not actually expanding the area. From an acreage planted standpoint, it is a bit of a blue ocean: we are still with safrinha corn on a fraction of the soy acres. On the soy-corn shift P&L impact, I do not have the Latin American number, but it would be materially less than the North American rule of thumb. A million-acre shift in Latin America would be much less impactful than in North America. David P. Johnson: When we look at what we are offering in Latin America regarding credit terms, given interest rates, that is where we rely on our barter program, which we believe is number one in the industry and growing. For Seed, we still get some prepayments of cash going into the season. For CP, where we increase credit offerings, we are very strategic—customer by customer. We talked about a little bit more bad debt this quarter. SG&A was up roughly $100 million in Q1, and about 25% of that was bad debt. As we sit here today, our past due as a percentage of sales is very much in line, if not a little bit favorable, to where we were at this point last year. We balance risk and opportunities by customer in close coordination between commercial and treasury teams. Operator: Your next question comes from the line of Joshua Spector with UBS. Please go ahead. Joshua Spector: Good morning. This is, Lucas Stone on for Josh. Just wanted to go back to the crop chem volume acceleration in the second half that you are expecting. You are looking for volumes to move up from low single digits in the first half to high single digits as we get into the second half of the year. Could you give a bit more detail on where you see that coming from product-wise and regionally? And how would you compare your growth there to what you are expecting for the market in the second half? Thanks. Robert King: I will jump in on that one. When we talk about the second half and the volume increase we think we will see as compared to the first half or first quarter, it is primarily Latin America-driven. More acres are going into production again this year. As Judd talked about, safrinha could be flat, but those acres will get planted into a crop and that still takes crop protection. Our biologicals in that area continue to grow—we have key products like Utrisha and BlueN, a nitrogen generator for plants. Given fertilizer pricing—especially ammonia and urea—this is an alternative, and we are seeing double-digit growth. Add to that the growth we saw in first quarter of Spinosyns due to increased pest pressure, and the overall demand from more land and the tropical climate with resistance continuing to grow. That is really what is driving us in the second half to get to high single-digit growth for crop protection. Operator: Your next question comes from the line of Analyst with Oppenheimer. Please go ahead. Analyst: A little bit different tack on what is going on in the Middle East and how that influences your business. Chuck, you noted the forward curve calling for more corn acres. We have had a significant shift in the global biofuels backdrop not just in the U.S., but Brazil, Argentina, Indonesia, as a factor for mitigating energy cost inflation. Can you talk about how you are thinking about this impact on your business? Are you seeing incremental interest in the new production system platform and winter canola? How is the biofuels backdrop changing how you are thinking about exiting 2026 into 2027? Thank you. Charles Victor Magro: Thank you for the question. We are very excited about the momentum gaining around the world on biofuels—both traditional and next gen. It is a little too early to call it a structural change yet, but this year we expect another record demand year for biofuels globally. Last year was also a record, and we think we will see even more demand if energy prices stay elevated globally. Around the world: Brazil is moving to E32 and will consume more of its domestic corn crop than ever—structurally great for farming in Brazil and helps with energy cost. Southeast Asia has lofty goals to be a leader in next-generation aviation fuel; if they hit their goal, that will drive a lot of crop demand. In the U.S., I think we are close to an E15 year-round mandate. We still need to get that across the line, but it makes strategic and economic sense and certainly would help farming. Our view is E15 could consume up to another 15% of the U.S. corn crop, which would be very good for U.S. farmers. There is a lot to like, and we think we will see continued growth. On our program, we have one of the leading biofuel crop development programs with multiple partners around the world. Judd? Judd O’Connor: Thanks, Chuck. Near term, in the South of the U.S., we are getting ready to harvest roughly 100,000 acres of crop that went in last fall focused with Bunge and Chevron on sustainable aviation fuel. The crop looks good agronomically. Yields look favorable and farmers are going to be profitable. Our retention rate with farmers in this new cropping system has been over 90%—if a farmer tries it once, they have built it into their program. We are excited about that. We are going to expand to somewhere north of 400,000 acres next year—material growth over the last three years as we have proven out the concept. Also note our 50/50 JV with BP in Latin America—mustard crops in Latin America—and we are looking at a number of other crops as well: winter canola and sunflower. We are just getting started. We will have crop that starts to go in the ground in 2027 in a more material way, and we will keep you informed. We are very excited about our internal platform around biofuels and what the next five to 10 years can look like. Operator: Your next question comes from the line of Benjamin Theurer with Barclays. Please go ahead. Benjamin Theurer: Yes, good morning. Thanks for taking my questions. Just wanted to follow up on separation. You have talked about the capital structure for the two new businesses. What are the considerations you are putting into place as it relates to the level of capitalization or leverage between the crop protection versus the new seed company? How should we think about the capital split and your ability to engage in scaling the business in seed, but also on the CP side? What is your current target? David P. Johnson: Right now, publicly, we have addressed that we would like both companies to have investment grade metrics from a credit standpoint. We are in pretty good shape to hit those targets given the strength of the overall Corteva, Inc. balance sheet. When the board does final approval toward the split date, major considerations will be where the liabilities sit—liabilities will stay with the company that they are in today. One element we addressed today was that the pension will be staying with new Corteva, Inc., and we are able to put a $1.5 billion discretionary payment in to ensure funding levels make sense. Beyond that, it is really cash levels and financial debt levels of the two. Both will be set up not only for investment grade metrics, but also to be on the offensive with plenty of strategic opportunities they will be able to execute on. Operator: Your next question comes from the line of Laurence Alexander with Jefferies. Please go ahead. Laurence Alexander: Hey. Good morning. This is Kevin Astok on for Lawrence. Back to the spin-off: you called out $100 million in dis-synergies. Can you walk through what remains to be absorbed post-spin? And related, how will these companies’ eventual standalone margin profiles compare to today? David P. Johnson: The fortunate situation for us going into the spin is that the way we have been segment reporting will be the way the businesses will be portrayed going forward. The only other adjustments will be how corporate costs are allocated between the two different businesses. Then two other elements: one being net dis-synergies and which business they go on—we are working very hard to reduce that as much as possible. The final element is whether there are any agreements with any shifts between the two businesses. As we sit here today, there are not any material shifts between the two businesses when it comes to ongoing offerings. It really will come down to the split of the corporate cost and where we land on dis-synergies between the two. Margin profiles are not going to change post split relative to how you see the segments today. Operator: Your next question comes from the line of Arun Viswanathan from RBC Capital Markets. Please go ahead. Arun Viswanathan: Great. Thanks for taking my question. Maybe I can get your thoughts on the competitive environment in seed. Your main competitor has been potentially a little strapped in the last few years, but they do have some new products coming out over the next few years. Do you view that as a competitive threat that reemerges, or do you feel like the pipeline at Corteva, Inc.—maybe discuss some of the pipeline projects you have that would offset that. You have talked about short-stature corn in the past and wheat as well, but anything else you would highlight? Thanks. Judd O’Connor: Thanks for the question. I will walk through our internal view for the next five-year window and then the competitive environment. There are a lot of good competitors in the market—we are competing with them at the farm gate each and every day. It all starts with germplasm. Our corn germplasm is as good as I have seen it in my 27–28 years with the company and continues to improve. The rate of genetic gain our R&D team is bringing is tremendous. The funnel and diversity of germplasm to fill all of our brands and licensing is fantastic. Our Z-series soybeans have been the best class of soybean we have brought to market and continue to improve. We have settled in around 65%+ Enlist penetration from a market perspective. There are going to be some new competitive entrants in that space. Germplasm is where it starts. The herbicide platform is important, but others are catching up to where we have been with Enlist, and we will compete accordingly. When we brought Enlist into the market, we had material market share gains, but it was not a flip of the switch. When Dicamba came to market and until they got their most recent label back, there was not a big switch. It is a lot about germplasm and yield—and it will continue to be. We have next-gen aboveground coming in 2030 in North America, next-gen aboveground coming in 2030 in Latin America. In 2030–2031, we will have above and below ground—brand new, novel mode of action, fully proprietary traits for Vylor. I feel as good as I have ever felt about our product portfolio. Our competitors will not stop; they will continue to work at it as well, but we have had a really good five-year run, and I see the next five years being very similar. We have a lot of things going in the right direction for us. Operator: Your final question comes from the line of Patrick David Cunningham with Citi. Please go ahead. Patrick David Cunningham: Hi. Good morning. Your differentiated mix—patented products within CP—sits at roughly 65%. What is the target percentage for this mix by the end of the decade? And what are the most meaningful patent cliffs we should be mindful of? Robert King: Good observation. We are running about two-thirds, a little bit north of two-thirds today, on a portfolio being differentiated. As you look at our pipeline and how we will continue to evolve, our new products are going to be pushing $2 billion in revenue this year and continuing to grow. We like what we have there. Rinskor and Rinskor-based solutions and RLEXs are still not at their peak and are going to continue; they will outpace Enlist once they get to their peak revenue. We have more coming—as Chuck talked about—at least seven actives that will hit the market over the next decade. By the end of this decade, Aviso will come out—this is going to be a blockbuster in Latin America for Asian soybean rust. We have biologicals coming as well. We expect the differentiated mix will continue to grow—slightly increasing from where it is today as we approach the end of the decade. Adding biologicals gives us a whole lot of strength in our value proposition at the farm gate. Operator: We have reached the end of the Q&A session. I will now pass the call back to Kimberly Booth for closing remarks. Kimberly Booth: Thanks for joining the call and for your interest in Corteva, Inc., and we hope you have a safe and wonderful day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the LeMaitre Vascular's Q1 2026 Financial Results Conference Call. As a reminder to everyone, today's call is being recorded. At this time, I would like to turn the call over to Mr. Dorian LeBlanc, Chief Financial Officer of LeMaitre Vascular. Please go ahead, sir. Dorian LeBlanc: Thank you. Good afternoon, and thank you for joining us on our Q1 2026 conference call. With me on today's call is our CEO, George LeMaitre; and our President, Dave Roberts. Before we begin, I'll read our safe harbor statement. Today, we'll be making some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today, May 5, 2026, and should not be relied upon as representing our estimates or views on any subsequent date. Please refer to the Cautionary Statement regarding forward-looking information and the Risk Factors in our most recent 10-K and subsequent SEC filings, including disclosures of factors that could cause results to differ materially from those expressed or implied. During this call, we will discuss non-GAAP financial measures, such as organic sales growth. Reconciliations of GAAP to non-GAAP measures discussed in this call are contained in the associated press release and if applicable, in supplemental materials, both of which are available in the Investor Relations section of our website, www.lemaitre.com. I'll now turn the call over to George LeMaitre. George LeMaitre: Thanks, Dorian. Q1 featured 11% sales growth, a 72.7% gross margin and 42% EPS growth. Grafts were up 20%, valvulotomes 15% and carotid shunts 11% as each category posted record sales. Our 3 geographies also posted record sales. EMEA was up 20%, APAC 18%; and the Americas, 7%. Artegraft has become our largest product, and we're investing in its growth in 3 ways: number one, filing more international approvals; number two, making longer sizes available for leg bypasses; and number three, proving Quick Stick claims for AV access. Worldwide Artegraft sales grew 36% in Q1. International Artegraft sales in Q1 were $2.1 million, and we expect 2026 sales to be $10 million versus $4 million in 2025. Health Canada has approved Artegraft and the launch is now planned for H2 2026 as we finalize Canadian-specific packaging validations. Additional Artegraft approvals are expected in 2027 for Korea, Brazil, Vietnam and India. We're also working to make longer artegrafts available. Because European surgeons use Artegraft for leg bypasses, our longest Artegraft, which is 50 centimeters, is now in high demand, and we know we could sell longer sizes. Unfortunately, our current packaging tube is just 53 centimeters long. So the first step is to gain approval for a longer tube, and we plan to make these filings in the U.S. and Europe in H2 2026. First sales of these longer artegrafts could start in H2 2027. Separately, we've made a pre-submission filing to the FDA as we seek Quick Stick AV access claims on Artegraft's U.S. labeling. This pre-submission will help us collaborate with the FDA to develop the pathway for a PMA filing or to design a clinical trial. While Artegraft's current U.S. labeling restricts cannulation to 10 days after implantation, peer-reviewed literature indicates that artegraft can be cannulated 1 to 3 days after implantation. RFA grew 25% in Q1, led by strong U.S. results. We currently distribute tissues in 3 countries: the U.S., Canada and the U.K. German implants should begin in Q2, and we now expect to receive Irish approval in H2. Our Irish warehouse opened in April, and we'll begin shipping our core medical devices starting in June as we await an audit from the Irish Tissue Authority. This audit should enable tissue distribution from our Dublin warehouse to Irish hospitals in H2. Long term, this warehouse will be used for pan-European distribution. We filed for Australian approval in April, and we plan to file in Austria, Holland, Belgium, Spain and Switzerland in 2026. As for our RFA facility transfer, tissue processing is ramping up in Burlington, and we should complete the project by year-end. We ended Q1 with 158 sales reps, up 3% year-over-year, and we plan to end 2026 with 170 to 180. We currently have 16 open requisitions for new reps, mostly in the U.S. We ended Q1 with 35 RSMs and country managers, up 13% year-over-year. We expect to go direct in Poland in Q4, and this project will include an office, warehouse, a GM, customer service team and several reps. Poland will be our 32nd direct country. Higher ASPs, geographic expansion and disciplined spending produced 11% sales growth and 42% EPS growth in Q1. Full year 2026 also shows op leverage. Increased guidance implies 12% sales growth and 26% EPS growth. Our new 2030 goals are posted on the walls of all LeMaitre conference rooms. We call them the 2030 planks, and our playbook remains simple: produce quality devices, build our sales force, go direct in new countries, acquire niche products and focus on profitability, cash flow and dividends. I'll now turn the call over to Dorian. Dorian LeBlanc: Thanks, George. Organic sales growth of 10% over Q1 2025 was driven by average selling price increases of 8% and unit growth of 2%. Unit growth was impacted by a lower-than-average quarter in our distribution business, which can be lumpy. Excluding distribution, direct sales grew 12.8% organically, comprised of 8.4% price and 4.4% units. Total organic revenue growth excludes a $2 million foreign exchange benefit in Q1 2026 and $1.5 million of Aziyo distribution sales in Q1 2025. These 2 items largely offset one another. We discontinued Aziyo distribution in May 2025. In Q1 2026, we posted a gross margin of 72.7%. The 350 basis point year-over-year improvement was driven primarily by higher ASPs and manufacturing efficiencies. Our Q2 gross margin guidance of 72.1% reflects the impact of our new Billerica warehouse and the manufacturing transfer of our RFA processing to Burlington. Operating expenses in Q1 2026 were $30.6 million, an increase of 6% versus Q1 2025. Despite the continued expansion of the sales force, overall company headcount decreased 3% from 662 at March 1, 2025, to 641 at March 31, 2026. Q1 2026 operating income increased 41% year-over-year to $17.8 million, with an operating margin of 27% compared to 21% in Q1 2025. Fully diluted earnings per share were $0.68, up 42%, benefiting from strong operating income and an improved effective tax rate. We believe our effective tax rate will remain lower than our historical rates. Given the strong growth in high-margin international Artegraft sales and our overall geographic sales mix, a larger share of our income qualifies for the foreign-derived intangible income or FDII deduction, which structurally lowers our tax rate. Excluding the discrete items in this quarter, we expect an 80 basis point improvement from historical effective tax rate due to the higher FDII deductions, another benefit of our U.S. manufacturing footprint. Cash from operations generated $15 million in Q1 2026 as compared to $9 million in Q1 2025. We paid $5.7 million in dividends to our shareholders during the quarter. We ended Q1 2026 with $367 million in cash and securities, an increase of $8 million in the quarter. The LeMaitre playbook continues to drive broad-based revenue growth, supported by our differentiated products, direct-to-hospital model and strong commercial organization. We are affirming our full year revenue guidance of $280 million, representing 12% organic growth. We are increasing our annual guidance for gross margin to 72.3% and operating to $79.8 million, representing 24% growth over adjusted 2025 operating income. We are also increasing annual guidance for diluted earnings per share to $3 or 26% growth from adjusted 2025. Historically, Q2 has been one of our strongest quarters, and we're expecting revenue of $71.5 million and an operating margin of 30%. Our current guidance assumes a constant euro-U.S. dollar exchange rate of $1.17 and no dilutive impact from our convertible debt. For additional details, please see today's press release. Finally, we'd like to welcome Keith Hinton from Freedom Capital Markets to the call. Keith initiated coverage on LeMaitre on March 31. With that, I'll turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Keith Hinton from Freedom Capital Markets. Keith Hinton: I have kind of a high-level question here on the pricing side of things. So EMEA has been growing faster than the U.S. for a few years. It's my assumption that the prices there start lower and there's less ability to take price over time. So considering that kind of balance against the ongoing mix shift towards grafts, where it seems like you do have good pricing leverage in the U.S. Just how should we think about the high sustainability of high single-digit blended pricing increases in the out years? George LeMaitre: This is George LeMaitre. Again, welcome to your firm for covering the company. And also welcome to the call in terms of asking about price increases and the sustainability. It's a question you can imagine we get frequently. We feel very comfortable with what's going on here. We have another year where I think we're validating all the way into Q1 that we're able to get these price increases. We got 8% in Q1. Did you want me to distinguish between European pricing flexibility and U.S. pricing flexibility? Was that part of your question? Keith Hinton: Yes, that would be perfect. George LeMaitre: Right. I would say it's not exactly answering it, but on that topic, I would say the floors, the pricing floors that we put in are largely in and installed in the United States and about 55% of our products, we have pricing floors and then we change them from year-to-year, of course. And in Europe, I still think we have a little room to go. I think only about 40% of our products have pricing floors. So you can do more -- you can add pricing floors to more of the different products over there. Also in Europe, I think it takes longer for prices to really get installed since particularly in Southern Europe, a lot of the stuff is sold on 3-year tenders. And so you can only change your price once every 3 years. So you change it and then it takes 3 years for it to fully get implemented. I hope that makes sense to you. So maybe a little more room over in Europe, given the fact that we're not as price floored over there and that it takes longer once you do a price -- to get to a price hike, it takes longer to get to. Keith Hinton: Great. And then just one specific, and again, apologies if I missed this, but can you talk a little bit about the performance for patches in the quarter? I know there was a bit of a tough comp there. You were lapping some supply issues for a competitor, and I think that was the last quarter of Elutia. So just talk a little bit about that and how we should think about patches growth going forward? Dorian LeBlanc: Right. And I can pull out, it was not such a great quarter for patches. XenoSure was up 5%. That's the core patch. And I can get you in a second, if you stand by, I can get you the full patch category. If anyone in the room has that, we can do that. XenoSure is the main piece of all this. And I'm getting closer here, Keith. I should know this off the top of my head. Let's see. Let's see that. That's going to help me. One second, I can do it. Organic growth for the whole category was 2.3% for the quarter. Again, 5% for Zeno and 2.3% for the whole category patches. Does that help? George LeMaitre: So we have his audio problem. Operator: Okay. Can hear you very well at the moment? George LeMaitre: Great. We lost you for a little while, yes. Operator: Our next question is coming from the line of Michael Petusky from Barrington Research. Michael Petusky: So George, I guess I'm curious with the stuff of the last, I guess, 2 months in the Middle East. Are you guys seeing any impact from that either just in terms of customers that you may have in that part of the world or just in general in terms of the cost of transporting things and so on and so forth? Just wondering any impact from sort of the international problems. George LeMaitre: Sure. So we have a very concrete topic about that, but it's not large. We weren't able to ship $175,000 worth of export towards the Middle East, at the end of the quarter. So we ended the quarter Q1 without having shipped that. But in general, Mike, I would say, no, we're not really being bothered by this. This is a big topic for everyone in the world. But for our little world LeMaitre Vascular so far, we've been okay. Probably as time goes by, the supply chain will put extra cost on us for transportation and things like that. But I would say, for now, we're crossing fingers and toes, and I think things are okay for us vis-a-vis what's going on in Iran. Michael Petusky: Great. And I don't know if David is there, but if he is, I'd love an update on M&A, any commentary he has there. David Roberts: Mike, yes, it's Dave. Nice to hear your voice. Yes. So we're out hunting. We're active. We've put out 2 or 3 term sheets so far this year. The hunting ground remains the same of open vascular, where there are a couple of dozen targets and cardiac surgery, which, of course, is about 12% of the revenue. And the revenue sweet spot stays in that sort of $15 million to $150 million, give or take. We do look small, we do look bigger. And certainly, we have cash and dry powder to execute. So we're just trying to find a good target that's the right fit at the right price. Michael Petusky: Obviously, you guys were pretty active for a long time in the last 5 years or so, it has been less so. Have you guys -- other than maybe looking bigger, I mean, have you guys changed the approach at all in terms of hurdle, internal hurdle rates or anything like that? Or is it just, hey, we're waiting for a pitch, and we just aren't seeing our pitch. David Roberts: I would say we haven't really changed it. I mean, obviously, the last sizable acquisition we did was Artegraft, which was almost 6 years ago. We did a very small one acquisition, which some people might have missed in December. It was just a few hundred thousand of revenue over in Europe. But high level, no, I mean, I would say, since Artegraft, we did that, and it was COVID and then we're integrating. But we've been hunting. I think one factor is that there just aren't that many targets left in open vascular. So that's piece A. Then piece B is, I think it's taken us a little while to sharpen our focus in cardiac surgery, and I feel like we're there now, which is why I think you hear me saying we're fairly active with respect to making these nonbinding offers. So we're out there. And yes, I mean, on the one hand, I'm fully cognizant of the amount of cash we have, but I've done enough bad acquisitions to know that you're really better off waiting for your pitch. And so we're waiting for our pitch. George LeMaitre: Mike, maybe a small add to that from George would be, I think in the last 6 years since we did the last big acquisition in June of 2000, I do think -- and I think I mentioned this on one of these calls, I think we've gotten more self-confident about our ability to grow this company organically. So the last 3 or 5 years, the stock price has moved a lot based on organic growth. And I think when you prove that to yourself that you can run a business organically that well, you start feeling less pressure to do acquisitions. So I think maybe that sort of implicitly made the bar go up a little bit as well. Operator: Our next question comes from the line of Michael Sarcone of Jefferies. Michael Sarcone: Just wanted to start, George, you opened up the call talking about some opportunities and then growth drivers for Artegraft. I wanted to hone in on the Quick Stick claims. Maybe I was hoping you could help us frame the volume opportunity. I believe Gore Acuseal is kind of the primary competitor there. Help us frame the opportunity for what you could gain in share or volume growth if you did get the Quick Stick claim. David Roberts: Mike, it's Dave Roberts. I'm going to jump in on this and George can add color. Yes, you are right in identifying the Gore Acuseal. Whenever you buy a Gore Tex raincoat, you support Acuseal. So there's that. And then there are FIXIN, there are other Quick Stick grafts on the market. Of course, Quick Stick really is focused on dialysis access and not peripheral bypass. Artegraft, it's funny. Over in Europe, as George mentioned, it's being used primarily for peripheral bypass. So a Quick Stick indication once the Europeans take up using grafts as part of their algorithm for dialysis access, the Quick Stick feature will really just help us in the U.S. And last year, our Artegraft sales in the U.S. were around $40 million. We don't really speak in TAMs too much around here. Do we think that Quick Stick will expand our sales of Artegraft? We do. And because we see these competitors, we know there's a market. And so -- but we feel also like this regulatory path is long for us. It could be 2 years, but it could be 5 or 6 years. And so we know the market is big enough that it completely justifies us investing the dollars to pursue that indication. But in terms of exactly how much bigger we expect the market to be, I don't think we're prepared to say that. We do think it will be materially bigger than our U.S. Artegraft sales today. But beyond that, I'm not so sure we're ready to say exactly how much bigger. Michael Sarcone: I guess just another one on Artegraft, just about the 53 centimeters, the longer length. How much -- I guess I'm trying to figure out what does that do for pricing for you? Obviously, as George mentioned, one of the central focuses here is sustainability of pricing. So what kind of ASP bump do you get as you elongate the length of some of these grafts? George LeMaitre: I think there's a good market out there, and we've proven it with our Omniflow II product, which we've had out there for 5 or 8 years now. That's the Ovine-based device out there, Mike. And so when we get to the longer Artegraft, and we'll get there at some point, we've already proven the 50-centimeter has significantly premium pricing versus the rest of the entire Artegraft portfolio of catalog numbers, if you will, the other lengths. So I would say when you get up to 53, 55, 58, you are going to be able to get into premium pricing there. So as good as possible. And some other good news is that when we went into Europe, our manager over there put pricing above the American pricing, which is kind of rare, and it seems to be working. So it should be nice gross margin devices when we get there. Operator: Our next question comes from the line of Brett Fishbin from KeyBanc Capital Markets. Unknown Analyst: This is Will on for Brett. Quick question on gross margin. You expanded around 350 basis points, and you called out higher pricing as well as some manufacturing efficiencies. Could you just speak a bit to the split between those 2 items? And then can you just double-click on some of the manufacturing efficiencies? And how much more room do you see to take out cost? Dorian LeBlanc: Yes. This is Dorian. Thanks for the question. The 350 bps year-over-year, it's largely the pricing is also driven by some positive mix. We talked about the distribution business being down a little bit. That's a lower-margin business overall. We also talked about the success of Artegraft, and that's a very high-margin business. So that price and that positive mix helped to that 350 bps. And the manufacturing efficiencies, we've talked about this on several calls now. And it's hard to identify really one single individual thing that we've done in the operations. But other than really maybe the theme of consolidating here in Massachusetts, which we do think long term gives us better operational efficiencies. But we have seen really good -- Trent Kamke who runs our operations, Ryan Connelly, our engineering team, Andrew Hodkinson, who runs quality regulatory, I think have done a nice job of just building a culture of continuous improvement here. So we've seen that come through in a lot of just discrete, what you call lean or Kaizen projects. Maybe the best way to articulate it is at the end of 2023, we had 211 direct labor employees in the company. And at the end of 2025, we had 175. So we continue to increase the number of devices that we're manufacturing, and we can continue to do it with fewer and fewer direct labor heads. And that's really a result of these automation projects, these lean kaizen type projects. And then we've also elsewhere in the cost structure, try to drive cost out over the last year. We did do some initiatives around freight and logistics in the back half of last year that really helped margins. We have been building out that footprint of warehouses across Europe, in particular, where we used to ship all the products from our German facility in Sulzbach to cover the European customers. We now have operations with warehouses in Switzerland, in Italy, in Spain, in France and the U.K. And just being closer to the customer has a lot of commercial benefits, but it also has a lot of cost benefits around freight. So I think we're just trying to continuously improve and drive cost out. And I think there continues to be opportunity for us there. But it really has been a great story, gross margin with the pricing and the abilities to just keep trying to continuously improve the operations. Unknown Analyst: Then maybe just sticking with the theme of margins. The guidance implies material ramp up in operating margin to hit 29% for the year. How should we think about the next few quarters and eventually getting to a 4Q exit rate? George LeMaitre: I think material here is that we have a 30% op margin coming at us in Q2, which is historically one of our better sales quarters. So that one is a little bit more obvious. But 29%, I don't know what do we have keyed in here for the back half. We have 29% for the H2. So that implies H2 at 29%, but we don't -- we're not splitting the quarters exactly right now. I hope that's cleaning up. But I mean 30% is very close to 29%. So it's a nice exit rate in any event. And what are we at this quarter? We're at 27% right now. So a little bit better. Dorian LeBlanc: This is Dorian. Maybe just to jump in a little there. Again, I think we did just talk through some of the investments that we plan to make in the back half of the year, some of the investments around Artegraft, talked about the Billerica warehouse and the Burlington manufacturing transition for RFA. But also, we do expect to ramp the sales force in the back half of the year and make other commercial investments. So 2025 was a year where the front half of the year was -- had a little more expense, and we had a little less expense in the back half. 2026 will probably be a more normal year where you see the second half of the year have a little bit more OpEx than the first half. Operator: Our next question comes from the line of Rick Wise from Stifel. Unknown Analyst: This is Annie on for Rick. So my first one is just on the first quarter OUS Artegraft performance. I think I heard you call out $2.1 million in sales this quarter, which would sort of imply this annual run rate that's a bit below your $10 million target for the full year. So I guess I'm just curious how you're thinking about the sales cadence through the rest of the year, if you're expecting sales dollars to continue stepping up each quarter or if there are any sort of seasonal dynamics that we should be conscious of and how you're expecting to sort of get to that $10 million target? George LeMaitre: Sure, sure. And if you go on a day adjusted look at this, Annie, 2.1 in those -- in the first quarter winds up being an 8.6%, not an 8.4%. So we did do the math on that. But you have plenty coming at you. Q1 is always your lightest quarter at this company, always. Canada has approval. We should be shipping devices in Q4 or I think we're saying H2 here at some point in the back half. And you also have the Southern European region kind of ramping up right now. So we felt good about that. We put that number out there at the last quarter, so we're validating again this quarter. Makes sense to us. The ramp makes a lot of sense to us to get to $10 million. Unknown Analyst: Great. And then maybe just one on RestoreFlow Allografts. I heard you highlight that you're beginning distribution in Germany in the second quarter, I believe, and you're expecting RFA to be approved in Ireland in the second half. Maybe you could just share your latest thoughts about the European RFA market opportunity and sort of the potential speed of adoption and revenue ramp there. George LeMaitre: Right. That's a good question. I would say it's been a little -- the Artegraft thing happened so suddenly. It sort of took front and center stage as a company last year and in this year. And I think RFA is kind of not as much focus from a regulatory perspective. But I think now the focus is on that, and these things will start coming soon. So I would say it's been a little bit slow to start with and that we should see it speed up as we get more regulatory focus on that product line. Also in Germany, we got the approval, if you remember, in October, and we have not done one implant yet, and we're still sort of building our supply of "German approved items" and they're slightly different technical reasons. They're slightly different than the American approved items. And so it's taken a little bit longer for us to build up stock there. Then maybe the Irish approval and audit by the Tissue Authority there is a little bit slower in coming than we expected. It took us a little bit longer to set up our Irish office, and you're not allowed to ask them to inspect your facility until the facility is truly open. So a couple of those items there. But to go back to this, we just filed in Australia, and then there's 5 European filings, which will take place in H2 of 2026, Austria, Holland, Belgium, Spain and Switzerland. So it's starting to happen here. But we would admit it's been a little bit light over there until now. Operator: Our next question comes from the line of Danny Stauder from Citizens JMP. Daniel Stauder: Just my first one on Artegraft, specifically on the point on making the longer sizes for light bypass. Could you talk about this decision? I mean it sounds like it's higher dollar in terms of the sell point and maybe it's more common in Europe. But are there any more recent trends from vascular surgeons that you're seeing that's leading to higher demand for these longer sizes? I guess in summation, the question is why now? And why are you pursuing this at this point? George LeMaitre: Right. I think it's always been very clear to our European colleagues that a 50-centimeter wasn't going to make them happy and that it just barely qualified for what we'll call fem-pop bypasses, which is just below the knee. They've always told us, yes, well, we can sell a 50, but George, we want 60s and 58 and 53s just like you provide us with that Omniflow graft. Again, I'm talking again about what I said. We sell Ovine Omniflow over there, and they're longer, and that's the market. They don't really do AV access in general in Europe. And so in the U.S., where we sell mostly AV access artegraft, 50 centimeters has always been sufficient for the whole entire history of this device. So we figured, oh, let's get going in Europe, but then we always knew. So this has been a project that's been on our drawing board for a while, but it's starting to get real now that we've got that CE mark. David Roberts: I would add, Dan. This is Dave Roberts. The backdrop, if a patient has peripheral vascular disease, especially distally down the calf towards the foot, the smaller diameter, the artery, the more likely it is that an endovascular intervention, whether it's an angioplasty or stent or atherectomy or whatever you have, isn't going to be durable over the long haul. So that's why we always see with our valvulotome a long bypass is what surgeons want to do with our allografts here in the U.S. and in Canada and the U.K., we've always seen the most demand for the longest allograft. So clinically, there's a very good reason for it. But as George said, for us, our U.S. Artegraft business has been mostly dialysis access. It's only since we got into Europe where they're really adopting it for peripheral that it's highlighted the need for a longer artegraft. Daniel Stauder: Just following up on that line of questioning. Just in terms of the market opportunity, how much would approvals here expand your total addressable market for this business? Are there certain procedures that this unlocks? It sounds like it might be more so in Europe, but any more detail on patient population sizing or growth here would be great in terms of what this could offer you? George LeMaitre: Right. Slightly complex answer, but the answer is we've given you a TAM, and I think we upped it the last time we met at $30 million for biologic grafts in Europe or international rather, OUS, let's call it. And that always included the bovine graft, and we sold something like $6 million last year of bovine, and we plan to sell $10 million worth of this bovine graft Artegraft. So that's 16 of the 30 TAM, but in knowing that we are already selling, it's a little complex, in knowing that we're already selling bovine for the distal bypasses for these longer bypasses, we already felt that was part of the TAM. So in the very short run, does this affect our TAM of 30 million? No. Though we should think about it for a while and come back to you guys on it. But in the short run, no, let's stay with 30 million as the TAM. Operator: Our next question comes from the line of Nathan Treybeck from Wells Fargo. Nathan Treybeck: Just thinking about capital allocation, I guess, as we think about your opportunity set, either organically or through M&A, are there any product categories you would call out in open vascular, open cardiac where you're seeing outsized momentum or maybe strategic underinvestment? David Roberts: I mean for us -- Nathan, this is Dave. It's a great question. I think the first level consideration is open vascular versus open cardiac. And for us, open vascular is still the center of the fairway. But like I've said, there are limited targets set in open vascular. When you get to cardiac, we're generally steering away from capital equipment, never say never. But the more important attribute for us is the niche market. And George emphasized that when he rattled off, I think, 5 of the key tenets of the LeMaitre playbook. We're looking for these niche markets where we can acquire into a leadership position. We really like physician preference items that are differentiated that the surgeons are going to gravitate towards over time. So the cardiac surgery market devices is, I'd say, at least 4x the size of the open vascular surgery market. So there are a lot of targets there. I'm not going to get specific for obviously competitive strategic reasons about the targets we're interested in, but there are plenty of these interesting niches that we could acquire into. And then hopefully, they would exhibit the same financial characteristics over time that our organic products are these days. Nathan Treybeck: How are you thinking about the RestoreFlow German launch in Germany? How are you thinking about the ramp and the contribution to growth this year? George LeMaitre: I mean -- this is George again. It's all baked in the guidance, but I think we're being quite cautious with what we're baking into guidance because we don't know. We've had one European launch over there, and it went fantastic. It was the U.K. But we haven't seen it yet. We have less supply. We didn't have supply issues the last time. The American and the British -- what the Americans and the British accepted for acceptable tissue was the same. So we didn't have a distinction. Now we have a distinction. Every single tissue that we send to Germany has to be sort of German qualified, if you will. So we've had a slower time. So I don't -- we don't know. We've got very cautious numbers baked in the guidance. We shall see maybe there's a little upside for everyone in this launch. Nathan Treybeck: I could squeeze one more in. As we think about your guidance philosophy, I mean, we see 10% organic growth, and there was this distribution dynamic in Q1. Your guidance implies an acceleration through the rest of the year. I guess, how derisked is this guidance at this point? George LeMaitre: I mean -- if you look at tough comps, easy comps, I think the summer quarter is an easy quarter to beat up on. So you have that going for you. And in general, maybe even Q4 is something that we can do better than what we had here. But you look at our guidance history, I think, Dave, what do we hit like 77% of the quarters for sales guidance. We haven't written on the investor preso out there. I think it's something like that, Nathan. So this is like our 78th call. So we're getting better and better at doing guidance, I think. But yes, there's always risk. We don't -- I don't think you would accuse us of sandbagging if we're "on making it 75% of the time". So we try to give you the best -- the right number and then and we chase it, too. We'll chase those numbers. They mean a lot to us. Operator: Our next question comes from the line of Jim Sidoti from Sidoti & Company. James Sidoti: Can you tell me what the operating cash and the capital expenditures were in the quarter? Dorian LeBlanc: Sure. This is Dorian, Jim. Cash from operations was $15.1 million, and the CapEx was $2.8 million. James Sidoti: You talked about the consolidation of the Chicago plant. Is that something you expect to be done by the end of this year? George LeMaitre: Yes. James Sidoti: I feel like I'd be missing something because I didn't ask an autograph question on the call. It seems like that's the topic of the day. You brought up Korea, Brazil, Vietnam, India. When do you expect those approvals? George LeMaitre: 2027. James Sidoti: Those are all 2027. So early, late, will they be contributing? George LeMaitre: I mean, I wrote in the -- we wrote in the script H2, but I bet you get one of them in H1 and 3 of them in H2, something like that. James Sidoti: Okay. So they'll be moderate contributors to 2027. George LeMaitre: We haven't even thought that through. We're thrilled to get them, and that would make us have 56 approvals instead of 52, but they're okay countries for us. Operator: Our next question rather, comes from the line of Frank Takkinen from Lake Street Capital Markets. Frank Takkinen: I was hoping to follow up on the distributor. Is there a chance that swings back in Q2 and the back half of the year? And then is this potentially a geography where you may elect to go direct? George LeMaitre: Okay. So you're talking about -- when we talked about export in Q1 being a little bit light, yes, there's a very good chance that it will swing back. Maybe if we look at maybe one fact that didn't come out yet, which is if you look at April, you guys -- we usually don't do this, but just to give people some comfort there. In April, sales growth was 13%. It was 7% price and 6% units. And that's a big hint that, yes, it was a temporary passing phenomenon. And one little step further here, Frank, the export business, interestingly enough, because we run around touting ourselves as a direct-to-hospital company. And lo and behold, if you really look at the facts, the export business of this company has a CAGR of 20% for the last -- since 2019, so skipping over the pandemic, starting in 2019, the 7-year CAGR, if you will, is 20%. And so that business continues to just do fantastic. And all it says to me is that the world is a very big place. We ignore it and the business keeps coming in, and then we use that to pick off places to go direct. You can see Poland, Mexico and Greece. If you're in our building and you look at the walls at all these 2030 plank sets, it says Poland, Mexico and Greece. So you're probably going to see that happen over the next 2 or 3 years, certainly Poland this year and then Mexico and Greece coming after that. But not worried. Very excited about the export business always. And we have 4 export managers right now or 3 and 1 being filled right now. And on our plank set, we plan to get to 8 export managers by 2030. So a place where we heavily invest because of the growth of the business as well as it produces great opportunities for us to go direct. Frank Takkinen: Perfect. Thanks for the April bonus. And then on the Artegraft R&D projects you mentioned, my assumption to this answer is no, but is this at all kind of marking a transition to maybe looking more internally at the portfolio for other R&D opportunities in light of maybe the M&A -- lack of appropriate M&A currently? Or is this just kind of one-off because Artegraft has had so much momentum? George LeMaitre: That's a good question. It's a good way to look at it. I mean one of the nice things about being a company that doesn't do too much R&D is that the R&D projects scream at you and you can't ignore them for too long. So maybe we could put that in that category. This is very, very obvious stuff. And also, you're allowed, if you don't do too much R&D, you're allowed to do some really low-risk, low beta projects. Making a longer tube is a very low-risk projects where we have high confidence that we'll get that approved by Europe and the U.S. So I hope that gives you some color on the choice of R&D projects. Probably -- I think we've said this before, and again, it's on these plank sets. We do plan to do a little bit more R&D around here. I think in the old days, we were targeting 10%. Now we're maybe targeting 8% just because we're at 6% and saying 10% seems false. But we should do more R&D around here. There's a lot of projects. The larger you get, the more important -- the more helpful a little bit of R&D is to each one of your 160 sales reps. And I think we're becoming conscious of that. Operator: Our next question comes from the line of Keith Hinton from the Freedom Capital Markets. Keith Hinton: I just have a high-level question on business development. If you do decide to execute on a sizable deal in the cardiac space, just beyond the purchase price, kind of how should we think about the potential need for incremental investment to just bolster your commercial presence in cardiac? Is there kind of a level of near-term margin dilution that you're willing to live with in order to bring in another growth driver for the out years? David Roberts: Keith, it's Dave. It's a good question. And the answer is it depends. And what it primarily depends on is if the cardiac surgery product is a product that's also used in vascular surgery because there are 5 or 7 crossover products like surgical sealants and figating clips and atraumatic occlusion devices like that and a relatively easy short learning curve, the answer might be no. We may not need a dilutive cardiac sales force. But if the product is a product that's used exclusively in cardiac surgery, then I would say it's much more likely. And the way we look at that is, okay, so maybe there is the need to establish some size of a cardiac sales force depends, of course, on the size of the acquisition and its geographic reach. But if that's the first step into cardiac surgery, then future cardiac acquisitions would leverage that channel to derive sales. So we're always taking a very long-term view around here. We've done vascular acquisitions for almost 30 years. And I think we would do -- we would have a long runway of cardiac acquisitions. So we pay attention to it, but it doesn't really deter us because we have a long-term viewpoint. Operator: Thank you. Ladies and gentlemen, that concludes today's conference. I would like to thank you all for your participation, and you may now disconnect. Have a great day.
Operator: Good day, and thank you for standing by. Welcome to the Jazz Pharmaceuticals 2026 First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, John Bluth, Head of Investor Relations. Please go ahead. John Bluth: Thank you, and good afternoon, everyone. Today, Jazz Pharmaceuticals reported its first quarter 2026 financial results. The slide presentation accompanying this webcast is available on the Investors section of our website, along with the press release and quarterly report on Form 10-Q for the first quarter ended March 31, 2026. On the call today are Renee Gala, President and Chief Executive Officer; Sam Pearce, Chief Commercial Officer; Robbie Iannone, Global Head of R&D and Chief Medical Officer; and Phil Johnson, Chief Financial Officer. On Slide 2, I'd like to remind you that today's webcast includes forward-looking statements such as those related to our future financial and operating results, growth potential and anticipated development, regulatory and commercial milestones, which involve risks and uncertainties that could cause actual events, performance, and results to differ materially from those contained in these forward-looking statements. We encourage you to review these risks and uncertainties described in today's press release and under the caption Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2025. We undertake no duty or obligation to update our forward-looking statements. As noted on Slide 3, we will discuss non-GAAP financial measures on this webcast. Descriptions of these non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial measures are included in today's press release and the slide presentation available on the Investors section of our website. I'll now turn the call over to Renee. Renée Galá: Thanks, John. Good afternoon, everyone, and thank you for joining today's conference call. Building on our record year in 2025, we are pleased to share our results from an exceptionally strong first quarter, led by commercial execution across our highly differentiated products for sleep, epilepsies, and cancers. This resulted in our highest ever first quarter total revenues of $1.1 billion, reflecting more than 19% year-over-year growth, driven by the outstanding performance of Xywav, Epidiolex, Modeyso, and Zepzelca. Our commercial teams generated double-digit growth across all our promoted brands and saw strong contributions from our ongoing launches. This performance reflects the discipline and consistent efforts of our teams working with clarity and purpose to support the physicians and patients we serve. In addition to our impressive commercial performance to start the year, we are urgently advancing the development of zanidatamab for patients with HER2-positive first-line locally advanced or metastatic GEA where the unmet medical need remains significant. The FDA recently accepted our sBLA for Ziihera under real-time oncology review and granted priority review with a PDUFA date of August 25, 2026. We are ready to launch Ziihera in GEA as soon as we receive FDA approval, and we expect Ziihera will become the HER2-targeted therapy of choice for HER2-positive first-line GEA patients given the magnitude of benefits seen across both experimental arms when compared to the trastuzumab control arm. In R&D, we continue to make progress across our pipeline with multiple ongoing registrational zanidatamab trials, early-stage trials evaluating oncology assets, and the early development of neuroscience and epilepsy assets. The year is also off to an excellent operational start with cash flow of over $400 million in the first quarter and non-GAAP adjusted EPS of $6.34. Our financial strength and disciplined capital allocation enable us to invest in the continued growth of our commercial portfolio and pipeline while also positioning us to execute on business development opportunities that fit our strategic focus in rare disease. With that, I'll turn the call over to Sam to share more details on our commercial performance. Samantha Pearce: Thank you, Renee. Our commercial team delivered strong results across Jazz's portfolio with momentum from our 2025 launches and coordinated execution continuing into 2026. I'll begin on Slide 7 with sleep. Xywav's net product sales increased 18% to $408 million in the first quarter of 2026 compared to the same period in 2025. As expected, HCPs and patients continue to drive demand for safer, low-sodium Xywav, and we saw strong new patient growth with approximately 425 net patient adds. There are now approximately 16,600 active patients taking Xywav, which remains the #1 branded treatment for narcolepsy based on product revenues and the only FDA-approved treatment for idiopathic hypersomnia. Our field teams continue to expand both the IH and narcolepsy markets by educating HCPs on the importance of addressing the full spectrum of daytime and nighttime symptoms. These efforts are complemented by digital and media campaigns to increase disease awareness and support patient education. Our Jazz care support services, including field-based nurse educators, support patients from initiation through titration and across the long-term treatment journey. These services remain important differentiators for Jazz. Moving to Slide 8 and Epidiolex. Epidiolex net product sales increased 15% to $250 million in the first quarter of 2026, driven by strong underlying demand and 16% volume growth during the quarter. Expanding our reach in the adult patient population and specifically in the long-term care setting remains a key focus and an important near-term growth opportunity. Our Nurse Navigator program continues to have a meaningful impact on improving patient persistency and expanding utilization of this resource remains a priority for 2026. Finally, as part of our commitment to bring Epidiolex to appropriate patients in Japan, we have partnered with Nippon Zoki, a Japanese company with deep expertise in CNS disorders. Jazz remains the sponsor of the clinical trial, and Nippon Zoki will lead regulatory, distribution, and commercial activities in Japan. Turning to our oncology portfolio, starting with Ziihera on Slide 9. In the first quarter of 2026, Ziihera generated net product sales of $13 million. Feedback from biliary tract cancer physicians continues to be positive with real-world experience consistent with the clinical profile observed in our trials. We are also continuing to expand into new community-based accounts beyond academic centers, increasing awareness of Ziihera in BTC and building readiness ahead of a potential launch in GEA. As a reminder, there is a substantial customer overlap across our solid tumor footprint, including approximately 90% overlap between BTC and GEA accounts. We believe this positions us well to accelerate uptake in GEA following its anticipated approval and launch on or before the August 25 PDUFA date. Once approved, our existing cross-functional team will be positioned to reach target customers and support rapid adoption of this practice-changing regimen for GEA patients. Turning to Slide 10 and our GEA launch preparations. Physicians are expressing excitement and interest in the potential use of Ziihera in GEA. It has been more than 15 years since a new first-line HER2-targeted agent became available for patients with metastatic gastric cancer. Given the unprecedented median overall survival data of more than 2 years, we believe Ziihera has the potential to become the preferred HER2-directed therapy and foundational backbone for treating HER2-positive first-line metastatic GEA. The addition of tislelizumab further improved survival outcomes in both PD-L1 positive and PD-L1 negative patients, consistent with Ziihera's unique mechanism of action that generates an innate immune response in the tumor. Ziihera already benefits from an established permanent J-code through its FDA approval in second-line HER2-positive BTC, which we expect will simplify reimbursement in GEA and reduce the administrative burden for providers. In addition, the compelling outcomes from the HERIZON-GEA trial supports our expectations for favorable payer access. Finally, our comprehensive Jazz care support services, together with Ziihera's established availability across customers' preferred distribution channels position us to enable seamless patient access at launch. Turning to Slide 11 and Modeyso. Modeyso generated $41 million in net product sales in the first quarter of 2026. This strong early performance following its launch in August 2025 reflects the significant unmet need in H3 K27M-mutant diffuse midline glioma, high awareness driven by advocacy groups and the value physicians see for patients. Approximately 500 patients have been treated with Modeyso since launch through the end of the first quarter. Our highly experienced neuro-oncology field teams, including medical and access colleagues continue to support the launch. The teams remain focused on expanding reach in community settings, whilst maintaining a well-supported presence in academic centers of excellence. Robust patient-centric support services and payer coverage continue to underpin launch momentum and support appropriate access for patients. Moving to Slide 12 and Zepzelca. In the first quarter of 2026, Zepzelca net product sales increased 60% to $101 million compared to the same period in 2025. Growth in the first quarter was primarily driven by strong uptake in the frontline maintenance setting following FDA approval of Zepzelca in combination with Tecentriq in October of last year. Given the strength of the IMforte clinical data and the opportunity to improve both progression-free survival and overall survival for patients with extensive stage small cell lung cancer, health care providers are rapidly adopting the Zepzelca combination in the first-line maintenance setting. As a result, this new indication is driving the product's strong performance. Our commercial initiatives will continue to be focused on first-line maintenance, reflecting our ongoing commitment to this priority. For the rest of 2026, first-line maintenance adoption is expected to grow with second-line use decreasing due to competition and fewer Zepzelca naive patients available for treatment. Overall, we are satisfied with the impressive commercial performance achieved across our portfolio in the first quarter and remain focused on maintaining this momentum throughout the year. With that, I'll now turn the call over to Rob to provide an update on our pipeline. Rob? Robert Iannone: Thanks, Sam. I'll start on Slide 14. This is an exciting time at Jazz. In addition to our outstanding commercial execution, we are also preparing to bring zanidatamab to HER2-positive first-line metastatic GEA patients. The data from the HERIZON-GEA trial definitively demonstrated that zanidatamab offers improved outcomes on all efficacy measures compared to trastuzumab and should be the new HER2-targeted agent of choice. The data also showed tislelizumab further improved survival outcomes in both PD-L1 positive and PD-L1 negative patients. The benefit regardless of PD-L1 status may be driven by zanidatamab's unique mechanism of action known as biparatopic binding. This enables zanidatamab to cross-link neighboring HER2 receptors, leading to receptor clustering, which blocks HER2 growth signaling and also triggers the complement cascade. Zanidatamab's ability to uniquely and broadly activate the innate immune system may in part explain the additional efficacy observed when tislelizumab was added to zanidatamab even in PD-L1 negative tumors. The triplet arm of zanidatamab, tislelizumab, and chemotherapy demonstrated improved overall survival with a remarkable median OS of 26.4 months, representing a meaningful improvement of more than 6 months median OS compared to prior studies in HER2-positive patients who have a poor prognosis in the metastatic setting. Among patients who had an objective response, the median duration of response was 20.7 months. Again, this benefit was observed irrespective of tumor PD-L1 status. To put this into context, in the KEYNOTE-811 trial, the duration of response for trastuzumab and pembrolizumab plus chemotherapy was 11.3 months. We are moving quickly to bring zanidatamab to HER2-positive first-line metastatic GEA patients. Following the oral presentation at ASCO GI in January, we submitted the data for potential inclusion in NCCN guidelines. We're pleased that the manuscript has been accepted for publication by a top-tier medical journal and plan to submit the peer-reviewed manuscript to NCCN once it has been published. Our supplemental BLA for zanidatamab has received priority review with a PDUFA date of August 25, 2026. We are actively engaged with the FDA in the review process, and we expect potential approval and launch of zanidatamab in GEA on or before the PDUFA date. Turning to Slide 15 and our pipeline. We have multiple clinical trials across our pipeline from early stage to registrational trials. We look forward to sharing data from some of these ongoing trials at the upcoming ASCO meeting in early June with a number of presentations on lurbinectedin and zanidatamab. The second planned interim analysis for overall survival of the zanidatamab and chemotherapy arm of the HERIZON-GEA trial is still expected midyear. At the time of top line readout, this arm showed a clinically meaningful effect on overall survival with a strong trend towards statistical significance compared to the control arm. The next pivotal Phase III trial for zanidatamab is in metastatic breast cancer patients who have progressed on or are intolerant to in HER2, and trial enrollment is progressing well. We continue to expect to complete enrollment in the EmpowHER trial in the first half of 2027, with top line data anticipated in late 2027 or early 2028. Other earlier-stage trials continue to progress across new indications, including a potentially registrational pan-tumor basket trial and a neoadjuvant adjuvant breast cancer trial. Looking ahead to later this year or early 2027, we anticipate the ongoing Phase III ACTION trial will have an interim overall survival readout. This trial is designed to confirm the benefit of Modeyso and support regulatory approval as frontline therapy directly following radiation instead of waiting for signs of tumor progression before treating with Modeyso. We are working with dedicated focus to both realize the full potential of our near-term opportunities and to rapidly progress our pipeline. Our in-house research and development efforts are underway, and we look forward to sharing updates on those and further pipeline progress in the future. Now I will turn the call over to Phil for a financial update. Phil? Philip Johnson: Thanks, Rob. I'll start with high-level comments on our non-GAAP adjusted P&L, as shown on Slide 17. Please note that our full financial results are available in today's press release and 10-Q. The outstanding execution of our field-based teams was reflected in record first quarter revenue of $1.07 billion, driven by 45% growth in our oncology portfolio, 18% growth in Xywav, and 15% growth in Epidiolex. Strong underlying performance drove the vast majority of our revenue growth. I do want to point out 2 smaller items that also contributed to growth this quarter. First, we had the normal 13 shipping weeks for our U.S. oncology product this quarter, while in last year's quarter, we had 12 shipping weeks. This contributed about 2 percentage points to our worldwide revenue growth rate. Second, the significant devaluation of the U.S. dollar led foreign exchange to contribute about 1.5 percentage points to our worldwide revenue growth. Moving down to P&L. Our non-GAAP adjusted gross margin declined slightly year-on-year, primarily due to higher sales of products carrying royalties, namely Zepzelca and Modeyso. Non-GAAP adjusted SG&A expense decreased by about $164 million. You may recall that in last year's quarter, we recognized litigation settlement expenses of $172 million. Excluding these expenses, SG&A increased by $8 million, driven by the inclusion of Modeyso expenses. Non-GAAP adjusted R&D expenses increased by $13 million, primarily due to the inclusion of Modeyso clinical trial expenses and higher compensation-related expenses. Our non-GAAP adjusted effective tax rate this quarter was slightly lower than our full year 2026 guidance due to excess tax benefits from share-based compensation, while our shares outstanding for the quarter reflect the accounting effect of our higher share price on our convertible notes and employee stock plans. At the bottom line, we posted very robust non-GAAP adjusted EPS of $6.34. Supported by our strong start to the year, we are reaffirming our full year 2026 revenue and expense guidance, including total revenue guidance of $4.25 billion to $4.5 billion. Total revenue guidance for 2026 includes the assumptions you see on Slide 18. As a reminder, we assume competitive dynamics in our sleep business will increase in the second half of the year, including high-sodium generics gaining volume and one or more daytime weight-promoting agents potentially entering the narcolepsy market. We also expect to see a decline in Xyrem and high sodium authorized generic revenues as generic high sodium oxybates build their volumes over the course of 2026. And as Sam mentioned earlier, we expect a decline in second-line use of Zepzelca. Our Q1 performance and focus on disciplined capital allocation position us well to achieve our 2026 guidance. Moving to Slide 19. Our balance sheet remains strong. We continue to generate significant cash from our business, recording $408 million of cash from operations in the first quarter of the year, and we ended the first quarter with $2.9 billion in cash and investments. Our overall financial position and robust operating cash flow provides significant flexibility to invest in value-driving commercial and R&D programs as well as in promising corporate development opportunities to support our rare disease strategy. I will now turn the call back to Renee for closing remarks. Renée Galá: Thank you, Phil. I'll conclude our prepared remarks on Slide 21. The first quarter of 2026 builds on the successes we achieved in 2025. Our focused commercial execution led to more than 19% growth in the first quarter. And based on these results, we are on track to achieve our 2026 financial guidance. We look forward to several upcoming catalysts, including the second interim analysis of overall survival from the HERIZON-GEA trial midyear. Top line readout for overall survival for the confirmatory ACTION trial for Modeyso is expected at the end of this year or early next year. And the top line readout from the trial evaluating zanidatamab in late-stage breast cancer post in HER2 treatment is expected in late '27 or early 2028. We continue to build upon our proven scientific expertise and capabilities to make a meaningful impact for patients. Supported by our strong financial position, you should expect to see us invest in our commercial brands and pipeline and business development to broaden our portfolio in key strategic focus areas of sleep, epilepsy, and oncology in addition to other areas of rare disease. I'd like to thank all our Jazz colleagues for their efforts and dedication to making a difference in the patients' lives that led to an exceptional first quarter. We are relentlessly focused on continuing to execute and deliver life-changing medicines to patients. That concludes our prepared remarks. I'd now like to turn the call over to the operator to open the line for Q&A. Operator: [Operator Instructions] Our first question today will be coming from the line of Jess Fye of JPMorgan. Jessica Fye: Question on zanidatamab for breast cancer. So if we assume zani beats Herceptin in breast cancer and gets approved one day for use in the post in HER2 setting, how do you expect physicians to make decisions about how to sequence agents in the context of a lack of data for other products post in HER2, among other things? Robert Iannone: I'm happy to address that, Jess. This is Rob Iannone. We became very interested in this space based on good advice from many key experts in the field. And the fundamental issue is that once HER2 moves to frontline, there's very little data about which HER2 agent to select as subsequent therapy. So the trial that we're running 303 will be the first time that we definitively in a randomized setting, evaluate zanidatamab versus what would be considered a standard of care. So we expect to be out ahead with important data that will inform decisions about whether to use zanidatamab or other HER2 agents in that space. Operator: And the next question is coming from the line of Joseph Thome of TD Cowen. Joseph Thome: Congrats on the quarter. Maybe one on Modeyso. Do you have any updated thoughts on sort of the size of this patient population? I think historically, it was thought that it was maybe 2,000 or 3,000, but it sounds like it sounds like already hitting 500 patients. So any thoughts on that total opportunity just given the strength of that launch? And maybe a follow-up, if I can, on M&A. Kind of what's your latest thinking in terms of where you'd like to go? Obviously, we've seen a lot of activity in the past few weeks in different areas. Kind of what's the sweet spot in terms of size and area of focus for Jazz going forward? Samantha Pearce: Yes. Hello, Sam here. I'm happy to take the question on Modeyso to start with. Yes, we're extremely pleased with the launch so far, $41 million in Q1 really gives us a lot of confidence around achieving that $500 million peak opportunity in the U.S. And as you mentioned, we've had 500 patients treated since launch. And I think that just reflects the very high unmet need that we see in this space. Overall survival from diagnosis is just 1 year. So this product has had a meaningful impact, and it's supported by high awareness from physicians and, obviously, very strong patient advocacy support as well. In terms of the size of the patient population, I think our best estimates are aligned to what you mentioned there. And over time, of course, we'll continue to evaluate that. But we do see potential upsides in duration of treatment as well as the size of the population. What we've seen so far is that patients are staying on treatment for longer than we initially anticipated. We'll have to wait for this cohort of patients to really mature before we get a really good handle on whether the duration of treatment exceeds that, that we saw in the trial, which is around about 10 months. But extremely happy with the start. I think our teams have done an excellent job really executing this launch well in such an important area of medical need. Renée Galá: And Joe, this is Renee. I'll jump in on BD. So we are highly engaged on the BD front, and I do expect us to have deals announced over the course of this year. We do have a clear strategy that is focused on expanding our presence in rare disease, in particular, where we believe there's a significant unmet need. So strengthening our current areas of epilepsy, sleep, and rare oncology, also expanding into new areas of rare disease, areas where we think we can leverage our capabilities and our footprint to continue to scale our business while driving further growth and profitability. In terms of the deal types, we -- it really depends on the asset and the transaction at hand, but we are looking at licensing structured deals, also outright M&A. I think the key here to being successful in BD is identifying value or risk that others don't see and then staying myopically focused on execution as we did with the Chimerix launch, the Chimerix acquisition and subsequent Modeyso launch. And we have very strong momentum now with the new CBO, Chief Business Officer, on board as of January 1. Importantly, we are well positioned to execute. Phil mentioned, we have a strong financial position, $2.9 billion in cash and cash equivalents on the balance sheet, strong cash flow. And while M&A has picked up, we do believe there is still a lot of substrate that is actionable and well aligned with our strategic priorities. Operator: Our next question will be coming from the line of Leo Timashev of RBC. Leonid Timashev: I wanted to stay with, you mentioned epilepsy. I just wanted to touch on that. You've been making a lot of investments in that area, both with Epidiolex, [ Cenobamate ] asset, you also have JZP-047, and now you mentioned potentially looking at BD there as well. So I guess I'm just curious how you're thinking about that area, to what extent it's a continued focus and how you think about either synergies or risk of cannibalization across sort of many different assets there? Renée Galá: Yes. Thanks for the question. This is Renee. I would say this is definitely an area of focus for us. There continues to be significant unmet need across the epilepsy space. You see a strong amount of polypharmacy here with respect to multiple -- sorry, multiple medications generally on board, in particular, when we're looking at serious refractory epilepsies. We think with the position that we have with Epidiolex being the #1 branded product and having the very long durability out to the very late 2030s, it gives us greater opportunity to continue to build around that franchise to build scale. I'm thrilled to see additional opportunities for patients with the strong data that we've been seeing come out with a number of companies in whether that's on the proof-of-concept side, starting to go into registrational studies or work that's happening early in pipelines. As we think about ourselves, we think there is plenty of room and need -- unmet need for patients to continue to see new mechanisms explored and new options for patients. So we do think there's still plenty of substrate, a great opportunity for us as a leader in epilepsy. You will note, last quarter, we said we were advancing the first molecule coming out of our labs that was not just a formulation play, but an innovative target novel mechanism coming out of our lab that went into patients in the epilepsy space. So we will continue to invest here, and we're excited about the opportunities. Operator: Our next question is coming from the line of Annabel Samimy of Stifel. Annabel Samimy: Just want to circle up on Modeyso again. Obviously, it's been exceedingly promising since the outset, and you have a potential to move into first-line treatment. I guess my question is, how should we think about the potential move into first-line treatment? Does this significantly expand the market? Should we think about this like we think about Zepzelca moving into first line and how it significantly inflected growth? I guess I'm trying to understand the magnitude given that most patients are in first line, progress to second line. Is it only about duration? Or is there a population opportunity there? Samantha Pearce: Yes. Hello, Annabel, happy to take that. Yes, I think there's 2 factors when we consider the ACTION study and what that will do for Modeyso and for improving the treatment to patients. Some patients don't make it to second line. So of course, there are more patients available to be treated. But having the opportunity to get Modeyso to patients before they progress will mean that the duration of treatment should be longer if they can use it straight after radiation. So those 2 things, I think, do -- will contribute to us achieving the $500 million peak potential, which does incorporate an assumption that we will have that first-line label. Rob, anything more to add on that? Robert Iannone: I mean you covered it well. I'd just point out that sometimes it's hard to judge progression in these patients. And then as you point out, once it's clinically apparent in addition to imaging, patients may rapidly progress and not benefit from second-line therapy. So the opportunity to start Modeyso right after the radiation therapy really does potentially add a significant benefit to patients and, ultimately, duration of therapy. Operator: And our next question is coming from the line of Marc Goodman of Leerink. Marc Goodman: Sam, can you talk about Epidiolex OUS? I heard Phil talk about the FX impact, but those numbers couldn't have just been FX, something is doing pretty well there. So maybe just talk, was there any particular country? Was there any buy-in? Anything unusual there? And maybe you could just comment on Rylaze as well, which happened to have a really good quarter and what was happening there? Samantha Pearce: Yes. Thanks for the question, Marc. Yes, it's great to see the performance outside of the U.S. for Epidiolex, very strong growth indeed. Around about 2/3 of that, I believe, was volume, and there was about 1/3 due to FX and some gross to net benefits from places like the U.K. with a VPAG adjustment that happened there. And I think really, this is just down to terrific execution by our teams. As you know, Epidiolex was launched a little bit later in Europe. So there's still quite some opportunity to continue to penetrate in the pediatric segment, but of course, also in the adult segment, which is a focus for both the U.S. and the ex-U.S. business. And then your other question around Rylaze. Yes, Rylaze, yes. Rylaze delivered a strong quarter, $104 million, which was 10% revenue growth. But that was comparing to quite a low Q1 '25. So I think the performance that we've seen in this quarter is in line with the prior quarters that we've seen other than the Q1, which is a low point. What we've seen with Rylaze is the COGS impact that started in '24 has been fully realized now. And our focus continues to be on making sure that patients -- appropriate patients can receive Rylaze that they're switched at the first sign of a hypersensitivity reaction and the opportunity to continue growth in AYA. But I think that $100 million per quarter for Rylaze is a good kind of stable base for us currently. Operator: And the next question is coming from the line of Etzer Darout of Barclays. Jordan Becker: This is Jordan Becker on for Etzer Darout. Congrats on the impressive quarter. Maybe just one, if we could expand on any second half dynamics for oxybates now with a full quarter in the rearview. Maybe if you could provide some more color on any potential competitive pressure from LUMRYZ specifically? And then on that, maybe any perceived pressure to IH growth down the line if LUMRYZ is approved in IH? Samantha Pearce: Yes, I'm happy to take that question on Xywav. Yes, we're very pleased with the continued momentum for Xywav, $408 million this quarter, 18% revenue growth, and a really healthy 12% volume growth. We continue to see really good patient adds, 425 net patient adds in the quarter, most of them continuing to come from IH, 300 net patient adds for IH, which is consistent with what we've seen in prior quarters. So we finished the quarter with 16,600 active patients. And when we look ahead to the outlook for Xywav for the remainder of the year, obviously, we're very pleased with the momentum that we're taking into the second quarter. We still have continued strong payer coverage, more than 90% commercial lives covered. Nothing has changed around the nature of our Xywav business in the first quarter of this year. And our 2026 full year guidance does include assumptions that generics will build volumes in the second half of the year as well as the potential for the entry of new wake-promoting agents entering the market in the second half of the year in the NT1 narcolepsy segment. But we believe Xywav will continue to have a really important place in therapy. We've invested in some really meaningful evidence generation, XYLO and the DUET studies, which show the importance of having a low-sodium option. And as you mentioned, it's the only option approved for IH and the DUET study, which shows just how effective Xywav is as a nighttime agent. And we believe those 2 benefits will continue to resonate strongly with physicians and patients, of course. Operator: Our next question is coming from the line of Brian Skorney of Baird. Unknown Analyst: This is [ Charlie ] on for Brian. I was just wondering if you could give us a sense of the size of the opportunity for Epidiolex in the adult and long-term care setting. And maybe some more color on the initiatives you're taking there with the new formulation? As well as would be curious to hear, will you be sharing any data from the Phase Ib in focal onset when you get that? And do you have any idea in terms of timing there as well as what your expectations are for the setting for Epidiolex? Samantha Pearce: I'm happy to take the first part of your question in relation to the adult segment, and then I'll hand over to Rob to talk about the study. Yes, we're very happy with the performance of Epidiolex in the first quarter of this year, $250 million, 15% revenue growth and 16% volume growth. As you probably recall, Epidiolex was launched initially very much as a pediatric drug, and we've seen really good penetration in that segment, a leading agent, obviously, for pediatric patients. One area that we do continue to see opportunities in is in that adult segment, particularly in long-term care facilities. So we've made some specific investments there with a dedicated team focusing on those facilities. And we've also invested in a diagnostic tool, REST-LGS tool because we know that adult patients with LGS often go undiagnosed. So we've supported physicians to help ensure that those patients can get a definitive diagnosis and benefit from Epidiolex. In addition to that, one of the hallmarks of Epidiolex is the very long persistency that we see, but we do see an opportunity to drive that even further. We know that patients that are enrolled onto our JazzCares program, which also gets the support of a Nurse Navigator, they do stay on treatment longer. So we've got a particularly focused effort now on ensuring that as many patients as possible can benefit from our JazzCares suite of services, and we believe that will drive even longer durations of treatment for Epidiolex. In addition to that, we're making quite significant investments in evidence generation. We have the EpiCom study in TSC and the BECOME survey, which has been focused on adults, which really just underlines the benefit that Epidiolex has not just for the control of seizures, but also for controlling some of the non-seizure symptoms that these patients experience as well. And that's one of the very significant differentiating benefits of Epidiolex. So overall, we're very encouraged by the momentum that we have with Epidiolex, but also really see a lot of long-term potential to continue to grow Epidiolex into the future, particularly in that adult segment. Robert Iannone: Thanks for the question on the focal onset seizure study. We're super excited about it. There's a lot of interest from epileptologists to more formally evaluate Epidiolex in this setting. As you know, doctors and treaters think about epilepsy in terms of types of seizures. And we have lots of data showing activity of Epidiolex across really every type of seizure with some preliminary evidence in focal onset seizures as well. This is an evidence generation study to go deeper into this particular population, and we would intend to publish this as soon as we have data available to do so. We haven't given any specifics on that yet. After a little more time lapses and we get a good sense of the enrollment rate, we may be able to update further. Operator: Our next question is coming from the line of David Amsellem of Piper Sandler. David Amsellem: I had a long-term competitive landscape question on your oxybate business. So your competitor has Valiloxybate, the sodium once-nightly or potential no sodium once-nightly product that's in development. To the extent that reaches the market, can you talk about how that could impact your Xywav business, both in terms of narcolepsy and the IH setting? And just in general, how are you planning to respond competitively to overall a more crowded landscape? The obvious is, of course, of orexin, but also next-generation oxybate products as well? Renée Galá: Maybe I can step in on that, and then I'll ask Rob to comment on how we're viewing orexin. So I would first point to the fact that Xywav has been competing for the last 2 years with a number of high-sodium options on the market. And over that time, we have not only built a strong group of patients that are relatively persistent in terms of their use of oxybate, the specific relief and flexibility that they receive from Xywav and also being the only option available for IH. We've done a lot of work in the market in terms of disease awareness. One of the areas that we've invested quite a lot in that Sam has spoken to earlier is the patient support services. I think that is highly differentiating for Jazz in terms of the extent of our services and the way that we have deployed those. And so we will continue to ensure that the unique differentiating benefits of Xywav as well as our various support services are well understood in the market. I would also note that we do, from a patent perspective, have a lot of confidence in our overall patent estate. So when you're thinking about the various programs that are out there that may be looking for a 505(b)(2) sort of path. From that perspective, we do have robust patents that include many Orange Book listed patents out to 2033 and '37 and then an Orange Book listed IH patent out to 2041. But maybe I'll also invite Rob to comment with respect to orexins coming into the market and our view there. Robert Iannone: Yes. We've been following orexins carefully and our conclusion is that it's likely to be complementary to Xywav. As Sam mentioned, alluding to the DUET study, we have significant data showing that the root cause in hypersomnia, such as narcolepsy type 1 and 2 as well as IH is really disrupted nighttime sleep. And oxybates are the only therapy that can address the disrupted nighttime sleep directly. And Xywav, of course, the only low sodium formulation that we believe is safest for patients who are at a high risk for cardiovascular outcomes. Certainly, orexins are showing to be potent daytime alerting agents. There's some preliminary data showing though that you can have insomnia, especially with the longer half-life formulations. And the limited PSC data that are out there suggests that certainly not improving disruptive nighttime sleep and may actually on the first half of the night, be impacting it negatively with the reports of insomnia. So we continue to think that this important space to follow. We have an orexin in development still. And -- but we think ultimately, this is going to be complementary to Xywav. Operator: Our next question is coming from the line of Mohit Bansal of Wells Fargo. Mohit Bansal: Congrats on all the progress. Just want to ask about Zepzelca IP here. I see a few new Orange Book listed patents here in 2025. So they go all the way to 2040. So how should we think about the life of Zepzelca beyond 2029, that's the comp of matter patent at this point? Renée Galá: Yes. Thanks, Mohit. This is Renee. So we do have a strong patent estate for Zepzelca. And as you noted, we do have multiple patents that extend out to 2040. We're also pursuing multiple new patents with the patent office that would also extend out to that time frame with additional applications, whether that be combo therapies, formulations, or methods of treatment. We have also stepping back and speaking to the ANDA filers that we've disclosed, we have filed suit against all 5 ANDA filers. And as a result of filing that suit, a stay of approval is in effect for up to the 30 months as is imposed by the FDA. And so while we're not going to speak broadly to active litigation, we do feel that we have a strong patent estate. And as we have more clarity and information on that, we will be certain to share that. Operator: Our next question is coming from the line of Jason Gerberry of Bank of America Securities. Jason Gerberry: Just one, Phil, on Xywav, I apologies if I missed this, but at the beginning of the year, I think you guided to flat to mid-single-digit growth for Xywav, given the growth of nearly 20% in 1Q. Just wondering if we should be assuming that we're coming in towards closer to the high end of that number? Or were there some onetime dynamics in the 1Q number to call out? And how should we think about zanidatamab pricing OUS and any MFN-related considerations? Philip Johnson: Sure. Thanks for the question, Jason. On Xywav, in the U.S., really pleased, as Sam mentioned, with the great execution of our field-based team. In terms of sort of underlying growth, we had volume growth of about 12% here in the first quarter. There was a bit of additional pickup coming from net price, primarily gross to net favorability with both mix of business and then patients successfully transitioning more quickly than in the past back on to their insurance in that first quarter reauthorization period. So that is something that is more of a first quarter phenomenon. We wouldn't expect to see that kind of net price pickup quarter-on-quarter as we get into Qs 2 through 4, but definitely pleased with Xywav performance in the first quarter sets us up nicely. We're achieving the full year guidance. I think that also applies to this total revenue guidance as well, not just Xywav. And then for the MFN zani, right now, the MFN considerations, as you know, are a bit uncertain. You've got some sort of conflicting input out there, certainly GLOBE and GUARD are as proposed to use a basket of ex-U.S. countries to provide reference pricing for the U.S. So we'll certainly be taking that into account as we look at the strategy for getting Ziihera to patients outside of the U.S., which is certainly a priority of ours, but one that we will need to take account of the current situation here in the U.S. as we move forward. I'm not sure, Sam, if you'd like to add any your thoughts from a commercial perspective or Renee more from a corporate strategic perspective. Samantha Pearce: I think you've covered it nicely, Phil. Operator: And our next question will come from the line of Ami Fadia of Needham & Company. Ami Fadia: I had a follow-up on the comments related to the oxybate franchise, particularly Xywav. I think at the beginning of the year, you talked about anticipating the potential for some additional headwinds either on pricing side or just in terms of access with the entry of generics. Maybe if you could sort of talk about some of the dynamics around whether you're seeing any pushback on the use of Xywav, particularly in narcolepsy? And how do you see the utilization in narcolepsy evolve with more generics kind of on the market? And then just on the Modeyso ACTION trial, can you sort of talk about what -- which interim OS analysis will be done by the time you have the data readout in late 2026, early 2027, and just sort of your confidence around the time line of that readout? Samantha Pearce: I'm happy to take the question relating to Xywav. Yes, of course, we've seen 2 multisource generics enter the market in Q1. As yet, we haven't seen any impact on Xywav business so far. As I mentioned previously, we continue to have a strong payer coverage supporting the use of Xywav. So nothing really has changed in the nature of our business for Xywav. But of course, it is still early days for the generics in the market. We do anticipate that as their volume grows through the course of the year, then we may start to see some actions taken by payers. That may include utilization management. We don't know yet. But we're very confident that Xywav offers a really important and differentiating option for patients, being the only low-sodium option, the only product approved for IH. And of course, it has already demonstrated how effective it is as a nighttime agent and the impact that has on daytime symptoms. So we've obviously carried strong momentum throughout the last 12 months and into this year, and we're in a strong position as we go into Q2. Maybe I'll hand over to Rob for the question on Modeyso. Philip Johnson: I'll go ahead, Sam, just add one thing real quickly as we think about what we're seeing with Xywav before we go on to Rob for Modeyso. Certainly, the dynamics are a bit unusual in the first quarter given reauthorization. But I do think we're seeing continued support by patients and physicians of the unique benefit that Xywav offers from looking at the net patient adds. I think LUMRYZ net patient adds were announced roughly 100 adds this quarter, like the 100 last quarter. Our numbers just in narcolepsy have been larger than that in each of those 2 quarters. Again, I think underscoring this unique benefit that only Xywav can offer and the safety advantage it confers being valued by patients as well as physicians. So we're in a great position from that perspective as well as we think about the back part of the year and how things could play out. Rob? Robert Iannone: Yes. So Ami, the ACTION trial is an OS-based endpoint, and there's one interim analysis and then a final analysis. The projections we gave are based on our current understanding of the events because it is an event-driven trial. And certainly, if the events slow over time, that could change, but we'll update as appropriate as time goes on. Operator: And our next question is coming from the line of David Hoang of Deutsche Bank. David Hoang: I first wanted to ask on the timing of a potential NCCN guideline incorporation for zani in GEA. Do you have any sense of relatively when that might occur versus the PDUFA date and how important is a Category 1 recommendation to drive uptake? And then in breast cancer, for zani, I wanted to get a sense of how you're thinking about the opportunity size in the different settings. So obviously, you're looking at post HER2, but I think you're also looking at neoadjuvant and adjuvant. And so I was just curious as to your thoughts on size of the opportunity in those various things. Robert Iannone: Great. On the NCCN guidelines, we proactively submitted the abstract data because it was available. We will certainly update NCCN with the full manuscript as soon as that's available, and we hope that gives them everything they need to make a prompt decision on that and adoption, which we expect. Certainly, we think the data speak for itself. I mean head-to-head against Herceptin, zanidatamab definitively wins. Clear that tislelizumab is adding and there's likely to be a synergy between zani and tislelizumab as demonstrated by the activity in the PD-L1 negative subset, supporting its use upfront with tislelizumab. And so we think those data speak for themselves, and that should be reflected in NCCN. Samantha Pearce: Sorry, just to finish off the remainder of that question there. Yes, I mean, NCCN guidelines inclusion, obviously important. We think that the data supports a Category 1 inclusion. If it comes before the launch, then that will open up access ahead of regulatory approval. Of course, we don't promote that ahead of regulatory approval, but certainly, that will make it easier for physicians to provide access to their patients. And yes, the breast cancer opportunity, obviously, very significant, significantly larger than either the BTC opportunity or the GEA opportunity with many more patients that can potentially benefit from zanidatamab. So we're excited, obviously, about that for the long-term potential for HER. Operator: And that does conclude today's Q&A session. I would like to turn the call over to Renee Gala, CEO, for closing remarks. Please go ahead. Renée Galá: Thanks, operator. I'd like to close today's call by thanking all our partners and stakeholders for their continued confidence and support. We look forward to sharing further updates on the potential approval of zanidatamab in GEA and additional meaningful progress with you over the remainder of the year. So thank you for joining us, and have a great day. Operator: This concludes today's program. Thank you all for joining. You may now disconnect.
Operator: Hello, and welcome to the Klaviyo Q1 2026 Earnings Call. [Operator Instructions] Also, as a reminder, this conference is being recorded. If you have any objections, please disconnect at this time. With that, I would now like to turn the call over to Ryan Flaim, Director of Investor Relations. Ryan, you may begin. Ryan Flaim: Welcome, everyone. We appreciate you joining us. Joining me today are Klaviyo Co-Founder and Co-CEO, Andrew Bialecki; Co-CEO, Chano Fernandez; and CFO, Amanda Whalen. Andrew, Chano and Amanda will first share their views on the quarter, and then we'll open up the line for your questions. Our commentary today will include non-GAAP measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release or earnings release supplemental materials, which can be found on our Investor Relations website. Additionally, some of our comments today contain forward-looking statements that are subject to risks, uncertainties and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risk factors, uncertainties and assumptions and other factors that could affect our financial results are included in our filings with the SEC. We do not undertake any responsibility to update these forward-looking statements, except as required by law. Andrew, that concludes my introduction. We're ready to begin. Andrew Bialecki: Thanks, everyone, and welcome. We've entered the era of agents and infrastructure, at least so far as software is concerned, and our first quarter showed what that means for Klaviyo. Before I cover our results and highlight a few specific observations, I'd like to take a few minutes to remind everyone of the opportunity AI presents and how we're taking advantage of it. Our strategy is centered on helping businesses grow by maximizing their most important asset, their relationships with their consumers. The businesses that win are the ones that deliver stunning personalized experiences at scale. That's been the goal of everything we built at Klaviyo for the last decade. And the reality is that creating those experiences through deep personalization, engaging media, meeting customers where they want to be met and optimizing those experiences automatically is still not easy. Our work over the last decade has been building the infrastructure to make that possible, what we call the B2C CRM. As we built it, we felt a growing gap between what our infrastructure is capable of and how businesses are actually using it. This capability overhang means businesses are missing opportunities with their consumers and in turn, leaving real dollars and greater success on the table. AI agents are allowing us to close that gap and revealing enormous latent demand for intelligence to design, deliver and optimize consumer experiences. Our agents are going further, finding new opportunities for the businesses we serve and contributing back to product direction. They're already among our most advanced users of our data and experience infrastructure, pushing the limits of what's possible and giving feedback for what to build next. We're entering a positive loop where agents use our infrastructure to build stunning consumer experiences that generates data and feedback that improves the infrastructure, which in turn makes agents smarter and more capable and the cycle repeats. Together, agents and the infrastructure we provide are the autonomous B2C CRM. We believe every consumer business will run on it and every consumer experience will be driven by it. And our agents and infrastructure get better with increased data scale and usage. Our infrastructure sees almost 4 billion daily events and signals across 8 billion consumer profiles. Ingesting, storing and indexing these signals in real time gives every business running on Klaviyo a real-time data feed on how consumers and businesses are interacting with each other and critically, gives businesses and the agents they run context on what will delight consumers. The laws of consumer behavior shift in real time. Our customers and the agents they deploy use our real-time view of consumers as context to deliver stunning highly performing experiences. And agents make it even easier to infuse this context into experiences for the benefit of consumers and businesses alike. Let's look at our first quarter results to show what this looks like in practice. Revenue increased 28% year-over-year to $358 million, with strong momentum across enterprise, international and our B2C CRM platform. Non-GAAP operating margin increased to over 16%, the highest in our history. More than 196,000 brands are on our platform. We closed the largest number of multimillion dollar ARR deals ever, and our largest customers once again grew their revenue, known as GMV, roughly 2x faster than the broader market. Our investments in ARR are not limited to the agents and infrastructure we build, but extend to how we operate and deliver Klaviyo. Annualized revenue per full-time employee in Q1 was over $600,000, up more than 25% year-over-year. As an example, we're committing and shipping code at nearly double the rate per engineer from a year ago. As a result, we shipped more than 75 features in the first quarter, including a private preview of our next-generation marketing and analytics agent, Composer, increased intelligence and channel capabilities for customer agent and deeper partnerships and product integrations with Google, Anthropic, Shopify and Canva. I'd like to share a bit more on our agent products and how we're seeing customers use them, starting with Composer. Composer is our next-generation agent for marketing and analysis and is an entirely redesigned agent harness. It builds from the learnings of how customers are using our first-generation marketing agent. Marketing agent's functionality was more narrowly scoped to content marketing and campaign creation. Composer takes advantage of the advances in underlying LLM's abilities through reason and use tools. Composer scope is dramatically expanded. It can reason over your data, take actions across consumer experiences and learn from those experiments. The private preview we introduced in March includes the ability to autonomously query and analyze consumer and marketing data and create marketing campaigns and automations across all services with support for creating and optimizing customer agent coming soon. On top of this, we built Composer to be extensible, so customers and partners can build subagents and system connectors it can use and makes them available wherever users work, not just the Klaviyo interface. Because this is such a significant step forward, we're being deliberate about quality, both in Composer's analysis and its creative decision-making. The bar is high, and we're committed to meeting it. Similar to how Vibe coding represented a shift from engineers focused on how software is created to what software to create, we've seen a similar trend with Composer where users are live marketing by focusing on what they want to achieve and create, letting Composer do the research and initial creation and then iterating with Composer on the insights and perfecting its outputs. The proof points are very exciting. Take One Beauty brand in our preview. Composer audited their marketing, found automations that have been broken for years, fixed them live and surfaced half a dozen other opportunities their team had never gotten to across creative, discounting strategy and personalization. That pattern is repeating across our enterprise users in the preview. Teams are using Composer to audit, source opportunities and implement in a single session. One of the most recognized apparel brands in the U.S. saw a 40% plus increase in top-performing flow revenue following a single session. Hydro Flask used Composer to find misconfigured targeting that had been preventing a campaign to send and Composer fixed it with them live. A prominent personal finance company masked and prioritized more than 1,000 flows across 13 business units in a single session, giving the team a clear picture of where to focus first. This is why global brands are telling us that Composer solves the biggest pain point they have and is the best agentic marketing solution they've seen on the market in the past year. And because Composer runs securely inside Klaviyo's data perimeter, it already addresses the data privacy concerns that typically slow enterprise AI adoption. For one enterprise fashion brand, it was the first marketing AI tool to clear their security teams review because Composer runs inside Klaviyo's trusted environment. Composer is the future of how businesses will use Klaviyo to understand their consumers and create stunning experiences for them. We're very excited to open up to more of our customers and partners in the coming weeks. Turning to customer agent. And similar to Composer, we've taken advantage of the improvements in underlying LLM intelligence and tool use to allow businesses to create more tailored, highly performing agents their consumers can interact with. The experience and abilities of customer agent built on Klaviyo can now be entirely customized with our custom skills launch last week. Customer agent now runs across text, WhatsApp, e-mail, RCS and web chat, and we're adding voice and multilingual support. Adoption continues to grow month-over-month and the experiences customer agent delivers are showing real results. Digitally native fashion brand, Naked wardrobe resolved 84% of conversations through customer agent and AI and saw a 28% increase in average order value, helping consumers own their style and buy on their time, including many instances of consumers shopping and chatting at 2:00 a.m. when customer support would have otherwise been offline. Finally, underneath our agents is our data infrastructure, capable of training, serving and optimizing personalization, machine learning and AI models. These models don't require direct tuning from users. They learn from usage and they improve the platform automatically. What this unlocks is true one-to-one personalization, the right content for every consumer at every interaction serve across every channel and agent we operate. These models and the features that leverage them were used by nearly 2/3 of our customers in the first quarter, and usage is driving outcomes. As an example, customers using our personalized send time models saw a 35% lift in click-through rates. More engaged consumers and higher revenue driven by infrastructure that get smarter, the more it's used. We believe this is a year marketing and analysis agents like Composer and always-on agents like Customer Agent become standard and ubiquitous. And we built for that deliberately, meeting customers in the tools they already use, an open garden, not a walled one. And to accelerate that, we've deepened integrations and expanded partnerships across the AI ecosystem. In February, we deepened our integration with Google by launching RCS to all customers, and we opened up beta access to Google Search and Ads products that connect discovery directly to customer agent experiences over RCS. The consumer can now see an ad, tap it and then immediately have an immersive conversation with a brand powered by customer agent. Google delivers the reach, Klaviyo stores the consumer relationship and delivers a personalized experience. We've extended access to our infrastructure and agents via expanded MCP connectors and applications with Claude, ChatGPT and Canva. MCP usage of Klaviyo continues to expand rapidly, increasing more than 10% week-over-week in Q1. And top users of MCP are querying more consumer data and building more marketing campaigns than their peers, with 16% more platform usage relative to those who don't use MCP. Businesses are connecting more data to Klaviyo, centralizing it and taking advantage of the increased accessibility. Consumer event volume from the hundreds of apps in our marketplace is up 44% year-on-year. As an example, AS Beauty home to Laura Geller and other brands and one of our largest customers runs a complete omnichannel program on Klaviyo, including greatly expanding their text messaging program this quarter. Their team queries Klaviyo data and Claude, model campaign performance and make faster decisions. Their KAV or Klaviyo attributed value is up 20% over the past two years. A senior leader there recently described Klaviyo as an indispensable pillar of their business, infrastructure that they and their brands rely upon. None of this happens without our customers and partners pushing us and Klaviyo is delivering. We're grateful for both. I'd like to finish by providing an update on our leadership team. First, Q1 was Chano and I's first full quarter together as co-CEOs, and it's been a terrific partnership where we have so much in common, including a relentless drive to deliver and highly complementary skills. Second, as we announced in a press release earlier today, after almost four years as our CFO, Amanda has made the personal decision to step down from her role at Klaviyo in the coming months, spend more time with her family before pursuing the next phase of her career. I want to take a moment to recognize what Amanda has meant to Klaviyo. She was instrumental in building the team that took us through IPO and helped us scale into a multiproduct, global AI-native business. Amanda will continue to lead our finance organization through August 21 and will remain in an advisory capacity through November to support a smooth transition. We've initiated a search for our next CFO, who will build on our strong financial foundation and momentum. Beyond what she's helped us build, she's been a terrific strategic partner and a trusted adviser to me and many others across Klaviyo. We wish her the absolute best. Amanda, on behalf of the entire Klaviyo team, thank you. And with that, Chano. Chano Fernandez: Thanks, Andrew. I want to echo your words on Amanda and the impact she has had across Klaviyo. We have confidence in the team and transition plan, and we're grateful Amanda will continue to provide leadership and support in the months ahead. Turning to the quarter. The core business is strong and the opportunity in front of us is large. Enterprise, international and platform consolidation each have real momentum right now. AI accelerates all 3. Let me walk you through what we are seeing and how we are executing. Starting with enterprise, new customers in the 50,000-plus ARR cohort were notably higher than Q1 2025. We closed one of our largest deals ever, an expansion bringing a single customer's contract to over $6 million ARR. The program here consistently in enterprise is fragmentation. Customer data, marketing execution and service are spread across too many systems. Fragmentation costs revenue. What resonates is consolidation onto one data model, one execution layer with AI that operates with full customer context across the entire life cycle. That's what Klaviyo does. The wins in Q1 reflect that. [Ellis And Olivia] is migrating to Klaviyo to unify online behavior, purchase history and in store associate interactions in one system. Weber Grills replaced a legacy platform with Klaviyo globally across the U.S., APAC and EMEA. Expansion activity was also strong as customers standardize more on their workflows on our platform. Take Patagonia, a long-time e-mail customers that came to us with two things on their mind, improving the customer experience and migrating off a fragmenting text messaging setup, creating redundant messaging across channels. We showed a clear technical plan and a credible commercial case. But the reason they choose Klaviyo was anchored in where we're going together. RCS, omnichannel journeys that support both commerce and advocacy. Patagonia is not a brand that wants to send more messages. They want to send the right ones. Finally, we were proud that this quarter, the Forrester Wave named Klaviyo a strong performer and recognized us with the highest customer satisfaction score among all vendors evaluated. We have enterprise credibility validated by a name Enterprise Trust, alongside proof the pipeline is converting. International revenue outside the Americas grew 39% year-over-year in Q1 and five of our top 10 largest new customers are from EMEA. What we're seeing in AI is just growth is the same platform priorities driving our largest U.S. enterprise deals, unification, real-time data and AI across channels. All Saints is a great example. The flagship U.K. fashion retailer replaced legacy technology in a multiyear deal with both the Global Digital Director and Chief Technology and Transformation Officers as champions of the move. They choose Klaviyo for speed to execution, the ability to unlock WhatsApp as a new audience channel and the future opportunity to consolidate e-mail and other channels on a single platform. They shared that this move reflects their desire to move toward a more agile way of working that will significantly reduce the hours spent on day-to-day CRM activities. We also welcome Hobbii, a fast-growing Nordic yarn retailer selling across multiple international markets, winning a competitive deal that came down to speed, flexibility and, the strength of our native integrations with platforms like Shopify. We continue to deepen the product capabilities our international customers want. Locale aware catalogs is a good example. Shopify merchants with country-specific catalogs can now run fully synchronized multi-market data automatically across every region they operate in. For many global brands, that's a requirement. Now Klaviyo delivers it. That same pattern, complex multi-market operations consolidating onto Klaviyo is showing up in categories well beyond our e-commerce goods. Legends Global is a flagship wing in ticketing and live events. They're bringing their global portfolio of more than 260 venues and attractions onto Klaviyo, integrating ticketing and venue systems, thinking data through our warehouse capabilities and giving the U.S. and U.K. teams a single platform to activate and execute across every market they operate in. Our partner ecosystem is deepening that reach further. In hospitality, the Thanx integration brings restaurants loyalty into a single workflow. And with our integration of this feature now GA, operators on Cloudbeds, Guesty, and Mews can trigger a pre-stay reminder the moment a reservation is made. We're building the go-to-market foundation to match the opportunity, consistency in how we sell, how we deploy and how we support customers at a scale. The data is clear. When customers unifying Klaviyo across e-mail, text, analytics and service, outcomes compound and our cross-sell motion is executing against that. One thing worth calling out on text messaging because it speaks directly to how we approach the market. Current fees have risen meaningfully across the industry over the past 12 months, and most platforms pass those costs through immediately. We chose to absorb them, a decision that reflects our commitment to customers first. This also gave us a real pricing advantage this quarter, and we leaned into it. But our competitive position is more durable than price. Text on Klaviyo runs on the same unified profile as e-mail, WhatsApp and every other channel, and that's what drives long-term share gains. Going forward, we'll be thoughtful and intentional about any future cost pass-throughs while continuing to negotiate the most competitive text messaging rates. In closing, Q1 showed a business with strong fundamentals, growing enterprise relevance and international momentum that is structural. We're investing where the opportunity is biggest, improving the execution foundation to capture it and staying focused on delivering outcomes for customers. The road ahead is significant, and we're ready for it. With that, I'll turn it over to Amanda. Amanda Whalen: Thanks, Chano and AB. Q1 was proof not just of what Klaviyo can do, but of how our business model works when each part reinforces the others. The growth engines we've been building, multiproduct adoption, enterprise momentum and international expansion reinforced each other this quarter. AI accelerated all of them, and the results showed-up exactly where we expected to see them in revenue, in margin, in customer retention and in the expanding values customers are generating from our platform. Revenue grew 28% year-over-year to $358 million, ahead of our expectations. We delivered our strongest non-GAAP operating margin and our first quarter of positive GAAP operating margin since going public. NRR was 110%, up 2.0 points year-over-year, meaning our customers aren't just staying, they're growing with us. Customers are also earning more from every message with KAV or the revenue that customers generate from Klaviyo per message up approximately 8% year-over-year. That's how our model is designed to work and tangible evidence of how we are building more valuable customer relationships that help our customers and in turn, our business grow. Turning to our growth engines. First, multiproduct adoption grew as more brands sought out the strategic advantage of consolidating onto a single platform. Service remains on the steepest adoption curve in our company's history. And all of this matters for future growth because multiproduct customers retain better and generate more value per profile over time. Second, enterprise momentum continued in Q1 with our $50,000-plus ARR customers growing 38% year-over-year to 4,175 customers. This is reflective of a broader structural shift as leading brands modernize and consolidate their tech stacks. These are complex multichannel relationships choosing Klaviyo as their long-term platform because we unify data, intelligence and action in one place. Third, international was again a highlight with revenue outside of the Americas up 39% year-over-year. Notably, revenue for EMEA outside of the U.K. was up 51%, marking the sixth consecutive quarter of growth above 50% in that region. Let's now turn to AI. Across each of our growth engines, AI is increasing both velocity and yield, helping customers do more faster and with better results. Automated flows generate 10x more revenue per message than campaign. And that acceleration is important because it flows directly into our model. As customers generate more value, we grow as well. Agents also represent a net new revenue opportunity. Customer agent is already contributing, and we expect that to grow as we expand channels and capabilities. Composer is early, but the value signals so far are strong. Higher intelligence drives higher value and higher value drives revenue. Turning to the P&L. Non-GAAP operating income was $59 million in Q1, representing a 16% non-GAAP operating margin. That's nearly 500 basis points of expansion year-over-year and our strongest margin since going public. GAAP profitability was driven by improved non-GAAP operating margin as well as a two percentage point reduction in stock-based compensation year-over-year. Non-GAAP gross margin was 76%. This reflects our continued success with text messaging cross-sell, offset in part by infrastructure efficiencies. Non-GAAP operating expenses were 59% of revenue, down 560 basis points year-on-year. Sales and marketing, in particular, saw meaningful leverage. This reflects two things: first, operational efficiencies enabled by AI that we're building into the business; and second, the absence of the B2C CRM marketing investment that we made in Q1 last year. Free cash flow was $19 million, a 5% margin. This reflects normal seasonality and the timing of annual bonus payments, consistent with what we saw in Q1 last year. Our trailing 12-month free cash flow margin was 16%, spotlighting the strong cash generation potential of the business. In March, our Board authorized a $500 million share repurchase program. This authorization reflects our Board's and management's confidence in the durability of our strategy, the scale of the opportunity ahead and our conviction that Klaviyo reflects an attractive long-term investment. As a component of that program, we immediately entered into a $100 million accelerated share repurchase, which was completed in April. We continue to execute on the remaining authorization. Our model is efficient enough that we can invest aggressively in growing the platform in AI and agents, in international, in enterprise and simultaneously return capital to shareholders. Turning to guidance. We're confident in the trajectory and set up for the remainder of the year. We outperformed Q1 expectations by approximately $10 million. Based on that performance and the broad momentum we're seeing, we are raising our full year 2026 revenue guidance by $13 million at the midpoint. This reflects our conviction in what's ahead. We now project revenue between $1.514 billion and $1.522 billion, representing 23% year-on-year growth. We're also raising our full year 2026 non-GAAP operating income guidance to a range of $222 million to $228 million, and non-GAAP operating margin of approximately 14.5% to 15%. The model continues to support reinvestment in growth while delivering expanded profitability. This guidance assumes that we continue to absorb the majority of carrier fee increases. As Chano described, thus far, we've made the strategic decision to absorb these fees rather than passing them directly to customers. Over the course of the year, we'll continue to be intentional in our approach, striking a balance that's strong and smart for both our business and our customers. For Q2, we expect revenue of $359 million to $363 million, representing growth of approximately 23% to 24% and non-GAAP operating income of $47.5 million to $50.5 million or a non-GAAP operating margin of 13% to 14%. As you're building your models for the balance of the year, I would like to call out a few items. With regards to revenue, we expect our sequential step-up in revenue from Q3 to Q4 to be similar to last year. We also expect higher operating margins in our fourth quarter this year compared to Q2 and Q3, driven by the timing of investments as well as the compounding effects of AI efficiencies. As we said last quarter, with scale, we have improved our forecasting visibility, which means we are guiding with greater precision. Our guidance philosophy remains consistent. Our goal is to share the best visibility we have and the numbers that we're confident in delivering. Our guidance reflects both that increased precision and our confidence in the business. Before we open the line to questions, I want to say a few words about the transition that we announced today. Klaviyo has never been stronger than where we are today. There is a significant opportunity ahead for us, strong momentum across the business, and a clear path to continue growing rapidly while expanding profitability. We also have an exceptional team in place, and I've always believed the right moment to take the next step is when the work is in great hands. AB and Chano, thank you for your partnership. Importantly, I'm not going anywhere just yet. I will remain CFO through August before transitioning into an advisory role through November. It has been a privilege to be a part of Klaviyo, and I'll be cheering this team on every step of the way. In closing, here's what we hope you will take away from Q1. We beat and raised. We expanded operating margin to the strongest level since our IPO. We returned $100 million to shareholders while continuing to invest in the platform. The businesses we serve grew, and their engagement with Klaviyo is deepening. This is exactly what our model is built to do, and AI is making all of it faster. We're confident in our trajectory. The platform is getting stronger, and the results are following. And with that, we'll open the line up for questions. Operator: [Operator Instructions] Our first question is from Samad Samana from Jefferies. Samad Samana: So I'm going to pack a 2-parter into this. So first, maybe on the product side, just as I think about Composer adoption, what are you seeing in customers that typically lead in new product adoption? And maybe how do you expect that product to accelerate the AI adoption flywheel? And just in case you mute me, Amanda, great to work with you, and I continue to look forward to working with you until the transition. But I just wanted to touch on that comment about guiding with more precision. And just does that mean that the 2Q guide should be closer to the pin? We had a slightly smaller beat in 1Q. Was that already a philosophy that started when guided for 1Q? Just help us, maybe get a better context in that statement as well. [p id="310160143" name="Andrew Bialecki" type="E" /> Awesome. Thanks for the question. I'll give the Composer one, and I'll pass it over to Amanda for guidance. So yes, we launched this private preview in March, and we're very excited about the results we've seen so far. And again, for context, our Composer agent really combines a combination of a bunch of subagents that do various tasks. But you can think about the two big groupings as, one, it will actually do marketing creation, so we can create marketing campaigns, automations, templates, and creative content. And then two is it will do the analysis. It will actually look at your customers, who they are, help you do cohorting, understand behaviors, as well as look back over previous marketing campaign performance to help you figure out what to do next. So what's great is, yes, we've introduced kind of a range of customers. Some are more power users. Some of them are more entrepreneurs who are just starting out, so we can get a feel for their usage patterns. And I'll tell you, kind of universally, the feedback has been very, very positive. We talked about our next-generation agents building off the success of our marketing agent last fall. And what we've done, and we talked about in past quarters, we've dramatically expanded its scope. So you can think of this as really like kind of, I don't know, version 2 or N+1 of our agent. And the thing that I'll call out is we're getting very, very good at building marketing, creative, and content that is on brand. This is both a function of what we've seen from the LLMs and some of the underlying technology improving, as well as just like technology that we've built at Klaviyo to harness those agents and keep them in the direction that brands want them, right? So actually, we're at an unfair advantage, frankly, because we can teach our agent to pattern match off of past campaigns. So it's a little bit -- that actually makes it better at maintaining a kind of brand in the field that you want. And then on the analytics side, I mean, we've seen just some like incredible results. I think we have customers that are now running these kinds of daily or weekly reviews of the marketing they're doing or how their customers are behaving. And so far, we've only given them the ability to kind of run that ad hoc. So they have to log in and execute those kinds of queries. In the near future, it's not very hard to see that like customers are just going to schedule these to run on demand to alert them of issues, and then couple that with the creation or the creative part of our agents, they'll be able to automatically take action. And in some cases, we expect our agent will just actually automatically decide to run new campaigns or make modifications to do -- for optimizations. And so we're very excited about that. I think the path is also to hey, the value is very clear because obviously, as we run incremental marketing campaigns where we make improvements, we can measure those results. Customers see it, they feel it, they're seeing the value. And I think the path to then, like, hey, the pricing and packaging and monetization is also very clear. And that's something else that we're using this private preview to really work through. So, never been more excited about the intelligence and really the agent capabilities that we're able to build on top of the infrastructure that is Klaviyo's marketing and data platform. And then I'll turn it over to you for guidance. Amanda Whalen: Thanks, Samad, and I'm going to look forward to staying in touch with you as well. On the question of guidance, we are closer to the pin this quarter by design. As we committed to you last quarter on the call, we spoke about guiding with greater precision and greater accuracy that comes with the benefits of that greater precision and greater accuracy that we see from scale. And so the tighter beat reflects that improved ability to forecast the business. If you take a step back and look at Q1, it was incredibly strong. We saw a 28% revenue growth. We saw our highest operating margin since the time of the IPO. We had our first quarter of GAAP profitability as well. And we saw real strength in some of the core metrics of the business, like an NRR of 110 and greater than 50,000 customers, up 38%. So overall, an incredibly strong Q1 that gives us confidence looking forward and gave us confidence to raise that outlook for the rest of the year by $13 million, which is even greater than the beat that we had for Q1. So what you see in the guidance for the rest of the year reflects both of those. It reflects both our increased precision and it reflects the confidence in the momentum that we've got in the business. Operator: Our next question is from DJ Hynes from Canaccord Genuity. [Operator Instructions] David Hynes: AB, I'd love to hear how your agency partners are embracing the innovation that Klaviyo is delivering, right? I mean on the one hand, you're giving them incredible powerful tools to do their jobs better. On the other hand, if the autonomous vision takes shape, you're kind of putting them out of work. So how do you balance that dynamic? And what are you hearing from those folks? Andrew Bialecki: Yes. I mentioned in our opening remarks, this kind of this capability overhang of like basically what you can do with Klaviyo and the infrastructure that we've built is actually, there's a lot more there that our customers and businesses are not taking advantage of. And I think our agencies have always helped close that gap. I think now with our agents, and I'll touch on both Composer, which is sort of for optimizing how you understand your customers and marketing and then customer agent, which is more consumer-facing, agencies are accelerating the adoption of both. So you talked about Composer, I think it makes it easier to take advantage of everything you can do with Klaviyo with all the data and marketing and messaging primitives that we're giving you. And agencies are actually able to take on more clients as a result because they're able to get more leverage as a result of Composer. So I've had many conversations where folks have said that they're actually changing their ratios of the kinds of products they can take on because of, I mean, Klaviyo is a product and it's just ease of use, but especially now because of like some of the agentic capabilities that we're offering. And then what's been great is I've talked to dozens of agencies where they're really establishing new practices around our customer agent. So just as a reminder, our customer agent is a whole new surface. We think about this as this is the digital representative for your business. It can do not just customer support, but can also help with sales conversations, marketing conversations. It can run the game. And because it's connected back to our data platform, it has a real-time view of who that end consumer is, that profile, it can do -- it can do much better than more generic AI agents at like actually matching up to what a consumer is trying to -- looking for. And you'll see that show up in some of the stats that we talked about around like product recommendations. Now the reality is, as we talk about driving adoption to that, like it's still what's growing very fast, service is our fastest-growing product line. The reality is that setting up agents is something that just not a lot of customers have expertise around. So we're both building products around that, where actually we've built a whole number of agents that will train up agents. But the reality is like when we go talk to businesses, they'll say, okay, well, there's some nuance to maybe like how I want to solve some of these, or how I want these experiences to work or how I operate my business. Those agencies are helping us bridge the gap and drive adoption. And so we're actually very excited. We've done a bunch of work to help them set up their own practices so that they can set up customer agents for our customers and help drive adoption. So I think our agency network is in great shape, and I think they're excited to help usher in both of our agents to our almost 200,000 customers -- 200,000 customers. Chano Fernandez: Hey DJ, Chano is speaking. I hope you are well. Just to give you an example, I talked to one of our agency partners that is building a custom order editing scale, connectivity and API that is handling the full post-purchase experience with a human agent, without a human basically in the loop. So that's all created significant automation allowing increased productivity for them. So we're all very excited. Operator: Our next question is from Rob Oliver from Baird. Robert Oliver: Can you hear me okay? First of all, Amanda, I wish you all the best, and it's been a pleasure working with you. My question is for Chano. Chano, just I guess, coming into this year, a lot of excitement around the enterprise opportunity moving upmarket, legacy replacements. You guys called out, I think, some really -- at least one really large win in the quarter. I would love to hear some color from you on what you're seeing within that installed base? How are sales cycles? How is the legacy replacement opportunity relative to kind of where it was when we all gathered last fall in Boston? And then any update on partner contribution would also be helpful. Chano Fernandez: Thank you so much, Rob, for your question. I mean, first, maybe the data, right? I mean we called, we doubled the number of customers over $1 million ARR basically last year, also end of Q1. Clearly, Amanda commented on the number of customers over $50,000, obviously, that's becoming now 38% year-on-year. And we talk to them on an expansion of customers doing with us more than $6 million ARR. And we talk with other customers, examples like Patagonia, that's been a long-term e-mail customer from us now adding text just because they see that fragmentation that have been falling and they see the value of that unified platform in terms of bringing customer experiences together. So I think that all presents a really terrific opportunity for us. I would say that we even with this growth rates beginning of the year is very exciting because, of course, as we're playing more into the enterprise, you know, Rob, that this will be playing more towards largest quarters, especially end of the year and Q4 being much bigger and much larger. And of course, where I think the team is doing a very good job is to put the focus and the discipline, right? The focus is around what we're doing on product and the investments that we're doing on go-to-market and in terms of bringing the results. I think the discipline is about clearly how we are building the pipeline and how we're doing, especially qualification on deals getting much more meaningful in terms of the enterprise cadences, right? So if you would say, how do you feel about the opportunity this is we will talk back in the autumn, I would say I feel even much more excited than I was in the autumn because I can see that tangible. Of course, I will tell you, yes, we are on the early innings of that opportunity, and we have a lot of work to do ahead of us, but the opportunity is just massive. -- right? So this can be by itself a really significant reacceleration engine for Klaviyo, and that's how I see it. It's not going to pan out in one quarter. I don't think it's going to pan out in two quarters, but we will see kind of these growth levels, I would say if I would be on your shoes kind of from a modeling perspective that will have significant impact down the road, and that is not too far away, right? And clearly, if we are creating those customer cases and experiences, again, that brings much more confidence that we're a player. In terms of the partners, as you know, we announced Accenture, and we are working with them pretty closely, of course, with other partners as well, but on a clear target list with clear activities and clear progress. So I'm expecting that we will see some of those wins coming during the course of the next few months. Clearly, on some of the wins that have already announced, there has been support from some of these partners, either because they influence the deal or they source the deal either/or is good for us. So very excited about the enterprise being a game changer for this company. Of course, we want to keep the healthy business of our core bread and butter in terms of the entrepreneur and SMB and lower business. That is doing very well if you look kind of the increase in net new logos overall and the dynamics that we have in that segment. Operator: Our next question is from Raimo Lenschow from Barclays. Raimo Lenschow: All the best from me as well, Amanda. The question I have, like I had a few people asking me about the fee that you mentioned. I think some of your competitors have kind of altered that. Can you talk a little bit about the impact it would have on potential revenue, but also profitability? Amanda Whalen: Sure. Thanks so much, Raimo. So what these are carrier fees. And when you are in the text messaging business, there are carrier fees that come to you from the big telco carriers that get charged that generally for many of our competitors are a pass-through. Now our primary operating principle is we are trying to operate with our customers with consistency and transparency and trust. And we're helping to make their business more predictable. And so thus far, we have taken the strategic choice not to pass through those carrier fees. Now some of them, they vary by carrier. So it's been building over the course of, I'd say, the last year or so with some of these announcements coming even as recently as last week. But we wanted to, again, have that predictability for our customers. Now it certainly helps in price. And Chano is leaning in, as he said, and the team on how we show our customers that value. But as we've said before, the reason that we win is not only because of price, it's primarily because of the value that we create for customers and the benefits that come to them from consolidation. Now as these grow, we're going to keep making thoughtful choices there over time. So I won't say that we'll continue to pass them on forever, but we're going to be really strong and choiceful and intentional about how and when and in what manner we do that. And that intention is built into the outlook for the back half of the year, both the increasing penetration of the text messaging business as well as this choice that we're making on carrier fees. Operator: Our next question is from Terrell Tillman from Truist Securities.... Amanda Whalen: Terry if you want to hop back in the que we can move on to the next question, we will pull you up again if you are able to login. Operator: Our next question is from Nicholas Altmann from BTIG. Nicholas Altmann: AB, one of the value propositions of Composer is just around the velocity of campaigns. And so how should we think about the monetization of Composer from a stand-alone SKU perspective versus Composer allowing customers to accelerate their e-mail and messaging volumes? And then the follow-up question to that is, does that sort of play into your decision to not pass through the SMS carrier fees? [p id="310160143" name="Andrew Bialecki" type="E" /> So when we think about Composer, I mean, we're ultimately, selling or we're providing is intelligence. And obviously, that's the form factor of like tokens. So what we're finding is that customers -- to go back to some of the examples that we've had is customers are, for instance, using us to review who their customers are, the state of their marketing and then using that to figure out like what to do next. And we're finding that those like sessions, right, those kinds of reviews they're doing are incredibly valuable. I mean they're generating thousands -- hundreds of thousands of dollars in incremental revenue and sales. And so the pricing that people get is it's actually pretty similar to if you were to hire somebody or how you value your own time. And we're just able to do that. We're able to provide that intelligence like through tokens and obviously, it's just much more efficient. And we can go much deeper because our agents have access to some internal benchmarks and like kind of best practices that aren't publicly available. So what that's doing is that intelligence, we look at it is an entirely new revenue stream. We think about the activities that people are doing in and around Klaviyo, like so obviously, we're storing information, people log in Klaviyo to understand who their customers are, different cohorts, behavioral trends. They're using it to actually create marketing. They're using it to then review that marketing. So we think that's just an entirely new revenue stream. In terms of, like the impact that's having on just overall platform usage, like actual usage of our infrastructure, yes, we're seeing that drive incremental use. One stat for us is as we've opened up the underlying infrastructure of Klaviyo to third-party agents or LLM clients like ChatGPT and Claude and Gemini, we're finding the folks that have integrated MCP and our best users. I mean, they're doing 16% more marketing, more campaigns, more automations, querying into their data more frequently. So, we think this is actually like this is kind of like the easy version of that trend because it still requires people to use those tools and prompt on their own. What we think is going to happen with our agent is you're going to be able to set it either in like sort of synchronous mode where you're chatting with it or having a conversation with it, it's on Klaviyo or other platforms. But you can also just set it on sort of this like, hey, run every day, right, asynchronous or recurring mode. And we think that will drive even more usage. So I go back to this, like there's just a lot of latent opportunity out there to do better marketing, deliver better customer experiences. And Composer is literally the conduit by which we're going to do that. And I think people see this as like, okay, that's very valuable and they're willing to pay for it. And I do think it will have this halo effect of really in two dimensions. One is, I think it will increase messaging volume because messaging will be just better, right? The creative, the content, the personalization will be better. And then two is Klaviyo is always indexed on the number of consumer relationships a business has. And one of the things that we look at is, well, how do you help a business grow more of those relationships and make sure they're higher quality. And obviously, like if a marketer or a business owner or somebody that owns the customer experience is strapped for time, like we see this. There are cohorts of consumers that they're just not able to deliver the right experience to because they just run out of capacity, right, their own like human time to work on that. Agents don't have that problem. I mean they can tirelessly work for that to optimize for every single one of those consumers. So we actually think that the number of consumer relationships business has are also going to grow as a result. You'll get less churn. So you think about like in the worst case, it's like, say, unwanted, right, marketing messaging or just marketing messaging that doesn't resonate, people unsubscribe. We actually think that will go down because the quality will go up. So those are some of the halo effects that we think we'll see beyond just directly monetizing Composer. Amanda Whalen: And I would think of, to the second half of your question, carrier fees is very distinct from this. As we just talked about before, carrier fees are about this choice and the balance that we're making between the two priorities of customer predictability and trust and maintaining our overall margins. And if you look at our gross margins for Q1, you can see that compared to last year, we absorbed the carrier fees. We saw significant growth in our text messaging business, and we were able to hold our gross margins relatively steady, which I think shows our ability to deliver on both of those priorities at once. As we think about the priorities for the back half of the year, it's about growing our gross profit dollars and continuing to grow that revenue and gross profit dollars while expanding our operating margin, and that is exactly what we're doing. As we committed to you at the beginning of the year, we're committed to increasing our operating margins by at least one point this year. And should we not only raised our operating income dollars, but also our operating margin in our guidance this year on the reflection of that strength that we're seeing in the business. Chano Fernandez: And I wouldn't take that not passing through the carrier fees is basically, as we say, it's an intentional decision on being customer first, but I wouldn't take it like if and when we decide to do that and, and what will be intentional and what is the right moment that we're basically winning because we are not doing that because clearly, we are winning because of the value of our offering and they comply -- the full unified basically data platform that we offer. And certainly, we are going to be value-based pricing down the road. It's not the aim of this team to be competing on pricing. I thought that decision was important, particularly now to provide some stability on pricing to our customers and, potentially reflects as well the highest customer satisfaction that we've been highlighted as a strong performer of the Forrester Wave. And I think we all know that happy customers basically renew and buy more from you. Operator: Our next question is from Siti Panigrahi from Mizuho. Siti Panigrahi: Amanda, it's a pleasure working with you. I wish you good luck. And then I want to dig into the NRR. That's 110%, up two points year-over-year, but flat sequentially. In prior calls, you talked about key drivers like core e-mail, SMS and then cross-sell and profile enforcement. And as the profile enforcement benefit already laps, so what keeps NRR at this or above this level? Is there -- what are the next driver you think that will push NRR higher in the back half of this year? Amanda Whalen: Thank you, Siti. It's a great question. And the largest driver of NRR is customer behavior and the way that customers are leaning into Klaviyo to automate more, to send more to use increasingly our flows, which generate 10x more revenue per message compared to a static campaign. And as customers see that value, they're leaning in and they're using Klaviyo. So if you break down NRR into its pieces and take a step back, the first and largest driver is expansion of customers' usage of our existing products. And that's where when they see that strong ROI and that strong return, they increase their usage and that, in fact, is contributing positively to NRR. The second driver is cross-sell, and we have increasing and strong momentum in our cross-sell as well. Customers see and understand the value of consolidating onto a single platform and the way it drives not only simplification from a business standpoint, but importantly, makes for a better customer journey and drives better relationships. And then there is a little bit in NRR on lapping of the price -- the profile enforcement from last year. And so as you think about it over the course of this year, you'll see some impact from that lapping of profile enforcement, but then you'll also see contribution coming in a positive sense from the improvements that we're seeing in expansion and in cross-sell. Operator: Our next question is from Callie Valenti from Goldman Sachs. Callie Valenti: I understand that the lighter beat was by design, but I think the sequential growth in the first quarter was still a bit lighter versus prior first quarter. So I wanted to ask, just given Klaviyo has outsized exposure to retail and e-commerce, is this potentially a result of the business becoming more seasonal over time as it scales? Or is there a better way to think about that? Amanda Whalen: I think, Callie, it's maybe a little bit actually inverse, we're seeing because we have gone to profile enforcement, we still do see seasonality because Q4 is our customers' biggest time of the year, and we are there for them, and they are counting on us to drive their revenue. But with profile enforcement, we see a little bit less seasonality there than we have in the past. It's primarily coming from our text messaging business and then some expansion there in e-mail. I will say that in Q1, what we saw was just strength across many different parts of the business. We saw strength in our international business, where it's growing 39% year-on-year. We're seeing increasing momentum in our enterprise business. And those enterprise businesses, again, tend to be steadier multiyear contracts. A great example of a multiyear contract that was a big win for us this quarter, for instance, is – All Saints, who signed a three-year contract. And those are going to tend to be less variable across the year. So it's all of these different areas of strength that we're seeing in the business that contribute to a great Q1 and then also a strong outlook for the year. Operator: Our final question is from Scott Berg from Needham & Company. Scott Berg: Nice quarter here. I want to ask just a question about the state of marketing budgets overall and from what you're seeing with customers through an interesting lens since you sell to lots of different sized customers. Your results talk about a marketing space that seems to be on fire right now, at least from a demand perspective, especially relative to the rest of our enterprise software companies that are growing, we'll call it, 40% or 50% slower than what Klaviyo is growing right now. I guess the question is why? I guess what's in the environment that's actually driving the spend? Or what are you seeing that has customers standing up, raising their hands saying, I've got to do this now, and I've got to do it in a pretty big way. Andrew Bialecki: I'm happy to take that, and Chano will add some color on to the specific customer examples. But I'll give you three trends I think we're seeing. So the first is because unlike most software enterprise software, we're focused on revenue generation. I mean there's sort of an insatiable appetite for if you can help grow top line, grow profits, people want to spend more. And we see that constantly. The second I'll say is just around consolidation, and that's both within marketing, but then across also marketing, our data and analytics products are now our service products, Customer Hub on the website. We're finding that people want to merge those budgets together. And it's not actually for like -- I mean, there's probably some total cost of ownership arguments there, but it's not to reduce costs. It's because they're finding that when you combine the data that we have with those marketing channels, you can get better performance. And that's making a big difference. So I think those are the trends that I think we would think are very evergreen, very durable. And they're definitely -- I mean, they're big contributors to our growth. And then obviously, we're going to overlay on top of that then I think there's a lot of demand -- I mean just speaking from what we're seeing from Composer, there's a lot of demand for then intelligence applied to this combined B2C CRM infrastructure that we offer because people get that there's a lot of ideas that they can't see or projects they can't execute on and they then want to use that as a way to efficiently execute those and then obviously drive greater profitability and increase revenues. Chano Fernandez: Yes. I would only add that personalization as well and the basically breadth of understanding that we provide out of those customer profiles and communicating with them at the right time through the right channel with the right message is really powerful in our platform, and they're leveraging that, and they're seeing the results through Klaviyo attributed revenue. Again, we more than doubled than the rest of the market in terms of our customer revenues through GMV. And then I would say the other trend is this productivity increase that we are providing in terms of the opportunity to do much more with less, a bit less headcount driven, but clearly, the opportunity to create those campaigns on targets and at the same time, have those customer agents that can communicate and put a great face to their business with their customers is terrific capabilities that they're leveraging on. So I think it's the increased revenue impact on ROI that they're seeing plus this technology shift that we are seeing and where Klaviyo is certainly at the center of and that is what is driving it. Operator: Thank you. This concludes today's call. Thank you for joining us. You may now disconnect.
Operator: Greetings, and welcome to Joby Aviation's First Quarter 2026 Financial Results Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Teresa Thuruthiyil. Please go ahead. Teresa Thuruthiyil: Thank you. Good afternoon and evening, everyone. Thank you for joining us for Joby Aviation's first quarter 2026 financial results conference call. I'm Teresa Thuruthiyil, Joby's Head of Investor Relations. We will begin today with prepared comments from JoeBen Bevirt, Founder and Chief Executive Officer; and Rodrigo Brumana, Chief Financial Officer. For the Q&A portion of today's call, we will also be joined by our Executive Chairman, Paul Sciarra. Please note that our discussion today will include statements regarding future events and financial performance as well as statements of belief, expectation and intent. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied. For a more detailed discussion of these risks and uncertainties, please refer to our filings with the SEC and the safe harbor disclaimer contained in today's shareholder letter. The forward-looking statements included in this call are made only as of the date of this call. And the company does not assume any obligation to update or revise them. Also during the call, we will refer both to GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in our Q1 2026 shareholder letter, which you can find on our Investor Relations website, along with a replay of this call. With all of that said, it's my pleasure to turn the call over to JoeBen. JoeBen Bevirt: Thank you, Teresa, and thank you, everyone, for joining us today. It's been less than 10 weeks since we last spoke. But despite the short window, I'm pleased to report that it's been another exceptional quarter of progress across all core areas of Joby's business. Perhaps the biggest news of the quarter was the selection of states that will participate in the White House-backed eIPP program. This program paves the way for us to bring our aircraft and service directly to U.S. communities this year ahead of FAA type certification. And to speak frankly, we were awarded this dream slate of opportunities. We were selected as part of 5 applications covering 11 states, including Texas, New York and Florida. Each of the selected programs is now in the process of finalizing an OTA agreement with the FAA and the Department of Transportation. These agreements are flexible R&D contracting mechanisms that enable faster and less restrictive collaboration than traditional federal contracts. They will define the scope, roles and time lines for what happens next, but our work has already begun. In New York, we're progressing with the installation of Joby charging infrastructure at both Eastside heliports. And the Port Authority of New York and New Jersey recently released a solicitation for a vertiport on the LaGuardia Airport Terminal C parking garage roof. In Texas, we've secured our MRO facility to support operations in the region. And in Florida, we've been working with Orlando International Airport on the development of a dedicated vertiport for air taxis. In other states like North Carolina, Utah, we're planning how to begin autonomous cargo flights using our Superpilot technology. Importantly, we're also already showing that we have the technical and operational maturity required to participate in the program. Alongside flying our first FAA conforming aircraft for TIA this quarter, we conducted a series of demonstration flights in the Bay Area and New York. During those flights, we landed at 2 major international airports, Oakland and JFK. We flew to 3 Manhattan heliports. We operated within Class B airspace, which surrounds our nation's busiest airports. And we demonstrated our ability to charge in a range of different environments. The New York flights, in particular, took our demonstrations to the next level by connecting JFK with the Wall Street Heliport, the West 30th Street Heliport and the East 34th Street Heliport. We not only demonstrated real-life use cases flown by our Blade customers today. We also completed the first ever flight of an eVTOL aircraft between an international airport and a downtown Heliport. And as they say, if you can make it in New York, you can make it anywhere. Whether it's flying past the Statute of Liberty or the Golden Gate Bridge, these flights demonstrated without question that we have the aircraft, the team, the tools and the experience required to make the most of the eIPP program. But that maturity hasn't come overnight. Our first transition flight with this design was way back in 2017. The success you are seeing today is the culmination of years of careful work in developing, testing and producing mature VTOL-capable aircraft. And that maturity will be key to delivering real VTOL passenger operations as part of the eIPP program. But to do that, you also need infrastructure. And I'm pleased to report we're making excellent progress on that front, too. Our New York demos highlighted the incredible value of the landing sites and lounges we gained access to as part of our Blade acquisition, which includes America's 3 busiest heliports. In L.A., we announced a partnership with the Ruben Brothers to bring a vertiport to the iconic towers at Century Plaza. In the Bay Area, we announced a partnership with the SAP Center to develop a vertiport in a key San Jose location. And in Dubai, we celebrated the completion of the first ever purpose-built commercial vertiport located right next to Dubai International Airport. It will serve as the operational hub for our services in the region. These are the first of multiple infrastructure developments and partnerships you'll be hearing about as our recent demonstration flights and eIPP opportunities accelerate conversations with partners around the world. Over the last few years, we have set ourselves apart. Thanks to the maturity of our aircraft design and our progress through certification. But as we scale production to meet the demands of our early markets and the eIPP program, it's clear that our head start on manufacturing will be equally important. The experience we are already building in certifiable production processes, production efficiency, supply chain optimization and inventory management are all going to be just as important as the technical and certification lead we've built over the last few years. By producing more aircraft, we'll be able to serve more markets and more customers, enabling us to access progressively lower unit costs ahead of our peers. To put our ramp into context, we are adding a third shift to our composites layup team and our automated fiber placement team. We're training batches of new technicians each month. And our composites team is already producing 2.5x the volume of parts it was producing this time last year. But it's not just about volume. It's also about quality and to some extent, speed. We aren't building prototype parts anymore. We're building conforming parts for a conforming aircraft. And we're seeing incredible results as we ramp production. As we move from producing composite parts for our first conforming aircraft to our fifth conforming aircraft, we have the time required to produce parts while simultaneously improving quality. Today, we're producing parts for our ninth conforming aircraft. And we continue to do all of this with Toyota at our side. We're embedding the knowledge and experience of the Toyota production system as we go, including practices such as Gemba Walks, where you observe work directly on the factory floor and Obeya rooms that centralize project information to accelerate decision-making and foster collaboration. This kind of day-to-day collaboration and knowledge sharing is invaluable as we ramp production. And we're incredibly fortunate to be learning directly from such an experienced automaker. On certification, we remain focused on the fifth and final stage of the type certification process and are making strong progress. During the quarter, we successfully completed our SR3 audit with the FAA, a milestone years in the making. The audit reviewed our aircraft design and safety requirements, test results and development standards and confirmed that the test results we are producing meet the FAA's expectations for the final phase of certification. This achievement, along with so much of what we've discussed today, is testament to the incredible work our teams have done over the last 5 years. And I'd like to take this opportunity to thank Didier for his remarkable contributions. He will be with us through early July and will continue to support us as an adviser after that. As we look ahead, we are promoting a number of our leaders to optimize our organizational efficiency and velocity. Looking more broadly across our product platform. We also completed full transition flights with our turbine electric VTOL aircraft during the quarter, including a 148-mile flight at our max takeoff weight of 2,400 kilograms. As a reminder, this aircraft is built on our standard electric S4 platform and introduces a gas turbine for increased range and payload. Achieving transition is one of the hardest technical challenge faced in the development of this technology. But by using our existing platform, our own core technologies and our experienced team, we've been able to deliver it in record time. That allowed us to demonstrate its maneuverability and endurance to the U.S. Army last month alongside our partner, L3Harris. There are live contract opportunities in this space today with clear capability gaps and strong demand for this type of system. That same operational experience and aircraft maturity is key to the partnership we announced with ASI or Air Space Intelligence last month. ASI has quietly built a reputation as a true leader in airspace modernization with their high fidelity 4D modeling and AI tools. And they are 1 of 3 companies currently competing to provide the software foundation for the FAA's brand-new air traffic control system. While our aircraft was designed to operate comfortably within the current system, we have always believed there are better ways to deliver higher volume eVTOL operations. And we are very excited about the ongoing work to modernize air traffic control led by Secretary Duffy. Alongside ASI, we plan to run real-life demonstrations of how scaled operations can be safely integrated into complex and high-traffic airspace later this year. This work is also an important step towards fully autonomous eVTOL operations. With our Superpilot stack, we already have the technology to do this. What's been missing is an airspace management system that allows for fully digital deconfliction of the airspace. Our work with ASI should help pave the way for this important next step. And if it's successful, it should mean safer, lower-cost aerial transportation for eVTOL and every other aircraft that uses U.S. airspace. We closed out the first quarter with a very strong balance sheet, incredible progress across all areas of our business and the clearest path we've ever had to beginning passenger operations. With our recent New York and San Francisco demos behind us and the eIPP program ahead of us, communities across America aren't just reading about the future of flight or hearing about it on calls like these anymore. They're seeing it in the skies above their own cities. And as I said to our team, when we rang the opening bell at the New York Stock Exchange last week, just half a mile from where our aircraft landed an hour later. We are quite literally ringing in the next golden age of flight. Rodrigo, over to you. Rodrigo Brumana: Thank you, JoeBen, and good evening, everyone. As JoeBen just described, Q1 was a quarter of steady progress. Last week in New York, I had the privilege of meeting many of you in person, including investors and analysts joining this call today. Together, we witnessed something remarkable. Successful flight demonstrations connecting Wall Street in Midtown to JFK in minutes, real aircraft flying real routes, all made possible through our Blade infrastructure in partnership with the FAA, local government and key infrastructure partners. It was a glimpse of the future. And I could not be more excited to be a part of this team. The moments like that don't happen by accident. They are the result of years of deliberate investment and disciplined execution. And from a finance perspective, my job is to ensure that continues by funding certification, scaling manufacturing and supporting commercial launch, while preserving the financial flexibility to execute. What you saw in New York last week and in the Bay Area the month before is the combination of deliberate investment and disciplined execution, producing tangible progress in the market. Now let me walk you through our first quarter financial results in more detail. We entered 2026 with a strong momentum on the balance sheet. We ended the first quarter with approximately $2.5 billion in cash, cash equivalents and short-term investments, including $1.3 billion in net proceeds raised during the quarter from our equity and convertible offerings and warrants exercised by Delta Airlines. Our Q1 use of cash, cash equivalents and short-term investments, excluding net proceeds from Q1 capital raises, totaled approximately $195 million. This includes $32 million of net purchase cost for our new Ohio manufacturing facility after financing. The gross purchase price was $62 million. And we financed roughly half of that at attractive terms, bringing the net cash impact for the quarter to $32 million. Excluding that onetime purchase, consistent with how we communicated our first half guidance, Q1 cash use was $163 million compared to $157 million in Q4. Additional detail is available in our Q1 shareholder letter. Total property and equipment investment in the quarter was approximately $78 million. Of that, $62 million reflects the gross Ohio purchase with the remaining $16 million supporting facility build-out, tooling and production equipment for our manufacturing ramp. Overall, Q1 spend is in line with our first half 2026 guidance of $340 million to $370 million, excluding the onetime Ohio purchase exactly as previewed and we remain on track within that range. Step back for a moment, the capital deployment you see this quarter reflects the choice to lead, not to follow. We are running a multiyear manufacturing ramp, an active type certification program, a global operations build-out and integration of Blade, all in parallel. Few companies in our industry are in a position to execute all 4 at once. We can because of years of foundational investment. And we can do it sustainably because of the strength of our balance sheet. On a GAAP basis, we reported a Q1 net loss of $110 million, a $12 million improvement compared to the $122 million net loss in Q4. The sequential improvement was driven by a $33 million noncash favorable change in the fair value of warrants and earn-out shares and $4 million in higher interest income, partially offset by a $27 million increase in loss from operations. As a reminder, the fair value revaluation of warrants and earn-out shares is driven primarily by changes in our share price and can introduce meaningful noncash volatility from quarter-to-quarter. Revenue for Q1 was $24 million, which was mostly Blade. Compared to Q4, revenue decreased $7 million, reflecting the absence of the onetime revenue we recognized in Q4 for the flight demonstrations in Japan. Blade performance in Q1 was strong. And we are now heading into the seasonal ramp with Q2 typically building as weather improves to a Q3 peak. Service levels and customer demand remained consistent. And Q1 puts us on a solid trajectory for our full year revenue guidance of $105 million to $115 million. Total operating expenses for Q1 were $258 million compared to $238 million in Q4. The $20 million increase was primarily driven by continued investment to support certification, manufacturing ramp and commercial readiness. Adjusted EBITDA, a non-GAAP metric that we reconcile to net income in our shareholder letter was a loss of $179 million in Q1 compared to a loss of $154 million in Q4. The $24 million sequential change reflects the revenue and expense dynamics I just described. Taken together, the capital deployed in Q1 reflects deliberate investment in the capabilities that set Joby apart, advancing certification, scaling manufacturing in California and Ohio and building the foundation for commercial launch. Q1 was a quarter of steady execution. And as the flights in New York and in the Bay Area demonstrated, our progress is increasingly visible, not just on the certification pathway, but in the skies above our largest cities. We have the balance sheet to leave and the discipline to do it well. Thank you for your continued support. And Operator, please open the call for questions. Operator: [Operator Instructions] The first question we have is from Kristine Liwag of Morgan Stanley. Kristine Liwag: JoeBen, Paul, Rodrigo, Teresa, it was really inspiring to see the Joby aircraft land in front of me my own eyes at the West 30th Street vertiport last week. So thank you for that. I guess with the very visible progress of Joby with eIPP, can you talk about what kind of conversations you're having with incremental customers? Because as you guys touched on your prepared remarks, the future is here. All the years of hard work that you've had is really coming to fruition and you have these capabilities occurring now. And so as these kind of firm up in what people could see the true mission of this, can you talk about those customer conversations? And how quickly do you think those potential orders could materialize? JoeBen Bevirt: Thank you, Kristine. So first, I think the experience for folks in New York was really indicative. And the excitement was really indicative of the progress that we're making and the opportunities ahead of us. There are so many customers who are really excited about beginning to use our service. I think the next element of that, I think you're referring to is sales of aircraft. And as Paul has talked about a number of times before, that's certainly a lever that we can choose to pull as we desire. There is a huge amount of demand from many international markets. And we may dial that depending upon the market. And then I think the third area where we're really seeing momentum and opportunity to capitalize on the demonstrations we've been doing and the momentum around eIPP is around infrastructure. And I think that the -- really accelerating those infrastructure conversations and getting more and more takeoff and landing locations built out is a strong opportunity. And then I would just -- back to your question about aircraft sales. I might turn it over to Paul to touch on the opportunities on the defense side. Paul Sciarra: Sure. Thanks for the question, Kristine. Yes, I mean, as we've talked about, we've got a pretty deep pool of sort of potential aircraft sales opportunities outside of the U.S. I mean we've talked specifically about Saudi Arabia, also about Japan with our partnership there. So all of those folks are really looking for the same things that we were able to demonstrate in New York, which is an aircraft that is mature. That can sort of meet the mission. And that is essentially supported by both maintenance and pilot training to make those aircraft sort of useful in their markets. So I think the work that we did in New York is certainly positive for the momentum that we're seeing on the sales side of things. Operator: The next question we have is from James Kirby of JPMorgan. James Kirby: Just for the eIPP, how are you thinking about sequencing the initial aircraft for the program by both location and operation? Is a decision tree that is based off potential revenue opportunity or maybe where infrastructure is already in place? Or is there a regulatory angle to that? Just kind of initial thoughts. I know it's early, just on how you're looking to scale the eIPP. JoeBen Bevirt: Thanks so much, James. So I think it's both of those elements. It's about infrastructure. And you have some states that are really moving very rapidly at deploying additional infrastructure and that's -- we're thrilled about that. And then there's also opportunities like in New York, where we already have existing infrastructure and an existing customer base and being able to bring the acoustic signature, the really remarkable acoustic signature of our aircraft to places that are currently quite impacted by helicopter noise, we think, is a massive opportunity. So we do see substantial demand across these eIPP markets. And we're very excited to be ramping our manufacturing as aggressively as we can to deliver on that opportunity. Operator: The next question we have is from Andres Sheppard of Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on all the great progress. And I echo those thoughts earlier. It was very exciting to see the aircraft in a natural environment. JoeBen, I guess my question, just to build from the last one is around the eIPP. Curious to get your vision on kind of how you see the program starting and kind of ramping up from there. We know, obviously, it will run for 3 years. We know it will start this summer. We know some of the projects have been selected. There might be a few additional ones. But what we don't know exactly, I guess, is kind of how the program will start. Is it going to be each project at the same time, multiple aircrafts at the same time or kind of rotating. So just curious on kind of how you see the program starting and kind of ramping up and really developing and maturing over these 3 years. JoeBen Bevirt: I think our -- the best crystal ball we've got at the moment is that we'll be signing or that agreements will start being signed in Q3. And that as we move into the back half of the year, we'll start to do operations. I would expect operations both for our eVTOL aircraft as well as for our autonomous platforms. And on the eVTOL side, we are, as I mentioned before, ramping manufacturing as aggressively as we can to be able to field as many aircraft into the eIPP markets as we can as we look into the back half of this year and the first half of next year. We'd really like to get those fleets in New York, Florida and Texas built out. Operator: [Operator Instructions] The next question we have is from Savi Syth of Raymond James. Savanthi Syth: I know you started flying the first kind of conforming aircraft. I was just curious when you think you'll start kind of full credit testing of the aircraft and what things need to transpire to get there? JoeBen Bevirt: Thank you so much, Savi. So we are thrilled to have that aircraft in the air. And just as a reminder, this was a monumental lift to build this aircraft with FAA DERs and [ VARs ] intimately involved in the process. Having that aircraft in the air is absolutely fantastic. That's one piece. The second piece is we need all of the conforming test articles to have been built and then tested and then many of those test reports written and submitted. So those are 2 parallel work streams that we're working on. The next step for the FAA -- or for our first conforming aircraft is for Joby pilots to begin doing testing. And in parallel to that, to get FAA pilots into the simulator and get them trained up. So really, you can think of 3 parallel work streams. One is the components and parts getting tested. Two is Joby pilots flying the conforming aircraft and doing all the test points in advance of the FAA pilots doing them. And then third is the FAA pilots getting trained in the simulator. Operator: The next question we have is from Chris Pierce of Needham & Company. Christopher Pierce: Just looking back to the eIPP and production. I mean it seems like the partners in the states are moving as fast as one could hope. I just want to get a sense of are there any bottlenecks you could potentially see on your side, manufacturing, raw materials, production, even pilots that you need to have at the ready in these locations? I just want to kind of get a sense of what you're doing to kind of head off all potential bottlenecks to get as many aircraft out there as possible. JoeBen Bevirt: Yes. Thank you so much, Chris. Great question. And I'd like to echo your shout out to the states and the FAA and the DOT for the absolutely phenomenal work that they're doing on this program. We are working very hard on all 3 elements that you mentioned: one, supply chain; two, ramping manufacturing; and three, we made a very early investment in our flight simulator and having that installed now and preparing that for beginning to train the FAA pilots is really speaks to the Joby team and the incredible foresight. As a reminder, we built that in partnership with CAE. So CAE is the world leader in flight simulators. Joby develops all the flight dynamics and the flight controls that run on that. And CAE provided the hardware. It was an amazing partnership. And we're so excited to start training pilots in it. Operator: [Operator Instructions] The next question we have is from Austin Moeller of Canaccord Genuity. Austin Moeller: So just my first question here. What is the status of the production activity time line in Ohio? And do you plan to add shifts there over time as well? JoeBen Bevirt: Thanks so much, Austin. The ramp of the team in Ohio is going really, really well. As a reminder, folks, we're doing propeller blade manufacturing there. And we're really pleased with the bring up of that facility. That was the first facility that we purchased in Ohio. We're adding additional components and systems that we're starting to build in that first facility. In addition, as a reminder, we bought an additional 730,000 square foot facility across the street. And that facility is beginning to get the build-out and preparing that facility for our -- beginning to put production processes into that facility. So it's 2 parallel work streams. One, building the workforce and adding more and more capabilities for our team in Ohio. And the second is building out that larger facility. So really, really pleased with the momentum and the maturity that we're seeing out of the team in Ohio. Operator: The next question we have is from Amit Dayal of H.C. Wainwright. Amit Dayal: Congrats on all the progress and good to see the flights starting to take place now. With respect to passenger flights, you've indicated potentially this could take place by the end of this year. I think earlier expectations of these might materialize in the Middle East. But with the situation over there, do you think these flights potentially take place here in the U.S.? JoeBen Bevirt: Thank you so much, Amit. So it is very exciting for us to now have 2 shots on goal for passenger flights this year, both in Dubai and as well as in our different eIPP markets. And so I think that's looking very strong that we'll see passenger flights later this year. And for me, this is a dream come true. This is something I've been waiting for, for a really, really long time. Operator: At this time, I'll be handing the call over to Teresa. Thank you, Teresa. Please go ahead. Teresa Thuruthiyil: Thank you, Irene, and thanks to all the analysts who asked questions today. Earlier this week, we invited members of our Reddit community to submit questions. We received a bunch of different questions about eIPP, future stops on our Electric Skies tour and conforming aircraft. So let's jump into a couple of them. First question asks, how far along are the other FAA conforming aircraft that are in production? How many are in production? What does the timeline look like for FAA pilot testing? JoeBen, do you want to give us a summary of that one? JoeBen Bevirt: Yes. So first, in terms of the number in production, as I said in my prepared remarks, we now have parts for 9 aircraft that are beginning to be built. And we have 5 aircraft that we will be using for TIA flight testing. And all of those are progressing well through our manufacturing operation. So this is indicative of the manufacturing ramp. As I said, we have spooled up our third shift for our composites operation and really seeing great momentum. And just to like put a fine point on it. We are ramping as fast as we can, but with the focus on quality. We really want to drive MCRs, which are nonconformances to 0. We want to be making as many of our parts with 0 defects as we possibly can. The name of the game in aviation manufacturing is making parts with incredible consistency and quality. And it's incredible to have the Toyota team that has a deep expertise and ethos steeped in quality. The Toyota production system is known around the world for the incredible quality and efficiency that it drives in the manufacturing processes and having Toyota shoulder to shoulder with us has been absolutely phenomenal. Teresa Thuruthiyil: JoeBen, thank you. The next question is about eIPP and the question asked. The purpose of eIPP is for AAM companies, cities and regulators to garner useful information earlier in the development process than would have been previously possible. Can you share any useful information Joby or regulators have learned from Joby's New York City and SSA area tours, including any unexpected public reactions? JoeBen Bevirt: Yes, thanks. So the key pieces this really showcased and built on the deep relationships that we've built, whether that's with the EDC and the Port Authority in New York, whether that's with the FAA and the DOT. And the Joby team just knocked it out of the park. The operations went flawlessly. And we are so grateful for -- I'm so grateful for the Joby team and for the relationships that we've built and the maturity of our processes and with the regulators. I think the thing that stood out for me the most, and I think was really remarkable about the flights was people getting to hear our aircraft for the first time and specifically not hear our aircraft when it flies by overhead. New York has large numbers of helicopters operating. And the difference in the acoustic profile between a helicopter where you can hear it from a long way away. And our aircraft where it can fly directly overhead and you can't even hear it in a city like New York is really exciting. And we can't wait to bring our aircraft to New York, to Florida, to Texas. And we're so grateful for the DOT and the FAA for the remarkable work that they've done on the eIPP and very grateful for the states and their incredible execution on this program. Teresa Thuruthiyil: Yes, it really was joy to have the community so involved in these flights that we did last week in New York City. Thank you, everyone, for joining us today. We greatly appreciate your support. Operator, over to you. Operator: Thank you. This concludes today's conference. And thank you for joining us. You may now disconnect your lines.
Operator: Hello, everyone, and welcome to the Intapp Third Quarter Fiscal 2026 Earnings Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Senior Vice President, Investor Relations, David Trone. The floor is yours. David Trone: Thank you. Welcome to Intapp's Fiscal Third Quarter 2026 Financial Results. On the call with me today are John Hall, Chairman and CEO, Intapp; and David Morton, Chief Financial Officer. During the course of this conference call, we may make forward-looking statements regarding trends, strategies and the anticipated performance of our business, including guidance provided for our fiscal fourth quarter and full year 2026. These forward-looking statements are based on management's current views and expectations, entail certain assumptions made as of today's date and are subject to various risks and uncertainties, including those described in our SEC filings and other publicly available documents that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Intapp disclaims any obligation to update or revise any forward-looking statements, except as required by law. Further, on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results, including non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP diluted net income per share and free cash flow. Our GAAP financial results, along with reconciliations of GAAP to non-GAAP financial measures can be found in today's earnings release and its supplemental financial tables, which is available on our website and as an exhibit to the Form 8-K furnished with the SEC prior to this call, or a supplemental financial presentation, which is available on our website. With that, I'll hand the conversation over to John. John Hall: Thanks, David. Good afternoon, everyone. Thank you for joining us. Q3 was a strong quarter, one that reflects both the health of our core business and the momentum building behind where Intapp is headed. Today, I'll share our Q3 results, reflect on what we put in motion at Investor Day at Amplify in February and walk through the client wins and early signals that speak to the opportunity ahead. First, the numbers. We achieved solid quarterly results in Q3, supported by the addition of new clients and the expansion of client accounts around the world. Our cloud ARR grew to $459 million, up 31% year-over-year. Cloud now represents 82% of our total ARR of $560 million. In the quarter, we earned SaaS revenue of nearly $108 million, up 27% year-over-year and total revenue of $146 million, up 13% year-over-year. February was a significant month for Intapp. We brought Amplify, our annual client and product showcase to New York and London, and we hosted our second Investor Day. Together, those events put a single thesis on the table. Intapp is entering its most consequential chapter with strength, and we have a tremendous road map ahead to unlock new value for our clients. If you weren't there, I'd encourage you to watch the recordings. I want to use the next few minutes to revisit that thesis. Demand for the professional firms we serve is growing, and we expect that to continue. As the economy expands, companies need outside counsel for high-stakes litigation, bankers for acquisitions and auditors for assurance. These firms provide functions that are fundamental to capitalism, expert advice and accepted third-party accountability that clients can't replicate internally. Their core economic value has nothing to do with technology, but their staying competitive does. These firms must transform and the opportunity to use AI to become more efficient, more capable and more competitive is significant. And the firms that move decisively will be the ones that win. But they're also learning something after experimenting with first-generation horizontal tools. Generic AI wasn't built for how these highly regulated firms actually work or for the professional trust and compliance standards they're required to uphold. For these firms, professional compliance is an existential issue. That's why we built Celeste, an AI-native agentic platform designed from the ground up for professional firms. Celeste delivers expert agents directly into the workflows that drive firm performance, business origination, deal and asset management, business intake and compliance and revenue management, built for firms not adapted from tools built for everyone else. Celeste works as a stand-alone platform and as a context and compliance layer that makes other leading AI tools more effective inside a firm, giving them the firm-specific context and professional compliance protections they need to operate in a highly regulated environment. Leading AI companies joined us on stage at Amplify as we launched Celeste. We are re-architecting our core business applications to run as expert agents powered by Celeste. We demonstrated expert agents for deal development, professional compliance and revenue management, all grounded in Intapp data and systems all running on Celeste. These innovations expand our addressable market meaningfully. As AI automates knowledge work inside firms, Intapp can move beyond competing for software budgets and capture a larger share of overall personnel budgets, pricing for the value that expert agents create and for the volume of activity flowing through the platform, matters opened, deals managed, engagements resourced, compliance actions approved. Celeste enables consumption-based pricing alongside our existing enterprise and seat models, giving us more ways to grow with our clients as adoption deepens. We are entering the agent market from a position of significant structural advantage. With thousands of firms already running on Intapp, we manage their end-to-end business workflows, their most critical data and their professional compliance programs. Now with a trusted professionally compliant agentic platform, no competitor can match that position. We grow as the firms do, and there is no one better positioned to lead this next chapter. At Amplify, 3 of the most consequential companies in AI spoke publicly about why they're building with Intapp. Our strategic alliance with Microsoft continues to deepen. On stage, Microsoft was direct about what enterprise AI actually requires for professional firms. AI is becoming part of the enterprise backbone. In order to make this really work at the enterprise level, especially for sensitive firms, we really need to think about walls to make sure that the data only shows up for the right people at the right time. Winston Weinberg, CEO of Harvey, discussed their collaboration with Intapp as a way to help clients succeed. "Intapp has been working on this for so long, and you have built such an incredible structure and trust with all the clients, making sure that we can integrate with all of your systems and making it the best for the end user." Elanor Dorfman, Head of Industries at Anthropic, articulated why our 2 platforms are built to work together, "we're very ecosystem-driven. We build primitives that we then work with our partners like Intapp to deliver, so customers experience customized value inside of these products." This is exactly the way we want to deliver AI into regulated enterprise environments. This is what it looks like when the market validates your position. And the signals we're seeing from clients and prospects back that up. Let me share a few highlights. Amplify grew over 40% more client attendees than last year with an 80% increase in digital impressions and more than 110% increase in client and partner engagement across social and digital channels. The appetite for Celeste is clear. Celeste content is generating 3x the average engagement across our channels, and the Celeste overview is averaging over 9 minutes per individual visit, the highest in our portfolio. Our April webinar series featuring Celeste, one for each industry vertical, set company records for both registrants and attendees. And sales development meetings in April exceeded monthly goals by over 65%, a new high watermark. That momentum runs alongside a business that continues to execute and now with Celeste. Q3 growth came from all 3 of our core motions: new clients, expansion within existing accounts and cloud migrations, while we continue building traction across newer verticals, products and geographies. In our legal vertical, we saw a continuing trend of firms seeking to modernize and expand their technology while continuing to require the trust and professional compliance expertise we provide. We mentioned last quarter that Ropes & Gray, an Am Law 100 firm, chose our compliance solutions to modernize intake and conflicts. This quarter, they decided to add to those solutions, choosing DealCloud to help accelerate their business development activity and Celeste to drive their agentic agenda. PLT, a current client utilizing conflicts, chose to further modernize their solutions and migrate to the cloud with Intapp Time. They also purchased Intapp Terms with Assist and Walls as they work to simplify their tech stack via a single provider. Kobre & Kim chose Intapp Time to increase overall efficiency and provide enhanced features to improve compliance. And an Am Law 100 firm chose Intapp Time for its trusted AI capabilities after a well-funded AI start-up competitor fell short of what their firm actually required. This is a pattern in the market. In the accounting industry, technology purchases continue to be driven by both the need for AI capabilities and the continuing competition resulting from PE investments and mergers. Among the firms that turned to Intapp for AI-driven modernization this quarter, Mauldin & Jenkins, an Accounting Today Top 100 firm needed a central place to track, monitor and review engagements. They chose Intapp Employee Compliance to deliver reliable confirmation with regulatory requirements. U.K.-based Summer Group looked to Intapp to solve inefficiencies from multiple systems brought together from acquisitions. Using Intapp Collaboration, they will be able to streamline operations and improve collaboration across the firm. The European offices of 2 major accounting firms chose Intapp as well. One purchased Intapp Collaboration to increase internal productivity and satisfaction. The other purchased both Intapp Collaboration and Walls to ensure greater control over data with geographic sensitivities. In our financial services verticals, firms continue to choose our purpose-built solutions for their industry specificity. A global private investment firm replaced a competing platform with Intapp DealCloud, choosing industry depth over a generic solution in order to drive adoption and value firm-wide. We also added new clients in real assets. A leading residential builder chose Intapp Properties to consolidate their workflows into one centralized repository. And Essential Properties, an internally managed REIT chose Intapp Properties to meet their growing demand for modern technology solutions. Q3 was a strong quarter, and it came at a defining moment. We launched Celeste in limited availability. Our clients are engaged and the early signals are strong. Our ecosystem is aligned, and our core business continues to execute across new logos, expansions and migrations. What comes next is what we've been building toward. Professional firms are transforming. The firm AI market is growing. And as Celeste moves toward broader availability, no one is better positioned to lead it than Intapp. To our clients, partners, investors, Board and the global Intapp team, thank you. This is the result of your trust and dedication. David, over to you. David Morton: Thank you, John, and thanks to everyone for joining us today. I'd also like to acknowledge those who participated in our Investor Day in February, both virtually and in person. Alongside our annual Amplify event, it marked an important step forward in articulating Intapp's firm AI strategy. We highlighted 3 key areas: the introduction of Celeste, our agentic AI platform, purpose-built for professional firms and the incremental TAM it unlocks, the strength of our enterprise go-to-market motion and our framework and line of sight to $1 billion in total ARR. We remain confident in that trajectory, underpinned by our differentiated position, serving highly regulated professionals with professional trust, compliance native, workflow critical industry-specific AI solutions. Turning to the quarter. We delivered strong fiscal third quarter results, reflecting continued momentum in our cloud business and growing market adoption of our AI offerings. Alongside strong quarterly performance across our growth, compliance and profitability offerings, our Celeste AI offering is now translating into meaningful contribution. Just a few months removed from our Celeste product announcement, over 15% of net new bookings in the quarter was driven by our Celeste AI solutions, including early monetization from firm AI pilots. We're seeing strong enterprise adoption across land, expand and vertical motions, reinforcing AI as a durable driver of cloud growth. Following our Amplify event, we also saw a meaningful uptick in demand generation, not just for Celeste, but across our broader product suite, driven by increased customer engagement with our AI capabilities. Cloud ARR grew 31% year-over-year to $459.3 million, supported by expansion within our $100,000-plus ARR client base and 123% cloud net revenue retention rate. We continue to operate the business with discipline. Gross and operating margins expanded year-over-year. Q3 marked a record free cash flow quarter, and we continued executing on our share repurchase program. Together, these results reflect our focus on driving operating leverage while investing for long-term growth. Our SaaS revenue was $107.9 million, up 27% year-over-year and now represents nearly 3/4 of total revenue, driven by both new client wins and expansion within the installed base. License revenue was $24.8 million, down 22% year-over-year, consistent with expectations as clients prepare for migration to the cloud. Professional services revenue totaled $13.4 million, up 7% year-over-year, supported by increased partner-led implementations. Total revenue was $146 million, up 13% year-over-year. Following the completion of our initial repurchase program, our Board authorized an additional $200 million in January. During Q3, we repurchased $100 million or approximately 3.9 million shares, bringing fiscal year-to-date repurchases to over 7 million shares. This reflects both our confidence in the long-term value of the business and our continued focus on managing dilution. Our partner ecosystem is becoming an increasingly important growth lever. Our co-sell motion with Microsoft continued to gain traction in Q3 with strong alignment and expanding Azure marketplace participation and MACC utilization, driving improved deal velocity, larger transaction sizes and reduced execution risk in the enterprise engagements. At the same time, our broader partner network is scaling alongside our AI road map. As highlighted at Amplify, we are building a targeted ecosystem around Celeste to expand both capability and reach. Non-GAAP gross margin was 78.8%, up from 77.9% a year ago, driven by cloud mix and efficiency gains. Non-GAAP operating expenses were $89.3 million compared to $80.3 million in the prior year period, reflecting continued investment in go-to-market capacity, pipeline generation and scaled client and partner events, including Amplify. Our non-GAAP operating income was $25.7 million, up from $20.3 million last year, and non-GAAP diluted EPS was $0.29. Free cash flow was $63.4 million, a record quarter, and we ended Q3 with $146.8 million in cash and cash equivalents. Some of our key metrics include cloud ARR grew 31% year-over-year to $459.3 million and total ARR increased 23%. Remaining performance obligations were $791.4 million, up 27% year-over-year, providing strong forward visibility. Clients generating at least $100,000 in ARR reached 858, representing more than 100 net adds year-over-year. We exited the quarter with over 1,375 clients at the $50,000-plus ARR. This cohort represents approximately 95% of total ARR and will be a go-forward quarterly disclosure. Turning to our guidance. For the fourth quarter of fiscal 2026, we expect SaaS revenue to be between $113.1 million and $114.1 million, total revenue between $149.1 million and $150.1 million, non-GAAP operating income between $28.4 million and $29.4 million and non-GAAP EPS between $0.36 and $0.38 based on approximately 79 million diluted shares. For the full fiscal year, we expect SaaS revenue between $421 million and $422 million, total revenue between $574.3 million and $575.3 million, non-GAAP operating income between $102.7 million and $103.7 million, non-GAAP EPS between $1.22 and $1.24 based on approximately 82 million diluted shares. Thank you. And I'll now turn the call back to the operator. Operator: [Operator Instructions] Your first question comes from the line of Kevin McVeigh with UBS. Kevin McVeigh: Congratulations on the continued execution. I wonder if you could give us just any initial feedback on Celeste and whether or not that's what's driving some of the uptick in the average client size because clearly, you're seeing pretty good momentum there and just maybe help dimensionalize that a little bit. John Hall: Thanks, Kevin. The feedback on Celeste has been tremendous. We had a very exciting set of programs at Amplify, where people got to see it for the first time. We released it in limited availability. So we've been managing the number of clients that we're engaging with. But the list of people who have looked at it, had us come and talk to them about what it can do is off the charts. So we're very excited about how well it's been received. And what's been really interesting to hear back from the prospects is they've really struggled with some of the first-generation tools in exactly the areas that we designed Celeste to address. So MCP is an important technology architecture for this generation, but it is revealing and creating a lot of new repositories of business information that are essentially ungoverned by the firm's professional compliance requirements. And what we've done with the Celeste architecture is exactly what addresses this core point. So there's a lot of excitement about the opportunity, and we've been working with several of the limited availability clients on some really exciting solutions already. And we were able to share with you all that Ropes & Gray bought the product in the quarter, and we have a group that is in the pipeline to do more. I think there's a really exciting opportunity for us to enter into this Agentic space here. Obviously, we announced the product 2/3, 2/3 of the way through Q3. So it was a small part of the time that we had in market in the quarter. Kevin McVeigh: That's helpful. Really helpful, John. And just a follow-up there. As the clients have started to season some of the LLMs, have they shifted preference in terms of any specific LLMs or they kind of stayed the course? John Hall: Well, that's also interesting. We're seeing a wide range across the market. There are people who had committed to OpenAI and ChatGPT early. We're seeing folks who have adopted Claude and like the Anthropic models. We're seeing a big footprint for Microsoft Copilot because this is such a Microsoft-oriented market and the overall relationship they have with Microsoft and the ability of Copilot to work with that whole environment is important to them. So it's a very interesting mix, we're even seeing some clients asking us about some of the other systems like xAI and Google. So I think that there is a rich competition going for those models out there. Celeste is importantly designed with a lot of feedback from our clients to be model agnostic. So we will allow clients to use whichever of the model fits best for their firm or even for each solution because some people prefer certain models for certain solution areas versus others, and they want to have a mix inside their firm. And we provide the professional compliance capability and the Agentic orchestration for all of those across multiple solution types and multiple models at the same time. So people really like that design. Operator: Your next question comes from the line of Alexei Gogolev of JPMorgan. Isabella Camaj: This is Bella Camaj on for Alexei. So starting with the adjusted EBIT guidance, it looks like the full year guidance raise was smaller in magnitude than the 3Q beat. Is that mainly just a product of expense timing with 3Q spend being pushed into 4Q? Or are you planning to step up investment next quarter into Celeste or other initiatives? David Morton: Thank you for the question. Yes, if you step back over 2 years ago, when we started framing the conversation in and around the leverage that we'll be driving towards the 300 to 500 basis points. Clearly, the first year, we drove over 600 basis points this past year, the implied guide will land you around the 300 basis points while letting us continue to invest ratably across our go-to-market efforts with everything that we've announced in the last Amplify event.; We're getting really good traction as well as in our product rate of pace of innovation has been nothing but spectacular. And so when you think about not having 100% leverage per se of all your incremental revenue, that's kind of how we've been scaling the company appropriately. Also, you get into a little bit timing. And what I mean by that is in Q2, you provide an annual guide that's across $4 million versus now we're very centered in, of course, the last quarter of the fiscal year, that guide midpoint is across only $1 million. So that's -- you get into a little bit of rounding there, too. Obviously, we're going to continue to drive our top line growth and continue to scale appropriately the company as we've guided both in our long-term and near-term targets. Isabella Camaj: Got it. That's helpful. And just a follow-up question. Looking at the impressive cloud NRR performance, could you quantify the mix between the drivers there, such as seat adds, module attach or AI-related expansion? And how should we think about NRR normalizing over the next few quarters? David Morton: Yes. We gave some windows of near-term success of kind of what's added to that, both with our -- with some incremental disclosures at Investor Day. And I would say those trends continue, both through our cross-sell and up-sell matter. Our NRR of the 123% -- 124% cadence that we've been operating at has some durability. And we're continuing to see the cohort that we're selling to this enterprise motion, which also ties into the $50,000-plus ARR cohort adds that we saw over this past quarter. So all in all, the team executed really strong, and they're driving both the actions, both on incremental up-sell as well as cross-sell across the board. Operator: Our next question comes from the line of Terry Tillman with Truist Securities. Unknown Analyst: This is Luke [indiscernible] for Terry. So I know you mentioned the revenue monetization for Celeste will come. But what are some key milestones and KPIs in terms of integrating Celeste are you looking for in the coming quarters and years? John Hall: Thanks for the question. We have a strong road map for the rollout of Celeste through this limited availability period and into general availability. There's a whole series of engagements with our clients that we're doing across our target markets. In addition to Celeste as a stand-alone platform, you can buy each of our products now with Celeste integrated into it. So DealCloud with Celeste, Compliance with Celeste, et cetera. There's a set of solutions that clients have already asked us to help them build out with agents, which gives us access to a whole new value proposition and TAM inside the firms. In addition to the traditional opportunity to sell our software into the IT budget, the firms are creating a second budget for AI solutions specifically, which we're now able to sell into. And we're looking increasingly at the conversations with firms about their personnel budget because part of the promise of the agentic strategy is, can you offset some of your hiring in the future with agents rather than additional headcount as your firm continues to scale. So if you look across our solution areas, we're bringing agents into each of them and the key milestones will be the extension of our products into Agentic workflows in each of those key areas. And the value for that is enormous. So we've had some very positive experiences with a lot of the engagements that we've had since limited availability launch. And you'll see more news from us as we grow and roll out more of the Agentic solutions inside each of the areas that we serve. Unknown Analyst: Awesome. And then I was hoping for a follow-up going into the compliance officer hiring that you mentioned within your client base. And if you could just double tap into that and potentially share any use cases from there. John Hall: Yes. The compliance officer, they go by several titles, but that role is an increasingly sought-after role across the firms in our market because of their unique professional compliance obligations. And Intapp has always had a very strong business being the system that enables the firms to run strong professional compliance programs, avoiding conflicts of interest, meeting their duties of loyalty, meeting their duties of independence, managing material nonpublic information across deals and across clients and across investors in a way that the firms really trust us to have the deep understanding of what this existential risk is to their firm. And the compliance officers that are being hired are increasingly getting involved in the AI strategy of these firms because there's such a risk as AI rolls out of these firms of creating ungoverned repositories of new information. So many of these systems encourage the users to drag documents and information into them so they can do really exciting analysis. But what's happening is larger and larger pools of ungoverned information are being formed inside these firms as they try these first-generation AI tools. And they've been in the market long enough now that the compliance officers, the risk officers and the AI leaders are getting together and saying, we need to start looking at how to manage the information governance risk, the professional compliance risk that goes along with all these tools. And so the experience that they've had these first couple of years has really set them up well to meet us when we come to talk to them about the Celeste design and they appreciate what we've built in from the ground up in this AI native Agentic platform that is designed to help manage and govern the AI from the Intapp systems, but also from the other AI systems that they're adopting. And we're the trusted provider in this category. And there really isn't a great counterpart in the competitive arena where we face a lot of competition. So I think this is an area where we have a lot of ability to affect the risk profile of these firms in a way the compliance officers are going to be delighted with and which they need to do. So we're excited about this. And the growth in that role is something that we're really targeting in our go-to-market. Operator: Your next question comes from the line of Parker Lane with Stifel. J. Lane: John, as you look at the different use cases and workflows for Celeste, be it compliance or intake or business origination, are there any particular areas that clients are looking to tackle first here with the launch of Celeste and the initial bookings momentum? Is that relatively representative of the existing apps that people have or anything that has hit the ground running that you'd call out? John Hall: Yes. Thanks, Parker. We have focused initially on the areas that the firms are already working with us. Obviously, that's going to be the fastest go-to-market for a general purpose compliant Agentic platform is to work with them in the areas that we can demonstrate value very quickly and then grow from there. So the first areas would be intake, business acceptance, all the compliance issues that are associated with how firms onboard new clients, key to their growth, business origination, sourcing and origination and all the work that firms do sourcing fundraising or sourcing opportunities to deploy funds. It's also in the lateral area. So a lot of the firms grow by hiring lateral partners and bringing books of business or bringing particular areas of expertise with them. This is a very complex maneuver, but is central to a big part of the market's growth strategy. There's also the private equity trend coming into accounting and consulting, the area of helping firms with mergers and getting through the compliance issues of bringing these larger and larger accounting firms together. And then in the time area, we have incredible opportunity to deploy agents in the whole realm of business utilization, how are firms using the resources they have, how are they starting to use AI in place of people and how are they going to capture that and the activity as a way to figure out what their pricing and profitability management needs to be. So all the business of the firm areas that Intapp has built such a strong position are perfect for us rolling out Celeste, and it's complementary to a lot of the areas in the practices where the firms have deployed other tools, but they really haven't had a great solution for the business side. And it's half to 2/3 of the population of the firm spends most of their time on these things. So it's a huge area for us, and we're very excited about how that's rolling out. J. Lane: That's great feedback. And Dave, I think you mentioned that 50% of net new bookings are from Celeste. I'd love to hear how the initial conversations have gone around the monetization of that and the business model there. Obviously, you haven't priced on seats fully in the past, but this is even a different business model altogether. So can you just give us some initial impressions of how those conversations have gone? David Morton: Yes. I'll add some and then invite John to as well. And just -- so we're clear, it was 15, 15% of the approximately 15%. I thought you might have said 50%, but everything rose last quarter. So it was really successful. No, it's been after Amplify, just the demand and outreach directly from our key clients as well as net new. And so it's been kind of pulling everything through not only within just those specific SKUs or that platform, but along a lot of our other products that we offer as well because they would like that whole suite. And so it's been more of a portfolio conversation. And they'll continue to engage with us as we look forward to future deployments, but everything we've seen thus far has been very, very positive. John, I don't know if you wanted to add any other notes on some of those as well. John Hall: No, I gave a few stats in the prepared remarks about the engagement that we have across the client base. It's incredible the volume that we're dealing where the people who are interested in getting engaged with. I think it really is speaking to one of the limitations of the general horizontal models that people have been trying to work with, and they really appreciate the architecture and the compliance design that we're bringing in. I also am super excited because we were only in the market for 4, 5 weeks of the quarter there at the end, and these are generally enterprise engagements. So people need a little time to go through, work with the product and come to conclusion they want to come on board and for us to get to this progress in just 4 or 5 weeks, I'm thrilled. And moreover, the pipeline going forward is very strong. So I think we're really tapping into an area here. It's still early, obviously, but I think we're really tapping into an area of need. Firms are trying to figure out how to get the best value and leverage out of this AI strategy, but they need to do it in an industry aware, compliance-aware way. And I think the opportunity here is huge. Operator: Your next question comes from the line of Steven Enders with Citi. Unknown Analyst: This is [indiscernible] for Steven Enders. I think my first question is, you mentioned winning over very well-funded generic LLMs. So as your customers become more cognizant of token costs, how does this benefit or impact Intapp and Celeste adoption? John Hall: Thanks for the question. I think your question is about how do firms react as they start to look at their scaling token costs. Yes. So I think one of the things to realize is that firms have been experimenting in a lot of different ways with these tools. And one of the things that they've discovered is that generic MCP creates a lot of traffic because they have to try things over and over or the system, the agent, the pool has to try things over and over to try to find the right answer, and it takes a few iterations or several iterations each time. One of the design principles in Celeste with our semantic layer, our context engine is to really understand the deterministic information inside the firm that so many of these solutions on the enterprise side and on the firm side are designed to go get and serve up as part of a general business workflow in many of these different functions inside the firm. And so what they're discovering is the Celeste architecture is actually much better at getting truer facts, more reliable facts out of the business systems as part of the workflows in a more effective and efficient way than a lot of the things that they were trying to develop or put together in a DIY model. And this is one of the deeper arguments for why I think there's a huge opportunity for these vertical companies with deep expertise to build solutions for this LLM and agentic generation in a way that really understands how the correct architecture should be put together and particularly for highly regulated industries like this one, it's not just a token cost issue, although that is certainly something that they need to manage. It's an information risk issue, which has serious implications for the firm's reputation and standing and compliance generally with their clients and with their regulators and with the courts. So I think there's a real argument here for a vertical-specific program and architecture like Celeste. I think it plays to our favor. Unknown Analyst: Perfect. That's very helpful. And my next question is just trying to understand the contribution of AI to net new. So you said Celeste is at about 15% of new ARR. And if I'm not wrong, I think Assist last quarter was about 10% of net new. So is the math right that at this point, AI contributes to about over 25%? Or how to think about the overall contribution from AI? David Morton: So growing... John Hall: Yes, go ahead, Dave. David Morton: No, go ahead, John. Sorry. John Hall: It's growing rapidly. We did incorporate the Assist technology into a new generation when we released Celeste. So this quarter, you had a period when we were selling Assist because we had not announced Celeste yet. And then in the last month of the quarter, we were selling and marketing and delivering Celeste, but only in limited availability. So what you're seeing is an evolution of the mix there. Operator: Your next question comes from the line of Alex Sklar with Raymond James. Johnathan McCary: This is Johnathan McCary on for Alex. I'll start with John. You alluded to winning against a well-funded start-up in a bid for time. So I'm actually just curious on the back of that. How often are you seeing those sorts of competitors in bake-offs and in which areas of the platform is that most common? And then how important are the partnerships with the likes of Anthropic and Microsoft when you're going into a competitive conversation like that with the prospect? John Hall: Yes. Thank you for the question. So in several areas, there have been venture-backed companies that have started in spaces that we've had a long history in. We've actually been very excited about the fact that we have such a rich enterprise position with strong data and strong compliance and strong trust in these firms that we're able to offer a very compelling case for why we have an enterprise-class system versus something that some of the smaller companies have put together. There's no question that competition has grown over the years inside the space. But one of the things I'm very impressed by what the team has done is that we've actually seen firms who have tried some of these newer tools for a little while and then turn them off and come back. So a lot of the opportunity here, I think, is to build on the enterprise-grade capabilities that we have developed over so many years and bring the Celeste technology in to meet the clients' needs. I think the partnerships certainly with Anthropic more recently, but in this area, Microsoft has a huge influence. And so our ability to build on the Microsoft relationship overall, I think, really helps us, particularly with the enterprise class firms for whom this is a core business function where they want to trust a scaled vendor. And we have to keep up with the competition in certain areas, but we also have set the pace in many areas of the product that is keeping everybody else on their toes, too. So it's a vibrant market, but I'm very impressed with how well the team has developed our offering here. And I gave a lot of examples in the script about our time win specifically on this point so that you all have some insight into how that's actually going out there. Johnathan McCary: Yes, very helpful. And then I'll pivot the one for Dave. So we heard about this at the Analyst Day a bit, but on the increased focus on the 2,800 named accounts. I'm curious what you think is left to do there from a hiring perspective? And then now in the AI world with Celeste out there in the market, what go-to-market adjustments do you think are needed now to kind of succeed and enable those clients, the largest accounts with your AI offering? David Morton: Yes. No, good question. We're going to continue to drive scale and efficiency with our sales and marketing motion, specifically on densifying those key enterprise accounts. We still have a lot to go, but we like the progress we've done thus far, and we're already busy at work thinking about FY '27 and what that portends and the massive amount of opportunities in front of us that we're really excited about. So more to come on that, but we like how everything is being set up thus far. Operator: Your next question comes from the line of Saket Kalia with Barclays. Saket Kalia: John, maybe for you, I just want to zoom out. There's a lot of great product stuff that I want to dig into. But maybe just at the highest level, I know that you spend a lot of time with customers. What do you hear from them around their hiring plans going forward? And because we've got such a diverse business, maybe you can just compare and contrast how those are different, if at all, between sort of professional services and financial services. John Hall: Yes. Thank you, Saket. We've been on quite a tour here leading up to Amplify with our advisory board and then after Amplify, I've met a lot of the firms along with many of the executives on the team who have been out with the team. It is a really interesting conversation because I ask this too. And almost everyone has said, yes, there's an opportunity for AI to bring efficiency into our business. We're not really looking at profound staffing changes for this next 12 months. Maybe the summer classes will be a little more controlled, but we don't feel like we're ready to say that all the work is something going to be done with AI. That being said, what they are saying and I think this is a very interesting positioning is rather than reduce the size of the team, they're looking to deploy more AI and more agents so that they can continue to scale their businesses, all of whom are growing and grow with the economy or faster without hiring as many people going forward, which is a much more culturally sensitive way of building these partnership firms and scaling them. And so that's been our messaging with Celeste is to help firms scale from here, and it's very positively received. Now there are pockets where people are saying, "Oh, these are areas inside the firm that we think are a place where we can reduce expenses and automate the activity." And where that's the case, we're able to build an ROI case for agents that can be very compelling. But I think the firms are selective about where in the firm they're proposing to do that. I think your question about professional services versus financial services, I think the firms that are still partnerships are a little more sensitive in this regard. I think the firms that have converted to corporations years ago or more recently who are looking to drive particularly this PE-backed investment drive efficiency for the bottom line, are saying there's a little bit more opportunity to deploy AI and agents to transform parts of the business. One of the things I'm really excited about is in these expert-driven businesses where so much of their value is the people who really represent the firm and have the knowledge for execution. It's in the business services areas that support all those folks that I think will be the first areas where they make transformative moves with staffing. And we are uniquely positioned on the business services side to help the firm deploy agents. And this is exactly what Celeste is for and what it's designed to do. So I think the area where they're going to go first is exactly the area where we're set up to serve them. Saket Kalia: Got it. Got it. That makes a ton of sense and very helpful. Dave, maybe for you, just on the back of that, it's great to hear about the early success with Celeste and limited availability. So I realize this is an unfair question because the sample size is still small. But I'm curious how you think about the uplift that you can get from existing customer as they sort of add Celeste on, if that makes sense. David Morton: It does. A good question. We're just really scratching the surface here. And one of the thesis is that it unlocks a whole new SAM and TAM that we rolled out at Investor Day. As you recall, our TAM that we're servicing is $20 billion of the core IT SAM that we offer, but then there's the whole $30 billion of non-IT spend, which is really the workforce that we think that we can tap into. And so when you look at our performance with just a couple of weeks out, yes, I just -- I think there's a large appetite there and just seeing the pull-through and the demand and the pipe gen thus far has been really, really encouraging. And so we look forward to continue to provide updates on this trajectory. But I do think we're continuing to participate across different vectors, which then also get us into platform, consumption, seat and so on and so on, along with our traditional enterprise motions that we've been doing. So anyway, more to come on that, Saket, but it's a fair question. Operator: There are no further questions for the question-and-answer session. I'd now like to turn the call back over to John Hall for final comments. John Hall: Okay. Thanks, everyone. We appreciate your attention and questions. We have a great Q3 behind us, and we're excited about our continued momentum to finish out fiscal '26. Thanks again for your time today, and we look forward to talking to you again next quarter. Operator: Thank you. And with that, we conclude our program for today. We thank you for participating, and you may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Cricut First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand over the conference to your first speaker today, Michael Hoade, Vice President of Finance. Please go ahead. Michael Hoade: Thank you, operator, and good afternoon, everyone. Thank you for joining us on Cricut's First Quarter 2026 Earnings Call. Please note that today's call is being webcast and recorded on the Investor Relations section of the company's website. A replay of the webcast will also be available following today's call. For your reference, accompanying slides used on today's call, along with a supplemental data sheet, have been posted to the Investor Relations section of the company's website, investor.cricut.com. Joining me on the call today are Ashish Arora, Chief Executive Officer; and Kimball Shill, Chief Financial Officer. Today's prepared remarks have been recorded, after which Ashish and Kimball will host a live Q&A. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements, and management may make additional forward-looking statements including statements regarding our strategies, business, expenses, tariffs, capital allocation and results of operations in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of Cricut's most recently filed Form 10-K or Form 10-Q that we have filed with the Securities and Exchange Commission. Actual events or results could differ materially. This call also contains time-sensitive information that is accurate only as of the date of this broadcast, May 5, 2026. Cricut assumes no obligation to update any forward-looking projection that may be made in today's release or call. I will now turn the call over to Ashish. Ashish Arora: Thank you, Michael. In Q1, we began to see the early benefits of our platform-first strategy with guided onboarding, bundles, guided flows in Design Space and services working together for a simpler, more compelling user experience. We successfully introduced our newest machines and launched Cricut's first service offering. Both reflect the strength of our platform in delivering a guided experience that helps users make what they want more easily. We're also encouraged by the positive response to the added value in our new machine bundles, which reinforces our strategy. We are pleased to see growth in active users year-on-year. Simplifying the user experience remains a key focus to drive engagement. We are pleased with profitability, growth in platform revenue and growth in global machine sell-out units. However, those gains did not yet translate into total company sales growth, which declined less than 2% year-over-year in Q1. We are moving with urgency to create a more compelling mass market experience, accelerate our development cycles and compete more effectively. Today, I will discuss what went well in Q1 2026, where we can improve and our priorities for the year. Kimball will then cover the financial details and our outlook for 2026. We delivered solid Q1 profitability despite early headwinds. Platform revenue increased nearly 6% and strong machine sell-out units gave us a solid start to the year. During the quarter, we launched 2 new cutting machines, Joy 2 and Explore 5, offered exclusively in bundled options designed to improve user onboarding while delivering compelling price points and value. We also launched the next generation of our handheld heat presses, EasyPress SE in the popular 9x9 and 12x10 sizes. To support these launches, we introduced several new materials and accessories and continue to improve our software platform, including new AI capabilities and easy-to-use guided project flows. We are encouraged by the initial results and user feedback. We are proud to be the recipient of Michaels' Best New Product Launch Award. Michaels is the world's largest craft retailer and an important partner for Cricut. We're also focused on increasing our speed of execution and are accelerating investments in hardware development, materials and engagement to support future growth. You can already see the early results of those investments in our 2026 launches so far. We plan to maintain a marketing and promotional cadence similar to last year, and we are excited about the road map ahead. We remain focused on acquiring new users and increasing engagement across our platform, which together drive our monetization flywheel of subscription and accessories and materials. We believe Cricut is a growth business, and we are intent on improving it. Let me talk about our priorities. At the top of the funnel, our goal is to broaden awareness and bring new consumers into the brand. Our research tells us that to do that successfully, Cricut has to feel relevant and approachable. Put simply, we need more consumers to believe that Cricut is for someone like me. That is the core objective of our influencer strategy today, and it will also be a central message in the broader marketing campaign we are preparing to launch this summer. As consumers move from awareness into consideration, we see 2 barriers that matter most. They need to believe that Cricut is easy to use and affordable. Our strategy is designed to address both. We are continuing to invest in onboarding, guided flows, software and platform improvements and bundle-only offerings. Together, these efforts help simplify the learning curve, improve affordability and perceived value and make it easier for new users to get started and succeed early in their journey with Cricut. We saw encouraging signs of progress in Q1. We continue to invest in marketing to expand our audience and deepen engagement with the brand. We gained momentum across key channels, driven in part by strong results from our influencer activations, along with continued improvement in overall digital marketing performance. These efforts were further supported by the halo effect of our late Q4 campaigns and promotional activity. Altogether, that contributed to strength in connected machine sell-out in Q1 with particularly strong consumer demand early in the quarter. While we did not grow products revenue in Q1, we did continue to see global machine sell-out increase year-over-year and quarter-to-date trends remain positive. At the same time, we are building the experience in a way that supports stronger adoption over the long term. In 2026, we are leaning into a bundle-only consumer experience as we launch the next generation of our cutting machines. These new bundles combine the machine, tools and materials with tightly integrated guided software flows to create a more cohesive out-of-box experience and help users succeed from their very first project. In Q1, we began to see early benefits from this approach, which I'll speak to more when I get to engagement. We also made important progress in innovation during the quarter. We introduced 2 next-generation cutting machines built on all new architectures, Cricut Joy 2 and Cricut Explore 5. We launched our direct-to-film service, Cricut's first service offering, which is another strong example of how we are reducing complexity for consumers. It combines the power of our creative platform with the simplicity of guided flows, enabling users to create vibrant full-color designs that are delivered directly to their doors. We believe this is the beginning of a new era for Cricut, one where we expand the top of the funnel, remove barriers to adoption and deliver a more seamless end-to-end experience that helps more users create with confidence from day 1. We continue to make progress stabilizing engagement trends, ending the quarter with active users up 1% and 90-day engaged users down 1%, representing improvements year-on-year and sequentially. We are encouraged by the early response to the initiatives we launched in late Q4 and into Q1, including guided flows for full-color stickers and insert cards, expanded vinyl decal use cases, our AI-assisted project designer tool and improved project preview visualization. We now have 6 guided flows, which cover our most popular use cases and dramatically simplify the user experience. In addition, we began rolling out AI Project Designer, which allows users to design and make a project through a conversational interface. Taken together, these launches reflect how our platform is evolving to become simpler, more intuitive and more compelling for a broader set of consumers. A key leading indicator of future growth is how effectively we engage new users. In Q1, cut intensity among our 2026 onboarder cohort in their first few weeks reached its highest level for a Q1 in the past 2 years. Users onboarding with our newly launched Joy 2 and Explore 5 machines are now guided through a broader range of projects that utilize a full set of materials included in their bundles. We also introduced additional improvements late in the quarter to further reduce friction and drive repeat engagement. These include enhanced educational content within guided flows, improved accuracy of our AI assistant chatbot and gamification designed to encourage exploration of machine capabilities and repeat visits. Among returning members, we are seeing early signs of progress as well. Members who joined in recent years and returned to create projects in Q1 demonstrated higher cut intensity compared to prior year. At the same time, as the large 2020 and 2021 cohorts continue to decline as a percentage of our active user base, we are seeing a moderation in overall engagement erosion. Our engagement marketing efforts, which focus on bringing users back into our platform are also becoming more effective and efficient. For example, using AI to generate and personalize life cycle campaign messaging has consistently improved click-through rates. The product improvements experienced by returning users in Design Space are positively impacting perception among both members and independent influencers. Looking ahead, we are excited about our upcoming platform innovations, which we believe will continue to make the creative experience faster, more intuitive and more delightful. In Q1, paid subscribers increased 104,000 or over 3% year-on-year to almost 3.08 million as we saw platform revenue increase nearly 6% to almost $84.8 million year-on-year. We did see a drop of 13,000 subscribers sequentially from Q4 2025, reflecting lower promotional activity in Q1 as we emphasize revenue growth in the quarter. As discussed in earlier calls, there is some natural subscriber attrition. So subscriber growth may be challenging until we increase the pace of machine sales and new user acquisition. We saw some of this pressure manifest in Q1. That said, we continue to see healthy sign-up rates from our new members and are achieving a higher revenue growth rate. Additionally, at the end of Q1, we started testing new subscription plans and pricing tiers on new sign-ups, using AI credits and shop benefits as differentiators. Early conversion signals and higher tier adoption are encouraging, but it is still early. We will continue to test new plans and price points as we add more value and benefits for our subscribers. Earlier, we also rolled out a price increase on new subscribers through the iOS App Store, while simultaneously offering alternative payment options to purchase via Cricut at the lower legacy price. We have been watching this test and have seen positive results in shifting users to the Cricut payment options or a higher price purchase via the App Store without significant impact to overall expected sign-ups. We have a rich road map to continually increase the value proposition for subscribers. Our goal is to make it incredibly compelling to be a subscriber to leverage our content, software tools and services. This remains a highly competitive category, particularly in material types with low barriers to entry, where we continue to see pressure from private label offerings at retail as well as new entrants across online marketplaces and store shelves. We are not satisfied with our position in part of this category, and we are moving aggressively to refresh the portfolio, improve value and sharpen our channel execution. Those efforts produced mixed results in Q1, but there were encouraging signs. We saw double-digit growth in value materials online, and we made share gains in iron-on, vinyl and cutting mats. At the same time, share in heat presses was pressured as we move through product line transitions. Overall, our view is clear. When we bring the right combination of innovation, quality and affordability to market, we can improve our share position while enhancing the making experience for our users. Innovation remains central to that effort. For example, with the launch of Joy 2 and Explore 5, we introduced omni pen, our new universal pen system, which has been well received for its performance and compatibility. Across Q1 and Q2, we are expanding the portfolio with more than 200 new SKUs and executing a meaningful retail refresh with key partners. We're also continuing to invest in core categories such as Smart Iron-on and Vinyl, with new colors, finishes and a broader assortment. At the same time, we are advancing our full-color strategy through continued innovation and printables across inkjet and sublimation along with refreshed tools and accessories. In heat presses, we are broadening our lineup to address more price points and use cases. EasyPress Mini LT, which we launched in Q4, is helping address affordability and early results suggest much of that demand has been incremental. In Q1, we also launched EasyPress SE in the popular 9x9 and 12x10 sizes, which expands our ability to compete more effectively across markets with a professional quality, easy-to-use heat transfer solution. We also launched Cricut's first service offering with our Direct-to-Film or DTF service, which leverages our creative platform content and new guided flows. Customers create vibrant full-color designs that we print and deliver to them, which they can then press on to fabric or other substrates. While still a small experiment, this service is an important example of how we can monetize our creative platform beyond cutting machines. Early response has been encouraging. So far, over 80% of orders are coming from subscribers and around 1/3 of orders have already come from repeat customers. Over time, we believe this can deepen engagement and further increase the value of our subscription offering. Stepping back, we are moving with urgency on both innovation and cost discipline. We have more product innovation ahead. We are equally focused on execution, improving the end-to-end customer experience and driving greater efficiency across the business. Our conviction remains the same. When we make it easier and more affordable for people to create, we increase engagement, materials usage and long-term value creation. With that, I will turn the call over to Kimball. Kimball Shill: Thank you, Ashish, and welcome, everyone. In the first quarter, we delivered revenue of $159.5 million, a 2% decline compared to the prior year. We generated $20.3 million in net income or 12.7% of total sales in Q1. Breaking revenue down further, Q1 2026 revenue from platform was $84.8 million, up nearly 6% year-over-year. ARPU increased 4.8% to $55.65 from $53.10 a year ago. Platform revenue was up primarily due to the year-over-year increase in paid subscribers and foreign exchange. As mentioned in our last call, as we shift to our bundle-only strategy where we will only sell next-generation connected machines bundled with materials, we will no longer provide the supplemental revenue breakdown of connected machines and accessories and materials in our SEC filings and data sheet. We will continue to report platform and products revenues and costs as we currently do in our consolidated statement of operations and comprehensive income. Q1 revenue from products was $74.7 million, down 9.6% year-over-year. Product revenue was down primarily due to the lower average selling prices from increased promotional activity and mix as we cleared out end-of-life inventory in preparation for our Q1 product launches. As Ashish mentioned, global machine sell-out units were positive in Q1 year-over-year. As a reminder, we don't have perfect coverage for sell-out data in all channels, so treat this as directional. In terms of geographic breakdown, international sales grew over 16% year-on-year to $40.9 million. International revenue represented 26% of total revenue in Q1 2026, up from 22% in the prior year, reflecting continued progress in expanding our global footprint. Foreign exchange benefited international sales in Q1 by 10.3%. Our targeted pricing and marketing investments in Europe and Australia drove solid results, delivering year-over-year growth across these regions. We also saw strong momentum in our emerging markets with our early-stage investments in Asia and Lat Am driving strong year-over-year growth. In contrast, we experienced a challenging quarter in our META region, which declined year-over-year, partly due to the ongoing geopolitical pressures. Importantly, our exposure to this region remains limited. Looking ahead, we plan to accelerate our investments in our international markets with a focus on increasing brand awareness and driving member acquisition throughout 2026. As Ashish mentioned, we ended the quarter with just under 3.08 million paid subscribers. We expect to see seasonal pressure on subscription rates in Q2 and Q3, which could result in flat to declining quarter-on-quarter subscriber growth rates. We remain focused on driving growth for the full year, supported by new product introductions, improved onboarding, ongoing investments in engagement and promotional support. Regarding engagement, in our published data sheet, Q3 and Q4 2025 active users, 90-day engaged users and platform ARPU were updated post earnings to reflect immaterial corrections. Moving to gross margin. Total gross margin in Q1 was 58.1%, which was down 2.4% year-on-year. Breaking gross margin down further, gross margin from platform in Q1 was 89%, a decrease compared to 89.2% a year ago. As we've mentioned previously, we are excited about our AI investments, and there may be some gross margin pressure as we continue to ramp AI features. Gross margin from products was 23.1% compared to 32.7% in Q1 a year ago. The decrease in gross margin for Q1 was primarily driven by inventory write-downs from end-of-life programs, lower monetization of previously reserved inventory, tariffs and increased promotional activity. Total operating expenses for the quarter were $69.8 million and included $6.3 million in stock-based compensation. Total operating expenses increased just over 1% from $69 million in Q1 2025. As Ashish mentioned, we are focused on increasing our speed of execution and are accelerating investments that will help drive future revenue growth for hardware product development, materials, engagement and marketing. So we expect to see greater increases in year-on-year operating expenses. Operating income for the quarter was $22.9 million or 14.4% of revenue compared to $29.3 million or 18% of revenue in Q1 last year. The Q1 2026 tax rate declined to 19% from 26.7% last year, primarily due to higher R&D tax credits from increased investments. For the quarter, net income was $20.3 million or $0.10 per diluted share compared to $23.9 million or $0.11 per diluted share in Q1 2025. Turning now to balance sheet and cash flow. We continue to generate healthy cash flow on an annual basis, which funds our inventory needs and investments for long-term growth. In Q1 2026, we generated $26.9 million in cash from operations compared to $61.2 million in Q1 2025. We ended Q1 2026 with cash and cash equivalents of $256 million. We remain debt-free. Inventory decreased by $8 million year-over-year to $106 million, reflecting improved inventory management and normalization as we exited end-of-life machines. As discussed on prior calls, inventory is now at levels that generally support the business with normal fluctuations as products transition. Accordingly, we typically use cash in the first half and into Q3 to build holiday inventory, then generate cash in Q4. During Q1, we used $12.2 million of cash to repurchase 2.8 million shares of our stock. As a result, $29.1 million remain on our approved $50 million stock repurchase program. During the quarter, we paid approximately $21 million for the declared $0.10 per share semiannual dividend on January 20, 2026. The Board also approved a recurring semiannual dividend of $0.10 per share, supported primarily by our profitable operations. The dividend will be payable on July 21, 2026, to shareholders of record as of July 7, 2026. Recall, we do not give detailed quarterly or annual guidance, but we do want to offer some color on our outlook for 2026. We are focused on bringing excitement to our category. We are doing this by accelerating our investments in R&D, new product launches and marketing, including international markets and continuing our promotional strategy to drive affordability. We remain optimistic about the year overall despite a more challenging first half. In Q2, we do not expect total company revenue to grow year-over-year, primarily due to a difficult comparison against Q2 2025, which benefited from revenue pull-forward amid tariff-related supply chain uncertainty. That said, we expect platform revenue to grow each quarter, while subscriber trends follow their typical seasonal pattern with softness in Q2 and Q3. With a strong road map ahead, we remain confident for growth in the second half. Previously, we talked about the headwinds that tariffs presented to our business. Given the recent Supreme Court ruling overturning IEEPA tariffs and associated dynamics, we are not providing any guidance on margin impact. We expect to be profitable each quarter and generate cash flow from operations for full year 2026. We also expect to continue to be active with our authorized $50 million stock repurchase program, which has $29.1 million remaining, and the Board approved a recurring semiannual dividend of $0.10 per share, payable on July 21, 2026, to shareholders of record July 7. While tariff uncertainty remains a reality, we are also navigating broader cost pressures, including input costs, supply chain dynamics and a more cautious consumer environment in certain markets. Our team continues to operate proactively and with discipline, adjusting where needed while maintaining our focus on strategic investments to position the company for growth. With that, I'll turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question comes from the line of Erik Woodring with Morgan Stanley. Dylan Liu: It's Dylan Liu on for Erik Woodring. So first, 90 days ago, you did mention a difficult comp, as you mentioned in the prepared remarks, for product in the first half of this year. So you posted 10% of product revenue decline for the first quarter. And how did that compare with your expectations? And as we are now 2/3 of the first half, has the first half headwind tracking better or worse than you had anticipated and why? And also, I'm curious about why you're confident that the second half will be better. Kimball Shill: Dylan, this is Kimball. Thanks for the question. So the story in the first half really is a story about average selling price declines on a year-over-year basis, and let me break that down for you in a second. But first, I want to highlight that we talked about machine sell-out units continue to be up year-over-year. And that I'll add that sell-in units are also up double digit in the first quarter. And why that's important is that's the start of our flywheel. So a consumer buys our connected machine, and then that gives us the opportunity to monetize them through subscriptions and accessories and materials. And so we're very pleased with those results. And it really is a story about lower selling prices this year versus last year and as we launched 2 new machines. So we launched this year Joy 2 and Explore 5. And last Q1, we launched Explore 4 and Maker 4. And the average selling price last year was much higher. So our Joy our Joy 2 machine has an entry point for U.S. consumers of $99 to $129. And that is comping against Maker 4 that had an entry price point of about $399 last year. And so part of it is we're just selling less expensive machines in the first half than we did in the first half of last year. Our continuing products in the market. So Maker 4, for example, continues forward in the market. And last year, when it was first launched, there was no promotionality. And as we move through the natural product life cycle, we are exercising promotion on that machine, but that also puts further pressure on the margins. And then we also saw some continued erosion in our accessories and materials business. Now as we move forward with our new bundle-only strategy on next-generation machines, there was some offsetting goodness that came from that where there's materials bundled with each machine in this next generation, but it wasn't enough to fully offset that trend. And then looking to Q2, we expect to see these trends continue. In addition, we also talked about our difficult comp in Q2 set up by last year where we had a pull-in related to tariff uncertainty, and we had retail partners asking for support, and we saw an opportunity to accelerate revenue last year that does set up that difficult comp. And so we don't expect to grow in the first half. That said, as we move to the back half, we expect to reverse that trend, right? We have more new products to come. We're excited about those products. We're confident in our road map. And so while I'm not prepared to give more detail than that, we do have more confidence in the back half, and we do expect to grow platform revenue each quarter as we move through the year. Ashish Arora: And Dylan, this is Ashish. Let me kind of reinforce a couple of things that Kimball mentioned. First of all, I think the thing that we feel really pleased about is the continued sell-out of machines, and that's a leading indicator. It's up to us of how we monetize that, but we believe that, that creates a healthy trend for our business. And as we said, we've seen that in Q1, and we continue to see that in Q2. The areas that we're going to lean in on -- I mean international is clearly one of them. We're going to continue to -- we have continued to lean in on international, continue to make marketing investments and other personnel investments, and we expect that to be a tailwind for the second half of the year. I also think that -- and we've talked about this for some time now. We've been working very hard for the last several quarters on driving innovation and new product introductions. So you'll see the impact of that in the second half. We are focusing on a new brand campaign of really addressing -- while we are addressing ease of use and affordability, we also want to make Cricut feel like that is for someone like them. So we -- hopefully that, that marketing campaign will deliver. And finally, as we go through the year, I think the availability of our higher-priced bundles will also have a positive impact. So we think that it's the year of the 2 halves. The first half had some headwinds as long as we continue to execute and we will see second half to have some tailwinds behind us. Dylan Liu: Got it. Just one follow-up, if I may. So on gross margins. So product gross margins recovered almost 5 points sequentially to 23%. What is your product gross margin outlook for the year? I do notice that at least for the international market, there are quite some -- there were quite some tailwind from FX side in the first quarter. With that in mind, how should we think about 2026 product gross margins? Kimball Shill: Dylan, thanks for the question. So gross margins are falling in line with expectations and consistent with what we talked about last quarter. And just breaking it down, I mean I think if you look at year '24 gross margins, on average, that kind of sets where you expect. But let me kind of break it down into pieces because we do expect lower gross margins this year than last year, right? And we are down as we have kind of 3 factors going. One, we have some E&O impairments related to end-of-life machines as we transition from old generation to next generation. There is less monetization of existing excess and obsolete inventory this year than last year, and that's consistent with the expectations we've talked about before. And there continues to be tariff pressures on margins. And that kind of breaks down into 2 pieces. We have IEEPA tariffs that a lot of the inventory we brought in have those built into our COGS and that continues to throw P&L -- flow through the P&L. We have applied for tariff refunds. And so if and when those happen, we'll take credit for them kind of in a one-time accounting entry, but there's no adjustments so far in that. And then even though the IEEPA tariffs have been overturned, the administration immediately put an additional 10% tariffs on everything. And so the way I think about that flowing through our business is 25% of our business roughly is international, not subject to tariffs. A little over half of the business this last quarter was platform. That's not subject to tariffs. But for the balance, it's subject to tariffs, and we had guided last time to about an average tariff impact of 20% going forward. That's closer to a 10% once we get through the noise of the IEEPA tariffs. And so tariffs will continue to be a bit of a headwind. On your question on international, we are excited about the continued growth in international. It was 16% for the quarter and about 10 points, as you called out, was related to foreign exchange. It's worth calling out that the benefit from foreign exchange started in Q2 last year in June. And so we'll lap that pretty soon. But even with that, we continue to have organic growth across our international segments. And we called out in the prepared remarks, solid growth in Europe and Australia and New Zealand and strong growth in some of our more nascent markets in Latin America and Asia. Let me add one more thing. So we talked about average selling prices in my last answer. That's really a story about revenue. We haven't seen the lower average selling prices pressuring margins. And that's because we've largely offset the lower prices on machines and materials with supply chain efficiencies and cost-out in reengineering. And so it's those 3 factors I talked about pressuring gross margins, not the fact that we're selling different units at lower prices as we move to next-generation products. Operator: Our next question comes from the line of Adrienne Yih from Barclays. Angus Kelleher-Ferguson: This is Angus Kelleher on for Adrienne Yih. I wanted to ask about retailers and your retail partners. Just given the recent uptick in energy prices and broader consumer pressure, are you seeing any change in retailer ordering behavior or demand signals either in terms of caution on forward buys or shifts in mix toward lower-priced offerings? Ashish Arora: Angus, this is Ashish. So I think overall, and just as I speak globally, right, I would say the headline is that our retailers are very excited about the road maps, the innovation that Cricut is driving. And I would say, across the board, there's general enthusiasm for driving innovation in the category. That's kind of the overriding theme. The second is we -- obviously, we changed our strategy from a stand-alone machine to bundles and primarily all our retailers today worldwide carry the bundles. And our goal in offering the bundles was to address ease of use so that people have everything that they need in the bundle as well as affordability. Those are the 2 things that -- and the retailers have been very pleased. As we said, Michaels gave us the new product launch award for the launch of Joy 2 and Explore 5. So today, that's what we hear from our retailers, is general enthusiasm for the category and general reception to the launch of bundles. They also see the platform improvements that we are making. I mean I would say, for the most part, we don't see a significant retailer shift in buying -- at least in their buying behavior from -- based on the economy or based on consumer sentiment today. Kimball, I don't know if you want to add anything to that, but that's -- I wanted to give a broader -- what are we hearing from retailers and today's enthusiasm... Kimball Shill: I agree. Retailers is enthusiastic. As we did mention in the prepared remarks, I mean we have seen some consumer caution, but that's primarily in Europe. We haven't seen a pullback in U.S. even as we're all watching oil prices and seeing how that evolves. Ashish Arora: That's great. I would say, if anything, even though it hasn't manifested itself, if this was to continue, we could see disruptions in supply chain or cost of plastics or shortage of certain things. But today... Kimball Shill: Well, so let me add to Ashish's comments. So on the supply side, anything that is oil stock related, we've seen some runs on that material, but we have been locking in our supply to make sure that we have continuity of supply. And so we're managing that risk proactively. Angus Kelleher-Ferguson: Great. That's great color. And then I just kind of have 2 housekeeping items. First, on the App Store dynamics, how meaningful has the shift toward Cricut direct payments been for subscriber economics so far? And then second, on the IEEPA-related tariff refunds, can you update us on the expected like magnitude of those? And I ask that because we've seen some of our branded peers monetize those receivables, but it sounds like you have not sold your receivables there. Kimball Shill: Yes. So let me take those down. So we actually have seen -- as we launched the parallel path on the iOS App Store, we have seen a majority of consumers choose the Cricut payment option and -- where they're able to access the legacy price. That said, there's still a significant minority choosing Apple Pay. And the good news across both is we haven't seen a significant impact to overall expected sign-up rates. And so we've learned that some consumers are willing to pay more for our offering without it really affecting sign-up rates. And I'll just add to that. At the very end of the quarter, we started some other tests not related to the iOS store, where we're testing new plans and higher pricing across multiple tiers. And so there's multiple tests that we're doing where we're learning more about consumer behavior and pricing relative to our subscription offering and largely differentiated by quantity of AI credits and some shop benefits. But it lets us learn on that without putting our entire installed base at risk with an across-the-board price increase. So we're pretty excited about that. And then on the IEEPA tariffs, we aren't sharing the number. We have applied for refunds. We had an ongoing duty drawback program, and so it was ordinary course for us to apply for those refunds. I will say it is material for us. We're not monetizing or factoring them because at this point, we have $256 million in cash. We have no debt. And so we can be patient to get that money back when we get it. But when we get it, we will make an accounting entry that credits COGS at the time and then keep moving forward. But at this point, we're just -- we're waiting to see how that process plays out. Operator: Thank you. This concludes the question-and-answer session, and thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.
Operator: Hello, and welcome to Ouster's First Quarter 2026 Earnings Conference Call. [Operator Instructions] The call today is being recorded, and a replay of the call will be available on the Ouster Investor Relations website 1 hour after the completion of this call. I would like to now turn the conference over to Chen Geng, Senior Vice President of Strategic Finance and Treasurer. Please go ahead. Chen Geng: Thank you, operator, and good afternoon, everyone. Thank you for joining our first quarter 2026 earnings call. Today on the call, we have Chief Executive Officer, Angus Pacala; and Chief Financial Officer, Ken Gianella. As a reminder, after the market closed today, Ouster issued its financial news release, which was also furnished on a Form 8-K and is posted in the Investor Relations section of the Ouster website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. I want to remind everyone that on this call, we will make certain forward-looking statements. These include all statements about our competitive position, product advantages and growth opportunities, anticipated industry trends, our business and strategic priorities, our operating expense targets, the impact of our recent acquisition, the development and expansion of our products, our products' capabilities and performance and our revenue guidance for the second quarter of 2026 and long-term financial targets. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially from those contained in or implied by these forward-looking statements are set forth in the first quarter 2026 financial results release and in the quarterly and annual reports we file with the Securities and Exchange Commission. Any forward-looking statements that we make on this call are based on assumptions as of today, and other than as may be required by law, Ouster assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. In today's conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures discussed today is included in the financial results release. I would now like to turn the call over to Angus. Charles Pacala: Hello, everyone, and thank you for joining us today. Over the last 4 months, we have seen the culmination of over 10 years of Ouster innovation, strategy and execution. In February, we acquired Stereolabs, a pioneer in AI camera vision and perception solutions, creating a world-leading sensing and perception company for Physical AI. We are already seeing the strategic rationale transform into operational reality with a resoundingly positive customer response. And just yesterday, we launched Rev8, the world's first native color lidar and a paradigm shift in AI perception. To perceive the world in full context requires a combination of structure and color, and Rev8 is the first sensor to unify both. With native color across our entire product portfolio of cameras and lidars, we have further strengthened Ouster as the foundational sensing and perception platform for Physical AI as we provide unified products and solutions that accelerate customer innovation and unlock new applications that sense, think, act and learn in the physical world. Now turning to an update of our Q1 2026 results. Ouster had a strong start to the year, achieving our 13th straight quarter of product revenue growth with over 12,600 lidar and cameras shipped, reflecting robust demand for our expanded product portfolio. With $49 million in revenue, we achieved another record product revenue quarter on a strong 43% gross margin, overcoming headwinds from a continuing constrained supply chain environment. We ended the quarter with adjusted EBITDA loss of $7 million and cash, cash equivalents and restricted cash and short-term investments of $175 million. Our Lidar business grew approximately 44% year-over-year with strong contributions from our industrial vertical, where we secured several large deals to power industrial automation. We significantly expanded our long-term relationship with a large European industrial company for port automation. In another key win supported by our NDAA-compliant centers, we secured a deal with an autonomous earthmoving company to retrofit heavy equipment to support a project with the U.S. Department of Defense. Ouster's Smart Infrastructure Solutions business continues to validate our end-to-end system strategy. We saw continued momentum from our expanded ITS distributor network as we won contracts to deploy Ouster BlueCity across the United States, securing large million dollar deals to provide next-generation traffic actuation systems in Arizona, Michigan and the Northeast U.S. We were also proud to announce the expansion of Ouster BlueCity with the Georgia Department of Transportation to modernize the region's traffic infrastructure. The turnkey Ouster BlueCity traffic management solution will be deployed at more than 30 intersections across the Greater Atlanta area in preparation for the FIFA World Cup and beyond. BlueCity is bringing Physical AI to smart cities around the world with over 700 contracted site deployments across intersections, mid-blocks and highways, reinforcing Ouster's position as a leading solution for transportation departments, seeking to transition from legacy traffic solutions into dynamic digitally integrated 3D lidar-powered traffic management solutions for actuation and analytics. We also saw strength from Ouster Gemini in the quarter, recognizing millions of dollars of revenue from a significant customer renewal. Leveraging our unified platform and proprietary deep learning perception model trained on over 4 million labeled objects, Gemini empowers our customers to operate more efficiently and safely at over 550 sites around the world. In the months since the acquisition, Stereolabs has already proven to be a perfect complement. We're seeing benefits of our unified platform through the ability to immediately help customers, combine multiple modalities of sensors and AI compute, easing the friction of combining disparate technologies and accelerating our customers' go-to-market efforts. The rapid integration and commercial success of our expanded camera vision portfolio provided tailwinds during the quarter, and business momentum exceeded our initial expectations. We are seeing strong demand from companies building foundational AI models and advanced robotics platforms and leading companies around the world are relying on our expanded product portfolio to train, scale and deploy the next generation of autonomous delivery, advanced manipulation and precision agriculture. We continue to see large opportunities for Stereolabs to augment Ouster's perception road map to meet Physical AI's increasing demand for sophisticated multi-sensor fusion. By merging our proprietary AI models with Stereolabs neural depth capabilities, we are delivering the specialized perception logic and application-specific software required to revolutionize safety and efficiency across the global supply chain. Continuing the momentum and our leadership in cameras for Physical AI, we released the Stereolabs ZED X Nano, which is shipping this month. This product sets a new standard for wrist-mount stereo vision, delivering 2.3 megapixels RGB with neural depth, 0 copy capture data pipeline and ruggedized GMSL2 connectivity and a 40% smaller form factor. Like all Stereolabs cameras, the ZED X Nano comes with a purpose-trained neural depth model, specifically tuned for its capabilities and further highlighting Ouster's deep vertical integration from hardware to software. Engineered for robotic manipulation and high-throughput data collection, we are helping robotics teams scale imitation and reinforcement learning from manipulation tasks. Leveraging Stereolabs' industry-leading image quality and end-to-end capture latency, our customers can now overcome critical bottlenecks by capturing high-resolution RGB and stereo camera depth images at up to 120 frames per second for training data and manipulation learning. And now turning to yesterday's highly anticipated product announcement. I'm truly excited to introduce Rev8, the world's first native color lidar sensors powered by next-generation L4 Ouster Silicon. We are redefining the meaning of lidar itself with native color sensing implemented directly on the silicon. By fusing color and 3D data through physics and leveraging Fujifilm color science, our patented native color technology unlocks megapixel resolution and stunning image quality with ultra-low latency and perfect spatial temporal alignment. We work with industry-leading camera experts to ensure Rev8 delivers uncompromising industrial grade imaging. Delivering an exceptional 48-bit color depth and 116 dB of dynamic range, Ouster's native color data maintains performance in lighting extremes from 1 lux to 2 million lux. We live in a world where a machine's capacity to perceive is constrained by the capability of its sensors. Rev8 is built to generate the petabytes of rich, native color 3D information necessary to build the next generation of Physical AI systems and train new world models. Now for the first time, a single lidar sensor can understand road signs, interpret brake lights or simply capture the richness of planet Earth in survey-grade colorized maps. Featuring radically upgraded OS 0, OS 1 and OSDome sensors and the new flagship 256-channel OS1 Max, Rev8 delivers industry-leading resolution, range and reliability designed for functional safety, affordability and scale. Rev8 represents the culmination of years of research and development, innovative design and rigorous testing. It is the most advanced family of lidar Ouster has ever developed and sets a new standard in sensing. All of this is a testament to Ouster's digital-first approach, which starts with our proprietary system-on-chip. Rev8 is powered by our breakthrough L4 Ouster Silicon with up to 256 channels of resolution honed over years of development by our in-house silicon design team. The L4 architecture features both the 128-channel L4 and the 256-channel L4 Max, each embedded with Fujifilm color science, resulting in exquisite color data and hardware-enabled high dynamic range. The L4 boasts 42.9 gigamax of processing power, detection of up to 20 trillion photons per second, a 40-kilohertz measurement rate with picosecond timing precision and is capable of processing up to 10.4 million points per second and 22.4 gigabits per second of data bandwidth off chip. And we've paired it with a completely redesigned light engine, featuring all new custom VCSEL arrays and our most advanced driver topology ever. Enhanced by picosecond timing precision, this architecture delivers unprecedented levels of range, resolution and accuracy across the entire Rev8 OS family. The cornerstone of the new Rev8 family is the flagship OS1 Max, a sensor without compromise. With double the resolution of the Rev7 OS2 and 1/4 of the size, the OS1 Max packs an incredible amount of capability into a small ruggedized form factor. The OS1 Max provides best-in-class performance with 256 channels of high-definition sensing up to 500 meters in all directions with a 45-degree vertical field view. No other 360-degree spinning lidar comes close. Purpose-built for high speed autonomy, smart infrastructure and heavy industrial applications, the OS1 Max is capable of resolving the smallest objects at long range. And like all Rev8 sensors, the OS1 Max offers exceptional native color imaging. But we didn't stop there. We set out to build the safest family of 3D lidar sensors ever created. This took years of rigorous engineering work, testing and design validation. The result, Rev8 is life-saving technology made right, ruggedized for the real world with automotive grade reliability that can withstand the harshest production environments. Ouster now offers a set of products to break into the multibillion-dollar market for industrial safety sensors long dominated by legacy players by replacing outdated 2D laser scanners and cameras with high-resolution 3D native color lidars. Every sensor is auto-grade, cybersecure and designed for ASIL-B, SIL-2 and PLd functional safety certifications, ensuring continuous uptime and industry-leading reliability. Importantly, this is a platform built to scale. Rev8 was designed for low-cost, high-volume production deployments to support mass market adoption. With a planned 10-year production life, Rev8 sensors provide the long-term program stability and scalability required for global commercial rollouts. With Rev8, we are delivering the safest, most feature rich, secure and reliable family of 3D lidar sensors we have ever built, and we hit the ground running. Earlier today, we announced the integration of our new Rev8 family across the NVIDIA Jetson platform, bringing native color lidar to the NVIDIA robotics ecosystem for the first time. With dedicated support for Rev8 across NVIDIA JetPack, Isaac Sim and Jetson AGX Orin and Thor, we are ensuring rich high-fidelity 3D digital lidar data is fully harnessed by NVIDIA's accelerated computing and development tools. This builds on years of integration support for previous OS sensor generations as well as Stereolabs' own integrations across the entire Zed portfolio. Together, we are providing the essential building blocks for Physical AI, enabling machines to sense, think and act in the real world with more speed and precision than ever before. Rev8 is shipping today and is being adopted by some of the world's most innovative companies. This is a testament to our close collaboration with key customers over years to ensure Rev8 met their program needs. We're already seeing early traction with dozens of technology leaders across the industrial, robotics, automotive and smart infrastructure markets intending to adopt Rev8 OS sensors, including Google, Volvo Autonomous Solutions, Liebherr, Epiroc, Field AI, Flyability, Skydio, PlusAI, Constellis, Bedrock, Kassbohrer, Third Wave Automation, Burro, Seegrid, Gecko Robotics, Pratt Miller, AIM Intelligent Machines, Cyngn, Freefly Systems, ATI Robotics and SwarmForm, among others. Clearly, there is overwhelming customer pull for Rev8, and this gives us confidence in an incredibly strong back half of the year. We spent years developing these groundbreaking capabilities, and I am thrilled to finally introduce Rev8 to the world. With that, let me now turn the call over to Ken, who will provide more context on our first quarter financial results. Kenneth Gianella: Thank you, Angus, and hello, everyone. As you heard, our excitement over the acquisition of Stereolabs and our new product launches look to keep the momentum we built in 2025 continuing into 2026. In the first quarter, we are pleased with our continued progress against both our financial and operational goals, which are the cornerstones of our path to profitability. Our results demonstrate the resilience of our operating model and the disciplined financial management across the business as we continue to execute within our long-term financial framework. Turning to the first quarter financial performance. Operating results were strong with revenue of $49 million, which included approximately 7 weeks of contribution from Stereolabs. This represents an increase of 49% compared with the first quarter last year. We shipped over 12,600 sensors, which included over 8,300 lidar, a new quarterly record and over 4,300 camera sensors. Royalty revenue in Q1 was not material. As I mentioned in our March call, this year, we expect total royalty revenue in 2026 to be less than $5 million. The majority of this amount will be recognized in the back half of this year. Smart infrastructure vertical was the largest contributor to first quarter revenue, followed by industrial. GAAP gross margin was 43%, up 200 basis points from the same quarter last year. GAAP operating expenses were $40 million, an increase of 7% from the first quarter last year. The increase was primarily due to the addition of Stereolabs operating expenses, including $2.3 million of acquisition and integration-related charges in Q1. We continue to anticipate year-over-year operating expenses to be higher 5% to 8%, with the acquisition of Stereolabs. However, we continue to focus on our path to profitability and will remain diligent in managing our operating expense profile. Excluding the acquisition and integration expense of Sterolabs, our adjusted EBITDA in Q1 was negative $7 million compared with negative $8 million in the first quarter last year. Ouster remains one of the industry's strongest balance sheets, ending the quarter with cash, cash equivalents, restricted cash and short-term investments of $175 million and no debt. The strength of our balance sheet gives us the strategic and financial flexibility to operate our business and gives confidence to our customers who rely on Ouster as a key Physical AI partner on their long-term autonomy journey. Now turning to guidance. For the second quarter of 2026, we expect to achieve total revenue in the range of $49.5 million to $52.5 million. Beyond the revenue outlook for Q2, I want to reiterate the long-term financial framework I discussed last quarter, which includes revenue growth of 30% to 50%, GAAP gross margins of 35% to 40% and GAAP operating expense growth of 5% to 8% from our 2025 levels. With our acquisition of Stereolabs, the release of Rev8, our smart infrastructure solutions and our investment in foundational AI models, Ouster has one of the broadest range of perception and sensing products in the market. We remain confident that our innovation and go-to-market strategy will continue to bring us closer to positive operating free cash flow and profitability. I'll now turn the call back to Angus for his closing remarks. Charles Pacala: Thanks, Ken. To close out, we are off to a great start executing against our 2026 strategic priorities, revolutionizing our lidar camera and AI compute products, extending our leadership in Physical AI solutions and executing towards profitability. We kicked-off the year with strong momentum, delivering our 13th consecutive quarter of product revenue growth. We're executing on our strategy to provide Physical AI's first unified sensing and perception platform, and I'm excited by the transformative products we are bringing to market this year as we work to solve our customers' most complex challenges. Rev8 is redefining the meaning of lidar with fundamentally new capabilities that empower our customers to simplify their perception stacks, better train next-generation world models and scale their production deployments. On the heels of a successful first quarter, Ouster is better positioned than ever as the foundational end-to-end sensing and perception platform for Physical AI. With that, I'd like to open up the call for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Colin Rusch of Oppenheimer & Co. Colin Rusch: Congratulations on getting Rev8 out. I guess I have a 2-part question to start with that introduction. Obviously, you've been working very closely with a lot of customers. And I'm curious about 2 things. One, how many of them have been waiting for this product to move into series production with some of their products given some of the range and the functional safety pieces to this? And then the second part is really about which new applications are you seeing as material opportunities for you guys to move into, given the functionality improvements that you're seeing with this next-generation product? Charles Pacala: Colin, thanks for the question. So while we don't preannounce -- we held on to the Rev8 announcement until it was ready to ship this quarter. Behind the scenes, we worked incredibly closely with a set of key customers for more than 1 year to make sure that Rev8 met their needs, both their current needs and future needs to expand business with us over time. And so it's no surprise that we had a really compelling list of over 20 customers that I announced, and I'm going to spare reading through them again. But it spans the gamut of existing customers doing things that they've always done, but doing them much more capably with a colorized point cloud to all new applications. So a great example of that would be high-altitude drone surveying. The OS1 Max is the perfect sensor for simplifying a drone payload. And we have a great interested customer, Skydio, who is very interested in the OS1 Max and gave some great comments about how the combination of payload into a single platform makes it a game changer for their type of surveying application where weight is at a premium and quality of data is at a premium. So we absolutely have new applications with the OS1 Max for things like that, for high-speed applications and driving on the highway or heavy machinery where you need to see small things at long range. And then obviously, the multibillion-dollar opportunity for functionally safe devices is brand new area for us to expand in our customer base and start to finally capture some of that significant value with these sensors. So -- but if you step back, long-term I expect the vast majority of our customer base to adopt Rev8 over time and to be operating with native color lidar data. I think the entire industry is going through a paradigm shift with this, and we're going to end up on the other side with native color Rev8 lidars across the vast majority of customers. Colin Rusch: Super helpful. And I guess the second question is really now that you've got a fairly rapidly evolving portfolio of offerings, including the edge compute, I guess I'm curious about a couple of things. One, how we should be thinking about mix on a go-forward basis? And then secondly, how much leverage you're getting from that edge compute capability in premise given some of the escalating data transfer expenses that we're starting to see for things like intersections where it can be upwards of $800,000 or $1 million of expense just to transfer data back to a data center if you're transferring all of it? Just curious how you're seeing that play out as well? Charles Pacala: Yes, sure. So in terms of the product portfolio, that's ever expanding. I mean I also want to highlight, we released the ZED X Nano during the quarter, which is a big deal and also a brand new use case in these wrist-mounted robotic manipulation. So the -- on the question of mix going forward, the -- we haven't split out exactly how we see that long-term unit basis or revenue basis. But we expect both of our businesses to grow very significantly. And obviously, we had an incredibly strong quarter with 44% year-over-year growth for lidar-only business. And overall, we were up significantly year-over-year, especially with the Stereolabs acquisition. So we expect to have very significant and strong growth across all of our product lines over time. And to the question around edge compute, I do expect that to start to contribute more to our overall business. Right now, I mean, we're really fresh off of acquiring Stereolabs. The compute was something that had good traction and still has good traction within the customer base. We're going to invest more into the compute line that we -- that they started. But I can't say that it's having a significant impact on the Ouster customers at this point. We're still getting our feet under us on exactly how to position that compute line up with the other customers. But I do think it will be a big opportunity for Ouster going forward. Operator: [Operator Instructions] Our next question comes from the line of Kevin Cassidy of Rosenblatt Securities. Kevin Cassidy: Congratulations on launching Rev8 and continuing this high growth. So maybe along those lines of questions around Rev8, you touched on it slightly. I think would Rev7 continue to go in production? What's the transition look like for the 2 different lidars? Charles Pacala: Yes. Great question. So we are fully committed to continuing to produce and support Rev7 for our established customer base. I mean Rev7 has been out for 3 years now. And we have a lot of customers that have fully qualified and are in active production with the Rev7's lineup, and it's a great set of products. I mean they are -- they really established Ouster as a performance technology and reliability leader in the lidar space and we don't want to change any of that. So while Rev8 is designed to be a seamless upgrade for any customer that wants to, we want to make sure that customers that have qualified Rev7 can continue to operate their businesses with it. So this is -- we're being customer-friendly here and making sure that it's their choice when they transition. Kevin Cassidy: Okay. And yes, I remember when Rev7 came out, it was an inflection point for you, especially on ASP increases. Are they similar ASPs between Rev7 and Rev8? Or maybe even talk about the manufacturing and the gross margins between the two? Charles Pacala: Yes. That's another great question about -- so Rev8 was designed to be more affordable than Rev7 and more scalable than Rev7. We want to make sure that we're enabling our customers to continue to scale and to bring this technology to the broader Physical AI ecosystem. So the Rev7 was a different scenario where we were introducing a fundamentally new capability and ASPs went up. Here, it will be a little bit more of a mix because we have vastly more customers in production, and we can't disrupt the economics of their production. So yes, we have new products that are incredible like the OS1 Max, that probably will command premium ASPs in certain domains. But we also want to make sure that a customer that wants to upgrade to Rev8 can do so without having a significant economic disruption or commercial disruption to the end business that they've created around the Rev7 product. And just going back again, highlighting, Rev8 was built to be more scalable and more affordable than Rev7. Operator: Our next question comes from the line of Andres Sheppard of Cantor Fitzgerald. Anand Balaji: This is Anand on for Andres. Congrats on the quarter. It's really great to see an update on the L4 chip with the Rev8 announcement. And based on the customer interest, as I know you disclosed a really long list of prospects on the call, maybe what type of opportunities there do you see in automotive, especially with robotaxis ramping up with Motional as your customer, et cetera? Who do you see interested there? What type of opportunities? Charles Pacala: So Rev8 is a big deal when it comes to the automotive world because Rev8 is an auto-grade sensor. They're designed for functional safety. So the ASIL-B functional safety spec in automotive is incredibly important, whether you're -- whether it's a lidar going into a consumer car or into robotaxi or a robo truck. So Rev8, the OS1 Max, the OS0, purpose designed to be ideal sensors for that market. I'm expecting some pretty significant things there just because it's the first time that we'll have a full suite of lidars that blankets. You can outrig an entire car and Ouster digital lidars and be a one-stop shop. So -- and we obviously, we work in the background with a number of customers, many of which I couldn't name, around the Rev8 spec for the automotive domain. But yes, so a lot of things to come there. I think that just highlighting the long-range, high-resolution aspect of the OS1 Max and combining that with the colorized point clouds is pretty game changing in the automotive domain, where advanced AI algorithms go hand-in-hand with the kind of flexible Physical AI progress that's been made in the ADAS sector. So we think these are really good sensors for that domain, and I can't wait to get them in customers' hands. Anand Balaji: Got it. And I guess maybe a question for Ken. As we think about the gross margins and the EBITDA improving that, and as we go through the financials, what's the most important remaining steps to hit breakeven? Is it the revenue scale, the gross margins, OpEx? Or is it a mix of these things to improve the EBITDA? Kenneth Gianella: Well, I think, number one, the continued innovation that we've been doing is a great stepping stone to showing how our long-term model, the consistency that we've brought over the last 3 years, it's just another proof point of us as a company, Ouster, continuing to hit those proof points year after year after year. And that long-term model, the 30% to 50% growth obviously, with the acquisition, it was high. But even with ex acquisition, 44% growth year-on-year, that's just a proof point of our underlying innovation continuing to that long-term model. If you do the math on that and you look at our gross margins, even staying -- we had another strong tailwind that we overcame some economic challenges and constraints in the quarter for a strong GAAP gross margin quarter. That 35% to 40%, coupled with the growth rate and our discipline on the OpEx side, the innovation we've done with little to no OpEx growth, that 5% to 8% with Stereolabs and the $2.3 million acquisition in the Q1, that combined together shows that we're on a strong path for somewhere within '27, starting to hit that profitability stride. So the model is holding true. We're going to continue to execute towards that. It's a very important milestone for us to get to that. But this innovation is key to unlocking that continued long-term growth. Operator: Our next question comes from the line of Richard Shannon of Craig-Hallum. Richard Shannon: Apologies, I just jumped on the call. I got like 4 or 5 earnings here tonight and I have no idea if this question was asked, but I want to ask it anyway, which is the new Rev8 product is quite interesting in many ways, a lot of performance improvements here. But the interesting one here is the ability to do color. I'm curious, Angus, if you can tell us a little bit more about that, how you did that? I assume this is something in the detector. Wondering if this is a technology that's exclusive, inherent to Ouster or are you the first one to try to implement this? Just any ideas to help us understand how you're doing this? And then maybe if you want to follow on, what applications do you expect to be adopting that first? Charles Pacala: Absolutely. Thanks, Richard. So I mean, the Rev8 native color point clouds are a genuine world-first invention. This is a really significant milestone for the lidar industry in general. And it's a first-of-its-kind technology, no question. So, the core innovation happens at the silicon level, and this just goes back to Ouster inventing digital lidar, and we've continued to innovate at the silicon architecture level now by fusing in-silicon color and lidar data so that customers don't have to think about this and getting an absolutely incredible result for the end customer. So absolutely, this is a world-first direct innovation, basically the result of 10 years of pushing on silicon innovation at Ouster and building it into the L4 and L4 Max chips. In terms of the applications, I mean, the most -- the clearest opportunity here is simply more context to train the next generation of Physical AI models. The world truly cannot be described with just 3D information or just color. It really is a combination of those 2 attributes that allows you to both sense the position of a street sign and read what it's saying or sense the location of a car and knowing that it's just slammed on its brakes with brake lights. So training AI models with a colorized point cloud data set is the final frontier that so many of our customers have been trying to reach. It's literally -- they call it the Holy Grail. I've heard that many times from our customer base. This is the Holy Grail colorized point clouds, unified and trained for -- trained into new AI algorithms. So -- that's the most obvious use case, and that just gives better, safer, more capable AI systems. There's also one in 3D surveying. So almost all surveying applications require a combination of structure and color or texture to assess the quality and status of a bridge, right? If you -- if a bridge is degrading, you want to know that it's structurally stagging, but you also want to see that the concrete has cracked and so color and lidar data give you that. So there are obvious applications with a customer set that really span every single customer use case. It's hard to identify any customer that won't benefit from this, which is why I said I think every customer effectively will adopt a Rev8 colorized capability eventually. So yes, again, this just comes back to 10 years pushing silicon innovation into our products, and this is the end result. Kenneth Gianella: Yes. And Richard, I just want to point out to the last piece of it. This is over almost a dozen patents just on the RGB colorization alone. And then the underlying Rev8 technology building not just from the Rev7, but it's almost 200 patents underneath supporting the Rev8. So that technology and effort that we've put in to bring out there, is also covered with real innovation with those patents for the company. Richard Shannon: Okay. That's helpful perspective. And one quick follow-up again on this topic here. As you add in color to applications that are previously using lidar, how do we think about the upsize in the -- in value and price that you're able to charge these sorts of things? Charles Pacala: Well, I think that did -- that goes back to another question that was asked around ASPs and how this filters down into costs and value capture. And this here really depends on the application. We always try to price our products to be -- to enable our customers' commercial application. It's one of the key strategies that we've done really well with, maintaining strong gross margins, but also working with customers to make sure that the pricing works for their business at scale. And so I'm giving you an unsatisfying answer. Rev8, the technology and getting color into our customers' hands, the pricing depends on the customer application. We do want to make sure that customers don't have price as an impediment to adopting an incredible capability that actually enables their long-term viability as a company. So I think the key takeaway is Rev8 is a drop-in compatible replacement for Rev7. So the adoption can be quick and seamless to getting that value, and that's a huge benefit to these customers. Operator: Thank you. This concludes the question-and-answer session. I would now like to turn it back to Angus for closing remarks. Charles Pacala: Well, I want to thank everyone for joining the call and really want to thank the Ouster team for the push that they made to get Rev8 out. This is a paradigm shift for the industry. We have incredible customer demand for the Rev8 product. And I can't wait to continue to update everyone that joined the call for the rest of the year on Rev8's adoption through the year. Thank you all. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon, and welcome to the BJ's Restaurants First Quarter 2026 Earnings Release Conference Call.? [Operator Instructions]? Please note this event is being recorded. I would now like to turn the conference over to Rana Schirmer, Director of SEC Reporting. Please go ahead. Rana Schirmer: Thank you, operator. Good afternoon, everyone, and welcome to our fiscal year 2026 first quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2026 first quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com.? I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projections in the forward-looking statements.? We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission.? We will start today's call with prepared remarks from Lyle Tick, our Chief Executive Officer and President, followed by Todd Wilson, our Chief Financial Officer, after which we will take your questions. And with that, I will turn the call over to Lyle. Lyle? Lyle Tick: Thank you, Rana. Good afternoon, everyone, and thank you for joining us to discuss our Q1 financial results, operating performance, and outlook. Q1 was another strong quarter for BJ's. We delivered our seventh consecutive quarter of sales and traffic growth, along with our sixth consecutive quarter of profit dollar growth and EBITDA margin expansion.? Same-store sales increased 2.4%, driven primarily by 2.2% traffic growth, continuing to outperform Black Box casual dining benchmarks by roughly 120 basis points on sales and close to 400 basis points on traffic.? On the profit side, restaurant-level operating margins were 16%, and adjusted EBITDA margins reached 10.5%, up 30 basis points year-over-year.? Our consistent performance continues to reflect the progress we're making across our 4 strategic priorities, focused on building a winning culture, improving our food, enhancing our atmosphere, and driving WOW hospitality and executional consistency. A few notable Q1 highlights in context. Valentine's Day performance was exceptional. Approximately half of our restaurants set new daily sales records, while 14 set weekly records, reinforcing our strength in the social spoage occasion.? We delivered Q1 results with roughly 20% lower media spend year-over-year as we continue to optimize how we deploy marketing dollars while ensuring we have sufficient resources to drive Q2, or what we call the celebration season. This is a testament to the progress our marketing and culinary teams have made in refining our go-to-market strategy and how best to leverage our product news and media. The quarter had its fair share of volatility, including approximately 70 basis points of weather-related headwinds year-on-year. Importantly, the teams managed this volatility effectively while growing sales and protecting margins.? We are also encouraged by the results of some of our tests and recent programming we put into the market. Overall, total beverage sales stabilized in Q1 behind growth in nonalcoholic beverages, our 22-ounce beer upgrade, and a successful seasonal beer offering in our waterfall beer, which was a collaboration with Sapporo Breweries, hitting on growing segment trends like lower ABV, sessionable drinks, and Japanese-style rice beer, which is one of the few growing segments in craft beer.? Our chicken sandwich renovations have shown a clear positive impact in tests, improving the chicken sandwich and overall handheld performance, and we'll be rolling them out as we move into Q3. Our premium Wagyu burger with a custom blend patty has garnered a lot of interest in trial and provides a top-of-the-barrel anchor in the burger category. This has just moved into a full system, limited-time feature, and will become part of our menu burger lineup as we move into Q3 as well.? Overall, I'm pleased with our Q1 results and encouraged by the positive momentum in the business as we head into Q2 and our growing outperformance versus black box casual dining benchmarks.? 18-plus months into my journey at BJ's, we have a clear road map, have made material progress in building stronger foundations, and we intend to continue to focus on bringing guests a better BJ's by investing in our food, our people, and our atmosphere, ensuring these elements continue to work in concert to drive performance.? While there's still a significant amount of work and opportunity ahead, we have made tangible progress across several areas.? We have seen significant improvement across our guest metrics since Q3 of 2024, with our Net Promoter Score improving roughly 10%. Our team member retention continues to be better than pre-pandemic levels and is trending positively. Both hourly and management turnover are improving on a trailing 12-month average and tracking 12-plus percentage points below black box industry benchmarks as we continue to strive to make BJ's a better, easier, and more rewarding place for our team members.? The work we're doing to upgrade our menu offerings, while still in its early stages, is reflected in improvement in our food scores, our momentum with younger guests, and our new product performance. Since the launch of the all-American Smashburger in June of 2025, the burger category has been delivering roughly 30% more sales than prior to the launch. Pizza has also performed well since its introduction, with category sales up about 20%, and we're beginning to see encouraging signs that the new pizza is improving repeat visits amongst guests who try it.? Seasonal Pizookies continue to resonate, particularly with younger guests, contributing to both traffic and growth in dessert sales. Our value scores have materially improved behind the Pizookie meal deal and an improved overall experience, reinforcing our complete value proposition. And our marketing strategy continues to evolve with greater emphasis on social and word of mouth to support our new products, complemented by selective use of broader media to deliver value messaging.? At the same time, we've materially improved margins over the last 18 months while making significant investments in our restaurants and guest experience through our remodels and facilities programs. We are, however, still in the early innings, and the vast majority of our opportunities still lie ahead of us.? The last 6 quarters of sales and traffic growth have been driven predominantly by traffic. We have brought a younger, hard-to-reach guest into our restaurants, lifted frequency, and meaningfully reset BJ's relevance in casual dining. As we look ahead, we will continue to build on the drivers of success to date while moving to further balance the model where traffic, as well as average check and mix carry weight, over time.? The Wagyu burger I mentioned earlier is an example of the category management work we're doing on the menu. Sitting alongside the all-American Smashburger that remains a hero at the opening price point of the category, the Wagyu burger gives guests a premium trade-up option, building a clear, good, better, best strategy within a high-affinity category.? In addition, we're moving into a test with a premium tier on the Pizookie meal deal, giving our most engaged guests a path to trade up while still reinforcing 2 core and ownable BJ's equities in variety and the Pizookie. We continue to work across the menu, extending the structured approach to category renovation. I'll share more information in the coming quarters as we gain more learnings from our market tests.? The progress to date, combined with the work ahead, will help us maintain momentum while continuing to allow us to improve flow-through over time. I'm confident in our plans and our commitment to investing in our people, ensuring they have the tools and support needed to bring our brands to life every day, advancing operational excellence, making BJ's better and easier for both team members and guests, continuing to improve our food offerings and guest experience, and setting the foundation for future net unit growth.? On net unit development, our prototype work is progressing at a pace. The two planned openings later this year are in Buckeye, Arizona, and Joliet, Illinois, and they will showcase a meaningfully improved guest experience. These markets represent a mix of an established performance market in Buckeye, Arizona, and a development opportunity in Illinois, where we expect approximately restaurants to benefit from increased brand awareness and operational leverage. As we build the pipeline, we will stay focused on refining the prototype to continue to improve the consistency and financial returns of future openings. Q1 delivered another strong quarter for BJ's and reflects our continued progress, sustained traffic-driven growth, and share gain. While the environment remains dynamic, we enter Q2 with positive momentum, strong plans, and growing outperformance versus black box casual dining benchmarks, and a focus on continuing to build on the foundations we've laid across our strategic priorities. Before I close, I would like to thank all our BJ's team members from our restaurants through to the support center for their passion and commitment in bringing our promise to life every day for our guests. Q1 was not without its volatility, navigating multiple severe weather episodes, and our teams took care of each other, our guests, and our restaurants, and adjusted in real time to deliver another strong result for BJ's. Thank you, and I will now turn it over to Todd for more color on our financial results and our outlook. Todd Wilson: Thank you, Lyle, and good afternoon, everyone. We delivered a strong first quarter with traffic-driven sales growth, generating an increase of $1.6 million in restaurant-level operating profit and a $2.4 million increase in adjusted EBITDA. As Lyle noted, we achieved these gains while navigating sales volatility, including 70 basis points of winter weather headwinds. Total revenue for the quarter was $358.1 million, a 2.9% increase versus last year. Comparable restaurant sales increased 2.4%, led by a 2.2% traffic growth and a 0.2% increase in average check. The traffic-led growth underscores the continued strength of our brand and our increasing guest frequency. Restaurant-level operating profit was $57.2 million, a $1.6 million increase versus last year. Margins were stable at 16%, reflecting strong operational execution in a shifting environment. Cost of sales was 25.1%, a sequential improvement from 25.5% in the fourth quarter. While this is a 10 basis point increase versus last year, led by anticipated beef inflation, we mitigated much of the impact with operational improvements, including reduced food waste and continued progress in our gross-to-net initiative focused on simplifying the efforts of our team members and more consistent execution for guests. Our menu evolution has also brought upgraded and new items to our guests, like pizza and seasonal Pizookies that are delivering increasing incidents, great guest satisfaction, and carry a favorable cost structure. Total labor expense was 36.3% of sales, a 20 basis point increase versus last year. Core labor expense, including hourly wages, management, and benefits, was unchanged from last year. Our operations were efficient while also delivering meaningful gains in guest satisfaction. The reported increase was driven entirely by higher workers' compensation costs resulting from rising medical expenses despite our team's good work in reducing the number of claims. We expect this pressure to begin to normalize in the back half of the year. Occupancy and operating expense was 22.7% of sales, a 30 basis point reduction versus last year. This reflects a strategic decision to shift marketing dollars into the second quarter to support our high-volume celebration season. It also reflects the good work our marketing team has done to optimize channel mix and drive better return on our investments with increased focus on social and digital channels. General and administrative costs are $22 million and 6.1% of sales, a 20 basis point reduction versus last year. Depreciation expense increased 110 basis points compared to last year, largely due to a one-time catch-up entry. Excluding this, the underlying increase was 30 basis points, reflecting our ongoing remodel program and new unit investment. These component parts delivered an adjusted EBITDA increase to $37.7 million as compared to $35.4 million last year. This represents a 30 basis point increase to 10.5% of sales. The strong business performance resulted in significant free cash flow that we deployed for three primary purposes. First, we invested $15.8 million in capital expenditures, primarily maintaining our restaurants and completing five remodels. Second, we repurchased and retired approximately 151,000 common shares for $5.3 million. Third, we repaid $23 million of debt. We ended the first quarter with net funded debt of $39.3 million, a significant reduction compared to $61.2 million at the end of 2025. With my first 100 days at BJ's complete, I would like to share an update on my initial areas of focus and the opportunity I see in front of us. Initially, my priority was stabilizing, building my immediate team, and strengthening the foundational processes within our accounting and finance functions. We are fortunate to have many great team members in place, and I'm pleased to have bolstered the team in key areas, including the addition of Ashley Van as our accounting leader, whom we announced a few weeks ago. With that groundwork in place, my focus has shifted to partnering more closely with Lyle and the broader leadership team to accelerate our growth initiatives. This includes our efforts to continue driving top-line sales growth through great operations, marketing efforts, and remodels, driving further margin gains in the middle of the P&L, and enhancing our unit economics to accelerate new restaurant growth. While I was optimistic when I joined in December, I'm even more energized by what I see today. The BJ's brand clearly resonates with a broad and growing cross-section of consumers. Our team is highly engaged, and we are continuing to build sales, traffic, and profitability. I am confident we have a significant runway ahead. Now turning to our 2026 financial outlook. We are reiterating all metrics in our 2026 full-year financial guidance. I will provide additional color for modeling purposes. First, comparable restaurant sales and traffic trends to start the second quarter are off to a strong start and continue to beat the Black Box casual dining benchmark. Second, we expect the second quarter to be the peak for commodity inflation this year, which will likely result in a Q2 cost-of-sales percentage marginally higher than Q1. In response, we are tracking towards a midyear menu update engineered to further optimize product mix. Combined with our planned pricing actions, we expect to fully offset the inflation impact in the second half of the year. Next, we expect occupancy and operating expenses to be approximately 23% of sales in Q2 as we reinvest the marketing favorability captured in Q1 to drive sales performance in our high-volume celebration season. Lastly, construction is underway for our new restaurant in Joliet, and we are on track to break ground in Buckeye in the coming weeks. We expect to record nominal preopening expenses in Q2 and Q3, with approximately 80% concentrated in Q4 as these restaurants open. As a reminder, we target roughly $700,000 in pre-opening costs per opening. Overall, our sales and traffic trends are strong, providing a solid foundation for the business. We are implementing targeted improvements across our menu, operations, and marketing tactics. As inflationary pressures ease, we expect these actions to further enhance performance, positioning us for accelerating profit growth in the second half of the year. In closing, the first quarter was a strong start to the year, defined by healthy traffic growth and resilient margins. This performance is a direct result of the hard work and dedication shown by our restaurant teams, field operators, and everyone at the support center. Thank you for your hard work and commitment. Looking ahead, we are confident that our strategic plan, combined with strong execution, will drive sustainable growth and create long-term value for our shareholders. With that, we'll turn the call over to the operator for questions. Operator: [Operator Instructions] Our first question today is from Brian Bittner with Oppenheimer & Company. Brian Bittner: Just want to ask about same-store sales. The seven consecutive quarters of traffic growth are very impressive, as is the outperformance against the benchmark. And it speaks for itself. So, I really want to ask about the average check side of the equation. It was flattish in the first quarter, which is definitely an improvement from where you were in 4Q. But I want to ask about the opportunity for the average check to become a bigger contributor to comp growth as the year unfolds? And perhaps what type of average check is embedded in your 2026 outlook for same-store sales growth of 1% to 3%. Lyle Tick: Sure. Brian, this is Lyle. I'll start and turn it over to Todd. Yes. I mean, look, I'm really pleased with the consistent traffic growth and outperformance that we've been seeing and with the moderation of the check compression, which I think we signaled to be expected in Q4 of last year when we were talking about this year. And so I think it's moving along very much the way that we expected it to, as we lap some of the performance from last year and then start to be able to layer in some of the other growth drivers. So right, in Q4, I think we had a very strong seasonal Pizookie play, then towards the end, we started to be able to lay in pizza, building on that mix. And then, as you see us coming into this year, we continue to build on pizza. As I started to talk about in my comments, things like the Wagyu burger, the chicken sandwich refresh, the PMD tiering, and other menu work we're doing, we've got a planful approach as we go forward that we think will continue to moderate and allow both of those levers to work for us as we go forward. So, in terms of the exact price or check built into the model? Todd Wilson: Yes, Brian, I'll jump in there. So relative to the guidance, what's embedded in our model is checked in a range of, call it, flat to plus 1%. As Lyle alluded to, we think that progressively advances through the year, both as we lap different items and as some of these new initiatives come on board. But we think Q1, marginally positive check in Q1. We think that's one side of the bookend. We think it could be as high as a plus 1% on the year, as some of these different initiatives take hold. Brian Bittner: And my follow-up is just really zooming out here. Can you give us maybe a state of the union updated state of the union on your plans for accelerating unit growth? How are you thinking about the near-term building blocks that are in place to accelerate unit expansion? And just as it relates to the longer-term opportunity, have you had a chance now that you've been there for a while, to maybe create a road map on how you are thinking about what the proper growth algorithm for this company is over the next many, many years? Lyle Tick: So yes, I'll answer both those questions. So first of all, I guess as we take a step back and we look at laying the foundations for unit growth as we go forward. I mean, I think our first stage of it was looking and making the geographical decision about where we want to grow, which I think I've talked about in terms of growing out from where we already have a footprint versus going greenfield and the concentric circle approach. The second part of that was getting to a new prototype design. Really, the first part of that job is getting to a prototype that we feel like our guests and our team members are going to love, and we feel great about what we've seen so far. And so that's step 2, and that will be reflected in the next 2 openings. Then I think the second job after you've established that is, as you go forward, we want to make it commercially exciting for all of us to accelerate growth. While the new units that we have to date have been a good use of capital, and that they've hurdled our weighted cost of capital. It's been a responsible use. We have much higher ambitions for that as we go forward and look to tune in the prototype, both through actual engineering of the prototype, but also flexibility in the size of the box, as I've talked about, a mix of first and second-generation space. Then, when I talk about the box also just challenging existing assumptions, right? There had been an assumption that BJ's was going to have something from 35 to 40 taps. So this is just one example. But when you do the productivity analysis, we probably need 20, and those are mostly driven by our BJ's beers. And when you start to kind of look through the opportunities and follow the numbers, there are a lot of benefits to play off of something like that, everything from cost to build, to ongoing maintenance of the infrastructure, to OpEx costs. So, just taking a holistic look at everything as we go forward. If I get my head up and look at the growth, we're looking to open a couple this year. I would say mid-single digits next year, moving towards double digits as we go into 2028 and beyond. And I feel like we have significant headroom in filling out our existing markets prior to actually having to go greenfield. So, as we've done our analysis, we will share more about the long-term growth algorithm as we go forward. But I feel very confident in the headroom that we have to grow BJ's units. Operator: The next question is from Jeffrey Bernstein with Barclays. Jeffrey Bernstein: My first question is just drilling down on the comp. I think you mentioned a growing outperformance versus the industry. I'm wondering if you could share maybe the sequential trends through the quarter and more specifics for April. And I recall last quarter, you saying you thought all 4 quarters would be within that 1% to 3% range. So just looking for some context there. And just lastly, whether or not gas price volatility, I know you mentioned weather was a big impact. I didn't mention gas. I'm just wondering whether you saw any kind of pressure or things in a sequential trend, as there was a spike in gas. Lyle Tick: Yes. I mean, thank you, Jeffrey, by the way, this is Lyle. I can only speak for our consumer. But our consumer has remained very resilient. When we look across Q1, we saw a very consistent performance across the periods in Q1 for our brand and our consumer. And as we've entered Q2, based on black box benchmarks, we have seen some of the delta between our performance and the category performance, our performance accelerates versus the category. But at least to date, obviously, we're keeping a very close eye on our consumer and their behavior. We really have seen a resilient consumer and resilient behavior, at least with respect to BJ's. Todd Wilson: Jeffrey, Todd here. I'll chip in on a few of those, just building on in kind of the word you asked. Relative to Black Box, Lyle may have said it in his prepared remarks, but we beat in Q1, we beat the benchmark by 3.3%. Encouragingly, that was across every geography that we operate in. So it was a consistent outperformance for our business, which is good to see. I think you asked about as well the quarterly same-store sales cadence. We talked last time about an annual expectation of 1% to 3% growth. We obviously reiterated that in terms of our full-year guidance. And I'd say we still feel good with that. We're able to deliver that growth consistently quarter after quarter. So I think that's consistent with what we would have shared in our last update. Jeffrey Bernstein: And then my follow-up is just taking a step back, Lyle. I think on a couple of occasions in your prepared remarks, you said you think the brand is still in the early innings. Seemingly, you've had some strong momentum and a number of quarters of accelerating strength. So, just wondering what exactly early innings means? What are you referring to in terms of where you see the greatest further opportunity, whether it's a long-term target that you're aspiring towards or whether there's a North Star or a player in the industry that you aspire to be like? Just wondering what exactly that means when you say early innings. What are you referring to? Lyle Tick: Yes. Well, I mean, one, very broadly, I'm 18 months roughly or a little bit more than that into a journey of, I think, what I've talked about, which is creating a more durable, consistent, and sustainable performance platform for BJ's that we expect and want to deliver on into the future. I think secondarily to that, a lot of the work that we've done in the first 18 months, what we'll continue to build off of, I would say, is foundational. So we put a lot of work into foundationally improving what we called our table stakes operations. And we see that coming through in our scores and our retention. But that is a foundation for us to then continue to improve operations. We solidified our value platform with the Pizookie meal deal. But as I alluded to in our comments, as you then get that platform solidified, the question is after that step 1, where are you going with step 2 and 3, and we talked about some of the tiering.? Then, really, on the menu work, we're really early doors there. The first real category renovation that we did was pizza, and I think we solidified our seasonal program for Pizookie. But we have a lot more ahead of us in continuing to do the menu work. And while I speak about all of those things individually, the idea is that as those things come together over time, they ultimately create a strong flywheel for BJ's working collectively together to deliver sustained performance. So when I look at where we're at, I would still say we are in the early innings of the journey with more opportunity ahead. But I do think we've identified our strategic priorities, and they'll guide us as we go forward, but there's more room in all of them. And obviously, we haven't even touched on really starting to get development going again. That's clearly in its early stages. Operator: The next question is from?Alexander Slagle with Jefferies. Alexander Slagle: I wanted to follow up on the Puzzuki meal deal, just sort of how you're feeling about the progress there and the next steps you talked about to further refine the offering, maybe with more attachment and upgrade options and the tiering options that you're testing. Lyle Tick: Yes, sure. So I mean, I feel really good about the Puzuki meal deal. It continues to resonate. It continues to bring in traffic and do its job and importantly, bring new people into BJ's that based on our numbers, is providing an improved experience. So that is exciting because hopefully, a number of those people are going to have a good experience and come back to us. When I think about evolving the Pizookie meal deal, there's a couple of different things that I would point to. One is, as I talked about some of the chicken sandwich work that we have done and how we've felt confident in what we've seen in testing and are going to roll those out as part of Q3 menu.? We're taking an opportunity within PMD, for example, at the $13 level to retire one of our less-performing items on there, and we're going to bring in a core chicken sandwich. The reason I mentioned that is because if you remember, the Smashburger, we introduced the Smashburger exclusively on PMD and, then it became very popular and people wanted it, and then it became a mainstay on the menu. So we are going to be doing a couple of premium chicken sandwiches on the menu, but an entry chicken sandwich on PMD that I think potentially could play a similar role for chicken sandwiches as hopefully Smashburger did for burgers for us.? Then there's the tiering, which is we have a lot of people who come and engage in PMD, and we wanted to give them an opportunity for our best and most frequent customers who are coming in and taking advantage of that deal to have trade-up opportunities. And so we've developed a premium tier offering. It's just a few offerings where we're able to condense the 13 a little bit, open up a trade-up tier a little bit. And I'm excited to see how the test goes. It's going to start in the next couple of days here. But we feel good about the products that we're putting into that tier. We think it will be a compelling partnership to the 13. Alexander Slagle: And then just on marketing spend, just remind us of the percentage of sales in the 1Q and what the 2Q outlook looks like? I know you gave some comments on that. Lyle Tick: Yes. When I look at marketing spend, I guess the thing that I would point us back to is that when we look at it year-over-year in terms of the full year marketing spend, we're planning flat year-over-year. I think it's 2.2%, if I'm not mistaken, reinvestment from a marketing spend percentage point of view. So we did make a strategic decision to move dollars out of Q1 to reinforce Q2. As I said, we call it celebration season. It's kind of one of our most critical seasons. And that was because when you think about the natural shape of our year, and what the important quarters are. And then Q1 is always a choppy time. You have weather, you've got January, and people eating and drinking differently and all those types of things.? So we felt that with our evolved marketing strategy, we could get more adolescent in Q1 and reinforce Q2. And so the biggest shift is really between Q2 and Q1. But overall, the percentage of sales year-on-year will remain flat. Operator: The next question is from Sharon Zackfia with William Blair. Sharon Zackfia: Sorry if I missed this, but I'm curious what you learned from your first pizza LTO. And then when you talk about the growth that you saw in pizza and burger, which is really quite amazing, what have you seen consumers shift away from? Kind of what did that come at the expense of? Lyle Tick: Yes. So the LTO, the Mike's Hot Honey LTO, it performed really well. It was our third, I believe, highest performing pizza in our pizza lineup, which we felt pretty good about. It had really good scores. You may see it rear its head again sometime later in the year. So we felt really good about that. We've actually just moved into our next pizza LTO, it's a Barada pizza. So think of like a margarita pizza, but with Barad and cheese, which I'm pretty excited about. It's a nice premium offering, but also not a meat-based offering. So excited about that. You may actually try it soon, Sharon. In terms of, sorry, the second part of the question, with respect to the growth of burgers and the growth of pizza, I mean, we've seen the sales growth. We've seen units per store per day growth. And overall, we've seen trading into pizza and trading into burgers is margin accretive to the menu. So we feel good about any sort of incident movement there from a margin percentage point of view. Where we've seen probably a little bit of movement around the menu, is in some of our steaks and slow roast category and in some of our specialty entrees, we've seen some movement there, while we've seen a lot of growth in pizza and burgers. Operator: The next question is from?Nerses Setyan?with Mizuho. Nerses Setyan: It was very helpful the cost commentary and the other OpEx commentary, but I didn't hear anything about labor. Would you mind sharing what your thoughts are on Q2 labor and maybe for the full year? And then just the bigger picture, where do you think the opportunities around remaining cost cuts and efficiency initiatives are across the P&L? Todd Wilson: Yes, Nerses, this is Todd. I'll start there. As we look at labor, if I look at last year in Q2, we ran a little over 35%, 35.4%. Part of our commentary on Q1, navigating those weather ups and downs, is not easy for an ops team. And we were really pleased with the job our team did in Q1, both on the margin side and the guest experience side, but we certainly feel like there's an opportunity there as we go forward. And so as we look at the balance of the year, we think there's an opportunity to improve our labor margins. Primarily, certainly, the traffic traction that we have leads that as traffic grows, we're able to leverage our fixed costs. And so that's a leading piece of it.? But there are specific initiatives in place. We work with our operators on a daily and weekly basis to learn what best practices are and how to implement those across the system. So as we look forward, we think there's an opportunity to improve that through the balance of the year. Operator: The next question is from Jon Tower with Citi. Jon Tower: Maybe starting, obviously, moving to this premiumization test on the PMD is interesting. I'm just curious, is this something that's spawned by consumer behavior that you're already seeing, meaning someone's coming in, getting the $13.99, and then adding a few more things to the menu such that you feel comfortable with the idea of moving in this direction? Lyle Tick: So it's less spurred by that, although we do see people coming in for the Pizookie Meal Deal and adding appetizers. Obviously, it doesn't include a drink.? So the vast majority of Pizookie Meal Deals also have a drink attached to them.? So those are opportunities. It's really just the idea of as we go forward, optimizing that $13 segment to the most high-performing products within the segment and then giving those people who are coming in looking for that kind of social splurge need state, but looking for kind of an entry point like the Pizookie Meal Deal to give them a place to go if they want to go for something more premium.? And so that it's a hypothesis based on what we see in our business, is the way people navigate our broad menu. We see a lot of people come in at different entry points when they're going to that social squares occasion. Then secondarily, obviously, observations in the market about how this tiering can work and work effectively for your business. Jon Tower: Maybe pivoting a little bit, but the World Cups are coming up, and it will be at the end of your fiscal second quarter. Obviously, you talked about the idea of the celebration season as being something that's important. But I know in the past, certainly, when the World Cup has been more aligned with your time zones, there has been an impact on the business. Curious how you're thinking through either marketing around it or building up any business around it, if anything at all? Lyle Tick: Yes. I mean, when we are looking at it, I'm hopeful that the World Cup, when you think about it year-on-year, will provide some tailwinds. In my previous life, which was much more sports bar-rooted with respect to the World Cup, you really saw material movement around U.S. games, Mexico games, and sometimes when there was like a really, really big matchup. So they were geographical and specific to matchups. And so we've looked at that in terms of our planning.? We've also looked at where we have restaurants in proximity to stadiums and venues where games are going on to make sure we're doing the right things locally. And then you may see some fun rifts on some of our iconic products that live into celebrating the World Cup, as well as an important year for the U.S., so we're playing around there. So yes, on our radar, I hope it will provide some tailwinds, and we're going to have a little bit of fun with it from a marketing and engagement perspective. Operator: The next question is from Brian Mullan with Piper Sandler. Allison Arfstrom: This is Allison on for Brian. Just one more on labor. But on the activity-based labor model, what percent of stores have it today? And any commentary you can share on learnings or data points you've noted through the scaling of this rollout would be great. Lyle Tick: Yes, yes. We're still at about 1/3 of our stores that have the activity-based labor model. We're still targeting it to be deployed to the system over the course of this year. We probably won't do much of that in Q2 because of the importance of Q2. So the next rollout phase will probably be more focused in Q3. What we continue to see with it is that it suggests that we have what I would call some marginal savings from a labor perspective because our looseness around our shoulder hours is more loose than the incremental labor we need at our peak hours is what the model is suggesting.? But the real KPIs that we continue to look at are in those restaurants, and are we seeing improvements across our guest metrics? And so we're pleased with that, and particularly where we're seeing, I think, most of the movement is in our speed metrics, which stands to logic as you get the right people in the right place at the right time. So overall, very much a build on the same story that you've heard before, on where we are and where we're going with that. Operator: The next question is from Todd Brooks with Benchmark StoneX. Todd Brooks: First, I was wondering about visibility into the celebration season, either through some of the advanced reservation capabilities and people utilizing those and being more aware of them year-over-year, or we're in the middle of graduation season now. Just Lyle, what's your take on the front end of celebration season here? Lyle Tick: I mean, as I mentioned, I think in my comments, Todd, is that we've been pleased with the performance as we've gone into Q2 and some of the accelerated outperformance we've seen against Black Box benchmarks. And so we feel good about how Q2 has gotten out of the gates for us and hope that bodes well for the rest of the celebration season. I think we have pretty strong plans that are reinforcing our core equities that we've been building off of. So I feel really good about the plans we have in place and at least how the quarter has gotten started. So overall, feeling good right now. Todd Brooks: And is this a period where it's so high volume that there's no opportunity to drive a lot more incremental traffic year-over-year? Is it more of a hold to hill? Or do you see opportunities to drive more traffic through the boxes this year? Lyle Tick: I mean, look, when I look at our top, top performing restaurants and you look at the AUVs that they're driving, there's clearly headroom for most of the restaurants in our system to continue to service and move more people through our boxes. So I think it's a matter of us operating as efficiently as possible and really doing the fundamentals right. It's about having it staffed right. It's about full hands in and out of the kitchen. It's about busing and turning tables quickly. And we have our teams very, very focused on that.? We've, over the past couple of years, been pushing towards getting more upfront reservations or at least as many as we can because it helps us be as planful as possible. But I think one of the things that we get credit for at BJ's from our guests is that we're a place where you can book ahead of time, but we're also a place that tends to be pretty flexible on accommodating people as they come through our doors. And I think that tends to be to our benefit. So I'm excited about the season. Todd Wilson: Todd, I'd just quickly add, Lyle commented on it in his prepared remarks, but right, we had roughly half of our restaurants setting records on Valentine's Day. And true for us, true for many in the restaurant business, that is typically one of, if not the highest volume days of the year. So seeing that many restaurants are able to raise the bar even further, I think, to me, very much says we have an opportunity to continue to grow even in the high season of Q2. Operator: This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to the First Quarter 2026 Financial Results Conference Call and Webcast. [Operator Instructions] Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations. Juliet Cunningham: Good afternoon, everyone, and thanks for joining us today. With me are Brian Blaser, President and Chief Executive Officer, and Joseph Busky, Chief Financial Officer. This conference call is being simultaneously webcast on the investor relations page of our website. To assist in the presentation, we also posted supplemental information on our investor relations page that will be referenced in this call. This conference call and supplemental information may contain forward-looking statements which are made as of today, May 5, 2026. We assume no obligation to update any forward-looking statement except as required by law. Statements that are not strictly historical, including the company's expectations, plans, financial guidance, future performance and prospects are forward-looking statements that are subject to certain risks, uncertainty, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Please refer to our SEC filings for a description of potential risks. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and supplemental information on the investor relations page of our website. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call are on a constant currency basis. Now I'd like to turn the call over to our CEO, Brian Blaser. Brian Blaser: Thanks, Juliet, good afternoon, everyone. I'll start today with a brief perspective on the first quarter and then discuss details of our business performance more broadly. Our first quarter results were impacted by a significantly softer respiratory season compared to Q1 of last year, with influenza-like illness or ILI visits down approximately 30% as reported by the CDC in April. While ILI visits are one indicator, the season was also notably weaker across other key measures, including severity of illness, hospitalizations, and duration. Overall, the respiratory season was both significantly milder and shorter than in Q1 2025. We also experienced broader macroeconomic and geopolitical headwinds during the first quarter. In China, sales slowed in March ahead of the anticipated national IVD pricing guidelines as distributors exercised caution on inventory purchases in light of potential future pricing declines. While final guidelines have not yet been issued following the comment period, our updated full year 2026 guidance reflects the estimated impact based on the current draft. As is expected, this estimate may change once the final guidelines and implementation timeline are announced. Accordingly, we are preparing mitigation actions to help offset these headwinds. Moving into 2027, the proposed pricing changes would impact only about half our sales in China. Even with the new guidelines, that business certainly isn't going away and will continue to be a meaningful component of our revenues. Notably, even after these pricing changes are implemented, we believe our China business will continue to be accretive to the company margin profile. We don't think the changes will be fully implemented until the middle of next year, which gives us time to work on mitigating actions. Shifting back to Q1 results, we also saw delays in some orders and tenders due to the ongoing disruption in the Middle East. Assuming conditions stabilize, we expect these orders and tenders to resume during the remainder of the year. Importantly, our underlying business remains strong and durable. Our core labs and immunohematology franchises are performing well, and we are executing against our priorities. As a result, we believe we are well-positioned to deliver on our objectives to expand our adjusted EBITDA margin and improve cash flow in 2026. We are also making solid progress in advancing our strategy. We completed the acquisition of LEX Diagnostics in April, adding a highly differentiated, ultra-fast molecular platform that strengthens our position in point of care, an area we believe will be a meaningful driver of future growth and reinforces our ability to deliver integrated diagnostic solutions across the continuum of care. We are already seeing strong customer interest and have secured our first orders. Customer insights reinforce this opportunity. Approximately 90% of Sofia customers currently use both antigen and molecular testing systems, and many have indicated a willingness to switch to our more competitive molecular platform. Their priorities are clear. Better ease of use, faster time to result, and lower costs. LEX is designed to deliver all three. To support launch readiness, we are expanding manufacturing capacity at our site in the U.K. We expect to begin placing instruments this quarter with measurable assay pull-through and associated revenue beginning in early 2027. And turning to our labs business, we launched our high-sensitivity troponin assay in the U.S., strengthening our cardiac portfolio and enhancing our clinical value proposition. We are seeing strong demand. We are now shipping to more than 300 U.S. customers. We also began rolling out the VITROS 450 platform in select international markets, expanding access to our diagnostic solutions. As a successor to the VITROS 350, this platform is designed to meet the needs of emerging markets requiring low volume, cost-effective solutions. Initial shipments are targeted for JPAC, followed by LATAM and EMEA, where we recently received the CE mark. Importantly, the combination of VITROS 450 and VITROS ECiQ enables us to deliver a comprehensive solution across clinical chemistry and immunoassays in attractive international markets. We expect these product launches to support our mid-single-digit revenue growth expectations for the labs business, which represents over half of our revenue. In summary, we are navigating near-term headwinds, but our strategy is sound, our innovation pipeline is strong, and we remain focused on executing with discipline to deliver sustainable, profitable growth. Now I'll turn the call over to Joe. Joseph Busky: Okay. Thanks, Brian. I'll walk through the key financials for the first quarter of 2026. Unless otherwise noted, all comparisons are to the prior year period on a constant currency basis. Total reported revenue was $620 million. Of that, non-respiratory revenue was $552 million, or $544 million, excluding the Donor Screening business. Labs revenue declined 8% primarily to the factors Brian just discussed. In addition, the termination of our joint business agreement with Grifols reduced Q1 Labs revenue and created a difficult year-over-year comp. Immunohematology grew 3% driven by North America, China, and JPAC. Triage declined by $3 million, primarily due to slower distributor sales in China. Looking at our respiratory revenue, as was widely reported, the North America respiratory market showed an atypical decline versus the prior year period. This was an industry-wide trend, not unique to QuidelOrtho, and is supported by KOLs and competitor reports. As a result, our respiratory revenue was $68 million, down significantly, as noted in our pre-announcement, due to the approximately 30% lower ILI visits compared to Q1 '25. Keep in mind, though, that our large global installed base of the Sofia platform and QuickVue has demonstrated growth over time. Importantly, during the first quarter of '26, we saw no change in testing protocols and our market share remained stable. Lastly, on revenue, foreign currency exchange was favorable by 210 basis points during the quarter. Now moving down the P&L, non-GAAP OpEx decreased by 2%, primarily due to R&D efficiencies. Adjusted gross profit margin was 44%, a decrease of 630 basis points due to product mix with lower respiratory revenue contribution. Our adjusted EBITDA was $109 million, representing an 18% adjusted EBITDA margin and adjusted diluted loss per share was $0.04. We expect to continue to drive adjusted EBITDA margin expansion for the full year with targeted staffing reductions, procurement, and facility consolidation cost savings initiatives. Now turning to the balance sheet. At the end of March, we had cash of $140 million and borrowings of $130 million under our revolving credit facility. From a cash flow standpoint, operating cash flow was negative $33 million, and free cash flow was negative $67 million. While we expected cash flow to be negative in the first half, which is consistent with our historical seasonality, first quarter 2026 cash flow declined year-over-year, primarily due to lower EBITDA related to the weaker respiratory season and the timing of accounts payable and accrued interest. Inventory also increased due to the weaker respiratory season as well as in preparation for multiple upcoming product launches. On the positive side, we delivered strong accounts receivable cash collections of $54 million and reduced our CapEx by $22 million compared to the prior year period, which was the result of lower systems and manufacturing capacity spend. We remain focused on improving cash flow generation still expect positive cash flow for the full year, now expected to be in the range of $100 million to $120 million, with positive cash flow driven by higher revenue in the second half of the year. Lastly, net debt to adjusted EBITDA leverage was 4.1x, including pro forma adjustments allowable under our credit agreement. We continue to expect pro forma leverage under the terms of our credit agreement to be at 3.25 to 3.5x by the end of this year. To wrap up, first quarter results reflected the impact of lower respiratory volumes, macro and geopolitical pressure, and continued investment in our strategic initiatives, including molecular diagnostics. Now I'd like to cover our full year 2026 outlook at a high level. For a full list of assumptions, please refer to page 6 of our first quarter 2026 earnings presentation. Importantly, we are providing a new guidance range. As noted in our Q1 pre-announcement, we are tethered to the low end of our previously provided range, which was purposely wide to account for respiratory season variability. We now expect total reported revenue of $2.7 billion to $2.75 billion, which is driven by 2 changes: our first quarter performance and the expected lower full year revenue in China, which takes into consideration distributor reactions to the pending China National IVD pricing guidelines as currently drafted. In North America, first quarter respiratory revenue reflecting a weaker ILI trend. Looking back over the past 10 years and excluding pandemic years, of course, in periods where ILI declined in Q1 versus the prior year, trends rebounded over the remainder of the year, resulting in higher ILI on a full year basis. Despite this empirical data, to be prudent, we are continuing to plan for an average respiratory season and forecasting a flat second half without a bump up and an 8% decline in respiratory revenue for the full year 2026. These two revenue impacts flow from the top line to the bottom line. Therefore, we now expect full year 2026 adjusted EBITDA of $615 million to $630 million, still representing an adjusted EBITDA margin of 23%, which reflects a 100 basis point improvement over full year 2025. We expect adjusted diluted earnings per share of $1.80 to $2.00, and we expect to deliver free cash flow of $100 million to $120 million. Note that the second quarter has historically been our seasonally lowest quarter. Consistent with this pattern, we expect sequential revenue, adjusted EBITDA, and adjusted EPS to be roughly in line with Q1 '26, but still reflecting year-over-year growth across all three metrics. Our updated outlook reflects improving operating performance in the second half of the year, as well as continued disciplined execution and the ramping up of the LEX Diagnostics business. With that, we'll now open up the line for questions. Operator: [Operator Instructions] Your first question comes from Tycho Peterson of Jefferies. Your line is open. Please go ahead. Jack Melick: This is Jack on for Tycho. Thanks for the question. Could you just walk us through the guide for second quarter growth by segment and then also down to P&L, what margins are going to look like? Joseph Busky: Yes, as, hey Jack, as noted in the prepared remarks, we do expect that sequentially Q2 will be relatively flat with Q1, but will provide growth year-over-year. The growth is going to come from the core business, as you think about the labs business and the IH business and the Triage business, that growth versus prior year. Jack Melick: Okay, that's helpful. Now in China NHSA, can you tell us exactly how big of a headwind that is in 2026? What you're assuming in the guidance and just a little bit more detail on how you arrived at that number. Joseph Busky: Yes, sure. As you think about the updated, the updated revenue guide, which again, is tethered to the low end of the previous revenue guide, there's really only two changes that we made to the revenue guide. I want to be really clear with that. One is the respiratory season weakness we saw in Q1. Then the impacts that we're seeing in China from our distributors pausing on their purchases due to the pending new national pricing guidelines, which we expect to come out in the next couple of months. I would say if you look at the new revenue guide, Jack, it's down roughly $75 million at the midpoint, and it's probably split almost 50/50 between the respiratory and the China. Maybe a little bit less on China, a little bit more on respiratory. Maybe maybe 45%, 30 respiratory and 30 China kind of thing. That's where we're seeing it. We have pretty good visibility, as you would imagine, from our local team and the good relationships we have with our customer base. We feel pretty good about this new guide for 2026. Operator: Your next question comes from the line of Andrew Brackmann of William Blair. Andrew Brackmann: I wanted to pick up off of Jack's first question there with respect to Q2. If you're sequentially sort of flattish to Q1, I think that implies a pretty significant ramp in adjusted EBITDA margin in Q3 and Q4. Can you maybe just talk to us about some of the levers that you see there, not just on the revenue side, but also on the cost side as well? Thanks. Brian Blaser: Hey, Andrew. I do think that what we're looking at in the guide as you think about first half, second half, is that we are expecting the revenue growth to pick up quite a bit in the second half versus the first half. That's really a function of we expect that the China impacts that we've talked about in the prepared remarks generally are going to happen in the first half of the year and not so much in the second half of the year. In addition, as I said we are expecting continued growth with labs, IH, and Triage, and we are planning for an average respiratory season in the second half of the year. Joseph Busky: Not, again, we're not expecting growth in the second half for respiratory year-over-year, we are expecting it to be flat. I don't expect it to be a headwind. The all those, all those factors, including what Brian mentioned with the new products coming out, the VITROS 450, the high-sensitivity troponin, and you're going to have some less revenue in the second half. You know, all those things contribute to the higher revenue in the second half versus the first half of the year, which will drop down and drive higher EBITDA, EPS, and cash flow. Andrew Brackmann: Okay. Thanks. Thanks for all that. Brian, with respect to LEX here, it sounds like some folks in your customer base are pretty interested in this. Can you maybe just sort of remind us about the switching costs that might exist for this platform for customers? How big of that is a hurdle here? I guess, what are some of the things that you can do to maybe be a little bit more aggressive to get these share wins, be that on pricing strategies, bundling or anything like that? Thanks. Brian Blaser: Yes. Thanks, Andrew. We are excited about LEX and working actively, as I mentioned, to build additional capacity in our site in the U.K. to support the ramp up. You know, at this point, we're expecting to place a few hundred instruments this year, then followed by a more significant ramp up in 2027 that I think is really going to begin to create meaningful assay pull-through. We're doing everything we can to bring on additional capacity as quickly as possible, because I think more than anything, we'll probably be capacity constrained versus demand constrained given what we're seeing with the product. Most of these instruments will be placed in customers, meaning there's no real capital outlay from a switching cost standpoint. The ease of use profile, this is truly a plug-and-play instrument that requires sample in, answer out in 6 to 10 minutes. You know, your question about the switching costs really have very low barriers to customer objection to placing new instruments. We don't think that's going to be an issue, and we think the value proposition across speed, turnaround time, and cost are really going to position this platform well. Operator: Your next question comes from the line of Patrick Donnelly of Citi. Patrick Donnelly: Maybe one on the China side. You know, I'm sure you guys saw this morning a competitor of sorts kind of walked away from their China diagnostics business and sold it, which was rewarded just given that it's been an overhang on a lot of the companies. I guess, what's your commitment there on the China side and visibility given some of these recent changes? It just feels like a slippery slope over there. How are you framing up that risk and the comfort level going forward on that business? Brian Blaser: Yes. Thanks, Patrick. You know, clearly the reimbursement changes are a headwind there, but the way we're looking at it the reimbursement changes themselves will only impact about half our sales there. You know, we have no plans to walk away from China. Even after these changes are implemented, we believe the business continues to be accretive to our company margin profile. In time to address this, we think that the changes won't be fully implemented until probably mid-next year. We're going to be taking actions to offset that. You know, clearly, we will continue to monitor the environment in China after these changes are made. As long as the economics continue to be favorable of we intend to remain in that market, I think over the very long term, it continues to be an attractive growth market for healthcare and diagnostic testing in particular. Patrick Donnelly: Okay. That's helpful. Then, maybe just on the margin side, the EBITDA build, can you just talk about some of the actions you're taking on the cost side not only this year, but just the base heading forward? Obviously, you guys in the past have given some longer term targets. Just how you're thinking about the key levers there as we work our way through the year and into next year. Thank you, guys. Brian Blaser: Yes. You know, we continue to do a lot of heavy lifting on the margin side of the business. That's I think I've referenced that we've taken out close to 1,000 positions in the organization. A lot of that work pushed us into the low 20s adjusted EBITDA margin. We're going to start to see a 50 to 100 basis point improvement starting in the second half of '26 from our Donor Screening exit. We've got a really a rich portfolio of projects across our indirect and direct procurement efforts. We've got the shutdown of our Raritan facility in progress, and we've got a lot of opportunity outside the U.S. to optimize our profitability in our OUS regions. You know, I'd say additionally, we continue to benefit from this dynamic of placing more immunoassay volume that's at higher margin. You know, we see the benefit of that. I think what you're going to see moving forward is the benefit of LEX and the molecular margins being typically much higher than immunoassay margins as well. You know, I think we get into that mid-20s range solidly with our procurement initiatives and the Raritan footprint optimization and maybe some targeted staff reductions. I think we push into the higher 20s as LEX becomes a bigger component of the business over the next few years. Operator: Your next question comes from the line of Lu Li of UBS. Lu Li: Why don't you go back to China a little bit? I think you mentioned that, in the guide, you're assuming the China impact are basically happening in first half and not the second half. I'm wondering if you can provide a little bit more color on that, whether you're still seeing like distributors pausing sales maybe in April, May. Just a little bit more color in terms of like what they're saying as well. That's my first question. Brian Blaser: Yes it's still early days. You know, I think our distributors got a bit spooked with this change in the reimbursement coming. They got very conscious of their inventories. You know, we've been working with them on some rebates and discounts and other things to offset some of that pressure. I think over the next 2 months here, we're going to see that that sort of behavior in the first quarter starts to mitigate and that will stabilize over time. Lu Li: Got it. My second question, why don't you double confirm your margin target? Are you still hoping to get to like mid-to-high 20s% by mid-2027, or that margin target maybe get a little bit delayed just given the potential changes in China and then maybe other macro factors? Joseph Busky: Yes. Hey, Lu, it's Joe. I think Brian touched on this a minute in his previous answer. Just to reiterate we are confident in our margin, EBITDA margin goals and the timeline for them. There's no change to that. That's because we still have, as Brian said, all these initiatives around procurement and site consolidation in flight that we expect to complete as we move through this year and into early next year. On China we do have some time. You know, we don't think that these potential reimbursement changes will be enacted until you get more into mid-'27. We've got about a year, really, to implement cost mitigation actions to offset any potential price declines that we may see in 2027. And so because of all that, we still feel really good about the margin goals and the timing that we've communicated already in the past. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call back to Brian Blaser, President and Chief Executive Officer, for closing remarks. Brian Blaser: Thank you, operator. In closing and stepping back from the first quarter the headwinds that we saw in the respiratory season and China, this really doesn't change our direction. We are executing well, our strategy's working, and we are strengthening the business in the right areas. We do expect a stronger second half and remain focused on delivering consistent profitable growth. Thank you for your interest in the company, and we look forward to updating you in the quarters ahead. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Welcome to the Philips First Quarter 2026 Results Conference Call on Wednesday, 6 of May 2026. During the call hosted by Mr. Roy Jakobs, CEO; and Ms. Charlotte Hanneman, CFO. [Operator Instructions]. Please note that this call will be recorded, and replay will be available on the Investor Relations website of Royal Philips. I'll now hand the conference over to Mr. Durga Doraisamy, Head of Investor Relations. Please go ahead, ma'am. Durga Doraisamy: Hello, everyone, and welcome to Philips' First Quarter 2026 Results Webcast. I'm here with our CEO, Roy Jakobs, and our CFO, Charlotte Hanneman. Our results press release and presentation are available on our Investor Relations website. The replay and full transcript of this webcast will be available on our website after this call concludes. I want to draw your attention to our safe harbor statement on the screen and in the presentation. I will now hand over to Roy. Roy Jakobs: Thanks, Durga, and good morning, everyone. Thank you for joining us today. I will start with an overview of our Q1 results and our outlook for the balance of the year. Charlotte will take you through the quarter and our guidance in more detail. We started '26 with a clear proof that our strategy is delivering, growth, margin expansion and strong order momentum despite the volatile environment. At the same time, we remain closely connected to our customers and employees. This includes those impacted by the situation in the Middle East. We continue to prioritize their safety, support and continuity of care. Against this current backdrop, we reiterate our full year guidance. Looking at Q1. Order intake grew 6%, reflecting continued momentum. Comparable sales increased 4% with growth across all business segments, led by personal health. We also expanded margins. Adjusted EBITDA margin improved by 40 basis points to 9%, despite higher tariffs. This marks our sixth consecutive quarter of delivering on our commitments, even as we operate in an uncertain and dynamic environment. Disciplined execution and focus on what we can control underpins our progress. We are on track to deliver the full year outlook we set in February, which includes currently known information within an uncertain macro environment. Our strategy remains anchored in three pillars: focused value creation, innovation-driven growth and disciplined execution. Let me take you through the first quarter in that context. Starting with our first pillar, focused value creation. We execute specific strategies by segment. And we invest with discipline, focusing on interventional monitoring to drive growth. We also drive growth geographically with North America as the key engine. You can also see this in our Q1 results. Equipment order intake grew 6% and with solid growth across D&T and Connected Care. North America led the growth, building on strong prior year comparison. Europe also performed strongly across several modalities. Looking at D&T, Order intake increased in the mid-single digits. Growth was driven by sustained momentum in image-guided therapy as our market-leading Azure platform continues to drive strong demand. Precision Diagnosis delivered solid order growth outside China. Globally, MR order intake was solid, with increasing interest in our healing free systems. Last year, 75% of our MR systems shipped were Helium free. For our customers, resilience and MRI is being tested more than ever. Helium supply is tightening geopolitical developments in the Middle East are adding further pressure to that. Costs continue to rise. As a result, health systems are seeking uninterrupted imaging and reliable service in everyday clinical practice. Philips is leading the shift to helium-free imaging with our high-performance BlueSeal technology, we are setting the new industry standard in MRI resilience, enabling uninterrupted operations and reducing dependence on scarce helium. We have installed more than 2,200 systems globally, saving over 6 million liters of helium. Building on this, we also unveiled the industry's first helium-free 3.0T MR systems. We expect regulatory clearance in 2027, positioning us to transition to a fully helium-free MR portfolio and extend our lead over competitors. In CT, we are seeing a strong funnel for our spectral technology. In the quarter, Verida, the industry's first AI-enabled detector-based spectral CT gained traction following its launch at RSNA last December, with initial orders secured in Europe. The first system installed in Q1 is already delivering results. At Nuestra Senora de Rosario University Hospital in Madrid, it is demonstrating seamless workflow integration and clinically relevant insights and importantly, without added operational complexity. Turning to Connected Care. Order intake grew in high single digits, mainly driven by monitoring and supported by enterprise Informatics. Demand was broad-based across all regions with particular strength in North America and Europe building on a strong prior year comparison. We continue to expand enterprise partnerships with large integrated delivery networks. These customers are investing in enterprise patient intelligence medical device integration and cybersecurity. They are increasingly adopting our enterprise monitoring as a service model to improve clinical, operational and economic outcomes. This reinforces our position as a partner of choice for enterprise-wide data-driven care delivery. Moving to Personal Health. This segment delivered another quarter of broad-based growth, driven by strong consumer sellout and continued market share gains. We drove this through active expansion and diversification of our channel footprint, adding more than 3,000 distribution points in Europe. At the same time, we strengthened our presence with key global retail partners through increased listings and expand placement. This included IPL expansion broader distribution of interdental products and more than doubling on bay distribution in the U.S. Our second pillar, innovation, is another key driver of both momentum and growth. Across modalities and products, we are accelerating innovation towards scalable AI-enabled hardware and software platforms. And that is already translating into stronger regulatory momentum for approvals of new product introductions. In Q1, we received 20 510(k) clearances and premarket approvals, more than doubling year-on-year. In MRI, we received FDA 510(k) clearance for SmartHeart our AI-powered cardiac MR solution. Just like SmartSpeed is a clinical application that extends software and AI-led innovation across the installed base. SmartHeart automates complex planning workflows in 1 click and does that under 30 seconds, simplifying operations and boosting productivity. It also reduces patient breaths by up to 75%, improving patient experience in a big way. NCP, we received FDA 510(k) clearance for both spectral CT Verida and our Rembra Wide-bore CT. Launched at the 2026 European Congress of Radiology this platform features an industry-leading 85-centimeter bore. It is designed for high throughput environment with an AI-enabled workflow and improve diagnostic confidence. In Image Guided Therapy, we received clearance for DeviceGuide, an AI-driven solution, fully integrated with our Azurion platform. It enables real-time automated detection and visualization of mitral valve repair devices during minimally invasive procedures. We also launched IntraSight plus ,integrating intravascular imaging and physiology into a single system to simplify workflows and improve efficiency in the cath lab. Looking beyond product innovations to our future transformative interventional platform introduced at our CMD in February. We made progress in advancing clinical validation. Building on our ecosystem of more than 100 clinical partnerships, we added a share of our Research Consortium in Q1. Seven clinical studies are now underway to demonstrate the benefits of AI and robotics assisted workflows and minimally invasive treatments for brain aneurysms and liver tumors. In Personal Health, AI is embedded in our propositions. For example, the Philips High-end Shaver 9000 Prestige Ultra. It uses intelligent sensing and AI-driven adaptation to respond to each user skin and hair type. Delivering a more personalized shave every time. This innovative proposition not only won the TIME's invention of the year for the groundbreaking features, with also significantly increased sales and margin demonstrating our leadership in this domain. Since creating the hybrid shaving category, we have sold more than 50 million OneBlade handles and 100 million blades. This growing installed base supports profitable recurring revenue from consumables with strong replacement blade performance in the quarter. In Oral Healthcare, we infused new Philips Sonicare 5700 to 7300 series models in the U.S., featuring next-generation Sonicare technology. In China, we launched Sonicare 7000 at the South China Dental Show, reinforcing our position as a professional or care leader and strengthening momentum with the dental community. Across Philips innovation continues at scale throughout our portfolio. We remain the largest medtech applicant as the European Patent Office in 2025, a strong proof point of the depth of our innovation engine. And this is not just about today. This leadership is fueling the next generation of innovations coming through our pipeline and positioning us well to drive accelerated growth. In our third pillar, disciplined execution, it all starts with patient safety and quality, our top priority. It ensures we bring innovation to market with the high standards of patient safety and well-being. We're making strong and steady progress building on the improvements delivered over the past 3 years. And importantly, we are now benefiting from the work we have done to make Philips simpler, leaner and more agile, strengthening the foundation of our execution. Field actions were reduced by about 20% year-to-date. This is on top of a reduction of around 40% in 2025, reflecting increased discipline and process effectiveness. Importantly, these improvements in our quality processes are also enabling the innovation momentum I highlighted earlier. We also maintained close and constructive engagement with global regulatory authorities including ongoing leadership level dialogues with FDA and other regulatory bodies worldwide. This underscores our commitment to quality, compliance and continuous improvement in serving our customers. It carries through to our supply chain, a critical enabler of execution. Over the past 3 years, we have simplified, regionalized and localized our operations to be closer to our customers. Our focus is clear: deliver on consistently superior customer experience through a high-performing supply chain, day in, day out. During the quarter, developments in the Middle East increased volatility across logistics and input costs, including materials and components. Through active management of our logistics network, we maintained stable supply chain operations while stepping up cost mitigation activities, which Charlotte will further discuss. Importantly, customer service levels remain strong and in line with previous quarter and we remain vigilant in managing ongoing developments in supply and cost. And as we look ahead, we will continue to deepen the simplicity, agility and resilience as these are critical capabilities for navigating the increasingly turbulent environment. Turning to commercial and service excellence. In Connected Care, we saw further traction in our enterprise monitoring as a service. As health systems adopt enterprise monitoring, demand for enterprise informatics solutions is also increasing. These solutions now represent a growing share of both our order book and sales across various periods. In the quarter, we saw strong demand for capsule device integration and clinical surveillance across care settings driven by effective cross-selling across our enterprise informatics and monitoring platforms. In Diagnostic Imaging, we expanded our partnership with AdventHealth through a 5-year enterprise service agreement. It enables our full service model across modalities, while supporting a long-term imaging infrastructure focused on quality and performance. Turning to the regions. Fundamentals remain supportive across our markets, particularly in North America where demand remains strong and the landscape continues to segment. We continue to see stable activity levels across hospital systems with no signs of disruption among larger systems. Cost pressures and workforce shortages persist, driving further consolidation among larger health systems. Demand for secure productivity and cybersecure enhancing platforms is increasing. This reinforces our expectation that North America will remain a key growth engine in 2026 and over the medium term. In Europe, capital spending remained broadly stable with an improvement in some markets during the quarter. Demand conditions remain stable, supporting our execution in the region. Select international regions continue to increase investments in health care and digitalization as reflected with strong wins in India and Brazil. In China, centralized procurement continued to increase in Q1. particularly in modalities such as ultrasound and CT, which have shorter lead times. This is driving longer decision cycles and a more price-focused environment. As a result, we are seeing lower order conversion consistent with recent trends. These dynamics continued in the quarter, contributing to ongoing pressure on equipment demand. At the same time, underlying health care demand remains intact, particularly in procedure-driven segments. We remain focused on maintaining competitiveness, selectively driving our portfolio and executing with discipline in this more price-sensitive environment. In Personal Health, consumer demand remains healthy in North America, and momentum continues across several markets globally, even as geopolitical developments create uncertainty. We are managing these dynamics with agility while maintaining a strong focus on execution. Charlotte will now discuss our first quarter performance in more detail and our outlook for 2026. Charlotte Hanneman: Thank you, Roy. I will start with segment level performance. In Diagnosis & Treatment, comparable sales increased by 2%. Image Guided Therapy delivered high single-digit growth, continuing its multiyear momentum and building on a strong prior year comparison. Performance was broad-based across all regions with particular strength in North America, led by the premium configurations of our Azurion platform, higher service revenues and coronary intravascular ultrasound. We are reinforcing this momentum by leveraging AI to automate product testing, reduce release cycle times by 25% and accelerating time to market for new innovations. Precision Diagnosis sales declined in the low single digits in Q1, as expected, mainly due to order book rebuilding and the segment's higher exposure to China. Innovations, including EPIQ CV, point-of-care ultrasound, BlueSeal MR and CT 5300 continued to drive growth with solid uptake in markets such as Western Europe and Latin America, reflecting their scalability. Adjusted EBITDA margin rose 30 basis points year-on-year to 9.8%, driven by sales growth, underlying gross margin from recently launched innovations productivity measures and favorable mix effect. These favorable impacts were partially offset by higher tariffs, cost inflation and currency effects. Now moving to Connected Care. Comparable sales increased by 3%. Monitoring delivered mid-single-digit growth with particular strength in North America and Europe. Growth was driven by higher installations of IntelliVue patient monitors and continued traction in enterprise monitoring as a service. Sleep & Respiratory Care grew in the low single digits with the obstructive sleep apnea portfolio, delivering strong double-digit growth outside the U.S. led by particular strength in Japan, our second largest market. Enterprise Informatics sales declined slightly, reflecting inherent quarterly unevenness and lower implementation and deployment cycles. Adjusted EBITDA margin declined by 60 basis points to 2.9% as sales growth and productivity measures were more than offset by higher tariffs, cost inflation, lower cost absorption and currency effect. In Personal Health, comparable sales increased by 9% in Q1 with all 3 business contributing. Growth was broad-based, led by double-digit growth in North America and a strong contribution from international regions. China contributed modestly, benefiting from an easier comparison base. Sellout remains strong globally with channel inventory maintained at appropriate levels. This momentum was supported by strong demand for recently launched innovations, including the high-end i9000 shaver with AI-powered SenseIQ technology and the Sonicare 5000 to 7000 series. Adjusted EBITDA margin expanded by 60 basis points to 15.8% as growth and productivity measures more than offset the higher tariffs, cost inflation and currency effect. Advertising and promotion spend increased year-on-year, consistent with our commitment to continue investing in the business to drive consumer recruitment and sustain long-term demand for our recently launched innovations. We are also leveraging AI to strengthen consumer engagement, embedding it across 94% of digital assets and generating over 27.8 billion searchable data points, 100x increase. This enables more personalized consumer interactions, improves content reuse efficiency and enhances our ability to drive future sales through more targeted and effective marketing. Finally, sales in segment Other of EUR 177 million increased by EUR 37 million compared with the first quarter of 2025, mainly reflecting activities related to a divestment. These activities are excluded from comparable sales growth and contribute only an insignificant amount to adjusted EBITDA. Adjusted EBITDA for the segment increased by EUR 7 million to EUR 11 million, mainly driven by lower costs. Now turning to group results. Comparable sales increased by 3.7% in the first quarter with growth across all segments and regions, led by North America and Western Europe. Adjusted EBITDA margin increased by 40 basis points year-on-year to 9%. Margin expansion was driven by sales growth, favorable mix effects and productivity measures, partially offset by higher tariffs and cost inflation. Product productivity delivery in 2026 is off to a solid start with Q1 delivery of EUR 126 million, on track to deliver our EUR 1.5 billion 3-year savings commitment. Execution is progressing at pace, underpinned by plans already in place. Actions in Q1 were led by operating model simplification, including streamlining central functions and reducing organizational layers as well as procurement initiatives such as SKU rationalization and supplier consolidation. We are also seeing early contributions from footprint optimization and AI-enabled efficiencies. Service productivity was another contributor, including through more remote troubleshooting and fewer on-site visits with benefits most visible in ITT and across Europe. In parallel, we continue to execute tariff mitigation actions. Overall, we remain on track with good visibility to deliver our 2026 productivity objectives. Against the backdrop of rising input cost inflation, we are accelerating mitigation actions, further sharpening our focus on productivity, cost discipline and structural efficiencies. Adjusting items came in at EUR 61 million, less than half of last year's EUR 143 million. This significant improvement reflects our continued focus on structurally reducing adjusting items. A one-off gain in Diagnosis & Treatment from the reversal of an acquisition-related provision and cost phasing also contributed to the year-over-year reduction. Income tax expense increased by EUR 17 million in the quarter, primarily due to higher income before tax. Financial income and expenses were EUR 47 million, broadly in line with the prior year. And net income rose to EUR 146 million, primarily due to higher earnings. Adjusted diluted earnings per share from continuing operations were EUR 0.23 in the quarter. compared with EUR 0.25 last year, primarily reflecting the adverse currency effect on nominal earnings and a higher diluted share count. Free cash flow in Q1 was an inflow of EUR 28 million. Excluding the impact of the prior year U.S. Respironics settlement payout, free cash flow improved by EUR 94 million year-on-year. This improvement was driven by higher earnings, improved working capital and lower adjusted items. Moving to the balance sheet. We ended the first quarter with EUR 2.6 billion in cash after a $265 million payment for the SpectraWAVE acquisition announced late last year. This acquisition reflects the disciplined, value-focused M&A strategy we outlined at our CMD, including a disproportionate resource allocation to our interventional platform to reinforce our coronary leadership. Integration is progressing well with the core foundations in place and commercial momentum building as planned, positioning the business to scale and capture growth in coronary interventions. Net debt was EUR 5.5 billion at the end of Q1. The leverage ratio improved to 1.8x on a net debt to adjusted EBITDA basis from 2.2x in Q1 2025, driven by higher earnings and reflecting our disciplined capital allocation. Now turning to our outlook. Amidst continued macro uncertainty, we remain focused on disciplined execution of our plan. Based on the current status, developments in the Middle East are expected to impact sales in the remainder of 2026, though not materially at the group level. At the same time, supply chain and logistic constraints are expected to drive cost inflation. Against this backdrop and based on our Q1 performance, our outlook for the full year remains unchanged. We expect comparable sales growth of 3% to 4.5%, with growth in each quarter within this range led by North America and the international region. We continue to expect comparable sales in China to be stable this year with growth in Personal Health, offsetting a slight decline in health systems against the backdrop of subdued near-term market conditions. Across segments for the full year, we continue to expect growth within this range with Connected Care and Personal Health at the upper end and diagnosis and treatment at the lower end. We are encouraged by the better-than-expected adjusted EBITDA margin performance in Q1, driven by innovation, productivity and cost discipline with some benefit from lower-than-anticipated tariff impact. Consistent with last year's approach, our full year 2026 outlook includes currently known tariffs, which are marginally more favorable than assumed in our February outlook. However, uncertainty remains. Also, while we are pursuing tariff refunds related to the International Emergency Economic Powers Act, our 2026 outlook does not include any potential benefits from these refunds. We are also seeing input cost headwinds, including freight, electronic components and plastics as well as other inputs affected by higher energy costs. We are actively mitigating these pressures. Over the course of the year, we expect to offset these pressures through supply chain optimization, productivity and selective pricing actions. At the same time, we continue to closely monitor cost developments across our supply chain. For the balance of 2026, we expect some near-term pressure on margins consistent with our plan, reflecting the annualized impact of tariffs, higher inflation and foreign exchange. As a reminder, last year, the higher tariffs did not impact our adjusted EBITDA meaningfully until Q3 due to the natural lag between inventory and a flow-through to the P&L. Accordingly, we reiterate our full year adjusted EBITDA margin guidance range of between 12.5% and 13%. Our full year free cash flow outlook also remains unchanged at between EUR 1.3 billion and EUR 1.5 billion. As previously indicated, our outlook excludes the ongoing Philips Respironics-related proceedings including the Department of Justice investigation. With that, I would like to hand it back to Roy for his closing remarks. Roy Jakobs: Thanks, Charlotte. To close. We delivered a solid start to the year and order intake momentum continues. In April, we signed a long-term strategic partnership with WellSpan Health in the U.S. It expands our role as the preferred provider across all imaging modalities and advances a system-wide approach to imaging and diagnostic technologies. Importantly, this partnership is also a strong validation of our innovation and platform strategy, bringing together our capabilities to deliver integrated long-term value for customers. It underscores strong customer trust and our value proposition and long-term partnerships. These relationships matter even more in the current operating environment. Our strategy is clear, and we remain focused on advancing our strategic priorities, driving innovation and strengthening our differentiation and competitiveness. At the same time, we are executing with discipline, staying focused on what we can control and closely monitor the evolving macro environment. Against this backdrop, we reiterate our full year outlook, which includes currently known information, but an uncertain macro environment. Thank you, and we will now open the line for questions. Operator: We will now open the line for questions. [Operator Instructions]. Your first question comes from Hassan Al-Wakeel of Barclays. Hassan Al-Wakeel: Roy, Charlotte, a couple, please. Firstly, if you could please talk to the building blocks of the mid-single-digit order growth in D&T for the quarter. the sustainability of U.S. market strength based on your customer conversations? as well as the softness in China precision diagnosis given centralized procurement and how your share is progressing here across the different modalities and related to this, I wonder if your thinking has evolved for China order and revenue stability this year across D&T. And then secondly, Charlotte, another strong quarter on margins, and you've been consistently talking about gross margin benefits from innovations. It'd be great if you could help break up the quarter's EBITA performance across productivity, mix and innovation and how sustainable you think each of these are. And also what you're seeing from cost inflation, specifically around freight and memory chips and what's assumed in guidance? Roy Jakobs: Let me go to the first one. The mid-single-digit D&T growth. So if you look to the buildup of that, actually, that is a continued very strong order intake in IGT which actually is trending at high single digits and above. So very, very strong and that, of course, over multiple quarters. Then you see that we also had mid-single-digit PD order intake outside of China. But then, of course, China is affecting the PD order book as well. But we see a very strong overall mix, and we see increased demand, and particularly also for MR. We called out, of course, the helium-free, but also we have seen just a broad-based interest in the MR solution really growing also as a modality in itself. And that also gives us confidence for the further conversion in due course of the year into the latter part of the year from a sales perspective. Then U.S. is a strong contributor to that, has remained very strong. And actually, also from our customer dialogues, see that strength continuing. Actually, we see a very healthy market where patient volume is strong, the procedures are growing. But as we also said before, it's not evenly spread across all health systems. So the bigger systems are winning more. And that's also we are well positioned with our platform-based solutions. So that's actually where we see that we kind of are continuing to close these long-term partnerships. You also saw that in the quarter with Advent, with WellSpan so we had more. So that's really working out, and we see that U.S. actually will continue to be a strong contributor for us. Then Europe actually was also strong. So I think I want to call that out that Europe was doing well and is picking up, but then China at the other hand, is showing continued cautious development. Q1 was in line with our performance expectations. So it's not that it's unexpected that it's not performing that strongly. We do see differentiated performance by modality. So IGT and MR are solid. CT and ultrasound are the most exposed to centralized procurement and therefore, they have the biggest impact. And then on the consumer side, you saw that actually PH grew but was on easier comps but we do see some sales sellout momentum in PH. And that's also what we expect for the rest of the year, and essence of similar trend of subdued kind of medtech portfolio that PH contributing and therefore, actually, the full year China sales are expected to be stable, and that's also as we have planned it. So in that sense, kind of this is tracking alongside what we plan for, where the biggest growth has to come from North America, Europe and international region. China is contributing as the market gives the opportunity. So we are not relying on the China recovery in the rest of the year. We are actually counting on strong momentum in North America and Europe, in particular, to do that. And in that perspective, actually, we see that where we have been focusing our strategy, it's really coming also to fruition because North America, IGT, extreme Stronghold. Monitoring is doing really well as well there. We see the other momentum going up. So I think we're well positioned to execute our plan as we have built it for the year on the growth side. And maybe that's a nice bridge to Charlotte to then also talk to the margins. As, of course, we have revolving developments there. Charlotte Hanneman: Thank you very much, Roy. And hello, Hassan. So indeed, as you said, we were pleased with how the margin has developed with a 40 bps expansion in Q1 despite the impact of tariffs. So if I break that down for you in a little bit more detail. Yes, we saw a positive impact coming from volume, from the business mix. But indeed, as you mentioned, also from higher gross margin from innovations. So CT 5300, I called it out before, is helping us from a gross margin perspective. We also see point-of-care ultrasound, which we recently launched also at a higher gross margin, also helped lift our margin. And then we see the continued momentum also from our MR BlueSeal at a higher margin as well. So that is certainly helping us. Of course, we continue to do our productivity work. We are pleased with our EUR 126 million of productivity in Q1. You've seen it last year. We finalized our EUR 2.5 billion program last year. It's a real strong muscle we have built and that we are now expanding spending on, which is really creating self-help in what is a turbulent situation. So with this productivity, we're nicely on track there. Of course, offsetting that is tariff and also a little bit of input cost inflation. One thing that's good to mention is that the tariff impact was a little bit lower than anticipated initially, also after, of course, the Supreme Board struck some of the tariffs. So if I then look forward, Hassan, based on your question, what does that mean for the outlook. So a few different components here. Of course, we started well in Q1 which is helping us we are seeing inflation and to your point, also in freight, in components and in plastics. But offsetting that is us really leaning in to mitigating that with supercharging AI, further reducing our bill of material cost and also doing selective pricing. And then the other component is also tariffs being a very modest tailwind for us versus our expectations as well for 2026. Operator: Your next question comes from Richard Felton of Goldman Sachs. Richard Felton: Two questions for me, please. First one is on China. You called out central procurement for ultrasound and CT. How much exposure does Philips have to those modalities in China now? And what level of price adjustments are you seeing perhaps linked to that, how much of the low single-digit decline that you called out in precision diagnostics was due to China? That's the first one. Second question is sort of slightly sort of longer-term question, I suppose, on the sleep business. ex U.S. in kind of broad terms, how has performance been as Philips has returned to the market OUS in terms of growth market share? Could you also perhaps talk a little bit about your innovation strategy in sleep? Roy Jakobs: Yes. Thank you, Richard. So on China, we have seen indeed that kind of the centralized procurement is being applied mostly on ultrasound and CT. That is because the specifications are being seen as more generic and therefore, they put them under the centralized procurement to a bigger extent. We have seen that, that also has significant margin implications in terms of the pricing pressure that you see in those segments. So volumes are actually holding, but you see that the value is decreasing, and that is putting the downward pressure. Actually, in our IGT and MR business, we see that they are for biggest majority outside of centralized procurement because they are so specific and also don't have the alternatives that they don't put them into the centralized procurement. So that's something in the centralized procurement approach in China that we see currently as they expand that across the country. In terms of the devices, kind of, you see that it's a very small part of it. So actually, there's not a big hit. But the biggest hit is indeed in PD with the ultrasound and CT on. So that's kind of also, therefore, hitting the performance in the first quarter, and we can expect that also to pressure the rest of the year, which means that actually the dialing up in the other parts of the world will be really crucial. And as you know, that's also working. Now if you look to the BI China part, as we said earlier, kind of, that is around 15% of global. And in the mix, you see that kind of MR is 50% of that. So that's better protected. The bigger pressure is indeed on the CT and the ultrasound part. And then you have IGT percentage in China is slightly bigger than the 15%, but it has, of course, a strong contribution also from the other parts, and it's better protected from centralized procurement. So that's a bit of what I can say about the mix. And maybe lastly, it also really calls that we have the right strategy chosen for China because we said we want to compete in segments that we find we can differentiate. And still where we find we can differentiate is the MR BlueSeal for sure, and we see also that actually they are kept that out of the CT for biggest part. It's our IGT franchise, which is really differentiating. There's no kind of alternative in the market. We see ultrasound cardiac actually also being better performing. But of course, that's a smaller part of the cardiac -- of the ultrasound market in China. That's why you see that in the other ultrasound parts, there's bigger pressure. Then n sleep, I think if you look at sleep outside of U.S., we see strong double-digit growth that's led by Japan, but also it's coming from the markets where we are coming back. That's offset by the ongoing respiratory pruning effect. So that's kind of where you see the mix effect coming in. where the comparison is normalizing towards end of the year. So that also should improve towards the end of the year. And from an innovation perspective, actually, we have seen good resonance also driving that double-digit growth by the new masks portfolio that we have been introducing together with the device, the software updates we are dialing in. And that actually the ecosystem is still very strong. Actually, people are still waiting also in certain markets really for us to get back and to get back on our platform because they really appreciate the patient interface that we have built. And that's given us also a strong way back into the market. Maybe the other part on SoC, of course, we are working strongly on the mitigation of the regulatory part. So that's something that we're also making good progress on. We said kind of we cannot comment on what it will exactly mean, but we are still hitting every single mark in terms of milestone with the FDA and that's actually forging ahead also as planned. Operator: Your next question comes from David Adlington of JPMorgan. David Adlington: So maybe on cost, I think you may have addressed some of this. But obviously, GE, called out cost inflation, most notably on memory chips. I just wondered if you could sort of help give some further color there and maybe quantify the exposure? And then secondly, obviously, another great quarter for Personal Health care in terms of growth. I'm not sure if you quantify the contribution of price or not, that will be useful. And as we get into the second half and more difficult comps, how you're thinking about the growth profile in PH. Charlotte Hanneman: David, let me take the first one. So from a cost inflation perspective, and maybe a few things. So as I said earlier, we do see cost inflation impacts. We do see that, and we've taken that into account in our guidance. And we -- the expectation we have is that the elevated levels that we see today in freight, electronic components, plastic, we will see that come through for the remainder of the year. But at the same time, we've included mitigation actions that we are taking, including, for instance, reducing our bill of material cost even further, going hard after AI-enabled savings and also selectively increasing our prices. And we have a lot of confidence based on the muscle we've been building over the past few years and also what we're seeing again transpire in Q1 from a productivity perspective. On top of that, some of the tariff tailwinds that we're seeing after February are also helping us. So there is a little bit on that. And then your second question on Personal Health and the effect of pricing. So we had another stellar quarter in Personal Health in Q1 with particularly North America doing very well with double-digit growth in North America. Of course, we were a bit helped by China, but only relatively little. Pricing from a pricing perspective, it is relatively flat. We saw a slightly positive pricing, which is probably mostly attributable to the innovations that we've been seeing like the 9000 shaver, like the new Sonicare range that we've introduced. So that has helped pricing a little bit. If I look to the remainder of the year or the full year, I should say, so we have reiterated our guidance from 3% to 4.5%. And we've also said that PH will be at the higher end of the guidance, and we're reiterating that today because, as you said, the comps are getting a little bit more difficult as we get through the remainder of the year. At the same time, we see very good momentum in Personal Health as well. Roy Jakobs: And maybe one addition. What is also helping it, David, is, we have been re-expanding our retail distribution. So actually, we have been getting listings and placements in the web shelf and particularly of big retailers. And that actually we gives us additional sustainable growth opportunity for the quarters to come. So it's the combination of really great innovation, but also now having a better access event the consumers that actually gives us confidence that this is a sustained growth path and that we are in line with the guidance that Charlotte just provided. Operator: Your next question comes from Veronika Dubajova of Citi. Veronika Dubajova: I will keep it to two, please. One is kind of big pick your question on patient monitoring. Obviously, one of your sort of competitors suppliers of changing ownership. I'm just curious on how you're thinking about what impact that might have on your business and whether this is strategically positive and negative and net neutral is this an asset that would have made sense in the context of Philips, if you can kind of share your thoughts on that, that would be super, super helpful. And then my second question, is just circling back to some of the inflation commentary. Maybe Charlotte, can you give us a flavor for why you think you are in a better position to mitigate some of the headwinds than GE Healthcare. Would just love to understand what you think you have in your back pocket that's obviously enabling you to maintain your margin. And if you very briefly could comment on your Q2 margin expectations, that might also be helpful. Roy Jakobs: Yes. Thank you, Veronika. Let me take the first one. So on the patient monitoring. So you saw that actually the strong momentum continues, strong order intake. Actually, we are playing a platform play there that actually really resonates well with our customers. And as part of that, actually, we have strong partnerships. Masimo is part of that. We don't think that actually there will be any change. That's also not what kind of has been signaled because we have the biggest access to customers globally in terms of monitoring base. So there's a real intrinsic interest to actually connect with us to the customer. And there's also mutually interest from us to actually be providing in a vendor-neutral way consumable solutions that are out there in the market. And that has been benefiting the partnership with Masimo in past years, and we believe that will be also going forward. So we see it as at least net neutral. And I think we are excited to work also with any new owner there to kind of grow the franchise and make it work for our customers. And to differentiate also first competition because this is one of the strongholds the combination that we have a very strong cybersecure platform with the broadest data reach with the medical device integration and the consumables actually makes it very appealing in a very complex environment for our customers to do business with us, and that has been driving all these long-term partnerships and also the share gains in monitoring along the way. Charlotte Hanneman: Yes. Thank you, Roy. Let me take your second question, Veronika on inflation. And if I think about where we are in the year, let's first start with, in Q1, we had a very solid Q1 with margin expansion ahead of our expectations. So that gives us confidence that, again, we are able to not only compensate some of the headwinds we're seeing, but even expanding our margins despite that. Then, of course, we're seeing cost inflation. We're seeing it in freight, and we see it in electronic components and in plastics, but we have already started taking mitigation actions. Those will -- we started building them. Those are a little bit back-end loaded, and they will start coming in the second half of the year. And to take you through what we're doing. First of all, we're doubling down on bill of material productivity. We've always said there's more to go after, and we're now doing that with increased feed. We're going after our AI-enabled efficiencies, where we've seen some early progress already in Q1, and we continue to see that as well. And then as well, we're doing selective pricing as well. So the other element is really the tariff tailwind that we're seeing a little bit that we -- we're seeing also in Q1, and we'll see that versus our expectations being a little bit better going forward. Now you also know that we've been a little bit prudent in the way we've put our full year guidance out as well. So that, of course, has given us a little bit of buffer as well. So now to your question on Q2 specifically and Q2. So if we think about Q2, a couple of things that I think are important to realize, of course, Q2 is the last quarter where we still didn't have the full impact of our tariffs in 2025. So -- and you know, we've spoken about it a lot of times the way the tariff impact flows into our P&L, which first goes into inventory, and then it flows into our P&L. So we have, again, a tough comparable from a tariff perspective. And then also, we see the cost inflation, of course, starting to hit us. We have already taken the mitigation actions, but it will take a little bit of time before that starts positively impacting our P&L. So we, therefore, expect our mitigation impact to be a little bit more back-end loaded. Operator: Your next question comes from Julien Dormois of Jefferies. Julien Dormois: The first one relates to the mitigation initiatives that you are taking, and you mentioned selective pricing initiatives. So could you just walk us through what are the segments where you have the more leeway and at what speed we could see those pricing initiatives contribute to margin? And the second question is more specific on Enterprise Informatics. You indicated that sales were down low single digits in Q1, and you mentioned the usual unevenness in revenue generation. But if you could shed more light on why that happened specifically and then what we should expect for the remainder of the year and maybe also in the midterm, that would be helpful. Charlotte Hanneman: Julien, let me take your first question on pricing. So yes, we've called out also last year, you might remember, selective pricing as well, and we've already put some of that in place last year. We, of course, focus there where we have leading positions, and that's where we increased our prices. So I'll give you a few examples. We're increasing our prices in Image Guided Therapy. We're doing that in hospital patient monitoring. We're doing that in some of our service contracts. We're doing that in some of our time and materials. So we have a very granular plan in place to increase prices where we can. As you rightfully mentioned, some of that will flow through in 2026 and some of that will take a little bit longer as it needs some time to flow through the order book and will then benefit us in 2027. But I think it's fair to say that we've learned from COVID. And also there, we've been able to build up a much stronger muscle when it comes to price increases and price discipline, which is now helping us implementing that with a little bit more speed. Roy Jakobs: Let me then go to EI. So in EI, we see a couple of trends as we also alluded to when we had the Capital Markets Day. One is actually, we see continued order uptake. We saw that picking up strongly in the second half of last year. We also saw it again in the first quarter, and we have a very good funnel. So we see that there's healthy demand that's also on the back of the cloud migration and the cloud offering that we have, but also the integrated diagnostics trend that we see coming out in the market is really generating increased interest. If you then look at the sales trend, this is indeed more patchy. Sales drills orders quite a bit in EI. Furthermore, you see that if customers migrate in or out, those give quite big hiccups because actually that's the lumpiness that's kind of inherent to that business. The other part is that you also see that the orders that we are taking now more and more also go into a SaaS model, where you see that kind of the revenue flows in over a longer period of time. And that actually gives you more recurring attractive revenue stream for the longer run, but of course, it gives a bit of a hiccup in these quarters. So we see positive interest. We see the integrated diagnostics story really picking up with customers and of course, fueled by AI and the data play, and we are really working how we can tap into that. And we see the funnel growing also supported with what we're doing with Amazon. And then lastly, you also saw that kind of on the monitoring side, the Capsule and HPM combination is already working. So you see also this kind of combination play really driving impact. So we are kind of positive on that notion as well that, that will come through in due course of the year. Operator: Your next question comes from Hugo Solvet of BNP Paribas. Hugo Solvet: I have 2, please, quick ones on margins. First, short term. Charlotte, on the Q2 margin, could you maybe just clarify your earlier comments? Is there a scenario where margin in Q2 be within the full year guidance range? And second, a bit more long term, when we think about the full year 2028 targets, you have around 600 to 700 bps of buffer for wage input cost, tariff macro and so on. What's the level of confidence that this buffer can accommodate for higher input costs given where they are at the moment? Charlotte Hanneman: Yes. Thank you very much, Hugo. So let me start with your first question on Q2 margin. So based on what I just said, first of all, the incremental tariffs weren't in effect in Q2 2025. as well as the cost inflation that we're seeing with the mitigation timing being back-end loaded, I expect the Q2 margins to be lower year-on-year in Q2. I also feel very confident that in the back end of the year, we will be able to get those mitigation factors in because we have very, very strong plans in place and very granular plans in place to start offsetting that. But Q2 in that sense will be a little bit of a lower quarter from a margin perspective. Now to your second question on the longer-term margin outlook, as we said in February, we -- of course, as we stood there in February, we knew that the world was a turbulent place. We didn't quite know how turbulent it would get, but we absolutely did take into account that there would be something that we would be seeing. So as a result, and we were also very transparent about the buffer that we took at that point in time, especially given the ability we have to also step up from a mitigation perspective, I don't -- I feel equally confident as I was in February that we'll be able to get to the mid-teens adjusted EBITDA margin by the end of 2028 based on what we know today. Hugo Solvet: Thank you very much and congrats on EBIT. Operator: And your next question comes from Aisyah Noor of Morgan Stanley. Aisyah Noor: My question is just on D&T and your competitive outlook in Europe following the launch of an ultrasound by United Imaging in this space. And as well on the recent launch of Verida for you, just how that's progressing and how we should be thinking about the sales contribution for 2026? Roy Jakobs: Yes. Thank you, Aisyah. And I already called out Europe actually picking up and performing well in Q1. And that's also in particularly for D&T, where we see actually that -- and then within D&T also PD actually is doing really well in Europe. So we see a few trends. One, MR already was picking up strong. So we see that continued. And also if you look to the BlueSeal penetration now, actually, that's really kind of going well, and we see a good funnel. on the MR side. Then also with the new Verida launch, actually, we see very strong interest in Spectral and how that now with a better workflow is really helping to support high-volume throughput at high-quality imaging. We've secured the first order already. We have an installation ongoing. So actually, very good reference as well, very strong clinical support. So actually, we have a kind of good expectation that Verida will be doing really well in Europe, and we see the first proof points of that coming through. Then lastly, ultrasound. Ultrasound actually is also doing well. Indeed, we had some competitors as well in this space, but actually ultrasound in Europe has been already starting last year, picking up very strongly after we kind of came out with our latest EPIQ launch and also the Flash. We have good order momentum of ultrasound in Europe, strong positioning. So actually, we are quite excited about the momentum in Europe, how that is increasing and especially also how our AI-based, but also, I would say, high productivity and performance solutions really hit the mark in a market that needs to be also kind of conscious of the spend in the environment that we are in, but that seems to work well. Operator: Due to the time, the last question today comes from Graham Doyle of UBS. Graham Doyle: Just 2, please. Just the first one, just on inflation again. Just to get some context on this. Obviously, you guided in Feb, and there's been obviously volatility. But is there any -- how meaningful is the incremental headwind? So is it something that was comfortably within your buffer? Or are you doing other things to sort of mitigate? And then, Roy, just on China, you mentioned a few times at the CMD and then today about kind of playing to win in certain segments. Is there any way within reason that you kind of identified to us the areas where you understand that perhaps you can't win and therefore, you've built it into your guidance that you kind of know that there's areas where you're probably deprioritizing. Is that possible to maybe contextualize that for us? Charlotte Hanneman: Graham, thanks. Let me take your first question on the inflation. So indeed, yes, we guided in February only 3 months ago, although a lot has happened. So as I said before, we are seeing an incremental headwind in plastics, in also freight. It's good to know as well that energy, we have hedged for 2026. So we will not see any impact from higher energy -- direct highly energy prices. There are a few components here, right? It's -- first of all, we did already better in Q1 than we thought. So we are a little bit ahead of where we thought we would be, which is giving us confidence. The second component is we are -- after the Supreme Court struck some of the tariffs in February, we're seeing some tailwinds as a result of that, that we are that we are taking into account as well, which is offsetting some of the inflation. And then the third component is we have launched already additional mitigation activities, including bill of material price reductions, including also optimize the way we look at freight and where we use air freight versus boat in order to also optimize the spend there and also leaning in even harder in what we know and do very, very well, which is driving further cost discipline. We've also -- we've always said there's more to go after. So we're doing that now with double speed as well. And putting that also in the context of what I said earlier that we have put a prudent guide out, all of that actually comes to a place where we can reiterate our guidance of 12.5% to 13% for the full year. Roy Jakobs: And then on China, indeed, I think the differentiated play is becoming more important. And to give you some examples where we see that actually, we have really the right to play and to win is, I called out MR. Actually, we have one of the biggest installed base of the helium-free already in China. And we just go also the notion that we have a green part support from the regulatory body and PMA to kind of get an accelerated approval for the 3T because they're so excited about the new innovation that this will bring to China. So that's a good example on MR. IGT is also really doing well, and we have a kind of good momentum, and we see that also well in demand in the market. And also sound, I called out there's different dynamics. You see that the cardiovascular, we are still unique, but it's, of course, a smaller segment in totality and you see quite brutal competition on GI. The same with CT spectral, Actually, we have, again, one of the stronger installed bases of CT Spectral in China. But if you look to the more generic CT, that's really very strong competition. So that's kind of where we said that's not our game play. And then we exited DXR because we said that's so commoditized. That's not our game in China. We also exited the value play in China, which is the lowest price segment because that will be very strongly locally favored and also at price points that are not attractive to us. So -- so we made distinct choices. Actually, within those segments, we also see that we are really trending with market or even kind of doing well within the market momentum. But yes, there is just a subdued overall market environment that we have to operate in. But I think we have been making the right choices. We're sticking to that. It's also in line with the plan. And also, as we showed in the results, it's also in line with the results that we have in Q1 and also for the full year expectation. So, in that sense, I think we derisked China in our plan. We're playing there to tap the opportunity that we have. And last but not least, China is not only a demand market, of course, there's also innovation happening in China that we want to stay close to, including AI innovation that's going very rapid. Robotics is developing very rapidly in China. And then, of course, there's also still components and sourcing that we get from China. So that China for us is a wider market than demand only, and that's why we kind of keep a strong footprint there, but in line with demand, we have kind of opted for a more selective go-to-market. Operator: That was the last question. Mr. Jakob, please continue. Roy Jakobs: Yes. Thank you all for attending the call, as you saw, we have a strong start to the year with growth orders and sales and margin expansion despite a very turbulent environment we operate in. We have the confidence reiterated our full year guidance. Of course, a lot of work to be done, but we have the actions in place, the plan in place and the team that is working it. So thank you for your attention again. Have a further great day. Operator: This concludes the Royal Philips First Quarter 2026 Results Conference Call on Wednesday, 6th of May 2026. Thank you for participating. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Amcor Third Quarter Results 2026. [Operator Instructions]. I will now hand the conference over to Tracey Whitehead, Head of Investor Relations. Tracey, please go ahead. Tracey Whitehead: Thank you, operator, and thank you, everyone, for joining Amcor's Fiscal 2026 third quarter earnings call. Joining today is Peter Konieczny, Chief Executive Officer, and Steve Scherger, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amcor.com, under the Investors section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we'll also discuss non-GAAP financial measures and related reconciliations can be found in the press release and the presentation. Remarks will also include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several factors that could cause future results to be different than current estimates. Reference can be made to Amcor's SEC filings, including our statement on Form 10-K and 10-Q for further details. Please note that during the question-and-answer session, we request that you limit yourself to a single question and then rejoin the queue if you have any additional questions or follow-ups. With that, over to you, PK. Peter Konieczny: Thank you, Tracey, and thanks to everyone for joining us as we review Amcor's fiscal 2026 third quarter results. As always, on Slide 3, we will start with safety, our #1 priority. The health and well-being of our colleagues remain a core value at Amcor, and that commitment will not change. In Q3, we continued to deliver industry-leading safety performance. 71% of our sites remained injury-free through the quarter. Our total recordable incident rate at 0.49 is a modest increase compared with last year's performance. This is not unusual after we acquire businesses, and we are pleased to see this key metric improve for the third consecutive quarter, following the Berry acquisition. Slide 4 highlights the key messages for today. First, I want to take a moment to highlight an important milestone. We've just reached the first anniversary of the combination between legacy Amcor and Berry. Reflecting on the past year, I'm genuinely pleased with the progress we've made on the initiatives we set out to achieve. The integration process itself went very smoothly. We kept our colleagues safe, maintained a strong focus on our customers and structured the organization around a robust leadership team, allowing us to quickly deliver on the synergy commitments we made. In addition, we were swift in identifying noncore businesses, and I'm happy to report that we're making substantial progress on those divestitures. We're navigating through a challenging and ever-changing environment, but it is clear that our uniquely positioned diversified global portfolio and the strength of our customer and supplier relationships have positioned us well. Our ability to stay focused on what we can control and execute effectively continues to drive resilient financial results. In the face of the Middle East conflict, securing supply and responsibly managing cost and pricing to counter inflation are key priorities for us, just as we've done successfully in the past. We have again taken swift action, and as such, we're not expecting the Middle East conflict to have any material impact on our Q4 earnings. We're confident in the underlying strength of our business, and that assurance comes from always putting our customers at the center of our decisions. Additionally, we're excited about the significant opportunities ahead as we work to realize the additional synergy benefits identified from the integration of legacy Amcor and Berry. Second, our financial performance in the third quarter was in line with expectations. Adjusted EPS of $0.96 per share was up 6% year-over-year. For the first 9 months, adjusted EPS increased 11% to $2.79 per share. Our ability to continue growing earnings through turbulent economic times reflects our focus on execution, synergies, cost and productivity improvements and responsible pricing actions while responding quickly and in a coordinated way as global market conditions abruptly change. I am proud of the way our teams around the world have come together again to face challenges with energy, agility and maturity. We are leveraging the unique position of Amcor's strengthened global portfolio to meet evolving customer needs. Our core portfolio continues to perform with another quarter of strong synergy capture and earnings stability in a modestly challenging volume environment. We are pleased to see a step-up in financial performance across our noncore businesses, which we anticipated and discussed last quarter. Third, we made important progress on our portfolio optimization actions with 4 additional sale agreements reached over the last 3 months, adding to the 2 agreements previously announced in Q1. The combined transaction value from these 6 divestitures is approximately $500 million. All cash proceeds will be used to reduce debt, consistent with the capital allocation priorities we have highlighted over the last several quarters. These actions sharpen our focus on higher return and higher growth opportunities across the $20 billion core portfolio as we continue to improve the overall quality, resilience and earnings profile of the business. Fourth, synergy delivery continues to accelerate, reaching $77 million in the quarter and $170 million for the first 9 months. Our proven integration capabilities, a strong synergy pipeline and consistent delivery at the upper end of expectations leaves us confident we will deliver $270 million of synergies in fiscal 2026, ahead of our initial $260 million year 1 target. And finally, we expect adjusted EPS to be in the range of $3.98 to $4.03 per share for fiscal year 2026, representing strong growth of roughly 12% at the midpoint, driven primarily by synergy realization. We have experience in successfully navigating supply disruptions and resulting inflation, and we do not expect the current conflict in the Middle East to have a material impact on Q4 earnings. The midpoint of our Q4 adjusted EPS implies more than 20% year-over-year growth and reflects the near full lap of the Berry acquisition on May 1. With input cost inflation significantly exceeding historical norms, our teams have acted fast, implementing responsible price and cost actions to maintain expected dollar earnings as we have in the past. In this environment, continuity of supply is a critical priority for our customers. And to meet that need, we have made choices about working capital management, primarily inventory through the fourth quarter. This will impact the timing of our previously assumed fiscal 2026 working capital improvements. And as a result, we now expect free cash flow to be in the range of $1.5 billion to $1.6 billion. Steve will talk more about the actions we have taken and the temporary impact on free cash flow in more detail shortly. Turning now to Slide 5 and financial performance for the third quarter and year-to-date. The business generated quarterly revenue of $5.9 billion, EBITDA of $892 million and EBIT of $687 million. This is significantly higher than the prior year as a result of the Berry acquisition, disciplined cost management, improved productivity and accelerating synergy benefits. Adjusted EPS increased 6% to $0.96 per share for the quarter, in line with our expectations. This includes benefits from tax-related synergies that lowered our effective tax rate, partially offset by a $25 million unfavorable impact related to the January and February winter storms in the U.S. And after funding $78 million of Berry transaction, restructuring and integration-related cash costs, free cash outflow was $39 million for the quarter. Today, the Board also declared a quarterly dividend of $0.65 per share, which is modestly up over the prior year and aligned with our capital allocation framework and long-term commitment to annualized dividend growth. Moving to Slide 6. Taking advantage of a unique opportunity to optimize the portfolio was one of the key commitments we highlighted after announcing the Berry acquisition. As mentioned earlier, we're making important progress and have now closed or reached agreements for the divestiture of 6 noncore businesses, representing approximately $500 million of combined annual revenue. A combined transaction value of approximately $500 million implies an average multiple of around 6x. In line with our previous commitments, all cash proceeds will be used to reduce debt and the net impact on EPS is not expected to be material. We're making good progress exploring alternatives for the remaining noncore businesses, including further encouraging discussions related to the North American beverage business. As mentioned, financial performance across the noncore businesses improved in the third quarter as expected, supporting our confidence that the remaining noncore businesses will be divested in line with our commitments. With that, I turn the call over to Steve. Stephen Scherger: Thank you, PK. Let me start on Slide 7 with an update on our synergy progress. Synergy delivery continued to accelerate in the third quarter, and we continue to expect to exceed our initial year 1 target of $260 million. In Q3, we delivered approximately $77 million of synergies. And for the first 9 months, synergies totaled approximately $170 million. We are confident that we will deliver $270 million in fiscal 2026 and $650 million cumulatively over 3 years. G&A and procurement synergies continue to ramp up as planned, and we have clear line of sight to achieving our targets of approximately $160 million in year 1 and approximately $325 million by fiscal 2028. We have started to see a modest contribution from operational synergies and the majority of these benefits are expected to contribute to earnings growth in years 2 and 3. Financial synergies were approximately $20 million for the quarter and $30 million for the first 9 months, reflecting ongoing optimization of our debt and tax structures. Finally, growth synergies continue to track well against our $280 million 3-year annualized revenue target with annualized revenue now exceeding $110 million. Third quarter earnings benefited by a few million dollars as a result of these wins, which are expected to ramp up further in the second half of calendar 2026. Moving to Slide 8, which highlights the performance of our $20 billion core portfolio. As a reminder, the core portfolio includes 6 focus categories: healthcare, beauty and wellness, proteins, liquids, foodservice and pet care. These represent approximately 50% of core portfolio sales. Focus category volume performance continues to exceed the portfolio average. These represent the most attractive, defensible and innovation-led markets where we hold leadership positions, where advanced solutions drive differentiation and where long-term consumer demand is most durable. From a performance standpoint, the core portfolio continues to outperform the total company. While overall volumes were similar, down approximately 1.5% in the quarter, the core portfolio maintained stronger EBIT margins of approximately 12.3%, reflecting favorable mix, a higher concentration of advanced solutions and the benefit of year 1 synergies. Volume and financial performance in the noncore business improved, as PK mentioned, with margins expanding meaningfully on a sequential basis. Year-to-date across the core portfolio, EBIT dollars were up approximately 4% relative to last year despite modestly lower volumes. As we simplify and focus the business, exit noncore businesses and invest in our focus categories, the overall growth profile, quality and resilience of Amcor will continue to improve. Turning to Slide 9 and the Global Flexible Packaging Solutions segment. Sales for the segment increased 29% on a constant currency basis, driven primarily by the Berry acquisition. On a comparable basis, volumes were down approximately 1.5%, an improvement of 100 basis points compared with Q2. In the developed markets of North America and Europe, volumes were down low single digits compared with the prior year and similar overall to the second quarter. Volumes across emerging markets were up, mainly reflecting mid-single-digit growth in Asia. By market category, volumes were higher in pet food and proteins, offset by lower volumes in healthcare and other nutrition. Adjusted EBIT was up 28% on a constant currency basis to $452 million, driven by $78 million of acquired earnings, net of divestitures. On a comparable basis, adjusted EBIT was up approximately 3% and adjusted EBIT margin of 13.9% reflects synergy benefits in line with our expectations. Excluding synergies, comparable earnings were broadly in line with the prior year. Turning to Slide 10 and the Global Rigid Packaging Solutions segment. Sales for this segment increased significantly on a constant currency basis, mainly as a result of the Berry acquisition. On a comparable basis, volumes were down approximately 1.5% in both the core and noncore businesses. This was modestly weaker sequentially due largely to the winter storm impact in the U.S. The business continued to deliver volume growth across emerging markets, mainly reflecting mid-single-digit growth in Latin America. By market category, volumes were higher in liquids, foodservice and beauty and wellness, offset by declines in healthcare and other nutrition. Adjusted EBIT was $276 million, up over last year on a constant currency basis, driven by approximately $175 million of acquired earnings net of divestitures. On a comparable basis and excluding noncore businesses, adjusted EBIT was broadly in line with the prior year. Synergy benefits were offset by an unfavorable $25 million impact from the winter storms in January and February. A concentration of plants in the most weather-impacted areas across the Midwest and Northeast resulted in a large number of lost production days. Adjusted EBIT margin, excluding winter storm impact, was approximately 13%, 100 basis points higher than the second quarter. Moving to free cash flow and the balance sheet on Slide 11. After funding $78 million of Berry transaction, restructuring and integration-related cash costs, free cash outflow for the quarter was $39 million, broadly in line with our range of expectations for the quarter and resulting in a first 9-month outflow of $93 million. Capital spending of $687 million is up compared with the prior year, and we continue to expect fiscal 2026 capital spending to be in the range of $850 million to $900 million. Adjusted leverage at the end of the quarter was 3.8x. This is aligned with our expectations and consistent with prior year sequential movements between the second and third quarters. Stronger fourth quarter free cash flow is expected to drive this metric down at fiscal year-end. Our commitment to an investment-grade credit rating, a strong balance sheet and a modestly growing dividend annually remains unchanged. Substantial annual free cash flow generation fully supports our capital allocation priorities. Turning to Slide 12. As PK stated, we are uniquely positioned and proactively mitigating the impact of the Middle East conflict. We are well positioned to support our customers through reliable supply and service. We have no operations in and minimal polymer sourcing from the region. Our broad global network and supplier base gives us important flexibility to source materials from different regions and suppliers and flex production locations. We also have the capabilities to quickly reformulate and qualify alternative structures. These factors, together with making a choice to hold more inventory than we previously assumed, help us ensure supply continuity for our customers. We have well-established pass-through mechanism in place, which function effectively in a business-as-usual environment. When conditions move outside normal operating ranges, additional actions can and should be implemented to fairly reflect higher cost in our pricing. Our teams have acted quickly to mitigate cost inflation with balanced and fair price actions. In prior cycles, this approach enabled us to successfully mitigate the impact of substantial inflation with very minimal earnings implications. Moving to our fiscal 2026 guidance on Slide 13. As PK highlighted earlier, we expect full year adjusted EPS to be in the range of $3.98 to $4.03 per share. This implies fourth quarter adjusted EPS growth of approximately 20% and will result in EPS growth of approximately 12% for fiscal 2026. Earnings growth will be driven primarily by synergy capture and strong execution. We expect fiscal 2026 free cash flow of $1.5 billion to $1.6 billion, including the impact of our decision to hold more inventory at higher costs. This compares with original guidance of $1.8 billion to $1.9 billion, which assumed a meaningful reduction in working capital in Q4. As supply conditions normalize, we expect to deliver the inventory and working capital improvements we previously anticipated, reversing the temporary timing impact we have now factored into our range. Taking into account updated earnings and free cash flow expectations, we now expect year-end leverage to be approximately 3.4 to 3.5x. Importantly, our commitment to deleveraging and to an investment-grade balance sheet has not changed. We remain confident in our ability to deliver significant and growing annual free cash flow, and we continue to see a clear pathway to operating within a 2.5 to 3x leverage range. Before handing the call back to PK, I would like to briefly highlight an announcement we made earlier today. Effective in 2027, we will transition our fiscal year-end from June 30 to December 31. We believe this change will enhance comparability with peers and simplify modeling for investors and analysts. Our first full calendar fiscal year will begin on January 1, 2027, and end on December 31, 2027. As part of this transition, we will have a 6-month reporting period from July 1, 2026, through December 31, 2026, and we plan to provide guidance for this transition period alongside our June 2026 Q4 and full year results in August. In addition, beginning in 2027, we will initiate the migration and consolidation of select corporate functions to a new U.S. headquarters in Miami, Florida, aligning resources more closely with our operating footprint. Switzerland and Australia will remain important parts of our corporate footprint as key hubs for our business. With that, I'll hand the call back to PK. Peter Konieczny: Thanks, Steve. To close, in spite of challenging market dynamics, Amcor is a uniquely positioned global packaging leader, and we are proactively mitigating impacts of the Middle East conflict. Execution remains disciplined and Q3 results were resilient and in line with expectations. Portfolio optimization continues to progress, sharpening our focus on higher value, more resilient end markets and improving the overall earnings profile of the business. Synergies are tracking well, and we expect to exceed our initial year 1 commitment. And with clear visibility to additional synergy benefits and a proven ability to navigate through volatility, we're confident in our outlook and the continued strength of our business. That concludes our prepared remarks. Operator, please open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Ghansham Panjabi with Baird. Ghansham Panjabi: Just going back to your comments on the Middle East impact on 4Q, which sounds sort of immaterial. Can you just give us a sense as to whether there'll be any sort of residual impact on the back half of '26 from a calendar year standpoint? And the reason I ask is, obviously, resin is up close to 100% in a very short period of time. And legacy Amcor had a pretty good track record of passing it through quickly, but Berry as a public company did have lags in their contract structure, et cetera. So just curious as to what's changed and how you've been able to mitigate the impact? Peter Konieczny: Thanks, Ghansham. This is PK. It's a good question. Let me provide a bit of background here. So first off, I think it's important for us to keep in mind that the collective new Amcor between legacy Berry and Amcor does not really have a lot of exposure to the Middle East. We have no operations in the Middle East nor do we have any employees, and we actually source very little resin from the Middle East. And actually, it's less than 5% of sourced resin from that region. So -- now we are operating in a global market, and therefore, we do have the 2 challenges of: one, keeping ourselves in supply and our customers in supply; and on the other hand, dealing with the inflation. Now you're asking sort of for the impact of inflation post the fourth quarter. The fourth quarter, we've essentially pretty much covered in our introductory comments. Here's the reality. First off, nobody knows what the inflation in the fourth quarter -- in the back half of the year is going to be like. We have a view on the fourth quarter, but there's lots of volatility out there. And I would just be speculating right now to throw an inflation number out there. And that's also important in terms of how to take the information on the fourth quarter. I'd be very, very careful and would suggest that nobody just annualizes that number because of the volatility that we're seeing. So I don't know what the inflation is. What I do know is the process that we are following in a very structured and disciplined way. And somewhere in our prepared comments, we said we didn't really have any impact of the Middle East on the third quarter. Financially, that is true. We had a significant impact in the third quarter from the Middle East in terms of our managerial activities that kicked into gear as we saw the Middle East crisis sort of develop. And the big efforts were on both sides, securing supply and then also going to customers and making sure that we would be able to offset the inflation. Now on that part, keep in mind that the combined business between Amcor and Berry roughly splits between 70% and 30% of contracted versus noncontracted business. The 30% is something that we handle through general price increases. So we're able to go to the market pretty quickly and recover that. On the 70%, we have a pretty good pass-through clauses, some of which have -- or I would say, generally, they have all become even better after we've gone through significant inflation periods in the past, recall '22, '23. But they're all designed for business-as-usual situations. Now what we're doing here, and that is across the whole portfolio is we're going to customers on the back of a collaborative approach. And this is driven by keeping everybody in supply, which is a significant concern across the whole value chain. We justify the additional cost that we have, and we're able to sit and come to conclusions in terms of relief, which is appropriate and matches the inflation and also appropriate in terms of the timing. That's sort of the way how we go about it, and we do that across the portfolio. Stephen Scherger: And Ghansham, it's Steve. Just to kind of follow on with PK. In terms of beyond Q4, our planning assumption is that our pass-through mechanisms and the relationships we have with our customers will continue to offset the cost environment. So on a Q4 basis, as we talked, no material impact, and that would be the same assumption as we look beyond Q4, given the mechanisms that are in place to offset either in an inflationary environment or if it were to revert to the other direction. So as you look beyond Q4, that's the assumption for a continuation of an offset. Operator: Your next question comes from the line of Jeff Zekauskas with JPMorgan. Jeffrey Zekauskas: You talked about your inventories rising and your free cash flow moving down by about $300 million. And that's really a 1 quarter effect. I would imagine that your inventories have to be relatively higher over the next several quarters. So as a base case, should we also expect some kind of free cash flow penalty in your -- in the 4 quarters that follow the June quarter of 2026? Stephen Scherger: Jeff, it's Steve. I'll be glad to take a cut at that. I think relative to our prior guidance, which assumed an inventory reduction, which was what we were planning to do, you're absolutely right. We are maintaining inventory levels kind of volumetrically, if you will, and the cash flow implications are driven by the inflation on the inventory. And so that is the Q4 impact that we're sharing with you. Moving beyond Q4, I think it will depend, obviously, if the markets stabilize relative to supply chains and value, the cash flow implications could be modest on a move-forward basis. So I think it's probably a little unpredictable to determine whether that cash flow impact is -- continues to rise or kind of stabilizes as the supply chains stabilize. So I think I wouldn't necessarily assume that there's an ongoing cash flow headwind. I think it will depend upon supply chain normalization in the environment. Operator: Your next question comes from the line of Ramoun Lazar with Jefferies. Ramoun Lazar: Maybe if you can shed some light on how you're seeing the consumer through your customers, particularly given some of those recent cost impacts on the consumer. I guess maybe if you can talk us through how the quarter panned out, that would be useful? Peter Konieczny: I'll take that, Ramoun. I'll talk to the quarter first and then make a couple of comments on the consumers, if that's okay. So the quarter that we're referring to is the third quarter, obviously, which is the one that we're reporting on. And we made a couple of comments already, but I'll try to give it my spin here and summarize it. So the company was down 1.5% in the third quarter, and that is 100 basis points improvement sequentially versus the prior quarter. The 1.5% is equally split between the core and the noncore business. So the core was 1.5% down and pretty much on the same level as in the prior quarter. So the improvement we saw -- we've seen a substantial improvement in the noncore business in terms of volumes. They were high single digits down in the prior quarter, second quarter and now 1.5% down in the third quarter. So very pleased with that. And that actually has driven also a significant improvement in the financial results of the noncore business, which was expected by us and is important also in the context of the progress that we're seeing in terms of selling it. Now back to the volumes. If I double-click on that by volumes -- sorry, by geography, North America and everything that I'm now saying is just focused on the core business. So North America is a little weaker than it has been in the second quarter, and that is due to the winter storm situation that we've seen in January and then to a lesser effect in February and hit particularly the Rigids business. Europe is better than in the prior quarter sequentially, very low single digits down. And we've seen our emerging markets actually kick back in and come back to growth with mid-single-digit growth across both regions, LatAm and Asia Pacific. And final comment is that the focus categories in the core business outperformed the company overall by about 150 basis points. So they're collectively flat. So that's the commentary on the quarter. When I think about the consumer, look, we think the quarter -- third quarter was probably not that much impacted by the Middle East crisis and that the inflation has found its way through to the consumer. I think it will be prudent to assume that it will happen over time. The consumer, we've talked about it many times in prior quarters, is stretched as a result of that value seeking. The last thing that the consumer is looking for is additional inflation at this point in time. What I will say, though, is that our customers have performed actually quite well in the third quarter. When you take a look at their performance, it's encouraging. And there is also a continued commitment to supporting volumes across the customer base, which I find encouraging, and we'll have to see how that plays out. Obviously, again, that goes against a consumer that's already stretched, and we'll have to see that it plays out. Our best guess at this point in time is and that applies to the fourth quarter, at very high level, I would also say that about the second half of the calendar year would be that the market, the consumer will be down low single digits. That's sort of our high-level base assumption. Operator: Your next question comes from the line of Mike Roxland with Truist Securities. Michael Roxland: PK, you mentioned continuity of supply critical for your customers. So obviously, it's one of the reason you're keeping the inventory elevated. We've heard that from other companies during reporting season thus far. Coming at it from a different angle, have you been able to gain any share given your global presence and product availability? Peter Konieczny: Thanks, Mike. It's a great question. First off, I believe that we're pretty well positioned in terms of supplies. And the reason for that is that we have a broad supply network across the globe. I was making a comment earlier that we buy very little from the Middle East region, less than 5%. Another reference point is that we buy about 65% of our resin from North America or in North America, where the supply chain obviously is more stable. We do have a global procurement team, obviously. We have the opportunities to swing volumes between suppliers because we're, in many cases, qualified across different formulations. And even when that's not the case, we have an excellent technical capability in order to get to qualifications quickly. So that is one of -- that is probably the core -- those are the core reasons why we feel good about our supplies right now. While I will not hide from you that it's -- we're laser-focused on it because we want to keep our customers, obviously, in supply. Now to the question of share gain, it's probably a bit early still. The only thing I can tell you is that in some cases, we have heard -- we've had conversations with customers that came to us and said, "Hey, can you help out because we are seeing some issues with incumbent suppliers in some cases?" And we obviously try to help where we can, and that gives you an indication. But I will say, overall, it's still early. Operator: Your next question comes from the line of John Purtell with Macquarie. John Purtell: Steve, thanks for the earlier comments, and PK, as well. Just had a question on sort of the gearing, Steve, and just how you see it profiling over the next sort of 12 months. In particular, sort of what are the key drivers that you see to drive that gearing back to target? Stephen Scherger: Yes. Thanks for that, John. I appreciate you raising that. As we shared, a modest uptick in our year-end leverage from our original guidance, a range now 3.4 to 3.5 pretty well chronicled in terms of the modest movements up there relative to the original guidance. It's a combination of modestly less EBITDA from the original guidance, given our volumes have been down 2% versus an original guidance, assuming more flattish and then the impact of the inventory, the $300 million. So that's a bit of the march towards the end of the year. I think very importantly, our commitment to our investment-grade rating, our commitment to deleveraging back to 3x or below is absolute. And given the actions that we're taking, both in the form of the divestitures that we've completed, those which we expect to complete as well as continued synergy capture as we look out over the next 12 to 18 months, we can see line of sight back towards that 3x leverage range as we look out towards really fiscal -- the new fiscal and calendar 2027. So while there's some short-term temporary impacts, it really hasn't altered our conviction and line of sight to deleveraging using our cash flows as well as our divestiture cash inbound to move ourselves towards that 3x and below. And I think the new fiscal calendar 2027 will be an important year for that inflection. Operator: Your next question comes from the line of Matt Roberts with Raymond James. Matthew Roberts: We might have a new fellow Floridian soon. So welcome. PK, the color you gave on volumes previously to a question just a minute ago, could you maybe [Technical Difficulty] the March exit rate looked versus what you saw in April? Was there any evidence of prebuying in certain markets given those cost increases that you discussed? And then additionally, maybe on nutrition and foodservice, are you seeing any changes in the promotional environment that could help drive sequential improvement? Or just what's driving [Technical Difficulty]? Peter Konieczny: Yes. Thanks, Matt. The line was a bit choppy there, but I think I got it all. So first off, you asked for the exit volumes in March and what we're seeing in April. Look, I think I'm on record. I don't really like to comment too much on short-term volume performances of the business or anything that goes back to a month, I think, is very risky to read too much into it. What I will tell you is on the back of what I mentioned earlier, too, we're expecting the fourth quarter to play out pretty much in terms of volumes just like what we've seen in the third quarter. So that's our assumption. I will tell you that as we sit here today and we look back to April, April looked better than that. And that doesn't change our expectations at this point in time, but it's just a fact. And when you ask me where that comes from, I'm not across it enough at this point in time to really give an indication here in terms of whether our customers are trying to increase stock a bit on the back of the overall situation. It could be the case, but I don't think it's a lot. I will also remind everybody that the supply chain is tight. So whenever they're asking these questions, you have to make sure that you're actually in the position to respond to that and to satisfy that request. So that's the situation on March and April. I think at the end, you also spoke about promotional activities and in general. I made a comment earlier, and I said we're very encouraged with what we're hearing from our large customers in their own results, earnings results. We hear what you hear and the commitment to supporting their volumes continues to be very solid. And that, I guess, will also -- that will translate in different initiatives, one of them being the promotional activities. So we were carefully listening to that and wondering how they deal with it in terms of making choices between protecting margins and driving volumes. But I think we are in a position where we see more consistency on that. Operator: Your next question comes from the line of George Staphos with Bank of America Securities. George Staphos: Appreciate the details. A lot of my questions have already been answered. My question, I want to go back to how you and your customers are mitigating the resin effect. On the additional pricing, PK and Steve, that you're contemplating with customers. Are these really an aggregation of one-off discussions? Or are you triggering any extraordinary clauses in your contracts, so it's a little bit more mechanical than negotiation? And how much does the extra inventory that you've built in not only allow for supply continuity, but maybe act as a buffer against the higher resin pricing and allowing you to, thus far from what we're hearing, Steve, manage second half -- or excuse me, the stub year relatively consistently with what you're seeing in the fourth quarter, which is not that big of an effect? Peter Konieczny: Thanks, George. I'll take the first part of your question, and then maybe Steve handles the inventory part, if that's okay. You were going back to the dynamics that we're seeing currently in dealing with our customers in order to get offset for the inflation. Look, as I said before, 30% is not contracted. So that's not the issue. 70% is contracted. In that 70%, we have a few contracts where we have opening clauses, which we can refer to given the situation that we're currently seeing. And this is all with a common understanding that this is not business as usual, what is happening. But it is an exception rather than rule. The other conversations, I go back to what I said earlier, they are conversations on a very collaborative approach with the customers where everybody understands we're seeing significant inflation hitting the business really hard in a very short period of time. We believe ourselves, we have made it very clear and everybody understands that in our business, we need to have an alignment on the commercial side between the buy and the sell side. And therefore, that requires support and help from our customers in order to keep us in business and make sure that we can supply them going forward. That's really the common interest driver that gets us to the table. And this is not a one-off conversation. It is a -- you can call it a one-off and it's not a one-off because as the situation changes with regards to inflation, we will have a continued dialogue with the customers in order to adjust ourselves to the market side of our inputs. So everybody understands it's not a one-off. It's not a destination here. It's a journey. So with that said, Steve, if you want to comment on the inventory side? Stephen Scherger: Yes. Thanks, PK. I think, George, it's a good question just relative to our inventory. As I mentioned earlier, we're not building necessarily volume of inventory. We're more maintaining what we had as opposed to the guidance of it declining. And obviously, we're carrying it at a higher cost. But to your point, what it does allow us to do because we had ample inventory at a volume level is to mitigate some of the timing of some of the cost increases. And those get factored into the collaborative conversations that PK was referencing with customers. We're working to be just very fair and very reliable and very consistent on servicing our customers and having the pricing that we execute with them, be in line with the actual realities of how pricing is coming through the business. As you indicate, some of the inventory that you have helps to mitigate. It also helps to mitigate some of the pace of the pricing and our intent for that to continue to be offset as we see movements. So it does actually help with those negotiations, those discussions with customers because we're able to mitigate some of the abruptness of what we're seeing on the cost side, and it's all part of that good collaborative dialogue with customers to help keep them in supply. Operator: Your next question comes from the line of Nathan Reilly with UBS. Nathan Reilly: Just a question about the synergy target as we roll into '27. Obviously, you've got the challenges in relation to tight procurement and supply chains. And of course, I guess, a more uncertain consumer environment just given the volatility and the potential for inflation. Can you just talk to me about how that impacts your ability to deliver on the procurement and also the growth synergy targets into FY '27? Peter Konieczny: Nathan, it's PK. I'll kick off here, and then I'll see if Steve wants to build. So first off, taking a step back, we reconfirmed our target of $650 million synergies over a period of 3 years, and we're guiding to a year 1 result in synergies, which exceeds our expectations of $270 million. That number in year 1 has a significant contribution of procurement in there. Otherwise, we would have not gotten there. And that was delivered in a situation where we are facing where we were facing the supply side. And we have many conversations on these calls before that with facing a pretty low margin situation on the supply side. As we go forward, particularly with regards to procurement, we're going to see a different situation. A lot of inflation is happening. I would assume that the margin situation on the supply side is going to somewhat improve. And we just believe that we will continue to be able to extract value. And that is on the back of certain characteristics that Amcor now has that we had in the past and that we will have going forward. That is we are a big buyer. We're a global buyer, and we're important to our suppliers. Therefore, the confidence in extracting synergies from the resin side has not changed. I will also say, and this is important for calibration, we've said this many times, resin is a portion of our procurement spend, right? We have overall $13 billion procurement spend, $3 billion of that is indirect. And from the remaining $10 billion, about half of that would be resin. So you have the other half is non-resin direct spend from procurement. Overall, we are pretty confident that we can deliver those numbers. Stephen Scherger: Yes. Nathan, just to add to PK's comments briefly. I think we certainly remain committed to the year 2 synergies, which are $260 million in year 2 coming off of the $270 million that we're committed to here in year 1. And so our line of sight to that remains positive and consistent. And then if you just kind of take it to what will be the stub year as was referenced earlier, we don't see anything that would change having half of that kind of roll through -- roughly half of that roll through during that 6-month upcoming period of time. So no change to our commitments and no change to the relative timing overall. Operator: Your next question comes from the line of Anthony Pettinari with Citi. Anthony Pettinari: I just had a quick question on the noncore portfolio. During the fiscal year, did the number or the composition of businesses that you consider noncore change? Did you sort of add or remove any businesses from that group? And then did the Middle East conflict, has it impacted time line or discussions for the divestitures? Peter Konieczny: Yes. Thanks, Anthony. It's a great question. The answer to your first question is, has the portfolio of the noncore businesses changed? The answer is no. And we never intended to do that. Just a few words on this. Look, we did a strategic assessment of our whole portfolio after we combined Amcor with Berry, and we had a number of parameters that we had on the table. We looked at growth, margin profiles, cyclicality of the businesses, industry structure, just to mention a few, and there were a couple of others. But those were strategic reviews that we had. And therefore, we singled those businesses out and we said, look, we do not -- we believe that there's better owners for that business, and we want to focus elsewhere. So that gives the whole process a certain solidity, which doesn't make it sort of erratic or opportunistic when you see a market dislocation like as what we're seeing currently with the Middle East crisis, right? So the perimeter has always been the same. We're very encouraged with the progress that we're making. We announced a number of other agreements over the last 3 months, which is great. And we're also encouraged with the conversations that we have around the North American beverage business, which is where we do not have an agreement yet and some adjacencies to that business in the specialty containers sort of space. It's encouraging conversations, particularly because these businesses are on a very nicely improving trend. We said that we saw improved performance in the third quarter, which was certainly driven by some relative volume performance sequentially, but even more so by us getting those businesses back on a very productive footing. And I have a lot of time for the teams that have done an excellent job in getting that done. Remember that we had a number of customer interactions that also addressed some challenging margin situations, and we have made good progress with that, and that's what you're seeing right now. So that has helped the business in the third quarter to perform better. We expect even more so sequentially of profitability in the fourth quarter. So in terms of timing, I cannot be specific around that as you would expect me to, but we're pretty encouraged that we will be able to get that done. Stephen Scherger: Yes, to your question, Anthony, and to PK's point, our actual performance in the North American beverage perimeter, that is the component of that. We're still working on a sale process. The actual performance financially was in line with prior year and margins were in line with our expectations. That was a good outcome and it's probably the most relevant component of the sale process, nothing that really is impactful relative to the Middle East conflict. It's more around the improvement in the performance year-over-year EBIT in line with prior year. Operator: Your next question comes from the line of Hillary Cacanando with Deutsche Bank. Hillary Cacanando: So you're making great progress on your synergy targets. Could you go over maybe some example of growth synergies where you were able to win a new contract because of a combined product using both Amcor and Berry's products? I would love to hear that. Peter Konieczny: Yes. Thank you, Hillary. Look, we have made really good progress on the growth synergies. Let me just recalibrate as we are on a year-to-date basis. So since we've had the acquisition, we have been able to close deals now up to $100 million annualized. Those businesses are ramping up, and they have started to impact the bottom line in the third quarter with a couple of million. That's perfectly as we expected. We got out of the chute pretty quickly here because we were expecting $280 million of growth synergies over 3 years, and we're essentially now at $110 million. So we made really good progress. The growth synergies, again, they're driven by the fact that we are able across the product portfolio, which is very complete now between Amcor and Berry to sell systems rather than components. We have very complementary technology footprint. We have additional capacity on the table. So these are just some examples. Now in terms of in terms of examples, there's various ones here. I wasn't quite expecting the question, but I want to go back to one that I've highlighted on an earlier call, global pharma customer actually in line with the oral dose GLP-1 drug was looking for different packaging formats for Europe and North America. In Europe, it was a blister format. In North America, it was a container format -- a rigid container format. So almost an opportunity that was made for the combined Amcor-Berry. We had the opportunities. We had the product. We were multiregional, and that has led to the closing of a good contract. This is just one example. There's many others out there, happy to follow up offline, but that gives you a feel. Operator: Your next question comes from the line of Gabrial Hajde with Wells Fargo Securities. Gabe Hajde: Lots of questions. But I'm curious on the healthcare and nutrition, which I think are focus areas for you all. Both, I think, were called out as being areas of weakness. And I think health care specifically was intended to improve kind of beginning in the middle of 2026. Can you comment on that? Peter Konieczny: Yes. Gabe, I'll give you some more color here. So I think what Steve was saying was, look, within the core business, we have our 6 focus categories. They actually outperformed the overall core business, right? And they were flat while the overall company was 1.5% down. So -- and the focus categories, which make up about 50% of the business, they include certain categories in nutrition, and then they also include healthcare. I'm not sure if we mentioned it on the call yet, but 5 out of the 6 focus categories were actually either flat. There was one that was flat. The others were low to mid-single digits up. And we had a bit of a weaker situation in healthcare. And just maybe commenting on healthcare because you specifically asked. I continue to believe that healthcare is a great end market category for us and a great business. We've had a number of positives also in the third quarter. We actually had wins with several pharma customers. We have a great partnership entered with a generics player around sustainability. We opened a coating facility in Malaysia in April with the first air-knife coating technology, which we've made a separate announcement on. So all of that is good. The volumes in healthcare were slightly down, but we have good positive mix. And when you go to the volumes, the U.S. winter storm impacted a few sites in terms of both our production, but also the customer pull-through. And when you look to our customers, you will see that we also had a bit of a weaker cold and flu season. And then in terms of outside of the focus categories, when you look at what's driven the rest is the other nutrition category, where you see more discretionary categories down. We've spoken about some [ natural ] confectioneries in the past. That's a market and also a customer sort of driven issue and then some weakness on the fresh and frozen food. And we also see some, I would say, generally trends to value-oriented essentials in that category. So that should give you a feel. But it's not that overall Nutrition is down. It was a particular segment of Nutrition outside of the focus category. So I hope that makes sense. Operator: Your next question comes from the line of Keith Chau with MST. Keith Chau: I can go back to the leverage point and maybe one for Steve. At the end of the year, the guidance is for a leverage ratio of 3.4 to 3.5x. Typically, heading into the September quarter, your leverage goes up by, call it, anywhere between 0.3 and 0.4x. Given you'll finish the year at an elevated level already, are you expecting to see that step up? And given the higher working capital at the moment and the investment in working capital, should we see an over recovery of cash in calendar year '27? Stephen Scherger: Yes. Thanks for that. I think the recovery of the cash will definitely occur once we see supply chains normalize and kind of see some of the consistency rather than a little bit of the volatility. The timing of that, of course, will be dependent upon when we actually see that occur. But the probabilities of it happening, certainly -- as you look out of calendar '26 into calendar '27, we would certainly see that as the likely case. But there's, of course, some unpredictability to that if the supply chains generally have volatility in it. But I think your planning assumption, our planning assumption, that would be relatively consistent with that. Relative to this fiscal year-end leverage being modestly up, we'll see some inflection, as you indicated, kind of in a normal, I'll call it, Q1 of the stub period, but we wouldn't expect to end the now stub period with leverage necessarily above where we're finishing. And then as we mentioned earlier, we would expect real improvement on the leverage as we look into the fiscal and calendar 2027, particularly given the things that will be very focused on for us, synergy capture being at the levels that we've expected and would see improvement both at the EBITDA and EPS level from synergy capture during that period of time. Obviously, our price and cost relationships will maintain themselves as neutral for today's conversations. And so no, I think you'll see really some very positive deleveraging as we look out of calendar '26 and into now calendar and fiscal '27. It's important to us and our commitment to deleveraging as we've previously discussed and highly committed. Operator: We have reached the end of the time we have for the Q&A session. I will now turn the call back to Peter Konieczny for closing remarks. Peter Konieczny: Yes. Thank you, operator. Thank you again for joining us, everyone. I'm sorry, we could not get to everyone today. But I -- and we certainly appreciate the interest, and we hope to see you soon. Thank you very much. Operator: This concludes today's call. Thank you for attending. You may now disconnect.