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Operator: Thank you for standing by. Welcome to Flex's Fourth Quarter and Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I will now turn the call over to Mrs. Michelle Simmons. You may begin. Michelle Simmons: Good morning, and thank you for joining us today for Flex's Fourth Quarter and Fiscal Year 2026 Earnings Conference Call. With me today is our Chief Executive Officer, Revathi Advaithi; our Chief Financial Officer, Kevin Krumm; and our Chief Commercial Officer, Michael Hartung. We'll give brief remarks followed by Q&A. Slides for today's call as well as a copy of the earnings press release are available on the Investor Relations section at flex.com. This call is being recorded and will be available for replay on our corporate website. Today's call contains forward-looking statements, which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. These statements reflect expected results for the full fiscal year and do not give effect to the planned spin-off of the Cloud and Power Infrastructure segment. For a full discussion of these risks and uncertainties, please see the cautionary statements in our presentation, press release or in the Risk Factors section in our most recent filings with the SEC. Note, this information is subject to change, and we undertake no obligation to update these forward-looking statements. Please note, all growth metrics will be on a year-over-year basis unless stated otherwise. Additionally, all results will be on a non-GAAP basis unless we specifically state it's a GAAP results. The full non-GAAP to GAAP reconciliations can be found in the appendix slides of today's presentation as well as in the summary financials posted on the Investor Relations website. In addition to our earnings presentation, we also published a separate presentation regarding the proposed transaction will be -- which will be discussed on today's call. Please refer to the earnings presentation to follow along. Before we begin, I want to share a brief update on our Investor Day. In light of yesterday's announcement, we are postponing the event until the fall when we expect to have more information to share. We will provide more details as the year progresses. Now I'd like to turn the call over to our CEO. Revathi? Revathi Advaithi: Thank you, Michelle. Good morning, and thank you for joining us today. We have a lot to cover this morning, so let me begin with an important milestone that reflects how our business has evolved and where we are headed. Seven years ago, we set out to transform Flex. The strategy was simple: focus on the right end markets, divest noncore assets, invest in the technologies that matter and execute with discipline. Since then, we have exited consumer-focused markets, spun off Nextracker into a leading solar business and created tremendous value for our shareholders and invested ahead of the curve in electrical products, recognizing early that compute would become power hungry and that data centers would need an integrated architecture. We have built a productivity machine in our factories and most importantly, we have invested in our teams, creating one of the best high-performing values-based culture. Yesterday brought the next milestone in that journey. We announced our intent to spin off our Cloud and Power Infrastructure business into a new publicly traded company with the spin expected to complete in the first quarter of calendar 2027. This decision reflects our conviction that the business has achieved the scale, growth profile and strategic importance to stand on its own. It also positions Flex to sharpen its identity and invest more aggressively in its highest-growth, highest-technology opportunities. Turning to Slide 5. SpinCo, historically our data center business, now captured in our CPI segment, will be a global critical digital infrastructure company, delivering end-to-end power and thermal management from grid to chip for AI data centers and mission-critical applications like utilities. What differentiates SpinCo is its depth across power, thermal and compute integration. That depth lets us replace the fragmented multi-vendor approach market-leading customers are actively moving away from and gives us the opportunity to build one of the largest electrical companies purpose-built to deliver from utility to chip with cooling and compute integration designed in from day 1. The timing is clear for two reasons. First, AI is driving compute density to levels that require power and thermal to be engineered as a unified system, not bolted on after the fact. Customers no longer want individual subsystems, they want a single partner who can deliver from grid to chip. SpinCo is purpose-built for this moment. Secondly, electrical infrastructure is entering a generational transformation. The shift to solid-state transformers and 800-volt DC distribution will reshape how power moves from grid to chip, unlocking the density and efficiency AI demands, and SpinCo is the only company with embedded power, distributed power, thermal and systems depth to lead it. Following the spin, Flex will continue to execute its proven playbook as a leading advanced manufacturing company, designing and building highly complex products at global scale for premier brands across diversified end markets. As global supply chains undergo structural changes, shorter technology cycles, rising system complexity and persistent constraints, customers are rethinking how products are designed, manufactured and scaled. These shifts are expanding opportunities for Flex to deepen customer relationships and capture greater system-level engagement. Post spin, as Flex allocates capital towards higher growth industries such as health care, robotics, warehouse automation and networking, we believe the company is entering its next phase of transformation. With a simplified portfolio and a sharpened strategic focus, Flex is positioned to expand margins and continue to actively optimizing its portfolio towards higher-growth opportunities that will drive strong cash flows and shareholder returns. Now turning to Slide 6. We believe spinning Flex into two distinct companies positions both to sharpen strategic focus, improve operating discipline and align capital allocation with their respective growth and margin priorities. This is not about changing our strategy. It is about unlocking value through simplification and clarity for customers, for employees and for our shareholders. Now from a financial perspective, both businesses have demonstrated strong fundamentals, and we expect the spin to enhance transparency while allowing each management team to pursue tailored investment priorities. We plan to provide additional details over the upcoming quarters, including stand-alone financials at the appropriate time. Now turning to Slide 7. Now to our recently announced acquisition. Over the past several years, we have deliberately evolved our portfolio across thermal technologies around integrated structure and power. Earlier this week, we closed our acquisition of Electrical Power Products or EP2, strengthening our power portfolio with utility-grade specification-driven solutions for grid modernization and electrification. These capabilities are becoming critical as data center growth places greater demands on power availability and reliability. Combined with our existing power distribution, switchgear, thermal management and integrated rack-scale capabilities, EP2 enhances our ability to deliver end-to-end solutions for utility and infrastructure customers, and it increases our exposure to long-cycle margin-accretive programs that support grid resiliency. To put a point on that momentum, we've recently secured substantial incremental business with several hyperscaler and data center customers, including Google. These are not single product manufacturing engagements. They span power infrastructure, thermal systems and complex hardware manufacturing deployed at scale across our global footprint. Capital deployment for these projects is already underway, and it will remain elevated through FY '27 as this growth alongside broader CPI growth requires expanded investment. We expect this level of investment to be unique to fiscal year '27. We have line of sight into fiscal year '28 and '29 requirements and expect CapEx to normalize in fiscal year '28. Awards of this scope are exactly why we believe the spin is the right move. These deployments require the integrated end-to-end capability that SpinCo will deliver as a focused company. Now turning to Slide 8. Let me put some numbers around the growth opportunities. For SpinCo, we're targeting revenue growth of 65% to 75% in fiscal year 2027, a significant step-up from fiscal year 2026. And for FY '28, we expect further acceleration with growth of over 80%. Going to Slide 9. Flex, post spin, is targeting low to mid-single-digit revenue growth in that same time frame and will invest in areas where growth is accelerating, including regulated and technology-driven markets such as health care, warehouse automation and networking tied to data center infrastructure growth. Now when you put all this together, it is clear that this is the right moment for this milestone. It is also clear that this leadership team has the credibility to deliver this milestone, having already executed and delivered spins like Nextracker. Now talking about leadership, I want to briefly address leadership as we take our next step. Turning to Slide 10. I'm excited to share that I will serve as CEO of SpinCo as we build a focused, purpose-driven platform designed to lead the future of compute infrastructure. I'm equally confident in the future of Flex, and I'm pleased to leave it in Michael Hartung's very capable hands as CEO. Michael joined Flex in 2007 through the acquisition of Solectron and has since held a range of senior leadership roles, most recently as our Chief Commercial Officer. Over the past 7 years, Michael and I have worked closely to transform this company, driving disciplined portfolio optimization, margin expansion, targeted acquisitions and building a stronger and a more resilient Flex. This playbook has delivered stronger customer relationships and meaningful returns for shareholders. Michael, thank you for your trusted partnership over the years and for stepping into this role. I look forward to supporting you and the entire leadership team as we embark on this next chapter. Michael Hartung: Thank you, Revathi. I'm honored to step into the role of CEO of Flex and to build on the strong foundation this team has created. As we sharpen our focus, I'm confident Flex is well positioned to build on its legacy of global manufacturing and supply chain excellence while serving customers across diversified end markets. I'm excited about the opportunities ahead and what this team can accomplish together. With that, I'll turn the call over to Kevin, who will walk through the financials in more detail. Kevin Krumm: Thank you, Michael, and good morning, everyone. I'd like to add that I, too, am excited about yesterday's announcement of the spin, and I'm looking forward to working with Revathi and Michael throughout this transition. Before I discuss our financial results, I'd like to take a moment to explain our new segmentation outlined on Slide 12. From this quarter, moving forward, we will be reporting in three new segments: Regulated Manufacturing Solutions, Integrated Technology Solutions and Cloud and Power Infrastructure. This new segmentation will provide clear visibility into our business units as our portfolio evolves. So upfront, I will make a few comments about our new segments. Regulated Manufacturing Solutions, or RMS, like Reliability Solutions before it, will house our industrial, automotive and health care business units. RMS is focused on specialized products with longer life cycles that demand a greater level of precision and consistency. Our critical and embedded power businesses have been removed from industrial and are now reported in a new segment. Integrated Technology Solutions, or ITS, consists of our communications and lifestyle business units. Similar to our previous Agility Solutions segment, ITS serves customers in fast-moving industries with shorter product life cycles with a focus on adaptability and time to market to meet the ever-changing needs of evolving industries. Communications includes what was previously our non-cloud CEC businesses and lifestyle now includes our former consumer device businesses. Finally, we have consolidated our data center power and cloud businesses, once housed within industrial and CEC, into a new segment, Cloud and Power Infrastructure or CPI. This new segment represents the business previously included in our data center disclosures and will now be reported via our cloud and cooling and power business units. As Revathi previously announced, we intend to spin this segment into a new publicly traded company and will provide segment-level disclosures until the transaction closes next year. I will now discuss our financial results for the fourth quarter of fiscal '26. Starting with our key financials on Slide 13. Fourth quarter revenue came in at $7.5 billion, up 17% year-over-year. Adjusted gross profit totaled $737 million, and adjusted gross margin improved to a record level 9.9%, up 50 basis points from the prior year. Adjusted operating profit was $500 million with adjusted operating margins at 6.7%, up 50 basis points from the prior year and another company record due to improved operational efficiency and product mix. Finally, adjusted earnings per share for the quarter increased 27% year-over-year to $0.93 per share. Turning to our quarterly segment results on the next slide. RMS revenue was $2.7 billion, up 13% from the prior year, driven by strong growth in industrial and health care. Adjusted operating income totaled $180 million, and adjusted operating margin was 6.6%, up 80 basis points year-over-year, driven by strong improvements in industrial and automotive. ITS revenue totaled $2.9 billion, an increase of 13% year-over-year. The increase in revenue was primarily driven by strength in communications. Adjusted operating income was $147 million and adjusted operating margin was 5%, unchanged from the prior year. Finally, CPI revenue totaled $1.8 billion, up 31% versus the prior year, driven by growth in both business units with power's growth rate exceeding cloud's. Adjusted operating income was $182 million, and adjusted operating margin was 9.9%, largely in line with the prior year with favorable mix impacts from power, offset by infrastructure investment in critical power and ramp costs in cloud. Looking at our full year results on Slide 15. Revenue was $27.9 billion, up 8% on continued strong growth in cloud, power and industrial, offset by persistent softness in our consumer-related end markets. Adjusted gross profit totaled $2.7 billion and adjusted gross margin improved to 9.5%, up 70 basis points from the prior year. Adjusted operating income totaled $1.8 billion, up 21%. And adjusted operating margin was 6.3%, up 70 basis points year-over-year, primarily driven by favorable product mix and continued improvements in operational efficiency. For the full year, Flex achieved adjusted EPS of $3.30 per share, up 25%, driven by increased adjusted operating income and strong share repurchases. Turning to our segment results for the year on Slide 16. Similar to fiscal '25, fiscal '26 was a dynamic year, characterized by macroeconomic uncertainties and rapidly accelerating AI deployment. I'm proud to say that, once again, we delivered on our expectations for growth, exceeding our revenue expectations for all segments. We have also maintained our focus on operational efficiency and execution, which led to another record year for adjusted gross and adjusted operating margins. RMS revenue was $10.2 billion for the year, a year-over-year increase of 5%, driven by industrial and health care, and delivered an adjusted operating margin of 6%, up 80 basis points, primarily driven by improvements in industrial. ITS revenue totaled $11.1 billion, down 2% from the prior year due to persistent softness in lifestyle, offset by growth in communications. Adjusted operating margin was 5.4%, an increase of 60 basis points, driven by improvements in communications. CPI revenue was $6.6 billion, up 38% year-over-year, exceeding our target of 35%. Adjusted operating margin was 9.2%, down 100 basis points year-over-year, reflecting incremental infrastructure investments in critical power and ramp costs in cloud. While these investments temporarily weighed on our margins, we expect to recoup the full 100 basis points in FY '27 and see further expansion of 50 to 100 basis points in FY '28 as we grow into these investments. Moving to cash on Slide 18. Free cash flow in the quarter was $212 million, and for the full fiscal year, we delivered approximately $1.1 billion in free cash flow. Q4 inventory was up 5% sequentially and 15% year-over-year, mostly supporting our CPI and RMS segment growth year-over-year. Inventory, net of working capital advances was 55 days, a reduction of 1 day versus the prior year. Fourth quarter net CapEx totaled $201 million, bringing full year CapEx to $625 million or approximately 2.2% of revenue. In the fourth quarter, we repurchased $200 million of stock or approximately 3 million shares. And for the full year, we repurchased $944 million of stock or approximately 19 million shares. Moving on to our fiscal '27 outlook on Slide 19. For fiscal '27, our expectations are the following: revenue to be between $32.3 billion and $33.8 billion, up 18% at the midpoint. Adjusted operating margin to be between 7% and 7.1%, an increase of approximately 80 basis points, driven in large part by recouped FY '26 investments in CPI. We expect an adjusted tax rate of 21%. We expect adjusted EPS to be between $4.21 and $4.51, up 32% at the midpoint. Finally, we expect CapEx to be in the range of $1.4 billion to $1.6 billion and free cash flow conversion of approximately 60%, excluding costs associated with the spin transaction. As Revathi mentioned, we secured significant business with multiple customers, including a multiyear contract with Google, underpinning our strong CPI growth expectations of 65% to 75% in FY '27 and 80% plus for FY '28. What we're putting in place today is foundational, power and cooling infrastructure to manufacture for the data center market to support a broad set of hyperscaler and AI programs, products and partnerships through FY '28 and FY '29. As we scale these investments, we expect incremental investments, but at levels materially lower than the upfront investment required to establish the core infrastructure and capabilities for this next phase of robust growth. To put a finer point on it, we expect CapEx to return to historical levels in FY '28 with CPI returning to approximately 2.5% to 3% of revenue and ITS and RMS below 2% of revenues. Post spin, both companies will be well positioned to capture growth from this generational AI-driven buildout. Moving on to our fiscal '27 segment outlook. For RMS, we expect revenue to be up low to mid-single digits, driven by strength in industrial and health care as automotive continues to stabilize. For ITS, we expect revenue to be flat to up low single digits as strength in communications is offset by softness and our continued deemphasis of low-value markets in lifestyle. And for CPI, we expect revenue to be up 65% to 75%, driven by continued accelerating demand in both cloud and power with power growth again outpacing cloud growth. Finishing off with our guidance for the first quarter on Slide 21, we expect RMS to be up high single digits to low double digits, driven by industrial and health care. We expect ITS to be up high single digits to low double digits based on strength in communications, offset by weakness in lifestyle. We expect CPI revenue to be up 20% to 30%, driven by continued growth in power and cloud. We expect CPI growth to ramp in the second half of fiscal '27 as investments made in fiscal '26 allow us to deliver against robust demand from recent program wins. For total Flex, we expect revenue in the range of $7.35 billion to $7.65 billion, up 14% at the midpoint with adjusted operating income between $469 million and $499 million. Interest and other expense is estimated to be around $65 million and the adjusted tax rate to be around 21%. Lastly, we anticipate adjusted EPS to be between $0.86 and $0.92 per share, up 24% at the midpoint based on approximately 374 million weighted average shares outstanding. In summary, we finished FY '26 in a position of strength, delivering record margins, strong cash flow and growth across critical end markets. As we look ahead to fiscal '27 and our announcement yesterday to spin off our Cloud and Power Infrastructure segment, we believe both companies are well positioned for their next phases of value creation. Flex's disciplined playbook under Revathi and Michael has driven shareholder returns that have consistently outperformed market benchmarks and current planned investments are intended to support continued progress post-spin. We are excited about the prospects of these businesses moving forward, and we are confident in the continued value they will create for investors, customers and our employees. With that, I will now turn the call back over to the operator to begin Q&A. Operator: [Operator Instructions] Our first question comes from the line of Samik Chatterjee with JPMorgan. Samik Chatterjee: A lot to digest here in terms of information over last night and today morning. Revathi, maybe if I can start with the decision to do a SpinCo here with the power and cloud assets. I understand the sort of value unlock that might create, but how did you sort of balance that against looking at the scale of the business, the sort of diversification across end markets and also customer concentration that, that business might have? How did you sort of weigh those opportunities and sort of those drivers before taking [ a decision? ] I'm interested to hear your thoughts on that. And I have a follow-up. Revathi Advaithi: Yes. Samik, thank you for the question. I would say that value unlock story is absolutely very clear, like you said. I think the important part to understand is if you look at what's happening in the AI data center space, and across power infrastructure in the U.S. and across the world, it is a one-time change that is happening in the architecture of power and in the architecture of data centers. And if you look at the portfolio that we have very thoughtfully built out in the last 4, 5 years, we do everything from rack and pod-scale system integration, we have the power and thermal architecture we talk about. And then we've been investing in building out all the way from the data center out to the substation with our utility investments that we have done. So we've built a very diversified portfolio across power, across thermal, across compute. And I think the beauty of the whole thing is with a very diversified customer base, not just hyperscalers, but also across colos, across neoclouds, then across a wide variety of utility customers. So diversified customers, diversified product portfolio, fantastic forward-looking growth rates, which is clear in terms of the value unlock story. So Samik, it definitely felt like it was a no-brainer to do it at this point in time with the business that we have built. And it is very well set up to run as a stand-alone company. Samik Chatterjee: Got it. And maybe just a quick follow-up, the acceleration that you're expecting in CPI's growth rate, can you just flesh that out a bit more? How much of that is attributable to your multiyear agreement with Google relative to maybe power, which you've obviously also invested in over the last year? Revathi Advaithi: Yes. I would say, Samik, that the acceleration of the CPI growth rate is related to Google and multiple other hyperscalers and including the growth that we're going to see across colos and neoclouds. So it's a very diversified kind of customer growth rate. It feels like almost every utility customer and almost every data center AI customer is seeing some very significant expansion. So we feel really good about the 65% to 75% and the 80-plus percent growth rate that we're seeing that we have set. And it's across all the three end markets, so which is product lines, cooling, compute integration and power, and across multiple customers. So well distributed between power and cloud, well distributed across multiple customers. And as I said earlier -- in my interview earlier today is that we are also booked out in terms of capacity and backlog for the next couple of years. Operator: Our next question comes from the line of Luke Junk with Baird. Luke Junk: I'd be curious just to get some additional color now that it's a bigger part of the SpinCo on the power franchise and just how we should think about some of the major subcomponents in terms of embedded and critical power in that business. And just thinking about relative growth rates backwards-looking and as you think about some of the discrete opportunities for those parts of the business going forward as well. Revathi Advaithi: Yes. Luke, I would say that in terms of subcomponents of power, I've said this before is what started our journey was the fact that Flex was already doing work around embedded power, which was power for the chip itself. Small business many years ago. But with the acceleration and the focus on power density for chip, obviously, that business is accelerating pretty significantly looking forward. And plus with the change in technology happening with 400-volt DC and 800-volt DC, embedded power is growing significantly. But you can't grow by yourself just with embedded power, right? What affects the power in the rack also affects all the power outside. So distributed power, which is low-voltage switchgear, medium-voltage switchgear, all the way out to power pods outside the data center, all the way up to the substation or utility-grade power infrastructure. We are seeing growth across all of it end-to-end. I'd say in terms of growth rates, we're going to share more as -- we've already given a lot of transparency into the new segmentation. And as every quarter gets announced, you will see all the comparisons get more clear. And so I'd say, feeling very good in terms of how the business is performing across the power franchise, and then you'll see further information on all the financials as we look forward. Luke Junk: And then for my follow-up, just hoping maybe you could give us some more texture on the multiyear contract with Google that you mentioned and the pipeline and sort of opportunities that you're seeing in total. It sounds like these awards are fairly foundational in terms of materiality. And I'm just hoping you can maybe double-click on where customers are coming from incrementally, and it feels like this is maybe a different type of opportunity. You mentioned kind of meeting the moment of this generational change. Is that kind of what you're seeing in these awards opportunities as well? Revathi Advaithi: Yes. I would say that the multiyear contract is with Google, as we talked about in the call itself, but it's also across multiple hyperscalers. I think that's -- and it's also across neoclouds and across colos. So I think that's a very important diversification story. But I think the cool part about all of this is it's not just in the compute integration side or in terms of building mechanical structures like racks and enclosures, but it's also across things like 400-volt DC, 800-volt DC power architecture for hyperscalers or distributed power in terms of the data center and the utility itself. So these multi-year contracts are really across multiple product lines, across multiple hyperscalers and other customers like neoclouds, colos and utilities. Let's not forget utilities also. And we feel good about the fact that we're adding capacity to meet this kind of multiyear commitment that we had from numerous customers, and we're setting up our factories to enable that kind of growth. Operator: Our next question comes from the line of Ruben Roy with Stifel. Sahej Singh: This is Sahej Singh on for Ruben Roy. Revathi, Kevin sort of called out power as the favorable mix driver in the fourth quarter and cloud as the ramp cost drag. So as cloud, that's the same sort of compute, cooling, data center architecture business units, as they scale through fiscal '27 now with the Google multiyear contract that you've mentioned and the GPU programs that we know of, does cloud's margin profile, once ramp costs digest, converge toward the segment average? And to the degree you're able to speak to it in a normalized FY '28, what's the rough margin spread between the two business units within CPI? Revathi Advaithi: Kevin, do you want to take that? Kevin Krumm: Yes. I'll take that question. So your question on sort of cloud margins. As we move into FY '28, we do -- we do have ramp costs in FY '27. We do expect to absorb those costs and continue to scale through that. And when looking at CPI, though, I will say that our cloud margins are lower than our power margins, and we've been talking about that for the last few years. And power in FY '27, we also invested in infrastructure costs that we expect to grow into in FY '28 as well, and that's the improvement that I pointed to in the script, where we think -- where we see CPI margin improving 100 basis points, largely driven by us growing into those investments that we made. But just to put a finer point on your question, our power margins are going to be and will continue to be higher than our cloud margins in that segment. Sahej Singh: That's helpful. Just a follow-up. Michael, congrats on the role. RMS came in at, I believe, you said 6% adjusted operating margin in fiscal '26 and ITS is a tad below that. So I guess without running the -- front-running the long-term framework you'll lay out in the fall, can you help us directionally think about the margin progression for RemainCo? Is it -- is mid-6s achievable through fiscal '27, '28 on the trajectory you're laying out? Or is that more -- is that further out as health care and auto recovery take time to play through? And I guess on the continued deemphasis on lifestyle, low-value markets, should we think of that as a more meaningful revenue exit that benefits margin or just more a portfolio refinement at the edges? I'll stop there. Revathi Advaithi: Michael? Michael Hartung: Yes. First, thank you for the congratulations. I appreciate it. In terms of the story for this year, if we start with the margin perspective, let's start with first what our result was in the FY '26 period where both ITS and RMS were up 80 basis points from 4.6% to 5.4%. And that strength came from across the portfolio with the exception of lifestyle. And remember that lifestyle now includes our consumer devices business. So this does reflect our deliberate repositioning away from those lower value end markets. I would also say that when you think about the playbook going forward, that we will continue to, from a financial perspective, prioritize high-quality earnings that maximize cash generation, we'll continue to drive the margin expansion story through some of the similar themes we've talked about in the past, starting with productivity on the very early stages of driving improvement in our cost structure on the advent of using AI-enabled technologies going forward. And then we'll continue to optimize the mix going forward as well. So from a margin standpoint, strength in Q4, similar progress into Q1. As you think about going forward, we think there's a lot of room for improvement given that productivity improvement that we've been driving, the value of AI in the future. And still, there's gas in the tank to continue optimizing that portfolio. If you think about the near term, we're early in the year, strong Q4, strong guide in Q1, still have a balanced perspective, first half, second half, relatively measured view on the second half today. And don't forget, we're lapping a really strong comparable in the second half, including that strong Q4. So really pleased with how we're positioned and really optimistic about where we can take this story from here, in particular, from a margin perspective and a revenue story. Revathi Advaithi: Yes. I think the only thing I would add, Michael, is that just to put a finer point on everything you've said is the framework for Flex, post-SpinCo, is to basically focus on the things we're focused on. So you'll see strong margin improvement, you'll see focus on growth in the areas of highest return. You'll see great cash generation and buyback invested with it and investments into new areas and technologies we want to lean into like areas like health care or associated with other infrastructure spend you're seeing. So the game plan is to continue to replicate what we have done and really lean into areas of investment that we haven't been able to focus on because of the focus on data centers. Operator: Our next question comes from the line of Mark Delaney with Goldman Sachs. Mark Delaney: Yes. Congratulations on the strong results and to both Revathi and Michael on the upcoming new roles. My first question was related to the plans for the spin. I'm hoping you can help investors better understand the potential for the two companies to grow faster on a stand-alone basis than they could together, perhaps with some examples. And if an aspect is to be able to better grow the products portion of the CPI business? Revathi Advaithi: Yes, Mark, first off, thank you for the congratulations. We've been seeing the story with Flex together for a few years. I would say for the spin portion of the business, so CPI, we've already given a pretty strong guide in terms of growth. We've talked about 65% to 75% and 80-plus percent for the year after. I would say the focus -- and you've also seen us focus on adding more to the product portfolio. We just announced the acquisition of EP2. So we're obviously continuing to expand our geographic reach and our product portfolio within the CPI portion of the business. I feel very good about the overall architecture we have put together with thermal management on cooling; with power, both in the rack outside the rack, now heading all the way to the utilities and then the whole focus in terms of rack and scale integration, bringing that together. So I would say the potential to grow is pretty significant. It is going to be all about kind of continuing to focus on adding capacity and bringing it on in a disciplined way, which is our biggest focus right now, and we'll keep looking for areas of technology that we can invest in. Mark Delaney: Understood. My other question was to better understand the medium- to longer-term outlook for CPI. You guided for 65% to 75% growth for fiscal '27, another 80% plus in fiscal '28. Does that growth represent Flex getting to the full run rate of the deals that you already signed across multiple hyperscalers in that fiscal '28 time frame? Or do the deals that you signed ramp even beyond '28? And then maybe help investors understand where margins in CPI can get to over that 2- to 3-year out time frame, I mean, already 9.2% in fiscal '26, but maybe give us a sense of where that could go over the medium to longer term as you ramp the programs you discussed today? Revathi Advaithi: Kevin, do you want to start off? Kevin Krumm: Yes, sure. Mark, so your questions on the programs that we've signed up, commensurate with the investments we're making, I would say that we would continue to see those programs expand beyond FY '28. So the numbers we're giving you today is through FY '28, but we would see some of those programs continue to grow into FY '29. From a margin standpoint, we've talked about it, and CPI, we expect to recoup the investment we made this year. We've said that's 100 basis points plus. As we move into FY '28, we expect additional margin expansion in CPI. On the script, I said 50 to 100 basis points. The drivers of that are going to be mix from the product businesses continuing to grow faster as a percent of revenue than the cloud side. But additionally, it's continued improvement on margins in our products business, really both, but our products business as we move through FY '28. And so moving FY '28 to FY '29, I guess I would say our expectations are we'll continue to raise the bar as we move through FY '28 and our expectations will continue to go up as we move into FY '29. Revathi Advaithi: Yes. So Mark, our framework of -- whether it's for CPI or for Flex won't change in the sense that we will focus on growth, but margin expansion will be a huge part of the story. So again, we're going to do both in both of the companies. And whether it's coming from mix or accelerated growth or continued investment in our products business, our expectation is that we will see margin expansion in both businesses. Operator: [Operator Instructions] And our last question comes from the line of -- our next question comes from the line of Steve Barger with KeyBanc. Steve Barger: Revathi, how much of the CPI growth forecast is just this incredible demand environment versus your own success in pitching the full product and service integration model to customers? And are you allocating capacity to customers who are willing to commit to the full suite? Revathi Advaithi: Yes. I would say, Steve, first, that's a really important question because a lot of what you're seeing today in terms of expectations from customers is still individual product-based, but what you're seeing moving forward from a technology architecture perspective and what we're working with customers in the next generation of products is more a full architecture based. So you'll continue to see that migration from individual products to complete architecture. And I would say that there's more to come on that. You're definitely seeing that both hyperscalers, colos, neoclouds are re-architecting their organizations to be able to deal with this change. And so today, I would say a lot of our growth is individual products, but a lot of our technology road maps are based on a complete architecture. Steve Barger: Got it. And then obviously, the addressable market is just expanding really fast. It's hard to know how that -- where that stops, if it does. But just thinking about the portfolio you've assembled what has become the hardest part of the business to replicate? Just talk about how you view your durable moat in a business that's growing the way it is. Revathi Advaithi: Yes. I'd say, Steve, first is the addressable market does continue to expand. I'd say U.S. data center capacity still is seeing a considerable shortfall in terms of what we're seeing today, but even the future-looking projections we're seeing in terms of what we're hearing from customers and what you're all seeing publicly. I'd say in terms of the addressable moat, for me, the addressable moat always comes down to two things. One is, what is your performance in terms of capacity growth and schedule. Today, customers want everything fully assembled, fully tested, just drop it off, ready to go in my data centers. And to do that at scale with the complexity that customers are expecting, very few companies can do this. This is -- I've done 3 decades of this, and it's very hard to bring that scale together and that architecture together and deploy it fully tested at customers. So I'd say that is a very significant moat that we have. And I saw that day 1 when I came to Flex is you can combine the complexity of power and cooling and compute and then put it together in one architecture with Flex's scale. I think that's the big moat that we're seeing, Steve. And I expect that, that will continue and actually will get even more complex as we move forward. Operator: I'll now turn the call back over to the CEO for any closing remarks. Revathi Advaithi: Thank you. Hey, yesterday's announcement marks another foundational step in the transformation of our business, and we are really excited about the opportunities ahead of us. On behalf of the entire Flex leadership team, I want to say a sincere thank you to our customers for their trust and partnership, of course, to our shareholders for their support and the global Flex team for their dedication and contributions. We look forward to sharing further updates in the coming months. Thank you, everyone. Operator: Thank you. This now concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Welcome to the Angi First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Julie Hoarau, Chief Financial Officer. Please go ahead. Julie Hoarau: Good morning, everyone. I'm Julie Hoarau, the CFO of Angi Inc. and welcome to Angi Inc.'s first quarter earnings call. Joining me today is Jeff Kip, CEO of Angi. Angi has published a shareholder letter, which is currently available on Angi's website in the Investor Relations section. We will not be reading the shareholder letter on this call. I will soon pass it over to Jeff for a few introductory remarks and then open it up to Q&A. Before we get to that, I'd like to remind you that during this presentation, we may make certain statements that are considered forward-looking under the federal securities laws. These forward-looking statements may include statements related to our outlook, strategy and future performance and are based on our current expectations, and on information currently available to us. Actual outcomes and results may differ materially from the future results expressed or implied in these statements, due to a number of risks and uncertainties, including those contained in our most recent quarterly report on Form 10-Q, our most recent annual report on Form 10-K and in the subsequent reports that we have filed with the SEC. The information provided on this conference call should be considered in light of such risks. We will also discuss certain non-GAAP measures, which, as a reminder, include adjusted EBITDA, which we'll refer to today as EBITDA for simplicity during the call. I will also refer you to our earnings release, shareholder letter and public filings with the SEC and again to our Investor Relations section of our website for all comparable GAAP measures and full reconciliations for all material non-GAAP measures. Now I will pass it off to Jeff. Jeffrey Kip: Good morning. Thank you all for taking the time to read our letter and join us today. We know everybody is busy. Just to repeat a little bit of what I wrote in the letter. We believe we're in the most -- in the middle of the most transformational time in technology in a generation. We think AI agents and agentic coding presents Angi opportunities that we did not have in the same way or fashion 12 or even a few months ago. We believe it's incumbent upon us with good stewards of the company and its capital to move aggressively to take advantage of these opportunities, moving from our legacy platform to a new AI native technology platform for our core business in flywheel, much faster as the first building agents to multiply the effectiveness of our core customer experience and offer new capabilities to our Pro customers, what we are now calling the Angi Pro Chief Revenue Officer is the second. And finally, leveraging a agentic coding to build these agents in the platform twice as fast as we could before is the third. We have great assets. We're confident that our existing flywheel is one of the best in the industry, if not the best. We have 30 years of brand equity. We have nearly 200,000 active [ Pros ] across North America and Europe. We have the most powerful customer acquisition engine there is in the industry. Our flywheel is going to spin even faster as we deploy agents to improve our customer success rates and serve as a phenomenal distribution base for our new product that anyone building AI software would love to have. Thus, we think we have a tremendous head start and great leverage against the opportunity. For the last 3 years, we've been working hard quarter-by-quarter to incrementally improve our customer experience and business on an old brittle legacy stack and the resources we've been using to do this are really critical to moving forward as quickly as possible against the much greater opportunities I just described. We have made real progress on the customer experience. I won't list everything I've listed in the past. But moving NPS 30 points and improving pro churn by 30% are key markers during that period. We've also made good incremental progress moving AI into our key revenue flows with 50% of our homeowners now touching our AI helper in their path. However, we've also not been 100% consistent at delivering incrementally with our legacy technology. The time and costs are extremely high. The incremental approach we've taken and we are taking is not enough, and it's not frankly worth the opportunity cost versus what else is in front of us. We just can't afford to keep our product development teams battling with the core technology to improve quarterly revenue and deliver against specific targets. So we're going to release our resources against the opportunities I just described. Getting to the new AI native platform is critical because it's going to allow our core product to function more effectively and drive AI-first innovation, improve the customer experience and the efficiency of the business. far better than we can on the decades old code in our current technology is made up of. Our core flywheel is going to spin faster in our core experience on both sides of the marketplace is going to be better. Shifting and focusing on building the new Angi Pro Chief Revenue Officer is an incredible opportunity because first, we're going to generate materially more value for our core Pro customers by making sure they win more of our leads, driving retention, engagement, multiplying lifetime value, which in turn will spike acquisition opportunity of new Pros. It's the strongest bet we can make in this business. And then secondly, we effectively will have a new business because our Pros will be able to use the Angi Pro [ CRO ] for [indiscernible] leads, the rest of their business, grow and enjoy more success, which is, of course, our core mission. We get more jobs done well for our homeowners and more jobs done well by our Pros. So we have a twofold market opportunity and a huge as yet undisrupted market where we have the leading assets and leading market position. So multiple things can be true at the same time. Our mission has not changed. We're focused on jobs done well, as I just said, and jobs [ won ] well for our Pros. Our goal is to deliver profitable and accelerating growth over time. And we are also making a clear pivot on how we execute our strategy, given, again, what we think is a remarkable opportunity in front of us in our space, and we think we are well positioned to win. So with that intro, we will move to questions. Operator: [Operator Instructions]. Our first question today comes from [ Dan Kernan ] with [ StoneX ]. Unknown Analyst: Jeff, I guess the first obvious question, just to follow up on this. We're calling it a pivot, but it's really more of an enhancement the way I think you guys are trying to win business. And so with the reduction of guidance here or the pull of guidance, I guess, for the short term, maybe you can just frame for us how much this is going to impact in your mind, revenue and EBITDA and over what time frame? And then I want to kind of follow up on sort of how you perceive the market opportunity. Jeffrey Kip: Okay. Thanks, Dan. Good to hear from you. So first, it is -- again, two things could be true. We have been going down the path. We've been going on. I think it's a material pivot in the way we deploy our resources and execute and I think it is a whole new opportunity that we are going to build as well. In terms of your question on revenue, EBITDA, cash flow, we've made a clear decision not to give guidance. We think that setting guidance and the pursuant distraction it is from executing its larger opportunity is not where we should be focused. But what I would say is our existing business in flywheel generate and will continue to generate solid operating cash flow, which we think of as adjusted EBITDA minus our CapEx and we plan to continue to generate solid operating cash flow. We're not looking to destroy our EBITDA margins or take our cash flow anywhere near 0. We're effectively going to fund our platform and product strategy internally, meaning we're only going to add to our cost base where we see more opportunity. For example, our AI software and token costs will be several million dollars more than we anticipated either a few months ago. But by taking resources off the legacy technology and acknowledging that we're no longer going to focus on quarterly revenue, there will be an opportunity cost measured in some amount of lower revenue implicit by not working on the core technology to deliver incremental revenue wins. But to be clear, we don't plan to use the cash on our balance sheet to fund the transformation rather, we actually anticipate continuing to build the cash on our balance sheet by continuing to produce cash flow. Unknown Analyst: Does that -- just to be clear on that before I ask the kind of TAM question, Jeff. It's obviously not a distraction. You're aiming for a bigger target here, some revenue opportunity loss, but you're -- I mean we're still focused on the core business, and we don't anticipate -- I mean, I don't -- is there any way to kind of frame how big a disruption you think this might be to the core business in general? Jeffrey Kip: Look, I think we plan to operate with a cash cushion. Without this being a commitment or guidance, I think we be happy with the cash flow cushion and give or take, the range of $50 million a year. That's adjusted EBITDA minus CapEx. That's not a goal of budget, a commitment or a plan or guidance, but that's directionally how we think about floor. And we think that, that's a good number that allows us to internally fund the transformation and continue to deliver cash flow to the business. And we think that our core business will continue to generate solid profitability, we think that once it gets on to the new platform, we will have the opportunity to accelerate with innovation and efficiency there. And then I think we'll have the opportunity as we put our agents in place and get penetration over the next several quarters, we think we'll have the opportunity to accelerate materially following getting the new Angi Pro CRO infrastructure into place. Unknown Analyst: So with that, Jeff, I think in the letter, you basically said that your -- the $700 billion TAM that you're referencing is just job value and for you guys to get to your $5 billion revenue opportunity, which you lay out there, it just seems like doubling your win rate. I mean, what you're suggesting here is that by building the CRO for Pros, I mean you have an opportunity for them to utilize this both on and off platform. So there seems like there's a software element to this. So maybe you could unpack for us how you think about getting to that $5 billion? And separately, is there a separate TAM that we aren't discussing yet today or in the shareholder letter that could be achieved or attacked from a software perspective, given that most pro marketing budgets are viewed as percentage of job value, but software is typically a separate expenditure line and kind of viewed as sort of a separate TAM when they think about cost of service? Jeffrey Kip: A great multipart but very smart question from you, Dan. I should expect nothing less. So yes, $700 billion TAM is residential construction, specialty construction, home services, total job value that we think is our target market for our platform and customer base. Today, we capture below 1.5%. The market is split 75% larger Pro, 10 employees or more, a 25% smaller Pro. We think we have 3% to 4% share in the smaller Pro market, and we're under 0.5% of the large Pro. We have a strong view, AI, no AI, we can replicate the share of the small Pro market in the large Pro market. We think we've underinvested and not executed well there over time. Doing just that -- and getting to that share would give us $2.5 billion of revenue with a 10% take rate, which is about our current take rate, which is Pros pay $50 a lead, they win 1 in 7, 1 in 8. The average job is about $4,000. And so we think about it that way, I'll come back to that. On our platform, 10 homeowners submit jobs. Seven of the jobs get completed, but only 2 of those are won by our PROs. If you look at our core long-standing strongest brands and businesses in Europe, which would be the U.K., Germany and the Netherlands, they win more like 3.5. So we believe that doubling that too is well within reach. And so Pros are winning twice as many, 4 out of the 7 instead of 2 out of the 7 that takes your share of the total job value in the market from 3% to 4% to 6% to 8% or 7% as a proxy. If you come back to the take rate, Pros are looking at their overall P&L and their share, they're paying to support their revenue. We think tend is a pretty good marker where you're driving good value. By improving the win rate, we would lower the take rate unless we took lead pricing, taking lead pricing is one way to keep the take rate, a fair take rate, another way is charging some for the software. So you're correct. There's 2 markets there. There's the lead market where maybe we'd like to be a little less than 10, to drive real value there. But there's also the software market and based on our research and looking at -- if you take 10% of that $700 billion job value market, it's $70 billion, that's the potential revenue. We think that there is a comparably sized market, $50 billion to $70 billion maybe, in services and software to sell the Pros that is likely growing as software transforms with AI. So on some level, there's $140 billion of revenue out there. I think our focus is on delivering against the [ 70 ] delivering for our Pros but it is a product that while we're first focused on Angi leads, our Pros should be able to use for other leads and frankly, running their overall business. So you're not wrong. And when we think about our $5 billion revenue target, one way to do it is to get 7% of the market and a 10% take rate. Another way to do it is to get a lower percent of the market and effectively have software and services revenue. And then the third leg we have is actually accelerating growth even faster in Europe, which can be a material contributor because there's another $500 billion or $600 billion of TAM in Europe which we've been less successful at penetrating. We think that's tied a bit to market structure, and that's a different conversation. But we think we have multiple ways to get to the $5 billion. And I think you've hit you've hit well on a couple of them. Operator: The next question comes from Youssef Squali with Truist. Unknown Analyst: This is Robert on for Youssef. On the Q1 performance, can you just explain the levers relative to 90 days ago, which areas of the business are outperformed and how sustainable is that outperformance? And then what are you guys doing in new LOM traffic channels? Julie Hoarau: I'll take the first question. So in terms of revenue, we had a strong like January and February. Then March pulled us to the lower end of our revenue range, driven primarily we believe by macro factors. Service request mix shifted away from larger jobs in category where we have the most extra capacity such as like roofing and HVAC and towards smaller jobs. We survey thousands of Pros and homeowners and it's clear that homeowners backed away from projects like more in March than in previous months. And as a result, like Pros reduced [ LEAP ] budget because they believe they would lean like less jobs. Meaning, overall, we had lower capacity. On EBITDA, our EBITDA came in at about $23 million. That's above our $10 million to $15 million guidance range. There were 2 contributing factors. First, we capitalized about EUR 2 million more of engineering labor than we thought in our initial guidance. We follow our accounting policy here, and we went by the book. So it went a little bit higher. And second, we had a couple of onetime benefits on expense and some timing. And so we came out above our guidance for Q1. Jeffrey Kip: Yes, I would again say editorially, we look at all-in adjusted EBITDA minus CapEx. So when we have these swings, you can blame Julie for following our accounting policy. But we -- given our druthers, we wouldn't capitalize it, and I don't mean to speak accounting heresy, just we think it makes things more complicated and the cash ends up in the same place. So we're just calling out that benefit. Let's talk a little bit about LLM traffic. We have been investing a fair amount in making sure that we are there for the LLM traffic. We've been buying OpenAI [indiscernible] successfully. We're near breakeven on that buy. There's been a bunch of noise out there on it, but we're happy with it. We're in their beta test, and we know they are working on optimizing and we're confident that we're going to be able to grow value and expand there. We've launched our app successfully on ChatGPT. We'd like to see them move their app ecosystem into deeper integrations, and we're working with them on that. We're going to launch on Amazon soon. And we are live working on multiple other integrations with major players, which we expect to announce in the next couple of months. The overall share of traffic from these sources is pretty low right now, but I think we are all seeing consumer usage shift and will increase. And we think the platforms are going to figure out how to leverage this traffic, and we'll be very interested in working with us. If you think about -- I wrote this in the letter, but if you think about our approach, our approach and our pivot is about making sure our Pros get better results. When our Pros get better results, our homeowners get better results. And when customers get better results the LLM wants their customers to go there. And so we think that in the same way that our results on SEO once kind of one SEO when we were a home adviser at Angi's List. And we have most recently taken really leading positions in and buying on [indiscernible] social for the same reason, we think we're going to do the same here. So we're pretty excited about it. Our approach has been -- we've developed technology where we can pick up the conversation in any part of the chat with the context in the chat. So if you were to say, "Hey, ChatGPT," or, "Hey, Claude," or whichever you're talking to, "I have water on the floor in my bathroom." We could effectively let the LLM know, and we will have let the LLM know, that we can pick up the conversation there and ask questions, which are LLM driven, but with our proprietary domain knowledge fine-tuning the LLM chat. We also can pick it up somewhere in the middle or at the end when Claude or ChatGPT, [ perplexity ] or whomever has diagnosed that, oh, you have a crack in the base of your toilet and we can say here's some Pros, Ms. or Mr. Consumer and get the job done there. And we're already taking the same approach with our core homeowner experience. We have in test an LLM first chat that effectively mirrors this experience. It's right now a conversion deprecation, which we want to narrow before we move it broadly. We do plan to lead with this experience when we're working with partners and new traffic channels because we do believe that ultimately, where we want to be is having a full chat with a homeowner, getting whatever information they're capable of, and homeowners aren't always very good at giving the information or assessing the information and being able to provide price estimates advice information and, of course, our Pros through the experience. And that is where we see things going, and that being beneficial to the pros on the other side as well. So that's how we're looking at it all holistically. So I hope that kind of answers your question. Operator: The next question comes from Sergio Segura with KeyBanc. Sergio Segura: First, I was hoping you could just provide a little bit more detail on what the Angi CRO is going to look like at the product level, any kind of required investment for that product? And just maybe a little color on why this is the right jobs to be done to focus on right now? And then secondly, relatedly, maybe how does your go-to-market strategy change with this new AI approach? And then if you could discuss any challenges or opportunities of targeting the smaller Pros that you mentioned in the letter for this product? Jeffrey Kip: Right. So the reason this is the right job to be done right now is on a simple basis, this is, we believe, the best way to achieve our mission and deliver the best customer experience to both sides of the market. What we're trying to do is make sure that when a homeowner comes to our platform, they hire a Pro from our platform and the job gets done well, and the Pro feels like they've won a job well. Everybody is happy when that happens, customer NPS is plus 50 for retention and satisfaction jumps and the Pros pay us, and we make more money, and everybody is happy. Our biggest gap, as I walked through earlier when I was responding to Dan is the number of jobs that are actually completed versus the number our Pros win. So to drive that North Star experience, our Pros need to win more. There's been just a dramatic change in the possibilities available to us with AI agents at a genetic coding in just the last few months. And we have been assessing and digging in and looking at what we're doing and we believe that agents offer us the opportunity to close the loop and take that metaphorically 2 out of 7 to 4 or 5 out of 7 that I referenced earlier, and double the win rate, double the effectiveness for the homeowner double the effectiveness for every -- the Pro and really grow value in the business and the ecosystem. In terms of how we're approaching this, how it's going to look, effectively, what we're doing is starting with the core lead to close cycle. So lead received first agent would be what you might call an AI call center and booking agent. Outbound call can be made to the homeowner, homeowner doesn't pick up outbound tech can call back in. Booking agent gets more information, confirms the needs, books into the Pros calendar, sends reminders to the homeowner and the Pro, make sure there's a rescheduling, make sure the Pro shows up and getting the booking is really the first key anchor in getting the job won. A lot of our large Pros look at booking rate as their key metric. But you can go from there and imagine that you can coach the Pro on the sale going in. You can record the visit. I don't know if anybody uses [ granola ] for their meetings and transcribes their meetings, you do something very comparable. You can send notifications with coaching advice to close the sale during the visit, and you can also take the transcription of the call and the agent can put together a draft quote by the time the Pro gets out to her or his truck or van and is able to then dispatch a quote right away. One of the gaps in the winning process is delivery of in a timely fashion and accurately. And once you have the quote, you have follow-up, you have checks on changes, you're closing the deal, you have asking the Pro to intervene with a visit or a call to close the deal. And you can go from there. And your imagination can take you to different places. And what we're going to do is carefully assess the needs and the opportunities to make sure the -- when the homeowner submits a service request and creates a lead for our Pro, one of our Pros is consistently winning it. And so you can imagine the ecosystem will look like that. And in our mindset, we should have our first agent in its first test in the next several weeks. We will then -- as that gets going and we complete or genic software development life cycle, which is the platform on which you do your agent development, we will work on getting our second one out, and we're working on prototypes and we get to our Investor Day in the fall. We hope to demo this for everybody who wants to come. And look, we're pretty excited. We think that the opportunities opened up here to really deliver value for our customers and then ultimately really accelerate the business to deliver value for more and more customers that our shareholders are incredible right now. Operator: The next question comes from Stephen Ju with UBS. Vanessa Fong: This is Vanessa on for Stephen. I just wanted to ask a question on the guidance. So can you add some color on what forecast item is getting more difficult for you to resend guidance on and is it more on the cost side as you build out the product? Jeffrey Kip: So I wouldn't say that we're having difficulty forecasting. We have high visibility in our business. We pay careful attention to what we're doing. It's just very simply, we're not going to give guidance because there isn't a reward for managing the quarterly or annual guidance. There's not any reward for hitting the range on our quarters. There's not any reward for dedicating resources to getting the next million dollars in the quarter versus the next billion of value that's in front of us. And to be honest, the market is telling us that. So we're going to stop trying to invest and improve our revenue on our old platform, which is really just fighting the last war. We believe the upside of our AI native strategy is on some level, uncapped. So we believe that anything that distracts from the tremendous prize management, engineering resources, anything that distracts from the tremendous prize we have in front of us is effectively kind of a waste of time. We still plan to run our commercial machine and drive the business back to Pro growth and ultimately revenue growth. We're just not putting a timetable on that. Our milestones that we're thinking about is we're targeting getting onto the new platform in the next 12 months or so. That's a key marker in terms of getting into a place where we can innovate and work on the core business. And then secondly, what I was just talking about in response to Sergio's question, we're going to sequentially build test and roll out our Angi Pro Chief Revenue Officer agents. And as we get that into place and the new platform rolls out, we anticipate being able to accelerate our revenue in 2027. And now we think it should be material. Otherwise, it's not really worth playing for. So I think without giving guidance, that's how we're thinking about it. And it's not a problem on visibility or difficulty. It's simply a matter of where we're prioritizing resources. And then frankly, the feedback we're getting from the market on the value of doing that. Operator: The next question comes from Cory Carpenter with JPMorgan. Unknown Analyst: This is Danny [indiscernible] for Cory. For the first, Jeff, can you talk about what this pivot business strategy means for the consumer homeowner experience and how it may change? And then for the second, can you talk about the rationale for the debt repurchase in 1Q and 2Q quarter-to-date and maybe provide an updated capital allocation strategy? Jeffrey Kip: So let me talk about the homeowner experience. I'm going to let Julie talk about our bonds, and then I'll add any color there. So I talked a little bit earlier about the development of the LLM surfaces as traffic sources and our strategy there. And that was sort of very practical how are we approaching this now? How are we working with the LLMs and how does that opportunity work? If you go a step further, what many people see right now, and you can just go back to the development of OpenClaw is really the key marker here, consumers are going to have personal agents more and more. And those personal agents are going to be able to go out form tests for them without them necessarily interfacing with in their minds, a website. So what we have -- what we strive to do is to be the best place for a homeowner come to get their job done well. We think that the strategy we've laid out continues to be the best thing. And as I said, we think that the strategy we've laid out is the best approach to delivering signals to the LLM to make the LLMs choose us effectively get the job done, get the traffic, to demonstrate that you're going to get to drive done, get more traffic. When you think -- when we think about personal agents, personal agents are effectively trained LLMs, trained on personal preferences. And so if we can train the LLM by delivering results to be a choice [ place ] to send homeowners, we will also train the personal agents. So what we want to do is we want to position ourselves not only to be a place where a homeowner can come and use us as their agent to get their questions answered and find their. But the homeowners personal agent will come and do that. And we think we do that by delivering jobs done well for our Pros, which means job has done well for our homeowners. I described a little bit earlier our thinking about the homeowner experience. And when you think about what I was saying with the ability to deliver estimates based on the information the homeowner gives us, again, homeowner information is not always perfect. So it'll have to be caveated estimates. Taking photos, taken info, have an iterative conversation make requests for the homeowner for certain measurements, et cetera. You can imagine the way the interactive experience can develop and ultimately, that means the Pro has better information. We get better matching, the Pro can match the technician and the equipment that they send, and we can have a much stronger ecosystem. And this can happen either by a homeowner coming through an LLM, coming to Angi, coming through a partner. We have several partners who deliver us traffic or, frankly, a homeowners trained personal agent. And we see the world evolving this way. And so we think the homeowner experience will evolve this way, and we need to deliver against it. Julie Hoarau: In terms of capital allocation. As just said earlier, we're confident in our ability to produce consistent cash flows. In terms of M&A strategy, we conservative and then we capped our share repurchase ability until next year. We have repurchased about 20% of our shares outstanding at the time of the spinoff, that the limit of the set hub of tax-free [ still ] and that's for data 2 years following the spinoff, so until April 2027. So as a result, we saw that buying bond was a good use of capital. We bought about $100 million worth of bonds. So that's about 20% of the debt outstanding at an almost like 9% discount. Jeffrey Kip: So just to follow on, we are clearly not against buying our shares at favorable prices, but we can't do that until next year. We're clearly not against buying our bonds at favorable prices. As Julie said, we just bought a bunch. We do have to be mindful of creeping tender rules and how that works. So we're not averse to doing it, but we have to -- in the same way, we have to pay attention to the structures around share repurchase. We have to pay attention to the structures around bond repurchases. And as Julie said, we are not in an aggressive mindset, we're in a disciplined mindset about M&A. We would take a great value and a great opportunity that augments our strategy but we're not trying to go and take the cash off our balance sheet and buy brand-new things that are outside of what we've told you our core strategy is and I think that's our thinking on capital. Operator: This concludes our question and answer session. I would like to pass the floor to Jeff. Jeffrey Kip: Well, thanks very much. Thanks for all the questions. I think we've laid out what our thesis is here, which is there are really tremendous new opportunities in front of us that are provided to us by AI agents at agentic coding. We think we're remiss to continue to work on the old technology, which is not easy to work with, nor is it productive to keep chasing quarters and revenue guidance, et cetera. We are incredibly excited about what's in front of us because we think we have a clear line of sight on executing against our agentic strategy, and we clearly believe that we have the strongest distribution base between our brands, our Pro network, and our acquisition machine in the industry. And we think we can spin the flywheel stand-alone. We think we can add to it by building our agents and then I think effectively, Dan pointed out, there's another market opportunity here for us as well. So we're extremely excited. It's going to take us the next several quarters to put it all in place with the new platform and the rollout of agents but we will be talking to you over time about our progress and how we're looking at the metrics, and we're -- we just think that this is a unique opportunity and we haven't seen something like this in the last few years for Angi. So thanks again for joining us, and we will talk to you soon. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the BioCryst First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nick Wilder. Please go ahead. Nick Wilder: Good morning, and welcome to BioCryst's First Quarter 2026 Corporate Update and Financial Results Conference Call. Participating with me today are President and CEO, Charles Gayer; Chief R&D Officer, Dr. Sandeep Menon; and Chief Financial Officer, Babar Ghias. A press release and slide presentation about today's news are available on our Investor Relations website. Today's call contains forward-looking statements, including statements regarding future results, unaudited and forward-looking financial information as well as the company's future performance and/or achievements. These statements are subject to known and unknown risks and uncertainties, which may cause our actual results, performance or achievements to be materially different from any future results or performance expressed or implied in this presentation. For additional information, including a detailed discussion of these risks, please refer to Slide 2 of the presentation. In addition, today's conference call includes non-GAAP financial measures. For a reconciliation of these non-GAAP financial measures against the most directly comparable GAAP financial measure, please refer to the earnings press release available on our Investor Relations website. I'd now like to turn the call over to Charlie. Charles Gayer: Thanks, Nick. 2026 is off to a very good start for BioCryst, marked by strong execution on our commercial and development programs, the smooth integration of Astria Therapeutics and disciplined management of our finances. ORLADEYO net revenue of $148.3 million for the quarter was right in line with our expectations, and monthly new patient prescriptions have tracked slightly ahead of 2025 averages. The pediatric launch -- pediatric indication launch is just beginning, but early signals confirm the need for oral prophylaxis for kids with HAE. We have received prescriptions for each of the 4 product strengths of ORLADEYO pellets, which demonstrates that even younger children need prophylaxis. We are committed to bringing oral prophy to the many kids who need it. We have also recently discovered a manufacturing issue that will delay the first product fulfillment, and our team is working closely with our manufacturing partner to identify the root cause. We expect to have more information about the product readiness later this quarter, and we do not expect this delay to affect our revenue guidance for 2026. We look forward to bringing ORLADEYO to the kids who need it as soon as possible. The pediatric indication is exciting, but it does not distract our team from driving new patient demand for ORLADEYO capsules. We are pleased that new prescription demand for ages 12 and up remains consistent with our quarterly averages since launch despite new competition. Physicians and patients continue to trust ORLADEYO as an effective and proven option for HAE prophylaxis. Turning to our pipeline development. Progress on the pivotal ALPHA-ORBIT trial for navenibart has exceeded our expectations. Enrollment will be completed at the -- by the end of next month and at approximately 145 enrolled patients, ALPHA-ORBIT will be the largest pivotal trial ever for HAE prophylaxis. The speed of enrollment is a testament to our team's execution as well as the attractiveness of navenibart profile. Our Phase 1 study for BCX17725 in Netherton syndrome is also hitting its stride. Investigator enthusiasm has been strong. Patients have started dosing, and we are on track to have proof-of-concept data by the end of the year in this high-need rare disease. I am thrilled that Dr. Sandeep Menon has joined us as Chief R&D Officer last month. We're making great progress in our pipeline and adding Sandeep makes us stronger. He has a track record of disciplined and successful drug development, and he shares our vision of building great value through serving rare disease patients. I'll turn it over to Sandeep to introduce himself. Sandeep Menon: Thank you, Charlie. I'm very excited to be joining BioCryst at this important inflection point in the company's evolution. The company is in a unique position of strength, especially from our strong performance of ORLADEYO. It's not just the commercial excellence that drew me to BioCryst, but the commitment to rigorous science to improve patient lives. I see a tremendous opportunity to build on the momentum that ORLADEYO has delivered as we guide the next wave of programs through the clinic. Navenibart, our injectable plasma kallikrein inhibitor for HAE prophylaxis will complete enrollment in the ongoing pivotal Phase 3 ALPHA-ORBIT study by the end of June this year. This keeps us on track to submit a regulatory filing in the U.S. by the end of next year. Navenibart has generated compelling clinical evidence so far. In the long-term open-label ALPHA-SOLAR study, it recently demonstrated 92% and 90% mean attack reductions in the 3-month and the 6-month dosing regimens, respectively. We now have a great opportunity to bring potentially best-in-class injectable to HAE patients that will complement our best-in-class oral ORLADEYO. Moving on to our next program, BCX17725, which is a KLK5 inhibitor, a potentially first-in-class therapy for Netherton syndrome, a very severe skin condition with no targeted or approved therapies for patients. I'm happy to share that we have started dosing patients in Part 4 of the ongoing Phase 1 study. Part 4 will enroll up to 12 patients with 3 months of dosing, and we expect to report this data by end of this year. Beyond BCX17725, we will continue to be disciplined in what we pursue, both internally and externally focusing on rare diseases, which play to our strengths. I'm excited to have the opportunity to shape the next chapter of BioCryst's growth. We have a proven track record in HAE, exciting assets progressing in the clinic and now a clear strategy for further expanding our presence in rare disease. I look forward to updating you on our continued progress over the course of the year. I will now transition to my colleague, Babar Ghias. Babar Ghias: Thanks, Sandeep. In my remarks today, I will be referring to non-GAAP figures, which are adjusted for revenues and expenses related to our European ORLADEYO business, stock-based comp and expenses related to the acquisition of Astria. This acquisition was classified as an asset acquisition for accounting purposes. And as a result, we recorded an in-process R&D charge of $698 million in Q1 as well as some other transaction-specific charges. I encourage you to review our press release for additional details on these adjustments. We believe that non-GAAP figures provide a clearer view of the strength of our business on a forward-looking basis, and we encourage you to focus on these metrics in your analysis. With that said, we are off to a strong start in 2026 with first quarter results reflecting continued momentum in ORLADEYO, further demonstrating the product's durability in an HAE market where there are increasing options for patients. During the quarter, not only did we deliver strong top line growth, we also posted a strong non-GAAP operating profit. We are pleased with the consistency of our profitability trend that is adding to our strong balance sheet position. Additionally, we have been very pleased with the overall integration of Astria Therapeutics into BioCryst family. This process has been running ahead of our expectations. This demonstrates that our team can, in the future, not only do transformational BD, but also integrate seamlessly. To shed more light on our financial figures, our non-GAAP Q1 2026 total revenue increased approximately 17% year-on-year. Since other revenues include contribution from RAPIVAB and licensing revenues, I would draw your attention to the ORLADEYO revenues of $148 million, which increased 21% year-on-year, excluding the European divestiture impact. New prescription demand is strong, and we continue to see growth in prescribers even in the sixth year of launch. We remain very excited about the future growth prospects for ORLADEYO as more prescribers get experience with the pediatric formulation and the commercial team continues to reinforce and expand the value proposition of ORLADEYO. In Q1, our non-GAAP operating profit came in at $54 million, an increase of 25% year-on-year, further demonstrating our ability to convert strong top line growth to bottom line growth. R&D costs increased in Q1 2026 versus the prior year, as you would expect, since we are now consolidating the costs related to navenibart. To refresh from the last call, we anticipate that 2026 R&D costs will increase over 2025 as we complete the ongoing Phase 3 trial and BLA-enabling CMC activities for navenibart. With the addition of Sandeep to our team, we will continue to refine a focused and disciplined R&D strategy to enhance our portfolio. To that end, we will continue to evaluate internal programs that do not make viable business sense. And as part of that evaluation during Q1, we decided to discontinue the development of avoralstat in DME. Our sales and marketing expenses for the quarter were $37 million on a non-GAAP basis, down slightly from Q1 2025. We are very pleased that our sales and marketing structure is at steady state. And while there may be some smaller increases in variable expenses, the current team is well-sized to support continued ORLADEYO growth. We anticipate sales and marketing expenses supporting our HAE franchise, ORLADEYO and navenibart upon potential approval as a whole will be very stable and poised to deliver substantial returns. Our G&A expense increased slightly by $1.8 million over Q1 2025 on a non-GAAP basis. This increase was primarily driven due to incremental overhead with the closing of Astria. We will continue to monitor our G&A over the course of 2026 and explore further areas of efficiencies. Driven by our strong operational results, we ended the first quarter with substantial liquidity of approximately $261 million in cash and investments despite funding part of the Astria purchase price from our balance sheet. During the quarter, we also closed on a senior credit facility of $400 million to fund the remaining cash portion of Astria acquisition, along with approximately 37 million BioCryst shares issued to Astria shareholders. Our cost of capital decreased compared to last year due to our strong financial position, and you will notice the benefit year-on-year in our interest expense. Earlier this week, we finalized the license agreement with Neopharmed Gentili to commercialize navenibart in Europe. We are pleased to be collaborating with NG on this transaction. A team that carries a unified vision to benefit people living with HAE and a commercial team that carefully developed over many years before transitioning to NG as part of our European divestiture last year. As part of this deal, we will receive $70 million in cash upfront and up to $275 million in future regulatory and sales milestone, along with tiered royalties on net sales ranging from 18% to 30% overall. This will increasing -- meaningfully strengthen our balance sheet in the near to medium term and naturally the downstream economics will be attractive to our overall financial profile. On a pro forma basis, including the net proceeds from the license agreement, our liquidity position stands at a total of $331 million as of March 31, 2026. This attractive position allows us to evaluate a wide range of capital allocation strategies to maximize value to our shareholders. Moving on quickly to guidance. As Charlie mentioned, we are maintaining expectations for full year 2026 ORLADEYO revenues to be between $625 million and $645 million. We expect full year 2026 non-GAAP OpEx to be between $450 million and $470 million. We continue to execute well. And as the year progresses, we will guide the Street of any changes. In closing, we have entered 2026 with strong momentum and are pleased to see strong trends in early Q2. Our goal is to keep driving top and bottom line growth, advancing our pipeline through both organic innovation and selective disciplined BD to accelerate our impact in the rare disease space. We are delighted to be sharing these positive business updates with you all today. And operator, we are now ready for the questions. Operator: [Operator Instructions] Your first question today will come from Jessica Fye of JPMorgan. Unknown Analyst: This is [ Abdullah ] on for Jess. Just 2 questions from us. What are your expectations for the deucrictibant XR's pivotal readout? And what profile do you expect? And then what are the latest trend -- what are your latest trends on paid rate in each payer segment? Charles Gayer: Sure. For deucrictibant, as we've said before, when we do a lot of work to try to predict the future. We have forecasting models that have proven to be really accurate launch to date, really predicted the growth of ORLADEYO. We always give our future competitors their best profile. So what we assume is deucrictibant will have very good efficacy when they report out in Q3. And that's built into our future forecast. And we still believe that ORLADEYO is on a path and will reach $1 billion in peak sales. And as far as the trends in the paid rate, we're still -- this year, we're still in the blizzard season where we go through all the reauthorization. Every year, it moves a little bit into the future as patients go through this process. So we're still in that process. We'll comment more at the end of Q2. But we're having really good success converting patients from long-term free product to paid product. So we're progressing as we expected. Operator: Your next question will come from Tazeen Ahmad of Bank of America. Unknown Analyst: This is Jeremiah on for Tazeen. Maybe a couple of questions from us. Just first on the navenibart out-licensing deal. Can you maybe just help us understand how much of that $275 million milestone pool is tied to regulatory versus commercial thresholds? And then just where you expect that royalty rate to settle at scale? And then maybe a question on pipeline, especially considering the prioritization of avoralstat. Just wondering, we haven't heard many updates about the complement pipeline in some time. Just wondering what are the next key decision points for bringing those programs forward? Charles Gayer: Babar, you want to take the royalty question? I'll cover the pipeline. Babar Ghias: Yes. So I think at this point in time, we're not necessarily breaking out the milestones and think we're very excited that upfront is a very sizable upside for an asset at this stage and naturally in sort of in line with some of the past licensing deals at this stage. As you can see that we feel very, very confident of that healthy royalty rate because, as I mentioned, it's a team that we actually developed and curated over many years. So we're very confident that the team will do a great job, and we'll realize the maximum benefit of that royalty rate. But you can imagine that a typical deal on the back end in terms of things, but something that we feel really confident to realize over the course of time. Charles Gayer: And then as far as the pipeline, number one, what we're focused on right now is the 2 programs that we have in clinical development. So navenibart in late stage, and then we're very excited about the potential for 17725, given the need in the Netherton's population. With Sandeep on board, we will be making future updates on our pipeline and our rare disease strategy, and we look forward to doing that as soon as we can. Operator: Your next question today will come from Laura Chico with Wedbush Securities. Laura Chico: I guess back to ORLADEYO for one. Charlie, I'm not sure if you can share any feedback here about the impact of some competing launches right now. I guess I'm thinking about DAWNZERA, but what are the impacts you're seeing on ORLADEYO retention? Has this changed your call strategy with physicians at all? And then just a follow-up with respect to the manufacturing issue. I think I missed it, but any impacts? Or could you just expand a little bit more with implications on the pediatric launch? Charles Gayer: Sure. Yes. Laura, as far as the competing launches, what we're seeing is what we expected, and this kind of goes back again to the forecasting we do. The recent launches, as you know, have been injectables. And so what we see is they're competing mainly with the existing market leader, TAKHZYRO. And so it's not affecting ORLADEYO. And as Babar and I both mentioned, our demand is as strong as it's ever been, and we're really pleased, not surprised, but really pleased to see that. And so that's why we have that continued confidence about the future growth of ORLADEYO and heading to the $1 billion in peak sales. And our retention rates, you asked about that are also in line with past expectations. Patients who start on ORLADEYO, 60% of them get to a year and then very slow or very sticky after that, very strong retention after a year. On the peds manufacturing, as we said, we're not changing our guidance. We'll have more information on the issue and timing, hopefully later this quarter. But we're not changing our guidance because the early demand has been very strong. And you may recall from past calls, in our forecast for this year, we were relatively conservative about the peds opportunity because we didn't know how quickly it would kick in. So we're very bullish on the long term, and we're on track for this year. Operator: The next question will come from Brian Abrahams of RBC Capital Markets. Brian Abrahams: Two from me. I guess, first on the navenibart Phase 3. It sounds like enrollment has gone really well there. So I'm wondering if you could talk about any learnings there just in terms -- from the enrollment conduct, just in terms of the appetite for long-acting injectables, the types of patients who could go on this therapy commercially and the potential size of that opportunity? And then just secondarily, following up on the manufacturing issue. Can you just give us a sense of what would need to be done to resolve this? Might this require any sort of FDA reinspection? Is there any overlap at all with this facility with regards to ORLADEYO for adults or navenibart? And could there be upside to your guidance if this resolves more quickly than expected, just given that you're seeing good launch demand already, and I know pediatric revenue was not really included all that much in your guidance? Charles Gayer: Sure. Thanks, Brian. Yes, first of all, navenibart, we're really excited about the pace of the enrollment. And as I said in my remarks, I think it is a reflection of the appetite that both patients and physicians have for an every 3- or 6-month dosing. This is why we wanted to acquire this product in the first place because we saw that, we heard that from customers. Getting to 3- and 6-month dosing is really meaningful and transformative. And so we think there's a potential to switch a lot of patients to this. There's -- as we've described before, there's two segments in this market. There are those patients who want oral therapy and do well on it. And then there's those who are on injectable therapy and are very comfortable with that. And the profile of navenibart is something that's really understandable to both physicians and patients. And I think that's, again, reflected in the trial enrollment. So we're excited about that future launch. As far as the manufacturing issue with ORLADEYO pellets, first of all, this is -- it's a different plant. It's a different manufacturer than capsules. So it has nothing to do with capsules. It's not an FDA issue at all. It's not a safety issue. It's just -- it's a batch problem in the specifications. We're digging in to get to the root cause so that we can manufacture consistent batches going forward. So we'll have an update on that timing when we have it. But this -- we do not expect this to be a long-term problem. And as far as the demand for the pediatric indication so far, it has been very strong. And so if we get this issue, we get the product out there in the relatively near future, we're right on track for this year and certainly very much on track for our long-term predictions. Operator: The next question today will come from Steve Seedhouse of Cantor. Steven Seedhouse: I wanted to see if you'd be willing to frame your expectations for the Phase 3 navenibart data. Obviously, most Phase 2s, including this one in HAE smaller than the Phase 3 would be, but the attack rate reduction was pretty profound in that Phase 2. So are you expecting like a greater than 90% attack rate reduction? Are you expecting that in both the every 3 months and the every 6 months arms? And is that what's framing pretty aggressive guidance, the $1.8 billion in 2033 sort of implies an even better launch than ORLADEYO. So I was hoping you could just frame what you're expecting from the data. Charles Gayer: We are expecting really good results, whether it's 90%, a little over 90%, a little less, I don't think that really matters so much. What matters is the attack rate that patients get down to. And in the open-label study, as you've seen, patients in both doses are getting down to a mean attack rate of just 0.16 per month. So that's less than 2 attacks per year. And those attacks tend to be more mild than other attacks. So that is functionally attack-free for patients. And to be able to get that from 3- or 6-month dosing, we do expect there to be comparable efficacy between the 2 because remember, the 6-month dosing is twice the dose of 3 months. And so that Phase 2 ALPHA-SOLAR data is very important, really gives us confidence for the future. Operator: The next question will come from Stacy Ku of TD Cowen. Stacy Ku: Welcome to Sandeep. So first, just as we think about ORLADEYO, I noticed that you had talked about the continued growth in prescribers. So just curious if you could further elaborate there. That's the first question. And then a quick follow-up on the pediatric product fulfillment. It sounds like you need a quarter or 2 to kind of get more information? Or is it to resolve the fulfillment issue? So just help us understand if the base case assumption for the potential delay is potentially within the year. That's two. And then three, as you started to dose another patients, just maybe talk a little bit more about what you're learning about the patient population, diagnosis awareness, potential size of the market and remind us your go and no-go decision on efficacy. Charles Gayer: Great. Thanks, Stacy. Let see if I can get all these. In the growth of prescribers, you've heard us talking before in 2025, around 60 new prescribers per month, give or take. We're in that same range in Q1. So as Babar said, in year 6 to still be adding prescribers to still be getting the prescriptions at the same rate is really a reflection of this product profile and how our teams launched it. As far as the peds pellet timing, as I said, we'll know more this quarter. Our expectation is we'll get this resolved pretty quickly. But we don't know the root cause. We haven't identified all the root cause yet. So it will just -- it will take a little bit of time. But based on what we see right now, we're on track for the year. And then as far as Netherton patients, we've done some work in the epi of this disease because that's really key. We know it's a very serious disease. We've met patients. We know how much they suffer from this. But the real key is what's the size of the market, what is the overall opportunity. And we've identified -- we have a high level of confidence that the U.S. market is 3,000-plus patients at this point. Those patients need to be correctly diagnosed. They need to be identified. But having a drug in the market is always a catalyst in rare disease for patient identification. So the keys for efficacy, no drug in this space has to be perfect. What we'll want to see is that the patients are getting better in their overall -- the overall scales of measuring Netherton syndrome. So ichthyosis scales measured by the physicians and the patients, we'll be looking at each. We'll be looking at does the drug continue to get to the epidermis the way that we've seen in healthy volunteers. So a range of things that will help us design a pivotal program that we hope can start next year. Operator: [Operator Instructions] Our next question today will come from Maury Raycroft of Jefferies. Maurice Raycroft: Congrats on the progress. Maybe just a quick follow-up on Netherton. Can you just talk more about how much data we should expect by year-end in that data update? Charles Gayer: Yes. Maury, we'll have up to 12 patients. That's what we're shooting for. And we want to release the data that we have altogether because it's a rare disease. That's not a huge number of patients, but we think it will give us the data we need to say, do we have a drug here. And so the package will come from that plus the 1 to 3 patients that we will have from the Part 3 of the study as well as the healthy volunteer data. So as the data comes in, we'll figure out what the package is at the end of the year, but it will be based on those roughly 12 patients. Maurice Raycroft: Got it. Okay. And just for digging into prophy competition a bit more, are you hearing about more patients considering switching or switching from ORLADEYO? And even if you're not seeing an impact yet, are you getting more pressure or headwinds in capturing new patients or switches from TAKHZYRO? I guess it seems like ORLADEYO is resilient with these new launches. Are you doing anything differently? Charles Gayer: Yes. We're really not doing anything differently. We're not -- we don't need to add to our sales force. We don't need to change our customers. We're already calling on the list of HAE prescribers and expanding that list as we've talked about. We see most of the switching, most of the market impact hitting TAKHZYRO, not ORLADEYO. Of course, patients switch from ORLADEYO all the time. 60% of them get to a year, 40% don't, and they switch to other products. And what we're seeing more is those patients when they do switch, they're more likely to switch to one of the new products, which makes a lot of sense. But the impact overall on ORLADEYO has been very minor. Operator: The next question will come from Jon Wolleben of Citizens. Catherine Okoukoni: This is Catherine on for John. Thank you for the color on the ORLADEYO launch. I was wondering if you could provide a little bit more commentary on kind of ex-U.S. sales beyond Europe, if you guys -- which you guys are seeing there and kind of plans for any expansion and then your thoughts about the same for navenibart. Charles Gayer: Sure. Thanks, Catherine. With our sale of the European business, Europe had been the large majority of our ex-U.S. sales. So ex U.S. is still an important contributor towards our peak, but we are -- the vast majority, well, over 90% of our revenue now comes from the U.S., and we expect it to be that way even as the brand grows towards $1 billion. We are though committed. We want to get our drugs to patients around the world because HAE is a global disease, and there are patients who need it. But from a revenue perspective, the great majority will be the U.S. And I'm sorry, the question on -- you had a question on navenibart. Catherine Okoukoni: And do you think for navenibart, you're going to kind of see the same trend if -- kind of European market in the majority of ex U.S. Charles Gayer: We would expect it to be largely the same as Babar was describing, our partners at Neopharmed Gentili are equally excited about this drug and having both ORLADEYO and navenibart in the portfolio, there's an important place for both of these products in all the different markets. And so we're excited about that opportunity. Operator: The next question will come from Gavin Clark-Gartner of Evercore ISI. Yesha Patel: This is Yesha on for Gavin. We were just wondering if on the pediatric pellet side, are you able to proactively work through payer access and reimbursement while resolving the manufacturing? Kind of also wondering how quickly you could convert the demand to paid drug when that's resolved. Charles Gayer: Yes. Thanks for the question. Absolutely, we've been doing that already. And we'll continue to do it. The ORLADEYO pellets slot right into our existing contracts for ORLADEYO capsules. So it's really not a separate market access initiative. And so our patient services team will help patients and health care providers work through that process. And that could create patients moving more quickly to paid therapy once we do have the product supply. Operator: And at this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Charles Gayer for any closing remarks. Charles Gayer: Thank you. Again, as Babar and Sandeep and I have described today, 2026 is off to a really strong start for BioCryst. I'm very happy with the team we have in place here, the way that we're executing on our commercial and development programs. And I believe that the best is yet to come for BioCryst. Thank you for your interest, and have a great day, everyone. Operator: The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.
Mathew R. Ishbia: Thanks for joining today. I appreciate you all. Obviously, a little different format this quarter. Hopefully you like it. We would love to get feedback on it. This probably fits my style more. Hopefully, if possible, I would love to be able to see you too. I do not think we set it up that way this time; maybe next time. I appreciate everyone being here today. I have a bunch of questions, so I am going to go through them. I know last quarter we did not do Q&A and people missed that, so I am happy to do this and make it valuable to you in any way possible about the industry and about UWM Holdings Corporation. I have a whole variety of questions. I will try not to duplicate and will tie some together. I will read a person’s name, read the question, and go through it. If anyone has any follow-up questions, I know I cannot take them live this way, but our investor relations team, Blake and everybody else, will be able to handle your questions and help you with anything you need. Let us get started. We will jump into it right now. First question, I have Doug Harter from BTIG: What is the status of bringing servicing in-house? What is the latest timeline transitioning all servicing to our own platform? Status of bringing servicing in-house: it is going fantastic. We feel really great about where servicing is right now and how it is going. We have fewer than 100 thousand loans on today, but all new are going on, and we have moved a bunch of loans over from Cenlar already. We feel really good about that. The process will be this year. Over the whole year, we will bring all of our loans in-house so there will be no subservicers by the end of this year. UWM Holdings Corporation will handle it all. It is going really great. Our technology process is going great. We partnered with Black Knight, we partnered with BILT, and we have also built a bunch of stuff ourselves. We feel really good about how that is going. Our client service has been excellent. All the metrics that people look at are fantastic, so we feel really good about that across the board. So servicing in-house is great. Transition timeline: that is this year. Hopefully that answers your question, Doug. I know there are a lot of servicing questions. I am sure I will get to them as we go through it. Next one, Ryan Nash, Goldman Sachs: What are your thoughts on future gain-on-sale margins? What does the competitive landscape look like in a heightened rate environment? Rates went up in March from February. I think the 10-year finished at 3.95%. And so seeing rates go up, how does that impact competitive landscape and gain-on-sale margins? We are in a really great position from a margin and competitive position standpoint. The competitive landscape is very competitive right now. A heightened rate environment means purchases more than refi. However, you looked at our first quarter—we did a heck of a job on the refinance side. I see gain-on-sale margins in the range they are in right now being the right range, and I think that will continue: not significantly higher, not significantly lower. I actually think there is upside in the margins. Our margins were pretty strong in the first quarter. I expect them to be in those ranges again in the second quarter. If rates come down, you could see margins increase. The competitive landscape is very competitive out there right now. We had a great first quarter—you saw the numbers and what we did—and first quarter is usually the slowest quarter. Rates going up, the war going on, and uncertainty create issues in the rate environment, but we feel really good about where it is at right now. Ryan Nash also asked thoughts on the Knicks winning it all. They have a very, very good team. We just lost to Oklahoma City, who is an amazing team too. The East is open. The Knicks have a real good chance. Not really cheering for anybody—I am just watching and learning. Good luck to your Knicks. Next question, Mark DeVries from Deutsche Bank: What is the strategic value you see in Two Harbors, and what updates can you share regarding its progress or impact? The Two Harbors thing is out there right now; it is interesting. When we originally went to acquire the company, they had something really great: a pristine servicing book. When we originally agreed on the deal before all the work was done, we thought there would be a lot of synergies also—capital markets expertise, maybe some finance expertise, and their servicing platform we could learn from. As we went through due diligence, we learned there was a really great servicing book, and we still like that servicing book. We originally put an offer out there. Where that stands now: we do not see as much value in their management team. Their team members are very good, but their leadership team—we were not as impressed with. They went out and tried to get another bid, and they did. Whether it was appropriate or not, we can discuss that at a later point. If they would have engaged with us, we always planned on paying $12. Quite honestly, based on when the stock price went down, I would rather pay it in cash than in stock. I feel like I am giving my stock away at a really low price. They never engaged—they just went out to another offer. We made another offer; they basically ignored it. We made another one and said, okay, we will go to $12—what we originally planned on paying. I think it was maybe $11.95, but you can do the math based on when the stock was at $5.11 or $5.15 the day we cut the deal, I think. We still feel really good about that deal. It is very clear that their management team and their board, which has had its own issues in the past with lawsuits and such, may be playing some games because they realize that we do not see any value for them specifically. They have really great shareholders, which we are excited to bring on to UWM Holdings Corporation. But their board and their management team do not have any value to us. Now they are trying to do anything they can to potentially engage with someone else so that they have jobs and sustainability. It will play out. The strategic value is their MSR book. Their shareholders have some value because we got a chance to get to know them during that process and feel like they are really good shareholders; we would love them to be UWM Holdings Corporation shareholders. Whether they take cash or stock does not matter to me. We feel really good about that. For the shareholders of Two Harbors, they obviously would prefer taking $12 in cash or UWM Holdings Corporation shares than taking $11.30 in cash. That is obviously going to play out that way. We feel good about the strategic value. It is very clear to us that it is the MSR book and the shareholders; we do not have any value for their leadership team, which is obviously not what they like to hear. Next, Mikhail Goberman from Citizens Bank: How do you foresee the balance between origination income and servicing income evolving, especially given the post-war reversal of rates seen since February? We are an origination company. We are the biggest and best originator in the country. We feel great about where we are in origination. You saw an amazing first quarter. We have been the number one originator for four straight years and the number one wholesale lender for eleven straight years. Origination is our game. As we bring servicing in-house, we will have more servicing, and we will continue to retain the servicing. Are we still opportunistic if someone gives me a bid that we believe is more than the intrinsic value? I will sell the servicing. I have those options. With the lower cost of servicing by bringing it in-house and the better level of service, which will help retention, we feel like we have the best of all of it. We will see with the income levels—origination versus servicing—but origination is still our game. We will continue to build out the servicing book, but we are always opportunistic. People call us all the time. Even with Two Harbors—some of the “pristine” servicing book they have happens to be our old servicing book that we sold them. We feel good about the paper we originate every day and servicing the loans, but if someone wants to offer us a great opportunistic price, we will always look at that. Jason Stewart from Compass Point: Was there an increased number of high-producing brokers affiliated with UWM Holdings Corporation during the quarter supporting wholesale channel growth? Good question. High-producing broker shops affiliated with UWM Holdings Corporation—I always say the numbers roughly—there are about 12 thousand to 12.5 thousand brokers that work with UWM Holdings Corporation, and maybe there are 400–500 that are not all-in with UWM Holdings Corporation. So there are not that many high-producing shops to bring over. Almost everyone in the market works with UWM Holdings Corporation. That is why we have almost 45% market share—I think it is 44.7% or 44.8% market share for the year last year in the pro channel. Our big focus is to grow the channel, help brokers do more, and help more originators realize that broker is the place to go—whether they join a broker shop or start their own—and that has been a really big focus. As the broker channel grows, UWM Holdings Corporation will grow, even if our market share happened to go down. I feel great about growing the broker channel. Are brokers coming over to join UWM Holdings Corporation? Yes, every single day people see the value of what UWM Holdings Corporation does. A separate note on the “all-in” thing with brokers from years ago: one of the biggest adversaries of UWM Holdings Corporation was a guy named Mike Fawaz at Rocket who was saying negative things about UWM Holdings Corporation and about what we do and how UWM Holdings Corporation was not best for brokers. Recently, he left Rocket, started a broker shop, called me, and now he is working with UWM Holdings Corporation. Someone that knows every detail at Rocket came and learned about UWM Holdings Corporation, started a broker shop, and picked to work with UWM Holdings Corporation. That sends a message. There are not that many big broker shops left out there that do not work with us, but that is an opportunity. The bigger thing is to grow the broker channel and continue to grow. The broker channel is continuing to be very positive, and we are excited about the growth. I have a couple of questions on Mia and the AI initiative, so let me combine them. One person asked about Mia’s text messaging capabilities and customer response to Mia generally. Let me give you a Mia update. Mia has been fantastic. It has been almost a year—I rolled it out at UWM Live last year—and it has been amazing. I would say roughly in the range of 80 thousand to 100 thousand closings over the last year have come from Mia. The last report I saw was very strong with Mia’s initiation of refinance opportunities. If you look at our servicing book, people ask, “You have 2% or 3% of the servicing book, but you did 12% or 13% of all refinances.” Mia is a big part of that. Brokers do a great job with the consumer upfront; consumers want to come back to the broker. The problem was brokers did an average to below-average job of following up with their past clients. They would do the purchase and then would not talk to them again. Now, with Mia, she is keeping the broker in front of the consumer. When the consumer goes to refinance, they work with the broker because the broker offers a better deal anyway; they just know who to call. Mia leaves voicemails and sends a text message out. She calls, and about 40% of her calls get picked up, which is higher than we expected, so 60% go to voicemail and we send a text message also. A lot of those call the broker back: “Was that AI or was that real?” Then they connect and do a loan. On the 40% that pick up—on a 40 thousand-call day, about 16 thousand—borrowers talk to Mia and have two-, three-, four-minute conversations. Some of them know it is AI and some do not—it has gotten that good. We send a follow-up email to the broker: “You have a call scheduled at 3 PM with Jenny, the borrower,” and it has been very successful. We are continuing to enhance it and make it better. The scale we are doing with our IT team has been phenomenal. I do not know anyone in any industry doing it at this scale. It is going to get better next week at UWM Live and beyond. We have big enhancements coming. It helps brokers win. That is a big part of how with 2% or 3% of the servicing book we are doing 12%–13% of refis—Mia and great brokers staying in front of their clients. Kyle Joseph asked to review industry competitive trends, current broker share, and how we anticipate it evolving. Current broker share is about 28%. Five years ago, in early 2020, it was 14%–15%, so it has almost doubled. Will it double again? We are working on it. Our goal is to help brokers be the number one overall channel—50.1%—and we are on a path to doing that. Our share has been very steady—over 40% for years now, roughly between 40% and 45%. That has never been done in the wholesale channel. It is because we provide value: we help brokers grow, look good to real estate agents, do more business, make the process easier, and be successful. We train them, coach them, and give them tools to win more loans. We will continue to be the best and the biggest in wholesale and overall. Being the largest lender in the country for four straight years, we only have a chance at 28 out of 100 loans. Every other lender is competing for 100 out of 100. If that 72 out of 100 that is retail moves to 65, 60, or 50, that is growth for UWM Holdings Corporation. That is why we are bullish on our growth and the broker growth—we are all going to win together. I also got a couple of questions tied to expenses. You saw our expenses went down. We invested a lot for years, and now we are starting to see the harvesting or success of those investments—TrackPlus, free credit reports to help brokers grow, and more. You will see more of a leveling out of expenses. They went down. Our investments are starting to pay off. You saw a little in the first quarter. Compared to the industry, we had a great quarter. Last year’s first quarter was $32 billion; this year we did about $45 billion. That is significant. Our gain on sale was up and volume is up year-over-year. Expenses are flat or down. We feel good about where we are from an expenses perspective. I think of them as investments, and they are paying off. Mikhail Goberman had another question on the new VantageScore rating system for borrower credit. Kudos to the leadership of FHFA on rolling out a new way. FICO scores and credit reports have gotten really expensive. With a competitor in there, you have options. Options create better outcomes—that is why wholesale works. Now FICO and Vantage are both striving to be the best. There were very few companies put on the pilot; we were one of them. I think it rolled out less than two weeks ago from FHFA Director Sandra Thompson with the support of Fannie Mae and Freddie Mac. Four business days later—Wednesday of last week—we rolled it out. VantageScore has been an enormous success. Not just saving $50 a credit report, though that is possible too. We have both FICO and VantageScore and are making sure borrowers get the best opportunity because they have different models. Vantage looks at thinner credit differently, can add rent and other things so more people can qualify or qualify with a little bit higher score. Under current comparability, you take a 20-point haircut from Vantage to FICO. So if a Vantage score is 744, that is equivalent of 724 in FICO. If the FICO score was 719, I just got that borrower a better deal with lower LLPAs. That is a win for consumers. In five business days, the amount of emails I have gotten on loans we have helped brokers win and consumers grateful that they can qualify for a home or got a better interest rate and lower fees has been phenomenal. Kudos to FHFA, to Fannie and Freddie for getting it out. We rolled it out with VA loans today, and FHA will be soon. MI companies like Essent and Enact are on it too. FICO is still great in many ways. It is not one or the other—both are great. We want to help consumers qualify for a mortgage and have better credit profiles. The rollout was done in four business days and worked flawlessly—our IT team did a heck of a job. Others may have it out in May or June. We are rolling with it now—saving loans, helping loans, giving better deals right now because of Vantage. I have a couple of questions on the BILT partnership. Indications of the BILT card relationship, increased leads, status of the partnership, and infrastructure in place. BILT—Ankur Jain, the CEO—is phenomenal. Their vision is great. UWM Holdings Corporation is a servicer; we brought servicing in-house. We are controlling everything. We chose a platform on the front end that provides rewards points to consumers for making their mortgage on time without using a credit card—they can use ACH and still get points. That has never been done in our industry. Rewards points for making your mortgage on time. People love points. You can also link your credit card and get points—your American Express points and BILT points—and use them for flights and other things. It is really cool. Beyond that, the servicing platform is slick. We built this with them, because they had never done this before on the front end for mortgage. It is great for consumers. BILT has over 6 million consumers and, depending on the year, 8%–10% of them buy houses. Those are curated leads. They will want to stay on the BILT platform and work with a mortgage broker. That is a huge opportunity. We already had that in pilot. There is a concierge service that gives our consumers—our brokers’ consumers—an amazing platform to get things done and make their life easier. It is a cool neighborhood experience. Ankur is going to speak at UWM Live next week—if you are there, you will understand it better. The vision is awesome. The key is UWM Holdings Corporation has servicing in-house. We have been the best originator in the country for a long time; we are going to be the best servicer because we are focused on it. It will help retention for our brokers and make the consumer experience better, with ancillary benefits too. The partnership is launched, rolling, fully active, and getting better every day—as we do with everything at UWM Holdings Corporation. We do not have all 700 thousand consumers on it yet; those are moving on to it. I have shadowed the team. The servicing process has been really great. You asked in the past why we did not do it—I always said focus on originations. We still do. The cost/expense will be great on servicing, not outsourcing anymore. Better yet, retention and experience for consumers and our brokers will be even better. We are excited about that. I also got questions on what we see in the business for the next three to five years (and even ten). Here is my high-level view. Over a five-year window—call it 2027 to 2031—we are expecting to do over $1.3 trillion in mortgages. There might be one year in there with $400 billion, and a year with $150–$200 billion, but I believe $1.3 trillion is the north star over five years. While that happens, my expenses basically stay the same. With our AI initiative and our technology, the expenses you see today—call it roughly $600 million in the quarter (I think it was about $590 million)—I expect that to be the level even as volume more than doubles. On top of that, I see another roughly 20%–25% in other revenue coming into UWM Holdings Corporation starting to happen with some ancillary products that are picking up steam. So revenue growth outside of just volume and gain-on-sale. To summarize: $1.3 trillion over five years, gain-on-sale margins in these ranges (maybe slightly higher), expenses flat or down (I will call it flat), and other revenue tied to AI initiatives that are starting to produce margin and other revenues. If I did not answer a shorter-term detail, Blake Kolo and investor relations are happy to talk anytime. Kyle Joseph: How are you thinking about the Homebuyer Privacy Protection Act (trigger lead rule) and potential impacts on competitive environment and overall margin? The trigger lead rule (effective March 4) definitely changed things. When a consumer used to pull credit, 50 people would call them. Now it is the servicer, the original lender, original broker, maybe their bank—three or four. That has changed the competitive landscape and is probably a better experience for consumers (fewer calls). On the flip side, consumers may not get as many options. You might get offered 6.5% with $5 thousand of fees and not know you could have gotten 6.25% with $3 thousand of fees working with a mortgage broker—going to mortgagematchup.com. Trigger leads made people compete more. From a competitive landscape, you could argue it is maybe not as good for consumers on rates and fees, though experience is better. If you are only winning on rates and fees, you will not be around long in this business. I could argue it may increase margins a little because there is less “low-ball to win” with fewer calls. It has been about 60 days—still early—but that is what we are seeing. Brokers who used trigger leads are finding other ways to buy data. It is still competitive, just a lot less noisy. A couple have asked about debt ratios: Why did secured debt go up relative to other aspects of the balance sheet, and how do we look at the debt ratio? We look at the debt ratios every day. The debt ratio was really good a couple of years ago when volume was not as good. Now the business is really good, and the debt ratios are not as good as we would like. Some of those ratios and liquidity numbers are a little bit of an anomaly based on trades we have out there to help balance the MSR book, which can move around. At the end of the quarter, it was up; it has already come down a bit now. Those fluctuations can throw the ratios off a little; they are better than they appear. We feel really good about it. We watch the numbers closely. The key is earnings. You saw we had a good earnings quarter in the first quarter. There will be quarters with bigger earnings. We are monitoring and managing it. We believe in delivering value to shareholders—dividends, which we have been doing, and potentially buybacks or other things. Overall, our leverage ratios and debt ratio—we feel really good. We monitor and manage them, and there are a lot of levers we can pull to make those ratios better while still doing more business and having higher earnings. You will see some of those in the second quarter and beyond. Jason Stewart from Compass Point: During periods of heightened volatility at the start of the year, how do you manage lock duration and pricing cadence? Do you increase frequency of rate sheet updates? How much volatility is absorbed? And impact of things like Purchase Boost 50 and pricing initiatives? The market has been very volatile. We have an extremely experienced capital markets team. Yes, sometimes you have two or three different rate sheets in a day—maybe four or five on rare days. If rates get better, we put an improvement out there to ensure brokers have the most competitive opportunity. If pricing gets worse, we worsen pricing. These numbers move all day. We have thresholds that move pricing up or down; when we hit those, we act. Some days you put a rate sheet out at 10 AM and nothing changes all day, or not enough to change pricing—we want some consistency for our clients as well. That balance is why you saw really strong margins in the fourth quarter and first quarter, and you will see strong margins in the second quarter. Built-in rewards have nothing to do with gain-on-sale or pricing; it is just another benefit for brokers and consumers because they get rewards points through BILT. On Purchase Boost 50 and other pricing initiatives: all are designed to help brokers succeed and win. Our brokers are not “I need the lowest price” to succeed. If lowest price alone won, they would cut comp in half and all use Provident. That is not how it works. A lot of our price incentives are more strategic. They incent brokers with price to use a tool of ours. For example, we had an incentive tied to 40–45 bps if you used hybrid or virtual closing because it makes the consumer experience better. That makes the consumer more likely to like you and refinance with you in the future. We track borrower happiness on every single loan. A lot of those are investments and are reflected in gain-on-sale. We did some of that in Q4 and Q1, and gain-on-sale is still much higher than last year’s Q1—about 123 bps in the first quarter (about 122 in the fourth). We track it daily and understand where we are. We give a very competitive price to our brokers, add significant value to help them win more loans, and provide the best service in the industry. We come out with AI tools and technology; we invest with free credit reports to help brokers compete even more and help more consumers. Many of these decisions are strategic to help brokers win. Sometimes a broker has never done a virtual closing, and the extra 45 bps gets them to do it, and then they continue doing it because they realize it is best for the consumer and helps them build their business. If brokers win, UWM Holdings Corporation wins. When consumers realize the fastest, easiest, cheapest way to get a mortgage is through brokers, UWM Holdings Corporation wins. Real estate agents win. We are one team because it is best for consumers. When a consumer goes to a random commercial or their local bank, they usually pay higher rates. When a consumer goes to mortgagematchup.com, they will find a broker who will get them a better rate, better fees, and a better experience. Anything I can do to drive more business there is what I will do. UWM Live is next week. It is the biggest mortgage event of the year. Please come. I will be there all day. We have great speakers. It is really cool to see the broker community. I will meet with investors and analysts—happy to spend time. We have covered a lot of the questions. Let me know how you like the format. Maybe next month, I can see you too, and we can have more interaction. Hopefully you like the format. I know last quarter you did not like that we did not do Q&A, so I am here for it. I love this. I will do this anytime. I enjoy talking about our business and the industry. Please give us feedback—give our investor relations team feedback on the format. If I did not answer your question, investor relations—Blake and the whole team—will answer all your questions. We appreciate you. Thanks for being partners of UWM Holdings Corporation—shareholders, investors, analysts. Anything we can do to help make your life easier. We are going to keep winning together with our brokers. The broker community and UWM Holdings Corporation will continue to grow with my amazing team members here. Thank you for your time. I am excited about the future here at UWM Holdings Corporation. The second quarter is going to be great as well. We will do the same format again unless we get a lot of feedback that you did not like it. Hopefully you did, and hopefully it was valuable to spend this time with me. Have a great day. Blake Kolo: The video is not, but we can hear you. They can hear you. Okay.
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2026 Steven Madden Limited Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Danielle McCoy, VP of Corporate Development and Investor Relations. Please go ahead. Danielle McCoy: Thanks, Jill, and good morning, everyone. Thank you for joining our first quarter 2026 earnings call and webcast. Before we begin, I'd like to remind you that our remarks that follow, including answers to your questions, contain statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to materially differ from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our press release issued earlier today and filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly earnings call, if at all. The financial results discussed on today's call are on an adjusted basis, unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release. Joining me on the call today is Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer and Executive Vice President of Operations. With that, I'll turn the call over to Ed. Ed? Edward Rosenfeld: All right. Well, thanks, Danielle, and good morning, everyone, and thank you for joining us to review Steven Madden's first quarter 2026 results. We got off to a solid start to the year in Q1 with healthy underlying demand across our brands, driven by our team's disciplined execution of our strategy for long-term growth, the foundation of which is deepening connections with consumers through compelling product assortments and effective marketing. Our flagship brand, Steven Madden, continued to gain momentum as the on-trend assortments created by Steven and his design team resonated with consumers. We saw strength across classifications, including casuals, dress shoes and boots, and we capitalized on a variety of trends in style and materials, including split toes, Velcro, hidden wedges, mesh and ballet-inspired looks. Our marketing team supported these assortments with rich brand and product storytelling, including our Hello Spring campaign, featuring it girl Delilah Belle and a full funnel approach that drove strong new customer acquisition and cultural relevance. And the combination of trend-right product and targeted marketing investments drove measurable brand heat. Online searches for Steven Madden increased 27% in the quarter, and global DTC comp sales rose 6% or 10%, excluding our stores in the Middle East. For the year, we continue to expect mid- to high single-digit revenue growth in the Steven Madden brand. Kurt Geiger London also delivered another strong quarter. In handbags, in addition to continued strength in the Kensington collection, new totes and shoulder bags drove strong demand. And in shoes, sandals were a standout, including exceptional performance in Meena Eagle slides. We also made progress on our key growth initiatives, including new store openings in the United States and international expansion into new markets. We now have leases secured for 4 new full-price stores and 1 premium outlet in the U.S. in 2026. And we signed a new franchise and distribution agreement with Reliance Brands to bring Kurt Geiger to India beginning in Q4. For the quarter, revenue for the Kurt Geiger brand increased 23% on a pro forma basis. And based on the momentum we are seeing, we have increased our forecast and now expect mid-teens pro forma revenue growth in the Kurt Geiger brand for the year. In Dolce Vita, we delivered a compelling spring assortment with particular strength in jelly, raffia and woven styles across footwear and handbags that drove robust sell-through with key wholesale customers, including Nordstrom, Dillard's and Macy's. We also continue to gain traction with our key growth initiatives of expanding the handbag category and growing in international markets. For 2026, we continue to expect high single-digit revenue growth in Dolce Vita. Now despite all this, in the first quarter, we saw, as expected, a decline in organic revenue driven by softness in private label and lower Steven Madden handbag revenue in the U.S. wholesale channel. That, combined with SG&A pressure from the normalization of incentive compensation and increased warehouse expenses resulted in an earnings decline for the quarter. But looking ahead, based on the strong underlying demand trends across our brand portfolio, we expect to return to earnings growth in the second quarter and deliver strong top and bottom line growth for the full year. And looking out further, we are confident that our powerful brands, proven business model and talented team position us to deliver sustainable growth for years to come. And now I'll turn it over to Zine to review our first quarter 2026 financial results in more detail and provide our updated outlook for 2026. Zine Mazouzi: Thanks, Ed, and good morning, everyone. In the first quarter, consolidated revenue was $653.1 million, an 18% increase compared to the first quarter of 2025. Excluding Kurt Geiger, which we acquired in the second quarter of 2025, consolidated revenue decreased 4.8% Wholesale revenue was $443.6 million, up 1% compared to the first quarter of 2025. And excluding Kurt Geiger, our wholesale revenue decreased 8.2%. Wholesale footwear revenue was $278.9 million, a 5.8% decrease or down 12%, excluding Kurt Geiger, primarily driven by a steep decline in the private label business. Wholesale accessories and apparel revenue was $164.8 million, up 15.1% compared to the first quarter in the prior year or down 0.5%, excluding Kurt Geiger, as declines in Steven Madden handbags and private label were mostly offset by increases in other branded accessories and apparel. In our direct-to-consumer segment, revenue was $206 million, an 83.8% increase compared to the first quarter of 2025. Excluding Kurt Geiger, our DTC revenue increased 8% with growth in both brick-and-mortar and e-commerce channels. Steven Madden brand the U.S. DTC comp sales increased 17%, driven by an exceptional performance in full-price channels. Outlet comps remained modestly negative, but showed significant sequential improvement as we began to anniversary declines in our border stores. International comp sales decreased 5%, but increased 1%, excluding our stores in the Middle East. We ended the quarter with 387 company-operated brick-and-mortar stores, including 95 outlets as well as 8 e-commerce websites and 162 company-operated concessions in international markets. Our licensing royalty income was $3.4 million in the quarter compared to $2.2 million in the first quarter of 2025. Consolidated gross margin was 46.3% in the quarter, a 540 basis point improvement compared to the prior year. Wholesale gross margin was 39.2% compared to 35.7% in the first quarter of 2025 due to higher average selling prices as well as mix benefits from the addition of the Kurt Geiger business and a lower penetration of private label. Direct-to-consumer gross margin was 60.8% compared to 60.1% in the comparable period in 2025 as a result of the addition of the Kurt Geiger business and a modest increase in the organic business. Operating expenses were $256 million or 39.2% of revenue in the quarter compared to $170.5 million or 30.8% of revenue in the first quarter of 2025, primarily driven by the addition of Kurt Geiger as well as higher incentive compensation and warehouse expenses. Operating income for the quarter was $46.3 million or 7.1% of revenue compared to $56.1 million or 10.1% of revenue in the prior year. The effective tax rate for the quarter was 25.3% compared to 24% in the fourth quarter -- in the first quarter of 2025. Finally, net income attributable to Steven Madden Limited for the quarter was $32.1 million or $0.45 per diluted share compared to $42.4 million or $0.60 per diluted share in the prior year. Turning to the balance sheet. Our financial foundation remains strong. As of March 31, 2026, we had $286.5 million of debt and $77.2 million in cash and cash equivalents for a net debt of $209.3 million. Inventory was $379.4 million compared to $238.6 million in the prior year. Excluding Kurt Geiger, inventory decreased 2.5%. Our CapEx in the quarter was $5.9 million. We did not repurchase any shares in the open market. And during the first quarter, we spent $7.4 million on shares acquired through the net settlement of employee stock awards. The company's Board of Directors approved a quarterly cash dividend of $0.21 per share. The dividend will be payable on June 19, 2026, to stockholders of record as of the close of business on June 8, 2026. Turning to our fiscal 2026 guidance. We are raising our revenue outlook and now expect revenue to increase 10% to 12%, up from our prior guidance of 9% to 11%. We are also introducing EPS guidance for the year and expect earnings per share to be in the range of $2 to $2.10. Now I'd like to turn the call over to the operator for questions. Operator? Operator: [Operator Instructions] First question comes from the line of Paul Lejuez with Citi. Paul Lejuez: Curious if you can talk about what's driving the higher revenue guidance for the year. I think you said it was Kurt Geiger, but any detail you can give in the core versus Kurt Geiger in terms of what has changed in your full year outlook? And then can you talk about the conversations you're having with private label customers and if there's been any change in how they're thinking as the tariff picture evolves? And then also just curious what you built in for tariffs within your guidance. Edward Rosenfeld: Sure. Okay. All right. So the first question was about the higher revenue guidance. And yes, we did raise Kurt Geiger based on the early momentum that we're seeing there. Kurt Geiger exceeded our -- the Kurt Geiger brand exceeded our expectations in Q1. We've also modestly raised our expectations for Steven Madden and Dolce Vita based on the strong performance that we're seeing there in spring and the momentum in those brands. So a positive picture because we did -- we were able to increase our forecast for each of our 3 largest brands. In terms of the private label conversations, I would say we're having a lot of conversations. I think they're productive, but the tariff picture remains uncertain. And so there's no major change to that situation right now, but it's something we're working hard on. We have taken our forecast up very modestly for the year based on some orders that we got for the tail end of the year, but we obviously still looking at a pretty steep decline in '26 and really targeting '27 for a recovery there. And then in terms of what we've built into the guidance, so we have assumed the section -- the 10% Section 122 tariffs remain in effect through about the end of July when those expire. And then we've built in a 15% tariff thereafter. Operator: The next question comes from the line of Anna Andreeva with Piper Sandler. Anna Andreeva: Congrats. Really nice to see the momentum. Curious on also what you're hearing from your partners, specifically to the off-price channel. Is that channel now back to growth? And how do you think about the contribution there? And it sounds like department store business is turning very quickly with the reorders. Are you guys able to fulfill that demand? Just any color on that would be great. And secondly, you mentioned the business back to earnings growth starting the second quarter. Just anything you can share how we should think about 2Q? Is the DTC business, which was super strong in 1Q, is that further accelerating from here? Edward Rosenfeld: Sure. Okay. So in terms of the off-price channel, yes, those businesses, we're seeing some nice improvement there. Those conversations have been very productive recently. And so we are seeing growth in that channel in 2026 versus 2025. Still not all the way back to '24 levels as opposed to -- your second question was about department stores. There, we are seeing strong growth. To your point, we're getting reorders. We are able to chase into goods for them. And we do expect that first tier business to exceed what we achieved in 2024. And then what was the third one? Zine Mazouzi: Do you expect DTC to accelerate in Q2? Edward Rosenfeld: Yes. So yes, so we're not going to guide quarterly, but I will say that we continue to see strong trends in that DTC business. Now the overall DTC growth, of course, won't be as strong because we'll be anniversarying Kurt Geiger starting in early May, but the core business or the organic business should see similar trends to what we saw in Q1. Anna Andreeva: No, that's great. Can I just sneak in another one? Just as you think about the uses of cash with the tariff refund, would paying down debt would be your first priority? Or just any color you can give on that? Zine Mazouzi: Yes. The first priority would be to accelerate the paydown of the debt. And then in the back half of the year, we'll start assessing potential repurchases. Operator: The next question comes from the line of Marni Shapiro with The Retail Tracker. Marni Shapiro: Congratulations. The assortments have looked absolutely fantastic. I'm curious if you could just talk a little bit more about the sell-throughs at the department stores. Are you seeing that across footwear and the apparel? And the apparel has looked really fantastic as far as I have seen. Could you talk a little bit about, I guess, how big that business can be and what the margin implications are? Are the margins on the apparel equal or better to what you're seeing in footwear and how that could play out over time? Edward Rosenfeld: Yes. So we've been pleased with what we've seen from a sell-through perspective. I would say in spring, footwear has been stronger because the Steven Madden brand, in particular, has been quite hot in footwear. Apparel, we had a little bit of a soft start to the year. I don't think we transitioned as well as we could. But once we got into the season, we've seen -- we've been very pleased with what we've seen. The team has done a great job with -- obviously, dresses has been our biggest category. We've got some very strong dresses, but we've also got some novelty denim that's been selling some blazers. So we continue to sort of expand, broaden out the strength in that business and very optimistic about what that can be longer term. In terms of how big that business is, it's over a couple of hundred million now for us in apparel. As of now, it is lower margin than the shoe and bag business. But we've been in investment mode, and we're still building. And over time, we think that should have comparable margins. Marni Shapiro: Great. And then if I could just ask one more follow-up on the Steven Madden brand. You've -- I mean, it looks so good in the stores. It looks so good everywhere and your placement has been excellent. You've had a couple of semiviral, viral items. Could you just talk about your investments behind social media and marketing and what that would look like for the rest of the year? Edward Rosenfeld: Yes. No, first of all, I really appreciate what you say about the product. We're really proud of how the team has executed there. And so I think it all starts with product, and that's the biggest driver here, but we also feel that we've really raised our game on the marketing front. And we continue to increase the investment there. As you know, years ago, we were -- a few years ago, we were sub-2% of revenue devoted to marketing. And now this year we'll be 5.3%, 5.4%, something like that. So a pretty significant increase in investment. And we've also, I think, done a better job of balancing that investment because when we first increased it, it was really very heavily focused at the bottom of the funnel on performance channels, and we now have much more balanced spend throughout the funnel. We're much more balanced by channel. And we're much more consistent about the way we tell the Steven Madden story across channels on an omnichannel basis. And so as you mentioned, obviously, given our core customer and the state of the world today, digital and social are paramount, and that's where we are focusing a lot of our spend. Marni Shapiro: Great. I'm sorry, can I sneak in one more? Dolce Vita, is it having as good -- like is the sell-through as strong on the Dolce Vita brand at wholesale as it is on the Steven Madden brand? Edward Rosenfeld: Yes, Dolce Vita is having a very strong spring. In fact, at their biggest customer, they're even outpacing Steven Madden in terms of sell-through. Operator: The next question comes from the line of Dana Telsey with Telsey Advisory Group. Dana Telsey: Nice to see the progress. With rising energy prices, is there any impact on cost and how you're planning or the contracts all taken care of for it? Or how do you think of that impact on rising energy prices? And then the cadence of the quarter, was there any difference in demand on the exit of the quarter? And we've now seen just lastly on product trends, boots become like a 52-week a year trend. Any updates on product trends or the sneakers, fashion, sandals, boots to discuss? Edward Rosenfeld: Sure. Yes, I'll take the latter 2 questions and then turn it back to Zine to talk about what we're seeing on freight. So in terms of the cadence of the quarter, there was -- it bounced around a little bit based on weather and Easter shift and promotion time, et cetera. But basically, I would say that it was pretty strong trends throughout the quarter, and there's nothing super meaningful to call out there. In terms of the product trends, I think the big thing is we've seen a decrease in penetration in sandals and sneakers, and we've seen super strong performance in casuals and really strong increases in dress shoes as well and also in boots -- and boots and booties. And as you correctly pointed out, those continue to be important even in spring. We did a really nice job, for instance, on our DTC in our DTC with boots for festival season. So Zine, do you want to talk about freight? Zine Mazouzi: Sure. So on the freight side, obviously, the war impact is visible, and we started seeing what they call EBS. These are emergency bunker surcharges that are being imposed by the maritime companies. So in our guide, we built in about 30 basis points of pressure from ocean as well as the increase we're seeing on air freight as well. So we started seeing air freight as probably as early as April. And then as far as the ocean side, the emergency bunker surcharges, those started in May, on May 1, and there's another round potentially that would be coming in July as well. So all in all, it's about a 30 basis point impact. From a cost perspective as far as raw materials, we're not seeing that yet. But if this continues for an extended period of time, we expect that, that will have an impact in the latter part of the year. Operator: The next question comes from the line of Sam Poser with Williams Trading. Samuel Poser: A couple of things. When we think about the gross margin more holistically for the balance of the year, how much -- in the press release, you discussed -- you backed out $55 million of the refunds out of the gross margin. How much of the refunds effective for the goods sold in Q1 were in it? And then going forward, I guess the question is, you're not going to see the same -- you're not planning to see -- what kind of increase in gross margin are we planning to see for the full year, taking into account the lower tariffs than what was true -- lower than the IEEPA tariffs, but then also the increase plus that 30 bps from freight. I mean how should we think about the gross margin? And then I have another question. Edward Rosenfeld: Yes, sure. So in the first quarter, obviously, there was a relatively modest negative impact from tariffs because of the reversal of IEEPA and then the institution of the Section 122. As we go forward, obviously, we'll see on a gross basis, a bigger impact than we saw in Q1. But if you're thinking about gross margin versus the prior year, we still should be seeing nice increases versus the prior year each quarter, although it will narrow a little bit in terms of the Delta. Part of that is that we anniversary Kurt Geiger in Q2, which has been a mix benefit to gross margin. But even in the organic basis, we do expect to see year-over-year gross margin improvement through the balance of the year. Samuel Poser: And then could you -- I know it's going to come out in the queue, but can you give us the adjusted gross margin and SG&A for footwear, wholesale, footwear, handbag wholesale and direct-to-consumer, please? Edward Rosenfeld: What do you mean adjusted? Samuel Poser: Wholesale footwear gross margin. So we can get to -- so build it out to the total, yes. Edward Rosenfeld: Yes. Wholesale footwear gross margin was 38.6%. Wholesale accessories was 40% and DTC, I think you have it, but it was $60.8 million. Samuel Poser: And then what about SG&A? I mean -- or give us the adjusted operating income for each one of those sections, however you want to do it? I mean I built my model this way. And it's important to break it up, but I'm sorry, I'm driving crazy. Edward Rosenfeld: EBIT dollars for wholesale footwear, $52.7 million, accessories and apparel, $28.8 million. DTC loss of $11.4... Samuel Poser: And the loss in DTC was primarily due because it's a small quarter. You have the fixed cost for Kurt Geiger with those fixed costs staying in. I assume that is correct. Edward Rosenfeld: That's right. We always -- I mean, even in the organic business, we're always loss-making in Q1 in DTC, and the same goes for Kurt Geiger. Samuel Poser: And you originally said that Kurt Geiger would do about $600 million. That's up just -- given the first quarter, it's just up a bit from there. Is that how we should think about it? Edward Rosenfeld: Yes, low 600s. Operator: The next question comes from the line of Janine Stichter with BTIG. Janine Hoffman Stichter: On Kurt Geiger, with the mid-teens growth of the brand, I just want to clarify, does that include any new distribution? And if not, how are you thinking about that? And then Steven Madden handbags, can you elaborate a little bit more what's going on there? Would you still expect it to turn positive in the second quarter? Edward Rosenfeld: Yes. Yes, in terms of the Kurt Geiger brand mid-teens growth, we are adding some wholesale distribution in the back half. I think the most important being that we are planning to -- we have reached agreement with Macy's to enter Macy's starting in October, we'll be in a beautiful concession in Herald Square as well as 15 other doors with handbag shops and also shoes. So we're excited about that. But there's also very strong momentum in the DTC business, digital. The new stores continue to perform well. As I mentioned, we're opening some additional stores -- excuse me, the U.S. stores continue to perform very well, and we're opening some additional U.S. stores. So a lot of good things happening there. And what was the second one, Steven? Danielle McCoy: Steven Madden... Edward Rosenfeld: Yes, Steven Madden handbags, yes. As we have indicated, we expect to return to growth starting in the current quarter. So we're pleased to have that headwind behind us. Janine Hoffman Stichter: Great. And then maybe just one more on the core Steven Madden business. I think you said organic gross margins for DTC were up slightly. Maybe just talk about what you're seeing from a promotional standpoint there. It seems like you've been able to pull back a little bit on the promotional lever. Edward Rosenfeld: Yes, we have. We've been pleased because of the strength of the product and the demand, we have been able to reduce overall promotion days. And that's -- we really haven't seen any significant impact to demand. So that's been very positive. Operator: The last question comes from the line of Aubrey Tianello with BNP Paribas. Aubrey Tianello: I wanted to ask on SG&A and how we should be thinking about the cadence of SG&A growth into the next quarter and then into the back half of the year when you lap the Kurt Geiger acquisition. Zine Mazouzi: Yes. So including Kurt Geiger in Q1, SG&A was up 50.2%. We expect that to be probably around, I would say, 25% increase in Q2, and then it should drop to low teens in Q3 and high singles in Q4. Aubrey Tianello: Perfect. And then maybe just a follow-up on the Middle East and how the conflict impacts the business from a direct standpoint in terms of revenues. You mentioned the impact to store comp in the prepared remarks. I'd be curious just what's included in the guidance for 2026 from a top line perspective from the Middle East. Edward Rosenfeld: Yes. It's about -- so we have about north of $50 million -- or we had north of $50 million business there, about 63 stores. I don't have the overall top line impact that we've built in there. But look, the business in the GCC, for instance, is still trending down close to 40% this month. And so we built in about $4 million profit hit, I know, in that region. Yes, Zine is telling me it's about $9 million to $10 million that we've taken out for the impact there. Zine Mazouzi: For revenue... Edward Rosenfeld: For revenue, excuse me. Aubrey Tianello: Okay. Got it. And then just last one. I wanted to ask about Kurt Geiger from a margin perspective. You mentioned in the past having a runway to getting to double-digit EBIT margins over time. Anything you can share on how EBIT margin is progressing for Kurt Geiger this year, especially in light of the higher revenue guide? Edward Rosenfeld: Yes. So we're expecting about 100 basis points of improvement in '26 versus '25. It still doesn't get us back to pre-tariff levels. So we need to continue to drive that up in the coming years. And we still continue to believe there's no reason this business shouldn't be in the double digits. And certainly, the branded portion, if we exclude the concessions, we think has potential to be certainly in the teens, if not the mid-teens. Operator: And I'm now showing no further questions, and I would like to turn it back to Ed Rosenfeld for closing remarks. Edward Rosenfeld: Great. Well, thanks so much for joining us today. We hope you have a great day, and we look forward to speaking with you on the next call. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Welcome to ITT's 2026 First Quarter Conference Call. Today is Wednesday, May 6, 2026. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Time. [Operator Instructions]. It is now my pleasure to turn the call over to Carleen Salvage, Vice President, Investor Relations and FP&A. You may begin. Carleen Salvage: Thank you, Kathy, and good morning. Joining me in Stanford today are Luca Savi, ITT's Chief Executive Officer and President; and Emmanuel Caprais, Chief Financial Officer. Today's call will cover ITT's financial results for the 3-month period ended April 4, 2026, which we announced this morning. Please refer to Slide 2 of the presentation available on our website, where we note that today's comments will include forward-looking statements that are based on our current expectations. Actual results may differ materially due to several risks and uncertainties and including those described in our 2025 annual report on Form 10-K and other recent SEC filings, except where otherwise noted, the first quarter results we present this morning will be compared to the first quarter of 2025 and include certain non-GAAP financial measures. The reconciliation of such measures to the most comparable GAAP figures are detailed in our press release and in the appendix of our presentation, both of which are available on our website. As previously communicated during our fourth quarter 2025 earnings call, going forward, ITT will include intangible amortization expenses related to acquisitions as a separate line item within the consolidated statement of operations and in its adjustments to earnings. In 2025, the impact of this reporting change on earnings per share was $0.13 in Q1 and $0.47 for the full year. All adjusted EPS figures presented going forward will be on this basis. A full reconciliation of the impact of the revision to adjusted operating income and margin, income from continuing operations and EPS for each quarter in 2025 and the full year can be found in the supplemental materials at the end of our presentation available on our website. With that, it is now my pleasure to turn the call over to Luca, who will begin on Slide 3. Luca Savi: Thank you, Carleen, and good morning. Before I begin, I want to recognize our employees across ITT for delivering a very strong start to the year. In particular, our Middle East teams who delivered despite the ongoing conflict the supply chain disruptions and the challenges this has represented to their professional and personal lives. Thank you. In Q1, we demonstrated solid momentum across the portfolio, thanks to the disciplined execution and the tangible benefits of our M&A strategy. We delivered outstanding orders growth above market revenue expansion and robust earnings exemplified our 25% EPS growth in the quarter. We are truly pumped up. Here are some highlights. We grew orders 26% at 8% organically. We grew revenue 33% and 11% organically. We expanded margin by 130 basis points and we delivered 25% adjusted EPS growth. I'm also encouraged by SPX FLOW's strong start. In month 1, we already produced net earnings cash accretion and promising top line growth. This is all included in our newly formed Flow Technologies segment that now combines industrial process and SPX FLOW. This was an outstanding quarter. Let's dive into the details. We grew revenue 33% and 11% organically with all businesses contributing. CCT up 17%, grew industrial connector sales by 27% and Aerospace and Defense by nearly 20% and we're already benefiting from the Boeing price negotiation closed last year. MT increased revenue by 15% and 5% organically in an automotive market down as friction outperformed global vehicle production by more than 1,400 basis points. And to top it off, Flow Technologies revenue was up 61% or 12% organically. The team delivered higher project sales, including from Sevan, which were up 44%, well down gland. Show cycle also grew 10% due to market share gains in all product categories. On orders, ITT grew 26% and 8% organically in Q1, showing broad strength across our segments. CCT grew 10% organically on the back of strong aerospace demand and market share gains in industrial connectors. In Flow Technologies, we delivered 44% orders growth and 7% organically, driven by share gains in short cycle, including baseline pumps, aftermarket and bars. Bars up 24% continues to benefit from a GLP-1 project that keeps expanding in scope. And friction continued to gain market share with significant platform awards, including in the high-performance segment. And last but not least, our book-to-bill was 1.09. We delivered equally strong margin expansion of 130 basis points with all businesses contributing. Flow Technologies delivered 23.7% operating margin up 100 basis points, thanks to significant contributions from volume and to a lesser extent, price. At 21.1% ITT deliver 130 basis points margin progression as productivity and volume growth more than offset price pressure. Finally, CCT expanded margin to 19.3% as volume growth and price both contributed. Moving to capital deployment. On March 2, we closed the SPX Flow acquisition, 1 month ahead of schedule and with a leverage ratio comfortably below 3 at 2.7. The newly created Flow Technologies segment, both nearly $3 billion in revenue and is a global flow leader with premier brands in pumps, bars, mixes and other process solutions. On the first day, the entire ITT leadership team actively participate in person to turn all meetings around the world with SPX FLOW employees. We lead out our vision and our expectations and answered questions from highly engaged employees. I was fortunate enough to be in delavant Wisconsin together with Rudy, or WakasaCheriboral leader. I was encouraged by what I saw in the plant by the enthusiasm of the local team by their deep knowledge of the business and their openness to do better and to do more. I also experienced this enthusiasm with Wendy, our mixing solutions leader and our 2 other sites in Rochester, New York and Palmyra Pennsylvania. Their team has been working hard to improve material flows and overall equipment efficiency. Biotech Wendy, Rudy and I also share future growth plans and was still early in the year, I'm heartened by the orders and sales growth we delivered in the first quarter to achieve high single-digit revenue growth for 2026. When it comes to synergies, the Flow Technologies team has been hard at work identifying and implementing actions to secure the $80 million cost of synergies. We have executed the first tranche related to corporate G&A cost reductions, and we are on track to deliver 1/3 of the total synergies in year 1. We're also working hard to deliver commercial synergies. And last week, the [ Wake ] Cerebral business of SPX 1 is first order for an ITT Bodeman Twence pulp, well done, Rudin and team and Rodolphe, I expect more. Finally, as part of our capital allocation strategy, we continue to cultivate and be active on smaller-sized M&A opportunities. In addition, in March, we also deployed $100 million towards share repurchases. Moving on to guidance. Today, we initiate on the new basis, our full year adjusted EPS guidance with a range of $7.70 to $8, up 9% at the midpoint. We're guiding to 37% revenue growth and 5% organic growth at the midpoint with a book to be above 1, and we expect SPX FLOW to contribute low-teens net adjusted EPS accretion. This guidance based on the profitable growth ITT has delivered over several years. Let us review our top line growth trajectory, since 2023 on Slide 4. Over the past 3 years, we have delivered outstanding top line growth with orders and revenue up over 9% on average every year and we expect the strong growth trends to continue in 2026, both by market share gains in our legacy businesses and the contribution of SPX FLOW. Insicity, for example, as defense spending ramps up, we've been awarded large multi contracts like F-35 and RSS in the U.S. and ground vehicles, radar and precision-guided systems in Europe. We're well positioned to capture a significant portion of the incremental future spend out of our Winter facility in Germany. During my recent visit there, I sit set down with our project managers who are collaborating with European contractors on the development of customized connectors for new decide applications, well done Marco and June on fostering this level of customer intimacy. In MT, our KONI business grew more than 30% over the last 3 years to become a $200 million platform for growth and the shock absorb leader for high-speed trains in China. Moreover, our friction business continues to counter platforms and win market share as demonstrated by the Q1 frictional outperformance of over 1,400 basis points. At the end of last year, friction reached 32% of the global auto OE market and the share gain journey continues. Flow Technologies has been growing at a 15% revenue CAGR since 2023, in addition to the 12% organic growth and a 61% total revenue growth in Q1 this year. We continue to differentiate our flawless project execution as demonstrated by vans growth of 44% with a book-to-bill over 1.2. Moving to backlog we have nearly doubled it in the last 3 years, and it will continue to grow in 2026 as we strive towards a book-to-bill above 1 this year as well. With that, let me now turn the call over to Emmanuel to discuss Q1 results in detail on Slide 5. Emmanuel Caprais: Thank you, and good morning. As Luca highlighted, we kicked off the year with a very strong quarter. In Q1, we delivered outstanding growth across the business in orders, revenue, margin and EPS. Our teams delivered $1.2 billion in revenue up 33% in total and 11% organically. CCT grew 17% organically, fueled by strength in aerospace and defense and industrial, which were up approximately 20%. We're also realizing the benefit of the Boeing contract renewal. Flow Technology grew 61% in total and 12% organically, driven by strong project shipments including [ venue ], which is up 44% and short cycle market share gains, especially in valves, which is up 19%. MT grew 5% organically, a significant achievement in a down market. Friction OE outperformed global automotive production by over 1,400 basis points with all regions above 1,000 basis points. NXPX FLOW added 17 points of growth to IT. On profitability, operating income grew 42% and margin expanded 130 basis points, primarily driven by strong operational performance in our legacy businesses and the XP XO contribution. MT operating income grew 22% for a margin of 21.1% as the team drove net productivity of 220 basis points. Flow Technologies expanded margin 100 basis points to 23.7%, driven by price and volume leverage. CCT delivered 20% income growth to a margin of 19.3%, driven by aerospace volume growth and Boeing contract benefits. As previously stated, intangible amortization expense related to acquisitions is now excluded from adjusted operating income, including in the segment. EPS of $1.98 on the new basis was up an outstanding 25% versus the prior year. You will note the immediate net accretion of the XPX Flow acquisition. Lastly, free cash flow of $14 million was impacted by $71 million of onetime acquisition-related expenses. Excluding these impacts, free cash flow was up 10% year-over-year. Let's now turn to the Q1 EPS bridge on Slide 16. The 25% EPS growth was primarily driven by strong operational performance delivered by all businesses compounded by the month 1 net contribution of XPX FLOW Included in the XPX FLOW contribution is income from operations, partially offset by the higher interest expense and tax rate as well as the dilution from the December equity issuance and the equity given to Lone Star as part of the acquisition consideration. There were 4 additional working days in Q1 versus the prior year that will be reabsorbed in Q4. Finally, we continue to invest in strategic programs such as VIDAR, FLRAA, our Friction high-performance segment and the Geopad to sustain growth for the long term. On to Slide 8. to discuss our 2026 outlook. With the XTX Low acquisition closed, we are now initiating our full year outlook. We expect 37% total revenue growth and 5% organic at the midpoint driven by aerospace and defense demand, strength in both Flow projects and short cycle and continued friction OE outperformance following an outstanding Q1. Contribution from previous acquisitions continue to be ahead of expectations. We expect to deliver roughly 70 basis points of margin expansion to approximately 20% at the midpoint fueled by top line growth, favorable price cost and productivity gains. We expect XPX Flow to deliver high single-digit revenue growth in 2026 and net adjusted EPS accretion in the low teens. Cost synergies are expected to be approximately $15 million in 2026. Regarding the Middle East. As a reminder, our overall exposure to the region is approximately 4% of total revenue and the conflict had minimal impact in our Q1 results. Finally, on cash, we expect to generate free cash flow of roughly $560 million at the midpoint resulting in a free cash flow margin between 10% and 11%. Now let's move to Slide 9 to finish with the EPS outlook detail. As you can see, the 9% EPS growth at the midpoint, much like Q1 will come from our differentiated execution comprised of above-market growth and productivity savings compounded by the XTX FLow accretion. The XTX Flow contribution is net of higher interest expense due to the $2.9 billion debt we contracted in March as well as a higher combined tax rate of 24.9%. It also includes a projected 90 million share count over the next 3 quarters. We will continue to invest part of the incremental profit generated to fund long-term growth initiatives. I'd now like to briefly discuss our Q2 outlook. EPS is expected to be up high single digits in Q2 compared to the prior year. We anticipate organic revenue growth in the mid-single digits. With Flow Technologies in the low double digits organically, CCT in the mid-single digits and empty in the low single digits. Operating margin should expand by around 50 basis points compared to the prior year and approximately 20%. Interest expense is expected to increase meaningfully due to the acquisition of XPX Flow. Let me now turn the call over to Luca to wrap up on slide. Luca Savi: Thanks, Emmanuel. A few points before Q&A. As you can see, we have pumped up for 2026. Our legacy business is firing on all cylinders. In Q1, we delivered 13% of this growth, 16% revenue growth and continued margin expansion. SPX FLOW provided a boost with 5% orders growth in 14% revenue growth and the fast start in synergy capture. This is our strategy in action. Organic value creation through market share gains and relentless execution driving sustained margin expansion compounded by M&A. This is the commitment we made during our Capital Markets Day, and it remains a commitment today. We do what we say and Q1 proves it. This is ITT. Before opening the line for Q&A, there is 1 more thing that we'd like to share. Is made even more better with by the great results that we shared with you all today. Emmanuel, our CFO for the last 6 years and my partner here at ITT for almost 14 years, Estonia is ready to take a break and will be leaving the company. Dear Emmanuel, thank you for everything you've done. As I told you, in the last 14 years, I probably spend more time with you than with my wife. I do not know if this talks more about our partnership or about my marriage. It has been a fantastic ride, full of challenges and achievements. I have so many memories from the very first day we met. We have always been there on my side, in the perform and in a transformed journey, and we transformed this company indeed. In these 14 years, you made us better. I always knew I could count on you. We have been a real thought partner, a copilot to discuss with to work with, to debate, agree, disagree with a real partner to bunk with. In these 14 years, you made me much, much better. I'm so grateful as I was very fortunate to find you that Day Milan and work with you side-by-side for 14 years, gratitude. Emmanuel, we seek around in an advisory role until the end of June, helping to ensure a seamless transition for us. Mike Samineli, Vice President, Treasurer, Chief Tax Officer and Assistant Secretary, has been appointed to serve as interim CFO. Thanks, Mike. To the people connected to our call, thank you for joining us today. As always, I appreciate your time and continued interest in ITT. Kathy, please open the line for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Joe Giordano with TD. Joseph Giordano: Yes. Emmanuel, I know you don't like the spotlight, but you've been a great partner for all these years. So I think we're all set to see you go. So best of luck to you in the next. Emmanuel Caprais: Thank you, Joe. Joseph Giordano: Let's start -- Luca, you never know everything about a deal, I guess, until you own it. So as SPX came into the portfolio, what was like a pleasant surprise to you versus what your initial views were? And was there anything there that you kind of realized, all right, maybe we have a little bit more work to do, maybe this was a little different than what we thought. Luca Savi: That's -- this is very true, Joe. I think that we don't forget that we cultivated the SPX FLOW for 3 years. So we visited all the plans. We went deep dive on the due diligence. So we really have met many people. And therefore, we were able to find many things before the acquisition. I would say 1 thing that surprised me even more positively as they've been able to walk the plant to talk to the people on the shop floor, for example, in Delavan is to see the commitment and the engagement of our workers in the Delavan plant, in the Rochester plant, in the Palmyra plant in Pennsylvania. So the engagement of the workforce on the shop floor is something that I was able to experience and definitely surprised me positively. I also was positively surprised by the growth potential that we have on the revenue synergies. We work hard on those. It's going to take more time because those are revenue synergies. But definitely, there are there and more and these are opportunities. Same on the cost side. So I think that all of those is good and you start seeing good in the results, good orders growth 5%, revenue growth 15% accretive to EPS, good pipeline visibility and moving fast on the synergies. I think that from a cultural point of view, similar, but there are aspects that they do differently that we -- both of us, we will have to adjust. Joseph Giordano: Yes. And then maybe your defense business has been doing great for a while now. If we have a larger trend here over the next several months towards like an ending of global hospitalities, does that create any sort of potential air pocket for anywhere? Emmanuel Caprais: No, we don't see that, Joe. I think that we are -- we have a portfolio that is broad in defense. And so we are on a lot of different applications. And so there's a lot of defense modernization. There's a large defense monetization trend that is happening both in the U.S. and in Europe. And we think that this is here to stay, and this is a long-term trend. Operator: Your next question comes from the line of Julian Mitchell with Barclays. Julian Mitchell: And wish you all the best Emmanuel. If we think about the first question really around selling days dynamics? Sorry for the fiddly question, but maybe help us understand how much of a contribution that was to sales or EPS in the first quarter -- and how we should think about the seasonality of EPS over the balance of the year as that selling days tailwind goes into reverse. Emmanuel Caprais: Yes, Julian. So the contribution of the additional 4 selling days was around 5% -- 5 points of growth in the quarter from a revenue standpoint and then a little less than $0.10 from an EPS standpoint in Q1. When we think about the cadence of EPS, I would say that the next few quarters are going to be around the $1.90 to $1.95 EPS for Q2, Q3 and Q4. Julian Mitchell: That's really helpful. And then my follow-up would just be around if we're thinking about operating margins kind of moving around a lot year-on-year, I think you guided up 50 bps in Q2. They were up over 100 bps in Q1, and you've got a pretty wide margin guide range for the year as a whole. So maybe any sort of -- is there any phasing of investment spend to be aware of in the year? And what are you assuming for the flow acquired operating margin for the year as a whole, including those synergies you mentioned, please? Emmanuel Caprais: Yes. I would say that from an operating margin standpoint, we expect continued progression during the year, and this is because of obviously the productivity improvements that we're driving in all the businesses, as well as some of the price actions that we're taking and that will have a full impact starting in Q2. So as you've come to expect of ITT we drive margin progression year-over-year that is really key to our success. And then from an SPX Flow standpoint, we expect -- so we had a really strong margin in Q1. And the reason for that is that we only had the month of March in there and March had 5 weeks which is unusually large. So a disproportionate impact in the quarter. We don't expect that margin to be the same in Q2, Q3 and Q4. However, we do expect that margin will continuously improve as we roll out our productivity plan as well as our growth initiatives. Operator: Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Jeffrey Hammond: Best of luck to Emmanuel. We're sad to hear you're leaving as it sounds like Luca, you are, too. Just staying on SPX FLOW, can you dig in a little more on the order trends in that business just from a market standpoint? And then it just -- it seems like shorter term, you may be getting some early revenue synergies. But just the opportunities around leaning in on commercial excellence and starting to drive out growth because I think what are the early concerns with the acquisition was the legacy growth rate? And how do you accelerate that? Luca Savi: Sure. Thanks, Jeff. So when you look at the orders growth was a good order growth of 5%. Now when that is overall for SPX FLOW in the quarter. When you look at the different businesses, you have Waukesha Cherry-Burrell, our Agini pumps, their orders were up double digit. Nutrition & Health Solutions, their orders were up 3%, mixers up 7% and the pumps up 2%. So all the different businesses were up actually in terms of orders. And all of the 4 businesses were up also in revenue with Nutrition & Health and Waukesha double-digit and mixer and pump in the low single digit. So overall, 15%, okay? We expect also the book-to-bill for the full year to be above 1 for SPX FLOW. Now this is very similar to what we said at the very beginning because during the due diligence, we saw that pipeline and we believe in this growth. Now this, to be honest, has got nothing to do with -- this is the good work that the SPX FLOW employees have done since nothing really has changed during the month of March. Now if you top this off together with our approach, going after the 100%, not the 80-20, be more granular and be more decentralized, I would expect that performance to continue to improve. Andrew Obin: Okay. Great. And then just from a modeling standpoint, Emmanuel, you gave kind of the organic trends in the 2Q by segment, but how should we think about that within the 4% to 6%? And then just on the tax rate, is there an opportunity to bring that down over time? That was a little bit of a surprise that the tax rate is going up? Emmanuel Caprais: Yes. So for the full year, Jeff, -- we expect both IP and CCT to lead the charge from an organic growth standpoint in the high single digits. And then Motion Technologies in the low single digits for the full year because, obviously, there's a decline in the automotive production. And so -- and the friction is really outperforming very, very nicely as we saw in Q1, but nonetheless, there's a global production that is down. And then from a tax rate standpoint, so today, we stand at almost 25% at 24.9. This is the impact. This is directly the impact of SPX Flow. And so Mike and the team will work on tax opportunities in order to bring that tax rate down. But I think with limited impact in 2026 and more to come in the years after. Operator: Your next question comes from the line of Nathan Jones with Stifel. Nathan Jones: I'll add my best wishes to Emmanuel. First question here on CCT margins. It seems over the last few years, you guys have done the work on improving the value proposition to customers there, even -- I mean I'm talking outside of the aerospace stuff, improving the productivity, improving the on-time delivery. So I guess my question is about value-based pricing in CCT and where you are in that process outside of the commercial OEM stuff? And how much do you think that could contribute to margins over the next 2 or 3 years? Luca Savi: Thanks, Nathan. This is fair. And I think that price has been also a good tailwind when you look at CCT in the last couple of years, exactly for the reason that you said. The price negotiation with Boeing that we closed last year is a natural proof of what you just said. Having said that, I think that there is more to do on the pricing on the CCT front, and this is what the team is working on. I would say the largest opportunity to be fair Nathan is probably in Cesare. So I think the Kesariais providing a great service to our customers, and they think that there is more to be done specifically in that part of CCT. Nathan Jones: I guess a follow-up question. [ Maris ] interested in revenue synergies out of this kind of deal, and I'm sure there is a lot of plans going on there. I know they take longer to generate. So I'm not going to ask you what they contribute to 2026. But maybe if you could just provide a little bit more color on the things that you're working on where you see the opportunities to generate revenue synergies and kind of if you have any target over time of what that could add to the overall growth for... Luca Savi: Sure. Let's try to be specific. So if you -- when I was in Delavan together with Rudy and we on the shop floor going around, -- we know that the Wacker doesn't have the twin screw pumps. As a matter of fact, we were spending money in Waukesha to really develop a new twin screw pumps. We did the assessment, Bornemann creams are super good, very well recognized in the market and therefore, Waukesha will sell Bornman wins screw pumps, that was just a small order that we had, but it's a start. And not only they will start selling but then we will also localize our production of the twin screw in our client in the bank. That is a specific activity that I'm sure will deliver quite a bit of synergies. Latin America on the mixing front. Nikos our leader in Latin America he is working hard together with the leaders of the different units in -- from SPX FLOW. And I'm sure that as we localize more the decision-making, we speeded up the decision and the action in the region in Latin America, and we get more intimate with the customers just the fact that we are there. that will provide good revenue synergies. The Middle East is another area where we are working on. But as you can imagine, that probably at this point in time is more planning and discussion. And then there are potential synergies happening just because now we have a base in Xidu, Shanghai, where we never had a plan before in the local -- in the legacy Flow Technologies in the legacy IP and a plant in Poland where we never had in Europe a low-cost base manufacturing. So we are working hard on all those fronts, Nathan. Operator: Your next question comes from the line of Vlad Bystricky with Citigroup. Vladimir Bystricky: Good morning, guys. And I echo the sentiment. Congratulations to Emmanuel. We'll miss working with you tremendously, obviously. I guess my first question -- just when I look at the organic growth outlook for the year, the plus 4% to 6%, it seems very consistent with what you were thinking coming into the year. But -- can you talk about whether there's been any sort of moving pieces underneath that businesses or regions that are trending better or worse versus 3 months ago? And I guess specifically, whether you're baking in any incremental headwinds in the Middle East associated with conflict there? Luca Savi: Sure. No major change from what we were expecting, Vlad -- and now as a matter of fact, sure, the Middle East is something to watch. But now just to give you a perspective of the Middle East, which is 4% of total year revenue, we have an impact in Q2, but the impact in Q2 is probably less than 1% of the IC revenue. It's probably between $0.5 million and $0.7 million of the sales when it comes to the Middle East. I think that there is a very strong performance in the short cycle when you look at the spare parts, the baseline. And I want to tell that growth is not nominal growth. That is real growth. This is volume growth. There was a little bit of price, but that was minimum. And then also the connectors industrial sales, both with the OEM and distribution and Vlad those are market share gains in Flow and also on the Connector side. Vladimir Bystricky: That's really helpful, Luca. And I guess just following up on that 1 on the industrial connectors -- can you -- when you talk about market share gains there, can you give us any more color on what specific end markets or verticals you're seeing share gains and any notable regional differences to call out there? Luca Savi: I think there is a very good performance on the -- in Asia Pacific, where the team has worked really hard on the medical side and Medical has been growing incredibly hard and then also on the HVOR. So Asia Pacific and China has been definitely a good tailwind whereas I would say, when you look at Europe on the orders front, it's really working hard on the defense because of the defense ramp-up that is happening in Europe. And in North America, you have really the distribution is wider. So it will be difficult really to really pointing out to any specific market. Operator: Your next question comes from the line of Brad Hewitt with Wolfe Research. Bradley Hewitt: So you mentioned that your friction business outgrew auto builds by 1,400 basis points during the quarter. Curious if you expect that outgrowth versus build to compress through the rest of the year? Or could there perhaps be upside this year is the typical algorithm of 400 to 500 basis points of outgrowth? Luca Savi: I would say, listen, is an exceptional performance. and allowed us in a market that was down 3.4% in the quarter actually to grow, show the resilience of the team, the resilience of the business. I would say, for the time being, this is only 1 quarter -- so I would say we stick to our usually forecast of an outperformance between 500 and 700 basis points for the full year. What I really like about this outperformance was that it was spread. It was in every region. Was in China. It was in Europe where we already had a high market share and was also in North America. And last but not least, is we won 39 platforms electrified platforms in the quarter, which will feed future market share gains. And whilst production will be down this year to 91 million vehicles. The production of hybrid and the production of EV will actually grow double digit, and this is where we are particularly strong. Bradley Hewitt: Okay. Great. And then as we think about at the total company level, can you walk through your assumptions for the year in terms of the net price cost equation as well as some of the moving pieces related to tariffs and material inflation? Luca Savi: Sure. On the price cost, you really have the usual dynamic. In terms of you have a very good price cost equation when it comes to IP and CCT because we've got more pricing power. Less so in motion technology where we feel the price pressure. But overall, for the full year, at ITT, the price cost is going to be positive. Now when you look at the tariff the situation is very fluid. I'm pretty sure that the next few weeks is going to be different than what it is today. Now we are actively pursuing any opportunity to recover any targets that we already pay, but we think that process will be long and who knows how it's going to pan out. And then -- what I would like to highlight is that as we demonstrated in 2025, we were able to offset that all the tariffs with commercial and productivity actions. So we think that, that will be a similar scenario in 2026. Operator: Your next question Matt Summerville with D.A. Davidson. Matt Summerville: Echo similar sentiment, Emmanuel. Just 2 quick ones for me. Can you talk about the core sort of industrial process funnel as you look ahead relative to maybe what you were seeing 90 days ago or a year ago, whatever makes sense to drive the most informed sort of comparison as to how that's evolving? And then I have a follow-up. Luca Savi: Sure, Matt. The funnel is very healthy. It's elevated and is actually up year-over-year, Matt, is also up sequentially to -- now what is interesting is that then if you want to go a little bit more granular and you look at the region, I would say the region where the funnel is up the most is North America, which is interesting because this is where we had our largest orders growth in North America. And despite that, the panel is up tremendously. -- which tells us something about the replenishment speed of the opportunity in North America. The funnel is down when you look at the Europe and the Middle East for obvious reasons because all the commercial conversation, the investment that we had with Saudi Aramco, for example, all of those are frozen. But we expect those to start quickly if the situation normalizes. Matt Summerville: And then I was wondering if you could help sort of cadence out the flow accretion you expect for the year if we were at $0.04 in Q1. Obviously, you're assuming something more conservative on the look ahead out 3 quarters. So maybe help me understand kind of the logic behind that. Maybe it's just conservatism but ultimately, how we should be thinking about that cadence? Emmanuel Caprais: Yes. So when you think about Q1, as I mentioned, in Q1, you have an outsized contribution from SPX Flow. And the reason for this is because basically March is so disproportionate compared to the rest of the quarter. And then you also have less interest expense as well as a smaller share count. So as you ramp that in Q2, Q3 and Q4, you get your interest that increases roughly by $30 million a quarter. You get your share count that goes to 90 million shares. And then so as a result, SPX FLOW continues to deliver really strong performance but it's kind of impacted by these variables and the normalizing of the fact that we don't have just 1 month with fibre. So I would say the continued progression of the performance of SPX FLOW from a growth standpoint, as Luca said, but also from a margin standpoint. And so -- and preparing the ground for further productivity as we hit '27, including cost synergies. Operator: Your last question comes from the line of Scott Davis with Melius Research. Unknown Analyst: It's Jake on for Scott. Congrats on getting the SPX deal across the goal line and congrats to manual as well. We appreciate all your help over the years and hopefully you'll be on the beach in a few months with a nice Cavern actually, I don't know what your drink is, but just on the Middle East I know you touched on -- you made a few comments on that. But I'd have to imagine when you start turning on some of those production has been shut in, you're going to have a lot of valves and pumps and other products that probably won't work as they should and to say nothing on some of the infrastructure that's been destroyed. So I guess, is there a way to think about what the upside might be on the other side of this conflict? Luca Savi: Yes, what you said is absolutely true. So I think that we expect that the investment that was supposed to happen, the conversation to start super quick. And then there should be some good service world that comes out of it. And this is where our team headed by Calin by Harland by Handy to be able to perform because the service business is actually very, very good. and the Saudi expansion that we made will be perfect at that time. One thing also I want to remind is the incredible performance also that we had of our Habonim valves in Israel. As despite what's going on and the war, this business has been able actually to grow orders despite the war to grow revenue despite the war. And sure, we had pressure on the margin because the cost of the containers, because of the transportation, et cetera, and the disruption on the operations, as you can imagine, but a great performance from the Habonim team over there in the Middle East as well. Unknown Analyst: Okay. That's good color. And just a different topic, I was surprised to hear you mention small bolt-on deals on the call, just given all you have on your plate with SPX and it seemed like a very deliberate comment, but I'm not sure if that's an indication that maybe there's some deals in your pipeline that you feel are actionable. So do you feel like you have the organizational capacity to be able to take on some more from here? Luca Savi: Yes, Jake. Yes, we do. Because when you think about the SPX FLOW, it involves our business units that outstanding the terms of SPX Flow, of course, will be integrated with our pumps business. But there are areas where the business and the business leaders are running very well, they got the capacity to really add to it. Think about Habonim. Habonim is performing incredibly well. 4% revenue growth, book-to-bill of 1.2. The fundamentals are strong. They've been practically untouched by the SPX Flow acquisition. So their management team, that business have the capacity to really to do a little bit more. And this is also why we kept our debt ratio to 2.7 to really have that flexibility. So we got the financial capacity to do small bolt-ons and also the management capacity. Obviously, they're going to be small in size, right? Nothing large. Operator: Thank you. This ends today's teleconference. Please disconnect your lines at this time, and have a wonderful day.
Operator: Thank you for your continued patience. Your meeting will begin shortly. If you need assistance at any time, please press 0, and a member of our team will be happy to help you. Please stand by. Your program is about to begin. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Ellington Financial Inc. First Quarter 2026 Earnings Conference Call. Today's call is being recorded. At this time, participants have been placed in listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question during that time, please press star then the number 1 on your keypad. If at any time your question has been answered, you may remove yourself from the queue by pressing 2. Lastly, if you should require operator assistance, please press star 0. It is now my pleasure to turn the call over to Alaael-Deen Shilleh. You may begin. Alaael-Deen Shilleh: Thank you. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical in nature and involve risks and uncertainties detailed in our annual and quarterly reports filed with the SEC. Actual results may differ materially from these statements, so they should not be considered predictions of future events. The company undertakes no obligation to update these forward-looking statements. Joining me today are Larry Penn, Chief Executive Officer of Ellington Financial Inc., Mark Tecotzky, Co-Chief Investment Officer, and JR Herlihy, Chief Financial Officer. Our first quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Today's call will track that presentation, and all statements and references to figures are qualified by the important notice and endnotes in the back of the presentation. With that, I will hand it over to Larry. Larry Penn: Good morning, everyone, and thank you for joining us today. I will begin on slide three of the presentation. Ellington Financial Inc. delivered an exceptionally strong first quarter in terms of both GAAP net income and adjusted distributable earnings. Even in the face of rising market volatility and widening credit spreads throughout the month of March, performance was strong across our diversified portfolio, which drove GAAP net income of 78¢ per share and annualized economic return of 26% and book value per share appreciation of 3% even after dividends. Our ADE continues to consistently outpace the quarterly dividend run rate of 39¢ per share, and this quarter, with our ADE reaching 55¢ per share, it exceeded our dividend by a very wide margin. Our strong ADE for the quarter reflected the high yields and steady credit performance from our loan portfolios, complemented by an absolutely standout quarter from Longbridge, which contributed a disproportionate share of both ADE and net income. Despite what is typically a seasonally slow quarter, Longbridge had a near-record quarter for proprietary reverse mortgage loan origination volumes, continued gains in market share for HECM originations, and healthy gain-on-sale margins across products. Our Longbridge segment's results also benefited from the successful PropReverse securitization we completed during the quarter, where we achieved our lowest-ever cost of funds and tightest-ever overall debt spreads for this type of securitization. Servicing was also a key contributor for Longbridge, driven by strong tail securitization execution, a net gain on our HMBS MSRs, and steady base servicing income. Finally, results at the Longbridge segment included gains on interest rate hedges, along with the receipt of a one-time litigation settlement payment that added to an already strong quarter. Overall, again, in what is typically a seasonally slow quarter, net income at our Longbridge segment not only set a quarterly record, but it actually surpassed its 2025 full-year net income by a wide margin. We also saw great contributions from our other origination platforms, with LendSure continuing its impressive run of performance in the first quarter. High origination volumes and strong gain-on-sale margins drove another excellent quarter at LendSure, with profitability contributing meaningfully to Ellington Financial Inc.'s bottom line, both through our ownership stake and through the steady flow of high-quality loans into our portfolio. Turning back to our portfolio, our non-QM, closed-end second lien, and agency-eligible strategies delivered continued robust results, supported by strong securitization executions. Our securitization platform remained highly active during the quarter. We participated in seven transactions totaling more than 2.8 billion from our EFMT shelf, compared to just 1.1 billion across four transactions in 2025. These higher volumes are facilitating larger deal sizes, with our average non-QM securitization size reaching 508 million in Q1 2026, nearly double the 205 million average in Q1 2025. Our first quarter results were further reinforced by continued strong credit performance across both our residential and commercial loan portfolios. Our delinquency rates actually declined for a second consecutive quarter, and realized credit losses remain minimal. In non-QM, we saw mortgage rates briefly dip below 6% in the quarter, triggering a brief prepayment spike in that sector. We have always focused on prepayment risk in our asset selection, and the recent prepayment spike highlighted the benefit of that focus. According to JPMorgan Research, our EFMT shelf has both the lowest prepayment speeds in the cohort and almost the lowest 30-plus day delinquency rates, each of which directly enhances the overall value of our high-yielding retained tranches. Importantly, consistency and durability of our loan performance help keep our securitization platform attractive to securitization investors. Turning now to the balance sheet, our portfolio grew by approximately 4% during the quarter, even net of securitization activity, driven primarily by growth in our loan portfolios. Our leverage ratios were essentially unchanged for the quarter, as equity growth kept pace with asset growth. We also continued to advance the acquisition of a residential mortgage servicer, which remains subject to regulatory approval. Once completed, this acquisition is expected to deepen our vertical integration by bringing additional servicing capabilities in-house and enhancing our ability to manage delinquent assets more directly and efficiently. One note on book value per share: because we carry our unsecured debt at fair value on the liability side of the balance sheet, higher interest rates and wider credit spreads had a positive impact on our book value per share. Over time, and all other things being equal, the prices of our assets should be loosely correlated with the prices of our long-term liabilities, but there will definitely be some month-to-month noise during periods of high credit spread volatility, as we are seeing so far this year. Looking at April, we saw continued solid performance across the investment portfolio and at Longbridge as well. However, with credit spreads in April retracing much of the March widening, we estimate that remarking liabilities will have a roughly 13¢ effect on book value per share in the other direction, which will offset some of April's solid portfolio performance. Turning to our equity activity, we raised 117 million of common equity in January through a block trade, using the proceeds specifically to redeem our Series A preferred stock, which was our highest-cost tranche. The issuance was accretive to book value per share net of all costs, and was precisely sized to fund the preferred stock redemption. Since our Series A preferred had carried a coupon of over 9%, redeeming that preferred stock has reduced our overall cost of capital, with the benefit flowing directly to common shareholders. Our common equity transaction was well received, with the offering more than two and a half times oversubscribed by institutional investors, and our timing was excellent, as we were able to execute ahead of the subsequent spike in market volatility. We will continue to monitor the markets with an eye toward issuing additional preferred equity when pricing becomes more attractive. With that, please turn to slide five, and I will turn the call over to JR to walk through our financial results in more detail. JR? JR Herlihy: Thanks, Larry. Good morning, everyone. For the first quarter, we reported GAAP net income of 78¢ per common share on a fully mark-to-market basis and ADE of 55¢ per share. On slide five, you can see the portfolio income breakdown by strategy: 61¢ per share from credit, 2¢ from agency, and a remarkable 47¢ from Longbridge. And on slide six, you can see the ADE contribution by segment: 58¢ per share from the investment portfolio segment and a sizable 21¢ from the Longbridge segment. ADE for the quarter exceeded expectations mainly due to the outsized contribution from Longbridge. Moving forward, we are now increasing our quarterly guidance on ADE per share to the 45¢ per share area, which is still well above our dividend run rate of 39¢. Starting with the credit portfolio, net interest income again increased sequentially, and we also generated net realized and unrealized gains across our non-QM and closed-end second lien loan portfolios, including retained tranches, as well as agency-eligible loans and commercial REO. These results were partially offset by losses in certain other credit strategies and on residential REO. We continue to benefit from strong overall earnings contributions from our loan originator affiliates, particularly LendSure, alongside solid credit performance across our loan businesses. For a second consecutive quarter, 90-day delinquency rates declined in both our residential and commercial loan portfolios, and life-to-date realized credit losses remain very low, as shown on slide 13. Moving to the agency strategy, results were driven by net interest income and net gains on interest rate hedges, partially offset by net losses on our agency RMBS, with spreads on many agency securities wider during the quarter. As Larry noted earlier, Longbridge had an excellent quarter across both originations and servicing. Origination results were driven by strong volumes and gain-on-sale margins, and also by the proprietary reverse mortgage loan securitization that we completed during the quarter, with net gains on that transaction further boosting earnings. In Longbridge's servicing business, steady base servicing net income, strong tail securitization executions, and a net gain on HMBS MSRs all contributed positively. Results at Longbridge also benefited from net gains on interest rate hedges and the receipt of a 17 million litigation settlement payment. Turning now to portfolio changes during the quarter, slide seven shows a 4% sequential increase in our adjusted long credit portfolio to 4.27 billion, net of securitizations, driven by growth in our loan portfolios and retained RMBS tranches. Our short-duration loan portfolios continue to generate significant paydowns, with RTL, commercial mortgage bridge, and consumer loan portfolios returning 224 million of principal during the quarter, representing 15% of their beginning fair value. On slide eight, our total long agency RMBS portfolio declined by 3% to 197 million, and on slide nine, the Longbridge portfolio increased by 13% to 695 million, with proprietary reverse mortgage loan origination volumes exceeding the impact of the prop loan securitization completed during the quarter. Longbridge originated 515 million of new loans during the quarter, which is a 52% increase from 2025. Please turn next to slide 10 for a summary of our borrowings. At March 31, the total weighted average borrowing rate on recourse borrowings was 5.49%, down 18 basis points from year-end, driven by tighter repo spreads. Quarter over quarter, net interest margin on the credit portfolio was relatively stable, while agency NIM declined as the benefit from swap carry moderated. At quarter-end, 30% of our recourse borrowings were long-term and non-mark-to-market, and 18% were unsecured. The weighted average remaining term of repo borrowings was nine months. Finally, during the quarter, we improved the terms on several of our credit facilities, with those enhancements taking effect in the second quarter. At March 31, our recourse debt-to-equity ratio was 1.9 to 1, and our overall debt-to-equity ratio was 9 to 1, both unchanged from year-end as equity growth kept pace with increased borrowings supporting our larger portfolio. Unencumbered assets increased by 8% to 1.9 billion. Slide 17 shows our credit hedging portfolio at quarter-end. Corporate credit hedges declined, while our net short TBA position increased. Our short TBA positions serve multiple purposes: hedging interest rates, volatility, and mortgage basis risk, while also historically performing well during periods of credit spread widening. As a result, they can provide protection in both interest rate stress scenarios and credit stress scenarios. Slide 16 shows our broader interest rate hedging portfolio, where the net short TBA position complements interest rate swaps and short Treasury positions across the yield curve. As has been our longstanding practice, we carry our unsecured notes at fair value through the income statement. Consistent with this treatment, quarter-over-quarter increases in interest rates and widening credit spreads—with the latter widening sharply at quarter-end—resulted in a positive mark-to-market on those liabilities, contributing to both GAAP net income and book value per share. Results also reflect an accrued incentive fee. At March 31, book value per share was $13.56, up 3% from $13.16 at year-end, and economic return for the first quarter was 26% annualized. With that, I will pass it over to Mark. Mark Tecotzky: Thanks, JR. This was a quarter where Ellington Financial Inc. showed resilience and stability amid substantial market stress. It was a quarter of very strong net income and very strong ADE. There were some tailwinds specific to the quarter, but even without those, we delivered strong performance from our more diversified, vertically integrated platform. Securitization volumes were 2.8 billion, our largest quarter ever, and well diversified across several loan types. We started securitizing non-QM loans back in 2017, and we now securitize five different loan types. Greater securitization volume does not just increase profits; it also tends to improve margins. It is important that these businesses operate at scale. At scale, some of the profits can be reinvested back into the business to improve technology. That is what we have been doing to grow market share and process more volume without adding meaningfully to operational headcount. At scale, our mortgage shelf benefits from improved liquidity, which is one of the most important factors for investment-grade buyers. Scale also enables us to provide consistent liquidity and stable pricing to our loan origination partners. All this deal activity creates a future potential tailwind for us, as the call rights from these deals can become exercisable and valuable if interest rates drop. Once that happens, we will generally look to resecuritize the underlying loans. By replacing short-term repo financing with match-funded, non-mark-to-market debt issued through our securitizations, we have gone a long way toward better insulating our portfolios from market shocks. As you know, we navigated COVID very well, but we still had to deal with margin calls from our repo lenders. Today, mark-to-market repo represents a much smaller percentage of our overall borrowings, so our margin call risk is even lower now than it was back then. To be clear, significant market-wide spread widening would hit our book value per share; however, the lasting damage to many REITs during COVID was not caused by the sudden dramatic spread widening itself, but by the inability to meet margin calls, which caused forced selling that crystallized losses. During the quarter, even after closing multiple securitizations and selling all the senior debt tranches, we still achieved a healthy 4% portfolio growth, bringing total portfolio assets to more than 5 billion. At one point late in the quarter, when credit spreads neared their widest levels of the year, we took advantage of a strong insurance company bid by selling a non-QM pool in the form of a whole loan sale. Insurance companies tend to be less sensitive to short-term fluctuations in market credit spreads, so we were able to monetize strong gains on our credit hedges at the same time that we sold the pool. Moving now to our originator affiliates, they had positive performance broadly, but Longbridge in particular had really amazing results. It has emerged as a market leader in private-label reverse mortgages. Demographic trends and the increasing preference of baby boomers to age in place represent powerful tailwinds that we expect will support continued strong growth. We also had strong returns in our non-QM and second lien strategies, and a relatively new agency-eligible loan strategy which is benefiting from the pullback of the GSEs. We see agency-eligible loans as a key growth area moving forward. Nonagency mortgage volumes continue to grow, with an increasing share of GSE-eligible loans migrating to private-label execution where pricing is frequently more attractive than what the GSEs offer. As we have spoken about before, the size of the nonagency market is growing while the Fannie and Freddie footprint continues to shrink. Importantly, this growth in the nonagency market is concentrated in sectors where Ellington Financial Inc. is actively involved. We see these trends—with the nonagency market growing and the Fannie and Freddie market shrinking—as a logical response to guarantee fees and LLPA pricing from the GSEs that are disconnected from historical or expected losses. Absent significant repricing from the GSEs, we think this dynamic will continue. It almost feels strange not to mention the war in the Middle East, but aside from the short-lived interest rate and spread volatility we saw in March, it was not materially impactful to our strategies. Looking ahead, if higher energy prices persist, many consumers will have less disposable income, and those at the lower end of the income spectrum may find it harder to meet their debt obligations. Given our large presence in the agency, the SCR, and multifamily lending, we also have exposure to renters who typically have lower incomes than homeowners. We are watching this very closely. HPA is no longer the powerful tailwind to credit performance it was in years past. 2025 was the weakest year of HPA growth in a decade, which means that borrowers facing income disruption may find it more difficult to pay off their mortgages simply through home sales. That said, housing is definitely more affordable than it was coming into 2025, which should be supportive of long-term loan performance. At Ellington, we continue to add resources to our research effort both to inform our investment decisions and to share insights with our origination partners, helping them make better credit decisions. Our aim is to continue to capture the large and, in many cases, growing opportunity in both residential and commercial lending. Now back to Larry. Larry Penn: Thanks, Mark. 2026 is off to a great start. In the first quarter, we delivered outsized GAAP net income, ADE that widely exceeded dividends, and strong growth in book value per share, despite elevated volatility and widening credit spreads late in the quarter. I attribute these excellent results to the strength of our diversified, vertically integrated platform and the excellent credit performance from our loan portfolios. But I also want to emphasize the significance of three other important factors in our success: the ongoing growth and stability of Longbridge, the increased scale and effectiveness of our securitization program, and our continued progress strengthening and optimizing our balance sheet. I will close by highlighting these three important factors. First, Longbridge. I do not think one can overstate just how much Longbridge now means for Ellington Financial Inc., and I am not just referring to the strength of this one quarter. Even in this prolonged higher interest rate environment, where many mortgage companies are still struggling, the Longbridge platform has achieved a level of consistency that has effectively given us a head start on our earnings targets each quarter. Furthermore, its target demographic, namely seniors, is obviously growing significantly, and meanwhile, the barriers to entry in the reverse mortgage business remain large. Longbridge's proprietary reverse mortgage business is now well established, with a seasoned securitization program and a deep and repeat investor base that continues to support strong execution. Many of Longbridge's costs are fixed or quasi-fixed, so its origination cost ratios have declined as volumes have grown. Its servicing cost ratios have also come down with the growth in its MSR portfolio, not only because of internal economies of scale, but also because its subservicing costs have declined as a result of increased competition among subservicers. As a result, Longbridge's MSR assets are generating very high yields for us, and those yields should continue to increase. Meanwhile, Longbridge's investments in technology are only adding to its operating efficiencies, and all of this has been achieved without the benefit of a meaningful decline in interest rates which, if that ever materializes, should be a significant tailwind for Longbridge's origination volumes and profitability. In summary, Longbridge is in a fundamentally stronger and more stable position than it was even a year or two ago, and we believe that Longbridge is well positioned to be an even more consistent and meaningful contributor to Ellington Financial Inc.'s earnings going forward, providing a strong and increasingly predictable foundation for our quarterly results. Second factor, our securitization platform. As I mentioned earlier, we priced seven transactions from our EFMT shelf during the quarter, totaling more than 2.8 billion. Our increased scale, achieved without compromising speed to market, reflects the continued expansion of our origination platform and has enhanced execution economics for us. Larger transactions enable us to spread fixed costs over a broader base, attract a wider institutional investor audience, and secure long-term non-mark-to-market financing on more favorable terms. And more frequent transactions mean that our loans spend less time in the warehouse period, when net interest margins and returns on equity are lower, and instead they transform more quickly into high-yielding retained tranches, which remain important contributors to our earnings. Third factor, all the important steps we have taken to strengthen our balance sheet. Our accretive common equity raise in January enabled us to retire our highest-cost preferred equity tranche. And following our inaugural Moody’s- and Fitch-rated unsecured debt issuance this past September, we have ready access to the long-term institutional debt markets. Issuing more unsecured notes remains a key priority, but we plan to be opportunistic—not just when it comes to overall market interest rates, but when it comes to the debt spreads over Treasuries that we can achieve. One balance sheet metric worth highlighting is the continued expansion of our unencumbered asset base, which has increased meaningfully since our unsecured notes offering in the third quarter of last year. At March 31, unencumbered assets stood at nearly 2 billion, up considerably over the past nine months. This reflects a deliberate migration where the proportion of our liabilities represented by long-term unsecured debt will continue to increase, and the proportion represented by short-term repo financing will continue to decrease. And as I just mentioned, we intend to continue this migration by issuing additional unsecured notes as market conditions permit. Our goal is to create a virtuous cycle where issuing long-term unsecured debt and using some of the proceeds to replace short-term debt improves our credit ratings and thereby makes additional unsecured debt issuances even more attractive and lowers our overall funding costs. In conclusion, I think we are firing on all cylinders now, and we are really excited not only about this great first quarter that we just reported, but about our prospects for the rest of the year and thereafter. We will now open the call for questions. Operator, please go ahead. Operator: Thank you. If you would like to ask a question, please press star then 1 on your keypad. To leave the queue at any time, you may press star then 2. Once again, it is star then 1 to ask a question. We will take our first question from Frank Gilabetti on behalf of Bose George with KBW. Your line is open. Frank Gilabetti: Hey, good morning, guys. I wanted to start with just your current run-rate ADE. It has consistently been above the dividend, and you noted earlier that you raised your ADE guidance. Where does the board see current dividend policy going forward, and what is the trade-off of retaining earnings to build book versus reinvesting some of those earnings in your operating companies? Larry Penn: Thanks, Frankie. Yes. Let me just start off by saying we are certainly not thinking of lowering the dividend, so let us just start with that. The dividend is at a good place. I think it does achieve good balance. We were able to, and have been able now recently to, build some book value per share. Our yield—at an 11 handle—I think that is a good yield. So I would say, again, certainly no thoughts of lowering the dividend. Could the next move at some point be a raise? Sure. But at this point, we just like where it is. Frank Gilabetti: Thank you. And then on the commercial REO outperformance, you showed some unrealized gains there, and roughly 60% of your commercial book is multifamily. Are those gains coming from successful workouts in the sector, or are you seeing some more positive trends there? JR Herlihy: It is more of the latter. The way that we mark those assets is we run a DCF that projects expenses and CapEx expenditures we expect, and then we discount those back to a net present value today, typically at a pretty high return in the double digits. The idea is if we deliver on those expectations, there is a higher terminal value at the end; the fair value should accrete up to that terminal value over time because of the high discount rate. That dynamic is what was driving the P&L in Q1 on the commercial REO book, as opposed to some large resolution. We thought it was worth flagging given its contribution to P&L. Frank Gilabetti: Great. And then just one last question if I can. On your agency allocation, it has come down over time. Where do you guys see that trending? Do you see it roughly in this 1% range going forward? Mark Tecotzky: Sure. I would say given the substantial recovery you saw in agency MBS spreads in 2025, and continuing on this year—albeit at a slower pace—I do not see that allocation going up. It will probably drop a little over time. We mentioned it dropped by 3% on a face amount to investment amount basis. We have expertise there, and should we get to a point in relative value of agency MBS versus all the other things we are doing that we thought it was compelling, we could certainly bring it up. The other area where you see activity on agency MBS—and JR mentioned it, I believe—is hedging activities. Especially as some of the securitizations, like agency-eligible investor loans and eligible second homes, a lot of those AAA bonds are explicitly priced at a dollar-price spread relative to the agency market. It functions as a very effective hedge. JR Herlihy: Just to add to that, as opposed to being a significant core strategy for us, agencies are going to be more opportunistic. If spreads widen, that could be more of a trade to put more agency on. And as Mark said, we actively manage the TBA short hedge, especially against our non-QM loans. Operator: We will move to Timothy DeAgostino with B. Riley Securities. Your line is open. Timothy DeAgostino: Yes, hi. Good morning. Thanks for taking the question, and congrats on another great quarter. Looking at the origination volumes at some other peers to Longbridge, I noted that March was a stronger month in the reverse space for origination volume. I was wondering if you all witnessed the same thing at Longbridge—if March volume was stronger than January and February—and if that theme has persisted through April and May. And then as well, if you could just provide some color on what you thought the driver of outperformance there was. JR Herlihy: Thanks, Tim. I would say that while Q1 is typically seasonally slow, Longbridge's sequential decline—from Q4 to Q1—was very modest. In other words, they originated almost as much in Q1 as they did in Q4, and then it was about 50% higher year over year versus Q1 2025. April is looking good, so we are seeing that momentum continue so far into Q2. Looking at month-by-month origination volumes, they did trend up from January to February to March, with March being the highest of the three by a decent margin. So we did see that same dynamic. In terms of drivers, prop has proven more resilient in the face of higher interest rates than HECM has. HECM volumes have certainly declined. Larry Penn: I would just add that this is still a very small market in the context of the entire mortgage market. Even though this is a seasonally slow quarter, I think that this product is gradually getting more traction overall, especially the prop product. Coming out of the seasonally slow months, I would expect to see some good seasonal effects. We talked about the demographics, and in terms of the marketing efforts that Longbridge has undertaken, those are helping as well. Pull-through rates are improving. There are a lot of things that we are doing to ultimately originate more loans that do not necessarily have to do with seasonality. I am looking for continued strong performance there. Timothy DeAgostino: Okay, great. Thank you. And then a second one: you guided to, at the bottom line, 45¢ per share on a run rate. As we think about net interest income, it took a pretty big material step up from 4Q to 1Q. Are there some one-off items driving that growth? And is there any guidance or color you want to provide on how we should think about net interest income going forward, looking at the larger portfolio? JR Herlihy: We were at 55¢ overall ADE. We mentioned the 45¢ area as a run rate moving forward, which is in line with Q4—Q4 was 47¢. The contribution from the investment portfolio segment—where most of the net interest income comes from—is running at a steady state. Most of the exceedance this quarter was from Longbridge, which is driven more by their origination activity and their securitization activity. The NII we are seeing has been trending up nicely in line with the growth of the portfolio, and we improved cost of funds this quarter as we discussed. I do not think there is huge volatility in NII quarter to quarter. The guidance is more signaling that we should not expect 21¢ from Longbridge every quarter. The NII contribution from the investment portfolio has been, as designed, pretty stable quarter to quarter. Our retained tranches are very high yielding and continue to grow, and we are continuing to grow the equity base as well, so hopefully everything is keeping pace with that. Operator: We will move to Trevor Cranston with Citizens JMP. Your line is open. Trevor Cranston: Hey, thanks. Good morning. There has been a decent move up in mortgage rates since the initial announcement of the GSE portfolio buying. I am curious for your current thoughts on the likelihood of more targeted government policies aimed at lowering mortgage rates as we go through the balance of the year, and particularly whether you think there is any chance that the GSEs do something like reducing LLPAs or G-fees in an attempt to get mortgage rates to a lower level. Mark Tecotzky: Hey, Trevor. When that announcement first came out, it seemed like if the focus is affordability, there were two other logical levers—not the GSEs, but FHA—could pull. One is LLPAs, because LLPAs clearly, for many types of GSE loans, are far in excess of historical or expected losses. They are also losing market share to the nonagency market because of high LLPAs, so that was one easy lever. The other lever was either an ongoing or upfront cost cut to MIPs on the FHA side. When you did not see those get done, our takeaway is it is probably not top of mind right now. You are seeing other tweaks to affordability—changes in title insurance and now acceptance of VantageScore. Vantage pulls are materially cheaper than a traditional FICO pull. While we think LLPA and G-fee ongoing or upfront cuts are possible, we would characterize them as not likely. I know some people spoke about the possibility that Fannie and Freddie would increase their purchases above and beyond their current caps and above and beyond the 200 billion. Again, we think it is possible, but not likely. What you have seen this year is relatively strong performance in CMBS. You are starting to see some pickup in bank buying, coming from some clarity around Basel III and proposals from Governor Bowman about changing capital requirements as a function of LLPA. That is broadly supportive of bank participation in the market. Bank buying was very weak last year, so we think banks will be a bigger part of the market—that is a tailwind. You have certainly seen REITs issuing shares and buying more agency MBS, which is a positive tailwind, and you have seen better foreign, non-U.S. participation. So there are pools of capital more aggressively buying agency MBS than at the start of 2025, and we think that is where the support comes from. If these other things that help add affordability happen, we think it is possible, but they are at the margin and definitely second-order effects. What is helping affordability is HPA growth that is less than income growth, and the decline in mortgage rates you saw since 2025; those have been supportive as well. Larry Penn: If I could just add, when you think about overall mortgage rates, these effects are important on spreads, but overall interest rates—Treasury rates, for example—are going to drive mortgage rates a lot more. Where is inflation, where is the deficit and the debt, what is Fed policy—those things are going to dwarf the impacts that some of these moves could have on mortgage rates. Operator: Next, we go to Analyst with JonesTrading. Your line is open. Analyst: Hey, good morning, guys. Thanks for taking the question, and congrats on a strong quarter. You mentioned that you sold a whole loan pool to an insurance company during the quarter. Could you talk a little bit about how this came about, and where you are seeing sales execute there versus where they would execute in the securitization market right now? Mark Tecotzky: Thanks for the question. We did a lot of whole loan sales back in 2023 when securitization spreads were wide; in many instances, that looked like materially better execution than securitizations. At the margin, our preference is securitizations—we mentioned all the benefits of operating at scale and improved liquidity for the shelf—so our preference is for securitizations. The transaction we talked about was a bit of a one-off. There were moments in the quarter with real volatility in equity prices, credit spreads, and rates. We are disciplined on the hedging of mortgage loans—not only interest rate hedging, including parcels along the curve, but also thinking about our exposure to changes in implied and realized vol, and the correlation between mortgage spreads and broader corporate credit spreads, either IG or high yield. There was a moment where spreads, both high yield and IG, widened substantially, but the spreads on the mortgage loans relative to Treasuries had not really moved. It was opportunistic for us to take advantage of that by making a loan sale, and then buying back the pro rata share of credit hedges we had allocated to those loans. That was unique to the volatility in that quarter. We look at loan sales all the time. Where we are in the cycle now, I think they are not going to be a big part of what we do going forward. We really like the yields, profiles, and call options we retain from doing securitizations. We like the momentum our shelf has and the better liquidity and bigger scale, and how that delivers more assets and better liquidity to the investors that support our shelf. Right now, that is where our focus is. Analyst: Thanks. And then a second one for me. With Longbridge, you mentioned you are leveraging technology there. Is there anything you are doing from an AI standpoint across there and the other originators where you are going to see more efficiencies or cost savings as you continue to scale? Larry Penn: Absolutely. Longbridge has rolled out an important AI product whereby its employees—even those that are customer-facing—can get quick access through AI to, for example, underwriting guidelines, to get better and quicker responses to customers' questions. That is just one example. Across many of our businesses, we are using AI in a big way to be more efficient. Operator: And that was our final question for today. We thank you for participating in the Ellington Financial Inc. First Quarter 2026 Earnings Conference Call. You may disconnect your line at this time, and have a wonderful day.
Operator: Hello, and welcome, everyone, joining today's TIC Solutions First Quarter 2026 Earnings Call. Please note this call is being recorded, and -- it is now my pleasure to turn the meeting over to Andrew Shen with Investor Relations. Please go ahead. Andrew Shen: Thank you, operator. Good morning, everyone, and thank you for joining the call. Joining me this morning is Ben Hard, our Chief Executive Officer; Kristen Chultas, our Chief Financial Officer; and Robbie Franklin, Executive Chairman. I would now like to remind you that certain statements in the company's earnings press release and on this call are forward-looking statements that are based on expectations, intentions and projections regarding the company's future performance, anticipated events or trends and other matters that are not historical facts. These statements are not a guarantee of future performance and are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. In our press release and filings with the SEC, we detailed material risks that may cause our future results to differ from our expectations. Our statements are as of today, May 6, 2026, and we undertake no obligation to update any forward-looking statements we may make, except as required by law. As a reminder, we have posted a presentation detailing our first quarter financial performance on the Investor Relations page of our website at ticsolutions.com. Our comments today will also include non-GAAP financial measures and other key operating metrics. The required reconciliations of non-GAAP financial metrics can be found in our press release and in our presentation. For the purposes of this call, we refer to our segments as Inspection and Mitigation, or I&M, Consulting Engineering, or CE and Geospatial or GO. Any reference to combined results reflects a non-GAAP combined view of legacy Acron and legacy NV5, where applicable for period-to-period comparability. More details on the calculation of the combined results are included in the presentation. It's now my pleasure to turn the call over to Ben. Benjamin Heraud: Thank you, Andrew, and good morning, everyone. Before I begin, I want to say how proud I am to lead this talented organization. Over the past several months, I've seen strong support from our leaders across the business and from the field and technical professionals who serve our clients every day. We have started 2026 with healthy momentum across the business. First quarter results reflect the strength of our combined platform, the resilience of our recurring and nondiscretionary services and the demand drivers that support tech solutions. This includes aging infrastructure, increasing energy demand, increasing data consumption and the digitization of the physical world. We believe these megatrends will continue to drive demand across our business and expand the need for technical services that enable us to turn data into solutions for our clients. These tailwinds inform our strategic priorities, winning in essential high-demand end markets and geographies, expanding our role across the asset life cycle and client relationships and driving higher value growth through technical differentiation and disciplined capital allocation. These priorities are supported by the breadth of our business. Through consulting engineering, we help clients plan, design and commission critical assets and infrastructure. Through inspection and mitigation, we help clients maintain asset integrity, reduce downtime and address reliability needs. Through Geospatial, we help clients capture, process and interpret asset and location data at scale. Together, these capabilities position Tech Solutions as a life cycle partner rather than a point solution provider. Our 2026 operating objectives are directly aligned with these strategic priorities. First, to win in essential high-demand end markets and geographies, we are focused on driving organic growth across the platform. This means expanding scope and market share and pursuing attractive opportunities to sell additional capabilities. Second, to expand our role across the asset life cycle and client relationships, we are strengthening organizational alignment and cross-segment collaboration. That includes improving how we manage accounts, deploy resources, support our field and technical teams and bring our capabilities together for our clients. Third, to drive higher value growth, we are focused on margin expansion and disciplined capital allocation. That means maintaining pricing discipline, improving utilization, managing costs, enhancing service mix and directing capital towards the highest value opportunities. In the quarter, we saw growth across transportation, infrastructure, utilities, manufacturing, midstream energy and data center end markets. We remain focused on converting these trends into sustainable, attractive and profitable growth. With that framework in mind, I'll walk through the performance across our segments and highlight where we are seeing progress against these priorities. Consulting Engineering delivered strong performance in the quarter with revenue increasing 9.5% year-over-year. We experienced broad-based revenue growth, offsetting pressure from timing in LNG engineering and power delivery. Adjusted gross profit increased 11% year-over-year and adjusted gross margin expanded 60 basis points, reflecting strong execution, improving mix and continued demand for high-value technical services. Data centers were the largest driver of growth in the first quarter, supported by hyperscaler and mission-critical infrastructure activity across both domestic and international operations. AI, cloud adoption and enterprise digitization continue to increase demand for data consumption storage and mission-critical uptime. Our focus is on capturing that demand where we have the right capabilities, client relationships and return profile. Consulting engineering also saw broad-based growth across several core capabilities, including civil program management, geotechnical and materials testing and buildings. Overall, Consulting Engineering's first quarter performance demonstrates the value of technical capabilities we offer across infrastructure and the built environment. The segment continues to benefit from durable demand trends tied to aging infrastructure, infrastructure investment and growth in key regional markets. Our performance also shows the operating leverage that can come from better utilization, focused execution and delivery of higher-value services. Geospatial also performed well, growing 4.5%, supported by strong commercial and utility demand, healthy fleet utilization and continued interest in geospatial digital transformation solutions. The team continues to pursue technically complex work across multiple markets and geographies. Recent examples include deep sea hydrographic survey work tied to rare earth minerals and advanced LiDAR and imagery opportunities internationally. These demonstrate the breadth of our capabilities and the ability to scale and apply specialized technical expertise across borders. We are also advancing our Geo AI efforts with a focus on improving processing efficiency, automating workflows and expanding higher-value analytics. We look forward to discussing these capabilities in more detail at our Investor Day, including how they support our broader Geospatial platform over time. Quarter end total backlog within Consulting Engineering and Geospatial was $1.12 billion, up approximately 14% from $983 million at the prior year quarter end. This backlog expansion, combined with the solid commercial execution supports our confidence in continued momentum and near-term outlook. Inspection and Mitigation delivered a steady result with revenue essentially flat year-over-year. While results were below our long-term expectations for the segment, the team remained focused on margin integrity, disciplined staffing and prioritizing higher quality, higher-margin opportunities. In the first quarter, our callout and outage activity increased moderately, helping offset lower sustaining capital work and continued pressure in certain regions. Performance was stronger in areas such as industrial road access, containment and in-lab services, and we're focused on replicating that execution more consistently across the I&M footprint through disciplined opportunity selection, stronger local accountability and a higher mix of high-value technical services. Inspection and mitigation demand continues to vary by end market and geography. Customer focus on throughput, uptime and critical integrity work remains intact, but broader market uncertainty is creating more variability in customer decisions around planned outages and scheduled maintenance, including timing, scope and duration. In the quarter, certain planned outage work shifted from the second quarter to the third quarter and some work was resized as customers remain selective on near-term spending. Performance pressure remains concentrated in the Gulf Coast, where LNG construction timing and several 2025 site losses continue to weigh on year-on-year growth. We are managing through these dynamics while expanding in areas we have a proven track record and pursuing new white space opportunities. We continue to execute on the operating model changes we outlined last quarter with a focus on regional accountability, cost control and more consistent opportunity sourcing. As discussed on the previous call, we have strengthened regional leadership in the segment and are adding both new and returning leaders in key areas to drive operational efficiency and commercial focus. As we move through the year, we expect I&M performance to benefit from normal seasonality, outage activity and stronger conversion of commercial opportunities while remaining disciplined on margin and work selection. To recap, Consulting engineering and Geospatial continued to benefit from strong demand and differentiated capabilities, while inspection and mitigation remains focused on improving execution, accountability, pricing and resource deployment. Across the platform, integration is improving how we manage accounts, expand services and control costs. Together, these actions position us to deliver durable growth, improved profitability and stronger cash flow over time. We are looking forward to hosting our Investor Day on Tuesday, May 19, in New York City. We plan to discuss the next phase of the TIC Solutions story, including our long-term growth framework, margin expansion plans, capital allocation priorities and how stronger execution can create additional value across the business. And with that, I will turn the call over to Kristen to review the financial results for the first quarter, provide an update on integration and offer more detail on our outlook. Kristin Schultes: Thank you, Ben, and good morning, everyone. In the first quarter, total revenue was $488 million. On a combined basis, total revenue grew 4.3% year-over-year or 3.1% in constant currency. Organic growth on a combined basis was 2.2%. Adjusted gross profit for the quarter was $180 million, up 3.8% from the combined adjusted gross profit of $174 million in the prior year period, driven primarily by revenue growth and margin expansion in Consulting and Engineering. Adjusted gross margin was 36.9%, roughly flat compared with the combined margin of 37.1% in the prior year period as Consulting Engineering margin expansion was offset by mix and margin pressure in Inspection & Mitigation. Inspection & Mitigation contributed first quarter revenue of $235 million, up 0.3%, driven by increased call-out and outage work and offset by lower sustaining capital activity. Inspection & Mitigations adjusted gross margin was 24.4% for the quarter compared with 25.2% in the prior year period, reflecting the impact of mix from less sustaining capital work. Consulting Engineering contributed first quarter revenue of $187 million, up 9.5%. Consulting Engineering's adjusted gross margin was 47.6%, up 60 basis points from 47.0% in the prior year period, driven by strength in infrastructure and building design and commissioning. Geospatial contributed first quarter revenue of $66 million, up 4.5%, driven by healthy demand from utility clients. Geospatial's adjusted gross margin was 51.0% compared with 54.2% in the prior year period, impacted by a pilot project that carries a higher proportion of subcontractor costs and a lower gross margin profile. We believe this work is highly strategic and supports higher value growth over time with a key client. Adjusted SG&A for the quarter was $123 million or 25.2% of revenue. This continues to be a critical focus area as we work to drive SG&A leverage through synergy realization as well as cost discipline in the business. Adjusted EBITDA was $57.7 million compared to combined adjusted EBITDA of $55.6 million in the prior year period, representing growth in line with the increase in combined revenue. Adjusted EBITDA margin was 11.8% compared with 11.9% a year ago on a combined basis, reflecting a path towards improved operating leverage. From a cash flow perspective for the quarter, operating cash flow was $10 million and capital expenditures were $6 million. The operating cash flow reflects the expected seasonality of the business, which includes greater working capital intensity in the first half of the year. Moving now to our balance sheet and capital resources. As of March 31, 2026, we had total liquidity of $537 million, including $427 million of cash and $111 million of available capacity under our revolving credit facility. Total term loan debt was $1.6 billion. Our capital allocation priorities remain unchanged. We remain focused on investing organically in the business and using free cash flow to provide additional flexibility for disciplined acquisitions while achieving lower leverage over time. Turning to integration. We continue to make great progress capturing the benefits and cost synergies associated with the NV5 combination. Importantly, we are ahead of schedule on synergy actions with approximately $17 million of the $25 million cost program now actioned on an annualized run rate basis. We now expect realized savings in 2026 to be roughly $15 million, modestly above the $12.5 million we discussed in previous quarters. These actions are intended to create lasting efficiencies in the combined cost structure and support margin expansion as our business scales. Now turning to our unchanged outlook. For the second quarter, our guidance reflects revenue of approximately $570 million to $582 million and adjusted EBITDA of approximately $90 million to $96 million. At the midpoint, this implies an adjusted EBITDA margin of approximately 16.1% for the second quarter, which would represent margin expansion year-over-year. We are reaffirming our previously issued full year 2026 guidance of $2.15 billion to $2.25 billion of revenue and $330 million to $355 million of adjusted EBITDA. At the midpoint, our guidance implies approximately 4% revenue growth and 10% growth in adjusted EBITDA against our 2025 combined results with an adjusted EBITDA margin of approximately 15.6% at the midpoint. By segment, on a combined basis, we expect CE and GEO growth to outpace growth in I&M for the full year. In Inspection & Mitigation, our outlook assumes a back half weighting supported by normal seasonality and the anticipated timing of certain outage and sustaining capital work. For 2026, we anticipate net interest expense of $95 million to $105 million, cash taxes in the range of $25 million to $35 million and capital expenditures of $55 million to $65 million. We typically see a working capital build as activity ramps through the first half of the year, followed by stronger cash conversion in the second half as collections catch up with revenue. We manage and evaluate free cash flow primarily on a full year basis, and we continue to expect healthy free cash flow generation over the full year. With that, I'll turn the call back to Ben. Benjamin Heraud: Thank you, Kristen. The first quarter reinforced the resilience of our business model and the benefits of our diversified platform. As discussed at the start of the call, the trends around aging infrastructure, increasing energy demand, increasing data consumption and the digitization of the physical world continue to support demand for the essential technical services we provide. As we move through 2026, we remain focused on the strategic priorities that define how we create value, winning in essential high-demand end markets and geographies, expanding our role across the asset life cycle and client relationships and driving higher value growth through technical differentiation and disciplined capital allocation. We are seeing progress against our top priorities while recognizing there is more work ahead. I want to close by acknowledging the strength of this organization and the leaders across our business. TIG Solutions has a significant long-term opportunity supported by a highly engaged team, strong cultural alignment and essential technical capabilities across resilient end markets. Our teams have continued to execute with discipline and focus while staying centered on our core purpose of delivering for our clients every day. With that, operator, we're ready to open the line for questions. Operator: And we'll take our first question from Chris Moore with CJS Securities. Unknown Analyst: So you exited some lower-margin customers contracts in inspection and mitigation in 2025. Just trying to get a sense if that process is still ongoing in '26. Benjamin Heraud: Yes. We're still maintaining discipline around our pricing and approach to the market. We're sort of seeing price increases amongst a number of our contracts, and we will continue to stay disciplined on our pricing model. Operator: Got it. Benjamin Heraud: Just to point out, no additional lost sites since last year. Unknown Analyst: Got it. In terms of the 4% organic growth that you're targeting in '26, maybe just from a big picture perspective, can you walk through the segments or subsegments and kind of rank those where you have the most visibility for the year and perhaps those where visibility is a little bit more limited at this point in time? Kristin Schultes: Yes, sure. I'll take that Chris. So if we look at our full year guidance at that midpoint, I think we haven't provided segment level guidance, but I would tell you that with the visibility that we have that our outlook for growth for Consulting Engineering and Geospatial is higher than I -- if we look at what drives confidence in our ability to deliver that, we have backlog within GO, which provides a lot of visibility. And as we disclosed that our backlog is up significantly. And also just with our internal flash and forecasting process within the I&M business, we also have good visibility. And inherently, things are moving, but we have good visibility to kind of what's to come. So this is our high conviction number and feel good about our ability to deliver in 2026. Unknown Analyst: Terrific. Very helpful. This one may be more for Investor Day. But just last one. Geospatial growth has bounced around a little bit, 4.5% this quarter. still sounds like lots of opportunities there. Just trying to get a sense for what a reasonable expectation is for a normalized annual growth rate for Geospatial. Benjamin Heraud: I think we'll continue to see good growth within it. We're pleased with the performance of Geospatial. We did have a little bit of margin pressure from that one project we pointed out earlier. But for the most part, there's a lot of digitization required around the world, and we have a very scalable platform that we're excited about expanding and growing. Kristin Schultes: Chris, you'll have an opportunity to meet the leader of our Geospatial business in a few weeks at our Investor Day, and he'll speak more to the long-term growth outlook of the segment. I think what you're seeing in the mid-single digits is the right way to think about it. Operator: We'll move next to Thomas Sano with JPMorgan. Unknown Analyst: I would like to ask about the IM business. Could you quantify the revenue and margin impact of each key headwind you talk about? Excluding these, like what do you see as the segment's underlying growth and margin potential? And what is your outlook for the recovery? And there any specific KPIs you are targeting in this business? Benjamin Heraud: Yes. Look, we're tracking a number of KPIs, and I would say, I would point to the Gulf has been an area of focus around improvement. We're seeing month-on-month improvement there. And with the leadership that we put in place earlier in the year, we're now just seeing a very aggressive commercial approach to that business. We talked earlier on the call about some shift with some outage work into Q3. That was known and sort of expected. Some real positive signs also around service line expansion. Our rope access group is up 9% and our in-lab work is up 20%. So also good indications of the business and its potential growth later in the year. Unknown Analyst: And follow-up on data centers in S business. What is your outlook for growth in data centers? What proportions of total revenue do you expect these segments to represent in 2026 and 2027? Benjamin Heraud: Yes. So use round numbers around 5%. We continue to see very, very nice growth within that business. We remain very excited about it. The U.S. business is starting to really -- the efforts that we've put in over the last couple of years are really starting to pay dividends, and that is growing at a really nice clip. -- now. So it's -- trailing 12 months was around $80 million in revenue. Backlogs of a similar amount. So we have a very strong line of sight into a strong year ahead. Operator: We'll move next to Kathryn Thompson with Thompson Research Group. Kathryn Thompson: Just first, big picture, you're approaching in June, first full year of NV5 as part of TIC Solutions. How is the integration as we approach the year mark? What has worked and what are areas for continued growth? Benjamin Heraud: I'll just sort of start at a high level and then let Kristen get into some more detail. I'd just say, and I've said this before, how pleased I am with the cultural alignment between the 2 organizations and the general level of excitement around bringing each company's services to their clients. And I think that that's really starting to show in some of the activity we have around service line expansion with our clients. I'll let Kristen dig into a bit more detail. Kristin Schultes: Yes. Thanks, Catherine. I'd love to talk about integration. So just a reminder, we closed in August, so that's when we'll hit the 1-year mark. From an integration milestone perspective, look, like I mentioned, we're ahead of schedule on and the actions. And we had a few million of savings in this quarter, and that's going to continue to ramp for the full year, and we expect $15 million of savings to flow through the P&L this year, which is really exciting. I'm proud of the leadership team that we have leading that integration for us. And in the quarter, we hit some key milestones. We exited or reduced 4 sites. We we've accomplished 13 to date. I think we've got 40 on our road map, and those are either reductions in footprint or exits of sites. We have added some key leadership additions to the team in different functional areas that are helping drive really creating scalability for this organization as we continue to grow and look to become an even larger organization and continue to grow. We have hit some internal system implementation milestones. We've stood up a shared services function within the finance organization and using technology. So lots of good exciting activity on the integration front. Kathryn Thompson: Okay. Obviously, a lot of focus on AI build-out, but also the energy build-out is critical and gaining more headlines. And really, the build-out includes generation, energy storage and transmission. When you think about those 3 legs of the stool, how does TIC solutions play in the energy build-out that's supporting not just only AI, but the broad reindustrialization of the U.S. market? Benjamin Heraud: Yes. I mean they're directly related aren't they, I mean the energy demand coming from AI and other areas. The 3 that you pointed out are areas that we're very well positioned for power delivery, the engineering work that we do around that right through from transmission to distribution to substation design. We actually just were awarded an energy storage project within the consulting and engineering group recently, a first of its kind, which is really exciting. And on the generation side of things, both -- it's an area that our NDT and inspection business works in, and it's actually quite an exciting opportunity we're working on at the moment, bringing together the data center expertise that we have in engineering and inspection and mitigation. So I think we're very well positioned for that growth in that area. Kathryn Thompson: So if I'm hearing correctly, you're there for the build-out, but also for the follow-on inspection work that one way to think about it? Benjamin Heraud: Yes. And also I would point to Geospatial, we fly 150,000 miles of lines every year. That's been growing, and that's recurring work that we do for utilities. Kathryn Thompson: Okay. Great. And when you look at say, 12 to 18 months from now, where do you see -- and you see kind of the end market exposure for TIC. What areas do you see growing the most as a percentage of total overall mix? And what may -- just by sheer growth in other markets may be shrinking. So it's broader because before, if you -- infrastructure with the mix was 25% in data centers were just 2%, but data centers obviously has grown a bit more than that. So high level, what are the areas of the greatest growth in terms of mix? And then speak to the margin profile of the growth areas. Benjamin Heraud: Yes. No worries. I mean I think if I were -- I wouldn't point to any areas shrinking, but there's obviously areas that we have more tailwinds and that we're more well positioned for. Energy, certainly, when you look at both generation and distribution, as I mentioned, we're well positioned for, and we do expect to continue to grow. The built environment in general is an area that is going very well for us, and we will continue to see. And then infrastructure across all segments is an area where just with aging infrastructure, the additional demand that is going on it, we just see a lot of tailwinds in that area, and we'll continue to grow. Operator: We'll move next to Jeff Martin with ROTH Capital Partners. Jeff Martin: I wanted to dive in a little bit on progress you're making with the initiatives on I&M. And are you seeing an expanding pipeline opportunity there, particularly given the chemicals business appears as though it has the potential to turn around here? Benjamin Heraud: Yes. We've actually had some positive signs on the chemicals side recently in our sales pipeline. We sort of talked about the reorganization efforts that we were doing on the U.S. and particularly the Gulf Coast I mentioned earlier, I don't want to bang on about it too much. But I'm just really pleased with the leadership that we have in place and the tone in the meetings -- we're definitely taking an aggressive approach to getting to new sites. And we have a nice pipeline of opportunities that I see. Once we get through this wrap effect of the lost sites into the second half of the year, we're expecting growth and very pleased with the progress that we've been making with the leadership there. Jeff Martin: Yes. And it's great to hear you have not lost additional sites since last quarter. I wanted -- my follow-up question was on GEO. I know contract renewals on the federal government level are always kind of a tricky point as we transition out of the end of the year. And I know there was a little bit of headwind exiting last year on contract renewals. Just curious if you could give us an update there. Benjamin Heraud: Yes. We haven't seen any major disruption there. They've sort of been coming in at the expected clip. So I think the bumps in the road that we had in Q4, we're not seeing signs of continuing at the moment. Operator: We'll take our next question from Andy Wittmann with Baird. Andrew J. Wittmann: So I guess I wanted to just ask a little bit more on the C&I segment. I heard that the call out in the lab testing work was good. That's about half of the segment. So I guess what I'm trying to understand is the -- obviously, when you lose a run and maintain, you got to go 4 quarters till the comps ease and you talked about how that gets better in the fourth quarter. How much of the kind of softness is just the fact that a couple of quarters ago or a quarter ago, you lost some of those contracts? And how much of it is really kind of systemic or uncertain demand? And can you talk about the uncertainty in the demand? Is that just because of volatile oil prices? Is it something else? And what does it take for better visibility to return to that market so that you can have a better sense of the timing and the scope of services that you're likely to do? Benjamin Heraud: Yes. I mean you're right. The run and maintain business is our most stable piece and it sort of drives some of the more higher-margin work, and we need to get back to winning new sites, which is sort of talking about the commercial discipline and focus that we've got. I'm confident we'll get back to, especially as we get past the ramp effect of these lost sites. Talking about uncertainty or volatility, where we're seeing that is with the outage work, and we called out the shift in some of that work from Q2 to Q3. This is nondiscretionary work that needs to be done. So they're going to need to do it at some point. And so we'll expect that work to start to flow in. Kristin Schultes: And Andy, I would just add that we certainly recognize the macro volatility that's out there right now. And I think the structure of our I&M business is fairly diversified compared to some of our other comps. We've got less than 10% of our I&M revenue is outage work, which is 5% of the combined business. Our refinery oil and gas exposure is less than 50% of our consolidated results as well. So we're potentially less impacted by timing and also less impacted by direct oil prices. we're focused on staying disciplined with regard to inflation pressures, whether it be with rates and fuel charges and whatnot. Andrew J. Wittmann: Yes. Just as an addendum to that question, what -- how has the competitive environment evolved against that volatility? Obviously, any time you're losing sites, that's a competitive dynamic. Has it improved or changed at all since late last year to what you're seeing this year for that? It sounds like then you've got some initiatives there, new leadership, talking about kind of motivating the team to get these new sites. What does it take? And what's it looking like right now competitively for those? Benjamin Heraud: Yes. In some cases, it's getting the culture right in the region, getting some of the leadership back that we had and that they bring work with them. So we've seen some really good initiatives around that. There has been some pricing pressure in the Gulf in particular. I think some of that's short-lived, and we're maintaining our discipline around that. And we've got a good line of sight on some pretty good opportunities. Andrew J. Wittmann: Okay. And then maybe just one last question. Just kind of looking at the cash flow statement, Kristen, it looks like -- obviously, the first quarter is always seasonally weak. I understand that. But just looking at the working capital here, your contract assets were a pretty big consumer of capital. Is that a result of -- you had a reference to like a larger contract where there was some subcontracted scope. Is that what we're seeing there? Is there like a percentage of completion projects that you're using a lot of subcontract labor? And is that why that contract asset is consuming capital right now? And when do you think that, that account can reverse and start giving you back some of that capital? Kristin Schultes: Yes. Good question, Andy. It was a big focus area of mine as well. I would say that there were a couple of larger billings that went out in early April that should have gone out in March, and that was the driver. We've got an isolated list of what those were. If you look at what else went through the cash flow statement in the quarter that was unusual, we did clear out some contingent payments for previous acquisitions, and that impacted the cash during the quarter as well. So the subcontractor cost by nature didn't drive the contract assets, but driving contract assets is a key focus of ours. Operator: We'll move next to Josh Chan with UBS. Joshua Chan: So maybe just a strategic one. I guess at the branch level, how would you say your combined company vision is being translated or proliferated at the branch level? Like how would you assess that at the moment? Benjamin Heraud: Yes. So we have a very -- like a commercial -- centralized commercial team that is absolutely focused on educating our branches on what the services they now have at their fingertips to take to their clients. So we have a very programmatic approach to that, that's driven from the top. We drive a very entrepreneurial culture throughout the organization. So the leaders at the branch levels are naturally very interested in what they can be bringing to their clients. And that's something that we really cultivate as a business, and that's what helps us drive our organic growth. Joshua Chan: Okay. I appreciate that. And then maybe on consulting engineering, obviously, a very good quarter. What's the right run rate for that business in terms of growth? I wonder if you can think about it from a matter of volume or hours plus price. Is that how you think about growth in that business? Benjamin Heraud: I mean, yes, volume and price, but I would say half of it is fixed fee, we really position ourselves at the higher value end of the work that we do to command solid pricing. And I would expect the growth path that we've got to continue. We have some really, really nice tailwinds with that business, point again to that backlog being up 14%. That's a very strong indicator of the strength of that business right now. Operator: We'll take our next question from Stephanie Moore with Jefferies. Stephanie Benjamin Moore: I wanted to maybe circle back to some of the commentary around data centers. Look, I think, obviously, you're seeing some of the benefits of that growth and those investments that are being made. But could you also talk about what this can mean from a longer-term standpoint and just remind us about -- obviously, there's the build-out opportunity, but then kind of the ongoing opportunity that we could expect to see where you guys would benefit because I think there's a little bit of a misunderstanding that there's certainly a long tail here. Benjamin Heraud: That's good, and I'm glad you asked that question because we are really focused on making sure that we're heavily involved in the ongoing operations of data centers. The services that we have position us really well for that actually. So only about 15% of the revenue we do in data centers is associated with ongoing operations right now. But if you think about that's growing. And if you think about what happens in these data centers, the technology is changing all the time. And so as they bring these new servers in, they require engineering, retro commissioning, CFD, computer fluid dynamics. These are all things that we do, and we're working with our clients ongoing. We also have a program management owners rep service that applies to data centers. So we are very, very focused on making sure that this isn't a one-off with all the work that we do and that we have a strong tail with each of these sites that we touch. Stephanie Benjamin Moore: Great. That's very helpful. And then maybe just thinking about -- I guess, just thinking about the underlying business, as you think about just what -- as you think about the cross-selling opportunity, I know you touched on this a little bit, but I think if we think back to the original merits of NV5, there were significant cross-selling opportunities. So maybe just help us focus on what might be the more immediate benefits that we could start to see and what actions -- and I guess, more importantly, what actions have been taken behind the scenes from either management or operations level that allow you to go and capture those revenue synergies? Benjamin Heraud: Yes. Great. We have a team that actually reports directly to me that's 100% focused on driving cross-selling through the organization. as you know, NV5 had a very strong cross-selling program, and we've extended and improved upon that for the FI Solutions platform. I would say as we're getting more mature with it, we are starting to see the trends in the areas that we can get more behind and focused on. Some examples is we're seeing clients really excited about the fact that we can do materials testing and quality assurance along with our NDT capabilities. So sort of a turnkey approach there. Pipeline and integrity, all segments have exposure there and bringing all the capabilities that we have sort of seamlessly is also something that we're excited about. And then around infrastructure and bridge inspection, that's an area where NV5 has very strong credentials, and we're bringing along our rope access and inspection capabilities and called out some specific projects last quarter. So just a few examples at a strategic level of where we're seeing opportunity. But I'm really pleased with the activity and the momentum that we're gaining around our cross-selling program right now. Kristin Schultes: And Stephanie, I would just add that we look at cross-selling more broadly even and see tremendous opportunity for service line expansion within the segment as well. So if you think about growth access opportunities in lab engineering, cross-selling within I&M as well as geospatial across to consulting engineering. So from a broad perspective, tremendous opportunity from a white space perspective within our existing customer base and also within M&A market. Operator: And it does appear that there are no further questions at this time. I would now like to hand back to Ben for any additional or closing remarks. Benjamin Heraud: Yes. Well, thanks, everyone, for your questions and for your continued interest in Tech Solutions. We remain focused on growth, execution and delivering on our commitments. We look forward to seeing you all at our Investor Day later this month, hopefully, and updating you on our progress next quarter. Thanks, everyone, and have a good day. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Greetings, and welcome to Gladstone Commercial Corporation First Quarter Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Mr. David Gladstone, Chairman of Gladstone Commercial Corporation. Thank you, Mr. Gladstone, you may begin. David Gladstone: Well, thank you so much for that nice introduction, and thanks to all of you guys on the phone for calling in today. I want to tell you, we do enjoy the time we have with you and on the phone even, and I wish we had more time to talk. But let's start out with Catherine Gerkis. She is our Director of Investor Relations, to provide a brief disclosure regarding certain regulatory matters that always impact everything we say. So Catherine, go ahead. Catherine Gerkis: Thanks, David. Good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the Investor page of our website, gladstonecommercial.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and earnings press release for more detailed information. You can also sign up for our e-mail notification service and find information on how to contact our Investor Relations department. We are also on X@gladstonecomps as well as Facebook and LinkedIn. Keyword for both is the Gladstone Companies. Today, we'll discuss FFO, which is funds from operations, a non-GAAP accounting term defined as net income, excluding the gains or losses from the sale of real estate and any impairment losses on property plus depreciation and amortization of real estate assets. We may also discuss core FFO, which is generally FFO adjusted for certain other nonrecurring revenues and expenses. We believe these metrics can be a better indication of our operating results and allow better comparability of our period-over-period performance. Now let's turn the presentation to Buzz Cooper, Gladstone Commercial's CEO and President. Arthur Cooper: Thank you, Catherine, and thank you all for joining today's call. We are pleased to update you on our results for the quarter ended March 31, 2026, our current portfolio and our 2026 outlook. During the quarter, we renewed or leased over 773,000 square feet of industrial and 32,000 square feet of office, resulting in an increase in straight-line rent of over $86,000 annually. We did not sell any properties in Q1 '26, but we did sell a portion of one parcel of land with a gain on sale of approximately $1.8 million. As we have discussed in the past, we remain steadfast in several key focus areas, growing our industrial concentration, adding value in our existing portfolio through renewals, extensions and strategic capital investments and disposing of noncore assets and strategically redeploying those proceeds into quality industrial assets. By executing on these focus areas, we expect to achieve increased portfolio WALT, strong occupancy rates, straight-line rental growth across the portfolio and a decreased cost of capital. Our asset management team continues to effectively manage the existing portfolio as evidenced by 100% collection of rents -- of cash-based rents for the period, 98.7% occupancy across the portfolio, 7.3-year average remaining lease term. Each of these milestones is a testament to the mission-critical nature of the assets in our portfolio, the quality of the tenant credit in the portfolio and our underwriting capabilities. We are grateful to our lenders for their continued trust and partnership with us. These long-standing relationships are critical to our continued investment in the current portfolio and the addition of mission-critical industrial assets going forward. In short, our relationship with our tenants, the capital market community and our financial capacity have allowed us to execute upon our focus areas at a high level. Looking ahead to 2026, we remain focused on evaluating opportunities for high-quality industrial assets that are mission-critical to tenants and industries and accretive to our long-term strategy. As I mentioned, we're working toward our near-term goal of [ 70% ] industrial annualized straight-line rent. We look to achieve this goal and push past it during the year. While we do not have a time line for the disposition of all of our office properties, we are keenly focused on growing the industrial concentration of our portfolio. At the same time, we will continue to work with our existing tenants to extend leases, capture mark-to-market opportunities, support tenant growth through targeted expansions, capital improvement initiatives and build-to-suit opportunities. While we remain aware of the challenging office environment, we will be strategic and intentional in evaluating our specific portfolio, seeking opportune times to dispose of office and noncore industrial as part of our continued capital recycling efforts. With the availability via our increased line of credit, access to private placement bond market, cash on hand and ability to raise money at our ATM, we are positioned to deploy capital into accretive industrial acquisitions and portfolio improvements. In closing, 2025 was a great year for the company, and the team is focused on continuing their efforts through the remainder of 2026. I will now turn the call over to Gary Gerson, our CFO, to review our financial results for the quarter and liquidity position. Gary Gerson: Thank you, Buzz. I'll start my remarks regarding our financial results this morning by reviewing our operating results for the first quarter of 2026. All per share numbers referenced are based on fully diluted weighted average common shares. FFO and core FFO per share available to common stockholders were both $0.35 per share, respectively, for the quarter. FFO and core FFO available to common stockholders during the same period in 2025 were both $0.34 per share, respectively. Same-store lease revenue increased by 1% in the 3 months ended March 31, 2026, over the same period in 2025 due to an increase in recovery revenue from property operating expenses and an increase in rental rates from leasing activity subsequent to the quarter ended March 31, 2025. Our first quarter results reflected total operating revenues of $41.9 million with operating expenses of $25.2 million as compared to operating revenues of $37.5 million and operating expenses of $23.9 million for the same period in 2025. Operating revenues were higher in 2026 due to an increased portfolio size, increased recovery revenues and higher rental rates. Expenses were higher in the first quarter of 2026 versus the same period in 2025, mainly due to higher depreciation from a larger portfolio, partially offset by crediting back all the incentive fee in the first quarter of 2026. At the end of the quarter, we had one small industrial property in Charlotte, North Carolina, held for sale. As of today, we have $17.9 million of loan maturities in 2026 and $35.2 million of loan maturities in the first quarter of 2027. At the end of the quarter, we had $34.3 million of revolver borrowings outstanding. Looking at our debt profile, as of March 31, 48% was fixed rate, 48% was hedged floating rate and 4% was floating rate, which is the amount drawn on our revolving credit. As of March 31, our effective average SOFR was 3.68%. Our outstanding bank term loans are all hedged to maturity with interest rate swaps. We continue to monitor interest rates closely and update our hedging strategy as needed. During the 3 months ended March 31, 2026, we did not sell any shares of common stock under our ATM. We continue to manage our equity activity to ensure that we have sufficient liquidity for upcoming capital requirements and new acquisitions. As of today, we have approximately $7.8 million in cash and $77 million of availability under our line of credit. We encourage you to review our quarterly financial supplement posted on our website, which provides more detailed financial and portfolio information for the quarter. Our common stock dividend is $0.30 per share per quarter or $0.10 per month or $1.20 per year. And now I'll turn the program back to David. David Gladstone: Thank you, Gary. That was a good one and [ that was good from also ] Catherine. Team continues to perform very, very well. Overall, a very nice quarter for us, like we've done for many quarters in the past. So for those of you who like quarterly dividends, this is a great company to buy into [Technical Difficulty] 773,000 square feet of industrial and 32,000 square feet of office. We sold a portion of land parcel, which gave us a gain on sale of about $1.78 million. Gladstone Commercial's team is growing. Real estate, we own and a good place to be, and the team is doing a great job managing the properties, especially during these challenging times. The good news is we have some very good properties and they're rented to some great tenants. Our team has strong professionals continuing to pursue potential quality properties on the list of acquisitions we have and are reviewing. Our acquisition team is seeking strong credit tenants. That's the key. But let's stop here and ask the operator to come on board and help us listen to some questions from some of the people on the phone. Operator? Operator: [Operator Instructions] Our first question comes from the line of Craig Kucera with Lucid Capital Markets. Craig Kucera: You were pretty active this quarter on the leasing front. Can you talk about the leasing spreads you typically achieve during the quarter versus prior? Arthur Cooper: In leasing spreads, Craig, are you referring to either plus up or down, in some cases, relative to rent or... Craig Kucera: Yes. That's relative to rent. Arthur Cooper: Relative to rent. So as mentioned, we did have a plus up for the year -- or excuse me, in the quarter. And most of that came from an industrial asset that we renewed. Certainly, we try to get mark-to-market as best as we can when that market is a plus up. We have addressed all of our leases for '26. We have 3 or 4 outstanding that we need to work on, are working on. As I've mentioned in the past, we're in front of all of our expiring leases from '26 and '27. Obviously, the main concern is our property down in Austin, and we are obviously working that hard. We have had some activity. And hopefully, we'll have some more information on that in the not-too-distant future. But we always look to optimize what we can relative to where we are in the market and obviously, the tenants need within the building. Craig Kucera: Got it. And you have a small -- go ahead. Arthur Cooper: Go ahead. David Gladstone: [indiscernible] next go to Craig. Craig Kucera: Okay, sure. So you did have a small sequential decline in occupancy from the fourth quarter. Was that in an office or an industrial property? Arthur Cooper: It was in an office for a period -- it's going to be for a short period of time due to a building in Pennsylvania, the tenant downsized and beginning in the third quarter, that occupancy will be picked up by a new tenant that is in on a longer-term lease. We hope to expand them within the whole building, but that will come back up, if you will, once we hit the third quarter. Craig Kucera: Got it. Okay. And I think last quarter, you thought you might close on maybe a $10 million property this quarter. Is that still in the mix? And kind of what's your near-term appetite and pipeline for acquisitions? Arthur Cooper: Sure. We have 2 transactions currently that we are working on that we do believe will close within this quarter, both industrial and use of proceeds from the sale of one of our buildings we've referenced in the past that, in fact, is very accretive for us, both the straight line and current rent on that transaction doubles. So it's very accretive to us. The pipeline, there's a lot of competition, as everyone knows. We look to differentiate ourselves via our underwriting as well as performance. There's been a little bit of a slowdown starting to come back now as things do coming out of the first quarter acquisitions. Obviously, the private credit is a little in flux. So people are looking back at sale leasebacks as a way to finance their operations. So we anticipate a more robust second and third quarter. Craig Kucera: Okay. Great. And just circling back to the Austin property, is that GM lease, is that expiring in the second half of '26? And I guess, kind of when you think about the lease expirations you have ahead of you in '26 and '27, can you give us a sense of the mix between office and industrial? Arthur Cooper: Sure. And that lease there in Austin expires 12/31 of '26. So we will have addressed this prior to that -- as we move through that building, I trust. In the '26 lease expirations, we have one sale that will occur, as Gary mentioned, held for sale. Then the office building I mentioned where the tenant is taking over 7/1 of '26. The other 3, 2 are office. They're in the process of renewal. One is with the U.S. government, of which they're obviously, with the shutdown and so forth is they're still paying, but thrown back the completion of the renewal there. And in one building, there will be a bit of a downsize with the tenant taking 50% of the building, 50% plus. And then going into '27, we have, again, as we always will, been in contact with all the tenancy. Some of them have fixed renewal right and notices. We feel confident that we'll have positive results coming out of that and some have already been renewed. So we're working them hard. But again, the office and industrial side of that, one industrial, absolutely, I'm certain that's going to renew for 245,000 square feet. Another one for 240 industrial, that's going to renew. Our office would be Delta down in Atlanta. We are in discussions with them on renewal as well as we are showing the space. They're very slow to make a decision. Again, we're pushing out until 12/31 of '27. So it's a mix currently of approximately 60-40, 60% is industrial, 40% office. Operator: Our next question comes from the line of David Storms with Stonegate. David Storms: To start with the parcel sale in the quarter. Just curious, is this a structural shift? Is this opportunistic? And maybe what's kind of the profile of a buyer that would come in for a parcel? Does it vary by geography? Or is there a typical kind of buyer you would see here? Arthur Cooper: David, I'm sorry, I missed the first part of your question. Who -- what's the profile of the buyer? David Storms: Yes, apologies. Just around the parcel sales, maybe what's the profile of a buyer that would come in for a parcel sale? And is this something that was just opportunistic? Or are you starting to look at this with more intent? Arthur Cooper: It was opportunistic. In fact, the municipality came in, wanted that strip of land, if you will, to the back and not used by the property, to put in a bike path. David Storms: Understood. That's perfect. And then just curious, you mentioned some of the macro stuff and some of the challenges in underwriting as well. Just curious as to how your underwriting processes have changed, maybe how you're evaluating tenants with their maybe energy needs in relation to AI, gas or geopolitical exposure, anything like that? Arthur Cooper: As you have heard consistently, we have not changed our credit underwriting and won't, which is one reason our occupancy within our portfolio has always been so strong. We have not had any tenants ask for relief. And as we stay in front of our tenants, we do quarterly reviews and annual where appropriate. So we have not seen a drop in credit quality. We have 2 or 3 that we keep an eye on. However, they've been improving. And again, no miss rental payments and no ask for relief. So we will stick to our knitting as it relates to our underwriting. David Storms: Understood. That's great commentary. And one more. It sounds like in the last round of questions, you had mentioned you're seeing maybe more sale-leaseback transactions. Is there a particular type of tenant that you're seeing this in? Just trying to maybe gauge what kind of momentum there would be for these kind of transactions? Arthur Cooper: Well, as you know, we look for mission-critical real estate, obviously, in the industrial side of the business. And with that comes manufacturing. We're not looking for big box distribution per se. At the right cap rate, we would look hard at it. But we are looking for those properties that have heavy bolt-down cost, heavy equipment within the building which leads to, obviously, the tenant very expensive to move. So they're industrial in nature and manufacturing with heavy need within the building, whether it's cranes or production lines or so forth. So that's what we look for. Operator: Our next question comes from the line of John Massocca with B. Riley. John Massocca: Apologies if I missed this earlier in the call. Can you lay out kind of what the kind of brackets on the acquisition pipeline are and kind of what you're seeing in terms of the cap rate environment? Arthur Cooper: Sure, John. And the brackets around -- we're not going to, as I mentioned, move our credit requirements within the analysis of the tenant. We are looking at deals in the [ mid-6.5 ] cap going in. There's a great deal of competition, and I know our competitors have referenced that as well. I think one of the differentiating points for us is we do what we say we're going to do. We don't look to get into a deal and then try to make a deal. We're going to stick to what we commit to do. We're going to do our underwriting. We're going to stick to our underwriting. And the profile is, again, middle market companies in hopeful locations where we see some value out of the real estate as evidenced by one of the properties we're holding for sale. So we're going to continue as we have in the past. And one of the places, I believe, where we have some opportunity to take advantage are portfolio tenants at the moment that are looking to expand that we can provide the capital to expand, so we can keep them in our portfolio. John Massocca: Any change to the size of the pipeline versus the 4Q earnings call -- at the time of the 4Q earnings call? Arthur Cooper: No. It's -- we're always in the range of $300 million to $350 million under review. We have 2 LOIs -- actually 3 LOIs currently for approximately $87 million. So it generally remains in that $300 million on an ongoing basis, and we're under reviewing currently 13 opportunities. John Massocca: And maybe in light of the kind of comments on potential tenants or tenants moving back to favoring the sale-leaseback model. I mean, was your tenant base or kind of targeted acquisition base using the private capital that was out there using kind of the private lending funds that was out there? Was that a competing source of kind of capital versus you all? Or is -- if those vehicles kind of pull back, do you think it impacts your investments both yields and/or kind of the amount of acquisition volume you can do? Arthur Cooper: I don't believe that it is a great competitor to us, honestly. They're always going to find some owe money that will go chase deals, but those don't work for us as it relates to return as well as the type of tenancy they might end up with. Again, as evidenced by our performance over 20-plus years, we're going to be thoughtful both in the type of tenancy, where it's located, the fungibility of the real estate. And of course, as you've heard before, it's credit first and credit second and the real estate as we get into the analysis of our deals. John Massocca: Okay. And then anything onetime to kind of be aware of in the 1Q results? I just thought I saw a little bit of accelerated rent, but I wanted to kind of confirm that? Gary Gerson: No, there's -- John, there's no accelerated rent in Q1. I mean the only thing that's you would call onetime event would be that sale of the parcel for the gain. That would pretty much be it. Otherwise, it's a pretty standard quarter. Operator: Our next question is a follow-up question from the line of David Storms. David Storms: Apologies. I did not meant it. David Gladstone: David, do you have another question? David Storms: Apologies. I do not have another question. I'm not too sure I got back in queue. David Gladstone: Okay. I don't know. Next question from operator. Operator: There are no further questions at this time. I'd like to turn the floor back over to Mr. Gladstone for closing comments. David Gladstone: That's really sad. We like to have lots of questions, but we get 3 or 4, and that's about it. We've got to get a different ownership base that ask us a lot of questions. So right now, we're -- you might say we're fat and happy. Everything is working as it should work, and we've got some really interesting things we're working on. So with that, I'll close it down and say thank you all for tuning in, and we'll see you again next quarter. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Hello, everyone. Thank you for joining us, and welcome to CDW First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Steve O'Brien with Investor Relations. Steve, please go ahead. Steven O'Brien: Thank you, Samantha. Good morning, everyone. Joining me today to review our first quarter 2026 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, for instance, non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-K. Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2025. Our net sales growth rates are described on an average daily basis unless otherwise indicated. As a reminder, we made changes to reflect our updated go-to-market structure, which are reflected in our earnings materials on the website. We also released an 8-K filing last Friday, which provides quarterly financial performance for 2024 and 2025, aligned to our new segment structure. We will talk through these new reported segments now and in the future. Replay of this webcast will be posted to our website later today. This conference call is property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris. Christine Leahy: Thank you, Steve, and good morning, everyone. I'll begin today's call with an overview of our first quarter performance, strategic progress and provide thoughts on the balance of the year. Al will provide additional detail on our results, our capital allocation priorities and further perspective on our outlook. The team delivered a strong start to the year in a complex and fast-moving environment. Excellent top line performance reflected agility both in securing supply and capturing demand for AI investment and ongoing infrastructure modernization. For the quarter, consolidated net sales increased 9% year-over-year. Gross profit grew 6%. Non-GAAP operating income increased 2%, non-GAAP net income per diluted share grew 6%, and our adjusted free cash flow totaled $251 million. Across all sizes and industries, customers navigated the operational challenge of moving AI from exploration into real production environments. Customers also navigated memory supply and pricing constraints, which reshaped budget priorities in this quarter. Teams responded quickly by leveraging our partner relationships, full stack capabilities and balance sheet strength to help customers secure product and identify alternatives, once again demonstrating their unmatched execution in yet another challenging supply market. Our ability to address the shift in near-term customer priorities and meet ongoing AI hardware infrastructure investment fueled strength across networking, storage, servers, power and cooling, which drove heavier infrastructure hardware mix in the quarter. Consistent with typical patterns, services, warranties and software assurance, which carry higher gross margins were lower customer priorities in the quarter. The built-in flexibility of our model helped support the resulting gross margin impact, enabling record first quarter gross profit and solid gross profit growth. While discretionary investments and seasonal expense patterns dampened non-GAAP operating income, disciplined capital management drove record first quarter non-GAAP net income per diluted share and strong cash flows. Let's take a closer look at the quarter. There were 3 performance drivers: our balanced portfolio of customer end markets, the breadth of our full stack offering and relentless execution of our growth strategy. First, our balanced portfolio of diverse customer end markets. Today, we operate across 3 U.S. segments: Commercial, Government and Education. In our Commercial segment, teams are organized around 3 customer channels: corporate, health care and financial services. Government teams are aligned to state and local and federal customers, while education teams are focused on K-12 and higher education. Separately, our other segment represents our combined U.K. and Canadian international operations. To maximize our ability to address the unique needs of customers based on size, within each end market, we further align our teams by customer size, enterprise, mid-market and small, each covered by dedicated sales professionals, industry strategists and technical resources. Against this quarter's complex backdrop, the diversity of our customer end market exposure again served us well with strong results in commercial, state and local, K-12 and international, more than offsetting market-specific challenges in federal and higher education. Commercial had an excellent start to the year, up 10%. Growth was broad-based across all sizes of customers, driven by demand for infrastructure hardware and software, reflecting both AI demand and the desire to manage supply constraints. Government increased 5% State and local's double-digit increase more than offset a low single-digit decline in federal, which was impacted by budget timing and procurement delays stemming from last year's shutdown. Education increased 3% with K-12 strength, primarily driven by client device purchasing in advance of price increases, offsetting extended decision-making by higher ed customers. In our U.K. and Canada operations, which we report together as other, the teams executed with focus and speed and together delivered 18% growth in U.S. dollars. U.K. delivered high single-digit local currency growth driven by private sector demand, while Canada was up double digits in local currency with balanced growth across end markets, reinforcing the scalability and relevance of our model beyond the U.S. The team's ability to address customer priorities was underpinned by the second driver of our performance, our comprehensive services-led full stack end-to-end offering, which includes hardware, software and services. Hardware increased 10%. Growth was led by infrastructure with networking, servers and enterprise storage each up more than 20%. Underlying client device demand was strong, but reported growth was 3%, reflecting difficult year-over-year comparisons driven by tariff-related pull-ins in the prior year, particularly in K-12 as well as shipment delays this quarter that pushed orders and elevated backlog. Software increased 11% as customers continue to invest in productivity, collaboration and security platforms. License growth was strong and focused on AI readiness and standardized core workloads. Cloud customer spend growth continued at a healthy pace but slowed compared to prior quarters as customers prioritized hardware investment. Services top line was flat in the quarter. Solid performance in professional and managed services was offset by declines in warranties, reflecting an infrastructure heavy revenue mix and normal timing between equipment purchases and installation. Notably, professional and managed services gross profit contributed nearly 15% of total gross profit growth, underscoring the strategic and financial value of higher-margin services. Once again, customers across our end markets leaned on CDW to help them navigate complexity and optimize their IT investments with speed and confidence. Sustaining that level of value consistently and at scale requires excellence in both how we go to market and how we operate. And that brings us to the third driver of our performance this quarter, our growth strategy. At the core of our growth strategy is a clear shift we are seeing from customers moving beyond interest in AI to a focus on how to put it to work in real environments at scale and with measurable business impact. That shift plays directly to CDW's strength and sits at the center of our AI forward full stack strategy. We are building CDW to be AI first and outcome obsessed. And at the center of that is our coworkers who every day turn complexity into real outcomes for our customers and partners. To achieve this, AI is an operating capability at CDW, not a bolt-on, and it is being embedded across how we operate, how we sell and the solutions we deliver. AI-driven enhancements across how we sell and operate include coworker AI fluency, deeper data integration and platform readiness and productivity gains from tools such as Agentic RFP capabilities. During the quarter, we furthered our progress embedding AI into our go-to-market motions with our CDW Assist Super Agent, which helps sales professionals prioritize opportunities and engage customers more effectively through insight-driven AI-supported workflows. At the enterprise level, AI is being embedded across our core systems and end-to-end workflows under our AI-powered modernization initiative, which we call Geared for Growth. Geared for Growth is translating AI-enabled productivity into operating leverage, supporting margin discipline while providing investment capacity to sustain scalable growth. We expect the benefits from Geared for Growth enterprise initiatives to begin flowing through in the back half of this year, building over time. Customers are focused on the same opportunity, turning AI's promise into practical, secure and measurable outcomes. AI adoption is a compute-intensive shift that increases both services intensity and hardware relevance. It reshapes how customers build, operate and secure their environments, requiring them to connect data, embed AI into existing systems, balance cost and performance and govern usage at scale, all while continually optimizing infrastructure. As complexity rises, customers need a partner who can execute reliably at scale. CDW orchestrates technology across the full stack in a way few others can. Our architectural expertise, expansive partner ecosystem, unmatched delivery scale and services forward model enable customers to adopt AI in ways that align with their environments, risk profiles and strategic priorities. A recent engagement where the customer turned to CDW to design, configure and implement a private AI factory hosted within a colocation environment brings this to life. Our advisory services team worked closely with the customer, a large financial services company to design an end-to-end solution that included accelerated compute nodes, high-speed fabric-based networking, enterprise switching and supporting compute infrastructure. The team also configured AI orchestration, containerization and workload management software. The comprehensive solution delivered a production-ready platform that provided greater customer control over data, cost and governance and generated a nearly 8-figure deal, which included a significant professional services component. The hard part of AI is not the model. It's the orchestration. AI increases complexity and value shifts from access to execution quality, depth and comprehensive end-to-end solutions, a shift that reinforces the relevance of our model across all of our customer end markets and sizes, small, mid-market and enterprise and expands our opportunity set, an opportunity further strengthened by our recent go-to-market alignment of resources. Organizations that once self-served or relied on smaller or more narrow partners now face requirements that demand scale, integration and breadth. AI is not only increasing wallet share, it's also bringing new customers to CDW. Unlocking that opportunity requires expanding access. With AI infrastructure demand expanding beyond hyperscaler and frontier model builders, the push to deploy AI at scale has driven demand for accelerating compute past available supply, making access, not ambition, a crucial restraint. To address this constraint, we have finalized a relationship with provider Boost Run to deliver our customers access to high-performance AI infrastructure through a flexible GPU-as-a-service model while remaining fully composable of on-premises and cloud environments that may be planned or in place. When paired with CDW's advisory services, change management, governance and adoption expertise, customer AI ambition across all sizes and industries become durable production-ready outcomes. Implementing accelerated compute is not the only way customers are operationalizing AI. AI is increasingly being embedded directly into the technology stack across end user and collaboration platforms, networking and security environments and the data center, driving smarter orchestration, monitoring and optimization. As customers embed AI into existing platforms, they are upgrading, not rearchitecting, placing greater demand on execution. Meeting those expectations requires a partner with deep expertise and the ability to operate at speed across the full environment. That plays directly to CDW's full stack end-to-end model. Regardless of how customers choose to consume it, AI adoption reinforces what differentiates CDW, our full stack relevance, end-to-end engagement and ability to execute at scale, supporting our durable, profitable growth. And that leads us to our outlook. We continue to approach the year with discipline and prudence and are maintaining our view for the U.S. IT addressable market to grow in the low single digits in 2026 on a customer spend basis with 200 to 300 basis points of CDW outperformance. Our outlook takes into account 2 countervailing factors, our near-term visibility into the second quarter given strong Q1 order activity that flowed into backlog and our prudent view of uncertainty in the second half of the year. It does not factor in potential wildcards such as recessionary conditions or meaningful changes in known ongoing exogenous factors, which include elevated geopolitical risks and more extreme dislocations in pricing and supply. As always, we will provide updated perspectives on business conditions and refine our view of the market as we move through the year. As AI adoption reshapes customer requirements and the continued uncertainty, expectations for integration, governance and execution are rising. Partners with scale, full stack relevance and the ability to deliver outcomes consistently with confidence and speed matter because when complexity rises, CDW's relevance grows. With that, let me turn it over to Al for a more detailed review of our financial performance. Al? Albert Miralles: Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our first quarter performance, move to capital allocation priorities and then finish with our outlook for the remainder of 2026. First quarter gross profit of $1.2 billion was up 6% year-over-year. This was at the higher end of our expectation for a mid-single-digit year-over-year increase as our teams help customers navigate a dynamic memory pricing and supply chain environment to capture demand in infrastructure hardware and client devices alongside increased demand for software licenses. Importantly, our growth reflects strong execution and broad-based customer demand across our segments. First quarter gross margin of 21% was down 60 basis points over the prior year's first quarter, but remains resilient given the demand environment and mix of the business. The decline was primarily driven by the impact of a lower mix of netted down revenues as customers focus more of their spend on acquiring solutions hardware in this volatile pricing environment. We do expect netted down revenues alongside professional and managed services to be higher priorities for customers in the second half of the year and to continue to outpace the overall business growth in the longer-term. Taken together, these dynamics were timing and mix driven, and we expect to remain principally within the margin framework we've shared for the full year. The diversity of our end markets served us well this quarter as all of our segments increased sales year-over-year. Our Commercial segment started the year strong, up almost 10%, driven by increased demand in infrastructure hardware across NetComm, servers and storage alongside infrastructure software strength, all up double digits. Underneath the surface of commercial, corporate, health care and financial services were all contributors to our year-over-year growth with our corporate and health care customers leaning in network upgrades and software investments, while our financial services customers focused on storage and server purchases to enable AI inferencing. Government increased sales by almost 5%, driven by state and local. Federal activity resumed post the fourth quarter shutdown, but net sales and gross profit were down year-over-year as we expected. Education was up low single digits as K-12 grew despite tough year-over-year compares helped by memory pricing-related urgency. International was exceptional in the first quarter with double-digit growth in the combined U.K. and Canadian business, driven by strength across our hardware portfolio. Our ability to remain flexible and meet customer needs where they needed us, combined with the diversity of our portfolio of products and partners also served us well in the first quarter. As referenced, demand for infrastructure hardware and software licenses was particularly strong across our commercial customers, while client device demand stood out across international, government and education. As customers primarily focused on hardware and licensed software, the spend growth in cloud, SaaS and professional managed services was more modest. Netted down sales were roughly flat year-over-year, representing 34.5% of gross profit, down from 36.5% of gross profit in Q1 2025. This was largely the result of software assurance and warranty performance, which declined amid hardware and software license growth. Professional and managed services spend increased low single digits. The need for and relevance of our cloud and services business remains high. But during this time of dynamic hardware pricing and supply chain concerns, customers have shifted their spend priorities. Turning to expenses for the first quarter. Non-GAAP SG&A totaled $738 million, up 8.8% year-over-year. This was consistent with our expectations of, one, a decline in expense dollars compared to the fourth quarter; and two, that the first quarter expense ratio would be the highest of the year. In addition to the normal level of increased incentives related to higher gross profit achievement and seasonally higher Q1 expenses, we are also investing in productivity enablement in the form of AI tools and training that will lead to an enhanced expense efficiency in the second half of the year and beyond. In that context, I'd like to take a minute to expand on our Geared for Growth effort, which Chris referred to in her remarks. The AI-powered modernization investments we've been making under Geared for Growth are focused on transforming how we operate and particularly as it supports our long-term durable and scalable growth. The program is a disciplined multiyear effort to simplify and rewire our operating model, reducing complexity, modernizing quote to cash and supporting processes and embedding AI to enable faster, better decisions across the enterprise. In addition to improving the end-to-end experience for our customers, partners and coworkers, Geared for Growth investments are beginning to translate into real productivity improvements across our operations and will support our commitment to return to our targeted SG&A efficiency ratio and enable greater value creation. To that end, we have already identified substantial opportunities that will enhance our cost structure and will begin to accrue benefits in the second half of this year. As we look forward into 2027 and 2028, we would anticipate run rate improvements in the range of $100 million to $200 million. These savings will be balanced with some reinvestment back into the business to fuel our broader growth strategy. We will provide you with further updates on the timing of these efforts and the financial impacts as we move forward. Turning back to the quarter. Coworker count ended at approximately 14,700 and customer-facing coworker count was 10,400, both down slightly year-over-year and quarter-over-quarter. Our ongoing goal is to balance growth, expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from our broader operations. Non-GAAP operating income was approximately $452 million, up 1.8% versus the prior year. Non-GAAP operating income margin of 8% was down 50 basis points from the prior year first quarter level. Net interest expense was down roughly $2 million year-over-year, driven by lower debt levels. Our non-GAAP effective tax rate was slightly below the low end of our targeted range at 25.2%. Non-GAAP net income was $295 million in the quarter, up 3.1% on a year-over-year basis. With first quarter weighted average diluted shares of 129.5 million, non-GAAP net income per diluted share was $2.28, up 6.3% versus the prior year period and towards the higher end of our expectation of mid-single-digit growth year-over-year. Moving to the balance sheet. At period end, net debt was $5.1 billion, up roughly $50 million from the prior quarter and driven by slightly lower cash and cash equivalents. Liquidity stands at $2.5 billion with cash plus revolver availability. The 3-month average cash conversion cycle was 16 days, slightly below our targeted range of high teens to low 20s. The cash conversion metric reflects our effective management of working capital, including disciplined management of our inventory levels even as infrastructure hardware sales were strong, client device growth continued, and we work closely with customers and partners to assure supply in this dynamic environment. As we've mentioned in the past, timing and market dynamics will influence working capital and the cash conversion cycle in any given quarter or year. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer-term. Adjusted free cash flow was $251 million. This reflects 85% of non-GAAP net income for the quarter within our stated rule of thumb of converting 80% to 90% of non-GAAP net income to cash. We utilized cash consistent with our 2026 capital allocation objectives during the quarter, including returning $201 million in share repurchases and $81 million in the form of dividends. This combined $282 million returned to shareholders is 112% of adjusted free cash flow, currently well ahead of our 2026 target of returning 50% to 75%. This brings me to our capital allocation priorities moving forward. Our first capital priority is to increase the dividend in line with non-GAAP net income growth. We have increased the dividend for 12 consecutive years through 2025. We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward. Our second priority is to ensure we have the right capital structure in place. We ended the first quarter at 2.5x net leverage within our targeted range of 2x to 3x. We will continue to proactively manage liquidity while maintaining flexibility. Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. We continually evaluate M&A opportunities that could accelerate our 3-part strategy for growth. While we remain active in the M&A market, our expected cash flow performance allows us to be opportunistic towards share repurchases as we deem our stock to be attractive at this valuation. Now turning to our outlook. Our first quarter performance was driven primarily by strong underlying demand as well as customer urgency to get ahead of memory-related price increases and potential supply chain concerns. We came into this year with an appropriately prudent outlook. We're pleased with our strong start, but the environment is still very dynamic and thus, continued prudence is warranted. We know customers are balancing the risk of supply chain and pricing volatility, macro and geopolitical wildcards against their AI road maps and related investments alongside compelling needs to address priorities across the full IT stack. We believe that our comprehensive capabilities, partner reach and our updated go-to-market structure, we are uniquely positioned to capitalize on opportunities and help our customers navigate the complexity. With these factors in mind, we are holding to our full year 2026 view of low single-digit growth for our addressable IT market. We continue to target market outperformance of 200 to 300 basis points on a customer spend basis. Factoring in market conditions, our first quarter performance and the elevated backlog entering the second quarter, we now expect gross profit to grow in the range of low to mid-single digits for the full year 2026. We continue to expect the second half gross profit contribution to be slightly above the first half with slightly more weight to the first half than we historically experienced, driven by customer urgency we've discussed. Based on a slightly higher mix of hardware products for 2026 than we originally anticipated, we now expect gross margin to be -- margins to be approximately in line with 2025 levels. Finally, we continue to expect our full year non-GAAP net income per diluted share to grow at the high end of mid-single digits year-over-year as we focus on operating leverage and effective execution of our capital allocation priorities. Please remember that we hold ourselves accountable for delivering our financial outlook on a constant currency basis. On that note, our expectation is for currency to be a slight benefit to reported growth rates for the year. Moving to modeling thoughts for the second quarter. We anticipate gross profit to grow at a high single-digit rate sequentially, leading to mid-single-digit year-over-year growth. Moving down the P&L, we expect second quarter non-GAAP SG&A to be modestly higher than the first quarter, resulting in an operating expense as a percentage of gross profit that is seasonally lower than the first quarter level and similar to the prior year's second quarter. Finally, we expect second quarter non-GAAP net income per diluted share to be up high single digits year-over-year. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. With that, I will ask the operator to open up for questions. We would ask each of you to limit your questions to one with a brief follow-up. Thank you. Operator: [Operator Instructions] Your first question comes from the line of Maggie Nolan with William Blair. Margaret Nolan: You gave several interesting AI examples. And I'm wondering at a portfolio level, how are you assessing whether AI-driven deals differ on a gross margin basis in terms of the services attach rate versus some of your more traditional infrastructure transactions? And just overall, should we think about AI as margin neutral or accretive or dilutive over time? Christine Leahy: Maggie, thanks for the question. I would say that the AI deals per se have a couple of components that make margin accretive. higher-value services attach and continuing recurring revenues. And overall, that's a larger sized deal typically and a higher margin deal. I think what we're going to see is AI is, as we all know, becoming ubiquitous and embedded across every component of the stack. And so we're very optimistic about how we can capitalize on that to drive margin accretion going forward. Margaret Nolan: And you gave a lot of good color around kind of the expectations for the remainder of the year. But I wanted to dig into the why behind your expectation that netted down revenues and services, in particular, should increase in the second half of the year, just given the current dynamics and everything you experienced in the quarter you just reported? Albert Miralles: Maggie. A couple of things. First, we continue to believe that the durability of netted down revenues, namely SaaS and cloud will continue, and there definitely is continued demand, buildup demand with respect to customers in that regard. I think the phenomenon that we're dealing with right now is just prioritization of customers around hardware spending and getting in front of price increases, potential supply concerns. And so as that works its way through the funnel in second quarter and beyond, we think we'll see that prioritization balance back to a broader array of product categories and namely those that fall into netted down. Given our continued engagement activity with customers, we have line of sight to see that, that will pick up in the back half and thereafter. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Joseph Cardoso: This is Joe Cardoso on for Samik. Maybe first, it sounds like you're seeing much stronger hardware revenue than you envisioned 90 days ago. But at the same time, you're also highlighting constraints and shipments delays inhibiting your ability to fulfill demand here. Can you maybe just help us think about some of the vectors there around how much of this is elevated demand? How much you guys are seeing pricing potentially running hotter than you previously expected? And if there's any particular areas of the portfolio kind of driving the upside here on the hardware side? And maybe as a second question to that, like how has backlog trended relative to maybe more normalized levels for CDW? Just trying to understand how elevated it is here now kind of entering the -- or now that we're in the second quarter. Albert Miralles: Yes. Joe, I would say broadly, what we have seen in the way of weighting of hardware pricing changes, supply friction is all in the realm of what we would have expected across all of those dimensions. So right, when we gave our original outlook, we expected that the first half would be heavily weighted towards solutions hardware. We've seen that play out. We expected the price changes, albeit diverse across different subcategories would vary and they have, and we expected that customer engagement and activity would be really strong. All of that has played out. And I would say maybe kind of bonus for the level of continued customer activity has persisted as we sit here now into the second quarter. The phenomena with respect to pull forward and backlog, look, I think in the first quarter, we experienced some level of pull forward consistent with what we would have expected. And -- but we did see a fair amount of written business that did not get delivered owing to our backlog leading into Q2 being a bit higher. All of those elements lead us to continued expectation of strength in Q2 and potentially beyond. We are reserving some level of uncertainty for the back half as all of that activity kind of makes its way through the funnel. And certainly, we'll give you more robust updates as we exit Q2. Joseph Cardoso: No. Got it. That's very helpful color. And then maybe just as my second one here, we're hearing concerns from investors around OEM partners potentially looking for further cost savings in this inflationary environment and potentially looking to squeeze channel partners to derive some of those savings. Just curious if you guys can share your thoughts, what you're seeing across your OEM relationships, how you're thinking about that risk and potentially that dynamic materializing in this macro this year? Christine Leahy: Joe, it's Chris. I'll take that one. We're used to seeing partners change their programs periodically and in particular, when there are inflection points in technology. And there's nothing different now -- what I would say is with the scale and size of CDW, our relationships with our partners tend to always turn out very well for CDW. So we're not experiencing what I would call any kind of constraints or downward pressure in conjunction with the partner programs and the economics. In fact, they're leaning on us more heavily given the importance of our role in the channel now, even more with AI. The orchestration requirements, the integration requirements, those are the bottlenecks in terms of reaching customers. So we're finding that our role both with customers, but equally with partners is becoming even more compelling and important. Operator: Your next question comes from the line of Amit Daryanani with Evercore ISI. Victor Santiago: This is Victor Santiago on for Amit. Can you guys talk about the strength you saw in financial services? And how durable is some of that strength here? Is this just an effect of the previous investments you made in building out the vertical or more of a one-off? Christine Leahy: Yes. Thank you for the question. I would say we consider it to be durable and a number of factors. First of all, FSI tends to be on the leading edge of technology, and indeed, they are when it comes to AI and infrastructure build-out. So those customers were very focused on servers and storage and all things supporting AI inferencing. I would also say that the changes that we've been making in our go-to-market more refinement over the last several years to tailor our coverage model to particular customer segments and then within those segments, the sizes has been very effective. You saw us do that in health care, strong results over time, durable results over time with health care increasing profitability. We're seeing the same thing with FSI, and we are expecting it to have these go-to-market evolution to have positive changes as we go forward and pick up momentum, quite frankly. Victor Santiago: Great. And as a quick follow-up, can you just talk about what drove that 40% plus sequential increase in inventory? Is that just a function of inventory positioning as you say, for some of that Q2 written business that Al talked about? Or is that just a function of higher ASPs? Albert Miralles: Yes. Thanks, Victor. I'll take that. Our inventory indeed was up in the quarter. And I think, look, really a reflection of who we are and how we operate in environments like this where customers have an urgency to get product. We step up. We are often first in line and able to get that inventory, and you saw that come through this quarter. That being said, we have our continued commitments on working capital and delivering free cash flow. So you take a quarter like this where our inventory went up several hundred million, and we still delivered our free cash flow within the range of expectations of relative to non-GAAP net income. As it pertains to ASP changes and kind of impacts on that inventory, I mean, certainly, that was the driver of what led to inventory increases, but it didn't have a meaningful impact on the dollar amount of that inventory. Operator: Your next question comes from the line of Adam Tindle with Raymond James. Adam Tindle: Chris, I just wanted to start on the new initiative that's being announced today. I think you called it Geared for Growth to simplify and rewire the operating model. I guess just 2 parts there. First would be how you thought about -- because you just underwent a lot of change in the go-to-market over the past year and implemented that as of January. So doing another program here, how you thought about preventing future or further disruption from the operating model? And then secondly, maybe it's related or maybe it's unrelated, we noticed you hired a new Chief Transformation Officer in the quarter. I wonder if you might just touch on that hiring rationale and key potential initiatives going forward? And I've got a follow-up. Christine Leahy: Sure, Adam. Thanks for the question. Geared for Growth, I describe it this way. It's really just the next phase in driving the durable success of the business. So go-to-market has been a 2-year process, and we're well in our spots, and it's going very well. When I think about geared for growth, it's really driving efficiency, productivity, coworker empowerment. And it's across all the vectors that you would expect. It's our AI tooling, it's our partner relationships, it's the solutions we're developing and driving efficiency and effectiveness across all of those. That is actually a positive to our go-to-market. And so we've been very thoughtful and careful about timing, Adam, the go-to-market changes followed by this geared for growth on top of the foundational technology stack changes we've made over time. So this has been a 3-, 4-, 5-year process. And so we think we're managing it very well. And we've already seen some great uptick in the sales organizations for the AI tools that we've rolled out. So when you roll positive tools into the organization that are driving more precision selling, speed to value, things like that, that all helps in terms of the change management. And we're feeling really quite positive about the uptake and how it's going. The second question, I think, was on Hang Tan and our Chief Transformation and Strategy Officer. We had a movement inside. We moved one of our leaders over to a business environment. And so we had to fill the position of Chief Strategy and Transformation Officer. Hang has been a great add. I think when you look at our business, you look at the speed of change in the world right now, you look at the position that we have in the market as the largest of our kind as the fullest capability as the trusted adviser having yet another player on the executive team with deep technical relationships, chops, operating experience and frankly, a competitive spirit is going to be one more addition to help us move with speed in the market to maintain our leading position. Adam Tindle: Helpful. Maybe just a follow-up for Al somewhat related to this initiative. I think you mentioned $100 million to $200 million run rate savings related to this. And I'm not having a hard time getting back to double-digit EPS growth, which was the algorithm when CDW traded at a much higher valuation multiple. So exciting stuff ahead in terms of that. But I did want to clarify, Al, on that $100 million to $200 million. Is that an annual, meaning like per year in 2027 and 2028? Or is that a total amount? And then secondly, it sounds like there's going to be some reinvestment. Any way for us to just kind of handicap it sounds like that may be a gross number, what might be a more reasonable net number? Albert Miralles: Yes. So first, amongst the things that Chris mentioned with geared to growth and all of the aspects of really improving our end-to-end operations, underpinning Geared for Growth, Adam, is our commitment to return to our targeted efficiency ratio and return to durable operating leverage. So that's probably the biggest takeaway from a financial perspective for you. As we look forward, first, these efforts have been underway. And in the first quarter, obviously, we had some front-end investments associated with them, but we expect those benefits to come through in the second half. And that's part of what supports our commitment to say operating leverage will happen in the second half of this year. So if you scroll that forward, Adam, to 2027, you should think of that $100 million estimate that we gave as a gross annual run rate impact. Now as you noted, some of that will get reinvested. I would say, upwards of half, maybe a little bit less there. But that reinvestment will include an expectation of ROI. So there's a compounding component of this. The $200 million would be what we see in the way of line of sight if we go further out a year or so and into 2028. Now Adam, as you would expect, when we provide this type of this transparency and particularly given the stage that we're at, we are often prudent. So we do see pretty meaningful opportunity and what could exceed those levels. But what we're giving you now is what we have confidence in, conviction around and line of sight in the way of these opportunities. And so we feel really good about this helping us to return back to that target efficiency level, getting to durable operating leverage and really enhancing our profitability while we're making a better experience for our customers, partners, coworkers. Adam Tindle: And it's very much appreciated. I know you guys typically don't go out that far, but to give us a little bit of a road map, exciting stuff ahead. Operator: Your next question comes from the line of David Vogt with UBS. David Vogt: In your commentary about strong order growth and the backlog going into the back half. Can you help us square maybe pull back a little bit? Obviously, the supply chain challenges are a consideration on maybe why backlog ticked up a bit and your inability to deliver. But you also talked about uncertainty in the back half. And I would assume that's related to uncertainty around demand following what could potentially be pretty meaningful price increases across the portfolio by your OEMs. Can you kind of help us square why you're thinking -- why you're confident enough to take the guide up for gross profit growth and the high end of, I guess, the EPS growth for the balance of the year given those sort of countervailing forces going forward? And then I have a follow-up. Albert Miralles: David -- so first, you should think of our outlook update as more steeped in Q2. We are not materially changing our view of the back half. That is an expectation that you might see some demand muting, you may see kind of hardware come off a bit in lieu of professional services, managed services netted down revenues. So what gives rise to our increase in the outlook is, #1, the amount of backlog that flowed into Q2, #2, the continued order activity written demand that we are processing as we speak and sit here now and the ongoing engagement and sentiment that we hear from our customers. So the pickup in our outlook was really steeped in an expectation of stronger results in Q2. Now David, importantly, as you know, we've been prudent all along with this. What we'll be looking for and looking closely at in Q2 is seeing does that order activity engagement with customers continue that could give rise to more optimism in the back half. But we're going to pause here and make sure that kind of we see that before we further update our outlook in the back half of the year. David Vogt: Great. That's helpful. And maybe just a follow-up on the backlog. Is there any color or commentary you can help us understand like the composition of the backlog, either by category, duration and what the underlying sort of margin dynamics of said products within the backlog looks like so we can think about timing of how that backlog goes into the second half and maybe into calendar '27 and what the potential margin impacts might look like? Albert Miralles: Yes. What I would share with you is the composition of the backlog looks consistent with the mix of business that we experienced in Q1. As you would expect, we were heavy on the solutions hardware side of things. So that is a meaningful component of the hardware backlog. But as well on the PC side of the house, we definitely had products that did not get delivered, and that is part of the reason why our growth for Q1 on the PC front looked a bit more muted than you might have expected. Operator: Your next question comes from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: I've got 2 of them. Al, I'm going to start with another margin-related question. And you gave netted down items as a percent of gross profit. If we take out netted down items, the gross margin of the core looks like declined to 25.3%, which is down 116 bps sequentially -- sorry, year-on-year and about 166 bps sequentially. As suppliers are raising prices, are you able to pass that on to end customers? And what drove that decline in margins for the core business? And as you look into the second half, do you see that improving based on mix and your visibility that you have? Do you see the core business margin stabilizing higher? And I have a follow-up. Albert Miralles: Yes, Ruplu. So let me just summarize where we came out on a gross margin basis for the quarter. So Q1 overall gross margin, 21%, down 60 basis points year-over-year. The high majority of that delta, Ruplu, came from the mix out of netted down revenues, literally, whatever, 50 basis points of that was due to the drop in netted down revenues. Now if we translate to your question with respect to gross margins ex netted down, we printed a gross margin of 14.8%. That was actually flat year-over-year versus 2025. If you look at that non-netted down margin relative to Q4, Q3, you will see it is lower. I would just remind you that Q1 is our typical seasonal trough of non-netted down margins. The headline there for you, Ruplu, is that as you would expect, as we get started in the year on our product margins, we don't have full earning out or optimization of all of our channel incentives that attach to products, and that's why Q1 seasonality is typically lower. Other variables that maybe I would just note sequentially here is that in Q1, we had obviously a drop in our mix of services, which would dilute the margins a bit and maybe a little bit more mix in enterprise business that comes at a slightly lower margin. So overall, we feel really good about the durability of our margins holding up, notwithstanding that netted down revenues came down in the quarter, but we expect that to come back in the back half of the year. Ruplu Bhattacharya: Got it. Can I ask a follow-up, which is a higher-level question. As you look into the second half of the year, what have you factored in, in terms of end market demand destruction as component costs, including memory are going higher? And how can investors get confidence that your guidance is sufficiently derisked for any such lower demand? So is there a way you can quantify what you're expecting for PC growth or server growth? And in terms of like what -- I guess what I'm trying to understand is how much can the economy be weaker or how much can demand be lower and you still be able to meet that 200 to 300 basis points of outperformance? Appreciate the color. Albert Miralles: Sure, Ruplu. Obviously, what we've seen in Q1 and what we expect in Q2 is an elevated level of solutions hardware, really customers showing an urgency to get this product that could go up in price, might be supply constrained. That being said, in the back half of the year, we don't expect that those categories to drop off a cliff. We just expect it to normalize in the environment. And I think what we would see in the back half is a more balanced view of our different categories. That is specifically netted down revenue, SaaS, cloud, professional services, managed services to look more balanced relative to that solutions hardware. So we would not call that demand destruction. It's really just a normalization and returning back towards what we would call a more healthy regular balance of product allocations. Operator: Your next question comes from the line of Keith Housum with Northcoast Research. Keith Housum: Great. In terms of the second half of the year, I appreciate the cautious tone based on the uncertainty and volatility in the markets today. As you think about product shortages and constraints in terms of allocations, how much is that factoring into your conservative stance for the second half of the year? Albert Miralles: Keith, not materially. Look, I think what we've seen is definitely an extension of lead times in products. And I talked about backlog, but we're seeing lead times. But I would say, as the year unfolds here, it definitely is becoming more orderly, the line of sight to lead times, the actual deliveries versus expectations. is settling in. So we are not feeling at this juncture, and we reserve the right to give you the update as we get to midyear. We're not feeling significant concern around being able to get product and the risk that customers would be waiting a very extended amount of time. So again, reasonably orderly, improving with time, and we would expect that the second half of the year looks much more normalized as things play out. Keith Housum: Great. And just as a follow-up, I appreciate the color on Geared for Growth. Is the driver of the opportunity for Geared for Growth, is it more of the AI-driven tools and the specification of some of your targeting work there? Is that driving the potential benefits you see about $100 million to $200 million? And then is this going to come more from doing more with less -- or is there going to be another round of layoffs that you perhaps have to entertain as you go through this process? Christine Leahy: Yes. I'll start with that one. Think of it as a wide spectrum. It certainly is focused on driving effectiveness into our sales and customer-facing organizations, but equally, embedding AI across our core end-to-end processes, which will indeed drive efficiency. In terms of where the specific dollars are coming from, they will be derived both from increased productivity as well as cost savings. and having our coworkers leverage their time, skills and capabilities in a more valuable way. So I just would say that Geared for Growth to us is actually all in service to our customers. At the end of the day, we've done a lot of foundational work over 4 years to get to the point now where we are able to be focused on AI first and our customers' outcomes and in doing so, supercharge the power of the business through AI. So we're quite excited about this program in view of the entire context of moving with speed to value for our customers, for our partners and for the development of our coworkers. Operator: We have reached the end of the Q&A session. I will now turn the call back to Chris Leahy for closing remarks. Christine Leahy: Okay. Thank you, Samantha. Let me close by recognizing the incredible dedication and hard work of our coworkers around the globe. Their ongoing commitment to serving our customers, that's what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those of you listening for your time and continued interest in CDW. Al and I look forward to talking to you next quarter. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Q1 2026 Comstock Resources, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Miles Jay Allison. Please go ahead. Miles Jay Allison: Thank you, everyone. Thank you for joining us. Welcome to the Comstock Resources, Inc. First Quarter 2026 Financial and Operating Results Conference Call. You can view a slide presentation during or after this call by going to our website at comstockresources.com and downloading the quarterly results presentation. There you will find a presentation titled First Quarter 2026 Results. I am Miles Jay Allison, chief executive officer of Comstock Resources, Inc. Here with me is Roland O. Burns, our president and chief financial officer, Daniel S. Harrison, our chief operating officer, and Ronald Eugene Mills, our VP of finance and investor relations. Please refer to slide two in our presentation and note that our discussions today will include forward looking statements within the meaning of securities laws. While we believe the expectations of such statements to be reasonable, there can be no assurance that such expectations will prove to be correct. If everyone would please go to slide three. On slide three, we summarize the highlights for the first quarter. Lower production, partially driven by production impact from significant winter weather in the first quarter, drove the lower financial results in the quarter compared to 2025. Our natural gas and oil sales were $339 million. We generated $192 million of operating cash flow, or $0.66 per share. Adjusted EBITDAX for the quarter was $251 million, and we reported adjusted net income of $44 million, or $0.15 per share. During the quarter, we had very strong drilling results which will drive production back up for the remainder of the year. Almost all the wells returned to sales in the first quarter were very late in the quarter. Since our last update, we put six new Western Haynesville wells online with an average per well initial production rate of 29 million cubic feet per day. In our legacy Haynesville, we turned 10 wells to sales with an average lateral length of 12,312 feet and a per well initial production rate of 31 million cubic feet per day. Now the power generation hub. On March 19, 2026, the United States Department of Commerce selected our Western Haynesville site to host a new 5.2 gigawatt natural gas fired power generation hub to be located in Anderson County, Texas, as shown on slide four. We are very excited about this development and what it means to have a large commercial customer in our backyard. The project is part of Japan's $550 billion investment commitment in the United States as part of the U.S.–Japanese trade deal. The U.S. and Japan would own the projects while NextEra Energy Resources will develop, build, and operate it. NextEra is actively developing the project, advancing site development, procurement, permitting, and commercial structuring as they work toward definitive agreements with the U.S. and Japan. This project takes advantage of our abundant natural gas supply and a strong transmission infrastructure in the area. The Anderson County facility will have up to 5.2 gigawatts of natural gas fired generation capable of serving up to 5 gigawatts of large load demand. Comstock Resources, Inc. will provide the natural gas supply for the facility, which could reach almost 1 billion cubic feet per day by 2031. We will now provide some more details on the financial results we reported yesterday. Roland? Roland O. Burns: Alright. Thanks, Jay. On slide five, we cover the first quarter financial results. Our production in the first quarter averaged 1.1 Bcfe per day. Oil and gas sales after hedging in the quarter were $339 million, reflecting the lower production level we had in the quarter. EBITDAX came in at $251 million, and we generated $192 million of cash flow during the first quarter. We reported a $107 million profit for the quarter, or $0.38 per share, but included in that number was a pretax $83 million mark to market unrealized gain related to our hedge book. So excluding the mark to market gain, exploration expense, which is related to seismic that we are shooting in our Western Haynesville play, and other nonrecurring items and the related income tax effect of those items, we reported adjusted net income of $44 million, or $0.15 per diluted share for the quarter. On slide six, we break down our natural gas price realizations in the quarter. The quarterly weighted average NYMEX settlement price averaged $4.96 in the first quarter, and the weighted average Henry Hub spot price was $4.90. 26% of our gas was sold in the spot market, so the appropriate NYMEX reference price would have been $4.94 for our production. Our realized gas price during the quarter averaged $4.27, reflecting a $0.69 basis differential compared to the NYMEX settlement price and a $0.67 differential compared to that reference price. A significant disconnect existed during the quarter between the regional hub prices and NYMEX, which drove the higher differentials in the quarter. We also had to purchase higher priced gas to make up for shut-in production during the winter storm event. In the quarter, we were also 72% hedged, which reduced our realized price down to $3.45. We did improve the overall price realizations by $0.05, to $3.50, with our third-party gas sales during the quarter. On slide seven, we detail our operating cost per Mcfe, and our EBITDAX per unit cost were negatively impacted by the lower production level in the quarter as much of our field costs are fixed. Our operating cost per Mcfe averaged $0.93 in the quarter, up $0.16 from the fourth quarter rate. Both lifting cost and G&A were up $0.04, attributable to the lower production level. Production ad valorem taxes increased $0.03 due to the higher gas prices in the quarter, and our gathering costs were up $0.05 mainly due to some prior period adjustments we recognized. Overall, our EBITDAX margin in the quarter was 73%. On slide eight, we recap spending on our drilling and other development activity in the quarter. We spent a total of $343 million on our drilling program. We drilled 11, or 9.3 net, horizontal Haynesville wells and six, or six net, Bossier wells for a total of 17 wells in the quarter, or 15.3 net wells. We turned 13 wells to sales, or 11.7 net wells, which had an overall average per well IP rate of 31 million cubic feet per day. Slide nine, we summarize our capitalization at the end of the first quarter. We ended the quarter with $350 million of borrowings outstanding under our upstream credit facility. Our upstream borrowing base is $2 billion, and our elected commitment under our facility is $1.5 billion. In March 2026, we entered into a new $150 million midstream credit facility for Pinnacle Gas Services. At March 31, the midstream credit facility had $47 million outstanding. Our last twelve months leverage ratio was 2.9 times. At the end of the first quarter, we had almost $1.3 billion of liquidity. I will now turn it over to Dan to discuss our operations in the quarter. Daniel S. Harrison: Okay. Thanks, Roland. Over on slide 10, this is just our updated overview of our acreage footprint in the Haynesville and Bossier shales across East Texas and North Louisiana. We now have 874,868 gross acres and 806,980 net acres that are prospective for commercial development of the Haynesville and Bossier shales. On the left is our Western Haynesville footprint, which we have now grown to over 540,000 net acres. On the right is our 266,570 net acres within our legacy Haynesville area. We currently have 36 wells producing on our Western Haynesville acreage, which is relatively undeveloped compared to the legacy Haynesville area. And, of course, with the higher pay thicknesses and the very high pressures we encounter in the Western Haynesville versus the legacy core, we expect the Western Haynesville will yield significantly more resource potential per section than our legacy Haynesville. On slide 11 is our current drilling inventory in our legacy Haynesville area at the end of the first quarter. Our operated inventory in the legacy Haynesville now consists of 955 gross locations, 740 net locations, which equates to an average working interest of 78%. On our non-operated inventory in the legacy Haynesville, we have 819 gross locations with 98 net locations, which is a 12% average working interest. Our drilling inventory we split into four buckets. We have our short laterals less than 5,000 feet. We have our medium length laterals that are from 5,000 to 8,500 feet. Our long laterals between 8,500 to 10,000 feet. And our extra-long laterals are everything over 10,000 feet. So in our gross operated inventory in the legacy Haynesville, we now have 30 short laterals, 141 medium laterals, 337 long laterals, and 447 extra-long laterals. The gross operated inventory is pretty much split 52% in the Haynesville and 48% in the Bossier. Legacy Haynesville inventory also includes 114 gross horseshoe locations with 53% of those being in the Haynesville and 47% in the Bossier. Over 80% of our gross operated inventory have laterals that are longer than 8,500 feet, and as of today, our average lateral length in legacy Haynesville inventory has climbed up to 10,019 feet. So this inventory provides us with decades of future drilling locations based on our current activity levels. On slide 12, we show our estimated drilling inventory in the Western Haynesville. Our Western Haynesville inventory currently consists of 3,331 gross locations and 2,546 net locations, which equates to an average working interest of approximately 76%. The number of our net locations is estimated since much of our Western Haynesville acreage has not yet been unitized. Our Western Haynesville inventory is more weighted to the Bossier formation with nearly two-thirds of the inventory in the Bossier shale and one-third of the inventory in the Haynesville shale. And we also have our Western Haynesville inventory divided into the four separate groups by length, with our short laterals less than 5,000 feet, the medium laterals between 5,000 and 8,500 feet, the long laterals between 8,500 and 10,000 feet, and the extra-long laterals over 10,000 feet. In our Western Haynesville gross operated inventory, we do not have any short laterals today. We have 1,319 medium laterals, 646 long laterals, and 1,366 extra-long laterals. So 60% of our Western Haynesville gross operated inventory has laterals greater than 8,500 feet. On slide 13, it is an update to our new horseshoe development program. The horseshoe well design, of course, combines two separate and adjacent shorter laterals into a longer single lateral, which results in a much more efficient use of our capital. On average, we realized 35% savings in our drilling costs when we drill a 10,000-foot horseshoe well compared to two 5,000-foot sectional lateral wells. Our drilling inventory in our legacy Haynesville area now includes 114 horseshoe locations. The Camp Tech 29-14-9 #2 was turned to sales in the first quarter with a 41 million cubic feet per day IP rate, and we plan to drill a total of 16 horseshoe wells in 2026. On slide 14, there is a chart outlining our average lateral lengths drilled that are based on when the wells have been drilled to total depth. Average lateral lengths are shown separately for the legacy Haynesville and for the Western Haynesville areas. In the first quarter, we drilled 12 wells to total depth in our legacy Haynesville area, and these wells had an average lateral length of 10,872 feet. The individual laterals range from 8,497 feet up to 15,772 feet. Our longest lateral drilled to date on our legacy Haynesville acreage still stands at 17,409 feet. In the first quarter, we also drilled five wells to total depth in the Western Haynesville, and these wells had an average lateral length of 10,356 feet. The individual lengths range from 9,400 feet up to 11,393 feet. Through the first quarter, our longest lateral drilled in the Western Haynesville stood at 12,763 feet. As of last month, we have since exceeded that length in the Western Haynesville with a new record lateral length of approximately 14,800 feet. The well, which is the Dolly Jones RP #1H, reached total depth in mid-April, and we have it scheduled for completion later this summer. To date, we have drilled 47 wells to total depth in the Western Haynesville, including 21 wells with laterals over 10,000 feet and seven wells with laterals over 12,000 feet. On slide 15, this outlines the 10 wells that we turned to sales on our legacy Haynesville acreage since our last call. The average lateral length on these was 12,312 feet, and the individual laterals range from a low of 9,465 feet up to a high of 15,143 feet. The individual IP rates on these wells range from a low of 15 million cubic feet per day up to a high of 41 million cubic feet per day, and the average IP was 31 million cubic feet per day. Five of our nine rigs are drilling on the legacy Haynesville acreage. Slide 16 outlines the six wells that we have turned to sales on our Western Haynesville acreage since the last call. These six wells had an average lateral length of 10,874 feet, with an average initial production rate of 29 million cubic feet per day, and we have four of our nine rigs currently drilling on our Western Haynesville acreage. On slide 17, this highlights the average drilling days and our average footage drilled per day in the legacy Haynesville area, and this is for our benchmark long lateral wells that are greater than 8,500 feet long. In the first quarter, we drilled 12 of our benchmark long lateral wells to total depth in the legacy Haynesville area, and we averaged 26 days to TD. In the first quarter, we averaged 921 feet drilled per day in our legacy acreage, which represents a 3% increase versus 2025. Four of the wells drilled in the first quarter were our horseshoe wells, which do take a few extra days compared to our normal straight laterals. Slide 18 highlights our drilling progress in the Western Haynesville. During the first quarter, we drilled five wells to total depth in the Western Haynesville. This now gives us a total of 44 wells that we have drilled to total depth through the end of the first quarter. We averaged 57 days for the five wells drilled to total depth during the first quarter. This is an increase of three days compared to the fourth quarter. You can see this is also reflected in the drilling speed of 478 feet per day during the first quarter, which is 4% lower than the fourth quarter. Aside from drilling issues we have, our quarter-to-quarter drilling performance in the Western Haynesville is mainly dictated by our vertical depth, our temperatures, and our lateral lengths, and this varies considerably across our acreage footprint. So where the wells are being drilled has a big impact on our drilling performance numbers quarter to quarter. Our fastest well drilled to date in the Western Haynesville still stands at 37 days, and it was drilled with a 12,045-foot lateral. On slide 19, this is a summary of our D&C cost through the first quarter for our benchmark long lateral wells that are located on our legacy Haynesville acreage position. These are laterals greater than 8,500 feet. These costs reflect all of our legacy area wells with greater than 8,500 feet. The drilling costs are based on when the wells reach TD, and the completion costs are based on when the wells are turned to sales. During the first quarter, we drilled 12 of our benchmark long lateral wells to total depth. The first quarter drilling cost averaged $700 per foot. This is a 3% increase compared to the fourth quarter. The increase in the first quarter drilling cost is the result of a combination of factors, mainly being overall shorter average lateral length in the first quarter, a higher number of wells drilled, and more wells drilled in our East Texas area, which does require an additional casing string we use to isolate the localized over-pressured SWD zones in that area. During the first quarter, we also turned eight of our benchmark long lateral wells to sales on our legacy Haynesville acreage. The first quarter completion cost came in at $652 per foot. This is a 9% decrease compared to the fourth quarter. This lower completion cost is due to a combination of using less horsepower, having higher frac efficiency, and with a slightly lower drill-out cost. We are currently running three full-time frac fleets. This is after we added our third frac fleet in January. We are adding a fourth frac fleet this month, and we are planning to maintain running four frac fleets through the end of the year. On the drilling side in the legacy Haynesville area, we have continued field testing with our rotary steerable drilling BHAs, and we are continuing to make good progress there. As we accumulate more data and make further refinements, we do expect this rotary steerable technology is going to play a larger role in our future drilling program to help drive more cost reductions. On slide 20, this is a summary of our D&C cost through the first quarter for all our wells drilled in the Western Haynesville. During the first quarter, we drilled five wells to total depth in the Western Haynesville with an average lateral length of 10,356 feet. Our first quarter drilling cost averaged $1,534 per foot. This represents a 3% increase compared to the fourth quarter. During the first quarter, we also turned five wells to sales in the Western Haynesville that had an average lateral length of 11,177 feet. First quarter completion cost averaged $1,537 per foot, which is basically unchanged compared to the fourth quarter. And to reiterate what was mentioned earlier, our drilling and completion performance in the Western Haynesville is greatly affected by where the wells are being drilled on the acreage, as there is much variability in the vertical depths and formation temperatures along with the lateral lengths. We are also implementing new performance initiatives that we expect will lead to further time savings and cost reductions. We have one of our existing Western Haynesville rigs being upgraded to a 10,000 PSI rating that is going to be available to us by late summer. With this upgrade, we will be able to increase our drilling speeds in both the vertical and horizontal hole sections, further reducing our cost. We also intend to test some new higher temperature rated drilling motors later this year, which we expect will lead to faster drill times and some longer runs. Once we get more successful and consistent runs of the rotary steerable drilling system in our legacy Haynesville area, we will be looking to deploy this technology into our Western Haynesville area. I also mentioned earlier that we drilled our record longest lateral to date in the Western Haynesville with a 14,800-foot lateral, and the well surpassed our initial performance expectations. The well was drilled with a larger hole size in the lateral, which allowed us to use larger insulated drill pipe, which leads to lower downhole temperatures, more reliable motor performance from the downhole drilling assemblies, and longer motor life. We plan to implement this new well design in more of our future wells, which, along with the other performance initiatives being undertaken, are going to lead to significantly lower and more predictable cost structure for our future wells. I will now turn the call back over to Jay. Miles Jay Allison: Alright, Dan. Thank you. Roland, thank you. If everyone would please turn to slide 21. I know we are dealing in a ninety-day capsule on this call. I understand that. But the Comstock Resources, Inc. story over the past five years has been defined by our quest to add substantial drilling opportunities in the Western Haynesville, not just the last ninety days of capsule. Over that period, we have leased or acquired drilling rights on 728,000 gross acres comprised of approximately 30,000 individual leases over that five-year period. Overall, our leases have favorable terms supporting our development program. And as a result of that program, over five years, not the last ninety days, we now have 2,546 net locations identified on our acreage. We have been joined by three other companies now who are actively drilling and working in the Western Haynesville Basin. The Haynesville shale is viewed, in our opinion, as the most important basin to supply natural gas to Gulf Coast LNG facilities and now the data centers being built in Texas and Louisiana. The arrival of the Western Haynesville is the game changer as the market looks into the future to where the needed natural gas will come from. They all ask that question. Now our relationship with NextEra, which goes back to 2015, combined with our ideal locations and the drilling results that Dan just talked about in the Western Haynesville, led to the 03/19/2026 announcement that the U.S. Department of Commerce selected our Western Haynesville site to host a new 5.2 gigawatt natural gas fired power generation hub to be located in Anderson County, Texas. So our current goals for the company, they are fivefold. Number one, enhance our legacy Haynesville drilling program, which we accomplished by adding 114 horseshoe wells to our near-term drilling program, which Dan talked about. They are fantastic performing wells. Currently, three of our five rigs deployed in our legacy Haynesville area are drilling horseshoe wells. Two, strive to continue to be the low-cost operator. The combination of having the lowest cost and an abundance of drilling inventory closest to the growing natural gas demand will drive the market value for Comstock Resources, Inc. Third, continue to protect the balance sheet, which was greatly helped by the divestitures we made in 2025 and by our robust hedging program as outlined on slide 22, as well as our strong financial liquidity of almost $1.3 billion. Four, support the buildout of our midstream company, Pinnacle Gas Services. The formation of Pinnacle Gas Services by us in 2023 to gather and treat our natural gas in the Western Haynesville not only supports our drilling program but also led to the power generation hub opportunities. By controlling our midstream, we will be able to keep our producing costs low and capture the future value by owning the infrastructure. Pinnacle Gas Services is now in a position to have its separate credit facility. We believe we are nearing the end of a very strong process finding an equity partner to allow us to continue to grow our midstream footprint and to take advantage of future opportunities to connect Western Haynesville to premium markets. And finally, number five, which is what much of this conversation has been on, optimize the drilling and completion of our wells in the Western Haynesville. Of the 44 wells we have drilled through the first quarter, many have different vertical designs, and they were drilled to various depths with laterals of various lengths, and were drilled and completed with different methods and tools as Dan has gone on about. We have also produced the wells by employing different drawdown levels. The well performance has varied, which should be expected in a new shale play. That is the good news, as we are very encouraged that we are cracking the code on the best way to drill the wells and complete the wells to unlock tremendous natural gas value and wealth in the future. Now I want to thank you for your time today. There will be questions, and we will turn it over to Ron if you want to call in and ask Ron questions. I also want to make one more comment. As an initial founder or developer in the legacy Haynesville in 2008, we learned from mistakes that were made there. We did learn, and we understand. The thing that we did not want to do in our 700,000-plus acres in the Western Haynesville, which might have unprecedented wealth because it has been a wealthy basin twenty, thirty years ago, is to make the mistakes that were made in the legacy starting in 2010. That is 4 million acres in the legacy. We have about 800,000 acres that we think are in the Western Haynesville. The mistakes that were made were drilling too fast because leases were expiring, and you destroyed value. The rocks are established. They cannot move. What we have to do as a company is we have to make those rocks valuable. The way we do that—and I understand cash burn and slow pace of resource delineation is a little taxing, I get that—but that is what we are doing to create the value where we already possess it. We will now open the call for questions. Operator: Thank you. At this time, we will conduct the question and answer session. Please limit to one question and one follow-up. To ask a question, you will need to press star 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press star 11 again. Please standby while we compile the Q&A roster. Our first question comes from the line of Carlos Escalante from Wolfe Research. Carlos, your line is now open. Carlos Escalante: Hey. Good morning, guys. Thank you for having us on. I appreciate the— Miles Jay Allison: Carlos? How are you? Thank you for headlining cash burn and slow pace of resource delineation risk investor patience. I love that headline. That is why I brought it up in my narrative, because I think that is exactly right. That is not a negative. It is a positive, but it is not a positive for everybody. So I just want you to know that, okay? Thank you for being honest and coming up with that headline. It helped me. Carlos Escalante: No, sure. And I appreciate you saying that and giving an overview on how you feel about the long-term value proposition. So why do we not start there? If you do not mind, maybe you can expand on your initial thoughts. You are dealing with a tough gas tape, as are all your other peers. On your current plan, as you mentioned, it may extend the period of that cash burn. So how patient do you expect investors to be, acknowledging that there is a long-term value proposition, but that you still have to get through X amount of quarters where your production and your capital at times has not been in line with or aligned with what you stated the quarter prior? If you can frame that for us, that would be tremendously helpful. Miles Jay Allison: Well, Carlos, I think, number one—and this is hard, you know? It is like going into the first day of advanced math and not understanding anything and barely remembering your teacher’s name when you walk out because it is so confusing. But if you look at our business plan, yes, we did miss production in the quarter by, you know, 13%, whatever the number is, and our CapEx was higher. Well, if you have our business plan, which is no M&A—if you throw M&A in here, you issue equity typically, you add production and you add inventory, and you kind of stir up the pot every quarter, every year. We have not had M&A. So if you do not have M&A, the only way you can increase production—there will be a time lapse. You know, it may be 90 days, 120 days, but there will be a lapse because if you are trying to protect your balance sheet last year, and you lay down one, two, three, four rigs, you are going to lose that production a year later. So what happens is it is a day of reckoning. We laid down the rigs. We did not do M&A. We kept adding a couple two or three thousand acres every month to our Western Haynesville, and most of that is the best of the best acreage. And we kept spending that money. Now in order to turn the cycle, you know, we did sell $445 million of assets that, in our business plan, were not important to us in the next fifteen years. But when you do that, then you pay down that debt. And then what happens? Well, you are going to have to lever up a little bit. And we did say that we would outspend maybe $400 million, $450 million, whatever—that depends on the price of natural gas. What you see in this quarter is production was down. Yes, we missed it. Headline: missed it. We will put some positive headline out there about the biggest data center in the U.S. I do not see that out there from some of you. But yes, we missed production, and CapEx was up a little bit. But if you do not do M&A and you do not puke up equity all the time by issuing equity to everybody when you buy stuff, what happens is you have a quarter like we have. We protect every share of equity that everybody has. Production is down, but you know what? Now you see production up. Our production should be up 13%, 14%, 15% for the second quarter. I think, Carlos, we have turned the corner. Now the corner is hard. You know, the ninety days is hard because you have to actually spend money on those four new rigs. You have to have these horseshoe wells really work. You have to have Daniel S. Harrison have the freedom to figure out the best way to drill and complete repeatable Western Haynesville wells in both the Bossier and the Haynesville, and they could be 90 pounds apart from each other, much less 20 miles in the east–west direction. So I think, Carlos, we have turned the corner. Now maybe the second quarter, because we did add that fourth frac fleet, the dollars that we took last year, we paid down our debt, and we are not doing anything radical to destroy value in the Western Haynesville. And like I said, the acreage that we have—if you keep the four rigs busy that we have right now in our Western Haynesville—every acre that we own will be HBP. Every acre with those four rigs, and we do not even have to have those four. So the plan works. And, you know, in the past, Carlos, you would say, well, you bought another 15,000, 20,000 acres. There is another $200–$300 million. It kind of hit us on the nose for the quarter. We do not plan on that. We do not see that out there. We do not see it. We see one or two thousand acres every month. If we could get more, we would get it, but it is not out there to be taken. So that is where I think we have crossed the bridge. What we are talking about now is a bridge we have crossed. It is a hard bridge to cross. We crossed it. Now let us look at where the future is going. Carlos Escalante: Sounds great to me, Jay. Appreciate the answer on that. My follow-up will be to you, Dan. Can you talk briefly about the Hutter Rodell IP? It looks like it underperformed the broad group and really the initial production rates of all the wells that you brought online, the average of all the wells you brought online, in the basin. Wondering if you can qualify for us what was the root cause. Was it completion design, geology? And what specifically changes can you make on your next pad to prevent whatever was the case that drove this underperformance relative to your very solid and high-quality IP rates in the Western Haynesville? Daniel S. Harrison: That is a good question. I will give you the really quick answer, and then I can give you a little bit more. The short answer is: when you make a lot of water during flowback, it is hard to get high IPs. Of the 36 wells that we have produced, we have seven of them that we have drilled “uphill.” The laterals go basically up instead of going down. Most of them go down dip quite a bit just due to the geology. But the Hutter Rodell is the furthest one by far as far as the TVD difference between the heel and the toe. It is nearly 1,400 feet from the heel to the toe. The main reason we did not get a good IP on this well was the well made a lot of water during flowback—all during flowback we were making really high water volumes. Same as wells in the core or no matter where we are at: if you are making a lot of water, it is just hard to get a high IP rate. So that is why we did not get a good IP rate on the well. We are still trying to triangulate and zero in on really whether it is more than just the geometry; it may be some geology involved. We did have our Brown TrueHeart BB well—it is about a mile away, but both were Haynesville targets. They both drilled uphill. The Brown TrueHeart did not go as far uphill, but it also made a lot of water during flowback. It got a little bit better IP because the water was not quite as high. Those two wells—the Brown TrueHeart BB and the Hutter Rodell—are in our deeper pay, those deeper TVDs, 17,500 to 18,500–18,800 range, and both of those wells made a lot of water during flowback. Now we have drilled five wells up on our shallower acreage up in the 14,000 to 16,000–17,000 TVD range that also went uphill—not at 1,400 feet, but maybe up 600–700 feet from the heel to the toe. Those wells made a little more water during the initial part of flowback, but by the time we released flowback, the water volumes were down. So I am not going to hang my hat 100% on the fact that they were drilled uphill for the high water volumes. I think it contributes to higher water volumes. I do not know if it is the sole reason. We are fracking another well right next to those as we speak—the Jones #1. Not to be confused with the Dolly Jones #1 that I mentioned as our long lateral we just drilled. This is another Jones #1, but it is right there in line with those other two wells. It is a Bossier as opposed to those being two Haynesvilles. We are going to have to see how that well responds to see if we can draw a conclusion that it is the geometry or if it is maybe just the Haynesville versus the Bossier—a little bit of geology in that answer too. But the short answer is: when you make a lot of water during flowback, it is hard to get IPs. We probably had, out of the 36, three wells that made really high water volumes during flowback that greatly affected the IP rates. Miles Jay Allison: And that is our platform. Daniel S. Harrison: That is load water, that is not formation water. That is correct. We are drilling from one end to the other of the wells that we have tested so far—50 to 60 miles. That is like going from East Texas all the way down to the deep and active fault zone in Louisiana. That is a huge distance, and there is a lot of variability in what these wells are going to make and how much water they are going to make and how they will perform. Comparing the Western Haynesville to the core: in the core, we do not really have a lot of wells that go downhill or uphill—they are pretty much horizontally 85–95 degrees or maybe even a little flatter than that. In the Western Haynesville, it is different. We have a lot more dip that leads to these higher-angled wellbores. Carlos Escalante: Understood. I will turn it back. Thank you, team. Miles Jay Allison: Great question. Thank you. Operator: Thank you. Our next question comes from the line of Charles Meade from Johnson Rice. Charles, your line is now open. Charles Arthur Meade: Good morning, Jay, Dan, Roland, Ron, and all the other Comstock Resources, Inc. people on the call. Jay, forgive me if this is kind of a basic question, but I wonder if you could just give us the whole picture from your point of view on this Texas power generation hub. You have made a bunch of announcements about it. From my point of view, it looks like you are the surface owner for where this site is going to be—at least that seems to be the case. You are going to supply gas to the power gen facility, but I guess that is not finalized yet. So maybe you could outline what roles Comstock Resources, Inc. is playing there and how close you are to finalizing commercial terms for gas sales. Miles Jay Allison: That is a great question. If you look at all the dancing on the floor about AI, hyperscalers, all the things that are happening, and all the things that are not funded—you can consider that background noise. What has happened here is, if you have a hyperscaler in your office, most of them will say, I really like Texas. It is a state that has a lot of natural gas, and we need it to power the generation that the NextEras of the world see. They like it. But you have to have a location that works. If you can come out, like we have done in the Western Haynesville, and you are in a really great geographic location with a big footprint, the sky is the limit. The federal government comes in with an agreement with the Japanese. The Japanese have committed this $550 billion. The federal government then will choose NextEra, and NextEra will choose where their site might be. It goes back to that 2015 relationship we have had with NextEra, and they said, we have done a lot of business in the past, we love the Western Haynesville, we have been out there; this is where we would like to have the data center and power hub. We do not own the surface. All we do, as far as dollars spent, is we provide the gas. The obligations to build and stuff like that—we do not have that. What we have is we provide them the gigawatts—the 5 gigawatts, the billion cubic feet per day, whatever it is. It may grow a lot higher than that—to fuel the turbines. So it is a really great event because it is at the United States government level, it is then at NextEra’s level, and it is our gas. We are a natural gas company. So whatever the big package is for the benefits, which would be the profits—whatever they are—you just wait and open those up when everybody else has discussed what the terms will be and when you have your first power that is needed. It is unimaginable that we would be the one that would have the acreage that we captured to have the upside and the midstream. You have to have the midstream to provide that gas to what NextEra sees as a huge role for U.S. shale gas to power AI hyperscalers and data centers. Charles Arthur Meade: Got it. Thank you, Jay, for that overview. And then if I could actually ask a follow-up about the Western Haynesville. I really like these maps—I am looking on page 16 where you give us the red dots on where your well results are. I am wondering if you could talk about the wells that are further up dip. If you could talk about what you are seeing as far as how the play changes. I am guessing you have probably lower D&C because it is less vertical depth, but what you are seeing with the productivity on those wells as you move up there also. Miles Jay Allison: I am going to let Dan do that. I want to put a little asterisk on that, Charles. If you were to look at where we drilled in, you know, the Circle M in 2022—we produced it eight months in 2022, and then we started drilling in 2023, 2024, 2025. If you were to go where we have drilled several wells and you were to infill drill—when you could drill dozens and dozens, not hundreds of wells—then infill drill them, and you have gathering near there on that pad site, and you want to get costs down, you could do that. That is not part of our business plan either. That is why we went 40–50 miles to the north to drill that Elijah #1. We had seismic. We had well control—we have around a thousand penetrations in all this footprint we have—and then we have the seismic, and now we have cores. Before we had the core, we would go north because the plan was—and that goes back to Carlos—you are going to have to have patience to delineate this. In one year, you jump 40–50 miles to the north. That is pretty quick delineation. They never did that in the core, not with any control. Our goal is to keep those rigs busy and, 99% of the time, to continue to hold acreage—not infill drill around existing known repeatable locations. It is a different business plan. Dan? Daniel S. Harrison: I will definitely reiterate the last thing he said there. Of the locations we are drilling for the whole acreage, I would say more than nine out of every ten are to hold acreage. Those two dots you are looking at are actually two pads—the two Bumpers and two Pollard wells at that location. On each pad, we had a well to the north and a well to the south. One of the Bumpers goes north—the NMH goes north; the DHGJ goes to the south. Pollard PFG goes to the north, and the Pollard MBK goes to the south—holding acreage. After looking at well performance, we knew we were probably understimulating these wells. We needed to pump bigger fracs. All four of those wells were pumped with bigger fracs up in that area than what we had pumped on the offsets in that little area you are looking at. All four wells look really good. I kind of spoke to two of those wells that went uphill when I was answering Carlos’ question earlier. We did not see big water volumes—maybe a little water in the first couple of days on flowback, but by the time we were off flowback and getting the well IP, they had pretty well dried up. They only go uphill there about 600–700 feet from the heel to the toe, and they look really good. All four of those we are really happy with. That is probably 14,000 to 16,500 TVD range on those wells—maybe the toe of the downdip wells closer to 17,000. It is less pressure, and they are cheaper to D&C. As a matter of fact, the record fastest, cheapest well to date—which we referenced as the record that we TD’d in 37 days—was a direct offset to one of those pads. It is the Jennings pad—the Jennings LOR and the Jennings FSRA. The Jennings FSRA was right next to those wells. It was up dip. We drilled to TD in 37 days with some great motor runs. The EUR will be a little bit less just because you have less pressure and it is at a shallower depth, but we offset that with the faster drill and lower D&C cost. Roland O. Burns: That is great color, Dan. Thank you. Daniel S. Harrison: You bet. Great question. Thank you. Operator: Our next question comes from the line of Derrick Whitfield from Texas Capital. Derrick, your line is now open. Derrick Lee Whitfield: Good morning, all, and thanks for your time. Miles Jay Allison: Morning, Derrick. Derrick Lee Whitfield: Jay, I appreciate your bigger-picture comments to open up the call. Maybe, Dan, I wanted to start with you. As you think about some of the new concepts that you guys are testing, you highlighted this quarter the use of rotary steerable drilling systems and your first well with a big-hole design. Could you perhaps speak to what these developments could mean in cost if they are successful as you think they will be? Daniel S. Harrison: On rotary steerable, that is probably going to be deployed later in the Western Haynesville. We have had several runs so far in the legacy Haynesville. The system we are using—we probably started running it maybe five or six months ago—and we are still making some tweaks. It is a learning process. We have had some really fantastic runs to date with that rotary steerable tool. We have also had some that did not make it very far due to issues in the tool that they are getting tweaked. When they rolled out the same technology in the Permian Basin a few years ago, it took them 18–24 months to get this tool refined to where it was humming. It is not an overnight thing. The last basin these tools come to is the Haynesville due to the depths and temperatures. We are super excited about the fantastic runs we have had, but we need to get more of those under our belt and with more consistency. Then we will roll it out into the Western Haynesville because that is a more difficult environment with temperatures. We have run several of them on each horseshoe well—super pleased with it. A lot of running room there. The 10k rig coming at the end of the summer—we are super excited. That is going to give us the ability to pump faster, more horsepower on bottom, better ROPs, knock some days off—pretty excited about that. Maybe the most exciting thing is this last well we drilled with big-hole laterals—8-1/2 inch bit size instead of 6-3/4. We needed a project that gave us the ability to drill a long lateral because you have to spend a lot more money before you ever get to the lateral—your casing strings up top have to be a whole size bigger, the casing has to be one size bigger. Before you ever get to the lateral, you are in the red—you are a little more expensive. You have to have a longer lateral that you think you are going to drill faster to make up that and break even or come out even cheaper. We came out even cheaper than we expected. Our drill cost on that well was lower than any of the bars you see on slide 20 on our cost per foot—slightly lower. We also feel it is a little bit more predictable than what we have done in the slim hole, and we can slide and turn a little bit more effectively than we can in the slim hole. There are some intangible benefits that we think are going to help us. We just need to drill more of them. We are going to make some changes in the vertical to make that a little bit cheaper, but we are super excited about it. We thought maybe we needed to drill 14,000–15,000 feet to have a breakeven versus the slim-hole laterals we have been drilling; we maybe only need to drill 11,000–12,000 feet for it to be cost-competitive with the slim holes. Miles Jay Allison: And, Derrick, going back to the question that Charles asked earlier—some of these are Bossier, some are Haynesville. So when Dan talks about a particular well, we may be 80 miles away with another Haynesville, but it is not exactly the Haynesville that he is talking about today. They all are a little different, and that is why we saw a lot of value destroyed in the legacy Haynesville back in 2008–2011. Not only were there too many rigs drilling it, they had leases that were expiring, and then you had natural gas prices collapse. We look at all of that, and I love the point that you said the bigger-picture concept. We are planting a bunch of these seeds, and these trees are starting to grow up, but you cannot do it too fast. Even though we are in an unprecedented bull market opportunity headed our way for LNG and data centers, I think our timing is going to be perfect for that, only because we are in the correct geographical location in America. That is the difference. If you own the basin—and yes, there are other companies out there drilling stuff, but they do not own what we own—you have to treat it differently. If it is valuable and precious, you have to treat it valuable and precious. That is exactly what we are trying to tell everybody today. Now, that may be the wrong type of candy in the candy store, and you do not like it. But that is what we are selling, and I will tell you the board is 100% behind it. Management and the Jones family—almost every day—they are in it. They understand it. We would like to go quicker, but you cannot. You will get in trouble if you go quicker. I think, like Carlos asked too, we have turned that curve because it is production going down and CapEx going up that gives you indigestion. I have it too, and I know everybody does. But I think we have turned the curve on that. So production should go up. We should have really great growth in the rest of this year, particularly in the third and fourth quarter. We did add that extra frac fleet. I see big sunshine out there. Daniel S. Harrison: Derrick, did I answer your question? Derrick Lee Whitfield: All good. And, Jay, I agree with you on NextEra. When you really think about that recent development and how meaningful and differentiated it is for you within the sector—just on the scale and the nearness of development—I agree. That is a big development that probably is not getting enough headline or time this morning. I did want to get back to Dan on another topic because I think this is also important in evaluating the play. Clearly, D&C optimization stuff you guys are working through now. But when you think about what you are seeing right now on restricted flowback testing to date, is that an optimization now that you are likely to turn as you progress development in Western Haynesville? Daniel S. Harrison: Absolutely. We need to be pumping bigger fracs—better stimulation. With those bigger stimulations, the volume of rock that you are out there touching, you need to keep it all open. If you keep it all open, you are exposed to significant reserves. To keep it open, you have to have that really conservative drawdown. I would say we are probably even slightly more conservative on drawdown going forward this year than where we were in the last six months. If you get the bigger EURs, you get a lot better PV-10 values. If you still can get the volumes within the first couple of years, you are really not going to affect your rate of return—it is going to be about the same number. That is the answer. Significant resource in the ground—just due to the thickness and the pressures—you are out there touching a lot of reserves, and you have to keep those fracs open. What you created, you have to keep open to extract those volumes and that value. So: bigger fracs, very conservative drawdown going forward. Miles Jay Allison: And, Derrick, we put boots on the ground. Dan and other top-tier people in the drilling group—two weeks ago they went to Germany. They put boots on the ground at the Baker plant. Look and see it, touch it—how can we tweak it to make it better, quicker, faster? If they are offering to teach you and to show you what we need, and they are going to spend their own money developing what we need, then we go there. Whether it is Carlos, Charles, Derrick—all the questions—we love them. We are giving you our best. It comes out in words, in emotion, in what we have done for thirty-eight years. We give you our best, and we do not tell a weird story. This is a hard story. It is the greatest story, though. On the equity side, every share is precious. We treat it like it is precious. Derrick Lee Whitfield: Perfect. Maybe just one more for the benefit of investors because many are thinking about it. Philosophically on guidance, when you provide guidance, should we think of that as a P50 with a little bit of risking—call it P45–P55 range? You guys are giving your best on the guidance and what you think you can execute against, but would love any color you could share on that. Daniel S. Harrison: We give you our best guess based on what the expectations are from a drilling and completion timeframe. I would say the legacy has been a little bit more predictable to date than Western Haynesville. But with the bigger fracs and the more conservative drawdown, it is going to make guiding the Western Haynesville volumes more predictable looking forward than looking backward. Miles Jay Allison: And pure volume—the Western Haynesville will take out some of the lumpiness. Derrick Lee Whitfield: All makes sense. Thanks for your time, guys. Miles Jay Allison: Great questions. Thank you, Derrick. Operator: Our next question comes from the line of Leo Mariani from ROTH. Leo, your line is now open. Leo Mariani: Hey, wanted to turn to the funding side a bit here. Obviously you guys secured the Pinnacle credit facility here, which you mentioned briefly. It looks like that you are consolidating that. It is on your balance sheet. Wanted to get a sense: is that debt recourse to Comstock Resources, Inc. there? And then additionally, you have spoken about other financing needed at the Pinnacle level. I know you are attempting to take Quantum out, which I guess supposedly pays them. So is there additional equity as well that you are looking to raise at the Pinnacle level, or do you think you are going to be good with this credit facility for the near future? Roland O. Burns: That is a good question, Leo. Yeah. We are running a process...
Operator: Good day, and thank you for standing by. Welcome to the Kyndryl Fourth Fiscal Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lori Chaitman, Global Head of Investor Relations. Lori Chaitman: Good morning, everyone, and welcome to Kyndryl's earnings call for the fourth fiscal quarter and year-end March 31, 2026. Before we begin, I'd like to remind you that our remarks today include forward-looking statements. These statements do not guarantee future performance and speak only as of today, and the company assumes no obligation to update its forward-looking statements, except as required by law. Actual outcomes or results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties. For more information on some of these risks and uncertainties, please see the Risk Factors section of our annual report on Form 10-K for the year ended March 31, 2025, and our quarterly report on Form 10-Q for the quarter ended December 31, 2025, as such factors may be updated from time to time in the company's subsequent filings with the SEC. Also, in today's remarks, we refer to certain non-GAAP financial metrics. Definitions and additional information about our calculation of non-GAAP financial metrics as well as a reconciliation of non-GAAP metrics to GAAP metrics for historical periods are provided in the presentation materials for today's event, which are available on our website at investors.kyndryl.com. Following our prepared remarks, we will hold a Q&A session. I'd now like to turn the call over to Kyndryl's Chairman and Chief Executive Officer, Martin Schroeter. Martin? Martin Schroeter: Thank you, Lori, and thanks to each of you for joining us. In our fiscal year 2026, we delivered adjusted pretax income growth and margin expansion and generated over $400 million in free cash flow. This performance comes against the backdrop of an environment that has continued to extend sales cycles and weighed on our revenue and signings performance. Customers are telling us that they are eager to embrace innovative solutions and modernization strategies, yet they are increasingly thoughtful and deliberate in their IT decision-making driven by the dynamic of sovereignty, AI and cyber preparedness, aiming to balance transformation with operational stability in today's complex environment. Considering these dynamics, we continue to invest in Kyndryl Consult, our alliance partnerships and our agentic AI capabilities, all while supporting and modernizing our customers' most complex mission-critical IT environments. Our strategic focus remains unchanged. We're focused on growing our revenues and earnings and generating cash to reinvest in our business. The successful execution and continuation of our advanced delivery initiative, the increasing use of AI across our own operations and the new workforce rebalancing actions gives us confidence that we're progressing toward our multiyear objectives. Both Harsh and I will discuss this in more detail. We will deliver sustainable profitable growth by increasing high-value consult engagements, deepening capabilities with our alliance partners and delivering innovative AI-led modernization services. As more post-spin signings convert into revenue in fiscal '27 and '28, these growth investments paired with our own use of innovation to drive productivity position us to achieve higher profitability going forward. On today's call, I'll highlight the underlying growth drivers that are strengthening our operations and the targeted actions we're taking in fiscal '27 to advance us towards our fiscal '28 goals. Let me start with Kyndryl Consult. In fiscal '26, Kyndryl Consult again delivered double-digit revenue growth, our third consecutive year of strong performance. We've invested heavily in Kyndryl Consult, including developing and hiring forward-deployed engineers and human systems architects and our AI innovation labs, where we co-create Agentic solutions at scale with customers. We exited the year with Kyndryl Consult signings exceeding revenue, positioning us well for another year of strong Consult revenue growth. This demonstrates how enterprises are turning to Kyndryl for our high-value services across agentic AI, IT modernization, public and private cloud and cybersecurity to help them modernize at scale, strength and resilience and unlock greater business value. Turning to our hyperscaler related revenue streams, we exceeded our initial target and realized nearly $2 billion in revenue in fiscal '26. Keep in mind, this revenue source was essentially 0 four years ago and has consistently grown year after year. This underscores the significant progress we've made in strengthening our core capabilities in establishing ourselves as a vital partner for our customers and alliances. We've been deepening our relationships with hyperscalers and most recently, developing new capabilities in areas such as data sovereignty and agentic modernization. Across the broader alliance ecosystem, Kyndryl continues to build strong momentum by translating innovation into secure, scalable and repeatable outcomes for customers. Additionally, we have continued to strengthen our collaborations with other important alliance partners beyond hyperscalers as private cloud becomes an important growth vector, including the likes of Broadcom, Dell, HP Enterprise and many others. For fiscal '27, we expect another year of strong growth from Kyndryl Consult and hyperscaler related revenue streams. Over the last few years, our success with Kyndryl Consult and hyperscalers has helped offset the headwinds we've been facing from our own accounts initiative and more recently from customers' decisions to procure hardware and software directly from IBM. You can also see from the chart on the right that 80% of our revenue in fiscal '27 is expected to be derived from post-spin higher margin signings supporting our multiyear objective of expanding projected pretax margins on post-spin signings into the high single digits. In fact, in fiscal '26 we signed 38 deals in excess of $50 million of which more than 30% consisted of new scope or were new logos. Given the multiyear nature of our customer relationships, I'm encouraged that we've signed more than 125 large deals over the last 3 years. Importantly, the investments we've made in consult, alliances and agentic AI capabilities have well positioned us in today's market where enterprises are turning to Kyndryl for their modernization needs. This reflects our ability to win large complex deals despite a more challenging environment, including longer sales cycles. With our heritage and mission-critical expertise and IP combined with AI-powered Kyndryl Bridge platform, and our differentiated solutions centered around the Kyndryl Agentic AI framework, Agentic Service Management and Digital Trust, we are seeing results in modernizing our own operations and in helping our customers continuously modernize their IT infrastructure and applications to scale AI to unlock business value and to enhance resiliency and address AI-enabled cyber threats every customer conversation right now is focused on agentic AI and what it means in the context of their business; returns on investment, implications for cybersecurity, their workforce and efficiency and in regulated environments, compliance. As customers embrace the agentic era, expectations of IT organizations to reinvent themselves have changed. And when you consider additional factors such as increasing tech and operational costs, modernization is no longer optional. It is a requirement. And at the same time, customers need a different approach to modernization as most traditional approaches are labor-intensive, slow, often encounter business disruptions and miss the expected ROI, which is why most customers lack confidence in their ability to execute modernization effectively. Our Kyndryl Readiness Report found that nearly half of organizations struggle to generate meaningful returns on AI because their IT environments, their infrastructure applications and business processes, simply were not built for it. It's like trying to run a shiny new 200-mile an hour bullet train on tracks built for 30 miles an hour. Our customers are challenged in moving from AI experiments to industrialized scale. In this rapidly evolving technological environment, Kyndryl becomes even more essential to our customers, helping them to prepare, navigate complexities and scale. Within our own delivery operations, we're using AI agents embedded in the Kyndryl Bridge platform to drive greater productivity and outcomes. For example, we're seeing incidents being resolved 70% to 90% faster, which means less disruption and more consistent service. We are seeing root cause analysis cycles approximately 75% faster, helping prevent the same issue from happening again. And we're seeing that the dependency on people's time reduced by 50% to 70% freeing up our people and their expertise for higher-value work that delivers transformation for customers and growth for Kyndryl. So let's now turn to how we're working with customers to deliver business outcomes across the modernization continuum using an agentic AI approach. Importantly, these aren't one-off engagements. They create clear paths for us to further develop and expand our long-term strategic partnerships with customers from infrastructure and applications into higher-value transformation work. We're working with a large European bank to build a joint competency center to establish a vendor-agnostic hybrid cloud design while complying with data sovereignty requirements and providing control over their AI adoption. They need flexibility and control across public and private cloud with a single simple view across their entire estate. We're leveraging our deep platform engineering expertise and agent modernization capabilities to rapidly deploy their shared cloud platform. By co-creating this future state together, we're also expanding our scope into the application layer. Next, with a global insurance company, the starting point was a decades-old mainframe environment running millions of lines of mission-critical code supported by a shrinking pool of in-house expertise. Such products have traditionally failed because of system complexity, limited documentation and skill shortages. We use AI agents to rapidly understand the current functionality and rewrite the system to a modern cloud-native architecture. The business outcomes we're delivering include an Agentic digital twin to retain institutional knowledge and a 50% faster data center exit. This has positioned us to replicate and apply our modernization approach to other mission-critical systems in other countries where they operate. And then with U.S. state government agencies, in this case, at D&B, we have a repeatable solution underpinned by Agentic AI to rapidly implement scalable and resilient digital platform services. The benefits of our approach include self-service for government employees and enhanced citizen experiences by reducing wait times and improving self-service. Importantly, we're deploying the solution across multiple states and countries as a standardized, repeatable offering. In all 3 examples, we were awarded new scope and now expect to expand into new areas. Customers are selecting Kyndryl for our decades of mission-critical engineering expertise and our unique approach to AI-led modernization services. We're a trusted adviser and long-term partner for our customers with differentiated solutions that center on achieving tangible business results. With that, I'd like to pass the call over to Harsh to discuss our fiscal year results and outlook, and then I'll close with a more detailed discussion on our multiyear objectives. Harsh? Harsh Chugh: Thanks, Martin, and hello, everyone. Today, I will focus my comments on our year-end results and our outlook for fiscal 2027. For fiscal year 2026, we generated $15.1 billion of revenue, flat from the prior year on a reported basis and down 3% in constant currency. We exited fiscal 2026 with total signings of $13.5 billion. As previously discussed, both revenue and signings were impacted by extended sales cycles, particularly in the U.K. and strategic markets and the evolution of our relationship with IBM. Our adjusted EBITDA in fiscal 2026 was $2.7 billion, and our adjusted pretax income was $581 million. Adjusted EBITDA margin increased 100 basis points, and our adjusted pretax margin increased 60 basis points year-over-year, reflective of a mix shift in the business as more post-spin signings flow to the P&L. Our 3 A's initiative continue to be an important source of margin expansion and value creation for us. Through our Alliances, we generated $1.9 billion in hyperscaler-related revenue in fiscal 2026, up 59% versus last year and exceeded the 50% growth in hyperscaler-related revenue that we were expecting at the beginning of the year. Through advanced delivery, we continue to drive efficiency by incorporating more AI-based technology into our services enabled through Kyndryl Bridge to further reduce our costs and increase our already strong service levels. To date, this is worth roughly cumulative $1 billion of savings a year to us. Our accounts initiative continues to address elements of contracts we inherited with substandard margins. We exited fiscal 2026 with $1 billion cumulative annualized profit savings from our focus accounts. A key takeaway point from this update on the 3 A's is that we have successfully implemented these initiatives, and they have become a core part of our operational discipline. I want to provide an update on what we shared last quarter on our evolving partnership with IBM, largely driven by how customers are consuming IBM innovation. This chart illustrates more than a 3-point adverse impact on revenue performance in constant currency since the spin-off, driven by our focus accounts initiative in our early years and more recently by this evolving relationship. As we have described before, at the time of spin-off, approximately 40% of our revenue from our inherited commercial agreements were in low to no margin position. Back then, our annualized run rate of spend with IBM was nearly $4 billion. Over the past 4 years, we have addressed most of the focus accounts, leading to improved profitability gains. In fact, by the end of this fiscal year, our annualized run rate of spend with IBM was less than $2 billion, half of where it was when we were spun off. Over the past year, especially in the second half of our fiscal 2026, customers started changing how they consume our high-value services and IBM innovation. While these changes do not affect the scope or margin of our services and our ability to grow our services content, they do have an impact on the size of our signings and consequentially, our revenue over time. And as we have said, this has a limited impact on our earnings, In fiscal 2027, we are expecting similar headwinds to continue. Turning to our cash flow. Our free cash flow was $406 million for the year, relatively in line with fiscal 2025 and approximately $50 million higher than the midpoint of our $325 million to $375 million guidance we provided on our February earnings call. This performance was driven by stronger cash collections and lower net CapEx in the fourth quarter. For the full year, working capital and other was a use of approximately $250 million of cash, largely related to broad-based incentive compensation payments that occurred in fiscal first quarter, coupled with lower compensation accruals in the current year based on our performance. Net CapEx of $543 million was up $20 million from last year, yet it was below what we anticipated, largely due to changing customers' consumption behaviors where they are buying direct from IBM. In the appendix, we include a bridge from our adjusted EBITDA to our free cash flow and more information on the free cash flow metric calculation. Today, we have a strong conversion of earnings to free cash flow at the rate we have been targeting. You can see on this slide that over the last 2 fiscal years, we delivered more than $1 billion in adjusted PTI and less cash taxes of $300 million over the same 2-year period, we generated over $800 million in free cash flow. We expect the same rate of earnings conversion to free cash flow going forward. While quarter-to-quarter dynamics can vary over time, this is our view on earnings to free cash flow conversion. Our financial position remains strong. Our cash balance at March 31 was $2.6 billion. Our cash is up $1.3 billion from the period ending December 31, which includes $300 million from operations and the $1 billion we drew under our revolving credit facility. Our debt maturities are well laddered from late 2026 to 2041. We plan to refinance or use cash on hand to fund our near-term debt maturity of $700 million later this calendar year and our pending acquisition of Solvinity, which is now expected to close in the first half of fiscal 2027 for EUR 100 million. Our net leverage ratio has been and continues to be well within our target range of 1x adjusted EBITDA. We exited this fiscal year at 0.5x, which is an improvement from 0.7x at the end of our fiscal 2024. We are rated investment grade by the rating agencies. Under the share repurchase authorization, we bought back 11.6 million shares of common stock at a cost of $304 million in fiscal 2026, of which 3.3 million was purchased in the fourth quarter at a cost of $49 million. Since the inception of the program, we have repurchased 6% of our outstanding shares. As of March 31, we have approximately $300 million capacity available under our current authorization. On capital allocation, our top priorities are to maintain a strong balance sheet and financial flexibility. We have remained focused on winning business with healthy margins, which takes significant discipline as enterprises prolong decision-making. Over the last 4 years, we have signed contracts with projected gross margins in the mid-20s and projected pretax margins in the high single digits. We have again included a gross profit book-to-bill chart that illustrates how we have been creating and capturing value in our business. With an average projected gross margin of 26% on signings over the last 3 years, we have added more gross profit dollars to our backlog than we have reported as gross profit over the same period. Having a gross profit book-to-bill ratio at or above 1 over the last 3 years demonstrates the quality of our post-spin signings and the expected future profit growth from committed contracts. And as Martin has highlighted, new scope and new logos continue to increase as a percent of our large deal signings. Turning to our outlook for fiscal 2027. Our outlook for adjusted pretax income is in the range of $600 million to $700 million. This pretax income outlook includes approximately $200 million of charges associated with the workforce rebalancing actions, which we expect to incur substantially in the first quarter of fiscal 2027. The savings from these actions will be primarily in the second half and will largely offset the charges. The impact on adjusted pretax income will largely be neutral on a full year basis. These actions are expected to yield annualized savings in the range of $400 million to $500 million in fiscal 2028. With the expectation that most of the charges will take place in the first quarter, we expect our first quarter adjusted pretax income to be a low point in earnings for the year with meaningful profit improvement expected for the remaining 9 months of the year. We expect our adjusted pretax income less cash taxes, which are estimated to be approximately $200 million to convert to free cash flow in the range of $400 million to $500 million. From a timing perspective and similar to last year, the first half of the year, particularly our first quarter will be a significant user of cash, largely due to annual software payments and incentive-based compensation payments and subsequent quarters will be more favorable. Our fiscal 2027 outlook assumes that revenue will be flat to down 2% in constant currency. Within that, we expect Kyndryl Consult and our alliances-related revenue streams will continue to grow. While at the same time, as I discussed earlier, we are assuming that our evolving relationship with IBM will be a similar headwind to what we have been experiencing. Taking into consideration the pace of signings in fiscal 2026 and what is expected to sign in the first half of 2027, we expect second half revenue to be stronger than first half. Let me now pass the call back to Martin to discuss our path toward our multiyear objectives. Martin Schroeter: Thank you, Harsh. As we think about where we exited fiscal '26 and our areas of focus in fiscal '27, I want to spend a few minutes outlining why I'm confident in our ability to achieve our fiscal '28 targets. We're entering fiscal '27 with a 5-point improvement in our beginning backlog for the year compared to fiscal '26. In addition, our pipeline includes scope expansions and new logos to support future signings growth and a better mix of higher-value services. In fact, Kyndryl Consult signings exceeded revenue this fiscal year, and we're driving both Kyndryl Consult capacity and productivity. We've delivered strong growth in hyperscaler-related revenue streams and with our customers' modernization needs accelerating and renewed demand in private cloud, we expect continued momentum across our alliance partners. We've been signing deals with projected pretax margins in the high single digits, and that pricing discipline will continue. We've transformed our business through the advanced delivery initiative, heavily embedding automation and AI into our operations and upskilling our teams for higher-value work. We're infusing Agentic AI and delivery of services through Kyndryl Bridge to address lower voluntary attrition rates and improve our SG&A efficiencies, we're taking workforce rebalancing actions to yield meaningful savings. We're confident in our strategic direction and our financial position remains strong. We believe our focus on higher-value services, coupled with the actions we're taking to streamline our own operations, positions us to navigate the evolving ways our customers consume IBM's innovation while keeping us on track toward our multiyear objectives. In fiscal '28, we continue to target more than $1.2 billion in adjusted pretax income and more than $1 billion in free cash flow, and these targets can be achieved on low single-digit constant currency revenue growth in fiscal '28. Before I open the call up to your questions, I want to briefly address the material weaknesses we disclosed last quarter. As a reminder, these issues did not impact our previously issued financial statements. We continue to make progress in addressing the identified weaknesses, and we expect to have the design, implementation and testing of controls completed when we file our fiscal '27 Form 10-K next year. We remain focused on strengthening our control environment and our processes, and further updates will be disclosed in our fiscal '26 Form 10-K filed at the end of the month. Importantly, I want to thank Kyndryl's around the world who are providing world-class services to our customers every day. Operator, let's move on to questions. Operator: [Operator Instructions] Our first question comes from Kevin Krishnaratne at Scotiabank. Kevin Krishnaratne: Can you hear me? Martin Schroeter: We can. Kevin Krishnaratne: Thanks for all the detail on the drivers for '27 on the revenue. I'm wondering if you could talk about the macro and the buying decisions, maybe what you're seeing from a geographic perspective. You did mention there's still some issues in U.K. and strategic markets. And I'm just wondering if you could talk about what would get you closer to that sort of flat growth for the year versus a negative 2% decline. Martin Schroeter: Yes. Great. Let me start. I'll ask Harsh to comment as well. A couple of things, I think, are important as we think about the pace of signings, customer behaviors, et cetera, et cetera. First is what we do, right? So we are mission-critical, which means that there are lots of stakeholders, regulators in many decisions, boards of our customers are involved. And we typically sign deals that are 4, 5 or 6 years long. So our customers understand that the environment in which they operate is likely to change over those times. And so the nature of what we do causes -- provides an ability for them to be really thoughtful about how they want to commit. Secondly, they have choices, more choices than ever. They have the choice of the platforms they want to use. They want -- they have the choices around AI and how they want to deploy it and all the new capabilities that are coming out. They have -- for our customer base anyway, there's a substantial amount of tech debt and they need to make choices about that. And then finally, they each operate in an environment that is always concerned about security and resiliency. It's always concerned about the regulatory environment and then increasingly, the discussion around sovereignty, not here in the U.S., but sovereignty is a big deal, data sovereignty, cloud sovereignty, et cetera, et cetera, et cetera. So the environment and the complexity and the nature of what we do says that our customers have to be thoughtful given the longer-term commitments they make. With all of that in mind, we do see good demand trends. Our pipeline as we enter this year is bigger than it was last year. The momentum we have and the capacity we're building in consults, our ability to help them, our customers with their most complex challenges around public and private clouds, et cetera, et cetera, et cetera, is -- has a lot of momentum. The sovereignty discussion, though, is an important one, again, not in the U.S., but in Europe, I'll go to Europe for a second. And that just creates a need for more time. Customers have to be comfortable that they're going to know the sovereignty answer for more than 6 months. This is -- again, these are longer-term commitments. So the nature of what we do, the choices customers have and the environment in which they operate tend to elongate sales cycles. But deals do get closed. In fact, we had a great April because some of the deals that we had expected to close in March just took a little bit longer. And again, it was all of the stakeholders that are involved. And we had a press release as did our customer a few days earlier this week. Bank of Luxembourg is a great example where we obviously had to spend time with the regulators with the Board, et cetera, et cetera. We got the deal, thus we had a great April. So I don't expect as we go through this year that the environment is going to be any different. In fact, I think it's going to get more complex. I think sovereignty is going to become a bigger issue over time. I think the regulatory environment is always changing. I'll let Harsh talk a little bit about sort of the profile of what he sees and your question around what does it take to be at 0 versus minus 2%. I would just remind again that we still see the same size impact from IBM and the IBM content this year. And so our down 2% to flat is outside of the IBM content is up a bit more than 1% and or up 3% depending on where we land. And that's, again, a demonstration of our capabilities, our work with our alliance partners, our consult momentum, et cetera, et cetera. Harsh, you want to... Harsh Chugh: Yes. I think it's important to talk about a few things. Underneath if you open under the covers, like this is after 3 years for the first time we had in fourth quarter growth in U.S., and we do see continuation of that, right? So now you connect back with the same modernization discussion is happening with most of the customers, right? So you can clearly see the connection back with sovereignty, the delays that we see in those decision-making is more prominent in Europe versus in U.S. And that is kind of giving us a bit more confidence of how we get to where we need to get to kind of after 3 years and that I see as buildout of confidence. And then you say, how do you range between 0 and 2 is kind of what is the rate and pace of closure because we still have a starting backlog and there is still in-year revenue that we have to build, and that is going to be a function of the rate and pace of whether it's the large deal versus more consult-driven smaller deals kind of that has a different revenue yield. So you can be on 2 different sides of the pole depending on rate and pace and the type of transaction with a good mix we are starting. So that kind of gives us kind of from a signings to the rate and pace of that signing and how you yield from that signing kind of gets you into the range with the 2 sites, one U.S. kind of with the strength in Europe with the sovereignty kind of one moving faster, the other one kind of with the delays that we are seeing that creates the range of possibilities. Lori Chaitman: Operator, next question please? Operator: Our next question comes from James Faucette at Morgan Stanley. James Faucette: I wanted to just touch on how you're thinking or how -- where you're seeing customers prioritize spend and maybe how that's changed versus a year ago? And in particular, I've been intrigued by a lot of the technology evaluation that companies seem to be doing and where they want to push data and how they want to structure it for AI applications, whether that be in the cloud or maybe even running on-prem for longer, et cetera. So just love to get an update on where you're seeing customers prioritize their spend right now and how you're moving to address that. Harsh Chugh: So let me kind of talk about this security, governance, evolution of AI. Data sovereignty is kind of driving many of these discussions. And the emergence of private cloud, which was what I would call a couple of years ago was not as prevalent, has become very prevalent. And I think data and where you keep data and how you run AI and where you use what model is becoming important. And I think private cloud has some evolution from that perspective compared to hyperscaler as to kind of what type of models you can use and where and who's investing. So that certainly is putting most of our customers in kind of what I call a dichotomy as to where I keep because these are longer-term decisions. But many of our customers are also in regulated industries. So they have important mainframe estate. So they're also saying, how do I provide micro services from my mainframe because I don't want to lose the capability and capacity it has. So how do I modernize the platform? How do I modernize my core banking application if you are a bank? So it's kind of -- we are seeing most of the banks where you would have seen, especially in the regulated industries kind of 2 states of world kind of mainframe and hyperscaler. Now you have an added complexity of now because of data sovereignty, now they have to kind of think about that too because that's becoming more and more important. How do I keep more control of my estate, my data and AI? And do I bring AI models into my estate? Or do I take my data into hyperscalers. So that is kind of the evolution you're seeing. And then some of it is going to be driven by the business process transformation they have to think about, which is Agentic AI, how do they use Agentic AI, and that kind of brings all their processes in question. So it's a complex environment, right? It's a very complex environment, and it puts us in -- right in the middle of those conversations because we have been with these customers for decades and who knows the process and environment better than us, right? So that is an opportunity for us. Martin Schroeter: Yes. No, I think, Harsh, you're right. I think the keyword in everybody's -- in all of our customers' minds is modernization. It takes a slightly different form based on their starting point. Again, I'll go to Bank of Luxembourg, where we're going to help them improve their customers' experience with Agentic. So they want to be a leading European Agentic bank. I think that's driving a lot of investment dollars in our customer base. Whether that's, as Harsh said well, private cloud, public cloud, it will be a mix. And then obviously, because of the role they play in the world, and particularly in Luxembourg, they're always looking to improve operational resilience, not only at the regulatory standards, obviously, but even to make sure they have the great customer experience. So modernization is the word of the day, where they start depends on their tech debt, but Agentic AI, modernization, resilience, they're all big investment themes here. Operator: Our next question comes from Jamie Friedman at Susquehanna. James Friedman: I appreciate all the additional disclosures here. This is really good, especially Page 14 where it kind of sum it up the signposts. I want to ask, Martin, in terms of the evolving IBM relationship, the 3-point unfavorable impact. And I got your comments about how that's going to impact fiscal '27. But if you think about how that is performing relative to the original guide out to 2028, I just don't remember if it was or if you said, was that already embedded in the assumption? Or is this evolving different than what you might have thought? Martin Schroeter: Yes. Thanks, Jamie. So no, it is different from what we thought not only back in Investor Day 2.5 years ago, it's also different from what we thought when we started last year. That's why we started to spend more time explaining it and so the investment community can understand it. So we had assumed as we got through the focus account period that we would -- or that our customers would continue to consume IBM's technology in the way they had in the past. It was not an unreasonable assumption at the time. And for a number of reasons, now they have -- customers have obviously choices. They have an ability to create a relationship. Some customers just like to have a direct relationship. And so no, it has evolved differently from what we expected. But it's really only -- not really -- it is only on the revenue side. We have 0 ability to mark up IBM's content within our deals. So it really just comes down for us to customers' choice on how they want to consume that technology. And obviously, it would affect the size of our signings, it would affect the size of the backlog, affect the revenue performance. But without any ability to mark up their content, it doesn't have any impact on our profit. So it is different. It's the short answer to your question. Lori Chaitman: Operator, let's move to the next question, please. Operator: Our next question comes from Tien-Tsin Huang at JPMorgan. Tien-Tsin Huang: Just curious, with the sales cycle staying little bit elongated here, what do you think is the catalyst to get sales cycles to normalize and get to a better place or even improve? I know you're talking to clients all the time. Is it something related to the frontier models getting better and more clarity around agent deployment, things like that? I'm just trying to better understand what we should be watching for, for that to heal. Martin Schroeter: Yes. Yes. Look, I'm not sure that on any individual customer basis that the environment is going to return, let's say, or resume something that existed in the past. Again, given the nature of what we do, the choices our customers have in the environments in which they operate, I think everything -- every bit of technology evolution continues to add complexity. So at the individual customer level, I think it's -- we're not going from where we are today back to some faster sales cycle. For us, the key, and I can ask Harsh to comment as well. For us, the key, and Harsh said it in his remarks, for us, the key is to make sure we're moving into new customers to make sure we have new content in all of our deals so that, that bigger pipeline yields in the time frames that we need. So I don't think we're -- like I said, I don't think we're going back on an individual customer basis from making -- to making decisions faster. But I do think for us, our focus on expanding our footprint in our customer base as well as chasing and signing new customers is critical for our business model. Harsh Chugh: Yes. The other thing that I would add is kind of this is a year where we, for the first time, seeing a very high level of new scope in our pipeline. And I'll kind of use one example that Martin kind of mentioned in his prepared remarks, the European bank, one of the first things we had to do with them was to kind of help them think about a vendor-agnostic private cloud environment as they're thinking about how they're going to have more control on the data and they're kind of moving some of that away from hyperscalers, right, because they're thinking about their own destiny in a different way. And then we are working in a joint collaboration, creating a center where we're going to jointly kind of work on this. But now the second thing that happens is because of the regulation in that European market, they have to get their services, which kind of the transactional system, core banking sits on mainframe, it's on older application environment, which they have never been able to expose and they have to instantaneously provide those services to other banks, other ecosystem. Now we are helping them through Agentic AI, understand the COBOL environment, how you're going to convert. What documentation exists is not even known. So now we are kind of taking a step up. So it's important that we continue to maintain a strong hold with the customer, help them evolve not only from an infrastructure point of view, but now evolving into their application environment. Like this is kind of where what I call faster, smaller kind of land and expand model through the new scope. Like that's kind of -- that's going to be the next stage of our evolution than just big deals, renewals, which sometimes [indiscernible] came longer, like you just enter a customer but never leave, right, follow their wallet. Lori Chaitman: Operator, I believe we have one more question in the queue. Operator: Yes. Our last question comes from Jonathan Lee at Guggenheim Partners. Yu Lee: I want to build off of Jamie's question from earlier. Your earnings materials points to your $1 billion free cash flow target for fiscal '28. And we heard you highlight the $1.2 billion target for adjusted pretax income. But if we heard you correctly, you called out low single-digit revenue growth for fiscal '28, which sounds like a downtick versus your mid-single-digit fiscal '28 target from the Analyst Day. Can you unpack what's happening with the downtick there? Is that an IBM dynamic? And given the longer decision cycles and complexity as well as sub 1x book-to-bill you saw this year, how should we think about the path to that fiscal '28 revenue growth? Martin Schroeter: So a couple of things. One, again, as I mentioned with Jamie's question, when we set out the triple double single, we did have a view about what the IBM content was going to be, and we assumed it was going to be kind of neutral, and that doesn't look like it's going to be neutral, right? We know last year it was more than 3 points. This year, similar size. Over time, that will diminish. It's not going to be 3 points or more than 3 points forever. In the time frames for '28, we'll see. We have to see how do we partner with them, what choices do customers make this year or throughout '27. And we'll then have a better view of whether our initial assumption about it being neutral will hold in the '28 itself. It has not held, as I said, for the first couple of years here. But again, the reason that the triple double single holds up is because it has no impact on our profit. Harsh, do you want to add? Harsh Chugh: Yes. I think if you look at the pipeline where we are starting and the scope of work we are doing. I mean if you look at 2 years back, the modernization, data sovereignty was not a big question, right? So you have to kind of think about what does it mean from sales cycle extension and kind of our penetration. So we have to think about business and how we use Agentic AI to be a bit more differently relevant. And if you look at the last 4 years, last 4 years of our gross profit book-to-bill has been kind of above 1x, right? So that's kind of one. I look at my consult, like my consult book-to-bill over the last 3 years have consistently been double digit kind of more than 1.1x. So that's kind of another one. And when I look at my consult pipeline, which is around the new scope, that also gives me the confidence that over the last 3 years, we have signed more than what I have hoped. So that kind of continues to give me the confidence with the pipeline, with the bookings I have and the relevancy of the type of discussion I'm having because these are higher-margin services, not just linked with an OEM, right? So that kind of gives me path kind of both from the revenue that we have to manage kind of with the IBM relationship, but the larger relevancy with the customer and the wallet that we have to follow. Operator: Good. Martin Schroeter: Thank you, Harsh. I think based on the operator saying that was the last question, I do want to thank everybody for joining us today. As you've heard, our focus this year is to drive progress across all of our targeted growth areas; Kyndryl Consult, the hyperscaler work we do, our focus on modernization and our customers' focus on modernizing in AI. And obviously, we're going to execute the actions that Harsh went into detail around to streamline how we operate. We've got a very focused team. We are confident that we can deliver. We're confident in our ability to deliver on our multiyear objectives. And again, you see that in our prepared materials. And all at the same time, do what we do, continue to do what we do every day, which is deliver the world's best infrastructure services to our customers. Thanks for joining. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Prudential Financial, Inc.'s Quarterly Earnings Conference Call. At this time, participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Tina Madon. Please go ahead. Tina Madon: Thank you. Good morning, everyone, and thank you for joining us. Representing Prudential Financial, Inc. on today's call are Andrew Sullivan, Chairman and Chief Executive Officer, and Yanela del Frias, Chief Financial Officer. We will start with prepared remarks by Andrew Sullivan and Yanela del Frias, and then we will address your questions. Before we begin, I want to remind you that today's discussion may include forward-looking statements. It is possible that our actual results may differ materially from those statements. In addition, remarks made on today's call and in our quarterly earnings press release, earnings presentation, and quarterly financial supplement, which can be found on our website at investors.prudential.com, include references to non-GAAP measures. For a reconciliation of such measures to the most comparable GAAP measures, and a discussion of the factors that could cause actual results to differ materially from those in these forward-looking statements, please see the slides titled Forward-Looking Statements and Non-GAAP Measures in the appendices to our earnings presentation and quarterly financial supplement. With that, I will now turn the call over to Andrew Sullivan. Andrew Sullivan: Good morning, everyone, and thank you for joining our call. This is my fifth earnings call as CEO and the first of my second year in the role. An important point to take stock of where we are as a company, and where we are headed. Over the past twelve months, we have made meaningful progress against the priorities I established at the onset, and we are seeing tangible evidence of stronger execution across the business. The issue we encountered in Japan was unexpected, but we are navigating through it and it does not change our assessment of the path forward. Results across the organization reinforce my confidence in our direction and in the operating discipline we are building. Last year, I laid out three priorities: evolving and delivering on our strategy, improving on our execution, and fostering a high-performance culture, aimed at delivering stronger performance, more consistent results, and sustained long-term value creation. Since then, we have sharpened our focus, raised the bar on accountability, and made foundational changes to our leadership and operating structure to support that agenda. Prudential Financial, Inc. is at a defining moment. We have a strong foundation, distinctive businesses, and significant capabilities. We compete in large, attractive, but highly competitive markets, and that puts a premium on accountability and strong operating discipline. Since that first call last year, I have been clear: delivering the level of performance our shareholders expect requires a simpler company, clearer priorities, and a relentless focus on execution. The status quo is not an option. Our business is anchored in real strengths. We have a trusted brand, deep distribution, and long-standing customer relationships in markets where demand is durable and growing. Nowhere is that more evident than in retirement and asset management, where powerful secular trends are creating significant opportunity. Institutions with the scale and capabilities to manage long liabilities, deliver reliable income solutions, and generate strong investment outcomes will win. A defining strength of Prudential Financial, Inc. is the integration between our retirement capabilities and our asset management platform. That connectivity enables us to source and manage assets in ways that support our retirement and protection liabilities, while positioning PGIM as a sustainable, capital-efficient growth engine for the enterprise. These differentiated competitive advantages matter, but positioning alone is not enough. Success requires clear choices. It means concentrating on the businesses and capabilities where our advantages are real and sustainable, and stepping back where they are not. You have seen us act on this conviction with our recent portfolio actions, specifically, the sales of our PGIM operations in Taiwan and India, as well as our insurance businesses in Kenya and Indonesia. The decision to exit markets where we do not see a scale opportunity or a path to market leadership reinforces our commitment to redeploy capital toward areas where we can generate high cash flows and attractive returns over the long term. It also means building an operating model supported by a culture that is grounded in accountability, candor, and consistently delivering at the highest level for customers, shareholders, and our employees. Our work towards these goals is well underway. While there is more to do, the direction is clear and our momentum is building. We will share more details on Prudential Financial, Inc.’s long-term vision and strategy on our second quarter call in August. With that, let me turn to the quarter. Pretax adjusted operating income was $1.6 billion, or $3.61 per share, up 10% from the year-ago quarter, with an adjusted operating return on equity of approximately 15%. These results reflect solid underlying performance, improved consistency and discipline in how we operate, and early benefits from the actions we have taken to sharpen focus and strengthen execution across the company. Let me now briefly highlight progress across the businesses. Starting with PGIM. PGIM delivered strong investment performance and continued to advance the simplification and integration of its organizational platform. This momentum translated into strong year-over-year earnings growth, and the business is on track to deliver the run-rate savings and margin expansion we previously committed to, both in magnitude and timeline. PGIM’s earnings profile is steadily improving, even as the rate environment and market uncertainty have weighed on certain asset classes and challenged flows, particularly fixed income and real estate, which comprise over 70% of PGIM’s assets under management. That said, we are pleased with the momentum in our expanding private assets business, both in capital deployment and fundraising, which have continued to increase since 2023. Our efforts, specifically in direct lending and asset-backed finance, are yielding strong results, driving approximately $5 billion of the $13 billion we deployed in private assets this quarter. These businesses are higher fee, higher margin, and vital to the competitiveness of our retirement business. We are also seeing good momentum in our active ETF retail, another important growth area for us. This platform reached nearly $30 billion in assets under management at quarter end, almost doubling over the last year. Additionally, PGIM's total flow picture improved meaningfully on a sequential basis. Third-party net inflows from institutional and retail sources totaled nearly $2 billion in the quarter, despite ongoing pressure from active equity outflows, consistent with industry trends. Affiliated net outflows were $1.9 billion, primarily driven by annuity runoff. Across our U.S. businesses, results reflect the actions we have taken to strengthen our competitive positioning. We have been very intentional and methodical in broadening our distribution and diversifying our product offerings. This is enabling us to capture demand and improve the underlying fundamentals of our retirement and insurance businesses. In Retirement, momentum remained strong. Retail Annuities delivered more than $3 billion in sales in the quarter, supported by continued strength in RILA and fixed products. Our new FlexGuard 2.0 product delivered the highest quarterly RILA sales in over a year. Additionally, we completed $1.4 billion in PRT transactions across multiple middle-market cases. These results underscore the depth and breadth of our franchise across both the retail and institutional markets. On the retail side, our broad product set is a key competitive strength, enabling us to meet customer preferences across various market environments. On the institutional side, our leadership spans from executing large, complex transactions to growing opportunities in the core middle market, as our scale, asset capabilities, and customer-centric expertise differentiate us. In Group Insurance, we continue to strengthen the foundational capabilities of this business and position it for improved outcomes. Our focus on product diversification, including supplemental health, and a pivot toward broader market representation through our premier middle-market segment, are driving momentum in this business. However, results this quarter reflect increased macroeconomic uncertainty, which impacted disability underwriting as experience continued to normalize from unusually favorable prior-year levels. This was partially offset by improved life underwriting due to favorable mortality experience, resulting in a total benefits ratio that increased year over year but was within our targeted range. Yanela will provide more details on these dynamics in her remarks, but it is important to keep in mind that our diversified portfolio of group life, group disability, and supplemental health products, supported by our disciplined pricing approach, positions us to navigate effectively as conditions evolve. We remain confident in the long-term fundamentals of our group business and our ability to perform through the cycle. In Individual Life, our focus on portfolio diversification, disciplined pricing, and expanded distribution has resulted in a more resilient earnings profile and enhanced capital efficiency. With the resegmentation of Guaranteed Universal Life, both the strength and quality of our ongoing Individual Life business is more visible, with this segment generating $139 million in AOI this quarter. Now turning to International. Sales and earnings this quarter reflected the financial impact of the sales suspension in Prudential of Japan. As we discussed on our April 21 call, voluntarily extending the POJ sales suspension through November 5 reflects our current judgment of the time required to make the operational, governance, organization, and related changes necessary for POJ to resume sales. We are confident in the underlying fundamentals of the franchise and in our ability to return POJ to the market as a stronger, more resilient business. Importantly, when looking more broadly across our Japan businesses, we have a sustainable and increasingly diversified platform. On the product side, our work to diversify into more yen offerings and build on our retirement offerings is paying off. This quarter, over 35% of our sales came from products launched in the last thirty-six months. On the distribution side, we are continuing to broaden and specifically strengthen our third-party distribution through banks and independent agents. Our independent agency sales were up 7% year over year, and third-party are approximately one-third of our total sales, demonstrating reduced reliance on our captive channels. Together, these factors reinforce the underlying strength and durability of our franchise in Japan. Outside of Japan, emerging markets delivered a very strong first quarter, led by a record earnings quarter in Brazil, where broader distribution, including agency and third-party expansion, and high productivity continue to support profitable new business growth. I would also like to note that we have now exceeded 1.2 million policies through our MercadoLibre relationship, demonstrating our ability to grow through digital platforms. With that, let me close with some final thoughts. What you are beginning to see across Prudential Financial, Inc. is a higher standard for how we are managing the business and positioning it for future success. We are simplifying the organization, allocating capital with greater discipline, raising the bar on execution, and increasingly leveraging technology and AI to become more productive and efficient. As I said at the beginning of my remarks, we operate in attractive but competitive markets. We have a clear understanding of the opportunities and challenges ahead. We are building a stronger Prudential Financial, Inc., one that is positioned to meet those challenges and deliver durable value to all stakeholders across cycles. This work is well underway. While changing the performance trajectory of a company of this size is a multiyear endeavor, our direction of travel is clear and our momentum is real. I affirm conviction in our path forward. With that, let me turn it over to Yanela. Yanela del Frias: Thank you, Andy, and good morning, everyone. Our first quarter results reflected continued momentum entering the year. We reported after-tax adjusted operating income of approximately $1.3 billion, or $3.61 per common share, reflecting a 10% increase from the prior-year quarter. This performance was primarily driven by higher spread income in our U.S. and International insurance businesses as well as more favorable life underwriting results. These increases were partially offset by higher operating expenses, including costs related to the sales suspension at Prudential of Japan. As I have highlighted previously, optimizing our expense base is a key area of focus. Excluding the impact of one-time items, our operating expenses were flat year over year. We are taking targeted actions to reduce costs across the enterprise to support investments in critical areas, including enhancing our service and distribution, and elevating our customer and advisor experience. We anticipate that the benefits of these actions will be evident in 2027. Let me now review the key performance highlights for each of our businesses. PGIM reported pretax adjusted operating income of $190 million, up 22% from the prior-year quarter. These results reflected higher asset management fees, driven by market appreciation, and higher other related revenues from agency earnings. These increases were partially offset by increased expenses related to growth initiatives, including the expansion of our direct lending and private asset-backed finance platform. PGIM is on track to deliver approximately $100 million of gross annual run-rate savings and more than 200 basis points of margin expansion in 2026, accelerating progress towards its 25% to 30% margin target. In the first quarter, PGIM delivered a 19.1% margin, reflecting a 260 basis point increase year over year, which demonstrates meaningful progress toward that goal. Recall that first quarter margins are seasonally the lowest of the four quarters due to the timing of annual long-term incentive awards. Assets under management totaled $1.4 trillion, increasing 3% from the prior-year quarter, driven primarily by market appreciation and strong broad-based investment performance across public and private fixed income. Total flows across third-party and affiliated sources were essentially flat, representing a substantial sequential improvement in all channels. Importantly, third-party net inflows totaled $1.8 billion, as strong fixed income inflows more than offset equity outflows, which, as Andy noted, remain pressured consistent with broader industry trends. Away from active equities, net outflows in PGIM’s affiliated channel totaled $1.9 billion, primarily driven by runoff in traditional variable annuities. Our U.S. Businesses generated pretax adjusted operating income of approximately $1.0 billion, a 3% increase compared to the prior-year quarter. Higher spread income in Retirement and Individual Life was partially offset by higher expenses across all the businesses related to the investments I mentioned earlier. Lower fee income associated with the runoff of our traditional variable annuity block, now reported in the U.S. Legacy Products segment, was also an offset. As disclosed in April, we established a new U.S. Legacy Products reporting segment in the first quarter. This segment includes certain traditional variable annuity and guaranteed universal life products that we no longer sell. The resegmentation improves transparency and better aligns our financial reporting with how we manage the business, while providing improved visibility into the underlying growth and earnings profiles of Retirement and Individual Life. We also believe that the combination of institutional and individual retirement will provide a clearer view of the growth trends in the predominantly spread-based earnings of this business. Now turning to the details of our Retirement segment. Retirement delivered pretax adjusted operating income of over $570 million in the first quarter, 9% higher year over year. These results primarily reflected higher spread related to new business growth as well as approximately $25 million of prepayment income, which is episodic. These increases were partially offset by higher distribution expenses associated with business growth along with the investments I mentioned earlier. Less favorable underwriting results were also an offset. Total sales in the quarter were $7.4 billion, including $3.3 billion of retail annuity sales, reflecting strong momentum following the December 2025 launch of FlexGuard 2.0, our newest RILA product. Pension risk transfer sales totaled $1.4 billion and were across four middle-market transactions. Net account values were $356 billion, up 8% year over year, reflecting market appreciation and broad-based growth across our diversified retirement product set. Of note, retail annuities grew to $58 billion in account values, representing a 34% increase from the prior year, driven by over $13 billion in sales over the last year. Now turning to Group Insurance. Group reported pretax adjusted operating income of $38 million compared to $89 million in the prior-year quarter. Excluding the impact of a favorable reserve refinement of approximately $30 million last year, the decline primarily reflected less favorable disability underwriting driven by higher incidence and severity amid increased macroeconomic uncertainty. This impact was partially offset by improved Life underwriting results driven by favorable mortality experience in the working-age population. This result also reflected higher expenses primarily related to investments supporting business growth and operational efficiency in both our claims and service organizations. The total benefits ratio increased to 83.7% in the quarter, as less favorable disability experience was partially offset by more favorable life experience. The benefits ratio remains within our target range of 83% to 87%. As a reminder, our total Group benefits ratio reached a first quarter record low of 81.3% last year, driven by the favorable reserve refinement I mentioned earlier and very favorable disability experience. Sales totaled $526 million in the quarter, up 32% year over year, driven by continued momentum in our Premier segment across our diversified product sets as we continue to execute on our market segment and product diversification strategy. This outcome also reflects strong supplemental health sales, which nearly doubled year over year. Individual Life generated pretax adjusted operating income of $139 million in the quarter, more than doubling year over year. This increase primarily reflected improved underwriting results due to more favorable mortality experience from lower severity of claims. Higher spread income also contributed to this result. Sales of $251 million marked a record first quarter, driven by strong momentum in variable accumulation products where we continue to lead given our robust distribution and service capabilities. Our new U.S. Legacy Products segment generated pretax adjusted operating income of $207 million in the first quarter, a 22% decrease compared to the prior-year quarter. This decrease primarily reflects lower net fee income driven by the continued runoff of the traditional variable annuity block, partially offset by market appreciation. Also contributing to the decline were less favorable underwriting results related to the GUL block. Our International businesses generated pretax adjusted operating income of $810 million in the first quarter, down 4% year over year. This result was driven by higher spread income along with more favorable underwriting results, primarily due to new business growth in Brazil, which had a record earnings quarter. These increases were more than offset by expenses related to the Prudential of Japan sales suspension. The financial impact of the suspension totaled $130 million in the quarter, in line with our expectations. Approximately $50 million of this amount related to customer reimbursements, $50 million related to Life Planner compensation. The remainder was attributable to lost sales and higher surrenders. As a reminder, and consistent with our comments on April 21, we continue to expect the aggregate impact to our 2026 pretax adjusted operating income will be approximately $525 million to $575 million. Sales in our International businesses of $424 million were down 27% on a constant currency basis compared to the prior-year quarter, primarily driven by the sales suspension at Prudential of Japan. Now turning to capital, ESR, and cash flows. Our capital position and strong regulatory capital ratios reinforce our AA financial strength and provide the flexibility to grow our core businesses. Our cash and liquid assets were $3.7 billion at the end of the quarter, which is well above our minimum liquidity target of $3.0 billion, and we have substantial off-balance sheet resources. Our Japan entities remain well capitalized and are managed to levels aligned with our AA objective. We estimate that our ESR results as of March 31 were in the range of 170% to 190%, well above our 150% operating target. As I mentioned on our April 21 call, we do not anticipate any material impact to our capital, ESR, or cash flows over 2026 and 2027 as a result of the voluntary sales suspension at Prudential of Japan. Before closing, I want to take a moment to update you on a revision to our tax rate guidance. We are lowering the range for full year 2026 from 23%–24% to 21%–22%. There were several factors which drove this, including lower expected earnings in our Japan business, and asset allocation changes we made in our Japan portfolio during the first quarter to optimize the after-tax investment return. To close, let me again reiterate that we are a large, diversified company with multiple sources of earnings and cash flow, and we remain confident in our broader trajectory. We look forward to discussing our strategic direction in more detail on our second quarter call in August. And with that, we are happy to take your questions. Operator: We will now open the call for questions. To ask a question, please press star one. Please ask one question and one follow-up. Our first question is coming from Tom Gallagher from Evercore ISI. Your line is now live. Tom Gallagher: A couple of questions about Japan. If I could start with Gibraltar, can you shed a little light on what is happening with that part of the business? I think there is the secondment issue that Pru has, but several other Japanese insurers are also dealing with that. And also, Andy, I think in the update call you did recently, you made the comment that you felt good that Gibraltar did not have the same systemic problems that occurred at POJ. So just want to understand maybe a little further elaboration on that and also how you feel about sales and persistency outlook at Gibraltar? Andrew Sullivan: Yes. Good morning, Tom, and thanks for giving me the opportunity to build on what we shared on the 21st. Remember, our Gibraltar segment consists of really two components: our 7,000 person strong captive Life Consultants, and our independent agent business. On top of that, we have a very strong bank channel business, and you mentioned the secondments. Secondments are what happens in the bank channel. The changes that are going on there, we are navigating just fine. So there is nothing really to report around that. But we have these multiple components that provide a great deal of diversification well beyond just Prudential of Japan and our Life Planner business, and that can help you understand the resilience that we are seeing in the overall platform. As far as sales go in Gibraltar, for our Life Consultants, we saw lower sales year over year that were unrelated to our compliance issues in POJ. That was counteracted by stronger independent agent sales. We have been very methodically adding independent agencies and deepening the number of agents in those agencies, and we are seeing that strengthen our overall independent agent sales. And as I referenced in my remarks, we are really seeing a strengthening third-party overall, which is beginning to balance our captive channels. As far as surrenders go in Gibraltar, the only effects that we believe we have seen relate to the weaker yen and the FX rate, and at the quarter end, surrenders were at normal levels in our Gibraltar platform. Tom Gallagher: Appreciate that. The follow-up is just on POJ. I know you gave the guidance of in-force earnings being down 10% year one, 15% in year two. Can you shed a little light on what kind of sales and lapse expectations are embedded in those numbers? Maybe just if we focus on the sales number, are you assuming a very gradual recovery, like sales levels are going to be half of the normal levels one year out and then gradually recovering? Any kind of directional help on how we think about the sales recovery and how that builds back over time? Yanela del Frias: Yes. Hi, Tom. Let me give you some details there. In terms of sales, the assumption is that there are no sales through November 5 during the suspension period, and then there is a gradual ramp up through 2027. The 2027 average LP production assumption is 50%. So through 2027, we are ramping up and we get to an average of 50% LP productivity. On surrenders, we are assuming that they remain at elevated levels above baseline and FX-related activity throughout the suspension period. Tom Gallagher: Great. Thanks for the detail, Yanela. Operator: Your next question is coming from Ryan Krueger from KBW. Your line is now live. Ryan Krueger: Thanks. Good morning. First question is just on the earnings power of the International business at this point. If I look at the earnings excluding variances, they were up 6% year over year, despite about a 4% drag from the POJ sales suspension and lapses. Can you give us some more color on just what factors led to this in the current quarter, and to what extent some of these things you would not expect to recur, or if we should view this as a pretty good run rate from here? Yanela del Frias: Hi, Ryan. I think there are a few things that you need to consider here, so let me walk through them. First is the timing of the cost and the impact of the POJ misconduct. As you heard in the prepared remarks, in the first quarter we had $50 million of customer reimbursements—that is nonrecurring—$50 million of LP comp, and then about $30 million of impact of sales and surrenders, half each. A few things to keep in mind: there were only two months of impact in the first quarter, as the suspension began in February. Second is that the impact is not linear. The impact of lost sales and surrenders builds as the year progresses. Similarly, the LP compensation grows through the year as well, because the payments are based on new business production, and the longer they are not selling, the higher that our payments will be. That is what impacts the timing. So it is not linear, and we expect the impact to grow throughout the year. Second, what you are seeing is the resilience of the Japan business coming through, as 90% of the earnings in POJ are driven by the in-force. So that is definitely contributing. And of course, you have strong earnings from Brazil. Brazil has been steadily growing. Typically, it has been contributing up in the high single digits in terms of earnings in International—a bit higher this quarter as Japan earnings were lower. Again, Brazil has grown steadily. You see the resilience in Japan earnings and the strength in Brazil. And then third, we did have prepays that impacted results. In total, we had about $50 million in prepays in the quarter. These are episodic and generally impacted several businesses, but mainly Retirement and International. Ryan Krueger: Thank you. Sorry, actually just one quick follow-up. The $50 million of prepays, that was total for the company or is that all in Japan? Yanela del Frias: That was total for the company, across several businesses, mainly impacting Retirement and International. Ryan Krueger: Got it. And then I know you updated the tax rate. Any change to your corporate guidance that you had given last quarter, given the favorable expenses this quarter? Yanela del Frias: No. We are not updating the corporate guidance. We did have some one-timers and also some expense timing. If you look at our normalization, there is about $70 million of one-timers—half of that is timing, half of that is real one-timers. At this time, we do not expect to update. The first half will be lighter, but the second half heavier, getting us to the $1.65 billion. Operator: Thank you. Next question today is coming from Suneet Kamath from Jefferies. Your line is now live. Suneet Kamath: Great, thanks. Starting with Andy, I appreciate the business exits that you mentioned in your prepared remarks, but it strikes me that they are not particularly needle moving. You can correct me if I am wrong there, but they did not seem to be that big. So I guess the question is, are you open to something bigger in terms of shifting the business mix? And in terms of setting the stage for this August call, should we think about that as the conclusion of a strategic review, or is this just updating guidance based on everything that has happened since the last time you gave it to us? Thanks. Andrew Sullivan: Yes, Suneet, thank you for the question. I appreciate the broader question. I have been very candid that the performance of the organization has not been good enough. We believe that a key contributor to that underperformance is a lack of focus. Both capital and investment dollars are spread too thinly. We have too many businesses in too many markets where we are either subscale or we are not competitive, and that is not a great use of the company’s capital. Our team has done work over the last year or so—and it has been a continual process. Strategy is always ongoing; it is not a start-and-stop type thing—but we have done a broader review as we did the step back and looked in the mirror. Our team is very committed to leaving the next generation of PRU leadership with a stronger performing company, a much more valuable company that is materially better focused and clearly winning in the spots that we compete. That means that we are a top player in a more focused set of businesses. We will focus our capital and investment dollars more than you have seen, and we are going to focus those on big markets with tailwinds where we clearly have the product and distribution capabilities and brand to win, and where we know that we could deliver a differentiated value proposition to drive strong shareholder returns. You mentioned you have already seen, I would call it early evidence, of where we are getting out of—obviously we mentioned those in the prepared remarks—and you have already seen areas we are leaning into, like retirement and asset management. But I would frame it that it is early in our business mix shift. Yanela and I are looking forward to providing you greater detail on the August call about that shift and about our change in focus as an organization. This is an iconic company with incredible capabilities, and we want to make sure that we do everything that we need to to put the company on a strong growth trajectory. Suneet Kamath: Okay. And then I just wanted to drill into the group disability business. I know it is not a huge business for you, but if I think about the loss ratio—let us call it in the high 70s—I think some of the other players that we cover are probably in the mid-60s. There is a pretty sizable gap there. Is there a structural reason why your loss ratio is so much higher? And at the end of the day, is this business producing adequate returns relative to the mid-teens ROE target that the company has overall? Thanks. Andrew Sullivan: Yes, Suneet, thanks for the question. I would say it is very important, when you look at group businesses across the industry, to look closely at both the size segment that they are in, as well as the product mix that they are in between Life, Disability, and voluntary products/supplemental health. All of those have different benefit ratio and admin ratio characteristics. The fact is a lot of competitors across the space have business mixes that are more down market than ours. I think, as you are well aware, our strongest asset in our business is National Accounts and the higher end of the middle market. Industry-wide, that segment has higher benefit ratios but lower admin ratios. So you have to be very careful comparing benefit ratios and admin ratios across companies. As we look at the performance of our business, to your question, this is a business that has cycles. We are coming off a year in 2025 of very low disability benefit and very low benefit ratios in general. This quarter, we saw underwriting pressure in the disability block, almost entirely related to LTD incidence and severity. That was offset by good performance in the Life block from working-age populations. This is a business that is producing returns in excess of our cost of capital. We are happy with the deployment of capital to this business, and it is a focused area of growth for us as we look forward. We fully expect to see performance to be in the guidance range of 83% to 87%. Operator: Thank you. Next question today is coming from Wesley Carmichael from Wells Fargo. Your line is now live. Wesley Carmichael: Hey, thank you. Good morning. Just wanted to talk about the Retirement segment for a second. It was good earnings in the quarter. I am trying to get an idea for run rate. I think, Yanela, you mentioned $25 million of prepay income. There is also some unfavorable and positive underwriting. If we net all that together, I get somewhere in the neighborhood of, call it, $600 million on a run-rate basis. Is that the kind of math you are doing? Yanela del Frias: Yes, Wes, I think that is right. I mentioned total prepays of $50 million, mainly in International and Retirement, in my prepared remarks. I did mention $25 million in Retirement. What you are seeing in Retirement—and it is probably easier to look year over year because you have the full impact of sales for the past year—is strong growth. That is due to the sales that we are seeing in retail annuities and in our institutional markets. If you adjust for the prepays and some other noise, you are seeing the growth in the business coming through. We also did have some higher operating expenses. As I mentioned, we are investing in service and technology and driving enhanced customer experience. We are funding that at a total company level with efficiencies throughout the company. Net-net, year over year at the total enterprise, expenses are flat. Wesley Carmichael: Got it. That is helpful. And just a different subject: when going through the resegmentation, you can kind of pull out the income statement for Guaranteed Universal Life. I think that business generated something like a $200 million loss in 2025 and I think $500 million in 2024 on a reported basis. Given that business seems to be generating a loss, how do you think about reserves there? You have already taken some charges, but do you need to do more to increase the reserves in that business? Yanela del Frias: The way to think about that is that the GUL losses are mainly driven by the reserve accruals. We have reinsured a portion of the block, but the retained portion still includes exposure to the underlying economics and is still in that stage where GAAP reserves are building up. GAAP dictates that reserves be accrued at a higher pace than the best estimate liability would require as you are building the reserve, and this is what leads to the GAAP losses that we are seeing earlier in the life of the block. These losses will reverse over the long term as the expected benefits are paid and the reserves are released. You are seeing that dynamic because we are still building the reserve, and over the long term that will reverse. Andrew Sullivan: Wes, I would just add a real positive of the resegmentation: you are seeing the strength and the quality of the go-forward Individual Life business. It is much more evident. We have been very methodical about executing the strategy to diversify the portfolio, to reduce expenses, and to write new business at attractive margins. This was a record sales quarter for us in Individual Life, and those sales are coming in well in excess of the cost of capital. We are pleased that you are now able to see the quality and growth of that Individual Life business now that we have resegmented out GUL. Wesley Carmichael: Got it. That is helpful. Thank you. Operator: Thank you. Our next question today is coming from Joel Hurwitz from Dowling & Partners. Your line is now live. Joel Hurwitz: Hey, good morning. Just on expenses, you mentioned in the prepared remarks that you expect some of the actions you are taking to be evident in 2027. Any more color on the expected benefits that you expect to emerge next year, and where would we see that show up in the financials? Yanela del Frias: Yes, Joel. In terms of expenses, taking it up a level, you have heard me speak a lot about our focus on continuous improvement and gaining efficiencies to be able to reinvest in the business. That is what is really funding these investments. We do expect these to have benefits in 2027. We are not necessarily quantifying that, but it will come through in our results. These are investments in things like modernizing and driving efficiencies in onboarding and claims management in Group, and investments in service delivery throughout all our U.S. businesses. These do lead to efficiencies. One thing I would highlight and remind you of is that last quarter, we took a $135 million restructuring charge that will result in run-rate savings of $150 million in 2027. Those are separate from the benefits of these investments. Joel Hurwitz: Got it. And then, Andy, going back to Gibraltar sales, I heard you say no issues on any of the POJ issues carrying over to Life Consultants. Any color on why Life Consultant sales have been a little subdued the past two quarters? Andrew Sullivan: Yes, Joel. We actually changed some of the incentive programs and rewards programs in our Life Consultant channel. It is part of our ongoing work around making sure that the business is as efficient as it needs to be, and that had an influence on the level of sales. We do not expect that to inhibit us in any way over the longer term in our ability to grow that Life Consultant channel. That is a channel that we consider pretty unique, in that it has specialized access to teachers and the Self-Defense Forces across Japan, and is literally in every geography across Japan with 7,000 agents. Joel Hurwitz: Got it. Thank you. Operator: You are welcome. Thank you. Next question is coming from Michael Ward from UBS. Your line is now live. Michael Ward: Hi, thank you. I just wanted to dig in on the group disability real quick. I get that it is a small business, but conceptually for the industry, you specifically mentioned macro-driven uncertainty driving claim incidence and severity. I was curious what specifically you meant by that? Andrew Sullivan: Yes. Mike, let me take the question overall and then hit your specific about the macroeconomic environment. It gets down to specifics that you have to look at across the books of business and the mix of products, etc. We experienced a weakening in our disability benefit ratio as you saw this quarter versus last year, but it did improve materially sequentially over 4Q, so we are seeing that recover. There were three main drivers, all LTD-related—not STD or paid leave, and we sometimes get that question. On LTD, we saw an increase in new claims incidence. The comment about the macro environment is when there is greater uncertainty around job loss, and you have seen tens of thousands of jobs being eliminated from a variety of big names. Remember that we tend to have a book of business that is up market, and we cover and service a lot of larger employers. That leads to higher incidence and higher severity. You also have to look at the segmentation of industry mix. We have many white-collar type cases, and you sometimes see greater impacts in those than blue-collar. So, increase in claims incidence and severity, and the other thing is we had somewhat lower resolutions in the quarter. That is going to vary quarter to quarter. We are comfortable with our capabilities and the way we are managing that, and we know that will be where it needs to be over the long term. Taking a step back, we have been in the Group business over a hundred years. We have seen cycle after cycle. We are very comfortable with our capabilities, and this is an important area of focus for us. Michael Ward: Thank you, Andy. And then on Japan, I think you have said no anticipated free cash flow impact over 2026–2027. But longer term, should we expect some free cash flow and ESR impact? Yanela del Frias: Hi, Mike. We did talk about, when you think about the earnings of POJ, that 90% come from the in-force, and the impact of the sales and surrenders will result in a 10% earnings power reduction in 2026 and another 5% in 2027, so getting to 15%. That is a small portion of the earnings in POJ. Obviously, the earnings will decline and then we will be ramping up. I also talked on the April 21 call about the fact that cash flows from Japan are driven by Japanese statutory versus GAAP, and that is a big piece of the difference in terms of why we have about a $1 billion impact on GAAP earnings, but that does not come through in statutory. That is also dampening the impact on cash flows. Over the long term, as we begin sales again, we will have earnings, and we also will not have the subsidy that we are paying the Life Planner, so that is an offset to the capital that we are putting in for the new sales. Net-net, we do not expect a longer-term significant impact assuming what we are seeing today. Michael Ward: Thanks, Yanela. Operator: Thank you. Next question is coming from Pablo Sengzon from JPMorgan. Your line is now live. Pablo Sengzon: Hi, good morning. First question: can you talk about what was new with the RILA product that you launched in December? And maybe use that as a stepping stone to discuss the broader competitive environment for RILAs. Are you still able to innovate on features or distribution, or are you having to give up economics to remain competitive? Andrew Sullivan: Thanks. Let me start with the competitive piece and then I will talk about the innovation in FlexGuard. The RILA market is competitive. You do not go from five competitors to 25 without it having a competitive effect. We have seen some well-established players enter the space, and we have seen some level of aggressive pricing. We always take a very consistent, disciplined approach to ensure that we generate profitable sales. It is not about revenue; it is about profit. Pricing is only one element of winning in this market. There are clear ways that we are differentiated other than pricing—our product features, our distribution, which continues to deepen and expand, our world-class service, and our brand. All of that matters. We are strong on all those facets, and that produces success. On the innovation in FlexGuard, recall when we launched FlexGuard 1.0, it was one of the fastest growing buffered annuity launches in the history of the industry. We are expecting very strong success from 2.0. In essence, we have tweaked the design so it offers more opportunity for growth with also more downside protection, in the way that the product is designed, all linked to market performance. We are now reporting total sales in our individual annuities market because these are all spread-based products, and given market conditions and competitive conditions, you need to lean in and lean out of different spots. It is a pretty dynamic market week to week. We know we have an all-weather portfolio, we are disciplined in our pricing, we have a lot of differentiation, and we will grow this overall in total from that set of capabilities. Pablo Sengzon: Thanks, Andy. And then for my follow-up about POJ, I was wondering if you would be willing to give a more current update on the Life Planner count or most recent trends and the persistency. I think if you look at the reported 1Q 2026 there was some slight deterioration, and I was wondering how the trend has developed through May. Thanks. Andrew Sullivan: Yes, Pablo. To reiterate what we shared on the April 21 call, what we saw in the first quarter is the Life Planner headcount was down less than 1%. Since the start of the year, the rate of LP resignations has been at a similar level compared to what we saw last year, and everything we have seen since announcing the 180-day extension of the suspension has been consistent with the expectations and financials that we put out to the street. We think the reason we are seeing such success is really due to a couple reasons. First, we are providing material financial support. It goes beyond the money that we are providing to the Life Planners. What they see is us stepping forward and being very committed to this business, being very committed to them, and they are very appreciative of that. We have also done a lot of work on improved and delivered training, and we are clearly painting a picture of where this business is going for those Life Planners. That is all being done so that Life Planners can see a sustainable career path, and we believe that is why we are seeing such good results—still early in this suspension period—from a Life Planner retention perspective. Operator: Our next question today is coming from Jack Magnus from BMO Capital Markets. Your line is now live. Jack Magnus: Hey, good morning. Just a question on risk transfer. Wondering how you view the outlook both for you and for the industry regarding volumes this year. Specifically, do you think we could see more jumbo cases come to market? Andrew Sullivan: Thanks, Jack. As you know well, PRT is a transaction-oriented business. It is not a flow business. It will be episodic, especially in the jumbo space. We have seen reduced activity in the market given the economic uncertainty and the geopolitics that are being experienced. Volatility and uncertainty make business leaders slower in decision-making. We have absolutely seen that in the marketplace. We expect that 2026 will mirror 2025 and that demand should get stronger in the second half. That is generally what happens, in particular in the jumbo space. It is hard to say exactly how much that will strengthen, but we believe that will be the pattern. Importantly, what you have now seen two quarters in a row is we are writing more middle-market deals. While we are clearly a leader in jumbo, we have a very good and growing presence in the middle market, and that will help balance out our success in the jumbo space. We are very well positioned. We are one of the best at this business, and now that we are participating more broadly across segments, we believe we will be even more successful going forward. Jack Magnus: Thank you. And then maybe on PGIM, can you talk about the outlook for the private markets business and some of the investments that you referenced earlier? Where do you feel that business is differentiated versus its competitors? And any impacts you are seeing related to some of the recent headlines around private credit? Andrew Sullivan: Sure. We are very proud of our privates business, and the biggest part of our privates business is credit. We are one of the largest and most successful credit managers in the industry. We have about $1 trillion of credit assets under management, about $750 billion or so of that public and $250 billion private. That is in addition to our roughly $150 billion in real estate. This is a focused business for us. In particular, in the private credit space, we have had a fast-growing direct lending and asset-backed finance capability. Our strength comes from the fact that, since we have the public side and the private side, we can serve customers with a range of risk and collateral types, and across the liquidity spectrum. That is a differentiator. On the private side, we have a vast origination network where we have direct access to companies around the globe. That enables us to source a significant share of non-sponsored deals. As for the space around private credit and the stress, most of what is in the headlines is around the retail side of the business. On the institutional side, we have seen strength. While institutions are slowing down a bit in their decision-making, they are still leaning into private credit and into the highest quality managers that have track records over decades of underwriting. That is what we are seeing, and that is why we are producing very good levels of private capital deployment as well as fundraising. Operator: Next question is coming from Tracy Benguigui from Wolfe Research. Your line is now live. Tracy Benguigui: Thank you. Just a quick follow-up on the GUL retained. I appreciate the GAAP commentary, but how do you think of the adequacy of those reserves on a statutory basis? Yanela del Frias: Yes. Tracy, first on a GAAP basis, I spoke about the reserving and the trend. I would also note that another data point in terms of adequacy on a GAAP basis is that we have to undertake loss recognition testing every quarter, which is required to ensure that the GAAP reserves are sufficient. As of 3/31, the GUL reserves held on our balance sheet exceed what is required under loss recognition. Under statutory accounting, the chief actuary signs off on those statutory reserves every year, affirming that they are sufficient as well. We go through all the processes, track assumption updates, and book them, and we have the actuarial sign-off on the statutory reserves. Tracy Benguigui: Okay. Switching gears a little bit, I am wondering, could VM-22, the principle-based reserving, reduce incentives to cede FA risk to your Bermudian affiliates? And how does VM-22 stack up against the BMA rules, which are also principle-based? Andrew Sullivan: The current proposed version of VM-22 is a helpful step towards a more economic principle-based standard. The relative benefits of Bermuda would be lower based on the current proposal, but our current view is that Bermuda continues to be an attractive option for us. We will continue to assess that over time as the VM-22 rules are finalized. Operator: Our final question today is coming from Wilma Jackson Burdis from Raymond James. Your line is now live. Analyst: Hi, this is Chris on for Wilma. There is a lot of growth opportunity in Japan reinsurance right now. Pru is one of the largest there. Could you discuss that market opportunity? Yanela del Frias: Hi, Chris. We do not participate in the reinsurance business as a business line, but we can participate in that opportunity through Prismic, our sponsored entity. An update on Prismic: we continue to work on an active pipeline for Prismic, including ongoing balance sheet optimization, financing new business growth, and working on third-party blocks. Prismic has made really good progress. In February, we entered into our first flow reinsurance transaction with Prismic, reinsuring MYGAs out of our Retirement business. In the first quarter, we executed a second flow reinsurance transaction with Prismic covering U.S. dollar-denominated Japan liabilities. Also in the first quarter, more relevant to your question, Prismic reached an agreement with Daiichi to reinsure a yen-denominated in-force block of whole life and annuity policies, and that is Prismic’s first third-party transaction. Andrew Sullivan: Chris, maybe just one add. We are very pleased with how Prismic has continued to move forward. As a reminder, as Prismic succeeds in third-party reinsurance, PGIM is able to manage a lion’s share of the assets that go into that relationship. That is a good growth engine for PGIM as well. Analyst: Great. Thank you. And then could we expect the POJ pause to have any effect on the pace of capital return to shareholders through the remainder of the year or through 2027? Yanela del Frias: No, Chris. As we said on the April 21 call, we do not expect the impact of the POJ sales misconduct to materially impact our cash flows or our capital position. We do not expect any changes to our capital deployment or shareholder distribution. Operator: Thank you. We have reached the end of our question and answer session. Ladies and gentlemen, that does conclude today’s teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
Operator: Good morning, and welcome to the Jack Henry Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Vance Sherard, Vice President, Investor Relations. Please go ahead. Vance Sherard: Thank you, Danielle. Good morning, and thank you for joining the Jack Henry Third Quarter Fiscal 2026 Earnings Call. Joining me today are Greg Adelson, President and CEO; and Mimi Carsley, CFO and Treasurer. Following my opening remarks, Greg will provide an overview of our business, along with updates on our strategic initiatives. Mimi will then discuss the financial results and updated fiscal 2026 guidance provided in yesterday's press release, which is available in the Investor Relations section of the Jack Henry website. Afterwards, we will open the lines for a Q&A session. Please note that this call includes forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially from our expectations. The company is not obligated to update or revise these statements. For a summary of risk factors and additional information that could cause actual results to differ materially from such forward-looking statements, refer to yesterday's press release and the Risk Factors and Forward-Looking Statements sections in our 10-K. During this call, we will discuss non-GAAP financial measures such as non-GAAP revenue and non-GAAP operating income. Reconciliations for these measures are included in yesterday's press release. Now I will hand the call over to Greg. Gregory Adelson: Thank you, Vance. Good morning, and thank you for joining today's call. As always, I want to begin by recognizing our associates for their hard work and dedication. They consistently go above and beyond to serve our clients and drive our success. I will share 3 key takeaways from the quarter and will then provide additional detail on our overall business. First, our financial performance. We produced record third quarter results with non-GAAP revenue of $616 million, up 7.3% over last year's third quarter. Our non-GAAP operating margin was a strong 22.9% on par with last year's Q3. Second, our sales performance. Our sales and marketing team delivered an outstanding quarter with 17 competitive core wins, including 5 institutions with more than $1 billion in assets. This represents our strongest third quarter for new core wins in 7 years and ties our best third quarter ever in over $1 billion wins. Year-to-date, we have won 43 core deals, 11 of which are institutions over $1 billion. That's up from 28 wins and 8 over $1 billion at this point last year. Based on our strong momentum, we are highly confident that we will exceed the 51 core wins achieved last year. Third, our higher-value core wins. We continue to see a higher number of trifecta solution wins. So far this year, 25 of our core wins or 58% of the total have included digital banking and card solutions. At this time last year, we only had 8 core deals that included digital banking and card solutions, just 29% of the total won. This healthy growth in trifecta wins reinforces the strength of our integrated platform and supports deeper, more valuable client relationships. Now turning to our broader business. I will begin with our use of artificial intelligence, followed by updates on several innovative solutions and specific products. As I have shared at recent investor conferences, we view AI as a significant strategic opportunity and have been operating and expanding our capabilities for more than 3.5 years by establishing strong governance processes that support a responsible, bold and balanced approach. Today, close to 100 AI tools are approved for internal use, ranging from general productivity platforms such as Gemini and Copilot to specialized business and development tools across all areas of our company. These tools support over 500 distinct use cases, delivering meaningful and measurable impacts. A few examples to share. In lending, developers working on our new Jack Henry origination solution, online account opening solution have increased productivity by roughly 90%, driven by faster coding and quicker issue resolution. In digital, as part of the new Jack Henry platform, we have built an AI-assisted recommendation system for exception item processing that is in closed beta with 3 banks. They all report that AI is reducing the time to close exceptions each day by 70% to 80%. And in customer service, our AI adviser bot is supporting our frontline representatives and has assisted with more than 3,700 complex support interactions over the past 2 months with a 96% success rate, servicing answers and seconds from our knowledge resources. To further accelerate adoption, we have deployed an internal team of AI coaches who work directly with our associates through workshops and hands-on support. We are also seeing meaningful productivity and efficiency gains from natural language development, sometimes referred to as vibe coding. For example, a nontechnical associate recently developed an internal application for our travel program, allowing us to meet a business need without licensing additional software. This is one example of many where our teams have independently built more efficient ways to address specific business challenges. Overall, we believe our approach to AI education and adoption significantly helps us minimize competitive risk. Additionally, regulatory requirements, network certifications and our role as the system of record make the banking industry very difficult to disintermediate. Shifting to our innovative solutions. We continue to make strong progress on our stablecoin strategy. Beta testing with clients to send and receive USDC is going well. And at this point, we are largely awaiting final regulatory guidance to proceed more expeditiously. We are delivering stablecoin processing through the public cloud native Jack Henry platform. This is important because the platform is connected to all of our core systems, serving as a bridge between emerging capabilities and our foundational cores. This provides our clients fast integrated access to capabilities such as stablecoin and our initial SMB solutions, Tap2Local and rapid transfers. Tap2Local, our SMB merchant payment solution continues to see significant traction as clients look to better serve SMBs increased deposits and recapture business from fintechs. At the end of April, more than 700 banks and credit unions were live with Tap2Local. Since beginning targeted marketing just a few days ago, active merchants have doubled to more than 1,600 with several thousand additional merchants currently in the enrollment process. We intentionally waited to begin marketing so we can ensure the product and infrastructure were fully operational. With that foundation now in place and marketing beginning to ramp up, we expect adoption to accelerate in the coming months. Client feedback has been very positive, particularly around Tap2Local's differentiated capabilities, including easy enrollment, tap to pay on both iOS and Android devices and continuous account reconciliation. As an additional validation to the product's uniqueness, Tap2Local recently won the Fintech Breakthrough Award for Small Business Payments Solution of the Year. We are also seeing strong early momentum with Jack Henry Rapid Transfers, which enables both SMBs and consumers to quickly move funds between external accounts, eligible cards and digital wallets. Rapid Transfers is now live with over 110 banks and credit unions with an additional 190 at various stages of onboarding. Transaction volumes have been healthy, particularly given that marketing has not yet begun. The average transaction size is approximately $260, which is double our original projections and is being driven by stronger-than-anticipated inbound transfers. Larger inbound transfers deliver one of the key value propositions, increased deposits for the financial institution. With higher average transaction sizes and consistent monthly activity without any marketing, Rapid Transfers is currently tracking well ahead of our initial modules, though we are still in the early innings of the rollout. As another key part of the Jack Henry platform, we are developing a cloud-native deposit-only core. Client testing is underway and development was completed 6 months ahead of our original schedule announced in February of 2022. We will continue to broaden our testing as the year progresses. I also want to highlight early progress on our enhanced embedded payments capabilities following the acquisition of Victor Technologies last fall. The Victor platform, now branded as Jack Henry Payments Orchestrator, enables financial institutions to embed payment capabilities directly into third-party nonbank brands such as fintechs and commercial customers. In Q3, we signed 1 bank and onboarded 3 fintechs to the platform and have quickly grown our sales pipeline to more than 40 banks and/or fintechs. Moving on to our reporting segments. In core, in addition to the 17 competitive wins I mentioned earlier, we also secured 4 on-premise to private cloud contracts, including 1 institution over $1 billion. So far this year, we have signed 23 in-to-out contracts with 8 being institutions over $1 billion. In payments, we continue to see strong growth in faster payments. Over the past year, our clients' adoption of Zelle grew by 25%, RTP by 26% and FedNow by 31%. In the third quarter, payment transaction volume across these channels increased 47% year-over-year. In complementary, we signed 36 new Financial Crimes Defender and faster payment module contracts during the quarter. As of March 31, we have completed 168 Financial Crimes Defender installations and another 68 in various stages of implementation. We've also installed 168 faster payment modules with an additional 256 in products. The Banno Digital platform had another strong quarter with 23 retail and 34 Banno's business signings. In total, we have 1,028 clients live on Banno, including 466 on Banno Business. The platform now serves more than 15.5 million registered users, up 13% from a year ago. As a reminder, all of our Banno wins and growth thus far has occurred within our core base. As we look ahead, we believe we are at a meaningful inflection point. We now have a competitive feature set, along with increased willingness among certain competitors to operate as open providers. As a result, we see an opportunity to begin expanding Banno beyond our existing base and more closely align it with our payment product strategy, where we have successfully sold outside the base for many years. We will provide more updates as we progress with this strategy. On the technology spending front, we recently released results from our eighth annual Strategy Benchmark survey, which highlights technology spending priorities. While we monitor a number of industry surveys, this one is particularly meaningful because it reflects direct input from the CEOs of our bank and credit union clients. The results point to a clear and growing commitment to technology investment. 88% of respondents expect to increase their technology budgets over the next 2 years, up from 76% last year. Of those, the largest segment, 41%, plans to increase investments between 6% and 10%. These trends are consistent with other industry surveys pointing to increased technology spending. We ask CEOs where they plan to prioritize those investments. For the first time, artificial intelligence ranks as the top priority, cited by nearly 50% of the respondents, followed by digital banking and data analytics. These priorities align directly with where Jack Henry has been investing and delivering innovation. Last week, we highlighted our differentiated innovation at the Jack Henry Annual Strategic Insight Symposium in Salt Lake City. We featured presentations and panels that included both Jack Henry leaders and well-known industry experts covering key topics such as the macroeconomic environment, the Jack Henry Benchmark survey, our technology priorities and progress, fraud initiatives, AI education and use cases, the impact of stable coins and tokens and meeting the needs of Gen Z. We will provide updates on many of these topics along with additional innovation updates at our Investor Day on September 15 in our Dallas offices. We recently completed and published our 2026 sustainability report. The report is an outstanding information source on the Jack Henry -- on Jack Henry and is available to review on the Investor Relations page on jackhenry.com. The report coincides with our 50th anniversary and reflects our continued focus on preserving long-term value for our associates, clients, communities, stockholders and the environment through responsible business practices. As part of our 50th anniversary celebration, our Board is looking forward to ringing the closing bell at NASDAQ tomorrow, May 7. This is one of the many activities we are doing throughout the year to mark this significant milestone. In closing, we remain focused on culture, service, innovation, strategy and execution. These key differentiators will enable Jack Henry to continue to drive industry-leading revenue growth and margin expansion. With strong sales momentum, increased client technology spending and a disciplined execution, we believe Jack Henry is extremely well positioned to capture the opportunities ahead. With that, I will turn it over to Mimi for more detail on our financials. Mimi Carsley: Thank you, Greg, and good morning, everyone. I would like to begin by thanking our associates who continually deliver value to our financial institution clients. The result is another quarter of solid revenue and earnings growth and continued momentum as we approach the end of our fiscal year. I will begin with our healthy third quarter results, then conclude with our updated fiscal '26 guidance. Q3 GAAP revenue increased 9%. Non-GAAP revenue increased 7% for the quarter and 8% year-to-date, a continuation of consistently strong performance. Third quarter deconversion revenue of approximately $19 million, which we previously announced was up approximately $9 million for the quarter, reflecting a steady pace of M&A activity among financial institutions. As a reminder, the dollar amount of deconversion revenue has little correlation with the number of transactions or annual revenue impact, and the absolute amount of deconversion revenue can vary greatly quarter-to-quarter. We continue to see industry consolidation as largely neutral to slightly positive for our business. Now let's look more closely at the details. GAAP services and support revenue increased 10% for the quarter, while non-GAAP increased 8%. Service and support growth during the quarter was primarily driven by strength in data processing and hosting revenue for both private and public cloud. Specific callouts include implementation services and license revenue. Private and public cloud offerings continue to drive strong growth. Cloud revenue increased 9% in the quarter. This reoccurring revenue contributor is 33% of our total revenue. Shifting to processing revenue, which is 43% of total revenue and another strategic component of our long-term growth model. We saw a solid performance with 7% GAAP and 6% non-GAAP growth for the quarter. Consistent with recent results, quarterly drivers included increased digital, card and faster payment processing revenue. Completing commentary on revenue, I would highlight total reoccurring revenue was 91% for the quarter. Next, moving to expenses. Beginning with cost of revenue, which increased 7% on a GAAP and non-GAAP basis for the quarter. Drivers for the quarter are consistent with recent previous quarter results and include higher personnel costs, direct costs growing consistent with lines of revenue and increased amortization of intangible assets. For modeling purposes, amortization of acquisition-related intangibles was $6 million for the quarter. Next, R&D expense increased 15% for GAAP and 12% on a non-GAAP basis for the quarter. Quarterly increase was primarily due to the net personnel costs driven by an increase in headcount over the trailing 12 months. And ending with SG&A expense for the quarter on a GAAP basis, it increased 9% and an increase of 8% on a non-GAAP basis. Results reflect an increase in personnel costs, specifically from headcount additions over the 12 months. We remain focused on generating annual compounding margin expansion. Q3 delivered consistent non-GAAP margin at 23%. Year-to-date non-GAAP margin improvement was 195 basis points with a non-GAAP margin of 25%. Non-GAAP margin benefits inherently from the leverage in our business model, strategic cost management and leveraging our existing workforce as we continue to focus on enterprise process improvement and AI utilization. These strong quarterly results produced a fully diluted GAAP earnings per share of $1.71, up 12%. For the year-to-date period, GAAP earnings per share was $5.41, an increase of 20%. Reviewing the 4 operating segments, we see positive performance across the board. Core segment non-GAAP revenue increased 9% for the quarter, with operating margin contraction of 27 basis points due to temporary product mix of lower-margin revenue sources such as implementation and work orders. Payments segment quarterly non-GAAP revenue increased 5%. The segment again had outstanding non-GAAP operating margin growth with quarterly results of 159 basis points. Card processing revenue showed steady growth and was partly offset by lower network incentive revenue. The segment also benefited from continuing shift and significant growth from faster payments. The complementary segment quarterly non-GAAP revenue increased an impressive 7% with healthy 99 basis points of non-GAAP margin expansion. Quarterly revenue growth continued to reflect demand for our digital solutions and a beneficial product mix with sales sourced from new core wins, existing core customers and noncore financial institutions. For the quarter, Corporate Services, formerly Corporate and Other, non-GAAP revenue increased 27%. This is primarily the result of increased hardware sales. Since the segment reflects expenses not allocated to other segments, we will not be discussing operating margins as it provides no meaningful insight. Now a review of cash flow and capital allocation. Q3 operating cash flow was $186 million, a 72% increase over the prior fiscal year Q3. Quarterly free cash flow of $122 million delivered a 137% increase over the prior fiscal year Q3. Our consistent dedication to value creation resulted in a trailing 12-month NOPAT return on invested capital of 23% compared to the 20% in the third quarter of the prior year. We are very proud of the durability of this metric and how it reflects our high-quality allocation of capital for our shareholders. Additionally, I would highlight the following significant year-to-date capital decisions resulting from our strong free cash flow generation. $284 million in share repurchases, $127 million in dividends paid plus the asset acquisition of Victor Technologies. We're proud to return meaningful cash to investors while maintaining a conservative balance sheet. The average purchase price of the shares repurchased was $160. We ended the quarter with debt of $90 million, consistent with normal course of the business revolver usage but expect to end the year -- the fiscal year debt-free, barring acquisitions or other opportunities. During the quarter, we established a new $1 billion revolver credit facility to support future growth opportunities. I will now discuss our third consecutive increase to full year guidance. As you are aware, yesterday's press release included updated increases to fiscal 2026 full year GAAP guidance. Deconversion guidance will continue to follow the conservative methodology introduced in fiscal '24. Fiscal '26 deconversion revenue guidance has been increased to $37 million. Full year GAAP revenue growth guidance increases to a range of 6.1% to 6.6%. Based on our strong year-to-date results, we have tightened the range of non-GAAP annual revenue growth guidance, resulting in a new outlook of 6.6% to 7.1%. Consistent with our budget plan and year-long messaging, Q4 will see relatively lower non-GAAP revenue growth compared to the previous 3 quarters. Drivers include projected digital revenue slowing from lower active user growth, card revenue growth, seeing pressure from risk management and less onetime network incentive revenue. Expenses during the fourth quarter are expected to reflect relatively higher pressure from medical cost benefits returning to historical levels, cloud migration infrastructure expense and commissions. Our expectation on fourth quarter revenue are below current analyst consensus. At the same time, full year revenue growth consensus is aligned, reflecting that part of the difference is that some of the revenue analysts expected in the fourth quarter shifting to the third quarter. Margins are projected to contract in the fourth quarter based on previously disclosed factors. However, based on the full year revenue growth and our robust financial model, we are increasing full year guidance for non-GAAP margin expansion to a range of 75 to 95 basis points from the original 20 to 40 basis points on the August call. As a reminder, we see fluctuations in quarterly results related to software usage license components along with the timing of implementations. Therefore, the correct performance indicator for our business is the consistently strong fiscal year financial results. Q4 results are not aligned with our early expectations for fiscal '27. The presented results and guidance metrics are indicative that our business operations remain healthy and sound with growth opportunities across all 4 operating segments. The full year GAAP tax rate estimate for fiscal '26 is 23.25%. The above increased guidance metrics result in a stronger full year outlook for GAAP EPS of $6.78 to $6.87 per share, a growth of 9% to 10%. As a reminder, even updated deconversion revenue guidance potentially understates GAAP EPS growth. Full year free cash flow conversion outlook for 95% to 105% for fiscal '26 with a bias towards the upper end of the range. Including, Q3 reflects another exceptional performance from our associates leading to increased guidance. We're pleased by the continued performance momentum and resulting fiscal year outlook. We remain strongly convinced that demand for our solutions aligned with continued technology spend by our clients and prospects, all supported by industry-leading service excellence from our associates will drive outstanding financial results and superior shareholder value. We appreciate the contributions of our dedicated associates that produce these superior results and our investors for their ongoing conference. Danielle, please open the line for questions. Operator: [Operator Instructions] The first question comes from Vasu Govil from KBW. Vasundhara Govil: Greg, first one for you. It was another very strong quarter on new core wins. I'm curious what's driving this trend? And if you are starting to already see some benefits from the competitor platform consolidation or if that's still on the come? Gregory Adelson: Yes. Thanks for the question. Yes, I think it's a combination of both. We've been talking a lot about what we've been doing on the innovative side. And so that's continued to play out with the products, the solutions. Obviously, our customer service hasn't wavered a bit. I will tell you, of the 17 core wins, 13 of them came from one provider and one competitive provider. But I will say that most of those, as you can imagine, the core processing contracting side takes anywhere from 9 to 12 months typically. So a lot of those were already in motion ahead of whatever announcements were made. But we did take some from really everybody, just so you know. So we had some wins from really all of our competitors. But again, the bulk of them came from one. Vasundhara Govil: And then maybe a quick one for you on the margin guide. The guide obviously implies a meaningful step down in the fourth quarter, and I caught your comment on the normalized medical expenses you're baking in. Any other drivers there? Or just trying to get a sense of whether there's any conservatism baked into the guide? Mimi Carsley: Yes, you're welcome. So yes, you're accurate, and I appreciate you hearing the commentary regarding Q4, which is not indicative of the full year performance, but more so due to some unique factors in Q4 that were expected as we thought about for the cadence of the year. So you're right to call out the medical expenses returning to normalized levels. We also had some commission shift where we saw some benefit earlier in the year. We expect based on the timing of those implementations for the commissions to -- some of that to hit in Q4. Additionally, just some of the mix we're seeing from some of the lower-margin business, some of it related to work orders and implementation also lead to a Q4 having less margin expansion or, in fact, margin contraction for the year. But again, the right metric for our business is the annual, and we're pleased to be able to increase guidance on full year margin expansion. Operator: The next question comes from Peter Heckmann from D.A. Davidson. Peter Heckmann: I wanted to talk a little bit about Anthropic's Mythos. Has Jack Henry been able to set up a timetable to access Mythos to use -- look at their own systems to identify any cyber vulnerabilities? And do you think that's something that Bancorp customers are increasingly going to demand from their vendors on a periodic basis. Gregory Adelson: Yes, Pete, so this is Greg. So a couple of things on Mythos. So we've been heavily involved ever since it came out. So I actually did a call with a lot of our competitors and others with the Head of Cybersecurity in Washington. So we had -- as soon as everything was announced, we were pulled in. Our cyber teams have been involved in a multitude of meetings. Project Glasswing, which is now called Mythos Workshop, our teams are getting information associated with that and joining various meetings. We've obviously done a whole host of things that we need to do for operational readiness across the organization. But candidly, we were doing that already. But the other thing is that you probably heard that on April 29, the Trump administration raised some objections. And so there's still some delay on where some of this utilization will get done. But our teams are heavily involved both with -- not only at our organization and with Mythos, but also across the entire landscape of our industry. All of our competitors and Jack Henry are working together with Washington to make sure that we protect our banks and credit unions. Mimi Carsley: And Greg, if I could add on to that. Mythos is just the current kind of attention in the industry, but we've made significant investments in fortifying and stepping up from a cybersecurity from an awareness and observability and a zero trust kind of resiliency philosophy over the last several years. So we feel like we're in a much stronger position today than we had been over the last several years to be able to handle this type of situation. Operator: The next question comes from Jason Kupferberg from Wells Fargo. Tyler DuPont: This is Tyler DuPont on for Jason. I wanted to just start by piggybacking off of the core questions and commentary. Given you signed 43 takeaways so far fiscal year-to-date, how should we be thinking about upside to that 50 to 55 annual target? If I heard correctly in the prepared remarks, Greg, you suggested that you have confidence in exceeding last year's number. But given last 4Q, you guys won 23 deals, that would imply over 60 this year. So I guess just given the success you've seen so far year-to-date, I'm wondering if you can help put sort of a finer point on expectations as we look to the rest of the year. Gregory Adelson: Yes, I appreciate the question. I can't really give a finer point. I can tell you that I'm very confident that we will be north of 51 and probably north of 55, somewhere in that range. I don't know exactly -- contracts are interesting as far as timing to go get them done. We've been completing a couple of contracts recently that took a lot longer than we expected and sometimes they get kind of turned over to the next quarter. But in reality, it's not just the number of wins we have, but also the size of the wins. So as we referenced, we had 11 over multibillions, but we've also won just this past quarter, we won $3.5 billion. We've won $5 billion. We've won $7.5 billion. And just recently, we just won an almost $10 billion client that is coming with 1.2 million accounts, which is actually about 25% larger than any customer we have today, including our largest asset size in the number of accounts. And those contracts took a long, long time to secure. So as you continue to go upmarket, contracts take longer. So it's really hard to give you a definitive answer. But the answer I'll give you is our sales team is really kicking butt right now. And obviously, a lot of the things that are going on in the industry are providing opportunities for us. And I think the best is still to come based on feedback and pipelines that we have. Our pipelines are extremely strong, not just in core, but in payments and complementary as well, and we're very bullish on that. Tyler DuPont: Great. That's great to hear. And I guess just as a quick follow-up, I just want to touch on free cash. The $122 million in the quarter was pretty meaningfully above, it looks like both consensus and even your own historical trends. So can you maybe just touch on how we should be thinking about free cash flow going forward versus the 90% to 100% conversion guide sort of both as we look down the barrel to the final quarter and as we try to hone our models for next year. Mimi Carsley: Yes. So I would say, Tyler, there were a couple of things as we look at trailing 12-month free cash flow. First and foremost, a tremendously strong operational foundation that led to strong cash, but there was also impact -- positive impact from the tax bill change that we saw come to clarity as well as some small asset sales. But overall, we feel great as we are improving the color this year for free cash flow conversion to that $95 million to $105 million, with a bias to the high side, sitting at around 109 -- $108 million, $109 million year-to-date from a trailing 12 months. We feel very good that we're returning to the historical norm levels of our free cash flow. Operator: The next question comes from Rayna Kumar from Oppenheimer. Rayna Kumar: Just given the volatile macro and political environment, as you talk to banks and credit unions, how are they thinking about IT spending for the next 6 to 12 months? And then separately, any read -- initial read on FY '27 revenue growth and margins? Gregory Adelson: Yes, Rayna, I'll take the first one. So kind of as we talked about in my prepared remarks, and we just came out of our strategic initiatives meeting with our top 150 or so clients. The focus -- and we actually had somebody from Washington come in and talk to our clients as well. But it's based on what's going on in the macro environment, honestly, it's not affecting the banks and credit unions focus on what they need to get done in the tech spending. So as we referenced in our own benchmark survey that just came out, we had 88% said that they were going to increase their spending as compared to 76% last year. And with that average, I think it was 41% is actually at 6% to 10% of an increase. And so that really coincides with everything that we've been talking about for the last 2 or 3 surveys that we've referenced on our calls, bank directors and others surveys. So that remains. The only difference is really where they're talking about spending the money. So AI for the first time became the #1 priority for them. But obviously, deposits, digital banking, in particular, fraud, other components are still up at the top. But -- so we're seeing it. I mean, again, our pipelines are very, very robust right now, again, in all parts of our business, not just core. And again, we're getting larger institutions. As I referenced, just this year, we've already won the one I just referenced that was almost $10 billion in assets, but 1.2 million accounts which is significantly larger than any one we have, which that comes with a lot of other products with it. So things along that line that continue to make us believe that the robustness of the technology spending will continue. Mimi Carsley: And then Rayna, I can take the second half of your question kind of building on that positive outlook that Greg just framed. It's a little premature to talk about FY '27. We're just excited about ending '26 in a great spot. Again, I would just call out that the quarterly pace of the year is not indicative of any kind of launching off pad for '27. So although we are all calling for a weaker Q4, it does not mean anything diminishes from our positive outlook for the full year and then next year. Even at roughly 91% reoccurring revenue, you would think a budgeting process would be easier, but we have a very comprehensive budgeting process here at Jack Henry. And so we are still working with each of our operational leaders to talk about the next year's plan and rigorous prioritization around investment and spending. So we will give more color to that when we talk about full year results next quarter. But overall, we're thinking a positive direction for FY '27. Operator: The next question comes from Madison Suhr from Raymond James. Madison Suhr: I just wanted to start on the trifecta wins. I think you mentioned 58% of wins this year were those trifecta wins. Just given what you're seeing in the pipeline, I mean, do you think this elevated level of cross-sell is sustainable, not only for the quarter, but just as we think about kind of the next year or so? Gregory Adelson: I do. I appreciate you asking the question. I mean I think we've seen the results of all the work and innovation that we put into our -- both our digital platform and our card platform. We've made a lot of changes through the years, and you've heard us reference over the last couple, in particular, about getting to a level of feature parity that we needed to compete with some of the larger digital-only providers, and we're starting to see that. We're starting to get some wins from all of the players, candidly. And so -- and they're not just coming in core wins, which is great, obviously, but you have to wait for those to be installed. We're also getting some current Jack Henry clients that were on competitive digital platforms that are now making the decision to move the Jack Henry Banno instead. So short answer to your question is I do feel very strongly that the work that we've done and are continuing to add with features like Rapid Transfers and Tap2Local that are not available anywhere else are big differentiators for us to winning deals. Madison Suhr: Okay. Great. And then I did want to follow up just on the Payments business. It grew 5% in the quarter. Just curious from your guys' vantage point, what's kind of the key buckets or key things that could accelerate growth in payments from here, just given I know that mid-single is maybe slightly below where you guys want to be. Mimi Carsley: Yes. We continue to see steady growth in card, the resilience of the consumer spending. And then on top of that, you get a boost from continued rebounded growth in remit and Bill Pay, Bill Pay, I would call out, even though it's not huge growth numbers, the increase has been quite positive, and that's a signaling of the resurgence post acquisition of Payrailz. And then on top of that, you have just tremendous growth, almost 50% growth in faster payments. So it's across the board. Volumes for card are good, but then you have extra growth from other areas of the business. Operator: The next question comes from Dominick Gabriele from Loop Capital. Dominick Gabriele: I guess Jack Henry is always focused on an open platform versus a walled garden. And I think that's really been a benefit to the business over time in gaining customers. Do you expect to partner with various AI potential financial providers with their products? And how would you think about that relationship? Would you take it similar to the types of partnerships with third parties, allowing their products to be on your platform and really focusing on Jack Henry's added value when the customers ultimately decide to choose Jack Henry products regardless. Gregory Adelson: Yes. It's a good question. I appreciate it. A couple of things. We are doing that today. So several of the AI-related companies are partnering with us today. That's how we're using some of the tools and also some of the -- incorporating some of it into some of the products that we are working on. We are being very careful on that. So partner is a really difficult word to use because in some cases, a partnership infers a lot of revenue changing hands on both sides. A lot of what I would call it is more of an integrated relationship. And in some cases, they're creating more financial gains for both of us and others, they're just creating opportunities for us to leverage tools that we're licensing. So -- but that is happening today and will continue to happen. We have a whole host of folks that we have hired to evaluate those tools and doing that, and we're being very careful because everybody's got something new to talk about. But that will continue. And to your point, we've been by far the most openness -- open platform through the years. And so we look at AI, we look at fintech opportunities, we look at fintechs that are using AI that's already embedded into their solutions as opportunities, and then we'll evaluate them one at a time. Dominick Gabriele: Great. Maybe just as a follow-up, if you look at the various growth rates of the segments, Core has been doing quite well. And outside of the comments you just made on payments, complementary double digits. I'm just curious of the quarter-over-quarter kind of implied reduction in the other 2 pieces of the business, given there is some momentum there. If you could just help walk through kind of that, I'd really appreciate it. Mimi Carsley: Sure. So as we always say, not to look at 1 quarter, but to look at the full year, particularly because some of these products, as you look at the installed calendar and even though we're thrilled to be looking at over 50 core wins, the revenue we're getting today is based on the wins we had, especially for core that we locked in last year, some of the complementary products can be installed sooner. But the profile of those customers does impact the revenue. So if you have years where the size of the installed base is different or the mix of the products they're taking, it can impact both revenue and margin. On top of that, what we've seen is some of the onetime service revenue related to work orders and implementation is also -- it's been a nice added revenue source, but I would say that kind of varies as well from quarter-to-quarter. And that's really the biggest driver causing for the fourth quarter in addition to just some grow-over challenges from last year's strength. Operator: The next question comes from Eric Teller from Wolfe Research. Unknown Analyst: It's Eric from Wolfe. I just wanted to understand a little bit more. When I think about the beginning of the year, you guys had called out pricing, M&A and some other variables, credit union account growth as having been potential risks or headwinds that decelerated what otherwise would have been a 7% to 8% algorithm for your year, ended up doing better than that as the year is progressing and not seeing those headwinds as materially. And you're seeing better core growth also, I think, than probably you anticipated at the beginning of the year. And so putting all those pieces together, where do you see the business positioned now in terms of your normal 7% to 8% trajectory? Do you think you have enough pillars for that business to sustain 7% to 8% in the next couple of years again without specifically guiding to '27? I'm just curious if you think the building blocks are there. Mimi Carsley: Eric, I appreciate the question. Yes, even though we haven't really talked about some of those headwinds as we progress through the year, we've grown over them. It's not that they've disappeared. We had it in our budget plan. We knew of some of the departures. We knew of some of the new contract renewals that we're going to face a bit of compression from a renewal perspective. We've just been able to grow over that. So I just -- I don't want to say like those pressures have abated. It's just we've been able to perform in spite of them. So as we look at next year, again, too premature to put any refinement on it, but I think the growth algorithm is certainly still intact. And as we've talked about, I think, even as much as on last quarter's call, the new exciting areas of innovation and business opportunity like the ones that Greg highlighted in SMB, faster payments, et cetera, it's going to be a couple of years until that has a meaningful contribution to the revenue growth that would kind of push us towards the upper bound of our growth algorithm and beyond. But we feel confident that next year is looking in line with the guidance we have historically given. Gregory Adelson: Yes. The only thing I want to add to that is that we did talk about that typically, we start to even out over the year with M&A. That is starting to play out exactly as we had said. But we had some -- in the early parts of the fiscal year when we were finishing our budgets and everything else, we had a little bit more of an upside down, but that started to balance itself out like we thought. The other thing is we referenced the changes we made in the renewal processes with how we went to renewals, and that has worked really, really well, candidly. And then I do think what Mimi just referenced with some of the new products and services that are still in earlier stages and -- but starting to gain some traction, that's where we get a lot of our confidence for the longer term in getting to the numbers you're talking about. Unknown Analyst: Okay. Greg, I just want to -- one follow-up on the core wins. It came up a couple of times, but I don't feel -- I still feel a little bit hungry for an understanding of what's actually driving the incremental step up in the magnitude of the wins than the run rate? Because like you said, these were basically formed from probably a few quarters ago in terms of the deals being signed or at least close to signed. So it wasn't really the industry changes we're hearing from competitors right now that caused the increase. So what did cause it to really kick in a few quarters ago already? Because it seems like if you add on what we're seeing in the competitive landscape, that could be additive even more so than the 55 going into next year if you -- when you take the 2 together. Gregory Adelson: Yes, I agree with you. I mean, I think you all have heard me enough talk about the differentiators and I bring them up every time because we're still getting some folks that don't fully understand it. And we are building things that nobody else is building, and we're doing it at a level of execution that nobody else is doing. So when you get an industry that's completely full right now of competitive uncertainty that is happening specifically with our largest competitors, we are the provider that is absolutely executing on the things that we said we were going to do and hasn't lost a step in customer service and never has. So people are -- I mean, I'm getting inbound calls from larger institutions that want to talk to us. I'm getting inbound calls from the largest consulting firms in the world that want to learn more about what we're doing. And we've been showing these large consulting firms our technology and their quote is, we are blowing them away. They never thought a core provider could do what we were doing with what we've built on the platform. So when you take all of that in the years of a lot of effort of building out the technology and now to a point where we can actually demonstrate it and have live products, that is really driving it. And again, with the unrest of what's going on with our competitors. So I do believe it's going to continue because we're going to continue to execute as we have been, and our products are only going to get further and further ahead of where our competition is. Operator: The next question comes from Ken Suchoski from Autonomous Research. Kenneth Suchoski: I wanted to get your high-level thoughts on how AI can play a role in the core processing industry. And we noticed one bank with over $25 billion in assets expanding its collaboration directly with OpenAI. And I'm curious to get your take just on, one, how much of a risk is there that banks or credit unions work directly with these AI companies? And then two, how involved is the core provider if that does happen? Or how does the core provider's role change in that scenario? Gregory Adelson: Yes. I think there's a couple of things. I think you referenced the $25 billion institution. And I do think the larger institutions as you continue to move up, they probably have more opportunity, more wherewithal money-wise and talent-wise to work with some of these providers directly. So you may see that. I can tell you in the community bank space, as I said on our benchmark survey, the #1 priority was AI. And our community and regional banks that Jack Henry works with, they don't have the wherewithal in most of the cases to build that out. So they're relying on us, which is why we've taken such a proactive way of doing this for the last 3.5 years. So as I mentioned, not only are we building the level of efficiency and effectiveness inside of the organization, we have 14 different POCs that we have going on right now with products. We have a whole host of things that we've built in our Financial Crimes solution, including things like SAR reports, suspicious activity reports that go out and doing those using AI, creating things that provide efficiency gains for our banks and credit unions with various tools like exception item processing that I referenced in the script. So things along that line that I think will continue to drive opportunities for people like us, at least that are very innovative and building out that level of innovation with our customers. Could there be a few that go around? Yes, maybe, but they're going to be fewer and far between than they are at the larger institution size. Kenneth Suchoski: Yes. That makes sense, Greg. And maybe just one for Mimi. Just on the payments non-GAAP revenue growth rate just because we're getting some questions on. I think I heard lower network incentives this quarter. Is that more of a onetime issue? Or does that carry through to future quarters? Just trying to think through the growth rate there and if it can accelerate from the 5%? Mimi Carsley: Yes, of course. The network incentive thresholds are kind of negotiated kind of year-by-year and sometimes intra-year. So I don't see that as a headwind kind of going forward in any kind of structural change way. It just happens that it has more of an impact this year in Q4 on top of a growover from an already strong year. So to me, the underlying trends of the strength in card volume, the strength in our enterprise payments business makes me feel comfortable about the ongoing growth rate in that segment. Operator: The next question comes from Cris Kennedy from William Blair. Cristopher Kennedy: It's great to hear about the larger wins. It seems like you're making a lot of progress there. Can you just remind us of the dynamics and/or the economics to Jack Henry as you move upmarket? Gregory Adelson: Yes. Thanks, Cris. Yes, the economics obviously change based on the amount of products that they buy with us. And again, I just referenced this larger one that we just literally won was not part of the account that I gave you. We just won over the last couple of weeks. But that one is asset size isn't -- it's roughly $10 billion in assets, which for us would be the second largest win in our history as a brand-new core as far as asset size. But more importantly, it's the number of accounts. So they have 1.2 million accounts, which is, like I said, 25% greater than any of our current customers, but they're buying a whole host of products from Jack Henry. So that creates a larger scale of opportunity for us than maybe some of the other institutions that are buying only a handful. The key of why I keep referencing trifecta is because trifecta for us really is the opportunity for us to drive 3 of our largest revenue products in with a single client. So really, the rest of it becomes gravy. And so it really does depend, Cris, but when we go in to sell a deal, we try to sell them everything we have. Some of it also could be timing. If the contract terms on some of the other products are not coterminous with the core, you sometimes have to wait to go back and win the digital or the card or other things like that to drive that. But economics really, truly vary. Like I just said, the $10 billion opportunity could look a lot greater than a lot of our other opportunities, and it's smaller in asset size. Operator: The next question comes from Will Nance from Goldman Sachs. William Nance: Mimi, I wanted to -- I'm sorry to ask another kind of guidance-oriented question. Very clear that the fourth quarter is not kind of indicative of a jumping off point. I just wanted to pressure test a couple of things in the fourth quarter on that statement. When we think about some of the things you called out, I think on the complementary side, lower digital account growth and then on the margin side, normalization of commissions in health care as well as the commencement of some of the public cloud spend and some of the duplicative costs there. And I was wondering if you could just maybe talk to either why those wouldn't continue into next year or if they are and we're supposed to kind of take from that, that you're factoring that into the budgeting process as you go through it. If you could just kind of speak to your confidence about like levers that you have to offset those things because you obviously have pretty good visibility on them as of today. Mimi Carsley: Yes. Happy to, Will. And I appreciate your acknowledgment that it's a little early for FY '27. But yes, I think particularly some of the headwinds that we see in Q4 around the digital account growth, it just happens to be the size of some of the wins previously. So we have some bluebirds that are scheduled to come on, and we'll see what the mix for the remaining year of the sales team wins look like as it impacts next year's implementation, but no concerns there at all. As Greg mentioned, we feel great from a competitive parity perspective and our -- both the robustness of the pipeline and the wins we're getting. So no concerns there of that being a carryover into FY '27. On some of the expenses that you mentioned, we mentioned in previous quarters that some of that savings particularly around some of the timing on the commissions as well as some of the timing from the expense medical claims being lower, really just created an opportunity for more of like a onetime windfall, if you will. And we've seen that at the beginning of the year, we talked about the $20 million to $40 million, and we're now set to deliver $75 million to $95 million. So we'll see where we start next year, but we always start conservative with the ambition that that's the floor and look to produce more. But nothing structural. But you're right, we expect kind of a normalization that should probably produce a little bit of a front half grow over challenge relative to the savings we saw this past year. But we continue to look at every position and every project with a refined eye to making sure it makes sense for the business. Gregory Adelson: Will, one thing I do want to emphasize related to the digital backlog is that the importance of us winning these deals from -- with existing Jack Henry clients from our competitors is why we continue to emphasize this. But right now, in our digital backlog, the digital wins with existing Jack Henry clients from competitors is twice the size of the backlog for the core wins. So that puts that in perspective of, again, we are winning some larger deals back in the Jack Henry base of deals that we did not win years ago. William Nance: Got it. That's super helpful. I appreciate all that color. And then maybe if I could just kind of ask a little bit more longer term of a question, and I should acknowledge despite some of the headwinds that you mentioned earlier this year, this is one of the best years that Jack Henry has put up from a margin expansion perspective in many years, and that's despite a more flattish back half of the year. And so I just want to acknowledge that you're kind of doing that with some of the headwinds that I think an earlier question mentioned. And so just wondering, as you look out, particularly in the context of the acceleration in core wins and a lot of the sales momentum that you have, how do you kind of think about that long-term margin expansion target? And just given what could be a faster pace of top line growth, like is there is there room to operate at the higher end of that margin expansion target while the sales momentum is going strong. Mimi Carsley: Yes. I think your goals are in line with our goals. We know that margin expansion is one of the key pillars from a shareholder value creation, and we are highly motivated to drive that. Not talking about any particular year, so this is not a reference to '27, but more kind of the near-term horizon. We've talked about there's a number of great tailwinds that will help us, whether that is the mix of the new products coming to fruition at higher margins, whether that is moving to a public cloud environment, whether that is AI and continuous improvement efficiencies. So we think there's definitely opportunities to improve the margin profile of the company. Operator: The next question comes from Dave Koning from Baird. David Koning: Nice job. One thing, corporate, just that segment grew super fast. Hardware you called out. I think that's pretty lumpy. But you made a comment that you expect growth in all 4 segments. Historically, corporate was kind of a decliner. Is there something that's changed there? And is it maybe less lumpy? Or is there some extra growth you expect? Maybe just discuss that a little bit. Mimi Carsley: Yes. I appreciate the question, Dave. I agree, hardware can be lumpy, and we saw that as a big headwind last year. It's hard to say what we expect for next year yet in terms of hardware. We did have an increase a little bit this year that's produced some wins. I would say, in general, that segment while we manage it quite tightly, it doesn't have the same operating characteristics as our other segments. And so it tends to be a little bit more ancillary services than key areas of revenue. David Koning: Yes, that's fair. And then just one last one on network. The network incentives, I get what they are. Just from a magnitude standpoint, is that like a -- I know it's lumpy, but is that like a 1% to 2% headwind in Q3 and Q4, just so we can understand kind of normalized. Mimi Carsley: Yes, I would say probably combined, looking at it from a combination perspectively and holistically across it. And I would focus more on the card volume itself as being more of an indicator forward and that strength, that continued strength of the consumer we think will lead to network incentives this year, just the threshold was pretty high. Gregory Adelson: Yes. And the other thing is on network incentives. It's an aggregate of all of our card association relationships and a lot of it is also predicated on average spend, not necessarily transactions. So we get paid on transactions. Obviously, the interchange is generated at the larger spend dollars. So some of that is predicated on spend dollars going down, but not necessarily our transactions going down for the network incentives. Operator: The next question comes from Kartik Mehta from Northcoast Research. Kartik Mehta: Greg, I realize there hasn't been as much M&A activity at least so far in 2026 as some anticipated. But if M&A activity picks up, do you think that impacts at all the number of RFPs that might be there for the core over the next couple of years? Gregory Adelson: I do. I do think that a lot of opportunities that tend to happen are folks that are undetermined on what they're going to do in the long term on whether potentially being acquired is an alternative or kind of preparing themselves for that through the process. So as you can tell, a lot of folks that maybe are going to be potentially looking to be purchased, they're going to be less likely to do an RFP at that point in time. So it can have an impact on both ways. But based on what we have seen, to answer your question, Kartik, we've seen a really steady dose. I think that the -- if you take the average number of RFPs that we typically talk about in a year, which is roughly 200, I think that number will be closer to 250 to 275 over the next couple of years with, one, the unrest that's going on at some of the competitors, but also just the whole M&A story itself. Kartik Mehta: So even with increase in M&A, that should not -- it should actually increase your opportunities? Gregory Adelson: In both ways, right? So we typically win more than we lose, right, in the M&A side. And then I think with the opportunities for us to continue to win our fair share of pure competitive takeaways. Kartik Mehta: Yes. And then just one last question for you or Mimi. In the past, you've talked about whenever there is some kind of an economic event, if banks get a little skittish, there's a portion of the business that might be impacted because it's a little bit faster sales cycle than the core or some of your other products. At this point in time, what percentage of the business do you think could be at risk if the economy slows or the banks get a little bit worried about what's happening? Mimi Carsley: Yes. So overall, we have not seen volatility related to the economic related to global issues happening. I would say, and something we've mentioned historically is the card business has the most sensitivity to macroeconomic. But overall, we have not seen a big change in the mix of that kind of exposure, if you will, to the economy. Gregory Adelson: Yes. And I think -- so specifically consumer sentiment drives a lot. And as you know, we have -- the bulk of our card business is debit, and that tends to be the one that gets pushed. But regardless, I mean, I don't know any of the products that we've seen. And again, we just came out of our SI event in Salt Lake and the feedback from our clients was, I mean, they're going to spend more and more because they know that that's their way to combat a lot of things. Technology solves a lot of their problems. Operator: The next question comes from James Faucette from Morgan Stanley. James Faucette: Greg, I want to circle back to a comment you made a few minutes ago that you're seeing increased engagement with consulting and systems integrators. And just wondering with those conversations, if you view that as a potential source of better implementation efficacy, especially if you can enlist the SIs to do a lot more of the work. And then just thinking about that as a potential incremental channel or point of leverage. Gregory Adelson: I'm really glad you asked the question, thank you. So absolutely, the things that we have found through these conversations, and we've had a multitude of conversations with 2 particular firms in particular. So I would say that, one, they are able to help validate the things that we were doing in the space as compared to others and giving us that feedback. And so we feel really good about that. Two is what you described, which is they're providing an entree into some of the larger institutions. In fact, I had 2 inbound calls from institutions that came as references from these consulting firms, and we haven't even inked a deal with either one of them yet. And so they're providing that level of validation that, hey, Jack Henry can play in this larger market. So -- and then thirdly, to your point, do they become potential implementation partners or other aspects? The answer is yes. And we're entertaining all of those things as opportunities present themselves. James Faucette: And Greg or Mimi, I just want to touch quickly on some of the things that you're doing in the Payments segment, continue to be intrigued by those. But I'm wondering how we should think about the margin profile of Tap2Local relative to the current segment margin? And is the Moov economics model initially dilutive because of onboarding support? Or can it be accretive because of the way the distribution runs through existing Banno and FI relationships? And how should we think about those trajectories over time? Mimi Carsley: Yes. I would say -- thanks for asking the question, James. I would say that some of those new growth initiatives are exciting on 2 fronts, both from a top line revenue perspective, still very early days. Greg shared some of the exciting momentum metrics. But from a revenue contribution perspective, it's still very small and expected to grow quite nicely over the next several years. From a margin perspective, because of the nature of the rev share, because of the limited amount of development work we've had to do to get that solution in market because of the partnerships we have on the marketing side with the network, it's going to be great margin. So excited when that comes to fruition. When I look about long-term growth momentum drivers for the business, those are certainly areas that I think will continue to accelerate payment size within our business and overall growth rate. Operator: The next question comes from Timothy Chiodo from UBS. Timothy Chiodo: I apologize if this was already addressed. I'm joining late from another earnings call. I realize it's maybe challenging to talk a little bit about large named competitors, but it's just coming up in a lot of investor discussions with the recent Wells Fargo win for Pismo and Visa overall. And I was hoping you could just let us in the investment community know how you're thinking about them as a potential new competitor that might not have been a part of the thought process maybe 2 years ago and now appears to be gaining some degree of traction. Gregory Adelson: Yes. So it has not been asked, Tim. So we'll forgive you for going to the other one first. That's okay. But here's the answer to the question. Pismo is not a full core. So if you even compare it to -- I think some folks had made comparisons to Finxact and Thought Machine and others. By the way, they left us out of there from a comparison standpoint with the things that we've built in the platform. But what I would say is it is -- the term core is really what's been the challenging component here. It has the ledgering capability. That is it. It does not have any of the other -- so people are calling it a headless core because of the UI and lacking of that, but it doesn't have any of the pure functionality of a core itself, which is why somebody like Wells Fargo can spend the money to build that out based on the Visa relationship that they have, and they can hold them accountable for executing based on the Visa relationship that they have. So I think there's a lot of dynamics in a deal like that, that are way more impactful than just what they're supposedly going to be doing with building out a potential core. I really believe that they could be using some of it more as a side core solution set, using the general ledger as a baseline for that. But there isn't any true deposit capabilities or lending capabilities in Pismo today, and I validated that with Visa. I mean we obviously have a strong relationship with Visa, and I have validated that at very top levels. So I think there's a little bit of an overreaction to what is truly going on with Pismo today. And we are not seeing them. I actually talked to our sales folks, and I said, do we see them in any single deal and the answer is no. Obviously, we do see them in card deals sometimes with what they're trying to do with DPS and bringing those 2 things together. But that's my answer for today based on what I know, based on conversations I've had with Visa directly and what our sales team has brought back to me. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Vance Sherard for closing remarks. Vance Sherard: Thank you, Danielle. Management will be participating in multiple investor events over the next few months, and we look forward to our conversations with investors. As Greg mentioned, we will be having our Investor Day on September 15 at our office in Dallas, and that will obviously be webcast. However, if you would like to attend in person, please reach out to Steve Fine on our IR team for more information. In conclusion, we extend our appreciation to all Jack Henry associates for their outstanding efforts, which have set us up to finish a successful fiscal 2026. Thank you for joining us today. Danielle, please provide the replay number. Operator: The replay number for today's call is (855) 669-9658 and the access code is 4124634. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good morning, and welcome to the Restaurant Brands International's First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Kendall Peck, RBI's Vice President of Treasury and Investor Relations. Please go ahead. Kendall Peck: Thank you, operator. Good morning, everyone, and welcome to Restaurant Brands International's earnings call for the quarter ended March 31, 2026. Joining me on the call today are Restaurant Brands International's Executive Chairman Patrick Doyle; CEO, Josh Kobza; and CFO, Sami Siddiqui. Following remarks from Josh, Sami and Patrick, we will open the call to questions. Today's discussion may include forward-looking statements, which are subject to risks detailed in the press release issued this morning and in our SEC filings. We will also reference non-GAAP financial measures, reconciliations of which can be found in the press release and trending schedules available on our Investor Relations website. As a reminder, organic adjusted operating income growth is on a constant currency basis and excludes results from the Restaurant Holdings segment. For calendar planning purposes, our preliminary Q2 earnings call is scheduled for the morning of August 6, 2026. And now I'll turn the call over to Josh. Joshua Kobza: Good morning, everyone, and thank you for joining us. When we met with you in Miami at our Investor Day in late February, we made clear commitments to the investment community and highlighted a vision for RBI through 2028. We laid out a path to 5%-plus net restaurant growth, predictable earnings growth and an investment-grade balance sheet while being the partner of choice for the best franchisees and the employer of choice for the best talent. We also committed to returning capital to shareholders in a meaningful and sustained way through a growing dividend and the resumption of share repurchases with the goal of delivering consistent double-digit total shareholder returns. And we've acted quickly on that commitment. We began repurchasing shares in March for the first time in over 2 years, reflecting our conviction in the business. Investor Day laid out the vision for the company we are building and Q1 is an early proof point that we're moving in the right direction. We converted strong top line results, including comparable sales growth of 3.2% and system-wide sales growth of 6.2% and a 10.7% organic AOI growth and mid-teens EPS expansion, while continuing to invest behind our brands and return capital to shareholders. This combination of top line growth, cost discipline and shareholder returns is exactly what we're aiming to deliver on a consistent basis. At Burger King, Tom and his team's work under Reclaim the Flame is starting to show up in the numbers. We saw strong performance on both an absolute and relative basis this quarter, delivering nearly 6% comparable sales growth in the U.S. and significantly outperforming the industry. Importantly, that performance wasn't driven by 1 collaboration or campaign. Over the last 4 years, the team has strengthened the foundation of the business from restaurant standards to the quality and consistency of the guest experience, and that's now enabling our brand elevation efforts to land more effectively. In Q1, we continue to take a balanced approach to value and family offerings and layered on exciting improvements to the Walker, both of which are driving higher engagement and repeat visits. In addition to the momentum of Burger King, both International and Tim Hortons delivered their 20th consecutive quarters of positive comparable sales, reflecting the quality of our franchisees, our brand strength and our teams. International continued to stand out, delivering 5.7% comparable sales and 11.1% system-wide sales growth, reinforcing its role as one of our most important long-term growth engines. We also closed our Burger King China joint venture with CPE, a milestone we're excited about and one that sets the business up for the kind of growth that we know is capable of. Overall, the momentum we built in Q1 gives me confidence. It reflects focused execution, engaged franchisees and the strength of the plan that we laid out in February. We're executing against it, and we're doing it in a way that the founders of our brands would be proud of with discipline and ownership mindset and a genuine commitment to building something durable for our franchisees, our guests and our shareholders. With that, let's turn to our segment highlights, starting with Tim Hortons, which represents roughly 41% of our operating profit. Tim delivered comparable sales growth of 1.5% in Canada, outperforming a relatively flat QSR industry amid a backdrop of lower consumer confidence and unfavorable weather in January and March. Growth was broad-based across all dayparts, with notable strength in morning and late night, largely driven by cold beverages and breakfast students. We remain focused on defending and extending our leadership in coffee, breakfast and baked goods. In Q1, we achieved the #1 position in Brand Health's best breakfast ranking for the first time, leading our nearest competitor by approximately 2 points, and we're focused on building from that position of strength. During the quarter, we launched our $3 breakfast sandwich or wrapped with a coffee, supporting our value leadership and ensuring Canadians can access their favorite core Tim's products at a great everyday price. We continue to build our presence in the PM daypart. Our $8.99 loaded wrap meals helped drive higher combo incidents throughout the quarter. And with continued execution improvements, we remain confident in the long-term opportunity to grow this part of the business. Across dayparts, beverages remain a key driver of our business. Beverage sales grew 2% year-over-year with another quarter of standout performance in cold beverages, up 10%; and continued strength in espresso-based drinks and tea, up 8%. As we move into the warmer months, we're excited to provide guests with more cold beverage innovation, including recent launches like protein and zero sugar centers. Underpinning these results is continued operational progress. We're making steady improvements with strong execution from our restaurant owners and team members reflected in an average Google rating of 4 stars for the quarter. Overall guest satisfaction also improved over 2 points year-over-year, with the PM daypart reaching an all-time high in Q1. At the same time, we're enhancing our digital experience and deepening guest engagement with a nearly 40% digital sales mix in Q1, supported by initiatives like roll up to win, which returned in February with a refreshed more engaging experience. We're looking forward to launching our loyalty partnership with Canadian Tire in the second half of the year, bringing more guests to the Tim's platform alongside another iconic Canadian brand. Finally, on development. While Q1 reflected normal seasonality, we remain confident in our path to accelerate growth in 2026, following our return to positive NRG in Canada last year. Tim is a brand that earns its industry outperformance quarter-by-quarter, through quality food and beverages, compelling everyday value, a consistently high-quality guest experience, and as a result, the loyalty of millions of Canadians who make it part of their daily routine. As we head into summer with an exciting innovation pipeline, continued focus on operational excellence and accelerating unit growth, we remain confident in the path ahead for this business. Turning now to International, which represents 29% of our operating profit. International delivered another quarter of strong results with comparable sales of 5.7% and net restaurant growth of 4.5% driving system-wide sales growth of over 11%. Performance was driven by solid execution of both menu innovation and everyday value, leading to broad-based momentum across some of our largest markets, including Burger King in Spain, Germany, Australia, Brazil, China, Korea and Japan. Our local teams continue to launch innovative products that are locally relevant, create guest excitement and drive incremental visits. We expanded baby burgers into Germany and Spain, building on the platform's strong performance in France last summer. In Korea, premium beef innovation like the Garlic Bulgogi Maximum Burger drove positive guest response, while in Australia, Hungry Jack's launched new unique beverages like Natell is coffee. At the same time, innovation must be balanced with strong value-for-money positioning. Markets like Brazil continue to execute a solid base of everyday value. While in China, we recently launched a value-oriented whole muscle chicken sandwich that has been met with incredible guest feedback. This combination of innovation and value has enabled us to deliver some of the strongest and most consistent international sales results in the industry over the past few years. During the first quarter, we also closed our joint venture agreement with CPE at Burger King China. In March, Patrick, Sami, Tiago and I spent time in Beijing with the Burger King China team, including Chairman Johnson Wang and Deputy CEO, Danny Tan, and we all came away energized about the path ahead. The team there is exceptional, and the early results speak for themselves with double-digit comparable sales growth and notable margin improvement in the first quarter. The team is already demonstrating its restaurant expertise and deep knowledge of the Chinese market with a clear plan to optimize the supply chain, enhance the brand's marketing and improve restaurant build costs to drive stronger returns. As we highlighted at Investor Day, BK China is an important component of our path back to 5%-plus NRG by 2028. And CPE has injected $350 million of primary capital into the business, fully funding development over the next 5 years, starting with a return to modestly positive net restaurant growth this year in 2026. While we were in China, we also spent time with the Popeyes China team, which is working to solidify brand positioning and increased awareness. We're looking forward to accelerating development this year and positioning the business for success under a new long-term operator within the next 2 years. The first quarter demonstrated how the International business continues to be a reliable source of growth for us, consistently outperforming, building on a strong base of scaled markets and with no shortage of catalysts ahead, from CPEs ambitions in China to Popeyes continued acceleration all around the world. Shifting now to Burger King, which represents roughly 18% of our operating profits. U.S. same-store sales grew 5.8%, outperforming the burger QSR industry by over 5 points this quarter. This is the result of 4 years of disciplined execution from Tom and his team that has positioned us and the system to successfully welcome guests back through impactful marketing. Our marketing continues to be anchored on 3 key tenets: elevating our core menu, connecting with families and kids and delivering consistent everyday value. This quarter, we launched the Elevated Whopper, featuring a new glazed spun, cremer mayo and clamshell packaging, which is driving positive guest feedback and the highest whopper average unit volumes in over 3 years. In April, we drove further trial and engagement with lapsed guests through nationwide Whopper Wednesday, reminding guests why our flame grilled burger is the very best in the industry. We also rolled out $3.99 King Junior Meals as part of our strategy to reengage with families and kids and saw continued growth in King Junior average unit volumes as a result. And on value, our $5 DUO and $7 Trios continue to perform well, complementing our premium offerings and providing guests with choice and a consistent value message. A key highlight this quarter was our direct engagement with guests and the launch of our brand elevation campaign. In February, Tom personally spoke with more than 1,500 guests as part of a listening campaign to better understand what they love about Burger King and where we have opportunities to improve. The feedback was really encouraging. There is clear late in love for the brand. And we received valuable input that's shaping our menu elevation road map and providing the team with ideas to further strengthen brand love and deepen guest connections. Our marketing efforts are supported by ongoing improvements in operations and strong alignment with our franchisees, as evidenced by their 97% vote to maintain their elevated ad fund contribution, which we announced at Investor Day. Overall, this was an exciting quarter for Burger King, and it serves as a strong proof point that our strategy is working. When we invite guests back to experience a better Burger King, they come and they stay. What's most encouraging is that these results are not isolated data points. They reflect a brand that's earning back guest trust and building real momentum and we believe we're still in the early innings of that journey. Now turning to Popeyes, where net restaurant growth of 1.2% was more than offset by a comparable sales decline of 6.5%, resulting in system-wide sales declining by 3.9%. While results were softer than we'd like to see, we have a clear understanding of the underlying drivers and are moving quickly to address them. At Investor Day, Peter laid out 3 key pillars required to get Popeyes back on track. One, improving in-restaurant execution and guest service; two, narrowing our focus on our core offerings; and third, rebuilding a consistent everyday value proposition. During our franchisee road shows in April, we brought these priorities together into a clear actionable framework, which was met with strong alignment and excitement from our franchise operators. To improve execution, we have increased field support to enable higher frequency, shoulder-to-shoulder training on our brand standards. We held our inaugural restaurant general manager guest experience rallies across roughly 20 cities over the past 2 months, featuring interactive training focused on delivering great guest service. I attended our rally in Miami and saw firsthand the incredible energy and engagement from our managers. We're beginning to see early improvements in product satisfaction and operational metrics, though it will take time for these to translate into top line results. We're also focused on the core of what we do best: bone-in chicken, tenders and the sandwich. A tighter focus makes it easier to execute well in the restaurant and ensures our marketing is working harder behind fewer stronger bets. To rebuild a consistent base of everyday value, we launched our $5 Faves platform, offering guests choice of their favorite Popeyes items at an affordable price point, and we're already seeing signs of underlying improvement in value scores. We'll continue to evolve this platform while exploring additional offerings for group occasions. So while there's more work to do on Popeyes, the plan is clear: franchisee alignment is strong, and the energy in the system tells me we're ready to execute and deliver some great results. I'm confident our efforts will support a return to positive comps in the second half of 2026. Finally, Firehouse Subs delivered net restaurant growth of 8.1% and relatively flat comparable sales, resulting in 7.2% system-wide sales growth. We continue to see solid development momentum, supported by a strong pipeline of franchise partners, average paybacks of less than 4 years and increasing brand awareness. As highlighted at our Investor Day, I'm excited to see Firehouse to become a more meaningful contributor to RBI's growth over time and remain confident that the brand will deliver another year of accelerated unit growth in 2026. With that, I'll pass it over to Sami to talk through our financial results for the quarter. Sami? Sami Siddiqui: Thanks, Josh, and good morning, everyone. Today, I'll discuss our Q1 financial results, capital structure and 2026 financial guidance. But before that, I want to recap a few takeaways from our Investor Day. First, we remain confident in the durability of our long-term algorithm anchored by approximately 3% same-store sales and 8% organic AOI growth, supported by disciplined cost management and accelerating net restaurant growth. We are on track to deliver roughly 1,800 net new restaurants per year by 2028 coming from 3 building blocks: 300 to 400 from our businesses in the U.S. and Canada, 300 to 400 from our 3 brands in China and around 1,100 from international including about 700 from our top 10 growth markets and 400 from the balance of the portfolio. Second, we are continuing to simplify the business and have a path to sunset restaurant holdings by the end of 2027. Third, we announced our intention to become an investment-grade company and remain on track to achieve corporate investment-grade leverage by 2028. And finally, we continue to generate strong free cash flow, which allows us to do it all: invest in high-return organic growth opportunities, support our path to investment-grade leverage and return capital to shareholders through a growing dividend and share repurchases. As Josh mentioned, we resumed share buybacks in March and have repurchased $60 million through April 30, an indication of confidence in our business momentum and our view that our shares remain undervalued. Now on to our results, beginning with our financials. In Q1, we delivered comparable sales growth of 3.2%, net restaurant growth of 2.6% and system-wide sales growth of 6.2%. We translated that to organic AOI growth of 10.7% and nominal adjusted EPS growth of 14.6%. Strong comparable sales were led by nearly 6% growth in both international and Burger King U.S. And while Q1 NRG marks a low point for the year due to typical seasonality, we remain on track to accelerate in 2026. Organic AOI growth outpaced system-wide sales growth this quarter, driven by a few factors. First, we saw $12 million of net bad debt recoveries, primarily stemming from international compared to approximately $8 million of net bad debt expense in the prior year period. Second, we benefited from a $12 million decline in segment G&A, excluding restaurant holdings. And third, we closed the Burger King China joint venture transaction with CPE on January 30 and began recording royalty revenues from BK China in the International segment once again. These tailwinds were partially offset by a $13 million AOI drag from Tim Hortons advertising and other services compared to $2 million in the prior year period, primarily due to the timing of certain marketing-related expenses. We expect to see a similar AOI drag in Q2, which will partially reverse in the back half of the year. As a result, we anticipate a full year AOI drag of approximately $20 million in 2026 compared to $14 million in 2025. As a reminder, the Tim Hortons advertising expenses and other services line item includes CPG marketing expenses, which are funded by Tim Hortons Corporate. Now turning to EPS. Adjusted EPS increased to $0.86 per share this quarter from $0.75 last year, representing nominal growth of 14.6%. This was driven by our AOI growth as well as a modest year-over-year decrease in adjusted net interest expense from $128 million to $124 million and an FX tailwind of approximately $0.04. Our adjusted effective tax rate this quarter was 18.5%, in line with our expectations for the full year of between 18% and 19%. Moving to cash flow and capital allocation. We generated nearly $200 million of free cash flow in Q1, including the impact of $53 million of CapEx and cash inducements and a $26 million benefit from our swaps and hedges. In March, we resumed share repurchases, repurchasing a total of $34 million of stock in the quarter and $26 million in April. We remain on track to repurchase approximately $500 million for the full year 2026 largely through a programmatic approach to buybacks subject to trading dynamics. In total, we returned approximately $315 million of capital to shareholders in Q1 through dividends and share repurchases. We ended the quarter with total liquidity of approximately $2.3 billion, including $1 billion of cash and a net leverage ratio of 4.2x. Finally, I'd like to discuss our 2026 financial guidance. First, we continue to expect segment G&A, excluding restaurant holdings, of about $600 million to $620 million. Second, we continue to expect net adjusted interest expense to stay approximately flat year-over-year in the $500 million to $520 million range based on a mid-3% average SOFR rate, which flows through to approximately 15% of our debt. Third, we continue to expect 2026 CapEx and cash inducements including capital expenditures, tenant inducements and incentives to be around $400 million. Fourth, we continue to expect Tim Hortons supply chain margins to be roughly in line with 2025 levels. And last, there are a couple of things to keep in mind for restaurant holdings, which, as a reminder, is not included in our organic AOI growth. In Q1, Restaurant Holdings AOI was negative $1 million, comprised of positive $8 million from our Carrols Burger King business, offset by a $9 million loss in our international start-up businesses, Popeyes China and Firehouse Brazil. For the 2026 full year, we continue to expect total RH AOI of roughly $10 million to $20 million. The expected year-over-year decline in RH AOI reflects the impact of Carrols restaurant refranchising, continued beef inflation and incremental investments in our international start-up businesses that we expect to continue until we transition ownership to new local partners. We are closely monitoring beef costs and expect normalization over time with relief now anticipated closer to 2027. So stepping back, Q1 provides a solid foundation for the year. We are well positioned to accelerate net restaurant growth in 2026, deliver another year of approximately 8% organic AOI growth and increasingly translate that growth into strong earnings. Our resumption of share repurchases this quarter is a clear reflection of this confidence. And with that, I'll turn it over to Patrick. J. Doyle: Thanks, Sami. I'm going to start with some thoughts on the overall restaurant category. Share a couple of observations on our recent trip to China and our international business generally, and then I'll shift to Burger King. I've been working in the restaurant industry almost 30 years. I've never seen better proof of how executing well on the fundamentals for guests can drive such differentiated outcomes. I have an exercise I go through on a regular basis: I sit with a piece of paper and write down whether I think the average customer is having a better experience today than they were a year ago. If the food, service and image are generally better and the perceptions of value are improving, sales are going to follow. And marketing's job is simply to amplify that truth. If you aren't convinced the truth is better than a year ago, you can't market your way around it. There are notable successes in the industry right now, and that includes Burger King, and they're putting up great numbers. And there are others in the industry where things are clearly getting worse and they are losing market share. Our teams are obsessed with being on the right side of that equation and hitting our 3%-plus comp gold this quarter is a reflection of that. Now turning to China. It's been a while since I was last there, and I came away encouraged by what I saw on the ground. We're finally starting to see some signs of improving consumer momentum. It's still early, but it feels like things are improving on the macro front after a number of rough years coming out of COVID. At Burger King China, our partnership with CPE is off to a strong start. They bring exactly what we were looking for in a partner: deep local operating experience and a clear focused plan to improve the business. The pace of execution on the ground is impressive, and early results are giving us real confidence that we made the right decision at the right time to position this business for growth as the consumer recovers. Burger King China is delivering on every element of my simple test. Food quality is improving, service is better, the restaurants look good and they're hitting the mark on value. And as a result, sales are very, very strong. At Popeyes China, it's clear we have a tremendous opportunity. And the team is focused on getting the brand positioning right so we can scale it with the right long-term partner. And at Tim's, I walk away confident about the potential of the business. There's still work to do to fully unlock that opportunity including incremental capital to support development, but it's a great brand with strong awareness in a huge and growing category. Our overall International business is outstanding. Our comps are some of the best in the industry. Our system-wide sales growth, which has averaged nearly 13% over the past 3 years is best-in-class and the free cash flow generated by the business is fantastic. We see lots of opportunity for continued outperformance. Congrats to Tiago and the team for yet another remarkable quarter. Now on to Burger King U.S. We've consistently said that if we put in the hard work, sales will follow. What you saw in our Q1 results is a reflection of that. And the great marketing we're seeing today, whether it's around the whopper or collaborations like SpongeBob or Mandalorian, only works because the in-restaurant experience is consistently better than it was a year ago. I particularly want to thank our franchisees. They've shown tremendous trust and alignment with our team and are starting to see the return on their investments, and we remain committed to improving those returns for our franchisees. We've made progress, but we are close to being satisfied. The most exciting part is that while we're proud of the progress we've made and the sales growth we're seeing by truly listening to our guests, we're also confident in our ability to continue improving our food, our service and the image in our restaurants moving forward. On top of that, guests know that they can come to us for consistent value and choice. That's how we'll continue to generate profitable growth in our restaurants. This is a business in company with real momentum, improving fundamentals and a system that is increasingly aligned and executing at a higher level. We've been seeing the signs of this internally for quite some time, but now our top line results are starting to make that progress visible to you all, and I'm confident this will continue. This quarter is not an outlier, and that's what gives me confidence in where Burger King and RBI more broadly is headed from here. With that, I'll turn it over to the operator for questions. Operator: [Operator Instructions]. Our first question will come from Dennis Geiger from UBS. Dennis Geiger: I wanted to ask a bit more about Tim Hortons. Encouraging to see the solid results despite the weather including the upside that you drove to the overall category. But just curious if you could help us think through where the Canadian macro environment is, where the Canadian consumer is, maybe how that's been impacting results of late and really how you think about the outlook for the brand looking ahead, if we do have a more difficult backdrop in that market? Joshua Kobza: Dennis, it's Josh. Thanks for the question. I'll share a few thoughts on Tim's in Canada macro, Sami or Patrick feel free to add on, if you like. I think when you step back and you've got to remember, Tim is an amazing business. It's one of the best restaurant businesses in the world, has fantastic brand scores, the #1 brand in Canada, really great unit economics, wonderful restaurant owners, and I think we've put up a pretty great track record here with 20 consecutive quarters of same-store sales, and I think that reflects the underlying strength of this business. There was a bit of macro softness in Q1, which you saw in those sector results. And I think importantly, we outperformed the sector by about 150 basis points, which is, I think, really remarkable and something we've done consistently. I think some of that macro softness is probably driven by a couple of the factors that I mentioned earlier and you cited. The weather was a bit tough. That happened sometimes in Q1, but I think particularly this year, January in Toronto, I think it might have been the most know that they've had in Toronto ever on record. So it was a bit rougher, and that's why we called it out, but that happens in Canada in Q1 sometimes. And there was a bit of a different consumer confidence. I think a bit of that was probably caused by some of the higher gas prices that you saw recently, but this happens from time to time. You have a bit of macro ups and downs. If you go back a year, actually, we saw something similar in Q1 and we printed a really great year overall. So our job, I think, is to deliver throughout any ups and downs that you see in the short run. And I think those things tend to even out over the medium term. And with regards to this year and the things we're doing, I think our plan highlights some of the great strength of the Tim's business and some things that only we can do. A few of them are that we're going to continue investing as we're able to do through the cycles. We're actually going to increase our investments in Canada this year. We're going to increase the pace of remodels doing, I think, 300-plus remodels in the country, that's hundreds of millions of dollars of investments back into our local markets. And we're also going to increase the pace of new restaurant openings. So we're going to be opening up restaurants, bringing Tim's to new markets and new communities. So we're making huge investments that I think almost nobody else is making or can make in Canada. I think there's also something very exciting that I mentioned that's coming up later this year, which is our partnership with Canadian Tire. Being the #1 most loved Canadian brand makes us absolutely the partner of choice for other iconic Canadian brands. And I think bringing those 2 brands together to deliver even more and differentiated value to our guests is going to be something very exciting for Tim's as we get into the back half. Another version of those partnerships that we'll bring to life is that we also are the partner of choice for some of the biggest IPs out there. So some of those global kind of family partnerships that you've seen us do elsewhere, we'll bring some of those to Canada, and we've got a couple in the lineup that we're particularly excited about that we think are going to generate a lot of excitement and a lot of engagement within our Tim's space. And lastly, I would tell you, the cold beverage and PM food calendar, that really ramps up as we get into the summer. So some of the food items that are going to drive our PM food start to come out here over the next couple of months and into the back half of this year. And I think our power as a brand is that we're really able to drive categories forward to transform categories and bring whole new ideas and things to Canada. We've done that in the past. That's a lot of our history as a concept, and we're going to do that again here going forward. And I think that's a unique asset of Tim's. I think you're bringing those things together and more, and that's what gives us confidence about the trajectory of the business regardless of any blips that we might see on the macro side. Operator: The next question comes from David Palmer, Evercore ISI. David Palmer: Great. And thank you for that color on Canada and Tim's very helpful thought. With regard to other international markets, I know there's concern that maybe some developed markets, Europe, for example, might be dealing with similar types of macro headwinds and obviously, the energy cost issue, could you speak to just what you're seeing around the world in terms of the consumer and market share? And any sort of adjustments you might be making as you see the macro conditions outside the U.S.? Joshua Kobza: So on our International business, if you look broadly across the business, as I mentioned earlier, really good results, over 5% same-store sales. So I think Thiago and all the teams and our partners around the world are doing a very nice job. If we break that down a little bit more into some of the regions, within our EMEA business, we actually had a very good quarter. So the EMEA business results were relatively in line with the rest of International. So some puts and takes across markets. But yes, I think when you look at the aggregate of that business, we continue to see good momentum. Obviously, we're keeping an eye on energy costs that can flow through things like utilities and all. So that's something we'll definitely watch over the rest of the year. But I'd say, so far, in the first quarter, the business there performed pretty well. The other big highlight I would call out is our Asia Pacific business, which has been performing wonderfully. I called out a few of the markets, but it's pretty broad. Our China business, as we talked about, is doing great. Johnson and Danny are doing a wonderful job posting double-digit comps. So off to a great start there. Japan continues to be a real standout with well into the double-digit comps again. So they're doing really well. Australia had a good quarter. Korea had a good quarter. So really across the Asian markets broad-based strength. And within Latin America, I would say, Brazil was a positive point, both across our Burger King business and especially Popeyes, which has been doing terrific in Brazil. So hopefully, that gives you a little bit more color on some of the biggest markets around the world, but overall, pretty happy with the quarter across the International business. Operator: The next question comes from Danilo Gargiulo from Bernstein. Danilo Gargiulo: While it's very encouraging to see the consumer response to Burger King U.S. relaunch of the whopper. And it seems you were able to reach mid-single digit even without being dragged into value work. So I was wondering if you can maybe expand on the sustainability of the results and perhaps if you can focus on your comments on these not being isolated data point? So can you share maybe your expectations for the brand now in the U.S., whether you think this will be fair to be assuming low to mid-single-digit growth in the coming quarters and/or increasing 2-year stacks, however, you may want to play this, in it in light of the momentum that the brand is experiencing or do you think that Burger King will remain a low single-digit same-store sales contributor to your trajectory going forward? Joshua Kobza: Thanks. I'll touch on a few thoughts on Bering here. And I think Patrick referenced it well. The really -- the thing that gives us so much confidence about what we're doing with Burger King is that what's happening now is building on underlying work that we've been doing on the foundation for the past 3 or 4 years. we focused on all the basics. We improved operations really dramatically in the consistency of operations in the system across the whole country. We made important improvements to our franchisee base that we're going to continue to do over the next few years. We've done a ton of remodels, made sure that the physical asset base looks a lot better and is ready to welcome back all kinds of guests and especially families that you see coming back. And now you started to see us really talk about that and build upon it with some of the culinary improvements that we've made. And I think Patrick referenced, one of the things I think, Tom and I'd love to say it too, like marketing amplifies the truth. And the important thing here is that we've built a much better version of Burger King that you're now seeing us talk about. And I think that's what gives us a lot of confidence. And we've now started to talk, I think, about the things that we're doing. And we're seeing the momentum build. We saw it with SpongeBob in the back half of last year. We were able to really effectively bring families back into the restaurant. But we saw things progressively build then again as we got into the first quarter here, where we started out with listening and then brought out the elevated Whopper, now building upon it further with Mandalorian. So I think that, that's kind of building the dynamic of what we're doing is what gives us confidence. And I also think we sort of -- we found our way into an amazing insight with all the listening. I think it actually taught us all a lot. It showed us that there is incredible latent love for this brand. We do these calls with our guests and hear what they have to say, it's amazing how many people -- they start out with, I love Burger King. That's the theme they love Burger King and they want us to do better. So what Tom and the team were working on resonates so well. And I think that's why you saw our guests embrace so strongly what we did with the whopper. And what you'll see us do over the next few years is we'll bring out kind of further and further chapters of all of the amazing things that we're doing to make Burger King even better, whether that's things like you probably just saw recently on Instagram, fixing all of the signs around the country, continue to remodel our restaurants. And we have a really incredible, I would say, roadmap of menu elevation ideas that have come from our guests and our team that will allow us to continue the momentum over many quarters and years to come. In terms of the, what you mentioned, Danilo, on kind of what the expectation should be? What I would say is I would stick with the definition that we've had over the last couple of years. We want to outperform the burger QSR segment consistently year upon year. And I think we've started to do that. This quarter was a great example of it, and we'll look to do that in future quarters and years going forward. Patrick, anything you want to add there? J. Doyle: Yes. I just -- Daniel, I think that we really got to an inflection point in the first quarter. And there were a lot of things that we wanted to talk about at Investor Day, but the timing of it was not an accident. And we scheduled it last year for the first quarter. And partly, it was because our confidence was growing in our execution at Burger King that we had enough improvements in our service levels, in better-looking restaurants, in all of those things that first quarter was when we were going to invite our guests back to take a new look at Burger King and to experience a new better Burger King and the results that we saw we're proud of them. But frankly, at some level, we're expected, given that we are inviting people back. And so we feel very good about where we are. And I guess the thing that I would say is that while we have made great progress, growth comes from continued improvements. We are continuing to remodel our restaurants. So the image that people experience is going to continue to get better. As Josh just laid out, we're going to continue to improve our food across our menu, which means food perceptions are going to continue to improve. We've got great consistent value and our franchisees are executing at a better and better level. So if you do all of that, it ought to drive consistent growth. We're proud of the fact that we have outperformed the category for a couple of years now, and what you saw in Q1 was an acceleration of that. Operator: The next question comes from Brian Bittner from Oppenheimer. Brian Bittner: Sticking on Burger King, again, congrats on those results. It does seem like you've got a great thing going there with the brand's resurgence, nearly 6% comps and now you are ready to accelerate refranchising. And sometimes refranchising this many units, it can cause some choppiness within the system. So as you do embark on now accelerating the refranchising of the RH segment, how do you make sure that the business momentum you have goes without a hiccup? And how do you think getting these stores in the right hands could actually be accretive to the trends of these stores? Joshua Kobza: Brian, thanks for the question. I think we are very focused on how this refranchising process goes and the success of our new franchisees, in particular. And I think we've seen some encouraging signs so far. And I would tell you as we have these discussions, our #1 criteria for the new partners that we want in these -- in the refranchising is the quality of the local operator, that's the #1 consideration that we have. And a couple of things we've seen so far. I was actually -- I spent -- last Friday, I was out visiting restaurants with one of our newest operators that just bought 30 restaurants just a bit north of here, and they're doing fantastic. They're improving the operations of their restaurants. They're getting great managers in all of the restaurants, they're working on planning their first remodels. They're outperforming the system by hundreds of basis points. And so I was really pleased with what I saw. And I can tell you, not just me, but everybody on the team is spending a ton of time with each of the new operators that comes in and takes over some of our restaurants to make sure that they're doing well, and we're hearing all of their feedback to make sure that not just they are successful, but each of our future franchisees who takes on some of the restaurants are successful. So I'd tell you a ton of focus, but pretty pleased with both the quality of the operators we're finding and their results so far. The other thing I would mention is I would tell you that the kind of the top of the funnel, the new transactions that we're seeing, we're seeing a lot of them. We're seeing a ton of interest both from outside parties, but a lot of inside folks as well, both team members from Carrols and people from our corporate teams who are really excited about what we're doing here with the brand. I think there really can't be any greater endorsement of the momentum of the brand and the fact that it's driven by sustainable fundamentals then the very folks who are working on it and driving that success want to become franchisees and be involved and participate in what the brand is doing for decades to come and dedicate their lives and their families' lives to it. So that gives us a ton of excitement. And I think we're going to have a lot of wonderful new franchisees in the Burger King system over the next couple of years. Sami and I, we talked through with every single week kind of the new potential partners, and we're seeing a number of applications every week and ones that we're really excited about. So I feel good about it. I think we have -- I think there's a ton of focus on it, and I think we're going to -- we're kind of setting the course for a great new version of the Burger King system with some wonderful existing and wonderful new franchisees. Operator: The next question comes from John Ivankoe from JPMorgan. John Ivankoe: Firstly, an observation. The execution of the whopper at Burger King really is objectively better. So congratulations on that because I know how much work goes into it, especially across an overall system. So that's first. And then secondly, as we think about brand momentum, from what I understand, you consider approximately 60%, correct me if I'm wrong, of the Burger King U.S. system to be modern. It would seem that if customers were to be reintroduced to the Burger King brand, you would want them to see a modern image restaurant. So the repeat would generally be higher. So I wonder if we have an opportunity to really look at some of the sales momentum in the business, operating momentum in the business and just overall sentiment around franchisees to perhaps accelerate some of the remodels for Burger King in the U.S. And if I could get a sense of where those remodels as a percentage of the overall system are modern as a percentage of the system could potentially end in '26, '27, '28, especially as you do want to accelerate and take advantage of just overall consumer and franchisee momentum as we think about Burger King U.S.? Joshua Kobza: First of all, thank you for the whopper feedback. It puts a smile on all of our faces every time we see that and we're getting guest calls and e-mails that are saying the same thing. I got a wonderful one from a guest by the name of Jim the other day. It said something to the effect of, "I hadn't tried you guys in a very long time. I saw your commercials and you look genuine, so I gave it a try, and you nailed it. And I went back again and you nailed it again." And so we're hearing that very consistently. And -- we all have Patrick's test in mind every day. Are we making our core products better for our guests every day? And we feel like we are. And I think that's really exciting as to the sustainability of the progress. In terms of I think you're right, we're in that 60% range. And we've said consistently that we want that to get to 80%-plus such that almost every Burger King you see in America has that modern clean image. It's going to take a little bit of time to get there. And we've had to strike the right balance of waiting until we were all the way there versus making some progress in talking about it, and we felt like it was the right time with where we are in numbers. Where we run and in operations, we felt we were ready to welcome guests back in today. And to your point on repeat business, that is one of the stats that we look at quite closely. And 1 of the things we saw recently that gave us a lot of confidence that I think we've mentioned is after we did the Spongebob promotion back in Q4, we tracked for each of those promotions, what's our repeat rate? So how often do the guests who come in for some of those promotions? How do they come back in the next 30, 60, 90 days? And we saw the highest repeat rate that we've seen in any of those promotions in a long time, which is another -- it was another data point that gave us confidence that as we brought new folks back in or lapsed guests in the case like the one I mentioned of Jim, that they were going to be happy with what they saw. So I think you're seeing that repeat rates start to increase, which is a great sign of operations quality, but also that we're going to get a really solid ROI out of any marketing that we do. In terms of remodel pace, I think we mentioned in the last quarter or 2 that we still want to get to 85%. It might take a little bit longer than the 2028 time line we had previously outlined. We would love to accelerate that pace. And I would tell you, we are investing pretty aggressively. So in our company stores and the former Carrols stores, we're investing pretty aggressively to increase the pace of remodels from what we did last year. And we're talking to our franchisees about the potential to do more. I think what we need to do is see a bit more sustained momentum of the same-store sales and have that flow through to the franchise profitability. And once we get franchise profitability moving meaningfully back in the right direction, which doing these kind of same-store sales helps an awful lot on that, then I think we have a good opportunity to think about trying to move a little bit faster on the remodels, but we got to do it in that order, I think. Sami, anything that you want to add there? Sami Siddiqui: No, John, I would just add on to what Josh was saying in terms of the pace and we talked about this, I think, a couple of quarters ago when we talked about maybe some of the remodels sort of getting pushed out a little bit. This top line momentum is a great accelerant when you think about it, but we have to look at the whole P&L. And we've talked a little bit in the past about sort of the unprecedented beef pressure that we've seen over the last year. And that those beef prices do remain elevated right now. We'd initially sort of planned for those to wind down for the second half of this year. We're seeing that elevated level of beef costs kind of persist a little bit. This is natural. It's part of a herd rebuilding cycle that occurs in our industry every so often. I think as you see relief on the food cost side, you'll see even more momentum and even more excitement around those remodels, particularly with sustained top line momentum. J. Doyle: I'll add 1 thing, John, which is simply, we've been watching every operational metric improve, and thank you for adding to that, which is we passed the test on the whopper, so thank you for that. And we had to make a decision. When do you really do the big relaunch. When do you invite everybody back when do you think that the experience is enough better that you want to put yourself out there and say now is the time to retry Burger King, and I think Tom and the team nailed it. I mean you can't wait for perfects. But what we are very confident of is that our guest experience at Burger King is going to continue to improve. We're going to continue to give them consistent value. The restaurants are going to continue to look better. And we had seen that in increasing repeat rates, which meant it was time to move and really invite them to give us a new look again. And the experience is just going to continue to improve. And that's what should give us confidence and give you confidence that we're going to continue to see good results in the business. Operator: The next question comes from Chris O'Cull from Stifel. Christopher O'Cull: Congrats guys on the solid start to the year. My question is on Tim's. I know the company is rolling out fountain drink equipment to the system and I was hoping you could just provide an update on where you are in that process and when you expect it to be completed? And then how significant do you believe this could be for lunch and dinner food sales? I mean, is this something that's going to be a slow build where people discover it or is it an opportunity to make combo meals heroes in your messaging for that lunch kind of day part? Joshua Kobza: Chris, you're right, we are starting to roll out fountain machines to the system. We had already had sparkling beverages. If you look at it across the system, we had sparkling quenches but we were doing it out of bottles. So as we get through the rollout here, what that enables us to do is a couple of things. One, it enables operational efficiencies. Obviously, using bottles is pretty complicated operationally. And moving to fountain machines makes things an awful lot easier and faster for our restaurant teams, but it also improves the cost profile of those beverages. And then the fountain machines will also open up a lot of new innovation paths that we have on the cold beverage side. So they'll enable some of the platforms and the drinks that we have in mind over the next couple of years. So it's an enabler, if you will, to, I would say, a next leg of growth in our cold bev business, and so that's pretty exciting. And then I would say lastly, I think you referenced this. As we move into PM food, one of the things that we want to be able to do is to drive more combo incidents. And I think I talked about moving that up in the quarter. And having a comprehensive set of beverage offers through a fountain machine is something that will allow us to drive that combo incidence and build the PM food business over time. So I think all of those things are pretty exciting and hopefully give you some sense of the things to come on our PM and cold Bev journey over the next couple of years. In terms of where we are today, we're about 1/4 of the system rolled out, and we'll finish that, I would say, over the next few quarters. Operator: Next question is from Andrew Charles from TD Cowen. Andrew Charles: One bookkeeping question in my real question. So international AOI saw nice improvements from the release calling out bad debt recoveries. How should we think about that dynamic going forward? And then my real question is about just the algorithm for 3% portfolio same-store sales on average. And curious just based on your confidence, you talked about BK momentum, you talked about the second half Popeyes rebound. Canadian macro is obviously challenged. I mean if you put it all together, do you believe the 3% growth applies to 2026, you face more challenging comparisons over the balance of the year? Sami Siddiqui: Andrew, I can take the beginning of that question. So yes, we called it out in our prepared remarks around a particular sort of international situation where we had an outside bad debt recovery, that's a one-off sort of occurrence. I think if you look at the performance even absent that one-off, we were still above algorithm, that 8% AOI algorithm. We were really, really pleased not only with the top line performance, but really with the bottom line growth. So we wanted to call out that one. I think as you kind of move throughout the year, we'll always call out one-off items, though we don't anticipate any sort of large one-off sort of items like that again. Joshua Kobza: And on your question on the 3% same-store sales, we laid that out as the benchmark. We've actually been pretty consistent about that over the years, and we reiterated that at our Investor Day in February. We're really pleased that in our first quarter reporting to you since then, we cleared that 3% bar, and what I can say is that sitting here where we are in early May, we continue to feel good about how we're performing against that threshold in Q2. Operator: Next question is from Lauren Silberman from Deutsche Bank. We're going to move on to the next question is from Sara Senatore from Bank of America. Sara Senatore: I guess maybe a housekeeping question and then a question about Popeyes. So you mentioned, I think, the idea that beef remains quite high, but -- and so the topic of franchisee profitability emerges, is it fair to assume that franchisee margins were under similar pressure to the RH margins in the first quarter? And I guess is the implication that perhaps you're taking less price and inflation or even the competitors just sort of thinking through the value proposition versus weighing that against franchisee economics? Sami Siddiqui: Yes. I can jump in there, sara, on the profitability side for our BK system. I think first off, it always starts with the top line, right? And we were really pleased with the top line performance. I think, yes, it has been a tough backdrop on the beef side. I think if you look at the margins year-on-year, keep in mind, last Q1, so Q1 of 2025, you had just started to see the beef costs run up and so as you think about the compare in Q1 of '26 where we've been -- we've continued to see all-time high beef costs, you'll see kind of as you think of the food basket, you see basically high single-digit food cost increases. And keep in mind, beef is about 25% of our food basket. So that's what's driving, I'd say, a more outsized year-on-year increase in Q1. Though, as you go through the rest of the year, and you think about that food cost basket, it will kind of revert to more mid-single digits inflation for the full year. And so that's how we're thinking about it. I think with respect to the Carrols margin, you actually see expansion on a year-on-year basis as you look at Q1 over Q1, largely driven by top line sales overcoming some of that beef cost inflation and continued great work on the operational side. So I think that's how we're thinking about the margin profile. And beef costs, I said it a couple of questions ago, I think as we get closer to 2027, it's probably when we expect to see more relief on the beef cost side. Joshua Kobza: And Sara, did you have a question on Popeyes as well? Sara Senatore: Yes. So just on Popeyes, obviously some, I think, some impressive initiatives that we're talking about at Investor Day, particularly for the second half. But there's also, I think, in a sense that there's been a lot of competition, and in particular, a lot of growth, unit growth in the chicken category. Is that something that you've observed? Is that sort of competitive incursion or intensity? Is that something that is a headwind for Popeyes just as you execute the brand-specific initiatives? I'm just trying to think through, it seems like a lot of the chicken operators perhaps are seeing some slower same-store sales than they have historically. Joshua Kobza: So in terms of the category and how I think about it, I zoom out a bit and say we are super happy to be in the chicken category. We got -- the reason we got involved with Popeyes 9 years ago now is that we knew that there was going to be huge secular growth in the chicken category in the U.S. and the world, and that's exactly what's happened. I think it's natural that when you have a great category like that that's doing well consistently over time, you're going to have competition, and that happens in any part of restaurants. I think there's a lot of concepts. A lot of them are upgrading what people expect in the category. I think that's good for the category. So I think that's positive, and it pushes us to improve our game to and that's a healthy tension. And the way I feel about it is I think Peter is off to a fantastic start. He's built a great team that's very focused on improving the quality of operations. We're already seeing it across the business, engaging with restaurant managers, getting all the franchisees on board with the plan. And we're already starting to see signs that operations are improving in product satisfaction improving. They're moving really fast to make progress on some of our core items. Things like tenders, which is a big part of our business, we've tightened our tender spec a bit, and that's rolled out across -- it's rolled out very quickly to -- now we're just over 1/3 of the system, will be done with the rest of the system by June and we're already starting to see really material improvements in product satisfaction for the tenders. Peter's focused on bone and chicken quality as well, making sure that we're serving our famous bone-in chicken exactly as it's meant to, that's the focus of seed trainings going to all of our restaurants across the entire country, starting right now in May. So I would tell you, the team is moving very quickly to make progress on operations and delivery of product quality. And I think that's what's going to lead to a turnaround in the business and help us to be more successful. And I would tell you, on the sales side, a lot of what gives us confidence about the back half is just that we've already seen sales -- underlying sales trends improving in the business from low points around the time of January. We've stepped up to a much better level. So I think we're seeing good progress. I would tell you, we're excited about the category. Any category in QSR is going to be competitive, and we're happy to be in a category that's continuing to grow servings, and I think it's going to be a growing category for a long time. J. Doyle: Sara, I'll add one thing, which is we know how to win in this category. We've got the best food in the category. And our execution is already improving. It needed to be better than it was, and we needed consistent value and Peter and his team and the franchisees are all over it. They believe in that as the path. And we know what it can do. The team will laugh at me if I don't quote my favorite statistic as I do every quarter, but where we are executing at a really high level with Popeyes is International. We've now crossed the $2 billion run rate in system sales outside of the U.S. I think we did $502 million in the first quarter. And our system sales growth was only up 43.9%. So we know with this amazing food, how well we can win. And by the way, there is a big competitor in chicken outside of the U.S., and we're growing a lot faster than they are. And so we know how to win in this category. We know that having the best food is ultimately our point of differentiation, and we just need more consistent execution and consistent value and we're doing those things. Operator: Our final question today will come from Gregory Francfort from Guggenheim. Gregory Francfort: Patrick, I guess maybe we've asked a lot about it, but just virgin U.S., what metrics do you feel like you're seeing in the underlying customer response or that maybe we're missing from the outside and that kind of give you confidence in the momentum going forward? J. Doyle: Yes. Ratings on the food, overall customer satisfaction, speed of service, repeat rate of customers coming back after having a great experience. All of those things are moving in the right direction. And that's why it was time to invite everybody back in. And we know that as we continue the remodeling the restaurants, they're going to be going into or driving through at a better looking restaurant. And so all those operational metrics have been moving in the right direction. It was time to invite people back, and that's why we have the confidence to do it. Operator: I'll now pass the call back to Josh for closing comments. Joshua Kobza: Thanks, Adam. Well, thank you all for joining us today. We really appreciate the time and the questions, as always. Going back to February at our Investor Day, we made a number of commitments and outlined a clear vision of what we want to deliver in the future. And I think in this quarter, we made a great start and made progress against essentially all of those commitments. First, we told you that we delivered same-store sales above 3%, and we did it this quarter. We said we're going to lay out a path to get back to 5%-plus net restaurant growth, and we did -- we made 1 of the most important steps towards that vision of the future by closing the China transaction and getting off our first quarter with our new partner to a terrific start. We said we're going to keep delivering 8%-plus AOI, and we did that for the quarter. And we told you that we're going to move towards a simpler business, where we made a lot of progress on starting to refranchise our Burger King U.S. restaurants and built a big pipeline to move towards our goals on that front. Finally, we announced a new capital allocation approach, where we're going to restart consistent share repurchases. And we did exactly that by repurchasing over $30 million so far in the quarter, and we look forward to repurchasing $500 million as we said for the full year. So thank you all very much for the time today. We wish you a great rest of the day. We look forward to updating you on our continued progress with our Q2 call in August. Have a great day. Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
Operator: _Good morning, and welcome to Apollo Global Management's First Quarter 2026 Earnings Conference Call. [Operator Instructions] This conference is being recorded. This call may contain forward-looking statements and projections, which do not guarantee future events or performance. Please refer to Apollo's most recent SEC filings for risk factors related to these statements. Apollo will be discussing certain non-GAAP measures on this call, which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in Apollo's earnings presentation, which is available on the company's website. Also note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Apollo fund. I would now like to turn the call over to Noah Gunn, Global Head of Investor Relations. Noah Gunn: Great. Thanks, operator, and welcome again, everyone, to our call this morning. Joining me to discuss our results and the momentum we're seeing across the business are Marc Rowan, CEO; Jim Zelter, President; and Martin Kelly, CFO. Earlier this morning, we published our earnings release and financial supplement on the Investor Relations portion of our website. As you can see, our first quarter results set a strong tone for the year. We generated record fee-related earnings of $728 million or $1.17 per share, spread related earnings of $719 million or $1.15 per share and total earnings or adjusted net income of $1.2 billion or $1.94 per share. We also declared a common dividend at our new higher rate annualizing to $2.25 per share and reflecting a 10% growth rate year-on-year. Lastly, I would flag that we published several presentations on Athene's website last Friday, that provide in-depth insightful information about the asset portfolio. This effort highlights our continued commitment to lead with transparency and be responsive to market feedback. And with that, I'll turn the call over to Marc. Marc Rowan: Thanks, Noah. Let me start where Noah ended. Strong results set a tone for a strong year. FRE of $728 was up 30% year-over-year and 6% quarter-over-quarter. ACS fees, $246 million for the quarter, the fourth straight quarter over $200 million. And just to spend a second there, ACS fees being strong means origination has been strong, not just in the quantity of origination but in the quality of origination. No one pays a fee for a normal core CLO, which many people count as origination. Origination for us comes from our syndication activities which is also how we expand our client base and many of our syndication partners turn into management fee over time once they see repeatable transactions. We continue to build businesses on this basis and use ACS fees and origination as a diagnostic of just how strong the business is. SRE of $719 at our long-term Altreturn of 11% would have been $907. On that basis, 2% quarter-over-quarter, 6% year-over-year, strong organic growth and in-line core spreads, the alts portfolio, low for the quarter, but doing exactly what it is supposed to do. The quarter -- S&P was off 17%. The Russell was off 16%. Levered equity, private equity, which is the strategy that most of our industry uses in their alts portfolio would have been worse down north of 20%. We were up 6% for the quarter. While this is not in line with our long-term expectations, this is not a miss. This is entirely how we invest. AAA, which continues to constitute the vast majority of Athene's alts portfolio is now the largest fund at Apollo, north of $27.5 billion, 12% net returns since inception. We are, in short, exactly where we want to be. We're seeing momentum across the business. Origination for the quarter was a particularly high quality, $71 billion. Based on the pipeline we see, I expect origination in Q2 to be even stronger. Recall that our record quarter for origination ever has been $97 billion. Whether we get all the way there or not will depend on how hard the team works, but I think we have a shot doing something very close to that. Origination is not just about numbers, it's about spread. Here, origination for the quarter was 350 basis points over treasuries with an average rating of BBB, and I'm sure Jim will spend more time on that in his remarks. Capital formation also really strong, $115 billion for the quarter, of which $50 billion was organic and $65 billion was the closing of the Pension Investment Corp. transaction for Athora. To break down the organic, asset management was $30 billion, Athene $20 billion. Based on what we're seeing for the first quarter and what we see in the pipeline for the year, we're reaffirming our 26% outlook of 20% FRE growth and 10% SRE growth, and the business trends continue to be highly favorable. The business, of course, is dependent on the macro environment. and the macro environment, notwithstanding the noise of what's happening geopolitically continues to be consistent with how we view the business over the past few years. Jim and I, each of us have now worked more than 40 years and for the vast, vast majority of that time, we have seen and managed our business and managed our investments with the notion that 95% of the outcomes will occur on the playing field and not outside the sidelines. And sometimes, we like what's on the playing field and sometimes we don't in terms of rates and economic cycle, but we know how to navigate that. And we never spent much time thinking about the small chance of out-of-box results because if I go through at least my career, 1987, 1990, 1997, 2000, 2001, 2008 and COVID. Almost every out-of-the-box event was unpredictable, uncorrelated and not something you could have spent your time preparing for. We have a little bit different situation today where I don't know, 65-35, 70-30 , we just have a much greater chance, in our opinion, of out of sideline results. Everything we see in front of us is actually quite strong. Everyone has a job. Employment stats are good. CapEx cycle is awesome. Government policy, incredibly accommodative. Capital markets, wide open. Why do we think that we have a greater than average chance of out-of-the-box results? Well, geopolitical reset is taking place around the globe, not just talking about what's happening with Iran, it's a total geopolitical reset. Again, maybe much needed. But nonetheless, has the potential to cause out-of-line results? Second, almost everything we're doing, whether intentional or not, has the potential to be inflationary at least in the short term. restricting the supply of goods, restricting the supply of labor and the free movement of goods and labors, maybe for good and valid reasons that need to be done are all inflationary in the short term, even if we are not seeing signs of it. Third, we are seeing the most comprehensive tech cycle we have ever seen or certainly I've ever seen in my career. This will be very, very far reaching. Almost every job will be enhanced or replaced. We're going to see, in our opinion, a complete flip of blue collar ascendancy and white collar stress. The political and other consequences of that, I just think, are unknown. And finally, consumers and businesses are actually in great shape. Governments, not so much. And this is not just a U.S. What is the natural reaction to this higher percentage of out-of-the-box results? Well, for us, it's to be defensive and continue to be defensive. That doesn't mean we're not investing, but it means we're investing with an eye toward protecting our capital and making sure that we are here to ride through cycles if there are corrections, which we quite frankly expect. That leaves us positioned well and ready to play offense. How does that play out in practice? Well, look at our equity business. In our equity business, whether it is the Private Equity business or the Hybrid Equity business, 0 exposure to software. Hybrid value results for the last 12 months plus 16%; private equity results Fund 10 -- 20% net IRR, 0.4 DPI versus 0 for the industry. In equity, again, that's how this defensive posture plays out. In credit, almost everything we've done recently is upmarket, moving more toward investment grade, moving more towards structure, moving more toward protection. Recall that better than 80% of what we originated last year was investment grade. If you look across the entirety of our credit business, sub-2% software exposure, all buckets of credit up 8% to 11% LTM, credit AUM is now vast majority investment grade. Let me flip now to discuss private credit. The market, actually, the press remains fixated on a $2 trillion slice of this market, which properly should be called levered lending. Most of the financial press treats this as if it is the entire story of what's happening in private markets, and it is far from it. The investment-grade private credit market, which is being driven by the global industrial renaissance is a $38 trillion market. Therefore, the total opportunity in private credit is some $40 trillion. The obsession with this very narrow corner of the market, this $2 trillion slice, levered lending, is frankly a failure of imagination. Credit in any economy only comes from 1 of 2 places. It comes from the banking system or the investment marketplace. There is no third choice. If levered lending is risky, do we want it as a policy matter inside the banking system or do we want it in the investment marketplace? I think the market has spoken, I think regulators have spoken. Does that mean that risk has been transferred to investors? I don't think so. What has happened in our marketplace and the growth of levered lending, particularly exposure to BDCs is a rational move by investors who are looking to derisk. Why do I say derisk? Because most of the funds, investors have invested in levered lending have come from the sale of their equity portfolio. Investors rationally have decided that they can earn equity-like returns from first lien risk rather than by holding equity for a portion of their more speculative exposures. This is not people who have taken their treasury portfolio or their investment-grade portfolio and gone into levered lending. This is people who have sold their equities to go into levered lending. The notion that alone is somehow riskier because it wasn't originated by a bank is not a coherent argument. Private credit is just credit. You underwrite it well and it performs. You underwrite it poorly and it doesn't. If you are concentrated in one industry and you are seeking very high returns and you do things other than first lien, and you do things that are highly pick and highly structured with smaller companies, you will suffer losses in pursuit of higher returns. If you run a large cap only, first lien only, cash pay only, less levered credit book on a fully diversified basis, you will not suffer losses absent a massive credit cycle, in which case credit everywhere in the economy will be affected. The origination channel is relevant, the jockey, not the horse. All of this is about risk management, and Jim will reinforce this and discuss ADS, our flagship, including recent performance. But the cycle we've been through in the press and the cycle we've been through explaining actually reinforces something that we've been doing over the past few years, which have not always made us popular in our industry. Trust and reputation, now more than ever, necessitates greater transparency on fund pricing for fund investors. New buyers particularly want more transparency around private assets. Last year, we launched the notion of estimated daily value as a pilot for our investment-grade fixed income suite of products, and we validated our asset pricing methodology for our platform, which is the largest private credit platform in the world by 6:30, our investors will have daily pricing for all corporate investment-grade fixed income assets. By 9:30, all investors will have daily pricing for direct lending and asset-backed finance also. That essentially means the totality of our credit business will be 100% daily pricing by 9:30, 100% daily pricing by 9:30. How does this work in practice? And what have we been doing to date? Because technique and process vary across our industry. If I take our direct lending business, our levered lending business, ADS, even in this market, we are focused on transparency and consistency, and we run a rigorous process with discipline. When public markets reprice, private markets should too. In ADS' case, the rules of the road are as follows: If we hold a position with anyone else, we take the lowest mark always whether we agree with that mark or not because that is indicative of where someone might sell the position, and therefore, we market to the lowest price. We map the entirety of our ADS book to the broadly syndicated loan index industry by industry. If any sector of the broadly syndicated loan industry is down more than 2.5%. At a minimum, we reflect 50% of the value, but it causes us to reanalyze 100% of our exposure in that. There are layers of analysis here about fundamentals, cost of capital, public comps and market trades and we marked to current information, not to hope. Whether we agree or not with these marks, just as we sometimes agree or disagree with public marks, we reflect them because private markets need to move when public markets move to the extent they reflect a broader consensus of spread or risk or other things. Another place we've seen noise in private markets is the noise around day 1 markups and secondaries, particularly on some of the calls for some of our peers. Let me address this directly in how we think. From our point of view in an evergreen format, this practice makes no sense. This leads to mispricing on a short-term basis, which was not that important in institutional funds where investors were not coming and going, but turns out to be very important in funds on an evergreen basis where investors have the opportunity to receive at least a portion of liquidity on a quarter-by-quarter basis. Across the totality of our $1 trillion platform, secondaries that have been marked up round to 0. To give you a sense of revenue for 2025 as a result of this markup for the year 2025, revenue was sub-$3 million. We're not sure this accounting practice makes sense, although it is what is currently demanded by the marketplace. And we are part of a group seeking to bring common sense and common sense marketing to this practice because we believe that this reflects reality. Market Making is another part of transparency. The continued convergence of public and private assets ultimately requires more liquidity. We have never seen a market where enhanced liquidity and enhanced transparency does not result in tremendous growth for the asset class. Last year, we started really pushing on Market Making in private markets. From a cold start, we are now north of $13 billion of traded assets. This quarter was exceptionally strong, particularly as fund managers now recognize that we are the leading source of liquidity and for private market assets, particularly credit assets. On top of that, our venture with ICE will bring greater transparency and consistency of data to this market. Every private asset in the Apollo portfolio going forward will have an ICE ID, possibly in addition to CUSIP. This is the beginning of standardization across this marketplace. It also gives us a tremendous amount of information on real-time pricing and helps inform our estimated daily values across our credit portfolio in particular. Enough on asset management for the moment, let's flip to Retirement Services. It is clear to us that there is significant demand for guaranteed lifetime income and for retirement income in all forms. The global retirement crisis gets clearer day by day, and we believe this is one of the biggest secular opportunities out there. Against that backdrop, we tap a portion of this market through Athene. '25, as you know, was a record year with $82 billion of organic origination, and we expect and plan to do more of that in '26. In Q1, we did see lots of competition in our view, irrational competition of people putting business on the books at ridiculously low spreads. We did the business we wanted to do and not anymore. Fortunately, we had a very strong and rich origination pipeline, which allowed us to continue to preserve spread against this competitive backdrop. Cash now in the Athene ecosystem is circa $40 billion, along with our treasury and our agency portfolio. This gives us a significant amount of dry powder, along with a robust origination pipeline tells me that we are on a better trajectory. Lots of noise around the industry, particularly with the words private credit. This is not about PE-backed insurers, it's about insurers. For us, no Cayman, no collateral loans, no games, just straightforward business. What we are doing is totally transparent, no guess work is required. As Noah mentioned, we put out 3 decks consistent with our policy of providing the greatest degree of transparency in our industry. If you find that we have not met that standard, please give Noah a ring. I don't know of any other insurer or any other financial institution that puts out the kind of data that we do, whether it is liability data for granular data on our asset portfolio. We have the luxury of doing this because we are not concerned about transparency. We have amassed the second largest capital base in our industry, some $35 billion, and we are committed to pursuing our AA rating. Why are we focused on rating? Well, because not everyone in our industry is doing what they should do. Not everyone runs their business the way we have run our business. We do worry about contagion. And again, this is not about PE-backed insurers. This is about insurers. Some of the more egregious practices we have seen across our industry do not come from some of the new players. They come from incumbents. What we can do is be transparent, be committed to higher ratings, build our capital base and run the business for the long term like principles because we are. Anyone out there pedaling false narratives about Athene. You now have all the information that you need. Athene has a fortress balance sheet with 95% fixed income, of which 90% is investment grade. Our exposure to levered lending, which people sometimes call private credit is de minimis, rounds closer to 0 than to 1%, Cayman in at 0.4%. Our exposure to software, 0.1%. Less asset impairment than our peer group, full transparency on related party affiliate and Apollo originated assets. We celebrate Apollo originated assets because that means we are controlling the risk and controlling the spread. Full transparency on top holdings with case studies, full transparency on credit quality and ratings. Interesting statistics in the materials that we've done on ratings. People can now draw conclusions as to whether any of the rating agencies are more or less leaned I challenge you to come to a conclusion that any one rating agency is better or worse with respect to credit quality than another rating agency. Public ratings and private ratings, these are the same analysts at the same firms in the same team, rating in many instances, the same company. There is no difference that we have seen between public and private ratings other than whether they are publicly available and most times, they are not publicly available. It is at the request of the issuer. In every instance we hand, we're in the process of going back and getting a second rating for places that we only have one rating that are private and continue to think this is best practice for the industry and challenge anyone find what we have yet to disclose or anyone in the industry who's doing better than we are doing with respect to disclosure. The same risk off defensive mentality that we talked about in our Asset Management business applies to our retirement services business. One of the ways we earned excess spread over a really long period of time, were the investment-grade tranches of CLOs going back 17-plus years. Investment-grade tranches of CLOs have outperformed investment-grade corporate bonds with respect to defaults and recoveries for the last 26 years. That is not a widely understood fact, but it is, in fact, a fact. They have also offered excess return because of a perception that somehow structured products are more risky. We had, at one point, on Athene's balance sheet, north of $40 billion of investment-grade tranches of CLOs, some 11% of Athene's balance sheet, by the way, 99.8% investment grade. What we saw, the market began to see. And over time, the spread available on CLOs vis-a-vis corporate bonds became challenged and declined. We have, as a result, run off our book and CLO exposure is now down below 8%, and we expect it to be even lower in the coming quarters. Recall that this book has an average life of less than 3 years in current market environment, and we expect the vast majority of this book to repay simply in the normal course. And to AMAPS. We are in the business of innovation and continuing to originate AMAPS, Apollo multi-asset prime securities essentially takes the benefit of CLO and adds greater number of issuers, less leverage better structure for investors with a FIC single A tranche versus a skinny single A tranche and 40% to 50% investment-grade assets. We believe, again, this is risk reduction. Oh, by the way, greater spread than the A tranche of a CLO. The way we view this is we are taking the 0 to 75 risk, which is equivalent in a CLO to AAA and AA and getting paid more than A pricing for a more diverse, more highly rated structure simply because it is new. Athene now has $11 billion of investment-grade exposure or 3% of the portfolio, essentially making up the decline of our CLOs. We would expect this to double over the coming months. as our CLO exposure comes down. You can see in real time us derisking the portfolio while preserving spread, and we are also seeing increased demand for this product across the marketplace as other insurers and other investment-grade accounts begin to appreciate a new structure, but new structures always take time, and we will garner the lion's share of this asset for the foreseeable future. Innovation is not just about assets, innovation at Athene is about liabilities. Recall that new markets, which was a very small contributor to volume in 2025, less than $1 billion. We expect to be north of $5 billion this year and ultimately to make up as much as half of Athene's new business. In Q1, it exceeded $1 billion for the first time in terms of liability generation from new markets and momentum is building, and we expect this to go up over time. Retirement is not just an issue in the U.S., retirement and retirement income and the need for it. is as much an issue in Europe. Athora this month closed the Pension Investment Corp. transaction. Pension Investment Corp. doubled Athora's assets to $125 billion, and also presents us another market of organic growth in addition to the Dutch market. In connection with this purchase, another EUR 3.5 billion of equity was raised for PIK. Total common equity inside Athora today is in excess of EUR 9 billion. And just like Athene, focused our energy around originating investment-grade product denominated in dollars appropriate for a U.S. regulated balance sheet. PIK in addition to the other assets within other franchises within Athora now requires us to expand our efforts to generate pound-denominated assets that are appropriate for U.K. regulated balance sheets. Let me now bring it home. We've been leading our industry into the future. Not everyone is doing what we're doing. Most of our industry started life as private equity firms. They then branched out into real estate and infrastructure and even private credit, but still in the structure of private credit for -- private equity firms inside of funds in relatively slow-moving businesses where money was raised by investors in fund format and now evergreen fund format. We are revolutionizing how and where capital, wealth building and retirement solutions are delivered. As we scale, which is a difficult thing, it is crucial to define and maintain what makes Apollo, Apollo. Some of the most important work Jim and I and the team have done is now on our website under our employment pages that's now been downloaded either on LinkedIn or from our website nearly 100,000 times, defining what makes Apollo, Apollo. This is our way of explaining to new hires and to new partners who have joined us, not just what the business norms are here, but what the cultural norms. As the world changes and as we are all confronted with new technologies and new ways of doing business, it is, in our opinion, the strongest cultures that are going to survive and adapt. We now have everything we need in front of us to achieve our 2029 targets to keep our edge and continue winning, we need to be uncompromising about who we are. We are now focusing our energies on building what comes after 2029. And we are purpose built for exactly this kind of environment, and we are leaning in. And with that, I'll turn the call over to Jim. James Zelter: Thanks, Marc. Let me take a step back and start with the big picture. Apollo sits at a unique intersection, what I like to call the intersection of first in Maine. On one side, we're fueling the historic capital needs of the global industrial renaissance such as AI, energy transition, defense and holistic infrastructure. On the other, we're providing retirees around the globe with retirement income solutions they need to fund the next chapter of their lives. And Apollo sits at this intersection delivering capital to where it's needed and generating returns for people who depend on them. Our scale and expertise on both sides of this intersection is unparalleled making our model more relevant than ever. We find ourselves in the middle of more conversations with CEOs, CFOs and CIOs than at any point in our history. Through close collaboration with our partners internally, we are pushing scale and transparency, driving innovation and reimagining how our industry delivers value. Our 35-plus year franchise is built on trust and reputation, and that, combined with our capital and our creativity is our moat. It's what allows us to deliver quality at scale, and you can see it in the momentum across origination and capital formation this quarter. Origination activity totaled $71 billion, representing 25% growth year-over-year and driving total volume of nearly $325 billion over the latest 12 months. Our activity in the quarter was $61 billion of debt comprised approximately 75% investment grade with an average A rating and 25% sub-investment grade with an average rating of B. With respect to spreads in the quarter, our investment-grade origination, we generated excess spread of 290 basis points over treasuries or approximately 210 basis points over comparably rated corporates. On sub-IG origination, we generated excess spread of 470 basis points over treasuries or approximately 170 over comparably rated high-yield corporate indexes. We continue to observe stable spreads consistent with recent quarters and noteworthy in an environment where public market spreads remain near multi-decade tights. Maintaining excess spread and quality at scale is not only made possible by the breadth and selectivity of our embedded proprietary origination ecosystem. I'd like to mention 2 recent transactions that demonstrate this scale. First, we provided a $19 billion bridge commitment in support of Paramount's acquisition of Warner Bros. This transaction reflects the sheer capital and scale that we've been able to provide in support of large-scale M&A and our ability to partner with banks to meet the needs of the marketplace. Secondly, in February and April, we led 2 AI-related financings totaling more than $8 billion to support a client's acquisition and lease of data center infrastructure to a large investment-grade counterparty. These types of franchise transactions for next-gen AI infrastructure not only highlight our leadership role in providing flexible capital solutions they showcase our principal versus agent mindset that underpins our patient approach. While others may have rushed to print their marquee AI infra transaction, we have been methodical on structure, partner selection and underwriting risk. We are at the forefront of opening up a new funding market that is financing the picks and shovels going into data centers and doing so with IG counterparty risk and amortizing structures. Across the 5 primary hyperscalers, CapEx investment of AI infrastructure is estimated to exceed $800 million this year and almost $1 trillion next year. Against this back up of enormous and historic CapEx spend, we have a variety of touch points with this ecosystem, including data centers, powers and chips and it's clear for us to private capital has a major role to play in this ecosystem. High-grade capital solutions has become a critical piece of our origination toolkit. We've led the creation of the structure and to name more than 150 transactions and $80 billion in volume since 2020. And our current pipeline is broader and deeper than the totality of what we've done to date. Intel and AB InBev are 2 examples that have gone full cycle from origination to repayment. On Intel specifically, they came to us with a need, we solved it as principal. And as their financial position evolved, they repaid the financing, netting a $3 billion gain for us and our clients. This is our model working. And in these types of situations, we are able to provide critical tailored capital that can be paid off as the client needs grow and evolve in time. In return, we get access to attractive investment-grade opportunities that offer excess spread. Turning to capital formation. As Marc mentioned, we generated $115 billion of total inflows in the quarter, including $65 billion from the [indiscernible] acquisition of the PIC. Of the $50 billion of organic inflows in the quarter, Asset Management delivered $30 billion, while Athene added $20 billion. Of the $30 billion of inflows in Asset Management during the quarter, approximately 75% went to credit-oriented strategies and 25% to equity-oriented strategies supported by strong demand across client types and geography. And as Marc highlighted, we have been active in the marketplace with the creation of the maps structured solution and the product continued to grow successfully during the quarter, generating $5 billion of inflows. Our institutional business had a very strong quarter as well. with hybrid value, in particular highlight, closing on a $1.5 billion in the quarter to reach a final close of $6.5 billion, exceeding its target. It's worth noting that approximately 1/3 of those of that capital came from new investors a clear sign that demand for hybrid offerings, the sweet spot between debt and equity is attracting greater interest in client portfolios. I'll also mention that [indiscernible] also hit a final close of $1.9 billion, and Athora closed $3.5 billion of new equity commitments with strong institutional support in the purchase of PIC. Importantly, what we're seeing on the ground right now as the institutional investors are not pulling back. And if anything, the volatile backdrop is drawing interest in institutions actively looking to deploy in a variety of precincts in credit and the level of engagement remains high globally. Our Global Wealth business had a solid quarter against a particularly challenging backdrop with fundraising totaling $4 billion, only modestly lower quarter-over-quarter. And consistent with industry trends within BDCs, we saw an uptick in redemption requests at ADS, though it's worth noting that 94% of the fund's investors did not submit a redemption request. The fund had net flat flows for the quarter and performance remained strong with preliminary April performance indicating of approximately 80 basis points. Beyond ADS, our diverse suite of semi-liquid and drawdown offerings continue to resonate as inflows remain consistent with recent quarters in aggregate. Looking ahead, the long-term wealth opportunity over a long cycle remains unchanged. What has changed is that we're entering a period where selectivity, underwriting discipline and origination quality are going to matter far more they did during the long, low volatile period that preceded. Previously, the primary way to differentiate one's product in the channel was dividend yield and some stretch to achieve this with higher leverage, more pick and moving down the capital structure and diversify -- higher exposure rather than diversified exposure. We expect that we will see dispersion across managers and believe investors now see who has been managing portfolios prudently for the long-term risk-adjusted returns. We see this as an opportunity for differentiation and share gains for our franchise. At Athene, inflows in the quarter totaled $20 billion, driven by activities across retail, flow reinsurance and funding agreements. And as Marc noted, new markets volumes are gaining early momentum, led by stable value and structured settlements. We continue to observe the broader demographic trend tailwind is real, demand for retirement income solutions is global and growing structurally around the globe and Athene remains well positioned to grow. The strength that we are seeing in our capital formation is being fueled by 6 diverse sources of demand. One, fixed income replacement. Two, the wealth channel. Third, third-party insurance. Four, traditional asset managers. Five, the DC 401(k) or the Department of [indiscernible] proposals helps pave the road for private assets in a greater manner and importantly, the traditional alts buckets with institutions are historic strength. The momentum is real, it's diversified and it's accelerating. Martin will now walk you through the financials. Martin Kelly: Good morning, everyone. Thanks, Jim. Clearly, it's busy around here. I'll try to be brief and touch on the key points. In Asset Management, AUM and fee gen AUM grew by 31% and 40% year-over-year, respectively. And as you know, total AUM close to $1 trillion. Clearly, a significant milestone in the context of trust that our clients continue to place in us as we provide excess return per unit of risk at an even greater scale. You heard the fee-related earnings of $728 million in the quarter reached a new high of 30% on the year and 6% on the quarter. And within that, we saw a 24% year-over-year growth in management fees, driven by third-party fundraising across credit and equity strategies, strong capital deployment and continued growth from Athene. Capital Solutions fees reached a new high and we're the fourth consecutive quarter above $200 million, as you heard, with contributions from approximately 90 discrete transactions in the quarter. Activity this quarter was led by opportunistic credit with the mix driven approximately 80-20 credit to equity and that compares with our 3-year average of approximately 60-40 across those 2 segments. While there's directional alignment between the volume and our capital solutions fee mix, the quality and mix of activity matters. And this quarter, we saw strong contributions from hybrid capital solutions as well as structured finance, both high-quality origination channels. Fee-related performance fees grew 19% year-over-year, reflecting continued growth across diversified Global Wealth products, including bridge and perpetual capital vehicles. This was sequentially lower in the quarter due to the absence of certain crystallizations which benefited Q4. Lastly, 27% growth in fee-related expenses reflects predominantly the addition of bridge as well as continued investment to support the firm's strategic growth initiatives. Our FRE margin reached 58% in the quarter, expanding approximately 50 basis points year-over-year, reflecting positive operating leverage on record quarterly fee-related revenue and expense discipline. In terms of our compensation philosophy, we firmly believe in the benefits of utilizing stock as an alignment tool within the TAM. In the first quarter, stock-based comp increased resulting from the vesting for several long-tenured employees who are retiring from the firm and the industry as well as the impact of seasonal annual grants. We manage comp on an after stock-based comp expense basis and expect the annual stock-based comp impact to continue to approximate 10% of fee-related revenues, well below the industry average of 15%. On the revenue outlook, we expect Athora's PIK acquisition to begin contributing in the second quarter at an annualized rate of approximately 20 basis points initially. We're excited by the opportunity ahead for Athora given its scale and strong positioning in the U.K. market. Our Asset Management business continues to execute at a high level, and we are reaffirming our 20%-plus FRE growth outlook as you heard this morning. Underpinning this view are expected strong inflows and a robust origination pipeline, broadening across all parts of our business, both of which will benefit our ACS business. And as an example, we are increasingly providing multiple draw financing solutions, which create better line of sight to future ACS revenues beyond the current pipeline. Moving to Retirement Services briefly, Athene's net investment assets grew 14% year-over-year to $300 million, and we generated $719 million of SRE for the quarter. The alternative investment portfolio return for the quarter was 6%, strong in the context of an exceptionally weak market backdrop. AAA, which is approximately 80% of the portfolio, delivered a positive annualized return in line with this level. The return on our alts portfolio would have been even stronger were it not for Atlas' recognition of an idiosyncratic impairment and Athora's capital raise associated with the PIK acquisition, which resulted in a flat mark quarter-over-quarter. The combination of these 2 items, which we do not expect to repeat, approximated 3.5 to 4 percentage points of annualized return in the quarter. The blended net spread across Athene's portfolio was 97 basis points versus the 120 basis points in the prior quarter. When considering our 11% return expectation on the alternatives portfolio, the net spread in the first quarter would have been 25 basis points higher. Adjusting for this, the net spread is in line with the 120 to 125 basis point outlook that we provided for the year. We continue to originate new organic business consistent with our long-term ROE targets and in line with historical averages. As we progress through the year, we continue to expect net spread stabilization as headwinds from asset prepayments continue to dissipate and the roll-off of profitable post-COVID businesses also dissipates, all in line with our update last November. As we execute on our 2026 plan, we do so with tangible momentum across our retirement services business, and we are reaffirming our previously communicated guide of 10% SRE growth, assuming an 11% alts return. With that, I'll hand the call back to the operator. We appreciate your time, and we welcome your questions. Operator: [Operator Instructions] Our first question today is coming from Alex Blostein of Goldman Sachs. Alexander Blostein: I was hoping we could start with some comments on the durability of the origination volumes and the transaction fees you guys are seeing. So obviously, a record quarter in what's been a volatile and tough backdrop for the market broadly. So maybe talk a little bit about how your sourcing is evolving between different origination platforms? How is the syndicate composition changing as well? And I know you mentioned that the second quarter is likely to be strong as well, so maybe you could expand on that a bit as well. James Zelter: Yes. I think when you take a step back, I think the growth and the momentum you're going to see is going to be in a variety of originations directly happening from the Apollo ecosystem rather than the platforms per se. Even this week when you saw the numbers on the hyperscalers, I mentioned, $800 billion and you go through the numbers and the source and uses has been well documented, 1/3 is going to come from cash flow of the company, 1/3 from the IG market and there's a large gap of funding, that's the private credit IG market that we are primarily focused on. And so we were not a name of a financing source a decade ago. The last 5 years, hundreds of dialogues with these companies where this is not a recent phenomenon. So the brand is really focusing on that infrastructure across the board. And I think the comments that Marc made and I made, it really is going to be in this -- the picks and shovels of a variety of the CapEx of the AI infrastructure. It's not just going to be on the data center per se, but also in defense as well as broader infrastructure. So the lessons and the history of what we did with Intel and AB InBev, the ability for those companies to actually redeem that when they got into a different situation. It's really happening on the Apollo side, but it's also happening in partnership with banks. The activities we do, even though Paramount per se is not the type of transaction that we are involved with day in and day out, that puts us in a unique spot of being able to be a holistic solution provider in scale that really is unmatched today. Marc Rowan: Yes. I would just add, this is not just an AI story. This is a global industrial renaissance story. This is infrastructure. This energy. This is energy transmission. This is energy transition. This is advanced manufacturing. This is defense and its AI and data. And it's not just a U.S. story, this is a European story. The U.S. clearly is out front. The recent week a number of us spent in Silicon Valley was informative. Here, we have the most prominent growth ecosystem anywhere in the planet and they have never been capital intensive before. We are going to see the growth ecosystem dominate debt issuance over the next 5 years. Today, the 10 largest issuers of IG are mostly financial institutions. Going forward, probably be the 5 largest banks and the 5 largest growth companies. Europe is going to be on a percentage basis, in our opinion, the strongest investment-grade private market in the world. Europe needs to do everything that the U.S. is doing. It's banking system, its capital markets are just not as developed. And while there's historically been hostility towards private capital and private solutions, we find ourselves in dialogue with quasi governmental entities who are addressing fundamentals. How do we restart the Hinkley nuclear plant? How do we provide for a massive upgrade for our grid? How do we provide inventory for our defense munitions and other things on a 1-year annual budget cycle when we know these core munitions are going to be needed over decades. These are the questions we are helping answer. But keep in perspective, we are, at the end of the day, a relatively small player in the credit markets. The totality of assets under management just crossed $1 trillion, of which $800 billion is credit and about $600 billion-ish is investment grade. This is not even relevant in the scale of this marketplace. And when you talk at some of our public markets, peers who are $14 trillion and more, we have a long way to go here and we are mindful that our job is not to be the biggest. Our job is to grow profitably and to make sure we maintain underwriting discipline and spread. Operator: Our next question is coming from Steven Chubak of Wolfe Research. Steven Chubak: So I wanted to ask on the private credit marketplace. Given one of the bigger concerns on private credit relates to opacity of the asset class. I was hoping you could speak to how the launch of Delhi pricing later this year might change the perceived riskiness of private credit, your approach to validating the pricing is really like this whole market maker in terms of the breadth of assets you're hoping to price and how you might frame the revenue opportunity from this business as it continues to scale. James Zelter: Let me start, and I'm sure Marc will add a few comments, but I think there's a threat here. I think Marc's comments about the private credit conversation being in a narrow corner, we just see it as a lack of imagination and it ties back to the prior question. The big growth in private credit is going to be in the IG universe. And interestingly, those investors are used to a bit more liquidity and certainly a lot more transparency. This is going to be driven by the investor universe. And we are -- whether it's our short duration vehicles, all of our fixed income asset classes that we've created a product suite for them to be able to allow private credit to be a major part, this is going to be standard operating procedure. And we've said consistently, the thread is the benefit of the larger spread is on your origination, not the fact that it is private and where it will be private for a while. Private does not also mean -- means it's market power forever. And so the infrastructure that we've created and the thread of the conversation being much more global, much more investment grade, that's the critical aspect. And again, I think you're seeing it tie through. There's a reason why origination ACS capital formation, Marc's original comment. ACS has allowed us to take our 3,000 LPs and turn it into thousands upon thousands of conversations. That's the open architecture at work. That's how we're reinventing the business model. And certainly, that's what gives us the enthusiasm and excitement in terms of how the business all works in concert. Marc Rowan: So I'll give you a little more, and it's going to require a little bit of -- we fundamentally changed our financial system. And particularly the large banks, investment banks were encouraged to deemphasize market making. In our equity markets, we had 4 firms step forward, led by James Street and Citadel, who now provide liquidity. The New York Stock Exchange, the London Stock Exchange are buildings. They are not sources of liquidity. And we have real liquidity in our equity markets. In our fixed income markets, no one stepped forward to provide liquidity. Fixed income trading capital in the world is now 10% of what it was in 2008 and the market is 3x its size. The entirety of the market, whether you are investment grade or below investment grade is just not that liquid. It just appears liquid on good days. We have already seen wholesale breakdowns in the liquidity of this marketplace during COVID and during U.K. LDI, and I expect that we will see this again. When you look at the quote of a piece of public fixed income, be it a bond or alone. Are you actually seeing liquidity? Or are you seeing dealer estimates? You're seeing a dealer estimate. The vast, vast majority of issues do not trade, have not traded and are quoted 1 by 1 or 5 by 5, they're not quoting on a liquid basis. But yet, we sleep at night. This has never happened before in the private markets because private was not tradable and was not indicated. And so a year ago or more than a year ago now in connection with the support of State Street's product that mixed for the first time public and private investment grade, we began market making. And we didn't just begin market making by holding on to the information. We created a data warehouse. We made that data available to all other dealers. We are not the only market maker. And what is going to happen is the same thing that happened in the levered lending market, the broadly syndicated market. We've gotten the market going, but ICE IDs, data repositories, standardized data and ultimately, jealousy are going to cause market-making competition. No one wants to see Apollo earning widespread. You have already seen in other markets, other dealers come in anywhere we can get other dealers to come in, we will. I don't know exactly where we'll end up this year in terms of market making. But every quarter on quarter, it just gets bigger. And we're starting to see third parties, other competitors make markets as well. Some in our industry are resisting this transparency. I just don't think that makes sense. And I think the recent press around marks is just driving us to the solution, and I expect regulatory interest to follow, which will also drive toward this solution. We use the same methodology that many public companies, many public asset managers use with respect to setting prices on a daily basis. We observed trades. We observe comparables. We observe trades and other issuers of the same issues that are public. We look at general market trends, and we will produce a price. That is the same price in many instances that you see for public securities. And every day, it gets better. That does not mean perfect, but our job is to try and make it better every single day, and we win in our opinion, if we have more transparency and more liquidity. Operator: The next question is coming from Bill Katz of TD Cowen. William Katz: Marc, you mentioned in your prepared comments that you have everything you need to sort of meet your 2029 goals, which is great to hear. I guess the question is you also mentioned that you're sort of thinking now through the next decade. As you think about your footprint today, obviously, you had a lot of buyback this quarter against some of the elevated issuance. How are you prioritizing capital return from here? Should we assume you have enough organic growth to get there? Or do you need to now be a bit more acquisitive? Or could you start to return more capital to investors as you continue to scale the business. Marc Rowan: Okay. So we have a 5-year plan. And that 5-year plan is the one we laid out in Investor Day. And when I referenced the 2029, I'm talking about that 5-year plan, which in round numbers gets us to plus asset management and a $5 billion retirement services business. The question Jim and I are asking ourselves is what comes next? Is it more of the same? Or is it something that is additive to that? I do not believe that we need to do anything from an acquisition point of view to meet our 2029 goals. Anything we choose to do will be accretive to the strategy and to the growth long term because buying more of the same just doesn't do anything for us. It actually creates noise and makes integration harder at a point in time when we are going through this massive productivity change. And this is the backdrop that we're thinking. We have everyone in our firm can actually envision how the addition of technology is going to make their current job easier, faster, better, stronger, less expensive. Most people can also envision how software and data going to free will allow them to evolve their current business into something that is more productive for serving their clients. Very few people can imagine that the cost of now building challenger businesses, particularly in areas where we have core strengths has gone to 0. The bar for buying something is just really high. because the embedded value of existing franchises, unless they are truly unique and have unbelievable staying power just doesn't add all that much to us. So we are mindful of our cost of capital and where our stock trades. We, as you know, have a dividend policy where we go up half of the FRE growth of the business, which we've done over the past 5 years. And when the market is in a risk-off mode, given that our business has not really cycled, we have been aggressive buyers of our stock. And we continue to think about it in that trade-off. If something is truly a catalytic to a strategy and can be another $5 billion business for us, yes, we'll entertain that. But to do more to integrate to buy more asset management. I just don't think we have any jealousy, any regret. We watch what's being purchased around our industry, and we kind of shrugged our shoulders and just say, like, did we miss it. And we haven't -- I don't think we've missed anything yet. The bar is really high for spending capital other than on stock. Operator: The next question is coming from Glenn Schorr of Evercore ISI. Glenn Schorr: I'm fascinated with the daily pricing thing. So I have a couple of very quick follow-ups. One, does -- how do you think that translates to anything in private equity and hybrid lands kind of get there to Two, how does it inform how you build your secondaries business? And then three, the biggie is what does that mean for the illiquidity premium, your ability to produce alpha and ultimately charge fees for how this industry was built. James Zelter: Let me start again. I want to make sure we frame this -- what we're talking here. Whenever we talk about the journey of transparency and daily pricing, it starts with the investment-grade private credit universe, the $38 trillion. Somehow the headlines and the dialogue always then goes to the $1.7 trillion. We'll get to the $1.7 trillion, but I want to really focus on the $38 trillion first. And that's where if you go back to what Marc mentioned, go back to the bank loan mark in the early '90s. Many banks did not want the agent to provide that transparency. Evolution took over, education took over, more investors came in. So I do think, Bill, I think that again, it ties back this origination. The premium that you are able to extract is upon the origination because you're providing a holistic solution to an issuer in addition to what they can do day in and day out with a public IG issuance. You're going to see cap tables of very large established companies having public IG debt in the cap table along with a private originated IG transaction or tranche. It may be an asset, it may be a geography, it may be a subsidiary. That's what Intel and AB InBev. Those companies had public and private origination and debt in their capital structure on the cap table. So we're going to start there, as Marc mentioned, we will evolve into the noninvestment-grade direct lending, leverage lending universe. But that's the prioritization in our view. But again, I go back, the premium that you're going to create is from the holistic solution you come as the provider of the capital in one fell swoop because most have to realize most origination that occurs in the leveraged loan market between high yield and leverage lending and IG is not on an underwritten basis. That's on an Asian basis. When we can act as principal, that's where it allows us to create that spread opportunity. Marc Rowan: So I'm going to hit it on its head, maybe a little more. When we originate something in the private market, today, investors demand 150 to 200 basis points. We end up with a management fee, and we end up sometimes where we don't manage the assets with an ACS fee. The more liquidity and the more transparency, why will the premium always be 150 to 200 basis points that investors demand. The originator should get to control more of the profit if, in fact, we are originating good risk. We do not view the "illiquidity premium" as the basis on which you get paid. It is what is currently demanded by investors for holding it. And yes, for the broader market that does not control origination, I expect that there will be a narrowing of spread. And therefore, we have been consistent for the past 5 years, measuring our industry on AUM is imprecise at best and foolhardy at worst. We measure our capacity to generate investments that are worth doing because that is ultimately what has value. The ability to get the entire firm focused on origination is how we run the business on a day-to-day basis. AUM is what follows as a result of having lots of good origination. Unlike a public asset manager that can buy everything that exists and can take any amount of money at any point in time, and therefore, AUM is a productive measure, AUM here and the chasing of AUM can be very degrading to a franchise if it exceeds your capacity to originate. And just to complete the thought because I want to say, Jim is right, we are at 6:30, 100% of our investment-grade corporate franchise, 9:30, the entirety of our credit franchise. I doubt in 2026, we're going to make progress around hybrid or private equity other than with respect to the techniques of valuation in the secondaries market. I believe the days of buying something at 70 and writing it up to par during an end. Ultimately, good investors should be able to make money in the secondaries market by superior underwriting and superior access to information. I'm not sure the day 1 pop is something that is ordained publically. Operator: Our next question is coming from Patrick Davitt of Autonomous Research. Patrick Davitt: For PIC, how should we think about the incremental expense on that 20 basis points? And should we assume the 20 basis points trend upward as you reposition the portfolio into higher-yielding assets? Martin Kelly: I'd say, Patrick, it's one very small because we have an established ecosystem in Europe in London today that manages Athora and it's very scalable. And so I would not expect much, if any cost against that revenue pull through. And then in terms of revenue potential, yes, the 20 bps is a starting point. And the balance sheet will require pretty extensive repositioning, but that will take a bit of time. And so we're very focused on that. But you should expect to see incremental management fee growth from here as we reposition that balance sheet. And that's all in accordance with PRA regulatory framework, which is quite distinct from the framework that's existed up until now for Athora being a EU balance sheet. Operator: The next question is coming from Mike Brown of UBS. Michael Brown: Great. I want to ask on sure. You reiterated the 10% growth for the year. So I just wanted to think through the puts and takes to asset yields and also kind of the higher cost of funds as we move through 26. Maybe just expand on how we should think about the spread dynamics. Can you still be in that $120 million to $125 million range. And then you mentioned, Marc, that the trajectory is improving. Can you just unpack that a little more, maybe just touch on annuities where the growth seems to be a bit tougher near term? And maybe could we see PRT coming back more in a bigger way in 2026? Martin Kelly: Mike, it's Martin. I'll hit the first point. So -- and I commented on this a bit in the prepared remarks. We're right in the middle of the range that we indicated last quarter for the year. And as far as the first quarter is concerned, we certainly expect that to be the case for the balance of the year. So $120 million, $125 million is the is the spread range assuming [indiscernible] 11%. As far as the quarter, we were pretty prescriptive last November in laying out the drivers of the spread progression over time. And if we look at what has happened in the quarter, it's very much in line with that. And so there's nothing -- there's no change to that. We continue to see some prepay headwinds, as expected, prepays, we believe, peaked in Q4. They were less in Q1. We expect that to dissipate over time, partly because of the CLO dynamic and the running off of that book. And then we are defensively positioned. We have -- between cash and treasuries on hand at the end of the quarter, we had close to $40 billion. And so that's an opportunistic sort of cost, if you like, to being ready to be more offensively positioned, partly in view of the market, probably in view of the pipeline of origination that we see in front of us. Operator: Our next question is coming from Ken Worthington of JPMorgan. Kenneth Worthington: So we've mentioned the $40 billion of cash in tertiary at Athene a couple of times. So Athene is very liquid. Spreads widened out in March, they've narrowed a bit in April. Is the market environment we're seeing today attractive enough that you'd expect those cash levels to be falling you really earmarking the excess cash for more opportunistic opportunities and maybe we even see seen cash levels build as you await those opportunities? Marc Rowan: So it's Marc. I'd say almost all of the spread widening we saw take place, took place in the media and did not take place in the market with the exception of below investment-grade software and IG software to some extent, where we did see spread lining where we just do not have nor do we want meaningful exposure given the diverse set of outcomes that can happen with respect to credit. So I would say in the marketplace, we have not seen the kind of spread widening to be interesting for us to go all in. It is our job to create. And the pipeline that we see coming together is really, really strong. Starting with the ARI commercial mortgage pipeline, moving into the AMAPS pipeline, as Tim said or I said earlier, we're $11 billion at Athene invested in AMAPS right now. We'll be double that by the end of the year. And that will, in part, be making up for CLO runoff, but part will be growth of the book. But we are holding cash and we do not account on the market bailing us out. This is all about self-help and originating volumes of liabilities consistent with the origination volume that we are able to bring to Athene, again, IG, and I am very optimistic and -- confident in the second quarter and optimistic for the balance of the year. that we have the kind of pipeline that is necessary to allow us to deliver on the targets that we have set out, both in terms of volumes and in terms of spreads. Operator: The next question is coming from Michael Cyprys with Morgan Stanley. Michael Cyprys: I wanted to come back, Marc, to your commentary on the technology cycle and your views around it being very far-reaching, whether it's throughout AI, blockchain tokenization and so forth. I was hoping you could talk about the positioning of Apollo how you're positioning Apollo to navigate, what challenges and risks do you see ahead? How do you think about insulating the business either through organic or inorganic steps as you look out? And what are some of the most exciting opportunities that you see for Apollo to capture in the midst of these developments? Marc Rowan: That sounds like the whole call. Look, this is -- we are -- there are just so many angles to this, Michael. It starts with the impact on the portfolio. which is -- and I'll go back to what John Zito and others were saying 18 months ago. Software is the ground 0 for issues around AI. That does not mean every software company is at risk. In fact, some may be enhanced. But our view was in the credit market, we are not paid to figure that out. The best you can do in credit is to get back your money and your interest on time in the amounts you've been agreed. And therefore, since there was no benefit to owning binary outcome software loans, who were bad, we sold them. If you just discovered 6 or 8 weeks ago that AI could impact enterprise software, what were you doing for the past 2 years? We don't know. And so it starts with asset selection. And obviously, it is not just enterprise software, it is other businesses that are vulnerable to services. It informs our underwrite of investment grade and where we choose to extend credit. Jim focused on this notion of picks and shovels. There are those who have made big bets on the future value of compute, 5 and 6 and 10 years from now. And I have no doubt that some of those bets are going to pay off really handsomely. And some of those bets are going to be disastrous. We have appropriate -- not done single-asset bets. We have spread across with the right structures and the right protections with the right risk award to kind of create convex upsides while getting some amount of downside protection and some notion of our money back. This informs our underwrite. So this is the asset side of our business. Internally, I said on the last call, we are circa 4,000 people in asset management, circa 2,000 people in our retirement services business. I will be surprised if other than on a short-term basis, we end up has more than that. Now I think that jobs are going to change, people are going to change. But the ability of our industry, which, for the first time, is at scale to not be so dependent on legacy systems that we can take advantage of new systems and new ways of doing things, I think, is extraordinary. Some of our industry will do this really aggressively. We will be among them, and some will not because their business is just not demanding enough and it's a pain in the butt to do. So I do expect this will give us opportunity to redeploy margin, redeploy people and whether we choose to take that as additional margin or whether we invest that in growth in the business is a choice we'll make quarter-by-quarter as we think about what is best for the organization over the long term. And then you've got to look politically. We are going to go through wholesale change. If you are an ideally graduate who's in the liberal arts and certain things, you're 10 years out of school, you're making $60,000. If you can level a concrete floor, you're making $250,000. That is a dynamic that we have to be really attentive to because we have no political history of blue-collar workers ascendant and white collar workers under pressure. And many of these white-collar jobs are going to be resident in blue cities. That's where the knowledge workers are. And so we expect some amount of political upheaval both here and in Europe as this transition takes place and as we see. And we are mindful of that in terms of our overall defensive posture. I don't know if you want to add. James Zelter: I guess, that's good. Operator: The next question is coming from Brennan Hawken of BMO Capital Markets. Brennan Hawken: You spoke earlier on the spread in Retirement Services. I'm curious about the flow dynamic. I was a bit surprised that the funding agreement flows were so resilient given the spread dynamics in the quarter. So curious about how you think about your expectations just from a volume perspective on the funding agreement side? And then also on the retail side, it's been a little lighter in the last few quarters. We hear about the competition. You spoke to the cost side before, but just curious from a volume perspective, what your expectations are. Is this the right volume level if you think about retail as we go forward. Martin Kelly: So Brennan, a couple of questions there. One is on the funding agreement side. We did no public funding agreements in the first quarter, given where spreads were. And given where spreads are today, they've come back in meaningfully from the wides, but they're still not the level. They're probably 15 to 20 basis points wide of where they need to be, depending on the tenor for us to find that attractive. We were, on the other hand, able to access private funding agreements in a way that compensated for that attractive spreads. So that's the funding agreement dynamic. The retail annuities is like -- as we've referenced a couple of times, the market has been competitive. That has eased somewhat and we had a stronger April. But I would expect sort of that to be a base level plus or minus relative to where we expect the immediate quarters to land. And so we think while PRT remains a channel which is not open, we're accessing the other channels, but we're balancing spread, and we're balancing return on equity and relative to the cost structure of the firm, which is a competitive advantage, clearly, and the origination capabilities that we have. Operator: The next question is coming from [indiscernible] of Piper Sandler. Unknown Analyst: I appreciate the question. I know it's the narrow corner of the market, but can you discuss the opportunity in direct lending today as well as some of the risks out there just cutting through some of the noise and headlines are you seeing increased interest from institutions, given some dislocations there? And then just on the retail side, how are the conversations with advisers and maybe more importantly, advisers and their end clients on the asset class and then confidence in adding alters exposure beyond just direct lending. James Zelter: Yes. I would say to the specific question, the area of pricing for new product in that direct lending market is a SOFR 450 product plus or minus. And I think many originators in light of the last activity the last couple of months with headlines were widening out indications to issuers. And the reality is the flow has been pretty light because of the strength of the broadly syndicated market and the high-yield market. And so that's an alternative financing vehicle and financing avenue. So from a product volume side, it's been a little bit lighter. But I would say many, many folks, including ourselves, for good quality direct loans that we believe, have robust business models, there's plenty of access. And it actually may result in industries or names that are not software or AI disruptable to trade actually a little bit of a tighter level. As we mentioned in our broad comments, institutions are looking at it as an opportunity to deploy even in bulk secondary opportunities or new primary mandates. Your third question is really about the adviser. I think, listen, there's been a tremendous amount of dialogue and insight and the degree of education on portfolio construction is really coming home to light, and we are spending a tremendous amount of our time on that. To say when the redemption cues and the redemption volumes, we really won't know for the next 4 weeks or so -- or next 2 weeks internationally and then 4 weeks domestically. I mentioned our preliminary numbers for April are strong. That, at the end of the day, will rule the day in terms of the asset class performance over time. So I think the headlines have dissipated a little bit. As we mentioned as well as a few of our peers, the redemption requests have not been wide across the investor universe. It's been a bit narrow based on a few distribution channels in a few geographies. But it's too early to tell exactly how that works in the next few weeks. But the reality is, this is a very robust asset class. For 10-plus years, it returned plus 300 or so versus public safe, high-yield and leveraged loans. So institutional investors have benefited. Global wealth investors have benefited from inception-to-date returns. And this is a period that we need to get through. Operator: The next question is coming from Wilma Burdis of Raymond James. Wilma Jackson Burdis: Can you talk about the opportunity -- market opportunity in Japan. We know Apollo is very strong there, and there's fewer competitors. And we've definitely seen an uptick in activity with Aflac and Prudential doing some deals. So can you just talk about what we can expect there going forward and if there's a good amount of volume. Unknown Executive: We've been very public, broadly speaking, on our constructive approach to what's going on in Japan. We actually took all of our 190 partners there in January for our biannual partners off-site for a strategic review of our business, but did a deep dive in Japan. I break it down into 3 areas: private equity area. We've been active with 4 to 5 carve-outs that really plays into our business model of corporate carve-outs in industrialized companies. That's number one. Number two is the distribution of yield product into their insurance and other retirement products vehicles, which we've continued to add dramatically in that space. Third is working with a lot of banks and helping them augment their excess capital and that's excess reserves in dollar-based assets. And the fourth, as you said, mentioned about the insurance business, we typically to date have been a reinsurer, but a lot of activity going on to see how we can use our competitive asset management and origination capabilities to compete to a broader degree. I think it'd be inappropriate to talk about any one transaction. But we're excited about what we see broadly speaking. And I will add that we brought on a very senior individual to run our Asia business, our Asia Pac business based in Japan, Ueda-san, who after a long career at Goldman ran GPIF as a CIO for 5 years, so incredibly well positioned, and it's really a statement of our view on the opportunity set in that country in that region. Operator: The next question is coming from Bart Dziarski of RBC Capital Markets. Bart Dziarski: I wanted to ask around Athene. So thanks for the enhanced disclosure. I do agree. I think it's the best disclosure out there for life insurance. And I wanted to ask sort of your view today on the regulatory temperature, if you will. So the NAIC is looking at CLO capital charges sound manageable for you guys. And then last week, the U.K. PRA. So they're looking into Bermuda-based funded reinsurance transaction. So just curious how you guys are thinking about the regulatory environment as it's evolving. Marc Rowan: It's going to be -- we'll see how you take this, it's going to be kind of an interesting dialogue. So we have been very engaged regulatory over a long period of time. We benefit from a good, robust set of rules that make sense. And the reason is that we are the largest factor in this industry. And like some of the largest, most dominant banks, we are indirectly responsible for the poor behavior of others. Every once in a while, when someone does something silly, a bill is delivered to the industry, and we are the largest participant in the paying of that bill, and we are tired of writing $100 million and $150 million checks for the stupidity of others. And so we have been consistent with our regulatory focus, equal capital for equal risk. The CLO project is a project that we have supported and helped on for a long period of time. It is ultimately up to the regulators to do the work that they need to do, informed by data, to come to the notion of equal capital for equal risk as opposed to an inherent bias for or again structured or for or against corporate securities. So in that regard, we're happy to see it. The other thing that's going on is there is an increased focus on offshore jurisdictions. Let's start with the U.S. The U.S. understands that to the extent massive amounts of money are being moved to the Cayman Islands and the Caymans are not as transparent that the U.S. system is on the hook. Every one of them understands is there is heightened exposure around Cayman. And this is not to say that Cayman itself is a bad place, but in the current regime, without the same protections that places like Bermuda or otherwise have done, they are not reciprocal jurisdictions and are under intense scrutiny. And it will not surprise me to see increased amounts of regulatory scrutiny and perhaps increased request for capital for those people who have made extensive use of Caymans, which, by the way, are not just new entrants. There are lots of established entrants who also have positions in the Caymans. With respect to the PRA, there is also a focus on offshore funded reinsurance. I believe the rules or the proposed rules that have come from the PRA are beneficial to people who are actually running a proper business. I expect them to be helpful to what we're trying to do. I also expect the same to come from the Japanese marketplace. In Japan, we have seen, like in many other jurisdictions, companies make use of offshore funded reinsurance in some places with credit counterparties who are not quite where they should be. Just like for the PRA, this is a concern for the Japanese regulator, and I would not be surprised to see formal or informal pressure brought around that. I come back to the competitive dynamic. Very few people have been able to amass the kind of capital base we have. The reason we've been able to do this is because we manage ROE, we write business that makes sense for us as principal and as a result, our investors allow us to retain the capital in the business and to compound that capital over time. Almost every other company in our industry pays out 90-plus percent of their earnings and does not grow their capital base. Over time, the ability to guarantee outcomes, we believe, is going to be more and more important. We are not shying away from the guarantee business. We like the guarantee business. We just want to be paid appropriately for what we're doing and continue to manage the business around robust ROEs, and we welcome the regulatory intensity. When we produce the kinds of decks you've seen for Athene, every regulator has them. We asked the question that you would logically ask, why isn't everyone required to do this? And again, there should not be just a focus on new entrants. This is a problem for the established insurers as well. There are a number of really good companies out there. We do lots of business with them, and there are a number of people who are cutting corners, and I do not believe are ultimately good players and good participants in the industry in their current form. Operator: Thank you. This brings us to the end of today's question-and-answer session. I would like to turn the floor back over to Mr. Gunn for closing comments. Noah Gunn: Great. Well, we appreciate everyone's time and extended attention this morning. As always, if you have any follow-up, please feel free to reach out, and we look forward to speaking with you soon. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines at this time or log off the webcast, and enjoy the rest of your day.
Operator: Good day, and thank you for standing by. Welcome to the Dine Brands Global, Inc. First Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Matt Lee, Senior Vice President, Finance and Investor Relations. Please go ahead, sir. Matt Lee: Good morning, and welcome to Dine Brands Global, Inc.'s First Quarter Fiscal 2026 Conference Call. This morning's call will include prepared remarks from John W. Peyton and Vance Yuwen Chang. Following those prepared remarks, Lawrence Y. Kim will also be available along with John and Vance to address questions during the Q&A portion of the call. Please remember our safe harbor regarding forward-looking information. During the call, management will discuss information that is forward-looking and involves known and unknown risks, uncertainties, and other factors, which may cause actual results to differ from those expressed or implied. Please evaluate the forward-looking information in the context of these factors, which are detailed in today's press release and 10-Q filing. The forward-looking statements are as of today, and we assume no obligation to update or supplement these statements. We will refer to certain non-GAAP financial measures, which are described in our press release and available on Dine Brands Global, Inc.'s investor relations website. With that, it is my pleasure to turn the call over to Dine Brands Global, Inc.'s CEO, John W. Peyton. John W. Peyton: Good morning, everyone, and thanks for joining us. Today, I will walk through Dine's Q1 results and share insights on consumer behavior as well as our brands' performance in the current environment, and then I will hand it over to Vance for a deeper dive into our financials. We started the year building upon the momentum from last quarter, achieving flat to positive sales growth across all three brands for the first time in several years. This performance reflects progress against our key priorities, which include enhancing the guest experience through operational improvements, strengthening and simplifying our marketing to better connect with guests, particularly through more targeted, culturally relevant engagement, and advancing menu innovation and everyday value platforms to meet evolving consumer needs. As the quarter progressed, the operating environment became more dynamic and, in many ways, more challenging as inflation for food away from home and higher gas prices put a strain on households. With consumer sentiment declining to historically low levels, discretionary spending has become harder to justify, prompting some guests to more carefully evaluate lower-cost alternatives across restaurants, grocery, and other food channels. We are seeing the most pressure on lower-income consumers. As a result, this is driving greater focus on offerings that combine compelling price points with quality, abundance, and differentiated experiences like Applebee's 2 for $25 platform and IHOP's everyday value menu. Against this backdrop, the importance of our strategy and the relevance of our brands becomes even more central to our performance. We operate scaled, well-recognized brands built around value and everyday occasions and offering experiences that cannot be easily replicated at home, delivered at an accessible price point. This remains a strength of our business even within a more challenging landscape. While we recognize there is more work to do to strengthen our financial performance this year, we are pleased with our first quarter sales performance and believe our focus on value, cultural relevance, and disciplined execution positions us well to compete and deliver sustainable results. I will now turn to our key financial highlights for the quarter. All of our brands outperformed Black Box on comp sales. Applebee's reported a 1.9% increase in comp sales, and IHOP posted flat comps, despite weather impacting Applebee's by 94 basis points and IHOP by 80 basis points in the quarter. Our EBITDA was $50.8 million compared to $54.7 million in the same quarter last year. Our decreased profitability reflects our investments in our dual brands and company-owned portfolio initiatives, and we expect these investments to create value over the long term. We returned $24 million of capital back to shareholders. Overall, our results reflect the balance between continued investment in the business and solid top-line performance across the portfolio. Now some updates across our portfolio starting with Applebee's. Building on our sales momentum from 2025, Applebee's posted positive comp sales in the first quarter, outperforming Black Box. The continued focus on our 2 for $25 value platform and new menu innovation serves as our primary sales drivers as these initiatives continue to resonate with our guests. Our strategy this quarter remained consistent: communicating new menu innovation through high-impact targeted marketing and maintaining strong execution in the restaurants. Rather than relying on broad-based campaigns, we are leaning into our 2 for $25 value platform and demand-led activations tied to cultural moments, allowing us to connect more efficiently and compete more effectively for share of wallet. The OM Cheeseburger launch is an example of our value strategy in action. Since its introduction in January, the burger has driven high interest and engagement, supported by its compelling $11.99 price point and inclusion on our 2 for $25 value platform. In just a few months, it became the highest-ordered burger on that platform, reinforcing Applebee's everyday value positioning. Because OM Cheeseburger launched in time for Valentine's Day, we further pushed our 2 for value platform to deliver an affordable yet experiential date night occasion. The OM Cheeseburger news generated more than 9 billion impressions, reached 96 million people on social media, and sparked nearly 80 times more organic reviews than typical campaigns. By providing guests with incredible value during this seasonal moment, it drove the highest single-day sales volume in Applebee's history, with the full week ranking among the top five sales weeks ever. Across digital channels, off-premise comp sales increased approximately 3.5% in the quarter, supported by third-party delivery and targeted promotions tied to key occasions like the Super Bowl and the NCAA Basketball Tournament. From an operations standpoint, our strategy is centered around driving excellence through simplicity, focus, and accountability. We are implementing initiatives that simplify kitchen operations, increase manager presence in the dining room, and improve off-premise order accuracy. During the quarter, manager visibility contributed to higher guest satisfaction scores as reflected in improved guest surveys and Google review scores. As part of these efforts, we are preparing for a systemwide launch of a new Toast point-of-sale platform. We expect this to meaningfully increase beverage order incidences, reduce voids, and increase tips while providing better data and tools for our teams. Collectively, these efforts position us to operate more efficiently and support long-term growth. While April sales have softened against tougher prior-year comps, our focus on value, targeted marketing, and operational discipline will support our performance in a dynamic environment. Turning to IHOP. For the second consecutive quarter, IHOP outperformed Black Box in both sales and traffic in a category where traffic remains under pressure. This reflects the brand's focus on great value, product innovation, culture-driven marketing, and an improved guest experience, all of which are helping to build momentum. Comp sales were primarily supported by check improvement as we balanced IHOP's everyday value menu with increased awareness of premium offerings. Breakfast combos tied to our Bottomless Pancakes campaign performed well, alongside limited-time offerings, including this quarter's featured Spotlight Stack, New York Cheesecake Pancakes. This approach continues in Q2 with the promotion of IHOP's signature Stuffed and Stacked Omelets, including the new bold Barbecue Pulled Pork Omelet, and the launch of a new proprietary coffee blend, the first new coffee introduced at IHOP in almost 20 years. IHOP continued to see momentum in off-premise, with comp sales increasing 2.6% year over year, largely driven by incremental third-party delivery volume. Beyond driving comp sales, third-party channels enhance brand visibility and enable engagement with guests across multiple channels. Off-premise represents 22% of sales, with continued opportunity across delivery, digital ordering, and emerging areas like catering. While early, we are already seeing an approximately 16% improvement in comp sales in catering, and we have made targeted investments over the past year in digital ordering, packaging, and local store marketing to further support the catering channel. IHOP's differentiated breakfast offering translates well to group occasions, and we are seeing meaningful upside in this channel as it continues to scale. Beyond expanding how guests access the brand, we are also focused on how to connect with them. We are showing up in culturally relevant moments that have resulted in incredible buzz for IHOP, allowing us to engage with new fans and consumers. Initiatives like National Pancake Day and the Bottomless Pancake campaign with NFL star Malik Nabers have been successful in driving engagement and keeping the brand top of mind. During National Pancake Day, we saw a 316% year-over-year increase in engagement across social channels, demonstrating the effectiveness of our investments to reach a broader audience. Underpinning all of this is a relentless focus on operational excellence and the guest experience. Speed is progressively improving, with table turns approximately 6% faster than they were in Q4. Guest complaints are down year over year, reflecting strong execution and consistency across the system, while investments in our new POS and hand-helds continue to enhance order accuracy and efficiency in our restaurants. Overall, IHOP continues to deliver steady performance in a challenging environment, with April sales holding steady behind our value menu and barbell strategy with premium offerings. Turning to Fuzzy's. The momentum from our Q4 promotions carried into Q1, contributing to Fuzzy's posting positive comp sales for the first time in three years, enabling the brand to outperform its competitors in sales every month in Q1. This progress is a result of the hard work we have done to strengthen the business with a focus on improving technology, streamlining the menu, and enhancing the in-restaurant experience. We are encouraged by Fuzzy's performance this quarter and remain focused on sustaining and building on this progress. Now for dual brands. It has been one year since we opened our first domestic dual brand in Seguin, Texas, and our confidence in the platform continues to grow. Across the system, most of these restaurants are generating about 1.5 to 2.5 times the sales of the original stand-alone restaurant while maintaining a healthy check balance across both brands. The Seguin restaurant is still delivering roughly two times its pre-conversion sales levels. Today, we have 43 dual brand restaurants open, with 13 additional locations under construction, and we remain on track to have approximately 80 open domestically by year-end. Interest in our dual brands remains strong among existing and new franchisees. We now have 10 different operators that have opened a dual brand restaurant, and of these, two are new franchisees to the Dine system. The dual brand model provides a flexible path to unlock additional value across our existing footprint. It allows franchisees to reposition lower-performing restaurants, including those that may have otherwise reached the natural end of their life cycle, while also enhancing performance at higher-sales restaurants. A long-standing Applebee's franchisee opened its first dual brand in Hawthorne, New York, just a month ago. The successful conversion of a high-sales single-brand restaurant validates that the dual brand model is adaptable and scalable across a range of sales profiles. The unit was already a strong-performing restaurant, and since converting and reopening in March, it has delivered an approximately 1.8 times sales lift. During the last few months, we have learned more about these restaurants from a guest perspective. A few highlights include: guests are excited to have the option to choose between two complementary iconic brands; 62% of our dine-in tickets contain at least one item from each brand; guests who purchase from both brands are spending on average 24% more than those who purchase from just one brand, leading to an overall higher check average at the dual brand restaurants; and sales remain balanced across all dayparts, proving our thesis about the complementary nature of these brands. We also made operational improvements, including updating our online ordering flow to make the experience more seamless for guests, which has driven an increase in average off-premise check, and improving efficiencies in back-of-house operations such as kitchen design. We continue to improve our pre-opening training at restaurants and are seeing newer restaurants achieve faster table turn times. Taken together, these results reinforce our confidence in dual brands as a big idea and a compelling growth vehicle, driving strong unit economics and continued franchisee demand. Turning to our broader development initiatives. We maintained momentum this quarter in new restaurant openings, opening 24, up from 10 at this time last year. We remain on track to meet our full-year domestic development guidance. Development remains a key priority for long-term growth driven by our dual brand formats, the Applebee's Looking Good remodel program, and targeted investments in our company-owned portfolio. In addition to new unit growth, we are also seeing meaningful opportunity within our existing footprint through relocations and real estate optimization. Two recent new restaurant openings are relocations within their existing markets, and while early, in both cases sales increased over 50% compared to the prior location, highlighting both the continued relevance of the brand and the importance of site selection in unlocking incremental growth. We made progress on the Applebee's Looking Good remodel program, completing 11 remodels this quarter. This program has consistent engagement among franchisees, and early results remain encouraging with, on average, a mid-single-digit percent sales lift. We expect about a third of the system to be remodeled by year-end. At IHOP, we are beginning a three-year renovation cycle with a fresh, modern design called California Heritage. It is a light, bright, and joy-filled design that brings a warm, welcoming feel to the restaurant while staying unmistakably IHOP. Before turning the call over to Vance, I note that while we expect to see some near-term headwinds, we remain focused on executing against our priorities and positioning the business to drive sustainable long-term growth in this challenging environment. I will now turn the call over to Vance. Vance Yuwen Chang: Thanks, John. On the top line, consolidated total revenues increased 4.8% to $225.2 million in Q1 versus $214.8 million in the prior year, primarily driven by the acquisition of company-owned restaurants since 2025. Excluding advertising revenues, franchise revenues in Q1 decreased 2.1% primarily due to a decrease in proprietary product sales and performance of our international franchisees. Increases in comp sales for the quarter were offset by closures. Rental segment revenues for 2026 were consistent with the prior-year period. G&A expenses were $53.1 million in 2026, up from $51.3 million in the same period last year, due to annualization of last year's investments in training, development, and operations to support our remodeling, dual brand initiatives, and our larger company restaurant portfolio. Adjusted EBITDA for 2026 decreased to $50.8 million from $54.7 million in 2025, primarily driven by the following factors: first, IHOP's proprietary product sales decreased due to sales timing to our distribution partners; and second, we have more company restaurants and dual brand restaurant openings than last year that resulted in higher G&A and pre-opening support cost. In addition, EBITDA was impacted by restaurants taken back since the prior-year quarter, which are still in turnaround stage and not yet at steady state. I will touch further on the progress we have seen in our company restaurants, particularly around the dual brand conversions, in a moment. Adjusted diluted EPS for 2026 was $1.07 compared to adjusted EPS of $1.03 for 2025. Turning to the statement of cash flows. We had adjusted free cash flow of negative $3 million for 2026 compared to $14.6 million for the same period last year, primarily driven by higher CapEx for company restaurants and the year-over-year impact of performance plan compensation payments. CapEx through 2026 was $12.1 million compared to $3.3 million for the same period in 2025. Nearly two-thirds of the CapEx year to date is tied to remodels and dual brand conversions of company-owned restaurants. Our lower adjusted free cash flow and increased CapEx this quarter is timing, as we expect to end the year with CapEx in the range that we previously provided. We finished our first quarter with total unrestricted cash of $104.2 million compared to unrestricted cash of $108.2 million at the end of the fourth quarter last year. On buybacks and dividends, we returned $20 million of capital to shareholders in Q1, including $22 million of share repurchases, which was approximately 5% of our shares outstanding at the beginning of the year. Our total shares repurchased in Q4 and Q1 were $52 million, which is above what we had committed to on our Q3 2025 call. We continue to believe our shares are undervalued and remain committed to share repurchases. Next, Applebee's performance. Q1 same-restaurant sales increased 1.9% year over year. Domestic average weekly franchise sales per restaurant were $56,300, including approximately $13,500 from off-premise, or 23.9% of total sales, of which 11.9% is from to-go and 12.1% is from delivery. Off-premise saw a positive 3.5% lift in comp sales in 2026 compared to the same period last year. IHOP's Q1 same-restaurant sales were flat. Domestic average weekly franchise sales per restaurant were $38,300, including $8,300 from off-premise, or 21.5% of total sales, of which 7.5% is from to-go and 14% is from delivery. Turning to commodities. Applebee's commodity cost in Q1 increased by 6.3% and IHOP's commodity cost increased by 3% versus the prior year. Our supply chain co-op, CSCS, continues to expect commodity costs in 2026 at mid-single digits for Applebee's and low-single digits for IHOP. The primary driver for both brands' commodity costs is higher beef prices, including the lapping of favorable beef contracts at Applebee's. In 2026, we implemented projects resulting in over $4 million of annualized savings across both systems, and we continue to partner with CSCS to leverage our scale. Lastly, our company-owned portfolio remains instrumental in strengthening brand performance and supporting the overall health of our system, and our goal is to ultimately refranchise the locations at the right time. At the end of Q1, we operated 86 company-owned restaurants totaling about 2% of our system, which is in line with our asset-light model. This includes 12 Applebee's restaurants that we opportunistically took back in February in the Virginia area, with the potential to complete approximately five dual brand conversions out of this portfolio. As has been reported, one of our franchisees, Neighborhood Restaurant Partners, filed for bankruptcy protection. As part of its proposed plan, they are selling approximately 53 restaurants. Dine is stepping in as a stalking horse bidder because we believe that securing these restaurants gives us direct operational insight and allows us to invest in the units through our development initiatives. Although closures for construction impacted profit in our company-owned portfolio, we are making progress. Q1 comp sales outperformed the system with close to a mid-single-digit comp sales improvement year over year. During the quarter, we completed six remodels and two dual brand conversions, bringing our total to 20 remodels and four dual brand conversions since taking back these restaurants. By the end of 2026, we expect to have completed or be under construction on over 30 remodels and eight-plus dual brands. While early, at our four company dual brand restaurants we are seeing sales lifts of approximately 2.5 times, which further supports our confidence in our dual brand strategy. We are maintaining our full-year financial guidance at this time. With that, I will hand it back over to John. Thank you. John W. Peyton: To wrap up, we are pleased with the start to the year and are confident that our strategy will enable us to navigate near-term headwinds. We remain focused on disciplined execution, supporting our franchisees, and investing in initiatives that position us for sustainable long-term growth. Thank you for your time today. We look forward to your questions. Operator, I will turn it back to you for instructions on how to access our queue. Operator: Certainly. We will now open the call for questions. In the interest of time, we ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows. Our first question for today comes from the line of Jeffrey Bernstein from Barclays. Your question, please. Jeffrey Bernstein: Great. Thank you very much. My first question is on the comp trends more recently. John, I think you mentioned that the Applebee's comp slowed and you referenced tougher compares. How do you think about that on more of a relevant two-year basis, and what is the underlying trend? You talked about lower income being a focus for your brands and perhaps more vulnerable. Could you discuss that, and whether the spike in gas prices had an outsized hit versus what you have seen in the past? And then I have a follow-up. John W. Peyton: Good morning, Jeff. That is exactly the answer. Our value-conscious, price-sensitive guests are very sensitive to increases in gas prices, the basics, and the cost of living. There is a lot of statistical data broadly and within our company that demonstrates that, and that is what we think we saw happening in April. We are encouraged by recent news where it seems to be lessening a little bit. More broadly, that reinforces our strategy around making sure that we have the right value message at Applebee's for those guests that are price sensitive. We continue to lean into the 2 for $25 message, strengthened by new and exciting news. Last quarter it was OM Cheeseburger, and we will have something new this quarter as well. Jeffrey Bernstein: Got it. And my follow-up is on the asset base. On the dual brands, I think you confirmed 80 in the U.S. by year-end. Where do you think that could go over time? You are picking some markets where you think it will work best, but clearly there is a very strong sales lift you are seeing. Where could the dual brand mix go over time, and more broadly, how has franchisee engagement been of late? Are they more open to the idea, relative to just opening more Applebee's on their own, or opening more of the dual brands in future years? John W. Peyton: We have modeled the opportunities across the country, looking at market size, demographics, competition, and daypart traffic. We have identified 900 opportunities in the U.S. to open a dual brand restaurant or convert an existing restaurant to a dual that would have minimal to no impact on an existing restaurant. Of those 900, 450 would be new builds, and 450 would be adding a second brand to an existing restaurant. We think that is achievable over the next eight to ten years. Franchisee enthusiasm is growing. Our pipeline is strengthening. We are very confident in the approximately 80 we have discussed for this year, and we are building a pipeline into 2027 and beyond. That pipeline includes franchisees that will be new to the dual brand system, and it is becoming equally balanced between existing Applebee's and existing IHOP franchisees. Operator: Thank you very much. Our next question comes from the line of Nerses Setyan from Mizuho. Your question, please. Nerses Setyan: Thank you. On guidance, specifically the EBITDA guidance, can you update us on approximately how much investment in company-owned stores is embedded in that guidance? Vance Yuwen Chang: Hey, Nick. Good morning. We are keeping guidance, and Q1 EBITDA was a little softer, but we are maintaining guidance for two reasons. We have the franchise business and the company restaurants. Overall, the franchise business is steady. Though it is a complicated operating environment, we believe our formula of value, targeted marketing, and operational execution will improve sales trends in the coming quarter. Company restaurants will continue to improve. It is not going to be a straight line, but we have more work to do in terms of construction and store execution. This short-term EBITDA pressure should moderate over time as we start to leverage the investments we have made. In Q1, we had more than 75 closure days due to remodels and program conversions. This is not going to happen for the rest of the year, so we will have fewer closure days. That is what is baked into our guidance. Nerses Setyan: In terms of alcohol licenses, is that behind us, or is that still an ongoing headwind? Vance Yuwen Chang: That is mostly behind us at this point, so it is a tailwind for us. Nerses Setyan: On the company-owned mix going up, you talked about the potential acquisition post the bankruptcy. Are you comfortable with the mix now, or could it continue to go up through the rest of the year and potentially into 2027? John W. Peyton: We are more amenable today than we were in years past to taking back restaurants or a portfolio of restaurants to strengthen them, strengthen the system, prevent closures, and then refranchise them, typically about three years after we acquire them. We will continue to do that when it is the right portfolio, right for the brand, and we can use those restaurants to advance our initiatives like proving out the remodel, converting to duals, and testing programs and technology. While our goal is not to get to 5% of the portfolio company-owned, I am comfortable getting to 5% and still being asset light. That is the threshold you should think about for where I am comfortable going, but it is not the goal to get there. Operator: Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press 11 on your telephone. If your question has been answered and you would like to remove yourself from the queue, simply press 11 again. Once again, we ask that you limit yourself to one question and one follow-up. Our next question comes from the line of Dennis Geiger from UBS. Your question, please. Dennis Geiger: Great. Thanks. I wanted to come back to the focus on quality and price points, value in particular. You spoke to having the right value message at Applebee's, the 2 for $25, and something new coming this quarter as well. Where was the value mix for both brands in the quarter, and on the go-forward, is it 2 for $25 plus something new as the playbook for the balance of the year, or do you think you have to do more given current consumer pressures? John W. Peyton: Good morning, Dennis. I will start with Applebee's, then Lawrence will address IHOP. For the quarter, about 26% of our tickets had value items on them, which would be either 2 for $25 or an LTO. That number is down from about a third, which is what it has been for many quarters. The reason is we had the Ultimate Trio as a national promotion in Q1, and we moved it out of the national price point to being priced individually by franchisees, so technically we do not count it. In terms of the trend, including Ultimate Trio sales, we are still running at about a third of our tickets including some sort of value item. That has been consistent for five to seven quarters. 2 for $25 is our primary value communication—two entrées and an appetizer for $25, or $12.50 per person. We keep it fresh with consistent messaging throughout the year and by introducing a new item to it. In addition, we will have value-driven LTOs designed to drive traffic. One other point: almost 62% of the items on 2 for $25 are the upsell tiers, not the entry level $25. Guests are paying increments that franchisees set based on their market. It is doing what it is supposed to do: driving traffic with the $25 message and upselling about two-thirds of the time. Lawrence, can you address IHOP? Lawrence Y. Kim: At IHOP, value mix in Q1 was 22%, slightly higher than Q4 at around 20%, and fairly consistent overall. The uptick in Q1 was primarily due to our Bottomless Pancakes promotion. Our value mix consists of the $6 Everyday Value Menu in addition to promotions like Bottomless Pancakes, our free pancake promotion on National Pancake Day, and our Senior Menu. Going forward, we are staying consistent with the $6 value message; it resonates extremely well. Since launching the weekday $6 value message in October 2024 and evolving it into the $6 Everyday Value Menu in September 2025—and further in March by adding a new BLT to expand daypart propositions—we have outperformed Black Box in traffic every month in 2025 and continue to do so into 2026. We will continue that momentum and balance value with innovation as part of our barbell strategy, including Stuffed and Stacked Omelets and our new coffee introduction, with more to come. Dennis Geiger: As a quick follow-up on check management, beyond value mix, what are you observing around appetizers, beverages, desserts, and other categories over the last couple of months? Lawrence Y. Kim: In 2025, we were laser-focused on driving value to build equity in the value landscape, which supported consistent traffic outperformance. In 2026, we are complementing value with innovation under the barbell strategy. You will see a cadence of both value and innovation through summer, fall, and winter to create awareness and balance across platforms. John W. Peyton: At Applebee's, average check remained about $39, including a slight menu price increase franchisees put in place in Q1. We did see some migration toward lower-priced items at the expense of a drink or an appetizer, but we maintained the average check at $39. Operator: Thank you. Our next question comes from the line of Brian Mullan from Piper Sandler. Analyst: Hi. This is Allison Marsh on for Brian Mullan. Thanks for taking the question. At IHOP, on the California Heritage remodel, can you talk more about what we should expect to see with the remodel—the cadence, how many units are eligible, and how you expect it to roll out? John W. Peyton: Thanks, Allison. Lawrence will take that. Lawrence Y. Kim: The California Heritage redesign is a bright, modern design that is distinctively IHOP, based on a platform we have seen across international and our dual brands. We are very early in the process and are working with our franchisee partners on the incentive program, similar to Applebee's. We will have more to share over the next several quarters. We are excited as some remodels are starting now, but again, we are early in the stage. John W. Peyton: I would add two things. First, on our IR site we have a dual brand video; the IHOP interior featured there is the California Heritage design, which gives a sense of its fresh, modern look. Second, the Applebee's Looking Good remodel program continues into year two. Franchisees are enthusiastically participating, and we expect about 40% of the portfolio to be considered current by the end of this year. Operator: Thank you. Our next question comes from the line of Todd Brooks from Benchmark. Your question, please. Todd Morrison Brooks: Thanks for taking my questions. John, to start, you talked about the stalking horse situation with the franchisee for the 50-plus units. Looking at the base, what is your assessment of franchisee health as we get into a tougher consumer environment? Would you expect more growth in the corporate-owned base—not necessarily up to the 5% cap you mentioned—but with the environment, to keep stores in operation? At this point, beyond willingness to invest and convert to dual, is there still a lot to learn from running stores? John W. Peyton: A couple of thoughts, Todd. The NRP situation is specific to that owner and decisions within their fund about financing. The restaurants we are potentially taking back via the stalking horse bid are a healthy portfolio, so they will be accretive. I do not think it is appropriate to project the NRP situation onto the broader portfolio. As to learning, I disagree that there is little left to learn. It has been a while since we owned restaurants, and having about 100 gives us the ability to test new POS technology, roll menu innovation faster, run tests in-market, and implement guest service and training programs. That is valuable, in addition to renovating and converting to duals. We are seeing progress in restaurants we own—trending positively, particularly on EBITDA and profit—and believe they will be accretive when we refranchise them in three years. I am all in on that. Vance Yuwen Chang: Hey, Todd. On franchisee health, these are franchisee self-reported financials that we collect a quarter in arrears. Based on what we are seeing, on average margins are steady, supported by steady sales performance and cost management initiatives that CSCS and franchisees are doing together. Franchisees are aligned with our strategy and remain committed to growing with us. We are proactively making workout programs to accelerate incentives, remodels, relocations, and unlock dual brand territories. Ultimately, as we have said, dual brands can provide a step-function change to franchisee unit economics outside of normal comp growth. We are enthusiastic about pushing that agenda, and franchisees are as well. Todd Morrison Brooks: As a follow-up on duals, you mentioned a 1.5 to 2.5 times sales lift versus individual branded locations, with strong lift in Hawthorne. What type of lift do you need for a conversion to pencil? Does 1.5 times get the return you or franchisees look for, or do you need closer to 2 times? Vance Yuwen Chang: The flow-through on incremental sales from a dual conversion is much higher than the traditional four-wall margin because you are generally not paying more rent and labor does not increase proportionally. That flow-through should be north of 30%. Using simple math, if a $2 million restaurant adds another $1 million in sales, that is about $300,000 of flow-through to the franchisee's bottom line. The cost of conversion is a little over $1 million, depending on deferred maintenance or structural work that is site-specific. On $1 million of cost with $300,000 of flow-through, that is a very attractive payback for franchisees and for company restaurants. Operator: Thank you. Our next question comes from the line of Brian Vaccaro from Raymond James. Your question, please. Brian Vaccaro: Hi. Thanks, good morning. Could you double-click on underlying consumer dynamics? You noted softness within lower income. Anything worth noting by daypart or weekday versus weekend for either brand? And could you comment on the average check and traffic trends within the comps in Q1 for each brand? John W. Peyton: When it comes to income cohorts, the primary change we have seen this quarter and in recent quarters is that our price-sensitive, more value-oriented guests seem to be staying home a bit more or looking for lower-cost alternatives. Among other cohorts, we did not see significant changes in behavior worth noting. Looking at dayparts, weekdays, and geography, there is no clear pattern—largely consistent with recent quarters. The consumer behavior issue is concentrated among guests most impacted by gas prices and the economy in general. On average check and traffic, Vance can add detail. Vance Yuwen Chang: Brian, average check for Applebee's was about $39; for IHOP, about $35. Menu pricing for Q1 was approximately 4% for Applebee's and 3% for IHOP. Applebee's saw positive PMIX this quarter; IHOP was negative PMIX. Both brands saw negative traffic, but IHOP outperformed Black Box every month for the quarter. Brian Vaccaro: Thank you. Lastly, on closures, it seemed to step up in Q1—I think 20 at IHOP and 32 at Applebee's—but you maintained net development targets for the year. Could you help square that? Vance Yuwen Chang: Typically, closures run about 1% to 2% of the system. In the last year and this year, it is slightly elevated because more franchise agreements are coming due than in normal years. Also, we are proactively making workout programs with franchisees to accelerate relocations and unlock dual brand territory, which is reflected in closure numbers. We are maintaining net development because we have a strong pipeline of dual brands and stand-alone IHOPs opening, and that is baked into guidance. Also, closures tend to be lower-sales restaurants, and openings are larger-sales restaurants, so it is not one-to-one in unit count—there is accretion as we relocate and build new restaurants while closing older, lower-volume units. Operator: Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to John W. Peyton, Dine Brands Global, Inc. CEO, for any further remarks. John W. Peyton: Thank you for guiding us today. Your expertise is valued as always. Thanks, everybody, for your questions and the time you spent with us. As we said in our release and on this call, we are pleased with the brands' performance during the quarter despite a tough environment. We have plans in place to continue to appeal to our guests, particularly those who are increasingly value oriented over the next quarter, and you will see some new news in the next couple of weeks that we think will drive a lot of traffic to both brands. Thanks, everybody, and have a great day. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Welcome to Devon Energy Corporation's first quarter 2026 conference call. At this time, all participants are in a listen-only mode. This call is being recorded. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the call over to Christopher Carr, director of investor relations. You may begin. Christopher Carr: Good morning, and thank you for joining us on the call today. Last night, we issued Devon Energy Corporation's first quarter 2026 earnings release and presentation materials. Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon Energy Corporation website. Joining me on the call today are Clay Gaspar, president and chief executive officer; Jeffrey Ritenour, chief financial officer; John Raines, SVP, asset management; Tom Hellman, SVP, E&P operations; and Trey Lowe, SVP and chief technology officer. As a reminder, this call will include forward-looking statements as defined under U.S. securities laws. These statements involve risks and uncertainties and may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in the SEC filings and earnings materials. With that, I will turn the call over to Clay. Thank you, and good morning, everyone. Thanks for joining us. Clay Gaspar: Today, we will focus on Devon Energy Corporation's strong first quarter 2026 results, which once again demonstrate the operational excellence and financial discipline that define this organization. After walking through our Q1 results, I will turn to a quick update on our transformative merger with Cotera Energy. Now let us turn to slide three for a deeper look at our first quarter results, which reflect strong execution across the business. As you can see on the slide, beating on production and capital once again resulted in impressive free cash flow for the quarter. Our production optimization efforts drove oil to 387 thousand barrels per day, reaching the top end of our guidance range. Capital spending came in 6% below the midpoint of our guidance, as we continue to capture drilling and completion efficiencies through advanced technology and focused execution across the program. Combined, these efforts translated to $816 million of free cash flow in the quarter, demonstrating the capital efficiency of our program and positioning us to return substantial value to shareholders. I want to emphasize that these results are not isolated wins. That kind of consistency does not happen by accident. It is the direct outcome of the exceptional talent and commitment of our teams across every basin. Turning to slide four, what makes this story even more exciting is where we are headed. On a stand-alone basis, Devon Energy Corporation is entering the second quarter with significant upside torque to free cash flow. Production is expected to step up, our cost structure remains well controlled, and the commodity backdrop is meaningfully stronger than what anyone underwrote coming into this year. You can see the sensitivity of this business to commodity prices on the right side of the slide. This is a very compelling yield profile in any environment, and it reflects both the operational gains we have delivered and the natural leverage of a high-margin portfolio. We are running the program we laid out, capturing the operational gains we committed to, and letting free cash flow accrue to our shareholders. Turning to slide five, the key free cash flow strength I just walked through does not happen on its own. It is the direct output of the business optimization work we launched just over a year ago. I am pleased to report that we will achieve our $1 billion target well ahead of schedule. We will accomplish this major milestone with contributions from every part of the business, including capital efficiency, production optimization, commercial improvements, and corporate cost reductions. I want to thank the entire Devon Energy Corporation organization for making this happen. When you challenge this high-quality team with a clear mission, you might as well consider it done. Business optimization has transitioned from a one-off project to a new cultural mindset. The focus and accountability that we built will translate directly into our integration work with Cotera, and I am confident this foundation will allow us to attack the merger synergies with the same urgency and rigor. The engine behind that innovation is technology and AI. I want to spend an extra minute here because I think it is the most important insight about Devon Energy Corporation today that is not intuitive from just a cursory analysis of the financials. The AI revolution is real, and what is happening across this organization is incredibly exciting. Internally, we talk about the three waves of AI impact. Wave one is a much more immediate connection to Devon Energy Corporation's massive stores of data, transforming what was inefficient data-hunting time into data analysis and value-creation time. After years of cleaning and organizing our data, we have a fully firewalled internal tool called ChatDVN that has been up and running for three years and is today a standard part of our daily workflow. We are now deep into seeing the benefits of wave two, where the AI is doing the heavy lifting of complicated calculations and time-consuming work. Examples of this are leveraging AI to write code for new apps, and also translating the massive drilling, completion, and production data flow into actionable intel that our engineers can immediately act upon. Wave two value is showing up in cutting-edge drilling and completion time, directly translating into lower capital costs. We are also having very significant wins in production, leveraging AI-created tools to do real-time artificial lift optimization. We now have over 850 wells on fully autonomous artificial lift optimization with a very impressive productivity improvement. We are now moving into wave three, where we are redesigning internal processes from the ground up with AI at the center. That is the frontier, and Devon Energy Corporation is leading the industry there. Slide six is a great example of where technology and AI are showing up across the business. We have shown this slide in past quarters to highlight some of the key initiatives that have contributed to the success of the business optimization plan. I am not going to walk through all of these today, but the one thing I do want to point out is this: the ability to see business optimization show up in the financials is what gives the program its credibility. On the right side of the slide, we have highlighted key milestones, along with where we started and where we ended, so that you can track the progress directly. This is the same playbook we will leverage with the Cotera integration. Turning to slide seven, as we have discussed in past quarters, parallel to driving incremental value out of the day-to-day business, we are also regularly evaluating opportunities to optimize our portfolio and enhance shareholder value. The strategic transactions and portfolio actions we have executed have already collectively delivered over $1 billion in present value uplift to our enterprise over the past year. These gains are in addition to the improvements from our business optimization initiative. The primary update this quarter is on Fervo, which recently filed its S-1 for an IPO, an important milestone for Fervo and for our investment. This milestone is significant in providing a public marker for our investment, highlighting the value uplift we have created. The partnership is pioneering next-generation geothermal technology and leveraging our core skills in geoscience, horizontal drilling and completions, and data analytics, while positioning Devon Energy Corporation in a power-generating sector with more significant growth potential. Now turning to slide eight, to what I know is top of mind for many of you: the status of our transformative merger with Cotera Energy. I am pleased to report that both the Devon Energy Corporation and Cotera shareholders voted overwhelmingly to approve the merger on May 4, and we expect this transaction to close tomorrow. I could not be more excited about what this combination means for our shareholders. The industrial logic is undeniable, and combining two strong operational teams overlapping in each other’s best basins creates substantial opportunity to enhance efficiency and drive results. Pro forma, Devon Energy Corporation will be one of the largest independent E&P companies in the United States. In addition to scale, our asset quality, inventory depth, and balance sheet strength position us to deliver durable free cash flow and returns through any commodity cycle. Our go-forward shareholder return framework will be thoughtfully designed and competitive with our highest-quality peers. It will be balanced between dividends, share repurchases, and debt repayment. Subject to formal board approval, our dividend will increase by over 30% on a per-share basis starting in the second quarter. Additionally, both companies paused their share repurchase programs between deal announcement and close, building cash during a period of unexpectedly strong commodity prices. With the repurchase program immediately resuming post close, we are positioned to increase repurchase activity beyond our legacy level and capitalize on any discount to our intrinsic and relative value. Integration planning is progressing extremely well, and I want to be clear: the $1 billion synergy target is the floor, not the ceiling. In fact, as of this morning, our integration teams have already identified 156 distinct value-capture opportunities, underscoring both the depth of the upside and the sense of urgency we are bringing to this work. Once we close, we will move quickly to bring the same business optimization discipline to the integration effort and provide transparency in every step along the way. Before I close, I want to address something directly. Naturally, on the back of the announcement of our merger, we have fielded questions about the opportunity to reallocate capital within our pro forma portfolio, and also the opportunity to evaluate the go-forward asset composition of the company. First, I am confident that with our new combined portfolio, we will have opportunities to further enhance the efficiency of the capital investment program. Second, actively managing our portfolio is core to who we are as a company. Devon Energy Corporation has a 55-year history of buying and selling assets, and we are always seeking opportunities to enhance near- and long-term shareholder value. Every asset in the combined portfolio has to compete for its capital and earn its seat at the table. We have initiated a complete review of all assets against our strategic and financial criteria. While we do not have any preconceptions about future actions, we are excited to thoroughly review the portfolio with the soon-to-be combined board and remain open to all alternatives that enhance long-term value. We will be thoughtful, disciplined, and move with speed. Every option will be measured against one test: does it leave Devon Energy Corporation a stronger, more focused company on the other side? To be clear, this merger has added depth and quality of our inventory in the Delaware Basin and positions Devon Energy Corporation to deliver peer-leading capital efficiency for the foreseeable future. Our discipline paired with operational excellence, financial strength, and unwavering commitment to shareholder returns is what gives Devon Energy Corporation its unique investment proposition. With the Cotera merger on the verge of closing, we are entering an exciting new chapter that builds on this strong foundation. We expect to provide combined full-year guidance in mid-June once management and the board have appropriate time to align on the company's plan. With that, operator, I would like to turn to our first question. We will now open the call for questions. Operator: Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. 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 Arun Jayaram of JPMorgan Securities LLC. Your line is open. Arun Jayaram: Good morning, Clay and team. Clay, I was wondering if you could provide more details on this portfolio review process, which obviously will pick up steam when you close the merger in a couple days. Perhaps you could articulate the criteria that you and the team are looking at to establish what you believe are going to be core assets at Devon Energy Corporation? Could it be inventory durability, commodity price mix, etc.? And also, if we look forward and you do decide to monetize assets in the portfolio, should we think about your intention to redeploy those proceeds into coring up existing positions or potentially looking at buybacks given what looks to be really compelling valuation of the equity? Clay Gaspar: Arun, there is a lot there. You hit all of the top five of the questions we presumed we would get today. I will try to be as specific as I can. Of course, you realize the last thing we want to do is box ourselves into something preconceived before we actually do the work, have the deep conversations, do the real critical and objective review, move swiftly, and then make sure we are aligned with our board going forward. What I would tell you is we are highlighting capital efficiency, inventory depth, free cash flow, and overall fit—how all these pieces fit together—as the tone and nature of the analysis. But I can tell you, it is not a simple formula that we goal-seek on and it spits out an answer. This is stress testing from every conceivable scenario—thinking about near-term wins, thinking about long-term lenses, thinking about the market, and the use of proceeds that you are talking about. And again, going back to that test of how do we make Devon Energy Corporation a better Devon Energy Corporation? How do we deliver more value near term and long term for our shareholders? We are going to move swiftly, decisively, and aggressively into this. We just do not think it is prudent to box ourselves into any preconceptions of what that could look like with an ill-conceived timeline or any kind of cadence like that. But I appreciate the question. Arun Jayaram: Got it. And I have a housekeeping question for Jeff. There are some moving pieces regarding 1Q taxes and your forward look on taxes. Could you provide us an updated view on what is going on there, assuming it is related to the move in commodity prices, and what the go-forward cash tax guide could look like? Jeffrey Ritenour: Yeah, you bet, Arun. You are right. We had some noise in the Q1 tax outcome to the positive. It was a flip from deferred to current, which created a real benefit for us in the first quarter. And then, as you saw with the second quarter guide, we moved the rate higher as a result of that. That is a function of the flip that we had between current and deferred, but also a function of the higher commodity prices and the capital efficiency that we are seeing. As Clay mentioned in his opening remarks, none of us were expecting to have the level of oil prices that we have seen here in the back half of the first quarter and here into the second quarter, and we are projecting that at least to some degree into the back half of the year. As a result, we are generating significantly more pretax income. As you have heard me say in the past, free cash flow generation is a good proxy for pretax income. With the capital efficiency that we are seeing from the teams, which has been phenomenal, married with the higher commodity prices, we are getting into a position where we are just seeing some of that tax shield get utilized on a faster basis. As a result, we have moved our expectation for current taxes into the back of the year a little bit higher. For the full year for Devon Energy Corporation on a stand-alone basis, it will still work out to be somewhere around that 10% level, but it will be a little bit higher in the next coming quarters given the low rate we had in the first quarter. Arun Jayaram: Thanks, Jeff. Operator: Your next question comes from the line of Neal Dingmann of William Blair. Your line is open. Please go ahead. Neal Dingmann: Morning, Clay. My first question is on Permian activity. Specifically, as we continue to see negative Waha prices, how much does this impact your future Permian decisions based on what you are seeing there, and how much exposure you have to Waha? Clay Gaspar: Let me pick up on that, and then Jeff can add a little bit of color. I am really proud of the team’s proactive work. As you know, we have been very aggressive in participating in additional pipe. We have helped underwrite some of the pipe. We have additional capacity coming on with Blackcomb later this year. We are positioned well but certainly have marginal exposure to Waha prices. Inevitably, what we are doing in those environments is looking to the highest gas-oil ratios—the gassiest of our assets—and pulling back on that production during that time. We saw a little bit of that in the first quarter. We can manage that with the nominal amount of exposure we have by pulling back on some of that activity. We will continue to fight the good fight. When there is a call for Permian gas, think about the opportunities that we will have, especially with the positive realizations once we get the infrastructure built. I am really excited about the future for Delaware when the inevitable call for the gas will come. Jeff, additional comments? Jeffrey Ritenour: Yeah, Clay, you nailed it. When Blackcomb comes online later this year, that will further limit our exposure to Waha. We will be, call it, 10% to 15% exposure to Waha at that point going forward. As Clay mentioned, the team has done a great job managing the exposure, shutting in some of the high GOR wells, which has helped us, in addition to the infrastructure takeaway that we have. We continue to believe there is going to be a need for more takeaway from the basin as we move into 2027 and beyond, and the team is very much focused on evaluating opportunities to further limit our exposure as we move forward. Clay Gaspar: One other final comment on that: make sure everyone is paying attention not just to the realized gas price, but also some of the value the hedge comes through other line items. We are being thoughtful about how we are protecting; it is not always physical—sometimes it is financial hedges that we have in place that show up in other lines of the financial statements. Neal Dingmann: Great point. And then, Clay, a second quick one on what I would call new ventures. You all continue to own a decent size of Fervo. Do you anticipate continuing to take positions in additional geothermal or other newer-type ventures? Clay Gaspar: It is exciting. We have dabbled in a few ideas thinking about how we leverage the amazing talents that we have—geoscience, drilling and completing horizontal wells, and building facilities. That is what we do. Where else can we extrapolate these skills? What we found is an incredible Fervo team we have really enjoyed the partnership with. Happy to be alongside those guys, and we will continue to look to other ways to expand Devon Energy Corporation’s footprint. Trey, do you have other comments there? Trey Lowe: Appreciate the question. There is a lot of exciting things happening at Fervo. We took our stake in the Series D and led that round. We have obviously been very happy with the investment that we have had there financially, as well as the investment that our teams have poured into them with different technical advice over the years, and seen them continue to de-risk enhanced geothermal systems operationally and technically. The thing that we did not expect going into that first investment was the power demand that we see for firm, always-on, 365-day power across the United States, especially the Western United States. We continue to be pretty bullish on that power demand story. This gives us some exposure to it, and we are definitely interested as the technology continues to get de-risked. But I think back to the spirit of the initial question: we are pouring ourselves into the success of Fervo at this point, and that has been our focus as a company. Operator: Your next question comes from the line of Neil Singhvi Mehta of Goldman Sachs. Your line is open. Please go ahead. Neil Singhvi Mehta: Good morning, Clay and team, and congrats on the shareholder vote. That is where I wanted to start—the synergies. It sounds like you are tracking towards the $1 billion of cost optimization and the margin stuff and the corporate cost stuff, but could you talk about early wins and thoughts on whether you could pull forward the year-end 2027 target? Make this a little more tangible for us. Clay Gaspar: Neil, I love the attitude. We have not even started the race, and you already want to pull forward the finish line. That is my kind of thinking. I am exceptionally confident in this combined team’s ability to pull the rope in the same direction, get integrated, and get a unified culture. I mentioned the 156 projects that are already identified. What does not come through in the numbers is the mutual excitement of the wins we are seeing from both sides of the ledger. It is really a true synergistic opportunity. We are seeing those things in all the major categories—from D&C capital optimization, which will come really quickly, to upside in production, to thinking about how we reallocate capital inside of the portfolio. Even the hardest work that we do around what is the optimal spacing, staggering, sequencing, and completion design in the Delaware Basin—we have two really strong teams that have worked these very hard problems in isolation. Now you have the benefit of two strong teams, brilliant folks, coming together and sharing their best ideas. If I have ever seen synergy, it is that. Rewinding back to the WPX–Devon merger: we signed the deal, worked so hard to get to that point, and then looked at each other and said, okay, what do we do now? We started scrambling to figure out how to capture these things, monitor, track, hold ourselves accountable, and make sure it is flowing through the financials. The beautiful thing about our position today is we have established some really great mechanics behind this. Trey led the business optimization project. It is already very fluent on this side of the family—how that works. I do not anticipate any issues in getting those mechanics applied to all of the opportunities. And I will go back to my comments from the script: technology is the key innovative underwriter of so much of this, and we are just getting started. We are in the exceptionally early innings of those wins. With this combined footprint—this amazing Delaware Basin is our crown jewel asset—you combine the two positions together and then apply all of these brilliant ideas and people and technology. Just watch out. We cannot wait to deliver on this. As I said, I consider it the floor, certainly not the ceiling. Neil Singhvi Mehta: That is a great point about the Delaware really becoming the star of the portfolio on a pro forma basis. You already have a Delaware-concentrated program, but it is only going to be more so. Maybe you can comment on the advantage of moving a little bit more toward being Delaware-focused versus diversified, recognizing you have a portfolio process that you are looking at, but at a high level, what would be some advantages of being more focused as an organization? Clay Gaspar: I do not want to presume that we are in any way not focused. We certainly have the scale, the capabilities, and the teams in place that it is not like we can only work in one basin at a time. We want to be exceptionally objective about all possibilities to enhance this company’s value, both short and long term, for our shareholders. I will go back to the prepared remarks about the opportunities that we have to really do the thorough work, diligently evaluate every scenario, and not just which basins we are in, but thinking about all of the potential upside we have in other areas and how these pieces work together. Do not forget, this ranking in opportunities can significantly change when you apply $1 billion of synergies. Think about the enhancement of opportunities that we have with much lower D&C cost, with better production, thinking about how we stack and stagger these wells and improve outcomes. That can really change the game and put us in a strong position. Maybe with the assets we have, maybe we see something else that fits even better into the portfolio as a bolt-on opportunity. All of that is on the table, as it always is. We do not want to presume one direction before we actually do the work and have the important alignment conversations that we need to have with the new management team and, importantly, with the board as well. Operator: Your next question comes from the line of Scott Andrew Gruber of Citigroup. Your line is open. Please go ahead. Scott Andrew Gruber: Good morning. Clay, you are obviously flush with cash here, and you have the integration in front of you, so you and the team may not be inclined to change the combined activity program much and just focus on synergy capture. I am thinking about where you could deploy some extra cash. I think about refracs in the Eagle Ford or even the Bakken in this environment. Those appear to be an area where you can deploy some modest incremental capital and get a quick payback but not really deplete core inventory. Just some thoughts there. Clay Gaspar: Appreciate that. We are always looking to enhance within the existing portfolio through capital allocation, and refracs are a great example of that. One thing—we have probably gone quieter on refracs over the last several quarters, and here is the leading indicator that came from that. We have improved our D&C cost and efficiency so much that now the drilling side of the equation, which is basically the part that you are eliminating in a refrac, has improved to the point that refracs now have to compete with new wells. We have probably done less of those. We are excited about other things we have in the hopper—some longer-term wins around enhanced oil recovery, some exciting early projects we have there. We have talked about surfactants we have tested in the Permian and other areas we are working on as well. Those are really impressive returns. That probably accrues more to the LOE side of the ledger than the capital side. We want to remain disciplined on our capital. We ultimately have our long-term best interests in mind, along with shorter-term wins, and however we can improve those wins along the way, we are happy to deliver. Scott Andrew Gruber: With this extra cash, you mentioned EOR and surfactants being a hot topic. What do you do with extra cash around the margin? Do you push harder on EUR or deploy more into AI and try to accelerate incorporation of those technologies into your operations? Clay Gaspar: I think there is a disconnect from these projects to the billions of dollars of free cash flow. Surfactants are incredibly cost effective. Some other ideas we are investing in and de-risking over time are relatively small investments and probably will remain that way for a bit. The cash you are talking about—the billions of dollars of free cash flow that we, stand-alone Devon Energy Corporation, and certainly as a combined company, will generate—we think about dividend policy, share repurchases, and debt repayment. We optimize those and want to be nimble, as different quarters can present different opportunities. It is important we get aligned with our board. These are absolutely board-level conversations. Structurally, what we have talked about pre-close is enhancing the dividend, likely announcing a very significant share repurchase program we could move aggressively on, and then looking at the debt. Inevitably, when you combine companies, just like when I look back at WPX, there were some real day-one early wins we were able to do on the debt front to enhance value to shareholders. Those are the more material opportunities for cash return to shareholders. Operator: Your next question comes from the line of Analyst of UBS. Your line is open. Please go ahead. Analyst: Thanks. Good morning, guys. On the merger webcast, you put out that you had 10-plus years of inventory at the current development pace. I know this was a third-party estimate, but given that you are going through this big cost-reduction program, once you start adding those into the equation, how are you thinking about the pro forma depth of that base? Does it push toward 15 years or greater? It feels like the cost of supply of that base is moving much lower for you. Clay Gaspar: Certainly, the cost of the wells can materially extend the runway. Think about the creaming curve and that tail that is just on the bubble—as you lower those costs, more of those yellow lights turn into green over time. I might ask John to add color on combining the Delaware Basin footprint. John Raines: Yeah, we need to go do a lot more of that work to get you more specific numbers, but I will give you a corollary back to 2025. With all the capital efficiencies we had in 2025, we saw our costs consistently move lower. That allowed us to do really good work on downspacing. When I go back and look at the risked resource replacement we had in the Delaware Basin from our appraisal and specifically downspacing, we replaced almost 100% of our consumption. When I think about that kind of additional resource gain and combine that across the two-company asset base, third-party estimates already pushed our inventory well beyond 10 years. I have to imagine that as we see learnings—from better staggering, better landing, and completion design—and lower cost, we are going to see that same trend over the two companies. Analyst: Got it. Thanks for that. Given the pro forma asset base and stronger balance sheet, is this opening up new investment opportunities and doors for you? Do you foresee more of these earlier-stage investments in companies like Fervo or WaterBridge? Or do you want to get more integrated, build your own midstream infrastructure, or look at long-cycle exploration opportunities? Clay Gaspar: Thanks for that question. That is part of our DNA. We have a bunch of entrepreneurs here, and what is really awesome is when we get aligned on what winning looks like. We did this work as stand-alone Devon Energy Corporation over the last six quarters with our board. Last year’s September strategy session was a magical moment. We walked out understanding what long-term success really looked like, and it was empowering for people around the company who are thinking about amending and extending the opportunity set we have above and beyond just drilling additional wells. While that is always going to be our core business, I am excited about leveraging the knowledge, position, scale, and footprint that we have and turning additional opportunities. Going forward, Tom Hellman is going to lead a lot of that effort for us. Thinking about the firepower we are going to have and the combined skills the company is going to bring together, there is definitely more to come. It helps longer-term investors think about Devon Energy Corporation’s value longer term and the sustainability of our ability to hold on to this free cash flow. It is all positive, and I am excited about where this could evolve over time. Operator: Your next question comes from the line of Phillip Jungwirth of BMO. Your line is open. Please go ahead. Phillip Jungwirth: Thanks, and first, congrats on achieving the $1 billion business optimization savings, which some of us were skeptical of. On the AI discussion, could you give more color around the fully autonomous artificial lift optimization—how to think about this relative to gas lift or ESP or basin-specific—and any estimate on how much you think this is improving runtime, which is very important at current oil prices? Clay Gaspar: Phil, thank you for the acknowledgment on the business optimization. There were a lot of skeptics, and rightfully so. This was about creating a sustainable $1 billion of incremental value without a transaction to lean on. I knew the organization had it; there was an untapped resource. It has moved from a project to more of a cultural norm, and it goes back to this hunger for data and the power of technology to do something with that data. I could not be more proud of the organization’s achievement. On artificial lift, essentially every well is on some form of artificial lift. We started with gas lift as a primary opportunity, and this extends to every other form as well. John can add additional color. John Raines: Extremely proud of the Smart Gas Lift program. We are using AI models to develop a physics-based calculation to optimize gas-lift injection rates on a closed-loop system that goes directly to the wells. We piloted this back in 2025, and we saw about a 2% to 3% uplift. We have now moved into full implementation in the Delaware Basin. We are over 850 wells at this point, and we have seen uplift in excess of what we saw in the pilot phase. We are on our way to 1.5 thousand wells across the portfolio. I do not want to give a specific number on uplift yet—just that it is better than what we saw in the pilot because it is early. We are already taking similar AI-derived models to look at other forms of artificial lift—ESPs and rod pumps. Those models are calculating the optimal rate for those wells. We are in the pilot phase on subsets of wells, identifying wells that may be producing below optimal injection rates, leading to actionable insights for our engineers. We are testing these insights and already seeing production uplift. Much like Smart Gas Lift, these are programs we will be able to scale. Smart Gas Lift has been a massive success for us, and I am looking forward to rolling these programs out as well. Phillip Jungwirth: Great. And a question on cash taxes as it relates to the portfolio review process. I know you have been buying and selling assets at Devon Energy Corporation for over 55 years, but you have probably never generated as much free cash flow, with Cotera in a similar position. Is there any ability to shield taxable gain for the pro forma company, or is this something that will have to be factored in and overcome in any value-creation analysis? Jeffrey Ritenour: Phil, we have to go away and do the work to give you a more definitive answer. Without question, to the extent that we land on executing some divestitures, we will evaluate that all on an after-tax basis. Some of the assets that we hold today certainly have a low basis, so we will have to be thoughtful about how we structure those transactions and be creative—how we work through them and structure appropriately to maximize free cash flow. We will look at all of it on an after-tax NPV basis. We will have the opportunity to look at different exchanges and even some JVs where it makes sense to try to minimize the impact as we work through. Operator: Your next question comes from the line of John Freeman of Raymond James. Your line is open. Please go ahead. John Freeman: Following up on the prior discussion on AI benefits on the artificial lift side and tying that into synergies: when I use the last 12 months of what you achieved on business optimization as a roadmap on synergies, certain buckets got realized quickly—corporate overhead and commercial opportunities—while the bucket that took the longest was production optimization. Looking at the buckets on slide nine for synergy capture and the AI artificial lift discussion, am I thinking about it right that now that you have the benefit of that, the bucket that took the longest in optimization may not have to take as long for these synergy buckets? Clay Gaspar: You are exactly right. Some of these will be early wins. Production is notoriously one of those slower-burning opportunities—you are talking about relatively small wins on hundreds or thousands of wells, and that takes time to work in. The great news is we have been doing the work and have the flywheel effect going. We have been methodical and thoughtful in how we built toward this. The $1 billion synergy will benefit from the work we have done to date—so more to come. I will turn to Trey—there are many other exciting things on the AI front in that category, and Trey is also co-leading the integration and has an insightful purview into the synergy goals. Trey Lowe: Appreciate the question, John. One of the outcomes I am optimistic about is that the tailwinds we are seeing on business optimization will carry through the synergy work, specifically the production items like Smart Gas Lift, as well as another collection of workstreams. The process we have built around which ideas become workstreams that we track, measure, and push forward—and the AI and technology, data-driven solutions that work—we are going to continue to push all of that forward with our structure. We have built a culture around it. The other thing we have learned over the last year is what our investors and analysts care about and how we can keep you updated as we make progress, and how we categorize and communicate it in a transparent way. We are 100% excited about the tailwinds on the production side, and the flywheel in all categories should set us up really well. John Freeman: Thanks, Trey. This was another really active quarter on the ground game side, especially in the Delaware Basin. Should we assume that is going to remain robust as you work to complement both companies' positions in the Delaware? John Raines: Yes, you should assume that is going to remain fairly robust. We have been very successful with our ground game. Since last year, we have added well over 100 net locations, predominantly in the Delaware Basin, with our ground game. In Q1, we had another great success. Our acquisition capital was roughly $150 million—90% Delaware Basin. That was not only success in the January lease sale but a lot of good knife-fighting behind the scenes and good work by the land team. It has been an instrumental part of our business, and you can expect us to remain very active on that front. Operator: Your next question comes from the line of Betty Jiang of Barclays. Your line is open. Please go ahead. Betty Jiang: Good morning. A follow-up on the buyback. Clay, could you speak to the logistics of having a new buyback authorized under the new board? You alluded to going beyond the legacy level. Could we see a catch-up on the buyback going forward to make whole on the repurchases that would have happened by the two stand-alone companies? Clay Gaspar: That is one way to look at it, but I would not presume we are trying to make up for lost time on any specific numbers. When we get the authorization of the new board, which is imminent, then we will be able to communicate that and get to work on a go-forward approach. Obviously, we had a cadence before, Cotera had a cadence before—how do we combine that and think about the best approach? There is an art and a science to share buybacks. There is real excitement from both legacy teams that we have an opportunity to return shareholder value with a tremendous amount of free cash flow and leverage that to buy back material shares. Betty Jiang: Makes sense. And a follow-up on target debt levels. The combined entity is going to generate a lot of free cash flow. How do you view the optimal debt level going forward? Would you ever want to be at net zero net debt, or how do you think about the right leverage at a mid-cycle price level? Clay Gaspar: You are on the track of one of the most common debates we have had with our board over the years—how best to return shareholder value: dividends, share repurchases, and, of course, debt. I do not want to jump in front of the important conversations we are going to have with the new combined board. You are hitting on the right opportunities, and all will be evaluated when we think about the incredible free cash flow of the combined entity. I look forward to updating everyone once we get alignment on the go-forward plan. Jeff, other thoughts? Jeffrey Ritenour: Betty, both companies historically have had phenomenal balance sheets—investment grade—with a lot of flexibility for the company. I think investors should expect that to continue as we go forward. As Clay said, we have to do some work with the board, but I expect you will see a philosophy on both the share repurchase program and the balance sheet consistent with what you saw from each company on a stand-alone basis historically. Betty Jiang: Great. That makes sense. Very much look forward to the pro forma update. Clay Gaspar: Thanks, Betty. Operator: Your next question comes from the line of Doug Leggate of Wolfe Research. Your line is open. Please go ahead. Doug Leggate: Thanks so much. Good morning, everyone. I have two questions. You talked about the number of initiatives you have already identified, obviously upside to the synergy target. Have you been able to get under the hood on the combined company and Cotera’s portfolio and assets, given the merger has not closed yet? How should we think about the veracity of the $1 billion target versus the number of opportunities you mentioned in your prepared remarks? Clay Gaspar: We have moved aggressively. For a combined 70 billion company to do a sign-to-close in three months is moving with incredible speed. At the same time, we have been incredibly disciplined on what we can and cannot do—there are very strict rules around what we could and could not share. There is an ability to use something called a clean room, where we can exchange certain data with third parties, and we have done some things like that. We have been able to exchange a certain amount to now, but had to work a lot of this independently. Of course, even to get to the merger agreement and get the deal signed, both teams needed to work this independently and understand the why for their shareholders. Between sign and close, we have been able to share some data and get closer by leveraging third parties and staying well inside the lines, but working together closer and closer. Starting tomorrow, it is full speed ahead. We will find additional opportunities. I feel very confident in the outcome. I am not raising the $1 billion number or accelerating the timeline. What I want to give investors confidence in is when we say $1 billion by the end of next year, we feel confident, and we will be able to deliver, much like we delivered on our last business optimization goal. The difference is the flywheel effect Trey mentioned—we already have a running start on some opportunities. When we really unleash the combined organization without restraints, it will be even more exciting in unlocking value. We will be incredibly disciplined each quarter, holding ourselves accountable, and as you have done, hold us accountable to delivering on these numbers. Doug Leggate: Thank you. My follow-up is on portfolio mix. There has been discussion about the mismatch with gas and oil assets and with the Marcellus. Do you agree or disagree that having a skewed mix toward gas has risks in terms of confusing investors? Clay Gaspar: While I will not talk about any specific investor, we get investor feedback all day, every day. I am excited about the combination. Two of the three basins have significant overlap from the Cotera side, and we are seeing synergies to make those assets better. Certainly, we have some other assets that either were solo Devon Energy Corporation or solo Cotera, and all of those, as I said earlier, need to earn their seat at the table. I am not presumptive on which assets will compete or not. We will move with thoroughness, diligence, and swiftness to evaluate all options. Part of the evaluation is what investors want from us—investors plural, as there are many views. We are not just trying to answer the question du jour, but thinking about investor sentiment that can stand the test of time—what investors will be excited about six months, 12 months, two years, four years from now. That is what we are goal-seeking. It is not just solving for a specific geography. We are thinking about capital efficiency, inventory depth, free cash flow, and how it all fits together. Do not underestimate what applying $1 billion of synergies could mean to one asset or another. With the skill set that we have, how do we unlock additional potential? That all needs to be thoroughly evaluated. We are moving fast on this, and we are not going to slow down, but it is right to be very thoughtful and make the right decisions before showing our hand on any of these important considerations. Operator: Your final question comes from the line of Analyst of Pickering Energy Partners. Your line is open. Please go ahead. Analyst: Thanks for getting me on. Clay, I would be interested in your take on the macro environment here given the supply disruption, and what signals you are looking for that would drive you to contemplate more than a maintenance program. Clay Gaspar: Historically, we have said we think the world is well supplied in oil—that was two or three quarters ago—with OPEC still bringing barrels back on. We are watching demand from Asia, Europe, and the U.S., and trying to watch at a macro level how supply and demand line up. Over the last couple of months, that dynamic has changed significantly. I think it is too early to call the end or how this resolves itself. Meanwhile, there are a lot of barrels off the market. We are watching international storage levels come down over time. That influences where we think the back end of the curve is trading and where it normally should be. We will continue to watch this. We have talked about not steering the ship with the front end of the curve. Oil price can bounce around $5 to $10 at a time, and trying to optimize on that can be ill-sought. We are watching the back end of the curve and the macro fundamentals. From our view, things are evolving, and we will continue to watch closely. Analyst: Shifting gears a bit on oil realizations, they were a little lower this quarter than prior quarters. Any comments on that pricing, and will you see any benefits from the Brent–WTI spread that has materialized across any of your assets going forward? Jeffrey Ritenour: You bet. I want to brag again on our marketing team. They have done a phenomenal job with our oil export program, and in the back half of the first quarter we started to see real benefit from that—getting some premiums to what we could have achieved domestically via the export program. I expect the same in the second quarter. We should see strength on a relative basis as a result of that export program. Kudos to the team—they have been really thoughtful as we built that out over the last couple of years, and it is starting to pay dividends, particularly in the volatile environment Clay just described. Analyst: Appreciate the answers. Thanks, guys. Operator: I will now pass the call back to Christopher Carr for closing remarks. Christopher Carr: Thank you for your interest in Devon Energy Corporation today. If there are any further questions, please reach out to the investor relations team. Have a good day. Thanks. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good morning. My name is Paul, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust Inc.'s First Quarter 2026 Financial Results Conference Call. All participants will be in a listen-only mode. After the speakers' remarks, there will be a question and answer period. Please note, today's call is being recorded. I would now like to turn the call over to Chris Petta, Head of Investor Relations for Granite Point Mortgage Trust Inc. Please go ahead. Thank you, and good morning, everyone. Chris Petta: Thank you for joining our call to discuss Granite Point Mortgage Trust Inc.'s First Quarter 2026 Financial Results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer; Steve Alpart, Chief Investment Officer and Co-Head of Originations; Blake Johnson, our Chief Financial Officer; Peter Morale, our Chief Development Officer and Co-Head of Originations; and Ethan Leibowitz, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of market conditions and review our current business activities, discuss our portfolio, and Blake will highlight key items from our financial results. The press release, financial tables, and earnings supplemental associated with today's call were filed yesterday with the SEC along with our Form 10-Q and are available in the Investor Relations section of our website. I would like to remind you that remarks made by management during this call and the supporting slides may include forward-looking statements that are uncertain and outside of the company's control. Forward-looking statements reflect our views regarding future events and are subject to uncertainties that could cause actual results to differ materially from expectations. Please see our filings with the SEC for a discussion of some of the risks that could affect results. We do not undertake any obligation to update any forward-looking statements. We also will refer to non-GAAP measures on this call. This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in our earnings release and slides and are available on our website. I will now turn the call over to Jack. Jack Taylor: Thank you, Chris, and good morning, everyone. We would like to welcome you and thank you for joining us for Granite Point Mortgage Trust Inc.'s First Quarter 2026 Earnings Call. U.S. commercial real estate markets continued their positive trajectory during the first quarter. However, recent geopolitical developments tied to the Iran conflict are influencing the U.S. capital markets, as rising energy prices have sharpened investors' focus on inflation trends and contributed to greater uncertainty about the timing of further interest rate cuts. Notwithstanding some of these headwinds, capital continued to flow into commercial real estate assets. Commercial real estate lending activity is expected to continue to improve through 2026, supported by steady demand and continued investor interest. While securitization volumes may moderate due to broader economic uncertainty surrounding the conflict in Iran and a mixed U.S. outlook, and deals are taking longer to complete, the market has shown strong resilience. We believe that recent fluctuations in the CMBS and CRE CLO spreads, along with a temporary slowdown in unsecured bond issuance, primarily reflect a recalibrating of risk while investors continue to be engaged and constructive in the commercial real estate sector. For Granite Point Mortgage Trust Inc., our primary objective continues to be capitalizing on the improving environment to resolve legacy loans and to set the stage to begin regrowing our portfolio in 2026. To that end, our accomplishments since the beginning of the year included two sizable full loan repayments, the sale of a B note secured by a hotel at a price somewhat above par, the final resolution on the Chicago retail loan above our carrying value, and the successful sale of a subordinate interest in debt secured by an office property located in Dallas, Texas. These actions furthered our goals of reducing higher-cost debt and setting the path for future growth. Given the improved capital markets, and to continue to address our legacy loan portfolio and pending maturity dates, we have been less inclined to provide borrowers with additional time and are pushing further for repayments through property sales, refinancings, and recapitalizations, and we are also selectively looking at some loan sales. In some cases, this approach was a contributing factor in recent downgrades for certain loans in our portfolio. With respect to our two REO assets, we are investing capital where we believe it will improve our outcome and will then seek to exit and extract capital. All of these initiatives will free up capital for us to optimize our balance sheet and set the stage for us to regrow our portfolio in future quarters. A restart of new origination activity is expected to improve our net interest spread and earnings, which has remained a key goal, which Blake will go into further shortly. I would now like to turn the call over to Steve Alpart to discuss our portfolio activities in more detail. Steve Alpart: Thank you, Jack, and thank you all for joining our first quarter earnings call. We ended the quarter with 1.6 billion in total loan portfolio commitments, inclusive of 1.5 billion in outstanding principal balance and about 68 million of future fundings, which accounts for only about 4% of total commitments. Our loan portfolio remains diversified across regions and property types and includes 40 investments with an average UPB of about 38 million and a weighted average stabilized LTV of 66% at origination. As of March 31, our portfolio weighted average risk rating increased to 3.2 from 2.9 at December 31. Realized loan portfolio yield for the first quarter was 6.5%, which, excluding nonaccrual loans, would be 7.9%, or 1.4% higher. We had an active quarter of loan repayments, paydowns, sales, and amortization totaling about 189 million. During the first quarter, we had two loan repayments totaling 174 million and sold a 13 million B note secured by a strong performing hotel in Hawaii at a price somewhat above par. We had about 14 million of future fundings and other investments, resulting in a net loan portfolio reduction of about 175 million for the first quarter. Post quarter-end, we achieved the final resolution on the 76 million Chicago retail loan via a property sale by the borrower after previously resolving the office component in 2025, also through a property sale. The loan had been risk-rated five and was on nonaccrual status. As a result of this transaction and the prior resolution on the office component, the company expects to realize a write-off of approximately 30.2 million, which had been reserved for through a previously recorded 31.3 million allowance for credit losses as of December 31. During the second quarter, we sold a subordinate interest in debt secured by an office property located in Dallas, Texas. I will now provide some color on the remaining risk-rated five loans. At March 31, we had five such loans with a total UPB of about 265 million, which post quarter-end was reduced to four loans totaling 189 million following the resolution of the Chicago retail loan. Three of the four are in active sales processes that we anticipate may be completed over the coming quarters. At quarter-end, we downgraded a 15 million loan collateralized by a 72-key hotel property from a risk rating of three to a risk rating of five. The hotel is well located and institutionally owned by a sponsor with a large amount of cash equity in the asset, who has also made substantial loan paydowns over time. The business plan had been well underway prior to the hotel becoming union [inaudible]. We are in discussions with the borrower and pursuing resolution alternatives, which we expect will involve the sale of the hotel over the coming quarters. Regarding the 27 million Tempe hotel and retail loan and the 53 million Atlanta multifamily loan, which have been discussed in prior quarters, in each of these cases, we are in active dialogue with the borrower and are reviewing resolution alternatives we expect will involve the sale of each property over the next few quarters. Regarding the 93 million Minneapolis office loan, as previously disclosed, we anticipate a longer resolution timeline given the persistent local market challenges. Resolving these remaining five-rated loans remains a top priority. As of quarter-end, we had two loans with a combined UPB of 69 million which have risk ratings of four and are on nonaccrual status. We are reviewing resolution alternatives for each of those loans and will provide additional information as the situations progress. Turning to the REO assets, we continue to have positive leasing successes at the suburban Boston property and remain actively engaged with our partner and the local jurisdiction and other third parties on several value-enhancing repositioning opportunities. We are continuing to invest capital into this property to maximize the outcome and are reviewing various alternatives. The Miami Beach office property is a Class A asset located in a strong submarket. We are having positive leasing discussions with a variety of existing and new tenants. We will prudently invest in the property and continue to review alternatives, including a sale of the property during 2026. As we have shared in prior quarters, our plan is to remain focused on repayments and resolutions. We expect our portfolio balance will trend lower until we start our origination efforts in 2026 to take advantage of attractive investment opportunities and begin to regrow our portfolio. I will now turn the call over to Blake to discuss our financial results. Blake Johnson: Thank you, Steve. Good morning, everyone, and thank you for joining us today. Turning to our financial results, for the first quarter, we reported a GAAP net loss attributable to common stockholders of 6 million, or -$0.13 per basic common share, which includes a benefit from credit losses of 200 thousand, and a distributable loss of 3 million, or -$0.06 per basic common share. Our book value at March 31 was $7.05, a decline of $0.24 from Q4. Our aggregate CECL reserve at March 31 was about 149 million, which is approximately 100 thousand higher than last quarter. The net increase in our specific reserve on our seven collateral-dependent loans was largely offset by a decrease in our general reserve, resulting from improving macroeconomic forecasts in our CECL model and a decrease in the general reserve portfolio balance. Approximately 81% of our total allowance was allocated to individually assessed loans. As of quarter-end, we had about 334 million of principal balance on loans with specific CECL reserves of about 120 million, representing 36% of the unpaid principal balance. Subsequent to quarter-end, the resolution of the Chicago retail loan decreased our specific CECL reserves by approximately 30 million to 90 million and the principal balance for collateral-dependent loans by 76 million to 258 million. The Chicago retail loan had a previously recorded 31.3 million specific reserve as of December 31, and the resolution was above our year-end carrying value, which resulted in a benefit from credit losses of approximately 1.1 million during the first quarter. As a result of this resolution, our CECL reserve as a percentage of our total commitments decreased from 9.4% at March 31 to 7.9%, assuming all else being equal. We believe we are properly reserved, and further resolutions should meaningfully reduce our total CECL reserve balance. Turning to liquidity and capitalization, we ended the quarter with about 44 million of unrestricted cash, and our total leverage decreased relative to the prior quarter from 2.0 times to 1.7 times, as proceeds from the two full loan repayments and one loan sale were used to reduce our higher-cost borrowings and pay down our CLO bonds. As of a few days ago, we carried about 56 million in cash. Our funding mix remains well diversified and stable, and we continue to have very constructive relationships with our financing counterparties. We expect to expand our financing capacity once we return to originating new loans. As we look forward, we expect our earnings to meaningfully improve. For example, our capital in our collateral-dependent loans and REO produced a GAAP net loss, excluding credit losses, of roughly $0.11 per common share during the first quarter, and once we redeploy our capital from these assets into new originations at target leverage, we expect to increase our quarterly EPS by approximately $0.17 to $0.19. In addition, improving our returns is not constrained by our existing capital, as we intend to further improve earnings through continued expense reduction initiatives and expand into new sources of capital-light income such as earning fees from joint venture structures with third-party investors. Given the attractive market opportunity ahead and our earnings potential, we believe the best use of our capital is to continue paying down our higher-cost debt, resolve our remaining nonaccrual loans and REO, and regrow our investment portfolio through new originations beginning later this year. I will now ask the operator to open the line for questions. Operator: Thank you. We will now open the call for questions. Our first question is from Jade Rahmani with KBW. Analyst: Hi, this is Jason Shapshaw on for Jade. Thanks for taking the question. It would be helpful to hear more about the loans that were downgraded to risk four. Just some more color on what drove the negative migration in your view. Steve Alpart: Hey, Jason. Good morning. It is Steve Alpart. Thanks for joining the call this morning. You are asking about the four-rated loans, I believe, in aggregate, if I heard the question correctly? Analyst: It looked like there were a couple of loans that were downgraded to risk four. Is that correct? Steve Alpart: That is correct. High level, we had seven nonaccrual loans at the end of the quarter. After we resolved the Chicago retail loan, that left six. After that loan was resolved, that left five rated-five loans, and there are two additional nonaccrual loans. With respect to the fours that are part of that cohort, high level, what I would say is that we are generally seeing improving markets, but it is uneven, and some of the markets are seeing a delayed recovery. These properties are behind under business plans, and that is why they have been downgraded to a four. For each of these loans, we are in discussions with the borrowers, and we expect to have more color over the coming quarters. Analyst: Great, thanks. And just on your multifamily book, do you have an expectation of getting higher repayments near term? Rent growth has been pretty muted overall for the sector, so it would be great to hear some color on overall performance for that part of your book. Steve Alpart: Sure. It is Steve again. I will take that. Yes, we are seeing a pretty steady rate of multifamily loan repayments. We had one large multifamily loan payoff this quarter, so it has been a pretty steady pace. We like the multifamily sector. We are seeing generally stable fundamentals in most of the markets that we are in. It has been well reported that the new supply picture looks much better as we get out into the future. The trend line in certain markets, particularly in the Sun Belt, has been a little more sluggish than I think a lot of people were expecting. We are seeing the supply picture get better, but there are some ongoing headwinds. The supply is different in every market. Declining immigration has been a factor. Generally, we are seeing improving fundamentals, but it is really asset by asset. We are seeing some borrowers in some markets have more pricing power on rents. Even in cases where borrowers are not getting rent bumps all the way to what they were expecting, the general trend is that we are seeing progress. We have seen a few assets fall behind on business plans, but that has not been the general trend, and where that does happen, we are expecting that, over time, borrowers will be able to push rents. Going back to your question, there is good liquidity in the sector, sentiment is positive, we are seeing payoffs, and we are pushing hard for these older loans to pay off as well. Analyst: Got it, thanks. Did you see any of the rate and geopolitical volatility have any impact on overall activity that may have impacted your book in the first quarter and so far in the second quarter? Have you seen that have any impact just overall? Jack Taylor: Yes. Thank you for the question. I think the overall impact is just a higher degree of uncertainty in the market generally, and that has led to a delay in payments and in resolutions. Not a cessation, but deals are all taking longer because of a higher degree of macro uncertainty, and especially with respect to rates. Analyst: Got it. That makes sense. And then just as my last question, it would be great to hear your current thoughts about the dividend. Given that DE has been below it, I understand that working through risk-five and some of the REO assets will be the main driver of earnings growth, but I wanted to hear your thoughts on the dividend. Jack Taylor: Sure. It is a good question. We are always examining the overall market and what is happening in our loan book and our earnings and the like. Basically, we take a considered approach working with our Board. That is a Board decision and is made thinking about the long-term potential for the company. I would say with the burn-off of the nonaccrual loans, which has had a meaningful drag on our earnings, we expect that to be reduced as we work through them, and we will continue to evaluate the company dividend with respect to future quarters, and we are aware that we are under-earning, but we are looking at the longer-term prospects. Analyst: Great. Thanks for taking the questions. Operator: Thank you. Our next question is from Christopher Muller with Citizens Capital Markets. Analyst: Hey, guys. Thanks for taking the questions. I guess on the subsequent resolution, and sorry if I missed this in your prepared remarks, but did that property move to REO or was it repaid? And then will the entire 30 million write-off come out of the specific reserve balance, so that balance is around 90 million, which I think I heard? Blake Johnson: Hi, good morning, Chris. This is Blake. Thanks for your question. Yes, so this property was not moved to OREO. This was held as a loan as of quarter-end, and as of March 31, the balance of the loan was 76 million. Jack Taylor: So when this resolved during early April, we did have that resulting write-off of around 30 million. Analyst: Got it. And then just looking at the specific reserve balances quarter over quarter, it looks like it increased about 15 million. Was that due to just the New Haven hotel, or was that also the new four-rated loans that came up? Blake Johnson: Yes. It is kind of interesting. I think it is best if you look at the entire reserve. It increased in total around 100 thousand. If you look at the primary drivers, we did have incremental losses on a certain number of collateral-dependent loans, and that was around 15 million in total. But it also included the shift of three of the loans from our general reserve in the previous quarter, which already had a substantial reserve as of December 31. So part of that shift included the balance that was previously in the general reserve. Analyst: Got it. And then just the last one if I could squeeze it in. I hear your comments on looking at JVs and some other different ways to look at the business. Is there anything that you guys are looking at today that you could share? Just what type of JVs would you be interested in? Blake Johnson: I can start first—do you want to take it, Jack? Okay. Thank you. So the point in our prepared remarks was we can introduce capital-light income and JVs, and this would actually help offset some of our operating expenses from an economic standpoint. If we started this today, for example, we would expect to see something between 2 million to 4 million in annual earnings in the first year. If you look at that on an EPS basis, it is around [inaudible] per share, quarterly. It really would increase from there because once you have the book JV start, you would see some momentum. As far as the actual structure itself, I can pass it to Jack, and he can provide some color. Jack Taylor: Yes, thank you. I would just add a couple of things. We have folks that we have known for a long time and some that are new acquaintances who have approached us, and they have a lot of capital. They would like to come into the market, and they know and trust us. So they are thinking and discussing with us what we are calling the capital-light strategies, which can take a number of forms: just originating for them directly where it is all their capital; it can be where it is part our capital and theirs; it could be a formal JV structure. The main point is that we have the infrastructure and the team to originate loans of the sorts—various forms actually—that these counterparties are interested in accessing without having to build their own team. We have been very pleased about the reverse inquiry. Some of them are on pause, in part because it would require us, as it is foreign capital, to carry quite sizable loans in cash for a period of time, so we are not yet able to transact on that type of structure. But others are still under consideration. Analyst: Got it. Very helpful, Jack. And great to hear you guys thinking outside the box and some different avenues you could take. I appreciate you taking the questions today. Jack Taylor: Great. Thank you. Operator: Our next question is from Gabriel Poggi with Raymond James. Analyst: Hey, guys, it is David on for Gabe. I wanted to ask a question around the vintage of some of your larger loans outstanding. How are conversations going with borrowers and their plans for repayment? Just wanted to get a feel for the playbook on some of these legacy office loans. Thanks. Steve Alpart: Hey, it is Steve. I will take that question, and thank you for joining the call this morning. Great question. It is a big point of focus for us. We have made a lot of progress reducing the balance of some of these older vintages loans, including the office loans. We have a very proactive asset management approach. We are in constant dialogue with these borrowers, and we are setting clear expectations. We are now in an improved commercial real estate market environment. As we continue to think about addressing these pending maturity dates, as you heard us say earlier, we have been less inclined to provide borrowers with additional time, and we are pushing very hard for borrower repayments, whether that is through property sales, refinancings, or recaps. We are also selectively looking at some loan sales. We are in discussions with borrowers, delivering clear expectations about getting a process underway, whether that is a refinancing or an equity recap if it is an asset they want to hold; if not, a property sale. There are a few cases where, for credits that we like, we may consider modifying and extending a loan to keep it in the portfolio. And, again, case by case, if we see some upside potential, we may selectively take back properties through either a deed in lieu or possibly through a foreclosure. This applies not just to the office, but it is particularly true for the office loans that you mentioned. We are pushing hard to turn over the portfolio. We will continue to do that over the next couple of quarters, and we are looking to unlock capital so we can redeploy into higher-earning assets. Analyst: Great. Thanks for taking my question. Operator: Thank you. There are no further questions at this time. I would like to hand the floor back over to Jack Taylor for closing comments. Jack Taylor: Thank you, Paul. And thank you again to all that joined us for this call, for your time and attention, and for your support. We look forward to reporting further progress and moving towards the regrowth of our company. Thank you. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Greetings, and welcome to Inter Parfums, Inc. First Quarter 2026 Conference Call and Webcast. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, [inaudible]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Devin Sullivan, Managing Director at The Equity Group and Inter Parfums, Inc. investor relations representative. Thank you. You may begin. Devin Sullivan: Thank you, Rob. Good morning, everyone, and thank you for joining us today. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar, and Chief Financial Officer, Michel Atwood. As a reminder, this conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. These factors may be found in the company's filings with the Securities and Exchange Commission under the headings “Forward-Looking Statements” and “Risk Factors.” Forward-looking statements speak only as of the date on which they are made, and Inter Parfums, Inc. undertakes no obligation to update the information discussed. Inter Parfums, Inc.’s consolidated results include two business segments: European-based operations through Interparfums SA, the company’s 72% owned French subsidiary, and United States-based operations. It is now my pleasure to turn the call over to Jean Madar. Jean, please go ahead. Jean Madar: Thank you, Devin, and good morning, everyone. We started off the year broadly in line with expectations, with consolidated sales increasing 2% on a reported basis, reflecting growth from both our U.S.- and European-based operations. Despite mixed results across the portfolio, aided by favorable foreign exchange movements, we were able to generate significant growth across several key markets operating in a more difficult environment while enhancing profitability. Our results reflect the strength of our underlying business, the appeal of our brands, and the disciplined execution of our strategy across a diverse global footprint. Consolidated sales growth in the first quarter reflected strong brand execution and solid performance in select regions, partially offset by macro and regional headwinds. North America, our largest market, increased by 7%, driven by continued category growth and innovative brand extensions, particularly from Coach. Central and South America grew 23%, supported by strong momentum in women’s and men’s Coach franchises and the Montblanc Legend line. Western Europe sales were flat, driven by slow consumer demand. These results were partially offset by softer performance in other parts of the world. Eastern Europe declined 12% driven by operational difficulties in certain markets, which disproportionately impacted Lanvin and Lacoste. Middle East and Africa declined 12% primarily due to recent intensifications of regional wars and conflicts. Asia Pacific sales decreased 7% driven by distribution changes we implemented in 2025 in South Korea and India, and softer consumer demand in Australia and New Zealand, which were partially compensated by strong growth in China. Moving to performance by brand, we saw solid growth from several of our larger brands. Coach increased 30%, reflecting strong sell-in following the launches of new extensions within the Coach Woman and Coach Men franchises—Coach Cherry and Coach Platinum—as well as sustained healthy demand across most existing lines. Montblanc rose 14%, driven by the launch of Legend Elixir, the first launch of the Legend franchise since 2024, and the success of the Explorer Extreme line launched last year and the lower sales base in last year’s first quarter. GUESS, our largest U.S.-based brand, grew 11% in the first quarter, driven by ongoing success of the Iconic franchise, supported by launches of new extensions within the Iconic and Seductive pillars. Roberto Cavalli continued to generate robust results to start 2026, achieving a 32% increase in net sales. Our blockbuster launch from last year, Serpentine, remains a substantial success, opening many more doors for us across the world. The product was a finalist for the Prestige Popular Packaging of the Year award at the Fragrance Foundation last month. Growth during the quarter was also fueled by the latest innovation—Roberto Cavalli Wildheart extension dual gender duo Wild Pink and Wild Blue—and their Roma Soluto, the newest fragrance within the Roma pillar. Other key brands reflected tougher comparisons. Lacoste declined 12% driven by last year’s strong innovation-led growth and weaker Eastern Europe conditions. We launched a new extension late in the first quarter called Original Aqua for men, and we plan to launch several other extensions throughout the year to further elevate the brand. While Donna Karan/DKNY declined 3% off a high prior-year base, we did see a 16% rebound in the Be Delicious core, indicating renewed consumer demand and improving franchise momentum. The Cashmere Mist deodorant also remains a successful product within the Donna Karan/DKNY brand, as it continues to be incredibly popular on TikTok Shop and Amazon. Overall, with the global fragrance market normalizing toward historical growth rates following several years of exceptional performance, capturing market share has taken on greater importance as a key source of momentum. In order to do that, our portfolio offerings must be both diverse and distinguished to reach and appeal to multiple large consumer audiences, especially in a more difficult operating environment. In addition to launching exciting new innovation across our existing portfolio, we are expanding our portfolio with new brands to further amplify our offerings and appeal. During the first quarter, we resumed distribution of the existing lines of Anigbutal and reopened two store locations in Paris, with another one to open soon. We will continue to develop the brand’s reach and offering within the high-end fragrance market. Also, we are continuing to develop brand new fragrances for L’Enchant and Off White, and these launches will happen in 2027. We expect these two new brands to help us elevate our positioning in the high-end fragrance category. And in January, we announced separate exclusive long-term worldwide fragrance license agreements with David Beckham and Nautica; David Beckham joins our portfolio in 2028 and Nautica in 2030, respectively. Both will be essential for us to expand our offerings in the lifestyle fragrance space that we know quite well. Fragrance continues to stand apart within beauty for its resilience, supported by its role as an accessible luxury and everyday form of self-expression that consumers continue to prioritize even amid macroeconomic and geopolitical uncertainty and more deliberate spending behavior. The category is also benefiting from powerful e-commerce tailwinds, with an increasing number of fragrance products purchased through nontraditional retailers including Amazon, underscoring the growing importance of digital marketplaces in both discovery and conversion. Consumers are also increasingly seeking personalization, which we find through fragrance layering as well as personalized AI-driven recommendations. Whether through social media, major e-commerce platforms, or physical retail, the way consumers discover, evaluate, and engage with fragrance is rapidly evolving. These are powerful channels for discovery, and we are actively leaning into that shift with a focus on storytelling that can bridge multiple channels and offer consumers an immersive and consistent brand experience. To be successful, brands must inspire desire, whether as a gateway into the world of an iconic fashion house—such as Jimmy Choo, Ferragamo, or Coach—or that of a celebrity like the one we will do with Beckham. We are continuing to develop our portfolio to maintain desirability across all our brands. The travel retail market continued to perform well, representing approximately 7% of total net sales, consistent with prior periods. Brands including Roberto Cavalli, GUESS, and Coach have performed well to start the year, with several retailers overall currently showing strength in Europe in particular. We anticipate steady growth in our travel retail business going forward. Despite a dynamic macroeconomic environment, the global fragrance category remains resilient, and we are well positioned to deliver on our goals this year. We remain cautiously optimistic for the balance of 2026, reflecting war and disruption in the Middle East while capturing improving dynamics in other regions. We are confident in our ability to navigate near-term volatility, continue to operate efficiently and profitably, and drive disciplined, sustainable, long-term growth in service of our customers, brand partners, and consumers. With respect to the Middle East, I realize that oftentimes we can fall into the trap of viewing different parts of the world primarily through the lens of how it impacts our business. But our concern for our colleagues and partners in the whole Middle East extends directly to them, their families, and communities. We truly appreciate and acknowledge their contribution during this time of heightened conflict, and of course, we pray for better days ahead. Before I close, I want to highlight that alongside operating our business, strengthening our ESG profile remains a key priority. Our ESG strategy is now in its third year and is going strong. We have seen a great return on our investment in this program across supply chain visibility, our ability to respond to new regulatory requirements, and our external investor ratings. These actions and enhanced measures resulted in Inter Parfums, Inc. receiving its third consecutive ESG rating increase from MSCI. We now sit at BBB and have our sights set on A. Our goal is to continue addressing the environmental and social risks that are most financially material to our business. This approach bears long-term, return-on-investment-focused resiliency with ESG performance. With that, I will now turn it over to Michel for a review of our financial results. Michel? Michel Atwood: Thank you, Jean, and good morning, everyone. I will begin by discussing the consolidated results before breaking them down into our two operating segments: European- and United States-based operations. As Jean pointed out, we delivered sales of $345 million, representing a 2% increase on a reported basis. On an organic basis, which excludes the impact of foreign exchange and the headwinds generated by the Middle East conflicts, sales declined 3%. Excluding the 1% headwind related to the war in the Middle East, organic sales declined by a more moderate 2%. The foundations of our business remain strong and continue to go from strength to strength. For instance, our top 20 brand-region combinations, which represent 86% of our global sales in Q1, grew 9%. Our direct-to-retail channel, which represents 43% of our sales in Q1, grew 16%. This significant growth has had a sizable positive impact on our P&L, as the direct-to-retail channel has significantly higher gross margins but also requires more SG&A, especially A&P and logistics. Our reported growth benefited from a favorable 4.6% foreign exchange tailwind. While the stronger euro has continued to favor our top line, it also increases our cost base across the P&L and our balance sheet. We are continuing to implement a variety of actions to mitigate that impact and have been pleased with the results. Beginning with gross margins, they expanded by 140 basis points to 65.1% from 63.7% of sales, primarily driven by favorable segment, brand, and channel mix as described above, as well as lower-than-expected destruction costs, which reflect enhanced efficiencies in areas such as inventory management and forecasting. These gains were partially offset by tariffs, which represented an expense of about $6 million during the quarter. We are pleased with the positive effect of our tariff mitigation activities and ongoing cost savings initiatives. Our manufacturing optimization—whereby we are shifting manufacturing closer to the point of sale—continues to contribute favorably to our operations and our cost structure. In combination with select pricing actions we took last year, we expect gross margin stability in 2026. SG&A expenses as a percentage of net sales rose 200 basis points to 43.6% compared to 41.6% in the prior-year period. The increase resulted from a number of factors: royalty costs grew ahead of sales due to the GUESS license extension and unfavorable brand mix; we also had FX impacts as described above and higher logistics costs related to supply chain transitions and channel mix. Our A&P spending was stable at $52 million, approximately 15% of sales, and we continue to invest in line with anticipated sell-out by retailers to help drive traffic across all distribution channels, which we believe are higher than our reported sales. Overall, our consolidated operating income was $74 million for the quarter, a 1% decline from the prior period, resulting in an operating margin of 21.5%, or a 70 basis point decrease from a very high 22.2% in 2025. Below the operating line, we reported a gain of $1.1 million in other income and expense compared to a loss of €1.7 million, leading to a positive year-over-year impact of $2.7 million compared to the 2025 first quarter. Within these numbers was a million-dollar increase in interest income behind a stronger ROI on our excess cash. Moving to tax, our consolidated effective tax rate was stable at 24.6% compared to 24.5% in the prior-year period. These factors led to net income of $43 million, or $1.35 per diluted share, representing an increase of 2% compared to net income of $42 million and $1.32 per diluted share in the prior-year period. As a percentage of net sales, net income rose to 12.6%, broadly in line with the prior-year period. Now moving to our two business segments, starting with European-based operations: net sales rose 2% but declined by 4% on an organic basis. Gross margin expanded by 190 basis points to 67.4% from 65.5%, driven by favorable brand and channel mix, lower-than-expected destruction costs, and some of the pricing that we took last year. These were partially offset by tariffs which represented an expense of $4 million. SG&A increased by 9% to $104 million, with SG&A as a percentage of net sales rising 270 basis points to 41.4% of sales compared to the prior-year period. The increase in SG&A was driven by foreign exchange impacts along with increases in employee-related costs as we are building up our Korean subsidiary, and higher logistics costs related to increased warehouse fees. Royalty costs also grew ahead of sales driven by unfavorable brand mix. Overall, net income attributable to European operations grew 4% to $50 million for the quarter, representing 19.8% of sales compared to 19.4% in the prior-year period. Turning to United States-based operations, net sales rose 2%, helped by a positive foreign exchange tailwind; organic sales were broadly flat. Gross margin remained essentially flat at 58.9% compared to 58.7%, with favorable brand and channel mix as well as lower-than-expected destruction costs offsetting tariffs which represented an expense of about $2 million. While SG&A expense increased 3%, SG&A as a percentage of net sales remained essentially flat at 47.9% compared to 47.6% in the prior-year period. Overall, net income attributable to the U.S.-based operations was broadly flat at $8 million for the quarter, representing 9% of sales. This also reflected a higher effective tax rate of 19.7% in 2026 compared to 18.1% in the prior period, driven by lower tax gain from stock-based compensation. As of March 31, our balance sheet remains strong with $237 million in cash, cash equivalents, and short-term investments, as well as working capital of close to $700 million. From a cash flow perspective, accounts receivable was up 6% and days sales outstanding was at 78 days, up from 74 days in the prior-year period, driven by foreign exchange and changes in channel mix. Despite the increase, we are still seeing strong collection activity and we do not anticipate any issues with collections or accounts receivable, even amid foreign exchange headwinds. On our costs, inventories declined significantly to $370 million as of 03/31/2026 from $390 million a year ago. This represented a seven-day reduction in inventory on hand to 259 days. By effectively managing working capital relative to our sales growth, we again significantly improved our operating cash flow. Cash flow generated from operating activities was positive during the quarter, compared to operating cash usage of $7 million during the 2025 first quarter. We continue to expect strong free cash flow productivity in 2026. Now turning to our guidance and outlook. As outlined in our earnings release issued last evening, we are maintaining our full-year outlook. We continue to expect sales of approximately $1.48 billion and diluted earnings per share of $4.85. Our EPS guidance does not include any benefit from potential tariff refunds. While we remain proactive in mitigating the impacts of tariffs on our cost structure, we are also monitoring the possibility of IEPA tariff refunds this year, which could total approximately $17 million. These potential tariff refunds are not included in our outlook for 2026; however, should they occur, we would likely take the opportunity to reinvest at least partially in support of our brands and fuel momentum where we think we can get a strong long-term ROI. We continue to anticipate a return to stronger growth in 2027 driven by enhanced innovation, including the development and distribution of our newest brands. Overall, we are seeing moderating demand in several international markets, along with tariff-related pressures on our cost structures, and we are continuing to closely monitor potential inflationary impacts as suppliers adjust pricing. Nevertheless, we remain well positioned with a strong innovation pipeline, enduring global partnerships, and a resilient consumer base that collectively reinforce our confidence in our long-term growth and value creation. With that, operator, please open the line for questions. Operator: Thank you. At this time, we will be conducting a question and answer session. Please ensure your handset is unmuted before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Sydney A. Wagner with Jefferies. Your line is now live. Sydney A. Wagner: Hi, thanks for taking our question. So gross margin obviously expanded during the quarter, which was great. Just curious looking ahead, which of those benefits do you view as structural versus more quarter-specific? And then on the category, you have spoken to seeing some normalization, but you have also noted pockets of strength where we are seeing maybe above-category growth. So how do you feel about the portfolio’s ability to capture those pockets of above-fragrance algorithm growth? Thank you. Michel Atwood: Gross margin was really a combination of everything going favorably for us this quarter. We had the impact of the pricing increases that we took last year. We had a significantly favorable mix impact coming from our direct-to-retail channel. As you know, the gross margin on our direct-to-retail is significantly higher than when we sell through distributors. It was really a perfect storm. At this point in time, we expect this to normalize over the balance of the year, and this is one of the reasons why we are maintaining our gross margin target flat for the year. I would expect to see some of this mitigating particularly over the course of the second and third quarter. Regarding the portfolio—Jean, do you want to touch on the portfolio piece? Jean Madar: Yes. Regarding the portfolio, I would like to say that our bigger brands are doing better than our smaller brands. When you look at Coach, Jimmy Choo, GUESS, Montblanc, DKNY, they are all in good shape and they will grow this year. We will look at the smaller brands and, in time, we will definitely edit the portfolio—maybe brands that are doing less than $10 million should not be part of the portfolio. That is why we are looking at always increasing the portfolio of brands, looking for bigger brands and bigger potentials, and we are happy to have signed in the first quarter of this year two new licenses, one with Beckham and one with Nautica. Even though they will start later on, they will be a great addition to the portfolio. Regarding geography, we think that there is good potential in the U.S. We see strength in the U.S., primarily department stores, Amazon U.S., and TikTok U.S.; we will perform a bit better than other parts of the world. Michel Atwood: Maybe just to build on Jean’s comments: we did see very strong growth in the U.S. market. The market was up 7% in the quarter and was very strong in March; it was up close to 9%. That is really driving and fueling the momentum, reiterating our core portfolio. Our top seven brands grew actually 8% this quarter. So we have a very strong portfolio, and I think we have a very long tail that we need to continue to streamline over time. Overall, I would say a very healthy core. And then in terms of emerging consumer segments, we are playing in some of these small-size, trial-size, lower price points when you think about TikTok. And as you know, with Gutal as well as with Sulphurino, we are starting to play in the higher luxury space, which has historically been one of the faster growing segments in this category. Sydney A. Wagner: If I can just poke in one quick follow-up: on that 9% growth you saw in March, are you still seeing that level of growth quarter-to-date, or how did the trends in April compare? Michel Atwood: I do not have the April numbers yet. I think we will be getting them in the next couple of days. We are not hearing or seeing anything that seems to be limiting the growth. I think growth in the U.S. continues to be very healthy. Sydney A. Wagner: Great. Thank you. Operator: Our next question comes from Susan Kay Anderson with Canaccord Genuity. Your line is now live. Susan Kay Anderson: Hi, thanks for taking my questions. It sounds like you feel really good about U.S. growth continuing maybe even into the back half. How are you feeling about Europe and globally in a more normalized fragrance growth environment? And then on newness, no big launches this year, but are you expecting more newness to roll out in the back half versus the first half to maintain share until we get to more blockbuster launches next year and some new licenses? Thanks. Jean Madar: Michel, do you want to answer on Europe? Michel Atwood: Yes, sure. As much as the U.S. continues to do well, I think Europe is more of a mixed bag. You saw our numbers for Eastern Europe. Eastern Europe is particularly impacted by the war in Ukraine and the challenging economic situation there. There has been a dramatic slowdown in purchasing and consumption, and it is definitely impacting certain brands that have a strong presence there. If you look at Western Europe, it is also a mixed bag. There are certain markets like Spain that continue to do well, but we are seeing a significant slowdown in markets like France and Germany—very large fragrance markets. Those are two markets where we are seeing very sluggish growth, even some decline; the last couple of quarters have been declining in France. Conversely, on the positive side, Latin America continues to do well. As the economies improve and the middle class expands, that will represent a long tail of growth in the future. Asia has been a little bit more temporary; we have had to make some changes in our distribution both in Korea and in India, and that is weighing down a bit on our growth, but that should eventually pick up once that situation improves. Jean, I will let you address the innovation piece. Jean Madar: The second part of your question, Susan, was are we going to have a blockbuster in the second part of the year? The answer is, like we have said before, this year of 2026 is not a big year for blockbusters. We really have a concentration of new launches—new big blockbusters—in 2027. We knew that. That is why we animate the portfolio with flankers, so we still have innovation but not as big as what we expect in 2027. It is a coincidence that we have so many new big launches in 2027. Actually, all our biggest brands will have a new franchise, a new pillar, in 2027. So for a year without huge innovation, I think we are doing quite well. Susan Kay Anderson: And then maybe just one follow-up on pricing. You will start to lap the price increases you took last year in August, and you talked a little bit about inflation maybe impacting COGS a little bit. How should we think about pricing as we start to cycle those price increases from last year? Are you expecting to take any more price this year? Michel Atwood: Our priority is to make sure we are offering the right consumer value with the offering. We have historically been very prudent with pricing. Last year we had to take pricing because of the tariffs, and we mostly took pricing here in the U.S. Outside of the U.S., there was very little pricing. At this point in time, unless we see something dramatic happening, it is unlikely we will take any pricing, especially in light of our innovation program. We may take some pricing as we launch new lines next year—it is always an opportunity when you launch something new to elevate the brand and price up—but we are not taking straight pricing on the existing lines. It is going to be more innovation pricing. Jean Madar: I totally agree. We do not like pricing here. We do it when we are really forced. Pricing is not the right answer to maintain or increase sales. We think that the retail price of our fragrances is well adapted at a more democratic level. I do not see pricing unless something like a tariff happens like last year, where we were forced—like everybody else in the industry—to react, but to date, that is not the case. Susan Kay Anderson: Okay. Great. Thank you so much for all the details. Good luck for the rest of the year. Operator: Our next question comes from Hamed Khorsand with BWS Financial. Your line is now live. Hamed Khorsand: Hi. I just wanted to ask you, given that you are seeing the growth in the marketplace with demand outpacing your competitors, is this consumers just trying out your products because they are seeing your advertisements, or is there some sort of loyalty to your brands that you are seeing this year that you were not seeing in prior years? Jean Madar: Great question. It depends on the brand; I think it is a little bit of both. We have some loyal customers coming back when the bottle is empty and they buy again the first. We also have a lot of curious new customers that are targeted by our aggressive digital advertising and buy a fragrance from our portfolio. For instance, I was looking at young boys anywhere from 13 to 17 years old buying a lot on TikTok, buying a lot on Amazon, and buying quite expensive fragrances. They have, apparently, the resources to do so. This is very interesting for us, and we are going in the future to look at these customers. Of course, teenage girls were always part of our target, but this is for us a new trend, and we are going to look at this carefully. Michel, want to add something? Michel Atwood: I would just say this is a category where people are always exploring. You have people that are loyal to a fragrance and wear the same fragrance forever, and some have a core fragrance that they keep and then a couple of new ones that they try on special occasions. What is important is to always be present when the consumer is top of mind. It is one of the reasons that we have spread out our A&P more evenly across the year. As you recall, we used to spend everything in the fourth quarter; we are now spending more regularly, and I think that is helping sustain demand. It is also important to always look good in store and be present in all the right channels. A lot of the work we have done, whether it is with Amazon or with TikTok in anticipating emerging channels, has been quite successful for us. Hamed Khorsand: Yes, that was going to be my follow-up. Given that you are seeing some efficiency or response to your advertising online, does that make you want to change your A&P in any way or put more weight toward what you are seeing respond? I am just trying to gauge if there is a possibility of upside sales here. Michel Atwood: You love asking us questions about A&P ROI. The challenge with A&P is you know that it works; you do not always know how everything works. The tools have gotten better, but generally speaking, we have plenty of opportunities to spend more to get a better return. It is about managing profitable growth and managing the short term, midterm, and long term. Certainly, and that is one of the reasons why you probably heard this in my prepared remarks: if we see more upside coming through in the form of tariff refunds, we will try to reinvest some of that. We believe that there is more upside here. Again, we want to do this responsibly, in terms of managing the top and the bottom line. We are constantly looking at ROI. Ten years ago, everybody was doing TV, and now everybody is doing digital. We are constantly evolving. We are investing a lot right now on Amazon and TikTok. We are always looking for that edge and that ROI, and I think that is a constant optimization opportunity. Hamed Khorsand: Great. Thank you. Operator: Our next question comes from Analyst with Berenberg. Your line is now live. Analyst: Yes. Hi, Jean and Michel. Thanks for the presentation. I have two or three questions; I will ask them one by one, if that is okay. First, about Lacoste—could you help us understand how you are looking at the year as a whole for Lacoste given the soft start? I understand the comment on Eastern Europe, but it is quite an important growth lever for EU ops generally. Do you feel like you can recover some of what you lost in Q1 for that brand specifically? Jean Madar: I am not worried at all about Lacoste, to be honest with you. In the first quarter, we had difficult comparisons. I think we can recoup definitely toward the end of the year. What is important is that in 2027 we are going to have a very important launch for Lacoste. I saw the product; it is great. The advertising will look great. So Lacoste is in very good shape. It is true that Eastern Europe was too slow—this explains a weak first quarter—but nothing to worry about. Michel Atwood: I would just add that Q1 and Q2 last year were really insane growth. We grew 30% in the first quarter; we grew 60% in the second. We had a huge amount of innovation. We are feeling pretty good about Lacoste overall as a brand, and some of the challenges we are seeing this quarter are really related to footprint and disproportionate impact. Lacoste is primarily strong in Europe, and as growth slows down, it is impacting the brand disproportionately. But the brand is very healthy, and we are feeling really good about it. Analyst: Perfect. Thank you. Second, how did orders trend through Q1—maybe putting the Middle East to one side as an exceptional circumstance? Do you feel more positive on the rest of the countries now than you did in, say, January or February? Jean Madar: I can try to answer that. We put our guidance for 2026 in November 2025, when we said that we would do $1.4448 billion. We have not changed the guidance even though there is a big conflict in an important region—the Middle East—which represents 7% of our sales. That means that we think that we will be able to find some growth outside. It is also a good thing to have a conservative guidance at the beginning of the year because we sell in 120 countries, and with so many geopolitical threats that we cannot control, we do not have to lower guidance even though there are difficult times in important regions. As of now, business is doing well. The orders that we received are in line with our projections. Michel, you want to add something? Michel Atwood: Our orders have been broadly in line with our expectations. The dip in the Middle East really happened in March and impacted March disproportionately. We do expect that quarter two will also be impacted disproportionately. Today, if we think about Q2, we are seeing Q2 as being flattish versus last year. Until we see how this settles and eventually picks up, we are going to continue to be prudent. Analyst: Very clear. Thank you. Third and final question: on the direct-to-retail channel, I know you have taken in-house Korea because you had to, but are there any markets where you feel like you are closer to reaching a scale where you could potentially in-source those? Would love to hear more about any projects you are working on there. Jean Madar: Please, Michel. Michel Atwood: I would say we are very happy with the partnerships. At the end of the day, the question is: what are you looking for? Are you looking for gross margin, or are you looking for total shareholder return? In a lot of the markets where we are currently present, we have great distributor partners—many we have been working with for many years. We are quite pleased with the level of progress and return on investment. There are always opportunities, particularly as we grow, to consider certain large markets, but the question is what do you get for it? Yes, you might get a better gross margin, but you will also get more expense, more inventory to manage, and more accounts receivable. At the end of the day, where are we going to get the best TSR? With the footprint we have, I think we have the best TSR. If something comes up at some point which makes more sense, we may consider it. At this point in time, we are not really looking to convert distributors to affiliates. Jean Madar: I totally agree. Korea was an opportunity; we took it. We can reevaluate, but nothing forces us to change from a distributor to subsidiaries. Operator: We have reached the end of the question and answer session. I would now like to turn the call back to Michel Atwood for closing comments. Michel Atwood: Thank you again for joining us today. Thank you to our teams for their continued dedication and agility in navigating this uncertain environment and helping us drive the efficiencies supporting our ongoing success. I would like to mention that I will be participating in the Jefferies Conference in Nantucket in June. If you would like to participate, please reach out to your sales representative at Jefferies for information. If you have any additional questions, please contact Devin Sullivan from The Equity Group, our IR representative. Thank you, and have a great day. Operator: This concludes today’s conference. You may disconnect your lines at this time, and thank you for your participation.